<PAGE>
Filed Pursuant to Rule 424(b)(2)
Registration File No.: 33-91148
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 4, 1995)
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$51,583,721.00 CLASS A CERTIFICATES
IHE FUNDING CORP.
(SELLER)
IRWIN HOME EQUITY CORPORATION
(SERVICER)
PRUDENTIAL SECURITIES
SECURED FINANCING CORPORATION
(DEPOSITOR)
Mortgage Pass-Through Certificates, Series 1995-2
Principal and interest payable monthly, commencing December 15, 1995
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The Series 1995-2 Mortgage Pass-Through Certificates (the "Certificates")
will consist of one Class of senior Certificates (the "Class A
Certificates"), and residual Certificates (the "Class R Certificates"). Only
the Class A Certificates are being offered hereby. The Class A Pass-Through
Rate is an adjustable rate which shall initially be 6.2675% per annum, payable
monthly at one-twelfth the annual pass-through rate.
The Certificates will evidence in the aggregate all of the beneficial
ownership interests in a segregated pool of assets (the "REMIC 1995-2")
within a trust fund consisting primarily of a pool of home equity revolving
credit line loans secured by mortgages on residential one-to-four-family
properties (the "Mortgage Loans" and together with all other assets of the
trust fund, the "Trust Fund"). The interest rate on the Mortgage Loans will
be adjustable based on the highest prime rate published in the "Money Rates"
section of The Wall Street Journal on the last Business Day of the month of
the applicable period. Approximately 39% of the Mortgage Loans by aggregate
principal balance as of the Cut-Off Date are secured by Mortgaged Properties
located in California and Florida. See "Risk Factors -- Geographic
Concentration" in this Prospectus Supplement.
The Depositor has caused MBIA Insurance Corporation (the "Certificate
Insurer")
MBIA
to issue a certificate guaranty insurance policy (the "Certificate Insurance
Policy") for the benefit of the Class A Certificateholders pursuant to which
it will guarantee certain payments to the Class A Certificateholders as
described herein.
Distributions in respect of interest will be made on the 15th day of each
month or, if the 15th day is not a Business Day, on the next succeeding
Business Day, commencing on December 15, 1995 (each, a "Remittance Date"), to
the holders of Certificates to the extent described herein. On each
Remittance Date, the amount of interest distributed in respect of the Class A
Certificates will equal the interest accrued at the Class A Pass-Through Rate
during the period commencing on the 15th day of the month immediately
preceding the month in which such Remittance Date occurs and ending on the
14th day of the month in which such Remittance Date occurs, and will be
calculated based on actual days elapsed divided by 360.
(Cover continued on next page)
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK
FACTORS" APPEARING ON PAGES S-17 THROUGH S-18.
If purchased at a price other than par, a Class A Certificate's yield to
maturity will be sensitive to the rate and timing of principal payments
(including prepayments) on the Mortgage Loans, the majority of which may be
prepaid at any time without penalty. Investors in the Class A Certificates
should consider the associated risks, including, in the case of Class A
Certificates purchased at a discount (or premium), the risk that a slower (or
faster) than anticipated rate of payments in respect of principal (including
prepayments) on the Mortgage Loans could result in an actual yield that is
lower than anticipated. See "Description of the Certificates -- Flow of
Funds" in this Prospectus Supplement and "Prepayment and Yield
Considerations" in the Prospectus.
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THESE SECURITIES DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE
DEPOSITOR, THE ORIGINATOR, THE SERVICER, THE CERTIFICATE INSURER, THE TRUSTEE
OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THESE SECURITIES NOR THE
UNDERLYING MORTGAGE LOANS WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The Class A Certificates will be purchased by Prudential Securities
Incorporated (the "Underwriter") from the Depositor and will be offered by
the Underwriter from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of sale.
Proceeds to the Depositor from the sale of the Class A Certificates will be
approximately $51,583,721.00, before deducting expenses payable by the Depositor
estimated to be approximately $490,000 in the aggregate, and before adding
accrued interest. See "Plan of Distribution" in this Prospectus Supplement.
The Class A Certificates are offered by the Underwriter when, as and if
issued, subject to delivery by the Depositor and acceptance by the
Underwriter, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. It is expected that the Class A Certificates will
be available for delivery through the facilities of The Depository Trust
Company on or about December 6, 1995.
PRUDENTIAL SECURITIES INCORPORATED
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS DECEMBER 1, 1995.
<PAGE>
(Cover continued from previous page)
There is currently no secondary market for the Class A Certificates and
there can be no assurance that a secondary market will develop or, if it does
develop, that it will provide Certificateholders with liquidity of investment
at any particular time or for the life of the Class A Certificates.
An election will be made to treat the REMIC 1995-2 as a real estate
mortgage investment conduit (a "REMIC") for federal income tax purposes. As
described more fully herein and in the Prospectus, the Class A Certificates
will constitute "regular interests" in the REMIC 1995-2 and the Class R
Certificates will constitute a "residual interest" in the REMIC 1995-2. See
"Summary Terms of the Certificates -- Federal Income Tax Status" and "Certain
Federal Income Tax Considerations" in this Prospectus Supplement and "Certain
Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC
Certificates" in the Prospectus.
The Class A Certificates described herein represent a Class of a separate
series of Certificates being offered by the Depositor from time to time
pursuant to the Prospectus dated August 4, 1995 accompanying this Prospectus
Supplement. The Prospectus shall not be considered complete without this
Prospectus Supplement. Any prospective investor should not purchase any Class
A Certificates described herein unless it shall have received the Prospectus
and 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.
-----------------
UNTIL NINETY DAYS FROM 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 THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
S-2
<PAGE>
SUMMARY TERMS OF THE CERTIFICATES
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
Prospectus. Capitalized terms used herein and not otherwise defined herein
have the meanings assigned in the Prospectus. See "Index of Significant
Prospectus Supplement Definitions" herein and "Index of Significant
Definitions" in the Prospectus.
Title of Securities .... Mortgage Pass-Through Certificates, Series
1995-2 (the "Certificates").
Trust .................. Prudential Securities Secured Financing
Corporation Trust 1995-2, a trust to be
formed under the laws of the State of New
York.
Depositor .............. Prudential Securities Secured Financing
Corporation (the "Depositor"). See "The
Depositor" in the Prospectus.
Servicer ............... Irwin Home Equity Corporation ("Irwin", or
in its capacity as servicer, the
"Servicer") will act as Servicer for the
REMIC 1995-2 and, in that capacity, will
provide customary servicing functions with
respect to the Mortgage Loans pursuant to
a Pooling and Servicing Agreement (the
"Pooling and Servicing Agreement") among
the Depositor, the Servicer and The Chase
Manhattan Bank, N.A., a national banking
association (the "Trustee"), will provide
certain reports to the Trustee and will
make certain advances to the extent
described in this Prospectus Supplement.
See "The Trustee" in this Prospectus
Supplement and "Servicing of the Mortgage
Loans and Contracts -- The Servicer" in
the Prospectus.
Seller ................. The Depositor will acquire the Mortgage
Loans from IHE Funding Corp. (in its
capacity as the seller to the Depositor,
the "Seller"). See "IHE Funding Corp." in
this Prospectus Supplement.
Certificates Offered ... The Certificates will consist of the Class A
Certificates (the "Class A Certificates")
and one class of residual Certificates
(the "Class R Certificates"). Only the
Class A Certificates are offered hereby.
Other Certificates ..... The Trust will also issue an exchangeable
certificate or certificates (collectively,
the "Exchangeable Certificate") which will
represent interests in Additional Balances
on the Mortgage Loans held by the Trust
Fund. Such Exchangeable Certificates may
be issued and reissued to and at the
request of the Seller and may be used by
the holder of such Exchangeable
Certificate as collateral for the issuance
of other certificates from other trusts
like the Trust. The amount of such
interest may change from time to time in a
manner defined in a supplement to the
Pooling and Servicing Agreement (a
"Supplement"). The Trust may also issue a
new series of certificates like the
Certificates which will also
S-3
<PAGE>
represent interests in Additional Balances
(the "Additional Certificates" and with
the "Exchangeable Certificates," the
"Other Certificates"). The amount of such
interest will be fixed in a manner defined
in a Supplement. Such new series of
certificates may be offered by the Seller
in public offerings or private placements.
SUCH ADDITIONAL BALANCES WILL NOT SERVE AS
COLLATERAL FOR THE CERTIFICATES AND
PAYMENTS ALLOCATED TO SUCH ADDITIONAL
BALANCES WILL NOT BE AVAILABLE TO
CERTIFICATEHOLDERS. WITH RESPECT TO THE
ALLOCATION OF PAYMENTS MADE ON THE
MORTGAGE LOAN TO THE CERTIFICATES AND THE
ADDITIONAL CERTIFICATES, SEE "ALLOCATIONS
OF PAYMENTS ON THE MORTGAGE LOANS BETWEEN
THE TRUST BALANCES AND THE ADDITIONAL
BALANCES." For the purposes of this
Prospectus Supplement, the Exchangeable
Certificate and the Additional
Certificates, including any additional
Series of Certificates issued by the Trust
will not be treated as Certificates.
Cut-Off Date ........... The close of business on October 31, 1995.
Issue Date ............. On or about December 6, 1995 (the "Issue
Date").
First Remittance Date .. December 15, 1995. Distributions on the
Certificates will be made on the 15th day
of each month (or, if such 15th day is not
a Business Day, on the next succeeding
Business Day) (each, a "Remittance Date").
"Business Day" shall mean any day other
than (i) a Saturday or Sunday, or (ii) any
day on which banking institutions located
in the States of New York or California
are authorized or obligated by law or
executive order to close.
Record Date ............ All distributions, other than the first
distribution and the final distribution on
the Certificates, will be made by or on
behalf of the Trustee to the persons in
whose names the Certificates are
registered at the close of business on the
last day of the calendar month immediately
preceding the related Remittance Date. The
first distribution on the Certificates
will be made by or on behalf of the
Trustee to the persons in whose names the
Certificates are registered on the Issue
Date.
Description of
Certificates;
Denominations ......... General. The Certificates will represent the
entire beneficial ownership interest in
the REMIC 1995-2. The assets of the REMIC
1995-2 will consist primarily of the
principal balances as of the Cut-Off Date
(the "Trust Balance") of a pool of home
equity revolving credit line loans
evidenced by loan agreements (each, a
"Loan Agreement") secured by mortgages or
deeds of trust on residential
one-to-four-family properties (such
properties, the "Mortgaged Properties" and
such pool, the "Mortgage Pool"). Any
additional balances added to the Mortgage
Loans ("Additional Balances") (which will
not serve as collateral for the
Certificates) shall be held by the Trust
Fund. See "Description of the Mortgage
Loans"
S-4
<PAGE>
in this Prospectus Supplement. In
addition, the Depositor has caused MBIA
Insurance Corporation (the "Certificate
Insurer") to issue a certificate guaranty
insurance policy (the "Certificate
Insurance Policy") relating to the Class A
Certificates for the benefit of the Class
A Certificateholders, pursuant to which it
will guarantee certain payments to the
Trustee for the benefit of the Class A
Certificateholders, as described herein.
The REMIC 1995-2 will be formed and the
Certificates will be issued pursuant to
the Pooling and Servicing Agreement.
Book-Entry Form. The Class A Certificates
initially will be issued in book-entry
form, in minimum denominations of $1,000
initial principal balance with integral
multiples thereof (except for one
Certificate which may be issued in a
lesser amount). The Class A Certificates
are sometimes referred to in this
Prospectus Supplement as "Book-Entry
Certificates." No person acquiring an
interest in the Book-Entry Certificates (a
"Beneficial Owner") will be entitled to
receive a definitive certificate
representing such person's interest in the
REMIC 1995-2, except under the limited
circumstances described herein. In
general, "Certificateholder" or "Holder"
shall mean each Person in whose name a
Certificate is registered in the
Certificate Register and the Book-Entry
Certificates initially will be represented
by a single certificate registered in the
name of Cede & Co. ("Cede"), which will be
the "Holder" or "Certificateholder" of
such Certificates, as the nominee of The
Depository Trust Company ("DTC"). The
rights of Beneficial Owners may only be
exercised through DTC and its
participating organizations, except as
otherwise specified herein. See
"Description of the Certificates --
Book-Entry Registration" and " --
Definitive Certificates" in this
Prospectus Supplement.
The Mortgage Pool ...... General. The statistical information
regarding the Mortgage Loans and the
Mortgaged Properties which is presented in
this Prospectus Supplement is based upon
the characteristics of the Mortgage Loan
pool as of the close of business on the
Cut-Off Date. Unless otherwise indicated,
all percentages set forth in this
Prospectus Supplement are based upon the
aggregate Principal Balances of the
Mortgage Loans as of the Cut-Off Date,
which was $51,583,721.78.
The Trust Balance of the Mortgage Loans to
be included in the REMIC 1995-2 will be
home equity revolving credit line loans
evidenced by Loan Agreements and secured
by mortgages (of which approximately 1.83%
by Cut-Off Date principal balance are
first mortgages and the remainder of which
are second mortgages) or deeds of trust on
one-to-four family residential properties,
a substantial portion of which are located
in the northern half of the State of
California and in selected markets in the
State of Florida, which generally have
original terms to stated maturity of
approximately 20
S-5
<PAGE>
years and which have scheduled payments of
interest only for the first ten years of
their respective terms. Commencing in its
eleventh year, each Mortgage Loan has
scheduled payments on a ten-year fully
amortizing basis. Unless otherwise
provided in an applicable supplement
hereto, the Monthly Payments for each
Mortgage Loan will be due on the fifteenth
day of each month (each, a "Due Date").
See "Description of the Mortgage Loans"
herein.
The Mortgage Loans were underwritten in
accordance with the underwriting standards
of the Servicer. See "Risk Factors --
Underwriting Standards and Potential
Delinquencies" in this Prospectus
Supplement. Approximately 19.9% of the
Mortgage Loans by aggregate principal
balance are secured by Mortgaged
Properties located in California and 19.0%
of the Mortgage Loans by aggregate
principal balance are secured by Mortgage
Properties located in selected markets in
Florida. See "Risk Factors -- Geographic
Concentration" in this Prospectus
Supplement.
Mortgage Interest Rate . The "Mortgage Interest Rate" of each
Mortgage Loan is the per annum interest
rate required to be paid by the mortgagor
under the terms of the related mortgage
note (the "Mortgage Note"). The Mortgage
Interest Rate borne by each Mortgage Loan
is adjustable on the date specified in the
related Mortgage Note (each such date, an
"Interest Adjustment Date") to a rate
which is based on the highest prime rate
as published in the "Money Rates" section
of The Wall Street Journal on the last
Business Day of the month. The Mortgage
Interest Rate on each Mortgage Loan will
be adjusted on each Interest Adjustment
Date to a rate equal to the sum of the
applicable prime rate and a fixed
percentage (the "Gross Margin") specified
in the related Mortgage Note, and is
generally subject to maximum and minimum
lifetime Mortgage Interest Rates
("Lifetime Rate Caps" and "Lifetime Rate
Floors," respectively) specified in the
related Mortgage Loan Agreement. As of the
Cut-Off Date, the weighted average
Mortgage Interest Rate for the Mortgage
Loans was approximately 13.64%.
As of the Cut-Off Date, the Gross Margins
for the Mortgage Loans will range from
1.90% to 6.90% and the weighted average
Gross Margin, as of the Cut-Off Date, will
be approximately 4.89%. As of the Cut-Off
Date, the Lifetime Rate Caps for the
Mortgage Loans will range from 15.65% to
23.90% per annum and the weighted average
Lifetime Rate Cap will be approximately
20.15% per annum. As of the Cut-Off Date,
the Lifetime Rate Floors for the Mortgage
Loans will range from 8.65% to 13.90% per
annum and the weighted average Lifetime
Rate Floor will be approximately 11.78%
per annum.
Original Class A
Principal Balance ...... $51,583,721.78.
S-6
<PAGE>
Interest; Class A
Pass-Through Rate ...... The Class A Pass-Through Rate applicable to
each Remittance Date will be equal to a
per annum rate equal to the lesser of (a)
the sum of (i) LIBOR on the second to the
last business day prior to the preceding
Remittance Date (or as of December 1, 1995,
in the case of the first Remittance Date)
plus (ii) for each Remittance Date which
occurs on or prior to the date on which the
aggregate Class A Principal Balance of the
Mortgage Loans is less than 10% of the
Original Class A Principal Balance of the
Mortgage Loans, 0.33%, and for each
Remittance Date occurring thereafter, 0.66%,
subject to certain exceptions described
under "Description of the Certificates--
Calculation of LIBOR" herein, and (b) the
Weighted Averate Rate Cap. Such rate will
be calculated on the basis of actual days
elapsed divided by 360. See "Description
of the Certificates -- Weighted Average
Rate Cap."
Interest on the Class A Certificates will
accrue from and including the preceding
Remittance Date (as defined below)(except
in the case of the first such period, in
which case interest shall accrue from the
Issue Date) to but not including the
related Remittance Date (each, an "Accrual
Period") at the Class A Pass-Through Rate
on the Class A Principal Balance as of the
last Remittance Date (after giving effect
to principal distributed on such last
Remittance Date)(such interest, net of
interest shortfalls not covered by
Compensating Interest and reductions in
respect of the Civil Relief Act, the
"Class A Interest Distribution Amount").
The amount of the Class A Interest
Distribution Amount payable with respect
to the Class A Certificates on any
Remittance Date shall be distributable, to
the extent described herein, on the 15th
day of each month, or if such day is not a
Business Day, the following Business Day
(each, a "Remittance Date"). With respect
to the first Remittance Date, interest
shall accrue on the Class A Certificates
at the Class A Pass- Through Rate on the
Class A Principal Balance as of the close
of business on the Cut-Off Date for the
period commencing on the Issue Date and
ending on December 14, 1995. See
"Description of the Certificates" in this
Prospectus Supplement.
Weighted Average Rate
Cap .................... In the event that LIBOR exceeds the Prime
Rate or the Prime Rate increases to a
level that subjects the Mortgage Interest
Rate to an applicable statutory maximum
interest rate, it is possible that the
weighted average Net Mortgage Interest
Rate on the Mortgage Loans for a related
Due Period will be less than the amount of
interest calculated in clause (a) under
"Interest; Class A Pass-Through Rate"
above. Therefore, the Class A Pass-Through
Rate is, on each Remittance Date, subject
to a maximum rate (the "Weighted Average
Rate Cap") equal to one-twelfth the
weighted average Mortgage Interest Rate,
net of the rates at which the Servicing
Fee, the
S-7
<PAGE>
Trustee's Fee and the Certificate
Insurance Policy Premium Amount are
calculated (the "Net Mortgage Interest
Rate").
Principal; Class A
Principal Balance ...... The "Principal Balance" of any Mortgage Loan
(or related REO Property) is the
outstanding principal balance of such
Mortgage Loan as of the end of the
calendar month preceding such date of
determination. The "Class A Principal
Balance" represents the maximum specified
dollar amount of principal to which the
Holders of the Class A Certificates are
entitled from the future cash flow on the
assets in the REMIC 1995-2. The "Class A
Principal Balance" at any time is equal to
the Class A Principal Balance as of the
Cut-Off Date (the "Original Class A
Principal Balance") minus the aggregate,
cumulative amounts actually distributed as
principal to the Class A
Certificateholders. See "Description of
the Certificates -- Flow of Funds," and
"The Certificate Insurer" and "The
Certificate Insurance Policy" in this
Prospectus Supplement.
The Holders of Class A Certificates are
entitled to receive certain monthly
distributions of principal on each
Remittance Date which generally reflect
collections of principal on the Mortgage
Loans during the prior calendar month (the
"Due Period").
The "Class A Principal Distribution
Amount" for any Remittance Date will be
the lesser of:
(a) the excess of (i) the sum, as of such
Remittance Date, of (A) the Available
Amount, plus (B) any amounts withdrawn
from the Reserve Account, plus (C) any
Insured Payment, over (ii) the Class A
Interest Distribution Amount; and
(b) the sum, without duplication, of:
(i) with respect to each Mortgage Loan,
and until the Trust Balance of such
Mortgage Loan is reduced to zero, all
scheduled installments of principal
received or advanced during the related
Due Period, and all unscheduled recoveries
of principal actually collected by the
Servicer during the prior calendar month
(see "Allocations of Payments on the
Mortgage Loans Between the Trust Balances
and the Additional Balances"),
(ii) the Trust Balance of each Mortgage
Loan that either was repurchased by the
Seller or by the Depositor or purchased by
the Servicer on the related Remittance
Date, to the extent such Trust Balance is
actually received by the Trustee,
(iii) any Substitution Adjustments
delivered by the Depositor on the related
Remittance Date in connection with a
substitution of a Mortgage Loan, to the
extent such Substitution Adjustments are
actually received by the Trustee,
S-8
<PAGE>
(iv) with respect to each Mortgage Loan
that became a Liquidated Mortgage Loan
during the prior calendar month, the Trust
Balance of such Mortgage Loan immediately
prior to the time when such Mortgage Loan
became a Liquidated Mortgage Loan, and
(v) the proceeds received by the Trustee
of any termination of the REMIC 1995-2 (to
the extent such proceeds related to
principal).
In no event will the Class A Principal
Distribution Amount with respect to any
Remittance Date be (x) less than zero or
(y) except in the event of an optional
termination by the Servicer, greater than
the outstanding Class A Principal Balance
as of the end of the second month
preceding the applicable Remittance Date.
With respect to any Remittance Date, the sum
of the Class A Interest Distribution
Amount and the Class A Principal
Distribution Amount as would be calculated
pursuant to (b) above with respect to such
Remittance Date is the "Class A Formula
Distribution Amount" for such Remittance
Date.
With respect to any Remittance Date, the
excess of the Class A Formula Distribution
Amount over the Available Amount with
respect to such Remittance Date is the
"Credit Enhancement Distribution Amount"
for such Remittance Date.
The actual amount distributed with respect
to the Class A Certificates on any
Remittance Date is the "Class A
Distribution Amount" for such Remittance
Date.
A "Liquidated Mortgage Loan" is, in general,
a defaulted Mortgage Loan as to which the
Servicer has determined that all amounts
that it expects to recover on such
Mortgage Loan have been recovered
(exclusive of any possibility of a
deficiency judgment). A loss on a
Liquidated Mortgage Loan (a "Liquidated
Loan Loss") will be recovered by the
Holders of the Class A Certificates on the
Remittance Date which immediately follows
the event of loss. Losses will be
allocated to the Trust Balance of any
Liquidated Mortgage Loan as provided in
"Allocation of Payments on the Mortgage
Loans between the Trust Balance and the
Additional Balance." Such payment will be
in the form of an Insured Payment if not
covered by withdrawals from the Reserve
Account. MBIA will insure the timely
payment of interest and the ultimate
payment of principal on the Class A
Certificates. See "The Certificate
Insurance Policy and the Certificate
Insurer" in this Prospectus Supplement.
The "Trust Balance" of any Mortgage Loan as
of any date of determination is the
portion of the principal balance of such
Mortgage Loan sold to the Trust as of the
Cut-Off Date, after giving effect to
prepayments received on or prior to the
latest Due Date, Deficient Valuations
incurred prior to such Due
S-9
<PAGE>
Date and the payment of principal due on
such Due Date (all allocated as provided
in "Allocation of Payments on the Mortgage
Loans between the Trust Balance and the
Additional Balance") and irrespective of
any delinquency in payment by the related
Mortgagor. The Trust Balance of a Mortgage
Loan which becomes a Liquidated Mortgage
Loan on or prior to such Due Date shall be
zero.
Certificateholders' Interest;
Other Certificates .... Each of the Class A Certificates offered
hereby represents an undivided interest in
the REMIC 1995-2 that consists of a
portion of the Trust Fund. The Trust
Fund's assets will be allocated among the
Class A Certificateholders, the Class R
Certificateholders, the interest of the
holders of other Series issued at some
future time pursuant to the Pooling and
Servicing Agreement and applicable
Supplements and the holder of the
Exchangeable Certificate representing the
remaining undivided interest in the right
to the assets of the Trust Fund not
allocated to the Certificateholders' or
the holders of any Additional
Certificates. The Seller initially will
hold the Class R Certificate. Irwin Union
Bank and Trust Company, an affiliate of
Irwin, will receive the Exchangeable
Certificate as partial consideration for
its sale of the Mortgage Loans to IHE
Funding Corp.
The holder of the Exchangeable Certificate
may tender the Exchangeable Certificate
or, if provided in the relevant
Supplement, Additional Certificates of any
Series to the Trustee and, upon satisfying
certain conditions described in the
Pooling and Servicing Agreement, cause the
Trustee to issue one or more new Series of
Additional Certificates or Exchangeable
Certificates, as described in "Description
of the Certificates -- Exchanges" herein.
The certificates of any new Series will be
issued pursuant to the Pooling and
Servicing Agreement and any related
Supplement. See "Description of the
Certificates" herein.
Credit Enhancement ..... The credit enhancement provided for the
benefit of the Class A Certificateholders
consists of (a) drawings on the Reserve
Account and, if adequate funds do not
exist therein, (b) the Certificate
Insurance Policy. See "Description of the
Certificates -- Reserve Account."
The Reserve Account
On the Issue Date, $2,966,064, which is
equal to 5.75% of the aggregate Principal
Balances of the Mortgage Loans as of the
Cut-Off Date, will be deposited into the
Reserve Account. On each Remittance Date,
funds constituting the Available Funds
Excess will be deposited into the Reserve
Account until the amount on deposit
therein equals the "Required Reserve
Account Level," which, subject to certain
conditions described in the Certificate
Insurance Agreement, initially
S-10
<PAGE>
shall be 8.5% of the Original Class A
Principal Balance. With respect to the
Certificates, the Pooling and Servicing
Agreement generally provides that on each
Remittance Date after the later to occur
of (i) the first Remittance Date more than
30 months after the Issue Date and (ii)
the date upon which the Class A Principal
Balance is less than 50% of the Original
Class A Principal Balance, the Required
Reserve Account Level may be reduced.
However, in the event that the aggregate
Principal Balance of Mortgage Loans that
are more than 90 days delinquent equals or
exceeds 3% of the Class A Principal
Balance, the Required Reserve Account
Level will increase as of the next
Remittance Date to 9.86% of the Original
Class A Principal Balance and the Required
Reserve Account Level may not subsequently
be reduced until the aggregate Principal
Balance of Mortgage Loans that are more
than 90 days delinquent remains less than
3.0% of the Class A Principal Balance for
six consecutive Remittance Dates. Funds on
deposit in the Reserve Account may be
withdrawn to make payments of the Credit
Enhancement Distribution Amount.
Withdrawals from the Reserve Account will
be replenished from Available Funds
Excess. Subject to certain limitations and
requirements described in the Pooling and
Servicing Agreement, distributions may be
made to the owner of the Residual
Certificate only from amounts on deposit
in the Reserve Account in excess of the
Required Reserve Account Level. Amounts on
deposit in the Reserve Account will be
invested in Permitted Investments. See
"Description of the Certificates --
Reserve Account."
The Certificate Insurance Policy
The Class A Certificateholders will have the
benefit of the Certificate Insurance
Policy, discussed more fully below. See
"The Certificate Insurer and the
Certificate Insurance Policy" herein and
"Credit Support -- Other Credit
Enhancement" in the Prospectus.
The Certificate Insurer ... MBIA Insurance Corporation (the "Certificate
Insurer"). See "The Certificate Insurer
and the Certificate Insurance Policy" in
this Prospectus Supplement.
Certificate Insurance
Policy ................. The Certificate Insurer will issue a
Certificate Guaranty Insurance Policy (the
"Certificate Insurance Policy") with
respect to the Class A Certificates,
pursuant to which it will irrevocably and
unconditionally guaranty payment on each
Remittance Date of Insured Payments to the
Trustee for the benefit of the Holders of
the Class A Certificates. On any
Remittance Date, the Certificate Insurer
will generally be required to make
available to the Trustee the amount, if
any, by which the Credit Enhancement
Distribution Amount exceeds amounts
available in the Reserve Fund. See
"Description of the Certificates --
Reserve Account." The Certificate Insur-
S-11
<PAGE>
ance Policy does not guarantee the Class A
Certificates any specified rate of
prepayments. A payment by the Certificate
Insurer under the Certificate Insurance
Policy is referred to herein as an
"Insured Payment." The Certificate Insurer
will be entitled to reimbursement for all
Insured Payments together with interest
thereon. See "The Certificate Insurance
Policy and the Certificate Insurer" in
this Prospectus Supplement.
Servicing of the
Mortgage Loans ......... The Servicer has agreed to service the
Mortgage Loans on a "scheduled/scheduled"
basis (i.e., the Servicer is responsible
for advancing scheduled payments of
interest and scheduled payments of
principal to the extent described in
"Summary Terms of the Certificates --
Periodic Advances" below) in accordance
with the Pooling and Servicing Agreement
and to cause the Mortgage Loans to be
serviced with the same care as it
customarily employs in servicing and
administering mortgage loans for its own
account, in accordance with accepted
mortgage servicing practices, of prudent
lending institutions and giving due
consideration to the Certificate Insurer's
and the Certificateholders' reliance on
the Servicer.
Periodic Advances ...... Subject to the Servicer's determination that
such action would not constitute a
Nonrecoverable Advance (as defined
herein), the Servicer is required to
deposit into the Trustee Collection
Account no later than the close of
business on the third Business Day prior
to the related Remittance Date (such day,
the "Determination Date") an amount equal
to the sum of (a) Monthly Payments on each
Mortgage Loan due by the related Due Date
but not received by the Servicer as of the
close of business on the related
Determination Date, net of the Servicing
Fee and (b) with respect to each REO
Property which was acquired during or
prior to the related Due Period and as to
which an REO disposition did not occur
during the related Due Period, an amount
equal to the excess, if any, of interest
on the Principal Balance of the Mortgage
Loan related to such REO Property at the
related Mortgage Interest Rate, net of the
Servicing Fee, for the related Due Period
for the related Mortgage Loan over the net
income from the REO Property to be
transferred to the Certificate Account for
such Remittance Date pursuant to the
Pooling and Servicing Agreement (the
"Periodic Advance"). Such Periodic
Advances by the Servicer are reimbursable
to the Servicer subject to certain
conditions and restrictions, and are
intended to provide both sufficient funds
for the payment of interest to the Holders
of the Class A Certificates and to pay the
premium due the Certificate Insurer. In
the event that, notwithstanding the
Servicer's good faith determination at the
time such Periodic Advance was made that
it would not be a Nonrecoverable Advance,
such Periodic Advance becomes a
Nonrecoverable Advance, the Servicer will
be entitled to reimbursement therefor from
the REMIC 1995-2.
S-12
<PAGE>
See "Description of the Certificates
--Payments on the Mortgage Loans" in this
Prospectus Supplement.
Prepayment Interest
Shortfalls ............. Not later than the close of business on the
Business Day immediately following the
Determination Date, the Servicer is
required to remit to the Trustee
Collection Account, an amount equal to the
lesser of (a) the aggregate of the
Prepayment Interest Shortfalls for the
related Remittance Date resulting from
principal prepayments during the related
Due Period and (b) its aggregate Servicing
Fees received in the related Due Period
and shall not have the right to
reimbursement therefor (the "Compensating
Interest"). With respect to any Remittance
Date and any Mortgage Loan, the
"Prepayment Interest Shortfall" will be an
amount equal to the excess, if any, of (a)
30 days' interest on the outstanding
Principal Balance of such Mortgage Loan at
a per annum rate equal to the related
Mortgage Interest Rate (or at such lower
rate as may be in effect for such Mortgage
Loan because of application of the
Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Civil Relief Act"),
any reduction as a result of a bankruptcy
proceeding (a "Deficient Valuation")
and/or any reduction by a court of the
monthly payment due on such Mortgage Loan
(a "Debt Service Reduction")), minus the
rate at which the Servicing Fee is
calculated, over (b) the amount of
interest actually remitted by the
Mortgagor in connection with such
principal prepayment in full less the
Servicing Fee for such Mortgage Loan in
such month.
Servicing Advances ..... Subject to the Servicer's determination that
such action would not constitute a
Nonrecoverable Advance and that a prudent
mortgage lender would make a like advance
if it or an affiliate owned the related
Mortgage Loan, the Servicer is required to
advance amounts with respect to the
Mortgage Loans ("Servicing Advances")
constituting "out-of-pocket" costs and
expenses relating to (a) the preservation
and restoration of the Mortgaged Property,
(b) enforcement proceedings, including
foreclosures, (c) expenditures relating to
the purchase or maintenance of a first
lien not included in the REMIC 1995-2 on
the Mortgaged Property, and (d) certain
other customary amounts described in the
Pooling and Servicing Agreement. Such
Servicing Advances by the Servicer are
reimbursable to the Servicer subject to
certain conditions and restrictions. In
the event that, notwithstanding the
Servicer's good faith determination at the
time such Servicing Advance was made, that
it would not be a Nonrecoverable Advance,
in the event such Servicing Advance
becomes a Nonrecoverable Advance, the
Servicer will be entitled to reimbursement
therefor from the REMIC 1995-2.
Servicing Fee .......... The Servicer is entitled to a servicing fee
of 1.00% per annum of the Principal
Balance of each Mortgage Loan (the
"Servicing Fee"), calculated and payable
monthly from the interest
S-13
<PAGE>
portion of Monthly Payments, Net
Liquidation Proceeds and certain other
proceeds. In the case that Irwin is no
longer acting as Servicer, the Successor
Servicer will be entitled to a Servicing
Fee of 1.00% per annum of the Principal
Balance of each Mortgage Loan.
Optional Termination by
the Servicer or Seller .... The Servicer or Seller may, at its option
(and if such option is not exercised by
the Servicer or the Seller, the
Certificate Insurer may, at its option)
terminate the REMIC 1995-2 on any date on
which the aggregate Class A Principal
Balances of the Mortgage Loans is less
than 10% of the aggregate Principal
Balances of the Mortgage Loans as of the
Cut-Off Date, by purchasing from the REMIC
1995-2, on the next succeeding Remittance
Date, all of the property of such REMIC at
a price equal to the sum of (a) the
greater of (i) 100% of the aggregate Trust
Balances of each outstanding Mortgage Loan
and each REO Property, and (ii) the fair
market value (disregarding accrued
interest) of the Trust Balances of the
Mortgage Loans and such REO Properties,
determined as the average of three written
bids (copies of which are to be delivered
to the Trustee and the Certificate Insurer
by the Servicer and the reasonable cost of
which may be deducted from the final
purchase price) made by
nationally-recognized dealers and based on
a valuation process which would be used to
value comparable mortgage loans and REO
properties, (b) the greater of (i) the
aggregate amount of accrued and unpaid
interest on the Trust Balances of the
Mortgage Loans through the related Due
Period and (ii) 30 days' accrued interest
thereon computed at a rate equal to the
related Mortgage Interest Rate, in each
case net of the Servicing Fee, and (c) any
unreimbursed amounts due to the
Certificate Insurer under the Pooling and
Servicing Agreement and any accrued and
unpaid Insured Payments. See "Servicing of
the Mortgage Loans -- Termination;
Purchase of Mortgage Loans" herein.
Trustee ................ The Chase Manhattan Bank, N.A., a national
banking association with offices located
at 4 Chase MetroTech Center, Brooklyn, New
York. See "The Trustee" in this Prospectus
Supplement.
ERISA Considerations ... A fiduciary of any employee benefit plan or
other retirement arrangement subject to
the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or the
Code should carefully review with its
legal advisors whether the purchase or
holding of Class A Certificates could give
rise to a transaction prohibited or not
otherwise permissible under ERISA or the
Code. The U.S. Department of Labor has
issued an individual exemption, Prohibited
Transaction Exemption 90-32, to the
Underwriter (the "Exemption"), which
generally exempts from the application of
certain of
S-14
<PAGE>
the prohibited transaction provisions of
ERISA, and the excise taxes imposed on
such prohibited transactions by Section
4975(a) and (b) of the Code and Section
502(i) of ERISA, transactions relating to
the purchase, sale and holding of
pass-through certificates such as the
Class A Certificates and the servicing and
operation of asset pools such as the REMIC
1995-2, provided that certain conditions
are satisfied. See "ERISA Considerations"
in this Prospectus Supplement.
Legal Investment ....... The Class A Certificates will not constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market
Enhancement Act of 1984. Other
Certificates representing balances in
other mortgage loans transferred to the
Trust after the Cut-Off Date may or may
not constitute such "mortgage related
securities."
However, there are regulatory requirements
and considerations applicable to regulated
financial institutions and restrictions on
the ability of such institutions to invest
in certain types of mortgage-related
securities. Prospective purchasers of any
of the Other Certificates that are
"mortgage related securities" should
consult their own legal, tax and
accounting advisors in determining the
suitability of and consequences to them of
the purchase, ownership and disposition of
the Other Certificates. See "Legal
Investment" in this Prospectus Supplement.
Federal Income Tax
Status ................. An election will be made to treat the REMIC
1995-2 as a real estate mortgage
investment conduit (a "REMIC") for federal
income tax purposes. The Class A
Certificates will be designated as the
regular interests in the REMIC 1995-2, and
the Class R Certificates will be
designated as the residual interest in the
REMIC 1995-2.
The Class A Certificates generally will be
treated as newly originated debt
instruments for federal income tax
purposes. Beneficial Owners of the Class A
Certificates will be required to report
income thereon in accordance with the
accrual method of accounting.
In addition, if the Class A Certificates are
issued with original issue discount for
federal income tax purposes, such event
generally will result in recognition of
some taxable income in advance of the
receipt of the cash attributable to such
income.
See "Certain Federal Income Tax
Considerations" in this Prospectus
Supplement and "Certain Federal Income Tax
Consequences -- Federal Income Tax
Consequences for REMIC Certificates" in
the Prospectus.
S-15
<PAGE>
Certificate Ratings ... It is a condition to the issuance of Class A
Certificates that the Class A Certificates
shall have been rated not lower than AAA
by Standard & Poor's Ratings Group
("Standard & Poor's") and Aaa by Moody's
Investors Service ("Moody's"). A security
rating is not a recommendation to buy,
sell or hold securities and may be subject
to revision or withdrawal at any time by
the assigning rating organization. The
ratings do not address the possibility
that Class A Certificateholders may suffer
a lower than anticipated yield. See
"Ratings" in this Prospectus Supplement
and "Prepayment and Yield Considerations"
in this Prospectus.
S-16
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Class A Certificates.
UNDERWRITING STANDARDS AND POTENTIAL DELINQUENCIES
The Servicer was incorporated as an Indiana corporation in September of
1994 and has been in the home equity credit line business since January 1995.
The underwriting standards for the Mortgage Loans have been developed by the
Servicer in conjunction with Irwin Union Bank and Trust Company, an affiliate
of the Servicer headquartered in Columbus, Indiana ("Irwin Union Bank") and
have been audited by Coopers & Lybrand to confirm compliance with those
standards. The Servicer is also in the process of developing a fixed-rate
closed-end loan program which is currently being tested. The results of such
tests will be analyzed and incorporated into the standards used by the
Servicer in connection with any necessary substitutions of the Mortgage
Loans. In soliciting the potential borrowers for the Mortgage Loans, Irwin
attempts to target the most creditworthy and profitable customer segments
within its targeted mailing lists. Irwin's home equity line of credit product
is targeted primarily as a debt consolidation loan for repeat or frequent
borrowers with strong credit ratings. Loan decisions are based on an analysis
of the prospective borrower's documented cash flow and credit history and
supplemented by a collateral evaluation. Prior to any commitment by Irwin to
originate a Mortgage Loan, Irwin Union Bank reviews and approves each
Mortgage Loan prior to its decision to make such Mortgage Loan. There can be
no assurance as to the level of delinquencies and defaults that may be
produced by the Trust. Since the Mortgage Loans are originated by mail
solicitation, prospective investors should be aware that delinquencies and
defaults with respect to the pool of Mortgage Loans may be different than
they would be with respect to pool of similar Mortgage Loans originated
through other means of solicitation. In addition, because the original
Combined Loan-to-Value Ratio of the Mortgage Loans may be high relative to
that of other similar second mortgage loans, recoveries on Defaulted Mortgage
Loans may be lower than the level of recoveries experienced by such other
defaulted mortgage loans.
GEOGRAPHIC CONCENTRATION
Approximately 39% of the Mortgage Loans are secured by Mortgaged
Properties located in the northern half of the State of California and
selected markets in Florida. Because of the relative geographic concentration
of the Mortgage Loans within California and Florida, losses on the Mortgage
Loans may be higher than would be the case if the Mortgage Loans were more
geographically diversified. For example, certain of the Mortgaged Properties
may be more susceptible to certain types of special hazards, such as
earthquakes, hurricanes and other natural disasters and major civil
disturbances, than residential properties located in other parts of the
country. In addition, the regional economies of the areas in which the
Mortgage Loans are located may be adversely affected to a greater degree than
the economies of other areas of the country by certain regional developments.
In recent years, property values of residential real estate generally have
declined in California and in Florida. If the relevant California and Florida
residential real estate markets experience an overall decline in property
values after the dates of origination of the respective Mortgage Loans, then
the rates of delinquencies, foreclosures and losses on the Mortgage Loans may
be expected to increase and such increase may be substantial. Further, the
State of California is an "election of remedies" state, which generally means
that in the event of default on Mortgage Loans in that state, the lender, in
this case the Servicer, on behalf of the Trustee, must elect either to sue on
the debt or pursue its remedies against the property. If the Servicer chooses
to pursue its remedies against the Borrower, then generally it will not be
able to foreclose against the Mortgaged Property.
DECLINE IN REAL ESTATE VALUES
No assurance can be given that the values of the Mortgaged Properties have
remained or will remain at their levels as of the dates of origination of the
related Mortgage Loans. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the
S-17
<PAGE>
Mortgage Loans become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses on
these Mortgaged Properties could be higher than losses now generally
experienced in the mortgage lending industry.
RISK OF MORTGAGE LOAN YIELD REDUCING CLASS A PASS-THROUGH RATE
The Class A Pass-Through Rate is based upon the value of an index
(one-month LIBOR) which is different from the value of the prime rate
applicable to the Mortgage Loans, as described under "The Mortgage Loans"
herein. The Mortgage Loans adjust monthly based upon the highest prime rate
as published in the "Money Rates" section of The Wall Street Journal on the
last Business Day in the month whereas the Pass-Through Rate on the Class A
Certificates adjusts monthly based upon a one-month LIBOR index, limited by
the Weighted Average Rate Cap. Consequently, the actual Class A Pass- Through
Rate for any Remittance Date may not equal what the Class A Pass-Through Rate
for such Remittance Date would have been without regard to the Weighted
Average Rate Cap. In addition, one-month LIBOR and the prime rate may respond
to different economic and market factors. Also, the Mortgage Loans indexed to
the prime rate are generally subject to specified Lifetime Rate Caps and
Lifetime Rate Floors. Thus, it is possible, for example, that one-month LIBOR
may rise during periods in which the prime rate applicable to the Mortgage
Loan is stable or is falling or that, even if both one-month LIBOR and the
prime rate rise during the same period, one-month LIBOR may rise much more
rapidly than the applicable prime rate. See "Class A Pass-Through Rate" in
the Summary to this Prospectus Supplement and "Description of the
Certificates --Calculation of LIBOR" and "-- Weighted Average Rate Cap."
RISK OF HIGHER LOSSES ASSOCIATED WITH FLOOD DAMAGE
On March 21, 1995, 39 counties in California were declared federal
disaster areas. A substantial portion of the Mortgage Loan Pool secured by
Mortgaged Properties in California are located in such counties (the "Damage
Area"). In general, primary hazard policies do not cover damage resulting
from floods. On the Issue Date, the Servicer will represent that none of the
Mortgagors residing in the Mortgaged Properties located in the Damage Area
have contacted it with any reports of damage of any kind or requests for
forbearance of any payments as a result of such flood damage. In addition,
any Mortgage Property damaged by flooding will be subject to repurchase by
the Seller.
It is not certain what effect the flood damage will have on the rate of
delinquencies, foreclosures, and losses of the Mortgage Loans located in the
affected area. It is possible that the affected Mortgage Loans may experience
higher levels of delinquencies, foreclosures and losses. It is also possible
that such Mortgage Loans will experience a higher or lower rate of
prepayments due to higher or lower rates of sales of the Mortgaged Properties
in the Damage Area. Furthermore, it is too early to determine what effect, if
any, the flood will have on market prices of residential housing in the
Damage Area and the California real estate market in general.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The statistical information regarding the Mortgage Loans which is
presented in this Prospectus Supplement is based upon the characteristics of
the Mortgage Loan pool as of the close of business on October 31, 1995 (the
"Cut-Off Date"). Unless otherwise indicated, all percentages set forth in
this Prospectus Supplement are based upon the aggregate Principal Balances of
the Mortgage Loans as of the Cut-Off Date, which was $51,583,721.78.
The Mortgage Loans to be included in the REMIC 1995-2 are evidenced by
loan agreements (each, a "Loan Agreement") secured by mortgages or deeds of
trust (of which approximately 1.83% by Cut-Off Date principal balance are
first liens and the remainder are second liens) (the "Mortgages") on one- to
four-family residential properties (the "Mortgaged Properties") and to have
the additional characteristics described below.
S-18
<PAGE>
The Mortgage Loans have original terms to stated maturity of
approximately 20 years. Each Mortgage Loan was selected for inclusion in the
REMIC 1995-2 from among those that met the following criteria as of the
Cut-Off Date: (i) a current Loan Balance of no less than $214.87, (ii) not
more than 31 days past due and (iii) not less than 233 months to contractual
maturity. The Mortgage Loans were selected by Irwin from the mortgage loans
in the Servicer's portfolio that met the above criteria using a selection
process believed by the Servicer not to be adverse to the Certificateholders
or to the Certificate Insurer. The loan application for each Mortgage Loan
was initially approved between January 1, 1995 and September 30, 1995 in the
ordinary course of Irwin's home equity revolving credit line loan program. As
of the Cut-Off Date, the average principal balance of the Mortgage Loans was
approximately $33,279.82. As of the Cut-Off Date, the weighted average, Gross
Margin of the Mortgage Loans was approximately 4.89% and the weighted average
Mortgage Interest Rate was 13.64%. The weighted average "Combined
Loan-to-Value Ratio" (calculated by dividing the sum of (x) any outstanding
first mortgage balance plus (y) the maximum available credit under the
Mortgage Loan as of the Cut-Off Date, by the appraised value of such
Mortgaged Property) of the Mortgage Loans at origination was approximately
92.23%. As of the Cut-Off Date, the weighted average maximum credit limit
utilization rate (computed by dividing the Loan Balance for each Mortgage
Loan by the related Credit Limit) was approximately 93.47%. The weighted
average remaining term to stated maturity was 237 months and the latest
scheduled maturity of any Mortgage Loan is October 15, 2015; however the
actual date on which any Mortgage Loan is paid in full may be earlier than
the stated maturity date due to unscheduled payments of principal.
Each of the Mortgage Loans is subject to a due-on-sale clause. See
"Certain Legal Aspects of the Mortgage Loans and Contracts -- Enforceability
of Certain Provisions" in the Prospectus.
The Mortgage Interest Rate on each Mortgage Loan will adjust monthly on
each applicable Interest Adjustment Date to a rate equal to the sum, which
rate will, in the principal repayment period beginning after the first ten
years of the Mortgage Loan, be rounded up to the nearest one-eighth of one
percentage point (12.5 basis points), of (i) the highest prime rate as
published in the "Money Rates" section of The Wall Street Journal on the last
Business Day of the month immediately preceding the related Interest
Adjustment Date Bank plus (ii) a fixed percentage (the "Gross Margin"), which
total is generally subject to a specified maximum and minimum lifetime
Mortgage Interest Rates ("Lifetime Rate Caps" and "Lifetime Rate Floors,"
respectively), as specified in the related Mortgage Note. Due to the
application of the Lifetime Rate Caps, the Mortgage Interest Rate on any
Mortgage Loan, as adjusted on any related Interest Adjustment Date, may not
equal the sum of the related prime rate and the Gross Margin. The Due Date is
the 15th day of the month for all of the Mortgage Loans. Each Mortgage Loan
requires the related Mortgagor to make current interest payments during the
life of the Mortgage Loan.
Effective with the first payment due on a Mortgage Loan after the tenth
anniversary date of the date of origination thereof, on each related Interest
Adjustment Date, the Monthly Payment will be adjusted to an amount that will
amortize the outstanding principal balance of the Mortgage Loan over its
remaining term. The weighted average number of months from the Cut-Off Date
to the first adjustment of the monthly payment such that the resulting amount
will amortize the outstanding principal balance of the Mortgage Loans over
the remaining term is 117 months.
Based on information supplied by the mortgagors in connection with their
loan applications at origination, 1,542 of the Mortgaged Properties, which
secure approximately 99.54% of the outstanding principal balance of the
Mortgage Loans, will be owner occupied primary residences and 8 of the
Mortgaged Properties, which secure approximately 0.46% of the outstanding
principal balance of the Mortgage Loans, will be non-owner occupied or second
homes.
SOLICITATION PROCESS
By monitoring geographic and economic trends, Irwin attempts to identify
stable or appreciating properties within selected real estate markets. Irwin
employs a number of data resources to identify markets demonstrating past,
present, and Irwin believes, future economic viability. Among the factors
considered in such regional analysis are (i) rate of unemployment as a
percentage of the labor force, (ii) changes in the number of non-agricultural
wage and salaried employment opportunities, (iii) number of housing starts in
the trailing twelve-month period and (iv) number of months of supply of
property resale
S-19
<PAGE>
inventory. Since January 1995, Irwin has processed over twenty thousand loan
applications from an initial geographic mailing base that included areas
within 13 states. Markets within ten additional states are currently under
consideration. Irwin expects to originate its home equity loan product line
through a variety of origination channels in as many as 35 states.
Using pre-screening and list processing (response modeling) techniques,
Irwin uses direct-mail methods to contact the most creditworthy and
profitable customer segments within its targeted mail base. Irwin's target
borrowers have the following general characteristics: (i) repeat or frequent
borrowers, (ii) have one or more credit cards with higher than average
interest rates, (iii) fee and payment-level sensitive, (iv) with relatively
few banking relationships, (v) higher than average income for the target
economic region, and (vi) the substantial majority of which qualify as
traditional "A" credits.
UNDERWRITING CRITERIA
Each prospective mortgagor completes a mortgage loan application that
includes information with respect to the applicant's liabilities, income,
credit history, employment history and personal information. At least two
credit reports on each applicant from national credit reporting companies are
required. The report typically contains information relating to such matters
as credit history with local and national merchants and lenders, installment
debt payments and any record of defaults, bankruptcies, repossessions or
judgments. All of the mortgaged properties associated with such loans are
appraised by licensed or certified appraisers. All appraisers are approved by
the Servicer. The Servicer requires the appraiser to address neighborhood
conditions, site and zoning status and the condition and valuation of
improvements. Following each appraisal, the appraiser prepares a report which
includes a reproduction cost analysis (when appropriate) based on the current
cost of constructing a similar home and market value analysis based on recent
sales of comparable homes in the area. All appraisals are required to conform
to FIRREA and the Uniform Standards of Professional Appraisal Practice. All
appraisal reports are reviewed by in-house appraisers and determined to be
acceptable to Irwin before the mortgage loan is made. All home equity loans
with a credit limit of $15,000 or more are required to be covered by title
insurance policies.
ORIGINATION PROCESS
The Mortgage Loans were underwritten by Irwin in accordance with
underwriting standards developed in conjunction with Irwin Union Bank which
approves and makes the extension of credit.
MORTGAGE LOAN CLOSING PROCEDURES
The Mortgage Loans are closed and the Mortgage Files reviewed, verified
and completed in accordance with the procedures developed by Irwin in
conjunction with Irwin Union Bank and Trust Company. For each Mortgage File,
the following closing procedures are observed. Following the customer's
acceptance of the credit offer, the account executive responsible for the
mortgage loan delivers the loan file to the closing area. The documents are
drafted after verifying that all files received contain a signed "final loan
analysis" from Irwin Union Bank and Trust Company and a "signing confirmation
request" from the applicable title company. Once documents are prepared, the
loan file is delivered for review and audit to the individual responsible for
approving the closing of the loan. Following approval, the mortgage file is
delivered by overnight courier to the signing agent. Using a funding audit
checklist prepared by Irwin and Irwin Union Bank and Trust Company, the signing
agent reviews each mortgage file for completeness. At the time of funding, the
individual responsible for closing the loan will fund the appropriate account.
Using post-closing procedures developed in conjunction with Irwin Union Bank and
Trust Company, every account funded is audited for completeness.
S-20
<PAGE>
Set forth below is a description of certain additional characteristics of
the Mortgage Loans as of the Cut-Off Date (except as otherwise indicated).
Dollar amounts and percentages may not add up to totals due to rounding.
MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
MORTGAGE AGGREGATE UNPAID AGGREGATE TRUST
MORTGAGE INTEREST RATES LOANS TRUST BALANCE BALANCE
- ----------------------- ----------- ---------------- ---------------
<S> <C> <C> <C>
10.51% -- 10.75% ....... 118 $ 5,140,329.09 9.97%
10.76% -- 11.00% ....... 1 10,000.00 0.02
11.51% -- 11.75% ....... 119 4,265,620.60 8.27
12.01% -- 12.25% ....... 1 100,000.00 0.19
12.51% -- 12.75% ....... 217 7,567,160.08 14.67
13.01% -- 13.25% ....... 3 150,395.09 0.29
13.51% -- 13.75% ....... 181 5,756,553.29 11.16
14.01% -- 14.25% ....... 2 52,013.88 0.10
14.51% -- 14.75% ....... 730 25,898,231.82 50.21
15.01% -- 15.25% ....... 2 31,010.70 0.06
15.51% -- 15.75% ....... 176 2,612,407.23 5.06
----------- ---------------- ---------------
Total .................. 1,550 $51,583,721.78 100.00%
=========== ================ ===============
</TABLE>
The weighted average Mortgage Interest Rate of the Mortgage Loans will be
approximately 13.639% per annum.
GROSS MARGIN
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
MORTGAGE AGGREGATE UNPAID AGGREGATE TRUST
GROSS MARGIN LOANS TRUST BALANCE BALANCE
- --------------- ----------- ---------------- ---------------
<S> <C> <C> <C>
1.76% -- 2.00% 118 $ 5,140,329.09 9.97%
2.01% -- 2.25% 1 10,000.00 0.02
2.76% -- 3.00% 119 4,265,620.60 8.27
3.26% -- 3.50% 1 100,000.00 0.19
3.76% -- 4.00% 217 7,567,160.08 14.67
4.26% -- 4.50% 3 150,395.09 0.29
4.76% -- 5.00% 181 5,756,553.29 11.16
5.26% -- 5.50% 2 52,013.88 0.10
5.76% -- 6.00% 730 25,898,231.82 50.21
6.01% -- 7.00% 178 2,643,417.93 5.12
----------- ---------------- ---------------
Total .......... 1,550 $51,583,721.78 100.00%
=========== ================ ===============
</TABLE>
The weighted average Gross Margin of the Mortgage Loans will be
approximately 4.889% per annum.
S-21
<PAGE>
LIFETIME RATE CAP
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
MORTGAGE AGGREGATE UNPAID AGGREGATE TRUST
LIFETIME RATE CAP LOANS TRUST BALANCE BALANCE
- ----------------- ----------- ---------------- ---------------
<S> <C> <C> <C>
15.51% -- 15.75% 1 $ 38,637.13 0.07%
15.76% -- 16.00% 1 35,325.82 0.07
16.51% -- 16.75% 2 56,026.23 0.11
16.76% -- 17.00% 3 68,894.12 0.13
17.51% -- 17.75% 5 132,800.00 0.26
17.76% -- 18.00% 497 16,182,755.38 31.37
18.51% -- 18.75% 21 766,727.02 1.49
18.76% -- 19.00% 58 2,346,704.83 4.55
19.01% -- 19.25% 1 10,000.00 0.02
19.51% -- 19.75% 51 1,788,299.38 3.47
19.76% -- 20.00% 187 6,645,281.87 12.88
20.51% -- 20.75% 50 1,444,552.47 2.80
20.76% -- 21.00% 244 7,895,014.71 15.31
21.01% -- 22.00% 93 3,126,011.73 6.06
22.01% -- 23.00% 280 10,188,707.50 19.75
23.01% -- 24.00% 56 857,983.59 1.66
----------- ---------------- ---------------
Total ............ 1,550 $51,583,721.78 100.00%
=========== ================ ===============
</TABLE>
The weighted average Lifetime Rate Cap of the Mortgage Loans will be
approximately 20.152% per annum.
LIFETIME RATE FLOOR
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
MORTGAGE AGGREGATE UNPAID AGGREGATE TRUST
LIFETIME RATE FLOOR LOANS TRUST BALANCE BALANCE
- ------------------- ----------- ---------------- ---------------
<S> <C> <C> <C>
8.51% -- 8.75% ... 38 $ 1,681,237.28 3.26%
8.76% -- 9.00% ... 80 3,459,091.81 6.71
9.01% -- 9.25% ... 1 10,000.00 0.02
9.51% -- 9.75% ... 50 1,682,619.21 3.26
9.76% -- 10.00% ... 69 2,583,001.39 5.01
10.26% -- 10.50% .. 1 100,000.00 0.19
10.51% -- 10.75% .. 76 2,448,956.23 4.75
10.76% -- 11.00% .. 141 5,118,203.85 9.92
11.01% -- 11.25% .. 1 93,292.86 0.18
11.26% -- 11.50% .. 1 38,700.00 0.08
11.51% -- 11.75% .. 68 2,013,150.48 3.90
11.76% -- 12.00% .. 112 3,732,402.81 7.24
12.26% -- 12.50% .. 2 52,013.88 0.10
12.51% -- 12.75% .. 295 9,731,267.01 18.86
12.76% -- 13.00% .. 511 17,276,107.45 33.49
13.01% -- 13.25% .. 1 15,443.77 0.03
13.51% -- 13.75% .. 15 228,806.99 0.44
13.76% -- 14.00% .. 88 1,319,426.76 2.56
----------- ---------------- ---------------
Total .............. 1,550 $51,583,721.78 100.00%
=========== ================ ===============
</TABLE>
The weighted average Lifetime Rate Floor of the Mortgage Loans will be
approximately 11.78% per annum.
S-22
<PAGE>
REMAINING MONTHS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
REMAINING MONTHS NUMBER OF AGGREGATE UNPAID AGGREGATE TRUST
TO STATED MATURITY MORTGAGE LOANS TRUST BALANCE BALANCE
- ------------------ -------------- ---------------- ---------------
<S> <C> <C> <C>
233 ............... 38 $ 1,351,429.92 2.62%
234 ............... 85 3,595,089.12 6.97
235 ............... 186 6,741,341.93 13.07
236 ............... 252 8,498,641.76 16.48
237 ............... 288 9,563,489.25 18.54
238 ............... 336 10,302,131.12 19.96
239 ............... 319 9,943,880.10 19.28
240 ............... 46 1,587,718.58 3.08
-------------- ---------------- ---------------
Total ............. 1,550 $51,583,721.78 100.00%
============== ================ ===============
</TABLE>
The weighted average remaining term to stated maturity of the Mortgage
Loans will be approximately 236.94 months.
YEAR OF ORIGINATION
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
YEARS OF NUMBER OF AGGREGATE UNPAID AGGREGATE TRUST
ORIGINATION MORTGAGE LOANS TRUST BALANCE BALANCE
- ------------- -------------- ---------------- ---------------
<S> <C> <C> <C>
1995 ......... 1,550 $51,583,721.78 100.00%
-------------- ---------------- ---------------
Total ........ 1,550 $51,583,721.78 100.00%
============== ================ ===============
</TABLE>
The earliest month and year of origination of any Mortgage Loan is March,
1995 and the latest month and year of origination will be September, 1995.
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
COMBINED CUT-OFF DATE
LOAN-TO-VALUE NUMBER OF AGGREGATE UNPAID AGGREGATE TRUST
RATIOS MORTGAGE LOANS TRUST BALANCE BALANCE
- -------------------------------------- -------------- ---------------- ---------------
<S> <C> <C> <C>
0% to and including 50% 22 $ 930,320.28 1.80%
Greater than 50% to and including 55% 6 187,518.63 0.36
Greater than 55% to and including 60% 8 226,171.98 0.44
Greater than 60% to and including 65% 8 249,542.32 0.48
Greater than 65% to and including 70% 10 522,149.89 1.01
Greater than 70% to and including 75% 17 820,443.15 1.59
Greater than 75% to and including 80% 86 3,252,104.11 6.30
Greater than 80% to and including 85% 138 4,428,315.60 8.58
Greater than 85% to and including 90% 292 9,413,182.99 18.26
Greater than 90% to and including 95% 129 4,831,277.33 9.37
Greater than 95% to and including 100% 834 26,722,695.50 51.81
-------------- ---------------- ---------------
Total ................................ 1,550 $51,583,721.78 100.00%
============== ================ ===============
</TABLE>
S-23
<PAGE>
The minimum and maximum Combined Loan-to-Value Ratios of the Mortgage
Loans as of the Cut-Off Date are approximately 16.8% and 100%, respectively,
and the weighted average Combined Loan-to-Value Ratio as of the Cut-Off Date
of the Mortgage Loans is approximately 92.23%. The "Combined Loan-to-Value
Ratio" of a Mortgage Loan as of the Cut-Off Date is the ratio, expressed as a
percentage, equal to the sum of any outstanding first mortgage balance plus
the maximum available amount of credit under the Mortgage Loan as of the
Cut-Off Date divided by the appraised value of the Mortgaged Property. See
"The Trust Funds -- Mortgage Loans" in the Prospectus.
MAXIMUM CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
RANGE OF MAXIMUM CREDIT MORTGAGE AGGREGATE UNPAID CUT-OFF DATE
LIMIT UTILIZATION RATES LOANS TRUST BALANCE TRUST BALANCE
- ----------------------------------------- ----------- ---------------- ---------------
<S> <C> <C> <C>
0% to and including 5% ... 3 $ 1,109.78 0.00%
Greater than 5% to and including 10% ... 4 22,347.77 0.04
Greater than 15% to and including 20% ... 4 32,617.25 0.06
Greater than 20% to and including 25% ... 6 83,487.75 0.16
Greater than 25% to and including 30% ... 6 95,298.41 0.18
Greater than 30% to and including 35% ... 10 141,273.65 0.27
Greater than 35% to and including 40% ... 13 291,067.55 0.56
Greater than 40% to and including 45% ... 7 148,919.52 0.29
Greater than 45% to and including 50% ... 19 470,892.59 0.91
Greater than 50% to and including 55% ... 24 480,458.45 0.93
Greater than 55% to and including 60% ... 29 680,886.32 1.32
Greater than 60% to and including 65% ... 30 873,416.26 1.69
Greater than 65% to and including 70% ... 25 794,093.66 1.54
Greater than 70% to and including 75% ... 42 1,344,108.25 2.61
Greater than 75% to and including 80% ... 31 1,046,923.47 2.03
Greater than 80% to and including 85% ... 31 1,199,882.88 2.33
Greater than 85% to and including 90% ... 46 1,895,194.10 3.68
Greater than 90% to and including 95% ... 78 2,734,822.71 5.31
Greater than 95% to and including 100.00% 1,142 39,246,921.41 76.09
----------- ---------------- ---------------
Total .................................... 1,550 $51,583,721.78 100.00%
=========== ================ ===============
</TABLE>
As of the Cut-off Date, the weighted average maximum credit limit
utilization rate of the Mortgage Loans was 93.47%.
S-24
<PAGE>
SECOND MORTGAGE RATIOS
OF MORTGAGE LOANS(1)(2)
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF TRUST
RANGE OF CUT-OFF DATE MORTGAGE AGGREGATE UNPAID BALANCE IN A SECOND
SECOND MORTGAGE RATIOS LOANS TRUST BALANCE LIEN POSITION
- -------------------------------------- ----------- ---------------- --------------------
<S> <C> <C> <C>
0% to and including 10% 66 $ 1,140,920.19 2.21%
Greater than 10% to and including 20% 608 16,644,236.57 32.27
Greater than 20% to and including 30% 506 17,648,168.16 34.21
Greater than 30% to and including 40% 223 9,243,582.41 17.92
Greater than 40% to and including 50% 78 3,336,897.04 6.47
Greater than 50% to and including 60% 20 1,009,211.84 1.96
Greater than 60% to and including 70% 9 352,256.90 0.68
Greater than 70% to and including 80% 11 588,365.89 1.14
Greater than 80% to and including 90% 4 323,508.97 0.63
Greater than 90% to and including 100% 25 1,296,573.81 2.51
----------- ---------------- --------------------
Total ................................. 1,550 $51,583,721.78 100.00%
=========== ================ ====================
</TABLE>
- ------------
(1) The Second Mortgage Ratio of a Mortgage Loan is the ratio (expressed
as a percentage) of the Credit Limit of the Mortgage Loan to the sum
of such Credit Limit and the outstanding balance of any senior
mortgage computed as of the date of the origination of the Mortgage
Loan.
(2) As of the Cut-off Date, the weighted average Second Mortgage Ratio of
the Mortgage Loans was 27.94%.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF
ORIGINAL NUMBER OF CUT-OFF DATE
MORTGAGE LOAN MORTGAGE AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ----------- ----------------- -----------------
<S> <C> <C> <C>
$ 0 -- $ 25,000 545 $ 9,843,594.46 19.08%
$25,001 -- $ 50,000 754 25,227,455.03 48.91
$50,001 -- $ 75,000 177 10,003,101.77 19.39
$75,001 -- $100,000 61 5,097,223.76 9.88
$100,001 -- $150,000 10 916,113.00 1.78
$150,001 -- $200,000 3 496,233.76 0.96
----------- ----------------- -----------------
Total .............. 1,550 $51,583,721.78 100.00%
=========== ================= =================
</TABLE>
As of the Cut-off Date, the average unpaid principal balance of the Mortgage
Loans will be approximately $33,279.82.
S-25
<PAGE>
MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
PROPERTY MORTGAGE AGGREGATE UNPAID AGGREGATE TRUST
TYPE LOANS TRUST BALANCE BALANCE
- ----------------- ----------- ---------------- ---------------
<S> <C> <C> <C>
Single-family ... 1,489 $50,028,487.26 96.98%
PUD .............. 26 686,192.36 1.33
Condominiums ..... 24 580,581.70 1.13
Multi-Family/Apt. 11 288,460.46 0.56
----------- ---------------- ---------------
Total ............ 1,550 $51,583,721.78 100.00%
=========== ================ ===============
</TABLE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
MORTGAGE AGGREGATE UNPAID AGGREGATE TRUST
STATE LOANS TRUST BALANCE BALANCE
- ------- ----------- ---------------- ---------------
<S> <C> <C> <C>
CA ..... 296 $10,288,409.29 19.95%
CO ..... 102 3,546,366.27 6.87
FL ..... 317 9,785,616.39 18.97
GA ..... 105 3,134,245.97 6.08
IL ..... 125 4,428,782.90 8.59
IN ..... 38 1,122,743.05 2.18
MD ..... 18 621,413.68 1.20
MI ..... 169 5,760,602.24 11.17
NY ..... 85 2,947,274.18 5.71
OR ..... 98 3,215,737.90 6.23
PA ..... 34 1,023,370.04 1.98
UT ..... 48 1,619,040.22 3.14
VA ..... 115 4,090,119.65 7.93
----------- ---------------- ---------------
Total . 1,550 $51,583,721.78 100.00%
=========== ================ ===============
</TABLE>
No more than approximately 0.68% of the Mortgage Loans will be secured by
Mortgaged Properties located in any one zip code.
S-26
<PAGE>
The information set forth in the preceding section "Description of the
Mortgage Loans" has been based upon information provided by Irwin Home Equity
Corporation and tabulated by the Depositor. None of the Depositor, the
Trustee or the Certificate Insurer make any representation as to the accuracy
or completeness of such information.
MANDATORY REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS
IHE Funding Corp. is required, with respect to Mortgage Loans that are
found by the Trustee to have defective documentation, or in respect of which
IHE Funding Corp. has breached a representation or warranty, to repurchase
such Mortgage Loans or substitute such Mortgage Loan with a Qualified
Substitute Mortgage Loan. See "Prepayment and Yield Considerations" and
"Description of the Certificates -- Assignment of Mortgage Loans;
Representations and Warranties of the Seller" herein.
DELINQUENCY AND FORECLOSURE EXPERIENCE
The Servicer commenced receiving applications for mortgage loans under its
lending programs only in 1995. Accordingly, Irwin has insufficient historical
delinquency, bankruptcy, foreclosure or default experience that may be
referred to for purposes of estimating the future delinquency and loss
experience of mortgage loans similar to the Mortgage Loans being sold to the
Trust.
IHE FUNDING CORP.
IHE Funding Corp., a Delaware corporation headquartered in Columbus
Indiana, is a wholly-owned subsidiary of Irwin Home Equity Corporation,
incorporated in the State of Delaware on November 29, 1995. IHE Funding Corp.
was organized for limited purposes, which include purchasing mortgage loans
from the Irwin Home Equity Corporation and its affiliates, selling and
transferring such mortgage loans to third parties and any activities
incidental to and necessary or convenient for the accomplishment of such
purposes. The principal executive offices of IHE Funding Corp. are located at
500 Washington Street, Columbus Indiana 47201. The telephone number of such
offices is (812) 376-1909.
IRWIN HOME EQUITY CORPORATION
GENERAL
Irwin Home Equity Corporation ("Irwin") is an Indiana corporation with a
single origination and servicing facility in San Ramon, California. Irwin is
a direct wholly-owned subsidiary of Irwin Financial Corporation ("IFC"), a
specialized financial services company headquartered in Columbus, Indiana.
Irwin originates and services home equity loans in selected markets
nationwide using a combination of direct mail and telemarketing. Irwin's home
equity line of credit product is marketed primarily as a debt consolidation
loan for repeat or frequent borrowers with strong credit ratings. As of
September 30, 1995, Irwin had over $67.7 million in assets and had originated
$52.33 million in home equity loans. Irwin underwrites first and second lien
mortgage loans secured by one- to four-family residences located primarily in
selected markets in the United States.
Irwin, in accordance with the underwriting standards of Irwin Union Bank,
underwrote all the Mortgage Loans that Irwin Union Bank has sold to IHE
Funding Corp., pursuant to a mortgage loan sale agreement (the "Mortgage Loan
Sale Agreement") between Irwin Union Bank, as Seller thereunder, and IHE
Funding Corp., as Purchaser thereunder. IHE Funding Corp. will sell the
Mortgage Loans to the Depositor, pursuant to a mortgage loan purchase
agreement between IHE Funding Corp. and the Depositor (the "Purchase and Sale
Agreement"). On the Issue Date, the Depositor will acquire the Mortgage Loans
from IHE Funding Corp. and simultaneously therewith transfer the Mortgage
Loans to the Trust.
S-27
<PAGE>
IRWIN HOME EQUITY CORPORATION, AS SERVICER
The Mortgage Loans will be serviced by Irwin Home Equity Corporation
pursuant to the Pooling and Servicing Agreement. Irwin Home Equity
Corporation is a wholly-owned subsidiary of Irwin Financial Corporation and
maintains a loan origination and servicing office in San Ramon, California.
Irwin Home Equity Corporation also engages in mortgage loan servicing
which includes the processing and administration of mortgage loan payments in
return for a servicing fee. At September 30, 1995, Irwin Home Equity
Corporation serviced 1,582 mortgage loans with an outstanding principal
balance of approximately $52.3 million.
At September 30, 1995, Irwin Home Equity Corporation had approximately 110
employees at its offices located at 2400 Camino Ramon, Suite 375, San Ramon,
California, 94583 and its telephone number is (510) 277-2001.
In May of 1995, Providian Bancorp, Inc. ("Providian") filed an action in
the Superior Court of the State of California for the City and County of San
Francisco against the Servicer and certain of its employees claiming
misappropriation of trade secrets and other related claims. The action arises
out of allegations involving certain current employees of the Servicer who
had been employees of Providian. Irwin believes that the claims are not
meritorious and intends to vigorously defend against this action but no
assurance can be given as to the outcome of this litigation. See "Servicing
the Mortgage Loans -- Removal and Resignation of the Servicer."
The following table sets forth certain information regarding the principal
balance of one- to four-family residential mortgage loans included in the
Servicer's servicing portfolio. The Servicer's servicing portfolio includes
mortgage loans held for sale and mortgage loans held for investment
(including mortgage loans held for Irwin Home Equity Corporation) which were
originated or acquired by the Servicer's mortgage banking operations.
THE SERVICER'S SERVICING PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDING
DECEMBER 31, 1994 SEPTEMBER 30, 1995
----------------- ------------------
<S> <C> <C>
Beginning servicing portfolio . $0 $ 0
Add:
Loans originated or acquired . 0 52,326,833.64
Subsequent draws (net of
prepayments).................. 0 12,689.76
Deduct:
Sale of servicing rights ..... 0 0
Loans sold, servicing released 0 0
Ending servicing portfolio .... $0 $52,339,523.40
================= ==================
Number of loans serviced ...... 0 1,582
Average loan size .............. N/A $ 33,084.40
================== ==================
</TABLE>
The information set forth in this section concerning the Servicer has been
provided by Irwin Home Equity Corporation. None of the Depositor, the Trustee
or the Certificate Insurer make any representation as to the accuracy or
completeness of such information.
S-28
<PAGE>
ALLOCATIONS OF PAYMENTS ON THE MORTGAGE LOANS
BETWEEN THE TRUST BALANCES AND THE ADDITIONAL BALANCES
The Mortgage Loans have been sold and assigned to the Trust Fund. The
REMIC 1995-2 is designated to include the right to receive payments
calculated in an amount equal to the aggregate outstanding principal balance
of the Mortgage Loans as of the close of business on the Cut-off Date, and
the right to receive all payments of interest thereon after the Cut-Off Date
(net of Servicing Fees). Although each Loan Agreement could evidence more
than the Trust Balance, whether arising subsequent to the Cut-off Date or
prior thereto, the balance allocated to the REMIC 1995-2 and allocated to the
Class A Certificates will be established as of the Cut-off Date. Future
payments on each Mortgage Loan will be allocated between the Class A
Certificates representing the Trust Balances and the Other Certificates
representing the Additional Balances in the following manner:
(a) Payments of interest by the Mortgagor on a Mortgage Loan with
respect to which an Additional Balance has been drawn will be allocated on
a pro rata basis between the Trust Balance thereof and such Additional
Balance in proportion to the interest owed on each balance.
(b) Any prepayments of principal received in respect of a Mortgage
Loan and any remaining portion of any Mortgage Loan payment which
represents the principal portion of the Monthly Payment (including any
Insurance Proceeds which are not Liquidation Proceeds and are applied in
reduction of a principal balance of the Mortgage Loan) will be applied
first to the Trust Balance of such Mortgage Loan until such Trust Balance
is reduced to zero, and then to any Additional Balance of such Mortgage
Loan arising from advances to the Mortgagor subsequent to the Cut-off
Date. When the Trust Balance of a particular Mortgage Loan has been
reduced to zero in this manner the Mortgage Loan will be released by the
Trustee to the holder of the Other Certificates representing the interest
in any Additional Balances.
(c) Net Liquidation Proceeds received on a Defaulted Mortgage Loan
will be allocated first to unpaid interest in the manner described above.
Any remaining proceeds will be allocated on a pro rata basis to the Trust
Balances and the Additional Balances according to the ratio of the Trust
Balance to such Additional Balance of such Defaulted Mortgage Loan
immediately prior to such time as it became a Defaulted Mortgage Loan.
On or prior to the Issue Date, the Trustee will have received an opinion
of the general counsel to Irwin Financial Corporation with respect to the
enforceability of provisions in the Pooling and Servicing Agreement regarding
the application and administration of payments under the mortgage loan
agreements requiring principal payments made on the Mortgage Loans to be
allocated first to the earliest draws made thereon. Currently, amounts
distributed on Other Certificates will be distributed on a pro rata basis to
the holders of such Other Certificates. In accordance with the Pooling and
Servicing Agreement, the Seller may enter into supplements to such Pooling
and Servicing Agreements which alter the allocation and distribution of such
payments to holders of such Other Certificates.
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, a Class A Certificate will be directly related to the
rate of payment of principal of the Mortgage Loans, including for this
purpose voluntary payment in full of Mortgage Loans prior to stated maturity,
liquidations due to defaults, casualties and condemnations, and repurchases
of or substitutions for Mortgage Loans by the Servicer as required or
permitted under the Pooling and Servicing Agreement or the Purchase and Sale
Agreement.
The actual rate of principal prepayments on pools of mortgage 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
mortgage loans at any time because of specific factors relating to the
mortgage loans in the particular pool, including, among other things, the age
of the mortgage 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 employment.
S-29
<PAGE>
All of the Mortgage Loans are prepayable by the related Mortgagors on the
Mortgage Notes without penalty.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates fall significantly below the interest rates at the time of origination,
mortgage loans may be subject to higher prepayment rates than if prevailing
rates remain at or above those at the time such mortgage loans were
originated. Conversely, if prevailing interest rates rise appreciably above
the interest rates at the time of origination, mortgage loans may experience
a lower prepayment rate than if prevailing rates remain at or below those at
the time such mortgage loans were originated. However, there can be no
assurance that the Mortgage Loans will conform to the prepayment experience
of conventional mortgage loans or to any past prepayment experience or any
published prepayment forecast. No assurance can be given as to the level of
prepayments on Mortgage Loans that the REMIC 1995-2 will experience.
As indicated above, if purchased at other than par, the yield to maturity
on a Class A Certificate will be affected by the rate of the payment of
principal of the Mortgage Loans. If the actual rate of payments on the
Mortgage Loans 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 higher than such investor's anticipated yield. If the actual
rate of payments on the Mortgage Loans 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.
In addition, the rate of prepayments may vary as between Mortgage Loans
with Additional Balances and Mortgage Loans without Additional Balances. To
the extent that Mortgage Loans without Additional Balances prepay all or a
portion of the outstanding Principal Balance of such Mortgage Loan, Class A
Certificateholders may realize a significantly different yield on their
investment than is otherwise experienced by the holder of the Other
Certificates.
The following discussion assumes the characteristics set forth in the
tables below. For the purpose of this table, the Final Scheduled Maturity
Date for the Class A Certificates is expected to be October 15, 2016, which
is 12 months after the final stated maturity date of the Mortgage Loan having
the latest maturity date. The weighted average life of the Class A
Certificates is likely to be shorter than would be the case if payments
actually made on the Mortgage Loans conformed to the foregoing assumption,
and the final Remittance Date with respect to any Class of the Class A
Certificates could occur significantly earlier than the Final Scheduled
Maturity Date, because (i) prepayments (including, for this purpose,
prepayments attributable to foreclosure, liquidation, repurchase and the
like) on Mortgage Loans are likely to occur, (ii) twelve months have been
added to obtain the Final Scheduled Maturity Date above, and (iii) the
Servicer may cause a liquidation of the REMIC 1995-2 when the aggregate
outstanding Class A Principal Balance of the Mortgage Loans is less than
10% of the aggregate Principal Balance of the Mortgage Loans as of the
Cut-Off Date.
"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 is scheduled to be repaid to an investor. The weighted
average life of the Class A Certificates will be influenced by the rate at
which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes liquidations due to default). Prepayments on mortgage
loans are commonly measured relative to a prepayment standard or model. The
model used in this Prospectus Supplement (the "Constant Prepayment Rate" or
"CPR") represents an assumed annualized rate of prepayment relative to the
then outstanding principal balance on a pool of new mortgage loans.
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<PAGE>
The following table regarding the Class A Certificates has been prepared
assuming that (i) the information with respect to the Mortgage Loans is as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED
AGGREGATE WEIGHTED AVERAGE MORTGAGE INTEREST ORIGINAL TERM TO REMAINING TERM AVERAGE
TRUST MORTGAGE INTEREST RATE (NET OF MATURITY (IN TO MATURITY (IN GROSS
BALANCE RATE SERVICING FEE) MONTHS) MONTHS) MARGIN
- --------------- ----------------- ----------------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
$ 51,583,721.78 13.64% 12.64% 240 237 4.889
</TABLE>
(ii) all calculations are done on the basis of a 360-day year consisting of
twelve 30-day months and the interest rate is fixed for the remaining term to
maturity at the weighted average mortgage interest rate noted in (i); (iii)
payment dates on each Mortgage Loan are the 15th day of the month; (iv) all
scheduled monthly payments on the Mortgage Loans are made in a timely
fashion; (v) all prepayments represent prepayments in full and there are no
Prepayment Interest Shortfalls; (vi) distributions on the Class A
Certificates are made on the 15th day of each month, commencing on December
15, 1995; (vii) the Issue Date is December 6, 1995; (viii) the Mortgage Loans
will prepay at the indicated constant CPR assumptions set forth below and
(ix) with regard to the weighted average lives the Servicer does not exercise
its option to terminate the REMIC 1995-2 when the aggregate principal balance
of the Mortgage Loans is reduced to less than 10% of the aggregate Principal
Balance of the Mortgage Loans as of the Cut-Off Date.
Based upon the foregoing assumptions, certain of which may not reflect
actual experience, the following table indicates the projected weighted
average life of the Class A Certificates at various CPR assumptions. As used
in the table, 0% CPR indicates no prepayments, 15% indicates prepayments at
an annual rate of 15%, and so forth.
CLASS A CERTIFICATES
<TABLE>
<CAPTION>
WEIGHTED EARLIEST RETIREMENT
AVERAGE LIFE AT THE SERVICER'S
YEARS (1) OPTION (2)
-------------- -------------------
<S> <C> <C>
CPR
- ---
0% .......... 15.83 15.80
10% .......... 7.61 7.43
15% .......... 5.62 5.34
20% .......... 4.31 4.01
25% .......... 3.41 3.12
26% .......... 3.26 2.97
30% .......... 2.77 2.51
35% .......... 2.30 2.08
</TABLE>
- ------------
(1) The weighted average life of the Class A Certificates is determined
by (a) multiplying the amount of each principal payment by the number
of years from the Issue Date to the related Remittance Date; (b)
adding the results; and (c) dividing the sum by the original Class A
Principal Balance.
(2) Determined assuming early retirement of the Class A Certificates upon
termination of the REMIC 1995-2 on the Remittance Date following the
first day of the month in which the aggregate unpaid principal
balance of the mortgage loans described in the table set forth in
clause (a) of the immediately preceding paragraph declines to a level
less than 10% of the aggregate principal balance of such mortgage
loans.
There is no assurance that prepayments will occur or, if they do occur,
that they will occur at any percentage of CPR.
The Pooling and Servicing Agreement provides that none of the Certificate
Insurer, the Trust or REMIC 1995-2, the Trustee, the Depositor or the
Servicer will be liable to any Certificateholder or Holder
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<PAGE>
for any loss or damage incurred by such Certificateholder or Holder as a
result of any difference in the rate of return received by such
Certificateholder or Holder as compared to the applicable Pass-Through Rate,
with respect to any Holder of Class A Certificates upon reinvestment of the
funds received in connection with any premature repayment of principal on the
Certificates, including any such repayment resulting from any prepayment by
the Mortgagor, any liquidation of such Mortgage Loan, or any repurchase of or
substitution for any Mortgage Loan by the Servicer.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Class A Certificates will be issued by and represents interests in
certain segregated assets of the Trust designated as the REMIC 1995-2. In
addition to the Class A Certificates, the Trust will also issue the Class R
Certificates and the Exchangeable Certificate, and may issue Additional
Certificates. The Class R Certificates have been designated as the single
"residual interest" for purposes of the Code. The Class R Certificates are
not being offered hereby. Pursuant to the Purchase and Sale Agreement, the
Class R Certificates and the Exchangeable Certificate will be transferred to
the Seller on the Issue Date as part of the consideration for the transfer of
the Mortgage Loans to the Depositor and the transfer of the Additional
Balances on the Mortgage Loans to the Trust Fund, respectively.
Each Class A Certificate represents a certain fractional undivided
ownership interest in the REMIC 1995-2 created and held pursuant to the
Pooling and Servicing Agreement described below, subject to the limits and
the priority of distribution described therein. The REMIC 1995-2 consists of,
with respect to any Mortgage Loan as to which a Trust Balance is still owing
to such REMIC, (a) the Trust Balances of the Mortgage Loans, together with
(i) all collections thereon and proceeds thereof collected after the Cut-Off
Date (other than Monthly Payments due on each Mortgage Loan up to and
including any Due Date occurring on or prior to the Cut-Off Date), and (ii)
all mortgage files relating thereto, (b) such assets as from time to time are
identified as REO Property and collections thereon and proceeds thereof, (c)
assets that are deposited in the Certificate Account, including amounts on
deposit in the Certificate Account and invested in Permitted Investments, (d)
the Reserve Account, (e) the Trustee's rights with respect to the Mortgage
Loans under all insurance policies required to be maintained pursuant to the
Pooling and Servicing Agreement and any insurance proceeds, (f) Liquidation
Proceeds (excluding any amounts allocated to the Additional Balances) and (g)
released mortgaged property proceeds (excluding any amounts allocated to the
Additional Balances). The Trust Fund owns all the Accounts, Additional
Balances and all collections with respect thereto. In addition, the Depositor
has caused the Certificate Insurer to issue the Certificate Insurance Policy
under which it will guarantee payments to the Class A Certificateholders as
described herein.
BOOK-ENTRY REGISTRATION
The Class A Certificates will be issued only in book-entry form, in
denominations of $1,000 initial principal balance with integral multiples
thereof, except that one Class A Certificate may be issued in a different
amount.
The Class A Certificates initially will be represented by a single
physical certificate registered in the name of Cede, as nominee of DTC, which
will be the "Holder" or "Certificateholder" of the Class A Certificates as
such terms are used in the Pooling and Servicing Agreement. No Beneficial
Owner will be entitled to receive a certificate representing such person's
interest in the Class A Certificates, except as set forth below under " --
Definitive Certificates" below. Unless and until Definitive Class A
Certificates are issued under the limited circumstances described herein, all
references to actions taken by Certificateholders or holders shall, in the
case of Class A Certificates, refer to actions taken by DTC upon instructions
from its Participants (as defined below), and all references herein to
distributions, notices, reports and statements to Certificateholders or
holders shall, in the case of Class A Certificates, refer to distributions,
notices, reports and statements to DTC or Cede, as the registered holder of
the Class A Certificates, as the case may be, for distribution to Beneficial
Owners in accordance with DTC procedures.
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<PAGE>
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Securities Exchange Act of 1934, as
amended. DTC was created to hold securities for its participating
organizations ("Participants") and to facilitate the clearance and settlement
of securities transactions between Participants through electronic
book-entries, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers (including
the Underwriter), banks, trust companies and clearing corporations. Indirect
access to the DTC system also is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Certificates, such as the Class A Certificates, among Participants
on whose behalf it acts with respect to the Book-Entry Certificates and to
receive and transmit distributions of principal of and interest on the
Book-Entry Certificates. Participants and Indirect Participants with which
Beneficial Owners have accounts with respect to the Book-Entry Certificates
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Beneficial Owners.
Beneficial Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Certificates may do so only through Participants and
Indirect Participants. In addition, Beneficial Owners will receive all
distributions of principal and interest from the Trustee, or a paying agent
on behalf of the Trustee, through DTC Participants. DTC will forward such
distributions to its Participants, which thereafter will forward them to
Indirect Participants or Beneficial Owners. Beneficial Owners will not be
recognized by the Trustee, the Servicer or any paying agent as
Certificateholders, as such term is used in the Pooling and Servicing
Agreement, and Beneficial Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its Participants.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Beneficial Owner to pledge Book-Entry Certificates to persons or entities
that do not participate in the DTC system, or to otherwise act with respect
to such Book-Entry Certificates, may be limited due to the lack of a physical
certificate for such Book-Entry Certificates. In addition, under a book-entry
format, Beneficial Owners may experience delays in their receipt of payments,
since distributions will be made by the Trustee, to Cede, as nominee for DTC.
DTC has advised the Depositor and the Servicer that it 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 accounts with DTC the Book-Entry Certificates are credited.
Additionally, DTC has advised the Depositor that it will take such actions
with respect to specified percentages of voting rights only at the direction
of and on behalf of Participants whose holdings of Book-Entry Certificates
evidence such specified percentages of voting rights. DTC may take
conflicting actions with respect to percentages of voting rights to the
extent that Participants whose holdings of Book-Entry Certificates evidence
such percentages of voting rights authorize divergent action.
None of the Depositor, the Servicer, the Certificate Insurer or the
Trustee will have any responsibility for any aspect of the records relating
to or payments made on account of beneficial ownership interests of the
Book-Entry Certificates held by Cede, as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
DEFINITIVE CERTIFICATES
The Class A Certificates, which will be issued initially as Book-Entry
Certificates, will be converted to Definitive Certificates and reissued to
Beneficial Owners or their nominees, rather than to DTC or its nominee, only
if (a) the Depository or the Servicer advises the Trustee in writing that DTC
is no longer
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<PAGE>
willing or able to discharge properly its responsibilities as depository with
respect to the Book-Entry Certificates and the Depository or the Servicer is
unable to locate a qualified successor or (b) the Trustee, at its option,
elects to terminate the book-entry system through DTC.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon delivery of
Definitive Certificates, the Trustee will reissue the Book-Entry Certificates
as Definitive Certificates to Beneficial Owners. Distributions of principal
of, and interest on, the Book-Entry Certificates will thereafter be made by
the Trustee, or a paying agent on behalf of the Trustee, directly to holders
of Definitive Certificates in accordance with the procedures set forth in the
Pooling and Servicing Agreement.
The Exchangeable Certificate and any Additional Certificates will be
issued in definitive form on the Issue Date in consideration of the sale of
the Additional Balances that may, from time to time, be added to the Mortgage
Loans and to the Trust Fund.
Definitive Certificates will be transferable and exchangeable at the
offices of the Trustee or the certificate registrar. No service charge will
be imposed for any registration of transfer or exchange, but the Trustee may
require payment by the Beneficial Owner of a sum sufficient to cover any tax
or other governmental charge imposed in connection therewith.
OTHER CERTIFICATES
In addition to the Certificates, the Trust will also issue the
Exchangeable Certificate which will represent interests in Additional
Balances. Such Exchangeable Certificates may be issued and reissued to and at
the request of the Seller and may be used by the holder of such Exchangeable
Certificate as collateral for the issuance of other certificates from other
trusts like the REMIC 1995-2. The amount of such interest may change from
time to time in a manner defined in a Supplement. The Trust may also issue
new series of certificates like the Certificates which will also represent
interests in Additional Balances (the "Additional Certificates" and with the
"Exchangeable Certificates," the "Other Certificates"). The amount of such
interest will be fixed in a manner defined in a Supplement. Such new series
of certificates may be offered in public offerings or private placements. THE
ADDITIONAL BALANCES SERVING AS COLLATERAL FOR THE ADDITIONAL CERTIFICATES
WILL NOT SERVE AS COLLATERAL FOR THE CERTIFICATES. ALTHOUGH PRINCIPAL
PAYMENTS ON EACH MORTGAGE LOAN WITH AN ADDITIONAL BALANCE ARE ALLOCATED TO
THE TRUST BALANCE OF SUCH MORTGAGE LOAN UNTIL SUCH TRUST BALANCE IS REDUCED
TO ZERO, INTEREST PAYMENTS ON THE MORTGAGE LOAN AND NET LIQUIDATION PROCEEDS
IN RESPECT THEREOF WILL ONLY BE AVAILABLE TO CERTIFICATEHOLDERS ACCORDING TO
THE PROPORTION THE ADDITIONAL BALANCE OF SUCH MORTGAGE LOAN STANDS IN
RELATION TO THE SUM OF THE TRUST BALANCE AND THE ADDITIONAL BALANCE OF SUCH
MORTGAGE LOAN. For the purposes of this Prospectus Supplement, the
Exchangeable Certificate and any additional Series of Certificates issued by
the Trust will not be treated as Certificates.
EXCHANGES
The Pooling and Servicing Agreement provides that the Holder of the
Exchangeable Certificate may tender the Exchangeable Certificate to the
Trustee in exchange for (i) one or more newly issued Series of Certificates
and (ii) a reissued Exchangeable Certificate (any such tender, an
"Exchange"). The Holder of the Exchangeable Certificate may perform an
Exchange by notifying the Trustee, in writing at least five days in advance
(an "Exchange Notice") of the date upon which the Exchange is to occur (an
"Exchange Date"). Any Exchange Notice shall state the designation of any
Series of Other Certificates to be issued on the Exchange Date and, with
respect to each such exchange and issuance: (i) the Additional Balances of
the Mortgage Loans to which such exchange of certificates relates and (ii) if
the exchange involves the issuance of a Series of Additional Certificates (a)
its initial Principal Balance (or the method for calculating such initial
Principal Balance), which at any time may not be greater than the current
principal amount of the Exchangeable Certificate at such time (or in the case
of an Exchange, the sum of the Principal Balance of the Series of
Certificates to be exchanged plus the current principal amount of the
Exchangeable Certificate), (b) its interest rate (or the method for
allocating interest payments or other
S-34
<PAGE>
cash flows to such Series), if any, and (c) the method of Credit Enhancement,
if any, with respect to such Series. The Pooling and Servicing Agreement
further provides that on the Exchange Date, the Trustee shall authenticate
and deliver any such Series of Certificates only upon delivery to it of a
Supplement satisfying the criteria set forth in the Pooling and Servicing
Agreement, and if such Series of Certificates is a Series of Additional
Certificates, each of the following: (a) the applicable Credit Enhancement,
if any, (b) the agreement, if any, pursuant to which the provider of Credit
Enhancement agrees to provide such Credit Enhancement, if any, (c) an opinion
of counsel to the effect that the newly issued Series of Certificates will
elect to be treated as a REMIC for Federal income tax purposes (or as a
comparable Federal income tax structure), that the issuance of the newly
issued Series of Certificates will not adversely affect the Federal income
tax characterization of any outstanding Certificates or other outstanding
Additional Certificates, (d) written confirmation from each nationally
recognized statistical rating organization rating the Series of Certificates
(each a "Rating Agency") that the Exchange will not result in such Rating
Agency's reducing or withdrawing its rating on any then outstanding Series as
to which it has provided a rating (considered without regard to any credit
enhancement), and (e) the existing Exchangeable Certificate or applicable
Certificates, as the case may be. Upon satisfaction of such conditions, the
Trustee shall cancel the existing Exchangeable Certificate or applicable
Other Certificates, as the case may be, and issue, as provided above, such
Series of Certificates and a new Exchangeable Certificate, dated the Exchange
Date. There is no limit to the number of Exchanges that may be performed
under the Agreement. In connection with any Exchange, additional Mortgage
Loans may be added to or subtracted from the Trust Fund, however no Mortgage
Loans will be deleted from, and no new Mortgage Loans will be designated as
included in, the REMIC 1995-2.
As provided in the Pooling and Servicing Agreement, and in connection with
an Exchange, each of the Servicer, the Depositor and the Trustee shall
execute a Supplement, which shall specify the relevant terms with respect to
any newly issued Series of Certificates. The terms of such Supplement may
modify or amend the terms of the Pooling and Servicing Agreement solely as
applied to such exchange and issuance. If on the date of the issuance of such
Series there is issued and outstanding one or more Series of Certificates and
no Series of Certificates is currently rated by a Rating Agency, then as a
condition to such Exchange a nationally recognized investment banking firm or
commercial bank shall also deliver to the Trustee an officer's certificate
stating, in substance, that the Exchange will not have an adverse effect on
the timing or distribution of payments to such other Series of Certificates
then issued and outstanding.
In connection with any issuance of Other Certificates, the holders of any
outstanding certificates will be entitled to review a summary of the general
terms of any Supplement governing such Other Certificates.
ASSIGNMENT OF MORTGAGE LOANS
Pursuant to the Purchase and Sale Agreement between IHE Funding Corp. and
the Depositor, IHE Funding Corp. will sell, transfer, assign, set over and
otherwise convey the Mortgage Loans without recourse to the Depositor on the
Issue Date. Pursuant to the Pooling and Servicing Agreement, the Depositor
will sell, transfer, assign, set over and otherwise convey without recourse
to the Trustee in trust for the benefit of the Certificateholders and the
Certificate Insurer all right, title and interest in and to each Mortgage Loan.
Each such transfer will convey all right, title and interest in and to (a)
principal due to the extent of the Trust Balance and (b) interest accruing
thereon after the Cut-Off Date; provided, however, that IHE Funding Corp. will
not convey, and IHE Funding Corp. reserves and retains all its right, title and
interest in and to, (i) principal (including principal prepayments in full and
curtailments (i.e., partial prepayments)) received on each such Mortgage Loan on
or prior to the Cut-Off Date and (ii) interest accrued on each Mortgage Loan on
or prior to the Due Date immediately preceding the Cut-Off Date.
In connection with such transfer and assignment, the Depositor will cause
to be delivered to the Trustee on the Issue Date the following documents
(collectively, with respect to each Mortgage Loan, the "Trustee's Mortgage
File") with respect to each Mortgage Loan:
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<PAGE>
(a) The original Mortgage Note, endorsed by the holder of record
without recourse in the following form: "Pay to the order of ,
without recourse" and signed in the name of the holder of record, and
if by the Seller, by an authorized officer;
(b) The original Mortgage with evidence of recording indicated
thereon; provided, however, that if such Mortgage has not been returned
from the applicable recording office, then such recorded Mortgage shall
be delivered when so returned;
(c) An assignment of the original Mortgage, in suitable form for
recordation in the jurisdiction in which the related Mortgaged Property is
located, in the name of the holder of record of the Mortgage Loan by an
authorized officer (with evidence of submission for recordation of such
assignment in the appropriate real estate recording office for such
Mortgaged Property to be received by the Trustee within 14 days of the
Issue Date); provided, however, that assignments of mortgages shall not be
required to be submitted for recording with respect to any Mortgage Loan
which relates to the Trustee's Mortgage File if the Trustee, each of the
Rating Agencies and the Certificate Insurer shall have received an opinion
of counsel satisfactory to the Trustee, each of the Rating Agencies and
the Certificate Insurer stating that, in such counsel's opinion, the
failure to record such assignment shall not have a materially adverse
effect on the security interest of the Trustee in the Mortgage; provided,
further, that any assignment not submitted for recordation within 14 days
of the Issue Date shall be recorded upon the earlier to occur of (i)
receipt by the Trustee of the Certificate Insurer's written direction to
record such Mortgage, (ii) the occurrence of any Event of Default, as such
term is defined in the Pooling and Servicing Agreement, or (iii) a
bankruptcy or insolvency proceeding involving the Mortgagor is initiated
or foreclosure proceedings are initiated against the Mortgaged Property as
a consequence of an event of default under the Mortgage Loan; provided,
further, that if the related Mortgage has not been returned from the
applicable recording office, than such assignment shall be delivered when
so returned (and a blanket assignment with respect to such Mortgage shall
be delivered on the Issue Date);
(d) Any intervening assignments of the Mortgage with evidence of
recording thereon;
(e) Any assumption, modification, consolidation or extension
agreements; and
(f) The policy of title insurance (or a commitment for title
insurance, if the policy is being held by the title insurance company
pending recordation of the Mortgage) and the certificate of primary
mortgage guaranty insurance, if any, issued with respect to such Mortgage
Loan, provided, however, that Mortgage Loans under $15,000 which are in a
second lien position and are submitted for review of title after July 10,
1995 shall be exempt from this requirement.
Pursuant to the Pooling and Servicing Agreement, the Trustee agrees to
execute and deliver on or prior to the Issue Date an acknowledgment of
receipt of the Certificate Insurance Policy and, for each Mortgage Loan, the
original Mortgage Note, item (a) above, with respect to the Mortgage Loans
(with any exceptions noted). The Trustee agrees, for the benefit of the
Certificateholders and the Certificate Insurer, to review (or cause to be
reviewed) each Trustee's Mortgage File within 45 Business Days after the
Issue Date (or, with respect to any Qualified Substitute Mortgage Loan,
within 45 Business Days after the receipt by the Trustee thereof) and to
deliver a certification generally to the effect that, as to each Mortgage
Loan listed in the Mortgage Loan Schedule, (a) all documents required to be
delivered to it pursuant to the Purchase and Sale Agreement are in its
possession, (b) each such document has been reviewed by it and has not been
mutilated, damaged, torn or otherwise physically altered, appears regular on
its face and relates to such Mortgage Loan, and (c) based on its examination
and only as to the foregoing documents, certain information set forth on the
Mortgage Loan Schedule accurately reflects the information set forth in the
Trustee's Mortgage File delivered on such date.
If the Trustee or the Certificate Insurer during the process of reviewing
the Trustee's Mortgage Files finds any document constituting a part of a
Trustee's Mortgage File which is not executed, has not been received or is
unrelated to the Mortgage Loans, or that any Mortgage Loan does not conform
to the requirements above or to the description thereof as set forth in the
Mortgage Loan Schedule, the Trustee or the Certificate Insurer, as
applicable, shall promptly so notify the Trustee, the Servicer, the Seller
and the Certificate Insurer. The Seller agrees to use reasonable efforts to
cause to be remedied a material defect in a document constituting part of a
Trustee's Mortgage File of which it is so notified by the Trustee. If,
however, within 60 days after the Trustee's notice to it respecting such
defect the Seller has not caused to be remedied the defect and the defect
materially and adversely affects the interest of the Holders in the Trust
Balance of the Mortgage Loan or the interests of the Certificate Insurer, the
Seller will either
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<PAGE>
(i) substitute in lieu of such Mortgage Loan a Qualified Substitute Mortgage
Loan and, if the then outstanding principal balance of such Qualified
Substitute Mortgage Loan is less than the applicable Trust Balance of such
Mortgage Loan as of the date of such substitution plus accrued and unpaid
interest thereon, deliver to the Servicer as part of the related monthly
remittance remitted by the Servicer the amount of any such shortfall (the
"Substitution Adjustment") or (ii) purchase such Mortgage Loan at a price
equal to the outstanding Principal Balance of such Mortgage Loan as of the
date of purchase, plus the greater of (x) all accrued and unpaid interest
thereon or (y) 30 days' interest thereon, computed at the related Mortgage
Interest Rate, plus the amount of any unreimbursed Servicing Advances made by
the Servicer, which purchase price shall be deposited in the Collection Account
or Trustee Collection Account on the next succeeding Determination Date after
deducting therefrom any amounts received in respect of such repurchased Mortgage
Loan or Loans and being held in the Collection Account or Trustee Collection
Account for future distribution to the extent such amounts have not yet been
applied to principal or interest on such Mortgage Loan (see " -- Flow of Funds"
below); provided, however, that the Seller may not purchase the Principal
Balance of any Mortgage Loan that is not in default or as to which no default is
imminent pursuant to clause (ii) preceding unless the Seller has theretofore
caused to be delivered to the Trustee an opinion of counsel knowledgeable in
federal income tax matters which states that such a purchase would not
constitute a prohibited transaction under the Code.
A "Qualified Substitute Mortgage Loan" is defined in the Pooling and
Servicing Agreement as any mortgage loan or mortgage loans which (i) has or
have the same interest rate index and a margin over such index and maximum
interest rate at least equal to those applicable to the deleted Mortgage
Loan, (ii) relates or relate to a detached one-family residence or to the
same type of residential dwelling as the deleted Mortgage Loan and in each
case has or have the same or a better lien priority as the deleted Mortgage
Loan with a Borrower having the same or better traditionally ranked credit
status and is an owner-occupied Mortgaged Property, (iii) matures or mature
no later than (and not more than one year earlier than) the deleted Mortgage
Loan, (iv) has or have a Loan-to-Value Ratio or Loan-to-Value Ratios at the
time of such substitution no higher than the Loan-to-Value Ratio of the
deleted Mortgage Loan, (v) has or have a principal balance or principal
balances (after application of all payments received on or prior to the date
of substitution)(which shall be the Trust Balance or Trust Balances thereof)
not substantially less and not more than the Trust Balance of the deleted
Mortgage Loan as of such date, (vi) satisfies or satisfy the criteria set
forth from time to time in the definition of "qualified replacement mortgage"
at Section 860G(a)(4) of the Code (or any successor statute thereto) and
(vii) complies or comply as of the date of substitution with each
representation and warranty set forth in the Purchase and Sale Agreement.
REPRESENTATIONS AND WARRANTIES OF THE SELLER
IHE Funding Corp. will represent, among other things, with respect to each
Mortgage Loan, as of the Issue Date, the following:
(a) The information set forth in the Mortgage Loan Schedule with
respect to each Mortgage Loan is true and correct;
(b) All of the original or certified documentation constituting the
Trustee's Mortgage Files (including all material documents related
thereto) has been or will be delivered to the Trustee on the Issue Date or
as otherwise provided in the Purchase and Sale Agreement;
(c) Each Mortgaged Property is improved by a one- to four-family
residential dwelling, which does not include cooperatives or mobile homes
other than permanently affixed, double-wide manufactured housing units, as
defined in the FNMA Selling Guide, and does not constitute other than real
property under state law;
(d) Each Mortgage Note will provide for a schedule of Monthly Payments
which are, if timely paid, sufficient to fully amortize the principal
balance of such Mortgage Note on or before its maturity date and to pay
interest at the applicable Mortgage Interest Rate;
(e) Each Mortgage is a valid, subsisting, enforceable and perfected
first or second lien on the Mortgaged Property, including all buildings on
the Mortgaged Property and all installations and
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<PAGE>
mechanical, electrical, plumbing, heating and air conditioning systems
located in or annexed to such buildings, and all additions, alterations
and replacements made at any time with respect to the foregoing. The first
lien of the Mortgage is subject only to:
(i) the lien of current real property taxes and assessments not yet
due and payable;
(ii) covenants, conditions and restrictions, rights of way,
easements and other matters of the public record as of the date of
recording acceptable to prudent mortgage lending institutions
generally and specifically referred to in the lender's title insurance
policy delivered to the originator of the Mortgage Loan and referred
to or otherwise considered in the appraisal made for the originator of
the Mortgage Loan; and
(iii) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security
intended to be provided by the Mortgage or the use, enjoyment, value
or marketability of the related Mortgaged Property.
Any security agreement, chattel mortgage or equivalent document
related to and delivered in connection with the Mortgage Loan establishes
and creates a valid, subsisting and enforceable first lien and first
priority security interest on the property described therein and
immediately prior to the sale of such Mortgage Loan to the Depositor under
the Purchase and Sale Agreement, the Seller had full right to sell and
assign the same to the Depositor under such Purchase and Sale Agreement.
The Mortgaged Property was not, as of the date of origination of the
Mortgage Loan, subject to a mortgage, deed of trust, deed to secure debt
or other security instrument creating a lien subordinate to the lien of
the Mortgage;
(f) Following the execution of the Mortgage Loan Sale Agreement
between IHE Funding Corp., as purchaser, and Irwin Union Bank and Trust
Company, a state chartered community bank headquartered in Columbus,
Indiana, as seller, and immediately prior to the sale of the Mortgage Loan
to the Depositor under the applicable Purchase and Sale Agreement, (i) IHE
Funding Corp. was the sole owner and holder of each Mortgage Loan, (ii)
each Mortgage Loan was not otherwise assigned or pledged, (iii) IHE
Funding Corp. had good, indefeasible and marketable title thereto, (iv)
IHE Funding Corp. had full right to transfer and sell the Mortgage Loan
therein to the Depositor under such Purchase and Sale Agreement free and
clear of any encumbrance, equity interest, participation interest, lien,
pledge, charge, claim or security interest, and (v) IHE Funding Corp. had
full right and authority subject to no interest or participation of, or
agreement with, any other party, to sell and assign each Mortgage Loan to
the Depositor under such Purchase and Sale Agreement, and following the
sale of each Mortgage Loan, the Depositor will own such Mortgage Loan free
and clear of any encumbrance, equity interest, participation interest,
lien, pledge, charge, claim or security interest;
(g) Each Mortgage Note is payable on the 15th day of each month. The
Mortgage Interest Rate and Monthly Payment are adjusted in accordance with
the terms of the Mortgage Note. All required notices of interest rate and
payment amount adjustments have been sent to the Mortgagor on a timely
basis and the computations of such adjustments were properly calculated.
Installments of interest are subject to change due to the adjustments to
the Mortgage Interest Rate on each Interest Adjustment Date, with interest
calculated and payable in arrears, sufficient to amortize, beginning after
the tenth anniversary thereof, the Mortgage Loan fully by the stated
maturity date. Complete amortization of the Mortgage Loan will generally
occur over an original term of twenty years from the date of origination
and ten years from the commencement of amortization. Such amortization
shall commence in the eleventh year of the original stated term to
maturity; the first ten years of payments on the Mortgage Loan are not
required to include payments of principal. All Mortgage Interest Rate
adjustments have been made in strict compliance with state and federal law
and the terms of the related Mortgage Note. Any interest required to be
paid pursuant to state and local law has been properly paid and credited;
(h) Each Mortgage Loan conforms, and all such Mortgage Loans in the
aggregate conform, to the description thereof set forth in this Prospectus
Supplement; and
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(i) All of the Mortgage Loans were originated in accordance with the
related underwriting criteria set forth in this Prospectus Supplement.
Pursuant to the Pooling and Servicing Agreement, upon the discovery by any
of the Certificateholders, Irwin Home Equity Corporation, the Seller, the
Certificate Insurer or the Trustee that any of the representations and
warranties contained in the Purchase and Sale Agreement have been breached in
any material respect as of the Issue Date, with the result that the interests
of the Certificateholders in the related Mortgage Loan or the interests of
the Certificate Insurer were materially and adversely affected
(notwithstanding that such representation and warranty was made to IHE
Funding Corp.'s best knowledge), the party discovering such breach is
required to give prompt written notice to the other parties. Subject to
certain provisions of the Purchase and Sale Agreement, within 60 days of the
earlier to occur of IHE Funding Corp.'s discovery or its receipt of written
notice of any such breach, IHE Funding Corp. will (a) promptly cure such
breach in all material respects, (b) remove each Mortgage Loan which has
given rise to the requirement for action by IHE Funding Corp., substitute one
or more Qualified Substitute Mortgage Loans and, if the outstanding principal
amount of such Qualified Substitute Mortgage Loans as of the date of such
substitution is less than the outstanding Trust Balance, plus accrued and
unpaid interest thereon of the replaced Mortgage Loans as of the date of
substitution, deliver to the REMIC 1995-2 as part of the amounts remitted by
the Servicer on such Remittance Date the amount of such shortfall, or (c)
purchase such Mortgage Loan at a price equal to the Trust Balance of such
Mortgage Loan as of the date of purchase plus the greater of (i) all accrued
and unpaid interest thereon and (ii) 30 days' interest thereon computed at
the Mortgage Interest Rate, plus the amount of any unreimbursed Servicing
Advances made by the Servicer, and deposit such purchase price into the
Trustee Collection Account on the next succeeding Determination Date after
deducting therefrom any amounts received in respect of such repurchased
Mortgage Loan or Loans and being held in the Trustee Collection Account or
the Certificate Account for future distribution to the extent such amounts
have not yet been applied to principal or interest on such Mortgage Loan;
provided, however, that any substitution of one or more Qualified Substitute
Mortgage Loans pursuant to clause (b) preceding must be effected not later
than two years after the Issue Date unless the Trustee and the Certificate
Insurer receive an opinion of counsel that such substitution would not
constitute a prohibited transaction for purposes of the REMIC provisions of
the Code and, provided, further, that IHE Funding Corp. may not purchase such
Mortgage Loan that is not in default or as to which no default is imminent
pursuant to clause (c) preceding unless IHE Funding Corp. has theretofore
caused to be delivered to the Trustee and the Certificate Insurer an opinion
of counsel knowledgeable in Federal income tax matters in form and substance
satisfactory to the Trustee to the effect that such a purchase would not
constitute a prohibited transaction for purposes of the REMIC provisions of
the Code or cause the REMIC to fail to qualify as a REMIC 1995-2 at any time
any Certificates are outstanding. The obligation of IHE Funding Corp. to cure
such breach or to substitute or purchase any Mortgage Loan constitutes the
sole remedy respecting a material breach of any such representation or
warranty to the Certificateholders, the Trustee and the Certificate Insurer.
PAYMENTS ON THE MORTGAGE LOANS
The Pooling and Servicing Agreement provides that the Servicer, for the
benefit of the Certificateholders, shall establish and maintain one or more
Collection Accounts (each, a "Collection Account") and shall maintain a
Collection Account with the Trustee (the "Trustee Collection Account"), and
that each Collection Account will generally be a trust account maintained
with a depository institution acceptable to each Rating Agency and the
Certificate Insurer (any such account, an "Eligible Account"). The Servicer
shall have the right to choose and relocate the Collection Account at any
time, provided each Collection Account shall otherwise comply with the
requirements of the preceding sentence and that there shall be a Trustee
Collection Account. The Pooling and Servicing Agreement permits the Servicer
to direct any depository institution maintaining a Collection Account to
invest the funds in such Collection Account in one or more Permitted
Investments, as defined below, that mature, unless payable on demand, no
later than the Business Day preceding the date on which the Servicer is
required to transfer any amounts included in such funds from such Collection
Account to the Trustee Collection Account or to the Certificate Account, or,
in the case of funds held in the Trustee Collection Account invested in any
such Permitted Investments, from the Trustee Collection Account to the
Certificate Account described below.
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The Servicer is obligated to deposit or cause to be deposited in the
Collection Account on a daily basis, amounts representing the following
payments received and collections made by it after the Cut-Off Date (other
than in respect of Monthly Payments on the Mortgage Loans due on each
Mortgage Loan up to and including any Due Date occurring on or prior to the
Cut-Off Date): (i) all payments on account of principal, including Principal
Prepayments; (ii) all payments on account of interest on the Mortgage Loans,
(iii) all Liquidation Proceeds and all Insurance Proceeds to the extent such
proceeds are not to be applied to the restoration of the related Mortgaged
Property or released to the related borrower in accordance with the express
requirements of law or in accordance with prudent and customary servicing
practices; (iv) all net revenues with respect to a Mortgaged Property held by
the REMIC 1995-2; (v) all other amounts required to be deposited in the
Collection Account pursuant to the Pooling and Servicing Agreement; and (vi)
any amounts required to be deposited in connection with net losses realized
on investments of funds in the Collection Account. The Pooling and Servicing
Agreement further provides that all funds deposited in any Collection Account
that are to be included in the Servicer Remittance Amount related to a
particular Remittance Date be transferred to the Trustee Collection Account
not later than the close of business on the third Business Day prior to such
Remittance Date.
The Trustee will be obligated to set up an account (the "Certificate
Account"), which is required to be an Eligible Account, into which the
Servicer will deposit or cause to be deposited the Servicer Remittance Amount
on the 14th day of each month (the "Servicer Remittance Date").
The "Servicer Remittance Amount" for a Servicer Remittance Date is equal
to the sum of (i) all unscheduled collections of principal and interest on
the Mortgage Loans (including Principal Prepayments, Net REO Proceeds and
Liquidation Proceeds, if any) collected by the Servicer during the related
Due Period and all scheduled Monthly Payments due on the related Due Date and
received on or prior to the Business Day preceding such Servicer Remittance
Date, (ii) all Periodic Advances made by the Servicer with respect to
payments due to be received on the Mortgage Loans on the related Due Date and
(iii) any other amounts required to be placed in a Collection Account by the
Servicer pursuant to the Pooling and Servicing Agreement but excluding the
following:
(a) amounts received on particular Mortgage Loans as late payments of
principal or interest and respecting which the Servicer has previously
made an unreimbursed Periodic Advance;
(b) the portion of Liquidation Proceeds used to reimburse any
unreimbursed Periodic Advances by the Servicer;
(c) those portions of each payment of interest on a particular
Mortgage Loan which represent the Servicing Fee;
(d) that portion of Liquidation Proceeds and REO Proceeds which
represents any unpaid Servicing Fee or amounts included in Liquidation
Proceeds and REO Proceeds allocated to the Additional Balances, see
"Allocation of Payments of the Mortgage Loans Between the Trust Balances
and the Additional Balances;"
(e) all income from Permitted Investments that is held in the
Collection Account for the account of the Servicer;
(f) all amounts in respect of late fees, assumption fees, prepayment
fees and similar fees;
(g) certain other amounts which are reimbursable to the Servicer, as
provided in the Pooling and Servicing Agreement;
(h) that portion of Net Foreclosure Profits otherwise due to the
Servicer as provided in the Pooling and Servicing Agreement; and
(i) any amounts allocable to the Additional Balances not otherwise
included in (a)-(h) above.
See "Allocation of Payments of the Mortgage Loans Between the Trust
Balances and the Additional Balances."
On each Remittance Date, any amount remaining on deposit in the
Certificate Account following the deposit of the Servicer Remittance Amount
(exclusive of the amount of any Insured Payment, the
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Certificate Insurance Policy Premium Amount, and any Trustee's fees then due
the Trustee)(such amount, the "Available Amount" for such Remittance Date) in
excess of the sum of (i) the Class A Formula Distribution Amount (calculated
for this purpose without regard to any required withdrawal from the Reserve
Account or portion thereof included therein), (ii) any Reimbursement Amount
(as defined herein) or other amount owed to the Certificate Insurer and (iii)
the Available Funds Excess for such Remittance Date shall, in accordance with
the Pooling and Servicing Agreement, be distributed to the holder of the
Class R Certificate. All principal payments collected with respect to an
Additional Balance shall be made available to make payments on the
Certificates to the extent that any unpaid Trust Balance related to such
Mortgage Loan remains outstanding, as described in the Pooling and Servicing
Agreement.
SERVICING FEES AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
As compensation for its activities as Servicer under the Pooling and
Servicing Agreement, the Servicer shall be entitled with respect to each
Mortgage Loan to the Servicing Fee, which shall be payable monthly from
amounts on deposit in the Collection Account. The "Servicing Fee" shall be an
amount equal to interest at one-twelfth of the Servicing Fee Rate for such
Mortgage Loan on the scheduled Principal Balance of such Mortgage Loan at the
end of the applicable Due Period. The "Servicing Fee Rate" with respect to
each Mortgage Loan will be 1.00% per annum. In the case that Irwin Home
Equity Corporation is no longer acting as Servicer, the Successor Servicer
will be entitled to a Servicing Fee calculated at a Servicing Fee Rate of
1.00% per annum. In addition, the Servicer shall be entitled to receive, as
additional servicing compensation, to the extent permitted by applicable law
and the related Mortgage Notes, any late payment charges, assumption fees or
similar items. The Servicer shall also be entitled to withdraw from the
Collection Account any interest or other income earned on deposits therein.
The Servicer shall pay all expenses incurred by it in connection with its
servicing activities under the Pooling and Servicing Agreement and shall not
be entitled to reimbursement therefor except as specifically provided in the
Pooling and Servicing Agreement.
The Servicer may recover Periodic Advances and Servicing Advances from the
Collection Account or the Trustee Collection Account to the extent permitted
by the Pooling and Servicing Agreement and by the terms of the Mortgage Loans
or, if not recovered from the Mortgagor on whose behalf such Periodic Advance
or Servicing Advance was made, from late collections on the related Mortgage
Loan, including liquidation proceeds, released mortgaged property proceeds,
insurance proceeds and such other amounts as may be collected by the Servicer
from the Mortgagor or otherwise relating to the Mortgage Loan, or, in the
case of Periodic Advances, from late collections of interest on any Mortgage
Loan. In the event a Periodic Advance or a Servicing Advance becomes a
Nonrecoverable Advance, the Servicer may be reimbursed for such advance from
the Certificate Account.
The Servicer shall not be required to make any Periodic Advance or
Servicing Advance which it determines would be a nonrecoverable Periodic
Advance or nonrecoverable Servicing Advance (a "Nonrecoverable Advance"). A
Periodic Advance or Servicing Advance is "nonrecoverable" if in the good
faith judgment of the Servicer, such Periodic Advance or Servicing Advance is
not ultimately recoverable.
RESERVE ACCOUNT
The Reserve Account. On the Issue Date, $2,966,064, which is equal to
5.75% of the aggregate Principal Balances of the Mortgage Loans as of the
Cut-Off Date, will be deposited into the Reserve Account. On each Remittance
Date, funds constituting the Available Funds Excess will be deposited into
the Reserve Account until the amount on deposit therein equals the Required
Reserve Account Level, which, subject to certain conditions described in the
Certificate Insurance Agreement, shall initially be 8.5% of the Original
Class A Pool Balance. With respect to the certificates, the Pooling and
Servicing Agreement generally provides that on each Remittance Date after the
later to occur of (i) the first Remittance Date more than 30 months after the
Issue Date and (ii) the date upon which the Class A Principal Balance is less
than 50% of the Original Class A Principal Balance, the Required Reserve
Account Level may be reduced, subject to certain minimums described in the
Certificate Insurance
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Agreement related to the level of the aggregate amount of delinquent Mortgage
Loans and to the level of Available Funds Excess on such Remittance Date.
However, if the aggregate Principal Balance of Mortgage Loans that are more
than 90 days delinquent equals or exceeds 3% of the Class A Principal
Balance, the Required Reserve Account Level will increase as of the next
Remittance Date to 9.86% of the Original Class A Principal Balance and the
Required Reserve Account Level may not subsequently be reduced until the
aggregate Principal Balance of Mortgage Loans that are more than 90 days
delinquent remains less than 3.0% of the Class A Principal Balance for six
consecutive Remittance Dates. The Pooling and Servicing Agreement requires
that, on each Remittance Date, amounts on deposit in the Reserve Account will
be withdrawn to make any necessary payments of the Credit Enhancement
Distribution Amount. Withdrawals from the Reserve Account will be replenished
from Available Funds Excess. Subject to certain limitations and requirements
described in the Pooling and Servicing Agreement, distributions may be made
to the owner of the Residual Certificate only from amounts on deposit in the
Reserve Account in excess of the Required Reserve Account Level. Amounts on
deposit in the Reserve Account will be invested in Permitted Investments. See
"-- Flow of Funds" below.
The Pooling and Servicing Agreement provides that, on any Remittance Date,
all amounts collected on account of principal (other than any such amount
allocable to the Holders of the Class R Certificates in respect of a
reduction of the Required Reserve Account Level) during the related Due
Period will be distributed to the Holders of the Class A Certificates on such
Remittance Date. If any Mortgage Loan became a Liquidated Mortgage Loan
during such Due Period, the Liquidation Proceeds net of certain liquidation
expenses and any unreimbursed Periodic Advances made by the Servicer with
respect to such Mortgage Loan (such proceeds, the "Net Liquidation Proceeds")
related to such Mortgage Loan and allocated to principal may be less than the
Trust Balance of the related Mortgage Loan; the amount of any such
insufficiency is a "Liquidated Loan Loss." In addition, the Pooling and
Servicing Agreement provides that the Trust Balance of any Mortgage Loan
after it becomes a Liquidated Mortgage Loan shall equal zero. However,
recoveries of any amounts attributable to a Liquidated Mortgage Loan will be
considered an unscheduled collection of principal on the Remittance Date
immediately following such recovery.
The Certificate Insurance Policy. The Pooling and Servicing Agreement
requires the Trustee to make a claim for an Insured Payment under the
Certificate Insurance Policy not later than the third Business Day prior to
any Remittance Date as to which the Trustee has determined that an Insured
Payment will be necessary. Investors in the Class A Certificates should
realize that, under extreme loss or delinquency scenarios, they may
temporarily receive no distributions of principal.
FLOW OF FUNDS
On each Remittance Date, the Trustee shall distribute, to the extent of
funds on deposit in the Certificate Account and Insured Payments on deposit
in the Certificate Account as follows:
(a) to the Certificate Insurer, the Certificate Insurance Policy
Premium Amount;
(b) to the Trustee, an amount equal to the Trustee's Fees then due to
it;
(c) from amounts then on deposit in the Certificate Account (including
any Insured Payments), to the Class A Certificateholders an amount equal
to the Class A Interest Distribution Amount;
(d) from amounts then on deposit in the Certificate Account (including
any Insured Payments), to the Class A Certificateholders an amount equal
to the Class A Principal Distribution Amount;
(e) from amounts then on deposit in the Certificate Account (excluding
any Insured Payments) to the Certificate Insurer the lesser of (x) the
excess of (i) such amount over (ii) the amount of any Insured Payment for
such Remittance Date and (y) the amount of all Insured Payments and other
payments made by the Certificate Insurer pursuant to the Certificate
Insurance Policy which have not been previously repaid together with
interest thereon at the rate set forth in the Certificate Insurance
Agreement (the "Reimbursement Amount") as of such Remittance Date;
(f) an amount equal to the lesser of (i) any amount then remaining in
the Certificate Account after the applications described in clauses (a)
through (e) above and (ii) the amount necessary to
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bring the amount on deposit in the Reserve Account to the Required Reserve
Account Level (such lesser amount, the "Available Funds Excess") shall be
deposited in the Reserve Account; and
(g) 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 Holders of the
Class R Certificates, the amount remaining on such Remittance Date, if
any.
Notwithstanding the foregoing, the aggregate amount on all Remittance Dates
to the Holders of the Class A Certificates on account of principal shall not
exceed the Original Class A Principal Balance. Any amounts payable to the
Additional Certificates and the Exchangeable Certificate shall be determined
by the applicable Supplement to the Pooling and Servicing Agreement.
CALCULATION OF LIBOR
The Class A Certificates will initially bear a pass-through rate of 6.2675%
which applies to the first Accrual Period, which solely for the purpose of
the first Remittance Date on December 15, 1995, begins on the Issue Date and
ends on the first Remittance Date. Thereafter, for each Remittance Date, on
the second to the last business day preceding the prior Remittance Date (each
such date, an "Interest Determination Date"), the Trustee will determine the
London interbank offered rate for one-month U.S. dollar deposits ("LIBOR")
for the succeeding Accrual Period for the Class A Certificates (such "Accrual
Period" to begin on the 15th day of the month preceding the month in which
the Remittance Date occurs and ends on the day before such Remittance Date)
on the basis of the offered rates of the Reference Banks for one-month U.S.
dollar deposits, as such rates appear on the Reuter Screen LIBO Page, as of
11:00 a.m. (London time) on such Interest Determination Date. As used in this
section, "business day" means a day on which banks are open for dealing in
foreign currency and exchange in London and New York City; "Reuter Screen
LIBO Page" means the display designated as page "LIBO" on the Reuter Monitor
Money Rates Service (or such other page as may replace the LIBO page on that
service for the purpose of displaying London interbank offered rates of major
banks); and "Reference Banks" means leading banks selected by the Trustee and
engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (i) with an established place of business in London, (ii)
whose quotations appear on the Reuter Screen LIBO Page on the Interest
Determination Date in question, (iii) which have been designated as such by
the Trustee and (iv) not controlling, controlled by, or under common control
with, the Depositor or any Seller.
On each Interest Determination Date, LIBOR for the related Accrual Period
for the Class A Certificates will be established by the Trustee as follows:
(a) If on such Interest Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the related Due Period shall be
the arithmetic mean of such offered quotations (rounded upwards if
necessary to the nearest whole multiple of 0.0625%).
(b) If on such Interest Determination Date fewer than two Reference
Banks provide such offered quotations, LIBOR for the related Due Period
shall be the higher of (x) LIBOR as determined on the previous Interest
Determination Date and (y) the Reserve Interest Rate. The "Reserve
Interest Rate" shall be the rate per annum that the Trustee determines to
be either (i) the arithmetic mean (rounded upwards if necessary to the
nearest whole multiple of 0.0625%) of the one-month U.S. dollar lending
rates which New York City banks selected by the Trustee are quoting on the
relevant Interest Determination Date to the principal London offices of
leading banks in the London interbank market or, in the event that the
Trustee can determine no such arithmetic mean, (ii) the lowest one-month
U.S. dollar lending rate which New York City banks selected by the Trustee
are quoting on such Interest Determination Date to leading European banks.
The establishment of LIBOR on each Interest Determination Date by the
Trustee and the Trustee's calculation of the rate of interest applicable to
the Class A Certificates for the related Accrual Period shall (in the absence
of manifest error) be final and binding.
WEIGHTED AVERAGE RATE CAP
In the event that LIBOR exceeds the Prime Rate or the Prime Rate increases
to a level that subjects the Mortgage Interest Rate for a Mortgage Loan to a
statutory maximum interest rate applicable to such
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Mortgage Loan, it is possible that the Weighted Average Net Mortgage Interest
Rate on the Mortgage Loans for a related Due Period will be less than the
amount of interest described in clause (a) of the section of the Summary of
the Terms of the Certificates entitled "Interest, Class A Pass-Through Rate."
Therefore, the Class A Pass Through Rate is, on each Remittance Date, subject
to a maximum rate (the "Weighted Average Rate Cap") equal to one-twelfth the
weighted average Net Mortgage Interest Rate.
REPORT TO CERTIFICATEHOLDERS
Pursuant to the Pooling and Servicing Agreement, on each Remittance Date
the Trustee will deliver to the Certificate Insurer, each Certificateholder
and the Depositor a written report containing information including, without
limitation, the amount of the distribution on such Remittance Date, the
amount of such distribution allocable to principal and allocable to interest,
the aggregate outstanding principal balance of the Class A Certificates as of
such Remittance Date, the amount of any Insured Payment included in such
distributions on such Remittance Date and such other information as required
by the Pooling and Servicing Agreement.
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SERVICING OF THE MORTGAGE LOANS
THE SERVICER
Irwin Home Equity Corporation will act as the Servicer of the REMIC 1995-2
and the Trust Fund. See "Irwin Home Equity Corporation."
COLLECTION AND OTHER SERVICING PROCEDURES; MORTGAGE LOAN MODIFICATIONS
The Servicer will be obligated under the Pooling and Servicing Agreement
to service and administer the Mortgage Loans, on behalf of the REMIC 1995-2,
solely in the best interests of and for the benefit of the Certificateholders
and the Certificate Insurer in accordance with the terms of the Pooling and
Servicing Agreement, and will have full power and authority to do any and all
things in connection with such servicing and administration which it may deem
necessary or desirable. The Servicer may perform any of its obligations under
the Pooling and Servicing Agreement through one or more subservicers.
Notwithstanding any such subservicing arrangement, the Servicer will remain
liable for its servicing duties and obligations under the Pooling and
Servicing Agreement as if the Servicer alone were servicing the Mortgage
Loans. The Servicer will be obligated under the Pooling and Servicing
Agreement to make reasonable efforts to collect all payments called for under
the terms and provisions of the Mortgage Notes and will be obligated,
consistent with the other terms of the Pooling and Servicing Agreement, to
follow such collection procedures as it would normally follow with respect to
mortgage loans comparable to the Mortgage Loans and which are required to
generally conform to the mortgage servicing practices of prudent mortgage
lending institutions which service mortgage loans of the same type as the
Mortgage Loans for their own account in the jurisdictions in which the
related Mortgaged Properties are located. Consistent with the above, the
Servicer will be permitted, in its discretion, to (i) waive any late payment
charge or other charge in connection with any Mortgage Loan, and (ii) arrange
a schedule, running for no more than 180 days after the due date of any
installment due under the related Mortgage Note, for the liquidation of
delinquent items.
REALIZATION UPON OR SALE OF DEFAULTED MORTGAGE LOANS
Except as described below, the Servicer will be required to foreclose upon
or otherwise comparably convert the ownership of properties securing such of
the Mortgage Loans as come into and continue in default and as to which no
satisfactory arrangements can be made for collection of delinquent payments.
In connection with such foreclosure or other conversion, the Servicer will be
required to follow such procedures as it follows with respect to similar
mortgage loans held in its own portfolio. However, the Servicer shall not be
required to expend its own funds in connection with any foreclosure or to
restore any damaged property unless it shall determine that (i) such
foreclosure and/or restoration will increase the proceeds of liquidation of
the Mortgage Loan to Certificateholders after reimbursement to itself for
such expenses and (ii) such expenses shall be recoverable to it through
liquidation proceeds (respecting which it shall reimburse itself for such
expense prior to the deposit in the Collection Account of such proceeds).
The Servicer will be permitted to foreclose against the Mortgaged Property
securing a defaulted Mortgage Loan either by foreclosure, by sale or by
strict foreclosure, and in the event a deficiency judgment is available
against the Mortgagor or any other person, may proceed for the deficiency.
In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure, the deed or certificate of
sale will be required to be issued to the Trustee, or to the Servicer on
behalf of the Trustee and the Certificateholder. Notwithstanding any such
acquisition of title and cancellation of the related Mortgage Loan, such
Mortgage Loan is required to be considered to be a Mortgage Loan held in the
REMIC 1995-2 until such time as the related Mortgaged Property is sold and
such Mortgage Loan becomes a Liquidated Mortgage Loan. Consistent with the
foregoing, for purposes of all calculations under the Pooling and Servicing
Agreement, so long as such Mortgage Loan is an outstanding Mortgage Loan:
(i) It will be assumed that, notwithstanding that the indebtedness
evidenced by the related Mortgage Note shall have been discharged, such
Mortgage Note and the related amortization
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schedule in effect at the time of any such acquisition of title (after
giving effect to any previous partial prepayments and before any
adjustment thereto by reason of any bankruptcy or similar proceeding or
any moratorium or similar waiver or grace period) remain in effect, except
that such schedule shall be adjusted to reflect the application of
proceeds received in any month pursuant to the succeeding clause.
(ii) Net proceeds (after payment of Servicer's expenses related to
disposition) from such property received in any month shall be deemed to
have been received first in payment of the accrued interest that remained
unpaid on the date that title to the related Mortgaged Property was
acquired by the REMIC 1995-2, with the excess thereof, if any, being
deemed to have been received in respect of the delinquent principal
installments that remained unpaid on such date. Thereafter, net proceeds
from such property received in any month shall be applied to the payment
of installments of principal and accrued interest on such Mortgage Loan
deemed to be due and payable in accordance with the terms of such Mortgage
Note and such amortization schedule. If such net proceeds exceed the then
unpaid REO amortization, the excess shall be treated as a partial
principal prepayment received in respect of such Mortgage Loan.
(iii) Only that portion of such net proceeds on such a Mortgage Loan
allocable to interest that bears the same relationship to the total amount
of net proceeds allocable to interest as the rate at which the Servicing
Fee is determined bears to the Mortgage Interest Rate borne by such
Mortgage Loan shall be allocated to the Servicing Fee with respect
thereto.
In the event that the REMIC 1995-2 acquires any Mortgaged Property as
aforesaid or otherwise in connection with a default or imminent default on a
Mortgage Loan, such Mortgaged Property will be required to be disposed of by
or on behalf of the REMIC 1995-2 within two years after its acquisition by
the REMIC 1995-2 unless (a) the Trustee shall have received an opinion of
counsel to the effect that the holding by the REMIC 1995-2 of such Mortgaged
Property subsequent to two years after its acquisition (and specifying the
period beyond such two-year period for which the Mortgaged Property may be
held) will not cause the REMIC 1995-2 to be subject to the tax on prohibited
transactions imposed by Code Section 860F(a)(1), otherwise subject the Trust
Fund or the REMIC 1995-2 to tax or cause the REMIC 1995-2 to fail to qualify
as a REMIC at any time that any Certificates are outstanding, or (b) the
Trustee (at the Servicer's expense) or the Servicer shall have applied for,
prior to the expiration of such two-year period, an extension of such
two-year period in the manner contemplated by Code Section 856(e)(3), in
which case the two-year period shall be extended by the applicable period.
The Servicer will also be required to ensure that the Mortgaged Property is
administered so that it constitutes "foreclosure property" within the meaning
of Code Section 860G(a)(8) at all times, that the sale of such property does
not result in the receipt by the REMIC 1995-2 of any income from
non-permitted assets as described in Code Section 860F(a)(2)(B), and that the
REMIC 1995-2 does not derive any "net income from foreclosure property"
within the meaning of Code Section 860G(c)(2), with respect to such property.
In lieu of foreclosing upon any defaulted Mortgage Loan, the Servicer may,
in its discretion, permit the assumption of such Mortgage Loan if, in the
Servicer's judgment, such default is unlikely to be cured and if the assuming
borrower satisfies the Servicer's underwriting guidelines with respect to
mortgage loans owned by the Servicer. In connection with any such assumption,
the Mortgage Interest Rate of the related Mortgage Note and the payment terms
will not be permitted to be changed. Any fee collected by the Servicer for
entering into an assumption agreement will be retained by the Servicer as
servicing compensation. Alternatively, the Servicer may encourage the
refinancing of any defaulted Mortgage Loan by the Mortgagor.
Notwithstanding the foregoing, prior to instituting foreclosure
proceedings or accepting a deed-in- lieu of foreclosure with respect to any
Mortgaged Property, the Servicer shall make, or cause to be made, inspection
of the Mortgaged Property in accordance with accepted servicing procedures,
and, with respect to environmental hazards, substantially comparable to such
procedures as are required by the provisions of the Federal National Mortgage
Association's Selling and Servicing Guide applicable to single-family homes
and in effect on the date hereof. The Servicer shall be entitled to rely upon
the results of any such inspection made by others. In cases where the
inspection reveals that such Mortgaged Property is
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potentially contaminated with or affected by hazardous wastes or hazardous
substances, the Servicer shall promptly give written notice of such fact to
the Certificate Insurer, the Trustee and each Class A Certificateholder. The
Servicer shall not commence foreclosure proceedings or accept a deed-in-lieu
of foreclosure for such Mortgaged Property without obtaining the consent of
the Certificate Insurer.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
In addition to the Servicing Fee, the Servicer is entitled under the
Pooling and Servicing Agreement to retain additional servicing compensation
in the form of assumption and other administrative fees, release fees, bad
check charges, any other servicing-related fees, Net Liquidation Proceeds not
otherwise required to be deposited in the Certificate Account pursuant to the
Pooling and Servicing Agreement, earnings paid on Permitted Investments and
amounts held on deposit as investment earnings on a Collection Account shall
be retained by or remitted to the Servicer to the extent not required to be
remitted to the Trustee for deposit in the Certificate Account. The Servicer
shall be required to pay all expenses incurred by it in connection with its
servicing activities under the Pooling and Servicing Agreement and shall not
be entitled to reimbursement therefor except as specifically provided for
therein.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer shall, to the extent it has knowledge of such
conveyance or prospective conveyance, exercise its rights to accelerate the
maturity of the related Mortgage Loan under any "due-on-sale" clause
contained in the related Mortgage or Mortgage Note; provided, however, that
the Servicer shall not exercise any such right if the "due-on-sale" clause,
in the reasonable belief of the Servicer, is not enforceable under applicable
law. In such event, the Servicer may enter into an assumption and
modification agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable under the
Mortgage Note and, unless prohibited by applicable law or the Mortgage or
Mortgage Note, the Mortgagor remains liable thereon. The Servicer is also
authorized, with the prior approval of the Certificate Insurer except as
provided in the Pooling and Servicing Agreement, to enter into a substitution
of liability agreement with such person, pursuant to which the original
Mortgagor is released from liability and such person is substituted as
Mortgagor and becomes liable under the Mortgage Note.
MAINTENANCE OF INSURANCE POLICIES AND ERRORS AND OMISSIONS AND FIDELITY
COVERAGE
The Servicer is required to cause to be maintained for each Mortgage Loan
a fire and hazard insurance policy with extended coverage on the related
Mortgaged Property in an amount which is not less than the full insurable
value of the Mortgaged Property securing such Mortgage Loan or the unpaid
principal balance of such Mortgage Loan, whichever is less. The Servicer will
also be required to maintain or cause to be maintained fire and hazard
insurance with extended coverage on each property acquired by the REMIC
1995-2 by foreclosure or by deed in lieu of foreclosure in an amount which is
at least equal to the lesser of (i) the full insurable value of the
improvements which are a part of such property and (ii) the principal balance
owing on such Mortgage Loan at the time of such foreclosure or grant in lieu
of foreclosure plus accrued interest and related liquidation expenses;
provided, however, that such insurance may not be less than the minimum
amount required to fully compensate for any loss or damage on a replacement
cost basis. Any cost incurred by the Servicer in maintaining any such
insurance shall not, for the purpose of calculating distributions to
Certificateholders, be added to the unpaid principal balance of the related
Mortgage Loan, notwithstanding that the terms of such Mortgage Loan so
permit. No earthquake or other additional insurance other than flood
insurance is, under the Pooling and Servicing Agreement, to be required of
any Mortgagor or to be maintained by the Servicer other than pursuant to the
terms of the related Mortgage Note or Mortgage and pursuant to such
applicable laws and regulations as shall at any time be in force and as shall
require such additional insurance.
If the Mortgaged Property was located at the time of origination in a
federally designated special flood hazard area, the Servicer will be
obligated to cause to be maintained flood insurance in respect thereof to the
extent available. Such flood insurance shall be in an amount equal to the
lesser of (i) the
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unpaid principal balance of the related Mortgage Loan, (ii) the full
insurable value, and (iii) the maximum amount of such insurance required by
the terms of the related Mortgage Note or Mortgage and as is available for
the related property under the national flood insurance program (assuming
that the area in which such property is located is participating in such
program). If a Mortgaged Property was, at origination of the related Mortgage
Loan, in a federally designated special flood hazard area, the Servicer will
obtain flood insurance in respect thereof providing substantially the same
coverage as described in the preceding sentence.
Alternatively, the Servicer may obtain, at its own expense, a blanket
insurance policy with an insurer insuring against fire and hazard losses on
all of the Mortgage Loans, which policy may contain a deductible clause, in
which case the Servicer shall, in the event that (i) there shall not have
been maintained on the related Mortgaged Property a policy otherwise
complying with the provisions described above, and (ii) there shall have been
one or more losses which would have been covered by such a policy had it been
maintained, deposit into the Certificate Account from its own funds the
amount not otherwise payable under the blanket policy because of such
deductible clause.
The Servicer will also be required under the Pooling and Servicing
Agreement to maintain in force (i) a policy or policies of insurance covering
errors and omissions in the performance of its obligations as Servicer and
(ii) a fidelity bond in respect of its officers, employees or agents. Each
such policy or policies and bond will, together, be substantially comparable
to a policy or policies and bond otherwise complying with the requirements of
FNMA for persons performing servicing for mortgage loans purchased by FNMA.
Although not yet approved as a seller/servicer by FNMA, the Servicer intends
to apply for such approval.
No pool insurance policy, special hazard insurance policy, bankruptcy bond
or repurchase bond will be maintained with respect to the Mortgage Loans, nor
will any Mortgage Loan be insured by any government or government agency.
SERVICER REPORTS
The Servicer is required to deliver to the Certificate Insurer, the
Trustee, Standard & Poor's and Moody's, not later than the last day of the
fifth month following the end of the Servicer's fiscal year an Officers'
Certificate stating that (i) the Servicer has fully complied with the
servicing provisions of the Pooling and Servicing Agreement, (ii) a review of
the activities of the Servicer during the preceding fiscal year and of
performance under the Pooling and Servicing Agreement has been made under
such officers' supervision, and (iii) to the best of such officers'
knowledge, based on such review, the 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 any such obligation,
specifying each such default known to such officers and the nature and status
thereof including the steps being taken by the Servicer to remedy such
default. The first such Officer's Certificate shall be delivered by the
Servicer in 1996.
Not later than the last day of the fifth month following the end of the
Servicer's fiscal year, the Servicer, at its expense, is required to cause to
be delivered to the Certificate Insurer, the Trustee, Standard & Poor's and
Moody's from a firm of independent certified public accountants (who may also
render other services to the Servicer) a statement to the effect that such
firm has examined certain documents and records relating to the servicing of
the Mortgage Loans during the preceding calendar year (or such longer period
from the Issue Date to the end of the following calendar year) and that, on
the basis of such examination conducted substantially in compliance with
generally accepted auditing standards and the requirements of the Uniform
Single Audit Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for FHLMC, such servicing has been conducted in compliance with the
Pooling and Servicing Agreement except for such significant exceptions or
errors in records that, in the opinion of such firm, generally accepted
auditing standards and the Uniform Single Audit Program for Mortgage Bankers
or the Audit Program for Mortgages serviced for FHLMC require it to report,
in which case such exceptions and errors shall be so reported.
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REMOVAL AND RESIGNATION OF SERVICER
The Trustee, only at the direction of the Certificate Insurer or the
majority Certificateholders, with the consent of the Certificate Insurer (in
the case of any direction of the majority Certificateholders), may remove the
Servicer upon the occurrence and continuation beyond the applicable cure
period of an event described below:
(a) any failure by the Servicer to remit to the Trustee any payment
required to be made by the Servicer under the terms of the Pooling and
Servicing Agreement which continues unremedied beyond any grace period
permitted by the Certificate Insurer;
(b) the failure by the Servicer to make any required Servicing Advance
which failure continues unremedied for a period of 30 days after the date
on which written notice of such failure, requiring the same to be
remedied, shall have been given to the Servicer by the Trustee or to the
Servicer and the Trustee by any Certificateholder or the Certificate
Insurer;
(c) any failure on the part of the Servicer duly to observe or perform
in any material respect any other of the covenants or agreements on the
part of the Servicer contained in the Pooling and Servicing Agreement, or
the failure of any representation and warranty set forth in the Pooling
and Servicing Agreement, which continues unremedied for a period of 30
days after the date on which written notice of such failure, requiring the
same to be remedied, shall have been given to the Servicer by the
Depositor or the Trustee, or to the Servicer and the Trustee by any
Certificateholder or the Certificate Insurer;
(d) a decree or order of a court or agency or supervisory authority
having jurisdiction in an involuntary case under any present or future
federal or state bankruptcy, insolvency or similar law or for the
appointment of a conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings, or for the winding-up or liquidation of its affairs, shall
have been entered against the Servicer and such decree or order shall have
remained in force, undischarged or unstayed for a period of 60 days;
(e) the Servicer shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings of or
relating to the Servicer or of or relating to all or substantially all of
the Servicer's property;
(f) the Servicer shall admit in writing its inability to pay its debts
as they become due, file a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the benefit
of its creditors, or voluntarily suspend payment of its obligations;
(g) the delinquency or loss experience of the Mortgage Loan pool
exceeds certain levels specified in the Pooling and Servicing Agreement;
or
(h) with respect to the litigation initiated by Providian Bancorp,
Inc. against the Servicer described herein, a final nonappealable judgment
or ruling is entered by a court of competent jurisdiction, or a settlement
is agreed to, which is materially adverse to the operation of the
Servicer's business or its ability to perform under the Pooling and
Servicing Agreement. See "Irwin Home Equity Corporation--Irwin Home Equity
Corporation as Servicer."
The Servicer may not assign its obligations under the Pooling and
Servicing Agreement nor resign from the obligations and duties thereby
imposed on it except by mutual consent of the Servicer, Irwin (if Irwin is
not the Servicer), the Certificate Insurer and the Trustee, or upon the
determination that the Servicer's duties thereunder are no longer permissible
under applicable law and such incapacity cannot be cured by the Servicer
without the incurrence, in the reasonable judgment of the Certificate
Insurer, of unreasonable expense. No such resignation shall become effective
until a successor has assumed the Servicer's responsibilities and obligations
in accordance with the Pooling and Servicing Agreement.
Upon removal or resignation of the Servicer, the Trustee has agreed to be
the Successor Servicer (the "Successor Servicer"). The Trustee, as Successor
Servicer, will be obligated to make Periodic Advances and Servicing Advances
and certain other advances unless it determines reasonably and in good faith
that
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such advances would not be recoverable. If, however, the Trustee is unwilling
or unable to act as Successor Servicer, or if the majority Certificateholders
(with the consent of the Certificate Insurer) or the Certificate Insurer so
requests, the Trustee shall appoint, or petition a court of competent
jurisdiction to appoint, in accordance with the provisions of the Pooling and
Servicing Agreement and subject to the approval of the Certificate Insurer,
any established mortgage loan servicing institution acceptable to the
Certificate Insurer having a net worth of not less than $15,000,000 as the
Successor Servicer in the assumption of all or any part of the
responsibilities, duties or liabilities of the Servicer.
The Trustee and any other Successor Servicer in such capacity is entitled
to the same reimbursement for advances and no more than the same servicing
compensation as the Servicer. See " -- Servicing and Other Compensation and
Payment of Expenses" above.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The REMIC 1995-2 will terminate upon notice to the Trustee of either: (a)
the later of the distribution to Certificateholders of the final payment or
collection with respect to the last Mortgage Loan (or Periodic Advances of
same by the Servicer), or the disposition of all funds with respect to the
last Mortgage Loan and the remittance of all funds due under the Pooling and
Servicing Agreement and the payment of all amounts due and payable to the
Certificate Insurer and the Trustee or (b) mutual consent of the Servicer,
the Certificate Insurer and all Certificateholders in writing.
Subject to provisions in the Pooling and Servicing Agreement concerning
adopting a plan of complete liquidation, the Servicer or Seller may, at its
option and at its sole cost and expense (and if such option is not exercised
by the Servicer or the Seller, the Certificate Insurer may, in accordance
with the provisions of the Pooling and Servicing Agreement, at its option and
at its sole cost and expense), terminate the REMIC 1995-2 on any date on
which the aggregate Class A Principal Balance of the Mortgage Loans is less
than 10% of the aggregate Principal Balances of the Mortgage Loans as of the
Cut-Off Date by purchasing, on the next succeeding Remittance Date, all of
the property of such REMIC at a price equal to the sum of (a) the greater of
(i) 100% of the Trust Balance of each outstanding Mortgage Loan and each REO
Property and (ii) the fair market value (disregarding accrued interest) of
the Mortgage Loans and REO Properties, determined as the average of three
written bids (copies of which are to be delivered to the Trustee and the
Certificate Insurer by the Servicer and the reasonable cost of which may be
deducted from the final purchase price) made by nationally recognized dealers
and based on a valuation process which would be used to value comparable
mortgage loans and REO property, (b) the greater of (i) aggregate amount of
accrued and unpaid interest on the Trust Balances of the Mortgage Loans
through the related Due Period and (ii) 30 days' accrued interest thereon at
a rate equal to the Mortgage Interest Rate, in each case net of the Servicing
Fee, and (c) any unreimbursed amounts due to the Certificate Insurer under
the Pooling and Servicing Agreement or the Insurance Agreement. No such
termination is permitted without the prior written consent of the Certificate
Insurer if it would result in a draw on the Certificate Insurance Policy.
AMENDMENT
The Pooling and Servicing Agreement may be amended from time to time by
the Depositor, the Servicer and the Trustee by written agreement, upon the
prior written consent of the Certificate Insurer (which consent shall not be
withheld if, in the opinion of counsel addressed to the Trustee and the
Certificate Insurer, failure to amend would adversely affect the interests of
the Certificateholders unless such consent would adversely affect the
interests of the Certificate Insurer), without notice to, or consent of, the
Certificateholders, to cure any ambiguity, to correct or supplement any
provisions herein, to comply with any changes in the Code, or to make any
other provisions with respect to matters or questions arising under the
Pooling and Servicing Agreement which shall not be inconsistent with the
provisions of the Pooling and Servicing Agreement, provided that such action
shall not, as evidenced by an opinion of
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counsel delivered to, but not obtained at the expense of, the Trustee,
adversely affect in any material respect the interests of any
certificateholder of any outstanding Series (or 100% of the class of
certificateholders so affected shall have consented); and provided, further,
that no such amendment shall reduce in any manner the amount of, or delay the
timing of, payments received on Mortgage Loans which are required to be
distributed on any Certificate without the consent of the Holder of such
Certificate, or change the rights or obligations of any other party to the
Pooling and Servicing Agreement without the consent of such party.
The Depositor, the Servicer and the Trustee may, with respect to any
Series, amend the terms and provisions of the Pooling and Servicing Agreement
by issuing a Supplement which shall specify the relevant terms with respect
to any newly issued Series and which may include without limitation: (i) its
name or designation, (ii) an initial Principal Balance or the method of
calculating such initial Principal Balance, (iii) the interest rate thereon
(or formula for the determination thereof), (iv) the Issue Date, (v) the
rating agency or agencies, if any, rating such Series, (vi) the name of any
applicable clearing agency, (vii) the rights of the Holder of the
Exchangeable Certificate that have been transferred to the certificateholders
of such Series pursuant to an applicable Exchange, (viii) the interest
payment date or dates and the date or dates from which interest shall accrue,
(ix) the method of allocating payments on or allocable to the Mortgage Loans
collections and, if applicable, the method by which the principal amount of
certificates of such Series shall amortize or accrete, (x) the names of any
accounts to be used by such Series and the terms governing the operation of
any such account, (xi) the terms of any Credit Enhancement with respect to
such Series, (xii) the Credit Enhancement provider, if applicable, (xv) the
terms on which the certificates of such Series may be repurchased or
remarketed to other investors, (xiii) the amount and method of any deposit
into any account provided for such Series, (xiv) the number of classes of
such Series, and if more than one class, the rights and priorities of each
such class, (xv) the priority of any Series with respect to any other Series,
(xvi) the rights, if any, of the holders of the Exchangeable Certificate and
any Additional Certificates that have been transferred to the holders of such
Series, and (xvii) any other relevant terms of such Series (including whether
or not such Series will be pledged as collateral for an issuance of any other
securities). The terms of such Supplement may modify or amend the terms of
the Agreement solely as applied to such new Series.
The Pooling and Servicing Agreement and any Supplement may be amended from
time to time by the Depositor, the Servicer and the Trustee with the consent
of the Certificate Insurer (which consent shall not be withheld if, in the
opinion of counsel addressed to the Trustee and the Certificate Insurer,
failure to amend would adversely affect the interests of the
Certificateholders unless such consent would adversely affect the interests
of the Certificate Insurer), and the Holders of the majority of the
Percentage Interest in the Class A Certificates for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
of the Pooling and Servicing Agreement or any Supplement or of modifying in
any manner the rights of the Holders; provided, however, that no such
amendment shall be made unless the Trustee receives an opinion of counsel, at
the expense of the party requesting the change, that such change will not
adversely affect the status of the REMIC 1995-2 as a REMIC or cause a tax to
be imposed on the Trust Fund or the REMIC 1995-2, and provided further, that
no such amendment shall reduce in any manner the amount of, or delay the
timing of, payments received on Mortgage Loans which are required to be
distributed on any Certificate without the consent of the Holder of such
Certificate or reduce the percentage for each Class the Holders of which are
required to consent to any such amendment without the consent of the Holders
of 100% of each Class of Certificates affected thereby.
The rights of the Certificateholders of Series 1995-2 will be determined
pursuant to the Pooling and Servicing Agreement. The rights of the Holders of
any Additional Certificates which may be issued by the Trust pursuant to an
Exchange shall be determined by a Supplement with respect thereto. As to any
such Series of Additional Certificates, the rights of such Certificateholders
as set forth in such Supplement shall supersede any rights of such
Certificateholders expressed in the Pooling and Servicing Agreement. The
Pooling and Servicing Agreement describes (i) the provisions of any such
Series which must be stated therein to describe the terms of such Series and
(ii) those provisions of the Pooling and Servicing Agreement which shall be
applicable to any such new Series unless stated otherwise in such Supplement.
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Such Supplement may provide for any other agreements between the parties
hereto as long as such agreements do not violate, as to any Certificates or
any Additional Certificates the terms and provisions regarding amendment as
expressed herein and in the Pooling and Servicing Agreement.
The Purchase and Sale Agreement contains substantially similar
restrictions regarding amendment.
THE TRUSTEE
The Chase Manhattan Bank, N.A., a national banking association, has been
named Trustee pursuant to the Pooling and Servicing Agreement. The Trustee
will serve initially as the custodian of the Trustee's Mortgage Files. The
Pooling and Servicing Agreement provides that the Trustee shall be entitled
to a fee (the "Trustee Fee") in respect of its services as Trustee.
The Trustee shall at all times be a banking association organized and
doing business under the laws of any State or the United States of America
subject to supervision or examination by federal or state authority,
authorized under such laws to exercise corporate trust powers, having a
combined capital and surplus of at least $50,000,000, whose long-term
deposits, if any, are rated at least "BBB" by Standard & Poor's and Baa2 by
Moody's, or such lower rating as may be approved in writing by the
Certificate Insurer and reasonably acceptable to the Certificate Insurer as
evidenced in writing. If at any time the Trustee shall cease to be eligible
in accordance with the provisions described in this paragraph, it shall
resign immediately in the manner and with the effect specified in the Pooling
and Servicing Agreement.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall become effective upon the acceptance of appointment by a
successor trustee.
The Trustee, or any trustee or trustees hereafter appointed, may resign at
any time in the manner set forth in the Pooling and Servicing Agreement. Upon
receiving notice of resignation, the Servicer shall promptly appoint a
successor trustee or trustees meeting the eligibility requirements set forth
above in the manner set forth in the Pooling and Servicing Agreement. The
Servicer will deliver a copy of the instrument used to appoint a successor
trustee to the Certificateholders, the Certificate Insurer and the Depositor,
and upon acceptance of appointment by a successor trustee in the manner
provided in the Pooling and Servicing Agreement, the Servicer will give
notice thereof to the Certificateholders. If no successor trustee shall have
been appointed and have accepted appointment within 30 days after the giving
of such notice of resignation, the resigning trustee may petition any court
of competent jurisdiction for the appointment of a successor trustee. Such
court may thereupon, after such notice, if any, as it may deem proper and
prescribe, appoint a successor trustee.
If the Trustee fails to perform in accordance with the terms of the
Pooling and Servicing Agreement, the Certificate Insurer or the majority
Certificateholders with the consent of the Certificate Insurer, may remove
the Trustee under the conditions set forth in the Pooling and Servicing
Agreement and appoint a successor trustee in the manner set forth therein.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Trust Fund or the REMIC 1995-2 or
property securing the same may at the time be located, the Servicer and the
Trustee acting jointly shall have the power and shall execute and deliver all
instruments to appoint one or more persons approved by the Trustee to act as
co-trustee or co-trustees, jointly with the Trustee, or separate trustee or
separate trustees, of all or any part of the Trust Fund, including the REMIC
1995-2, and to vest in such person or persons, in such capacity, such title
to the Trust Fund or the REMIC 1995-2, or any part thereof, and, subject to
the provisions of the Pooling and Servicing Agreement, such powers, duties,
obligations, rights and trusts as the Servicer and the Trustee may consider
necessary or desirable.
THE CERTIFICATE INSURANCE POLICY
AND THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer for
inclusion in this Prospectus Supplement.
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The Certificate Insurer, in consideration of the payment of the premium
and subject to the terms of the Certificate Insurance Policy, thereby
unconditionally and irrevocably guarantees to any Owner (as defined below)
that an amount equal to each full and complete Insured Payment will be
received by the Trustee, or its successor, as Trustee for the Owners (the
"Trustee") on behalf of the Owners from the Certificate Insurer, for
distribution by the Trustee to each Owner of each Owner's proportionate share
of the Insured Payment. The Certificate Insurer's obligation under the
Certificate Insurance Policy with respect to a particular Insured Payment
shall be discharged to the extent funds equal to the applicable Insured
Payment are received by the Trustee, whether or not such funds are properly
applied by the Trustee. Insured Payments shall be made only at the time set
forth in the Certificate Insurance Policy and no accelerated Insured Payments
shall be made regardless of any acceleration of the Class A Certificates,
unless such acceleration is at the sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance Policy
does not cover shortfalls, if any, attributable to the liability of the
Trust, any REMIC established by the Trust or the Trustee for withholding
taxes, if any (including interest and penalties in respect of any such
liability).
The Certificate Insurer will pay any Insured Payment that is a Preference
Amount (as described below) on the Business Day following receipt on a
Business Day by the Fiscal Agent (as described below) of (i) a certified copy
of the order requiring the return of a preference payment, (ii) an opinion of
counsel satisfactory to the Certificate Insurer that such order is final and
not subject to appeal, (iii) an assignment in such form as is reasonably
required by the Certificate Insurer, irrevocably assigning to the Certificate
Insurer all rights and claims of the Owner relating to or arising under the
Class A Certificates against the debtor which made such preference payment or
otherwise with respect to such preference payment and (iv) appropriate
instruments to effect the appointment of the Certificate Insurer as agent for
such Owner in any legal proceeding related to such preference payment, such
instruments being in a form satisfactory to the Certificate Insurer, provided
that if such documents are received after 12:00 noon New York City time on
such Business Day, they will be deemed to be received on the following
Business Day. Such payments shall be disbursed to the receiver or trustee in
bankruptcy named in the final order of the court exercising jurisdiction on
behalf of the Owner and not to any Owner directly unless such Owner has
returned principal or interest paid on the Class A Certificates to such
receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policy no later than 12:00 noon New York City time on
the later of (i) the Remittance Date on which the Class A Distribution Amount
is due or (ii) the second Business Day following receipt in New York, New
York on a Business Day by State Street Bank and Trust Company, N.A., as
Fiscal Agent for the Certificate Insurer or any successor fiscal agent
appointed by the Certificate Insurer (the "Fiscal Agent") of a Notice (as
described below); provided that if such Notice is received after 12:00 noon
New York City time on such Business Day, it will be deemed to be received on
the following Business Day. If any such Notice received by the Fiscal Agent
is not in proper form or is otherwise insufficient for the purpose of making
a claim under the Certificate Insurance Policy it shall be deemed not to have
been received by the Fiscal Agent for purposes of this paragraph, and the
Certificate Insurer or the Fiscal Agent, as the case may be, shall promptly
so advise the Trustee and the Trustee may submit an amended Notice.
Insured Payments due under the Certificate Insurance Policy unless
otherwise stated in the Certificate Insurance Policy will be disbursed by the
Fiscal Agent to the Trustee on behalf of the Owners by wire transfer of
immediately available funds in the amount of the Insured Payment less, in
respect of Insured Payments related to Preference Amounts, any amount held by
the Trustee for the payment of such Insured Payment and legally available
therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Certificate Insurer to deposit or cause to be
deposited, sufficient funds to make payments due under the Certificate
Insurance Policy.
As used in the Certificate Insurance Policy, the following terms shall
have the following meanings:
"Agreement" means the Pooling and Servicing Agreement, without regard
to any amendment or supplement, unless the Certificate Insurer shall have
consented thereto.
S-53
<PAGE>
"Business Day" means any day other than a Saturday, a Sunday or a day
on which banking institutions in New York City or in the city in which the
corporate trust office of the Trustee under the Pooling and Servicing
Agreement is located are authorized or obligated by law or executive order
to close.
"Deficiency Amount" means, as of each Remittance Date, the excess, if
any, of the Class A Insured Distribution Amount over the Available Amount.
"Insured Payment" means (i) as of each Remittance Date, the Deficiency
Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of the exhibit
attached to the Certificate Insurance Policy, the original of which is
subsequently delivered by registered or certified mail, from the Trustee
specifying the Insured Payment which shall be due and owing on the
applicable Remittance Date.
"Owner" means each Class A Certificateholder (as defined in the
Pooling and Servicing Agreement and other than the Trustee, the Servicer
or any sub-servicer) who, on the applicable Remittance Date, is entitled
under the terms of the applicable Class A Certificate to payment
thereunder.
"Preference Amount" means any amount previously distributed to an
Owner on the Class A Certificates that is recoverable and sought to be
recovered as a voidable preference by a trustee in bankruptcy pursuant to
the United States Bankruptcy Code (11 U.S.C.), as amended from time to
time, in accordance with a final nonappealable order of a court having
competent jurisdiction.
Capitalized terms used in the Certificate Insurance Policy and not
otherwise defined therein will have the respective meanings set forth in the
Pooling and Servicing Agreement as of the date of execution of the
Certificate Insurance Policy, without giving effect to any subsequent
amendment or modification to the Pooling and Servicing Agreement unless such
amendment or modification has been approved in writing by the Certificate
Insurer.
Any notice under the Certificate Insurance Policy or service of process on
the Fiscal Agent may be made at the address listed below for the Fiscal Agent
or such other address as the Certificate Insurer shall specify in writing to
the Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006 Attention: Municipal Registrar and Paying Agency, or
such other address as the Fiscal Agent shall specify to the Trustee in
writing.
The Certificate Insurance Policy is being issued under and pursuant to,
and shall be construed under, the laws of the State of New York, without
giving effect to the conflict of laws principles thereof.
The insurance provided by the Certificate Insurance Policy is not covered
by the Property/Casualty Insurance Security Fund specified in Article 76 of
the New York Insurance Law.
The Certificate Insurance Policy is not cancelable for any reason. The
premiums on the Certificate Insurance Policy are not refundable for any
reason including payment, or provision being made for payment, prior to the
maturity of the Class A Certificates.
The Certificate Insurer, formerly known as Municipal Bond Investors
Assurance Corporation, is the principal operating subsidiary of MBIA Inc., a
New York Stock Exchange listed company. MBIA Inc. is not obligated to pay the
debts of or claims against the Insurer. The Insurer is domiciled in the State
of New York and licensed to do business in all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. The Certificate Insurer has one European branch in the Republic of
France.
All information regarding the Certificate Insurer, a wholly owned
subsidiary of MBIA Inc., including the financial statements of the
Certificate Insurer for the year ended December 31, 1994, prepared in
accordance with generally accepted accounting principles, included in the
Annual Report on Form 10-K
S-54
<PAGE>
of MBIA Inc. for the year ended December 31, 1994, is hereby incorporated by
reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by reference
herein shall be modified or superseded for purposes of this Prospectus
Supplement to the extent that a statement contained herein modifies or
supersedes such statement. Any statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a part of this
Prospectus Supplement.
The tables below present selected financial information of the Certificate
Insurer determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities ("SAP") and
generally accepted accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
-------------------------------
DECEMBER 31, SEPTEMBER 30,
1994 1995
-------------- ---------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets ... $ 3,401 $ 3,678
Liabilities ........ 2,291 2,484
Capital and Surplus 1,110 1,194
</TABLE>
<TABLE>
<CAPTION>
GAAP
-------------------------------
DECEMBER 31, SEPTEMBER 30,
1994 1995
-------------- ---------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets .............. $ 3,759 $ 4,257
Liabilities ......... 1,704 1,895
Shareholder's Equity 2,055 2,362
</TABLE>
Audited financial statements of the Certificate Insurer as of December 31,
1994 and 1993 and for each of years ended December 31, 1994, 1993 and 1992
are included herein as Appendix A. Unaudited interim financial statements of
the Certificate Insurer for the nine-month period ended September 30 are
included herein as Appendix B. Such financial statements have been prepared
on the basis of generally accepted accounting principles. Copies of the
Certificate Insurer's 1994 year-end audited financial statements prepared in
accordance with statutory accounting practices are available from the
Certificate Insurer. The address of the Certificate Insurer is 113 King
Street, Armonk, New York 10504.
A copy of the Annual Report on Form 10-K of MBIA Inc. is available from
the Certificate Insurer or the Securities and Exchange Commission.
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 heretofrom, other than with respect
to the accuracy of the information regarding the Certificate Insurance Policy
and Certificate Insurer set forth under the heading "The Certificate
Insurance Policy and the Certificate Insurer" and in Appendix A and Appendix
B.
Moody's Investors Service ("Moody's") rates the claims paying ability of
the Certificate Insurer "Aaa."
Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies,
Inc. ("Standard & Poor's"), rates the claims paying ability of the
Certificate Insurer "AAA."
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Certificate Insurer and its ability to pay claims on
its policies of insurance. Any further explanation as to the significance of
the above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Class A
Certificates, and such ratings may be subject to revision or withdrawal at
any time by the rating agencies. Any downward
S-55
<PAGE>
revision or withdrawal of any of the above ratings may have an adverse effect
on the market price of the Class A Certificates. The Certificate Insurer does
not guaranty the market price of the Class A Certificates nor does it
guaranty that the ratings on the Class A Certificates will not be reversed or
withdrawn.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
An election will be made to treat the REMIC 1995-2 as a REMIC for federal
income tax purposes. Skadden, Arps, Slate, Meagher & Flom, special tax
counsel to the Depositor, will deliver its opinion that, assuming compliance
with the Pooling and Servicing Agreement, the REMIC 1995-2 will be treated as
a REMIC for Federal income tax purposes. The Class A Certificates will be
designated as the regular interests in the REMIC 1995-2, and the Class R
Certificates will be designated as the residual interest in the REMIC 1995-2.
The Class R Certificates are "Residual Certificates" for purposes of the
Prospectus.
The Certificates will be treated as "qualifying real property loans" for
mutual savings banks and domestic building and loan associations, "regular or
residual interests in a REMIC" for domestic building and loan associations,
and "real estate assets" for real estate investment trusts, to the extent
described in the Prospectus.
The Class A Certificates generally will be treated as debt instruments for
federal income tax purposes. Beneficial owners (or registered holders, in the
case of Definitive Certificates) of the Class A Certificates will be required
to report income on such Certificates in accordance with the accrual method
of accounting.
The Class A Certificates will not be issued with original issue discount for
Federal income tax purposes. The Prepayment Assumption (as defined in the
Prospectus) that is to be used in determining the rate of accrual of original
issue discount and whether the original issue discount is considered de minimis,
and that may be used by a holder of a Class A Certificate to amortize premium,
will be calculated using 26% CPR. See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates" in the Prospectus. No representation is made as to the
actual rate at which the Mortgage Loans will prepay.
The REMIC 1995-2 may be treated as a "single-class REMIC." If so, Class A
Certificateholders who are individuals, trusts, estates or pass-through
entities may be required to recognize certain amounts of income in addition
to interest and discount income. Under temporary Treasury regulations, each
owner of a regular or residual interest in a single-class REMIC is allocated
(i) the owner's proportionate share of the REMIC's allocable investment
expenses and (ii) a corresponding amount of additional income. A deduction
for the amounts of allocable investment expenses will be allowed the owners
of such certificates only to the extent such amounts exceed 2 percent of such
owner's adjusted gross income. In addition, a non-corporate owner may not be
able to deduct any portion of such expenses in computing such owner's
alternative minimum tax liability. Class A Certificateholders 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. See also "Certain Federal Income Tax Consequences --
Federal Income Tax Consequences for REMIC Certificates -- Treatment of
Certain Items of REMIC Income and Expenses" in the Prospectus.
The Class A Certificates will qualify as regular interests under the REMIC
rules because they will receive interest at a variable rate subject to a
"funds-available cap." The funds-available cap will limit the amount of
interest to be paid on the Class A Certificates to the aggregate payments of
interest and principal concurrently made on the underlying mortgage loans
(net of certain fees and other amounts). The Class A Certificates will be
issued with original issue discount because under certain circumstances all
or a portion of the interest that has accrued at the variable rate may not be
paid currently.
S-56
<PAGE>
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain restrictions on (a) employee benefit plans (as
defined in Section 3(3) of ERISA), (b) plans described in section 4975(e)(1)
of the Code, including individual retirement accounts or Keogh plans, (c) any
entities whose underlying assets include plan assets by reason of a plan's
investment in such entities (each a "Plan") and (d) persons who have certain
specified relationships to such Plans ("Parties-in- Interest" under ERISA and
"Disqualified Persons" under the Code). Moreover, based on the reasoning of
the United States Supreme Court in John Hancock Life Ins. Co. v. Harris Trust
and Sav. Bank, 114 S. Ct. 517 (1993), an insurance company's general account
may be deemed to include assets of the Plans investing in the general account
(e.g., through the purchase of an annuity contract), and the insurance
company might be treated as a Party-in-Interest with respect to a Plan by
virtue of such investment. ERISA also imposes certain duties on persons who
are fiduciaries of Plans subject to ERISA and prohibits certain transactions
between a Plan and Parties-in-Interest or Disqualified Persons with respect
to such Plans. There are certain exemptions issued by the United States
Department of Labor (the "DOL") that may be applicable to an investment by an
ERISA Plan in the Certificates, including Prohibited Transaction Class
Exemption 83-1 ("PTE 83-1"). For further discussion of PTE 83-1, including
the necessary conditions to its applicability and other important factors to
be considered by an ERISA Plan contemplating investing in the Certificates,
see "ERISA Considerations" in the Prospectus.
On June 6, 1990, the DOL issued to the Underwriter an individual
administrative exemption, Prohibited Transaction Exemption 90-32, 55 Fed.
Reg. 23147 (the "Exemption"), from certain of the prohibited transaction
rules of ERISA with respect to the initial purchase, the holding and the
subsequent resale by an ERISA Plan of certificates in pass-through trusts
that meet the conditions and requirements of the Exemption. Among the
conditions that must be satisfied for the Exemption to apply are the
following:
1. The Acquisition of the Class A Certificates by a Plan is on terms
(including the price for 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 the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
3. The Class A Certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's, Moody's, Duff &
Phelps Inc. ("D&P") or Fitch Investor Service, Inc. ("Fitch");
4. The sum of all payments made to the Underwriter in connection with
the distribution of the Class A Certificates represents not more than
reasonable compensation for underwriting the Class A Certificates. The sum
of all payments made to and retained by the Servicer represents not more
than reasonable compensation for the Servicer's services under the
Agreement and reimbursement of the Servicer's reasonable expenses in
connection therewith;
5. The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below); and
6. The Plan investing in the Class A Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933.
The Trust also must meet the following requirements:
a. The corpus of the Trust must consist solely of assets of the
type which have been included in other investment pools;
b. certificates in such other investment pools must have been rated
in one of the three highest rating categories of S&P, Moody's, D&P or
Fitch for at least one year prior to the Plan's acquisition of
certificates; and
S-57
<PAGE>
c. certificates evidencing interests in such other investment
pools must have been purchased by investors other than plans for at
least one year prior to any Plan's acquisition of Class A
Certificates.
In order for the Exemption to apply to certain self-dealing/conflict of
interest prohibited transactions that may occur when a Plan fiduciary causes
the Plan to acquire Class A Certificates, the Exemption requires, among other
matters, that: (i) in the case of an acquisition in connection with the
initial issuance of Certificates, at least fifty percent of each class of
certificates in which Plans have invested is acquired by persons independent
of the Restricted Group and at least fifty percent of the aggregate interest
in the Trust is acquired by persons independent of the Restricted Group (as
defined below); (ii) such fiduciary (or its affiliate) is an obligor with
respect to 5 percent or less of the fair market value of the obligations
contained in the Trust; (iii) the Plan's investment in Class A Certificates
does not exceed twenty-five percent (25%) of all of the certificates
outstanding at the time of the acquisition and (iv) immediately after the
acquisition, no more than twenty-five percent (25%) of the assets of the Plan
are invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity.
The Exemption does not apply to certain prohibited transactions in the
case of Plans sponsored by the Underwriter, the Trustee, the Servicer, any
obligor with respect to the Mortgage Loans included in the Trust, any entity
deemed to be a "sponsor" of the Trust as such term is defined in the
exemption, or any affiliate of any such party (the "Restricted Group").
Subject to the foregoing, the Depositor believes that the Exemption will
apply to the acquisition and holding of the Class A Certificates by Plans and
that all conditions of such exemption other than those within the control of
the investors have been met.
Before purchasing a Class A Certificate, a fiduciary of an ERISA Plan
should make its own determination as to the availability of the exemptive
relief provided in the Exemption or the availability of any other prohibited
transaction exemptions (including PTE 83-1), and whether the conditions of
any such exemption will be applicable to the Class A Certificates. Any
fiduciary of an ERISA Plan considering whether to purchase a Class A
Certificate should also carefully review with its own legal advisors the
applicability of the fiduciary duty and prohibited transaction provisions of
ERISA and the Code to such investment. See "ERISA Considerations" in the
Prospectus.
A governmental plan as defined in Section 3(32) of ERISA is not subject to
ERISA, or Code Section 4975. However, such a governmental plan may be subject
to a federal, state, or local law, which is, to a material extent, similar to
the provisions of ERISA or Code Section 4975 ("Similar Law"). A fiduciary of
a governmental plan should make its own determination as to the need for and
the availability of any exemptive relief under Similar Law.
The sale of Certificates to an ERISA Plan is in no respect a
representation by the Depositor or the Underwriter that this investment meets
all relevant legal requirements with respect to investments by ERISA Plans
generally or any particular ERISA Plan, or that this investment is
appropriate for ERISA Plans generally or any particular ERISA Plan.
LEGAL INVESTMENT
The Class A Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA"). The Other Certificates representing interests in other mortgage
loans transferred to the Trust after the Cut-Off Date may or may not
constitute such "mortgage related securities." Prospective purchasers of the
Other Certificates should consult their own legal, tax and accounting
advisors in determining the suitability of and consequence to them of the
purchase, ownership and disposition of any Other Certificates determined to
be "mortgage related securities."
Additionally, institutions subject to the jurisdiction of the Office of
the Comptroller of the Currency, the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation, the Office of
Thrift Supervision, the National Credit Union Administration or state banking
or insurance
S-58
<PAGE>
authorities should review applicable rules, supervisory policies and
guidelines of these agencies before purchasing any of the Class A
Certificates or Other Certificates, since such Class A Certificates or Other
Certificates may be deemed to be unsuitable investments under one or more of
these rules, policies and guidelines and certain restrictions may apply to
such investments. It should also be noted that certain states have enacted
legislation limiting to varying extents the ability of certain entities (in
particular, insurance companies) to invest in mortgage related securities.
Investors should consult with their own legal advisors in determining whether
and to what extent the Class A Certificates and Other Certificates constitute
legal investments for such investors. See "Legal Investment" in the
Prospectus.
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the Underwriting Agreement dated as
of December 1, 1995 (the "Underwriting Agreement") between the Depositor and
Prudential Securities Incorporated (the "Underwriter"), the Depositor has
agreed to sell to the Underwriter and the Underwriter has agreed to purchase
from the Depositor the Class A Certificates.
The Depositor is obligated to sell, and the Underwriter is obligated to
purchase, all of the Class A Certificates offered hereby if any are
purchased.
The Underwriter has advised the Depositor that it proposes to offer the
Class A Certificates purchased by the Underwriter for sale from time to time
in one or more negotiated transactions or otherwise, at market prices
prevailing at the time of sale, at prices related to such market prices or at
negotiated prices. The Underwriter may effect such transactions by selling
such Certificates to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or
commissions from the Underwriter or purchasers of the Class A Certificates
for whom they may act as agent. Any dealers that participate with the
Underwriter in the distribution of the Class A Certificates purchased by the
Underwriter may be deemed to be underwriters, and any discounts or
commissions received by them or the Underwriter and any profit on the resale
of Class A Certificates by them or the Underwriter may be deemed to be
underwriting discounts or commissions under the Securities Act.
For further information regarding any offer or sale of the Class A
Certificates pursuant to this Prospectus Supplement and the Prospectus, see
"Plan of Distribution" in the Prospectus.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter or contribute to losses arising out of certain liabilities,
including liabilities under the Act.
Prudential Securities Incorporated is an affiliate of the Depositor.
RATINGS
It is a condition to the original issuance of the Class A Certificates
that they will receive ratings of "AAA" by Standard & Poor's and "Aaa" by
Moody's. The ratings assigned to the Class A Certificates will be based on
the claims-paying ability of the Certificate Insurer. The ratings assigned to
the Class A Certificates do not cover the payment of any Credit Enhancement
Distribution Amount. Explanations of the significance of such ratings may be
obtained from Moody's Investors Services, Inc., 99 Church Street, New York,
New York 10007 and Standard & Poor's Rating Group, 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.
LEGAL MATTERS
Certain legal matters in connection with the Class A Certificates will be
passed upon for Irwin Home Equity Corporation by Matthew F. Souza, Esq.,
General Counsel to Irwin Financial Corporation and for the Depositor and the
Underwriter by Skadden, Arps, Slate, Meagher & Flom, New York, New York.
Certain legal matters relating to the Certificate Insurer and the Certificate
Insurance Policy will be passed upon for the Certificate Insurer by Kutak
Rock, Omaha, Nebraska.
S-59
<PAGE>
INDEX OF SIGNIFICANT PROSPECTUS
SUPPLEMENT DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Accrual Period ............................ S-7, S-43
Additional Balances ....................... S-4
Additional Certificates ................... S-4, S-34
Available Amount .......................... S-41
Available Funds Excess .................... S-42
Beneficial Owner .......................... S-5
Book-Entry Certificates ................... S-5
Business Day .............................. S-4
Cede ...................................... S-5
Certificate Account ....................... S-40
Certificate Insurance Policy .............. Cover, S-5
Certificate Insurer ....................... Cover, S-11
Certificateholder ......................... S-5
Certificates .............................. Cover, S-3
Civil Relief Act .......................... S-13
Class A Certificates ...................... Cover, S-3
Class A Distribution Amount ............... S-9
Class A Formula Distribution Amount ...... S-9
Class A Interest Distribution Amount ..... S-7
Class A Pass-Through Rate ................. S-7
Class A Principal Balance ................. S-8
Class A Principal Distribution Amount .... S-8
Class R Certificates ...................... Cover, S-3
Collection Account ........................ S-39
Combined Loan-to-Value Ratio .............. S-19, S-24
Compensating Interest ..................... S-13
Constant Prepayment Rate .................. S-30
CPR ....................................... S-30
Credit Enhancement Distribution Amount ... S-9
Cut-Off Date .............................. S-4, S-18
Damage Area ............................... S-18
Debt Service Reduction .................... S-13
Deficient Valuation ....................... S-13
Depositor ................................. S-3
Determination Date ........................ S-12
DOL ....................................... S-57
DTC ....................................... S-5
Due Date .................................. S-6
Due Period ................................ S-8
Eligible Account .......................... S-39
ERISA ..................................... S-14, S-57
Exchange .................................. S-34
Exchangeable Certificate .................. S-3
Exchange Date ............................. S-34
Exchange Notice ........................... S-34
Exemption ................................. S-14, S-57
First Remittance Date ..................... S-4
Fiscal Agent .............................. S-53
GAAP ...................................... S-55
Gross Margin .............................. S-6
Holder .................................... S-5
IFC ....................................... S-27
Indirect Participants ..................... S-33
S-60
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Insured Payment ........................... S-12
Interest Adjustment Date .................. S-6
Interest Determination Date ............... S-43
Irwin ..................................... S-3, S-27
Issue Date ................................ S-4
LIBOR ..................................... S-43
Lifetime Rate Caps ........................ S-6, S-19
Lifetime Rate Floors ...................... S-6, S-19
Liquidated Loan Loss ...................... S-9, S-42
Liquidated Mortgage Loan .................. S-9
Loan Agreement ............................ S-4, S-18
Moody's ................................... S-16, S-55
Mortgage Interest Rate .................... S-6
Mortgage Sale Agreement ................... S-27
Mortgage Loans ............................ Cover
Mortgage Note ............................. S-6
Mortgage Pool ............................. S-4
Mortgaged Properties ...................... S-4, S-18
Mortgages ................................. S-18
Net Liquidation Proceeds .................. S-42
Net Mortgage Interest Rate ................ S-8
Nonrecoverable Advance .................... S-41
Original Class A Principal Balance ....... S-8
Other Certificates ........................ S-4, S-34
Participants .............................. S-33
Plan ...................................... S-57
Periodic Advance .......................... S-12
Pooling and Servicing Agreement ........... S-3
Prepayment Interest Shortfall ............. S-13
Principal Balance ......................... S-8
Providian ................................. S-28
PTE 83-1 .................................. S-57
Purchase and Sale Agreement ............... S-27
Qualified Substitute Mortgage Loan ....... S-37
Rating Agency ............................. S-35
Reimbursement Amount ...................... S-43
REMIC ..................................... S-2, S-14
REMIC 1995-2 .............................. Cover
Remittance Date ........................... Cover, S-4
Required Reserve Account Level ............ S-10
Residual Certificates ..................... S-56
Restricted Group .......................... S-58
Rules ..................................... S-33
SAP ....................................... S-55
Seller .................................... S-3
Servicer .................................. S-3
Servicer Remittance Amount ................ S-40
Servicer Remittance Date .................. S-40
Servicing Advances ........................ S-13
Servicing Fee ............................. S-13, S-41
Similar Law ............................... S-58
SMMEA ..................................... S-58
Standard & Poor's ......................... S-16, S-55
Substitution Adjustment ................... S-37
Successor Servicer ........................ S-49
Supplement ................................ S-3
Title of Securities ....................... S-3
S-61
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Trust ..................................... S-3
Trust Fund ................................ Cover
Trust Balance ............................. S-4, S-9
Trustee ................................... S-3, S-14
Trustee Collection Account ................ S-39
Trustee Fee ............................... S-52
Trustee's Mortgage File ................... S-35
Underwriter ............................... Cover, S-59
Underwriting Agreement .................... S-59
Weighted average life ..................... S-30
Weighted Average Rate Cap ................. S-7, S-44
</TABLE>
S-62
<PAGE>
APPENDIX A
MUNICIPAL BOND INVESTORS ASSURANCE
CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1994 AND 1993
AND FOR THE YEARS ENDED
DECEMBER 31, 1994, 1993 AND 1992
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION:
We have audited the accompanying consolidated balance sheets of Municipal
Bond Investors Assurance Corporation and Subsidiaries as of December 31, 1994
and 1993, 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, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Municipal
Bond Investors Assurance Corporation and Subsidiaries as of December 31, 1994
and 1993, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1994 in
conformity with generally accepted accounting principles.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1993 the Company adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes." As discussed in Note 2 to
the consolidated financial statements, effective January 1, 1994 the Company
adopted Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
Coopers & Lybrand L.L.P.
New York, New York
February 1, 1995
A-1
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- -----------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity securities, at amortized cost (market value $2,971,369) . $ -- $2,753,974
Fixed maturity securities held as available-for-sale at market
(amortized cost $3,123,838) ............................................ 3,051,906 --
Short-term investments, at amortized cost (which approximates market
value) ................................................................. 121,384 104,205
Other investments ....................................................... 11,970 98,215
----------------- -----------------
TOTAL INVESTMENTS ...................................................... 3,185,260 2,956,394
Cash and cash equivalents ................................................ 1,332 747
Accrued investment income ................................................ 55,347 51,514
Deferred acquisition costs ............................................... 133,048 120,484
Prepaid reinsurance premiums ............................................. 186,492 170,551
Goodwill (less accumulated amortization of $32,437 and $27,476) ......... 110,543 115,504
Property and equipment, at cost (less accumulated depreciation of $9,501
and $3,452) ............................................................. 39,648 37,574
Receivable for investments sold .......................................... 945 1,949
Other assets ............................................................. 46,552 18,912
----------------- -----------------
TOTAL ASSETS ............................................................. $3,759,167 $3,473,629
================= =================
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue ................................................ $1,512,211 $1,402,807
Loss and loss adjustment expense reserves ............................... 40,148 33,735
Current income taxes payable ............................................ -- 1,771
Deferred income taxes ................................................... 97,828 106,686
Payable for investments purchased ....................................... 6,552 33,340
Other liabilities ....................................................... 46,925 37,547
----------------- -----------------
TOTAL LIABILITIES ...................................................... 1,703,664 1,615,886
----------------- -----------------
Shareholder's Equity .....................................................
Common stock, par value $150 per share; authorized, issued and
outstanding -- 100,000 shares .......................................... 15,000 15,000
Additional paid-in capital .............................................. 953,655 943,794
Retained earnings ....................................................... 1,134,061 895,312
Cumulative translation adjustment ....................................... 427 (1,203)
Unrealized (depreciation) appreciation of investments, net of deferred
income tax (benefit) provision of $(25,334) and $2,606 ................. (47,640) 4,840
----------------- -----------------
TOTAL SHAREHOLDER'S EQUITY ............................................. 2,055,503 1,857,743
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY ............................. $3,759,167 $3,473,629
================= =================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-2
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------
1994 1993 1992
---------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gross premiums written ....................................... $361,523 $ 479,390 $ 368,732
Ceded premiums ............................................... (49,281) (47,552) (32,588)
---------- ----------- -----------
Net premiums written ........................................ 312,242 431,838 336,144
Increase in deferred premium revenue ......................... (93,226) (200,519) (173,203)
---------- ----------- -----------
Premiums earned (net of ceded premiums of $33,340, $41,409
and $28,276) ............................................... 219,016 231,319 162,941
Net investment income ........................................ 193,966 175,329 149,359
Net realized gains ........................................... 10,335 8,941 11,419
Other income ................................................. 1,539 3,996 2,001
---------- ----------- -----------
Total revenues .............................................. 424,856 419,585 325,720
---------- ----------- -----------
Expenses:
Losses and loss adjustment expenses .......................... 8,093 7,821 5,619
Underwriting and operating expenses .......................... 41,044 38,006 34,092
Policy acquisition costs, net ................................ 21,845 25,480 18,119
---------- ----------- -----------
Total expenses .............................................. 70,982 71,307 57,830
---------- ----------- -----------
Income before income taxes and cumulative effect of
accounting changes .......................................... 353,874 348,278 267,890
Provision for income taxes .................................... 77,125 86,684 54,802
---------- ----------- -----------
Income before cumulative effect of accounting changes ........ 276,749 261,594 213,088
Cumulative effect of accounting changes ....................... -- 12,923 --
---------- ----------- -----------
Net income .................................................... $276,749 $ 274,517 $ 213,088
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-3
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
-------------------- CAPITAL EARNINGS
SHARES AMOUNT
--------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Balance, January 1, 1992 .... 100,000 $ 2,500 $776,544 $ 479,707
Increase in par value of
common stock ................ -- 12,500 (12,500) --
Net income ................... -- -- -- 213,088
Change in foreign currency
translation ................. -- -- -- --
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $(1,151) ... -- -- -- --
Dividends declared (per
common share $220.00) ....... -- -- -- (22,000)
Capital contribution from
MBIA Inc. ................... -- -- 163,368 --
Tax reduction related to MBIA
Inc.'s Stock Option Plan ... -- -- 4,531 --
--------- --------- ------------ ------------
Balance, December 31, 1992 .. 100,000 15,000 931,943 670,795
--------- --------- ------------ ------------
Net income ................... -- -- -- 274,517
Change in foreign currency
translation ................. -- -- -- --
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $(1,381) ... -- -- -- --
Dividends declared (per
common share $500.00) ....... -- -- -- (50,000)
Tax reduction related to tax
sharing agreement with MBIA
Inc. ........................ -- -- 11,851 --
--------- --------- ------------ ------------
Balance, December 31, 1993 .. 100,000 15,000 943,794 895,312
--------- --------- ------------ ------------
Net income ................... -- -- -- 276,749
Change in foreign currency
translation ................. -- -- -- --
Change in unrealized
depreciation of investments
net of change in deferred
income taxes of $27,940 .... -- -- -- --
Dividends declared (per
common share $380.00) ....... -- -- -- (38,000)
Tax reduction related to tax
sharing agreement with MBIA
Inc. ........................ -- -- 9,861 --
--------- --------- ------------ ------------
Balance, December 31, 1994 .. 100,000 $15,000 $953,655 $1,134,061
========= ========= ============ ============
</TABLE>
A-4
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
UNREALIZED
CUMULATIVE APPRECIATION
TRANSLATION (DEPRECIATION)
ADJUSTMENT OF INVESTMENTS
------------ --------------
<S> <C> <C>
Balance, January 1, 1992 .... $(126) $ 143
Increase in par value of
common stock ................ -- --
Net income ................... -- --
Change in foreign currency
translation ................. (348) --
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $(1,151) ... -- 2,236
Dividends declared (per
common share $220.00) ....... -- --
Capital contribution from
MBIA Inc. ................... -- --
Tax reduction related to MBIA
Inc.'s Stock Option Plan ... -- --
------------- --------------
Balance, December 31, 1992 .. (474) 2,379
------------- --------------
Net income ................... -- --
Change in foreign currency
translation ................. (729) --
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $(1,381) ... -- 2,461
Dividends declared (per
common share $500.00) ....... -- --
Tax reduction related to tax
sharing agreement with MBIA
Inc. ........................ -- --
------------- --------------
Balance, December 31, 1993 ..(1,203) 4,840
------------- --------------
Net income ................... -- --
Change in foreign currency
translation ................. 1,630 --
Change in unrealized
depreciation of investments
net of change in deferred
income taxes of $27,940 .... -- (52,480)
Dividends declared (per
common share $380.00) ....... -- --
Tax reduction related to tax
sharing agreement with MBIA
Inc. ........................ -- --
------------- --------------
Balance, December 31, 1994 ..$ 427 $(47,640)
============= ==============
</TABLE>
The accompanying notes are an Integral part of the consolidated financial
statements.
A-5
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------------------
1994 1993 1992
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................................... $ 276,749 $ 274,517 $ 213,088
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in accrued investment income ........................ (3,833) (5,009) (8,869)
Increase in deferred acquisition costs ....................... (12,564) (10,033) (13,278)
Increase in prepaid reinsurance premiums ..................... (15,941) (6,143) (4,312)
Increase in deferred premium revenue ......................... 109,167 206,662 177,515
Increase in loss and loss adjustment expense reserves ....... 6,413 8,225 4,337
Depreciation ................................................. 1,607 1,259 685
Amortization of goodwill ..................................... 4,961 5,001 5,095
Amortization of bond premium (discount), net ................. 621 (743) 647
Net realized gains on sale of investments .................... (10,335) (8,941) (11,419)
Deferred income taxes ........................................ 19,082 7,503 8,217
Other, net ................................................... (8,469) 15,234 (2,385)
------------- ----------- -----------
Total adjustments to net income .............................. 90,709 213,015 156,233
------------- ----------- -----------
Net cash provided by operating activities .................... 367,458 487,532 369,321
------------- ----------- -----------
Cash flows from investing activities:
Purchase of fixed maturity securities, net of payable for
investments purchased ....................................... (1,060,033) (786,510) (913,643)
Sale of fixed maturity securities, net of
receivable for investments sold ............................. 515,548 205,342 371,693
Redemption of fixed maturity securities, net of receivable
for investments redeemed .................................... 128,274 225,608 40,947
Sale (purchase) of short-term investments, net ............... 3,547 (40,461) 28,206
Sale (purchase) of other investments ......................... 87,456 (37,777) (30,005)
Capital expenditures, net of disposals ....................... (3,665) (3,601) (8,029)
------------- ----------- -----------
Net cash used in investing activities ........................ (328,873) (437,399) (510,831)
------------- ----------- -----------
Cash flows from financing activities:
Capital contribution from MBIA Inc. .......................... -- -- 163,368
Dividends paid ............................................... (38,000) (50,000) (22,000)
------------- ----------- -----------
Net cash (used) provided by financing activities ............ (38,000) (50,000) 141,368
------------- ----------- -----------
Net increase (decrease) in cash and cash equivalents .......... 585 133 (142)
Cash and cash equivalents -- beginning of year ................. 747 614 756
------------- ----------- -----------
Cash and cash equivalents -- end of year ....................... $ 1,332 $ 747 $ 614
============= =========== ===========
Supplemental cash flow disclosures:
Income taxes paid ............................................. $ 53,569 $ 52,967 $ 40,997
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-6
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Municipal Bond Investors Assurance Corporation ("MBIA Corp.") is a
wholly-owned subsidiary of MBIA Inc. MBIA Inc. was incorporated in
Connecticut on November 12, 1986 as a licensed insurer and, through the
following series of transactions during December 1986, became the successor
to the business of the Municipal Bond Insurance Association (the
"Association"), a voluntary unincorporated association of insurers writing
municipal bond and note insurance as agent for the member insurance
companies:
o MBIA Inc. acquired for $17 million all of the outstanding common stock
of a New York domiciled insurance company and changed the name of the
insurance company to MBIA Corp. Prior to the acquisition, all of the
obligations of this company were reinsured and/or indemnified by the former
owner.
o Four of the five member companies of the Association together with their
affiliates purchased all of the outstanding common stock of MBIA Inc. and
entered into reinsurance agreements whereby they ceded to MBIA Inc.
substantially all of the net unearned premiums on existing and future
Association business and the interest in, or obligation for, contingent
commissions resulting from their participation in the Association. MBIA
Inc.'s reinsurance obligations were then assumed by MBIA Corp. The
participation of these four members aggregated approximately 89% of the net
insurance in force of the Association. The net assets transferred from the
predecessor included the cash transferred in connection with the reinsurance
agreements, the related deferred acquisition costs and contingent commissions
receivable, net of the related unearned premiums and contingent commissions
payable. The deferred income taxes inherent in these assets and liabilities
were recorded by MBIA Corp. Contingent commissions receivable (payable) with
respect to premiums earned prior to the effective date of the reinsurance
agreements by the Association in accordance with statutory accounting
practices, remained as assets (liabilities) of the member companies.
Effective December 31, 1989, MBIA Inc. acquired for $288 million all of
the outstanding stock of Bond Investors Group, Inc. ("BIG"), the parent
company of Bond Investors Guaranty Insurance Company ("BIG Ins."), which was
subsequently renamed MBIA Insurance Corp. of Illinois ("MBIA Illinois").
In January 1990, MBIA Illinois ceded its portfolio of net insured
obligations in exchange for cash and investments equal to its unearned
premium reserve of $153 million to MBIA Corp. Subsequent to this cession,
MBIA Inc. contributed the common stock of BIG to MBIA Corp. resulting in
additional paid-in capital of $200 million. The insured portfolio acquired
from BIG consists of municipal obligations with risk characteristics similar
to those insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA
Illinois.
Also in 1990, MBIA Inc. formed MBIA Assurance S.A. ("MBIA Assurance"), a
wholly-owned, French subsidiary, to write financial guarantee insurance in
the international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA Assurance was
contributed to MBIA Corp. in 1991 resulting in additional paid-in capital of
$6 million. Pursuant to a reinsurance agreement with MBIA Corp., a
substantial amount of the risks insured by MBIA Assurance is reinsured by
MBIA Corp.
In 1993, MBIA Inc. formed a wholly-owned subsidiary, MBIA Investment
Management Corp. ("IMC"), with the principal purpose of providing guaranteed
investment agreements guaranteed as to principal and interest for states,
municipalities and municipal authorities. IMC commenced operations in August
1993. MBIA Corp. insures IMC's outstanding investment agreement liabilities.
In 1993, MBIA Corp. assumed the remaining business from the fifth member
of the Association.
A-7
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"). Significant accounting
policies are as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of MBIA Corp.,
MBIA Illinois, MBIA Assurance and BIG Services, Inc. All significant
intercompany balances have been eliminated. Certain amounts have been
reclassified in prior years' financial statements to conform to the current
presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with
banks.
INVESTMENTS
Effective January 1, 1994, MBIA Corp. adopted Statement of Financial
Accounting Standards ("SFAS") 115. In accordance with SFAS 115, MBIA Corp.
reclassified its entire investment portfolio (including "Fixed maturity
securities" and its "Municipal investment agreement portfolio") as
"available- for-sale." Pursuant to SFAS 115, securities classified as
available-for-sale are required to be reported in the financial statements at
market value, with unrealized gains and losses reflected as a separate
component of shareholders' equity. The cumulative effect of MBIA Corp.'s
adoption of SFAS 115 was a decrease in shareholders' equity at December 31,
1994 of $46.8 million, net of taxes. The adoption of SFAS 115 had no effect
on MBIA Corp.'s earnings. As required under SFAS 115, prior years' financial
statements have not been restated. Accordingly, Fixed maturity securities
reported in MBIA Corp.'s consolidated balance sheet at December 31, 1993 are
reflected at amortized cost, based on MBIA Corp.'s then stated intention to
hold such securities to maturity.
Bond discounts and premiums are amortized on the effective-yield method
over the remaining term of the securities. For pre-refunded bonds the
remaining term is determined based on the contractual refunding date.
Short-term investments are carried at amortized cost, which approximates
market value. Investment income is recorded as earned. Realized gains or
losses on the sale of investments are determined by specific identification
and are included as a separate component of revenues.
Other investments consist of MBIA Corp.'s interest in limited partnerships
and a mutual fund which invests principally in marketable equity securities.
MBIA Corp. records dividends from its investment in marketable equity
securities and its share of limited partnerships and mutual funds as a
component of investment income. In addition, MBIA Corp. records its share of
the unrealized gains and losses on these investments, net of applicable
deferred income taxes, as a separate component of shareholder's equity.
PREMIUM REVENUE RECOGNITION
Premiums are earned pro rata over the period of risk. Premiums are
allocated to each bond maturity based on par amount and are earned on a
straight-line basis over the term of each maturity. When an insured issue is
retired early, is called by the issuer, or is in substance paid in advance
through a refunding or defeasance accomplished by placing U.S. Government
securities in escrow, the remaining deferred premium revenue, net of the
portion which is credited to a new policy in those cases where MBIA Corp.
insures the refunding issue, is earned at that time, since there is no longer
risk to MBIA Corp. Accordingly, deferred premium revenue represents the
portion of premiums written that is applicable to the unexpired risk of
insured bonds and notes.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate primarily
to, and vary with, premium production. For business produced directly by MBIA
Corp., such costs include compensation of
A-8
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
employees involved in marketing, underwriting and policy issuance functions,
certain rating agency fees, state premium taxes and certain other
underwriting expenses, reduced by ceding commission income on premiums ceded
to reinsurers. For business assumed from the Association, such costs were
comprised of management fees, certain rating agency fees and marketing and
legal costs, reduced by ceding commissions received by the Association on
premiums ceded to reinsurers. Policy acquisition costs are deferred and
amortized over the period in which the related premiums are earned.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses ("LAE") are established
in an amount equal to MBIA Corp.'s estimate of the identified and
unidentified losses, including costs of settlement on the obligations it has
insured.
To the extent that specific insured issues are identified as currently or
likely to be in default, the present value of expected payments, including
loss and loss adjustment expenses associated with these issues, net of
expected recoveries, is allocated within the total loss reserve as case basis
reserves. Management of MBIA Corp. periodically evaluates its estimates for
losses and LAE and any resulting adjustments are reflected in current
earnings. Management believes that the reserves are adequate to cover the
ultimate net cost of claims, but the reserves are necessarily based on
estimates and there can be no assurance that the ultimate liability will not
exceed such estimates.
CONTINGENT COMMISSIONS
Contingent commissions may be receivable from MBIA Corp.'s and the
Association's reinsurers under various reinsurance treaties and are accrued
as the related premiums are earned.
INCOME TAXES
MBIA Corp. is included in the consolidated tax return of MBIA Inc. The tax
provision for MBIA Corp. for financial reporting purposes is determined on a
stand alone basis. Any benefit derived by MBIA Corp. as a result of the tax
sharing agreement with MBIA Inc. and its subsidiaries is reflected directly
in shareholder's equity for financial reporting purposes.
Deferred income taxes are provided in respect of temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse.
The Internal Revenue Code permits financial guarantee insurance companies
to deduct from taxable income additions to the statutory contingency reserve
subject to certain limitations. The tax benefits obtained from such
deductions must be invested in non-interest bearing U. S. Government tax and
loss bonds. MBIA Corp. records purchases of tax and loss bonds as payments of
Federal income taxes. The amounts deducted must be restored to taxable income
when the contingency reserve is released, at which time MBIA Corp. may
present the tax and loss bonds for redemption to satisfy the additional tax
liability.
PROPERTY AND EQUIPMENT
Property and equipment consists of MBIA Corp.'s headquarters and equipment
and MBIA Assurance's furniture, fixtures and equipment, which are recorded at
cost and, exclusive of land, are depreciated on the straight-line method over
their estimated service lives ranging from 4 to 31 years. Maintenance and
repairs are charged to expenses as incurred.
GOODWILL
Goodwill represents the excess of the cost of the acquired and contributed
subsidiaries over the tangible net assets at the time of acquisition or
contribution. Goodwill attributed to the acquisition of the
A-9
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
licensed insurance company includes recognition of the value of the state
licenses held by that company, and is amortized by the straight-line method
over 25 years. Goodwill related to the wholly-owned subsidiary of MBIA Inc.
contributed in 1988 is amortized by the straight-line method over 25 years.
Goodwill attributed to the acquisition of MBIA Illinois is amortized
according to the recognition of future profits from its deferred premium
revenue and installment premiums, except for a minor portion attributed to
state licenses, which is amortized by the straight-line method over 25 years.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
current exchange rates. Operating results are translated at average rates of
exchange prevailing during the year. Unrealized gains or losses resulting
from translation are included as a separate component of shareholder's
equity.
3. STATUTORY ACCOUNTING PRACTICES
The financial statements have been prepared on the basis of GAAP, which
differs in certain respects from the statutory accounting practices
prescribed or permitted by the insurance regulatory authorities. Statutory
accounting practices differ from GAAP in the following respects:
o premiums are earned only when the related risk has expired rather than
over the period of the risk;
o acquisition costs are charged to operations as incurred rather than as
the related premiums are earned;
o contingent commissions are accrued when the related earned premiums are
recognized;
o a contingency reserve is computed on the basis of statutory requirements
and reserves for losses and LAE are established, at present value, for
specific insured issues which are identified as currently or likely to be in
default, while under GAAP reserves are established based on MBIA Corp.'s
reasonable estimate of the identified and unidentified losses and LAE on the
insured obligations it has written;
o Federal income taxes are only provided on taxable income for which
income taxes are currently payable, while under GAAP deferred income taxes
are provided with respect to temporary differences;
o fixed maturity securities are reported at amortized cost rather than
market;
o tax and loss bonds purchased are reflected as admitted assets as well as
payments of income taxes; and
o certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP.
A-10
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a reconciliation of consolidated shareholder's equity
presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and
its subsidiaries, MBIA Illinois and MBIA Assurance:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
------------------------------------------
1994 1993 1992
------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
GAAP shareholder's equity ................. $2,055,503 $1,857,743 $ 1,619,643
Premium revenue recognition ............... (296,524) (242,577) (210,179)
Deferral of acquisition costs ............. (133,048) (120,484) (110,451)
Unrealized losses ......................... 71,932 -- --
Contingent commissions .................... (1,706) (1,880) (2,185)
Contingency reserve ....................... (620,988) (539,103) (403,875)
Loss and loss adjustment expense reserves 18,181 26,262 11,085
Deferred income taxes ..................... 90,328 99,186 90,303
Tax and loss bonds ........................ 50,471 25,771 31,454
Goodwill .................................. (110,543) (115,503) (120,505)
Other ..................................... (13,568) (11,679) (9,297)
------------ ------------- -------------
Statutory capital and surplus ............ $1,110,038 $ 977,736 $ 895,993
============ ============= =============
</TABLE>
Consolidated net income of MBIA Corp. determined in accordance with
statutory accounting practices for the years ended December 31, 1994, 1993
and 1992 was $224.9 million, $258.4 million and $189.6 million, respectively.
4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
Premiums earned include $53.0 million, $85.6 million and $43.1 million for
1994, 1993 and 1992 respectively, related to refunded and called bonds.
5. INVESTMENTS
MBIA Corp.'s investment objective is to optimize long-term, after-tax
returns while emphasizing the preservation of capital and claims-paying
capability through maintenance of high quality investments with adequate
liquidity and by the avoidance of excessive interest rate risk exposure
through prudent maturity selection. MBIA Corp.'s investment policies limit
the amount of credit exposure to any one issuer. The fixed maturity portfolio
comprises high quality (average Double-A) taxable and tax-exempt investments
of diversified maturities.
A-11
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables set forth the amortized cost and market value of the
fixed maturities included in the consolidated investment portfolio of MBIA
Corp. as of December 31, 1994 and 1993.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES MARKET VALUE
------------ ------------ ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
Taxable bonds:
United States Treasury and Government
Agency .............................. $ 258,531 $ 3,012 $ 10,663 $ 250,880
Corporate and other obligations ..... 468,923 2,387 25,301 446,009
Tax-exempt bonds:
State and municipal obligations ..... 2,396,384 36,631 77,998 2,355,017
------------ ------------ ------------ --------------
Total fixed maturities .............. $3,123,838 $ 42,030 $113,962 $3,051,906
============ ============ ============ ==============
DECEMBER 31, 1993
Taxable bonds:
United States Treasury and Government
Agency .............................. $ 334,729 $ 17,326 $ 354 $ 351,701
Corporate and other obligations ..... 365,660 25,326 1,493 389,493
Tax-exempt bonds:
State and municipal obligations ..... 2,053,585 177,285 695 2,230,175
------------ ------------ ------------ --------------
Total fixed maturities .............. $2,753,974 $219,937 $ 2,542 $2,971,369
</TABLE>
Fixed maturity investments carried at market value of $7.4 million at
December 31, 1994 and at amortized cost of $7.6 million at December 31, 1993,
were on deposit with various regulatory authorities to comply with insurance
laws.
The table below sets forth the distribution by expected maturity of the
fixed maturities and short-term investments at amortized cost and market
value at December 31, 1994. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations.
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
MATURITY
Within 1 year ..................................... $ 121,428 $ 121,384
Beyond 1 year but within 5 years .................. 512,741 526,119
Beyond 5 years but within 10 years ................ 1,387,250 1,351,090
Beyond 10 years but within 15 years ............... 788,742 762,187
Beyond 15 years but within 20 years ............... 397,700 377,225
Beyond 20 years ................................... 37,361 35,285
------------ -----------
Total fixed maturities and short-term investments $3,245,222 $3,173,290
============ ===========
</TABLE>
A-12
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. INVESTMENT INCOME AND GAINS AND LOSSES
Investment income consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1994 1993 1992
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities .............. $193,729 $173,070 $147,598
Short-term investments ........ 3,003 2,844 2,749
Other investments ............. 12 2,078 1,265
---------- ---------- ----------
Gross investment income .... 196,744 177,992 151,612
Investment expenses ........... 2,778 2,663 2,253
---------- ---------- ----------
Net investment income ...... 193,966 175,329 149,359
Net realized gains (losses):
Fixed maturities ............. 784 8,326 11,798
Other investments ............ 9,551 615 (379)
---------- ---------- ----------
Net realized gains (losses) 10,335 8,941 11,419
---------- ---------- ----------
Total investment income .... $204,301 $184,270 $160,778
========== ========== ==========
</TABLE>
Unrealized gains (losses) consist of:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-----------------------
1994 1993
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
Fixed maturities:
Gains .......................... $ 42,030 $219,937
Losses ......................... (113,962) (2,542)
----------- ----------
Net ........................... (71,932) 217,395
Other investments:
Gains .......................... -- 7,446
Losses ......................... (1,042) --
----------- ----------
Net ........................... (1,042) 7,446
Total ........................... (72,974) 224,841
Deferred income tax (benefit) .. (25,334) 2,606
----------- ----------
Unrealized (losses) gains--net $ (47,640) $222,235
=========== ==========
</TABLE>
The deferred tax benefit in 1994 relates primarily to unrealized losses on
MBIA Corp.'s fixed maturity investments, which are reflected in shareholders'
equity in 1994 in accordance with MBIA Corp.'s adoption of SFAS 115.
A-13
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The change in net unrealized gains (losses) consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1994 1993 1992
----------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities ................ $(71,932) $101,418 $19,118
Other investments ............... (8,488) 3,842 3,387
----------- ---------- ---------
Total ......................... (80,420) 105,260 22,505
Deferred income tax (benefit) .. (27,940) 1,381 1,151
----------- ---------- ---------
Unrealized (losses) gains, net $(52,480) $103,879 $21,354
=========== ========== =========
</TABLE>
7. INCOME TAXES
Effective January 1, 1993, MBIA Corp. changed its method of accounting for
income taxes from the income statement-based deferred method to the balance
sheet-based liability method required by SFAS 109. MBIA Corp. adopted the new
pronouncement on the cumulative catch-up basis and recorded a cumulative
adjustment, which increased net income and reduced the deferred tax liability
by $13.0 million. The cumulative effect represents the impact of adjusting
the deferred tax liability to reflect the January 1, 1993 tax rate of 34% as
opposed to the higher tax rates in effect when certain of the deferred taxes
originated. As permitted under the new rules, prior years' financial
statements have not been restated.
SFAS 109 requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
effect on tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1994 and 1993 are as presented below:
<TABLE>
<CAPTION>
1994 1993
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets
Tax and loss bonds ............................ $ 50,332 $ 24,168
Unrealized losses ............................. 25,334 --
Alternative minimum tax credit carry forwards 22,391 7,570
Loss and loss adjustment expense reserves .... 6,363 9,192
Other ......................................... 3981 3,084
---------- ---------
Total gross deferred tax assets .............. 108,401 44,014
---------- ---------
Deferred tax liabilities
Contingency reserve ........................... 91,439 47,621
Deferred premium revenue ...................... 54,523 45,903
Deferred acquisition costs .................... 48,900 44,502
Unrealized gains .............................. -- 2,606
Contingent commissions ........................ 4,746 4,744
Other ......................................... 6,621 5,324
---------- ---------
Total gross deferred tax liabilities ........ 206,229 150,700
---------- ---------
Net deferred tax liability ................. $ 97,828 $106,686
========== =========
</TABLE>
A-14
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under SFAS 109, a change in the Federal tax rate requires a restatement
of deferred tax assets and liabilities. Accordingly, the restatement for the
change in the 1993 Federal tax rate resulted in a $5.4 million increase in
the tax provision, of which $3.2 million resulted from the recalculation of
deferred taxes at the new Federal rate.
The provision for income taxes is composed of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1994 1993 1992
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current .... $58,043 $66,086 $46,585
Deferred .. 19,082 20,598 8,217
--------- --------- ---------
Total .... $77,125 $86,684 $54,802
========= ========= =========
</TABLE>
The provision for income taxes gives effect to permanent differences
between financial and taxable income. Accordingly, MBIA Corp.'s effective
income tax rate differs from the statutory rate on ordinary income. The
reasons for MBIA Corp.'s lower effective tax rates are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes computed on pre-tax financial income at
statutory rates ............................................. 35.0% 35.0% 34.0%
Increase (reduction) in taxes resulting from:
Tax-exempt interest ......................................... (12.0) (10.6) (11.3)
Benefit from tax sharing agreement .......................... -- -- (3.0)
Amortization of goodwill .................................... 0.5 0.5 0.7
Other ....................................................... (1.7) -- 0.1
-------- -------- --------
Provision for income taxes ................................. 21.8% 24.9% 20.5%
======== ======== ========
</TABLE>
8. DIVIDENDS AND CAPITAL REQUIREMENTS
Under New York Insurance Law, MBIA Corp. may pay a dividend only from
earned surplus subject to the maintenance of a minimum capital requirement
and the dividends in any 12-month period may not exceed the lesser of 10% of
its policyholders' surplus as shown on its last filed statutory-basis
financial statements, or of adjusted net investment income, as defined, for
such 12-month period, without prior approval of the Superintendent of the New
York State Insurance Department.
In accordance with such restrictions on the amount of dividends which can
be paid in any 12-month period, MBIA Corp. had approximately $73 million
available for the payment of dividends as of December 31, 1994. In 1994, 1993
and 1992, MBIA Corp. declared and paid dividends of $38 million, $50 million
and $22 million, respectively, to MBIA Inc.
Under Illinois Insurance Law, MBIA Illinois may pay a dividend from
unassigned surplus, and the dividends in any 12-month period may not exceed
the greater of 10% of policyholders' surplus (total capital and surplus) at
the end of the preceding calendar year, or the net income of the preceding
calendar year without prior approval of the Illinois State Insurance
Department.
In accordance with such restrictions on the amount of dividends which can
be paid in any 12-month period, MBIA Illinois may pay a dividend only with
prior approval as of December 31, 1994.
The insurance departments of New York State and certain other states and
the agencies which rate the bonds insured by MBIA Corp. have various
requirements with which MBIA Corp. was in compliance as of December 31, 1994,
relating to the maintenance of certain minimum ratios of statutory capital
and reserves to net insurance in force.
A-15
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. LINES OF CREDIT
MBIA Corp. has a standby line of credit commitment in the amount of $600
million with a group of major banks to provide loans to MBIA Corp. after it
has incurred cumulative losses (net of any recoveries) from September 30,
1994 in excess of the greater of $500 million and 6.25% of average annual
debt service. The obligation to repay loans made under this agreement is a
limited recourse obligation payable solely from, and collateralized by, a
pledge of recoveries realized on defaulted insured obligations including
certain installment premiums and other collateral. This commitment has a
seven-year term and expires on September 30, 2001 but, subject to approval by
the banks, may be annually renewed to extend the term to seven years beyond
the renewal date.
MBIA Corp. and MBIA Inc. maintain bank liquidity facilities aggregating
$250 million.
At December 31, 1994, $17 million was outstanding under these facilities.
10. NET INSURANCE IN FORCE
MBIA Corp. guarantees the timely payment of principal and interest on
municipal and certain non-municipal bonds and notes. MBIA Corp.'s ultimate
exposure to credit loss in the event of nonperformance by the insured is
represented by the insurance in force as set forth below.
The insurance policies issued by MBIA Corp. are unconditional commitments
to guarantee timely payment on the bonds and notes to bondholders. The
creditworthiness of each insured issue is evaluated prior to the issuance of
insurance and each insured issue must comply with MBIA Corp.'s underwriting
guidelines. Further, the payments to be made by the issuer on the bonds or
notes may be backed by a pledge of revenues, reserve funds, letters of
credit, investment contracts or collateral in the form of mortgages or other
assets. The right to such money or collateral would typically become MBIA
Corp.'s upon the payment of the insured amount by MBIA Corp.
As of December 31, 1994, insurance in force, net of cessions to
reinsurers, has a range of maturity of 1-40 years. Net insurance in force
includes international business of $2.5 billion representing 18 issues and
$0.3 billion representing 5 issues at December 31, 1994 and 1993,
respectively. The distribution of net insurance in force by state and type of
bond, including IMC's $1,526.1 million and $493.0 million municipal
investment agreement liability guaranteed by MBIA Corp. in 1994 and 1993,
respectively, is set forth in the tables below:
A-16
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-----------------------------------------
1994
-----------------------------------------
NUMBER OF % OF NET
NET INSURANCE ISSUES INSURANCE
IN FORCE OUTSTANDING IN FORCE
------------- ------------- -----------
(IN BILLIONS)
<S> <C> <C> <C>
California .... $ 43.9 2,832 14.3%
Florida ....... 25.4 1,805 8.3
New York ...... 25.0 4,447 8.2
Pennsylvania . 19.5 2,108 6.4
Texas ......... 18.6 2,102 6.1
New Jersey .... 15.0 1,590 4.9
Illinois ...... 14.7 1,139 4.8
Massachusetts 8.6 1,064 2.8
Ohio .......... 8.3 996 2.7
Georgia ....... 7.4 978 2.4
All others .... 119.6 10,723 39.1
------------- ------------- -----------
$306.0 29,784 100.0%
============= ============= ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1993
-----------------------------------------
NUMBER OF % OF NET
NET INSURANCE ISSUES INSURANCE
IN FORCE OUTSTANDING IN FORCE
------------- ------------- -----------
(IN BILLIONS)
<S> <C> <C> <C>
California .... $ 37.9 2,410 14.2%
Florida ....... 22.9 1,716 8.6
New York ...... 21.5 4,116 8.0
Pennsylvania . 17.7 1,889 6.6
Texas ......... 17.5 1,784 6.5
New Jersey .... 11.9 1,298 4.5
Illinois ...... 12.2 1,120 4.6
Massachusetts 7.4 959 2.8
Ohio .......... 7.0 915 2.6
Georgia ....... 5.9 815 2.2
All others .... 105.4 10,130 39.4
------------- ------------- -----------
$267.3 27,152 100.0%
============= ============= ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-----------------------------------------
1994
-----------------------------------------
NUMBER OF % OF NET
NET INSURANCE ISSUES INSURANCE
IN FORCE OUTSTANDING IN FORCE
------------- ------------- -----------
(IN BILLIONS)
<S> <C> <C> <C>
Municipal
General Obligation .................. $ 84.2 11,029 27.5%
Utilities ........................... 56.0 5,087 18.3
Health Care ......................... 50.6 2,670 16.5
Special Revenue ..................... 22.7 1,291 7.4
Transportation ...................... 21.3 1,486 7.0
Industrial development and pollution
control revenue .................... 15.1 1,016 4.9
Higher education .................... 14.0 1,208 4.6
Housing ............................. 13.6 2,663 4.5
Other ............................... 3.8 124 1.2
------------- ------------- -----------
281.3 26,574 91.9
------------- ------------- -----------
Non-municipal
Asset/mortgage-backed ............... 12.8 151 4.2
Investor-owned utilities ............ 5.7 2,918 1.9
Other ............................... 6.2 141 2.0
------------- ------------- -----------
24.7 3,210 8.1
------------- ------------- -----------
$306.0 29,784 100.0%
============= ============= ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1993
-----------------------------------------
NUMBER OF % OF NET
NET INSURANCE ISSUES INSURANCE
IN FORCE OUTSTANDING IN FORCE
------------- ------------- -----------
(IN BILLIONS)
<S> <C> <C> <C>
Municipal
General Obligation .................. $ 72.7 10,310 27.2%
Utilities ........................... 50.8 4,640 19.0
Health Care ......................... 47.7 2,558 17.8
Special Revenue ..................... 20.6 1,153 7.7
Transportation ...................... 19.1 1,431 7.1
Industrial development and pollution
control revenue .................... 11.2 1,058 4.2
Higher education .................... 12.7 1,119 4.8
Housing ............................. 14.7 2,614 5.5
Other ............................... 2.4 68 0.9
------------- ------------- -----------
251.9 24,951 94.2
------------- ------------- -----------
Non-municipal
Asset/mortgage-backed ............... 8.5 94 3.2
Investor-owned utilities ............ 4.5 2,056 1.7
Other ............................... 2.4 51 0.9
------------- ------------- -----------
15.4 2,201 5.8
------------- ------------- -----------
$267.3 27,152 100.0%
============= ============= ===========
</TABLE>
11. REINSURANCE
MBIA Corp. reinsures portions of its risks with other insurance companies
through various quota and surplus share reinsurance treaties and facultative
agreements. In the event that any or all of the reinsurers were unable to
meet their obligations, MBIA Corp. would be liable for such defaulted
amounts.
A-17
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amounts deducted from gross insurance in force for reinsurance ceded by
MBIA Corp. and MBIA Illinois were $42.6 billion and $36.8 billion, at
December 31, 1994 and 1993, respectively. Ceded insurance in force includes
international business of $0.7 billion representing two issues at December
31, 1994. The distribution of ceded insurance in force by state and type of
bond is set forth in the tables below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
--------------------------------------------------------
1994 1993
--------------------------- ---------------------------
CEDED % OF CEDED CEDED % OF CEDED
INSURANCE IN INSURANCE IN INSURANCE IN INSURANCE IN
STATE FORCE FORCE FORCE FORCE
- --------------------- ------------- ------------ ------------- ------------
(IN BILLIONS) (IN BILLIONS)
<S> <C> <C> <C> <C>
California ........... $ 7.5 17.6% $ 5.7 15.5%
New York ............. 4.9 11.5 4.2 11.4
Pennsylvania ......... 2.6 6.1 2.7 7.3
Texas ................ 2.5 5.9 2.6 7.1
Illinois ............. 2.3 5.4 1.9 5.2
Florida .............. 2.1 4.9 1.9 5.2
New Jersey ........... 2.0 4.7 0.9 2.4
District of Columbia 1.6 3.8 0.9 2.4
Washington ........... 1.2 2.8 1.1 3.0
Puerto Rico .......... 1.1 2.6 1.1 3.0
Ohio ................. 0.9 2.1 0.7 1.9
Massachusetts ........ 0.9 2.1 0.8 2.2
All others ........... 13.0 30.5 12.3 33.4
------------- ------------ ------------- ------------
$42.6 100.0% $36.8 100.0%
============= ============ ============= ============
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31
----------------------------------------------------
1994 1993
------------------------- -------------------------
CEDED % OF CEDED CEDED % OF CEDED
INSURANCE INSURANCE IN INSURANCE INSURANCE IN
TYPE OF BOND IN FORCE FORCE IN FORCE FORCE
- ----------------------------------------------------- ----------- ------------ ----------- ------------
MUNICIPAL
<S> <C> <C> <C> <C>
General obligation ................................... $ 9.7 22.8% $ 8.3 22.5%
Utilities ............................................ 8.5 20.0 8.8 23.9
Health care .......................................... 6.5 15.3 6.8 18.5
Transportation ....................................... 4.5 10.6 3.1 8.4
Industrial development and pollution control revenue 2.9 6.8 0.3 0.8
Special revenue ...................................... 2.7 6.3 2.6 7.1
Higher education ..................................... 1.2 2.8 0.9 2.4
Housing .............................................. 1.0 2.3 1.2 3.3
Other ................................................ 1.5 3.5 1.8 4.9
----------- ------------ ----------- ------------
38.5 90.4 33.8 91.8
----------- ------------ ----------- ------------
Non-municipal
Asset/mortgage-backed ................................ 2.7 6.3 2.1 5.7
Other ................................................ 1.4 3.3 0.9 2.5
----------- ------------ ----------- ------------
4.1 9.6 3.0 8.2
----------- ------------ ----------- ------------
$42.6 100.0% $36.8 100.0%
=========== ============ =========== ============
</TABLE>
A-18
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Included in gross premiums written are assumed premiums from other
insurance companies of $6.3 million, $20.4 million and $10.1 million for the
years ended December 31, 1994, 1993 and 1992, respectively. The percentages
of the amounts assumed to net premiums written were 2.0%, 4.7% and 3.0% in
1994, 1993 and 1992, respectively.
Gross premiums written include $0.2 million in 1994, $5.4 million in 1993
and $5.0 million in 1992 related to the reassumption by MBIA Corp. of
reinsurance previously ceded. Also included in gross premiums in 1993 is
$10.8 million of premiums assumed from a member of the Association. Ceded
premiums written are net of $1.6 million in 1994, $2.5 million in 1993 and
$4.7 million in 1992 related to the reassumption of reinsurance previously
ceded by MBIA Corp.
Effective January 1, 1993, MBIA Corp. adopted SFAS 113. Under SFAS 113,
assets and liabilities relating to reinsurance contracts must be shown gross
of the effects of reinsurance. SFAS 113 also established guidelines to
determine whether risk is transferred under a reinsurance contract. If risk
is transferred, the conditions for reinsurance accounting are met. If risk is
not transferred, the contract is accounted for as a deposit.
12. EMPLOYEE BENEFITS
MBIA Corp. participates in MBIA Inc.'s pension plan covering all eligible
employees. The pension plan is a defined contribution plan and MBIA Corp.
contributes 10% of each eligible employee's annual total compensation.
Pension expense for the years ended December 31, 1994, 1993 and 1992 was $3.0
million, $3.1 million and $2.7 million, respectively. MBIA Corp. also has a
profit sharing/401(k) plan which allows eligible employees to contribute up
to 10% of eligible compensation. MBIA Corp. matches employee contributions up
to the first 5% of total compensation. MBIA Corp. contributions to the profit
sharing plan aggregated $1.4 million, $1.3 million and $0.9 million for the
years ended December 31, 1994, 1993 and 1992, respectively. The 401(k) plan
amounts are invested in common stock of MBIA Inc. Amounts relating to the
above plans that exceed limitations established by Federal regulations are
contributed to a non-qualified deferred compensation plan. Of the above
amounts for the pension and profit sharing plans, $2.6 million, $2.6 million
and $2.2 million for the years ended December 31, 1994, 1993 and 1992,
respectively, are included in policy acquisition costs.
MBIA Corp. also participates in MBIA Inc.'s common stock incentive plan
which enables employees of MBIA Corp. to acquire shares of MBIA Inc. or to
benefit from appreciation in the price of the common stock of MBIA Inc.
Certain key employees of MBIA Corp. were granted Stock Appreciation Rights
("SARs"). On March 29, 1991, those MBIA Corp. employees who had previously
been granted SARS agreed to the cancellation of such SARs.
Effective January 1, 1993, MBIA Corp. adopted SFAS 106. Under SFAS 106,
companies are required to accrue the cost of employee post-retirement
benefits other than pensions during the years that employees render service.
Prior to January 1, 1993, MBIA Corp. had accounted for these post-retirement
benefits on a cash basis. In 1993, MBIA Corp. adopted the new pronouncement
on the cumulative catch-up basis and recorded a cumulative effect adjustment
which decreased net income and increased other liabilities by $0.1 million.
As of January 1, 1994, MBIA Corp. eliminated these post-retirement benefits.
13. RELATED PARTY TRANSACTIONS
The business assumed from the Association, relating to insurance on unit
investment trusts sponsored by two members of the Association, includes
deferred premium revenue of $1.9 million and $2.3 million at December 31,
1994 and 1993, respectively.
In 1993, MBIA Corp. assumed the balance of $10.8 million of deferred
premium revenue from a member of the Association which had not previously
ceded its insurance portfolio to MBIA Corp. Also
A-19
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
in 1993, MBIA Corp. assumed $0.4 million of deferred premium revenue relating
to one of the trusts which was previously ceded to an affiliate of an
Association member.
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the
payment obligations of the members of the Association, one of which is a
principal shareholder of MBIA Inc., which had their Standard & Poor's
claims-paying rating downgraded from Triple-A on their previously issued
Association policies. In the event that they do not meet their Association
policy payment obligations, MBIA Corp. will pay the required amounts directly
to the paying agent instead of to the former Association member as was
previously required. The aggregate amount payable by MBIA Corp. on these
surety bonds is limited to $340 million. These surety bonds remain
outstanding as of December 31, 1994.
MBIA Corp. has investment management and advisory agreements with an
affiliate of a principal shareholder of MBIA Inc., which provides for payment
of fees on assets under management. Total related expenses for the years
ended December 31, 1994, 1993 and 1992 amounted to $2.6 million, $2.4 million
and $2.1 million, respectively.
MBIA Corp. has various insurance coverages provided by a principal
shareholder of MBIA Inc., the cost of which was $1.9 million, $2.0 million
and $2.2 million for the years ended December 31, 1994, 1993 and 1992,
respectively.
Included in other assets at December 31, 1993 is $3.2 million of net
receivables from MBIA Inc. and other subsidiaries. Included in other
liabilities at December 31, 1992 is $2.8 million of net payables to MBIA Inc.
and other subsidiaries.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments shown in the
following table have been determined by MBIA Corp. using available market
information and appropriate valuation methodologies. However, in certain
cases considerable judgment is necessarily required to interpret market data
to develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amount MBIA Corp. could realize
in a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
FIXED MATURITY SECURITIES--The fair value of fixed maturity securities
equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
SHORT-TERM INVESTMENTS--Short-term investments are carried at amortized
cost which, because of their short duration, is a reasonable estimate of fair
value.
OTHER INVESTMENTS--Other investments consist of MBIA Corp.'s interest in
limited partnerships and a mutual fund which invests principally in
marketable equity securities. The fair value of other investments is based on
quoted market prices.
CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR
INVESTMENTS PURCHASED-- The carrying amounts of these items are a reasonable
estimate of their fair value.
PREPAID REINSURANCE PREMIUMS--The fair value of MBIA Corp.'s prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third party reinsurers under current
market conditions.
DEFERRED PREMIUM REVENUE--The fair value of MBIA Corp.'s deferred premium
revenue is based on the estimated cost of entering into a cession of the
entire portfolio with third party reinsurers under current market conditions.
A-20
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES--The carrying amount is
composed of the present value of the expected cash flows for specifically
identified claims combined with an estimate for unidentified claims.
Therefore, the carrying amount is a reasonable estimate of the fair value of
the reserve.
INSTALLMENT PREMIUMS--The fair value is derived by calculating the present
value of the estimated future cash flow stream at MBIA Corp.'s estimated cost
of capital.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------
1994 1993
-------------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Fixed maturity securities ................. $3,051,906 $3,051,906 $2,753,974 $2,971,369
Short-term investments .................... 121,384 121,384 104,205 104,205
Other investments ......................... 11,970 11,970 98,215 98,215
Cash and cash equivalents ................. 1,332 1,332 747 747
Prepaid reinsurance premiums .............. 186,492 159,736 170,551 141,441
Receivable for investments sold ........... 945 945 1,949 1,949
LIABILITIES:
Deferred premium revenue .................. 1,512,211 1,295,305 1,402,807 1,173,882
Loss and loss adjustment expense reserves 40,148 40,148 33,735 33,735
Payable for investments purchased ........ 6,552 6,552 33,340 33,340
OFF-BALANCE-SHEET INSTRUMENTS:
Installment premiums ...................... -- 176,944 -- 186,490
</TABLE>
A-21
<PAGE>
APPENDIX B
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
AND FOR THE THREE AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1995 AND 1994
B-1
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
I N D E X
<TABLE>
<CAPTION>
PAGE
<S> <C>
Consolidated Balance Sheets--September 30, 1995 (Unaudited) and December 31, 1994
(Audited) ......................................................................... 3
Consolidated Statements of Income--Three months and nine months ended
September 30, 1995 and 1994 (Unaudited) ........................................... 4
Consolidated Statement of Changes in Shareholder's Equity--Nine months ended
September 30, 1995 (Unaudited) .................................................... 5
Consolidated Statements of Cash Flows--Nine months ended September 30, 1995 and
1994 (Unaudited) .................................................................. 6
Notes to Consolidated Financial Statements (Unaudited) ............................. 7
</TABLE>
B-2
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 DECEMBER 31, 1994
------------------ -----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Investments:
Fixed maturity securities held as available-for-sale at market
(amortized cost $3,332,939 and $3,123,838) ..................... $3,480,987 $3,051,906
Short-term investments, at amortized cost (which approximates
market value) .................................................. 173,529 121,384
Other investments ............................................... 13,228 11,970
------------------ -----------------
Total investments .............................................. 3,667,744 3,185,260
Cash and cash equivalents ....................................... 2,202 1,332
Accrued investment income ....................................... 57,092 55,347
Deferred acquisition costs ...................................... 138,132 133,048
Prepaid reinsurance premiums .................................... 195,146 186,492
Goodwill (less accumulated amortization of $36,134 and $32,437) 106,846 110,543
Property and equipment, at cost (less accumulated depreciation
of $11,457 and $9,501) ......................................... 40,839 39,648
Receivable for investments sold ................................. 776 945
Other assets .................................................... 48,050 46,552
------------------ -----------------
Total assets ................................................... $4,256,827 $3,759,167
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue ........................................ $1,598,597 $1,512,211
Loss and loss adjustment expense reserves ....................... 42,246 40,148
Deferred income taxes ........................................... 184,053 97,828
Payable for investments purchased ............................... 10,333 6,552
Other liabilities ............................................... 56,694 46,925
------------------ -----------------
Total liabilities .............................................. 1,894,923 1,703,664
------------------ -----------------
Shareholder's Equity
Common stock, par value $150 per share; authorized, issued and
outstanding -- 100,000 shares .................................. 15,000 15,000
Additional paid-in capital ...................................... 963,645 953,655
Retained earnings ............................................... 1,285,606 1,134,061
Cumulative translation adjustment ............................... 2,464 427
Unrealized appreciation (depreciation) of investments, net of
deferred income tax provision (benefit) of $51,786 and
$(25,334) ...................................................... 95,189 (47,640)
------------------ -----------------
Total shareholder's equity ..................................... 2,361,904 2,055,503
------------------ -----------------
Total liabilities and shareholder's equity ..................... $4,256,827 $3,759,167
================== =================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-3
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Gross premiums written ................... $ 92,362 $ 80,313 $270,139 $274,841
Ceded premiums ........................... (13,077) (12,011) (32,206) (38,686)
---------- ---------- ---------- ----------
Net premiums written .................... 79,285 68,302 237,933 236,155
Increase in deferred premium revenue .... (23,336) (13,358) (76,422) (72,829)
---------- ---------- ---------- ----------
Premiums earned (net of ceded premiums
of $8,900, $11,719, $23,552 and
$26,087) ............................... 55,949 54,944 161,511 163,326
Net investment income .................... 55,988 49,676 162,836 144,070
Net realized gains ....................... 2,902 751 6,324 9,659
Other income ............................. 421 887 1,553 1,505
---------- ---------- ---------- ----------
Total revenues ......................... 115,260 106,258 332,224 318,560
---------- ---------- ---------- ----------
Expenses:
Losses and loss adjustment expenses ..... 3,211 1,626 7,954 5,665
Underwriting and operating expenses ..... 10,554 10,820 29,553 30,466
Policy acquisition costs, net ............ 5,511 5,232 15,781 16,292
---------- ---------- ---------- ----------
Total expenses ......................... 19,276 17,678 53,288 52,423
---------- ---------- ---------- ----------
Income before income taxes ................ 95,984 88,580 278,936 266,137
Provision for income taxes ................ 20,811 19,293 60,891 59,070
---------- ---------- ---------- ----------
Net income ................................ $ 75,173 $ 69,287 $218,045 $207,067
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-4
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL CUMULATIVE APPRECIATION
PAID-IN RETAINED TRANSLATION (DEPRECIATION)
------------------- CAPITAL EARNINGS ADJUSTMENT OF INVESTMENTS
SHARES AMOUNT
-------- --------- ---------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 ... 100,000 $15,000 $953,655 $1,134,061 $ 427 $(47,640)
Net income .................. -- -- -- 218,045 -- --
Change in foreign currency
translation ................ -- -- -- -- 2,037 --
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $77,120 ... -- -- -- -- -- 142,829
Dividends declared
(per common share $665) .. -- -- -- (66,500) -- --
Tax reduction related to tax
sharing agreement with MBIA
Inc. ....................... -- -- 9,990 -- -- --
--------- --------- ------------ ------------ ------------- --------------
Balance, September 30, 1995 100,000 $15,000 $963,645 $1,285,606 $2,464 $ 95,189
========= ========= ============ ============ ============= ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-5
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 218,045 $ 207,067
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in accrued investment income .............................. (1,745) (1,214)
Increase in deferred acquisition costs ............................. (5,084) (7,560)
Increase in prepaid reinsurance premiums ........................... (8,654) (12,599)
Increase in deferred premium revenue ............................... 85,076 85,499
Increase in loss and loss adjustment expense reserves ............. 5,098 5,076
Depreciation ....................................................... 1,975 1,027
Amortization of goodwill ........................................... 3,697 3,721
Amortization of bond discount, net ................................. (1,389) (3)
Net realized gains on sale of investments .......................... (6,324) (9,659)
Deferred income taxes .............................................. 9,105 13,807
Other, net ......................................................... 21,247 (4,339)
----------- -----------
Total adjustments to net income .................................... 103,002 73,756
----------- -----------
Net cash provided by operating activities .......................... 321,047 280,823
----------- -----------
Cash flows from investing activities:
Purchase of fixed maturity securities, net of payable for
investments purchased ............................................. (664,949) (824,635)
Sale of fixed maturity securities, net of receivable for investments
sold ............................................................... 376,589 355,441
Redemption of fixed maturity securities, net of receivable for
investments redeemed ............................................... 55,513 91,793
(Purchase) sale of short-term investments, net ...................... (17,035) 30,897
(Purchase) sale of other investments ................................ (664) 87,376
Capital expenditures, net of disposals .............................. (3,131) (132)
----------- -----------
Net cash used in investing activities .............................. (253,677) (259,260)
----------- -----------
Cash flows from financing activities:
Dividends paid ...................................................... (66,500) (21,000)
----------- -----------
Net cash used by financing activities .............................. (66,500) (21,000)
----------- -----------
Net increase in cash and cash equivalents ............................ 870 563
Cash and cash equivalents--beginning of period ....................... 1,332 747
----------- -----------
Cash and cash equivalents--end of period ............................. $ 2,202 $ 1,310
=========== ===========
Supplemental cash flow disclosures:
Income taxes paid ................................................... $ 40,290 $ 41,530
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-6
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited and
include the accounts of MBIA Insurance Corporation and its Subsidiaries (the
"Company"). The statements do not include all of the information and
disclosures required by generally accepted accounting principles. These
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto for the year ended December 31, 1994.
The accompanying consolidated financial statements have not been audited by
independent accountants in accordance with generally accepted auditing
standards but in the opinion of management such financial statements include
all adjustments, consisting only of normal recurring adjustments, necessary
to summarize fairly the Company's financial position and results of
operations. The results of operations for the nine months ended September 30,
1995 may not be indicative of the results that may be expected for the year
ending December 31, 1995. The December 31, 1994 condensed balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
2. DIVIDENDS DECLARED
Dividends declared by the Company during the nine months ended September
30, 1995 were $66.5 million.
B-7
<PAGE>
PROSPECTUS
- -----------------------------------------------------------------------------
PRUDENTIAL SECURITIES
SECURED FINANCING CORPORATION
(DEPOSITOR)
Pass-Through Certificates
(Issuable in Series)
- -----------------------------------------------------------------------------
Prudential Securities Secured Financing Corporation (the "Depositor") may
sell from time to time under this Prospectus and related Prospectus
Supplements Pass-Through Certificates or Notes (such Pass-Through
Certificates or such Notes, together the "Certificates"), issuable in series
(each, a "Series") consisting of one or more classes (each, a "Class") of
Certificates on terms to be determined at the time of sale.
The Certificates of a Series will evidence the beneficial ownership interests
in a separate trust formed by the Depositor for the benefit of the holders of
the related Series of Certificates (the "Certificateholders"). Unless
otherwise specified in the applicable Prospectus Supplement, the property of
each such trust (for each Series, the "Trust Fund") will consist of a
segregated pool (the "Pool") of (i) promissory notes or other evidences of
indebtedness secured by first, second or more junior liens on fee simple or
leasehold interests in the Mortgaged Properties (as defined herein),
including installment sale contracts with respect to any such properties, or
participation in any of the foregoing (the "Mortgage Loans") or (ii)
manufactured housing conditional sales contracts and installment agreements
(the "Contracts"). The Mortgage Loans or Contracts included in a Trust Fund
will have been acquired from one or more affiliates of the Depositor or from
one or more Unaffiliated Sellers (as defined herein) by the Depositor and
conveyed by the Depositor to such Trust Fund. The Mortgage Loans included in
a Mortgage Pool or the Contracts included in a Contract Pool of a Series will
be serviced by a servicer (the "Servicer") described in the applicable
Prospectus Supplement.
The Certificates of a Series will consist of (i) one or more Classes of
Certificates representing fractional undivided interests in all the principal
payments and the interest payments, to the extent of the related Net Mortgage
Rates (as defined herein) or Net Contract Rates (as defined herein), on the
related Mortgage Loans or Contracts ("Standard Certificates"), (ii) one or
more Classes of Certificates ("Multi-Class Certificates") each of which will
be assigned a principal balance (a "Stated Amount") based on the value of
future cash flows from the related Trust Fund without distinction as to
principal or interest or may have no principal amount but may instead be
assigned a notional amount (a "Notional Amount") on which interest accrues,
and each of which will bear interest on the Stated Amount or Notional Amount
thereof at a fixed rate (which may be zero) specified in, or a variable rate
determined as specified in, the applicable Prospectus Supplement (the
"Interest Rate") or (iii) one or more Classes of Certificates representing
fractional undivided interests in all or specified portions of the principal
payments and/or interest payments, to the extent of the related Net Mortgage
Interest Rate, on the related Mortgage Loans ("Stripped Certificates"). Any
Class of Certificates may be divided into two or more subclasses (each, a
"Subclass") and any Class of Standard Certificates may be divided into two or
more Subclasses that consist of Multi-Class Certificates. In addition, a
Series of Certificates for which a REMIC (as defined herein) election has
been made will also include one Class or one Subclass of Residual
Certificates (as defined herein).
Each Series of Certificates will include one or more classes. The
Certificates of any particular class may represent beneficial ownership
interests in the related Mortgage Loans held by the related Trust Fund, or
may represent debt secured by such Mortgage Loans, as described herein and in
the related Prospectus Supplement. Any Series of Certificates may include one
or more Classes or Subclasses of Certificates (the "Subordinated
Certificates") that are subordinate in right of distributions to such rights
of one or more of other Classes or Subclasses of such Series (the "Senior
Certificates"). If specified in the applicable Prospectus Supplement, the
relative interests of the Senior Certificates and the Subordinated
Certificates of a Series in the Trust Fund may be subject to adjustment from
time to time on the basis of distributions received in respect thereof (the
"Shifting Interest Certificates"). If so specified in the applicable
Prospectus Supplement, credit support may also be provided for any Series of
Certificates in the form of a guarantee, letter of credit, mortgage pool
insurance policy or other form of credit enhancement as described herein.
(Cover continued on next page)
- -----------------------------------------------------------------------------
THE ASSETS OF THE RELATED TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE
RELATED SECURITIES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE DEPOSITOR, THE SERVICER OR ANY OF THEIR AFFILIATES, EXCEPT
AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE
CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED
BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SELLER, THE SERVICER
OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS
SUPPLEMENT. SEE "RISK FACTORS" PAGE 13.
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 Certificates may be sold from time to time by the Depositor through
dealers or agents designated from time to time, through underwriting
syndicates led by one or more managing underwriters or through one or more
underwriters acting alone. See "Plan of Distribution." Affiliates of the
Depositor may from time to time act as agents or underwriters in connection
with the sale of Certificates. The terms of a particular offering will be set
forth in the Prospectus Supplement related to such offering.
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of Certificates unless accompanied by the Prospectus
Supplement relating to the offering of such Certificates.
The date of this Prospectus is August 4, 1995
<PAGE>
(Cover continued from previous page)
Neither the Mortgage Loans nor the Contracts will be guaranteed or insured
by any governmental agency or instrumentality or, except as specified in the
related Prospectus Supplement, by any other person. The only obligations of
the Depositor with respect to a Series of Certificates will be pursuant to
certain limited representations and warranties made by the Depositor, to the
extent described herein and in the related Prospectus Supplement. The
Servicer with respect to a Series of Certificates relating to Mortgage Loans
or Contracts will be named in the related Prospectus Supplement. The
principal obligations of a Servicer will be limited to certain obligations
pursuant to certain representations and warranties and to its contractual
servicing obligations.
An election may be made to treat each Trust Fund (or one or more
segregated pools of assets therein) underlying a Series which includes
MultiClass Certificates as a "real estate mortgage investment conduit" (a
"REMIC") for federal income tax purposes. Series of Certificates for which a
REMIC election has been made will include one or more Classes or Subclasses
which constitute "regular interests" in the REMIC ("Regular Certificates")
and one Class or Subclass with respect to each REMIC which constitutes the
"residual interest" therein (the "Residual Certificates"). Alternatively, a
Trust Fund may be treated as a grantor trust or as a partnership for federal
income tax purposes, or may be treated for federal income tax purposes as a
mere security device which constitutes a collateral arrangement for the
issuance of debt. See "Certain Federal Income Tax Consequences."
There will have been no public market for the Certificates of any Series
prior to the offering thereof. No assurance can be given that such a market
will develop, or that if such a market does develop, it will provide
Certificateholders with liquidity of investment or will continue for the life
of the Certificates.
<PAGE>
REPORTS
In connection with each distribution and annually, Certificateholders will
be furnished with statements containing information with respect to principal
and interest payments and the related Trust Fund, as described herein and in
the applicable Prospectus Supplement for such Series. Any financial
information contained in such reports will not have been examined or reported
upon by an independent public accountant. See "Servicing of the Mortgage
Loans and Contracts -- Reports to Certificateholders." The Servicer for each
Series relating to Mortgage Loans or Contracts will furnish periodic
statements setting forth certain specified information to the related Trustee
and, in addition, annually will furnish such Trustee with a statement from a
firm of independent public accounts with respect to the examination of
certain documents and records relating to the servicing of the Mortgage Loans
or Contracts in the related Trust Fund. See "Servicing of the Mortgage Loans
and Contracts -- Reports to the Trustee" and "Evidence as to Compliance."
Copies of the monthly and annual statements provided by the Servicer to the
Trustee will be furnished to Certificateholders of each Series upon request
addressed to Prudential Securities Secured Financing Corporation, One Seaport
Plaza, 26th Floor, New York, New York 10292, Attention: James Fadel (212)
214-1000.
AVAILABLE INFORMATION
The Depositor has filed a Registration Statement (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with the Securities and Exchange Commission (the "Commission") with
respect to the Certificates offered pursuant to this Prospectus. This
Prospectus contains, and the Prospectus Supplement for each Series of
Certificates will contain, a summary of the material terms of the documents
referred to herein and therein, but neither contains nor will contain all of
the information set forth in the Registration Statement of which this
Prospectus is a part. For further information, reference is made to such
Registration Statement and any amendments thereof and to the exhibits
thereto. Copies of the Registration Statement may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 upon payment of the prescribed charges, or may be examined free of
charge at the Commission's offices, 450 Fifth Street, N.W., Washington, D.C.
20549 or at the regional offices of the Commission located at Room 1400, 75
Park Place, New York, New York 10007 and Northwestern Atrium Center, 500 West
Madison Street, Suite 400, Chicago, Illinois 60661-2511.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the
termination of any offering of Certificates evidencing interests therein. The
Depositor will provide or cause to be provided without charge to each person
to whom this Prospectus is delivered in connection with the offering of one
or more Classes of Certificates, a list identifying, all filings with respect
to a Trust Fund pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act, since the Depositor's latest fiscal year covered by its annual report on
Form 10-K and a copy of any or all documents or reports incorporated herein
by reference, in each case to the extent such documents or reports relate to
one or more of such Classes of such Certificates, other than the exhibits to
such documents (unless such exhibits are specifically incorporated by
reference in such documents). Requests to the Depositor should be directed
to: Prudential Securities Secured Financing Corporation, One Seaport Plaza,
26th Floor, New York, New York 10292, telephone number (212) 214-1000,
Attention: James Fadel.
3
<PAGE>
SUMMARY OF PROSPECTUS
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus, and by reference to the
information with respect to each Series of Certificates contained in the
related Prospectus Supplement. Certain capitalized terms used and not
otherwise defined herein shall have the meanings given elsewhere in this
Prospectus. An index indicating where certain terms used herein are defined
appear at the end of this Prospectus.
Title of Securities .... Pass-Through Certificates (Issuable in
Series).
Depositor .............. Prudential Securities Secured Financing
Corporation, formerly known as P-B Secured
Financing Corporation (the "Depositor"), a
Delaware corporation, is a whollyowned
limited purpose finance subsidiary of
Prudential Securities Group Inc. The
Depositor's principal executive offices are
located at One Seaport Plaza, 26th Floor,
New York, New York 10292, and its telephone
number is (212) 214-1000. See "The
Depositor."
Unaffiliated Sellers ... The Depositor will acquire the Mortgage
Loans and Contracts from one or more
institutions unaffiliated with the Depositor
("Unaffiliated Sellers").
Trustee ................ The Trustee with respect to a Series will be
specified in the related Prospectus
Supplement.
Servicer ............... The Servicer for each Series relating to
Mortgage Loans or Contracts will be
specified in the applicable Prospectus
Supplement. The Servicer will service the
Mortgage Loans or Contracts comprising each
Trust Fund and administer each Trust Fund
pursuant to a separate Pooling and Servicing
Agreement (each, a "Pooling and Servicing
Agreement"). The Servicer may subcontract
all or any portion of its obligations as
Servicer under each Pooling and Servicing
Agreement to qualified subservicers (each, a
"Sub-Servicer") but the Servicer will not be
relieved thereby of its liability with
respect thereto. See "Servicing of the
Mortgage Loans and Contracts."
The Trust Funds ........ The Trust Fund for each Series of
Certificates may consist of any combination
of Mortgage Pool and/or Contract Pools (each
as defined herein) and certain other related
property, as specified herein and in the
applicable Prospectus Supplement. Unless
otherwise specified in the applicable
Prospectus Supplement, each Mortgage Pool
will be comprised of Mortgage Loans or
Contracts or participations therein.
Unless otherwise specified in the applicable
Prospectus Supplement, each Contract Pool
will consist of fixed or adjustable rate
manufactured housing installment sale,
contracts and installment loan agreements.
Each Contract may be secured by a new or
used Manufactured Home (as defined herein).
Neither the Certificates, the interest
thereon, nor the underlying Mortgage Loans
are guaranteed by the United States nor do
4
<PAGE>
they constitute debts or obligations of the
United States or any agency or
instrumentality of the United States.
The particular characteristics of each Trust
Fund will be set forth in the applicable
Prospectus Supplement.
Description of the
Certificates ........... The Certificates issued by any Trust Fund
may represent beneficial ownership interests
in the related Mortgage Loans held by the
related Trust Fund, or may represent debt
secured by such Mortgage Loans, as described
herein and in the related Prospectus
Supplement. Certificates which represent
beneficial ownership interests in the
related Trust Fund will be referred to as
"Certificates" in the related Prospectus
Supplement; Certificates which represent
debt issued by the related Trust Fund will
be referred to as "Notes" in the related
Prospectus Supplement.
With respect to Notes issued by the related
Trust Fund, the related Trust Fund will
enter into an indenture by and between such
Trust Fund and the trustee named on such
indenture, as set forth in the related
Prospectus Supplement.
Each Series of Certificates will be recourse
to the assets of the related Trust Fund
only. The sole source of payment for any
Series of Certificates will be the assets of
the related Trust Fund. The Certificates
will not be obligations, either recourse or
non-recourse (except for certain
non-recourse debt described under "Certain
Federal Income Tax Consequences"), of the
Depositor, the Servicer or any Person other
than the related Trust Fund. In the case of
Certificates that represent beneficial
ownership interest in the related Trust
Fund, such Certificates will represent the
ownership of such Trust Fund; with respect
to Certificates which are Notes, such Notes
will be secured by the related Trust Fund.
Notwithstanding the foregoing, and as to be
described in the related Prospectus
Supplement, certain types of credit
enhancement, such as a financial guaranty
insurance policy or a letter of credit, may
constitute a full recourse obligation of the
issue of such credit enhancement.
Each Series will consist of one or more
Classes of Certificates which may be (i)
Standard Certificates, (ii) Multi-Class
Certificates or (iii) Stripped Certificates.
Any Class of Certificates may be divided
into two or more Subclasses and any Class of
Standard Certificates may be divided into
Subclasses which consist of Multi-Class
Certificates. The Depositor will cause each
Trust Fund (or one or more segregated pools
of assets therein) with respect to a Series
which includes Standard Certificates
redeemable on a random lot basis,
Multi-Class Certificates or Shifting
Interest Certificates to elect to be treated
as a REMIC. In addition, any Series with
respect to which an election has been made
to treat the Trust Fund (or one or more
segregated pools of assets therein) as a
REMIC will include one Class or one Subclass
of Residual Certificates as to each REMIC.
The Residual Certificates of a Series, if
offered hereby, will represent the right to
receive distributions with respect to
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the related Trust Fund as specified in the
related Prospectus Supplement. Unless
otherwise specified in the applicable
Prospectus Supplement, the Certificates will
be offered only in fully registered form.
A. Standard Certificates
........................ Unless otherwise provided in the applicable
Prospectus Supplement, Standard Certificates
of a Series will each evidence a fractional
undivided beneficial ownership interest in
the related Trust Fund and will entitle the
holder thereof to its proportionate share of
a percentage of all of the payments and
other receipts with respect to the principal
of and interest (to the extent of the
applicable Net Mortgage Rate or Net Contract
Rate) on the related Mortgage Loans or
Contracts. If specified in the applicable
Prospectus Supplement, with respect to any
Class of Standard Certificates of a Series
for which a REMIC election has been made,
distributions of principal may be allocated
among the Certificateholders of such Class
on a pro rata, random lot or such other
basis as is specified in such Prospectus
Supplement.
B. Multi-Class
Certificates ........... Multi-Class Certificates of a Series will
consist of Certificates each of which
evidences a beneficial ownership interest in
the related Trust Fund and will be assigned
a Stated Amount, which may be based on an
amount of principal of the underlying
Mortgage Loans or Contracts or on the value
of future cash flows from the related Trust
Fund without distinction as to principal or
interest and an Interest Rate which may be a
fixed rate (which may be zero) or a variable
rate or which will otherwise accrue interest
as specified in the applicable Prospectus
Supplement. The holder of a Multi-Class
Certificate will be entitled to receive, to
the extent funds are available therefor,
interest payments on the outstanding Stated
Amount thereof at the applicable Interest
Rate or as otherwise specified in the
applicable Prospectus Supplement and
distributions in reduction of such Stated
Amount determined in the manner and applied
in the priority set forth in the applicable
Prospectus Supplement.
C. Stripped Certificates Stripped Certificates will each evidence an
undivided beneficial ownership interest in
the related Trust Fund and will entitle the
holder thereof to its proportionate share of
a specified portion (which may be zero) of
principal payments and/or a specified
portion (which may be zero) of interest
payments (to the extent of the applicable
Net Mortgage Interest Rate) on the related
Mortgage Loans.
Pooling and Servicing
Agreement .............. The Certificates of each Series will be
issued pursuant to a Pooling and Servicing
Agreement among the Depositor, the Servicer,
if any, and the Trustee.
Cut-Off Date ........... The date specified in the applicable
Prospectus Supplement.
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Distribution Dates ..... Unless otherwise specified in the applicable
Prospectus Supplement, distributions on
Standard Certificates or Stripped
Certificates will be made on the 25th day
(or, if such day is not a business day, the
business day following the 25th day) of each
month, commencing with the month following
the month in which the applicable Cut-Off
Date occurs. Distributions on Multi-Class
Certificates will be made monthly,
quarterly, or semiannually, on the dates
specified in the applicable Prospectus
Supplement. The dates upon which such
distributions are made are referred to
herein as the "Distribution Dates."
Record Dates ........... Distributions will be made on each
Distribution Date set forth in the
Prospectus Supplement to Certificateholders
of record at the close of business on the
last business day of the month preceding the
month in which such Distribution Date occurs
or such other date as may be set forth in
the Prospectus Supplement (the "Record
Date").
Interest ............... With respect to a Series of Certificates
consisting of Standard Certificates or
Stripped Certificates, unless otherwise
specified in the applicable Prospectus
Supplement, interest on the related Mortgage
Loans, Mortgage Certificates or Contracts at
the applicable pass-through rate (the
"Pass-Through Rate"), as set forth in the
applicable Prospectus Supplement, will be
passed through monthly on each Distribution
Date to holders thereof, in accordance with
the particular terms of each such
Certificate. Holders of Multi-Class
Certificates will receive distributions of
interest at the applicable Interest Rate, if
any, on the Stated Amount or Notional Amount
of such Certificates, or as otherwise
specified in the applicable Prospectus
Supplement, without regard to the Net
Mortgage Rates or Net Contract Rates on the
underlying Mortgage Loans or Contracts.
Unless otherwise specified in the applicable
Prospectus Supplement, the "Net Mortgage
Rate" for each Mortgage Loan in a given
period will equal the Mortgage Rate for such
Mortgage Loan in such period (the "Mortgage
Rate") less any Fixed Retained Yield, and
less the Servicing Fee (as defined herein).
Unless otherwise specified in the applicable
Prospectus Supplement, the "Net Contract
Rate" for each Contract in a given period
will equal the Contract Rate for such
Contract in such period (the "Contract
Rate") less any Fixed Retained Yield, and
less the Servicing Fee. The "Servicing Fee"
with respect to each Mortgage Loan or
Contract is an amount reserved for servicing
such Mortgage Loan or Contract and
administration of the related Trust Fund.
Principal (including
prepayments) ........... With respect to a Series of Certificates
consisting of Standard Certificates or
Stripped Certificates, unless otherwise
specified in the applicable Prospectus
Supplement, principal payments (including
prepayments received on each related
Mortgage Loan or Contract during the month
preceding the month in which a Distribution
Date occurs) will be passed through to
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holders on such Distribution Date, in
accordance with the particular terms of each
such Certificate.
Distributions in
Reduction of Stated
Amount ................ With respect to each Class and Subclass of
Multi-Class Certificates, distributions in
reduction of Stated Amount will be made on
each Distribution Date to the holders of the
Certificates of such Class and Subclass then
entitled to receive such distributions until
the aggregate amount of such distributions
have reduced the Stated Amount of each such
Class and Subclass of Certificates to zero.
Distributions in reduction of Stated Amount
will be allocated among the Classes or
Subclasses of such Certificates in the
manner specified in the applicable
Prospectus Supplement. Distributions in
reduction of Stated Amount with respect to
any Class or Subclass of Multi-Class
Certificates of a Series may be made on a
pro rata or random lot or such other basis
as is specified in the applicable Prospectus
Supplement. See "Description of the
Certificates -- Distributions to Multi-
Class Certificateholders."
Forward Commitments;
Pre-Funding ........... A Trust Fund may enter into an agreement
(each, a "Forward Purchase Agreement") with
the Depositor whereby the Depositor will
agree to transfer additional Mortgage Loans
to such Trust Fund following the date on
which such Trust Fund is established and the
related Certificates are issued. Any Forward
Purchase Agreement will require that any
Mortgage Loans so transferred to a Trust
Fund conform to the requirements specified
in such Forward Purchase Agreement. If a
Forward Purchase Agreement is to be
utilized, and unless otherwise specified in
the related Prospectus Supplement, the
related Trustee will be required to deposit
in a segregated account (each, a
"Pre-Funding Account") all or a portion of
the proceeds received by the Trustee in
connection with the sale of one or more
classes of Certificates of the related
Series; subsequently, the additional
Mortgage Loans will be transferred to the
related Trust Fund in exchange for money
released to the Depositor from the related
Pre-Funding Account in one or more
transfers. Each Forward Purchase Agreement
will set a specified period during which any
such transfers must occur. The Forward
Purchase Agreement or the related Pooling
and Servicing Agreement will require that,
if all moneys originally deposited to such
Pre-Funding Account are not so used by the
end of such specified period, then any
remaining moneys will be applied as a
mandatory prepayment of the related class or
classes of Certificates as specified in the
related Prospectus Supplement.
Credit Enhancement
A. By Subordination ... A Series of Certificates may include one or
more Classes or Subclasses of Senior
Certificates and one or more Classes or
Subclasses of Subordinated Certificates. The
rights of the
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holders of Subordinated Certificates of a
Series to receive distributions with respect
to the related Mortgage Loans or Contracts
will be subordinated to such rights of the
holders of the Senior Certificates of the
same Series to the extent (the "Subordinated
Amount") specified herein and in the
applicable Prospectus Supplement. This
subordination is intended to enhance the
likelihood of the timely receipt by the
Senior Certificateholders of their
proportionate share of scheduled monthly
principal and interest payments on the
related Mortgage Loans or Contracts and to
reduce the likelihood that the Senior
Certificateholders will experience losses.
The Prospectus Supplement for Series of
Certificates including a subordination
feature may also specify the allocation of
distributions and priority of payments of
principal, or Stated Amount, and interest
among one or more Classes or Subclasses of
Senior Certificates of such Series. The
protection afforded to Senior
Certificateholders of a Series will be
effected by a preferential right, as
specified in the applicable Prospectus
Supplement, of such Senior
Certificateholders to receive, on any
Distribution Date, current distributions on
the related Mortgage Loans or Contracts and
(if so specified in the applicable
Prospectus Supplement) by the establishment
of a reserve fund (the "Subordination
Reserve Fund") for such Series. Any
Subordination Reserve Fund may be funded
initially with a deposit of cash,
instruments or securities in an amount
specified in the applicable Prospectus
Supplement and, if so specified in the
related Prospectus Supplement, may be
augmented by the retention of distributions
which otherwise would have been available
for distribution to the Subordinated
Certificateholders in the manner and to the
extent specified in the applicable
Prospectus Supplement. The Subordination
Reserve Fund for a Series may be funded and
maintained in such other manner as is
specified in the related Prospectus
Supplement. The maintenance of any
Subordination Reserve Fund would be intended
to preserve the availability of the
subordination provided by the Subordinated
Certificates and to provide liquidity, but
in certain circumstances the Subordination
Reserve Fund could be depleted and, if other
amounts available for distribution are
insufficient, shortfalls in distributions to
the Senior Certificateholders could result.
Unless otherwise specified in the related
Prospectus Supplement, until the
Subordinated Amount is reduced to zero,
Senior Certificateholders will be entitled
to receive the amount of any such shortfall,
together with interest at the applicable
Pass-Through Rate, Interest Rate, or at such
other rate specified in the applicable
Prospectus Supplement, as the case may be,
on the next Distribution Date. Senior
Certificateholders will bear their pro rata
share of any losses realized on the related
Mortgage Loans or Contracts in excess of the
applicable Subordinated Amount. If so
specified in the applicable Prospectus
Supplement, the protection afforded to
holders of Senior Certificates of a Series
by the subordination of certain rights of
holders of Subordinated Certificates of such
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<PAGE>
Series to distributions on the related
Mortgage Loans or Contracts may be effected
by a method other than that described above,
such as, in the event that the applicable
Trust Fund (or one or more segregated pools
of assets therein) elects to be treated as a
REMIC, the reallocation from time to time,
on the basis of distributions previously
received, of the respective percentage
interests of the Senior Certificates and the
Subordinated Certificates in the related
Trust Fund. See "Description of the
Certificates -- Distributions to Percentage
Certificateholders -- Shifting Interest
Certificates."
B. By Other Methods ... The Certificates of any Series, or any one
or more Classes thereof, may be entitled to
the benefits of a guarantee, letter of
credit, mortgage pool insurance policy,
surety bond, reserve fund, spread account,
application of excess interest to principal
or other form of credit enhancement as
specified in the applicable Prospectus
Supplement. See "Description of the
Certificates" and "Credit Support."
Advances ............... Under the Pooling and Servicing Agreement
for each Series relating to Mortgage Loans
or Contracts, unless otherwise provided in
the applicable Prospectus Supplement, the
related Servicer will be obligated to make
advances of cash ("Advances") to the
Certificate Account (as defined herein) in
the event of delinquencies in payments on
the Mortgage Loans or Contracts to the
extent described herein and in the
applicable Prospectus Supplement and only to
the extent that the Servicer determines such
Advances would be recoverable from future
payments and collections on the Mortgage
Loans or Contracts. Any Advances made by the
Servicer will ultimately be reimbursable to
the Servicer from the Certificate Account.
See "Servicing of the Mortgage Loans and
Contracts --Advances and Limitations
Thereon."
Early Termination ...... If so specified in the related Prospectus
Supplement, a Series of Certificates may be
subject to early termination through the
repurchase of the assets in the related
Trust Fund by the person or persons, under
the circumstances and in the manner
specified in such Prospectus Supplement. See
"Prepayment and Yield Considerations."
Legal Investment ....... If so specified in the Prospectus
Supplement, one or more classes of
Certificates offered pursuant to this
Prospectus will constitute "mortgage related
securities" under the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA"), so
long as they are rated in one of the two
highest rating categories by at least one
"nationally recognized statistical rating
organization." As "mortgage related
securities," such Certificates offered
pursuant to this Prospectus will constitute
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 inves-
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<PAGE>
tors. Since certain other classes of
Certificates offered pursuant to this
Prospectus will not either represent
interests in, or be secured by, qualifying
mortgage loans, such Certificates will not
constitute "mortgage related securities"
under SMMEA. No representation is made as to
the appropriate characterization of any
Certificates under any laws relating to
investment restrictions, as to which
investors should consult their legal
advisors. See "Legal Investment."
ERISA Limitations ...... A fiduciary of any employee benefit plan
subject to the fiduciary responsibility
provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
including the prohibited transaction rules
thereunder, and to the corresponding
provisions of the Internal Revenue Code of
1986, as amended (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."
Federal Income Tax
Status ................. The federal income tax consequences of
investment in a Certificate of any Series
will vary depending upon the characteristics
of such Certificate. If so specified in the
applicable Prospectus Supplement, an
election may be made to have the Trust Fund
(or one or more segregated pools of assets
therein) with respect to a Series of
Certificates treated as a REMIC for federal
income tax purposes. See "Certain Federal
Income Tax Consequences."
Rating ................. At the date of issuance of each Series of
Certificates, the Certificates offered
pursuant to the related Prospectus
Supplement will be rated in one of the four
highest rating categories by at least one
statistical rating organization that has
been requested by the Depositor to rate such
Certificates (a "Rating Agency"). Such
ratings will address, in the opinion of such
Rating Agency, the likelihood that the
related Trust Fund will be able to make
timely payment of all amounts due on the
related Series of Certificates in accordance
with the terms thereof. Such ratings will
neither address any prepayment or yield
considerations applicable to any
Certificates nor constitute a recommendation
to buy, sell or hold any Certificates.
The ratings expected to be received with
respect to any Certificates will be set
forth in the related Prospectus Supplement.
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Certificates.
Limited Liquidity. There can be no assurance that a secondary market for
the Certificates of any series or class will develop or, if it does develop,
that it will provide Certificateholders with liquidity of investment or that
it will continue for the life of the Certificates of any series. The
Prospectus Supplement for any series of Certificates may indicate that an
underwriter specified therein intends to establish a secondary market in such
Certificates; however, no underwriter will be obligated to do so. Unless
otherwise specified in the related Prospectus Supplement, the Certificates
will not be listed on any securities exchange.
Limited Obligations. The Certificates will not represent an interest in or
obligation, either recourse or non-recourse (except for certain non-recourse
debt described under "Certain Federal Income Tax Consequences"), of the
Depositor, the Servicer or any person other than the related Trust. The only
obligations of the foregoing entities with respect to the Certificates or the
Mortgage Loans will be the obligations (if any) of the Depositor and the
Servicer pursuant to certain limited representations and warranties made with
respect to the Mortgage Loans, the Servicer's servicing obligations under the
related Pooling and Servicing Agreement (including its limited obligation, if
any, to make certain advances in the event of delinquencies on the Mortgage
Loans, but only to the extent deemed recoverable) and, if and to the extent
expressly described in the related Prospectus Supplement, certain limited
obligations of the Depositor, Servicer, applicable Sub-Servicer, or another
party in connection with a purchase obligation ("Purchase Obligation") or an
agreement to purchase or act as remarketing agent with respect to a
Convertible Mortgage Loan upon conversion to a fixed rate. Notwithstanding
the foregoing, and as to be described in the related Prospectus Supplement,
certain types of Credit Enhancement, such as a financial guaranty insurance
policy or a letter of credit, may constitute a full recourse obligation of
the issuer of such Credit Enhancement. Except as described in the related
Prospectus Supplement, neither the Certificates nor the underlying Mortgage
Loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the Depositor, the Servicer, any Sub-Servicer or any
of their affiliates. Proceeds of the assets included in the related Trust
Fund for each series of Certificates (including the Mortgage Loans and any
form of Credit Enhancement) will be the sole source of payments on the
Certificates, and there will be no recourse to the Depositor or any other
entity in the event that such proceeds are insufficient or otherwise
unavailable to make all payments provided for under the Certificates.
Limitations, Reduction and Substitution of Credit Enhancement. With
respect to each series of Certificates, Credit Enhancement will be provided
in limited amounts to cover certain types of losses on the underlying
Mortgage Loans. Credit Enhancement will be provided in one or more of the
forms referred to herein, including, but not limited to: a letter of credit;
a Purchase Obligation; a mortgage pool insurance policy; a special hazard
insurance policy; a bankruptcy bond; a reserve fund; a financial guaranty
insurance policy or other type of Credit Enhancement to provide partial
coverage for certain defaults and losses relating to the Mortgage Loans.
Credit Enhancement also may be provided in the form of the related class of
Certificates, subordination of one or more classes of Certificates in a
series under which losses in excess of those absorbed by any related class of
Certificates are first allocated to any Subordinate Certificates up to a
specified limit, cross-support among Trust Fund Assets and/or
overcollateralization. See "Credit Support -- Subordination" and "Other
Credit Enhancement." Regardless of the form of Credit Enhancement provided,
the coverage will be limited in amount and in most cases will be subject to
periodic reduction in accordance with a schedule or formula. Furthermore,
such Credit Enhancements may provide only very limited coverage as to certain
types of losses, and may provide no coverage as to certain other types of
losses. Generally, Credit Enhancements do not directly or indirectly
guarantee to the investors any specified rate of prepayments. The Servicer
will generally be permitted to reduce, terminate or substitute all or a
portion of the Credit Enhancement for any series of Certificates, if the
applicable Rating Agency indicates that the then-current rating thereof will
not be adversely affected. To the extent not set forth herein, the amount and
types of coverage, the identification of any entity providing the coverage,
the terms of any subordination and related information will be set forth in
the Prospectus Supplement relating to a series of Certificates. See "Credit
Support -- Subordination" and "Other Credit Enhancement."
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RISKS OF THE MORTGAGE LOANS
Risk of the Losses Associated with Junior Liens. Certain of the Mortgage
Loans will be secured by junior Liens subordinate to the rights of the
mortgagee or beneficiary under each related senior mortgage or deed of trust.
As a result, the proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the principal balance of a mortgage
loan only to the extent that the claims, if any, of each such senior
mortgagee or beneficiary are satisfied in full, including any related
foreclosure costs. In addition, a mortgagee secured by a junior Lien may not
foreclose on the related mortgaged property unless it forecloses subject to
the related senior mortgage or mortgages, in which case it must either pay
the entire amount of each senior mortgage to the applicable mortgagee at or
prior to the foreclosure sale or undertake the obligation to make payments on
each senior mortgage in the event of default thereunder. In servicing junior
lien loans in its portfolio, it has been the practice of the Servicer to
satisfy each such senior mortgage at or prior to the foreclosure sale only to
the extent that it determines any amounts so paid will be recoverable from
future payments and collections on such junior Lien loans or otherwise. The
Trusts will not have any source of funds to satisfy any such senior mortgage
or make payments due to any senior mortgagee. See "Certain Legal Aspects of
Mortgage Loans and Contracts -- Foreclosure."
Risk of Losses Associated with Declining Real Estate Values. An investment
in securities such as the Certificates that generally represent beneficial
ownership interests in the Mortgage Loans or debt secured by such Mortgage
Loans may be affected by, among other things, a decline in real estate values
and changes in the borrowers' financial condition. No assurance can be given
that values of the Mortgaged Properties have remained or will remain at their
levels on the dates of origination of the related Mortgage Loans. If the
residential real estate market should experience an overall decline in
property values such that the outstanding balances of any senior Liens, the
Mortgage Loans and any secondary financing on the Mortgaged Properties in a
particular Mortgage Pool become equal to or greater than the value of the
Mortgaged Properties, the actual rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the
nonconforming credit mortgage lending industry. Such a decline could
extinguish the interest of the related Trust in the Mortgaged Properties
before having any effect on the interest of the related senior mortgagee. In
addition, in the case of Mortgage Loans that are subject to negative
amortization, due to the addition to principal balance of deferred interest
("Deferred Interest"), the principal balances of such Mortgage Loans could be
increased to an amount equal to or in excess of the value of the underlying
Mortgaged Properties, thereby increasing the likelihood of default. To the
extent that such losses are not covered by the applicable Credit Enhancement,
holders of Certificates of the series evidencing interests in the related
Mortgage Pool will bear all risk of loss resulting from default by Mortgagors
and will have to look primarily to the value of the Mortgaged Properties for
recovery of the outstanding principal and unpaid interest on the defaulted
Mortgage Loans.
Risk of Losses Associated with Certain Non-Conforming and Non-Traditional
Loans. The Depositor's underwriting standards consider, among other things, a
mortgagor's credit history, repayment ability and debt service-to-income
ratio, as well as the value of the property; however, the Depositor's
Mortgage Loan program generally provides for the origination of Mortgage
Loans relating to non-conforming credits. Certain of the types of loans that
may be included in the Pools may involve additional uncertainties not present
in traditional types of loans. For example, certain of the Mortgage Loans may
provide for escalating or variable payments by the borrower under the
Mortgage Loan (the "Mortgagor"), as to which the Mortgagor is generally
qualified on the basis of the initial payment amount. In some instances the
Mortgagors' income may not be sufficient to enable them to continue to make
their loan payments as such payments increase and thus the likelihood of
default will increase. For a more detailed discussion, see "Underwriting
Guidelines."
Risk of Losses Associated with Balloon Loans. Certain of the Mortgage
Loans may constitute "Balloon Loans." Balloon Loans are originated with a
stated maturity of less than the period of time of the corresponding
amortization schedule. Consequently, upon the maturity of a Balloon Loan, the
Mortgagor will be required to make a "balloon" payment that will be
significantly larger than such Mortgagor's previous monthly payments. The
ability of such a Mortgagor to repay a Balloon Loan at maturity frequently
will depend on such borrower's ability to refinance the Mortgage Loan. The
ability of
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<PAGE>
a Mortgagor to refinance such a Mortgage Loan will be affected by a number of
factors, including the level of available mortgage rates at the time, the
value of the related Mortgaged Property, the Mortgagor's equity in the
related Mortgaged Property, the financial condition of the Mortgagor, the tax
laws and general economic conditions at the time.
Although a low interest rate environment may facilitate the refinancing of
a balloon payment, the receipt and reinvestment by Certificateholders of the
proceeds in such an environment may produce a lower return than that
previously received in respect of the related Mortgage Loan. Conversely, a
high interest rate environment may make it more difficult for the Mortgagor
to accomplish a refinancing and may result in delinquencies or defaults. None
of the Depositor, the Servicer, any Sub-Servicer or the Trustee will be
obligated to provide funds to refinance any Mortgage Loan, including Balloon
Loans.
Risk of Losses Associated with ARM Loans. ARM Loans may be underwritten on
the basis of an assessment that Mortgagors will have the ability to make
payments in higher amounts after relatively short periods of time. In some
instances, Mortgagors' income may not be sufficient to enable them to
continue to make their loan payments as such payments increase and thus the
likelihood of default will increase.
Risk of Losses Associated with Bankruptcy of Mortgagors. General economic
conditions have an impact on the ability of borrowers to repay Mortgage
Loans. Loss of earnings, illness and other similar factors also may lead to
an increase in delinquencies and bankruptcy filings by borrowers. In the
event of personal bankruptcy of a Mortgagor, it is possible that a Trust
could experience a loss with respect to such Mortgagor's Mortgage Loan. In
conjunction with a Mortgagor's bankruptcy, a bankruptcy court may suspend or
reduce the payments of principal and interest to be paid with respect to such
Mortgage Loan or permanently reduce the principal balance of such Mortgage
Loan thereby either delaying or permanently limiting the amount received by
the Trust with respect to such Mortgage Loan. Moreover, in the event a
bankruptcy court prevents the transfer of the related Mortgaged Property to a
Trust, any remaining balance on such Mortgage Loan may not be recoverable.
Risk of Losses Associated with Foreclosure of Mortgaged Properties. Even
assuming that the Mortgaged Properties provide adequate security for the
Mortgage Loans, substantial delays could be encountered in connection with
the liquidation of defaulted Mortgage Loans and corresponding delays in the
receipt of related proceeds by the Certificateholders could occur. An action
to foreclose on a Mortgaged Property securing a Mortgage Loan is regulated by
state statutes, rules and judicial decisions and is subject to many of the
delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete. Furthermore, in
some states an action to obtain a deficiency judgment is not permitted
following a nonjudicial sale of a Mortgaged Property. In the event of a
default by a Mortgagor, these restrictions, among other things, may impede
the ability of the Servicer to foreclose on or sell the Mortgaged Property or
to obtain liquidation proceeds (net of expenses) ("Liquidation Proceeds")
sufficient to repay all amounts due on the related Mortgage Loan. The
Servicer will be entitled to deduct from Liquidation Proceeds all expenses
reasonably incurred in attempting to recover amounts due on the related
liquidated Mortgage Loan ("Liquidated Mortgage Loan") and not yet repaid,
including payments to prior lienholders, accrued Servicing Fees, legal fees
and costs of legal action, real estate taxes, and maintenance and
preservation expenses. In the event that any Mortgaged Properties fail to
provide adequate security for the related Mortgage Loans and insufficient
funds are available from any applicable Credit Enhancement,
Certificateholders could experience a loss on their investment.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in
realizing upon a defaulted mortgage loan having a small remaining principal
balance as it would in the case of a defaulted mortgage loan having a larger
principal balance, the amount realized after expenses of liquidation would be
less as a percentage of the outstanding principal balance of the smaller
principal balance mortgage loan than would be the case with a larger
principal balance loan.
Under environmental legislation and judicial decisions applicable in
various states, a secured party that takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a mortgaged property that, prior
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to foreclosure, has been involved in decisions or actions which may lead to
contamination of a property, may be liable for the costs of cleaning up the
purportedly contaminated site. Although such costs could be substantial, it
is unclear whether they would be imposed on a holder of a mortgage note (such
as a Trust) which, under the terms of the Pooling and Servicing Agreement, is
not required to take an active role in operating the Mortgaged Properties.
See "Certain Legal Aspects of Mortgage Loans and Contracts -- Environmental
Risks."
Certain of the Mortgaged Properties relating to Mortgage Loans may not be
owner occupied. It is possible that the rate of delinquencies, foreclosures
and losses on Mortgage Loans secured by nonowner occupied properties could be
higher than for loans secured by the primary residence of the borrower.
Litigation. Any material litigation relating to the Depositor or the
Servicer will be specified in the related Prospectus Supplement.
Geographic Concentration of Mortgaged Properties. Certain geographic
regions from time to time will experience weaker regional economic conditions
and housing markets than will other regions, and, consequently, will
experience higher rates of loss and delinquency on mortgage loans generally.
The Mortgage Loans underlying certain series of Certificates may be
concentrated in such regions, and such concentrations may present risk
considerations in addition to those generally present for similar mortgage
loan asset-backed securities without such concentrations. Information with
respect to geographic concentration of Mortgaged Properties will be specified
in the related Prospectus Supplement or related current report on Form 8-K.
Legal Considerations. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures, and require licensing
of the Depositor and the Servicer and Sub-Servicers. In addition, most states
have other laws, public policy and general principles of equity relating to
the protection of consumers, unfair and deceptive practices and practices
that may apply to the origination, servicing and collection of the Mortgage
Loans. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and
principles may limit the ability of the Servicer to collect all or part of
the principal of or interest on the Mortgage Loans, may entitle the borrower
to a refund of amounts previously paid and, in addition, could subject the
Servicer to damages and administrative sanctions. See "Certain Legal Aspects
of Mortgage Loans and Contracts."
The Mortgage Loans may also be subject to federal laws, including: (i) the
Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms of the Mortgage 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. Depending on the provisions of the
applicable law and the specific facts and circumstances involved, violations
of these laws, policies and general principles of equity may limit the
ability of the Servicer to collect all or part of the principal of or
interest on the Mortgage Loans, may entitle the borrower to rescind the loan
or to a refund of amounts previously paid and, in addition, could subject the
Servicer to damages and administrative sanctions. If the Servicer is unable
to collect all or part of the principal or interest on the Mortgage Loans
because of a violation of the aforementioned laws, public policies or general
principles of equity then the Trust may be delayed or unable to repay all
amounts owed to Investors. Furthermore, depending upon whether damages and
sanctions are assessed against the Servicer or the Depositor, such violations
may materially impact the financial ability of the Depositor to continue to
act as Servicer or the ability of the Depositor to repurchase or replace
Mortgage Loans if such violation breaches a representation or warranty
contained in a Pooling and Servicing Agreement.
Collections on the Mortgage Loans may vary due to the level of incidence
of delinquent payments and of prepayments. Collections on the Mortgage Loans
may also vary due to seasonal purchasing and payment habits of borrowers.
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Book-Entry Registration. Issuance of the Certificates in book-entry form
may reduce the liquidity of such Certificates in the secondary trading market
since investors may be unwilling to purchase Certificates for which they
cannot obtain definitive physical securities representing such
Certificateholders' interests, except in certain circumstances described in
the related Prospectus Supplement.
Since transactions in Certificates will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's
book-entry system ("Direct or Indirect Participants") and certain banks, the
ability of a Certificateholder to pledge a Certificate to persons or entities
that do not participate in the DTC system, or otherwise to take actions in
respect of such Certificates, may be limited due to lack of a physical
certificate representing the Certificates.
Certificateholders may experience some delay in their receipt of
distributions of interest on and principal of the Certificates since
distributions may be required to be forwarded by the Trustee to DTC and, in
such a case, DTC will be required to credit such distributions to the
accounts of its Participants which thereafter will be required to credit them
to the accounts of the applicable class of Certificateholders either directly
or indirectly through Indirect Participants. See "Description of the
Certificates."
The Status of the Mortgage Loans in the Event of Bankruptcy of the
Depositor. In the event of the bankruptcy of the Depositor at a time when it
or any affiliate thereof holds a Certificate, a trustee in bankruptcy of the
Depositor, or its creditors could attempt to recharacterize the sale of the
Mortgage Loans to the related Trust as a borrowing by the Depositor or such
affiliate with the result, if such recharacterization is upheld, that the
Certificateholders would be deemed creditors of the Depositor or such
affiliate, secured by a pledge of the Mortgage Loans. If such an attempt were
successful, it could prevent timely payments of amounts due to the Trust.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor 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 (including fees and charges) above
an annual rate of 6% during the period of such Mortgagor's active duty
status, unless a court orders otherwise upon application of the lender. It is
possible that such action could have an effect, for an indeterminate period
of time, on the ability of the Servicer to collect full amounts of interest
on certain of the Mortgage Loans. In addition, the Relief Act imposes
limitations that would impair the ability of the Servicer to foreclose on an
affected Mortgage Loan during the Mortgagor'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.
Certificate Rating. The rating of Certificates credit enhanced through
external Credit Enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external Credit Enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to
the Certificates would likely result in a reduction in the rating of the
Certificates. See "Ratings" in the Prospectus Supplement.
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THE TRUST FUNDS
GENERAL
The Trust Fund for each Series of Certificates will consist primarily of a
Pool of Mortgage Loans (a "Mortgage Pool") and/or Contracts (a "Contract
Pool"). In addition, a Trust Fund will also include (i) amounts held from
time to time in the related Certificate Account, (ii) the Depositor's
interest in any primary mortgage insurance, hazard insurance, title insurance
and/or other insurance policies relating to a Mortgage Loan or Contract,
(iii) any property which initially secured a Mortgage Loan and which has been
acquired by foreclosure or trustee's sale or deed in lieu of foreclosure or
trustee's sale, (iv) any Manufactured Home which initially secured a Contract
and which is acquired by repossession, (v) if applicable, and to the extent
set forth in the applicable Prospectus Supplement, any Subordination Reserve
Fund and/or any other reserve fund, (vi) if applicable, and to the extent set
forth in the applicable Prospectus Supplement, one or more guarantees,
letters of credit, insurance policies, or any other credit enhancement
arrangement, and (vii) such other assets as may be specified in the related
Prospectus Supplement. Unless otherwise specified in the applicable
Prospectus Supplement, the Trust Fund will not include, however, the portion
of interest on the Mortgage Loans or Contracts which constitutes the Fixed
Retained Yield, if any. See "Fixed Retained Yield" below. If specified in the
related Prospectus Supplement, certain Certificates will evidence the entire
fractional undivided ownership interest in the related Mortgage Loans held by
the related Trust Fund or may represent debt secured by the related Mortgage
Loans.
THE MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist of Mortgage Loans evidenced by promissory notes or
other evidences of indebtedness (the "Mortgage Notes") that provide for an
original term to maturity of not more than 40 years, for monthly payments and
for interest on the outstanding principal amounts thereof at a rate that is
either fixed or subject to adjustment as described in the related Prospectus
Supplement. If so specified in the applicable Prospectus Supplement, the
adjustable interest rate on certain of the Mortgage Loans will be convertible
into a fixed interest rate at the option of the mortgagor at the times and
upon the conditions specified therein ("Convertible Mortgage Loans"). The
Mortgage Loans may provide for fixed level payments or be GPM Loans, GEM
Loans, Balloon Loans or Buy-Down Loans (each as defined herein) or Mortgage
Loans with other payment characteristics as described in the related
Prospectus Supplement. In addition, the Mortgage Pools may include
participation interests in Mortgage Loans, in which event references herein
to payments on Mortgage Loans underlying, such participations shall mean
payments thereon allocable to such participation interests, and the meaning
of other terms relating to Mortgage Loans will be similarly adjusted.
Similarly, the Mortgage Pools may include Mortgage Loans with respect to
which a Fixed Retained Yield has been retained, in which event references
herein to Mortgage Loans and payments thereon shall mean the Mortgage Loans
exclusive of such Fixed Retained Yield. A "Fixed Retained Yield" in a
Mortgage Loan or Contract represents a specified portion of the interest
payable thereon. The Prospectus Supplement for a Series will specify whether
there will be any Fixed Retained Yield in any Mortgage Loan or Contract and,
if so, the owner thereof. See "Servicing of the Mortgage Loans and Contracts
- -- Fixed Retained Yield." Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Loans will be secured by promissory notes
or other evidences of indebtedness (the "Mortgages") creating first, second
or more junior liens on conventional one-to four-family residential
properties (which may include mixed-use or vacation properties), all of which
will be located in any of the fifty states or the District of Columbia. The
Mortgage Loans may also consist of installment contracts for the sale of real
estate. If so provided in the applicable Prospectus Supplement, a Mortgage
Pool may also contain cooperative apartment loans (the "Cooperative Loans")
evidenced by promissory notes (the "Cooperative Notes") secured by security
interests in shares issued by private, non-profit, cooperative housing
corporations (the "cooperatives") and in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific Cooperative
Dwellings in such cooperatives' buildings. In the case of a Cooperative Loan,
the proprietary lease or occupancy agreement securing such Cooperative Loan
is generally subordinate to any blanket mortgage on the related cooperative
apartment
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building and/or the underlying land. Additionally, 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.
Mortgage Loans may be entitled to the benefit of external credit
enhancement. Residential Mortgage Loans may be insured by the Federal Housing
Administration or its successors against defaults by the borrower in the
payment of principal and interest thereon, have a portion of principal and
interest payments guaranteed by the Department of Veterans Affairs or its
successors or be subject to other payment guarantees, including guarantees
under the National Housing Act.
Unless otherwise specified in the Prospectus Supplement for a Series, each
Mortgage Loan must have an original term of maturity of not less than 5 years
and not more than 40 years. Unless otherwise specified in the Prospectus
Supplement for a Series, no Mortgage Loan for residential property will have
had, at origination, a principal balance in excess of $5,000,000 or a
Loan-to-Value Ratio in excess of 95%, and Mortgage Loans having Loan-to-Value
Ratios at the time of origination exceeding 80% will be supported by external
credit enhancement or be covered by primary mortgage insurance providing,
coverage on at least the amount of each such mortgage loan in excess of 75%
of the original fair market value of the mortgaged property and remaining in
force until the principal balance of such Mortgage Loan is reduced to 80% of
such original fair market value. The "Loan-to-Value Ratio" is the ratio,
expressed as a percentage, of the principal amount of the Mortgage Loan
outstanding at the origination of such loan divided by the fair market value
of the Mortgaged Property. The fair market value of the Mortgaged Property
securing any Mortgage Loan is, unless otherwise specified in the applicable
Prospectus Supplement, the lesser of (x) the appraised value of the related
Mortgaged Property determined in an appraisal obtained by the originator at
origination (or, in the case of a refinancing, an appraisal obtained at the
origination of the refinanced mortgage loan) and (y) the sale price for such
property.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at the levels which existed on the dates of
origination of the related Mortgage Loans. If the residential real estate
market should experience an overall decline in property values such that the
outstanding balances of the Mortgage Loans and any secondary financing on the
Mortgaged Properties in a particular Trust Fund become equal to or greater
than the value of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. To the extent that
such losses are not covered by the methods of credit support or the insurance
policies described herein, they will be borne by holders of the Certificates
of the Series evidencing interests in such Trust Fund. Furthermore, in a
declining real estate market a new appraisal could render the Cut-Off Date
Loan-to-Value Ratios as unreliable measures of leverage.
The Prospectus Supplement for each Series will set forth certain
characteristics of the related Mortgage Loans, which may include the
aggregate principal balance of the Mortgage Loans in the Mortgage Pool
underlying such Series as of the Cut-Off Date for such Series (the "Cut-Off
Date Aggregate Principal Balance"), the range of original terms to maturity
of the Mortgage Loans in the Mortgage Pool, the weighted average remaining
term to stated maturity at the Cut-Off Date of such Mortgage Loans, the
earliest and latest origination dates of such Mortgage Loans, the range of
Mortgage Rates and Net Mortgage Rates borne by such Mortgage Loans, the
weighted average Net Mortgage Rate at the Cut-Off Date of such Mortgage
Loans, the percentage of such Mortgage Loans which had Loan-to-Value Ratios
at the time of origination of 80% or less, the percentage of such Mortgage
Loans that had Loan-to-Value Ratios at origination in excess of 80% and the
highest outstanding, principal balance at origination of any such Mortgage
Loan.
Unless otherwise specified in the applicable Prospectus Supplement, all of
the Mortgage Loans in a Trust Fund will have monthly payments due on a
specified day of each month (each, a "Due Date") and will, with respect to
Mortgage Loans secured by residential properties, require at least monthly
payments of interest on any outstanding balance. If so specified in the
applicable Prospectus Supplement, the Mortgage Pools may include adjustable
rate Mortgage Loans that provide for payment adjustments to be made less
frequently than adjustments in the Mortgage Rates. Each adjustment in the
Mortgage Rate
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which is not made at the time of a corresponding adjustment in payments (and
which adjusted amount of interest is not paid currently on a voluntary basis
by the mortgagor) will result in a decrease (if the Mortgage Rate rises) or
an increase (if the Mortgage Rate declines) in the rate of amortization of
the Mortgage Loan. Moreover, such payment adjustments on the Mortgage Loans
may be subject to certain limitations, as specified in the Prospectus
Supplement, which may also affect the rate of amortization on the Mortgage
Loan. As a result of such provisions, or in accordance with the payment
schedules of certain GPM Loans and other Mortgage Loans, the amount of
interest accrued in any month may equal or exceed the scheduled monthly
payment on the Mortgage Loan. In any such month, no principal would be
payable on the Mortgage Loan, and if the accrued interest exceeded the
scheduled monthly payment, such excess interest due would become "Deferred
Interest" that is added to the principal balance of the Mortgage Loan.
Deferred Interest will bear interest at the Mortgage Rate until paid. If such
limitations prevent the payments from being sufficient to amortize fully the
Mortgage Loan by its stated maturity dare, a lump sum payment equal to the
remaining unpaid principal balance will be due on such stated maturity date.
See "Prepayment and Yield Considerations."
Unless otherwise specified in the applicable Prospectus Supplement, the
Mortgage Loans in each Mortgage Pool will be permanent loans (as opposed to
construction and land development loans) secured by Mortgages on Mortgaged
Properties. The Mortgaged Properties will consist of residential properties
only, including detached homes, townhouses, units in planned unit
developments, condominium units, mixed-use properties, vacation homes and
small scale multifamily properties, all of which constitute a "dwelling or
mixed residential and commercial structure" within the meaning of Section
3(a)(41)(A)(i) of the Securities Exchange Act of 1934, as amended (the
"Mortgaged Properties"). The Mortgage Loans will be secured by liens on fee
simple or leasehold interests (in those states in which long-term ground
leases are used as an alternative to fee interests) in such Mortgaged
Properties, or liens on shares issued by cooperatives and the related
proprietary leases or occupancy agreements occupy specified units in such
cooperatives' buildings. The geographic distribution of Mortgaged Properties
will be set forth in the Prospectus Supplement. Each Prospectus Supplement
will also set forth the percentage of the Cut-Off Date Aggregate Principal
Balance of the Mortgage Loans in the related Mortgage Pool representing the
refinancing of existing mortgage indebtedness and the types of Mortgaged
Properties.
If so specified in the applicable Prospectus Supplement, a Trust Fund may
contain Mortgage Loans subject to temporary buy-down plans (the "Buy-Down
Loans") pursuant to which the monthly payments made by the mortgagor during
the early years of the Mortgage Loan will be less than the scheduled monthly
payments on the Mortgage Loan. The resulting difference in payment will be
compensated for from an amount contributed by the seller of the related
Mortgaged Property or another source and, if so specified in the related
Prospectus Supplement, placed in a custodial account (the "Buy-Down Account")
by the Servicer. If the mortgagor on a Buy-Down Loan prepays such Mortgage
Loan in its entirety, or defaults on such Mortgage Loan and the Mortgaged
Property is sold in liquidation thereof, during the period when the mortgagor
is not obligated, on account of the buy-down plan, to pay the full monthly
payment otherwise due on such loan, the unpaid principal balance of such
Buy-Down Loan will be reduced by the amounts remaining in the Buy-Down
Account with respect to such Buy-Down Loan, and such amounts shall be
deposited in the Certificate Account (as defined herein), net of any amounts
paid with respect to such Buy-Down Loan by any insurer, guarantor or other
person pursuant to a credit enhancement arrangement described in the
applicable Prospectus Supplement.
If so specified in the applicable Prospectus Supplement, a Trust Fund may
include Mortgage Loans which are amortized over 30 years or some other term,
or which do not provide for amortization prior to maturity, but which have a
shorter term (each such Mortgage Loan, a "Balloon Loan") that causes the
outstanding principal balance of such Mortgage Loan to be due and payable at
the end of a certain specified period (the "Balloon Period"). If specified in
the applicable Prospectus Supplement, the originator of such Balloon Loan
will be obligated to refinance each such Balloon Loan at the end of its
Balloon Period at a new interest rate determined prior to the end of such
Balloon Period by reference to an index plus a margin specified in the
related Mortgage Note. The mortgagor is not, however, obligated to refinance
the Balloon Loan through such originator. In the event a mortgagor refinances
a Balloon Loan, the new loan will not be included in the Trust Fund. See
"Prepayment and Yield Considerations."
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If specified in the Prospectus Supplement for any Series, the Mortgage
Loans included in the Trust Fund for such Series may be what are commonly
referred to as "home equity revolving lines of credit" ("Home Equity Lines").
Home Equity Lines are generally evidenced by a loan agreement ("Loan
Agreement") rather than a note. Home Equity Lines generally may be drawn down
from time to time by the borrower writing a check against the account, or
acknowledging the advance in a supplement to the Loan Agreement (the amount
of such drawn down, an "Additional Balance"). A Home Equity Line will
establish a maximum credit limit with respect to the related borrower, and
will permit the borrower to draw down Additional Balances, and repay the
aggregate balance outstanding in each case from time to time in such a manner
so that the aggregate balance outstanding does not exceed the maximum credit
limit. A Home Equity Line will be secured by either a senior or a junior lien
Mortgage, and will bear interest at either a fixed or an adjustable rate.
In certain states the borrower must, on the opening of an account, draw an
initial advance of not less than a specified amount. Home Equity Lines
generally amortize according to an amortization basis established at the time
of the initial advance. The "amortization basis" is the length of time in
which the initial advance plus interest will be repaid in full. The
amortization bases of the Home Equity Lines generally range from 60 months (5
years) to 180 months (15 years) depending on the credit limit assigned.
Generally, the amortization basis will be longer the higher the credit limit.
The minimum monthly payment on a Home Equity Line will generally be equal to
the sum of the following: (i) an amount necessary to completely repay the
then-outstanding balance and the applicable finance charge in equal
installments over the assigned amortization basis ("Basic Monthly Amount");
(ii) any monthly escrow charges; (iii) any delinquency or other similar
charges; and (iv) any past due amounts, including past due finance charges.
The Basic Monthly Amount typically is recomputed each time the related
Mortgage Rate adjusts and whenever an Additional Balance is advanced; such
recomputation in the case of an Additional Advance may also reset the
amortization schedule. The effect of each such advance on the related Home
Equity Line is to reset the commencement date of the original maturity term
to the date of the later advance. For example, a Home Equity Line made
originally with a 15-year maturity from date of origination changes at the
time of the next adjustment or advance to a Home Equity Line with a maturity
of 15 years from the date of such advance. For certain Home Equity Lines, the
same type of recomputation exists for adjustments of the related Mortgage
Rate.
Prior to the expiration of a specified period, the reduction of the
account to a zero balance and the closing of a Home Equity Line account may
result in a prepayment penalty. A prepayment penalty also may be assessed
against the borrower if a Home Equity Line account is closed by the Servicer
due to a default by the borrower under the Loan Agreement.
Each Loan Agreement will provide that the Servicer has the right to
require the borrower to pay the entire balance plus all other accrued but
unpaid charges immediately, and to cancel the borrower's credit privileges
under the Loan Agreement if, among other things, the borrower fails to make
any minimum payment when due under the Loan Agreement, if there is a material
change in the borrower's ability to repay the Home Equity Line, or if the
borrower sells any interest in the property securing the Loan Agreement,
thereby causing the "due-on-sale" clause in the trust deed or mortgage to
become effective.
Mortgage Loans which are secured by junior mortgages are subordinate to
the rights of the mortgagees under the related senior mortgage or mortgages.
Accordingly, liquidation, insurance and condemnation proceeds received with
respect to the related mortgaged property will be available to satisfy the
outstanding balance of such a Mortgage Loan only to the extent that the
claims of the senior mortgages have been satisfied in full, including any
related liquidation and foreclosure costs. In addition, a junior mortgagee
foreclosing on its mort,age may be required to purchase the related mortgaged
property for a price sufficient to satisfy the claims of the holders of any
senior mortgages which are also being foreclosed. In the alternative, a
junior mortgagee which acquires title to a related mortgaged property,
through foreclosure, deed-in-lieu of foreclosure or otherwise may take the
property subject to any senior mortgages and continue to perform with respect
to any senior mortgages, in which case the junior mortgagee must comply with
the terms of any senior mortgages or risk foreclosure by the senior
mortgagee.
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If so specified in the applicable Prospectus Supplement, a loan pool may
include graduated equity mortgage loans ("GEM Loans"). GEM Loans are fixed
rate, fully amortizing mortgage loans which provide for monthly payments
based on a 10-to 30-year amortization schedule, and which provide for
scheduled annual payment increases for a number of years and level payments
thereafter. The full amount of the scheduled payment increases during the
early years is applied to reduce the outstanding principal balance of such
loans.
If so specified in the applicable Prospectus Supplement, a Mortgage Pool
may include graduated payment mortgage loans ("GPM Mortgage Loans"). GPM
Mortgage Loans provide for payments of monthly installments which increase
annually in each of a specified number of initial years and level monthly
payments thereafter. Payments during the early years are required in amounts
lower than the amounts which would be payable on a level debt service basis
due to the deferral of a portion of the interest accrued on the mortgage
loan. Such deferred interest is added to the principal balance of the
mortgage loan and is paid, together with interest thereon, in the later years
of the obligation. Because the monthly payments during the early years of
such a GPM Mortgage Loan are not sufficient to pay the full interest accruing
on the GPM Mortgage Loan, the interest payments on such GPM Mortgage Loan may
not be sufficient in its early years to meet its proportionate share of the
distributions expected to be made on the related Certificates. Thus, if the
Mortgage Loans include GPM Mortgage Loans, the Servicer will, unless
otherwise specified in the Prospectus Supplement, establish a reserve fund
(the "GPM Fund") which (together with, if specified in the related Prospectus
Supplement, reinvestment income thereon) will be sufficient to cover the
amount by which payments of interest on such GPM Mortgage Loan assumed in
calculating, distributions expected to be made on the Certificates of such
Series exceed scheduled interest payments according to the relevant graduated
payment mortgage plan for the period during which excess occurs.
If so specified in the applicable Prospectus Supplement, a Trust Fund may
contain ARM buy-out loans ("ARM Buy-Outs") which are automatically
repurchased by the Depositor upon the occurrence of either(i) a switch from a
fixed-rate mortgage to an adjustable rate mortgage pursuant to the terms of
the underlying note or (ii) a switch from an adjustable rate to a fixed rate
mortgage pursuant to the terms of the underlying note.
If specific information respecting the Mortgage Loans to be included in a
Trust Fund is not known to the Depositor at the time the Certificates of a
Series are initially offered, more general information of the nature
described above will be provided in the Prospectus Supplement and 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 thereof and to be filed with
the Commission promptly after the initial issuance of such Certificates.
THE CONTRACTS
Unless otherwise specified in the applicable Prospectus Supplement, each
Contract Pool will consist of conventional manufactured housing installment
sales contracts and installment loan agreements (collectively, the
"Contracts") originated by a manufactured housing dealer in the ordinary
course of business and purchased by the Unaffiliated Seller. Unless otherwise
specified in the applicable Prospectus Supplement, each Contract will be
secured by Manufactured Homes (as defined below), each of which will be
located in any of the fifty states or the District of Columbia. Unless
otherwise specified in the applicable Prospectus Supplement, the Contracts
will be fully amortizing and will bear interest at a fixed or adjustable
annual percentage rate (the "APR" or "Contract Rate"). The Contract Pool may
include Contracts with respect to which a Fixed Retained Yield has been
retained, in which event references herein to Contracts and payments thereon
shall mean the Contracts exclusive of such Fixed Retained Yield. The
Prospectus Supplement for a Series will specify whether there will be any
Fixed Retained Yield in any Contract, and if so, the owner thereof. See
"Fixed Retained Yield" below.
The Unaffiliated Seller of the Contracts will represent that the
Manufactured Homes securing the Contracts consist of manufactured homes
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
designed
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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."
Unless otherwise specified in the Prospectus Supplement for a Series, each
Contract must have an original term to maturity of not less than 1 year and
not more than 40 years. Unless otherwise specified in the Prospectus
Supplement for a Series, no Contract will have had, at origination, a
principal balance in excess of $5,000,000 or a Loan-to-Value Ratio in excess
of 95%. The "Loan-to-Value Ratio" is the ratio, expressed as a percentage, of
the principal amount of the Contract outstanding at the origination of such
loan divided by the fair market value of the Manufactured Home. The fair
market value of the Manufactured Home securing any Contract is, unless
otherwise specified in the applicable Prospectus Supplement, either (x) the
appraised value of the related Manufactured Home determined in an appraisal
obtained by the originator at origination and (y) the sale price for such
property, plus, in either case, sales and other taxes and, to the extent
financed, filing and recording fees imposed by law, premiums for related
insurance and prepaid finance charges.
Manufactured Homes, unlike site-built homes, generally depreciate in
value. Consequently, at any time after origination it is possible, especially
in the case of Contracts with high Loan-to-Value Ratios at origination, that
the market value of a Manufactured Home may be lower than the principal
amount outstanding under the related Contract.
The Prospectus Supplement for each Series will set forth certain
characteristics of the related Contracts, which may include the aggregate
principal balance of the Contracts in the Contract Pool underlying such
Series as of the Cut-Off Date for such Series (the "Cut-Off Date Aggregate
Principal Balance"), the range of original terms to maturity of the Contracts
in the Contract Pool, the weighted average remaining term to stated maturity
at the Cut-Off Date of such Contracts, the earliest and latest origination
dates of such Contracts, the range of Contract Rates and Net Contract Rates
borne by such Contracts, the weighted average Net Contract Rate at the
Cut-Off Date of such Contracts, the percentage of such Contracts which had
Loan-to-Value Ratios at the time of origination of 80% or less, the
percentage of such Contracts that had Loan-to-Value Ratios at origination in
excess of 80% and the highest outstanding principal balance at origination of
any such Contract.
Unless otherwise specified in the applicable Prospectus Supplement, all of
the Contracts in a Trust Fund will have monthly payments due on the first of
each month (each, a "Due Date") and will be fully-amortizing Contracts. If so
specified in the applicable Prospectus Supplement, Contracts may have Due
Dates which occur on a date other than the first of each month. If so
specified in the applicable Prospectus Supplement, the Contract Pools may
include adjustable rate Contracts that provide for payment adjustments to be
made less frequently than adjustments in the Contract Rates. Each adjustment
in the Contract Rate which is not made at the time of a corresponding
adjustment in payments (and which adjusted amount of interest is not paid
currently on a voluntary basis by the obligor) will result in a decrease (if
the Contract Rate rises) or an increase (if the Contract Rate declines) in
the rate of amortization of the Contract. Moreover, such payment adjustments
on the Contracts may be subject to certain limitations, as specified in the
Prospectus Supplement, which may also affect the rate of amortization on the
Contract. As a result of such provisions, the amount of interest accrued in
any month may equal or exceed the scheduled monthly payment on the Contract.
In any such month, no principal would be payable on the Contract, and if the
accrued interest exceeded the scheduled monthly payment, such excess interest
due would become "Deferred Interest" that is added to the principal balance
of the Contract. Deferred Interest will bear interest at the Contract Rate
until paid. If such limitations prevent the payments from being sufficient to
amortize fully the Contract by its stated maturity date, a lump sum payment
equal to the remaining unpaid principal balance will be due on such stated
maturity date. See "Prepayment and Yield Considerations."
The geographic distribution of Manufactured Homes will be set forth in the
Prospectus Supplement. Each Prospectus Supplement will set forth the
percentage of the Cut-Off Date Aggregate Principal
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Balance of any Contracts in the Contract Pool which are secured by
Manufactured Homes which have become permanently affixed to real estate. Each
Prospectus Supplement will also set forth the percentage of the Cut-Off Date
Aggregate Principal Balance of the Contracts in the related Contract Pool
representing the refinancing of existing mortgage indebtedness. Unless
otherwise specified in a Prospectus Supplement, no Contract in the Contract
Pool will be more than 30 days past due as of the Cut-Off Date.
If specific information respecting the Contracts to be included in a Trust
Fund is not known to the Depositor at the time the Certificates of a Series
are initially offered, more general information of the nature described above
will be provided in the Prospectus Supplement and 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 thereof and to be filed with the Commission
promptly after the initial issuance of such Certificates.
FIXED RETAINED YIELD
Fixed Retained Yield with respect to any Mortgage Loan or Contract is that
portion, if any, of interest at the Mortgage Rate or Contract Rate that is
retained by the Depositor or other owner thereof and not included in the
related Trust Fund. The Prospectus Supplement for a Series will specify
whether a Fixed Retained Yield has been retained with respect to the Mortgage
Loans or Contracts of such Series, and, if so, the owner thereof. If so, the
Fixed Retained Yield will be established on a loan-by-loan basis with respect
to the Mortgage Loans or Contracts and will be specified in the schedule of
Mortgage Loans or Contracts attached as an exhibit to the applicable Pooling
and Servicing Agreement. The Servicer, with respect to Mortgage Loans or
Contracts, may deduct the Fixed Retained Yield from payments as received and
prior to deposit of such payments in the Certificate Account for such Series
or may (unless an election has been made to treat the Trust Fund (or one or
more segregated pools of assets therein) as a REMIC) withdraw the Fixed
Retained Yield from the Certificate Account after the entire payment has been
deposited in the Certificate Account. Notwithstanding the foregoing, any
partial payment or recovery of interest received by the Servicer relating to
a Mortgage Loan or Contract (whether paid by the mortgagor or obligor or
received as Liquidation Proceeds, Insurance Proceeds or otherwise), after
deduction of all applicable servicing fees, will be allocated between Fixed
Retained Yield (if any) and interest at the Net Mortgage Rate or Net Contract
Rate on a pari passu basis.
INSURANCE POLICIES
Unless otherwise specified in the applicable Prospectus Supplement, the
Pooling and Servicing Agreement will require the Servicer to cause to be
maintained for each Mortgage Loan or Contract an insurance policy issued by a
generally acceptable insurer insuring the Mortgaged Property underlying such
Mortgage Loan or the Manufactured Home underlying such Contract against loss
by fire, with extended coverage (a "Standard Hazard Insurance Policy").
Unless otherwise specified in the applicable Prospectus Supplement, the
Pooling and Servicing Agreement will require that such Standard Hazard
Insurance Policy be in an amount at least equal to the lesser of 100% of the
insurable value of the improvements which are a part of such Mortgaged
Property or Manufactured Home or the principal balance of such Mortgage Loan
or Contract; provided, however, that such insurance may not be less than the
minimum amount required to fully compensate for any damage or loss on a
replacement cost basis. The Servicer will also maintain on property acquired
upon foreclosure, or deed in lieu of foreclosure, of any Mortgage Loan, and
on any Manufactured Home acquired by repossession a Standard Hazard Insurance
Policy in an amount that is at least equal to the lesser of 100% of the
insurable value of the improvements which are a part of such property or the
insurable value of such Manufactured Home or the principal balance of the
related Mortgage Loan or Contract plus, if required by the applicable Pooling
and Servicing Agreement, accrued interest and liquidation expenses; provided,
however, that such insurance may not be less than the minimum amount required
to fully compensate for any damage or loss on a replacement cost basis. Any
amounts collected under any such policies (other than amounts to be applied
to the restoration or repair of the Mortgaged Property or Manufactured Home
or released to the borrower in accordance with normal servicing procedures)
will be deposited in the Certificate Account.
The Standard Hazard Insurance Policies covering the Mortgaged Properties
generally will cover physical damage to, or destruction of, the improvements
on the Mortgaged Property caused by fire,
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lightning, explosion, smoke, windstorm, hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Because the Standard Hazard Insurance Policies relating to such
Mortgage Loans will be underwritten by different insurers and will cover
Mortgaged Properties located in various states, such policies will not
contain identical terms and conditions. The most significant terms thereof,
however, generally will be determined by state law and generally will be
similar. Most such policies typically will not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods
and other water-related causes, earth movement (including earthquakes,
landslides and mudflows), nuclear reaction, wet or dry rot, vermin, rodents,
insects or domestic animals, hazardous wastes or hazardous substances, 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.
The Standard Hazard Insurance Policies covering the Contracts will
provide, at a minimum, the same coverage as a standard form fire and extended
coverage insurance policy that is customary for manufactured housing in the
state in which the Manufactured Home is located.
The Servicer may maintain a blanket policy insuring against hazard losses
on all of the Mortgaged Properties or Manufactured Homes in lieu of
maintaining the required Standard Hazard Insurance Policies. The Servicer
will be liable for the amount of any deductible under a blanket policy if
such amount would have been covered by a required Standard Hazard Insurance
Policy, had it been maintained.
In general, if a Mortgaged Property or Manufactured Home is located in an
area identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards (and such flood insurance has been
made available) the Pooling and Servicing Agreement will require the Servicer
to 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. Generally, the Pooling and Servicing
Agreement will require that such flood insurance be in an amount not less
than the lesser of (i) the amount required to compensate for any loss or
damage to the Mortgaged Property on a replacement cost basis and (ii) the
maximum amount of insurance which is available under the federal flood
insurance program.
Any losses incurred with respect to Mortgage Loans or Contracts due to
uninsured risks (including earthquakes, mudflows, floods, hazardous wastes
and hazardous substances) or insufficient hazard insurance proceeds could
affect distributions to the Certificateholders.
The Servicer will maintain or cause to be maintained with respect to each
Mortgage Loan a primary mortgage insurance policy in accordance with the
standards described in the "Mortgage Loans" above.
The Servicer shall obtain and maintain at its own expense and keep in full
force and effect a blanket fidelity bond and an error and omissions insurance
policy covering the Servicer's officers and employees as well as office
persons acting on behalf of the Servicer in connection with the servicing of
the Mortgage Loans.
Although the terms and conditions of primary mortgage insurance policies
differ, each primary mortgage insurance policy will generally cover losses up
to an amount equal to the excess of the unpaid principal amount of a
defaulted Mortgage Loan (plus accrued and unpaid interest thereon and certain
approved expenses) over a specified percentage of the value of the related
Mortgage Property.
As conditions precedent to the filing or payment of a claim under a
primary mortgage insurance policy, the insured will typically be required, in
the event of default by the mortgagor, among other things, to: (i) advance or
discharge (a) hazard insurance premiums and (b) as necessary and approved in
advance by the 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) if the
insurer pays the entire amount of the loss or damage, tender to the insurer
good and merchantable title to, and possession of, the Mortgaged Property.
Any mortgage insurance relating to the Contracts underlying a Series of
Certificates will be described in the related Prospectus Supplement.
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ACQUISITION OF THE MORTGAGE LOANS AND CONTRACTS FROM UNAFFILIATED SELLERS
The Mortgage Loans or Contracts underlying a Series of Certificates will
be purchased by the Depositor, either directly or through affiliates, from
Unaffiliated Sellers pursuant to a separate agreement (a "Loan Sale
Agreement") between the Depositor or such affiliate and each such
Unaffiliated Seller. The Depositor expects that, unless otherwise specified
in the applicable Prospectus Supplement, each Mortgage Loan or Contract so
acquired will have been originated by the originator thereof in accordance
with the underwriting criteria specified under "Underwriting Guidelines."
Unless otherwise specified in the applicable Prospectus Supplement, each
Unaffiliated Seller must be an institution experienced in originating and
servicing conventional mortgage loans or manufactured housing contracts in
accordance with accepted practices and prudent guidelines, and must maintain
facilities to originate and service those loans satisfactory to the
Depositor. In addition, each Unaffiliated Seller must satisfy certain
criteria as to financial stability evaluated on a case by case basis by the
Depositor. Unless otherwise provided in the applicable Prospectus Supplement,
each Unaffiliated Seller pursuant to the related Loan Sale Agreement will
make certain representations and warranties to the Depositor in respect of
the Mortgage Loans or Contracts sold by such Unaffiliated Seller to the
Depositor as described herein under "Representations and Warranties" below.
Unless otherwise provided in the applicable Prospectus Supplement with
respect to each Series, the Depositor will assign all of its rights (except
certain rights of indemnification) and interest in the related Loan Sale
Agreement to the related Trustee for the benefit of the Certificateholders of
such Series, and the Unaffiliated Seller shall thereupon be liable to the
Trustee for defective Mortgage Loan or Contract documents or an uncured
breach of such Unaffiliated Seller's representations or warranties, to the
extent described below under "Assignment of the Mortgage Loans and Contracts"
and "Representations and Warranties."
ASSIGNMENT OF THE MORTGAGE LOANS AND CONTRACTS
At the time of the issuance of the Certificates of a Series, the Depositor
will cause the Mortgage Loans comprising the Mortgage Pool (including any
related rights to, or security interests in, leases, rents and personal
property) or the Contracts comprising the Contract Pool included in the
related Trust Fund to be assigned to the Trustee, together with all principal
and interest received by or on behalf of the Depositor on or with respect to
such Mortgage Loans or Contracts after the Cut-Off Date, other than principal
and interest due on or before the Cut-Off Date and other than any Fixed
Retained Yield. The Trustee or its accent will, concurrently with such
assignment, authenticate and deliver the Certificates evidencing such Series
to the Depositor in exchange for the Mortgage Loans or Contracts. Each
Mortgage Loan or Contract will be identified in a schedule appearing as an
exhibit to the applicable Pooling and Servicing, Agreement. Each such
schedule will include, among other things, the unpaid principal balance as of
the close of business on the applicable Cut-Off Date, the scheduled monthly
payment of principal, if any, and interest, the maturity date and the
Mortgage Rate or Contract Rate for each Mortgage Loan or Contract in the
related Trust Fund.
With respect to each Mortgage Loan in a Trust Fund, the mortgage or other
promissory note, any assumption, modification or conversion to fixed interest
rate agreement, a copy of any recorded UCC-1 financing statements and related
continuation statements, together with original executed UCC-2 or UCC-3
financing statements disclosing an assignment of a security interest in any
personal property constituting security for repayment of the Mortgage Loan to
the Trustee, an executed re-assignment of assignment of leases, rents and
profits to the Trustee if the assignment of leases, rents and profits is
separate from the Mortgage, a mortgage assignment in recordable form and the
recorded Mortgage (or other documents as are required under applicable law to
create a perfected security interest in the Mortgaged Property in favor of
the Trustee) will be delivered to the Trustee (or to a designated custodian);
provided that, in instances where recorded documents cannot be delivered due
to delays in connection with recording, copies thereof, certified by the
Depositor to be true and complete copies of such documents, sent for
recording, may be delivered and the original recorded documents will be
delivered promptly upon receipt. As to each Mortgage Loan for which there is
primary mortgage insurance, the certificate of primary mortgage insurance
will be delivered to the Trustee. The assignment of each Mortgage will be
recorded promptly after the initial issuance of Certificates for the related
Trust Fund, except in states where, in the opinion of counsel acceptable to
the Trustee, such recording is not
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required to protect the Trustee's interest in the Mortgage Loan against the
claim of any subsequent transferee or any successor to or creditor of the
Depositor, any affiliate of the Depositor or the originator of such Mortgage
Loan.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee (or to a designated
custodian) the related original Cooperative Note, the 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 cause to be filed in the appropriate
office an assignment and a refinancing statement evidencing the Trustee's
security interest in each Cooperative Loan.
With respect to each Contract, there will be delivered to the Trustee (or
to a designated Custodian) the original Contract and copies of documents and
instruments related to each Contract and the security interest in the
property securing each Contract. In order to give notice of the right, title
and interest of Certificateholders to the Contracts, the Depositor will cause
a UCC-1 financing statement to be executed by the Depositor or the
Unaffiliated Seller identifying the Trustee as the secured party and
identifying all Contracts as collateral. Unless otherwise specified in the
related Prospectus Supplement, the Contracts will not be stamped or otherwise
marked to reflect their assignment to the Trust. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Contracts without notice of such assignment, the
interest of Certificateholders in the Contracts could be defeated. See
"Certain Legal Aspects of the Mortgage Loans and Contracts."
The Trustee (or the custodian hereinafter referred to) will hold such
documents relating to Mortgage Loans or Contracts in trust for the benefit of
Certificateholders of the related Series and will review such documents
within 45 days of the date of the applicable Pooling and Servicing Agreement.
Unless otherwise provided in the applicable Prospectus Supplement, if any
document is not delivered or is found to be defective in any material respect
or has not been recorded as required by the applicable Loan Sale Agreement,
the Trustee (or such custodian) shall immediately notify the Servicer and the
Depositor, and the Servicer shall immediately notify the related Unaffiliated
Seller. If the Unaffiliated Seller cannot cure such omission or defect within
60 days after receipt of such notice, the Unaffiliated Seller will be
obligated, pursuant to the related Loan Sale Agreement, either to repurchase
the related Mortgage Loan or Contract from the Trustee within 60 days after
receipt of such notice, at a price (the "Purchase Price") equal to the then
unpaid principal balance thereof, plus accrued and unpaid interest at the
applicable Mortgage Rate or Contract Rate (less any Fixed Retained Yield with
respect to such Mortgage Loan or Contract and less the rate, if any, of
servicing compensation payable to the Unaffiliated Seller with respect to
such Mortgage Loan or Contract) through the last day of the month in which
such repurchase takes place or to substitute one or more new Mortgage Loans
or Contracts for such Mortgage Loan or Contract. In the case of a Mortgage
Loan or Contract so repurchased by an Unaffiliated Seller, the Purchase Price
will be deposited in the related Certificate Account. In the case of a
substitution, such substitution will be made in accordance with the standards
described in "Representations and Warranties" below.
There can be no assurance that an Unaffiliated Seller will fulfill this
repurchase or substitution obligation. The Servicer will be obligated to
enforce such obligation to the same extent as it must enforce the obligation
of an Unaffiliated Seller for a breach of representation or warranty as
described below under "Representations and Warranties." However, as in the
case of an uncured breach of such a representation or warranty, neither the
Servicer (unless the Servicer is the Unaffiliated Seller) nor the Depositor
will be obligated to purchase or substitute for such Mortgage Loan or
Contract if the Unaffiliated Seller defaults on its repurchase or
substitution obligation, unless such breach also constitutes a breach of the
representations or warranties of the Servicer or the Depositor, as the case
may be. Unless otherwise specified in the related Prospectus Supplement, this
repurchase or substitution obligation constitutes the sole remedy available
to the Certificateholders or the Trustee for omission of, or a material
defect in, a constituent document.
The Trustee will be authorized to appoint a custodian to maintain
possession of the documents relating to the Mortgage Loans or Contracts. The
custodian will keep such documents as the Trustee's agent under a custodial
agreement.
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REPRESENTATIONS AND WARRANTIES
Each Unaffiliated Seller, pursuant to the related Loan Sale Agreement,
will have made representations and warranties in respect of the Mortgage
Loans sold by such Unaffiliated Seller. Unless otherwise specified in the
related Prospectus Supplement, each Unaffiliated Seller of Mortgage Loans
will have represented, among other things, substantially to the effect that
(i) immediately prior to the sale and transfer of such Mortgage Loans, the
Unaffiliated Seller had good title to, and was the sole owner of, each such
Mortgage Loan and there had been no other assignment or pledge thereof, (ii)
as of the date of such transfer, such Mortgage Loans are subject to no
offsets, defenses or counterclaims, (iii) each Mortgage Loan at the tune it
was made complied in all material respects with applicable state and federal
laws, including, usury, equal credit opportunity and disclosure laws, (iv) a
lender's policy of title insurance was issued on the date of the origination
of each Mortgage Loan and each such policy is valid and remains in full force
and effect, (v) as of the date of such transfer, each related Mortgage is a
valid lien on the related Mortgaged Property (subject only to (a) the lien of
current real property taxes and assessments, (b) covenants, conditions and
restrictions, rights of way, easements and other matters of public record as
of the date of the recording of such Mortgage, such exceptions appearing of
record and either being acceptable to mortgage lending institutions generally
or specifically reflected in the lender's policy of title insurance issued on
the date of origination and either (A) specifically referred to in the
appraisal made in connection with the origination of the related Mortgage
Loan or (B) which do not adversely affect the appraised value of the
Mortgaged Property as set forth in such appraisal, (c) other matters to which
like properties are commonly subject which do not materially interfere with
the benefits of the security intended to be provided by the Mortgage and (d)
in the case of second or more junior loans any senior loans of record as of
the date of recording of the Equity Loan) and such property is free of
material damage and is in good repair, (vi) as of the date of such transfer,
no Mortgage Loan is 30 days or more delinquent in payment and there are no
delinquent tax or assessment liens against the related Mortgaged Property
that would permit taxing authority to initiate foreclosure proceedings, and
(vii) with respect to each Mortgage Loan, if the Mortgaged Property is
located in an area identified by the Federal Emergency Management Agency as
having special flood hazards and subject in certain circumstances to the
availability of flood insurance under the federal flood insurance program,
such Mortgaged Property is covered by flood insurance meeting the
requirements of the applicable Pooling and Servicing Agreement.
Each Unaffiliated Seller, pursuant to the related Loan Sale Agreement,
will have made representations and warranties in respect of the Contracts
sold by such Unaffiliated Seller. Unless otherwise specified in the related
Prospectus Supplement, each Unaffiliated Seller of Contracts will have
represented, among other digs, substantially to the effect that (i)
immediately prior to the sale and transfer of such Contracts, the
Unaffiliated Seller had good title to, and was the sole owner of, each such
Contract and there had been no other assignment or pledge thereof, (ii) as of
the date of such transfer, such Contracts are subject to no offsets, defenses
or counterclaims, (iii) each Contract at the time it was made complied in all
material respects with applicable state and federal laws, including usury,
equal credit opportunity and disclosure laws, (iv) as of the date of such
transfer, each related Contract is 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 transfer, no Contract is 30
days or more delinquent in payment and there are no delinquent tax or
assessment liens against the related Manufactured Home, and (vi) with respect
to each Contract, the Manufactured Home securing the Contract is covered by a
Standard Hazard Insurance Policy in the amount required by the Pooling and
Servicing Agreement and all premiums then due on such insurance have been
paid in full.
All of the representations and warranties of an Unaffiliated Seller in
respect of a Mortgage Loan or Contract will have been made as of the date on
which such Unaffiliated Seller sold the Mortgage Loan or Contract to the
Depositor. A substantial period of time may have elapsed between the date as
of which the representations and warranties were made and the later date of
initial issuance of the related Series of Certificates. Since the
representations and warranties referred to in the preceding paragraphs are
the only representations and warranties that will be made by an Unaffiliated
Seller, the Unaffiliated Seller's repurchase obligation described below will
not arise if, during the period commencing on the date of sale of a Mortgage
Loan or Contract by the Unaffiliated Seller to the Depositor, the relevant
event occurs that
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would have given rise to such an obligation had the event occurred prior to
sale of the affected Mortgage Loan or Contract. However, the Depositor will
not include any Mortgage Loan or Contract in the Trust Fund for any series of
Certificates if anything has come to the Depositor's attention that would
cause it to believe that the representations and warranties of an
Unaffiliated Seller will not be accurate and complete in all material
respects in respect of such Mortgage Loan or Contract as of the date of
initial issuance of the related Series of Certificates.
The Depositor will, unless otherwise provided in the applicable Prospectus
Supplement, assign all of its rights (except certain rights to
indemnification) with respect to such representations and warranties pursuant
to any related Loan Sale Agreement to the Trustee for the benefit of the
Certificateholders of the related Series. The Servicer, or the Trustee if the
Servicer is the Unaffiliated Seller, will promptly notify the relevant
Unaffiliated Seller of any breach of any representation or warranty made by
it in respect of a Mortgage Loan or Contract which materially and adversely
affects the interests of the Certificateholders in such Mortgage Loan or
Contract. Unless otherwise specified in the related Prospectus Supplement, if
such Unaffiliated Seller cannot cure such breach within 60 days after notice
from the Servicer or the Trustee, as the case may be, then such Unaffiliated
Seller will be obligated either (i) to repurchase such Mortgage Loan or
Contract from the Trust Fund at the applicable Purchase Price or (ii) subject
to the Trustee's approval and to the extent permitted by the Pooling and
Servicing Agreement, to substitute for such Mortgage Loan or Contract (a
"Deleted Loan") one or more Mortgage Loans or Contracts, as the case may be
(each, a "Substitute Loan"), but only if (i) with respect to a Trust Fund (or
one or more segregated pools of assets therein) for which a REMIC election is
to be made, such substitution is effected within two years of the date of
initial issuance of the Certificates or (ii) with respect to a Trust Fund for
which no REMIC election is to be made, such substitution is effected within
120 days of the date of initial issuance of the Certificates. Except as
otherwise provided in the related Prospectus Supplement, any Substitute Loan
will, on the date of substitution, (i) have a Loan-to-Value Ratio no greater
than that of the Deleted Loan, (ii) have a Mortgage Rate or Contract Rate not
less than (and not more than 1% greater than) the Mortgage Rate or Contract
Rate of the Deleted Loan, (iii) have a Net Mortgage Rate or Net Contract Rate
not less than (and not more than 1% greater than) the Net Mortgage Rate or
Net Contract Rate of the Deleted Loan, (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 Loan Sale Agreement as of the date of substitution. If
substitution is to be made for a Deleted Loan with an adjustable Mortgage
Rate or Contract Rate, the Substitute Loan will also bear interest based on
the same index, margin, frequency and month of adjustment as the Deleted
Loan. In the event that one Substitute Loan is substituted for more than one
Deleted Loan, or more than one Substitute Loan is substituted for one or more
Deleted Loans, then the amount described in clause (i) will be determined on
the basis of aggregate principal balances (provided that in all events the
tests for a "qualified mortgage" as described in the second paragraph under
the heading "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates -- Qualification as a REMIC" are met as
to each Substituted Loan), the rates described in clauses (ii) and (iii) with
respect to Deleted Loans will be determined on the basis of weighted average
Mortgage Rates and Net Mortgage Rates or Contract Rates and Net Contract
Rates, as the case may be, and the terms described in clause (iv) will be
determined on the basis of weighted average remaining terms to maturity. In
the case of a Substitute Loan, the mortgage file relating, thereto will be
delivered to the Trustee (or the custodian) and the Unaffiliated Seller will
pay an amount equal to the excess of (i) the unpaid principal balance of the
Deleted Loan, over (ii) the unpaid principal balance of the Substitute Loan
or Loans, together with interest on such excess at the Mortgage Rate or
Contract Rate to the next scheduled Due Date of the Deleted Loan. Such amount
will be deposited in the Certificate Account for distribution to
Certificateholders. Except in those cases in which the Servicer is the
Unaffiliated Seller, the Servicer will be required under the applicable
Pooling and Servicing Agreement to enforce this repurchase or substitution
obligation for the benefit of the Trustee and the holders of the
Certificates, following the practices it would employ in its good faith
business judgment were it the owner of such Mortgage Loan or Contract. This
repurchase or substitution obligation will constitute the sole remedy
available to holders of Certificates or the Trustee for a breach of
representation by an Unaffiliated Seller.
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Neither the Depositor nor the Servicer (unless the Servicer is the
Unaffiliated Seller) will be obligated to purchase or substitute for a
Mortgage Loan or Contract if an Unaffiliated Seller defaults on its
obligation to do so, and no assurance can be given that Unaffiliated Sellers
will carry out their respective repurchase obligations with respect to
Mortgage Loans or Contracts.
If so specified in the applicable Prospectus Supplement, the Depositor,
the Servicer or another entity specified in the applicable Prospectus
Supplement, will make such representations and warranties as to the types and
geographical concentration of the Mortgage Loans or Contracts in the related
Mortgage Pool or Contract Pool and as to such other matters concerning such
Mortgage Loans or Contracts as may be described therein. Upon a breach of any
such representation or warranty which materially and adversely affects the
interests of the Certificateholders in a Mortgage Loan or Contract, the
entity making such representation or warranty will be obligated either to
cure the breach in all material respects, repurchase the Mortgage Loan or
Contract at the Purchase Price or substitute for such Mortgage Loan or
Contract in the manner, and subject to the conditions, described above
regarding the obligations of Unaffiliated Sellers with respect to missing or
defective loan documents or the breach of such Unaffiliated Sellers'
representations and warranties. This repurchase or substitution obligation
constitutes the sole remedy available to the Certificateholders or the
Trustee for a breach of a representation or warranty by the Depositor, the
Servicer or such other party, respectively.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
Each Series of Certificates will be issued pursuant to a Pooling and
Servicing Agreement among the Depositor, the Servicer, if the Series relates
to Mortgage Loans or Contracts, and the Trustee named in the related
Prospectus Supplement. The provisions of each Pooling and Servicing Agreement
will vary depending upon the nature of the Certificates to be issued
thereunder and the nature of the related Trust Fund. Forms of the Pooling and
Servicing Agreements have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. The following summaries
describe certain provisions of the Certificates and the Pooling and Servicing
Agreements; however, the summaries do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the Pooling and Servicing Agreement for each Series of
Certificates and the applicable Prospectus Supplement. Each Pooling and
Servicing Agreement executed and delivered with respect to each Series will
be filed with the Commission as an exhibit to a Current Report on Form 8-K
promptly after issuance of the Certificates of such Series. The Depositor
will provide a copy of the Pooling and Servicing Agreement (without exhibits)
relating to any Series without charge upon written request of a holder of a
Certificate of such Series addressed to Prudential Securities Secured
Financing Corporation, One Seaport Plaza, 26th Floor, New York, New York
10292, Attention: James Fadel.
Each Series of Certificates will evidence the beneficial ownership
interest in the related Trust Fund created by the Depositor pursuant to the
related Pooling and Servicing Agreement. Each Series of Certificates will
consist of one or more Classes of Standard Certificates, Stripped
Certificates or Multi-Class Certificates. Any Class of Certificates may be
divided into two or more Subclasses and any Class of Standard Certificates
may be divided into two or more Subclasses that consist of Multi-Class
Certificates. Any Class or Subclass of Multi-Class Certificates may be
Compound Interest Certificates. In addition, each Series for which the
Depositor has caused the related Trust Fund (or one or more segregated pools
of assets therein) to elect to be treated as a REMIC will include one Class
or one Subclass of Residual Certificates with respect to each such REMIC
which, if offered hereby, will represent the right to receive distributions
with respect to such Trust Fund as specified in the related Prospectus
Supplement.
Each Series of Certificates may include one or more Classes or Subclasses
of Certificates (the "Subordinated Certificates") that are subordinate in
right of distributions to one or more other Classes or Subclasses of
Certificates (the "Senior Certificates"). Two types of subordination
arrangements for a Series which consists of two Classes of Standard
Certificates are described herein. See "Distributions to Standard
Certificateholders." Any other type of subordination arrangement for Standard
Certificates, or any subordination arrangement for any Class of Multi-Class
Certificates or Stripped Certificates, will be described in the applicable
Prospectus Supplement. Certain Series or Classes of Certificates may be
covered by insurance policies or other forms of credit enhancement, in each
case as described herein and in the related Prospectus Supplement.
Except as described in the related Prospectus Supplement, the Mortgage
Loans or Contracts included in a Trust Fund will not be guaranteed or insured
by any governmental agency or instrumentality or any other insurer.
The Depositor will cause each Trust Fund (or one or more segregated pools
of assets therein) with respect to a Series which includes Standard
Certificates redeemable on a random lot basis, Multi-Class Certificates or
Shifting Interest Certificates to elect to be treated as a REMIC. The
Depositor may cause any other Trust Fund (or segregated pool of assets
therein) to elect to be treated as a REMIC. If such an election is made, such
Series will consist of one or more Classes or Subclasses of Certificates that
will represent "regular interests" within the meaning of Code Section
860G(a)(1) (such Certificates collectively referred to as the "Regular
Certificates") and one Class or one Subclass of Certificates that will be
designated as the "residual interest" with respect to each REMIC within the
meaning of Code Section 860G(a)(2) (the "Residual Certificates") representing
the right to receive distributions as specified in the Prospectus Supplement
for such Series. See "Certain Federal Income Tax Consequences" herein. The
related Prospectus Supplement will specify whether one or more REMIC
elections are to be
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made. Alternatively, the Pooling and Servicing Agreement for a Series may
provide that a REMIC election is to be made at the discretion of the
Depositor or the Servicer and may only be made if certain conditions are
satisfied. As to each Series with respect to which a REMIC election is to be
made, the Servicer and the Trustee will be obligated to take certain actions
in order to comply with applicable REMIC laws and regulations, and no
Certificateholder other than a holder of a Residual Certificate will be
liable for any prohibited transaction taxes under applicable REMIC laws and
regulations.
The Depositor may sell certain Classes or Subclasses of the Certificates
of a Series, including one or more Classes or Subclasses of Subordinated
Certificates or one Class or one Subclass of Residual Certificates, in
privately negotiated transactions exempt from registration under the
Securities Act. Alternatively, if so specified in the applicable Prospectus
Supplement, the Depositor may offer one or more Classes or Subclasses of the
Subordinated Certificates or the one Class or one Subclass of Residual
Certificates of a Series by means of this Prospectus and such Prospectus
Supplement.
Unless otherwise specified in the applicable Prospectus Supplement with
respect to a Series of Certificates, each Certificate offered hereby and by
the applicable Prospectus Supplement will be issued in fully registered form
(each, a "Definitive Certificate") and will be issued in the authorized
denominations as specified in the applicable Prospectus Supplement. The
Certificates of a Series offered hereby and by means of the applicable
Prospectus Supplement will be transferable and exchangeable at the office or
agency maintained by the Trustee or such other entity for such purpose set
forth in the related Prospectus Supplement. No service charge will be made
for any transfer or exchange of Certificates, but the Trustee or such other
entity may require payment of a sum sufficient to cover any tax or other
governmental charge in connection with such transfer or exchange. In the
event that an election is made to treat the Trust Fund (or one or more
segregated pools of assets therein) as a REMIC, no legal or beneficial
interest in all or any portion of the "Residual Certificates" thereof may be
transferred without the receipt by the transferor of any affidavit signed by
the transferee stating that the transferee is not a "Disqualified
Organization" within the meaning of Code Section 860E(e)(5) or an agent
(including a broker, nominee, or other middleman) thereof. The Prospectus
Supplement with respect to a Series may specify additional transfer
restrictions with respect to the Residual Certificates. See "Certain Federal
Income Tax Consequences -- Federal Income Tax Consequences for REMIC
Certificates -- Taxation of Residual Certificates -- Tax-Related Restrictions
on Transfer of Residual Certificates." If so specified in the related
Prospectus Supplement, the Certificates of specified Classes or Subclasses of
a Series may be issued in the form of book entries on the records of The
Depository Trust Company ("DTC") and participating members thereof.
Distributions will be made on each of the Distribution Dates specified in
the applicable Prospectus Supplement for a Series to persons in whose name
the Certificates of such Series are registered at the close of business on
the related Record Date. Unless otherwise specified in the applicable
Prospectus Supplement, distributions to Certificateholders of all Series
(other than the final distribution in retirement of the Certificates) will be
made by check mailed to the address of the person entitled thereto as it
appears on the certificate register, except that, with respect to any holder
of a Certificate evidencing not less than the specified fractional undivided
interest, notional amount or Stated Amount set forth in such Prospectus
Supplement, distributions will be made by wire transfer in immediately
available funds, provided that the Trustee shall have been furnished with
appropriate wiring instructions not less than three business days (or such
longer period as may be specified in the related Prospectus Supplement) prior
to the related Distribution Date. The final distribution in retirement of
Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency maintained by the Trustee or such other
entity for such purpose, as specified in the final distribution notice to
Certificateholders.
A Series of Certificates will consist of one or more Classes of Standard
Certificates or Stripped Certificates (referred to hereinafter sometimes
collectively as "Percentage Certificates") or two or more Classes of
Multi-Class Certificates (each as described below).
PERCENTAGE CERTIFICATES
Each Series of Percentage Certificates may include one or more Classes of
Standard Certificates or Stripped Certificates, any Class of which may be
divided into two or more Subclasses. The Standard
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Certificates of each Class will evidence fractional undivided interests in
all of the principal and interest (to the extent of the Net Mortgage Interest
Rate) payments on the Mortgage Loans comprising the Trust Fund related to
such Series. Each holder of a Standard Certificate of a Class will be
entitled to receive its Certificate's percentage interest of the portion of
the Pool Distribution Amount (as defined below) allocated to such Class. The
percentage interest of each Standard Certificate will be equal to the
percentage obtained by dividing the aggregate unpaid principal balance of the
Mortgage Loans represented by such Standard Certificate as of the Cut-Off
Date by the aggregate unpaid principal balance of the Mortgage Loans
represented by all the Standard Certificates of the same Class as of the
Cut-Off Date.
The Stripped Certificates of each Class will evidence fractional undivided
interests in specified portions of the principal and/or interest payments on
the Mortgage Loans comprising the Trust Fund related to such Series. The
holders of the Stripped Certificates of each Class will be entitled to
receive a portion (which may be zero) as specified in the applicable
Prospectus Supplement of the principal distributions comprising the Pool
Distribution Amount, and a portion (which may be zero) as specified in the
applicable Prospectus Supplement of the interest distributions comprising the
Pool Distribution Amount on each Distribution Date.
In the case of Classes of Stripped Certificates representing interests in
interest distributions on the Mortgage Loans and not in principal
distributions on the Mortgage Loans, such Certificates will be denominated in
notional amounts. The aggregate original notional amount for a Class of such
Certificates will be equal to the aggregate unpaid principal balance (or a
specified portion thereof) of the Mortgage Loans as of the Cut-Off Date
specified in the applicable Prospectus Supplement. The notional amount of
each such Stripped Certificate will be used to calculate the holder's pro
rata share of the interest distributions on the Mortgage Loans allocated to
that Class and for the determination of certain other rights of holders of
such Class of Stripped Certificates and will not represent an interest in, or
entitle any such holder to any distribution with respect to, any principal
distributions on the Mortgage Loans. Each such Certificate's pro rata share
of the interest distribution on the Mortgage Loans on each Distribution Date
will be calculated by multiplying the interest distributions on the Mortgage
Loans allocated to its Class by a fraction, the numerator of which is the
original notional amount of such Stripped Certificates and the denominator of
which is the aggregate original notional amount of all the Stripped
Certificates of its Class.
The interest of a Class of Percentage Certificates representing an
interest in a Trust Fund (or a segregated pool of assets therein) with
respect to which an election to be treated as a REMIC has been made may be
fixed as described above or may vary over time as a result of prepayments
received and losses realized on the underlying Mortgage Loans. A Series of
Percentage Certificates comprised of Classes whose percentage interests in
the Trust Fund may vary is referred to herein as a Series of "Shifting
Interest Certificates." Distributions on, and subordination arrangements with
respect to, Shifting Interest Certificates are discussed below under the
headings "Description of the Certificates -- Distributions to Percentage
Certificateholders -- Shifting Interest Certificates" and "Credit Support --
Subordination -- Shifting Interest Certificates."
MULTI-CLASS CERTIFICATES
Each Series may include one or more Classes or Subclasses of Multi-Class
Certificates. Each Multi-Class Certificate will be assigned a Stated Amount
or Notional Amount. The Stated Amount may be based on an amount of principal
of the underlying Mortgage Loans or Contracts or on the value of future cash
flows from the related Trust Fund, without distinction as to principal and
interest received on the Mortgage Loans or Contracts. Interest on the Classes
or Subclasses of Multi-Class Certificates will be paid at rates specified in
or determined as specified in the applicable Prospectus Supplement, and will
accrue in the manner specified therein. Any Class or Subclass of Multi-Class
Certificates may consist of Certificates on which interest accrues but is not
payable until such time as specified in the applicable Prospectus Supplement
("Compound Interest Certificates"), and interest accrued on any such
Certificate will be added to the Stated Amount thereof in the manner
described therein.
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The Stated Amount of a Multi-Class Certificate of a Series at any time
will represent the maximum specified dollar amount (exclusive of interest at
the related Interest Rate, if any) to which the holder thereof is entitled
from the cash flow on the Mortgage Loans or Contracts and other assets in the
Trust Fund for such Series and will decline to the extent distributions in
reduction of Stated Amount are received by such holder. The initial Stated
Amount of each Class within a Series of Multi-Class Certificates will be
specified in the applicable Prospectus Supplement.
FORWARD COMMITMENTS; PRE-FUNDING
A Trust Fund may enter into an agreement (each, a "Forward Purchase
Agreement") with the Depositor whereby the Depositor will agree to transfer
additional Mortgage Loans to such Trust Fund following the date on which such
Trust Fund is established and the related Certificates are issued. The Trust
Fund may enter into Forward Purchase Agreements to permit the acquisition of
additional Mortgage Loans that could not be delivered by the Depositor or
have not formally completed the origination process, in each case prior to
the date on which the Certificates are delivered to the Certificateholders
(the "Closing Date"). Any Forward Purchase Agreement will require that any
Mortgage Loans so transferred to the Trust Fund conform to the requirements
specified in such Forward Purchase Agreement.
If a Forward Purchase Agreement is to be utilized, and unless otherwise
specified in the related Prospectus Supplement, the related Trustee will be
required to deposit in a segregated account (each, a "Pre-Funding Account")
up to 100% of the net proceeds received by the Trustee in connection with the
sale of one or more classes of Certificates of the related Series; the
additional Mortgage Loans will be transferred to the related Trust Fund in
exchange for money released to the Depositor from the related Pre-Funding
Account. Each Forward Purchase Agreement will set a specified period (the
"Funding Period") during which any such transfers must occur; for a Trust
Fund which elects federal income treatment as REMIC or as a grantor trust,
the related Funding Period will be limited to three months from the date such
Trust Fund is established; for a Trust Fund which is treated as a mere
security device for federal income tax purposes, the related Funding Period
will be limited to nine months from the date such Trust Fund is established.
The Forward Purchase Agreement or the related Pooling and Servicing Agreement
will require that, if all moneys originally deposited to such Pre-Funding
Account are not so used by the end of the related Funding Period, then any
remaining moneys will be applied as a mandatory prepayment of the related
class or classes of Certificates as specified in the related Prospectus
Supplement.
During the Funding Period the moneys deposited to the Pre-Funding Account
will either (i) be held uninvested or (ii) will be invested in
cash-equivalent investments rated in one of the four highest rating
categories by at least one nationally recognized statistical rating
orgnaization and which will either mature prior to the end of the Funding
Period, or will be drawable on demand and in any event, will not constitute
the type of investment which would require registration of the related Trust
Funds as an "investment company" under the Investment Company Act of 1940, as
amended.
DISTRIBUTIONS TO PERCENTAGE CERTIFICATEHOLDERS
Except as otherwise specified in the applicable Prospectus Supplement, on
or about the 15th day of each month in which a Distribution Date occurs (the
"Determination Date"), the Servicer will determine the amount of the payments
or other receipts on account of principal and interest on the Mortgage Loans
or Contracts which have been received and which will be distributable to
holders of Certificates on the next Distribution Date (as further described
below, the "Pool Distribution Amount"). The Pool Distribution Amount will be
allocated among the Classes or Subclasses of Percentage Certificates of such
Series in the manner described herein under "Description of the Certificates
- -- Standard Certificates"; however, if such Certificates are also composed of
Senior Certificates and Subordinated Certificates, then the Pool Distribution
Amount will be allocated in accordance with the terms of the applicable
subordination arrangement. Two types of subordination arrangements are
described below for a Series which consists of two Classes of Standard
Certificates. Any other type of subordination arrangement employed for
Certificates of a Series will be described in the related Prospectus
Supplement.
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Unless otherwise specified in the applicable Prospectus Supplement, the
"Pool Distribution Amount" for a Distribution Date with respect to a Series
of Certificates as to which the relevant Trust Fund consists of Mortgage
Loans or Contracts will be the sum of all previously undistributed payments
or other receipts on account of principal (including principal prepayments,
Net Liquidation Proceeds (as defined herein), and Net Insurance Proceeds (as
defined herein), if any) and interest on the related Mortgage Loans or
Contracts received by the Servicer after the related Cut-Off Date (except for
amounts due on or prior to such Cut-Off Date), or received by the Servicer on
or prior to the Cut-Off Date but due after the Cut-Off Date, in either case
received on or prior to the Determination Date in the month in which such
Distribution Date occurs, plus (i) all Advances made by the Servicer, (ii)
all withdrawals from any Buy-Down Fund or other fund described in the related
Prospectus Supplement, if applicable, and (iii) all proceeds of Mortgage
Loans or Contracts or property acquired in respect thereof purchased or
repurchased from the Trust Fund as provided in the Pooling and Servicing
Agreement ("Repurchase Proceeds"), but excluding the following:
(a) amounts received as late payments of principal or interest
respecting which the Servicer previously has made one or more unreimbursed
Advances;
(b) any unreimbursed Advances with respect to Liquidated Mortgage
Loans (as defined herein) or Liquidated Contracts (as defined herein);
(c) those portions of each payment of interest on a particular
Mortgage Loan or Contract which represents (i) the Fixed Retained Yield,
if any, and (ii) the applicable Servicing Fee, as adjusted in respect of
Prepayment Interest Shortfalls as described in "Servicing of the Mortgage
Loans and Contracts -- Adjustment to Servicing Compensation in Connection
with Prepaid and Liquidated Mortgage Loans and Contracts";
(d) all amounts representing scheduled payments of principal and
interest due after the Due Date occurring in the month in which such
Distribution Date occurs;
(e) all principal prepayments and all proceeds (including Liquidation
Proceeds, Insurance Proceeds and Repurchase Proceeds) of any Mortgage
Loans or Contracts, or property acquired in respect thereof, liquidated,
foreclosed, purchased or repurchased pursuant to the applicable Pooling
and Servicing Agreement, received on or after the Due Date occurring in
the month in which such Distribution Date occurs, and all related payments
of interest on such amounts;
(f) where permitted by the related Pooling and Servicing Agreement,
that portion of Liquidation Proceeds or Insurance Proceeds which
represents Fixed Retained Yield, if any, or any unpaid Servicing Fee to
which the Servicer is entitled;
(g) all amounts representing certain expenses reimbursable to the
Servicer and other amounts pertained to be withdrawn by the Servicer from
the Certificate Account, in each case pursuant to the applicable Pooling
and Servicing Agreement;
(h) all amounts in the nature of late fees, assumption fees,
prepayment fees and similar fees which the Servicer is entitled to retain
pursuant to the applicable Pooling and Servicing Agreement; and
(i) where permitted by the applicable Pooling and Servicing Agreement,
reinvestment earnings on payments received in respect of the Mortgage
Loans or Contracts.
CERTIFICATES OTHER THAN SHIFTING INTEREST CERTIFICATES
With respect to a Series of Certificates which is comprised of one Class
of Standard Certificates which are Senior Certificates and one Class of
Standard Certificates which are Subordinated Certificates, the Servicer shall
determine the aggregate amount which would have been distributable to such
Class of Senior Certificates (the "Senior Class Distributable Amount") and
the aggregate amount which would have been distributable to such Class of
Subordinated Certificates (the "Subordinated Class Distributable Amount")
assuming, among other things, no delinquencies or losses on the Mortgage
Loans or Contracts preceding such Distribution Date and, based on the Pool
Distribution Amount and such Distributable Amounts, will determine the amount
actually to be distributed to each Class and Subclass.
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Calculation of Distributable Amounts. If a Series of Certificates includes
one Class of Standard Certificates which are Senior Certificates and one
Class of Standard Certificates which are Subordinated Certificates, unless
otherwise specified in the applicable Prospectus Supplement, the Senior Class
Distributable Amount with respect to such Senior Certificates on a
Distribution Date will be an amount equal to the sum of:
(i) the aggregate undivided interest, expressed as a percentage and
specified in the applicable Prospectus Supplement, evidenced by such Class
of Senior Certificates (the "Senior Class Principal Portion") of:
(a) all scheduled payments of principal on each outstanding
Mortgage Loan or Contract that became due on the Due Date immediately
preceding such Distribution Date in accordance with the amortization
schedules of the related Mortgage Loans or Contracts (as adjusted to
give effect to any previous prepayments), whether or not such payments
were actually received by the Servicer (the aggregate of such
scheduled payments due on any such Due Date being referred to herein
as "Scheduled Principal");
(b) all principal prepayments received by the Servicer in the month
preceding the month in which such Distribution Date occurs;
(c) the Scheduled Principal Balance (as defined herein) of each
Mortgage Loan or Contract which was purchased from the Trust Fund as
provided in the Pooling and Servicing Agreement (as described in "The
Trust Funds" and "The Pooling and Servicing Agreement"), and of each
Mortgage Loan or Contract as to which the Servicer has determined that
all recoveries of Liquidation Proceeds and Insurance Proceeds have
been received (a "Liquidated Mortgage Loan" or "Liquidated Contract"),
in each case during the month preceding the month in which such
Distribution Date occurs, calculated as of the date each such Mortgage
Loan or Contract was purchased or calculated as of the date each such
Mortgage Loan or Contract became a Liquidated Mortgage Loan or
Liquidated Contract, as the case may be; and
(d) with respect to (1) the disposition of the Mortgaged Property
or Manufactured Home in connection with any Liquidated Mortgage Loan
or Contract, the amount by which Net Liquidation Proceeds and Net
Insurance Proceeds exceed the unpaid principal balance of such
Mortgage Loan or Contract and accrued but unpaid interest on such
Mortgage Loan or Contract at the Mortgage Rate or Contract Rate to the
Due Date next succeeding the last date of receipt of the Liquidation
Proceeds and Insurance Proceeds, and (2) the repurchase of Mortgage
Loans or Contracts in connection with an early termination of the
Trust Fund (see "The Pooling and Servicing Agreement -- Termination;
Purchase of Mortgage Loans and Contracts"), the amount by which the
repurchase price exceeds the aggregate unpaid principal balances of
the Mortgage Loans or Contracts in the related Trust Fund and accrued
but unpaid interest at the weighted average Mortgage Rate or Contract
Rate through the end of the month in which such repurchase occurs
(collectively, "Gain From Acquired Property"); and
(ii) interest at the Pass-Through Rate for the Class of Senior
Certificates from the second preceding Due Date (or the Cut-Off Date in
the case of the first Distribution Date) to the Due Date immediately
preceding such Distribution Date on the Senior Class Principal Portion of
the aggregate Scheduled Principal Balance of the Mortgage Loans or
Contracts as of the second preceding Due Date (or as of the Cut-Off Date
in the case of the first Distribution Date) whether or not such interest
was actually received by the Servicer; provided that Prepayment Interest
Shortfall is included only to the extent that funds for such purposes are
available out of Servicing Compensation; less
(iii) the Senior Class Principal Portion of any indemnification
payments made to the Servicer, the Depositor, or any officer, director,
employee or agent of either the Servicer or the Depositor since the
preceding Distribution Date as described under "Servicing of the Mortgage
Loans and Contracts -- Certain Matters Regarding the Servicer and the
Depositor" below (the "Indemnification Payments").
Unless otherwise specified in the applicable Prospectus Supplement, the
Subordinated Class Distributable Amount with respect to a Distribution Date
for Percentage Certificates which are Subordinated Certificates will be an
amount equal to the sum of:
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(i) the aggregate undivided interest, expressed as a percentage and
specified in the applicable Prospectus Supplement, evidenced by such
Subordinated Certificates (the "Subordinated Class Principal Portion") of:
(a) all Scheduled Principal;
(b) all principal prepayments received by the Servicer during the
month preceding the month in which such Distribution Date occurs;
(c) the Scheduled Principal Balance of each Mortgage Loan or
Contract which was purchased from the Trust Fund as provided in the
Pooling and Servicing Agreement (as described in "The Trust Funds" and
"The Pooling and Servicing Agreement"), and of each Mortgage Loan or
Contract which became a Liquidated Mortgage Loan or Liquidated
Contract, in each case during the month preceding the month in which
such Distribution Date occurs, determined as of the date each such
Mortgage Loan or Contract was purchased, or as of the date each such
Mortgage Loan or Contract became a Liquidated Mortgage Loan or
Liquidated Contract, as the case may be; and
(d) Gain From Acquired Property; and
(ii) interest at the Pass-Through Rate for the Class of Subordinated
Certificates from the second preceding Due Date (or from the Cut-Off Date
in the case of the first Distribution Date) to the Due Date immediately
preceding such Distribution Date on the Subordinated Class Principal
Portion of the Scheduled Principal Balance of the Mortgage Loans or
Contracts as of the second preceding Due Date (or as of the Cut-Off Date
in the case of the first Distribution Date), whether or not such interest
was actually received with respect to the Mortgage Loans or Contracts;
provided that Prepayment Interest Shortfall is included only to the extent
that funds for such purposes are available out of Servicing Compensation;
less
(iii) the Subordinated Class Principal Portion of any Indemnification
Payments.
The foregoing is subject to the proviso that if one or more REMIC
elections are made with respect to a Series of Certificates, any Gain From
Acquired Property will not be included in the Distributable Amount of the
Class of such Series which consist of Regular Interests, but shall instead be
paid in full to the holders of the Residual Certificates of such Series.
Calculation of Amounts To Be Distributed. The Servicer will calculate, on
the related Determination Date, the portion of the Distributable Amount for
each Class of the Series that is actually available to be paid out of the
Pool Distribution Amount on the Distribution Date prior to any adjustments
with respect to subordination. The portion so available on a Distribution
Date to the Senior Certificateholders and to the Subordinated
Certificateholders (respectively, the "Senior Class Pro Rata Share" and the
"Subordinated Class Pro Rata Share") will, unless otherwise specified in the
applicable Prospectus Supplement, be the amount equal to the product of the
Pool Distribution Amount for such Distribution Date and a fraction, the
numerator of which is the Distributable Amount for such Class on such
Distribution Date and the denominator of which is the sum of the
Distributable Amounts for such Series on such Distribution Date.
So long as the Subordinated Amount is greater than zero, the holders of
Senior Certificates will be entitled to receive on any Distribution Date the
lesser of (a) the sum of the Senior Class Distributable Amount and the Senior
Class Carryover Shortfall (as defined below) and (b) the Senior Class Pro
Rata Share on such Distribution Date (the "Basic Senior Class Distribution").
In addition, to the extent Senior Class Credit Enhancement is available, the
holders of Senior Certificates will be entitled to receive the amount, if
any, by which the Senior Class Distributable Amount plus any Senior Class
Carryover Shortfall (as defined below) on such Distribution Date exceeds the
Basic Senior Class Distribution on such Distribution Date (such excess being
referred to herein as the "Senior Class Shortfall"). "Senior Class Credit
Enhancement" includes: (a) amounts otherwise distributable to the holders of
Subordinated Certificates on such Distribution Date and amounts available for
such purpose in any Subordination Reserve Fund pursuant to any subordination
of the rights of any holders of Subordinated Certificates as
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described below; and (b) any other credit enhancement arrangement which shall
be specified in the related Prospectus Supplement. See "Credit Support". The
"Senior Class Carryover Shortfall" on any Distribution Date means the amount
the holders of Senior Certificates were entitled to receive on the prior
Distribution Date over the amount the holders of Senior Certificates actually
received on such prior Distribution Date, together with interest on the
difference at Pass-Through Rate for the Senior Certificates from such prior
Distribution Date through the current Distribution Date.
At the time the Subordinated Amount, if any, is reduced to zero, Senior
Certificateholders will be entitled to the Senior Class Pro Rata Share on
each Distribution Date. In such event any remaining Senior Class Shortfall
will cease to be payable from available sources of credit enhancement, except
that the portion of such Senior Class Shortfall which is attributable to the
account of interest on any previous Senior Class Carryover Shortfall (the
"Senior Class Shortfall Accruals") shall continue to bear interest at the
Pass-Through Rate for the Senior Certificates, and the holders of Senior
Certificates shall continue to have a preferential right to be paid such
amount from distributions otherwise available for distribution to any holders
of Subordinated Certificates, until such amount (including interest thereon
at the Pass- Through Rate for the Senior Certificates) is paid in full. See
"Credit Support -- Subordination."
So long as the Subordinated Amount is greater than zero, the holders of
Subordinated Certificates will be entitled to receive on any Distribution
Date an amount equal to the excess of (a) the sum of (i) the Pool
Distribution Amount and (ii) all amounts released from the Subordination
Reserve Fund for distribution to the holders of Subordinated Certificates on
such Distribution Date over (b) the sum of (i) the Basic Senior Class
Distribution, (ii) any amounts required to be distributed to the holders of
Senior Certificates pursuant to the subordination of the rights of the
holders of Subordinated Certificates and (iii) amounts required to be
deposited in the Subordination Reserve Fund. See "Credit Support." At the
time the Subordinated Amount, if any, is reduced to zero, Subordinated
Certificateholders will be entitled to the Subordinated Class Pro Rata Share
on each Distribution Date; provided, however, that such amount to be
distributed to the holders of Subordinated Certificates shall be decreased to
give effect to the preferential right of the holders of Senior Certificates
to receive Senior Class Shortfall Accruals as provided herein.
The foregoing is subject to the proviso that if a REMIC election has been
made with respect to a Trust Fund (or a segregated pool of assets therein),
the Subordinated Certificateholders of the related Series will be entitled to
the sum of (a) the Subordinated Class Pro Rata Share, (b) all amounts in the
Subordination Reserve Fund (net of any amount required to be maintained as
liquidity for Advances) and (c) such other amounts, if any, as may be
specified in the related Prospectus Supplement (including, if such
Certificates are Residual Certificates, any Gain From Acquired Property).
SHIFTING INTEREST CERTIFICATES
On each Distribution Date for a Series which is comprised of two Classes
of Standard Certificates which are Shifting Interest Certificates, the
holders of record on the Record Date of the Senior Certificates thereof will
be entitled to receive, to the extent of the Pool Distribution Amount with
respect to such Distribution Date and prior to any distribution being made on
the related Subordinated Certificates, an amount equal to the Senior Class
Distribution Amount. The Senior Class Distribution Amount will (except as
otherwise set forth in the applicable Prospectus Supplement) be calculated
for any Distribution Date as the lesser of (x) the Pool Distribution Amount
for such Distribution Date and (y) the sum of:
(i) one month's interest at the applicable Pass-Through Rate on such
Class's outstanding principal balance (less, if specified in the
applicable Prospectus Supplement, (a) the amount of such interest
constituting Deferred Interest, if any, not then payable on the Mortgage
Loans or Contracts and (b) the amount by which the Prepayment Interest
Shortfall with respect to the preceding month exceeds the aggregate
Servicing Fees relating to mortgagor or obligor payments or other
recoveries distributed on such Distribution Date, in each case allocated
to such Class on the basis set forth in the related Prospectus
Supplement);
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(ii) if distribution of the amount of interest calculated pursuant to
clause (i) above on prior Distribution Dates was not made in full on such
prior Distribution Dates, an amount equal to (a) the difference between
(x) the amount of interest which the holders of such Certificates would
have received on such prior Distribution Dates if there had been
sufficient funds available in the Certificate Account and (y) the amount
of interest actually distributed to such holders on such prior
Distribution Dates, together with interest on such difference (to the
extent permitted by applicable law) at the applicable Pass-Through Rate of
such Class (the "Unpaid Interest Shortfall") less (b) the aggregate amount
distributed on Distribution Dates subsequent to such prior Distribution
Dates with respect to the Unpaid Interest Shortfall;
(iii) such Class's percentage, calculated as provided in the related
Prospectus Supplement, of (a) all scheduled payments of principal due on
each outstanding Mortgage Loan or Contract that became due on the Due Date
occurring in the month in which such Distribution Date occurs, (b) all
partial principal prepayments received in the month preceding the month in
which such Distribution Date occurs and (c) except for Special Hazard
Mortgage Loans or Special Hazard Contracts covered by clause (iv) below,
the Scheduled Principal Balance of each Mortgage Loan or Contract which,
during the month preceding the month in which such Distribution Date
occurs, (i) was the subject of a principal prepayment in full, (ii) became
a Liquidated Mortgage Loan or Liquidated Contract or (iii) was purchased
from the Trust Fund as provided in the Pooling and Servicing Agreement (as
described in "The Trust Funds" and "The Pooling and Servicing Agreement");
and
(iv) if the Special Hazard Termination Date (as defined below) has
occurred as a result of cumulative net losses on Special Hazard Mortgage
Loans or Special Hazard Contracts exceeding the applicable Special Hazard
Loss Amount (as defined below), such Class's specified percentage of the
Net Liquidation Proceeds and Net Insurance Proceeds from any Mortgage Loan
or Contract that became a Special Hazard Mortgage Loan or Special Hazard
Contract during the month preceding the month in which such Distribution
Date occurs, less the total amount of delinquent installments of principal
in respect of such Special Hazard Mortgage Loan or Special Hazard Contract
that were previously the subject of distributions to the holders of such
Class of Certificates out of amounts otherwise distributable to the
holders of the related Subordinated Certificates and less the portion of
such Net Liquidation Proceeds and Net Insurance Proceeds allocable to
interest on the Senior Certificates;
provided that, if such Distribution Date falls on or after the Cross-Over
Date (i.e., the date on which the amount of principal payments on the
Mortgage Loans or Contracts to which the holders of the related Subordinated
Certificates are entitled has been reduced to zero as a result of the
allocation of losses to the Subordinated Certificates), then the Senior Class
Distribution Amount will instead equal the lesser of (x) the Pool
Distribution Amount and (y) the sum of the items referred to above plus the
amount by which such Senior Certificates' outstanding principal balance as of
such Distribution Date exceeds the Pool Scheduled Principal Balance as of
such Distribution Date. The "Scheduled Principal Balance" of a Mortgage Loan
or Contract for any Distribution Date is the unpaid principal balance of such
Mortgage Loan or Contract as specified in the amortization schedule at the
time relating thereto (before any adjustment to such schedule by reason of
bankruptcy, moratorium or similar waiver or grace period) as of the first day
of the month preceding the month in which such Distribution Date occurs after
giving effect to the payment of principal due on such first day of the month,
any partial prepayments applied on or prior to such first day of the month,
the addition to the principal of such Mortgage Loan or Contract on or prior
to such first day of the month of any Deferred Interest, and irrespective of
any delinquency in payment by the mortgagor or obligor. The "Pool Scheduled
Principal Balance" as of any Distribution Date is the aggregate of the
Scheduled Principal Balances of all Mortgage Loans or Contracts in a Trust
Fund for such Distribution Date.
If so provided in the applicable Prospectus Supplement, the Class of
Senior Certificates will also be entitled to receive its specified
percentage, referred to in clauses (y)(iii)(b) and (y)(iii)(c)(i) above, of
all partial principal prepayments and all principal prepayments in full on
the Mortgage Loans or Contracts in the related Trust Fund under the
circumstances or for the period of time specified therein, which will have
the effect of accelerating the amortization of the Class of Senior
Certificates while increasing the
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<PAGE>
respective interest evidenced by the Class of Subordinated Certificates in
the related Trust Fund. Increasing the respective interest of the
Subordinated Certificates relative to that of the Senior Certificates is
intended to preserve the availability of the subordination provided by the
Subordinated Certificates.
If the Special Hazard Termination Date would occur on any Distribution
Date under the circumstances referred to in "Credit Support --
Subordination," the Senior Class Distribution Amount for each Class and
Subclass of Senior Certificates of such Series calculated as set forth in the
two preceding paragraphs will be modified to the extent described in such
section.
Amounts distributed to the Class of Senior Certificates on a Distribution
Date will be deemed to be applied first to the payment of current interest,
if any, due on such Certificates (i.e., the amount calculated pursuant to
clause (y)(i) of the third preceding paragraph), second to the payment of any
Unpaid Interest Shortfall (i.e., the amount calculated pursuant to clause
(y)(ii) of such paragraph) and third to the payment of principal, if any, due
on such Certificates (i.e., the aggregate of the amounts calculated pursuant
to clauses (y)(iii) and (y)(iv) of such paragraph).
As indicated above, in the event that the Pool Distribution Amount on any
Distribution Date is not sufficient to make the full distribution of current
interest to the holders of Senior Certificates entitled to payments of
interest, the difference between the amount of current interest which the
holders of such Certificates would have received on such Distribution Date if
there had been sufficient funds available and the amount actually distributed
will be added to the amount of interest which the holders of such
Certificates are entitled to receive on the next Distribution Date. Unless
otherwise specified in the related Prospectus Supplement, the amount of any
such interest shortfall so carried forward will bear interest (to the extent
permitted by applicable law) at the Pass-Through Rate applicable to such
Certificates or at such other rate as specified in the applicable Prospectus
Supplement.
If the Pool Distribution Amount is insufficient on any Distribution Date
to make the full distribution of principal due to the holders of Senior
Certificates, the percentage of principal payments to which the holders of
the Senior Certificates would be entitled on the immediately succeeding
Distribution Date will be increased, as more fully described below under
"Credit Support --Subordination -- Shifting Interest Certificates." This
increase will have the effect of reducing, as a relative matter, the
respective interest of the holders of the related Subordinated Certificates
in future payments of principal on the related Mortgage Loans or Contracts.
If the Pool Distribution Amount is not sufficient to make full distribution
described above to the holders of the Class of Senior Certificates on any
Distribution Date, unless otherwise provided in the applicable Prospectus
Supplement, the holders of such Class will share in the funds actually
available in proportion to the respective amounts that such Class would have
received had the Pool Distribution Amount been sufficient to make the full
distribution of interest and principal due to such Class.
Unless otherwise provided in the related Prospectus Supplement, on each
Distribution Date the holders of the related Class of Subordinated
Certificates of a Series will be entitled to receive, out of the Pool
Distribution Amount, all amounts remaining and available for distribution to
them after deduction of the amounts required to be distributed to the holders
of all Senior Certificates of such Series.
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<PAGE>
EXAMPLE OF DISTRIBUTION TO STANDARD CERTIFICATEHOLDERS
The following chart sets forth an example of the application of the
foregoing provisions to the first two months of the related Trust Fund's
existence, assuming the Certificates are issued in the month of January, with
a Distribution Date on the 25th of each month and a Determination Date on the
15th of each month:
<TABLE>
<CAPTION>
<S> <C>
January 1(A) ................... Cut-Off Date.
January 2 -- January 31(B) .... The Servicer receives any principal prepayments, Net Liquidation
Proceeds, Net Insurance Proceeds and Repurchase Proceeds.
January 31(C) .................. Record Date.
February 1 -- February 15(D) .. The Servicer receives scheduled payments of principal and interest
due on February 1.
February 15(E) ................. Determination Date.
February 25(F) ................. Distribution Date.
</TABLE>
Succeeding monthly periods follow the pattern of (B) through (F), except that
the period in (B) begins on the first of the month.
- ------------
(A) The initial unpaid principal balance of the Mortgage Loans or
Contracts in a Trust Fund would be the aggregate unpaid principal
balance of the Mortgage Loans or Contracts at the close of business
on January 1, after deducting principal payments due on or before
such date. Those principal payments due on or before January 1 and
the related interest payments would not be part of the Trust Fund and
would be remitted by the Servicer to the Depositor when received.
(B) Principal prepayments, Net Liquidation Proceeds, Net Insurance
Proceeds and Repurchase Proceeds received during this period would be
credited to the Certificate Account for distribution to
Certificateholders on the February 25 Distribution Date. To the
extent funds are available from the aggregate Servicing Fees relating
to mortgagor payments or other recoveries distributed on the related
Distribution Date, the Servicer would make an additional payment to
Certificateholders with respect to any Prepayment Interest Shortfall
realized during this period.
(C) Distributions in the month of February will be made to
Certificateholders of record at the close of business on this date.
(D) Scheduled monthly payments on the Mortgage Loans or Contracts due on
February 1 will be deposited in the Certificate Account as received
by the Servicer. Principal prepayments, Net Liquidation Proceeds, Net
Insurance Proceeds and Repurchase Proceeds received during this
period, will be deposited in the Certificate Account but will not be
distributed to Certificateholders on the February 25 Distribution
Date. Instead, such amounts will be credited to the Certificate
Account for distribution to Certificateholders on the March 25
Distribution Date.
(E) As of the close of business on February 15, a determination will be
made of the amounts of Advances and the amounts of principal and
interest which will be distributed to the Certificateholders. Those
scheduled payments due on or before February 1 which have been
received on or before February 15 and those principal prepayments,
Net Liquidation Proceeds, Net Insurance Proceeds and Repurchase
Proceeds received during the period commencing January 2 and ending
on January 31 will be distributed to Certificateholders on the
February 25 Distribution Date. In addition, the amounts payable in
respect of any form of credit enhancement will be calculated in
accordance with the related Pooling and Servicing Agreement.
(F) Unless otherwise so specified in the related Prospectus Supplement,
the Servicer or the Paying Agent, will make distributions to
Certificateholders on the 25th day of each month, or if such 25th day
is not a business day, on the next business day.
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DISTRIBUTIONS TO MULTI-CLASS CERTIFICATEHOLDERS
VALUATION OF MORTGAGE LOANS AND CONTRACTS
If specified in the Prospectus Supplement relating to a Series of
Certificates having one or more Classes or Subclasses of Multi-Class
Certificates, for purposes of establishing the principal amount of Mortgage
Loans or Contracts that will be included in a Trust Fund for such Series,
each Mortgage Loan or Contract to be included in such Trust Fund will be
assigned an initial "Pool Value." Unless otherwise specified in the
applicable Prospectus Supplement, the Pool Value of each Mortgage Loan or
Contract in the Trust Fund for such Series will be the Stated Amount of
Certificates of such Series which, based upon certain assumptions and
regardless of any prepayments on such Mortgage Loans or Contracts, can be
supported by the scheduled payments of principal and interest on such
Mortgage Loans or Contracts (net of the Fixed Retained Yield on such Mortgage
Loans or Contracts, if any, and the applicable Servicing Fee), together with
reinvestment earnings thereon, if any, at the Assumed Reinvestment Rate for
the period specified in the related Prospectus Supplement and amounts
available to be withdrawn (if applicable) from any reserve fund for such
Series, all as specified in the applicable Prospectus Supplement. In
calculating the Pool Value of a Mortgage Loan or Contract included in the
Trust Fund, future distributions on such Mortgage Loan or Contract will be
determined based on scheduled payments on such Mortgage Loan or Contract. Any
similar Mortgage Loans or Contracts may be aggregated into one or more groups
(each, a "Pool Value Group") each of which will be assigned an aggregate Pool
Value calculated as if all such Mortgage Loans or Contracts in the Pool Value
Group constituted a single loan having the highest interest rate and the
longest maturity of any such loan for such Pool Value Group. There are a
number of alternative means of determining the Pool Value of a Mortgage Loan,
Contract or Pool Value Group, including determinations based on the
discounted present value of the remaining scheduled payments of principal and
interest thereon and determinations based on the relationship between the
Mortgage Rates or Contract Rates borne thereby and the Interest Rates of the
Multi-Class Certificates of the related Series. The Prospectus Supplement for
each Series will describe the method or methods (and related assumptions)
used to determine the Pool Values of the Mortgage Loans or Contracts or the
Pool Value Groups for such Series.
The "Assumed Reinvestment Rate" for a Series of Multi-Class Certificates
will be the highest rate permitted by the nationally recognized statistical
rating agency or agencies rating such Series of Multi-Class Certificates or a
rate insured by means of a surety bond, guaranteed investment contract or
similar arrangement satisfactory to such rating agency or agencies. If the
Assumed Reinvestment Rate is so insured, the related Prospectus Supplement
will set forth the terms of such arrangement.
DISTRIBUTIONS OF INTEREST
The Trustee will make distributions of interest on each Class of the
Multi-Class Certificates from the date and at the rates per annum (calculated
on the Stated Amount or Notional Amount of such Class) specified in, or as
otherwise determined in the manner set forth in, the related Prospectus
Supplement (and unless otherwise specified in such Prospectus Supplement,
calculated on the basis of a 360-day year of twelve 30-day months) and in
accordance with the priorities set forth in the related Prospectus
Supplement. Interest on all Classes of Multi-Class Certificates of a Series,
other than Compound Interest Certificates, will be distributed on the
Distribution Dates for such Series specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
distributions of interest on each Class of Compound Interest Certificates
will be made on each Distribution Date after the Stated Amount of all
Multi-Class Certificates of such Series having a Last Scheduled Distribution
Date prior to the Last Scheduled Distribution Date of such Class of Compound
Interest Certificates has been reduced to zero. Prior to that time, interest
on such Class of Compound Interest Certificates will be added to the Stated
Amount thereof on each Distribution Date. Such Class of Compound Interest
Certificates will thereafter receive distributions of interest on the Stated
Amount thereof as so adjusted.
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DISTRIBUTIONS IN REDUCTION OF STATED AMOUNT FOR A SERIES OF MULTI-CLASS
CERTIFICATES NOT INCLUDING A SUBORDINATION FEATURE
The Stated Amount of a Multi-Class Certificate of a Series at any time
will represent the maximum specified dollar amount (excluding interest
distributions, but including, in the case of Compound Interest Certificates,
interest which has not been distributed and which has been added to the
Stated Amount thereof) to which the holder thereof is entitled from the cash
flow on the assets included in the Trust Fund for such Series and will
decline to the extent distributions in reduction of Stated Amount are
received by such holder. The initial Stated Amount of each Class of
Multi-Class Certificates will be specified in the applicable Prospectus
Supplement. On each Distribution Date, distributions in reduction of Stated
Amount of the Classes of Multi-Class Certificates will be made, to the extent
funds are available, to the holders of the Multi-Class Certificates of such
Series then entitled to receive such distributions, in the order and in the
amounts specified in the related Prospectus Supplement. Distributions in
reduction of Stated Amount may be allocated among Classes of Multi-Class
Certificates in order to provide limited protection to certain Classes
against an increase in the weighted average life of such Classes as a result
of a slower than expected or scheduled rate of principal prepayments on the
Mortgage Loans ("extension protection"). In addition, distributions in
reduction of Stated Amount may be allocated among Classes of Multi-Class
Certificates in order to provide limited protection to certain Classes
against a reduction in the weighted average life of such Classes as a result
of a faster than expected or scheduled rate or principal prepayments on the
Mortgage Loans ("call protection"). By virtue of such allocations of
distributions in reduction of Stated Amount to provide extension protection
and call protection to some Classes, the weighted average lives of certain
other Classes may be more greatly affected by a faster or slower than
expected or scheduled rate of principal prepayments on the Mortgage Loans.
See "Prepayment and Yield Considerations -- Weighted Average Life of
Certificates." Distributions in reduction of Stated Amount with respect to
any Class or Subclass of Multi-Class Certificates will be made on a pro rata
or random lot or such other basis as is specified in the applicable
Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Certificates, the aggregate amount that will be distributed in
reduction of Stated Amount to holders of Multi-Class Certificates of a Series
then entitled thereto on any Distribution Date for such Series will equal, to
the extent funds are available, the sum of (i) the Multi-Class Certificate
Distribution Amount (as defined herein) and (ii) if and to the extent
specified in the related Prospectus Supplement, the applicable percentage of
the Spread specified in such Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, the
"Multi-Class Certificate Distribution Amount" with respect to a Distribution
Date for a Series of Multi-Class Certificates will equal the amount, if any,
by which the Stated Amount of the Multi-Class Certificates of such Series
(after taking into account the amount of interest to be added to the Stated
Amount of any Class of Compound Interest Certificates on such Distribution
Date and before giving effect to any distributions in reduction of Stated
Amount on such Distribution Date) exceeds the Pool Value (as defined herein)
of the Mortgage Loans or Contracts included in the Trust Fund for such Series
as of the end of the period (a "Due Period") specified in the related
Prospectus Supplement. For purposes of determining the Multi-Class
Certificate Distribution Amount with respect to a Distribution Date for a
Series of Certificates having one or more Classes of Multi-Class
Certificates, the Pool Value of the Mortgage Loans or Contracts included in
the Trust Fund for such Certificates will be reduced to take into account all
distributions thereon received by the Trustee during the applicable Due
Period.
Unless otherwise specified in the applicable Prospectus Supplement,
"Spread" with respect to a Distribution Date for a Series of Multi-Class
Certificates will be the excess of (a) the sum of (i) all payments of
principal and interest received on the related Mortgage Loans or Contracts
(net of the Fixed Retained Yield, if any, and the applicable Servicing Fee,
if any, with respect to such Mortgage Loans or Contracts) in the Due Period
applicable to such Distribution Date and, in the case of the first Due
Period, any amount deposited by the Depositor in the Certificate Account on
the Closing Date, (ii) income from reinvestment thereof, if any, and (iii) to
the extent specified in the applicable Prospectus Supplement, the amount of
cash withdrawn from any reserve fund or available under any other form of
credit enhancement for such Series since the prior Distribution Date (or
since the Closing Date, in the case of
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<PAGE>
the first Distribution Date) and required to be deposited in the Certificate
Account for such Series, over (b) the sum of (i) all required to be deposited
on the Multi-Class Certificates of such Series on such Distribution Date,
(ii) the Multi-Class Certificate Distribution Amount for such Distribution
Date, (iii) if applicable, any Special Distributions (as described below) in
reduction of the Stated Amount of the Multi-Class Certificates of such Series
made since the preceding Distribution Date (or since the Closing Date in the
case of the first Distribution Date), including any accrued interest
distributed with such Special Distributions, (iv) all administrative and
other expenses relating to the Trust Fund payable during the Due Period
preceding such Distribution Date, other than such expenses which are payable
by the Servicer, if any, and (v) any amount required to be deposited into any
reserve fund. Reinvestment income on any reserve fund will not be included in
Spread except to the extent that reinvestment income is taken into account in
calculating the initial amount required to be deposited in such reserve fund,
if any.
SUBORDINATION
The Prospectus Supplement relating to a Series which includes one or more
Classes or Subclasses of Multi-Class Certificates may specify that the rights
of one or more of such Classes or Subclasses (or the related Residual
Certificates of such Series) will be Senior to, or subordinated to, the
rights of one or more other Classes of Certificates of such Series.
If a Series which includes one or more Classes or Subclasses of
Multi-Class Certificates includes a subordination feature, on each
Distribution Date, distributions of interest, if any, will be made in
accordance with the preferential priorities specified in the related
Prospectus Supplement and from the date and at the Interest Rates specified
therein or as otherwise specified therein and distributions in reduction of
Stated Amount, if any, will be made to the holders of the Multi-Class
Certificates in the amount and in the manner specified in and in accordance
with the preferential distribution provisions described in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement
the Subordinated Amount will be reduced as the pool experiences losses, as
well as through seasoning and prepayment of the Mortgage Loans or Contracts
included in the Trust Fund.
SPECIAL DISTRIBUTIONS
To the extent specified in the Prospectus Supplement relating to a Series
which includes Multi-Class Certificates which have less frequent than monthly
Distribution Dates, any such Class or Subclass having Stated Amounts may
receive special distributions in reduction of Stated Amount, together with
accrued interest on the amount of such reduction ("Special Distributions") in
any month, other than a month in which a Distribution Date occurs, if, as a
result of principal prepayments on the Mortgage Loans or Contracts, the
Trustee determines, based on assumptions specified in the applicable Pooling
and Servicing Agreement, that the amount of cash anticipated to be available
on the next Distribution Date for such Series to be distributed to the
holders of such Multi-Class Certificates may be less than the sum of (i) the
interest scheduled to be distributed to such holders and (ii) the amount to
be distributed in reduction of Stated Amount of such Multi-Class Certificates
on such Distribution Date. Any such Special Distributions will be made in the
same priority and manner as distributions in reduction of Stated Amount would
be made on the next Distribution Date.
To the extent specified in the related Prospectus Supplement, one or more
Classes of Certificates of a Series may be subject to special distributions
in reduction of the Stated Amount thereof at the option of the holders of
such Certificates, or to mandatory distributions by the Servicer. Any such
distributions with respect to a Series will be described in the applicable
Prospectus Supplement and will be on such terms and conditions as described
therein and specified in the Pooling and Servicing Agreement for such Series.
LAST SCHEDULED DISTRIBUTION DATE
The "Last Scheduled Distribution Date" for each Class of Multi-Class
Certificates of a Series having a Stated Amount, to the extent Last Scheduled
Distribution Dates are specified in the applicable Prospectus Supplement, is
the latest date on which (based upon the assumptions set forth in the
applicable
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<PAGE>
Prospectus Supplement) the Stated Amount of such Class is expected to be
reduced to zero. Since the rate of distributions in reduction of Stated
Amount of each such Class of Multi-Class Certificates will depend upon, among
other things, the rate of payment (including prepayments) of the principal of
the Mortgage Loans or Contracts, the actual last Distribution Date for any
such Class may occur significantly earlier than its Last Scheduled
Distribution Date. To the extent of any delays in receipt of any payments,
insurance proceeds or liquidation proceeds with respect to the Mortgage Loans
or Contracts included in any Trust Fund, the last Distribution Date for any
such Class may occur later than its Last Scheduled Distribution Date. The
rate of payments on the Mortgage Loans or Contracts in the Trust Fund for any
Series of Certificates will depend upon their particular characteristics, as
well as on the prevailing level of Interest Rates from time to time and other
economic factors, and no assurance can be given as to the actual prepayment
experience of the Mortgage Loans or Contracts. See "Prepayment and Yield
Considerations."
CREDIT SUPPORT
SUBORDINATION
CERTIFICATES OTHER THAN SHIFTING INTEREST CERTIFICATES
If so specified in the Prospectus Supplement relating to a Series of
Certificates as to which the related Trust Fund consists of Mortgage Loans or
Contracts, other than a Series of Shifting Interest Certificates, the rights
of the holders of a Class of Subordinated Certificates to receive
distributions will be subordinated to the rights of the holders of a Class of
Senior Certificates, to the extent of the Subordinated Amount specified in
such Prospectus Supplement. The Subordinated Amount will be reduced by an
amount equal to Aggregate Losses and will be further reduced in accordance
with a schedule described in the applicable Prospectus Supplement. Aggregate
Losses as defined in the applicable Pooling and Servicing Agreement for any
given period will equal the aggregate amount of delinquencies, losses and
other deficiencies in the amounts due to the Senior Certificateholders paid
or borne by the Subordinated Certificateholders (but excluding any payments
of Senior Class Shortfall Accruals or interest thereon) ("Payment
Deficiencies") during such period, whether such aggregate amount results by
way of withdrawals from the Subordination Reserve Fund (including, prior to
the time that the Subordinated Amount is reduced to zero, any such withdrawal
of amounts attributable to the Initial Deposit, if any), reductions in
amounts that would otherwise have been distributable to the Subordinated
Certificateholders on any Distribution Date, or otherwise; less the aggregate
amount of previous Payment Deficiencies recovered by the related Trust Fund
during such period in respect of the Mortgage Loans or Contracts giving rise
to such Previous Payment Deficiencies, including, without limitation, such
recoveries resulting from the receipt of delinquent principal or interest
payments, Liquidation Proceeds and insurance proceeds (net, in each case, of
any applicable Fixed Retained Yield and any unpaid Servicing Fee to which the
Servicer is entitled, foreclosure costs and other servicing costs, expenses
and advances relating to such Mortgage Loans or Contracts).
The protection afforded to the Senior Certificateholders by the
subordination feature described above will be effected both by the
preferential right, to the extent specified in the applicable Prospectus
Supplement, of such Senior Certificateholders to receive current
distributions on the related Mortgage Loans or Contracts that, but for such
subordination, would otherwise have been distributable to the Subordinated
Certificateholders from the related Trust Fund (to the extent of the
Subordinated Amount for such Series) and (unless otherwise specified in the
applicable Prospectus Supplement) by the establishment and maintenance of a
Subordination Reserve Fund for such Series. Unless otherwise specified in the
applicable Prospectus Supplement, the Subordination Reserve Fund will not be
a part of the Trust Fund. The Subordination Reserve Fund may be funded
initially with an initial deposit by the Depositor (the "Initial Deposit") in
an amount set forth in the applicable Prospectus Supplement. Following the
initial issuance of the Certificates of a Series and until the balance of the
Subordination Reserve Fund (without taking into account the amount of any
Initial Deposit) first equals or exceeds the Specified Subordination Reserve
Fund Balance set forth in the applicable Prospectus Supplement, the Servicer
will withhold all amounts that would otherwise have been distributable to the
Subordinated
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<PAGE>
Certificateholders and deposit such amounts (less any portions thereof
required to be distributed to Senior Certificateholders as described below)
in the Subordination Reserve Fund. The time necessary for the Subordination
Reserve Fund of a Series to reach the applicable Specified Subordination
Reserve Fund Balance for such Series after the initial issuance of the
Certificates, and the period for which such balance is maintained, will be
affected by the prepayment, delinquency and foreclosure or repossession
experience of the Mortgage Loans or Contracts in the related Trust Fund and
cannot be accurately predicted. Unless otherwise specified in the applicable
Prospectus Supplement, after the amount in the Subordination Reserve Fund
(without taking into account the amount of any Initial Deposit) for a Series
first equals or exceeds the applicable Specified Subordination Reserve Fund
Balance, the Servicer will withhold from the Subordinated Certificateholders
and will deposit in the Subordination Reserve Fund such portion of the
principal payments on the Mortgage Loans or Contracts otherwise distributable
to the Subordinated Certificateholders as may be necessary to maintain the
Subordination Reserve Fund (without taking into account the amount of any
Initial Deposit) at the Specified Subordination Reserve Fund Balance. The
Prospectus Supplement for each Series will set forth the amount of the
Specified Subordination Reserve Fund Balance applicable from time to time and
the extent, if any, to which the Specified Subordination Reserve Fund Balance
may be reduced. Unless otherwise specified in the applicable Prospectus
Supplement, the Specified Subordination Reserve Fund Balance for a Series
will not be required to exceed the Subordinated Amount.
If on any Distribution Date while the Subordinated Amount exceeds zero,
there is a Senior Class Shortfall, the Senior Class Certificateholders will
be entitled to receive from current payments on the Mortgage Loans or
Contracts that would otherwise have been distributable to Subordinated
Certificateholders the amount of such Senior Class Shortfall. If such current
payments are insufficient, an amount equal to the lesser of: (i) the entire
amount on deposit in the Subordination Reserve Fund available for such
purpose; or (ii) the amount necessary to cover the Senior Class Shortfall
will be withdrawn from the Subordination Reserve Fund. Amounts representing
investment earnings on amounts held in the Subordination Reserve Fund will
not be available to make payments to the Senior Certificateholders. If
current payments on the Mortgage Loans or Contracts and amounts available in
the Subordination Reserve Fund are insufficient to pay the entire Senior
Class Shortfall, then amounts held in the Certificate Account for future
distributions will be distributed as necessary to the Senior
Certificateholders.
In the event the Subordination Reserve Fund is depleted before the
Subordinated Amount is reduced to zero, the Senior Certificateholders will
continue to have a preferential right, to the extent specified in the
applicable Prospectus Supplement, to receive current distributions of amounts
that would otherwise have been distributable to the Subordinated
Certificateholders to the extent of the then Subordinated Amount.
After the Subordinated Amount is reduced to zero, the Senior
Certificateholders of a Series will, unless otherwise specified in the
applicable Prospectus Supplement, nonetheless have a preferential right to
receive payment of Senior Class Shortfall Accruals and interest which has
accrued thereon from amounts that would otherwise have been distributable to
the Subordinated Certificateholders. The Senior Certificateholders will
otherwise bear their proportionate share of any losses realized on the Trust
Fund in excess of the Subordinated Amount.
Unless otherwise specified in the related Prospectus Supplement, amounts
held from time to time in the Subordination Reserve Fund for a Series will be
held for the benefit of the Senior Certificateholders and Subordinated
Certificateholders of such Series until withdrawn from the Subordination
Reserve Fund as described below; provided, however, that the portion of the
Initial Deposit, if any, which has not been recovered by the Servicer and any
undistributed investment earnings attributable thereto will continue to be
the property of the Servicer and will ultimately be recoverable by the
Servicer.
Amounts withdrawn from the Subordination Reserve Fund for a Series and
deposited in the Certificate Account for such Series will be charged first
against amounts in the Subordination Reserve Fund other than the Initial
Deposit, if any, for such Series, and thereafter against such Initial
Deposit.
If so specified in the related Prospectus Supplement, if the Subordinated
Amount for a Series is reduced to zero and funds remain in the Subordination
Reserve Fund, an amount (the "Advance
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Reserve") equal to the lesser of (i) the amount of the Initial Deposit and
(ii) such funds remaining in the Subordination Reserve Fund at the time the
Subordinated Amount is reduced to zero, will remain in the Subordination
Reserve Fund and be available in certain circumstances for withdrawal to make
Advances.
Any amounts in the Subordination Reserve Fund for a Series on a
Distribution Date in excess of the Specified Subordination Reserve Fund
Balance on such date prior to the time the Subordinated Amount for such
Series is reduced to zero, and any amounts remaining in the Subordination
Reserve Fund for such Series upon termination of the trust created by the
applicable Pooling and Servicing Agreement, will be paid, unless otherwise
specified in the applicable Prospectus Supplement, to the Subordinated
Certificateholders of such Series in accordance with their pro rata ownership
thereof, or, in the case of a Series with respect to which an election has
been made to treat the Trust Fund as a REMIC, first to the Residual
Certificateholders (to the extent of any portion of the Initial Deposit, if
any, and undistributed reinvestment earnings attributable thereto), and
second to the Subordinated Certificateholders of such Series, in each case in
accordance with their pro rata ownership thereof. Amounts permitted to be
distributed from the Subordination Reserve Fund for a Series will no longer
be subject to any claims or rights of the Senior Certificateholders of such
Series.
Funds in the Subordination Reserve Fund for a Series will be invested as
provided in the applicable Pooling and Servicing Agreement in certain types
of eligible investments ("Eligible Investments"). If an election has been
made to treat the Trust Fund (or one or more pools of segregated assets
therein) as a REMIC, no more than 30% of the income or gain of the
Subordination Reserve Fund in any taxable year may be derived from the sale
or other disposition of investments held for less than three months in the
Subordination Reserve Fund. The earnings on such investments will be
withdrawn and paid to the Subordinated Certificateholders of such Series or
to the holders of the Residual Certificates, in the event that an election
has been made to treat the Trust Fund (or a pool of segregated assets
therein) with respect to such Series as a REMIC, in accordance with their
respective interests. Investment income earned on amounts held in the
Subordination Reserve Fund will not be available for distribution to the
Senior Certificateholders or otherwise subject to any claims or rights of the
Senior Certificateholders.
Eligible Investments for monies deposited in the Subordination Reserve
Fund will be specified in the applicable Pooling and Servicing Agreement and,
unless otherwise provided in the applicable Prospectus Supplement, will
mature no later than the next Distribution Date.
Holders of Subordinated Certificates of a Series will not be required to
refund any amounts which have been properly distributed to them, regardless
of whether there are sufficient funds to distribute to Senior
Certificateholders the amounts to which they are entitled.
If specified in the related Prospectus Supplement, the Subordination
Reserve Fund may be funded in any other manner acceptable to each Rating
Agency and consistent with an election, if any, to treat the Trust Fund (or
one or more pools of segregated assets therein) for such Series as a REMIC,
as will be more fully described in such Prospectus Supplement.
SHIFTING INTEREST CERTIFICATES
If specified in the applicable Prospectus Supplement, the rights of the
holders of the Subordinated Certificates of a Series of Shifting Interest
Certificates to receive distributions with respect to the Mortgage Loans or
Contracts in the related Trust Fund will be subordinated to such rights of
the holders of the Senior Certificates of such Series to the extent described
below, except as otherwise set forth in such Prospectus Supplement. This
subordination is intended to enhance the likelihood of regular receipt by
holders of Senior Certificates of the full amount of scheduled monthly
payments of principal and interest due them and to provide limited protection
to the holders of the Senior Certificates against losses due to mortgagor or
obligor defaults.
The protection afforded to the holders of Senior Certificates of such a
Series by the subordination feature described above will be effected by the
preferential right of such holders to receive, prior to any distribution
being made in respect of the related Subordinated Certificates, current
distributions on the related Mortgage Loans or Contracts of principal and
interest due them on each Distribution Date out of the funds available for
distribution on such date in the related Certificate Account and, to the
extent
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described below, by the right of such holders to receive future distributions
on the Mortgage Loans or Contracts that would otherwise have been payable to
the holders of Subordinated Certificates.
Losses realized on Liquidated Mortgage Loans or Liquidated Contracts
(other than certain Liquidated Mortgage Loans that are Special Hazard
Mortgage Loans or Liquidated Contracts that are Special Hazard Contracts as
described below) will be allocated to the holders of Subordinated
Certificates through a reduction of the amount of principal payments on the
Mortgage Loans or Contracts to which such holders are entitled. Prior to the
Cross-Over Date, holders of Senior Certificates of each Class entitled to a
percentage of principal payments on the related Mortgage Loans or Contracts
will be entitled to receive, as part of their respective Senior Class
Distribution Amounts payable on each Distribution Date in respect of each
Mortgage Loan or Contract that became a Liquidated Mortgage Loan or
Liquidated Contract in the preceding month (subject to the additional
limitation described below applicable to Liquidated Mortgage Loans that are
Special Hazard Mortgage Loans or Liquidated Contracts that are Special Hazard
Contracts), their respective shares of the Scheduled Principal Balance of
each such Liquidated Mortgage Loan or Liquidated Contract, together with
interest accrued at the Pass-Through Rate for such Class, irrespective of
whether Net Liquidation Proceeds and Net Insurance Proceeds realized thereon
are sufficient to cover such amount. For a description of the full Senior
Class Distribution Amount payable to holders of Senior Certificates of each
Series, see "Description of the Certificates -- Distributions to Standard
Certificateholders --Shifting Interest Certificates."
On each Distribution Date occurring on or after the Cross-Over Date,
holders of Senior Certificates of each Class entitled to a percentage of
principal payments will generally receive, as part of their respective Senior
Class Distribution Amounts, only their respective shares of the Net
Liquidation Proceeds and Net Insurance Proceeds actually realized in respect
of the applicable Liquidated Mortgage Loans or Liquidated Contracts after
reimbursement to the Servicer of any previously reimbursed Advances made in
respect of such Liquidated Mortgage Loans or Liquidated Contracts. See
"Description of the Certificates -- Distributions to Standard
Certificateholders --Shifting Interest Certificates."
In the event that a Mortgage Loan becomes a Liquidated Mortgage Loan or a
Contract becomes a Liquidated Contract as a result of a hazard not insured
against under a Standard Hazard Insurance Policy (a "Special Hazard Mortgage
Loan" or "Special Hazard Contract"), the holders of Senior Certificates of
each Class entitled to a percentage of principal payments on the related
Mortgage Loans or Contracts will be entitled to receive in respect of each
Mortgage Loan or Contract which became a Special Hazard Mortgage Loan or
Special Hazard Contract in the preceding month, as part of their respective
Senior Class Distribution Amounts payable on each Distribution Date prior to
the Special Hazard Termination Date, their respective shares of the Scheduled
Principal Balance of such Mortgage Loan or Contract, together with interest
accrued at the applicable Pass-Through Rate, rather than their respective
shares of Net Liquidation Proceeds and Net Insurance Proceeds actually
realized. The Special Hazard Termination Date for a Series of Certificates
will be the earlier to occur of (i) the date on which cumulative net losses
in respect of Special Hazard Mortgage Loans or Special Hazard Contracts
exceed the Special Hazard Loss Amount specified in the applicable Prospectus
Supplement or (ii) the Cross-Over Date. Since the amount of the Special
Hazard Loss Amount for a Series of Certificates is expected to be
significantly less than the amount of principal payments on the Mortgage
Loans or Contracts to which the holders of the Subordinated Certificates of
such Series are initially entitled (such amount being subject to reduction,
as described above, as a result of allocation of losses on other Liquidated
Mortgage Loans or Liquidated Contracts as well as Special Hazard Mortgage
Loans or Special Hazard Contracts), the holders of Subordinated Certificates
of such Series will bear the risk of losses in the case of Special Hazard
Mortgage Loans or Special Hazard Contracts to a lesser extent than they will
bear losses on other Liquidated Mortgage Loans or Liquidated Contracts. Once
the Special Hazard Termination Date has occurred, holders of Senior
Certificates of each Class entitled to payments of principal will be entitled
to receive, as part of their respective Senior Class Distribution Amounts,
only their respective shares of Net Liquidation Proceeds and Net Insurance
Proceeds realized on Special Hazard Mortgage Loans or Special Hazard
Contracts (less the total amount of delinquent installments in respect of
each Special Hazard Mortgage Loan or Special Hazard Contract that were
previously the subject of distributions to the holders of the Senior
Certificates and less the portion of such Net Liquidation Proceeds and Net
Insurance
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Proceeds allocable to interest). The outstanding principal balance or
notional amount of each such Class will, however, be reduced by such Class's
specified percentage of the Scheduled Principal Balance of each such Special
Hazard Mortgage Loan or Special Hazard Contract. See "Description of the
Certificates -- Distributions to Standard Certificateholders -- Shifting
Interest Certificates."
If the cumulative net losses on all Mortgage Loans or Contracts in a Trust
Fund that have become Special Hazard Mortgage Loans or Special Hazard
Contracts in the months prior to the month in which a Distribution Date
occurs would exceed the Special Hazard Loss Amount for a Series of
Certificates, that portion of the Senior Class Distribution Amount as of such
Distribution Date for each Class of Senior Certificates of such Series
entitled to a percentage of principal payments on the Mortgage Loans or
Contracts in the related Trust Fund attributable to Mortgage Loans or
Contracts which became Special Hazard Mortgage Loans or Special Hazard
Contracts in the month preceding the month of such Distribution Date will be
calculated not on the basis of the Scheduled Principal Balances of such
Special Hazard Mortgage Loans or Special Hazard Contracts but rather will be
computed as an amount equal to the lesser of (a) such Class's percentage,
calculated as provided in the related Prospectus Supplement, of the Scheduled
Principal Balance of such Special Hazard Mortgage Loans or Special Hazard
Contracts and (b) the sum of (i) the excess of the Special Hazard Loss Amount
over the cumulative net losses on all Mortgage Loans or Contracts that became
Special Hazard Mortgage Loans or Special Hazard Contracts in months prior to
the month of such Distribution Date and (ii) the excess of (a) the product of
the percentage of principal payments to which such Class is entitled
multiplied by the aggregate Net Liquidation Proceeds and Net Insurance
Proceeds (net of the portion of each thereof allocable to interest) of the
Mortgage Loans or Contracts which became Special Hazard Mortgage Loans or
Special Hazard Contracts in the month preceding the month of such
Distribution Date over (b) the total amount of delinquent installments in
respect of such Special Hazard Mortgage Loans or Special Hazard Contracts
that were previously the subject of distributions to such Class paid out of
amounts otherwise distributable to the holders of the related Subordinated
Certificates.
Although the subordination feature described above is intended to enhance
the likelihood of timely payment of principal and interest to the holders of
Senior Certificates, shortfalls could result in certain circumstances. For
example, a shortfall in the payment of principal otherwise due the holders of
Senior Certificates could occur if losses realized on the Mortgage Loans or
Contracts in a Trust Fund were exceptionally high and were concentrated in a
particular month. See "Description of the Certificates -- Distributions to
Standard Certificateholders -- Shifting Interest Certificates" for a
description of the consequences of any shortfall of principal or interest.
The holders of Subordinated Certificates will not be required to refund
any amounts previously properly distributed to them, regardless of whether
there are sufficient funds on a subsequent Distribution Date to make a full
distribution to holders of each Class of Senior Certificates of the same
Series.
OTHER CREDIT ENHANCEMENT
In addition to subordination as discussed above, credit enhancement may be
provided with respect to any Series of Certificates in any other manner which
may be described in the applicable Prospectus Supplement, including, but not
limited to, credit enhancement through an alterative form of subordination
and/or one or more of the methods described below.
LIMITED GUARANTEE
If so specified in the Prospectus Supplement with respect to a Series of
Certificates, credit enhancement may be provided in the form of a limited
guarantee issued by a guarantor named therein.
LETTER OF CREDIT
Alternative credit support with respect to a Series of Certificates may be
provided by the issuance of a letter of credit by the bank or financial
institution specified in the applicable Prospectus Supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of
credit issued with respect to a Series of Certificates will be set forth in
the Prospectus Supplement relating to such Series.
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POOL INSURANCE POLICIES
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Depositor will obtain a pool insurance policy for the
Mortgage Loans or Contracts in the related Trust Fund. The pool insurance
policy will cover any loss (subject to the limitations described in a related
Prospectus Supplement) by reason of default to the extent a related Mortgage
Loan or Contract is not covered by any primary mortgage insurance policy. The
amount and terms of any such coverage will be set forth in the Prospectus
Supplement.
SPECIAL HAZARD INSURANCE POLICIES OR OTHER FORMS OF SUPPORT FOR SPECIAL
HAZARD LOSSES
If so specified in the applicable Prospectus Supplement, for each Series
of Certificates as to which a pool insurance policy is provided, the
Depositor will also obtain a special hazard insurance policy for the related
Trust Fund in the amount set forth in such Prospectus Supplement. The special
hazard insurance policy will, subject to the limitations described in the
applicable Prospectus Supplement, protect against loss by reason of damage to
Mortgaged Properties or Manufactured Homes caused by certain hazards not
insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties or Manufactured Homes are
located. The amount and terms of any such coverage will be set forth in the
Prospectus Supplement.
SURETY BONDS
If so specified in the Prospectus Supplement relating to a Series of
Certificates, credit support with respect to one or more Classes of
Certificates of a Series may be provided by the issuance of a surety bond
issued by a financial guarantee insurance company specified in the applicable
Prospectus Supplement. The coverage, amount and frequency of any reduction in
coverage provided by a surety bond will be set forth in the Prospectus
Supplement relating to such Series.
FRAUD COVERAGE
If so specified in the applicable Prospectus Supplement, losses resulting
fraud, dishonesty or misrepresentation in connection with the origination or
sale of the Mortgage Loans or Contracts may be covered to a limited extent by
representations and warranties to the effect that no such fraud, dishonesty
or misrepresentation had occurred, by a reserve fund, letter of credit, or
other method. The amount and terms of any such coverage will be set forth in
the Prospectus Supplement.
MORTGAGOR BANKRUPTCY BOND
If so specified in the applicable Prospectus Supplement, losses resulting
from a bankruptcy proceeding relating to a mortgagor or obligor affecting the
Mortgage Loans or Contracts in a Trust Fund with respect to a Series of
Certificates will be covered under a mortgagor bankruptcy bond (or any other
instrument that will not result in a downgrading of the rating of the
Certificates of a Series by the Rating Agency that rated such Series). Any
mortgagor bankruptcy bond or such other instrument will provide for coverage
in an amount meeting the criteria of the Rating Agency rating the
Certificates of the related Series, which amount will be set forth in the
related Prospectus Supplement. The amount and terms of any such coverage will
be set forth in the Prospectus Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust Fund may
include in lieu of some or all of the foregoing or in addition thereto third
party guarantees, and other arrangements for maintaining timely payments or
providing additional protection against losses on the assets included in such
Trust Fund, paying administrative expenses, or accomplishing such other
purpose as may be described in the Prospectus Supplement. The Trust Fund may
include a guaranteed investment contract or reinvestment agreement pursuant
to which funds held in one or more accounts will be invested at a specified
rate. If
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any Class of Certificates has a floating interest rate, or if any of the
Mortgage Loans or Contracts in the related Trust Fund has a floating interest
rate, the Trust Fund may include an interest rate swap contract, an interest
rate cap agreement or similar contract providing limited protection against
interest rate risks.
PREPAYMENT AND YIELD CONSIDERATIONS
PASS-THROUGH RATES AND INTEREST RATES
Any Class of Certificates of a Series may have a fixed Pass-Through Rate
or Interest Rate, or a Pass-Through Rate or Interest Rate which varies based
on changes in an index or based on changes with respect to the underlying
Mortgage Loans or Contracts (such as, for example, varying on the basis of
changes in the weighted average Net Mortgage Rate or Net Contract Rate of the
underlying Mortgage Loans or Contracts) or may receive interest payments with
respect to the underlying Mortgage Loans or Contracts in such other manner
specified in the applicable Prospectus Supplement.
The Prospectus Supplement for each Series will specify the range and the
weighted average of the Mortgage Rates or Contract Rates and Net Mortgage
Rates or Net Contract Rates for the Mortgage Loans or Contracts underlying
such Series as of the Cut-Off Date. Unless otherwise specified in the related
Prospectus Supplement, each monthly interest payment on a Mortgage Loan or
Contract will generally be calculated as the product of one-twelfth of the
applicable Mortgage Rate or Contract Rate at the time of such calculation and
the then unpaid principal balance on such Mortgage Loan or Contract. The Net
Mortgage Rate or Net Contract Rate with respect to each Mortgage Loan or
Contract will be similarly calculated on a loan-by-loan basis, by subtracting
from the applicable Mortgage Rate or Contract Rate, the Fixed Retained Yield,
if any, payable to the Depositor or other person or entity specified in the
Prospectus Supplement and any Servicing Fee applicable to each Mortgage Loan
or Contract. If the Trust Fund includes adjustable-rate Mortgage Loans or
Contracts or includes Mortgage Loans or Contracts with different Net Mortgage
Rates or Net Contract Rates, the weighted average Net Mortgage Rate or Net
Contract Rate may vary from time to time as set forth below. See "The Trust
Funds." The Prospectus Supplement for a Series will also specify the initial
Pass-Through Rate or Interest Rate for each Class of Certificates of such
Series having a Pass-Through Rate or Interest Rate and will specify whether
each such Pass-Through Rate or Interest Rate is fixed or is variable.
The Net Mortgage Rate or Net Contract Rate for any adjustable rate
Mortgage Loan or Contract will change with any changes in the index specified
in the related Prospectus Supplement on which such Mortgage Rate or Contract
Rate adjustments are based, subject to any applicable periodic or aggregate
caps or floors on the related Mortgage Rate or Contract Rate or other
limitations described in the related Prospectus Supplement. The weighted
average Net Mortgage Rate or Net Contract Rate with respect to any Series may
vary due to changes in the Net Mortgage Rates or Net Contract Rates of
adjustable rate Mortgage Loans or Contracts, to the timing of the Mortgage
Rate or Contract Rate readjustments of such Mortgage Loans or Contracts and
to different rates of payment of principal of fixed or adjustable rate
Mortgage Loans or Contracts bearing different Mortgage Rates or Contract
Rates.
If the Trust Fund for a Series includes adjustable rate Mortgage Loans or
Contracts, any limitations on the periodic changes in a mortgagor's or
obligor's monthly payment, any limitations on the adjustments to the Net
Mortgage Rates or Mortgage Rates or to the Net Contract Rates or Contract
Rates, any provision that could result in Deferred Interest and the effects,
if any, thereof on the yield on Certificates of the related Series will be
discussed in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, no
distribution of principal and only a partial distribution of interest will be
made to Certificateholders with respect to a negatively amortizing Mortgage
Loan or Contract. Distribution of the portion of scheduled interest at the
applicable Net Mortgage Rate or Net Contract Rate representing Deferred
Interest with respect to such Mortgage Loan or Contract will be passed
through to the Certificateholders on the Distribution Date following the Due
Date on which it is received. Such Deferred Interest will bear interest at
the Net Mortgage Rate or Net Contract Rate for such Mortgage Loan or
Contract. For federal income tax purposes, Deferred Interest may constitute
interest income to the Trust Fund and to Certificateholders at the time that
it
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accrues, rather than at the time that it is paid. See "Certain Federal Income
Tax Consequences -- Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made -- Deferred Interest," "-- Federal Income Tax
Consequences for REMIC Certificates -- Taxation of Regular Certificates --
Deferred Interest" and "-- Taxation of Residual Certificates -- Deferred
Interest."
SCHEDULED DELAYS IN DISTRIBUTIONS
At the date of initial issuance of the Certificates of each Series offered
hereby, the initial purchasers of a Class of Certificates (other than certain
Classes of Residual Certificates) will be required to pay accrued interest at
the applicable Pass-Through Rate or Interest Rate for such Class from the
Cut-Off Date for such Series to, but not including the date of issuance. With
respect to Standard Certificates, the effective yield to Certificateholders
will be below the yield otherwise produced by the applicable Pass-Through
Rate because while interest will accrue at such Pass-Through Rate from the
first day of each month through the last day of such month (unless otherwise
specified in the related Prospectus Supplement), principal and interest
distributions with respect to such month will not be made until the 25th day
(or if such 25th day is not a business day, the business day immediately
following such 25th day) of the month following the month of accrual (or
until such other Distribution Date specified in the applicable Prospectus
Supplement). If so specified in the related Prospectus Supplement, a Class of
Multi-Class Certificates may be entitled to distributions on each
Distribution Date of interest accrued during a period (an "Interest Accrual
Period" specified in such Prospectus Supplement ending on such Distribution
Date or ending on a date preceding such Distribution Date. In the latter case
the effective yield to such Certificateholders will be below the yield
otherwise produced by the applicable initial public offering prices and
Interest Rates because (i) on the first Distribution Date the time period
upon which interest payable is calculated will be less than the time elapsed
since the commencement of accrual of interest, (ii) the interest that accrues
during the Interest Accrual Period will not be paid until a date following
such Interest Accrual Period specified in the related Prospectus Supplement,
and (iii) during each Interest Accrual Period following the first Interest
Accrual Period, in the case of a Class of Multi-Class Certificates currently
receiving distributions in reduction of Stated Amount, interest is based upon
a Stated Amount which is less than the Stated Amount of such Certificates
actually outstanding, since the distribution in reduction of Stated Amount
made on the following Distribution Date is deemed to have been made, for
interest accrual purposes only, at the end of the preceding Interest Accrual
Period. The Prospectus Supplement for each Series of Certificates will set
forth the nature of any scheduled delays in distribution and the impact on
the yield of such Certificates.
INTEREST SHORTFALLS DUE TO PRINCIPAL PREPAYMENTS
When a Mortgage Loan or Contract is prepaid in full, the mortgagor or
obligor pays interest on the amount prepaid only to the date of prepayment
and not thereafter. Similarly, Liquidation Proceeds and Insurance Proceeds
are also likely to include interest only to the time of payment. When a
Mortgage Loan or Contract is prepaid in part, and such prepayment is applied
as of a date other than the Due Date occurring in the month of receipt or the
Due Date occurring in the month following the month of receipt, the mortgagor
or obligor pays interest on the amount prepaid only to the date of prepayment
and not thereafter. The effect of the foregoing is to reduce the aggregate
amount of interest which would otherwise be passed through to
Certificateholders if such Mortgage Loan or Contract were outstanding, or if
such partial prepayment were applied, on the succeeding Due Date. To mitigate
this reduction in yield, the Pooling and Servicing Agreement relating to a
Series will provide, unless otherwise specified in the applicable Prospectus
Supplement, that with respect to any principal prepayment or liquidation of
any Mortgage Loan or Contract underlying the Certificates of such Series, the
Servicer will pay into the Certificate Account for such Series to the extent
funds are available for such purpose from the related aggregate Servicing
Fees (or portion thereof as specified in the related Prospectus Supplement)
which the Servicer is entitled to receive relating to mortgagor or obligor
payments or other recoveries distributed on the related Distribution Date,
such amount, if any, as may be necessary to assure that the amount paid into
the Certificate Account with respect to such Mortgage Loan or Contract
includes an amount equal to interest at the Net Mortgage Rate or Net Contract
Rate for such Mortgage Loan or Contract for the period from the date of such
prepayment or liquidation to but not including the next Due Date. See
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"Servicing of the Mortgage Loans and Contracts -- Adjustment to Servicing
Compensation in Connection with Prepaid and Liquidated Mortgage Loans and
Contracts."
WEIGHTED AVERAGE LIFE OF CERTIFICATES
Weighted average life of a Certificate refers to the average amount of
time that will elapse from the date of issuance of the Certificate until each
dollar in reduction of the principal amount or Stated Amount of such
Certificate is distributed to the investor. The weighted average life and the
yield to maturity of any Class of the Certificates of a Series will be
influenced by, among other things, the rate at which principal on the
Mortgage Loans or Contracts included in the Mortgage Pool or Contract Pool
for such Certificate is paid, which is determined by scheduled amortization
and prepayments (for this purpose, the term "prepayments" includes
prepayments and liquidations due to default, casualty, condemnation and the
like).
The Mortgage Loans or Contracts may be prepaid in full or in part at any
time. Unless otherwise specified in the applicable Prospectus Supplement or
as described in the following paragraph, no Mortgage Loan or Contract will
provide for a prepayment penalty and all fixed rate Mortgage Loans or
Contracts will contain due-on-sale clauses permitting the holder to
accelerate the maturity of the Mortgage Loan or Contract upon conveyance of
the Mortgaged Property or Manufactured Home.
Some of the Mortgage Loans may call for Balloon Payments. Balloon Payments
involve a greater degree of risk than fully amortizing loans because the
ability of the borrower to make a Balloon Payment typically will depend upon
its ability either to refinance the loan or to sell the related Mortgaged
Property. The ability of a borrower to accomplish either of these goals will
be affected by a number of factors, including the level of available mortgage
rates at the time of the attempted sale or refinancing, the borrower's equity
in the related Mortgaged Property, the financial condition of the borrower
and operating history of the related Mortgaged Property, tax laws, prevailing
economic conditions and the availability of credit for commercial real estate
projects generally.
Some of the Mortgage Loans included in the Trust Fund may, in the event
one or more are required to be repurchased or otherwise removed from the
Trust Fund, require the payment of a release premium.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The Prospectus Supplement for each Series which
includes more than one Class or Subclass of Multi-Class Certificates will
describe one or more such prepayment standards or models and will contain
tables setting forth the weighted average life of each such Class or Subclass
and the percentage of the original aggregate Stated Amount of each such Class
or Subclass 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 Mortgage Loans or Contracts are
made at rates corresponding to various percentages of the prepayment standard
or model specified in the related Prospectus Supplement.
There is, however, no assurance that prepayment of the Mortgage Loans or
Contracts underlying a Series of Certificates will conform to any level of
the prepayment standard or model specified in the related Prospectus
Supplement. A number of economic, geographic, social and other factors may
affect prepayment experience. These factors may include homeowner mobility,
economic conditions, changes in mortgagor's or obligor's housing needs, job
transfers, unemployment, mortgagor's or obligor's net equity in the
properties securing the mortgages or contracts, servicing decisions,
enforceability of due-on-sale clauses , market interest rates, the magnitude
of related taxes, and the availability of funds for refinancing. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Rates or Contract Rates on the Mortgage Loans or Contracts underlying a
Series of Certificates, the prepayment rates of such Mortgage Loans or
Contracts are likely to be higher than if prevailing rates remain at or above
the rates borne by such Mortgage Loans or Contracts. It should be noted that
Certificates of a Series may evidence an interest in a Trust Fund with
different Mortgage Rates or Contract Rates. Accordingly, the prepayment
experience of such Certificates will to some extent be a function of the mix
of Mortgage Rates or Contract Rates of the Mortgage Loans or Contracts. In
addition, the terms of the Pooling and Servicing Agreement will require the
Servicer to enforce any due-on-sale clause to the extent specified therein.
See "Servicing of the Mortgage Loans and Contracts -- Enforcement of
Due-on-Sale Clauses; Realization
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Upon Defaulted Mortgage Loans and Contracts" and "Certain Legal Aspects of
the Mortgage Loans and Contracts -- Due-On-Sale Clauses" for a description of
certain provisions of each Pooling and Servicing Agreement and certain legal
developments that may affect the prepayment experience on the Mortgage Loans
or Contracts.
A lower rate of principal prepayments than anticipated would negatively
affect the total return to investors in any Certificates of a Series that are
offered at a discount to their principal amount or, if applicable, their
parity price, and a higher rate of principal prepayments than anticipated
would negatively affect the total return to investors in the Certificates of
a Series that are offered at a premium to their principal amount or, if
applicable, their parity price. Parity price is the price at which a
Certificate will yield its coupon, after giving effect to any payment delay.
In addition, the yield to investors in a Class of Certificates which bears
interest at a variable Interest Rate or at a variable Pass-Through Rate, will
also be affected by changes in the index on which any such variable Interest
Rate, or variable Pass-Through Rate is based. Changes in the index may not
correlate with changes in prevailing mortgage interest rates or financing
rates for manufactured housing, and the effect, if any, thereof on the yield
of the Certificates will be discussed in the related Prospectus Supplement.
The yield on certain types of Certificates may be particularly sensitive to
prepayment rates, and further information with respect to yield on such
Certificates will be included in the applicable Prospectus Supplement.
At the request of the mortgagor or obligor, the Servicer may refinance the
Mortgage Loans or Contracts in any Trust Fund by accepting prepayments
thereon and making new loans secured by a Mortgage on the same property or a
security interest in the same Manufactured Home. Upon such refinancing, the
new loans will not be included in the Trust Fund. A mortgagor or obligor may
be legally entitled to require the Servicer to allow such a refinancing. Any
such refinancing will have the same effect as a prepayment in full of the
related Mortgage Loan or Contract.
The Depositor may be obligated and the applicable Unaffiliated Seller will
be obligated, under certain circumstances, to repurchase certain of the
Mortgage Loans or Contracts. In addition, the terms of certain insurance
policies relating to the Mortgage Loans or Contracts may permit the
applicable insurer to purchase delinquent Mortgage Loans or Contracts. The
proceeds of any such repurchase will be deposited in the related Certificate
Account and such repurchase will have the same effect as a prepayment in full
of the related Mortgage Loan or Contract. See "The Trust Funds -- Assignment
of the Mortgage Loans and Contracts." In addition, if so specified in the
applicable Prospectus Supplement, the Servicer will have the option to
purchase all, but not less than all, of the Mortgage Loans or Contracts in
any Trust Fund under the limited conditions specified in such Prospectus
Supplement. For any Series of Certificates for which an election has been
made to treat the Trust Fund (or one or more segregated pools of assets
therein) as a REMIC, any such purchase may be effected only pursuant to a
"qualified liquidation," as defined in Code Section 86OF(a)(4)(A). See "The
Pooling and Servicing Agreement -- Termination; Purchase or other Disposition
of Mortgage Loans and Contracts."
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USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement,
substantially all of the net proceeds from the sale of each Series of
Certificates will be used by the Depositor for the purchase of the Mortgage
Loans or Contracts represented by the Certificates of such Series or to
reimburse amounts previously used to effect such a purchase, the costs of
carrying the related Mortgage Loans or Contracts until the sale of the
Certificates and other expenses connected with pooling the related Mortgage
Loans or Contracts and issuing the Certificates.
THE DEPOSITOR
Prudential Securities Secured Financing Corporation, formerly known as P-B
Secured Financing Corporation (the "Depositor"), was incorporated in the
State of Delaware on August 26, 1988 as a wholly-owned, limited purpose
finance subsidiary of Prudential Securities Group Inc. (a wholly-owned
indirect subsidiary of The Prudential Insurance Company of America). The
Depositor's principal executive offices are located at 199 Water Street, New
York, New York 10292. Its telephone number is (212) 214-7435.
As described herein under "The Trust Funds -- Assignment of the Mortgage
Loans and Contracts" and "-- Representations and Warranties", the only
obligations, if any, of the Depositor with respect to a Series of
Certificates may be pursuant to certain limited representations and
warranties and limited undertakings to repurchase or substitute Mortgage
Loans or Contracts under certain circumstances. Unless otherwise specified in
the applicable Prospectus Supplement, the Depositor will have no servicing
obligations or responsibilities with respect to any Mortgage Pool, Contract
Pool or Trust Fund. The Depositor does not have, nor is it expected in the
future to have, any significant assets.
As specified in the related Prospectus Supplement the Servicer with
respect to any Series of Certificates relating to Mortgage Loans or Contracts
may be an affiliate of the Depositor. As described under "The Trust Funds,"
the Depositor anticipates that it may acquire Mortgage Loans and Contracts
through or from an affiliate.
Neither the Depositor nor Prudential Securities Group Inc. nor any of its
affiliates, including The Prudential Insurance Company of America, will
insure or guarantee the Certificates of any Series.
UNDERWRITING GUIDELINES
MORTGAGE LOANS SECURED BY RESIDENTIAL PROPERTIES
The Depositor expects that all Mortgage Loans included in a Mortgage Pool
will have been originated in accordance with the underwriting procedures
described herein, subject to such variations as are specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, all or a representative sample of the Mortgage Loans comprising
the Mortgage Pool for a Series will be reviewed by or on behalf of the
Depositor to determine compliance with such underwriting procedures and
standards and compliance with other requirements for inclusion in the related
Mortgage Pool.
Except as otherwise set forth in the related Prospectus Supplement, it is
expected that each originator of Mortgage Loans will have applied, in a
standard procedure which complies with applicable federal and state law and
regulations, underwriting procedures that are intended to evaluate the
mortgagor's credit standing and repayment ability, and the value and adequacy
of the Mortgaged Property as collateral. A prospective mortgagor will have
been required to fill out an application designed to provide to the original
lender pertinent credit information. As part of the description of the
mortgagor's financial condition, the mortgagor will have been required to
provide a current balance sheet describing assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the mortgagor's credit history with local
merchants and lenders and any record of bankruptcy. In addition, an
employment verification will have been obtained in the case of individual
borrowers which reports the mortgagor's current salary, length of such
employment and whether it was expected that the mortgagor will continue such
employment in the future. If a prospective borrower was self-employed, the
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mortgagor will have been required to submit copies of signed tax returns. The
mortgagor may also have been required to authorize verification of deposits
at financial institutions where the mortgagor has demand or savings accounts.
In determining the adequacy of the Mortgaged Property as collateral,
except in the instance of certain small second loan applications, an
appraisal will have been made of each Mortgaged Property considered for
financing. Each appraiser will have been selected in accordance with
predetermined guidelines established by or acceptable to the Unaffiliated
Seller for appraisers. The appraiser will have been required to inspect the
Mortgaged Property and verify that it was in good condition and that
construction, if new, has been completed. The appraisal is based on the
market value of the comparable properties, the estimated rental income (if
considered applicable by the appraiser) and the cost of replacing the
Mortgaged Property.
In determining the adequacy of the Mortgaged Property as collateral, the
originator shall, in the case of second or more junior loans, look at the
combined Loan-to-Value Ratio in determining whether the Mortgage Loan exceeds
lending guidelines. Furthermore, when considering such second or more junior
loans, confirm that payment has been timely made on the senior liens.
Once all applicable employment, credit and property information was
received, a determination would have been made as to whether the prospective
mortgagor had sufficient monthly income available (i) to meet its monthly
obligations on the Mortgage Loan (determined on the basis of the monthly
payments due in the year of origination and taking into consideration,
payments due on any senior liens) and other expenses related to the Mortgaged
Property (such as property taxes and hazard insurance) and (ii) in the case
of individual mortgagors, to meet monthly housing expenses and other
financial obligations and monthly living expenses. When two individuals
cosign loan documents, the income and expenses of both individuals may be
included in the computation. Underwriting guidelines generally similar to
traditional underwriting guidelines used by FNMA and FHLMC which were in
effect at the time of origination of each Mortgage Loan will generally have
been used, except that the ratios at origination of the amounts described in
clauses (i) and (ii) above to the applicant's stable monthly gross income may
exceed in certain cases the then applicable FNMA and FHLMC guidelines. With
respect to a vacation or second home, no income derived from the property
will have been considered for underwriting purposes.
Other credit considerations may cause departure from the traditional
guidelines. If the Loan-to- Value Ratio and/or term of the Mortgage Loan is
less than a percentage specified in the related Prospectus Supplement,
certain aspects of review relating to monthly income assets may be foregone
and standard ratios of monthly or total expenses to gross income may not be
applied. The Depositor may permit an Unaffiliated Seller's underwriting
standards to otherwise vary in certain cases to the extent specified in the
related Prospectus Supplement.
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the mortgagor but rather must look solely to the property
for repayment in the event of foreclosure. The Depositor will require that
the Unaffiliated Sellers represent and warrant that underwriting standards
applied to each Mortgage Loan purchased by the Depositor from such
Unaffiliated Seller (including Mortgage Loans secured by Mortgaged Properties
located in anti-deficiency states) require that the value of the property
being financed, as indicated by the appraisal, currently supports and is
anticipated to support in the future the outstanding principal balance of
such Mortgage Loan.
Certain of the types of loans which may be included in the Mortgage Pools
are recently developed and may involve additional uncertainties not present
in traditional types of loans. For example, certain of such Mortgage Loans
may provide for escalating or variable payments by the mortgagor. These types
of Mortgage Loans are underwritten on the basis of a judgment that mortgagors
will have the ability to make larger monthly payments in subsequent years. In
some instances, however, a mortgagor's income may not be sufficient to make
loan payments as such payments increase.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the real estate market should
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experience an overall decline in property values such that the outstanding
principal balances of the Mortgage Loans, and any secondary financing on the
Mortgaged Properties, in a particular Mortgage Pool become equal to or
greater than the value of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, adverse
economic conditions (which may or may not affect real property values) may
affect the timely payment by mortgagors of scheduled payments of principal
and interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to any Mortgage Pool. To
the extent that such losses are not covered by subordination provisions,
insurance policies or other credit support, such losses will be borne, at
least in part, by the holders of the Certificates of the related series.
CONTRACTS
The underwriting guidelines utilized in connection with the origination of
the Contracts underlying a Series of Certificates will be described in the
related Prospectus Supplement.
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS
The following summaries describe certain provisions of the Pooling and
Servicing Agreements which relate to Trust Funds comprised of Mortgage Loans
or Contracts. The summaries do not purport to be complete and are subject to
and are qualified in their entirety by reference to, all the provisions of
the Pooling and Servicing Agreement for each Series and the related
Prospectus Supplement, which may further modify the provisions summarized
below. The provisions of each Pooling and Servicing Agreement will vary
depending upon the nature of the Certificates to be issued thereunder and the
nature of the related Trust Fund. Each Pooling and Servicing Agreement
executed and delivered with respect to each Series will be filed with the
Commission as an exhibit to a Current Report on Form 8-K promptly after
issuance of the Certificates of such Series.
THE SERVICER
The Servicer under each Pooling and Servicing Agreement will be named in
the related Prospectus Supplement. The entity serving as Servicer may be an
affiliate of the Depositor and may have other normal business relationships
with the Depositor or the Depositor's affiliates. The Servicer with respect
to each Series will service the Mortgage Loans or Contracts contained in the
Trust Fund for such Series. For Trust Funds comprised of Mortgage Loans, the
Servicer will be a seller/servicer approved by FNMA or FHLMC. Any Servicer
may delegate its servicing responsibilities to one or more sub-servicers
(each a "Sub-Servicer"), but will not be relieved of its liabilities with
respect thereto.
The Servicer will make certain representations and warranties regarding
its authority to enter into, and its ability to perform its obligations
under, the related Pooling and Servicing Agreement. An uncured breach of such
a representation or warranty that in any respect materially and adversely
affects the interests of the Certificateholders will constitute an Event of
Default by the Servicer under the related Pooling and Servicing Agreement.
See "The Pooling and Servicing Agreement -- Events of Default -- Mortgage
Loans or Contracts" and "-- Rights Upon Event of Default -- Mortgage Loans or
Contracts."
PAYMENTS ON MORTGAGE LOANS AND CONTRACTS
The Servicer or the Trustee will, as to each Series of Certificates,
establish and maintain, or cause to be established and maintained, a separate
trust account or accounts in the name of the Trustee (collectively, the
"Certificate Account"), which must be maintained with a depository
institution (the "Certificate Account Depository") acceptable to the Rating
Agency rating the Certificates of such Series. Such account or accounts will
be maintained with a Certificate Account Depository (i) whose long-term debt
obligations at the time of any deposit therein are rated not lower than the
rating on the related Series of Certificates at the time of the initial
issuance thereof, (ii) the deposits in which are insured by the Federal
Deposit Insurance Corporation (the "FDIC") through either the Bank Insurance
Fund or the Savings Association Insurance Fund (to the limit established by
the FDIC) and the uninsured deposits in
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which accounts are otherwise secured such that, as evidenced by an opinion of
counsel, the Trustee for the benefit of the Certificateholders of the related
Series has a claim with respect to funds in the Certificate Account for such
Series, or a perfected security interest in any collateral (which shall be
limited to Eligible Investments) securing such funds, that is superior to the
claims of any other depositor or general creditor of the Certificate Account
Depository with which the Certificate Account is maintained or (iii) which is
otherwise acceptable to the Rating Agency or Agencies.
A Certificate Account may be maintained as an interest bearing or a
non-interest bearing account, or the funds held therein may be invested
pending each succeeding Distribution Date in certain Eligible Investments.
Any such Eligible Investments shall mature not later than the business day
preceding the next Distribution Date and no such investment shall be sold or
disposed of prior to the maturity date of such Eligible Investment; however,
in the event that an election has been made to treat the Trust Fund (or a
segregated pool of assets therein) with respect to a Series as a REMIC, no
such Eligible Investments will be sold or disposed of at a gain prior to
maturity unless the Servicer has received an opinion of counsel or other
evidence satisfactory to it that such sale or disposition will not cause the
Trust Fund (or segregated pool of assets) to be subject to the tax on
"prohibited transactions" imposed by Code Section 860F(a)(1), otherwise
subject the Trust Fund (or segregated pool of assets) to tax, or cause the
Trust Fund (or segregated pool of assets) to fail to qualify as a REMIC.
Unless otherwise provided in the related Prospectus Supplement, any interest
or other income earned on funds in the Certificate Account will be paid to
the Servicer or its designee as additional servicing compensation. All losses
from any such investment will be deposited by the Servicer into the
Certificate Account immediately as realized. If permitted by the Rating
Agency or Agencies and so specified in the related Prospectus Supplement, a
Certificate Account may contain funds relating to more than one Series of
Certificates.
Each Sub-Servicer servicing a Mortgage Loan or Contract will be required
by the Servicer to establish and maintain one or more separate accounts which
may be interest bearing and which comply with the standards with respect to
Certificate Accounts set forth above (collectively, the "Sub-Servicing
Account"). Each Sub-Servicer will be required to credit to the related
Sub-Servicing Account on a daily basis the amount of all proceeds of Mortgage
Loans or Contracts received by the Sub-Servicer, less its servicing
compensation. The Sub-Servicer shall remit to the Servicer by wire transfer
of immediately available funds all funds held in the Sub-Servicing Account
with respect to each Mortgage Loan or Contract on a monthly remittance date
which shall occur on or before two business days preceding the Determination
Date occurring in such month.
The Servicer will deposit in the Certificate Account for each Series of
Certificates any amounts representing scheduled payments of principal and
interest on the Mortgage Loans or Contracts due after the applicable Cut-Off
Date but received prior thereto, and, on a dally basis, the following
payments and collections received or made by it with respect to the Mortgage
Loans or Contracts subsequent to the applicable Cut-Off Date (other than
payments due on or before the Cut-Off Date):
(i) all payments on account of principal, including prepayments, and
interest, net of any portion thereof retained by a Sub-Servicer as its
servicing compensation and net of any Fixed Retained Yield;
(ii) all amounts received by the Servicer in connection with the
liquidation of defaulted Mortgage Loans or Contracts or property acquired
in respect thereof, whether through foreclosure sale or otherwise,
including payments in connection with defaulted Mortgage Loans or
Contracts received from the mortgagor or obligor other than amounts
required to be paid to the mortgagor or obligor pursuant to the terms of
the applicable Mortgage Loan or Contract or otherwise pursuant to law
("Liquidation Proceeds"), and further reduced by expenses incurred in
connection with such liquidation, other reimbursed servicing costs
associated with such liquidation, certain amounts applied to the
restoration, preservation or repair of the Mortgaged Property or
Manufactured Home, any unreimbursed Advances with respect to such Mortgage
Loan or Contract and, in the discretion of the Servicer, but only to the
extent of the amount permitted to be withdrawn from the Certificate
Account, any unpaid Servicing Fees, in respect of the related Mortgage
Loans or Contracts or the related Mortgaged Properties or Manufactured
Homes ("Net Liquidation Proceeds");
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(iii) all proceeds received by the Servicer under any title, hazard or
other insurance policy covering any such Mortgage Loan or Contract
("Insurance Proceeds"), other than proceeds to be applied to the
restoration or repair of the related Mortgaged Property or Manufactured
Home or released to the mortgagor or obligor in accordance with the
applicable Pooling and Servicing Agreement, and further reduced by
expenses incurred in connection with collecting on related insurance
policies, any unreimbursed Advances with respect to such Mortgage Loan or
Contract and in the discretion of the Servicer, but only to the extent of
the amount permitted to be withdrawn from the Certificate Account, any
unpaid Servicing Fees, in respect of such Mortgage Loan or Contract ("Net
Insurance Proceeds");
(iv) all amounts required to be deposited therein from any related
reserve fund, and amounts available under any other form of credit
enhancement applicable to such Series;
(v) all Advances made by the Servicer;
(vi) all amounts withdrawn from Buy-Down Funds or other funds
described in the related Prospectus Supplement, if any, with respect to
the Mortgage Loans or Contracts, in accordance with the terms of the
respective agreements applicable thereto;
(vii) all Repurchase Proceeds; and
(viii) all other amounts required to be deposited therein pursuant to
the applicable Pooling and Servicing Agreement.
Notwithstanding the foregoing, the Servicer will be entitled, at its
election, either (a) to withhold and pay itself the applicable Servicing Fee
and/or to withhold and pay to the owner thereof any Fixed Retained Yield from
any payment or other recovery on account of interest as received and prior to
deposit in the Certificate Account or (b) to withdraw the applicable
Servicing Fee and/or any Fixed Retained Yield from the Certificate Account
after the entire payment or recovery has been deposited therein; however,
with respect to each Trust Fund (or a segregated pool of assets therein) as
to which a REMIC election has been made, the Servicer will, in each instance,
withhold and pay to the owner thereof the Fixed Retained Yield prior to
deposit of the related payment or recovery in the Certificate Account.
Advances, amounts withdrawn from any reserve fund, and amounts available
under any other form of credit enhancement will be deposited in the
Certificate Account not later than the business day preceding the
Distribution Date on which such amounts are required to be distributed. All
other amounts will be deposited in the Certificate Account not later than the
business day next following the day of receipt and posting by the Servicer.
If the Servicer deposits in the Certificate Account for a Series any
amount not required to be deposited therein, it may at any time withdraw such
amount from such Certificate Account.
The Servicer is permitted, from time to time, to make withdrawals from the
Certificate Account for the following purposes, to the extent permitted in
the applicable Pooling and Servicing Agreement:
(i) to reimburse itself for Advances;
(ii) to reimburse itself from Liquidation Proceeds for expenses
incurred by the Servicer in connection with the liquidation of any
defaulted Mortgage Loan or Contract or property acquired in respect
thereof and for amounts expended in good faith in connection with the
restoration of damaged property, to reimburse itself from Insurance
Proceeds for expenses incurred by the Servicer in connection with the
restoration, preservation or repair of the related Mortgage Properties or
Manufactured Homes and expenses incurred in connection with collecting on
the related insurance policies and, to the extent that Liquidation
Proceeds or Insurance Proceeds after such reimbursement are in excess of
the unpaid principal balance of the related Mortgage Loans or Contracts
together with accrued and unpaid interest thereon at the applicable Net
Mortgage Rate or Net Contract Rate through the last day of the month in
which such Liquidation Proceeds or Insurance Proceeds were received, to
pay to itself out of such excess the amount of any unpaid Servicing Fees
and any assumption fees, late payment charges or other mortgagor or
obligor charges on the related Mortgage Loans or Contracts;
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(iii) to pay to itself the applicable Servicing Fee and/or pay the
owner thereof any Fixed Retained Yield, in the event the Servicer is not
required, and has elected not, to withhold such amounts out of any payment
or other recovery with respect to a particular Mortgage Loan or Contract
prior to the deposit of such payment or recovery in the Certificate
Account;
(iv) to reimburse itself and the Depositor for certain expenses
(including taxes paid on behalf of the Trust Fund) incurred by and
recoverable by or reimbursable to it or the Depositor, as the case may be;
(v) to pay to the Depositor or the Unaffiliated Seller with respect to
each Mortgage Loan or Contract or property acquired in respect thereof
that has been repurchased by the Depositor or the Unaffiliated Seller, as
the case may be, all amounts received thereon and not distributed as of
the date as of which the purchase price of such Mortgage Loan or Contract
was determined;
(vi) to pay itself any interest earned on or investment income earned
with respect to funds in the Certificate Account (all such interest or
income to be withdrawn not later than the next Distribution Date);
(vii) to make withdrawals from the Certificate Account in order to
make distributions to Certificateholders; and
(viii) to clear and terminate the Certificate Account.
The Servicer will be authorized to appoint a paying agent (the "Paying
Agent") to make distributions, as agent for the Servicer, to
Certificateholders of a Series. If the Paying Agent for a Series is the
Trustee of such Series, such Paying Agent will be authorized to make
withdrawals from the Certificate Account in order to make distributions to
Certificateholders. If the Paying Agent for a Series is not the Trustee for
such Series, the Servicer will, prior to each Distribution Date, deposit in
immediately available funds in an account designated by the Paying Agent the
amount required to be distributed to the Certificateholders on such
Distribution Date.
The Servicer will cause any Paying Agent which is not the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
agrees with the Trustee that such Paying Agent will:
(1) hold all amounts deposited with it by the Servicer for
distribution to Certificateholders in trust for the benefit of
Certificateholders until such amounts are distributed to
Certificateholders or otherwise disposed of as provided in the applicable
Pooling and Servicing Agreement;
(2) give the Trustee notice of any default by the Servicer in the
making of such deposit; and
(3) at any time during the continuance of any such default, upon
written request of the Trustee, forthwith pay to the Trustee all amounts
held in trust by such Paying Agent.
ADVANCES AND LIMITATIONS THEREON
Unless otherwise provided in the applicable Prospectus Supplement, the
Servicer will advance on or before the business day preceding each
Distribution Date its own funds (an "Advance") or funds held in the
Certificate Account for future distribution or withdrawal and which are not
included in the Pool Distribution Amount for such Distribution Date, in an
amount equal to the aggregate of payments of principal and interest which
were due during the related Due Period, that were delinquent on the
Determination Date and were not advanced by any Sub-Servicer, to the extent
that the Servicer determines that such advances will be reimbursable from
late collections, Insurance Proceeds, Liquidation Proceeds or otherwise.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the Class or Classes of Certificates
entitled thereto, rather than to guarantee or insure against losses. Unless
otherwise provided in the applicable Prospectus Supplement, advances of the
Servicer's funds will be reimbursable only out of related recoveries on the
Mortgage Loans or Contracts respecting which such amounts were advanced, or
from any amounts in the Certificate Account to the extent that the Servicer
shall determine that any such advances previously made are not ultimately
recoverable from late
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collections, Insurance Proceeds, Liquidation Proceeds or otherwise. If
advances have been made by the Servicer from excess funds in the Certificate
Account, the Servicer will replace such funds in the Certificate Account on
any future Distribution Date to the extent that funds in the Certificate
Account on such Distribution Date are less than payments required to be made
to Certificateholders on such date.
ADJUSTMENT TO SERVICING COMPENSATION IN CONNECTION WITH PREPAID AND
LIQUIDATED
MORTGAGE LOANS AND CONTRACTS
When a mortgagor or obligor prepays a Mortgage Loan or Contract in full,
the mortgagor or obligor pays interest on the amount prepaid only to the date
on which such principal prepayment is made. Similarly, Liquidation Proceeds
from a Mortgaged Property or Manufactured Home will not include interest for
any period after the date on which the liquidation took place, and Insurance
Proceeds may include interest only to the date of settlement of the related
claims. Further, when a Mortgage Loan or Contract is prepaid in part, and
such prepayment is applied as of a date other than a Due Date, the mortgagor
or obligor pays interest on the amount prepaid only to the date of prepayment
and not thereafter. The effect of the foregoing is to reduce the aggregate
amount of interest which would otherwise be passed through to
Certificateholders if such Mortgage Loan or Contract were outstanding, or if
such partial prepayment were applied, on the succeeding Due Date. Unless
otherwise specified in the applicable Prospectus Supplement, in order to
mitigate the adverse effect to Certificateholders of a Series resulting from
the prepayment or liquidation of a Mortgage Loan or Contract or settlement of
an insurance claim with respect thereto, the amount of the aggregate
Servicing Fees will be reduced by an amount equal to the accrual of interest
on any prepaid or liquidated Mortgage Loan or Contract at the Net Mortgage
Rate for such Mortgage Loan or the Net Contract Rate for such Contract from
the date of its prepayment or liquidation or the date of such insurance
settlement to the next Due Date (the "Prepayment Interest Shortfall"). Such
reductions in the aggregate Servicing Fees will be made by the Servicer with
respect to the Mortgage Loans or Contracts under the applicable Pooling and
Servicing Agreement, but only to the extent that the aggregate Prepayment
Interest Shortfall does not exceed the aggregate Servicing Fees relating to
mortgagor or obligor payments or other recoveries distributed on the related
Distribution Date. The amount of the offset against the aggregate Servicing
Fees will be included in the scheduled distributions to Certificateholders on
the Distribution Date on which the related principal prepayments, Liquidation
Proceeds or Insurance Proceeds are passed through to Certificateholders. See
"Prepayment and Yield Considerations." Payments with respect to any
Prepayment Interest Shortfall will not be obtained by means of any
subordination of the rights of Subordinated Certificateholders or any other
credit enhancement arrangement (except to the extent such credit enhancement
pays interest with respect to a Mortgage Loan or Contract in excess of the
related Net Mortgage Rate or Net Contract Rate and such excess would
otherwise be paid to the Servicer as a Servicing Fee).
REPORTS TO CERTIFICATEHOLDERS
Unless otherwise specified or modified in the related Pooling and
Servicing Agreement for each Series, a statement setting forth the following
information, if applicable, will be included with each distribution to
Certificateholders of record of such Series:
(i) to each holder of a Certificate other than a Multi-Class
Certificate, the amount of such distribution allocable to principal of the
related Mortgage Loans or Contracts, separately identifying the aggregate
amount of any principal prepayments included therein, the amount of such
distribution allocable to interest on the related Mortgage Loans or
Contracts, and the aggregate unpaid principal balance of the Mortgage
Loans or Contracts after giving effect to the principal distributions on
such Distribution Date;
(ii) to each holder of a Multi-Class Certificate on which an interest
distribution and a distribution in reduction of Stated Amount are then
being made, the amount of such interest distribution and distribution in
reduction of Stated Amount, and the Stated Amount of each Class after
giving effect to the distribution in reduction of Stated Amount made on
such Distribution Date;
(iii) to each holder of a Multi-Class Certificate on which a
distribution of interest only is then being made, the aggregate Stated
Amount of Certificates outstanding of each Class after giving effect
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to the distribution in reduction of Stated Amount made on such
Distribution Date and on any Special Distribution Date occurring
subsequent to the last such report and after including in the aggregate
Stated Amount the Stated Amount of the Compound Interest Certificates, if
any, outstanding and the amount of any accrued interest added to the
Stated Amount of such Compound Interest Certificates on such Distribution
Date;
(iv) to each holder of a Multi-Class Certificate which is a Compound
Interest Certificate (but only if such holder shall not have received a
distribution of interest equal to the entire amount of interest accrued on
such Certificate with respect to such Distribution Date),
(a) the information contained in the report delivered pursuant to
clause (ii) above;
(b) the interest accrued on such Class of Compound Interest
Certificates with respect to such Distribution Date and added to the
Stated Amount of such Compound Interest Certificate; and
(c) the Stated Amount of such Class of Compound Interest
Certificates after giving effect to the addition thereto of all
interest accrued thereon;
(v) to each holder of a Certificate, the aggregate amount of the
Servicing Fees paid with respect to such Distribution Date;
(vi) to each holder of a Certificate, the amount by which the
Servicing Fee has been reduced by the aggregate Prepayment Interest
Shortfall for the related Distribution Date;
(vii) the aggregate amount of any Advances by the Servicer included in
the amounts actually distributed to the Certificateholders;
(viii) to each holder of each Senior Certificate (other than a
Shifting Interest Certificate):
(a) the amount of funds, if any, otherwise distributable to
Subordinated Certificateholders and the amount of any withdrawal from
the Subordination Reserve Fund, if any, included in amounts actually
distributed to Senior Certificateholders;
(b) the Subordinated Amount remaining and the balance in the
Subordination Reserve Fund, if any, following such distribution; and
(c) the amount of any Senior Class Shortfall with respect to, and
the amount of any Senior Class Carryover Shortfall outstanding prior
to, such Distribution Date;
(ix) to each holder of a Certificate entitled to the benefits of
payments under any form of credit enhancement or from any reserve fund
other than the Subordination Reserve Fund:
(a) the amounts so distributed under any such form of credit
enhancement or from any such reserve fund on the applicable
Distribution Date; and
(b) the amount of coverage remaining under any such form of credit
enhancement and the balance in any such fund, after giving effect to
any payments thereunder and other amounts charged thereto on the
Distribution Date;
(x) in the case of a Series of Certificates with a variable
Pass-Through Rate, such Pass-Through Rate;
(xi) the book value of any collateral acquired by the Trust Fund
through foreclosure or otherwise; and
(xii) the number and aggregate principal amount of Mortgage Loans or
Contracts one month and two or more months delinquent.
In addition, within a reasonable period of time after the end of each
calendar year, a report will be furnished to each Certificateholder of record
at any time during such calendar year (a) as to the aggregate of amounts
reported pursuant to clauses (i) through (xii) above, as applicable, for such
calendar year or, in the event such person was a Certificateholder of record
during a portion of such calendar year, for the
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applicable portion of such year and (b) such other information as required to
enable Certificateholders to prepare their tax returns. In the event that an
election has been made to treat the Trust Fund (or one or more segregated
pools of assets therein) as a REMIC, the Trustee with respect to a Series
will be required to sign the federal income tax returns with respect to such
REMIC. See "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates -- Administrative Matters."
REPORTS TO THE TRUSTEE
No later than 15 days after each Distribution Date for a Series, the
Servicer will provide the Trustee of such Series with a report setting forth
the status of the related Certificate Account and the related Subordination
Reserve Fund, if any, and any other reserve fund as of the close of business
on such Distribution Date, stating that all distributions required to be made
by the Servicer under the applicable Pooling and Servicing Agreement have
been made (or if any required distribution has not been made by the Servicer,
specifying the nature and status thereof) and showing, for the period covered
by such statement, the aggregate of deposits to and withdrawals from the
Certificate Account for each category of deposits and withdrawals specified
in the Pooling and Servicing Agreement. Such statement shall also include
information as to (i) the aggregate unpaid principal balances of all the
Mortgage Loans or Contracts as of the close of business on the last day of
the month preceding the month in which such Distribution Date occurs (or such
other day as may be specified in the applicable Pooling and Servicing
Agreement); and (ii) the amount of any Subordination Reserve Fund and any
other reserve fund, as of such Distribution Date (after giving effect to the
distributions on such Distribution Date). Copies of such reports may be
obtained by Certificateholders upon request in writing addressed to the
related Trustee at its mailing address provided in the related Prospectus
Supplement.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer, directly or through Sub-Servicers, will make reasonable
efforts to collect all payments called for under the Mortgage Loans or
Contracts and will, consistent with the applicable Pooling and Servicing
Agreement and any applicable agreement governing any form of credit
enhancement, follow such collection procedures as it follows with respect to
mortgage loans or manufactured housing contracts serviced by it that are
comparable to the Mortgage Loans or Contracts, as the case may be. Consistent
with the above, the Servicer may, in its discretion, (i) waive any prepayment
charge, assumption fee, late payment charge or any other charge in connection
with the prepayment of a Mortgage Loan or Contract and (ii) arrange with a
mortgagor or obligor a schedule for the liquidation of deficiencies running
for not more than six months after the applicable Due Date.
Pursuant to the Pooling and Servicing Agreement, the Servicer, to the
extent permitted by law, will establish and maintain or will cause to be
established and maintained one or more escrow accounts (collectively, the
"Servicing Account") in which the Servicer will be required to deposit or
cause to be deposited payments by mortgagors or obligors, as applicable, for
taxes, assessments, mortgage and hazard insurance premiums and other
comparable items. Withdrawals from the Servicing Account may be made to
effect timely payment of taxes, assessments, mortgage and hazard insurance,
to refund to mortgagors or obligors amounts determined to be overages, to pay
interest to mortgagors or obligors on balances in the Servicing Account, if
required, to repair or otherwise protect the Mortgaged Properties or
Manufactured Homes and to clear and terminate such account. The Servicer will
be responsible for the administration of each Servicing Account. The Servicer
will be obligated to advance certain amounts which are not timely paid by
mortgagors or obligors, to the extent that the Servicer determines that such
amounts will be recoverable out of Insurance Proceeds, Liquidation Proceeds,
or otherwise. Alternatively, if specified in the applicable Pooling and
Servicing Agreement, in lieu of establishing a Servicing Account, the
Servicer may procure a performance bond or other form of insurance coverage,
in an amount acceptable to the Rating Agency rating the related Series of
Certificates, covering loss occasioned by the failure to escrow such amounts.
ENFORCEMENT OF DUE-ON-SALE CLAUSES; REALIZATION UPON DEFAULTED MORTGAGE LOANS
AND CONTRACTS
Each Pooling and Servicing Agreement will provide that, when any Mortgaged
Property or Manufactured Home is conveyed by the mortgagor or obligor, the
Servicer will exercise its rights to
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accelerate the maturity of such Mortgage Loan or Contract under any
"due-on-sale" clause applicable thereto, if any, unless (a) it is not
exercisable under applicable law or (b) such exercise would result in loss of
insurance coverage with respect to such Mortgage Loan or Contract. In any
such case, the Servicer is authorized to take or enter into an assumption and
modification agreement from or with the person to whom such Mortgaged
Property or Manufactured Home has been or is about to be conveyed, pursuant
to which such person becomes liable under the Mortgage Note or Contract and,
unless prohibited by applicable state law, the mortgagor or obligor remains
liable thereon, provided that the Mortgage Loan or Contract will continue to
be covered by any pool insurance policy and any related primary mortgage
insurance policy, and the Mortgage Rate or Contract Rate with respect to such
Mortgage Loan or Contract and the payment terms shall remain unchanged. The
Servicer will also be authorized, with the prior approval of any pool insurer
and any primary mortgage insurer, if any, to enter into a substitution of
liability agreement with such person, pursuant to which the original
mortgagor or obligor is released from liability and such person is
substituted as mortgagor or obligor and becomes liable under the Mortgage
Note or Contract.
The Servicer is obligated under the Pooling and Servicing Agreement for
each Series to realize upon defaulted Mortgage Loans or Contracts to the
extent provided therein. However, in the case of foreclosure or of damage to
a Mortgaged Property or Manufactured Home from an uninsured cause, the
Servicer is not required to expend its own funds to foreclose, repossess or
restore any damaged property, unless it reasonably determines (i) that such
foreclosure, repossession or restoration will increase the proceeds to
Certificateholders of such Series of liquidation of the Mortgage Loan or
Contract after reimbursement of the Servicer for its expenses and (ii) that
such expenses will be recoverable to it through Liquidation Proceeds or
Insurance Proceeds. In the event that the Servicer has expended its own funds
for foreclosure or to restore damaged property, it will be entitled to charge
the Certificate Account for such Series an amount equal to all costs and
expenses incurred by it.
The Servicer may foreclose against property securing a defaulted Mortgage
Loan either by foreclosure, by sale or by strict foreclosure and in the event
a deficiency judgment is available against the mortgagor or other person (see
"Certain Legal Aspects of the Mortgage Loans and Contracts -- The Mortgage
Loans -- Anti-Deficiency Legislation and Other Limitations on Lenders" for a
description of the availability of deficiency judgments), may proceed for the
deficiency. It is anticipated that in most cases the Servicer will not seek
deficiency judgments against any mortgagor or obligor, and the Servicer is
not required under the Pooling and Servicing Agreement to seek deficiency
judgments.
With respect to a Trust Fund (or one or more segregated pools of assets
therein) as to which a REMIC election has been made, if the Trustee acquires
ownership of any Mortgaged Property or Manufactured Home as a result of a
default or imminent default of any Mortgage Loan or Contract secured by such
Mortgaged Property or Manufactured Home, the Trustee generally will be
required to dispose of such property with two years following its acquisition
by the Trust Fund. The Servicer also will be required to administer the
Mortgaged Property or Manufactured Home in a manner which does not cause the
Mortgaged Property or Manufactured Home to fail to qualify as "foreclosure
property" within the meaning of Code Section 860G(a)(8) or result in the
receipt by the Trust Fund of any "net income from foreclosure property"
within the meaning of Code Section 860G(c). In general, this would preclude
the holding of the Mortgaged Property or Manufactured Home as a dealer in
such property or the receipt of rental income based on the profits of the
lessee.
The Servicer may modify, waive or amend the terms of any Mortgage Loan or
Contract without the consent of the Trustee or any Certificateholder. Such
modification, waiver or amendment shall only be given if the Servicer
determines that it is in the best interests of Certificateholders and,
generally, only if the Mortgage Loan is in default or the Service has
determined that default is reasonably foreseeable.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
For each Series of Certificates, the Servicer will be entitled to be paid
the Servicing Fee on the related Mortgage Loans or Contracts until
termination of the applicable Pooling and Servicing Agreement, subject,
unless otherwise specified in the applicable Prospectus Supplement, to
adjustment as described under "Adjustment to Servicing Compensation in
Connection with Prepaid and Liquidated Mortgage
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Loans and Contracts" above. The Servicer, at its election, will pay itself
the Servicing Fee for a Series with respect to each Mortgage Loan or Contract
by (a) withholding the Servicing Fee from any scheduled payment of interest
prior to deposit of such payment in the Certificate Account for such Series
or (b) withdrawing the Servicing Fee from the Certificate Account after the
entire interest payment has been deposited in the Certificate Account. The
Servicer may also pay itself out of the Liquidation Proceeds or Insurance
Proceeds with respect to a Mortgage Loan or Contract, or withdraw from the
Certificate Account, the Servicing Fee in respect of such Mortgage Loan or
Contract or other recoveries with respect thereto to the extent provided in
the applicable Pooling and Servicing Agreement. The Servicing Fee with
respect to the Mortgage Loans or Contracts underlying the Certificates of a
Series will be specified in the applicable Prospectus Supplement. Any
additional servicing compensation in the form of prepayment charges,
assumption fees, late payment charges or otherwise will be retained by the
Servicer to the extent not required to be deposited in the Certificate
Account.
In addition to amounts payable to any Sub-Servicer, the Servicer will pay
all expenses incurred in connection with the servicing of the Mortgage Loans
or Contracts underlying a Series, including, without limitation, payment of
the hazard insurance policy premiums and fees or other amounts payable
pursuant to any applicable agreement for the provision of credit enhancement
for such Series, payment of the fees and disbursements of the Trustee and any
custodian, fees due to the independent accountants and expenses incurred in
connection with distributions and reports to Certificateholders. However,
certain of these expenses may be reimbursable to the Servicer pursuant to the
terms of the applicable Pooling and Servicing Agreement. In addition, the
Servicer will be entitled to reimbursement for certain expenses incurred by
it in connection with the liquidation of defaulted Mortgage Loans or
Contracts. In the event that claims are either not made or are not fully paid
from any applicable form of credit enhancement, the related Trust Fund will
suffer a loss to the extent that Net Liquidation Proceeds and Net Insurance
Proceeds are less than the principal balance of the related Mortgage Loan or
Contract, plus accrued interest thereon at the Net Mortgage Rate or Net
Contract Rate. In addition, the Servicer will be entitled to reimbursement of
expenditures incurred by it in connection with the restoration of any
Mortgaged Property or Manufactured Home, such right of reimbursement being
prior to the rights of the Certificateholders to receive Liquidation Proceeds
and Insurance Proceeds. The Servicer is also entitled to reimbursement from
the Certificate Account of Advances, of advances made by it to pay taxes or
insurance premiums with respect to any Mortgaged Property or Manufactured
Home and of certain losses against which it is indemnified by the Trust Fund.
EVIDENCE AS TO COMPLIANCE
THE MORTGAGE LOANS
Each Pooling and Servicing Agreement will provide that on or before a
specified date in each year, beginning with the first such date occurring at
least six months after the related Cut-Off Date, a firm of independent public
accountants will furnish a statement to the Trustee to the effect that, on
the basis of the examination by such firm conducted substantially in
compliance with either the Uniform Single Audit Program for Mortgage Bankers
or the Audit Program for Mortgages serviced for FHLMC, the servicing by or on
behalf of the Servicer of mortgage loans under pooling and servicing
agreements substantially similar to each other (including the related Pooling
and Servicing Agreement) was conducted in compliance with the terms of such
agreements other than exceptions that are immaterial and any significant
exceptions of errors in records that, in the opinion of the firm, either the
Audit Program for Mortgages serviced for FHLMC, or paragraph 4 of the Uniform
Single Audit Program for Mortgage Bankers, requires it to report. In
rendering its statement such firm may rely, as to matters relating to the
direct servicing of mortgage loans by Sub-Servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Audit Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC (rendered within one year of such statement) of
firms of independent public accountants with respect to the related
Sub-Servicer.
THE CONTRACTS
Each Pooling and Servicing Agreement relating to a Series of Certificates
representing interests in a Contract Pool will provide that on or before a
specified date in each year, beginning with the first such
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date after the related Cut-Off Date, a firm of independent public accountants
will furnish a statement to the Trustee to the effect that such firm is of
the opinion that the system of internal accounting controls in effect on the
date of such statement relating to the servicing procedures performed by the
Servicer under the Pooling and Servicing Agreement, taken as a whole, was
sufficient for the prevention and detection of errors and irregularities
which would be material to the assets of the Trust Fund and that nothing has
come to their attention that would cause them to believe that such servicing
has not been conducted in compliance with the provisions of the Pooling and
Servicing Agreement, other than such exceptions as shall be set forth in such
report.
Each Pooling and Servicing Agreement will also provide for delivery to the
Trustee annually on or before the specified date therein, a statement signed
by two officers of the Servicer to the effect that the Servicer has fulfilled
its obligations under the Pooling and Servicing Agreement throughout the
preceding year or, if there has been a default in the fulfillment of any such
obligation, describing each such default.
Copies of the annual accountants' statement and the statement of officers
of the Servicer may be obtained by Certificateholders without charge upon
written request to the Servicer at the address of the Servicer set forth in
the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE SERVICER AND THE DEPOSITOR
The Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement for each Series (other than its duties as
Certificate Registrar for such Series, if it is acting as such), except upon
its 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 of a type and nature presently carried on by it. No such
resignation will become effective until the Trustee for such Series or a
successor Servicer has assumed the Servicer's obligations and duties under
the Pooling and Servicing Agreement. If the Servicer resigns for any of the
foregoing reasons and the Trustee is unable or unwilling to assume
responsibility for servicing the Mortgage Loans or Contracts, it may appoint
another institution as Servicer, as described under "The Pooling and
Servicing Agreement -- Rights Upon Event of Default -- Mortgage Loans or
Contracts" below.
The Pooling and Servicing Agreement will provide that neither the
Depositor, the Servicer (if the Series of Certificates relates to Mortgage
Loans or Mortgage Contracts) nor any director, officer, employee or agent of
either of them will be under any liability to the Trust Fund or the
Certificateholders, for the taking of any action or for refraining from the
taking of any action in good faith pursuant to the Pooling and Servicing
Agreement, or for errors in judgment; provided, however, that none of the
Depositor, the Servicer or any director, officer, employee or agent of the
Depositor or Servicer will be protected against any liability that would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of his or its duties or by reason of reckless
disregard of his or its obligations and duties thereunder. The Pooling and
Servicing Agreement will further provide that the Depositor, the Servicer and
any director, officer, employee or agent of either of them shall be entitled
to indemnification by the 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 gross negligence in the performance of his or its
duties thereunder or by reason of reckless disregard of his or its
obligations and duties thereunder. In addition, the Pooling and Servicing
Agreement will provide that the Depositor and the Servicer will not be under
any obligation to appear in, prosecute or defend any legal action that is not
incidental to its duties under the Pooling and Servicing Agreement and that
in its opinion may involve it in any expense or liability. The Depositor and
the Servicer may, however, in its discretion, undertake any such action
deemed by it 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 Servicer will be entitled to
be reimbursed therefor out of the Certificate Account, and any loss to the
Trust Fund arising from such right of reimbursement will be allocated pro
rata among the various Classes of Certificates unless otherwise specified in
the applicable Pooling and Servicing Agreement.
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Any person into which the Servicer may be merged or consolidated, or any
person resulting from any merger, conversion or consolidation to which the
Servicer is a party, or any person succeeding to the business through the
transfer of substantially all of its assets, or otherwise, of the Servicer
will be the successor of the Servicer under the Pooling and Servicing
Agreement for each Series provided that such successor or resulting entity is
qualified to service mortgage loans for FNMA or FHLMC and that the applicable
Rating Agency's rating of any Certificates for such Series in effect
immediately prior to such event is not adversely affected thereby.
The Servicer also has the right to assign its rights and delegate its
duties and obligations under the Pooling and Servicing Agreement for each
Series (A) in connection with a sale or transfer of a substantial portion of
its mortgage or manufactured housing servicing portfolio; provided that (i)
in the case of a transfer by a Servicer of Mortgage Loans, the purchaser or
transferee accepting such assignment or delegation is qualified to service
mortgage loans for FNMA or FHLMC, (ii) the purchaser or transferee is
reasonably satisfactory to the Depositor and the Trustee for such Series and
executes and delivers to the Depositor and the Trustee an agreement, in form
and substance reasonably satisfactory to the Depositor and the Trustee, which
contains an assumption by such purchaser or transferee of the due and
punctual performance and observance of each covenant and condition to be
performed or observed by the Servicer under the Pooling and Servicing
Agreement from and after the date of such agreement; and (iii) the applicable
Rating Agency's rating of any Certificates for such Series in effect
immediately prior to such assignment, sale or transfer is not qualified,
downgraded or withdrawn as a result of such assignment, sale or transfer or
(B) to any affiliate of the Servicer, provided that the conditions contained
in clauses (i) through (iii) above are met. In the case of any such
assignment or delegation, the Servicer will be released from its obligations
under the Pooling and Servicing Agreement except for liabilities and
obligations incurred prior to such assignment and delegation.
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THE POOLING AND SERVICING AGREEMENT
EVENTS OF DEFAULT
MORTGAGE LOANS OR CONTRACTS
Events of Default under the Pooling and Servicing Agreement for each
Series of Certificates relating to Mortgage Loans or Contracts include (i)
any failure by the Servicer to remit to the Trustee or to any Paying Agent
for distribution to Certificateholders any required payment which continues
unremedied for 5 days; (ii) any failure by the 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
(or 10 days in the case of a failure to maintain any pool insurance policy
required to be maintained pursuant to the Pooling and Servicing Agreement)
after the giving of written notice of such failure to the Servicer by the
Trustee, or to the Servicer and Trustee by the holders of Certificates of
such Series having voting rights allocated to such Certificates ("Voting
Interests") aggregating not less than 25% of the Voting Interests represented
by all Certificates for such Series; (iii) any breach of representation or
warranty of the Servicer relating to such Servicer's authority to enter into,
and its ability to perform its obligations under, such Pooling and Servicing
Agreement; (iv) certain events of insolvency, readjustments of debt,
marshalling of assets and liabilities or similar proceedings and certain
actions by the Servicer indicating its insolvency, reorganization or
inability to any its obligations and (v) if specified in the applicable
Pooling and Servicing Agreement, any failure by the Servicer to remit to the
Trustee the amount of any Advance by the business day preceding the
applicable Distribution Date.
RIGHTS UPON EVENT OF DEFAULT
MORTGAGE LOANS OR CONTRACTS
So long as Event of Default remains unremedied under the Pooling and
Servicing Agreement for a Series of Certificates relating to Mortgage Loans
or Contracts, the Trustee for such Series or holders of Certificates of such
Series evidencing not less than 25% of the Voting Interests in the Trust Fund
for such Series may terminate all of the rights and obligations of the
Servicer under the Pooling and Servicing Agreement and in and to the Mortgage
Loans or Contracts (other than the Servicer's right to recovery of any
Initial Deposit for such Series and other expenses and amounts advanced
pursuant to the terms of the Pooling and Servicing Agreement, which rights
the Servicer will retain under all circumstances), whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under the Pooling and Servicing Agreement and will be entitled to monthly
servicing compensation not to exceed the aggregate Servicing Fees, together
with the other servicing compensation in the form of assumption fees, late
payment charges or otherwise as provided in the Pooling and Servicing
Agreement. In the event that the Trustee is unwilling or unable so to act, it
may select, pursuant to the private or public bid procedure described in the
applicable Pooling and Servicing Agreement, or petition a court of competent
jurisdiction to appoint, (i) in the case of a Servicer of Mortgage Loans, a
housing and home finance institution, bank or mortgage servicing institution
with a net worth of at least $15,000,000 and which is a FNMA- and
FHLMC-approved seller/servicer or (ii) in the case of a Servicer of
Contracts, an institution with a net worth of at least $15,000,000 which has
serviced for at least one year immediately prior thereto a portfolio of
manufactured housing loans of not less than $100,000,000, to act as successor
to the Servicer under the provisions of the Pooling and Servicing Agreement
relating to the servicing of the Mortgage Loans or Contracts. In the event
such public bid procedure is utilized, the successor Servicer would be
entitled to servicing compensation in an amount equal to the aggregate
Servicing Fees, together with the other servicing compensation in the form of
assumption fees, late payment charges or otherwise, as provided in the
Pooling and Servicing Agreement, and the Servicer would be entitled to
receive the net profits, if any, received from the sale of its servicing
rights and obligations under the Pooling and Servicing Agreement.
During the continuance of any Event of Default under the Pooling and
Servicing Agreement for a Series of Certificates relating to Mortgage Loans
or Contracts, the Trustee for such Series will have the right to take action
to enforce its rights and remedies and to protect and enforce the rights and
remedies of the Certificateholders of such Series, and holders of
Certificates evidencing not less than 25% of the
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Voting Interests for such Series may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred upon the Trustee. However, the
Trustee will not be under any obligation to pursue any such remedy or to
exercise any of such trusts or powers unless such Certificateholders have
offered the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred by the Trustee thereby. Also,
the Trustee may decline to follow any such direction if the Trustee
determines that the action or proceeding so directed may not lawfully be
taken or would be unjustly prejudicial to the nonassenting Certificateholders
or if, under certain circumstances, the Trustee receives conflicting
directions from different groups of Certificateholders.
No Certificateholders 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 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 not less than 25% of the Voting Interests
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.
AMENDMENT
Each Pooling and Servicing Agreement may be amended by the Depositor, the
Servicer (with respect to a Series of Certificates relating, to the Mortgage
Loans or Contracts) and the Trustee without the consent of the
Certificateholders, (i) to cure any ambiguity, (ii) to correct or supplement
any provision therein that may be inconsistent with any over provision
therein, (iii) to modify, eliminate or add to any of its provisions to such
extent as shall be necessary to maintain the qualification of the Trust Fund
(or one or more segregated pools of assets therein) as a REMIC at all times
that any Certificates are outstanding or to avoid or modify the risk of the
imposition of any tax on the Trust Fund pursuant to the Code that would be a
claim against the Trust Fund, provided that the Trustee has received an
opinion of counsel to the effect that such action is necessary or desirable
to maintain such qualification or to avoid or minimize the risk of the
imposition of any such tax and such action will not, as evidenced by such
opinion of counsel, adversely affect in any material respect the interests of
any Certificateholder, (iv) to change the timing and/or nature of deposits
into the Certificate Account, provided that such change will not, as
evidenced by an opinion of counsel, adversely affect in any material respect
the interests of any Certificateholder and that such change will not
adversely affect the then current rating assigned to any Certificates, as
evidenced by a letter from each Rating Agency to such effect, (v) to add to,
modify or eliminate any provisions therein restricting transfers of certain
Certificates, which are inserted in response to the Code provisions described
below under "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates -- Taxation of Residual Certificates --
Tax-Related Restrictions on Transfer of Residual Certificates," or (vi) to
make any other provisions with respect to matters or questions arising under
such Pooling and Servicing Agreement that are not inconsistent with the
provisions thereof, provided that such action will not, as evidenced by an
opinion of counsel, adversely affect in any material respect the interests of
the Certificateholders of the related Series. The Pooling and Servicing
Agreement may also be amended by the Depositor, the Servicer, where
applicable, and the Trustee with the consent of the holders of Certificates
evidencing interests aggregating not less than 66 2/3 % of the Voting
Interests evidenced by the Certificates 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 of modifying in any
manner the rights of the Certificateholders; provided, however, that no such
amendment may (i) reduce in any manner the amount of, or delay the timing of,
any payments received on or with respect to Mortgage Loans or Contracts that
are required to be distributed on any Certificates, without the consent of
the holder of such Certificate, (ii) adversely affect in any material respect
the interests of the holders of a Class or Subclass of Certificates of a
Series in a manner other than that set forth in clause (i) above without the
consent of the holders of Certificates aggregating not less than 66 2/3 % of
the Voting Interests evidenced by such Class or Subclass, or (iii) reduce the
aforesaid percentage of the Certificates, the holders of which are required
to consent to such amendment, without the consent of the holders of all
Certificates of the Class or Subclass affected then
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outstanding. Notwithstanding the foregoing, the Pooling and Servicing
Agreement may be amended by the Depositor, the Servicer, where applicable,
and the Trustee provided that such action is approved by holders of
Certificates evidencing 100% of the Percentage Interest of each Class that,
as evidenced by an opinion of counsel, is adversely affected in any material
respect by such action. For purposes of giving any such consent (other than a
consent to an action which would adversely affect in any material respect the
interests of the Certificateholders of any Class, while the Servicer or any
affiliate thereof is the holder of Certificates aggregating not less than 66
2/3 % of the Percentage Interest of such Class), any Certificates registered
in the name of the Servicer or any affiliate thereof shall be deemed not to
be outstanding. Notwithstanding the foregoing, the Trustee will not consent
to any such amendment if such amendment would subject the Trust Fund to tax
or cause the Trust Fund (or one or more segregated pools of assets therein)
to fail to qualify as a REMIC.
TERMINATION; PURCHASE OR OTHER DISPOSITION OF MORTGAGE LOANS AND CONTRACTS
The obligations created by the Pooling and Servicing Agreement for a
Series of Certificates will terminate upon the earlier of (i) the later of
the final payment or other liquidation of the last Mortgage Loan or Contract
subject thereto and the disposition of all property acquired upon foreclosure
of any such Mortgage Loan or Contract and (ii) any purchase or disposition
described in the following paragraph. 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 late survivor of certain persons named in
such Pooling and Servicing Agreement. For each Series of Certificates, the
Trustee 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 appointed by the Depositor and specified in the notice of termination.
If so provided in the related Prospectus Supplement, the Pooling and
Servicing Agreement for each Series of Certificates will permit, but not
require, the person or persons specified in such Prospectus Supplement to
purchase from the Trust Fund for such Series, or will require the Trust Fund
to sell, all remaining Mortgage Loans or Contracts at the time subject to the
Pooling and Servicing Agreement at a price specified in such Prospectus
Supplement. In the event that an election has been made to treat the related
Trust Fund (or one or more segregated pools of assets therein) as a REMIC,
any such purchase or disposition will be effected only upon receipt by the
Trustee of an opinion of counsel that such purchase (i) will be part of a
"qualified liquidation" or other evidence as defined in Code Section
860F(a)(4)(A), (ii) will not otherwise subject the Trust Fund (or segregated
asset pool) to tax, or (iii) will not cause the Trust Fund (or segregated
asset pool) to fail to qualify as a REMIC. The exercise of such right or such
disposition will effect early retirement of the Certificates of that Series,
but the right so to purchase may be exercised, or the obligation to sell will
arise, only after the aggregate principal balance of the Mortgage Loans or
Contracts for such Series at the time of purchase is less than a specified
percentage of the aggregate principal balance at the Cut-Off Date for the
Series, or after the date set forth in the related Prospectus Supplement. See
"Prepayment and Yield Considerations."
THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement will be named in
the applicable Prospectus Supplement. The commercial bank or trust company
serving as Trustee may have normal banking relationships with the Depositor,
the Servicer or any of their respective affiliates.
With respect to a Series of Certificates relating to Mortgage Loans or
Contracts, the Trustee may resign at any time, in which event the Servicer
will be obligated to appoint a successor trustee. The Servicer (with respect
to a Series of Certificates relating to Mortgage Loans or Contracts) may also
remove the Trustee if the Trustee ceases to be eligible to act as Trustee
under the Pooling and Servicing Agreement, if the Trustee becomes insolvent
or in order to change the situs of the Trust Fund for state-tax reasons. Upon
becoming aware of such circumstances, the Servicer or Depositor, as the case
may be, will become obligated to appoint a successor trustee. The Trustee may
also be removed at any time by the holders of Certificates evidencing not
less than 51% of the Voting Interest in the Trust Fund, except that, any
Certificate registered in the name of the Depositor, the Servicer or any
affiliate thereof will not be
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taken into account in determining whether the requisite Voting Interest in
the Trust Fund necessary to effect any such removal has been obtained. Any
resignation and removal of the Trustee, and the appointment of a successor
trustee, will not become effective until acceptance of such appointment by
the successor trustee. The Trustee, and any successor trustee, will have a
combined capital and surplus, or shall be a member of a bank holding system
with an aggregate combined capital and surplus, of at least $50,000,000 and
will be subject to supervision or examination by federal or state
authorities.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts 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 security for the Mortgage Loans or
Contracts is situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage
Loans or Contracts.
THE MORTGAGE LOANS
GENERAL
The Mortgage Loans will, in general, be secured by either first, second or
more junior mortgages, deeds of trust, or other similar security agreements
depending upon the prevailing practice in the state in which the underlying
property is located. A mortgage creates a lien upon the real property
described in the mortgage. There are two parties to a mortgage: the
mortgagor, who is the borrower; and the mortgagee, who is the lender. In a
mortgage state instrument, the mortgagor delivers to the mortgagee a note or
bond evidencing the loan and the mortgage. Although a deed of trust is
similar to a mortgage, a deed of trust has three parties: a borrower called
the trustor (similar to a mortgagor), a lender called the beneficiary
(similar to a mortgagee), and a third-party grantee called the trustee. Under
a deed of trust, the borrower grant the property, irrevocably until the debt
is paid,, in trust, generally with a power of sale, to the trustee to secure
payment of the loan. The trustee's authority under a deed of trust and the
mortgage's authority under a mortgage are governed by the express provisions
of the deed of trust or mortgage, applicable law, and, in some cases, with
respect to the deed of trust, the directions of the beneficiary.
The real property covered by a mortgage is most often the fee estate in
land and improvements. However, a mortgage may encumber other interests in
real property such as a tenant's interest in a lease of land or improvements,
or both, and the leasehold estate created by such lease. A mortgage covering
an interest in real property other than the fee estate requires special
provisions in the instrument creating such interest or in the mortgage to
protect the mortgagee against termination of such interest before the
mortgage is paid.
FORECLOSURE
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in
completion of the foreclosure occasionally may result from difficulties in
locating necessary parties defendant. When the mortgagee's right of
foreclosure is contested, the legal proceedings necessary to resolve the
issue can be time-consuming. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a
receiver or other officer to conduct the sale of the property. In some
states, mortgages may also be foreclosed by advertisement, pursuant to a
power of sale provided in the mortgage. Foreclosure of a mortgage by
advertisement is essentially similar to foreclosure of a deed of trust by
nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property to a third party upon any default
by the borrower under the terms of the note or deed of trust. In certain
states, such foreclosure also may be accomplished by judicial action in the
manner provided for foreclosure of mortgages. In some
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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 must provide
notice in some states to any other individual having an interest of record in
the real property, including any junior lienholders. If the deed of trust is
not reinstated within any applicable cure period, a notice of sale must be
posted in a public place and, in most states, published for a specified
period of time in one or more newspapers. In addition, some state be laws
require that a copy of the notice of sale be posted on the property and sent
to all parties having an interest of record in the property.
In some states, the borrower-trustor has the right to reinstate the loan
at any time following default until shortly before the trustee's sale. In
general, the borrower, or any other 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. Certain state laws control the amount of
foreclosure expenses and costs, including attorneys' fees, which may be
recovered by a lender.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the receiver or other designated officer, or by the trustee, is a
public sale. However, because of the difficulty a potential buyer at the sale
would 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 the
foreclosure sale. Rather, it is common for the lender to purchase the
property from the trustee or receiver for an amount equal to the unpaid
principal amount of the note, accrued and unpaid interest and the expenses of
foreclosure. Thereafter, subject to the right of the borrower in some states
to remain in possession during the redemption period, the lender will assume
the burdens of ownership, including obtaining hazard insurance and making
such repairs at its own expense as are necessary to render the property
suitable for sale. The lender commonly will obtain the services of a real
estate broker and pay the broker a 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 mortgage insurance proceeds.
FORECLOSURE ON SHARES OF COOPERATIVES
The cooperative shares 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 the proprietary lease of occupancy agreement, and 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. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required 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
tenantstockholder 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. 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 provide that in the event of a foreclosure on
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 or assigning the proprietary lease. Generally, the lender
is not limited in any rights it may have to dispossess the
tenantstockholders.
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Foreclosure on the cooperative shares is accomplished by a sale in
accordance with the provisions of Article 9 of the 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 foreclosure 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 foreclosure. 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 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 and/or foreclosure
of a mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale.
In most states where the right of redemption is available, statutory
redemption may occur upon payment of the foreclosure purchase price, accrued
interest and taxes. In some states, the right to redeem is an equitable
right. The effect of a right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser at a foreclosure sale, or of any
purchaser from the lender subsequent to judicial foreclosure or sale under a
deed of trust. Consequently, the practical effect of the redemption right is
to force the lender to maintain the property and pay the expenses of
ownership until the redemption period has run.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The Mortgage Loans are secured by mortgages or deeds of trust some of
which are junior to other mortgages or deeds of trust held by other lenders
or institutional investors. The rights of the Trust (and therefore the
Certificateholders), as mortgagee under a junior mortgage or beneficiary
under a junior deed of trust, are subordinate to those of the mortgagee under
the senior mortgage or beneficiary under the senior deed of trust, including
the prior rights of the senior mortgagee to receive hazard insurance and
condemnation proceeds and to cause the property securing the Mortgage Loan to
be sold upon default of the mortgagor or trustor, thereby extinguishing the
junior mortgagee's or junior beneficiary's lien unless the junior mortgagee
or junior beneficiary asserts its subordinate interest in the property in
foreclosure litigation and, possibly, satisfies the defaulted senior mortgage
or deed of trust. As discussed more fully below, a junior mortgagee or junior
beneficiary may satisfy a defaulted senior loan in full and, in some states,
may cure such default and loan. In most states, no notice of default is
required to be given to a junior mortgagee or junior beneficiary and junior
mortgagees or junior beneficiaries are seldom given notice of defaults or
senior mortgages. In order for a foreclosure action in some states to be
effective against a junior mortgagee or junior beneficiary, the junior
mortgagee or junior beneficiary must be named in any foreclosure action, thus
giving notice to junior lienors. It is standard practice of the Sellers to
protect their interest by attending any sale of which they have notice or
appearing and bidding for, or redeeming, the property if it is in their best
interest to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, (including the sellers) confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness
secured by the mortgage or deed of trust. Thus, in the event improvements on
the property are damaged or destroyed by fire or other casualty, or in the
event the property is taken by condemnation, the mortgagee or beneficiary
under any underlying senior mortgages will have the prior right to collect
and apply any insurance proceeds payable under a hazard
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insurance policy to restore or repair the property if feasible, and to
collect any remaining insurance proceeds or any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the senior mortgages or deeds of trust. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage or trust deed.
The form of mortgage or deed of trust used by most institutional lenders
typically contains a "future advance" clause, which provides, in essence,
that additional amounts advanced to or on behalf of the mortgagor or trustor
by the mortgagee or beneficiary are to be secured by the mortgage or deed of
trust. The priority of any advance made under the clause depends, in some
states, on whether the advance was an "obligatory" or "optional" advance. If
the mortgagee or beneficiary is obligated to advance the additional amounts,
the advance is entitled to receive the same priority as amounts initially
advanced under the mortgage or deed of trust, notwithstanding the fact that
there may be junior mortgages or deeds of trust and other liens which
intervene between the date of recording of the mortgage or deed of trust and
the date of the future advance, and, in some states, notwithstanding that the
mortgagee or beneficiary had actual knowledge of such intervening junior
mortgages or deeds of trust and other liens at the time of the advance. Where
the mortgagee or beneficiary is not obligated to advance additional amounts
or, in some states, has actual knowledge of the intervening junior mortgages
or deeds of trust and other liens, the advance will be subordinate to such
intervening junior mortgages or deeds of trust and other liens. Priority of
advances under a "future advance" cause rests, in some states, on state
statutes giving priority to all advances made under the loan agreement to a
"credit limit" amount stated in the recorded mortgage.
Another provision sometimes included in the form of the mortgage or deed
of trust used by institutional lenders (and included in some of the forms
used by the Sellers) obligates the mortgagor or trustor to pay, before
delinquency, all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding
purporting to affect the property or the rights of the mortgagee or
beneficiary under the mortgage or deed of trust. Upon a failure of the
mortgagor or trustor to perform any of these obligations, the mortgagee or
beneficiary is given the right under certain mortgages or deeds of trust to
perform the obligations itself, at its election, with the mortgagor or
trustor agreeing to reimburse the mortgagee or beneficiary for any sums
expended by the mortgagee or beneficiary on behalf of the mortgagor or
trustor. All sums so expended by the mortgagee or beneficiary become part of
the indebtedness secured by the mortgage or deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgage under a mortgage. In
some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or
sale under a deed of trust. A deficiency judgment is a personal judgment
against the former borrower equal in most cases to the difference between the
amount due to the lender and the net amount realized upon the foreclosure
sale.
Some state statutes may require the beneficiary or mortgagee to exhaust
the security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against
the borrower. In certain other states, the lender has the option of bringing
a personal action against the borrower on the debt without first exhausting
such security; however, in some of these states, the lender, following
judgment on such personal action, may be deemed to have elected a remedy and
may be precluded from exercising remedies with respect to the security.
Consequently, the practical effect of the election requirement, when
applicable, is that lenders will usually proceed first against the security
rather than bringing a personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the
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time of such sale. The purpose of these statutes is to prevent a beneficiary
or a mortgagee from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided
for in certain instances where the value of the lender's security has been
impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement and foreclosure on
the beneficial interest in a land trust. 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 Mortgage
Loan secured by shares of a cooperative, would be such shares and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy
laws, the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state
laws affording relief to debtors, may interfere with or affect the ability of
a secured mortgage lender to realize upon its security. For example, in a
Chapter 13 proceeding under the Federal Bankruptcy Code, when a court
determines that the value of a home is less than the principal balance of the
loan, the court may prevent a lender from foreclosing on the home, and, as
part of the rehabilitation plan, reduce the amount of the secured
indebtedness to the value of the home as it exists at the time of the
proceeding, leaving the lender as a general unsecured creditor for the
difference between that value and the amount of outstanding indebtedness. A
bankruptcy court may grant the debtor a reasonable time to cure a payment
default, and in the case of a mortgage loan not secured by the debtor's
principal residence, also may reduce the monthly payments due under such
mortgage loan, change the rate of interest and alter the mortgage loan
repayment schedule. Certain court decisions have applied such relief to
claims secured by the debtor's principal residence.
The Internal Revenue Code of 1986, as amended, provides priority to
certain tax liens over the lien of the mortgage or deed of trust. The laws of
some states provide priority to certain tax liens over the lien of the
mortgage of deed of trust. Certain environmental protection laws may also
impose liability for cleanup expenses on owners by foreclosure on real
property, which liability may exceed the value of the property involved.
Numerous federal and some state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination,
servicing and the enforcement of mortgage loans. These laws include the
federal Truth in Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act,
and related statutes and regulations. These federal laws and state laws
impose specific statutory liabilities upon lenders who originate or service
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
"DUE-ON-SALE" CLAUSES
The forms of note, mortgage and deed of trust relating to conventional
Mortgage Loans may contain a "due-on-sale" clause permitting acceleration of
the maturity of a loan if the borrower transfers its interest in the
property. In recent years, court decisions and legislative actions placed
substantial restrictions on the right of lenders to enforce such clauses in
many states. However, effective October 15, 1982, Congress enacted the
Garn-St Germain Depository Institutions Act of 1982 (the "Act") which
purports to preempt state laws which prohibit the enforcement of
"due-on-sale" clauses by providing among other matters, that "due-on-sale"
clauses in certain loans (which loans may include the Mortgage Loans) made
after the effective date of the Act are enforceable, within certain
limitations as set forth in the Act and the regulations promulgated
thereunder. "Due-on-sale" clauses contained in mortgage loans originated by
federal savings and loan associations or federal savings banks are fully
enforceable pursuant to regulations of the Office of Thrift Supervision
("OTS"), as successor to the Federal Home Loan Bank Board ("FHLBB"), which
preempt state law restrictions on the enforcement of such clauses. Similarly,
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"due-on-sale" clauses in mortgage loans made by national banks and federal
credit unions are now fully enforceable pursuant to preemptive regulations of
the Office of the Comptroller of the Currency and the National Credit Union
Administration, respectively.
The Act created a limited exemption from its general rule of
enforceability for "due-on-sale" clauses in certain mortgage loans ("Window
Period Loans") which were originated by non-federal lenders and made or
assumed in certain states ("Window Period States") during the period, prior
to October 15, 1982, in which that state prohibited the enforcement of
"due-on-sale" clauses by constitutional provision, statute or statewide court
decision (the "Window Period"). Though neither the Act nor the FHLBB
regulations promulgated thereunder actually names the Window Period States,
FHLMC has taken the position, in prescribing mortgage loan servicing
standards with respect to mortgage loans which it has purchased, that the
Window Period States were: Arizona, Arkansas, California, Colorado, Georgia,
Iowa, Michigan, Minnesota, New Mexico, Utah and Washington. Under the Act,
unless a Window Period State took action by October 15, 1985, the end of the
Window Period, to further regulate enforcement of "due-on-sale" clauses in
Window Period Loans, "due-on-sale" clauses would become enforceable even in
Window Period Loans. Five of the Window Period States (Arizona, Minnesota,
Michigan, New Mexico and Utah) have taken actions which restrict the
enforceability of "due-on-sale" clauses in Window Period Loans beyond October
15, 1985. The actions taken vary among such states.
By virtue of the Act, the Servicer may generally be permitted to
accelerate any conventional Mortgage Loan which contains a "due-on-sale"
clause upon transfer of an interest in the property subject to the mortgage
or deed of trust. With respect to any Mortgage Loan secured by a residence
occupied or to be occupied by the borrower, this ability to accelerate will
not apply to certain types of transfers, including (i) the granting of a
leasehold interest which has a term of three years or less and which does not
contain an option to purchase, (ii) a transfer to a relative resulting from
the death of a borrower, or a transfer where the spouse or children becomes
an owner of the property in each case where the transferee(s) will occupy the
property, (iii) a number resulting from a decree of dissolution of marriage,
legal separation agreement or from an incidental property settlement
agreement by which the spouse becomes an owner of the property, (iv) the
creation of a lien or other encumbrance subordinate to the lender's security
instrument which does not relate to a transfer of rights of occupancy in the
property (provided that such lien or encumbrance is not created pursuant to a
contract for deed), (v) a transfer by devise, descent or operation of law on
the death of a joint tenant or tenant by the entirety, and (vi) other
transfers as set forth in the Act and the regulations thereunder. The extent
of the effect of the Act on the average lives and delinquency rates of the
Mortgage Loans cannot be predicted. See "Prepayment and Yield
Considerations."
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("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. The OTS (as successor to
the FHLBB) is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. The statute authorized
any state to reimpose Stated Rate limits by adopting before April 1, 1983, a
law or constitutional provision which expressly rejects application of the
federal law. Fifteen states have adopted laws reimposing or reserving the
right to impose interest rate limits. In addition, even where Title V is not
so rejected, any state is authorized to adopt a provision limiting certain
other loan charges.
Unless otherwise specified in the applicable Prospectus Supplement, each
Unaffiliated Seller will represent and warrant in the related Loan Sale
Agreement that all Mortgage Loans sold by such Unaffiliated Seller to the
Depositor were originated in full compliance with applicable state laws,
including usury laws. See "The Trust Funds -- Representations and
Warranties."
ADJUSTABLE RATE LOANS
The laws of certain states may provide that mortgage notes relating to
adjustable rate loans are not negotiable instruments under the Uniform
Commercial Code. In such event, the Trustee will not be
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deemed to be a "holder in due course" within the meaning of the Uniform
Commercial Code and may take such a mortgage note subject to certain
restrictions on its ability to foreclose and to certain contractual defenses
available to a mortgagor.
ENFORCEABILITY OF CERTAIN PROVISIONS
Standard forms of note, mortgage and deed of trust generally 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 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. Under the Pooling and Servicing Agreement, late
charges and prepayment fees (to the extent permitted by law and not waived by
the Servicer) will be retained by the Servicer as additional servicing
compensation.
Courts have Unposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be 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 sustained their judgment for
the lender's judgment and have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders
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.
In other cases, some courts have been faced with the issue whether federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that borrowers under deeds of trust receive notices in
addition to the statutorily-prescribed minimum requirements. 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.
THE CONTRACTS
GENERAL
As a result of the assignment of the Contracts to the Trustee, the Trust
Fund will succeed collectively to all of the rights (including the right to
receive payment on the Contracts) and will assume the obligations of the
obligee under the Contracts. Each Contract evidences both (a) the obligation
of the obligor to repay the loan evidenced thereby, and (b) the grant of a
security interest in the Manufactured Home to secure repayment of such loan.
Certain aspects of both features of the Contracts are described more fully
below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code (the "UCC") in effect in the states in which the Manufactured
Homes initially were registered. Pursuant to the UCC, the sale of chattel
paper is treated in a manner similar to perfection of a security interest in
chattel paper. Under the Pooling and Servicing Agreement, the Servicer will
transfer physical possession of the Contracts to the Trustee or a designated
custodian or may retain possession of the Contracts as custodian for the
Trustee. In addition, the Servicer will make an appropriate filing of a UCC-1
financing statement in the appropriate states to give notice of the Trustee's
ownership of the Contracts. Unless otherwise specified in the related
Prospectus Supplement, the Contracts will not be stamped or marked otherwise
to reflect their assignment from the Depositor to the Trustee. Therefore, if
through negligence, fraud or otherwise, a subsequent purchaser were able to
take physical possession of the Contracts without notice of such assignment,
the Trustee's interest in Contracts could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate
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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 non-title
states, perfection pursuant to the provisions of the UCC is required. The
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
housing conditional sales contract is registered. In the event the Servicer
fails, due to clerical errors, to effect such notation or delivery, or files
the security interest under the wrong law (for example, under a motor vehicle
title statute rather than under the UCC, in a few states), the
Certificateholders may not have a first priority security interest in the
Manufactured Home securing a Contract. 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 home under applicable state real estate law. In order to
perfect a security interest in a manufactured home under real estate laws,
the secured party must file either a "fixture filing" under the provisions of
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. Substantially all of
the Contracts contain provisions prohibiting the borrower from permanently
attaching the Manufactured Home to its site. So long as the borrower does 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 Unaffiliated Seller and transferred to the Depositor. With
respect to a Series of Certificates and if so described in the related
Prospectus Supplement, the Servicer may be required to perfect a security
interest in the Manufactured Home under applicable real estate laws. The
Servicer will represent that at the date of the initial issuance of the
related Certificates it has obtained a perfected first priority security
interest by proper notation or delivery of the required documents and fees
with respect to substantially all of the Manufactured Homes securing the
Contracts.
The Depositor will cause the security interests in the Manufactured Homes
to be assigned to the Trustee on behalf of the Certificateholders. Unless
otherwise specified in the related Prospectus Supplement, neither the
Depositor nor the Trustee will amend the certificates of title to identify
the Trustee or the Trust Fund as the new secured party, and neither the
Depositor nor the Servicer will deliver the certificates of title to the
Trustee or note thereon the interest of the Trustee. Accordingly, the
Servicer (or the Unaffiliated Seller) which continue to be named as the
secured party on the certificates of title relating to the Manufactured
Homes. In many states, such 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 Depositor'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 in the Manufactured Home might not be
effective or perfected or that, in the absence of such notation or delivery
to the Trustee, the assignment of the security interest in the Manufactured
Home might not be effective against creditors of the Servicer (or the
Unaffiliated Seller) or a trustee in bankruptcy of the Servicer (or the
Unaffiliated Seller).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or
administrative error by state recording officials, the notation of the lien
of the Servicer (or the Unaffiliated Seller) on the certificate of title or
delivery of the required documents and fees will be sufficient to protect the
Certificateholders against the rights of subsequent purchasers of a
Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the
security interest assigned to the Trustee is not perfected, such security
interest would be subordinate to, among others, subsequent purchasers for
value of Manufactured Homes and holders of perfected security interests.
There also exists a risk in not identifying the Trustee as the new secured
party on the certificate of title that, through fraud or negligence, the
security interest of the Certificateholders could be released.
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In the event that the owner of a Manufactured Home moves it 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 until the owner re-registers the Manufactured Home in such state.
If the owner were to relocate a Manufactured Home to another state and not
re-register the Manufactured Home in such state, and if steps are not taken
to re-perfect 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 re-register a
Manufactured Home; accordingly, the Trustee must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien,
the Servicer would receive notice of surrender if the security interest in
the Manufactured Home is noted on the certificate of title. Accordingly, the
Trustee would have the opportunity to re-perfect 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,
re-registration could defeat perfection. In the ordinary course of servicing
the manufactured housing conditional sales contracts, the Servicer takes
steps to effect such re-perfection upon receipt of notice of registration or
information from the obligor as to relocation. Similarly, when an obligor
under a manufactured housing conditional sales contract sells a manufactured
home, the Trustee (or its custodian) must surrender possession of the
certificate of title or the Servicer will receive notice as a result of its
lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related manufactured housing conditional sales contract
before release of the lien. Under the Pooling and Servicing Agreement, the
Servicer is obligated to take steps, at the Servicer's expense, as are
necessary to maintain perfection of security interests in the Manufactured
Homes.
Under the laws of most states, liens for repairs performed on a
Manufacturer Home and liens for personal property taxes take priority over a
perfected security interest. The Unaffiliated Seller will represent in the
Pooling and Servicing Agreement that it has no knowledge of any such liens
with respect to any Manufactured Home securing payment on any Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee or Certificateholders in the event such a
lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Servicer on behalf of the Trustee, to the extent required by the
related Pooling and Servicing Agreement, may take action to enforce the
Trustee's security interest with respect to Contracts in default by
repossession and resale of the Manufactured Homes securing such defaulted
Contracts. So long as the Manufactured Home has not become subject to the
real estate law, a creditor can repossess a Manufactured Home securing a
Contract by voluntary surrender, by "self-help" repossession that is
"peaceful" (i.e., without breach of the peace) or, in the absence of
voluntary surrender and the ability to repossess without breach of the peace,
by judicial process. The holder of a Contract must give the debtor a number
of days' notice, which varies from 10 to 30 days depending on the state,
prior to commencement of any repossession. The UCC and consumer protection
laws in most states place restrictions on repossession sales, including
requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor
be given notice of any sale prior to resale of the unit so that the debtor
may redeem at or before such resale. In the event of such repossession and
resale of a Manufactured Home, the Trustee 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 of subsequently perfected
security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in
many cases the defaulting borrower would have no assets with which to pay a
judgment.
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.
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CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of
notice of claims by the debted thereunder. The effect of this rule is to
subject the assignee of such a contract to all claims and defenses which the
debtor could assert against the seller of goods. Liability under this rule is
limited to amounts paid under a Contract; however, the obligor also may be
able to asset the rule to set off remaining amounts due as a defense against
a claim brought by the Trustee against such obligor. Numerous other federal
and state consumer protection laws impose requirements applicable to the
origination and lending pursuant to the Contracts, including the Truth in
Lending Act, the Federal Trade Commission Act, the Fair Credit Billing Act,
the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair
Debt Collection Practices Act and the Uniform Consumer Credit Code. In the
case of some of these laws, the failure to comply with their provisions may
affect the enforceability of the related Contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such
sale or transfer that is not consented to.
In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so 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. Consequently, in some states the Servicer may be
prohibited from enforcing a "due-on-sale" clause in respect of certain
Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations shall not apply to any loan which is
secured by a first lien on certain kinds of manufactured housing. The
Contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral
fees and requiring a 30-day notice period prior to instituting any action
leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, and state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered
by Title V. The Unaffiliated Seller will represent that all of the Contracts
comply with applicable usury law.
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS
A number of lawsuits have been brought in the United States alleging
personal injury from exposure to the chemical formaldehyde, which is preset
in many building materials, including such components of manufactured housing
as plywood flooring and wall paneling. Some of these lawsuits were brought
against manufacturers of manufactured housing, suppliers of component parts,
and related persons in the distribution process. Depositor is aware of a
limited number of cases in which plaintiffs have won judgments in these
lawsuits.
The holder of any Contract 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 Contract and
may be unable to collect amounts still due under the Contract. The successful
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assertion of such claim constitutes a breach of a representation or warranty
of the person specified in the related Prospectus Supplement, and the
Certificateholders would suffer a loss only to the extent that (i) such
person breached its obligation to repurchase the Contract in the event an
obligor is successful in asserting such a claim, and (ii) such person, the
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.
INSTALLMENT CONTRACTS
MORTGAGE LOANS AND CONTRACTS
The Mortgage Loan and Contracts may also consist of Installment Contracts.
Under an Installment Contract the seller (hereinafter referred to in this
Section as the "lender") retains legal title to the property and enters into
an agreement with the purchaser (hereinafter referred to in this Section as
the "borrower" for the payment of the purchase price, plus interest, over the
term of such contract. Only after full performance by the borrower of the
contract is the lender obligated to convey title to the real estate to the
purchaser. As with mortgage or deed of trust financing, during the effective
period of the Installment Contract, the borrower is generally responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his
or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The lender
in such a situation does not have to foreclosure in order to obtain title to
the property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of
forfeiture. Under such statute, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the
borrower may be granted some grace period during which the contract may be
reinstated upon full payment of the default amount and the borrower may have
a post-foreclosure statutory redemption right. In other states, courts in
equity may permit a borrower with significant investment in the property
under an Installment Contract for the sale of real estate to share in the
proceeds of sale of the property after the indebtedness is repaid or may
otherwise refuse to enforce the forfeiture clause. Nevertheless, generally
speaking, the lender's procedures for obtaining possession and clear title
under an Installment Contract for the sale of real estate in a given state
are simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a mortgaged property.
ENVIRONMENTAL RISKS
Real property pledged for a Mortgaged Loan or Contract as security to a
lender may be subject to unforeseen environmental risks. Of particular
concern may be those mortgaged properties which have been the site of
manufacturing, industrial or disposal activity. Such environmental risks may
give rise to (a) a diminution in value of property securing any Mortgage Loan
or the inability to foreclose against such property or (b) in certain
circumstances as more fully described below, liability for clean-up costs or
other remedial actions, which liability could exceed the value of such
property or the principal balance of the related Mortgage Loan.
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Under the laws of certain states, failure to perform the remediation
required or demanded by the state of any condition or circumstance that (i)
may pose an imminent or substantial endangerment to the public health or
welfare or the environment, (ii) may result in a release or threatened
release of any Hazardous Material, or (iii) may give rise to any
environmental claim or demand (each such condition or circumstance, or
"Environmental Condition") may give rise to a lien on the property to ensure
the reimbursement of remedial costs incurred by the state. In several states
such lien has priority over the lien of an existing mortgage against such
property. The value of a Mortgaged Property as collateral for a Mortgage Loan
could therefore be adversely affected by the existence of any such
Environmental Condition.
The state of the law is currently unclear as to whether and under what
circumstances clean-up costs, or the obligation to take remedial actions,
could be Unposed on a secured lender such as the Trust Fund. Under the laws
of some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), a lender may
be liable as an "owner or operator" for costs of addressing releases or
threatened releases of hazardous substances on a mortgaged property if such
lender or its agents or employees have participated in the management of the
operations of the borrower, even though CERCLA's definition of "owner or
operator," however, is a person "who without participating in the management
of the facility, holds indicia of ownership primarily to protect his security
interest" (the "secured-creditor exemption"). This exemption for holders of a
security interest such as a secured lender applies only when the lender seeks
to protect its security interest in the contaminated facility or property.
Thus, if a lender's activities begin to encroach on the actual management of
such facility or property, the lender faces potential liability as an "owner
or operator" under CERCLA. Similarly, when a lender forecloses and takes
title to a contaminated facility or property (whether it holds the facility
or property as an investment or leases it to a third party), the lender may
incur potential CERCLA liability.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly
contained CERCLA's secured-creditor exemption. The court held that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under
CERCLA; rather, liability could attach to a lender if its involvement with
the management of the facility is broad enough to support the inference that
the lender had the capacity to influence the borrower's treatment of
hazardous waste. The court added that a lender's capacity to influence such
decisions could be inferred from the extent of its involvement in the
facility's financial management. A subsequent decision by the United States
Court of Appeals for the Ninth Circuit in In re Bergsoe Metal Corp.,
disagreeing with the Fleet Factors court, held that a secured lender had no
liability absent "some actual management of the facility" on the part of the
lender. On April 29, 1992, the United States Environmental Protection Agency
(the "EPA") issued a final rule interpreting and delineating CERCLA's
secured-creditor exemption. The final rule defines a specific the range of
permissible actions that may be undertaken by a holder of a contaminated
facility without exceeding the bounds of the secured-creditor exemption.
Issuance of this rule by the EPA under CERCLA would not necessarily affect
the potential for liability in actions by either a state or a private party
under CERCLA or in actions under other federal or state laws which may impose
liability on "owners or operators" but do not incorporate the second-creditor
exemption.
If a lender is or becomes liable for clean-up costs, it may bring an
action for contribution against the current owners or operators, the owners
or operators at the time of on-site disposal activity or any other party who
contributed to the environmental hazard, but such persons or entities may be
bankrupt or otherwise judgment proof. Furthermore, such action against the
borrower may be adversely affected by the limitations on recourse in the
documents in the Mortgage Document File. Similarly, in some states
anti-deficiency legislation and other statues requiring the lender to exhaust
its security before bringing a personal action against the borrower-trustor
(see "Anti-Deficiency Legislation and Other Limitations on Lenders" below)
may curtail the lender's ability to recover from its borrower the
environmental clean-up and other related costs and liabilities by the lender.
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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 or Contract
(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 or Contract 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
action could have an effect, for an indeterminate period of time, on the
ability of the Servicer to collect full amounts of interest on certain of the
Mortgage Loans or Contracts in a Trust Fund. Any shortfall in interest
collections resulting from the application of the Relief Act could result in
losses to the holders of the Certificates of the related Series. In addition,
the Relief Act imposes limitations which would impair the ability of the
Servicer to foreclose on an affected Mortgage Loan or Contract during the
borrower's period of active duty status. Thus, in the event that such a
Mortgage Loan or Contract goes into default, there may be delays and losses
occasioned by the inability to realize upon the Mortgaged Property or
Manufactured Home in a timely fashion.
TYPE OF MORTGAGED PROPERTY
The lender may be subject to additional risk depending upon the type and
use of the Mortgaged Property in question. For instance, Mortgaged Properties
which are hospitals, nursing homes or convalescent homes may present special
risks to lenders in large part due to significant governmental regulation of
the operation, maintenance, control and financing of health care
institutions. Mortgages on Mortgaged Properties which are owned by the
Borrower under a condominium form of ownership are subject to the
declaration, by-laws and other rules and regulations of the condominium
association. Mortgaged Properties which are hotels or motels may present
additional risk to the lender in that: (i) hotels and motels are typically
operated pursuant to franchise, management and operating agreements which may
be terminable by the operator; and (ii) the transferability of the hotel's
operating, liquor and other licenses to the entity acquiring the hotel either
through purchase or foreclosure is subject to the vagaries of local law
requirements. In addition, Mortgaged Properties which are multifamily
residential properties may be subject to rent control laws, which could
impact the future cash flows of such properties. Finally, Mortgaged
Properties which are financed in the installment sales contract method may
leave the holder of the note exposed to tort and other claims as the true
owner of the property which could impact the availability of cash to pass
through to investors.
CERTAIN MATTERS RELATING TO INSOLVENCY
The Unaffiliated Seller of the Mortgage Loans or Contracts and the
Depositor intend that the transfer of such Mortgage Loans or Contracts to the
Trust Fund constitute a sale rather for a pledge of the Mortgage Loans or
Contracts to secure indebtedness of the seller of the Mortgage Loans or
Contracts. However, if the Unaffiliated Seller were to become a debtor under
the federal bankruptcy code or be placed in a conservatorship or receivership
under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), as the case may be, it is possible that a creditor,
receiver, conservator or trustee-in-bankruptcy of such seller may argue that
the sale of the Mortgage Loans or Contracts by the Unaffiliated Seller is a
pledge of the Mortgage Loans or Contracts rather than a sale. This position,
if argued or accepted by a court, could result in a delay in or reduction of
distributions to the related Certificateholders.
Under FIRREA the FDIC as receiver or conservator of a Servicer subject to
its jurisdiction may enforce a contract notwithstanding any provision of the
contract providing for termination thereof by reason of the insolvency of, or
appointment of a receiver or conservator for, the Servicer. Consequently,
provisions in a Pooling and Servicing Agreement providing for an Event of
Default upon certain events of insolvency, receivership or conservatorship of
the Servicer may not be enforceable against the FDIC as receiver or
conservator to the extent that the exercise of such rights is based solely
upon the insolvency of or appointment of a receiver or conservator for the
Servicer. In addition, the FDIC may transfer the assets and liabilities of an
institution in receivership or conservatorship to another institution.
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BANKRUPTCY LAWS
Numerous statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to obtain payment of the loan, to
realize upon collateral and/or enforce a deficiency judgment. For example,
under federal bankruptcy law, virtually all actions (including foreclosure
actions and deficiency judgment proceedings) are automatically stayed upon
the filing of the bankruptcy petition, and, often, no interest or principal
payments are made during the course of the bankruptcy proceeding. The delay
and the consequences thereof caused by or on behalf of a junior lienor may
stay the senior lender from taking action to foreclose out such junior lien.
In a case under the Bankruptcy Code, the lender is precluded from foreclosing
without authorization from the bankruptcy court. In addition, a court with
federal bankruptcy jurisdiction may permit a debtor through his or her
Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on the debtor's residence by paying arrearage
within a reasonable time period and reinstating the original mortgage loan
payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no
sale of the residence had yet occurred) prior to the filing of the debtor's
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 mortgage loan default by paying arrearages over a
number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
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 in the position of a general
unsecured creditor for the difference between the value of the residence and
the outstanding balance of the loan.
Federal bankruptcy law may also interfere with or affect the ability of
the secured mortgage lender to enforce an assignment by a mortgagor of rent
and leases related to the Mortgaged Property if the related mortgagor is in a
bankruptcy proceeding. Under Section 362 of the Bankruptcy Code, the
mortgagee will be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue can be time-consuming and may
result in significant delays in the receipt of the rents. Rents may also
escape an assignment thereof (i) if the assignment is not fully perfected
under state law prior to commencement of the bankruptcy proceeding, (ii) to
the extent such rents are used by the borrower to maintain the mortgaged
property, or for other court authorized expenses, or (iii) to the extent
other collateral may be substituted for the rents.
To the extent a mortgagor's ability to make payment on a mortgage loan is
dependent on payments under a lease of the related property, such ability may
be impaired by the commencement of a bankruptcy proceeding relating to a
lessee under such lease. Under the federal bankruptcy laws, the filing of a
petition in bankruptcy by or on behalf of a lessee results in a stay in
bankruptcy against the commencement or continuation of any state court
proceeding for past due rent, for accelerated rent, for damages or for a
summary eviction order with respect to a default under the lease that
occurred prior to the filing of the lessee's petition.
In addition, federal bankruptcy law generally provides that a trustee or
debtor in possession in a bankruptcy or reorganization case under the
Bankruptcy Code may, subject to approval of the court (a) assume the lease
and retain it or assign it to a third party or (b) reject the lease. If the
lease is assumed, the trustee or debtor in possession (or assignee, if
applicable) must cure any defaults under the lease, compensate the lessor for
its losses and provide the lessor with "adequate assurance" of future
performance. Such remedies may be insufficient, however, as the lessor may be
forced to continue under the lease with a lessee that is a poor credit risk
or an unfamiliar tenant if the lease was assigned, and any assurances
provided to the lessor may, in fact, be inadequate. Furthermore, there is
likely to be a period of time between the date upon which a lessee files a
bankruptcy petition and the date upon which the lease is assumed or rejected.
Although the lessee is obligated to make all lease payments currently with
respect to the post-petition period, there is a risk that such payments will
not be made due to the lessee's poor financial condition. If the lease is
rejected, the lessor will be treated as an unsecured creditor with respect
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to its claim for damages for termination of the lease and the mortgagor must
relet the mortgage property before the flow of lease payments will
recommence. In addition, pursuant to Section 502(b)(6) of the Bankruptcy
Code, a lessor's damages for lease rejection are limited by a formula.
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer to the Trust Fund of any payments made by
the mortgagor under the related Mortgage Loan. Moreover, some recent court
decisions suggest that even a non-collusive, regularly conducted foreclosure
sale may be challenged in a bankruptcy proceeding as a "fraudulent
conveyance," regardless of the parties' intent, if a bankruptcy court
determines that the mortgaged property has been sold for less than fair
consideration while the mortgagor was insolvent and within one year (or
within any longer state statutes of limitations if the trustee in bankruptcy
elects to proceed under state fraudulent conveyance law) of the filing of
bankruptcy.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated material federal
income consequences of the purchase, ownership, and disposition of the
Certificates. The discussion below does not purport to address all federal
income consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules. The discussion is
based upon laws, regulations, rulings and decisions now in effect all of
which are subject to change. This discussion reflects the applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as regulations (the "REMIC Regulations") promulgated by the U.S.
Department of the Treasury on December 23, 1992. 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 Certificates.
For purposes of this discussion, where the applicable Prospectus
Supplement provides for a Fixed Retained Yield with respect to the Mortgage
Loans or Contracts of a Series of Certificates, references to the Mortgage
Loans or Contracts will be deemed to refer to that portion of the Mortgage
Loans or Contracts held by the Trust Fund, which does not include the Fixed
Retained Yield. For purposes of this discussion, references to the "principal
amount" or "principal balance" of a Certificate will be deemed to refer to
the Stated Amount in the case of Multi-Class Certificates. For purposes of
this discussion, unless otherwise specified, the term "Mortgage Loans" will
be used to refer to Mortgage Loans and Contracts. References to a "holder" or
"Certificateholder" in this discussion generally mean the beneficial owner of
a Certificate.
The following discussion addresses securities of three general types: (i)
securities ("REMIC Certificates") representing interests in a Trust Fund, or
a portion thereof, which the Depositor will covenant to elect to have treated
as a real estate mortgage investment conduit ("REMIC") under sections 860A
through 860G of the Code; (ii) securities ("Non-REMIC Certificates")
representing interests in a Trust Fund (a "Grantor Trust Estate") which the
Depositor will covenant not to elect to have treated as a REMIC; and (iii)
securities ("Notes") that are intended to be treated for federal income tax
purposes as indebtedness secured by the underlying Mortgage Loans. This
Prospectus does not address the tax treatment of partnership interests. Such
a discussion will be set forth in the applicable Prospectus Supplement for
any trust issuing securities characterized as partnership interests. The
Prospectus Supplement for each series of securities will indicate whether a
REMIC election (or elections) will be made for the related Trust Estate and,
if a REMIC election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC.
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REMIC CERTIFICATES
GENERAL
With respect to a particular Series of Certificates, an election may be
made to treat the Trust Fund (or one or more segregated pools of assets
therein) as one or more REMICs within the meaning of Code Section 860D. A
Trust Fund or a portion or portions thereof as to which one or more REMIC
elections will be made will be referred to as a "REMIC Pool." For purposes of
this discussion, Certificates of a Series as to which one or more REMIC
elections are made, which will include all Multi-Class Certificates and may
include Standard Certificates or Stripped Certificates or both, are referred
to as "REMIC Certificates" and will consist of one or more Classes of
"Regular Certificates" and one Class of "Residual Certificates" in the case
of each REMIC Pool. Qualification as a REMIC requires ongoing compliance with
certain conditions. With respect to each Series of REMIC Certificates, the
Depositor's Counsel has advised the Depositor that in the firm's opinion,
assuming (i) the making of such an election, (ii) compliance with the Pooling
and Servicing Agreement, and (iii) compliance with any changes in the law,
including any amendments to the Code or applicable Treasury regulations
thereunder, each REMIC Pool will qualify as a REMIC. In such case, the
Regular Certificates will be considered to be "regular interests" in the
REMIC Pool and generally will be treated for federal income tax purposes as
if they were newly originated debt instruments, and the Residual Certificates
will be considered to be "residual interests" in the REMIC Pool. The
Prospectus Supplement for each Series of Certificates will indicate whether
one or more REMIC elections with respect to the related Trust Fund will be
made, in which event references to REMIC or "REMIC Pool" herein shall be
deemed to refer to each such REMIC Pool.
STATUS OF REMIC CERTIFICATES
REMIC Certificates held by a mutual savings bank or a domestic building
and loan association will constitute "qualifying real property loans" within
the meaning of Code Section 593(d)(1) in the same proportion that the assets
of the REMIC Pool would be so treated. REMIC Certificates held by a domestic
building and loan association will constitute either "a regular or residual
interest in a REMIC" within the meaning of Code Section 7701(a)(19)(C)(xi),
but only in the same proportion that the assets of the REMIC Pool would be
treated as "loans . . . secured by an interest in real property which is . .
. residential real property" (such as single family or multifamily
properties, but not commercial properties) within the meaning of Code Section
7701(a)(19)(C)(v) or as other assets described in Code Section
7701(a)(19)(C), and otherwise will not qualify for such treatment. REMIC
Certificates held by a real estate investment trust will constitute "real
estate assets" within the meaning of Code Section 856(C)(5)(A), and interest
on the Regular Certificates and income with respect to Residual Certificates
will be considered "interest on obligations secured by mortgages on real
property or on interests in real property" within the meaning of Code Section
856(C)(3)(B) in the same proportion that, for both purposes, the assets and
income of the REMIC Pool would be so treated. If at all times 95% or more of
the assets of the REMIC Pool qualify for the foregoing respective treatments,
the REMIC Certificates will qualify for the corresponding status in their
entirety. For purposes of Code Sections 593(d)(1) and 856(c)(5)(A), payments
of principal and interest on the Mortgage Loans that are reinvested pending
distribution to holders of Certificates qualify for such treatment. Where two
REMIC Pools are part of a tiered structure they will be treated as one REMIC
for purposes of the tests described above respecting asset ownership of more
or less than 95%. In addition, if the assets of a REMIC include Buy-Down
Loans, it is possible that the percentage of such assets constituting
"qualifying real property loans" or if possible, "loans . . . secured by an
interest in real property" for purposes of Code Section 593(d)(1) and
7701(a)(19)(c)(v), respectively, may be required to be reduced by the amount
of the related Buy-Down Fund. REMIC Certificates held by a regulated
investment company will not constitute "Government securities" within the
meaning of Code Section 851(b)(4)(A)(i). REMIC Certificates held by certain
financial institutions will constitute an "evidence of indebtedness" within
the meaning of Code Section 582(c)(1).
QUALIFICATION AS A REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in
the Code. The REMIC Pool must fulfill an asset
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test, which requires that no more than a de minimis portion of the assets of
the REMIC Pool, as of the close of the third calendar month beginning after
the "Startup Day" (which for purposes of this discussion is the date of
issuance of the REMIC Certificates) and at all times thereafter, may consist
of assets other than "qualified mortgages" and "permitted investments." The
REMIC Regulations provide a "safe harbor" pursuant to which the de minimis
requirement is met if at all times the aggregate adjusted basis of the
nonqualified assets in less than 1 percent of the aggregate adjusted basis of
all the REMIC Pool's assets. An entity that fails to meet the safe harbor may
nevertheless demonstrate that it holds no more than a de minimis amount of
nonqualified assets. A REMIC also must provide "reasonable arrangements" to
prevent its residual interest from being held by "disqualified organizations"
and applicable tax information to transferors or agents that violate this
requirement. See "Taxation of Residual Certificates -- Tax-Related
Restrictions on Transfers of Residual Certificates --Disqualified
Organizations."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed-price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
certificates of beneficial interest in a grantor trust that holds mortgage
loans, regular interests in another REMIC, loans secured by timeshare
interests and loans secured by shares held by a tenant stockholder in a
cooperative housing corporation, provided, in general, (i) the fair market
value of the real property security (including buildings and structural
components thereof) is at least 80% of the principal balance of the related
Mortgage Loan either at origination or as of the Startup Day (an original
loan-to-value ratio of not more than 125% with respect to the real property
security) or (ii) substantially all the proceeds of the Mortgage Loan or the
underlying mortgage loan were used to acquire, improve or protect an interest
in real property that, at the origination date, was the only security for the
Mortgage Loan or underlying mortgage loan. A qualified mortgage includes a
qualified replacement mortgage, which is any property that would have been
treated as a qualified mortgage if it were transferred to the REMIC Pool on
the Startup Day and that is received either (i) in exchange for any qualified
mortgage within a three-month period thereafter or (ii) in exchange for a
"defective obligation" within a two-year period thereafter. A "defective
obligation" includes (i) a mortgage in default or as to which default is
reasonably foreseeable, (ii) a mortgage as to which a representation or
warranty made at the time of transfer to the REMIC Pool has been breached,
(iii) a mortgage that was fraudulently procured by the mortgagor, and (iv) a
mortgage that was not in fact principally secured by real property (but only
if such mortgage is disposed of within 90 days of discovery). A mortgage loan
that is "defective" as described in clause (iv) that is not sold or, if
within two years of the Startup Day, exchanged, within 90 days of discovery,
ceases to be a qualified mortgage after such 90-day period.
The REMIC Regulations provide that obligations secured by interests in
manufactured housing which qualify as "single family residences" within the
meaning of Code Section 25(e)(10) may be treated as "qualified mortgages" of
a REMIC. Under Code Section 25(e)(10), the term "single family residence"
includes any manufactured home which has a minimum of 400 square feet of
living space and a minimum width in excess of 102 inches and which is of a
kind customarily used at a fixed location. The Depositor will represent and
warrant that each of the Manufactured Homes securing the Contracts meets this
definition of "single family residence."
Permitted investments include cash flow investments, qualified reserve
assets and foreclosure property. A cash flow investment is any instrument,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13
months, until the next scheduled distribution to holders of interests in the
REMIC Pool. A qualified reserve asset is any intangible property held for
investment that is part of any reasonably required reserve maintained by the
REMIC Pool to provide for payments of expenses of the REMIC Pool or to
provide additional security for payments due on the regular or residual
interests that otherwise may be delayed or defaulted upon because of default
(including delinquencies) on the qualified mortgages, lower than expected
reinvestment returns, prepayment interest shortfalls and certain other
contingencies. The reserve fund will be disqualified if more than 30 percent
of the gross income from the assets in such fund for the year is derived from
the sale of property held for less than three months, unless required to
prevent a default on the
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regular interests caused by a default on one or more qualified mortgages. A
reserve fund must be reduced "promptly and appropriately" as payments on the
Mortgage Loans are received. Foreclosure property is real property acquired
by the REMIC Pool in connection with default or imminent default of a
qualified mortgage and generally held for not more than two years, with
extensions granted by the Internal Revenue Service.
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet certain requirements. All of the interests in a
REMIC Pool must be either of the following: (i) one or more classes of
regular interests or (ii) a class of residual interests on which
distributions, if any, are made pro rata. A regular interest is an interest
in a REMIC Pool that is issued on the Startup Day with fixed terms, is
designated as a regular interest, and unconditionally entitles the holder to
receive a specified principal amount (or other similar amount), and provides
that interest payments (or other similar amounts), if any, at or before
maturity either are payable based on a fixed rate or at a qualified variable
rate or consist of a specified, nonvarying portion of the interest payments
on qualified mortgages. The specified principal amount of a regular interest
that provides for interest payments consisting of a specified, nonvarying
portion of interest payments on qualified mortgages may be zero. A residual
interest is an interest in a REMIC Pool other than a regular interest that is
issued on the Startup Day and is designated as a residual interest. An
interest in a REMIC Pool may be treated as a regular interest even if
payments of principal with respect to such interest are subordinated to
payments on other regular interests or the residual interest in the REMIC
Pool, and are dependent on the absence of defaults or delinquencies on
qualified mortgages or permitted investments, lower than reasonably expected
returns on permitted investments, unanticipated expenses incurred by the
REMIC Pool or prepayment interest shortfalls. Accordingly, the Regular
Certificates of a Series will constitute one or more classes of regular
interests, and the Residual Certificates with respect to each REMIC Pool in
that Series will constitute a single class of residual interests on which
distributions are made pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for
such year and thereafter. In this event, an entity with multiple classes of
ownership interests may be treated as a separate association taxable as a
corporation under Treasury regulations, and the Regular Certificates may be
treated as equity interests therein. The Code, however, authorizes the
Treasury Department to issue regulations that address situations where
failure to meet one or more of the requirements for REMIC status occurs
inadvertently and in good faith, and disqualification of the REMIC Pool would
occur absent regulatory relief. Investors should be aware, however, that the
Conference Committee Report to the 1986 Act indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or
a portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
GENERAL
In general, interest paid or accrued, original issue discount, and market
discount on a Regular Certificate will be treated as ordinary income to a
holder of the Regular Certificate (the "Regular Certificateholder"), and
principal payments on a Regular Certificate will be treated as a return of
capital to the extent of the Regular Certificateholder's basis in the Regular
Certificate allocable thereto. Regular Certificateholders must use the
accrual method of accounting with regard to Regular Certificates, regardless
of the method of accounting otherwise used by such Regular
Certificateholders.
ORIGINAL ISSUE DISCOUNT
Compound Interest Certificates will be, and certain of the Regular
Certificates of other Classes of a Series may be, issued with "original issue
discount" within the meaning of Code Section 1273(a). Holders of any Class or
Subclass of Regular Certificates having original issue discount generally
must include original issue discount in ordinary income for federal income
purposes as it accrues, in accordance with the constant yield method that
takes into account the compounding of interest. Such accrual may be in
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advance of receipt of the cash attributable to such income. The following
discussion is based in part on temporary and final Treasury regulations
issued on February 2, 1994 under Code Sections 1271 through 1273 and 1275
(the "OID Regulations") and in part on the provisions of the 1986 Act.
Regular Certificateholders should be aware, however, that the OID Regulations
do not adequately address certain issues relevant to prepayable securities,
such as the Regular Certificates. To the extent such issues are not addressed
in the OID Regulations, the Depositor intends to apply the methodology
described in the Conference Committee Report to the 1986 Act. No assurance
can be provided that the Internal Revenue Service will not take a different
position as to those matters not currently addressed by the OID Regulations.
Moreover, the OID Regulations include an anti-abuse rule allowing the
Internal Revenue Service to apply or depart from the OID Regulations where
necessary or appropriate to ensure a reasonable result in light of the
applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect
on the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors as to the discussion herein and the
appropriate method for reporting interest and original issue discount with
respect to the Regular Certificates.
Each Regular Certificate (except to the extent described below with
respect to a Regular Certificate on which principal is distributed in a
single installment or by lots of specified principal amounts upon the request
of a Certificateholder or by random lot (a "Retail Class Certificate")) will
be treated as a single installment obligation for purposes of determining the
original issue discount includible in a Regular Certificateholder's income.
The total amount of original issue discount on a Regular Certificate is the
excess of the "stated redemption price at maturity" of the Regular
Certificate over its "issue price." The issue price of a Regular Certificate
offered pursuant to this Prospectus generally is the first price at which a
substantial amount of Regular Certificates of that Class is sold to the
public (excluding bond houses, brokers and underwriters). Although unclear
under the OID Regulations, the Depositor intends to treat the issue price of
a Class as to which there is no substantial sale as of the issue date or that
is retained by the Depositor as the fair market value of that Class as of the
issue date. The issue price of a Regular Certificate also includes any amount
paid by an initial Regular Certificateholder for accrued interest that
relates to a period prior to the issue date of the Regular Certificate,
unless the Regular Certificateholder elects on its federal income tax return
to exclude such amount from the issue price and to recover it on the first
Distribution Date. The stated redemption price at maturity of a Regular
Certificate always includes the principal amount of the Regular Certificate,
but generally will not include distributions of interest if such interest
distributions constitute "qualified stated interest." Under the OID
Regulations, qualified stated interest generally means interest payable at a
single fixed rate or a qualified variable rate as described below, provided
that such interest payments are unconditionally payable at intervals of one
year or less during the entire term of the Regular Certificate. No
distributions on a Compound Interest Certificate, or on other Regular
Certificates with respect to which interest distributions may be deferred and
added to principal, will constitute qualified stated interest, and,
accordingly, the stated redemption price at maturity of such Regular
Certificates includes not only their principal balances but also all other
distributions (whether denominated as accrued interest or current interest)
to be received thereon. Likewise, the Depositor intends to treat an "interest
only" Class, or a Class on which interest is substantially disproportionate
to its principal amount (a so-called "super-premium") Class as having no
qualified stated interest. Where the interval between the issue date and the
first Distribution Date on a Regular Certificate is shorter than the interval
between subsequent Distribution Dates, the interest attributable to the
additional days will be included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate. For
this purpose, the weighted average maturity of the Regular Certificate is
computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution is scheduled to be made by a fraction, the numerator of which is
the amount of each distribution included in the stated redemption price at
maturity of the Regular Certificate and the denominator of which is the
stated redemption price at maturity of the Regular Certificate. The
Conference Committee Report to the 1986 Act provides that the schedule of
such distributions should be
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determined in accordance with the assumed rate of prepayment of the Mortgage
Loans (the "Prepayment Assumption") and the anticipated reinvestment rate, if
any, relating to the Regular Certificates. The Prepayment Assumption with
respect of a Series of Regular Certificates will be set forth in the related
Prospectus Supplement. Holders generally must report de minimis original
issue discount pro rata as principal payments are received, and such income
will be capital gain if the Regular Certificate is held as a capital asset.
However, under the OID Regulations, Regular Certificateholders may elect to
accrue all de minimis original issue discount (other than de minimis issue
discount attributable to a "teaser" interest rate or an initial interest
holiday) as well as market discount and market premium, under the constant
yield method. See "Election to Treat All Interest Under the Constant Yield
Method."
A Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the
original issue discount on the Regular Certificate accrued during an accrual
period for each day on which it holds the Regular Certificate, including the
date of purchase but excluding the date of disposition. The Depositor will
treat the monthly period ending on the day before each Distribution Date as
the accrual period. With respect to each Regular Certificate, a calculation
will be made of the original issue discount that accrues during each
successive full accrual period (or shorter period from the date of original
issue) that ends on the day before the related Distribution Date on the
Regular Certificate. The Conference Committee Report to the 1986 Act states
that the rate of accrual of original issue discount is intended to be based
on the Prepayment Assumption. Other than as discussed below with respect to a
Retail Class Certificate, the original issue discount accruing in a full
accruing period would be the excess, if any, of (i) the sum of (a) the
present value of all of the remaining distributions to be made on the Regular
Certificate as of the end of that accrual period that are included in the
Regular Certificate's stated redemption price at maturity, and (b) the
distributions made on the Regular Certificate during the accrual period that
are included in the Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of the Regular Certificate at
the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence is calculated based on
(i) the yield to maturity of the Regular Certificate at the issue date, (ii)
events (including actual prepayments) that have occurred prior to the end of
the accrual period, and (iii) the Prepayment Assumption. For these purposes,
the adjusted issued price of a Regular Certificate at the beginning of any
accrual period equals the issue price of the Regular Certificate, increased
by the aggregate amount of original issue discount with respect to the
Regular Certificate that accrued in all such prior periods, and reduced by
the amount of distributions included in the Regular Certificate's stated
redemption price at maturity that were made on the Regular Certificate in
such prior periods. The original issue discount accruing during any accrual
period (as determined in this paragraph) will then be divided by the number
of days in the period to determine the daily portion of original issue
discount for each day in the period. With respect to an initial accrual
period shorter than a full accrual period, the daily portions of original
issue discount must be determined according to an appropriate allocation
under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Mortgage
Loans that exceed the Prepayment Assumption, and generally will decrease (but
not below zero for any period) if the prepayments are slower than the
Prepayment Assumption.
In the case of a Retail Class Certificate, the Depositor intends to
determine the yield to maturity of such Certificate based upon the
anticipated payment characteristics of the Class as a whole under the
Prepayment Assumption. In general, the original issue discount accruing on
each Retail Class Certificate in a full accrual period would be its allocable
share of the original issue discount with respect to the entire Class, as
determined in accordance with the preceding paragraph. However, in the case
of a distribution in retirement of the entire unpaid principal balance of any
Retail Class Certificate (or portion of such unpaid principal balance), (a)
the remaining unaccrued original issue discount allocable to such Certificate
(or to such portion) will accrue at the time of such distribution, and (b)
the accrual of original issue discount allocable to each remaining
Certificate of such Class (or the remaining unpaid principal balance of a
partially redeemed Retail Class Certificate after a distribution of principal
has been received)
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will be adjusted by reducing the present value of the remaining payments on
such Class and the adjusted issue price of such Class to the extent
attributable to the portion of the unpaid principal balance thereof that was
distributed. The Depositor believes that the foregoing treatment is
consistent with the "pro-rata prepayment" rules of the OID Regulations, but
with the rate of accrual of original issue discount determined based on the
Prepayment Assumption for a Class as a whole. Investors are advised to
consult their tax advisors as to this treatment.
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted
issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, such a subsequent purchaser may elect to treat all such
acquisition premium under the constant yield method, as described below under
the heading "Election to Treat All Interest Under the Constant Yield Method."
VARIABLE RATE REGULAR CERTIFICATES
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate
if, generally, (i) the issue price does not exceed the original principal
balance by more than a specified amount, and (ii) the interest compounds or
is payable at least annually at current values of (a) one or more "qualified
floating rates," (b) a single fixed rate followed by one or more qualified
floating rates, (c) a single "objective rate" or (d) a single fixed rate and
a single objective rate that is a "qualified inverse floating rate." A
floating rate is a qualified floating rate if variations in the rate can
reasonably be expected to measure contemporaneous variations in the cost of
newly borrowed funds, where such rate is subject to a multiple of not less
than zero nor more than 1.35. Such rate may also be increased or decreased by
a fixed spread or subject to a fixed cap or floor, or a cap or floor that is
not reasonably expected as of the issue date to affect the yield of the
instrument significantly. An objective rate includes a rate determined using
a single fixed formula and that is based on one or more qualified floating
rates or the yield or changes in the price of actively traded personal
property. A qualified inverse floating rate is a rate equal to a fixed rate
minus a qualified floating rate that inversely reflects the contemporaneous
variations in the cost of newly borrowed funds; an inverse floating rate that
is not a qualified inverse floating rate may nevertheless be an objective
rate. A Class of Regular Certificates may be issued under this Prospectus
that does not have a variable rate under the foregoing rules, for example, a
Class that bears an interest-only or super-premium floating rate, or a fixed
rate for one year or more followed by the inverse of an index multiplied by
more than 1.35. It is possible that such a Class may be considered to bear
"contingent interest," within the meaning of proposed Treasury regulations
issued on December 16, 1994. These proposed regulations under certain
circumstances could result in a deferral of the timing of reporting of such
interest income when compared to the original issue discount rules. However,
the proposed regulations regarding contingent interest have not been adopted
in final form and may not currently by relied upon. Moreover, under the REMIC
Regulations, a Regular Certificate (i) bearing a rate that qualifies as a
variable rate under the OID Regulations that is tied to current values of a
variable rate (or the highest, lowest or average of two or more variable
rates) including a rate based on the average cost of funds of one or more
financial institutions, or a positive or negative multiple of such a rate
(plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the qualified mortgages that bear
either a fixed rate or a variable rate, including such a rate that is subject
to one or more caps or floors, or (ii) bearing one or more such variable
rates for one or more periods, or one or more fixed rates for one or more
periods, and a different variable or fixed rate for other periods, qualifies
as a regular interest in a REMIC. Accordingly, unless otherwise indicated in
the applicable Prospectus Supplement, the Depositor intends to treat Regular
Certificates that qualify as regular interests under this rule in the same
manner as obligations bearing a variable rate for original issue discount
reporting purposes, with regular interests that do not meet the definition of
a variable rate in the OID Regulations being treated as having all
non-qualified stated interest.
The amount of original issue discount with respect to a Regular
Certificate bearing a variable rate of interest will accrue in the manner
described above under "Original Issue Discount," with the yield to maturity
and future payments on such Regular Certificate generally to be determined by
assuming that
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interest will be payable for the life of the Regular Certificate based on the
initial rate (or, if different, the value of the applicable variable rate as
of the pricing date). Unless otherwise specified in the applicable Prospectus
Supplement, the Depositor intends to treat such variable interest as
qualified stated interest, other than variable interest on an interest-only
Class, which will be treated as non-qualified stated interest includible in
the stated redemption price at maturity. Ordinary income reportable for any
period will be adjusted based on subsequent changes in the applicable
interest rate index.
DEFERRED INTEREST
Any Deferred Interest that accrues with respect to a Class of Regular
Certificates will constitute income to the holders of such Regular
Certificates prior to the time distributions of cash with respect to such
Deferred Interest are made. The Depositor will treat all interest on a
Regular Certificate as to which there may be Deferred Interest as includible
in the stated redemption price at maturity thereof.
MARKET DISCOUNT
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these Code sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Certificate (i) is exceeded by the then-current
principal amount of the Regular Certificate, or (ii) in the case of a Regular
Certificate having original issue discount, is exceeded by the adjusted issue
price of such Regular Certificate at the time of purchase. Such purchaser
generally will be required to recognize ordinary income to the extent of
accrued market discount on such Regular Certificate as distributions
includible in the stated redemption price at maturity thereof are received,
in an amount not exceeding any such distribution. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take
into account the Prepayment Assumption. The Conference Committee Report to
the 1986 Act provides that until such regulations are issued, such market
discount would accrue either (i) on the basis of a constant interest rate, or
(ii) in the ratio of stated interest allocable to the relevant period to the
sum of the interest for such period plus the remaining interest as of the end
of such period, or in the case of a Regular Certificate issued with original
issue discount, in the ratio of original issue discount accrued for the
relevant period to the sum of the original issue discount accrued for such
period plus the remaining original issue discount as of the end of such
period. Such purchaser also generally will be required to treat a portion of
any gain on a sale or exchange of the Regular 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 as partial distributions in reduction of the
stated redemption price at maturity were received. Such purchaser will be
required to defer deduction of all or a portion of the excess of the interest
paid or accrued on indebtedness incurred or continued to purchase or carry
the Regular Certificate over the interest distributable thereon. The deferred
portion of such interest expense in any taxable year generally will not
exceed the accrued market discount on the Regular Certificate for such year.
Any such deferred interest expense is, in general, allowed as a deduction not
later than the year in which the related market discount income is recognized
or the Regular Certificate is disposed of. As an alternative to the inclusion
of market discount in income on the foregoing basis, the Regular
Certificateholder may elect to include market discount in income currently as
it accrues on all market discount instruments acquired by such Regular
Certificateholder in that taxable year or thereafter, in which case the
interest deferral rule will not apply. See "Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in
which such election may be deemed to be made.
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the
Regular Certificate (determined as described above in the fourth paragraph
under "Original Issue Discount") remaining after the date of purchase. It
appears that de minimis market discount would generally be
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reported pro rata as principal payments are received. Treasury regulations
implementing the market discount rules have not yet been issued, and
therefore investors should consult their own tax advisors regarding the
application of these rules as well as the advisability of making any of the
elections with respect thereto.
PREMIUM
A Regular Certificate purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased
at a premium. If the Regular Certificateholder holds such Regular Certificate
as a "capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize such premium
under the constant yield method. The Conference Committee Report to the 1986
Act indicates a Congressional intent that the same rules that will apply to
the accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations
such as the Regular Certificates, although it is unclear whether the
alternatives to the constant yield method described above under "Market
Discount" are available. Amortizable bond premium will be treated as an
offset to interest income on the Regular Certificates, rather than a separate
deduction item. See "Election to Treat All Interest Under the Constant Yield
Method" below regarding an alternative manner in which the Code Section 171
election may be deemed to be made.
TREATMENT OF LOSSES
Regular Certificateholders will be required to report income with respect
to Regular Certificates on the accrual method of accounting, without giving
effect to delays or reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans, except to the extent it can be
established that such losses are uncollectible. Accordingly, the holder of a
Regular Certificate, particularly a Subordinate Certificate, may have income,
or may incur a diminution in cash flow as a result of a default or
delinquency, but may not be able to take a deduction (subject to the
discussion below) for the corresponding loss until a subsequent taxable year.
Although not entirely clear, it appears that Regular Certificateholders that
are corporations should in general be allowed to deduct as an ordinary loss
such loss with respect to principal sustained during the taxable year on
account of any Regular Certificates becoming wholly or partially worthless,
and that, in general, Regular Certificateholders that are not corporations
will be allowed to deduct as a short-term capital loss any loss sustained
during the taxable year on account of a portion of any such Regular
Certificates becoming wholly worthless. Although the matter is not free from
doubt, non-corporate Regular Certificateholders should be allowed a bad debt
deduction at such time as the principal balance of such Regular Certificates
is reduced to reflect losses resulting from any liquidated Mortgage Loans.
The Internal Revenue Service, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect such
losses only after all the Mortgage Loans remaining in the Trust Fund have
been liquidated or the applicable Class of Regular Certificates has been
otherwise retired. The Internal Revenue Service could also assert that losses
on the Regular Certificates are deductible on some other method that may
defer such deductions for all holders, such as reducing future cash flow for
purposes of computing original issue discount. This may have the effect of
creating "negative" original issue discount which would be deductible only
against future positive original issue discount or otherwise upon termination
of the Class. Regular Certificateholders are urged to consult their own tax
advisors regarding the appropriate timing, amount and character of any loss
sustained with respect to such Regular Certificates. Losses attributable to
interest previously reported as income should be deductible as ordinary
losses by both corporate and non- corporate holders. Special loss rules are
applicable to banks and thrift institutions, including rules regarding
reserves for bad debts. Such taxpayers are advised to consult their tax
advisors regarding the treatment of losses on Regular Certificates.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD METHOD
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified
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stated interest. For purposes of applying the constant yield method to a debt
instrument subject to such an election, (i) "interest" includes stated
interest, original issue discount, de minimis original issue discount, market
discount and de minimis market discount, as adjusted by any amortizable bond
premium or acquisition premium and (ii) the debt instrument is treated as if
the instrument were issued on the holder's acquisition date in the amount of
the holder's adjusted basis immediately after acquisition. A holder generally
may make such an election on an instrument by instrument basis or for a class
or group of debt instruments. However, if the holder makes such an election
with respect to a debt instrument with amortizable bond premium or with
market discount, the holder is deemed to have made elections to amortize bond
premium or to report market discount income currently as it accrues under the
constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year
in which the debt instrument is acquired and is irrevocable except with the
approval of the Internal Revenue Service. Investors should consult their own
tax advisors regarding the advisability of making such an election.
SALE OR EXCHANGE OF REGULAR CERTIFICATES
If a Regular Certificateholder sells or exchanges a Regular Certificate,
the Regular Certificateholder will recognize gain or loss equal to the
difference, if any, between the amount received and its adjusted basis in the
Regular Certificate. The adjusted basis of a Regular Certificate generally
will equal the cost of the Regular Certificate to the seller, increased by
any original issue discount or market discount previously included in the
seller's gross income with respect to the Regular Certificate and reduced by
amounts included in the state redemption price at maturity of the Regular
Certificate that were previously received by the seller and by any amortized
premium.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or
short-term depending on whether the Regular Certificate has been held for the
long-term capital gain holding period (currently more than one year). Such
gain will be treated as ordinary income (i) if a Regular Certificate is held
as part of a "conversion transaction" as defined in Code Section 1258(c), up
to the amount of interest that would have accrued on the Regular
Certificateholder's net investment in the conversion transaction at 120% of
the appropriate applicable Federal rate under Code Section 1274(d) in effect
at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition
of property that was held as a part of such transaction, (ii) in the case of
a non-corporate taxpayer, to the extent such taxpayer has made an election
under Code Section 163(d)(4) to have net capital gains taxed as investment
income at ordinary income rates, or (iii) to the extent that such gain does
not exceed the excess, if any, of (a) the amount that would have been
includible in the gross income of the holder if his yield on such Regular
Certificate were 110 percent of the applicable Federal rate as of the date of
purchase, over (b) the amount of income actually includible in the gross
income of such holder with respect to the Regular Certificate. In addition,
gain or loss recognized from the sale of a Regular Certificate by certain
banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c). Pursuant to the Revenue Reconciliation Act
of 1993, capital gains of certain non-corporate taxpayers are subject to a
lower maximum tax rate than ordinary income of such taxpayers. The maximum
tax rate for corporations is the same with respect to both ordinary income
and capital gains.
TAXATION OF RESIDUAL CERTIFICATES
TAXATION OF REMIC INCOME
Generally, the "daily portions" of REMIC taxable income or net loss will
be includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Certificates ("Residual Holders"), and will not
be taxed separately to the REMIC Pool. The daily portions of REMIC taxable
income or net loss of a Residual Holder are determined by allocating the
REMIC Pool's taxable income or net loss for each calendar quarter ratably to
each day in such quarter and by allocating such daily
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portion among the Residual Holders in proportion to their respective holdings
of Residual Certificates in the REMIC Pool on such day. REMIC taxable income
is generally determined in the same manner as the taxable income of an
individual using the accrual method of accounting except that (i) the
limitation on deductibility of investment interest expense and expenses for
the production of income do not apply, (ii) all bad loans will be deductible
as business bad debts, and (iii) the limitation on the deductibility of
interest and expenses related to tax-exempt income will apply. The REMIC
Pool's gross income includes interest, original issue discount income, and
market discount income, if any, on the Mortgage Loans, reduced by
amortization of any premium on the Mortgage Loans, plus income on
reinvestment of cash flows and reserve assets plus any cancellation of
indebtedness income upon allocation of realized losses to the Regular
Certificates. The REMIC Pool's deductions include interest and original issue
discount expense on the Regular Certificates, servicing fees on the Mortgage
Loans, other administrative expenses of the REMIC Pool and realized losses on
the Mortgage Loans. The requirement that Residual Holders report their pro
rata share of taxable income or net loss of the REMIC Pool will continue
until there are no Certificates of any class of the related Series
outstanding.
The taxable income recognized by a Residual Holder in any taxable year
will be affected by, among other factors, the relationship between the timing
of recognition of interest and original issue discount or market discount
income or amortization of premium with respect to the Mortgage Loans, on the
one hand, and the timing of deductions for interest (including original issue
discount) on the Regular Certificates, on the other hand. In the event that
an interest in the Mortgage Loans is acquired by the REMIC Pool at a
discount, and one or more of such Mortgage Loans is prepaid, the Residual
Holder may recognize taxable income without being entitled to receive a
corresponding amount of cash because (i) the prepayment may be used in whole
or in part to make distributions in reduction of principal on the Regular
Certificates, and (ii) the discount on the Mortgage Loans which is includible
in income may exceed the deduction allowed upon such distributions on those
Regular Certificates on account of any unaccrued original issue discount
relating to those Regular Certificates. When there is more than one Class of
Regular Certificates that distribute payments in reduction of principal
balance sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Certificates when distributions in reduction of principal are being
made in respect of earlier Classes of Regular Certificates to the extent that
such Classes are not issued with substantial discount. If taxable income
attributable to such a mismatching is realized, in general, losses would be
allowed in later years as payments on the later Classes of Regular
Certificates are made. Taxable income may also be greater in earlier years
than in later years as a result of the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of such a
Series of Regular Certificates, may increase over time as distributions of
principal are made on the lower yielding Classes of Regular Certificates,
whereas, to the extent the REMIC Pool contains fixed rate Mortgage Loans,
interest income with respect to any given Mortgage Loan will remain constant
over time as a percentage of the outstanding principal amount of that loan.
Consequently, Residual Holders must have sufficient other sources of cash to
pay any federal, state, or local income taxes due as a result of such
mismatching or unrelated deductions against which to offset such income,
subject to the discussion of "excess inclusions" below under "Limitations on
Offset or Exemption of REMIC Income." The timing of such mismatching of
income and deductions described in this paragraph, if present with respect to
a Series of Certificates, may have a significant adverse effect upon a
Residual Holder's after-tax rate of return. In addition, a Residual Holder's
taxable income during certain periods may exceed the income reflected by such
Residual Holder for such periods in accordance with generally accepted
accounting principles. Investors should consult their own accountants
concerning the accounting treatment of their investment in Residual
Certificates.
BASIS AND LOSSES
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Holder is limited to the adjusted basis of the
Residual Certificate as of the close of the quarter (or time of disposition
of the Residual Certificate if earlier), determined without taking into
account the net loss for the quarter. The initial adjusted basis of a
purchaser of a Residual Certificate is the amount paid for such Residual
Certificate. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Holder and will be
decreased (but not below zero), first, by a
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cash distribution from the REMIC Pool and, second, by the amount of loss of
the REMIC Pool reportable by the Residual Holder. Any loss that is disallowed
on account of this limitation may be carried over indefinitely by the
Residual Holder for whom such loss was disallowed and may be used by such
Residual Holder only to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Certificate as an offset to its share of the taxable income of
the related REMIC Pool. However, that taxable income will not include cash
received by the REMIC Pool that represents a recovery of the REMIC Pool's
basis in its assets. Such recovery of basis by the REMIC Pool will have the
effect of amortization of the issue price of the Residual Certificates over
their life. However, in view of the possible acceleration of the income of
Residual Holders described above under "Taxation of REMIC Income," the period
of time over which such issue price is effectively amortized may be longer
than the economic life of the Residual Certificates.
A Residual Certificate may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of such residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the Internal Revenue Service may provide future guidance on the
proper tax treatment of payments made by a transferor of such a residual
interest to induce the transferee to acquire the interest, and Residual
Holders should consult their own tax advisors in this regard.
Further, to the extent the initial adjusted basis of the Residual Holder
(other than the original holder) in the Residual Certificate is greater than
the corresponding portion of the REMIC Pool's basis in the Mortgage Loans,
the Residual Holder will not recover a portion of such basis until
termination of the REMIC Pool unless future Treasury regulations provide for
periodic adjustments to the REMIC income otherwise reportable by such holder.
The REMIC Regulations currently in effect do not so provide. See "Treatment
of Certain Items of REMIC Income and Expense -- Market Discount" below
regarding the basis of Mortgage Loans to the REMIC Pool and "Sale or Exchange
of a Residual Certificate" below regarding possible treatment of a loss upon
termination of the REMIC Pool as a capital loss.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
Although the Depositor intends to compute REMIC income and expense in
accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are
subject to uncertainty and differing interpretations. The Depositor makes no
representation as to the specific method that it will use for reporting
income with respect to the Mortgage Loans and expenses with respect to the
Regular Certificates and different methods could result in different timing
of reporting of taxable income or net loss to Residual Holders or differences
in capital gain versus ordinary income.
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original
issue discount income on Regular Certificates as described above under
"Taxation of Regular Certificates -- Original Issue Discount" and "--
Variable Rate Regular Certificates," without regard to the de minimis rule
described therein.
Deferred Interest. Any Deferred Interest that accrues with respect to any
adjustable rate Mortgage Loans held by the REMIC Pool will constitute income
to the REMIC Pool and will be treated in a manner similar to the Deferred
Interest that accrues with respect to Regular Certificates as described above
under "Taxation of Regular Certificates -- Deferred Interest."
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool
allocable to such Mortgage Loans is exceeded by their unpaid principal
balances. The REMIC Pool's basis in such Mortgage Loans is generally their
fair market value immediately after the transfer thereof to the REMIC Pool.
The REMIC Regulations provide that such basis is equal in the aggregate to
the issue prices of all regular and residual interests in the REMIC Pool (or
the fair market value thereof at the Closing Date in the case of a retained
Class). The accrued
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portion of such market discount would be recognized currently as an item of
ordinary income in a manner similar to original issue discount. Market
discount income generally should accrue in the manner described above under
"Taxation of Regular Certificates -- Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans immediately after the
transfer thereof to the REMIC Pool based on the aggregate of the issue prices
(or the fair market value of retained Classes) of the regular and residual
interests in the REMIC Pool. In a manner analogous to the discussion above
under "Taxation of Regular Certificates -- Premium," a REMIC Pool that holds
a Mortgage Loan as a capital asset under Code Section 1221 may elect under
Code Section 171 to amortize premium on the Mortgage Loans originated after
September 27, 1985 under the constant yield method. Amortizable bond premium
will be treated as an offset to interest income on the Mortgage Loans, rather
than as a separate deduction item. To the extent that mortgagors on the
Mortgage Loans are individuals, Code Section 171 will not be available for
premium on Mortgage Loans originated on or prior to September 27, 1985.
Premium with respect to such Mortgage Loans may be deductible in accordance
with a reasonable method regularly employed by the holder thereof. The
allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may
argue that such premium should be allocated in a different manner, such as
allocating such premium entirely to the final payment of principal.
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME
Except in the case of certain thrift institutions, a portion (or all) of
the REMIC taxable income includible in determining the federal income tax
liability of a Residual Holder will be subject to special treatment. That
portion, referred to as the "excess inclusion," is equal to the excess of
REMIC taxable income for the calendar quarter allocable to a Residual
Certificate over the daily accruals for such quarterly period of (i) 120% of
the long-term applicable Federal rate that would have applied to the Residual
Certificate (if it were a debt instrument) on the Startup Day under Code
Section 1274(d), multiplied by (ii) the adjusted issue price of such Residual
Certificate at the beginning of such quarterly period. For this purpose, the
adjusted issue price of a Residual Certificate at the beginning of a quarter
is the issue price of the Residual Certificate, plus the amount of the daily
accruals of REMIC income described in this paragraph for all prior quarters,
decreased by any distributions made with respect to such Residual Certificate
prior to the beginning of such quarterly period. Accordingly, the portion of
the REMIC's taxable income that will be treated as excess inclusions will be
a larger portion of such income as the adjusted issue price of the Residual
Certificates diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
"excess inclusion" generally may not be offset by other deductions, including
net operating loss carryforwards, on such Residual Holder's return. Further,
if the Residual Holder is an organization subject to the tax on unrelated
business income imposed by Code Section 511, the Residual Holder's excess
inclusion will be treated as unrelated business taxable income of such
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who
are not U.S. Persons (as defined below under "Tax-Related Restrictions on
Transfer of REMIC Residual Certificates -- Foreign Investors"), and the
portion thereof attributable to excess inclusions is not eligible for any
reduction in the rate of withholding tax (by treaty or otherwise). See
"Taxation of Certain Foreign Investors -- Residual Certificates" below.
Finally, if a real estate investment trust or a regulated investment company
owns a Residual Certificate, a portion (allocated under Treasury regulations
yet to be issued) of dividends paid by the real estate investment trust or
regulated investment company could not be offset by net operating losses of
its shareholders, would constitute unrelated business taxable income for
tax-exempt shareholders, and would be ineligible for reduction of withholding
to certain persons who are not U.S. Persons.
An exception to the inability of a Residual Holder to offset excess
inclusions with unrelated deductions and net operating losses applied to Code
Section 593 institutions ("thrift institutions"). For
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purposes of applying this rule, all members of an affiliated group filing a
consolidated return are treated as one taxpayer, except that thrift
institutions to which Code Section 593 applies, together with their
subsidiaries formed to issue REMICs, are treated as separate corporations.
Furthermore, the Code provides that regulations may disallow the ability of a
thrift institution to use deductions to offset excess inclusions necessary or
appropriate to prevent avoidance of tax. A thrift institution may not so
offset its excess inclusions unless the Residual Certificates have
"significant value," which requires that (i) the Residual Certificates have
an issue price that is at least equal to 2% of the aggregate of the issue
prices of all Residual Certificates and Regular Certificates with respect to
the REMIC Pool, and (ii) the anticipated weighted average life of the
Residual Certificates is at least 20% of the anticipated weighted average
life of the REMIC Pool. The anticipated weighted average life of the Residual
Certificates is based on all distributions anticipated to be received with
respect thereto (using the Prepayment Assumption). The anticipated weighted
average life of the REMIC Pool is the aggregate weighted average life of all
classes of interests therein (computed using all anticipated distributions on
a regular interest with nominal or no principal). Finally, an ordering rule
under the REMIC Regulations provides that a thrift institution may only
offset its excess inclusion income with deductions after it has first applied
its deductions against income that is not excess inclusion income. If
applicable, the Prospectus Supplement with respect to a Series will set forth
whether the Residual Certificates are expected to have "significant value"
within the meaning of the REMIC Regulations.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL CERTIFICATES
Disqualified Organizations. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as
defined below), a tax would be imposed in an amount equal to the product of
(i) the present value of the total anticipated excess inclusions with respect
to such Residual Certificate for periods after the transfer and (ii) the
highest marginal federal income tax rate applicable to corporations. The
REMIC Regulations provide that the anticipated excess inclusions are based on
actual prepayment experience to the date of the transfer and that projected
payments are based on the Prepayment Assumption. The present value rate
equals the applicable Federal rate under Code Section 1274(d) as of the date
of the transfer for a term ending with the last calendar quarter in which
excess inclusions are expected to accrue. Such a tax generally would be
imposed on the transferor of the Residual Certificate, except that where such
transfer is through an agent (including a broker, nominee or other middleman)
for a Disqualified Organization, the tax would instead be imposed on such
agent. However, a transferor of a 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 does not
have actual knowledge that such affidavit is false. The tax also may be
waived by the Treasury Department if the Disqualified Organization promptly
disposes of the residual interest and the transferor pays income tax at the
highest corporate rate on the excess inclusion for the period the residual
interest is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that is allocable
to the interest in the Pass-Through Entity during the period such interest is
held by such Disqualified Organization, and (ii) the highest marginal federal
corporate income tax rate. Such tax would be deductible from the ordinary
gross income of the Pass-Through Entity for the taxable year. The
Pass-Through Entity would not be liable for such tax if it has received an
affidavit from such record holder that it is not a Disqualified Organization
or stating such holder's taxpayer identification number, and during the
period such person is the record holder of the Residual Certificate, the
Pass-Through Entity does not have actual knowledge that such affidavit is
false.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government,
any international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if
all of its activities are subject to tax and a majority of its board of
directors is not selected by any such governmental entity), any cooperative
organization furnishing electric energy or providing telephone
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service to persons in rural areas as described in Code Section 1381(a)(2)(C),
and any organization (other than a farmers' cooperative described in Code
Section 521) that is exempt from taxation under the Code unless such
organization is subject to the tax or unrelated business income imposed by
Code Section 511, and (ii) "Pass-Through Entity" means any regulated
investment company, real estate investment trust, common trust fund,
partnership, trust, or estate and certain corporations operating on a
cooperative basis. Except as may be provided in Treasury regulations, any
person holding an interest in a Pass-Through Entity as a nominee for another
will, with respect to such interest, be treated as a Pass-Through Entity.
The Pooling and Servicing Agreement with respect to a Series will provide
that no legal or beneficial interest in a Residual Certificate may be
transferred unless (i) the proposed transferee provides to the transferor,
the Depositor and the Trustee an affidavit providing its taxpayer
identification number and stating such transferee is the beneficial owner of
the Residual Certificate, is not a Disqualified Organization and is not
purchasing such Residual Certificate on behalf of a Disqualified Organization
(i.e., as a broker, nominee or middleman thereof), and (ii) the transferor
provides a statement in writing to the Depositor and the Trustee that it has
no actual knowledge that such affidavit is false. Moreover, the Pooling and
Servicing Agreement will provide that any attempted or purported transfer in
violation of these transfer restrictions will be null and void and will vest
no rights in any purported Transferee. Each Residual Certificate with respect
to a Series will bear a legend referring to such restrictions on transfer,
and each holder of a Residual Certificate will be deemed to have agreed, as a
condition of ownership thereof, to any amendments to the related Pooling and
Servicing Agreement required under the Code or applicable Treasury
regulations to effectuate the foregoing restrictions. Information necessary
to compute an applicable excise tax must be furnished to the Internal Revenue
Service and to the requesting party within 60 days of the request, and the
Depositor or the Trustee may charge a fee for computing and providing such
information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor
would continue to be treated as the owner of the Residual Certificates and
thus would continue to be subject to tax on its allocable portion of the net
income of the REMIC Pool. Under the REMIC Regulations, a transfer of a
"noneconomic residual interest" (as defined below) to a Residual Holder
(other than a Residual Holder who is not a U.S. Person, as defined below
under "Foreign Investors") is disregarded for all federal income tax purposes
if a significant purpose of the transferor is to impede the assessment or
collection of tax. A residual interest in a REMIC (including a residual
interest with a positive value at issuance) is a "noneconomic residual
interest" unless, at the time of the transfer, (i) the present value of the
expected future distributions on the residual interest at least equals the
product of the present value of the anticipated excess inclusions and the
highest corporate income tax rate in effect for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. The anticipated excess inclusions
and the present value rate are determined in the same manner as set forth
above under "Disqualified Organizations." The REMIC Regulations explain that
a significant purpose of a transfer will be deemed to impede the assessment
or collection of tax if the transferor, at the time of the transfer, either
knew or should have known that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC. A safe harbor
is provided if (i) the transferor conducted, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and
found that the transferee historically had paid its debts as they came due
and found no significant evidence to indicate that the transferee would not
continue to pay its debts as they came due in the future, and (ii) the
transferee represents to the transferor that it understands that, as the
holder of the noneconomic residual interest, the transferee may incur tax
liabilities in excess of cash flows generated by the interest and that the
transferee intends to pay taxes associated with holding the residual interest
as they become due. The Pooling and Servicing Agreement with respect to a
Series will require the transferee of a REMIC Residual Certificate to certify
to the matters in the preceding sentence as part of the affidavit described
above under the heading "Disqualified Organizations." The transferor must
have no actual knowledge or reason to know that such statements are false.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This
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rule appears intended to apply to a transferee who is not a "U.S. Person" (as
defined below), unless such transferee's income is effectively connected with
the conduct of a trade or business within the United States. A Residual
Certificate is deemed to have tax avoidance potential unless, at the time of
the transfer, (i) the future value of expected distributions equals at least
30% of the anticipated excess inclusions after the transfer, and (ii) the
transferor reasonably expects that the transferee will receive sufficient
distributions from the REMIC Pool at or after the time at which the excess
inclusions accrue and prior to the end of the succeeding taxable year for the
accumulated withholding tax liability to be paid. If the non-U.S. Person
transfers the Residual Certificate back to the U.S. Person, the transfer will
be disregarded and the foreign transferor will continue to be treated as the
owner unless arrangements are made so that the transfer does not have the
effect of allowing the transferor to avoid tax on accrued excess inclusions.
The Prospectus Supplement relating to the Certificates of a Series may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, or an estate or trust
that is subject to U.S. federal income tax regardless of the source of its
income.
SALE OR EXCHANGE OF A RESIDUAL CERTIFICATE
Upon the sale or exchange of a Residual Certificate, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount
realized over the adjusted basis (as described above under "Taxation of
Residual Certificates -- Basis and Losses") of such Residual Holder in such
Residual Certificate at the time of the sale or exchange. In addition to
reporting the taxable income of the REMIC Pool, a Residual Holder will have
taxable income to the extent that any cash distribution to it from the REMIC
Pool exceeds such adjusted basis on that Distribution Date. Such income will
be treated as gain from the sale or exchange of the Residual Certificate. It
is possible that the termination of the REMIC Pool may be treated as a sale
or exchange of a Residual Holder's Residual Certificate, in which case, if
the Residual Holder has an adjusted basis in such Residual Holder's Residual
Certificate remaining when its interest in the REMIC Pool terminates, and if
such Residual Holder holds such Residual Certificate as a capital asset under
Code Section 1221, then such Residual Holder will recognize a capital loss at
that time in the amount of such remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate
in effect at the time the taxpayer entered into the transaction minus any
amount previously treated as ordinary income with respect to any prior
disposition of property that was held as a part of such transaction or (ii)
in the case of a non-corporate taxpayer, to the extent such taxpayer has made
an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. In addition, gain or loss
recognized from the sale of a Residual Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of
Code Section 1091 will apply to dispositions of Residual Certificates where
the seller of the Residual Certificate, during the period beginning six
months before the sale or disposition of the Residual Certificate and ending
six months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual
Certificate.
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TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
PROHIBITED TRANSACTIONS
Income from certain transactions entered into by the REMIC Pool, called
prohibited transactions, will not be part of the calculation of income or
loss includible in the federal income tax returns of Residual Holders, but
rather will be taxed directly to the REMIC Pool at a 100% rate. Prohibited
transactions generally include (i) the disposition of a qualified mortgage
other than for (a) substitution within two years of the Startup Day for a
defective, including a defaulted, obligation (or the repurchase in lieu of
substitution of a defective, including a defaulted, obligation at any time),
or for any qualified mortgage within three months of the Startup Day, (b)
foreclosure, default, or reasonably foreseeable default of a qualified
mortgage, (c) bankruptcy or insolvency of the REMIC Pool, or (d) a qualified
(complete) liquidation, (ii) the receipt of income from assets that are not
the type of mortgages or investments that the REMIC Pool is permitted to
hold, (iii) the receipt of compensation for services, or (iv) the receipt of
gain from disposition of cash flow investments other than pursuant to a
qualified liquidation. Notwithstanding (i) and (iv), it is not a prohibited
transaction to sell REMIC Pool property to prevent a default on Regular
Certificates as a result of a default on qualified mortgages or to facilitate
a clean-up call (generally, an optional termination to save administrative
costs when no more than a small percentage of the Certificates is
outstanding). The REMIC Regulations indicate that the modification of a
Mortgage Loan generally will not be treated as a disposition if it is
occasioned by a default or reasonably foreseeable default, an assumption of
the Mortgage Loan, the waiver of a due-on-sale or due-on-encumbrance clause
or the conversion of an interest rate by a mortgagor pursuant to the terms of
a convertible adjustable rate Mortgage Loan.
CONTRIBUTIONS TO THE REMIC POOL AFTER THE STARTUP DAY
In general, a REMIC Pool will be subject to tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to a REMIC Pool (i) during the
three months following the Startup Day, (ii) made to a qualified reserve fund
by a Residual Holder, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call, and (v) as otherwise
permitted in Treasury regulations yet to be issued.
NET INCOME FROM FORECLOSURE PROPERTY
The REMIC Pool will be 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.
Generally, property acquired by deed in lieu of foreclosure would be treated
as "foreclosure property" for a period of two years, with possible
extensions. 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.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool'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 the date of the adoption of the plan of liquidation, then the
REMIC Pool will not be subject to the prohibited transaction rules on the
sale of its assets, provided that the REMIC Pool 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 Certificates and Residual
Holders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file tax returns for federal income tax purposes in a manner
similar to a partnership. The form for such income
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tax return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income
Tax Return. Treasury regulations provide that, except where there is a single
Residual Holder for an entire taxable year, the REMIC Pool will be subject to
the procedural and administrative rules of the Code applicable to
partnerships, including the determination by the Internal Revenue Service of
any adjustments to, among other things, items of REMIC income, gain, loss,
deduction, or credit in a unified administrative proceeding. The Residual
Holder owning the largest percentage interest in the Residual Certificates
will be obligated to act as the REMIC Pool's "tax matters person," as defined
in applicable Treasury regulations, with respect to the REMIC Pool, and will
be required to irrevocably designate the Trustee as its agent to perform all
of the functions of the tax matters person.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed two percent of the investor's adjusted gross income. In addition,
Code Section 68 provides that itemized deductions otherwise allowable for a
taxable year of an individual taxpayer will be reduced by the lesser of (i)
3% of the excess, if any, of adjusted gross income over $100,000 ($50,000 in
the case of a married individual filing a separate return) (in each case,
subject to adjustment for inflation), or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. In the case of a REMIC Pool,
such deductions may include deductions under Code Section 212 for the
Servicing Fee and all administrative and other expenses relating to the REMIC
Pool, or any similar expenses allocated to the REMIC Pool with respect to a
regular interest it holds in another REMIC. Such investors who hold REMIC
Certificates either directly or indirectly through certain pass-through
entities may have their pro rata share of such expenses allocated to them as
additional gross income, but may be subject to such limitation on deductions.
In addition, such expenses are not deductible at all for purposes of
computing the alternative minimum tax and may cause such investors to be
subject to significant additional tax liability. Temporary Treasury
regulations provide that the additional gross income and corresponding amount
of expenses generally are to be allocated entirely to the holders of Residual
Certificates in the case of a REMIC Pool that would not qualify as a fixed
investment trust in the absence of a REMIC election. However, such additional
income and limitation on deductions will apply to the allocable portion of
such expenses to holders of Regular Certificates, as well as to holders of
Residual Certificates, where such Regular Certificates are similar to
pass-through certificates in a fixed investment trust. Unless indicated
otherwise in the applicable Prospectus Supplement, all such expenses will be
allocable to the Residual Certificates. In general, such allocable portion
will be determined based on the ratio that a Regular Certificateholder's
income, determined on a daily basis, bears to the income of all holders of
Regular Certificates and Residual Certificates with respect to the REMIC
Pool. As a result, individuals, estates, or trusts holding REMIC Certificates
(either directly or indirectly through a grantor trust, partnership, S
corporation, REMIC, or certain other pass-through entities described in the
foregoing temporary Treasury regulations), may have taxable income in excess
of the interest income at the pass-through rate on Regular Certificates that
are issued in a single Class or otherwise consistently with fixed investment
trust status or in excess of distributions of cash for the related period on
Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
REGULAR CERTIFICATES
Interest, including original issue discount, distributable to Regular
Certificateholders who are nonresident aliens, foreign corporations, or other
Non-U.S. Persons (i.e., any persons who are not U.S. Persons, as defined
above), will be considered "portfolio interest" and, therefore, generally,
will not be subject to 30% United States withholding provided that such
Non-U.S. Person (i) is not a "10-percent shareholder" within the meaning of
Code Section 871(h)(3)(B) with respect to the Depositor, or a controlled
foreign corporation described in Code Section 881(c)(3)(C) and (ii) provides
the Trustee, or the person who would otherwise be required to withhold tax
from such distributions under Code Section 1441 or 1442, with an appropriate
statement, signed under penalties of perjury, identifying the beneficial
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owner and stating, among other things, that the beneficial owner of the
Regular Certificate is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless
reduced or eliminated pursuant to an applicable tax treaty or unless the
interest on the Regular Certificate is effectively connected with the conduct
of a trade or business within the United States by such Non-U.S. Person. In
the latter case, such Non-U.S. Person will be subject to United States
federal income tax at regular rates. Investors who are Non-U.S. Persons
should consult their own tax advisors regarding the specific tax consequences
to them of owning a Regular Certificate.
RESIDUAL CERTIFICATES
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Holders who are Non-U.S. Persons are treated as interest for
purposes of the 30% (or lower treaty rate) United States withholding tax.
Treasury regulations provide that amounts distributed to Residual Holders may
qualify as "portfolio interest," subject to the conditions described in
"Regular Certificates" above, but only to the extent that (i) the Mortgage
Loans were issued after July 18, 1984 and (ii) the Trust Fund or segregated
pool of assets therein (as to which a separate REMIC election will be made),
to which the Residual Certificate relates, consists of obligations issued in
"registered form" within the meaning of Code Section 163(f)(1). Generally,
Mortgage Loans will not be, but regular interests in another REMIC Pool will
be, considered obligations issued in registered form. Furthermore, a Residual
Holder will not be entitled to any exemption from the 30% withholding tax (or
lower treaty rate) to the extent of that portion of REMIC taxable income that
constitutes an "excess inclusion." See "Taxation of Residual Certificates--
Limitations on Offset or Exemption of REMIC Income." If the amounts paid to
Residual Holders who are Non-U.S. Persons are effectively connected with the
conduct of a trade or business within the United States by such Non-U.S.
Persons, 30% (or lower treaty rate) withholding will not apply. Instead, the
amounts paid to such Non-U.S. Persons will be subject to United States
federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts will be taken into account for
purposes of withholding only when paid or otherwise distributed (or when the
Residual Certificate is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See
"Taxation of Residual Certificates --Tax-Related Restrictions on Transfer of
Residual Certificates -- Foreign Investor Investors" above concerning the
disregard of certain transfers having "tax avoidance potential." Investors
who are Non-U.S. Persons should consult their own tax advisors regarding the
specific tax consequences to them of owning a Residual Certificate.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to
a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the Trustee, its agent, or the broker who effected the sale of the Regular
Certificates, or such Regular Certificateholder is otherwise an exempt
recipient under applicable provisions of the Code. Any amounts to be withheld
from distribution on the Regular Certificates would be refunded by the
Internal Revenue Service or allowed as a credit against the Regular
Certificateholder's federal income tax liability.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to
the Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of records of
Regular Certificates or beneficial owners who own Regular Certificates
through a broker or middleman as nominee. All brokers, nominees and all other
non-exempt holders of record of Regular Certificates (including corporations,
non-calendar year taxpayers, securities or commodities dealers, real estate
investment trusts, investment companies, common trust funds, thrift
institutions and charitable trusts) may request such information for any
calendar year by telephone or in writing by contacting the person designated
in Internal Revenue Service Publication 938 with respect to a particular
Series of Regular Certificates. Holders through nominees must request such
information from the nominee.
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The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual Holders,
furnished annually, if applicable, to holders of Regular Certificates, and
filed annually with the Internal Revenue Service concerning Code Section 67
expenses (see "Limitations on Deduction of Certain Expenses" above) allocable
to such holders. Furthermore, under such regulations, information must be
furnished quarterly to Residual Holders, furnished annually to holders of
Regular Certificates, and filed annually with the Internal Revenue Service
concerning the percentage of the REMIC Pool's assets meeting the qualified
asset tests described above under "Status of REMIC Certificates."
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NON-REMIC CERTIFICATES
STANDARD CERTIFICATES
GENERAL
In the event that a Trust Fund (or a segregated pool of assets therein)
with respect to a Series of Standard Certificates does not elect to be
treated as a REMIC, the Trust Fund will be classified as a grantor trust
under subpart E, Part 1 of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of
Code Section 7701(i). Where there is no Fixed Retained Yield with respect to
the Mortgage Loans underlying such Series of Standard Certificates and where
such Certificates are not designated as Stripped Certificates, as described
below under "Stripped Certificates," the holder of each such Certificate will
be treated as the owner of a pro rata undivided interest in the ordinary
income and corpus portions of the Trust Fund represented by the Standard
Certificate and will be considered the beneficial owner of a pro rata
undivided interest in each of the Mortgage Loans, subject to the discussion
below under "Recharacterization of Servicing Fees." Accordingly, the holder
of a Standard Certificate of a particular Series (a "Standard
Certificateholder") will be required to report on its federal income tax
return its pro rata share of the entire income from the Mortgage Loans
represented by its Standard Certificate, including interest at the coupon
rate, original issue discount (if any,) prepayment fees, assumption fees, and
late payment charges received by the Servicer, in accordance with such
Standard Certificateholder's method of accounting. A Standard
Certificateholder generally will be able to deduct its share of the Servicing
Fee and all administrative and other expenses of the Trust Fund in accordance
with its method of accounting, provided that such amounts are reasonable
compensation for services rendered to that Trust Fund. However, investors who
are individuals, estates, or trusts who own Standard Certificates, either
directly or indirectly through certain pass-through entities, will be subject
to limitations with respect to certain itemized deductions described in Code
Section 67, including deductions under Code Section 212, for the Servicing
Fee and all such administrative and other expenses of the Trust Fund, to the
extent that such deductions, in the aggregate, do not exceed two percent of
an investor's adjusted gross income. In addition, Code Section 68 provides
that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000 ($50,000 in the case of a married
individual filing a separate return) (in each case, subject to adjustment for
inflation), or (ii) 80% of the amount of itemized deductions otherwise
allowable for such year. As a result, such investors holding Standard
Certificates, directly or indirectly through a pass-through entity, might
have aggregate taxable income in excess of the aggregate amount of cash
received as interest or discount on such Standard Certificates. In addition,
such expenses are not deductible at all for purposes of computing the
alternative minimum tax and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is Fixed Retained
Yield with respect to the Mortgage Loans underlying a Series of Standard
Certificates or where the servicing fees are in excess of reasonable
servicing compensation, the transaction may be subject to the application of
the "stripped bond" and "stripped coupon" rules of the Code, as described
below under "Stripped Certificates" and "Recharacterization of Servicing
Fees," respectively.
TAX STATUS
The Depositor's Counsel has advised the Depositor that, except as
discussed below with respect to Buy-Down Loans:
1. A Standard Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v), provided
that the property securing the Mortgage Loans represented by that Standard
Certificate is of the type described in such section of the Code.
2. A Standard Certificate owned by a financial institution described
in Code Section 593(a) will be considered to represent "qualifying real
property loans" within the meaning of Code Section
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593(d)(1), provided that the property securing the Mortgage Loans
represented by that Standard Certificate is of the type described in such
section of the Code.
3. A Standard Certificate owned by a real estate investment trust will
be considered to represent "real estate assets" within the meaning of Code
Section 856(c)(5)(A) to the extent that the assets of the related Trust
Fund consist of qualified assets, and interest income of such assets will
be considered "interest on obligations secured by mortgages on real
property" to such extent within the meaning of Code Section 856(c)(3)(B).
4. A Standard Certificate owned by a REMIC will be considered to
represent an "obligation (including any participation or certificate of
beneficial ownership therein) which is principally secured by an interest
in real property" within the meaning of Code Section 860G(a)(3)(A) to the
extent that the assets of the related trust fund consist of "qualified
mortgages" within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buy-Down Loans may be characterized in their
entirety under the Code provisions cited in clauses 1, 2 and 3 of the
immediately preceding paragraph. Code Section 593(d)(1)(C) provides that the
term "qualifying real property loan" does not include a loan "to the extent
secured by a deposit in or share of the taxpayer." The application of this
provision to a Buy-Down Fund is uncertain, but it may require that a
taxpayer's investment in a Buy-Down Loan be reduced by the Buy-Down Fund. As
to the treatment of Buy-Down Loans as "qualifying real property loans" under
Code Section 593(d)(1) if the exception of Code Section 593(d)(1)(C) is
inapplicable, as "loans . . . secured by an interest in real property" under
Code Section 7701(a)(19)(C)(v), or as "real estate assets" under Code Section
856(c)(5)(A), there is indirect authority supporting treatment of an
investment in a Buy-Down Loan as entirely secured by real property if the
fair market value of the real property securing the loan exceeds the
principal amount of the loan at the time of issuance or acquisition, as the
case may be. There is no assurance that the treatment described above is
proper. Accordingly, Standard Certificateholders are urged to consult their
own tax advisors concerning the effects of such arrangements on the
characterization of such Standard Certificateholder's investment for federal
income tax purposes.
PREMIUM AND DISCOUNT
Standard Certificateholders are advised to consult with their tax advisors
as to the federal income tax treatment of premium and discount arising either
upon initial acquisition of Standard Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Certificate will be determined generally as described above under "Federal
Income Tax Consequences for REMIC Certificates -- Taxation of Residual
Certificates --Premium."
Original Issue Discount. Original issue discount generally must be
reported as gross income as it accrues under a constant interest method, in
advance of the cash attributable to such income. Unless indicated otherwise
in the applicable Prospectus Supplement, no prepayment assumption will be
assumed for purposes of such accrual. However, Code Section 1272 provides for
a reduction in the amount of original issue discount includible in the income
of an obligation holder that acquires the obligation after its initial
issuance at a price greater than the sum of the original issue price and the
previously accrued original issue discount, less prior payments of principal.
Accordingly, if such Mortgage Loans acquired by a Standard Certificateholder
are purchased at a price equal to the then unpaid principal amount of such
Mortgage Loans, no original issue discount attributable to the difference
between the issue price and the original principal amount of such Mortgage
Loans (i.e., points) will be includible by such holder.
Market Discount. Market discount on the Mortgage Loans will be determined
and will be reported as ordinary income generally in the manner described
above under "Federal Income Tax Consequences for REMIC Certificates --
Taxation of Regular Certificates -- Market Discount," except that the ratable
accrual methods described therein will not apply. Rather, the holder will
accrue market discount pro rata over the life of the Mortgage Loans, unless
the constant yield method is elected. Unless indicated otherwise in the
applicable Prospectus Supplement, no prepayment assumption will be assumed
for purposes of such accrual.
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Deferred Interest. Any Deferred Interest that accrues with respect to a
Standard Certificate will constitute income to the holder of such Standard
Certificate prior to the time distributions of cash with respect to such
Deferred Interest are made under the OID Regulations. The Depositor will
treat all interest on a Standard Certificate as to which there may be
Deferred Interest as includible in the stated redemption price at maturity of
the Mortgage Loans.
RECHARACTERIZATION OF SERVICING FEES
If the Servicing Fee paid to the Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither
income nor a deduction to Certificateholders. In this regard, there are no
authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of the
Mortgage Loans, the reasonableness of servicing compensation should be
determined on a weighted average or loan-by-loan basis. If a loan-by-loan
basis is appropriate, the likelihood that such amount would exceed reasonable
servicing compensation as to some of the Mortgage Loans would be increased.
Internal Revenue Service guidance indicates that a servicing fee in excess
of reasonable compensation ("excess servicing") will cause the Mortgage Loans
to be treated under the "stripped bond" rules. Such guidance provides safe
harbors for servicing deemed to be reasonable and requires taxpayers to
demonstrate that the value of servicing fees in excess of such amounts is not
greater than the value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
Servicer who receives a servicing fee in excess of such amounts would be
viewed as retaining an ownership interest in a portion of the interest
payments on the Mortgage Loans. Under the rules of Code Section 1286, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from the right to receive some or all of the
principal payments on the obligation would result in treatment of such
Mortgage Loans as "stripped coupons" and "stripped bonds." Subject to the de
minimis rule discussed below under "-- Stripped Certificates," each stripped
bond or stripped coupon could be considered for this purpose as a
non-interest bearing obligation issued on the date of issue of the Standard
Certificates, and the original issue discount rules of the Code would apply
to the holder thereof. While Standard Certificateholders would still be
treated as owners of beneficial interests in a grantor trust for federal
income tax purposes, the corpus of such trust could be viewed as excluding
the portion of the Mortgage Loans the ownership of which is attributed to the
Servicer, or as including such portion as a second class of equitable
interest. Applicable Treasury regulations treat such an arrangement as a
fixed investment trust, since the multiple classes of trust interests should
be treated as merely facilitating direct investments in the trust assets and
the existence of multiple classes of ownership interests is incidental to
that purpose. In general, such a recharacterization should not have any
significant effect upon the timing of amount of income reported by a Standard
Certificateholder, except that the income reported by a cash method holder
may be slightly accelerated. See "Stripped Certificates" below for a further
description of the federal income tax treatment of stripped bonds and
stripped coupons.
SALE OR EXCHANGE OF STANDARD CERTIFICATES
Upon sale or exchange of a Standard Certificate, a Standard
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its aggregate adjusted basis in the
Mortgage Loans and other assets represented by the Standard Certificate. In
general, the aggregate adjusted basis will equal the Standard
Certificateholder's cost of the Standard Certificate, increased by the amount
of any income previously reported with respect to the Standard Certificate
and decreased by the amount of any losses previously reported with respect to
the Standard Certificate and the amount of any distributions received
thereon. Except as provided above with respect to market discount on any
Mortgage Loans, and except for certain financial institutions subject to the
provisions of Code Section 582(c), any such gain or loss would be capital
gain or loss if the Standard Certificate was held as a capital asset.
However, gain on the sale of a Standard Certificate will be treated as
ordinary income (i) if a Standard Certificate is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up
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to the amount of interest that would have accrued on the Standard
Certificateholder's net investment in the conversion transaction at 120% of
the appropriate applicable Federal rate in effect at the time the taxpayer
entered into the transaction minus any amount previously treated as ordinary
income with respect to any prior disposition of property that was held as a
part of such transaction or (ii) is in the case of a non-corporate taxpayer,
to the extent such taxpayer has made an election under Code Section 163(d)(4)
to have net capital gains tax as investment income at ordinary income rates.
Pursuant to the Revenue Reconciliation Act of 1993, capital gains of certain
non-corporate taxpayers are subject to a lower maximum tax rate than ordinary
income of such taxpayers. The maximum tax rate for corporations is the same
with respect to both ordinary income and capital gains.
STRIPPED CERTIFICATES
GENERAL
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership
of the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Certificates that are subject to those rules will be referred to as "Stripped
Certificates." The Certificates will be subject to those rules if (i) the
Depositor or any of its affiliates retains (for its own account or for
purposes of resale), in the form of Fixed Retained Yield or otherwise, an
ownership interest in a portion of the payments on the Mortgage Loans, (ii)
the Depositor or any of its affiliates is treated as having an ownership
interest in the Mortgage Loans to the extent it is paid (or retains)
servicing compensation in an amount greater than arm's length consideration
for servicing the Mortgage Loans (see "Standard Certificates --
Recharacterization of Servicing Fees" above), and (iii) Certificates are
issued in two or more Classes or Subclasses representing the right to non-pro
rata percentages of the interest and principal payments on the Mortgage
Loans.
In general, a holder of a Stripped Certificate (a "Stripped
Certificateholder") will be considered to own "stripped bonds" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Certificate's allocable share of the
servicing fees paid to the Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"Standard Certificates -- Recharacterization of Servicing Fees." Although not
free from doubt, for purposes of reporting to Stripped Certificateholders,
the servicing fees will be allocated to the Stripped Certificates in
proportion to the respective entitlements to distributions of each Class (or
Subclass) of Stripped Certificates for the related period or periods. The
holder of a Stripped Certificate generally will be entitled to a deduction
each year in respect of the servicing fees, as described above under
"Standard Certificates -- General," subject to the limitation described
therein.
Code Section 1286 generally treats a stripped bond or a stripped coupon as
an obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped
Certificates for federal income tax purposes is not clear in certain respects
at this time, particularly where such Stripped Certificates are issued with
respect to a Mortgage Pool containing variable-rate Mortgage Loans, the
Depositor has been advised by counsel that (i) the Trust Fund will be treated
as a grantor trust under subpart E, Part I of subchapter J of the Code and
not as an association taxable as a corporation or a "taxable mortgage pool"
within the meaning of Code Section 7701(i), and (ii) each Stripped
Certificate should be treated as a single installment obligation for purposes
of calculating original issue discount and gain or loss on disposition. This
treatment is based on the interrelationship of Code Section 1286, Code
Sections 1272 through 1275, and the OID Regulations. Although it is possible
that computations with respect to Stripped Certificates could be made in one
of the ways described below under "Taxation of Stripped Certificates
- --Possible Alternative Characterizations," the OID Regulations state, in
general, that two or more debt instruments issued by a single issuer to a
single investor in a single transaction should be treated as a single debt
instrument for original issue discount purposes. Accordingly, all payments on
any Stripped Certificates should be aggregated and treated as though they
were made on a single debt instrument. The Pooling and Servicing Agreement
requires that the Trustee make and report all computations described below
using this aggregate approach, unless substantial legal authority requires
otherwise.
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Furthermore, Treasury regulations issued December 28, 1992 provide for
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount.
In addition, under these regulations, a stripped Certificate that represents
a right to payments of both interest and principal may be viewed either as
issued with original issue discount or market discount (as described below),
at a de minimis original issue discount, or, presumably, at a premium. This
treatment suggests that the interest component of such a Stripped Certificate
would be treated as qualified stated interest under the OID Regulations.
Further, these final regulations provide that the purchaser of such a
Stripped Certificate will be required to account for any discount as market
discount rather than original issue discount if either (i) the initial
discount with respect to the Stripped Certificates was treated as zero under
the de minimis rule, or (ii) no more than 100 basis points in excess of
reasonable servicing is stripped off the related Mortgage Loans. Any such
market discount would be reportable as described above under "Federal Income
Tax Consequences for REMIC Certificates -- Taxation of Regular Certificates
- -- Market Discount," without regard to the de minimis rule therein, assuming
that a prepayment assumption is employed in such computation.
TAXATION OF STRIPPED CERTIFICATES
Original Issue Discount. Except as described above under "General," each
Stripped Certificate will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount with
respect to a Stripped Certificate must be included in ordinary income as it
accrues, in accordance with a constant interest method that takes into
account the compounding of interest, which may be prior to the receipt of the
cash attributable to such income. Based in part on the OID Regulations and
the amendments to the original issue discount sections of the Code made by
the 1986 Act, the amount of original issue discount required to be included
in the income of a holder of a Stripped Certificate in any taxable year
likely will be computed generally as described above under "Federal Income
Tax Consequences for REMIC Certificates -- Original Issue Discount" and "--
Variable Rate Regular Certificates." However, with the apparent exception of
a Stripped Certificate issued with de minimis original issue discount, as
described above under "General," the issue price of a Stripped Certificate
will be the purchase price paid by each holder thereof, and the stated
redemption price at maturity will include the aggregate amount of the
payments to be made on the Stripped Certificate to such Stripped
Certificateholder, presumably under the Prepayment Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition
of original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each
Mortgage Loan represented by such Stripped Certificateholder's Stripped
Certificate. While the matter is not free from doubt, the holder of a
Stripped Certificate should be entitled in the year that it becomes Certain
(assuming no further prepayments) that the holder will not recover a portion
of its adjusted basis in such Stripped Certificate to recognize a loss (which
may be a capital loss) equal to such portion of unrecovered basis.
Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Certificates --
Taxation of Regular Certificates -- Sale or Exchange of Regular
Certificates." To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Certificates, such
subsequent purchaser will be required for federal income tax purposes to
accrue and report such excess as if it were original issue discount in the
manner described above. It is not clear for this purpose whether the assumed
prepayment rate that is to be used in the case of a Stripped
Certificateholder other than an original Stripped Certificateholder should be
the Prepayment Assumption or a new rate based on the circumstances at the
date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. When an investor
purchases more than one Class of Stripped Certificates, it is currently
unclear whether for federal income tax purposes such Classes of Stripped
Certificates should be treated separately or aggregated for purposes of the
rules described above.
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Possible Alternative Characterizations. The characterizations of the
Stripped Certificates discussed above are not the only possible
interpretations of the applicable Code provisions. For example, the Stripped
Certificateholder may be treated as the owner of (i) one installment
obligation consisting of such Stripped Certificate's pro rata share of the
payments attributable to principal on each Mortgage Loan and a second
installment obligation consisting of such Stripped Certificate's pro rata
share of the payments attributable to interest on each Mortgage Loan, (ii) as
many stripped bonds or stripped coupons as there are scheduled payments of
principal and/or interest on each Mortgage Loan, or (iii) a separate
installment obligation for each Mortgage Loan, representing the Stripped
Certificate's pro rata share of payments of principal and/or interest to be
made with respect thereto. Alternatively, the holder of one or more Classes
of Stripped Certificates may be treated as the owner of a pro rata fractional
undivided interest in each Mortgage Loan to the extent that such Stripped
Certificate, or Classes of Stripped Certificates in the aggregate, represent
the same pro rata portion of principal and interest on each such Mortgage
Loan, and a stripped bond or stripped coupon (as the case may be), treated as
an installment obligation or contingent payment obligation, as to the
remainder. Final regulations issued on December 28, 1992 regarding original
issue discount on stripped obligations make the foregoing interpretations
less likely to be applicable. The preamble to those regulations states that
they are premised on the assumption that an aggregation approach is
appropriate for determining whether original issue discount on a stripped
bond or stripped coupon is de minimis, and solicits comments on appropriate
rules for aggregating stripped bonds and stripped coupons under Code Section
1286.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Standard Certificateholder or Stripped
Certificateholder at any time during such year, such information (prepared on
the basis described above) as the Trustee deems to be necessary or desirable
to enable such Certificateholders to prepare their federal income tax
returns. Such information will include the amount of original issue discount
accrued on Certificates held by persons other than Certificateholders
exempted from the reporting requirements. The amount required to be reported
by the Trustee may not be equal to the proper amount of original issue
discount required to be reported as taxable income by a Certificateholder,
other than an original Certificateholder that purchased at the issue price.
In particular, in the case of Stripped Certificates, unless provided
otherwise in the applicable Prospectus Supplement, such reporting will be
based upon a representative initial offering price of each Class of Stripped
Certificates. The Trustee will also file such original issue discount
information with the Internal Revenue Service. If a Certificateholder fails
to supply an accurate taxpayer identification number or if the Secretary of
the Treasury determines that a Certificateholder has not reported all
interest and dividend income required to be shown on his federal income tax
return, 31% backup withholding may be required in respect of any payments, as
described above under "Federal Income Tax Consequences for REMIC Certificates
- -- Backup Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Standard Certificate or Stripped Certificate
evidences ownership in Mortgage Loans that are issued on or before July 18,
1984, interest or original issue discount paid by the person required to
withhold tax under Code Section 1441 or 1442 to nonresident aliens, foreign
corporations, or other non-U.S. persons ("foreign persons") generally will be
subject to 30% United States withholding tax, or such lower rate as may be
provided for interest by an applicable tax treaty. Accrued original issue
discount or market discount recognized by the Standard Certificateholder or
Stripped Certificateholder on the sale or exchange of such a Certificate also
will be subject to federal income tax at the same rate.
Treasury Regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a foreign person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements, described above under
"Federal Income Tax Consequences for REMIC Certificates -- Taxation of
Certain Foreign Investors -- Regular Certificates."
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NOTES
GENERAL
With respect to each Series of Notes, the Depositor's Counsel will deliver
its opinion to the Depositor that (unless otherwise limited in the applicable
Prospectus Supplement) such securities will be classified as debt secured by
the related Mortgage Loans. Consequently, Notes will not be treated as
ownership interests in the Mortgage Loans or the Trust Fund. Holders will be
required to report income received with respect to Notes in accordance with
their normal method of accounting. For additional tax consequences relating
to Notes purchased at a discount or with premium, see "Non-REMIC Certificates
- -- Premium and Discount."
SPECIAL TAX ATTRIBUTES
As described above, Non-REMIC Certificates will possess certain special
tax attributes by virtue of their being ownership interests in the underlying
Mortgage Loans. Similarly, REMIC Certificates will possess similar attributes
by virtue of the REMIC provisions of the Code. In general, Notes will not
possess such special tax attributes. Investors to whom such attributes are
important should consult their own tax advisors regarding investment in
Notes.
SALE OR EXCHANGE
If a holder of a Note sells or exchanges such security, the holder will
recognize gain or loss equal to the difference, in any, between the amount
received and the holder's adjusted basis in the security. The adjusted basis
in the security generally will equal its initial cost, increased by any
original issue discount or market discount previously included in the
seller's gross income with respect to the security and reduced by the
payments previously received on the security, other than payments of
qualified stated interest, and by any amortized premium.
In general (except as described in "Non-REMIC Certificates --Premium and
Discount -- Market Discount") except for certain financial institutions
subject to section 582(c) of the Code, any gain or loss on the sale or
exchange of a Note recognized by an investor who holds the security as a
capital asset (within the meaning of section 1221 of the Code), will be
capital gain or loss and will be long-term or short-term depending on whether
the security has been held for more than one year.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose certain requirements on those employee
benefit plans to which they apply ("Plans") and on those persons who are
fiduciaries with respect to such Plans. The following is a general discussion
of such requirements, and certain applicable exceptions to and administrative
exemptions from such requirements.
Before purchasing any Certificates, a Plan fiduciary should determine
whether there exists any prohibition to such purchase under the requirements
of ERISA, whether prohibited transaction exemptions such as PTE 83-1 or any
individual administrative exemption (as described below) applies, including
whether the appropriate conditions set forth therein would be met, or whether
any statutory prohibited transaction exemption is applicable, and further
should consult the applicable Prospectus Supplement relating to such Series
of Certificates.
CERTAIN REQUIREMENTS UNDER ERISA
GENERAL
In accordance with ERISA's general fiduciary standards, before investing
in a Certificate a Plan fiduciary should determine whether to do so is
permitted under the governing Plan instruments and is appropriate for the
Plan in view of its overall investment policy and the composition and
diversification of its portfolio. A Plan fiduciary should especially consider
the ERISA requirement of investment
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prudence and the sensitivity of the return on the Certificates to the rate of
principal repayments (including prepayments) on the Mortgage Loans or
Contracts, as discussed in the related Prospectus Supplement and in
"Prepayment and Yield Considerations" herein.
Parties in Interest/Disqualified Persons. Other provisions of ERISA (and
corresponding provisions of the Code) prohibit certain transactions involving
the assets of a Plan and persons who have certain specified relationships to
the Plan (so-called "parties in interest" within the meaning of ERISA or
"disqualified persons" within the meaning of the Code). The Depositor, the
Servicer (if any) or the Trustee or certain affiliates thereof might be
considered or might become "parties in interest" or "disqualified persons"
with respect to a Plan. If so, the acquisition or holding of Certificates by
or on behalf of such Plan could be considered to give rise to a "prohibited
transaction" within the meaning of ERISA and the Code unless an
administrative exemption described below or some other exemption is
available.
Special caution should be exercised before the assets of a Plan are used
to purchase a Certificate if, with respect to such assets, the Depositor, the
Servicer (if any) or the Trustee or an affiliate thereof either: (a) has
investment discretion with respect to the investment of such assets of such
Plan; or (b) has authority or responsibility to give, or regularly gives
investment advice with respect to such assets for a fee and pursuant to an
agreement or understanding that such advice will serve as a primary basis for
investment decisions with respect to such assets and that such advice will be
based on the particular investment needs of the Plan.
DELEGATION OF FIDUCIARY DUTY
Further, if the assets included in a Trust Fund were deemed to constitute
Plan assets, it is possible that a Plan's investment in the Certificates
might be deemed to constitute a delegation, under ERISA, of the duty to
manage Plan assets by the fiduciary deciding to invest in the Certificates,
and certain transactions involved in the operation of the Trust Fund might be
deemed to constitute prohibited transactions under ERISA and the Code.
The U.S. Department of Labor (the "Department") has published final
regulations (the "Regulations") concerning whether or not a Plan's assets
would be deemed to include an interest in the underlying assets of an entity
(such as a Trust Fund) for purposes of the reporting and disclosure and
general fiduciary responsibility provisions of ERISA, as well as for the
prohibited transaction provisions of ERISA and the Code, if the Plan acquires
an "equity interest" (such as a Certificate) in such entity.
Certain exceptions are provided in the Regulations whereby an investing
Plan's assets would be deemed merely to include its interest in the
Certificates instead of being deemed to include an interest in the assets of
a Trust Fund. However, it cannot be predicted in advance nor can there be any
continuing assurance whether such exceptions may be met. For example, one of
the exceptions in the Regulations states that the underlying assets of an
entity will not be considered "plan assets" if, immediately after the most
recent acquisition of any equity interest in the entity, whether or not from
the issuer or an underwriter, less than 25% of the value of each class of
equity interest is held by "benefit plan investors," which are defined as
Plans, individual retirement accounts, and employee benefit plans not subject
to ERISA (for example, governmental plans), but this exception is tested
immediately after each acquisition of an equity interest in the entity
whether upon initial issuance or in the secondary market.
ADMINISTRATIVE EXEMPTIONS
Individual Administrative Exemptions. Several underwriters of
mortgage-backed securities have applied for and obtained ERISA prohibited
transaction exemptions (each, an "Individual Exemption") which are in some
respects broader than Prohibited Transaction Class Exemption 83-1 (described
below). Such exemptions can only apply to mortgage-backed securities which
among other conditions, are sold in an offering with respect to which such
underwriter serves as the sole or a managing underwriter, or as a selling or
placement agent. If such an Individual Exemption might be applicable to a
Series of Certificates, the related Prospectus Supplement will refer to such
possibility. An Individual Exemption does not apply to Plans sponsored by the
Restricted Group (as defined below) or the Trustee.
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Some of the conditions that must be satisfied for an Individual Exemption
to apply are the following:
(1) The rights and interests evidenced by Certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by other
Certificates of the Trust Fund;
(2) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from either Standard & Poor's Corporation ("S&P"),
Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Rating Co.
("D&P") or Fitch Investors Service, Inc. ("Fitch");
(3) The Trustee is not an affiliate of any of the Depositor, the
underwriter specified in the applicable Prospectus Supplement, the
Servicer (if any), any obligor with respect to Mortgage Loans included in
the Trust Fund constituting more than five percent of the aggregate
unamortized principal balance of the assets in the Trust Fund, or any
affiliate of such parties (the "Restricted Group"); and
(4) The Plan investing in the Certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933.
If the conditions to an Individual Exemption are met, whether or not a
Plan's assets would be deemed to include an ownership interest in the
Mortgage Loans in a Mortgage Pool, the acquisition, holding and resale of the
Certificates by Plans would be exempt from the prohibited transaction
provisions of ERISA and the Code.
Moreover, an Individual Exemption can provide relief from certain
self-dealing/conflict of interest prohibited transactions, only if, among
other requirements, (i) a Plan's investment in Certificates of any class does
not exceed twenty-five percent of all of the Certificates of that Class
outstanding at the time of the acquisition and (ii) immediately after the
acquisition no more than twenty-five percent of the assets of the Plan with
respect to which such person is a fiduciary are invested in Certificates
representing an interest in one or more trusts containing assets sold or
served by the same person.
PTE 83-1. Prohibited Transaction Class Exemption 83-1 for Certain
Transactions Involving Mortgage Pool Investment Trusts ("PTE 83-1") permits
certain transactions involving the creation, maintenance and termination of
certain residential mortgage pools and the acquisition and holding of certain
residential mortgage pool pass-through certificates by Plans, whether or not
the Plan's assets would be deemed to include an ownership interest in the
mortgages in the mortgage pool, and whether or not such transactions would
otherwise be prohibited under ERISA.
The term "mortgage pool pass-through certificate" is defined in PTE 83-1
as "a certificate representing a beneficial undivided fractional interest in
a mortgage pool and entitling the holder of such a certificate to
pass-through payment of principal and interest from the pooled mortgage
loans, less any fees retained by the pool sponsor." It appears that, for
purposes of PTE 83-1, the term "mortgage pool pass-through certificate" would
include Certificates issued in a single Class or in multiple classes that
evidence a beneficial undivided fractional interest in a mortgage pool of
one- to four-family residential mortgage loans and entitle the holder thereof
to both a specified percentage of future interest payments (after permitted
deductions) and a specified percentage of future principal payments.
However, it appears that PTE 83-1 does or might not apply to the purchase
and holding of (a) Certificates that evidence the beneficial ownership only
of a specified percentage of future interest payments (after permitted
deductions) on a Trust Fund or only of a specified percentage of future
principal payments on a Trust Fund, (b) Residual Certificates, (c)
Certificates evidencing ownership interests in a Trust Fund which includes
Mortgage Loans secured by multifamily residential properties or shares issued
by cooperative housing corporations, or (d) Certificates which are
subordinated to other classes of Certificates of such Series. Accordingly,
unless exemptive relief other than PTE 83-1 applies, Plans should not
purchase any such Certificates.
PTE 83-1 sets forth certain "general conditions" and "specific conditions"
to its applicability. Section 11 of PTE 83-1 sets forth the following general
conditions to the application of the exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans or the
property
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securing such loans, and for indemnifying certificateholders against
reductions in pass-through payments due to property damage or defaults in
loan payments; (ii) the existence of a pool trustee who is not an affiliate
of the pool sponsor; and (iii) a requirement that the sum of all payments
made to and retained by the pool sponsor, and all funds inuring to the
benefit of the pool sponsor as a result of the administration of the mortgage
pool, must represent not more than adequate consideration for selling the
mortgage loans plus reasonable compensation for services provided by the pool
sponsor to the pool. The system of insurance or protection referred to in
clause (i) above must provide such protection and indemnification up to an
amount not less than the greater of 1% of the aggregate unpaid principal
balance of the pooled mortgages or the unpaid principal balance of the
largest mortgage in the pool. It should be noted that in promulgating PTE
83-1 (and a predecessor exemption), the Department did not have under its
consideration interests in pools of the exact nature as some of the
Certificates described herein.
EXEMPT PLANS
Employee benefit plans which are governmental plans (as defined in Section
3(32) of ERISA), and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements and assets of such plans may be
invested in Senior Certificates without regard to the ERISA considerations
described above, subject to the provisions of other applicable federal and
state law.
UNRELATED BUSINESS TAXABLE INCOME -- RESIDUAL CERTIFICATES
The purchase of a Residual Certificate by such plans, or by most varieties
of ERISA Plans, may give rise to "unrelated business taxable income" as
described in Code Sections 511-515 and 860E. Further, prior to the purchase
of Residual Certificates, a prospective transferee may be required to provide
an affidavit to a transferor that it is not a "Disqualified Organization"
which term includes certain tax-exempt entities not subject to Code Section
511, including certain governmental plans, as discussed herein under the
caption "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates -- Income Tax Consequences for REMIC
Certificates --Taxation of Residual Certificates -- Tax-Related Restrictions
on Transfer of Residual Certificates."
Due to the complexity of these rules and the penalties imposed upon
persons involved in prohibited transactions, it is particularly important
that potential investors who are Plan fiduciaries carefully consider the
consequences under ERISA of their acquisition and ownership of Certificates.
The sale of Certificates to a Plan is in no respect a representation by
the Depositor or the applicable underwriter that this investment meets all
relevant legal requirements with respect to investments by Plan generally or
any particular Plan, or that this investment is appropriate for Plans
generally or any particular Plan.
LEGAL INVESTMENT
If specified in the related Prospectus Supplement, the Certificates of one
or more classes offered pursuant to this Prospectus will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended ("SMMEA"), so long as they are rated in one of the
two highest rating categories by at least one nationally recognized
statistical rating organization. As "mortgage related securities," such
Certificates will constitute legal investments for persons, trusts,
corporations, 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. Pursuant to SMMEA, a number
of states enacted legislation, on or before the October 3, 1991 cutoff for
such enactments, limiting to varying extents the ability of certain entities
(in particular, insurance companies) to invest in "mortgage related
securities," in most cases by requiring the affected investors to rely solely
upon existing state law, and not SMMEA. Accordingly, the investors affected
by such legislation will be authorized to invest in the Certificates only to
the extent provided in such legislation.
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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 limitation 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. Section 24 (Seventh), subject in
each case to such regulations as the applicable federal regulatory authority
may prescribe. In this connection, federal credit unions should review
National Credit Union Administration (the "NCUA") Letter to Credit Unions No.
96, as modified by Letter No. 108, which includes guidelines to assist
federal credit unions in making investment decisions for mortgage related
securities. The NCUA has adopted rules, effective December 2, 1991, which
prohibit federal credit unions from investing in certain mortgage related
securities (including securities such as certain series, Classes or
Subclasses of Certificates), except under limited circumstances.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Securities Activities"
dated January 28, 1992 (the "Policy Statement") of the Federal Financial
Institutions Examination Council. The Policy Statement, which has been
adopted by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Comptroller of the Currency and the Office
of Thrift Supervision, effective February 10, 1992, and by the NCUA (with
certain modifications), effective June 26, 1992, prohibits depository
institutions from investing in certain "high-risk" mortgage securities
(including securities such as certain series, Classes or Subclasses of
Certificates), except under limited circumstances, and sets forth certain
investment practices deemed to be unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any
Certificates, as certain series, Classes or Subclasses may be deemed
unsuitable investments, or may otherwise be restricted, under such rules,
policies or guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits,
provisions which may restrict or prohibit investment in securities which are
not "interest-bearing" or "income-paying" and, with regard to any
Certificates issued in book-entry form, provisions which may restrict or
prohibit investment in securities which are issued in book-entry form.
OTHER CLASSES OF CERTIFICATES OFFERED PURSUANT TO THIS PROSPECTUS WILL NOT
CONSTITUTE "MORTGAGE RELATED SECURITIES" UNDER SMMEA BECAUSE THEY WILL NOT
REPRESENT BENEFICIAL OWNERSHIP INTERESTS IN QUALIFYING MORTGAGE LOANS UNDER
SMMEA. THE APPROPRIATE CHARACTERIZATION OF THOSE CERTIFICATES UNDER VARIOUS
LEGAL INVESTMENT RESTRICTIONS, AND THUS THE ABILITY OF INVESTORS SUBJECT TO
THESE RESTRICTIONS TO PURCHASE THE CERTIFICATES, MAY BE SUBJECT TO
SIGNIFICANT INTERPRETIVE UNCERTAINTIES. ALL INVESTORS WHOSE INVESTMENT
AUTHORITY IS SUBJECT TO LEGAL RESTRICTIONS SHOULD CONSULT THEIR OWN LEGAL
ADVISORS TO DETERMINE WHETHER, AND TO WHAT EXTENT, THE CERTIFICATES WILL
CONSTITUTE LEGAL INVESTMENTS FOR THEM.
NO REPRESENTATION IS MADE AS TO THE PROPER CHARACTERIZATION OF THE
CERTIFICATES FOR LEGAL INVESTMENT OR FINANCIAL INSTITUTION REGULATORY
PURPOSES, OR AS TO THE ABILITY OF PARTICULAR INVESTORS TO PURCHASE
CERTIFICATES UNDER APPLICABLE LEGAL INVESTMENT RESTRICTIONS. THE
UNCERTAINTIES DESCRIBED ABOVE MAY (AND ANY UNFAVORABLE FUTURE DETERMINATIONS
CONCERNING LEGAL INVESTMENT OR FINANCIAL INSTITUTION REGULATORY
CHARACTERISTICS OF THE CERTIFICATES ADVERSELY AFFECT THE LIQUIDITY OF THE
NON-SMMEA CERTIFICATES.
INVESTORS SHOULD CONSULT WITH THEIR OWN LEGAL ADVISORS IN DETERMINING
WHETHER AND TO WHAT EXTENT THE CERTIFICATES CONSTITUTE LEGAL INVESTMENTS FOR
SUCH INVESTORS.
114
<PAGE>
PLAN OF DISTRIBUTION
The Depositor may sell the Certificates offered hereby in Series either
directly or through underwriters. The related Prospectus Supplement or
Prospectus Supplements for each Series will describe the terms of the
offering for that Series and will state the public offering or purchase price
of each Class of Certificates of such Series, or the method by which such
price is to be determined, and the net proceeds to the Depositor from such
sale.
If the sale of any Certificates is made pursuant to an underwriting
agreement pursuant to which one or more underwriters agree to act in such
capacity, such Certificates will be acquired by such underwriters for their
own account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices to be determined at the time of sale or at the time of
commitment therefor. Firm commitment underwriting and public reoffering by
underwriters may be done through underwriting syndicates or through one or
more firms acting alone. The specific managing underwriter or underwriters,
if any, with respect to the offer and sale of a particular Series of
Certificates will be set forth on the cover of the Prospectus Supplement
related to such Series and the members of the underwriting syndicate, if any,
will be named in such Prospectus Supplement. The Prospectus Supplement will
describe any discounts and commissions to be allowed or paid by the Depositor
to the underwriters, any other items constituting underwriting compensation
and any discounts and commissions to be allowed or paid to the dealers. The
obligations of the underwriters will be subject to certain conditions
precedent. Unless otherwise provided in the related Prospectus Supplement,
the underwriters with respect to a sale of any Class of Certificates will be
obligated to purchase all such Certificates if any are purchased. Pursuant to
each such underwriting agreement, the Depositor will indemnity the related
underwriters against certain civil liabilities, including liabilities under
the Securities Act.
If any Certificates are offered other than through underwriters pursuant
to such underwriting agreements, the related Prospectus Supplement or
Prospectus Supplements will contain information regarding the terms of such
offering and any agreements to be entered into in connection with such
offering.
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 in connection with reoffers and
sales by them of Certificates. Certificateholders should consult with their
legal advisors in this regard prior to any such reoffer and sale.
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Depositor, any affiliate thereof or any other person or
persons specified therein may purchase some or all of one or more Classes of
Certificates of such Series from the underwriter or underwriters or such
other person or persons specified in such Prospectus Supplement. Such
purchaser may thereafter from time to time offer and sell, pursuant to this
Prospectus and the related Prospectus Supplement, some or all of such
Certificates so purchased, directly, through one or more underwriters to be
designated at the time of the offering of such Certificates, through dealers
acting as agent and/or principal as in such other manner as may be specified
in the related Prospectus Supplement. Such offering may be restricted in the
manner specified in such Prospectus Supplement. Such transactions may be
effected at market prices prevailing at the time of sale, at negotiated
prices or at fixed prices. Any underwriters and dealers participating in such
purchaser's offering of such Certificates may receive compensation in the
form of underwriting discounts or commissions from such purchaser and such
dealers may receive commissions from the investors purchasing such
Certificates for whom they may act as agent (which discounts or commissions
will not exceed those customary in those types of transactions involved). Any
dealer that participates in the distribution of such Certificates may be
deemed to be an "underwriter" within the meaning of the Securities Act of
1933, and any commissions and discounts received by such dealer and any
profit on the resale of such Certificates by such dealer might be deemed to
be underwriting discounts and commissions under the Securities Act of 1933.
LEGAL MATTERS
Certain legal matters and certain tax matters will be passed upon for the
Depositor by Dewey Ballantine, New York, New York and/or such other counsel
as will be named on the related Prospectus Supplement.
115
<PAGE>
RATING
At the date of issuance of each Series of Certificates, the Certificates
offered hereby will be rated in one of the four highest categories by at
least one Rating Agency. See "Ratings" in the related Prospectus Supplement.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating agency. Each securities rating should be evaluated independently of
any other rating.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Commission in
Washington, D.C. Copies may be obtained at rates prescribed by the Commission
upon request to the Commission, and may be inspected, without charge, at the
offices of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
See "Available Information."
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMCs Information Statement and the most recent Supplement to such
Information Statement and any quarterly report made available by FHLMC can be
obtained by writing or calling the Investor Inquiry Department at FHLMC at
8200 Jones Branch Drive, McLean Virginia 22102 (outside Washington, D.C.
metropolitan area, telephone 800-336-FMPC; within Washington, D.C.
metropolitan area, telephone 703-759-8160). The Depositor has not and will
not participate in the preparation of FHLMC's Offering Circulars, Information
Statements or Supplements.
Copies of FNMA's most recent Prospectus for FNMA Certificates and FNMA's
annual report and quarterly financial statements as well as other financial
information are available from the Senior Vice President for Investor
Relations of FNMA, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016
(202-752-7115). The Depositor has not and will not participate in the
preparation of FNMA's Prospectuses.
116
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
TERM PAGE
- -------------------------------------------- ------------
[S] [C]
Act ......................................... 75
Advance ..................................... 60
Advance Reserve ............................. 46
Advances .................................... 10
APR ......................................... 22
ARM Buy-Outs ................................ 22
Balloon Loan ................................ 20
Balloon Loans. .............................. 14
Balloon Period .............................. 20
Basic Senior Class Distribution ............. 37
Buy-Down Account ............................ 20
Buy-Down Loans .............................. 20
Call protection ............................. 42
CERCLA ...................................... 81
Certificate Account ......................... 57
Certificate Account Depository .............. 57
Certificateholder ........................... 1
Certificates ................................ 1
Class ....................................... 1
Code ........................................ 11, 84
Commission .................................. 3
Compound Interest Certificates .............. 32
Contract Pool ............................... 18
Contract Rate ............................... 8, 22
Contracts ................................... 1, 22
Convertible Mortgage Loans .................. 18
Cooperative Loans ........................... 18
Cooperative Notes ........................... 18
Cooperatives ................................ 18
Credit Enhancer ............................. 17
Cut-Off Date Aggregate Principal Balance ... 19, 23
D&P ......................................... 111
Debt Securities ............................. 85
Deferred Interest ........................... 14, 20
Definitive Certificate ...................... 31
Deleted Loan ................................ 29
Depositor ................................... 1, 4, 54
Determination Date .......................... 33
Direct or Indirect Participants ............. 17
Disqualified Organization ................... 97
Distribution Dates .......................... 7
DTC ......................................... 31
Due Date .................................... 19, 23
Due Period .................................. 42
Eligible Investments ........................ 47
Environmental Condition ..................... 81
EPA ......................................... 82
117
<PAGE>
TERM PAGE
- -------------------------------------------- ------------
ERISA ....................................... 11, 109
Excess servicing ............................ 105
Extension protection ........................ 42
FDIC ........................................ 57
FHLBB ....................................... 75
FIRREA ...................................... 83
Fitch ....................................... 111
Foreign persons ............................. 108
Funding Period .............................. 33
Gain From Acquired Property ................. 35
GEM Loans ................................... 21
GPM Fund .................................... 22
GPM Mortgage Loans .......................... 21
Grantor Trust Estate ........................ 85
Indemnification Payments .................... 36
Initial Deposit ............................. 45
Insurance Proceeds .......................... 58
Interest Accrual Period ..................... 52
Interest Rate ............................... 1
Liquidated Contract ......................... 35
Liquidated Mortgage Loan .................... 15, 35
Liquidation Proceeds ........................ 15, 58
Loan Sale Agreement ......................... 25
Loan-to-Value Ratio ......................... 19, 22
Moody's ..................................... 111
Mortgage Certificate Pool ................... 18
Mortgage Loans .............................. 1
Mortgage Notes .............................. 18
Mortgage Pool ............................... 18
Mortgage Rate ............................... 7
Mortgaged Properties ........................ 20
Mortgages ................................... 18
Mortgagor ................................... 14
Multi-Class Certificates .................... 1
Net Contract Rate ........................... 8
Net Insurance Proceeds ...................... 58
Net Liquidation Proceeds .................... 58
Net Mortgage Rate ........................... 7
Non-REMIC Certificates ...................... 85
Notional Amount ............................. 1
OTS ......................................... 75
Pass-Through Entity ......................... 97
Pass-Through Rate ........................... 7
Paying Agent ................................ 60
Payment Deficiencies ........................ 45
Percentage Certificates ..................... 31
Plans ....................................... 109
Pool ........................................ 1
Pool Distribution Amount .................... 33
118
<PAGE>
TERM PAGE
- -------------------------------------------- ------------
Pool Value Group ............................ 41
Pooling and Servicing Agreement ............. 4
Prepayment Interest Shortfall ............... 61
PTE 83-1 .................................... 111
Purchase Obligation ......................... 13
Purchase Price .............................. 27
Rating Agency ............................... 12
Record Date ................................. 7
Registration Statement ...................... 3
Regular Certificates ........................ 30
Relief Act .................................. 17, 82
REMIC ....................................... 85
REMIC Certificates .......................... 85
REMIC Regulations ........................... 84
Repurchase Proceeds ......................... 34
Residual Certificates ....................... 30
Residual Holders ............................ 93
Scheduled Principal ......................... 35
Secured-creditor exemption .................. 81
Securities Act .............................. 3
Senior Certificates ......................... 2, 30
Senior Class Credit Enhancement ............. 37
Senior Class Distributable Amount ........... 35
Senior Class Principal Portion .............. 35
Senior Class Shortfall ...................... 37
Senior Class Shortfall Accruals ............. 37
Series ...................................... 1
Servicer .................................... 1
Servicing Account ........................... 63
Servicing Fee ............................... 8
Shifting Interest Certificates .............. 2
SMMEA ....................................... 11, 112
Special Distributions ....................... 43
Special Hazard Contract ..................... 48
Special Hazard Mortgage Loan ................ 48
Standard Certificateholder .................. 103
Standard Certificates ....................... 1
Standard Hazard Insurance Policy ............ 24
Stated Amount ............................... 1
Stripped Certificates ....................... 1
Sub-Servicer ................................ 4, 57
Sub-Servicing Account ....................... 58
Subclass .................................... 1
Subordinated Amount ......................... 9
Subordinated Certificates ................... 2, 30
Subordinated Class Distributable Amount .... 35
Subordinated Class Principal Portion ....... 36
Subordination Reserve Fund .................. 9
Substitute Loan ............................. 29
119
<PAGE>
TERM PAGE
- -------------------------------------------- ------------
Thrift institutions ......................... 96
Title V ..................................... 76, 80
Trust Fund .................................. 1
U.S. Person ................................. 98
UCC ......................................... 72, 77
Unaffiliated Sellers ........................ 4
Unpaid Interest Shortfall ................... 38
Voting Interests ............................ 67
Window Period ............................... 75
Window Period Loans ......................... 75
Window Period States ........................ 75
120
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR OR BY THE UNDERWRITER. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED
OR 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
SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
TABLE OF CONTENTS
PAGE
--------
PROSPECTUS SUPPLEMENT
Summary Terms of the Certificates ....................... S-3
Risk Factors ............................................ S-17
Description of the Mortgage Loans ....................... S-18
IHE Funding Corp. ....................................... S-27
Irwin Home Equity Corporation ........................... S-27
Irwin Home Equity Corporation, as Servicer .............. S-28
Allocations of Payments on the Mortgage Loans Between
the Trust Balances and the Additional Balances ........ S-29
Prepayment and Yield Considerations ..................... S-29
Description of the Certificates ......................... S-32
Servicing of the Mortgage Loans ......................... S-45
The Trustee ............................................. S-52
The Certificate Insurance Policy and The Certificate
Insurer ................................................ S-52
Certain Federal Income Tax Considerations ............... S-56
ERISA Considerations .................................... S-57
Legal Investment ........................................ S-58
Plan of Distribution .................................... S-59
Ratings ................................................. S-59
Legal Matters ........................................... S-59
Index of Significant Prospectus Supplement Definitions . S-60
Appendix A -- Audited Financial Statements of the
Certificate Insurer .................................... A-1
Appendix B -- Unaudited Financial Statements of the
Certificate Insurer .................................... B-1
PROSPECTUS
Reports ................................................. 3
Available Information ................................... 3
Incorporation of Certain Information by Reference ...... 3
Summary of Prospectus ................................... 4
Risk Factors ............................................ 12
The Trust Funds ......................................... 17
Description of the Certificates ......................... 30
Credit Support .......................................... 44
Prepayment and Yield Considerations ..................... 50
Use of Proceeds ......................................... 54
The Depositor ........................................... 54
Underwriting Guidelines ................................. 54
Servicing of the Mortgage Loans and Contracts. ......... 56
The Pooling and Servicing Agreement ..................... 67
Certain Legal Aspects of the Mortgage Loans and
Contracts .............................................. 70
Certain Federal Income Tax Consequences ................. 84
REMIC Certificates ...................................... 85
Non-REMIC Certificates .................................. 104
Notes ................................................... 110
ERISA Considerations .................................... 110
Legal Investment ........................................ 113
Plan of Distribution .................................... 115
Legal Matters ........................................... 115
Rating .................................................. 116
Additional Information .................................. 116
PRUDENTIAL
SECURITIES
SECURED FINANCING
CORPORATION TRUST 1995-2
IHE FUNDING CORP.
(SELLER)
IRWIN HOME EQUITY
CORPORATION
(SERVICER)
$51,583,721.00
CLASS A CERTIFICATES
MORTGAGE
PASS-THROUGH CERTIFICATES,
SERIES 1995-2
PROSPECTUS SUPPLEMENT
PRUDENTIAL SECURITIES INCORPORATED
December 1, 1995
