<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus Dated August 4, 1995)
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$52,419,000
First Alliance Mortgage Loan Trust 1996-1
$20,541,000 7.34% Class A-1 Fixed Rate Group Certificates
$31,878,000 Class A-2 Variable Rate Group Certificates
Mortgage Pass-Through Certificates
Series 1996-1
[GRAPHIC OMITTED]
Servicer
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
Depositor
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The Mortgage Pass-Through Certificates, Series 1996-1 (the
"Certificates") will consist of the Class A-1 Fixed Rate Group Certificates (the
"Class A-1 Certificates" or the "Fixed Rate Certificates"), the Class A-2
Variable Rate Group Certificates (the "Class A-2 Certificates" or the "Variable
Rate Certificates," and collectively with the Fixed Rate Certificates, the
"Offered Certificates" or the "Class A Certificates") and the Class R
Certificates (the "Subordinate Certificates"). Only the Offered Certificates are
offered hereby.
As more fully described herein, interest distributions on the Offered
Certificates will be based on the Certificate Principal Balance thereof and the
then applicable Pass-Through Rate thereof. The Pass-Through Rate for the Class
A-1 Certificates will be fixed at 7.34% per annum. The Pass-Through Rate for the
Class A-2 Certificates adjusts monthly as described herein and with respect to
the first Payment Date will be 5.8175% per annum.
For a discussion of significant matters affecting investment in the
Certificates, see "Risk Factors" beginning on page S-14 herein and beginning on
page 12 in the Prospectus.
The Certificates will represent undivided ownership interests in a pool
of closed-end mortgage loans (the "Mortgage Loans") held by First Alliance
Mortgage Loan Trust 1996-1 (the "Trust"). The Trust will be created pursuant to
a Pooling and Servicing Agreement (the "Pooling and Servicing Agreement")
between First Alliance Mortgage Company (the "Company") and in its capacity as
servicer (the "Servicer") of the Mortgage Loans, Prudential Securities Secured
Financing Corporation, in its capacity as depositor of the Mortgage Loans (the
"Depositor") and Bankers Trust Company of California, N.A., in its capacity as
trustee (the "Trustee").
(Cover continued on next page)
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THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF FIRST ALLIANCE MORTGAGE COMPANY,
THE DEPOSITOR, ANY ORIGINATORS OR ANY OF THEIR AFFILIATES. NEITHER
THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Offered Certificates will be purchased by the Underwriter from the
Depositor and will be offered by the Underwriter from time to time in negotiated
transactions or otherwise, at varying prices to be determined at the time of
sale. Proceeds to the Depositor, including accrued interest, are expected to be
approximately 99.82% of the aggregate principal balance of the Offered
Certificates before deducting expenses payable by the Depositor estimated to be
$250,000. See "Underwriting" herein.
The Offered Certificates are offered subject to prior sale, when, as,
and if accepted by the Underwriter and subject to the approval of certain legal
matters. It is expected that delivery of the Offered Certificates in book-entry
form will be made on or about March 29, 1996 only through the facilities of The
Depository Trust Company, CEDEL and Euroclear.
Prudential Securities Incorporated
March 28, 1996
<PAGE>
(Cover continued from previous page)
The obligations of the Depositor, the Company, the Trustee and the
Servicer with respect to the Certificates will be limited to their respective
contractual obligations under the Pooling and Servicing Agreement. The assets of
the Trust initially will include two pools (each, a "Mortgage Loan Group" or
"Group") of closed-end mortgage loans (the "Mortgage Loans") secured by
mortgages or deeds of trust (the "Mortgages") on one-to-four family residential
properties (the "Mortgaged Properties") to be conveyed by the Company to the
Depositor and by the Depositor to the Trust on the Closing Date. The Fixed Rate
Certificates will represent undivided ownership interests in a pool of
fixed-rate Mortgage Loans (the "Fixed Rate Group") secured by Mortgages which
may be either in a first or junior lien position. The Variable Rate Certificates
will represent undivided ownership interests in a pool of variable-rate Mortgage
Loans (the "Variable Rate Group") secured by Mortgages which are in a first lien
position.
Distributions on the Subordinate Certificates are subordinate to
distributions on the Offered Certificates to the extent described herein. The
Pooling and Servicing Agreement will designate each Mortgage Loan Group as a
sub-trust to be held by the Trustee. Distributions of principal and interest
payable to each Class of the Offered Certificates will be made on the 20th day
of each month or if the 20th day is not a business day, the first business day
thereafter (each, a "Payment Date"), beginning in April 1996.
[GRAPHIC OMITTED]
On or before the issuance of the Certificates, the Company will obtain
from MBIA Insurance Corporation (the "Certificate Insurer") two certificate
guaranty insurance policies, one relating to the Fixed Rate Certificates and the
other relating to the Variable Rate Certificates (the "Certificate Insurance
Policies") in favor of the Trustee. Each Certificate Insurance Policy will
provide for 100% coverage of the principal amount of, and scheduled interest due
on, the related Class(es) of Class A Certificates.
The last scheduled Payment Date for the Class A-1 Certificates is June
20, 2027; and the last scheduled Payment Date for the Class A-2 Certificates is
June 20, 2027. It is expected that the actual last Payment Date for each Class
of Certificates will occur significantly earlier than such last scheduled
Payment Dates. The yield to maturity on the Offered Certificates will depend on,
among other things, the rate and timing of principal payments (including
prepayments, which rate may vary significantly over time, repurchases, defaults
and liquidations) on the Mortgage Loans. See "Prepayment and Yield
Considerations" in this Prospectus Supplement.
An election will be made to treat certain assets of the Trust as a real
estate mortgage investment conduit (a "REMIC") for federal income tax purposes.
As described more fully herein, each Class of Offered Certificates will
constitute "regular interests" in the REMIC. See "Certain Federal Income Tax
Consequences" herein and "Certain Federal Income Tax Consequences -- REMIC
Certificates" in the Prospectus.
Prior to their issuance there has been no market for the Offered
Certificates nor can there be any assurance that one will develop, or if it does
develop, that it will provide the Owners of the Offered Certificates with
liquidity or will continue for the life of the Offered Certificates. Prudential
Securities Incorporated (the "Underwriter") intends, but is not obligated, to
make a market in the Offered Certificates.
None of the Mortgage Loans were 31 days or more delinquent in their
monthly payments as of the Cut-Off Date. However, investors in the Class A
Certificates should be aware that approximately 2.53% and 1.01% (by aggregate
principal balance as of the Cut-Off Date) of the Mortgage Loans in the Fixed
Rate Group and Variable Rate Group, respectively, had a first monthly payment
due on or before January 1, 1996. Therefore, it was not possible for any
Mortgage Loan other than such Mortgage Loans to have had a monthly payment that
was delinquent 31 days or more. See "Risk Factors -- Risk of Higher
Delinquencies Associated With Underwriting Standards" herein for important
information regarding the delinquent mortgage loans. Prospective investors
should consider the factors set forth under "Risk Factors" in this Prospectus
Supplement.
-----------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-----------------------------
The Certificates offered by this Prospectus Supplement will be part of
a separate series of Certificates being offered by the Depositor pursuant to its
Prospectus dated August 4, 1995 of which this Prospectus Supplement is a part
and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the "Index to Location of
Principal Defined Terms" herein and "Index of Significant Definitions" in the
Prospectus for the definitions of certain capitalized terms.
Trust: First Alliance Mortgage Loan Trust 1996-1 (the
"Trust").
Certificates Offered: Class A-1 Fixed Rate Group
Certificates (the "Class A-1 Certificates" or
the "Fixed Rate Certificates") and Class A-2
Variable Rate Group Certificates (the "Class
A-2 Certificates" or the "Variable Rate
Certificates" and together with the Fixed Rate
Certificates, the "Class A Certificates" or the
"Offered Certificates").
The Depositor: Prudential Securities Secured Financing
Corporation (the "Depositor"). See "The
Depositor" in the Prospectus.
Company and Servicer: First Alliance Mortgage Company,
a California corporation (the "Company" and in
its separate capacity as servicer, the
"Servicer"). The Company's principal executive
offices are located at 17305 Von Karman Avenue,
Irvine, California 92714-6203, and its phone
number is (714) 224-8500.
Trustee: Bankers Trust Company of California, N.A., a
national banking association (the "Trustee").
The Trustee's principal executive offices are
located at 3 Park Plaza, 16th Floor, Irvine,
California 92714.
Originators: The Company and any entity from which the
Company, on or prior to the Closing Date,
acquires Mortgage Loans is an "Originator" of
the related Mortgage Loans for purposes of this
Prospectus Supplement. On the Closing Date the
Company will sell the Mortgage Loans to the
Depositor, which will deposit the Mortgage
Loans in the Trust.
Cut-Off Date: March 1, 1996.
Closing Date: On or about March 29, 1996.
The Certificates: The Mortgage Pass-Through Certificates (the
"Certificates") will consist of the Class A
Certificates and the Class R Certificates (the
"Subordinate Certificates"). The Certificates
will be issued pursuant to a pooling and
servicing agreement (the "Pooling and Servicing
Agreement") to be dated March 1, 1996, among
the Servicer, the Company, the Depositor and
the Trustee. Only the Offered Certificates are
offered hereby.
The assets of the Trust initially will include
two pools (each, a "Mortgage Loan Group" or
"Group") of closed-end mortgage loans (the
"Mortgage Loans") secured by mortgages or deeds
of trust (the "Mortgages") on one-to-four
family residential properties (the "Mortgaged
Properties") to be conveyed to the Trust on the
Closing Date. The Fixed Rate Certificates will
represent undivided ownership interests in a
pool of fixed-rate Mortgage Loans (the "Fixed
Rate Group") secured by Mortgages which may be
either in a first or junior lien position. The
Variable Rate Certificates will represent
undivided ownership interests in a pool of
variable-rate Mortgage Loans (the "Variable
Rate Group") secured by Mortgages which are in
a first lien position.
S-1
<PAGE>
The Pooling and Servicing Agreement will
designate each Mortgage Loan Group as a
sub-trust to be held by the Trustee. Each Class
of Class A Certificates represents the right to
receive payments from funds available to be
distributed with respect to the related
Mortgage Loan Group, as hereinafter described.
The Last Scheduled Payment Date for the Class
A-1 Certificates is June 20, 2027; and the Last
Scheduled Payment Date for the Class A-2
Certificates is June 20, 2027. It is expected
that the actual last Payment Date for each
Class of Certificates will occur significantly
earlier than such scheduled Payment Dates. See
"Prepayment and Yield Considerations" herein.
The Certificate Insurer does not directly or
indirectly guarantee any specified rate of
prepayments. See "Risk Factors" herein and in
the Prospectus.
Denominations: The Offered Certificates are issuable in book
entry form in minimum denominations of original
principal amounts of $1,000 and integral
multiples thereof.
The Mortgage Loans: Unless otherwise noted, all statistical
percentages in this Prospectus Supplement are
approximate and are measured by the aggregate
principal balance of the Mortgage Loans (the
"Original Aggregate Loan Balance") or of the
Mortgage Loans in the applicable Mortgage Loan
Group, in each case as of the Cut-Off Date. See
"Additional Information" herein.
The Mortgage Loans to be conveyed to the
Depositor by the Company and by the Depositor
to the Trust on the Closing Date (the "Mortgage
Loans") consist of 641 fixed-rate and
variable-rate Mortgage Loans on single-family
homes, including investment properties (which
may be condominiums, town- houses, one-to-four
family residences or homes in planned unit
developments), 42.86% of which, by aggregate
principal balance, are located in the state of
California and 57.14% of which by aggregate
principal balance, collectively are located in
the states of Arizona, Colorado, Florida,
Georgia, Idaho, Illinois, Oregon, Utah and
Washington. The Mortgage Loans are secured by
Mortgages of which 98.08% by aggregate
principal balance are first mortgages or deeds
of trust and 1.92% by aggregate principal
balance are secured by second mortgages or
deeds of trust. The Mortgage Loans in the Trust
are all closed-end mortgage loans in that the
mortgagee is not required to make future
advances thereunder. All of the Mortgage Loans
are actuarial loans, as discussed herein under
"The Mortgage Loan Pool -- Interest Payments on
the Mortgage Loans."
As of the Cut-Off Date, the Mortgage Loans had
an aggregate principal balance of
$52,419,909.39; the Mortgage Loans in the Fixed
Rate Group had an aggregate principal balance
of $20,541,764.16 and the Mortgage Loans in the
Variable Rate Group had an aggregate principal
balance of $31,878,145.23 . The Fixed Rate
Certificates will be issued in respect of the
Fixed Rate Group, and the Variable Rate
Certificates will be issued in respect of the
Variable Rate Group.
All of the Mortgage Loans were originated or
acquired by the Company in accordance with the
Company's mortgage loan program as described
herein. See "Mortgage Loan Program". As a
general matter, the Company's
S-2
<PAGE>
mortgage loan program consists of the
origination and packaging of Mortgage Loans
relating to non-conforming credits. A
non-conforming credit means a mortgage loan
which is ineligible for purchase by the Federal
National Mortgage Association ("FNMA") due to
credit characteristics that do not meet FNMA
guidelines. Mortgage Loans originated under the
Company's mortgage loan program are likely to
experience rates of delinquency, bankruptcy and
loss that are higher than mortgage loans
originated under FNMA guidelines. None of the
Mortgage Loans by aggregate principal balance
were 31 days or more delinquent in their
monthly payments as of the Cut-Off Date.
However, investors in the Class A Certificates
should be aware that approximately 2.53% and
1.01% (by aggregate principal balance as of the
Cut-Off Date) of the Mortgage Loans in the
Fixed Rate Group and Variable Rate Group,
respectively, had a first monthly payment due
on or before January 1, 1996. Therefore, it was
not possible for any Mortgage Loan other than
such Mortgage Loans to have had a monthly
payment that was delinquent 31 days or more.
See "Risk Factors -- Risk of Higher
Delinquencies Associated with Underwriting
Standards" herein.
The Combined Loan-to-Value Ratio ("CLTV") of a
Mortgage Loan is equal to the ratio (expressed
as a percentage) of (x) the sum of the (i)
original Loan Balance of the Mortgage Loan and
(ii) the outstanding principal balances of any
senior mortgage loans (computed at the date of
origination of the Mortgage Loan) and (y) the
appraised value of the Mortgaged Property at
the time of origination. The Loan-to-Value
Ratio ("LTV") of a Mortgage Loan is equal to
the ratio (expressed as a percentage) of the
original Loan Balance of the Mortgage Loan and
the appraised value of the Mortgaged Property
at the time of origination.
Fixed Rate Group. The weighted average CLTV of
the Mortgage Loans in the Fixed Rate Group as
of the Cut-Off Date was 57.92% and the weighted
average LTV was 55.90%. The weighted average
remaining term to stated maturity was 332
months, with a range from 119 months to 360
months. The average principal balance of the
Mortgage Loans in the Fixed Rate Group was
$73,102.36, with a range from $15,000.00 to
$302,053.00; the Mortgage Rates of the Mortgage
Loans in the Fixed Rate Group ranged from 7.95%
to 16.25% per annum, with a weighted average
Mortgage Rate of 10.17% per annum.
The "Junior Lien Ratio" of a Mortgage Loan is
equal to the ratio (expressed as a percentage)
of the original principal balance of such
Mortgage Loan to the sum of (i) the original
principal balance of such Mortgage Loan and
(ii) the outstanding principal balances of any
senior mortgage loans (computed at the date of
origination of the Mortgage Loan). As of the
Cut-Off Date, the weighted average Junior Lien
Ratio of the Mortgage Loans in the Fixed Rate
Group was 96.70%. As a percentage of the
aggregate principal balance of the Mortgage
Loans in the Fixed Rate Group, 95.10% were
secured by first mortgages and 4.90% by second
mortgages, respectively. As a percentage of the
aggregate principal balance of the Mortgage
Loans in the Fixed Rate Group as of the Cut-Off
Date, 98.45% were secured by mortgages on
one-family detached dwellings, 1.09% by
mortgages on two-to-four family dwellings and
0.46% by mortgages on
S-3
<PAGE>
planned unit developments. See "The Mortgage
Loan Pool -- Fixed Rate Group" herein.
Variable Rate Group. All of the Mortgage Loans
in the Variable Rate Group bear interest rates
that adjust based on the London interbank
offered rate for six-month United States Dollar
deposits in the London Market based on
quotations of major banks as published in The
Wall Street Journal ("Six Month LIBOR Loans").
All of the Mortgage Loans in the Variable Rate
Group also are subject to periodic interest
rate adjustment caps, lifetime interest rate
ceilings and lifetime interest rate floors. See
"The Mortgage Loan Pool -- Variable Rate Group"
herein.
The weighted average LTV of the Mortgage Loans
in the Variable Rate Group as of the Cut-Off
Date was 61.40%, and the weighted average
remaining term to stated maturity was 347
months, with a range from 120 months to 360
months. The average principal balance of the
Mortgage Loans in the Variable Rate Group was
$88,550.40, with a range from $21,105.61 to
$376,571.26. All of the Mortgage Loans in the
Variable Rate Group have initial and maximum
Mortgage Rates. The initial Mortgage Rates are
the minimum Mortgage Rates for the Mortgage
Loans in the Variable Rate Group. The weighted
average initial Mortgage Rate of Mortgage Loans
in the Variable Rate Group was 8.03% per annum,
with initial Mortgage Rates that ranged from
5.95% to 11.75% per annum. The weighted average
maximum Mortgage Rate of the Mortgage Loans in
the Variable Rate Group was 15.02% per annum,
with maximum Mortgage Rates that ranged from
12.45% to 18.75% per annum. The gross margin
range for the Six Month LIBOR Loans in the
Variable Rate Group was 3.95% to 6.95%. As of
the Cut-Off Date, 100% of the Mortgage Loans in
the Variable Rate Group had interest rates
which were not fully indexed (i.e., the entire
gross margin has not yet been added to the rate
given by the index).
All of the Mortgage Loans in the Variable Rate
Group were secured by first mortgages. As a
percentage of the aggregate principal balance
of the Mortgage Loans in the Variable Rate
Group as of the Cut-Off Date, 96.67% were
secured by mortgages on one-family detached
dwellings, 2.34% by mortgages on two-to-four
family dwellings, 0.44% by mortgages on
condominiums and 0.55% by mortgages on planned
unit developments. See "The Mortgage Loan Pool
-- Variable Rate Group" herein.
General. The Mortgage Loans are not insured by
either primary or pool mortgage insurance
policies; however, certain distributions due to
the Owners of the Offered Certificates are
insured by two Certificate Insurance Policies,
one relating to the Fixed Rate Certificates and
the other relating to the Variable Rate
Certificates. Each Certificate Insurance Policy
will provide for 100% coverage of the principal
amount of, and scheduled interest due on, the
related Class A Certificates. See "Credit
Enhancement" in this Summary and "The
Certificate Insurance Policies and the
Certificate Insurer" in this Prospectus
Supplement. The Mortgage Loans are not
guaranteed by the Company, the Depositor, any
Originator or any of their respective
affiliates. The Mortgage Loans are required to
be serviced by the Servicer in accordance with
the terms of the Pooling and Servicing
Agreement and with reasonable care, using that
degree of skill and attention
S-4
<PAGE>
that the Servicer exercises with respect to
comparable mortgage loans that it services for
itself and others. See "The Pooling and
Servicing Agreement" herein.
lass A-1 Original Certificate
Principal Balance: $20,541,000.
Class A-2 Original Certificate
Principal Balance: $31,878,000.
Class A-1 Pass-Through Rate: 7.34% per annum.
Class A-2 Pass-Through Rate: The initial Class A-2 Pass-Through Rate, which
will apply to the Accrual Period beginning on
the Closing Date and ending on April 21, 1996,
will be 5.8175% per annum. On each Payment Date
thereafter, the Class A-2 Pass-Through Rate
will be equal to the lesser of (i) with respect
to any Payment Date which occurs on or prior to
the date on which the outstanding aggregate
Loan Balance of the Mortgage Loans in the Trust
has declined to 10% or less of the Original
Aggregate Loan Balance, the London interbank
offered rate for one-month United States dollar
deposits ("LIBOR") (calculated as described
under "Description of the Offered
Certificates-- Calculation of LIBOR" herein) as
of the second to last business day prior to the
immediately preceding Payment Date plus, 0.38%
per annum and with respect to any Payment Date
thereafter, LIBOR plus 0.76% per annum and (ii)
the "Available Funds Cap", which the Pooling
and Servicing Agreement defines to be the
weighted average of the Mortgage Rates on
Mortgage Loans in the Variable Rate Group, less
the sum of (a) the Variable Rate Group
Servicing Fee (as defined herein), (b)
beginning on the seventh Payment Date following
the Closing Date, the premiums due to the
Certificate Insurer with respect to the
Certificate Insurance Policy relating to the
Class A-2 Certificates, (c) the fees due to the
Trustee relating to the Class A-2 Certificates,
and (d) beginning on the seventh Payment Date
following the Closing Date, 0.50%, expressed as
a percentage of the Mortgage Loans in the
Variable Rate Group, calculated as of the first
day of the related Remittance Period.
The Pooling and Servicing Agreement
provides that if, on any Payment Date,
the Available Funds Cap limits the Class
A-2 Pass-Through Rate (i.e., the rate
set by the Available Funds Cap is less
than the Class A-2 Formula Pass-Through
Rate), the amount of any such shortfall
will be carried forward and be due and
payable on future Payment Dates and
shall accrue interest at the applicable
Class A-2 Formula Pass-Through Rate,
until paid (such shortfall, together
with such accrued interest, the
"Available Funds Cap Carry-Forward
Amount"). The Certificate Insurance
Policy for the Class A-2 Certificates
does not cover the Available Funds Cap
Carry- Forward Amount; the payment of
such amount may be funded only from (i)
any excess interest in the Variable Rate
Group resulting from the Available Funds
Cap being in excess of the Class A-2
Formula Pass-Through Rate on future
Payment Dates and (ii) any Net Monthly
Excess Cashflow which would otherwise be
paid to the Servicer or the Trustee on
account of certain reimbursable amounts,
or to the Owners of the Subordinate
Certificates.
The "Class A-2 Formula Pass-Through
Rate" for a Payment Date is the rate
determined by clause (i) of the
definition of "Class A-2 Pass-Through
Rate" on such Payment Date.
S-5
<PAGE>
Distributions, Generally: Distributions on the Certificates will be made
on the twentieth day of each calendar month, or
if such day is not a business day, the next
succeeding business day (each, a "Payment
Date") commencing in April 1996, to the Owners
of record (see "Description of the Offered
Certificates-- General" herein). The Owners of
record shall be such Owners as of the last day
of the calendar month immediately preceding the
calendar month in which such Payment Date
occurs, whether or not such day is a business
day (each a "Record Date") in an amount equal
to the product of such Owner's Percentage
Interest and the amount distributed in respect
of such Owner's Class of such Certificates on
such Payment Date.
The "Percentage Interest" represented by any
Certificate will be equal to the percentage
obtained by dividing the Original Certificate
Principal Balance of such Certificate by the
Original Certificate Principal Balance of all
Certificates of the same Class.
The Class A Distribution Amount relating to
each Mortgage Loan Group for each Payment Date
(to the extent funds are available therefor)
shall be allocated among the Class A
Certificates in the following amounts and in
the following order of priority:
(i) First, to the Owners of the Class A
Certificates of the related Mortgage Loan
Group, the related Class A Current Interest on
a pro rata basis without any priority among
such Class A Certificates.
(ii) Second, to the Owners of the related Class
of Class A Certificates (A) the Class A
Principal Distribution Amount (as defined below
under the heading "Distributions of Principal")
applicable to the Fixed Rate Group shall be
distributed to the Owners of the Class A-1
Certificates until the Class A-1 Certificate
Principal Balance is reduced to zero and (B)
the Class A Principal Distribution Amount
applicable to the Variable Rate Group shall be
distributed to the Owners of the Class A-2
Certificates until the Class A-2 Certificate
Principal Balance is reduced to zero.
Distributions of Interest: For each Payment Date, the interest due with
respect to the Fixed Rate Certificates will be
the interest which has accrued thereon at the
Class A-1 Pass-Through Rate during the calendar
month immediately preceding the calendar month
in which such Payment Date occurs; the interest
due with respect to the Variable Rate
Certificates will be the interest which has
accrued thereon at the then applicable Class
A-2 Pass-Through Rate from the preceding
Payment Date (or from the Closing Date in the
case of the first Payment Date) to and
including the day prior to the current Payment
Date. Each period referred to in the prior
sentence relating to the accrual of interest is
the "Accrual Period" for the related Class of
Class A Certificates and the amount of interest
due on a Class of Class A Certificates on a
Payment Date is the "Class A Current Interest"
for each Class of Class A Certificates on such
Payment Date.
All calculations of interest on the Fixed Rate
Certificates will be made on the basis of a
360-day year assumed to consist of twelve
30-day months. Calculations of interest on the
Variable Rate Certificates will be made on the
basis of the actual number of days elapsed in
the related Accrual Period and a year of 360
days.
S-6
<PAGE>
Distributions of Principal: The Owners of each Class of Class A
Certificates are entitled to receive certain
monthly distributions of principal on each
Payment Date which generally reflect
collections of principal during the prior
calendar month. The Certificate Insurance
Policies only guarantee the amount by which the
sum of the related Class A Current Interest and
the related Subordination Deficit, if any,
exceeds Total Available Funds for the related
Mortgage Loan Group (after taking into account
the portion of the related Class A Principal
Distribution Amount to be actually distributed
on such Payment Date without regard to any
related Insured Payment to be made with respect
to such Payment Date) as more fully described
herein under "The Certificate Insurance
Policies and the Certificate Insurer."
The credit enhancement provisions of the Trust
result in a limited acceleration of the
principal payments to the Owners of each Class
of Class A Certificates; such credit
enhancement provisions are more fully described
under "Description of the Offered Certificates
-- Overcollateralization Provisions" and "--
Crosscollateralization Provisions" herein. Such
credit enhancement provisions also have the
effect of accelerating and shortening the
weighted average lives of the Class A
Certificates by increasing the rate at which
principal is distributed to the Owners. See
"Prepayment and Yield Considerations" herein.
In addition, the following discussion makes use
of a number of technical defined terms which
are defined under "Description of the Offered
Certificates -- Overcollateralization
Provisions" and "-- Crosscollateralization
Provisions" herein.
On each Payment Date, distributions in
reduction of the Certificate Principal Balance
of the Offered Certificates will be made in the
amounts described herein. The "Class A
Principal Distribution Amount" for each
Mortgage Loan Group with respect to each
Payment Date shall be the lesser of:
(a) the related Total Available Funds for the
related Mortgage Loan Group plus any related
Insured Payment minus the related Class A
Current Interest; and
(b) (i) the sum, without any duplication of:
(a) the Carry-Forward Amount with respect
to the related Mortgage Loan Group;
(b) the principal portion of all scheduled
monthly payments on the Mortgage Loans in
the related Mortgage Loan Group due during
the related Due Period, to the extent
actually received by the Trustee on or
prior to the related Remittance Date or to
the extent actually advanced by the
Servicer on or prior to the related
Remittance Date and the principal portion
of all full and partial principal
prepayments made by the respective
Mortgagors during the related Remittance
Period;
(c) the scheduled Loan Balance of each
Mortgage Loan in the related Mortgage Loan
Group that either was repurchased by the
Company or an Originator or purchased by
the Servicer on the related Remittance
Date, to the extent such scheduled Loan
Balance is actually received by the Trustee
on or prior to the related Remittance Date;
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(d) any Substitution Amounts delivered by
the Company or an Originator on the related
Remittance Date in connection with a
substitution of a Mortgage Loan in the
related Mortgage Loan Group (to the extent
such Substitution Amounts relate to
principal), to the extent such Substitution
Amounts are actually received by the
Trustee on or prior to the related
Remittance Date;
(e) all Net Liquidation Proceeds actually
collected by the Servicer with respect to
the Mortgage Loans in the related Mortgage
Loan Group during the related Remittance
Period (to the extent such Net Liquidation
Proceeds relate to principal) to the extent
actually received by the Trustee on or
prior to the related Remittance Date;
(f) the amount of any Subordination Deficit
with respect to such Mortgage Loan Group
for such Payment Date;
(g) the proceeds received by the Trustee of
any termination of the related Mortgage
Loan Group (to the extent such proceeds
relate to principal); and
(h) the amount of any Subordination
Increase Amount with respect to such
Mortgage Loan Group for such Payment Date
consisting of the amount of any Net Monthly
Excess Cash Flow to be actually applied for
the accelerated payment of principal on the
related Class A Certificates;
minus
(ii) the amount of any Subordination
Reduction Amount with respect to such
Mortgage Loan Group for such Payment Date
consisting of the amount of any Net Monthly
Excess Cash Flow to be actually paid to the
Owners of the Subordinate Certificates.
In no event will the Class A Principal
Distribution Amount for any Mortgage Loan Group
and Payment Date (x) be less than zero or (y)
be greater than the then-outstanding
Certificate Principal Balance of the related
Class of Class A Certificates.
The sum of the Class A Current Interest and the
Class A Principal Distribution Amount with
respect to any Class of Class A Certificates
and Payment Date is the "Class A Distribution
Amount" for such Class of Class A Certificates
and Payment Date.
The "Carry-Forward Amount" with respect to a
Class of Class A Certificates for any Payment
Date is the sum of (x) the amount, if any, by
which (i) the Class A Distribution Amount for
such Class as of the immediately preceding
Payment Date exceeded (ii) the amount of the
actual distribution made to the Owners of the
related Class of Class A Certificates on such
immediately preceding Payment Date plus (y) 30
days' interest on the interest portion of such
amount, calculated at the related Pass-Through
Rate. See "Description of the Offered
Certificates -- Distributions" herein.
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
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recover on such Mortgage Loan have been
recovered (exclusive of any possibility of a
deficiency judgment).
Any loss on a Liquidated Mortgage Loan (i.e., a
Realized Loss) may or may not be allocated to
the Owners of the related Class of Class A
Certificates on the Payment Date which
immediately follows the event of loss. However,
the Owners of the Class A Certificates are
entitled to receive ultimate recovery of any
Realized Losses which occur in the related
Mortgage Loan Group, which receipt will be no
later than the Payment Date occurring after
such Realized Loss creates a Subordination
Deficit and will be in the form of an Insured
Payment if not covered through Net Monthly
Excess Cashflow in the related Group or the
other Group.
Insured Payments do not include Realized Losses
until such time as the aggregate cumulative
Realized Losses have created a Subordination
Deficit nor do Insured Payments cover the
Servicer's failure to make Delinquency Advances
until such time as the aggregate cumulative
amount of such unpaid Delinquency Advances,
when added to Realized Losses have created a
Subordination Deficit.
A "Subordination Deficit" with respect to a
Mortgage Loan Group and Payment Date is the
amount, if any, by which (x) the Certificate
Principal Balance of the related Class A
Certificates, after taking into account all
distributions to be made on such Payment Date,
exceeds (y) the aggregate principal balances of
the Mortgage Loans in the related Mortgage Loan
Group as of the close of business on the Due
Date in the calendar month in which such
Payment Date occurs.
Credit Enhancement: The Credit Enhancement provided for the benefit
of the Owners of the Offered Certificates
consists of (x) the overcollateralization and
crosscollateralization mechanics which utilize
the internal cash flows of the Trust and (y)
the Certificate Insurance Policies.
Overcollateralization. The credit enhancement
provisions of the Trust result in a limited
acceleration of each Class of Offered
Certificates relative to the amortization of
the related Mortgage Loans in the early months
of the transaction. The accelerated
amortization is achieved by the application of
certain excess interest to the payment of Class
A Certificate principal. This acceleration
feature creates, with respect to each Mortgage
Loan Group, overcollateralization which results
from the excess of the aggregate scheduled Loan
Balances of the Mortgage Loans in the related
Mortgage Loan Group over the aggregate related
Class A Certificate Principal Balance. Once the
required level of overcollateralization is
reached, and subject to the provisions
described in the next paragraph, the
acceleration feature will cease, unless
necessary to maintain the required level of
overcollateralization.
The Pooling and Servicing Agreement provides
that, subject to certain floors, caps and
triggers, the required level of
overcollateralization with respect to a
Mortgage Loan Group may increase or decrease
over time. An increase would result in a
temporary period of accelerated amortization of
the related Class A Certificates to increase
the actual level of overcollateralization to
its required level; a decrease would result in
a
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temporary period of decelerated amortization to
reduce the actual level of
overcollateralization to its required level.
Crosscollateralization. In addition to the
foregoing, the Pooling and Servicing Agreement
provides that such excess interest, together
with certain other excess amounts, generated by
one Mortgage Loan Group may be used to fund
shortfalls in Available Funds in the other
Mortgage Loan Group or accelerate the
amortization of the Class of Class A
Certificates related to the other Mortgage Loan
Group, subject to certain prior requirements of
such Mortgage Loan Group.
See "Description of the Offered
Certificates--Overcollateralization Provisions"
and "-- Crosscollateralization Provisions"
herein.
The Certificate Insurance Policies. The Company
will obtain the Certificate Insurance Policies,
which are noncancelable, in favor of the
Trustee on behalf of the Owners of each Class
of the Offered Certificates. On each Payment
Date, the Certificate Insurer will be required
to make available to the Trustee the amount by
which the related Class A Current Interest and
any Subordination Deficit for the related
Mortgage Loan Group exceeds the Total Available
Funds (after deducting the amount necessary to
pay the related premium amount to the
Certificate Insurer) for such Mortgage Loan
Group as of such Payment Date. The Certificate
Insurance Policies do not guarantee to Owners
of the related Class A Certificates any
specified rate of Prepayments. Also, the
Certificate Insurance Policy for the Class A-2
Certificates does not insure the payment of the
Available Funds Cap Carry- Forward Amount. See
"Credit Enhancement" in this Summary and "The
Certificate Insurance Policies and the
Certificate Insurer" herein and "Credit
Support" in the Prospectus.
Certificate Insurer: MBIA Insurance Corporation (the "Certificate
Insurer").
Delinquency Advances
and Compensating Interest: The Servicer will be obligated to make advances
("Delinquency Advances") with respect to
delinquent payments of interest (at the related
Mortgage Rate less the Servicing Fee, as
defined below, and less certain miscellaneous
administrative amounts) and scheduled principal
due on each Mortgage Loan to the extent that
such Delinquency Advances, in good faith and in
the Servicer's reasonable judgment, are
reasonably recoverable from the related
Mortgage Loan. Delinquency Advances are
recoverable from (i) future collections on the
Mortgage Loan which gave rise to the
Delinquency Advance, (ii) Liquidation Proceeds
for such Mortgage Loan and (iii) from certain
excess moneys which would otherwise be paid to
the Owners of the Subordinate Certificates.
In addition, the Servicer will also be required
to deposit in the Principal and Interest
Account with respect to any full Prepayment
received on a Mortgage Loan during the related
Remittance Period out of its own funds without
any right of reimbursement therefor, an amount
equal to the difference between (x) 30 days'
interest at such Mortgage Loan's Mortgage Rate
(less the Servicing Fee and less certain
miscellaneous administrative amounts) on the
Loan Balance of such Mortgage Loan as of the
first day of the related Remittance Period and
(y) to the extent not previously advanced, the
interest (less the Servicing Fee and less
certain miscellaneous administrative
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<PAGE>
amounts) paid by the Mortgagor with respect to
such Mortgage Loan during such Remittance
Period (any such amount paid by the Servicer,
"Compensating Interest"). The Servicer will not
be required to pay Compensating Interest with
respect to any Remittance Period in an amount
in excess of the aggregate Servicing Fee
received by the Servicer for such Remittance
Period or to cover shortfalls in collections of
interest due to curtailments.
Any failure by the Servicer to remit to the
Trustee a Delinquency Advance or Compensating
Interest to the extent required under the
Pooling and Servicing Agreement will constitute
an event of default under the Pooling and
Servicing Agreement, in which case, upon the
removal of the Servicer, the Trustee or the
successor Servicer will be obligated to make
such advances in accordance with the terms of
the Pooling and Servicing Agreement. See
"Servicing of the Mortgage Loans and Contracts
-- Advances and Limitations Thereon" in the
Prospectus.
Book-Entry Registration of the
Offered Certificates: The Offered Certificates will initially be
issued in book-entry form. Persons acquiring
beneficial ownership interests in such Offered
Certificates ("Beneficial Owners") may elect to
hold their interests through The Depository
Trust Company ("DTC"), in the United States, or
Centrale de Livraison de Valeurs Mobilieres,
S.A. ("CEDEL") or the Euroclear System
("Euroclear"), in Europe. Transfers within DTC,
CEDEL or Euroclear, as the case may be, will be
in accordance with the usual rules and
operating procedures of the relevant system. So
long as the Offered Certificates are Book-Entry
Certificates (as defined herein), such
Certificates will be evidenced by one or more
Certificates registered in the name of Cede &
Co. ("Cede"), as the nominee of DTC or one of
the European Depositaries (as defined below).
Cross-market transfers between persons holding
directly or indirectly through DTC, on the one
hand, and counterparties holding directly or
indirectly through CEDEL or Euroclear, on the
other, will be effected in DTC through Citibank
N.A. ("Citibank") or Chemical Bank ("Chemical",
and together with Citibank, the "European
Depositaries"), the relevant depositaries of
CEDEL and Euroclear, respectively, and each a
participating member of DTC. The Offered
Certificates will initially be registered in
the name of Cede. The interests of the Owners
of such Certificates will be represented by
book-entries on the records of DTC and
participating members thereof. No Beneficial
Owner will be entitled to receive a definitive
certificate representing such person's
interest, except in the event that Definitive
Certificates (as defined herein) are issued
under the limited circumstances described
herein. All references in this Prospectus
Supplement to any Offered Certificates reflect
the rights of Beneficial Owners only as such
rights may be exercised through DTC and its
participating organizations for so long as such
Offered Certificates are held by DTC. See
"Description of the Offered
Certificates--Book-Entry Registration of the
Offered Certificates" herein and Annex I
hereto.
Monthly Servicing Fee: First Alliance Mortgage Company, as Servicer,
will retain a fee equal to 1.00% per annum (the
"Fixed Rate Group Servicing Fee"), payable
monthly at one-twelfth the annual rate, of the
then-outstanding principal amount of each
Mortgage Loan in the Fixed Rate Group as of the
first day of each calendar month and a fee
equal to 0.50% per annum, subject to certain
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adjustments during the first year after the
Closing Date (the "Variable Rate Group
Servicing Fee"), payable monthly at one-twelfth
the annual rate, of the then-outstanding
principal amount of each Mortgage Loan in the
Variable Rate Group. The Fixed Rate Group
Servicing Fee and the Variable Rate Group
Servicing Fee are collectively referred to as
the "Servicing Fee." The Servicing Fee is
inclusive of any compensation paid to the
Trustee (or an affiliate thereof) as the
back-up servicer of a Mortgage Loan.
Optional Termination: The Servicer, acting directly or through a
permitted designee, will have the right to
purchase from the Trust all the Mortgage Loans
then held by the Trust, at a price at least
equal to par plus accrued interest, on any
Remittance Date on or after the Remittance Date
on which the then-outstanding aggregate
principal balance of the Mortgage Loans in the
Trust has declined to 10% or less of the
Original Aggregate Loan Balance. Under certain
circumstances the Certificate Insurer may also
exercise such purchase rights if the Servicer
does not do so. See "The Pooling and Servicing
Agreement-- Optional Termination" herein.
Ratings: It is a condition of the original issuance of
the Offered Certificates that the Offered
Certificates receive ratings of AAA by Standard
& Poor's Ratings Service, a Division of The
McGraw-Hill Companies ("Standard & Poor's"),
and Aaa by Moody's Investors Service, Inc.
("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 entity. See
"Prepayment and Yield Considerations" and
"Ratings" herein and "Prepayment and Yield
Considerations" in the Prospectus.
Risk Factors: Credit Considerations. For information with
regard to the Mortgage Loans and their related
risks, see "The Mortgage Loan Pool" herein.
Prepayment Considerations. For information
regarding the consequences of prepayments of
the Mortgage Loans, see "Prepayment and Yield
Considerations" herein.
Other Considerations. For a discussion of other
risk factors that should be considered by
prospective investors in the Offered
Certificates, see "Risk Factors" herein and in
the Prospectus.
Federal Income Tax Aspects: For Federal income tax purposes an election
will be made to treat the Trust as a "real
estate mortgage investment conduit" (the
"REMIC"). Each Class of Offered Certificates
will be designated as "regular interests" in
the REMIC and will be treated as debt
instruments of the Trust for federal income tax
purposes. The REMIC will issue the Class R
Certificates, which will be designated as the
sole class of "residual interests" in the
REMIC. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
ERISA Considerations: As described under "ERISA
Considerations" herein, the Class A
Certificates may be purchased by employee
benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, as
amended. See "ERISA Considerations" herein and
in the Prospectus.
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<PAGE>
Legal Investment
Considerations: The Class A Certificates will not constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA"). Accordingly, many
institutions with legal authority to invest in
comparably rated securities based on first
mortgage loans may not be legally authorized to
invest in the Class A Certificates.
Certain Legal Matters: Certain legal matters relating to the validity
of the issuance of the Certificates will be
passed upon for the Company and the Servicer by
Arter & Hadden, Washington, D.C., and by Steven
Gourley, Los Angeles, California, counsel to
the Company and the Servicer. Certain legal
matters relating to insolvency issues and
certain federal income tax matters concerning
the Certificates will be passed upon for the
Company by Arter & Hadden, Washington, D.C.
Certain legal matters relating to the Depositor
will be passed upon for the Depositor by Dewey
Ballantine, New York, New York. Certain legal
matters relating to the validity of the
issuance of the Certificates will be passed
upon for the Underwriter by Dewey Ballantine.
Certain legal matters relating to the
Certificate Insurer and the Certificate
Insurance Policies will be passed upon for the
Certificate Insurer by Kutak Rock, Omaha,
Nebraska.
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<PAGE>
RISK FACTORS
Prospective investors in the Class A Certificates should consider the
following factors (as well as the factors set forth under "Risk Factors" in the
Prospectus) in connection with the purchase of the Class A Certificates.
Risk of Mortgage Loan Yield Reducing Class A-2 Pass-Through Rate. The
Class A-2 Pass-Through Rate is based upon the value of an index (LIBOR) which is
different from the value of the indices applicable to the Mortgage Loans in the
Variable Rate Group, as described under "The Mortgage Pool -- Variable Rate
Group" herein (either as a result of the use of a different index rate
determination date, rate adjustment date or rate cap or floor). The Variable
Rate Group contains Mortgage Loans that adjust semi-annually based upon a
six-month LIBOR index whereas the Pass-Through Rate on the Class A-2
Certificates adjusts monthly based upon a one-month LIBOR index, subject to the
Available Funds Cap. Consequently, the Class A-2 Pass-Through Rate for any
Payment Date may not equal the Class A-2 Formula Pass-Through Rate during the
related Accrual Period. In particular, the Class A-2 Pass-Through Rate adjusts
monthly, while the interest rates of the Mortgage Loans in the Variable Rate
Group adjust less frequently, with the result that the Available Funds Cap may
be lower than the Class A-2 Formula Pass- Through Rate for extended periods in a
rising interest rate environment. In addition, one-month LIBOR and the index
applicable to such Mortgage Loans may respond to different economic and market
factors, and there is not necessarily any correlation between them. Thus, it is
possible, for example, that one-month LIBOR may rise during periods in which the
Mortgage Loan's index is stable or is falling or that, even if both one-month
LIBOR and such index rise during the same period, one-month LIBOR may rise much
more rapidly than such index. See "Class A-2 Pass-Through Rate" in the Summary
herein.
Risk of Higher Delinquencies Associated with Underwriting Standards.
All of the Mortgage Loans were originated or acquired by the Company in
accordance with the Company's mortgage loan program described herein. See
"Mortgage Loan Program" herein. As a general matter, the Company's mortgage loan
program consists of the origination and packaging of mortgage loans relating to
non-conforming credits. A non-conforming credit means a mortgage loan which is
ineligible for purchase by FNMA due to credit characteristics that do not meet
FNMA guidelines. Mortgage Loans originated under the Company's mortgage loan
program may experience rates of delinquency, foreclosure and bankruptcy that are
higher than mortgage loans originated under FNMA guidelines. None of the
Mortgage Loans were 31 days or more delinquent in their monthly payments as of
the Cut-Off Date. However, investors in the Class A Certificates should be aware
that approximately 2.53% and 1.01% (by aggregate principal balance as of the
Cut-Off Date) of the Mortgage Loans in the Fixed Rate Group and Variable Rate
Group, respectively, had a first monthly payment due on or before January 1,
1996. Therefore, it was not possible for any Mortgage Loan other than such
Mortgage Loans to have had a monthly payment that was delinquent 31 days or
more.
Risk of Higher Default Rates Associated with California Real Property.
Since 42.86% of the Mortgaged Properties relating to the Mortgage Loans are
located in California, an overall decline in the California residential real
estate market could adversely affect the values of the Mortgaged Properties
securing such Mortgage Loans, causing the Loan Balances of the related Mortgage
Loans to equal or exceed the value of such Mortgaged Properties.
The standard hazard insurance policy required to be maintained under
the terms of each Mortgage Loan does not insure against physical damage arising
from earth movement (including earthquakes, landslides and mudflows).
Accordingly, should such event cause losses in respect of the Mortgage Loans, if
the protection afforded by the overcollateralization and crosscollateralization
of the Certificates is insufficient and upon the occurrence of a Subordination
Deficit the Certificate Insurer is unable to meet its obligations under the
Certificate Insurance Policy, then the Owners of the Offered Certificates could
experience a loss on their investment.
Risk of Higher Loss Rates Associated with Junior Liens. Since 4.90% of
the aggregate principal balance of the Mortgage Loans in the Fixed Rate Group as
of the Cut-Off Date are secured by junior deeds of trust or mortgages which are
subordinate to the rights of the beneficiaries under the related senior
mortgages, a decline in real property values could extinguish the interest of
the beneficiary of a junior deed of trust on the Mortgaged Property before
having any effect on the interest of the beneficiary of a senior mortgage
thereon. To the extent that such losses result in a shortfall of available funds
from payments relating to the Mortgage Loans and in the event
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that the Certificate Insurer is unable to meet its obligation upon the
occurrence of a Subordination Deficit, then the owners of the Offered
Certificates will bear all risk of loss resulting from default by Mortgagors and
will have to look primarily to the value of the Mortgaged Property for recovery
of the outstanding principal and unpaid interest on the defaulted Mortgage
Loans. See "Mortgage Loan Program -- Underwriting Guidelines" herein and "Risk
Factors -- Risks of the Mortgage Loans" in the Prospectus.
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures, and require
licensing of the Company. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Mortgage Loans. The Company will be required to
repurchase any Mortgage Loans which, at the time of origination, did not comply
with applicable federal and state laws and regulations. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Trust to collect all or part of the principal of or interest on
the Mortgage Loans, may entitle the borrower to a refund of amounts previously
paid and, in addition, could subject the Company to damages and administrative
enforcement. See "Certain Legal Aspects of Mortgage Loans and Contracts" in the
Prospectus.
Approximately 81.4% of the Mortgage Loans will be subject to the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Riegle Act"),
which incorporates the Home Ownership and Equity Protection Act of 1994. The
Riegle Act adds certain additional provisions to Regulation Z, which is the
implementing regulation of the Truth-In-Lending Act. These provisions impose
additional disclosure and other requirements on creditors with respect to
non-purchase money home equity loans with high interest rates or high upfront
fees and charges. In general, home equity loans within the purview of the Riegle
Act have annual percentage rates over 10% greater than the yield on Treasury
Securities of comparable maturity and/or fees and points which exceed the
greater of 8% of the total loan amount or $400. The provisions of the Riegle Act
apply on a mandatory basis to all home equity loans originated on or after
October 1, 1995. These provisions can impose specific statutory liabilities upon
creditors who fail to comply with their provisions and may affect the
enforceability of the related loans. In addition, any assignee of the creditor
would generally be subject to all claims and defenses that the consumer could
assert against the creditor, including, without limitation, the right to rescind
the home equity loan. The Company will represent and warrant in the Pooling and
Servicing Agreement that each Mortgage Loan was originated in compliance with
all applicable laws including the Truth-in-Lending Act, as amended.
Risk of Seller Insolvency. The Company believes that the transfer of
the Mortgage Loans to the Depositor and by the Depositor to the Trust
constitutes a sale by the Company to the Depositor and by the Depositor to the
Trust and, accordingly, that such Mortgage Loans will not be part of the assets
of the Company in the event of the insolvency of the Company or of the Depositor
in the event of the bankruptcy of the Depositor and will not be available to the
creditors of the Company or the Depositor, as the case may be. However, in the
event of an insolvency of the Company or the Depositor, it is possible that a
bankruptcy trustee or a creditor of the Company or the Depositor may argue that
the transaction between the Company and the Depositor or between the Depositor
and the Trust was a pledge of such Mortgage Loans in connection with a borrowing
by the Company or the Depositor, as the case may be, rather than a true sale.
Such an attempt, even if unsuccessful, could result in delays in distributions
on the Certificates.
On the Closing Date, the Trustee, the Company, the Depositor, the
Rating Agencies and the Certificate Insurer will have received an opinion of
Arter & Hadden, counsel to the Company, with respect to the true sale of the
Mortgage Loans from the Company to the Depositor and by the Depositor to the
Trustee, in form and substance satisfactory to the Certificate Insurer and the
Rating Agencies.
MORTGAGE LOAN PROGRAM
As a general matter, the Company's Mortgage Loan program will consist
of the origination and packaging of Mortgage Loans relating to non-conforming
credits. For purposes hereof, "non-conforming credit" means a mortgage loan
which, based upon standard underwriting guidelines, is ineligible for purchase
by FNMA due to credit characteristics that do not meet FNMA guidelines. However,
certain of the Mortgage Loans will relate to FNMA conforming credits.
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The Mortgagors generally will have taken out the related Mortgage Loans
for one of three reasons: (i) to refinance an existing mortgage loan, (ii) to
consolidate debt, or (iii) to obtain cash proceeds by borrowing against the
Mortgagor's equity in the related Mortgaged Property. The Mortgage Loans are
commonly referred to as home equity loans.
Underwriting Guidelines
As more fully described below under "Qualifications of Originators,"
there are various types of Originators that may participate in the Company's
Mortgage Loan Program. Under the Company's Mortgage Loan Program, the Company
has purchased and originated the Mortgage Loans pursuant to standard
underwriting guidelines according to the Company's Originator Guide, as modified
from time to time, used by the Company, Affiliated and Unaffiliated Originators
("Company's Guidelines"). The underwriting guidelines are described below.
Company's Guidelines. The Company's Guidelines are set forth in the
Company's Guides. The Company's Guides are revised continuously based on
opportunities and prevailing conditions in the nonconforming credit residential
mortgage market, as well as the expected market for the resulting Certificates.
Substantially all loans originated or purchased by the Company are
subjected to the Company's Guidelines. The underwriting process is intended to
assess the prospective borrower's creditworthiness, capacity to repay and
collateral. The fixed-rate and adjustable-rate loans are generally fully
amortized over a fifteen or thirty year schedule. Loan amounts range from a
minimum of $12,000 to a maximum of $350,000, unless a higher amount is approved
by the Company's loan committee. The properties securing the loans are primarily
single family detached, owner occupied residences. Occasionally, loans are
originated or acquired on one- to four-family residential properties,
condominiums or townhouses. No mobile home, co-operative or land loans are
originated or acquired.
The weighted average CLTV of the Company's loans generally does not
exceed 75%. The CLTV is defined as the ratio, expressed as a percentage, of the
sum of the original principal balance of a Mortgage Loan and the principal
balance at the time of origination of such Mortgage Loan of any mortgage loan
which has a prior lien against the Mortgaged Property (a "Senior Mortgage
Loan"), regardless of any lesser amount actually outstanding (computed at the
time of the origination of the Mortgage Loan) to the appraised value of the
related Mortgaged Property at the time of origination of the Mortgage Loan.
Complete documentation for any senior deeds of trust are reviewed and approved
by the Company's loan committee. Substantial negative amortization or potential
for severe increase in payments on underlying loans will disqualify a borrower's
loan application. A CLTV of 80% is the maximum allowed under the Company's
Guidelines; however, loans having the maximum 80% CLTV are often not originated
due to the application of all of the underwriting guidelines. The Company's loan
officers, upon review of a prospective borrower's application, will adjust the
maximum CLTV downward for any one or more of the following six factors: (1)
property condition; (2) income (source, amount, reliability); (3) debt ratios;
(4) credit quality; (5) job stability; and (6) household stability. The
Company's Guidelines also permit the origination of loans to prospective
mortgagors who may have experienced significant credit problems in the past such
as recent bankruptcies or who are currently experiencing difficulties in
satisfying existing mortgage obligations. An existing mortgage loan is not
required to be current at the time the application is submitted.
Generally, the borrower is required to have an acceptable credit
history given the amount of equity available, the strength of the employment
history and income stability. Income, employment, and deed of trust status is
verified for each applicant by telephone and/or written inquiry, examination of
tax returns, pay check stubs, court supported documents or bank statements.
Self-employed applicants provide personal and business financial statements.
In general, the value of each property proposed as security for a
mortgage loan is required to be determined by a full appraisal. After evaluation
of five neighborhood comparables, a Company appraiser will complete his
appraisal with an inspection of the subject property and a meeting with the
prospective borrower. Company appraisers are licensed in those states which
require licensing. The Company performs review appraisals on all mortgage loans
that (i) have a CLTV in excess of 62%, (ii) have a principal amount of more than
$150,000 or less than $60,000, (iii) are originated by a branch office during
the first 60 days such branch office is open, or (iv) have an appraised value in
excess of $350,000.
S-16
<PAGE>
Certain laws protect loan applicants by offering them a timeframe after
loan documents are signed, termed the rescission period, during which the
applicant has the right to cancel the loan. The rescission period must have
expired prior to funding a loan and may not be waived by the applicant except as
permitted by law.
The Company's Guidelines require title insurance coverage issued by an
approved American Land Title Association or California Land Title Association
title insurance company on each loan the Company originates or purchases. The
Company, the related Originator and their assignees are generally named as the
insured. Title insurance policies indicate the lien position of the mortgage
loan and protect the insured against loss if the title or lien position is not
as indicated.
The applicant is required to secure hazard insurance in an amount
sufficient to cover the new loan and any prior mortgage. If the sum of the
outstanding first mortgage, if any, and the related loan exceeds replacement
value, insurance equal to replacement value may be accepted. The Company or its
designee is required to ensure that its name and address is properly added to
the "Mortgagee Clause" of the insurance policy. In the event the Company or the
related Originator's name is added to a "Loss Payee Clause" and the policy does
not provide for written notice of policy changes of cancellation, an endorsement
adding such provision is required.
Approved Guidelines. The Company may acquire Mortgage Loans
underwritten pursuant to underwriting guidelines that may differ from the
Company's Guidelines. Certain of the Mortgage Loans have been acquired in
negotiated transactions, and such negotiated transactions are governed by
agreements ("Master Loan Transfer Agreements") relating to ongoing acquisitions
of Mortgage Loans by the Company from Originators who will represent that the
Mortgage Loans have been originated in accordance with underwriting guidelines
agreed to by the Company; the Company will review or cause to be reviewed all of
the Mortgage Loans in any delivery of Mortgage Loans from the related Originator
for conformity with the Approved Guidelines.
The underwriting standards utilized in negotiated transactions and
Master Loan Transfer Agreements may vary from the Company's Guidelines. The
Approved Guidelines are designed to provide an underwriter with information to
evaluate either the security for the related Mortgage Loan, which security
consists primarily of the borrower's repayment ability, or the adequacy of the
Mortgaged Property as collateral, or a combination of both. Moreover, there can
be no assurance that every Mortgage Loan was originated in conformity with the
applicable Approved Guidelines in all material respects, or that the quality or
performance of Mortgage Loans underwritten pursuant to varying guidelines as
described above will be equivalent under all circumstances.
Quality Control. The Company's quality control department reviews in
its entirety every loan file originated by the retail branch offices as well as
wholesale originators. Loan files are reviewed prior to approval for
completeness, accuracy, and compliance with the Company's underwriting criteria
and applicable regulations.
Qualifications of Originators
The Company has purchased Mortgage Loans with an aggregate principal
balance of $9,508,843.57 from two Originators. Each such Originator from which a
Mortgage Loan is acquired has been accepted by the Company for participation in
the Company's mortgage loan program. Originators that enter into Master Loan
Transfer Agreement and which meet the following qualifications are hereinafter
referred to as "Participating Originators." As of the date of approval, each
Participating Originator is generally required to have a specified minimum level
of experience in originating non-conforming conventional mortgage loans.
Furthermore, an Originator that will retain the servicing of the related
Mortgage Loans will be required to have a conventional Mortgage Loan servicing
portfolio of a required amount and to have a specified minimal level of
experience servicing comparable mortgage loans.
The Company may waive or modify in an appropriate case any of the
foregoing requirements for Participating Originators. Among Affiliated and
Unaffiliated Originators, only Participating Originators may enter into Master
Loan Transfer Agreements with the Company and may serve as Sub-Servicers for any
loans acquired by a Trust and originated by such Affiliated and Unaffiliated
Originators. The Company will make directly, or will guarantee compliance with,
any representations and warranties made by any Affiliated and Unaffiliated
Originator with respect to the Mortgage Loans originated by it and acquired by a
Trust.
S-17
<PAGE>
All Affiliated and Unaffiliated Originators are required to originate
mortgage loans in accordance with the applicable underwriting standards.
However, with respect to any Originator, some of the generally applicable
underwriting standards described herein and in the Company's Guidelines may be
modified or waived with respect to certain Mortgage Loans originated by such
Originators.
Representations by Originators
Each Originator has made representations and warranties in respect of
the Mortgage Loans sold by such Originator. Such representations and warranties
include, among other things, that at the time of the sale by the Originator to
the Company of each Mortgage Loan: (i) the information with respect to each
Mortgage Loan set forth in the Schedules of Mortgage Loans is true and correct
as of the related Cut-Off Date; (ii) each Mortgage Loan being transferred to the
Trust is a qualified mortgage under the REMIC provisions of the Code and is a
Mortgage; (iii) each Mortgaged Property is improved by a single (one-to-four)
family residential dwelling, which may include condominiums and townhouses; (iv)
each Mortgage Loan had, at the time of origination, either an attorney's
certification of title or a title search or title policy; (v) as of the related
Cut-Off Date each Mortgage Loan is secured by a valid and subsisting lien of
record on the Mortgaged Property having the priority indicated on the related
Schedule of Mortgage Loans subject in all cases to exceptions to title set forth
in the title insurance policy, if any, with respect to the related Mortgage
Loan; (vi) each Originator held good and indefeasible title to, and was the sole
owner of, each Mortgage Loan conveyed by such Originator; and (vii) each
Mortgage Loan was originated in accordance with law and is the valid, legal and
binding obligation of the related Mortgagor.
The Company will assign to the Trustee for the benefit of the Owners of
the Certificates all of its right, title and interest in the Master Loan
Transfer Agreements insofar as such agreement relates to the representations and
warranties made by an Originator in respect of such Mortgage Loan and any
remedies provided for breach of such representations and warranties. If an
Originator cannot cure a breach of any representation or warranty made by it in
respect of a Mortgage Loan that materially and adversely affects the interests
of the Owners of the Certificates in such Mortgage Loan within a time period
specified in the related Pooling and Servicing Agreement, the Company will be
obligated to purchase from the related Trust such Mortgage Loan at the Loan
Purchase Price.
THE PORTFOLIO OF MORTGAGE LOANS
General
The Mortgage Loan Pool includes newly-originated fixed and variable
rate loans which were originated directly by the Company or one or more
unrelated third party Originators.
All of the Mortgage Loans in the Variable Rate Group adjust based on
the London interbank offered rate for six-month United States Dollar deposits in
the London Market based on quotations of major banks published in The Wall
Street Journal and have a periodic semi-annual rate adjustment cap of 1% and a
lifetime cap of 6% or 7% above the startup rate. Furthermore, all mortgage loans
originated under the retail adjustable rate program are in a first lien position
and generally do not allow for balloon payments. Such retail adjustable rate
mortgage loans are originated in accordance with the Company's Guidelines. See
"Mortgage Loan Program -- Underwriting Guidelines" herein.
Acquisitions
Fixed Rate Group. All of the Mortgage Loans in the Fixed Rate Group
were originated by the Company pursuant to the Company's Guidelines or acquired
by the Company from an Originator. Mortgage Loans representing an aggregate
principal balance of $223,201.93 or 1.09% of the Fixed Rate Group by aggregate
principal balance were acquired from an Originator other than the Company.
Variable Rate Group. All of the Mortgage Loans in the Variable Rate
Group were originated by the Company and were underwritten pursuant to the
Company's Guidelines or acquired by the Company from an Originator. Mortgage
Loans representing an aggregate principal balance of $9,285,641.64 or 29.13% of
the Variable Rate Group by aggregate principal balance were acquired from an
Originator other than the Company.
S-18
<PAGE>
Delinquencies
The following tables set forth information relating to the delinquency,
foreclosure and loan loss experience of the Servicer for its servicing portfolio
of fixed and variable rate mortgage loans for the period ending December 31,
1995 and for each of the four prior calendar years. The Servicer is not an
approved seller/servicer by FNMA or the Federal Home Loan Mortgage Corporation.
<TABLE>
<CAPTION>
Delinquency and Foreclosure Experience of the
Servicer's Servicing Portfolio
Year Ended December 31,
---------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Number Dollar Number Dollar Number Dollar Number Dollar Number Dollar
of Amount of Amount of Amount of Amount of Amount
Loans (000) Loans (000) Loans (000) Loans (000) Loans (000)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio (1)...... 8,865 $617,389 8,346 $554,323 7,100 $333,918 6,740 $239,306 6,104 $207,669
Delinquent Loans (2).....
31-60 days...... 116 8,339 90 6,084 98 4,547 77 3,370 60 2,206
61-90 days...... 88 6,538 73 4,471 72 3,070 56 2,563 26 847
91 days or more. 256 21,002 186 13,589 174 7,749 123 5,973 57 2,666
--- ------ --- ------ --- ----- --- ----- -- -----
Total.......... 460 $35,879 349 $24,144 344 $15,366 256 $11,906 143 $5,719
=== ------- === ======= === ======= === ======= === ======
Total Delinquency Percentage 5.19% 5.81% 4.18% 4.36% 4.85% 4.60% 3.80% 4.98% 2.34% 2.75%
REO Properties (3)....... 3 $152 21 $1,997 20 $2,445 10 $1,418 3 $684
- ---------------------------
<FN>
(1) Adjustable rate loans were included in the portfolio beginning in
September, 1993.
(2) The period of delinquency is based on the number of days payments are
contractually past due and includes all loans in foreclosure.
(3) REO Properties (i.e., "real estate owned" properties - properties relating
to mortgages foreclosed or for which deeds in lieu of foreclosure have
been accepted and held by the Servicer pending disposition excluding
leased properties).
</FN>
</TABLE>
<TABLE>
<CAPTION>
Loan Loss Experience of the
Servicer's Servicing Portfolio
Year Ended December 31,
-------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ----- ----- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Average Portfolio Balance (1)...................... $585,881 $444,146 $286,612 $223,488 $189,426
Net Losses (2)..................................... $169 $44 $63 $36 $0
As a percentage of Average Portfolio
Balance................................... 0.03% 0.01% 0.02% 0.02% 0.00%
- --------------------------
<FN>
(1) Average Portfolio Balance equals the average of the portfolio balance of
the current period and the portfolio balance of the prior period.
(2) "Net Losses" means actual net profits realized with respect to the
disposition of REO property less net losses incurred with respect to the
liquidation or charge-off of mortgage loans. Net Losses are presented only
if a net loss has occurred or, as $0 if net profit has occurred.
</FN>
</TABLE>
S-19
<PAGE>
USE OF PROCEEDS
The Company will sell the Mortgage Loans to the Depositor and the
Depositor will sell the Mortgage Loans to the Trust concurrently with the
delivery of the Certificates. Net proceeds from the sale of the Class A
Certificates will be applied by the Trust to the purchase of the Mortgage Loans
from the Depositor. Such net proceeds will (together with the Subordinate
Certificates retained by the Company or its affiliates) represent the purchase
price to be paid by the Depositor to the Company for the Mortgage Loans.
THE MORTGAGE LOAN POOL
General
Unless otherwise noted, all references to statistical percentages in
this Prospectus Supplement appearing "as of the Cut-Off Date," together with all
dollar amount references herein to aggregate principal balances appearing "as of
the Cut-Off Date" have been calculated using the aggregate scheduled principal
balances of the Mortgage Loans as of the close of business on the Cut-Off Date.
This subsection describes generally certain characteristics of the
Mortgage Loans. Unless otherwise specified herein, references herein to
percentages of Mortgage Loans refer in each case to the approximate percentage
of the aggregate principal balance of the Mortgage Loans as of the Cut-Off Date,
based on the outstanding principal balances of the Mortgage Loans in the Fixed
Rate Group or the Mortgage Loans in the Variable Rate Group, in each case as of
the Cut-Off Date, and giving effect to all payments due on or prior to the
Cut-Off Date. The Mortgage Loan Pool consists of 641 loans evidenced by
promissory notes (the "Notes") secured by deeds of trust, security deeds or
mortgages on the Mortgaged Properties, 42.86% of which by aggregate principal
balance are collectively located in the State of California and 57.14% of which
by aggregate principal balance are located in the States of Arizona, Colorado,
Florida, Georgia, Idaho, Illinois, Oregon, Utah and Washington. The Mortgaged
Properties securing the Mortgage Loans consist of single-family residences
(which may be detached, part of a two-to-four family dwelling, a condominium
unit or a unit in a planned unit development). The Mortgaged Properties may be
owner-occupied (which includes second and vacation homes) or non-owner occupied
investment properties. The Mortgage Loan Pool consists of 98.08% of loans
secured by first lien mortgages on the related properties and 1.92% of loans
secured by second liens on the related Mortgaged Properties.
The Mortgage Loans were required to satisfy the following criteria as
of the Cut-Off Date: had remaining terms to stated maturity of no greater than
360 months; None were 31 or more days delinquent; had a Mortgage Rate as of the
Cut-Off Date of at least 7.95% with respect to the Fixed Rate Group and at least
5.95% with respect to the Variable Rate Group; and had a CLTV not in excess of
80.00% with respect to the Fixed Rate Group and had a LTV not in excess of
81.70% with respect to the Variable Rate Group.
Each Mortgage Loan in the Trust will be assigned to one of the two
Mortgage Loan Groups comprised of Mortgage Loans which bear fixed interest rates
only, in the case of the Fixed Rate Group, and Mortgage Loans which bear
adjustable interest rates only, in the case of the Variable Rate Group. Each of
the Mortgage Loans contained in the Fixed Rate Group will be secured by a
Mortgage having either a first or junior lien position with respect to the
related Property. Each of the Mortgage Loans contained in the Variable Rate
Group will be secured by Mortgages which are in a first lien position. All of
the Mortgage Loans originated in both the Fixed Rate Group and the Variable Rate
Group were originated less than six months prior to the Cut-Off Date. The Fixed
Rate Certificates represent undivided ownership interests in all Mortgage Loans
contained in the Fixed Rate Group, and the Variable Rate Certificates represent
undivided ownership interests in all Mortgage Loans contained in the Variable
Rate Group.
Fixed Rate Group
All of the Mortgage Loans in the Fixed Rate Group are Actuarial Loans.
All of the Mortgage Loans in the Fixed Rate Group as of the Cut-Off Date require
monthly payments of principal that will fully amortize the Mortgage Loans by
their respective stated maturity dates. No Mortgage Loan in the Fixed Rate Group
had a stated maturity date later than May 1, 2026. As of the Cut-Off Date, the
aggregate principal balance of all Mortgage
S-20
<PAGE>
Loans in the Fixed Rate Group was 99.98% of the aggregate principal balance of
such Mortgage Loans at the times of their origination.
The Mortgage Loans in the Fixed Rate Group had the following aggregate
characteristics as of the Cut-Off Date:
Aggregate Number of Mortgage Loans....................... 281
Arizona......................................... 15
California...................................... 151
Colorado........................................ 14
Florida......................................... 29
Georgia......................................... 7
Idaho........................................... 1
Illinois........................................ 21
Oregon.......................................... 12
Utah............................................ 3
Washington...................................... 28
Principal Balance
Aggregate....................................... $20,541,764.16
Minimum......................................... $15,000.00
Maximum......................................... $302,053.00
Average......................................... $73,102.36
Mortgage Rates
Weighted Average................................ 10.17%
Range........................................... 7.95% - 16.25%
Original Term to Stated Maturity (range in months)....... 120 - 360
Remaining Term to Stated Maturity (range in months)...... 119 - 360
Weighted Average CLTV.................................... 57.92%
Weighted Average LTV..................................... 55.90%
Weighted Average Junior Lien Ratio....................... 96.70%
Percentage of First Mortgages............................ 95.10%
Percentage of Second Mortgages........................... 4.90%
Some of the aggregate percentages in the following tables may not total
100% due to rounding.
<TABLE>
<CAPTION>
DISTRIBUTION OF CLTV'S
Fixed Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Range of CLTV's Mortgage Loans Principal Balance Principal Balance
- --------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
75.001 - 80.000%.................................... 14 $ 1,528,003.82 7.44%
70.001 - 75.000..................................... 31 3,353,092.15 16.32
65.001 - 70.000..................................... 43 3,701,906.09 18.02
60.001 - 65.000..................................... 22 1,796,861.41 8.75
55.001 - 60.000..................................... 34 2,849,734.30 13.87
50.001 - 55.000..................................... 28 1,940,539.75 9.45
45.001 - 50.000..................................... 21 1,377,868.34 6.71
40.001 - 45.000..................................... 22 1,282,912.48 6.25
35.001 - 40.000..................................... 14 664,228.91 3.23
30.001 - 35.000..................................... 15 682,479.19 3.32
25.001 - 30.000..................................... 10 401,656.66 1.96
20.001 - 25.000..................................... 14 574,848.83 2.80
15.001 - 20.000..................................... 9 243,550.91 1.19
10.001 - 15.000..................................... 4 144,081.32 0.70
- ---------- ----
Total........................................ 281 $20,541,764.16 100.00%
=== ============== =======
</TABLE>
S-21
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF LTV'S
Fixed Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Range of LTV's Mortgage Loans Principal Balance Principal Balance
- -------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
75.001 - 80.000%.................................... 12 $ 1,425,729.82 6.94%
70.001 - 75.000..................................... 28 3,270,274.15 15.92
65.001 - 70.000..................................... 35 3,435,961.76 16.73
60.001 - 65.000..................................... 17 1,544,855.46 7.52
55.001 - 60.000..................................... 32 2,777,850.70 13.52
50.001 - 55.000..................................... 26 1,885,282.12 9.18
45.001 - 50.000..................................... 21 1,377,868.34 6.71
40.001 - 45.000..................................... 21 1,247,586.48 6.07
35.001 - 40.000..................................... 11 593,223.10 2.89
30.001 - 35.000..................................... 14 659,817.84 3.21
25.001 - 30.000..................................... 12 589,369.61 2.87
20.001 - 25.000..................................... 19 725,113.46 3.53
15.001 - 20.000..................................... 21 598,014.84 2.91
10.001 - 15.000..................................... 8 317,784.32 1.55
5.001 - 10.000..................................... 4 93,032.16 0.45
- --------- ----
Total............................................ 281 $20,541,764.16 100.00%
=== ============== =======
</TABLE>
The CLTV's and LTV's shown above were calculated based upon the
appraised values of the Mortgaged Properties at the time of origination (the
"Appraised Values"). No assurance can be given that such appraised values of the
Mortgaged Properties have remained or will remain at their levels on the dates
of origination of the related Mortgage Loans. If property values decline such
that the outstanding balances of the Mortgage Loans, together with the
outstanding balances of any senior Mortgage Loans, 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 heretofore experienced by the
Servicer, as set forth above under "The Portfolio of Mortgage Loans," and by the
mortgage lending industry in general.
<TABLE>
<CAPTION>
DISTRIBUTION OF JUNIOR LIEN RATIOS
Fixed Rate Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Junior Lien Ratios Mortgage Loans Principal Balance Principal Balance
- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
10.01 - 20.00%.................................... 2 $ 69,199.00 0.34%
20.01 - 30.00..................................... 13 437,557.49 2.13
30.01 - 40.00..................................... 8 209,644.60 1.02
40.01 - 50.00..................................... 4 236,034.58 1.15
50.01 - 60.00..................................... 1 27,300.00 0.13
60.01 - 70.00..................................... 1 27,105.00 0.13
90.01 - 100.00..................................... 252 19,534,923.49 95.10
--- ------------- -----
Total........................................ 281 $20,541,764.16 100.00%
=== ============== =======
</TABLE>
S-22
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF MORTGAGE RATES
Fixed Rate Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
- -------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
7.51 - 8.00%..................................... 1 $ 104,008.00 0.51%
8.01 - 8.50...................................... 3 216,786.00 1.06
8.51 - 9.00...................................... 60 4,906,292.37 23.88
9.01 - 9.50...................................... 39 3,496,861.23 17.02
9.51 - 10.00...................................... 64 5,212,910.81 25.38
10.01 - 10.50...................................... 4 473,755.00 2.31
10.51 - 11.00...................................... 42 2,938,452.38 14.30
11.01 - 11.50...................................... 1 36,715.00 0.18
11.51 - 12.00...................................... 22 1,289,614.64 6.28
12.01 - 12.50...................................... 1 101,421.25 0.49
12.51 - 13.00...................................... 6 334,466.69 1.63
13.51 - 14.00...................................... 28 1,082,012.08 5.27
14.01 - 14.50...................................... 1 25,391.53 0.12
14.51 - 15.00...................................... 7 271,790.38 1.32
15.51 - 16.00...................................... 1 24,593.80 0.12
16.01 - 16.50...................................... 1 26,693.00 0.13
- --------- ----
Total............................................ 281 $20,541,764.16 100.00%
=== ============== =======
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
Fixed Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
State Mortgage Loans Principal Balance Principal Balance
- ----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Arizona............................................... 15 $ 1,010,585.91 4.92%
California............................................ 151 12,080,735.52 58.81
Colorado.............................................. 14 821,001.62 4.00
Florida............................................... 29 1,982,849.90 9.65
Georgia............................................... 7 451,650.88 2.20
Idaho................................................. 1 59,946.58 0.29
Illinois.............................................. 21 1,390,126.60 6.77
Oregon................................................ 12 784,420.89 3.82
Utah.................................................. 3 121,482.27 0.59
Washington............................................ 28 1,838,963.99 8.95
-- ------------ ----
Total............................................ 281 $20,541,764.16 100.00%
=== ============== =======
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF REMAINING TERMS TO STATED MATURITY
Fixed Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Range of Months Mortgage Loans Principal Balance Principal Balance
<C> <C> <C> <C> <C>
109 - 120 .................................... 5 $ 344,173.38 1.68%
169 - 180 .................................... 49 2,145,265.12 10.44
229 - 240 .................................... 14 925,077.24 4.50
349 - 360 .................................... 213 17,127,248.42 83.38
--- ------------- -----
Total.................................................. 281 $20,541,764.16 100.00%
============== =======
</TABLE>
S-23
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF PRINCIPAL BALANCES
Fixed Rate Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Principal Balances Mortgage Loans Principal Balance Principal Balance
------------------ -------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 0 - 15,000 ............................ 1 $ 15,000.00 0.07%
15,001 - 20,000 ............................ 4 80,000.00 0.39
20,001 - 25,000 ............................ 15 337,756.94 1.64
25,001 - 30,000 ............................ 13 355,344.55 1.73
30,001 - 35,000 ............................ 13 434,178.52 2.11
35,001 - 40,000 ............................ 11 408,401.52 1.99
40,001 - 45,000 ............................ 12 507,855.48 2.47
45,001 - 50,000 ............................ 11 529,089.24 2.58
50,001 - 55,000 ............................ 22 1,150,569.26 5.60
55,001 - 60,000 ............................ 17 984,414.45 4.79
60,001 - 65,000 ............................ 28 1,740,999.47 8.48
65,001 - 70,000 ............................ 15 1,007,731.12 4.91
70,001 - 75,000 ............................ 17 1,238,338.20 6.03
75,001 - 80,000 ............................ 11 854,369.54 4.16
80,001 - 85,000 ............................ 10 814,391.93 3.96
85,001 - 90,000 ............................ 5 434,833.45 2.12
90,001 - 95,000 ............................ 12 1,095,334.57 5.33
95,001 - 100,000 ............................ 9 875,699.21 4.26
100,001 - 125,000 ............................ 32 3,552,825.25 17.30
125,001 - 150,000 ............................ 10 1,324,028.27 6.45
150,001 - 200,000 ............................ 5 847,735.77 4.13
200,001 - 250,000 ............................ 4 876,184.00 4.27
250,001 - 300,000 ............................ 3 774,630.42 3.77
350,000 - 300,001 ............................ 1 302,053.00 1.47
Total.......................................................... 281 $20,541,764.16 100.00%
=== ============== =======
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF PROPERTY TYPES
Fixed Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Property Type Mortgage Loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Two-to-Four Family....................................... 3 $ 224,220.00 1.09%
Planned Unit Development................................. 2 94,037.48 0.46
Single Family............................................ 276 20,223,506.68 98.45
--- ------------- -----
Total............................................... 281 $20,541,764.16 100.00%
=== ============== =======
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF OCCUPANCY STATUS
Fixed Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Occupancy Status Mortgage Loans Principal Balance Principal Balance
- ---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Investor Property........................................ 11 $ 743,595.08 3.62%
Primary Residence........................................ 270 19,798,169.08 96.38
--- ------------- -----
Total............................................... 281 $20,541,764.16 100.00%
=== ============== =======
</TABLE>
S-24
<PAGE>
Variable Rate Group
All of the Mortgage Loans in the Variable Rate Group are Actuarial
Loans and are secured by first mortgages. All of the Mortgage Loans in the
Variable Rate Group require monthly payments of principal that will fully
amortize such Mortgage Loans by their respective stated maturity dates. No
Mortgage Loan in the Variable Rate Group had a stated maturity date later than
May 1, 2026. As of the Cut-Off Date, the aggregate principal balance of the
Mortgage Loans in the Variable Rate Group was 99.96% of the aggregate principal
balance of such Mortgage Loans at the times of their origination. The Mortgage
Loans in the Variable Rate Group are Six Month LIBOR Loans and have semi-annual
interest rate and semi-annual payment adjustment frequencies. The gross margin
range for the Six Month LIBOR Loans is 3.95% to 6.95%. As of the Cut-Off Date,
100% of the Mortgage Loans in the Variable Rate Group had interest rates which
were not fully indexed (i.e., the entire gross margin has not yet been added to
the rate given by the index).
The Mortgage Loans in the Variable Rate Group had the following
aggregate characteristics as of the CutOff Date:
<TABLE>
<CAPTION>
<S> <C>
Aggregate Number of Mortgage Loans.................................... 360
Arizona...................................................... 9
California................................................... 97
Colorado..................................................... 29
Florida...................................................... 37
Georgia...................................................... 2
Idaho........................................................ 4
Illinois..................................................... 77
Oregon....................................................... 26
Utah......................................................... 31
Washington................................................... 48
Principal Balance
Aggregate.................................................... $31,878,145.23
Minimum...................................................... $21,105.61
Maximum...................................................... $376,571.26
Average...................................................... $88,550.40
Weighted Average Initial Mortgage Rate................................ 8.03%
Initial Mortgage Rate Range........................................... 5.95% - 11.75%
Original Term to Stated Maturity (range in months).................... 120 - 360
Remaining Term to Stated Maturity (range in months)................... 120 - 360
Weighted Average Original Term to Stated Maturity (months)............ 347
Weighted Average Remaining Term to Stated Maturity (months)........... 347
Weighted Average LTV.................................................. 61.40%
Weighted Average Gross Margin......................................... 5.24%
Gross Margin Range.................................................... 3.95% - 6.95%
Semi-Annual Rate Adjustment Cap....................................... 1%
Lifetime Cap
Percentage of Mortgage Loans with a 6% Lifetime Cap
above the startup rate.............................. 1.64%
Percentage of Mortgage Loans with a 7% Lifetime Cap
above the startup rate.............................. 98.36%
Weighted Average Maximum Mortgage Rate................................ 15.02%
Maximum Mortgage Rate Range........................................... 12.45% - 18.75%
</TABLE>
S-25
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF LTV's
Variable Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Range of LTV's Mortgage Loans Principal Balance Principal Balance
- -------------- -------------- ----------------- -----------------
<C> <C> <C> <C> <C>
80.001 - 85.000%......................................... 2 $ 195,065.57 0.61%
75.001 - 80.000.......................................... 28 2,954,540.20 9.27
70.001 - 75.000.......................................... 52 5,304,944.01 16.64
65.001 - 70.000.......................................... 53 5,055,645.84 15.86
60.001 - 65.000.......................................... 60 5,819,380.74 18.26
55.001 - 60.000.......................................... 42 3,599,197.68 11.29
50.001 - 55.000.......................................... 34 3,254,824.91 10.21
45.001 - 50.000.......................................... 23 1,702,864.19 5.34
40.001 - 45.000.......................................... 24 1,856,051.65 5.82
35.001 - 40.000.......................................... 12 665,194.15 2.09
30.001 - 35.000.......................................... 10 672,349.03 2.11
25.001 - 30.000.......................................... 9 404,456.69 1.27
20.001 - 25.000.......................................... 7 263,482.96 0.83
15.001 - 20.000.......................................... 2 84,042.00 0.26
10.001 - 15.000.......................................... 2 46,105.61 0.14
- --------- ----
Total............................................... 360 $31,878,145.23 100.00%
=== ============== =======
</TABLE>
The LTV's shown above were calculated based upon the Appraised Values
of the Mortgaged Properties. No assurance can be given that appraised values of
the Mortgaged Properties have remained or will remain at their levels on the
dates of origination of the related Mortgage Loans. If property values decline
such that the outstanding balances of the Mortgage Loans 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 heretofore
experienced by the Servicer, as set forth above under "The Portfolio of Mortgage
Loans," and by the mortgage lending industry in general.
<TABLE>
<CAPTION>
DISTRIBUTION OF REMAINING TERMS TO STATED MATURITY
Variable Rate Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Months Mortgage Loans Principal Balance Principal Balance
------ -------------- ----------------- -----------------
<C> <C> <C> <C> <C>
109 - 120................................................ 5 $ 375,504.65 1.18%
169 - 180................................................ 24 1,653,363.95 5.19
229 - 240................................................ 4 256,256.69 0.80
349 - 360................................................ 327 29,593,019.94 92.83
--- ------------- -----
Total............................................... 360 $31,878,145.23 100.00%
=== ============== =======
</TABLE>
S-26
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF PRINCIPAL BALANCES
Variable Rate Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Principal Balances Mortgage Loans Principal Balance Principal Balance
- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$0 - 25,000 ............................ 4 $ 93,040.57 0.29%
25,001 - 30,000 ............................ 4 111,213.14 0.35
30,001 - 35,000 ............................ 7 231,618.52 0.73
35,001 - 40,000 ............................ 7 259,441.45 0.81
40,001 - 45,000 ............................ 16 679,155.68 2.13
45,001 - 50,000 ............................ 9 431,148.39 1.35
50,001 - 55,000 ............................ 18 954,393.42 2.99
55,001 - 60,000 ............................ 19 1,084,412.26 3.40
60,001 - 65,000 ............................ 18 1,126,473.32 3.53
65,001 - 70,000 ............................ 24 1,620,860.81 5.08
70,001 - 75,000 ............................ 20 1,465,519.83 4.60
75,001 - 80,000 ............................ 29 2,248,407.76 7.05
80,001 - 85,000 ............................ 28 2,299,415.62 7.21
85,001 - 90,000 ............................ 18 1,587,555.47 4.98
90,001 - 95,000 ............................ 24 2,226,595.07 6.98
95,001 - 100,000 ............................ 21 2,034,698.15 6.38
100,001 - 125,000 ........................... 46 5,137,922.93 16.12
125,001 - 150,000 ........................... 24 3,265,821.03 10.24
150,001 - 200,000 ............................ 13 2,232,169.55 7.00
200,001 - 250,000 ............................ 7 1,524,567.00 4.78
250,001 - 300,000 ............................ 2 541,325.00 1.70
300,001 - 350,000 ............................ 1 345,819.00 1.08
350,001 - 400,000 ............................ 1 376,571.26 1.18
- ---------- ----
Total..................................................... 360 $31,878,145.23 100.00%
=== ============== =======
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF PROPERTY TYPES
Variable Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Property Type Mortgage Loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Condominium.............................................. 2 $ 141,448.00 0.44%
Two-to-Four Family....................................... 9 745,198.11 2.34
Planned Unit Development................................. 2 173,878.56 0.55
Single Family............................................ 347 30,817,620.56 96.67
--- ------------- -----
Total............................................... 360 $31,878,145.23 100.00%
=== ============== =======
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF OCCUPANCY STATUS
Variable Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Occupancy Status Mortgage Loans Principal Balance Principal Balance
- ---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Investor Property........................................ 8 $ 665,601.00 2.09%
Primary Residence........................................ 352 31,212,544.23 97.91
--- ------------- -----
Total............................................... 360 $31,878,145.23 100.00%
=== ============== =======
</TABLE>
S-27
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF INITIAL MORTGAGE RATES
Variable Rate Group
Aggregate % of Aggregate
Range of Initial Number of Unpaid Unpaid
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
- -------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
5.51 - 6.00%........................................ 25 $ 2,417,964.26 7.59%
6.01 - 6.50......................................... 42 4,418,577.69 13.86
6.51 - 7.00......................................... 36 3,694,657.09 11.59
7.01 - 7.50......................................... 17 1,503,869.00 4.72
7.51 - 8.00......................................... 65 5,879,068.22 18.44
8.01 - 8.50......................................... 42 3,754,232.64 11.78
8.51 - 9.00......................................... 48 4,021,558.55 12.62
9.01 - 9.50......................................... 14 1,106,942.04 3.47
9.51 - 10.00......................................... 30 2,390,829.77 7.50
10.01 - 10.50......................................... 21 1,403,254.68 4.40
10.51 - 11.00......................................... 13 959,864.12 3.01
11.01 - 11.50......................................... 4 172,230.17 0.54
11.51 - 12.00......................................... 3 155,097.00 0.49
- ---------- ----
Total............................................ 360 $31,878,145.23 100.00%
=== ============== =======
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF MAXIMUM MORTGAGE RATES
Variable Rate Group
Range of Aggregate % of Aggregate
Maximum Number of Unpaid Unpaid
Mortgage Rates Mortgage Loans Principal Balance Principal Balance
- -------------- -------------- ----------------- -----------------
<C> <C> <C> <C> <C>
12.01 - 12.50%...................................... 1 $ 76,138.25 0.24%
12.51 - 13.00....................................... 25 2,417,964.26 7.59
13.01 - 13.50....................................... 41 4,342,439.44 13.62
13.51 - 14.00....................................... 36 3,694,657.09 11.59
14.01 - 14.50....................................... 17 1,503,869.00 4.72
14.51 - 15.00....................................... 66 6,001,609.55 18.83
15.01 - 15.50....................................... 42 3,754,232.64 11.78
15.51 - 16.00....................................... 49 4,006,415.67 12.57
16.01 - 16.50....................................... 16 1,190,041.67 3.73
16.51 - 17.00....................................... 29 2,324,016.91 7.29
17.01 - 17.50....................................... 21 1,411,964.04 4.43
17.51 - 18.00....................................... 12 919,278.53 2.88
18.01 - 18.50....................................... 2 80,421.18 0.25
18.51 - 19.00....................................... 3 155,097.00 0.49
- ---------- ----
Total....................................... 360 $31,878,145.23 100.00%
=== ============== =======
</TABLE>
S-28
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF MARGINS
Variable Rate Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Margins Mortgage Loans Principal Balance Principal Balance
------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
3.001 - 4.000%...................................... 39 $ 3,453,597.16 10.83%
4.001 - 5.000....................................... 149 14,885,090.04 46.69
5.001 - 6.000....................................... 80 6,528,266.36 20.48
6.001 - 7.000....................................... 92 7,011,191.67 21.99
-- ------------ -----
Total.......................................... 360 $31,878,145.23 100.00%
=== ============== =======
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
Variable Rate Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
State Mortgage Loans Principal Balance Principal Balance
- ----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Arizona.................................................. 9 $ 659,698.76 2.07%
California............................................... 97 10,386,493.18 32.58
Colorado................................................. 29 2,266,027.80 7.11
Florida.................................................. 37 2,595,639.75 8.14
Georgia.................................................. 2 128,290.00 0.40
Idaho.................................................... 4 248,917.81 0.78
Illinois................................................. 77 6,488,040.16 20.35
Oregon................................................... 26 2,251,538.29 7.06
Utah..................................................... 31 2,541,239.58 7.97
Washington............................................... 48 4,312,259.90 13.53
-- ------------ -----
Total............................................... 360 $31,878,145.23 100.00%
=== ============== =======
</TABLE>
Interest Payments on the Mortgage Loans
Each Mortgage Loan provides for monthly payments by the obligor on the
related Note (the "Mortgagor") according to the actuarial method. Actuarial
loans provide that interest is charged to the Mortgagors thereunder, and
payments are due from such Mortgagors, as of a scheduled day of each month which
is fixed at the time of origination. Scheduled monthly payments made by the
Mortgagors on the actuarial loans either earlier or later than the scheduled due
dates thereof will not affect the amortization schedule or the relative
application of such payments to principal and interest.
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effects on a Fixed Rate
Certificate Owner's yield resulting from the timing of the settlement date and
those considerations discussed below under "Payment Delay Feature of Fixed Rate
Certificates"), the yield to maturity on an Offered Certificate will be directly
related to the rate of payment of principal of the Mortgage Loans in the related
Mortgage Loan Group, including for this purpose voluntary payment in full of
Mortgage Loans in the related Mortgage Loan Group prior to stated maturity (a
"Prepayment"), liquidations due to defaults, casualties and condemnations, and
repurchases of Mortgage Loans in the related Mortgage Loan Group by the Company
or by the Certificate Insurer. 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, the extent of the
S-29
<PAGE>
mortgagors' equity in such properties, and changes in the mortgagors' housing
needs, job transfers and unemployment.
The timing of changes in the rate of prepayments may significantly
affect the actual yield to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors. In general, the
earlier the payment of principal of the Mortgage Loans the greater the effect on
an investor's yield to maturity. As a result, the effect on an investor's yield
of principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Class A Certificates will not be offset by a subsequent like reduction
(or increase) in the rate of principal prepayments. Investors must make their
own decisions as to the appropriate prepayment assumptions to be used in
deciding whether to purchase any of the Class A Certificates. Neither the
Company nor the Depositor makes any representations or warranties as to the rate
of prepayment or the factors to be considered in connection with such
determination.
Projected Prepayments and Yields for Offered Certificates
If purchased at other than par, the yield to maturity on an Offered
Certificate will be affected by the rate of the payment of principal of the
Mortgage Loans in the related Mortgage Loan Group. If the actual rate of
payments on the Mortgage Loans in a Mortgage Loan Group is slower than the rate
anticipated by an investor who purchases an Offered Certificate of the related
Class at a discount, the actual yield to such investor will be lower than such
investor's anticipated yield. If the actual rate of payments on the Mortgage
Loans in a Mortgage Loan Group is faster than the rate anticipated by an
investor who purchases an Offered Certificate of the related Class at a premium,
the actual yield to such investor will be lower than such investor's anticipated
yield.
All of the Mortgage Loans in the Fixed Rate Group are fixed rate
Mortgage Loans. The rate of prepayments with respect to conventional fixed rate
mortgage loans has fluctuated significantly in recent years. In general, if
prevailing interest rates fall significantly below the interest rates on fixed
rate mortgage loans, such mortgage loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rates
on such mortgage loans. However, the monthly payment on a home equity or home
improvement loan is often smaller than the monthly payment on a purchase money
first mortgage loan. Because of the smaller loan balance on a refinancing, a
decrease in the interest rate payable results in a smaller reduction in the
amount of the Mortgagor's monthly payment. Conversely, if prevailing interest
rates rise appreciably above the interest rates on fixed rate mortgage loans,
such mortgage loans are likely to experience a lower prepayment rate than if
prevailing rates remain at or below the interest rates on such mortgage loans.
All of the Mortgage Loans in the Variable Rate Group are adjustable
rate mortgage loans. As is the case with conventional fixed rate mortgage loans,
adjustable rate mortgage loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if prevailing
interest rates fall significantly, adjustable rate mortgage loans could be
subject to higher prepayment rates than if prevailing interest rates remain
constant because the availability of fixed rate mortgage loans at competitive
interest rates may encourage mortgagors to refinance their adjustable rate
mortgage loans to a lower fixed interest rate. However, no assurance can be
given as to the level of prepayments that the Mortgage Loans will experience.
Neither the Company nor the Depositor believes that data compiled by FNMA or
FHLMC is representative of the types of borrowers included in the Company's
lending program and cannot assure that such prepayment experience is relevant to
the Mortgage Loans contained in the Variable Rate Group.
The "Last Scheduled Payment Date" for each Class of the Class A
Certificates is as follows: Class A-1 Certificates, June 20, 2027 and Class A-2
Certificates, June 20, 2027. The Last Scheduled Payment Date for the Class A-1
and Class A-2 Certificates is the Payment Date in the month following the
calendar month of maturity of the latest possible maturing Mortgage Loan in the
respective Mortgage Loan Group, plus one year. The weighted average life of each
Class of Class A Certificates is likely to be shorter, and the actual final
Payment Date with respect to each Class of Class A Certificates could occur
significantly earlier than the Last Scheduled Payment Date because (i)
Prepayments are likely to occur which shall be applied to the payment of the
Class A Principal Balances, (ii) Net Monthly Excess Spread to the extent
available will be applied as an accelerated payment of principal on the Class A
Certificates up to the Specified Subordinated Amount for each Class and (iii)
the Servicer or, in limited
S-30
<PAGE>
circumstances, the Certificate Insurer, may cause a termination of the Trust
when the aggregate outstanding principal balance of the Mortgage Loans in the
Trust has declined to 10% or less of the Original Aggregate Loan Balance.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The model used in this Prospectus Supplement
("Home Equity Prepayment" or "HEP") is a prepayment assumption (the "Prepayment
Assumption") which represents an assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of mortgage loans for the
life of such mortgage loans. 21% HEP assumes prepayment rates of 2.1% per annum
of the then outstanding principal balance of the Mortgage Loans in the first
month of the life of the Mortgage Loans and an additional 2.1% per annum in each
month thereafter up to and including the tenth month. Beginning in the eleventh
month and in each month thereafter during the life of the Mortgage Loans, 21%
HEP assumes a constant prepayment rate of 21% per annum. As used in the table
below, 0% Prepayment Assumption assumes prepayment rates equal to 0% of the
Prepayment Assumption, i.e., no prepayments on the mortgage loans having the
characteristics described below. The Prepayment Assumption does not purport to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
related Mortgage Loans.
The tables entitled "Weighted Average Lives" have been prepared on the
basis of the following assumptions (collectively, the "Modeling Assumptions"):
(i) the Mortgage Loans of the related Mortgage Loan Groups prepay at the
indicated percentage of the related Prepayment Assumption; (ii) distributions on
the Offered Certificates are received, in cash, on the 20th day of each month,
commencing in April 1996; (iii) no defaults or delinquencies in, or
modifications, waivers or amendments respecting, the payment by the Mortgagors
of principal and interest on the Mortgage Loans occur; (iv) scheduled payments
are assumed to be received on the first day of each month commencing in April
1996 (or as set forth in the following table) and prepayments represent payment
in full of individual Mortgage Loans and are assumed to be received on the last
day of each month, commencing in March 1996 (or as set forth in the following
table) and include 30 days' interest thereon; (v) the level of Six-Month LIBOR
is equal to 5.309% for the first Accrual Period and 5.457% thereafter; (vi) the
Class A-2 Pass-Through Rate remains constant at 5.8175% per annum; (vii) the
Offered Certificates are purchased on April 3, 1996; (viii) the Mortgage Rate
for each Mortgage Loan in the Variable Rate Group is adjusted on its next
Mortgage Rate change date (and on subsequent Mortgage Rate change dates, if
necessary) to equal the sum of (a) the assumed level of the Six-Month LIBOR
index and (b) the respective gross margin (such sum being subject to the
applicable periodic adjustment cap of 1%); and (ix) each Mortgage Loan Group
consists of Mortgage Loans having the following characteristics:
FIXED RATE GROUP
Remaining
Mortgage Term to
Principal Mortgage Rate Net of Stated Maturity Seasoning
Balance Rate Servicing Fee (months) (months)
------- ---- ------------- -------- --------
$2,489,438.50 10.909% 9.909% 172 0
18,052,325.66 10.069 9.069 354 0
S-31
<PAGE>
<TABLE>
<CAPTION>
VARIABLE RATE GROUP
Remaining Number of
Initial Term to Mos.
Initial Mortgage Stated to next Mtg.
Principal Mortgage Rate Net of Maturity Seasoning Gross Rate Change
Balance Rate Servicing Fee (months) (months) Margin (months)
------- ---- ------------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
$9,887,084.99 8.381% 7.881% 347 0 5.207% 5
7,201,777.00(1) 8.097 7.597(2) 353 0 5.504 6
14,789,283.24 7.771 7.271 343 1 5.138 6
<FN>
(1) Commencing with the second Accrual Period, assumed to be a single
Mortgage Loan with the characteristics set forth above. Scheduled
payments are assumed to be received on the first day of each month
commencing in May 1996. Prepayments are assumed to be received on the
last day of each month commencing in April 1996 and include 30 days'
interest thereon.
(2) During the first Accrual Period interest is assumed to be available at
a rate of 7.597% per annum.
</FN>
</TABLE>
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a Certificate until each dollar of principal
of such Certificate will be repaid to the investor. The weighted average life of
the Class A Certificates will be influenced by the rate at which principal
payments on the Mortgage Loans in the related Mortgage Loan Group are paid,
which may be in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes prepayments, liquidations due to default
or early termination of the Trust). The weighted average lives of the Class A
Certificates also will be influenced by the overcollateralization of the Class A
Certificates because collections otherwise payable to the Subordinate
Certificates are applied as principal prepayments to the Class A Certificates
until the outstanding aggregate principal balance of the Class A Certificates is
less than the aggregate outstanding principal balance of the Mortgage Loans in
each Mortgage Loan Group by the Specified Subordinated Amount for such Group.
These prepayments have the effect of accelerating the amortization of the Class
A Certificates, thereby shortening their respective weighted average lives.
Based on the foregoing Modeling Assumptions, the tables below indicate
the weighted average life of each Class of the Offered Certificates, assuming
that the Mortgage Loans in the related Mortgage Loan Group prepay according to
the indicated percentages of the related Prepayment Assumption:
<TABLE>
<CAPTION>
PREPAYMENT ASSUMPTIONS
Assumption I Assumption II Assumption III Assumption IV Assumption V
------------ ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Fixed Rate Group (HEP): 0% 13% 18% 21% 28%
Variable Rate Group (HEP): 0% 15% 20% 23% 30%
</TABLE>
WEIGHTED AVERAGE LIVES
Class A-1
Weighted
Prepayment Average Life Earliest Retirement
Assumption (years)(1) Date(2)
- ---------- ---------- -------
I .............................. 19.09 May 20, 2024
II .............................. 6.34 March 20, 2010
III .............................. 4.80 October 20, 2006
IV .............................. 4.16 May 20, 2005
V .............................. 3.16 February 20, 2003
S-32
<PAGE>
Class A-2
Weighted
Prepayment Average Life Earliest Retirement
Assumption (years)(1) Date(2)
- ---------- ---------- -------
I .............................. 20.27 May 20, 2024
II .............................. 5.77 March 20, 2010
III .............................. 4.43 October 20, 2006
IV .............................. 3.87 May 20, 2005
V .............................. 2.97 February 20, 2003
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balances of the Mortgage Loans decline to a level equal to
10% of the Original Aggregate Loan Balance.
There is no assurance that prepayments will occur, or, if they do
occur, that they will occur at any constant percentage or in accordance with any
of the aforementioned Prepayment Assumptions.
Payment Delay Feature of Fixed Rate Certificates
The effective yield to the Owners of the Fixed Rate Certificates will
be lower than the yield otherwise produced by the related Class A-1 Pass-Through
Rate and the purchase price of such Certificates because principal and interest
distributions will not be payable to such holders until at least the twentieth
day of the month following the month of accrual (without any additional
distributions of interest or earnings thereon in respect of such delay).
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the mortgage pool and
the Mortgaged Properties is based upon the pool of Mortgage Loans as constituted
at the close of business on the Cut-Off Date, as adjusted for the scheduled
principal payments due on or before such date. Prior to the issuance of the
Offered Certificates, Mortgage Loans may be removed from the mortgage pool as a
result of incomplete documentation or non-compliance with representations and
warranties set forth in the Pooling and Servicing Agreement, if the Company
deems such removal necessary or appropriate. A limited number of other mortgage
loans may be included in the mortgage pool prior to the issuance of the Offered
Certificates.
A current report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed and incorporated by reference to the
Registration Statement, together with the Pooling and Servicing Agreement with
the Commission within fifteen days after the initial issuance of the Offered
Certificates. In the event Mortgage Loans are removed from or added to the
mortgage pool as set forth in the preceding paragraph, such removal or addition
will be noted in the current report on Form 8-K. Also, the Company intends to
file certain additional yield tables and other computational materials with
respect to the Fixed Rate Certificates and/or the Variable Rate Certificates
with the Commission in a report on Form 8-K. Such tables and materials were
prepared at the request of certain prospective investors, based on assumptions
provided by, and satisfying the special requirements of, such prospective
investors. Such tables and assumptions may be based on assumptions that differ
from the Modeling Assumptions. Accordingly, such tables and other materials may
not be relevant to or appropriate for investors other than those specifically
requesting them.
DESCRIPTION OF THE OFFERED CERTIFICATES
General
The Certificates will consist of the Class A-1 Certificates, the Class
A-2 Certificates and the Class R Certificates. The Certificates will be issued
by First Alliance Mortgage Loan Trust 1996-1, a trust to be organized under the
laws of the State of New York. Only the Offered Certificates are offered hereby.
The Subordinate Certificates will be retained by the Company, and are not being
offered hereby. The Offered Certificates together with the Subordinate
Certificates are herein referred to as the "Certificates."
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Persons in whose name a Certificate is registered in the Register
maintained by the Trustee are the "Owners" of the Certificates. For so long as
the Offered Certificates are in book-entry form with DTC, the only "Owner" of
the Offered Certificates as the term "Owner" is used in the Pooling and
Servicing Agreement will be Cede. No Offered Interest Holder will be entitled to
receive a definitive certificate representing such person's interest in the
Trust, except in the event that physical Certificates are issued under limited
circumstances set forth in the Pooling and Servicing Agreement. All references
herein to the Owners of Offered Certificates shall mean and include the rights
of Offered Interest Holders, as such rights may be exercised through DTC and its
participating organizations, except as otherwise specified in the Pooling and
Servicing Agreement.
As described in "The Mortgage Loan Pool" herein, the Mortgage Loan Pool
is divided into the Fixed Rate Group, which contains first and junior lien
Mortgage Loans having fixed rates of interest and the Variable Rate Group, which
contains first lien Mortgage Loans having variable rates of interest. For each
Mortgage Loan Group, the related Class of Class A Certificates will evidence the
right to receive on each Payment Date the Class A Distribution Amount for such
Class of Class A Certificates, in each case until the related Certificate
Principal Balance has been reduced to zero. The Owners of the Subordinate
Certificates will be entitled to receive distributions of residual Net Monthly
Excess Cashflow.
One-hundred percent of the Class A Distribution Amount due to the
Owners of each Class of the Class A Certificates on each Payment Date is insured
by the Certificate Insurer pursuant to the Certificate Insurance Policies.
See "The Certificate Insurance Policies and the Certificate Insurer" herein.
Payment Dates
The Pooling and Servicing Agreement will require that the Trustee
create and maintain a Certificate Account, to be established as a trust account
held by the trust department of the Trustee (the "Certificate Account"). All
funds in the Certificate Account shall be invested and reinvested by the Trustee
for the benefit of the related Owners and Certificate Insurer, as directed by
the Servicer, in Eligible Investments.
One business day prior to the related Payment Date (or, if such day is
not a business day, the immediately preceding business day) (the "Remittance
Date") the Servicer is required to withdraw from the Principal and Interest
Account and remit to the Trustee, for deposit in the Certificate Account, the
Monthly Remittance Amount for the related Mortgage Loan Group. The Monthly
Remittance Amount for a Mortgage Loan Group is equal to (a) the sum of (i) the
balance on deposit in the Principal and Interest Account as of the close of
business on the related Determination Date, (ii) all Delinquency Advances and
Compensating Interest (collectively, the "Advances") and (iii) certain amounts
required to be deposited by the Servicer in the Certificate Account, including
Loan Purchase Prices and Substitution Amounts, reduced by (b) the sum of (i)
scheduled payments on the Mortgage Loans collected but due after the related Due
Date, (ii) reinvestment income on amounts in the Principal and Interest Account,
(iii) all amounts reimbursable to the Servicer and (iv) any unscheduled
payments, including Mortgagor prepayments on the Mortgage Loans, Insurance
Proceeds and Net Liquidation Proceeds occurring in the month of such Payment
Date. With respect to any Payment Date, (i) the Due Date is the first day of the
month in which such Payment Date occurs, and (ii) the Determination Date is the
12th day of the month in which such Payment Date occurs or, if such day is not a
business day, the immediately preceding business day. "Remittance Period" means,
the period beginning on the first day of the calendar month immediately
preceding the month in which the related Remittance Date occurs and ending on
the last day of such month. See "The Pooling and Servicing Agreement -- Payments
on Mortgage Loans and Contracts" in the Prospectus.
The Compensating Interest for any Payment Date is equal to the
aggregate shortfall, if any, in collections of interest (adjusted to the related
net Mortgage Rates) resulting from principal prepayments in full on the Mortgage
Loans received in the corresponding Remittance Period. Such shortfalls will
result because interest on prepayments in full is distributed only to the date
of prepayment. The Servicer will be obligated to apply amounts otherwise payable
to it as servicing compensation in any month to cover any shortfalls in
collections of one full month's interest at the applicable net Mortgage Rate
resulting from principal prepayments in full. The Servicer is not obligated to
cover any shortfalls in collections of interest for prepayments in part. Such
prepayments in part are applied to reduce the outstanding principal balance of
the related Mortgage Loan as of the Due Date in the month of prepayment.
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Distributions
Distributions on the Certificates will be made on each Payment Date to
Owners of record of the Certificates as of the immediately preceding Record Date
in an amount equal to the product of such Owner's Percentage Interest and the
amount distributed in respect of such Certificateholder's Class of such
Certificates on such Payment Date. The "Percentage Interest" represented by any
Offered Certificate will be equal to the percentage obtained by dividing the
Original Certificate Principal Balance of such Offered Certificate by the
Original Certificate Principal Balance of all Certificates of the same Class.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Pooling
and Servicing Agreement requires that, on each Payment Date, Net Monthly Excess
Spread with respect to a Mortgage Loan Group be applied on such Payment Date as
an accelerated payment of principal on the related Class of Class A
Certificates, but only to the limited extent hereafter described. The Net
Monthly Excess Spread equals (i) the excess (such excess being the "Total
Monthly Excess Spread" with respect to the related Mortgage Loan Group), if any
of (x) the interest which is collected on the Mortgage Loans in such Mortgage
Loan Group during a Remittance Period and with respect to Due Dates occurring in
the month in which such Payment Date occurs (net of the Servicing Fee and of
certain miscellaneous administrative amounts) plus the interest portion of any
Delinquency Advances and Compensating Interest over (y) the sum of (I) the
interest which accrues on the related Class of Class A Certificates during the
related Accrual Period, (II) the premiums due to the Certificate Insurer with
respect to the related Certificate Insurance Policy and the fees due to the
Trustee and (III) with respect to the Variable Rate Group, the lesser of (x) one
month's interest on the Class A-2 Certificates, calculated at the Available
Funds Cap for such Payment Date and (y) the amount of any Available Funds Cap
Carry-Forward Amount for such Payment Date, minus (ii) any portion of the Total
Monthly Excess Spread which is used to cover any shortfalls in Available Funds
on such Payment Date in the related Mortgage Loan Group, or in the other
Mortgage Loan Group, or used to reimburse the Certificate Insurer on account of
prior Insured Payments.
Pursuant to the Pooling and Servicing Agreement, each Mortgage Loan
Group's Net Monthly Excess Spread is required to be applied as a payment of
principal on the related Class of Class A Certificates until the related
Subordinated Amount has increased to the level required with respect to the
related Mortgage Loan Group. "Subordinated Amount" means, with respect to any
Mortgage Loan Group and Payment Date, the difference, if any, between (x) the
aggregate principal balances of the Mortgage Loans in such Mortgage Loan Group
as of the close of business on the last day of the preceding Remittance Period
after taking into account payments of scheduled principal on the Mortgage Loans
due on the Due Date which immediately follows the last day of such Remittance
Period and (y) the Class A Principal Balance of the related Class of Class A
Certificates as of such Payment Date (and assuming all distributions are made on
such Payment Date). With respect to either Mortgage Loan Group, any amount of
Net Monthly Excess Spread actually applied as a payment of principal is a
"Subordination Increase Amount". The required level of the Subordinated Amount
with respect to a Mortgage Loan Group and Payment Date is the "Specified
Subordinated Amount" with respect to such Mortgage Loan Group and Payment Date.
The Pooling and Servicing Agreement generally provides that the related
Specified Subordinated Amount may, over time, decrease, or increase, subject to
certain floors, caps and triggers.
To the extent that any Mortgage Loan Group's Net Monthly Excess Spread
is not required to be applied to the payment of a Subordination Increase Amount
on the related Class of Class A Certificates because the Subordinated Amount
related to such Class is equal to or greater than the then Specified
Subordinated Amount related to such Class, such Net Monthly Excess Spread
(together with the amount of any Subordination Reduction Amount, as described in
the second succeeding paragraph) is permitted to be applied to the payment of
Subordination Increase Amounts on the other Class of Class A Certificates to the
extent necessary to increase the related Subordinated Amount to the level of its
Specified Subordinated Amount.
The application of Net Monthly Excess Spread to principal has the
effect of accelerating the amortization of the related Class of Class A
Certificates relative to the amortization of the Mortgage Loans in the related
Mortgage Loan Group. To the extent that any Net Monthly Excess Spread is not so
used, the Pooling and Servicing
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Agreement provides that it will be used to reimburse the Servicer or Trustee
with respect to any amounts owing to each, or paid to the Owners of the
Subordinated Certificates.
In the event that the required level of the Specified Subordinated
Amount with respect to a Mortgage Loan Group is permitted to decrease or "step
down" on a Payment Date in the future, the Pooling and Servicing Agreement
provides that a portion of the principal which would otherwise be distributed to
the Owners of the related Class of Class A Certificates on such Payment Date
shall be distributed to the Owners of the Subordinated Certificates on such
Payment Date. This has the effect of decelerating the amortization of the
related Class of Class A Certificates relative to the amortization of the
Mortgage Loans in the related Mortgage Loan Group, and of reducing the related
Subordinated Amount. "Excess Subordinated Amount" means, with respect to any
Mortgage Loan Group and Payment Date, the difference, if any, between (x) the
Subordinated Amount that would apply to the related Mortgage Loan Group on such
Payment Date after taking into account all distributions to be made on such
Payment Date (except for any distributions of related Subordination Reduction
Amounts as described in this paragraph) and (y) the related Specified
Subordinated Amount for such Payment Date. If, on any Payment Date, the Excess
Subordinated Amount is, or, after taking into account all other distributions to
be made on such Payment Date would be, greater than zero (i.e., the Subordinated
Amount is or would be greater than the related Specified Subordinated Amount),
then any amounts relating to principal which would otherwise be distributed to
the Owners of the related Class of Class A Certificates on such Payment Date
shall instead be distributed to the Owners of the Subordinated Certificates
(subject to certain other prior applications as described below under
"Crosscollateralization Provisions") in an amount equal to the lesser of (x) the
Excess Subordinated Amount and (y) the amount available for distribution on
account of principal with respect to the related Class of Class A Certificates
on such Payment Date; such amount being the "Subordination Reduction Amount"
with respect to the related Mortgage Loan Group for such Payment Date. As a
technical matter regarding the cash flow structure of the Trust, Subordination
Reduction Amounts may result even prior to the occurrence of any decrease or
"step down" in the related Specified Subordinated Amount. This is because the
Owners of the related Class of Class A Certificates will generally be entitled
to receive 100% of collected principal, even though the related Class A
Principal Balances will, following the accelerated amortization resulting from
the application of the Net Monthly Excess Spread, represent less than 100% of
the related Mortgage Loan Group's aggregate scheduled principal balance. In the
absence of the provisions relating to Subordination Reduction Amounts, the
foregoing may otherwise increase the Subordinated Amounts above their Specified
Subordinated Amount requirements even without the further application of any Net
Monthly Excess Spread.
The Pooling and Servicing Agreement provides that, on any Payment Date
all amounts (subject to the discussion in the preceding paragraph) collected on
account of principal (including the principal portion of any Delinquency
Advances and other than any such amount applied to the payment of a
Subordination Reduction Amount) with respect to a Mortgage Loan Group during the
prior Remittance Period together with principal due on the Due Date which
immediately follows the last day of such Remittance Period will be distributed
to the Owners of the related Class of Class A Certificates on such Payment Date.
If any Mortgage Loan became a Liquidated Mortgage Loan during such prior
Remittance Period, the Net Liquidation Proceeds related thereto and allocated to
principal may be less than the principal balance of the related Mortgage Loan;
the amount of any such insufficiency is a "Realized Loss." In addition, the
Pooling and Servicing Agreement provides that, the principal balance of any
Mortgage Loan which becomes a Liquidated Mortgage Loan shall thenceforth equal
zero. The Pooling and Servicing Agreement does not contain any rule which
requires that the amount of any Realized Loss be distributed to the Owners of
the related Class of Class A Certificates on the Payment Date which immediately
follows the event of loss; i.e., the Pooling and Servicing Agreement does not
require the current recovery of losses. However, the occurrence of a Realized
Loss will reduce the Subordinated Amount with respect to the related Mortgage
Loan Group, which, to the extent that such reduction causes the Subordinated
Amount to be less than the related Specified Subordinated Amount applicable to
the related Payment Date, will require the payment of a Subordination Increase
Amount on such Payment Date (or, if insufficient funds are available on such
Payment Date, on subsequent Payment Dates, until the Subordinated Amount equals
the related Specified Subordinated Amount). The effect of the foregoing is to
allocate losses to the Owners of the Subordinated Certificates by reducing, or
eliminating entirely, payments of Monthly Excess Cash Flow and of Subordination
Reduction Amounts which such Owners would otherwise receive.
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Overcollateralization and the Certificate Insurance Policies. The
Pooling and Servicing Agreement defines a "Subordination Deficit" with respect
to a Mortgage Loan Group and Payment Date to be the amount, if any, by which (x)
the Class A Principal Balance of the related Class of Class A Certificates,
after taking into account all distributions to be made on such Payment Date,
exceeds (y) the aggregate principal balances of the Mortgage Loans in the
related Mortgage Loan Group as of the close of business on the Due Date which
immediately follows the last day of the prior Remittance Period. The Pooling and
Servicing Agreement requires the Trustee to make a claim for an Insured Payment
under the related Certificate Insurance Policy not later than the third Business
Day prior to any Payment Date as to which the Trustee has determined that a
Subordination Deficit will occur for the purpose of applying the proceeds of
such Insured Payment as a payment of principal to the Owners of the related
Class of Class A Certificates on such Payment Date. The Certificate Insurance
Policies are thus similar to the subordination provisions described above
insofar as the Certificate Insurance Policies guarantee ultimate, rather than
current, payment of the amounts of any Realized Losses to the Owners of the
related Class of Class A Certificates. Investors in the Class A Certificates
should realize that, under extreme loss or delinquency scenarios applicable to
the related Mortgage Loan Pool, they may temporarily receive no distributions of
principal.
Crosscollateralization Provisions
On each Payment Date, an amount equal to the sum of (x) the Total
Monthly Excess Spread with respect to each Mortgage Loan Group and Payment Date
plus (y) any Subordination Reduction Amount with respect to each such Mortgage
Loan Group and Payment Date (such amount being the "Total Monthly Excess
Cashflow" with respect to such Mortgage Loan Group and Payment Date) will be
required to be applied in the following order of priority:
(i) such amount shall be used to fund any shortfall on
such Payment Date with respect to the related Mortgage Loan Group and
equal to the difference, if any, between (x) the related Class A
Distribution Amount (calculated only with respect to clause (y) of the
definition thereof and without any Subordination Increase Amount) with
respect to such Mortgage Loan Group for such Payment Date and (y) the
Available Funds with respect to such Mortgage Loan Group for such
Payment Date (the amount of such difference being equal to an
"Available Funds Shortfall" with respect to the related Mortgage Loan
Group);
(ii) any portion of the Total Monthly Excess Cashflow
with respect to such Mortgage Loan Group remaining after the
application described in clause (i) above shall be used to fund any
Available Funds Shortfall with respect to the other Mortgage Loan
Group;
(iii) any portion of the Total Monthly Excess Cashflow
with respect to such Mortgage Loan Group remaining after the
applications described in clauses (i) and (ii) above shall be paid to
the Certificate Insurer in respect of amounts owed on account of any
Insured Payments theretofore made and interest thereon with respect to
the related Mortgage Loan Group (any such amount so owed to the
Certificate Insurer and not theretofore paid, together with accrued
interest thereon, the "Insurer Reimbursable Amount" with respect to the
related Mortgage Loan Group); and
(iv) any portion of the Total Monthly Excess Cashflow
with respect to such Mortgage Loan Group remaining after the
applications described in clauses (i), (ii) and (iii) above shall be
paid to the Certificate Insurer in respect of any Insurer Reimbursable
Amount with respect to the other Mortgage Loan Group.
The amount, if any, of the Total Monthly Excess Cashflow with respect to a
Mortgage Loan Group on a Payment Date remaining after such applications is the
"Net Monthly Excess Cashflow" with respect to such Mortgage Loan Group for such
Payment Date; such amount is required to be applied in the following order of
priority on such Payment Date:
(i) such amount shall be used to fund the payment of
any required Subordination Increase Amount with respect to the related
Mortgage Loan Group as a portion of the distribution of the Class A
Principal Distribution Amount on such Payment Date;
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(ii) any portion of the Net Monthly Excess Cashflow
remaining after the application described in clause (i) above shall be
used first, to make any required Subordination Increase Amount with
respect to the other Mortgage Loan Group and second, to pay any
Available Funds Cap Carry-Forward Amount; and
(iii) any remaining Net Monthly Excess Cashflow may then
be used to reimburse the Servicer and the Trustee for certain amounts
owing to each, or may be paid to the Owners of the Subordinated
Certificates.
Credit Enhancement Does Not Apply to Prepayment Risk
In general, the protection afforded by the subordination provisions and
by the Certificate Insurance Policies is protection for credit risk and not for
prepayment risk. The subordination provisions may not be adjusted, nor may a
claim be made under the Certificate Insurance Policies to guarantee or insure
that any particular rate of prepayment is experienced by the Trust.
Class A Distributions and Insured Payments to the Owners of the Offered
Certificates
No later than three Business Days prior to each Payment Date the
Trustee will be required to determine the amounts to be on deposit in the
Certificate Account on such Payment Date with respect to each of the two
Mortgage Loan Groups and equal to the sum of (x) such amounts excluding the
amount of any Total Monthly Excess Cashflow amounts included in such amounts,
plus (y) any amounts of Total Monthly Excess Cashflow (as described above under
"Crosscollateralization Provisions") to be applied on account of such Mortgage
Loan Group on such Payment Date. The amounts described in clause (x) of the
preceding sentence with respect to each Mortgage Loan Group and Payment Date are
the "Fixed Rate Group Available Funds" and the "Variable Rate Group Available
Funds", respectively or, generally, "Available Funds;" the sum of the amounts
described in clauses (x) and (y) of the preceding sentence with respect to each
Mortgage Loan Group and Payment Date are the "Fixed Rate Group Total Available
Funds" and the "Variable Rate Group Total Available Funds," respectively, or,
generally, "Total Available Funds." If the sum of the Class A Distribution
Amounts with respect to the Fixed Rate Certificates, for any Payment Date
exceeds the Fixed Rate Group Total Available Funds for such Payment Date, the
Trustee will be required to draw the amount of such insufficiency from the
Certificate Insurer under the Certificate Insurance Policy applicable to the
Fixed Rate Certificates. Similarly, if on any Payment Date the Class A
Distribution Amount with respect to the Variable Rate Certificates exceeds the
Variable Rate Group Total Available Funds for such Payment Date, the Trustee
will be required to draw the amount of such insufficiency from the Certificate
Insurer under the Certificate Insurance Policy applicable to the Variable Rate
Certificates. The Trustee will be required to deposit to the Certificate Account
the amount of any Insured Payment made by the Certificate Insurer. The Pooling
and Servicing Agreement provides that amounts which cannot be distributed to the
Owners of the Offered Certificates as a result of proceedings under the United
States Bankruptcy Code or similar insolvency laws will not be considered in
determining the amount of Total Available Funds with respect to any Payment
Date.
On each Payment Date, and following the making by the Trustee of all
allocations, transfers and deposits heretofore described under this caption,
from amounts (including any related Insured Payment) then on deposit in the
Certificate Account with respect to the related Mortgage Loan Group, the Trustee
will be required to distribute (x) to the Owners of the Fixed Rate Certificates,
the related Class A Distribution Amount for such Payment Date and (y) to the
Owners of the Variable Rate Certificates, the related Class A Distribution
Amount for such Payment Date together with any portion of any Available Funds
Cap Carry-Forward Amount to be funded on such Payment Date.
Calculation of LIBOR
The Class A-2 Certificates will initially bear a pass-through rate of
5.8175% per annum which applies to the Accrual Period beginning on the Closing
Date and ending on April 21, 1996. Thereafter on the second business day
preceding each Payment 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 next Accrual Period for the Class A-2
Certificates on the basis of the offered rates of the Reference Banks for
one-month U.S. dollar
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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 Company or any
Originator.
On each Interest Determination Date, LIBOR for the related Accrual
Period for the Class A-2 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
Accrual Period for the Class A-2 Certificates 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
Accrual Period for the Class A-2 Certificates 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-2 Certificates for the related Accrual Period shall (in the absence of
manifest error) be final and binding.
Book Entry Registration of the Offered Certificates
The Offered Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Beneficial Owners may elect to hold their Book-Entry
Certificates directly through DTC in the United States, or CEDEL or Euroclear
(in Europe) if they are participants of such systems ("Participants") , or
indirectly through organizations which are Participants. The Book-Entry
Certificates will be issued in one or more certificates per class of Offered
Certificates which in the aggregate equal the principal balance of such Offered
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for CEDEL and
Chemical will act as depositary for Euroclear (in such capacities, individually
the "Relevant Depositary" and collectively the "European Depositaries").
Investors may hold such beneficial interests in the Book-Entry Certificates in
minimum denominations representing principal amounts of $1,000 and in integral
multiples in excess thereof. Except as described below, no Beneficial Owner will
be entitled to receive a physical certificate representing such Certificate (a
"Definitive Certificate"). Unless and until definitive Certificates are issued,
it is anticipated that the only "Owner" of such Book-Entry Certificates will be
Cede & Co., as nominee of DTC. Beneficial Owners will not be Owners as that term
is used in the Pooling and Servicing Agreement. Beneficial Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's Ownership of such
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Book-Entry Certificate will be recorded on the records of DTC (or of a
participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the Beneficial
Owner's Financial Intermediary is not a DTC Participant and on the records of
CEDEL or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While such Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. Participants
and indirect participants with whom Beneficial Owners have accounts with respect
to Book-Entry Certificates are similarly required to make book-entry transfers
and receive and transmit such distributions on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interests.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Offered
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Owners who are not
Participants may transfer ownership of Offered Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Offered Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Offered
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Offered Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences -- Taxation of Certain Foreign Investors" and "-- Backup
Withholding" in the Prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC Participant
in the Book-Entry Certificates,
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whether held for its own account or as a nominee for another person. In general,
beneficial ownership of Book- Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC Participants as in effect from
time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by Chemical Bank (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear Securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is a branch of a New York banking corporation
which is a member bank of the Federal Reserve System. As such, it is regulated
and examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the Beneficial Owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Certificates held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL
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Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a Beneficial Owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to
Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. CEDEL or the Euroclear Operator, as the case may
be, will take any action permitted to be taken by an Owner under the Pooling and
Servicing Agreement on behalf of a CEDEL Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Offered Certificates which conflict with actions taken with
respect to other Offered Certificates.
None of the Depositor, the Company, the Servicer 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 will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Company advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book-Entry Certificates and the Company or the
Trustee is unable to locate a qualified successor, (b) the Company, at its sole
option, elects to terminate a book-entry system through DTC or (c) DTC, at the
direction of the Beneficial Owners representing a majority of the outstanding
Percentage Interests of the Offered Certificates, advises the Trustee in writing
that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book- Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among Participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
Certain Activities
The Trust has not and will not: (i) issue securities (except for the
Certificates); (ii) borrow money; (iii) make loans; (iv) invest in securities
for the purpose of exercising control; (v) underwrite securities; (vi) except as
provided in the Pooling and Servicing Agreement, engage in the purchase and sale
(or turnover) of investments; (vii) offer securities in exchange for property
(except Certificates for the Mortgage Loans); or (viii) repurchase or
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otherwise reacquire its securities. See "Servicing of the Mortgage Loans and
Contracts -- Reports To Certificateholders" in the Prospectus for information
regarding reports to the Owners.
THE COMPANY
The Company, First Alliance Mortgage Company, was incorporated in the
State of California on May 13, 1975. The Company has been actively involved in
the mortgage lending business since its founding. The Company is a privately
held company 100% owned by Brian Chisick and his wife, Sarah Chisick. The
current business and all of its predecessors have been located in Orange County,
California. Approximately 170 of the Company's 292 employees are located at the
corporate headquarters. The remainder of the Company's employees work in
seventeen branch offices distributed throughout the United States. The branch
offices are located in the following cities in California: Long Beach, Encino,
Irvine, West Covina, Oakland, San Jose and Pleasant Hill. The Company has branch
offices outside California located in the following cities: Bellevue,
Washington; Denver, Colorado; Oakbrook Terrace and Arlington Heights, Illinois;
Miami and Fort Lauderdale, Florida; Portland, Oregon; Atlanta, Georgia; Phoenix,
Arizona and Salt Lake City, Utah.
The Company maintains its corporate headquarters at 17305 Von Karman
Avenue, Irvine, California 92714- 6203. Its telephone number is (714) 224-8500.
THE CERTIFICATE INSURANCE POLICIES AND THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement.
The Certificate Insurer, in consideration of the payment of the premium
and subject to the terms of the Certificate Insurance Policies 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, 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 Policies 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 do not
include the payment on the Class A-2 Certificates of any Available Funds Cap
Carry-Forward Amount. Insured Payments shall be made only at the time set forth
in the Certificate Insurance Policies 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
Policies do not cover shortfalls, if any, attributable to the liability of the
Trust, the REMIC or the Trustee for withholding taxes, if any (including
interest and penalties in respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the 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 such Preference Amount, (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 such 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 Policies no later than 12:00 noon New York City time on
the later of the Payment Date on which the related Class A Distribution
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Amount is due or the 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 claim under the related
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 Policies unless
otherwise stated in the Certificate Insurance Policies will be disbursed by the
Fiscal Agent to the Trustee on behalf of 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
Policies.
As used in the Certificate Insurance Policies, the following terms
shall have the following meanings:
"Agreement" means the Pooling and Servicing Agreement dated as
of March 1, 1996 among First Alliance Mortgage Company, as Company,
First Alliance Mortgage Company, as Servicer, Prudential Securities
Secured Financing Corporation, as Depositor and Bankers Trust Company
of California, N.A., as Trustee, without regard to any amendment or
supplement thereto unless the Certificate Insurer shall have consented
in writing thereto.
"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 Agreement
is located are authorized or obligated by law or executive order to
close.
"Class A Distribution Amount" shall have the same meaning
ascribed to such term in the Agreement as of the date of execution of
the Certificate Insurance Policies, without giving effect to any
subsequent amendment or modification to the Agreement.
"Insured Payment," with respect to either Mortgage Loan Group
and as to any Payment Date, will equal the sum of (i) the excess, if
any, of (a) the sum of the related Class A Current Interest and the
related Subordination Deficit, if any, over (b) the related Total
Available Funds (after applying the cross collateralization provisions
of the Agreement, after any deduction for the related Premium Amount
and fee payable to the Trustee and after taking into account the
portion of the related Class A Principal Distribution Amount to be
actually distributed on such Payment Date without regard to any related
Insured Payment to be made with respect to such Payment Date), plus
(ii) the related 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 related 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 Payment Date.
"Owner" means each Owner of a Class A Certificate (as defined
in the Agreement) who, on the applicable Payment 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.
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Capitalized terms used in the Certificate Insurance Policies and not
otherwise defined therein shall have the respective meanings set forth in the
Agreement as of the date of execution of the Certificate Insurance Policies,
without giving effect to any subsequent amendment or modification to the
Agreement unless such amendment or modification has been approved in writing by
the Certificate Insurer.
Any notice under the Certificate Insurance Policies or service of
process on the Fiscal Agent may be made at the address listed below for the
Fiscal Agent of the Certificate Insurer or such other address as the Certificate
Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency or such
other address as the Fiscal Agent shall specify to the Trustee in Writing.
The Certificate Insurance Policies are 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 POLICIES IS NOT
COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76
OF THE NEW YORK INSURANCE LAW.
The Certificate Insurance Policies are not cancelable for any reason.
The premiums on the Certificate Insurance Policies 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 Certificate Insurer. The Certificate Insurer is
domiciled in the State of New York and licensed to do business in all 50 states,
the District of Columbia and 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 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 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 or in any other subsequently filed
document which also is incorporated by reference 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"):
SAP
--------------------------------
December 31, September 30,
1994 1995
(Audited) (Unaudited)
(In millions)
Admitted Assets................................ $3,401 $3,678
Liabilities.................................... 2,291 2,484
Capital and Surplus............................ 1,110 1,194
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GAAP
--------------------------------
December 31, September 30,
1994 1995
(Audited) (Unaudited)
(In millions)
Assets........................................ $3,759 $4,257
Liabilities................................... 1,704 1,895
Shareholder's Equity.......................... 2,055 2,362
Audited financial statements of the Certificate Insurer as of December
31, 1994 and 1993 and for each of the three years ended December 31, 1994, 1993
and 1992 are included herein as Appendix B. Unaudited financial statements of
the Certificate Insurer for the nine-month period ended September 30, 1995 are
included herein as Appendix C. 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 address
of the Certificate Insurer is 113 King Street, Armonk, New York 10504.
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 Policies and
Certificate Insurer set forth under the heading "The Certificate Insurance
Policies and the Certificate Insurer" and in Appendices B and C.
Moody's rates the claims paying ability of the Certificate Insurer
"Aaa." The Class A Certificates are rated in the highest rating category by
Moody's.
Standard & Poor's rates the claims paying ability of the Certificate
Insurer "AAA." The Class A Certificates are rated in the highest rating category
by Standard & Poor's.
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 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.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in this Prospectus Supplement, there is set forth below a
summary of certain other provisions of the Pooling and Servicing Agreement.
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Formation of the Trust
On the Closing Date, the Trust will be created and established pursuant
to the Pooling and Servicing Agreement. On such date, the Company will sell
without recourse the Mortgage Loans to the Depositor, the Depositor will sell
without recourse the Mortgage Loans to the Trust and the Trust will issue the
Offered Certificates to the Owners thereof pursuant to the Pooling and Servicing
Agreement.
The property of the Trust shall include all money, instruments and
other property to the extent such money, instruments and other property are
subject or intended to be held in trust for the benefit of the Owners, and all
proceeds thereof, including, without limitation, (i) the Mortgage Loans, (ii)
such amounts, including Eligible Investments, as from time to time may be held
by the Trustee in the Certificate Account and by the Servicer in the Principal
and Interest Account (except as otherwise provided in the Pooling and Servicing
Agreement), each to be created pursuant to the Pooling and Servicing Agreement,
(iii) any Property, the ownership of which has been effected on behalf of the
Trust as a result of foreclosure or acceptance by the Servicer of a deed in lieu
of foreclosure and that has not been withdrawn from the Trust, (iv) any
insurance policies relating to the Mortgage Loans and any rights of the Company
under any insurance policies, (v) Net Liquidation Proceeds with respect to any
Liquidated Loan, (vi) the Certificate Insurance Policies and (vii) the rights of
the Company against any Originator pursuant to the related Master Loan Transfer
Agreement (collectively, the "Trust Estate").
The Offered Certificates will not represent an interest in or an
obligation of, nor will the Mortgage Loans be guaranteed by, any originator, the
Company, the Depositor, the Servicer or the Trustee.
Sale of Mortgage Loans
Pursuant to the Pooling and Servicing Agreement, on the Closing Date
the Company will sell without recourse to the Depositor and the Depositor will
sell without recourse to the Trust all right, title and interest of the Company
and the Depositor, as the case may be, in each Mortgage Loan listed on the
related schedules of the Mortgage Loans delivered to the Trustee prior to the
Closing Date with respect to the Mortgage Loans (the "Schedules of Mortgage
Loans") and all of each of their right, title and interest in all scheduled
payments due on each Mortgage Loan after the Cut-Off Date and all principal and
all interest collected on each such Mortgage Loan after the Cut-Off Date.
In connection with the sale of the Mortgage Loans on the Closing Date,
the Company will be required to deliver to the Trustee at least five Business
Days prior to the Closing Date a file consisting of (i) the original Notes or
certified copies thereof, endorsed by the Originator thereof in blank or to the
order of the holder, (ii) originals of all intervening assignments, showing a
complete chain of title from origination to the applicable Originators, if any,
including warehousing assignments, with evidence of recording thereon, (iii)
originals of all assumption and modification agreements, if any, and, unless
such Mortgage Loan is covered by a counsel's opinion as described in the next
paragraph, (iv) either: (a) the original Mortgage, with evidence of recording
thereon, or a certified copy of the Mortgage as recorded, or (b) if the original
Mortgage has not yet been returned from the recording office, a certified copy
of the Mortgage and (v) evidence of title insurance with respect to the
mortgaged property in the form of a binder or commitment substance satisfactory
to the Trustee and the Certificate Insurer. The Trustee will agree, for the
benefit of the Owners, to review each such file on or before the Closing Date
and again within 90 days after the Closing Date or to ascertain that all
required documents (or certified copies of documents) have been executed and
received.
Pursuant to the terms of the Pooling and Servicing Agreement, the
Company shall assign to the Depositor and the Depositor shall assign to the
Trustee for the benefit of the holders of the Certificates all of the Company's
right, title and interest in each Master Loan Transfer Agreement insofar as it
relates to the representations and warranties made therein by the Originators
and the Company in respect of the origination of the Mortgage Loans and the
remedies provided for breach of such representations and warranties. Upon
discovery by the Trustee of a breach of any representation, warranty or covenant
which materially and adversely affects the interests of the Owners of the
Certificates in a Mortgage Loan, the Trustee will promptly notify the Originator
and the Company. The Originators and the Company will have 60 days from its
discovery or its receipt of such notice to cure such breach or repurchase the
Mortgage Loan.
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The Company is additionally required to cause to be prepared and
recorded, within 75 business days of the Closing Day (or, if original recording
information is unavailable, within such later period as is permitted by the
Pooling and Servicing Agreement) assignments of the Mortgages from the
Originators (other than the Company) to the Company and then to the Trustee, in
the appropriate jurisdictions in which such recordation is necessary to perfect
the lien of the Trust thereof as against creditors of or purchasers from the
Originators; provided, however, that if the Company furnishes to the Trustee
executed recordable assignments of the Mortgages and to the Trustee and the
Certificate Insurer an opinion of counsel to the effect that no such recording
is necessary to perfect the Trustee's interests in the Mortgages with respect to
any of the relevant jurisdictions, then such recording will not be required with
respect to such jurisdictions.
Removal and Resignation of the Servicer
The Pooling and Servicing Agreement provides that the Servicer may not
resign from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless such duties and obligations 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 (or an
affiliate thereof) or a successor Servicer has assumed the Servicer's
obligations and duties under the Pooling and Servicing Agreement. The
Certificate Insurer, the Trustee or the Owners with the consent of the
Certificate Insurer, will have the right, pursuant to the Pooling and Servicing
Agreement, to remove the Servicer upon the occurrence of any of (a) the
continuing failure of the Servicer to deliver to the Trustee any proceeds or
required payment for a period of five business days after written notice; (b)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the Servicer and certain actions by
the Servicer indicating its insolvency or inability to pay its obligations; (c)
the continuing failure of the Servicer to perform any one or more of its
material obligations under the Pooling and Servicing Agreement for a period of
sixty (60) days after notice by the Trustee or the Certificate Insurer of said
failure; or (d) the failure of the Servicer to cure any breach of any of its
representations and warranties set forth in the Pooling and Servicing Agreement
which materially and adversely affects the interests of the Owners or the
Certificate Insurer for a period of sixty (60) days after the Servicer's
discovery or receipt of notice thereof.
The Pooling and Servicing Agreement additionally provides that the
Certificate Insurer may remove the Servicer upon the occurrence of any of the
following events:
(i) with respect to any Payment Date, if the sum of the Fixed
Rate Group and Variable Rate Group Total Available Funds will be less
than the sum of the Class A Distribution Amounts with respect to all of
the Class A Certificates, in respect of such Payment Date; provided,
however, that the Certificate Insurer will have no right to remove the
Servicer pursuant to the provision described in this clause (i) if the
Servicer can demonstrate to the reasonable satisfaction of the
Certificate Insurer that such event was due to circumstances beyond the
control of the Servicer;
(ii) the failure by the Servicer to make any required
Servicing Advance;
(iii) the failure of the Servicer to perform one or more of
its obligations under the Pooling and Servicing Agreement and the
continuance thereof for a period of thirty (30) days or such longer
period as agreed to in writing by the Certificate Insurer;
(iv) the failure by the Servicer to make any required
Delinquency Advance or to pay any Compensating Interest by the
Remittance Date; or
(v) if the delinquency or loss levels applicable to the
Mortgage Loans exceed certain "trigger" levels set forth in the Pooling
and Servicing Agreement.
The Trustee
In accordance with the Pooling and Servicing Agreement, following the
termination of the Servicer and pending the appointment of any other person as
successor servicer, the Trustee (for this purpose, the term Trustee includes an
affiliate thereof) shall be the successor Servicer and is empowered to perform
the duties of the Servicer; it being expressly understood, however, that the
Trustee, the Company, the Depositor, the Servicer and the Owners,
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agree, prior to any termination of the Servicer, that the Servicer shall perform
such duties. Specifically, and not in limitation of the foregoing, the Trustee
shall, upon termination of the Servicer, during its performance as successor
Servicer and pending the appointment of any other person as successor servicer,
have the power and duty:
(i) to collect Mortgagor payments;
(ii) to foreclose on defaulted Mortgage Loans;
(iii) to enforce due-on-sale clauses and to enter into
assumption and substitution agreements as permitted by the Pooling and
Servicing Agreement;
(iv) to deliver instruments of satisfaction;
(v) to make Delinquency Advances and Servicing Advances and to
pay Compensating Interest; and
(vi) to enforce the Mortgage Loans.
During any period in which the Trustee is successor Servicer, the
Trustee shall be entitled to all compensation due to the Servicer.
Governing Law
The Pooling and Servicing Agreement and each Certificate will be
construed in accordance with and governed by the laws of the State of New York
applicable to agreements made and to be performed therein.
Termination of the Trust
The Pooling and Servicing Agreement will provide that the Trust will
terminate upon the earlier of (i) the payment to the Owners of all Certificates
from amounts other than those available under the Certificate Insurance Policies
of all amounts required to be paid such Owners upon the later to occur of (a)
the final payment or other liquidation (or any advance made with respect
thereto) of the last Mortgage Loan or (b) the disposition of all property
acquired in respect of any Mortgage Loan remaining in the Trust Estate or (ii)
any time when a Qualified Liquidation (as defined in the Pooling and Servicing
Agreement) of the Trust Estate is effected.
Optional Termination
By the Servicer. At its option, the Servicer acting directly or through
one or more affiliates may determine to purchase from the Trust all of the
Mortgage Loans and other property then held by the Trust, and thereby effect
early retirement of the Certificates, on any Remittance Date when the aggregate
outstanding principal balances of the Mortgage Loans has declined to 10% or less
of the Original Aggregate Loan Balance. Under certain circumstances the
Certificate Insurer may also exercise such purchase rights if the Servicer does
not do so.
Upon Loss of REMIC Status. Following a final determination by the
Internal Revenue Service, or by a court of competent jurisdiction, in each case
from which no appeal is taken within the permitted time for such appeal, or if
any appeal is taken, following a final determination of such appeal from which
no further appeal can be taken to the effect that the REMIC held by the Trust
does not and will no longer qualify as a "REMIC" pursuant to Section 860D of the
Code (the "Final Determination"), at any time on or after the date which is 30
calendar days following such Final Determination, (i) the Certificate Insurer or
the Owners of a majority in Percentage Interest represented by the Class of
Offered Certificates then outstanding with the consent of the Certificate
Insurer (which consent may not be unreasonably withheld) may direct the Trustee
on behalf of the Trust to adopt a plan of complete liquidation as contemplated
by Section 860F(a)(4) of the Code and (ii) the Certificate Insurer may notify
the Trustee of the Certificate Insurer's determination to purchase from the
Trust all Mortgage Loans and other property acquired by foreclosure, deed in
lieu of foreclosure, or otherwise in respect of any Mortgage Loan then remaining
in the Trust, and thereby effect the early retirement of the Certificates. The
purchase price for any purchase of the property of the Trust Estate shall be
equal to the sum of (x) the greater of (i) 100% of the aggregate Loan Balances
of the Mortgage Loans as of the Due Date which immediately follows the last day
of the related Remittance Period immediately preceding the day of purchase minus
amounts remitted from the Principal and Interest Account
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representing collections of principal on the Mortgage Loans during the related
Remittance Period and Due Period, and (ii) the fair market value of such
Mortgage Loans (disregarding accrued interest), (y) one month's interest on such
amount computed at the weighted average Pass-Through Rate of the Class A
Certificates and (z) the aggregate amount of any unreimbursed Delinquency
Advances and any Delinquency Advances which the Servicer has theretofore failed
to remit.
Upon receipt of such notice or direction from the Certificate Insurer,
the Trustee will be required to notify the Owners of the Subordinated
Certificates of such election to liquidate or such determination to purchase, as
the case may be (the "Termination Notice"). The Owners of a majority of the
Percentage Interest of the Subordinated Certificates then outstanding may,
within sixty (60) days from the date of receipt of the Termination Notice (the
"Purchase Option Period"), at their option, purchase from the Trust all (but not
fewer than all) Mortgage Loans and all property theretofore acquired by
foreclosure, deed in lieu of foreclosure, or otherwise in respect of any
Mortgage Loan then remaining in the Trust Estate at a purchase price equal to
the aggregate Loan Balances of all Mortgage Loans as of the last day of the
Remittance Period immediately preceding the date of such purchase, plus one
month's interest on such amount at the weighted average Pass-Through Rate and
plus the aggregate amount of any unreimbursed Delinquency Advances and any
Delinquency Advances which the Servicer has theretofore failed to remit. If,
during the Purchase Option Period, the Owners of the Subordinated Certificates
have not exercised the option described in the immediately preceding sentence,
then upon the expiration of the Purchase Option Period (i) in the event that the
Certificate Insurer or the Owners of the Class A Certificates with the consent
of the Certificate Insurer have given the Trustee the direction described in
clause (a)(i) above, the Trustee will be required to sell the Mortgage Loans and
distribute the proceeds of the liquidation of the Trust Estate, each in
accordance with the plan of complete liquidation, such that, if so directed, the
liquidation of the Trust Estate, the distribution of the proceeds of the
liquidation and the termination of the Pooling and Servicing Agreement occur no
later than the close of the sixtieth (60th) day, or such later day as the
Certificate Insurer or the Owners of the Class A Certificates with the consent
of the Certificate Insurer permit or direct in writing, after the expiration of
the Purchase Option Period and (ii) in the event that the Certificate Insurer
has given the Trustee notice of the Certificate Insurer's determination to
purchase the Trust Estate described in clause (a)(ii) preceding the Certificate
Insurer will be required to, within sixty (60) days, purchase all (but not fewer
than all) Mortgage Loans and all property theretofore acquired by foreclosure,
deed in lieu of foreclosure or otherwise in respect of any Mortgage Loan then
remaining in the Trust Estate. In connection with such purchase, the Servicer
will be required to remit to the Trustee all amounts then on deposit in the
Principal and Interest Account for deposit to the Certificate Account, which
deposit will be deemed to have occurred immediately preceding such purchase.
Following a Final Determination, the Owners of a majority of the
Percentage Interest of the Subordinated Certificates then outstanding may, at
their option and upon delivery to the Certificate Insurer of an opinion of
counsel experienced in Federal income tax matters acceptable to the Certificate
Insurer selected by the Owners of the Subordinated Certificates which opinion
shall be reasonably satisfactory in form and substance to the Owners of a
majority of the Percentage Interests represented by the Class A Certificates
then outstanding, to the effect that the effect of the Final Determination is to
increase substantially the probability that the gross income of the Trust will
be subject to federal taxation, purchase from the Trust all (but not fewer than
all) Mortgage Loans and all property theretofore acquired by foreclosure, deed
in lieu of foreclosure, or otherwise in respect of any Mortgage Loan then
remaining in the Trust Estate at a purchase price equal to the aggregate Loan
Balances of all Mortgage Loans as of the Due Date which immediately follows the
last day of the Remittance Period immediately preceding the date of such
purchase, plus one month's interest on such amount computed at the weighted
average Pass-Through Rate plus the aggregate amount of unreimbursed Delinquency
Advances and any Delinquency Advances which the Servicer has theretofore failed
to remit. In connection with such purchase, the Servicer will be required to
remit to the Trustee all amounts then on deposit in the Principal and Interest
Account for deposit to the Certificate Account, which deposit shall be deemed to
have occurred immediately preceding such purchase. The foregoing opinion shall
be deemed satisfactory unless the Certificate Insurer gives the Owners of a
majority of the Percentage Interest of the Subordinated Certificates notice that
such opinion is not satisfactory within thirty days after receipt of such
opinion.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the
Offered Certificates is to be considered only in connection with "Certain
Federal Income Tax Consequences" in the Prospectus. The discussion herein and in
the Prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Offered Certificates.
REMIC Elections
The Trustee will cause an election to be made to treat the Trust as a
REMIC for federal income tax purposes. Arter & Hadden, special tax counsel, will
advise that, in its opinion, for federal income tax purposes, assuming (i) the
REMIC election is made and (ii) compliance with the Pooling and Servicing
Agreement, the Trust will be treated as a REMIC, each Class of Offered
Certificates will be treated as "regular interests" in the REMIC and the Class R
Certificates will be treated as the sole class of "residual interests" in the
REMIC. For federal income tax purposes, regular interests in a REMIC are treated
as debt instruments issued by the REMIC on the date on which those interests are
created, and not as ownership interests in the REMIC or its assets. Owners of
Offered Certificates that otherwise report income under a cash method of
accounting will be required to report income with respect to such Offered
Certificates under an accrual method. The Offered Certificates may be issued
with "original issue discount" for federal income tax purposes. The prepayment
assumption to be used in determining whether any Class of Offered Certificates
is issued with original issue discount and the rate of accrual of original issue
discount is 21% HEP. No representation is made that any of the Mortgage Loans
will prepay at this rate or any other rate. See "Certain Federal Income Tax
Consequences -- Taxation of Regular Certificates" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements on those employee benefit plans and
individual retirement arrangements to which it applies ("Plan") and on those
persons who are fiduciaries with respect to such Plans. Any Plan fiduciary which
proposes to cause a Plan to acquire any of the Offered Certificates should
consult with counsel with respect to the consequences under ERISA and the Code
of the Plan's acquisition and ownership of such Certificates. See "ERISA
Considerations" in the Prospectus.
The Department of Labor has issued to Prudential Securities
Incorporated an individual prohibited transaction exemption, Prohibited
Transaction Exemption 90-32 (the "Exemption"), which generally exempts from the
application of the prohibited transaction provision of Section 406(a), Section
406(b)(1) and Section 406(b)(2) of ERISA and the excise taxes imposed pursuant
to Sections 4975(a) and (b) of the Code, with respect to the initial purchase,
the holding and the subsequent resale by Plans of certificates in pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of the Exemption. The loans covered by the
Exemption include mortgage loans such as the Mortgage Loans.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction
with an unrelated party;
(2) the rights and interests evidenced by the certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust;
(3) the certificates acquired by the Plan have received a
rating at the time of such acquisition that is one of the three highest
generic rating categories from either Standard & Poor's, Moody's, Duff
& Phelps Credit Rating Co. ("D&P") or Fitch Investors Service, Inc.
("Fitch");
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(4) the Trustee must not be an affiliate of any other member
of the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
Underwriter in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
Seller pursuant to the assignment of the loans to the Trust Estate
represents not more than the fair market value of such loans; the sum
of all payments made to and retained by any Servicer represents not
more than reasonable compensation for such person's services under the
Pooling and Servicing Agreement and reimbursement of such person's
reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
The Trust Estate must also meet the following requirements:
(i) the corpus of the Trust Estate must consist solely of
assets of the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have
been rated in one of the three highest rating categories of Standard &
Poor's, Moody's, Fitch or D&P for at least one year prior to the Plan's
acquisition of certificates; and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than Plans
for at least one year prior to the Plan's acquisition of certificates.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables held in the trust;
provided that, among other requirements, (i) in the case of an acquisition in
connection with the initial issuance of 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; (ii) such fiduciary (or its affiliate) is an obligor with respect to five
percent or less of the fair market value of the obligations contained in the
trust; (iii) the 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 (iv) 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 serviced by the same entity. The
Exemption does not apply to Plans sponsored by the Company, the Certificate
Insurer, the Underwriter, the Trustee, any obligor with respect to Mortgage
Loans included in the Trust Estate constituting more than five percent of the
aggregate unamortized principal balance of the assets in the Trust Estate, or
any affiliate of such parties (the "Restricted Group").
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 90-32 and
the Exemption, and the potential consequences in their specific circumstances,
prior to making an investment in the Offered Certificates. Moreover, each Plan
fiduciary should determine whether under the general fiduciary standards of
investment procedure and diversification an investment in the Offered
Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
RATINGS
It is a condition of the original issuance of the Class A Certificates
that they 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.
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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 security rating assigned to the Offered
Certificates should be evaluated independently of similar security ratings
assigned to other kinds of securities.
Explanations of the significance of such ratings may be obtained from
Moody's Investors Service, Inc., 99 Church Street, New York, New York, 10007 and
Standard & Poor's, a Division of The McGraw-Hill Companies, 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 Offered Certificates.
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Accordingly, many institutions with legal authority to invest in
comparably rated securities may not be legally authorized to invest in the Class
A Certificates.
UNDERWRITING
Under the terms and subject to the conditions set forth in the
Underwriting Agreement for the sale of the Offered Certificates, dated March 28,
1996, the Depositor has agreed to cause the Trust to sell and Prudential
Securities Incorporated (the "Underwriter") has agreed to purchase the Offered
Certificates.
In the Underwriting Agreement, the Underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase the entire principal
amount of each Class of Offered Certificates.
The Underwriter has advised the Depositor that it proposes to offer the
Offered 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 Offered Certificates for whom they may act as
agent. Any dealers that participate with the Underwriter in the distribution of
the Offered 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 Offered Certificates by them or the
Underwriter may be deemed to be underwriting discounts or commissions under the
Securities Act.
Proceeds to the Depositor, including accrued interest, are expected to
be approximately 99.82% of the aggregate principal balance of the Offered
Certificates, before deducting expenses payable by the Depositor in connection
with the Offered Certificates, estimated to be $250,000. In connection with the
purchase and sale of the Offered Certificates, the Underwriter may be deemed to
have received compensation from the Depositor in the form of underwriting
discounts.
The Depositor has agreed to indemnify the Underwriter against certain
liabilities including liabilities under the Securities Act of 1933, as amended.
The Depositor has been advised by the Underwriter that the Underwriter
presently intends to make a market in each Class of Offered Certificates, as
permitted by applicable laws and regulations. The Underwriter is not obligated,
however, to make a market in either Class of Offered Certificates and such
market-making may be discontinued at any time at the sole discretion of the
Underwriter. Accordingly, no assurance can be given as to the liquidity of, or
trading markets for, the Offered Certificates.
The Underwriter is an affiliate of the Depositor.
For further information regarding any offer or sale of the Offered
Certificates pursuant to this Prospectus Supplement and the Prospectus, see
"Plan of Distribution" in the Prospectus.
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REPORT OF EXPERTS
The consolidated financial statements of the Certificate Insurer, MBIA
Insurance Corporation (formerly known as Municipal Bond Investors Assurance
Corporation), as of December 31, 1994 and 1993 and for each of the three years
in the period ended December 31, 1994, appearing in Appendix B of this
Prospectus Supplement have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their report thereon appearing elsewhere herein,
and are included in reliance upon the authority of such firm as experts in
accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Company and the Servicer by Arter &
Hadden, Washington, D.C. and by Steven Gourley, Los Angeles, California, counsel
to the Company and the Servicer. Certain legal matters relating to the Depositor
will be passed upon for the Depositor by Dewey Ballantine, New York, New York.
Certain legal matters relating to insolvency issues and certain federal income
tax matters concerning the Certificates will be passed upon for the Company by
Arter & Hadden, Washington, D.C. Certain legal matters relating to the validity
of the Certificates will be passed upon for the Underwriter by Dewey Ballantine.
Certain legal matters relating to the Certificate Insurer and the Certificate
Insurance Policies will be passed upon for the Certificate Insurer by Kutak
Rock, Omaha, Nebraska.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered First
Alliance Mortgage Loan Trust 1996-1 Mortgage Pass-Through Certificates, Class A
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of DTC,
CEDEL or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets.
Initial settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
asset-backed certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depositary, as the case
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may be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last coupon
payment date to and excluding the settlement date, on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. Payment
will then be made by the Relevant Depositary to the DTC Participant's account
against delivery of the Global Securities. After settlement has been completed,
the Global Securities will be credited to the respective clearing system and by
the clearing system, in accordance with its usual procedures, to the CEDEL
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the CEDEL or Euroclear cash debt will be valued instead as of the actual
settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depositary for the benefit of CEDEL
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective Depositary, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist to
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the CEDEL Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would
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automatically fail on the sale side unless affirmative action is taken. At least
three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear account
in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not a
U.S. Person. This summary does not deal with all aspects of U.S. Federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I-3
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Accrual Period......................................................S-6
Advances...........................................................S-34
Appraised Values...................................................S-22
Available Funds....................................................S-38
Available Funds Cap.................................................S-5
Available Funds Cap Carry-Forward Amount............................S-5
Available Funds Shortfall..........................................S-37
Beneficial Owners..................................................S-11
Book-Entry Certificates............................................S-39
Carry-Forward Amount................................................S-8
Cede...............................................................S-11
CEDEL..............................................................S-11
CEDEL Participants.................................................S-41
Certificate Account................................................S-34
Certificate Insurer................................................S-10
Certificates.......................................................S-33
Chemical...........................................................S-11
Citibank...........................................................S-11
Class A Certificates................................................S-1
Class A Current Interest............................................S-6
Class A Distribution Amount.........................................S-8
Class A Principal Distribution Amount...............................S-7
Class A-1 Certificates..............................................S-1
Class A-1 Original Certificate Principal Balance....................S-5
Class A-1 Pass-Through Rate.........................................S-5
Class A-2 Certificates..............................................S-1
Class A-2 Formula Pass-Through Rate.................................S-5
Class A-2 Original Certificate Principal Balance....................S-5
Class A-2 Pass-Through Rate.........................................S-5
Closing Date........................................................S-1
CLTV................................................................S-3
Company.............................................................S-1
Company's Guidelines...............................................S-16
Compensating Interest..............................................S-11
Cooperative........................................................S-41
Cut-Off Date........................................................S-1
D&P................................................................S-51
Definitive Certificate.............................................S-39
Delinquency Advances...............................................S-10
Depositor...........................................................S-1
DTC................................................................S-11
DTC Participants...................................................S-40
ERISA..............................................................S-51
Euroclear..........................................................S-11
Euroclear Operator.................................................S-41
Euroclear Participants.............................................S-41
European Depositaries..............................................S-11
Excess Subordinated Amount.........................................S-36
Exemption..........................................................S-51
Financial Intermediary.............................................S-39
Fiscal Agent.......................................................S-44
Fitch..............................................................S-51
Fixed Rate Certificates.............................................S-1
Fixed Rate Group....................................................S-1
Fixed Rate Group Available Funds...................................S-38
Fixed Rate Group Servicing Fee.....................................S-11
Fixed Rate Group Total Available Funds.............................S-38
FNMA................................................................S-3
GAAP...............................................................S-45
Insurer Reimbursable Amount........................................S-37
Interest Determination Date........................................S-38
Junior Lien Ratio...................................................S-3
Last Scheduled Payment Date........................................S-30
LIBOR...............................................................S-5
Liquidated Mortgage Loan............................................S-8
LTV.................................................................S-3
Master Loan Transfer Agreements....................................S-17
Modeling Assumptions...............................................S-31
Moody's............................................................S-12
Mortgage Loan Group.................................................S-1
Mortgage Loans......................................................S-1
Mortgaged Properties................................................S-1
Mortgages...........................................................S-1
Mortgagor..........................................................S-29
Net Monthly Excess Cashflow........................................S-37
Notes..............................................................S-20
Offered Certificates................................................S-1
Original Aggregate Loan Balance.....................................S-2
Originator..........................................................S-1
Owner..............................................................S-34
Participants.......................................................S-39
Participating Originators..........................................S-17
Payment Date........................................................S-6
Percentage Interest.................................................S-6
Plan...............................................................S-51
Pooling and Servicing Agreement.....................................S-1
Prepayment.........................................................S-29
Prepayment Assumption..............................................S-31
Realized Loss......................................................S-36
Record Date.........................................................S-6
Reference Banks....................................................S-39
Relevant Depositary................................................S-39
REMIC..............................................................S-12
Remittance Date....................................................S-34
Remittance Period..................................................S-34
Restricted Group...................................................S-52
Reuter Screen LIBO Page............................................S-39
Riegle Act.........................................................S-15
Rules..............................................................S-40
SAP................................................................S-45
Securities..........................................................S-1
Senior Mortgage Loan...............................................S-16
Servicer............................................................S-1
Servicing Fee......................................................S-12
Six Month LIBOR Loans...............................................S-4
SMMEA..............................................................S-13
Specified Subordinated Amount......................................S-35
Standard & Poor's..................................................S-12
Subordinate Certificates............................................S-1
Subordination Deficit...............................................S-9
Subordination Increase Amount......................................S-35
Subordination Reduction Amount.....................................S-36
Terms and Conditions...............................................S-41
Total Available Funds..............................................S-38
Total Monthly Excess Cashflow......................................S-37
Total Monthly Excess Spread........................................S-35
Trust...............................................................S-1
Trustee.............................................................S-1
Underwriter........................................................S-53
Variable Rate Certificates..........................................S-1
Variable Rate Group.................................................S-1
Variable Rate Group Available Funds................................S-38
Variable Rate Group Servicing Fee..................................S-12
Variable Rate Group Total Available Funds..........................S-38
A-1
<PAGE>
APPENDIX B
AUDITED FINANCIAL STATEMENTS FOR THE CERTIFICATE INSURER
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."
/s/ COOPERS & LYBRAND L. L. P.
-------------------------------
New York, New York
February 1, 1995
PAGE 1 OF 27
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
December 31, 1994 December 31, 1993
----------------- -----------------
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
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
-2-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
Years ended December 31
------------------------------
1994 1993 1992
-------- -------- --------
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
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
-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)
Unrealized
Common Stock Additional Cumulative Appreciation
------------ Paid-in Retained Translation (Depreciation)
Shares Amount Capital Earnings Adjustment of Investments
------ ------ --------- -------- ----------- --------------
Balance,
January 1,
1992 100,000 $ 2,500 $776,544 $ 479,707 $ (126) $ 143
Increase in
par value
of common
stock --- 12,500 (12,500) --- --- ---
Net income --- --- --- 213,088 --- ---
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) --- --- --- (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 (474) 2,379
------- ------- -------- ---------- ----- --------
Net income --- --- --- 274,517 --- ---
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) --- --- --- (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 (1,203) 4,840
------- ------- -------- ---------- ----- --------
Net income --- --- --- 276,749 --- ---
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) --- --- --- (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 $ 427 $(47,640)
======= ======= ======== ========== ===== ========
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended December 31
----------------------------------
1994 1993 1992
----------- --------- ---------
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
The accompanying notes are an integral part of the
consolidated financial statements.
- 5 -
<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:
. 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.
. 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").
-6-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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:
-7-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
-8-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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
-9-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 licensed insurance company includes
recognition of the value of the state licenses held
-10-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
. premiums are earned only when the related risk has
expired rather than over the period of the risk;
. acquisition costs are charged to operations as incurred
rather than as the related premiums are earned;
. contingent commissions are accrued when the related
earned premiums are recognized;
. 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;
-11-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
. 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;
. fixed maturity securities are reported at amortized cost
rather than market;
. tax and loss bonds purchased are reflected as admitted
assets as well as payments of income taxes; and
. certain assets designated as "non-admitted assets" are
charged directly against surplus but are reflected as
assets under GAAP.
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:
As of December 31
--------------------------------------
In thousands 1994 1993 1992
---------- ---------- ----------
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
========== ========== ==========
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.
-12-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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.
Gross Gross
Amortized Unrealized Unrealized
In thousands Cost Gains Losses Market Value
- ------------------------------------------------------------------------------
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
========== ======= ======== ==========
-13-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gross Gross
Amortized Unrealized Unrealized
In thousands Cost Gains Losses Market Value
- -----------------------------------------------------------------------------
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
========== ======== ====== ==========
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.
Amortized Market
In thousands Cost Value
- --------------------------------------------------------------------
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
========== ==========
-14-
<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:
Years ended December 31
--------------------------------
In thousands 1994 1993 1992
- -------------------------------------------------------------------------
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
======== ======== ========
Unrealized gains (losses) consist of:
As of December 31
---------------------
In thousands 1994 1993
- --------------------------------------------------------------------------
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
========= ========
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.
-15-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The change in net unrealized gains (losses) consists of:
Years ended December 31
----------------------------------
In thousands 1994 1993 1992
- --------------------------------------------------------------------------
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
======== ======== =======
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 taxes 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.
-16-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
In thousands 1994 1993
- --------------------------------------------------------------------------
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 3,981 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
======== ========
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:
Years ended December 31
----------------------------
In thousands 1994 1993 1992
-----------------------------------------------------------------
Current $58,043 $66,086 $46,585
Deferred 19,082 20,598 8,217
------- ------- -------
Total $77,125 $86,684 $54,802
======= ======= =======
-17-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
Years ended December 31
-----------------------
1994 1993 1992
- ------------------------------------------------------------------
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%
==== ==== ====
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.
-18-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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.
-19-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
As of December 31
----------------------------------------------------------------
1994 1993
------------------------------- -------------------------------
Net Number % of Net Net Number % of Net
Insurance of Issues Insurance Insurance of Issues Insurance
In Force Outstanding In Force In Force Outstanding In Force
--------- ----------- --------- --------- ----------- --------
(in billions) (in billions)
California $ 43.9 2,832 14.3% $ 37.9 2,410 14.2%
Florida 25.4 1,805 8.3 22.9 1,716 8.6
New York 25.0 4,447 8.2 21.5 4,116 8.0
Pennsylvania 19.5 2,108 6.4 17.7 1,889 6.6
Texas 18.6 2,102 6.1 17.5 1,784 6.5
New Jersey 15.0 1,590 4.9 11.9 1,298 4.5
Illinois 14.7 1,139 4.8 12.2 1,120 4.6
Massachusetts 8.6 1,064 2.8 7.4 959 2.8
Ohio 8.3 996 2.7 7.0 915 2.6
Georgia 7.4 978 2.4 5.9 815 2.2
All others 119.6 10,723 39.1 105.4 10,130 39.4
------ ------ ----- ------ ------ -----
$306.0 29,784 100.0% $267.3 27,152 100.0%
====== ====== ===== ====== ====== =====
-20-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31
---------------------------------------------------------------
1994 1993
------------------------------- -------------------------------
Net Number % of Net Net Number % of Net
Insurance of Issues Insurance Insurance of Issues Insurance
In Force Outstanding In Force In Force Outstanding In Force
--------- ----------- --------- --------- ----------- ---------
(in billions) (in billions)
Municipal
General
Obligation $ 84.2 11,029 27.5% $ 72.7 10,310 27.2%
Utilities 56.0 5,087 18.3 50.8 4,640 19.0
Health Care 50.6 2,670 16.5 47.7 2,558 17.8
Special Revenue 22.7 1,291 7.4 20.6 1,153 7.7
Transportation 21.3 1,486 7.0 19.1 1,431 7.1
Industrial
development
and pollution
control
revenue 15.1 1,016 4.9 11.2 1,058 4.2
Higher education 14.0 1,208 4.6 12.7 1,119 4.8
Housing 13.6 2,663 4.5 14.7 2,614 5.5
Other 3.8 124 1.2 2.4 68 0.9
------ ------ ----- ------ ------ -----
281.3 26,574 91.9 251.9 24,951 94.2
------ ------ ----- ------ ------ -----
Non-municipal
Asset/mortgage-
backed 12.8 151 4.2 8.5 94 3.2
Investor-owned
utilities 5.7 2,918 1.9 4.5 2,056 1.7
Other 6.2 141 2.0 2.4 51 0.9
------ ------ ----- ------ ------ -----
24.7 3,210 8.1 15.4 2,201 5.8
------ ----- ----- ------ ------ -----
$306.0 29,784 100.0% $267.3 27,152 100.0%
====== ====== ===== ====== ====== =====
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.
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:
-21-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31
------------------------------------------------
1994 1993
---------------------- ----------------------
Ceded % of Ceded Ceded % of Ceded
Insurance Insurance Insurance Insurance
State In Force In Force In Force In Force
- -------------------------------------------------------------------------
(in billions) (in billions)
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%
===== ===== ===== =====
As of December 31
------------------------------------------------
1994 1993
---------------------- ----------------------
Ceded % of Ceded Ceded % of Ceded
Insurance Insurance Insurance Insurance
Type of Bond In Force In Force In Force In Force
- -------------------------------------------------------------------------
(in billions) (in billions)
Municipal
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%
===== ===== ===== =====
-22-
<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.
-23-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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.
-24-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
-25-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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.
-26-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31,
-----------------------------------------------
1994 1993
--------------------- ---------------------
Carrying Estimated Carrying Estimated
In thousands Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------
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
<PAGE>
APPENDIX C
UNAUDITED FINANCIAL STATEMENTS FOR THE CERTIFICATE INSURER
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
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
---------
PAGE
----
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
- 2 -
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
September 30, 1995 December 31, 1994
------------------ -----------------
(Unaudited) (Audited)
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 45,246 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
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
- 3 -
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands)
Three months ended Nine months ended
September 30 September 30
------------------ -------------------
1995 1994 1995 1994
-------- -------- -------- --------
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
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
- 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)
Unrealized
Common Stock Additional Cumulative Appreciation
--------------- Paid-in Retained Translation (Depreciation)
Shares Amount Capital Earnings Adjustment of Investments
------- ------- -------- ---------- ---------- --------------
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
apprec-
iation 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 shar-
ing agree-
ment with
MBIA Inc. --- --- 9,990 --- --- ---
------- ------- -------- ---------- ------- ---------
Balance,
September 30,
1995 100,000 $15,000 $963,645 $1,285,606 $2,464 $95,189
======= ======= ======== ========== ====== =========
The accompanying notes are an integral part of the consolidated
financial statements.
- 5 -
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Nine months ended
September 30
--------------------
1995 1994
-------- --------
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
The accompanying notes are an integral part of the consolidated
financial statements.
- 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.
- 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).
(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)
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.
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.
2
<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).
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Neither the Certificates, the interest thereon,
nor the underlying Mortgage Loans are guaranteed
by the United States nor do 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
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<PAGE>
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 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.
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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.
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.
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<PAGE>
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 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
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<PAGE>
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 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
9
<PAGE>
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 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
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<PAGE>
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 investors.
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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<PAGE>
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 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.
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<PAGE>
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, Certific- ateholders 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 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."
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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.
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
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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
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.
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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
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
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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."
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
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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.
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.
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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 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
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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 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
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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, 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.
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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.
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
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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 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."
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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.
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
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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 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
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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.
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.
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
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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 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.
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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 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.
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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.
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
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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.
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";
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(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.
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;
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(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:
(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
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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 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
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<PAGE>
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);
(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
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<PAGE>
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 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
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<PAGE>
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.
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
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<PAGE>
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.
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.
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<PAGE>
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.
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.
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<PAGE>
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 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,
41
<PAGE>
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 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."
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<PAGE>
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 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.
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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 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
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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
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."
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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 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
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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.
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.
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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 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
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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 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
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(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 "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
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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 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.
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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."
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,
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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 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
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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
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
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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 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;
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(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");
(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:
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(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;
(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.
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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 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).
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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 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
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(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 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.
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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 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.
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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 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
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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 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
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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.
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 Voting Interests for such
Series may direct the time, method and place of conducting any proceeding for
any remedy available to
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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
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
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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 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.
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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 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.
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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.
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,
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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 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.
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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 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.
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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, "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
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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 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.
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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 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
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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.
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
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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.
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.
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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 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.
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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.
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
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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.
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
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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.
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
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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 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
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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.
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
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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 "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 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."
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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
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.
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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 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
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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 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) 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
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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 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.
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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 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.
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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 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
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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 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
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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 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
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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 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.
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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 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.
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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 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
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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 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.
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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.
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.
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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 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
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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 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
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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.
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."
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
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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
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).
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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.
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
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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 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
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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.
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.
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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.
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
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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."
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.
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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 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.
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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.
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.
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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 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.
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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.
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. ss. 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,
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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.
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
110
<PAGE>
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.
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.
111
<PAGE>
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.
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
Term Page
- ---- ----
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
ERISA ..............................................11, 109
Excess servicing ..................................................105
Extension protection.................................................42
FDIC ...................................................57
FHLBB ...................................................75
FIRREA ...................................................83
<PAGE>
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
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
<PAGE>
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
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
<TABLE>
<CAPTION>
<S> <C>
No dealer, salesman or any other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not berelied upon as having been authorized by the
Company or by the Underwriter. This Prospectus Supplement and the Prospectus do $52,419,000
not constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitationis not qualified to do so or to anyone to whom [GRAPHIC OMITTED]
it its unlawful to make any such offer or solicitation. Neither the delivery
of this 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>
<TABLE>
<CAPTION>
Servicer
TABLE OF CONTENTS
Prospectus Supplement
<S> <C>
Summary...........................................................S-1 <C>
Risk Factors.....................................................S-14 Prudential Securities
The Portfolio of Mortgage Loans..................................S-18 Secured Financing Corporation
Use of Proceeds..................................................S-20
The Mortgage Loan Pool...........................................S-20 Depositor
Prepayment and Yield Considerations..............................S-29
Additional Information...........................................S-33
Description of the Offered Certificates..........................S-33
The Company......................................................S-43
The Certificate Insurance Policies and the Certificate Insurer...S-43 $20,541,000 7.34% Class A-1
The Pooling and Servicing Agreement..............................S-46 Fixed Rate Group Certificates
Certain Federal Income Tax Consequences..........................S-51
ERISA Considerations.............................................S-51 $31,878,000 Class A-2
Ratings..........................................................S-52 Variable Rate Group Certificates
Legal Investment Considerations..................................S-53
Underwriting.....................................................S-53
Report of Experts................................................S-54
Certain Legal Matters............................................S-54
Global Clearance, Settlement and
Tax Documentation Procedures.............................Annex I Mortgage Loan
Index to Location of Principal Defined Terms......................A-1 Pass-Through Certificates
Audited Financial Statements for the Certificate Insurer..........B-1 Series 1996-1
Unaudited Financial Statements for the Certificate Insurer........C-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....................................28 PROSPECTUS SUPPLEMENT
Credit Support.....................................................43
Prepayment and Yield Considerations................................48 ------------------------------------------
Use of Proceeds....................................................52
The Depositor......................................................52
Underwriting Guidelines............................................52
Servicing of the Mortgage Loans and Contracts......................54
The Pooling and Servicing Agreement................................65
Certain Legal Aspects of the Mortgage Loans and Contracts..........68 Prudential Securities Incorporated
Certain Federal Income Tax Consequences............................81
ERISA Considerations..............................................106 March 28, 1996
Legal Investment..................................................109
Plan of Distribution..............................................110
Legal Matters.....................................................111
Rating............................................................111
Additional Information............................................112
Index of Significant Definitions..................................113
</TABLE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the related Securities, whether or not participating
in the distribution thereof, may be required to deliver this Prospectus and the
related Prospectus Supplement. This delivery requirement is in addition to the
obligation of dealers to deliver a Prospectus Supplement and Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
