PROSPECTUS SUPPLEMENT
(To Prospectus dated December 16, 1996)
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Life Financial Services Trust 1996-1
$55,000,000 6.95% Class A Certificates
Life Savings Bank, Federal Savings Bank
(Seller and Servicer)
Norwest Bank Minnesota, National Association
Trustee and Back-Up Servicer
Prudential Securities Secured Financing Corporation
(Depositor)
Mortgage Pass-Through Certificates, Series 1996-1
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The Mortgage Pass-Through Certificates Series 1996-1 will consist of one
class of Certificates (the "Class A Certificates" or the "Certificates").
The Class A Certificates will bear interest at a rate (the "Class A
Pass-Through Rate") equal to 6.95% per annum, payable monthly at
one-twelfth the annual rate.
The Certificates will evidence in the aggregate all of the beneficial
ownership interests in a trust fund (the "Trust Fund") consisting primarily
of a pool of fixed-rate, closed-end, monthly pay, generally fully
amortizing, residential home equity loans secured by first or second lien
mortgages or deeds of trust on real properties (the "Mortgage Loans") held
by Life Financial Services Trust 1996-1 (the "Trust"). The Certificates
also will be entitled to the benefits of the Reserve Account described
herein.
The Trust will be created pursuant to a Pooling and Servicing Agreement
(the "Pooling and Servicing Agreement") among Life Savings Bank, Federal
Savings Bank, as seller and servicer (the "Servicer"), Prudential
Securities Secured Financing Corporation, as depositor (the "Depositor"),
and Norwest Bank Minnesota, National Association, as trustee and backup
servicer (the "Trustee"). On the Issue Date (as defined herein) Mortgage
Loans (the "Initial Mortgage Loans") having an aggregate Principal Balance
(determined as of the applicable Cut-Off Date, defined herein) of between
approximately $44,000,000 to $55,000,000 will be transferred to the Trust
Fund (as defined herein). The Pooling and Servicing Agreement provides that
additional mortgage loans (the "Subsequent Mortgage Loans") having an
aggregate Principal Balance equal to the difference between $55,000,000 and
the aggregate Principal Balance as of the applicable Cut-Off Date of the
Initial Mortgage Loans (the "Original Pre-Funded Amount") may be purchased
by the Trust from the Depositor from time to time on or before February 13,
1997 from funds deposited in the Pre-Funding Account (as defined herein) on
the Closing Date from proceeds of the sale of the Class A Certificates.
The Depositor will cause MBIA Insurance Corporation (the "Certificate
Insurer") to issue a certificate guaranty insurance policy (the
"Certificate Insurance Policy") for the benefit of the Class A
Certificateholders pursuant to which it will guarantee certain payments to
the Class A Certificateholders as described herein.
[MBIA Logo]
Prospective Investors should consider the factors set forth under "Risk Factors"
beginning on page S-16 herein and beginning on page 12 in the Prospectus. (Cover
continued on next page)
THESE SECURITIES DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR,
THE SELLER, THE SERVICER, THE CERTIFICATE INSURER (OTHER THAN WITH RESPECT
TO THE CERTIFICATE INSURANCE POLICY), THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THESE SECURITIES NOR THE
UNDERLYING MORTGAGE LOANS WILL BE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY
OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENT-
ATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Class A Certificates will be purchased by Prudential Securities
Incorporated (the "Underwriter") from the Depositor and will be offered by
the Underwriter from time to time to the public in negotiated transactions
or otherwise at varying prices to be determined at the time of sale.
Proceeds to the Depositor from the sale of the Class A Certificates will be
approximately $54,719,156.25, before deducting expenses payable by the
Depositor estimated to be approximately $350,000 in the aggregate, and
before adding accrued interest. See "Plan of Distribution" in this
Prospectus Supplement.
The Class A Certificates are offered by the Underwriter when, as and if
issued, subject to delivery by the Depositor and acceptance by the
Underwriter, to prior sale and to withdrawal, cancellation or modification
of the offer without notice. It is expected that the Class A Certificates
will be available for delivery in book-entry form only through the
facilities of The Depository Trust Company, in the United States or Cedel
Bank, societe anonyme or the Euroclear System in Europe on or about
December 18, 1996.
Prudential Securities Incorporated
December 16, 1996
<PAGE>
(Cover continued from previous page)
Distributions in respect of principal and interest will be made on the 15th
day of each month or, if the 15th day is not a Business Day, on the next
succeeding Business Day, commencing on January 15, 1997 (each, a
"Distribution Date"), to the holders of Certificates to the extent
described herein. On each Distribution Date, the amount of interest
distributed in respect of the Class A Certificates will equal the interest
accrued at the Class A Pass-Through Rate on the Class A Principal Balance
during the prior calendar month, and will be calculated based on a 360-day
year consisting of twelve 30-day months.
If purchased at a price other than par, a Class A Certificate's yield to
maturity will be sensitive to the rate and timing of principal payments
(including prepayments) on the Mortgage Loans, some of which may be prepaid
at any time without penalty. Investors in the Class A Certificates should
consider the associated risks, including, in the case of Class A
Certificates purchased at a discount (or premium), the risk that a slower
(or faster) than anticipated rate of payments in respect of principal
(including prepayments) on the Mortgage Loans could result in an actual
yield that is lower than anticipated. See "Description of the
Certificates-Flow of Funds" in this Prospectus Supplement and "Prepayment
and Yield Considerations" in this Prospectus Supplement and in the
Prospectus.
There is currently no secondary market for the Class A Certificates and
there can be no assurance that a secondary market will develop or, if it
does develop, that it will provide Certificateholders with liquidity of
investment at any particular time or for the life of the Certificates.
No election will be made to treat the Trust as a real estate mortgage
investment conduit for federal income tax purposes. See "Summary Terms of
the Certificates - Federal Income Tax Status" and "Certain Federal Income
Tax Considerations" in this Prospectus Supplement and "Certain Federal
Income Tax Consequences - Non-REMIC Certificates" in the Prospectus.
The Class A Certificates described herein represent a class of a separate
series of Certificates being offered by the Depositor from time to time
pursuant to the Prospectus dated December 16, 1996 accompanying this
Prospectus Supplement. The Prospectus shall not be considered complete
without this Prospectus Supplement. Any prospective investor should not
purchase any Class A Certificates described herein unless it shall have
received the Prospectus and this Prospectus Supplement. The Prospectus
contains important information regarding this offering which is not
contained herein, and prospective investors are urged to read the
Prospectus and this Prospectus Supplement in full.
--------------------
Until ninety days from the date of this Prospectus Supplement, all dealers
effecting transactions in the Class A Certificates, whether or not
participating in this distribution, may be required to deliver this
Prospectus Supplement and the Prospectus. This is in addition to the
obligation of dealers to deliver a Prospectus Supplement and the Prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
SUMMARY TERMS OF THE CERTIFICATES
The following is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and
in the Prospectus. Capitalized terms used herein and not otherwise defined
herein have the meanings assigned elsewhere in this Prospectus Supplement
and the Prospectus. See "Index of Significant Prospectus Supplement
Definitions" herein and "Index of Significant Definitions" in the
Prospectus.
Title of Securities............... Life Financial Services Trust 1996-1,
Mortgage Pass-Through Certificates,
Series 1996-1, Class A (the
"Certificates").
Trust............................. Life Financial Services Trust 1996-1, a
trust to be formed under the
laws of the State of New York.
Depositor......................... Prudential Securities Secured Financing
Corporation (the "Depositor"). See
"The Depositor" in the Prospectus.
Seller and Servicer............... The Depositor will acquire the Mortgage
Loans from Life Savings Bank, Federal
Savings Bank (in its capacity as the
seller of the Mortgage Loans, the
"Seller"). Also, Life Savings Bank,
Federal Savings Bank will (i) act as
servicer for the Trust Fund (in such
capacity, the "Servicer") and, as such,
will provide customary servicing
functions with respect to the Mortgage
Loans pursuant to a Pooling and
Servicing Agreement dated as of November
30, 1996 (the "Pooling and Servicing
Agreement") among the Depositor, the
Seller, the Servicer and Norwest Bank
Minnesota, National Association, a
national banking association, as trustee
and backup Servicer, (ii) provide
certain reports to the Trustee and (iii)
make certain advances to the extent
described in this Prospectus Supplement.
The obligations of the Servicer with
respect to the Certificates will be
limited to its contractual servicing
obligations. See "The Trustee" in this
Prospectus Supplement and "Servicing of
the Mortgage Loans and Contracts--The
Servicer" in the Prospectus.
Trustee and Back-Up Servicer...... Norwest Bank Minnesota, National
Association (in such capacities, the
"Trustee" and the "Back-Up Servicer,"
respectively).
Certificates Offered.............. The Certificates will consist of the
Class A Certificates only (the "Class A
Certificates").
Cut-Off Date...................... The close of business on November 30, 1996
(the "Cut-Off Date"), or with respect to
Mortgage Loans originated after November
30, 1996, the applicable date of
origination.
Statistical
Calculation Date................. November 15, 1996.
Issue Date........................ On or about December 18, 1996
(the "Issue Date").
First Distribution Date........... January 15, 1997. Distributions on the
Certificates will be made on the 15th
day of each month (or, if such 15th day
is not a Business Day, on the next
succeeding Business Day) (each, a
"Distribution Date"). "Business Day"
shall mean any day other than a Saturday
or Sunday or any day on which banking
institutions located in the States of
California, Minnesota or New York are
authorized or obligated by law or
executive order to close.
Record Date....................... All distributions, other than the final
distribution on the Certificates, will
be made by or on behalf of the Trustee
to the persons in whose names the
Certificates are registered at the close
of business on the last business day of
the month preceding the month in which
the related Distribution Date occurs
(such date, the "Record Date").
Description of Certificates....... The Trust Fund will be formed and the
Certificates will be issued pursuant to
the Pooling and Servicing Agreement. The
Certificates will represent the entire
beneficial ownership interest in the
Trust Fund. The assets of the Trust Fund
will consist primarily of a pool of
Mortgage Loans (the "Mortgage Pool") as
described more fully herein. On the
Issue Date, Mortgage Loans having an
aggregate Principal Balance as of the
applicable Cut-Off Date of between
approximately $44,000,000 and
$55,000,000 will be purchased by the
Trust from the Depositor (such Mortgage
Loans, the "Initial Mortgage Loans").
The Pooling and Servicing Agreement
provides that additional mortgage loans
(the "Subsequent Mortgage Loans") having
an aggregate Principal Balance equal to
the difference between $55,000,000
(i.e., the original principal amount of
the Class A Certificates) and the
aggregate Principal Balance as of the
applicable Cut-Off Date of the Initial
Mortgage Loans (the "Original Pre-Funded
Amount") may be purchased by the Trust
from the Depositor from time to time on
or before February 13, 1997 from funds
deposited in the Pre-Funding Account (as
defined herein) on the Closing Date from
proceeds of the sale of the Class A
Certificates. See "The Mortgage Pool" in
this Prospectus Supplement. The
Certificates also will be entitled to
the benefits of the Reserve Account
described herein. See "Description of
the Certificates-- Reserve Account". In
addition, the Depositor will cause MBIA
Insurance Corporation (the "Certificate
Insurer") to issue a certificate
guaranty insurance policy (the
"Certificate Insurance Policy") relating
to the Certificates for the benefit of
the Certificateholders, pursuant to
which it will guarantee certain payments
to the Certificateholders as described
herein.
Book-Entry Form. The Class A Certificates
are sometimes referred to in this
Prospectus Supplement as "Book-Entry
Certificates." No person acquiring an
interest in the Book-Entry Certificates
(a "Beneficial Owner") will be entitled
to receive a definitive certificate
representing such person's interest in
the Trust Fund, except under the limited
circumstances described herein.
Beneficial Owners may elect to hold
their interests through The Depository
Trust Company ("DTC"), in the United
States, or Centrale de Livraison des
Valeurs Mobiliers, societe anonyme
("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. In general,
"Certificateholder" or "Holder" shall
mean each Person in whose name a
Certificate is registered in the
Certificate Register and the Book-Entry
Certificates initially will be
represented by a single certificate
registered in the name of Cede & Co.
("Cede"), which will be the "Holder" or
"Certificateholder" of such
Certificates, as the nominee of DTC or
CEDEL or Euroclear (collectively, the
"European Depositories"). 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 The Chase
Manhattan Bank ("Chase"), the relevant
depositories of CEDEL or Euroclear,
respectively, and each participating
member of DTC. The rights of Beneficial
Owners may only be exercised through DTC
and its participating organizations,
except as otherwise specified herein.
See "Description of the Certificates --
Book-Entry Registration" and " --
Definitive Certificates" in this
Prospectus Supplement.
Denominations..................... The Class A Certificates initially will be
issued in book-entry form, in
denominations of $1,000 initial
principal balance and integral multiples
of $1,000 in excess thereof (except for
one Certificate which may be issued in a
lesser amount).
The Mortgage Pool................. The Mortgage Loans to be included in the
Trust Fund will be fixed- rate, closed-end,
monthly pay, generally fully amortizing,
residential home equity loans secured by
first or second mortgages or deeds of trust
(the "Mortgages") on real properties (the
"Mortgaged Properties"). The Mortgage Loans
have original terms to stated maturity
ranging from 144 months to 360 months and
have an aggregate Principal Balance as of
the Statistical Calculation Date of
approximately $27,646,202.91 (the
"Statistical Calculation Date Aggregate
Principal Balance"). Unless otherwise noted,
all statistical percentages in this
Prospectus Supplement are approximate and
measured by the aggregate Principal Balances
of the related Mortgage Loans in relation to
the Statistical Calculation Date Aggregate
Principal Balance, in each case as of the
Statistical Calculation Date. The Depositor
expects that Mortgage Loans that were not
contained in the pool of Mortgage Loans as
of the Statistical Calculation Date will be
added to the pool of Mortgage Loans
delivered to the Trustee on the Issue Date
so that the aggregate Principal Balance of
the Initial Mortgage Loans as of the
applicable Cut-Off Date will be between
approximately $44,000,000 and $55,000,000.
While the statistical distribution of the
characteristics for the pool of Mortgage
Loans delivered on the Issue Date may vary
somewhat from the statistical distribution
of such characteristics for the preliminary
pool of Mortgage Loans presented in this
Prospectus Supplement, the Depositor does
not believe that the characteristics of the
pool of Mortgage Loans delivered on the
Issue Date will differ materially, except
that up to 30.5% of such Mortgage Loans may
be secured by Mortgaged Properties located
in California.
The monthly payments for the Mortgage Loans
occur throughout a month, although most due
dates occur on the first day of each month
(each, a "Due Date"). See "The Mortgage
Pool" herein. See "Certain Legal Aspects of
the Mortgage Loans and Contracts -- The
Mortgage Loans" in the Prospectus.
The Mortgage Loans were originated and
underwritten, or purchased and
reunderwritten, by the Seller in accordance
with the underwriting standards described in
this Prospectus Supplement under "The Seller
and the Servicer." Approximately 25.2% of
the Mortgage Loans by Statistical
Calculation Date Aggregate Principal Balance
are secured by Mortgaged Properties located
in California. See "Risk Factors--
Geographic Concentration" in this Prospectus
Supplement. At least 45% of the Mortgage
Loans will be secured by liens on Mortgaged
Properties in which the borrowers have no
equity therein (i.e., the related combined
loan-to-value ratios exceed 100%) at the
time of origination of such Mortgage Loans.
See "Risk Factors - Underwriting Standards,
Limited Operating History and Potential
Delinquencies."
The Subsequent Mortgage Loans to be
purchased by the Trust, if available, will
be originated and underwritten or purchased
and reunderwritten by the Seller, sold by
the Seller to the Depositor and then sold by
the Depositor to the Trust. The Pooling and
Servicing Agreement will provide that the
Subsequent Mortgage Loans, as well as all
Mortgage Loans following the conveyance of
such Subsequent Mortgage Loans to the Trust,
must conform to certain specified
characteristics. See "The Mortgage Pool--
Conveyance of Subsequent Mortgage Loans" in
this Prospectus Supplement.
The Trust will be obligated to purchase the
Subsequent Mortgage Loans from time to time
on or before February 13, 1997 subject to
the availability thereof. In connection with
each purchase of Subsequent Mortgage Loans,
the Trust will be required to pay to the
Depositor a cash purchase price equal to
100% of the principal amount thereof from
the Pre-Funding Account. Under the Pooling
and Servicing Agreement, the Depositor will
be obligated to sell Subsequent Mortgage
Loans to the Trust and the Trust will be
obligated, subject to the satisfaction of
certain conditions described herein, to
purchase such Subsequent Mortgage Loans. The
Depositor will designate as a cut-off date
(each a "Subsequent Cut-Off Date") the first
day of the month in which Subsequent
Mortgage Loans will be conveyed by the
Depositor to the Trust (each a "Subsequent
Transfer Date") during the Pre-Funding
Period (as defined herein). The Trust may
purchase the Subsequent Mortgage Loans only
from the Depositor and not from any other
person. See "The Mortgage Pool -- Conveyance
of Subsequent Mortgage Loans" in this
Prospectus Supplement.
Original Class A
Principal Balance ................ $55,000,000.
Class A Pass-Through Rate......... 6.95% per annum, plus with respect to any
Distribution Date after the Clean-up Call
Date (defined herein), 0.50% (the "Class A
Pass-Through Rate").
Interest.......................... Interest will accrue on the Class A
Certificates at the Class A Pass-Through
Rate on the Class A Principal Balance during
each calendar month, and will be calculated
on the basis of a 360-day year consisting of
twelve 30-day months (such interest, the
"Current Interest"). The amount of interest
payable will generally be equal to the
applicable Current Interest, reduced in each
case by an amount equal to the aggregate of
the Prepayment Interest Shortfalls (as
defined herein) and the Civil Relief Act
Interest Shortfalls (as defined herein)
(together, the "Mortgage Loan Interest
Shortfalls"), if any, for such Distribution
Date to the extent not covered by the
Servicing Fee described herein. The amount
of interest (as described above) payable
with respect to the Class A Certificates on
any Distribution Date constitutes the "Class
A Interest Distribution Amount" and shall be
distributable, to the extent of available
funds, on the 15th day of each month, or if
such day is not a Business Day, the
following Business Day, commencing January
15, 1997 (each, a "Distribution Date").
Mortgage Loan Interest Shortfalls will not
be covered by or under the Certificate
Insurance Policy. See "Description of the
Certificates" in this Prospectus Supplement.
Principal......................... The Original Class A Principal Balance
(as defined herein) represents the maximum
specified dollar amount of principal to
which the Holders of the Class A
Certificates are entitled from the future
cash flow on the assets in the Trust Fund,
the Reserve Account and the Certificate
Insurance Policy. The "Class A Principal
Balance" at any time is equal to the
Original Class A Principal Balance minus the
aggregate, cumulative amounts actually
distributed as principal to the Class A
Certificateholders on all Distribution
Dates. See "Description of the
Certificates-- Flow of Funds" and "The
Certificate Insurance Policy and the
Certificate Insurer" in this Prospectus
Supplement.
The Holders of Class A Certificates are
entitled to receive certain monthly
distributions of principal on each
Distribution Date which generally reflect
actual collections of principal received
during the prior calendar month.
The "Class A Principal Distribution Amount"
for any Distribution Date will be the lesser
of:
(a) the excess of (i) the sum, as of such
Distribution Date, of (A) the Available
Amount plus (B) any amounts on deposit in
and available to be withdrawn from the
Reserve Account, plus (C) any Insured
Payment over (ii) the Class A Interest
Distribution Amount; and
(b) the sum, without duplication, of:
(i) with respect to each Mortgage
Loan, (A) all scheduled installments of
principal actually received, and the
principal portion of all Periodic Advances
actually made, during the calendar month
preceding the Distribution Date (the "Due
Period") and (B) all prepayments,
curtailments and other unscheduled receipts
of principal other than Liquidation
Proceeds,
(ii) the Principal Balance of each
Mortgage Loan that either was repurchased by
the Seller or by the Depositor or purchased
by the Servicer with respect to the related
Distribution Date, to the extent such
Principal Balance is actually received by
the Trustee,
(iii) any Substitution Adjustments
delivered by the Seller or the Servicer with
respect to the related Servicer Distribution
Date in connection with a substitution of a
Mortgage Loan, to the extent such
Substitution Adjustments are actually
received by the Trustee,
(iv) with respect to each Mortgage
Loan that became a Liquidated Mortgage Loan
during the prior calendar month, the
Principal Balance of such Mortgage Loan
immediately prior to the time when such
Mortgage Loan became a Liquidated Mortgage
Loan,
(v) any moneys released from the
Pre-Funding Account as a prepayment of the
Class A Certificates on or prior to the
Distribution Date in February 1997, and
(vi) the proceeds received by the
Trustee of any termination of the Trust (to
the extent such proceeds relate to
principal).
In no event will the Class A Principal
Distribution Amount with respect to any
Distribution Date be (x) less than zero or
(y) greater than the then outstanding Class
A Principal Balance.
With respect to any Distribution Date, the
sum of the Class A Interest Distribution
Amount and the Class A Principal
Distribution Amount that would be calculated
pursuant to (b) above with respect to such
Distribution Date, is the "Class A Formula
Distribution Amount". The "Available Amount"
for any Distribution Date equals (i) the
Servicer Distribution Amount for such
Distribution Date plus any other amount the
Servicer, the Seller, the Depositor or the
Trustee is required to deposit in the
Certificate Account on or prior to such
Distribution Date (other than from the
Reserve Account or Insured Payments) minus
(ii) the fee due the Trustee and the premium
amount due the Certificate Insurer.
With respect to any Distribution Date, the
excess of the Class A Formula Distribution
Amount over the Available Amount with
respect to such Distribution Date is the
"Credit Enhancement Distribution Amount" for
such Distribution Date.
The actual amount distributed with respect
to the Class A Certificates on any
Distribution Date is the "Class A
Distribution Amount" for such Distribution
Date.
A defaulted Mortgage Loan will be deemed a
"Liquidated Mortgage Loan" upon the first to
occur of (i) such Mortgage Loan becoming 120
days delinquent or (ii) when the Servicer
has determined that all amounts that it
expects to recover on such Mortgage Loan
have been recovered. A loss on a Liquidated
Mortgage Loan (a "Liquidated Loan Loss")
will be recovered by the Holders of the
Class A Certificates on the Distribution
Date which immediately follows the event of
loss. Such distribution will be in the form
of an Insured Payment if not covered by
withdrawals from the Reserve Account or
otherwise available from the Available
Amount. Subject to timely receipt of a
proper notification by the Certificate
Insurer, the Certificate Insurer will insure
the timely payment of interest and the
ultimate payment of principal on the Class A
Certificates. See "The Certificate Insurance
Policy and the Certificate Insurer" in this
Prospectus Supplement.
The "Principal Balance" of any Mortgage
Loan as of any date of determination is the
outstanding principal balance of such
Mortgage Loan as of such date of
determination after giving effect to
prepayments received prior to the end of the
related Due Period, any reductions as a
result of a bankruptcy proceeding incurred
prior to the related Due Date and the
payment of principal due on such Due Date
and irrespective of any delinquency in
payment by the related Mortgagor. The
Principal Balance of a Mortgage Loan which
becomes a Liquidated Mortgage Loan on or
prior to the related Due Date shall be zero.
Pre-Funding Account............... On the Issue Date the Trustee will deposit
the Original Pre-Funded Amount in the
Pre-Funding Account. Such amount will be
funded from the sale of the Class A
Certificates, and may be used to acquire
Subsequent Mortgage Loans during the period
(the "Pre-Funding Period") from the Issue
Date until the earliest of (i) the date on
which the amount on deposit in the
Pre-Funding Account is less than $100,000,
(ii) the date on which an Event of Default
occurs under the Pooling and Servicing
Agreement, or (iii) February 13, 1997. The
amount on deposit in the Pre-Funding Account
will be reduced during the Pre-Funding
Period by the amount thereof used to
purchase Subsequent Mortgage Loans in
accordance with the Pooling and Servicing
Agreement. The Depositor expects that the
Original Pre- Funded Amount will be reduced
to less than $100,000 by February 13, 1997.
Any amount remaining in the Pre-Funding
Account at the end of the Pre-Funding Period
will be used to prepay the Class A
Certificates.
Capitalized Interest
Account......................... On the Closing Date the Trustee will be
required to deposit a portion of the
proceeds of the sale of the Class A
Certificates in an account (the "Capitalized
Interest Account") in the name of the
Trustee on behalf of the Trust and the
Certificate Insurer. The amount deposited
therein will be used, as necessary, by the
Trustee during the Pre- Funding Period to
fund the aggregate amount of interest
accruing during the related Due Period at
the Class A Pass-Through Rate on the amount
by which the Class A Principal Balance
exceeds the aggregate Principal Balance of
the Initial Mortgage Loans as of the Cut-Off
Date. Any amounts remaining in the
Capitalized Interest Account on the
Distribution Date which follows the end of
the Pre-Funding Period and not used for such
purposes are required to be paid directly to
the Seller on such Distribution Date.
Credit Enhancement................ The credit enhancement provided for the
benefit of the Class A Certificateholders
consists of (a) drawings on the Reserve
Account and, if adequate funds do not exist
therein and (b) drawings on the Certificate
Insurance Policy. See "Description of the
Certificates--Reserve Account."
The Reserve Account
On the Issue Date, an initial cash deposit
in an amount required by the Certificate
Insurer will be made into a reserve account
(the "Reserve Account") to be maintained
with the Trustee. The Reserve Account will
not be a part of the Trust Fund but will be
held in trust by the Trustee for the benefit
of the Certificateholders and the
Certificate Insurer.
On each Distribution Date, the Trustee will
deposit into the Reserve Account the cash,
if any, remaining after payment of interest
and principal to the holders of the
Certificates as described above under
"--Interest" and "--Principal," and payment
of Trust expenses and certain amounts
reimbursable to the Servicer and the
Certificate Insurer, until the aggregate
amount then on deposit in the Reserve
Account equals the amount required by the
Certificate Insurer. With respect to the
Certificates, the Pooling and Servicing
Agreement generally provides that, subject
to certain floors and triggers, the amount
required to be on deposit in the Reserve
Account (the "Required Reserve Account
Level") may be reduced or eliminated. In
addition, certain triggers or conditions may
cause the Required Reserve Account Level to
be increased. Funds on deposit in the
Reserve Account may be withdrawn to make
payments of the Credit Enhancement
Distribution Amount. Withdrawals from the
Reserve Account will be replenished from the
flow of funds. See "Description of the
Certificates - Flow of Funds." Subject to
certain limitations and requirements
described in the Pooling and Servicing
Agreement, distributions may be made by the
Trustee to the Seller only from amounts on
deposit in the Reserve Account in excess of
the Required Reserve Account Level. Amounts
on deposit in the Reserve Account will be
invested in Permitted Investments. See
"Description of the Certificates -- Reserve
Account."
The Seller will not be required to refund
any amounts previously properly distributed
to it, regardless of whether there are
sufficient funds on a subsequent
Distribution Date to make a full
distribution to Holders of the Class A
Certificates on such Distribution Date.
The Certificate Insurance Policy.
The Class A Certificateholders will have the
benefit of the Certificate Insurance Policy,
discussed more fully below. See "The
Certificate Insurance Policy and the
Certificate Insurer" herein and "Credit
Support -- Other Credit Enhancement" in the
Prospectus.
The Certificate Insurer........... MBIA Insurance Corporation (the "Certifi-
cate Insurer"). See "The Certificate
Insurance Policy and the Certificate
Insurer" in this Prospectus Supplement.
Certificate Insurance
Policy.......................... The Certificate Insurer will issue a
Certificate Guaranty Insurance Policy (the
"Certificate Insurance Policy") with respect
to the Class A Certificates, pursuant to
which it will irrevocably and
unconditionally guaranty payment of Insured
Payments to the Trustee for the benefit of
the Holders of the Class A Certificates,
assuming timely receipt of proper
notification by the Certificate Insurer. On
any Distribution Date, the Certificate
Insurer will generally be required to make
available to the Trustee the amount, if any,
by which the Credit Enhancement Distribution
Amount exceeds amounts on deposit in and
available to be withdrawn from the Reserve
Account. See "Description of the
Certificates-- Reserve Account" in this
Prospectus Supplement. The Certificate
Insurance Policy does not guarantee the
Class A Certificates any specified rate of
prepayments. Mortgage Loan Interest
Shortfalls will not be covered under the
Certificate Insurance Policy. "Insured
Payment" has the meaning set forth under the
heading the "Certificate Insurance Policy
and the Certificate Insurer." The
Certificate Insurer will be entitled to
reimbursement for all Insured Payments.
Servicing of the Mortgage
Loans........................... The Servicer will be obligated to service
and administer the Mortgage Loans in
accordance with the Pooling and Servicing
Agreement and to cause the Mortgage Loans to
be serviced with the same care as it
customarily employs in servicing and
administering mortgage loans for its own
account, in accordance with accepted
mortgage servicing practices of prudent
lending institutions, and giving due
consideration to the Certificate Insurer's
and the Certificateholders' reliance on the
Servicer.
Periodic Advances................. Subject to the Servicer's determination
that such action would not constitute a
Nonrecoverable Advance (as defined herein),
the Servicer is required to deposit into the
Collection Account no later than the close
of business on the 10th day of the month in
which the related Distribution Date occurs
(or if such 10th day is not a Business Day,
the Business Day immediately preceding such
10th day) (the "Servicer Distribution Date")
an amount equal to the sum of (a) Monthly
Payments on each Mortgage Loan due by the
related Due Date but not received by the
Servicer as of the close of business on the
Business Day immediately preceding such
Servicer Distribution Date, net of the
Servicing Fee, and (b) with respect to each
REO Property which was acquired during or
prior to the related Due Period and as to
which an REO Disposition did not occur
during the related Due Period, an amount
equal to the excess, if any, of interest on
the Principal Balance of the Mortgage Loan
related to such REO Property at the related
Mortgage Interest Rate, net of the Servicing
Fee, for the most recently ended Due Period
over the net income from the REO Property to
be transferred to the Certificate Account
for such Distribution Date pursuant to the
Pooling and Servicing Agreement (the
"Periodic Advance"). Such Periodic Advances
by the Servicer are reimbursable to the
Servicer subject to certain conditions and
restrictions and are intended to provide
both sufficient funds for the payment of
interest and scheduled principal to the
Holders of the Class A Certificates and to
pay the premium due the Certificate Insurer.
In the event that, notwithstanding the
Servicer's good faith determination at the
time such Periodic Advance was made that it
would not be a Nonrecoverable Advance, such
Periodic Advance becomes a Nonrecoverable
Advance, the Servicer will be entitled to
reimbursement therefor from the Trust Fund.
See "Description of the
Certificates--Payments on the Mortgage
Loans" in this Prospectus Supplement.
Prepayment Interest
Shortfalls...................... Not later than the close of business on
each Servicer Distribution Date prior to the
related Distribution Date, the Servicer is
required to remit to the Trustee an amount
equal to the lesser of (a) the aggregate of
the Prepayment Interest Shortfalls for the
related Distribution Date resulting from
principal prepayments in full or in part
during the related Due Period and (b) its
aggregate Servicing Fees received in the
related Due Period and shall not have the
right to reimbursement therefor (the
"Compensating Interest"). With respect to
any Distribution Date and any Mortgage Loan
for which a prepayment in full or in part
was received, the "Prepayment Interest
Shortfall" will be an amount equal to the
excess, if any, of (a) 30 days' interest on
the outstanding Principal Balance of such
Mortgage Loans at a per annum rate equal to
the rate borne by the related Mortgage Loan
(the "Mortgage Interest Rate") (or at such
lower rate as may be in effect for such
Mortgage Loan because of application of the
Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Civil Relief Act")),
minus the rate at which the Servicing Fee is
calculated, over (b) the amount of interest
actually remitted by the Mortgagor (as
defined herein) in connection with such
principal prepayment in full or in part less
the Servicing Fee for such Mortgage Loan in
such month. Insured Payments do not cover
Prepayment Interest Shortfalls.
Civil Relief Act Interest
Shortfalls...................... The reduction, if any, in interest
payable on the Mortgage Loans attributable
to Civil Relief Act Interest Shortfalls will
be borne by the Class A Certificateholders
and will not be covered by payments from the
Servicer, the Certificate Insurance Policy
or otherwise. See "Risk Factors--
Limitations on Interest Payments and
Foreclosures."
Servicing Advances................ Subject to the Servicer's determination
that such action would not constitute a
Nonrecoverable Advance and that a prudent
mortgage lender would make a like advance if
it or an affiliate owned the related
Mortgage Loan, the Servicer is required to
advance amounts with respect to the Mortgage
Loans ("Servicing Advances") constituting
"out-of-pocket" costs and expenses relating
to (a) the preservation, restoration and
protection of the Mortgaged Property, (b)
any enforcement or judicial proceedings,
including foreclosures, and (c) certain
other customary amounts described in the
Pooling and Servicing Agreement. Such
Servicing Advances by the Servicer are
reimbursable to the Servicer subject to
certain conditions and restrictions. In the
event that, notwithstanding the Servicer's
good faith determination at the time such
Servicing Advance was made, that it would
not be a Nonrecoverable Advance, in the
event such Servicing Advance becomes a
Nonrecoverable Advance, the Servicer will be
entitled to reimbursement therefor from
amounts received on the related Mortgage
Loan.
Servicing Fee..................... The Servicer is entitled to a servicing fee
of 1.00% per annum of the Scheduled
Principal Balance of each Mortgage Loan less
prepayments received (the "Servicing Fee"),
calculated and payable monthly from the
interest portion of scheduled monthly
payments, liquidation proceeds and certain
other proceeds.
Optional Termination by the
Servicer or the Certificate
Insurer......................... The Servicer may, at its option, (or, if
the Servicer fails to exercise such option,
the Certificate Insurer may, at its option)
terminate the Trust on any date (the first
date on which such event occurs, the
"Clean-up Call Date") on which the aggregate
Principal Balance of the Mortgage Loans is
less than 5% of the sum of (a) the aggregate
Principal Balance of the Initial Mortgage
Loans as of the applicable Cut-Off Date (the
"Cut-Off Date Aggregate Principal Balance")
and (b) the Original Pre-Funded Amount, by
purchasing from the Trust, on the next
succeeding Distribution Date, all of the
outstanding Mortgage Loans and REO
Properties (as defined herein) at a price
equal to the sum of (a) 100% of the
aggregate Principal Balance of each
outstanding Mortgage Loan and each REO
Property and (b) the greater of (i) the
aggregate amount of accrued and unpaid
interest on the Mortgage Loans through the
related Due Period and (ii) 30 days' accrued
interest thereon computed at a rate equal to
the related Mortgage Interest Rate, in each
case net of the Servicing Fee, and (c) any
unreimbursed amounts due to the Certificate
Insurer and the Trustee under the Pooling
and Servicing Agreement and the Insurance
Agreement and any accrued and unpaid Insured
Payments. If the Servicer or the Certificate
Insurer fails to exercise its option to
terminate the Trust, the Class A
Pass-Through Rate will be increased by 0.50%
per annum for each Distribution Date after
the Clean-up Call Date. See "Servicing of
the Mortgage Loans--Termination; Purchase of
Mortgage Loans" in this Prospectus
Supplement.
ERISA Considerations.............. No Class A Certificates may be purchased
for, or on behalf of, any employee benefit
plan or other retirement arrangement which
is subject to Title I of the Employee
Retirement Income Security Act of 1974, as
amended, and/or Section 4975 of the Internal
Revenue Code of 1986, as amended (the
"Code"), or any entity whose underlying
assets include plan assets by reason of such
plan or account investing in such entity
(including insurance company separate or
general accounts and collective investment
funds). By its acceptance of a Class A
Certificate, each Certificateholder will be
deemed to have represented and warranted
that it is not subject to the foregoing
limitations. See "ERISA Considerations"
herein and in the Prospectus.
Legal Investment.................. The Class A Certificates will not consti-
tute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984.
Federal Income Tax
Status.......................... No real estate mortgage investment conduit
("REMIC") election will be made for the
Trust Fund. Stroock & Stroock & Lavan,
special Federal tax counsel, will give its
opinion that the Trust Fund will be
classified as a "grantor trust" for Federal
income tax purposes.
See "Certain Federal Income Tax
Considerations" in this Prospectus
Supplement and "Certain Federal Income Tax
Consequences -- Non- REMIC Certificates" in
the Prospectus.
Certificate Ratings............... It is a condition to the issuance of
Class A Certificates that the Class A
Certificates shall have been rated not lower
than "AAA" by Standard & Poor's Rating
Services, a division of The McGraw-Hill
Companies, Inc. and "Aaa" by Moody's
Investors Service, Inc., (each a "Rating
Agency," and together, the "Rating
Agencies") taking into account the
Certificate Insurance Policy issued with
respect to such Certificates. A security
rating is not a recommendation to buy, sell
or hold securities and may be subject to
revision or withdrawal at any time by the
assigning rating organization. The ratings
do not address the possibility that Class A
Certificateholders may suffer a lower than
anticipated yield. See "Ratings" in this
Prospectus Supplement and "Prepayment and
Yield Considerations" in the Prospectus.
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors
in connection with the purchase of the Class A Certificates.
Prepayment and Maturity Considerations
Borrowers may prepay their loans at any time, generally without any
prepayment fees. The rate of prepayments of the Mortgage Loans cannot be
predicted and may be affected by a wide variety of economic, social and other
factors, including state and federal income tax policies, interest rates and the
availability of alternative financing. Therefore, no assurance can be given as
to the rate of prepayments that the Trust will experience.
A number of factors may impact on the prepayment behavior of a pool of
loans such as the Mortgage Loans. One such factor is that the principal balance
of the Mortgage Loans is relatively small. A small principal balance may be
easier for a borrower to prepay than a large balance and therefore a higher
prepayment rate may result for a loan pool such as the Mortgage Loans. In
addition, in order to refinance a first priority mortgage loan, the borrower
must generally repay any subordinate mortgage loans. However, a small principal
balance may make refinancing a Mortgage Loan at a lower interest rate less
attractive to the borrower as the perceived impact to the borrower of lower
interest rates on the size of the monthly payment may not be significant. Other
factors that might be expected to affect the prepayment rate include general
economic conditions and the general interest rate environment, possible future
changes affecting the deductibility for federal income tax purposes of interest
payments on home equity loans, the amounts of, and interest rates on, any
underlying senior mortgage loans, and the tendency of borrowers to use first
priority mortgage loans as long-term financing for home purchase and junior
mortgage loans as shorter-term financing for a variety of purposes, including
home improvement, education expenses and purchases of consumer durables such as
automobiles. Accordingly, the Mortgage Loans may experience a higher rate of
prepayment than traditional fixed rate mortgage loans.
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancings of the related senior
mortgage loan or loans), sales of Mortgaged Properties subject to "due-on-sale"
clauses and liquidations due to default, as well as the receipt of proceeds from
physical damage. In addition, repurchases from the Trust of Mortgage Loans
required to be made by the Seller under the Pooling and Servicing Agreement will
have the same effect on the Class A Certificateholders as a prepayment of the
related Mortgage Loans. All of the Mortgage Loans contain "due-on-sale"
provisions, and the Servicer will enforce such provisions to the extent
permitted by applicable law. In addition, if the Seller is unable to cure
documentation defects or provide Qualified Substitute Mortgage Loans for the
affected Mortgage Loans, affected Mortgage Loans will be repurchased, and the
Class A Certificateholders will experience a principal prepayment. Unused Pre-
Funding moneys, if any, will be used no later than the February 15, 1997
Distribution Date to make a mandatory prepayment to the Holders of the Class A
Certificates. See "Certain Legal Aspects of the Mortgage Loans and Contracts --
The Mortgage Loans" in the Prospectus.
In general, if prevailing interest rates fall significantly below the
interest rates for the Mortgage Loans at the time of their origination, the
Mortgage Loans, all of which bear fixed interest rates, may be subject to higher
prepayment rates than if prevailing rates remain at or above those at the time
such Mortgage Loans were originated. Should prepayments on the Mortgage Loans
increase because of such interest rate reductions, the average life and final
maturity of the Class A Certificates may be shortened.
See "Prepayment and Yield Considerations."
S-16
<PAGE>
The weighted average life of a pool of loans is the average amount of
time that will elapse from the date such pool is formed until each dollar of
principal is scheduled to be repaid to the investors in such pool. Because it is
expected that there will be prepayments and defaults on the Mortgage Loans, the
actual weighted average life of the Class A Certificates is expected to vary
substantially from the weighted average remaining term to stated maturity of the
Mortgage Loans as set forth herein under "The Mortgage Pool -- General." Certain
information, based on specified prepayment assumptions, as to the possible
weighted average life of the Class A Certificates is set forth herein under
"Prepayment and Yield Considerations."
The Seller maintains only limited records of the historical prepayment
experience of its portfolio of loans, which the Seller believes does not provide
meaningful information with respect to the Mortgage Loans. In any event, no
assurance can be given that prepayments on the Mortgage Loans will conform to
any historical experience and no prediction can be made as to the actual
prepayment experience on the Mortgage Loans.
The Subsequent Mortgage Loans and the Pre-Funding Account
If the principal amount of Subsequent Mortgage Loans sold to the Trust
during the Pre-Funding Period is less than 100% of the Original Pre-Funded
Amount, a prepayment of principal to Holders of the Class A Certificates as
described herein will be required. Any such prepayment will effect the yield to
maturity of a Class A Certificate purchased at a price other than par. In
addition, any conveyance of Subsequent Mortgage Loans is subject to the
following conditions, among others: (i) each such Subsequent Mortgage Loan must
satisfy the representations and warranties specified in the Purchase Agreement
and the Pooling and Servicing Agreement; (ii) the Depositor will not select such
Subsequent Mortgage Loans in a manner that it believes is adverse to the
interests of the Holders of the Class A Certificates and the Certificate
Insurer; (iii) the Depositor will deliver certain opinions of counsel with
respect to the validity of the conveyance of such Subsequent Mortgage Loans; and
(iv) as of the Subsequent Cut-Off Date, the Mortgage Loans at that time,
including the Subsequent Mortgage Loans to be conveyed by the Depositor as of
such Subsequent Cut-Off Date, will satisfy the criteria set forth in the Pooling
and Servicing Agreement, as described herein under "The Mortgage Pool --
Conveyance of Subsequent Mortgage Loans." Although no assurances can be given,
it is anticipated by the Depositor that the principal amount of Subsequent
Mortgage Loans sold to the Trust will require the application of substantially
all amounts on deposit in the Pre-Funding Account and that there will be no
material principal prepayment to the Holders of the Class A Certificates.
<PAGE>
Underwriting Standards, Limited Operating History and Potential Delinquencies
The Mortgage Loans consist of loans originated or purchased as part of
the Seller's Portfolio Series mortgage loans (the "Portfolio Series" ) and
Liberator Series mortgage loans (the "Liberator Series"). Portfolio Series loans
are targeted as debt consolidation loans for borrowers who have a generally
strong credit rating. The Portfolio Series loans, however, have a high ratio of
combined first and second liens to the value of the real property securing such
loans, up to a 125% maximum. Liberator Series loans are targeted for the
purchase or refinance of residential real property by borrowers who because of
prior credit problems or the absence of a credit history are considered
sub-prime borrowers or other borrowers whose application does not conform for a
loan under the Federal National Mortgage Association ("FNMA") or the Federal
Home Loan Mortgage Corporation ("FHLMC") underwriting guidelines. The loan to
value ratios for the Liberator Series loans generally are 80% or less, but may
be as high as 90%. While the Seller also originates these types of loans from
its origination offices, a substantial portion of the Mortgage Loans were
originated for or purchased by the Seller through its nationwide network of
correspondents and other third party originators.
The Mortgage Loans, therefore, involve a higher degree of risk than
traditional first or second lien mortgage loans particularly because of (i) the
high combined loan to value ratios involved in the Portfolio Series loans, which
means that in the event of a default by a borrower there is likely to be little
or no equity in the real property securing the loans to look to for recovery of
any losses, and (ii) the potential for default by the sub-prime borrowers under
the Liberator Series loans.
Moreover, the Seller's historical experience regarding the level of
delinquencies and non-performing loans with respect to the loans it originates
is not a reliable guide to possible future problems that might be experienced by
the Mortgage Loans. The Seller reorganized its lending operations in 1994, which
reorganization instituted more stringent underwriting procedures seeking to
improve the quality of loans originated, but also changed the Seller's lending
focus from traditional residential mortgage loans to generally higher risk
loans, including the Portfolio and Liberator Series loans. In addition, while
the Seller conducts its own underwriting review of all of the loans it
purchases, the Mortgage Loans acquired by the Seller could still experience a
higher level of problems than would be the case if they were totally originated
by the Seller.
Pursuant to the Seller's underwriting guidelines, the assessment of the
creditworthiness of the related borrower is the primary consideration in
underwriting the Portfolio Series mortgage loans, and the evaluation of the
adequacy of the value of the related mortgaged property in relation to the
mortgage loan, together with the amount of all liens senior to the lien of the
mortgage loan (i.e., the related
"combined loan-to-value ratio"), is given less consideration, and in certain
cases no consideration, in underwriting the Portfolio Series mortgage loans. See
"The Seller and Servicer -- Underwriting Criteria" herein. In general, the
credit-worthiness of the borrower under the Portfolio Series mortgage loans
generally conforms to the FNMA and FHLMC underwriting guidelines for first-lien,
single family mortgage loans.
Although the creditworthiness of the related borrower is the primary
consideration in the underwriting of the Portfolio Series mortgage loans, no
assurance can be given that such creditworthiness of the borrower will not
deteriorate as a result of future economic and social factors, which
deterioration may result in a delinquency or default by such borrower on the
related mortgage loan. Furthermore, because the adequacy of the value of the
related mortgaged property is given less consideration, and in certain cases no
consideration, in underwriting the Portfolio Series mortgage loan, no assurance
can be given that any proceeds will be recovered from the foreclosure or
liquidation of the related mortgaged property from a defaulted mortgage loan.
See "--Realization Upon Defaulted Secured Loans" below.
Solicitation Process
A substantial portion of the Mortgage Loans will have been originated
for or purchased by the Seller through purchases from its network of
correspondents, other third party originators and mortgage brokers. All of the
Mortgage Loans that were acquired by the Seller will have been re-underwritten
by, and reviewed for compliance with, the Seller's underwriting guidelines.
Although the Seller performs an extensive review in connection with the
re-underwriting of acquired loans, these mortgage loans acquired by the Seller
may have been originated by the originator thereof through the application of
the underwriting guidelines of the Seller in a manner that is different from the
Seller's application and such loans may be of a lesser credit quality.
Geographic Concentration
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency on loans
generally. Any concentration of the Mortgage Loans in such a region may present
risk considerations in addition to those generally present for similar mortgage
backed securities without such concentration. The Seller originates or purchases
its loans nationwide, although the Seller originates and purchases in excess of
50% of its Mortgage Loans in California, Utah, Virginia and Maryland. Thus, the
Mortgage Loans may be subject to the risk that a downturn in the economy in
these areas of the country would more greatly affect the Mortgage Pool than if
the Mortgage Pool were more diversified. Approximately 25.2 % and 14.3% of the
Mortgage Loans by Statistical Calculation Date Aggregate Principal Balance are
secured by Mortgaged Properties located in California and Utah, respectively.
Because of the relative geographic concentration of the Mortgage Loans within
these states, losses on the Mortgage Loans may be higher than would be the case
if the Mortgage Loans were more geographically diversified. For example, certain
of the Mortgaged Properties may be more susceptible to certain types of special
hazards, such as earthquakes and other natural disasters and major civil
disturbances, than residential properties located in other parts of the country.
In recent years, property values of residential real estate generally have
declined in California.
Balloon Payments
The Mortgage Loans have been originated at fixed interest rates for
fixed terms ranging from 144 to 360 months. As of the Statistical Calculation
Date, approximately 17% of the Mortgage Loans are not fully amortized over their
terms and instead require substantial balloon payments on their maturity dates.
All of such loans are Liberator Series loans. See "The Mortgage Pool." Because
the principal balance of such Mortgage Loans does not fully amortize over the
term of the Mortgage Loan, such Mortgage Loans may involve greater risks of
default than Mortgage Loans whose principal balance is fully amortized over the
term of the Mortgage Loan. The borrower's ability to pay the balloon amount due
at maturity of such a Mortgage Loan will depend on the borrower's ability to
obtain adequate refinancing or funds from other sources to repay the Mortgage
Loan.
Nature of Collateral; Second Lien Mortgage Loans
As of the Statistical Calculation Date, approximately 86% of the
Mortgage Loans are secured by junior (second) liens which are subordinate to the
rights of the mortgagee under related senior mortgages. See "The Mortgage Pool."
As a result, the proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the principal balance of such a junior
Mortgage Loan only to the extent that the claims, if any, of each such senior
mortgagee are satisfied in full, including any related foreclosure costs. In
addition, a mortgagee of a junior mortgage may not foreclose on the Mortgaged
Property securing such mortgage unless it forecloses subject to the related
senior mortgage(s), 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 home equity loans in its portfolio, it
is the Servicer's practice to satisfy or reinstate each such senior mortgage at
or prior to the foreclosure sale only to the extent that it determines any
amount so paid will be recoverable from future payments and collections on the
related loans or otherwise. The Trust will have no source of funds to satisfy
any senior mortgage or make payments due to any senior mortgagee.
General economic conditions have an impact on the ability of borrowers
to repay loans. Loss of earnings, illness and other similar factors may lead to
an increase in delinquencies and bankruptcy filings by borrowers. In the event
of bankruptcy of a mortgagor, it is possible that the 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, thus 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 the Trust, any remaining balance
on such Mortgage Loan may not be recoverable.
An overall decline in the residential real estate market could
adversely affect the values of the Mortgaged Properties relating to the
Liberator Series Mortgage Loans such that the outstanding principal balances,
together with the primary senior financing thereon, equals or exceeds the value
of the related Mortgaged Properties. Such a decline would adversely affect the
position of a second mortgagee before having such an effect on that of the
related first mortgagee. A rise in interest rates over a period of time and the
general condition of the Mortgaged Property as well as other factors may have
the effect of reducing the value of the Mortgaged Property from the appraised
value at the time the Mortgage Loan was originated. If there is a reduction in
value of the Mortgaged Property, the ratio of the amount of the Mortgage Loan to
the value of the Mortgaged Property may increase over what it was at the time
the Mortgage Loan was originated. Such an increase may reduce the likelihood of
liquidation or other proceeds being sufficient to satisfy the Mortgage Loan
after satisfaction of any senior liens.
Even assuming that the Mortgaged Properties relating to the Liberator
Series Mortgage Loans provide adequate security for the related 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 Class A Certificateholders. An action to foreclose on the Mortgaged
Property securing a Mortgage Loan is regulated by state statutes and rules 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 Net Liquidation Proceeds sufficient to repay all amounts due on the
related Mortgage Loan. In addition, the Servicer will be entitled to deduct from
collections received during the preceding Due Period with respect to a
particular Liquidated Mortgage Loan all expenses reasonably incurred in
attempting to recover amounts due on such Liquidated Mortgage Loan and not yet
repaid, including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses, thereby
reducing collections available to Class A Certificateholders. See "The Seller
and the Servicer -- Delinquency and Loan Loss Experience" and "Description of
the Certificates."
Liquidation expenses with respect to defaulted loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a Servicer took the same steps in realizing
upon a defaulted loan having a small remaining principal balance as it would in
the case of a defaulted loan having a large remaining principal balance, the
amount realized after expenses of liquidation would be smaller as a percentage
of the outstanding principal balance of the small loan than would be the case
with the defaulted loan having a large remaining principal balance. Because the
average outstanding principal balance of the Mortgage Loans is relatively small,
Net Liquidation Proceeds on Liquidated Mortgage Loans may be small as a
percentage of the principal balance of a Mortgage Loan.
With respect to substantially all of the Portfolio Series Mortgage
Loans, at the date of origination the combined loan to value ratio exceeded
100%. Therefore, in the event of default by a Mortgagor of any such Portfolio
Series Mortgage Loan, the Trust may be unable to recover any Net Liquidation
Proceeds even if the value of the related Mortgaged Property does not decline.
Decline in Real Estate Values
No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at their levels as of the dates of origination of
the related Mortgage Loans. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans become equal to or greater than the value of the
Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses
on these Mortgaged Properties could be higher than losses now generally
experienced in the mortgage lending industry.
Payments on the Mortgage Loans
The scheduled monthly payment date with respect to substantially all
of the Mortgage Loans occurs on the first day of a month. When a principal
prepayment is made on a Mortgage Loan, the Mortgagor is charged interest only up
to the date of such prepayment, instead of for a full month. However, such
principal receipts will only be passed through to the Certificateholders once a
month, on the Distribution Date which follows the calendar month in which such
prepayment was received by the Servicer. The Servicer is obligated to pay,
without any right of reimbursement, those shortfalls in interest collections
payable on the Class A Certificates that are attributable to the difference
between the interest paid by a mortgagor in connection with a prepayment and 30
days' interest (in such case at the related Mortgage Interest Rate (or at such
lower rate as may be in effect by application of the Civil Relief Act), less the
Servicing Fee, such shortfalls being "Prepayment Interest Shortfalls"), but only
to the extent of the Servicing Fee for the related Due Period (any such payment,
"Compensating Interest"). Prepayment Interest Shortfalls and Civil Relief Act
Interest Shortfalls will not be covered by payments under the Certificate
Insurance Policy.
Prepayment Interest Shortfalls that are not covered by application of
the Servicing Fee, together with Civil Relief Act Interest Shortfalls, will be
allocated among the Holders of Class A Certificates on a pro rata basis to
reduce the interest otherwise payable on the Class A Certificates. See
"Description of the Certificates -- Flow of Funds" in this Prospectus
Supplement.
Legal Considerations
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and may require licensing of the
originators of the Mortgage Loans. In addition, many states have other laws,
such as consumer protection laws, unfair and deceptive practices acts and debt
collection practices acts which may apply to the origination or collection of
the Mortgage Loans. Depending on the provisions of the applicable law,
violations of these laws 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 Trust to damages and administrative enforcement. See "Certain Legal Aspects
of the Mortgage Loans and Contracts" in the Prospectus.
The Mortgage Loans are also subject to federal laws, including: (i) the
Federal Truth in Lending Act and Regulation Z promulgated thereunder as to
consumer purpose Mortgage Loans, which require certain disclosures to the
borrowers regarding the terms of such Mortgage Loans; (ii) the Equal Credit
Opportunity Act and Regulation B promulgated thereunder as to the business and
consumer purpose Mortgage Loans, 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 as to the business and consumer purpose Mortgage Loans, which regulates the
use and reporting of information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Mortgage Loans and in addition could subject the Trust to damages and
administrative enforcement. In addition, under the terms of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the "Civil Relief Act") or
similar state legislation, the interest charged and the ability of the Servicer
to foreclose on loans to certain Mortgagors may be limited. Generally, under the
Civil Relief Act, a mortgagor who enters military service after the origination
of such mortgagor's mortgage loan (including a mortgagor who was in reserve
status and is called to active duty after origination of the mortgage loan),
shall not be charged interest (including fees and charges) above an annual rate
of 6.0% during the period of such mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. The Civil Relief Act applies to
mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Civil Relief Act applies to
mortgagors who enter military service (including reservists who are called to
active duty) after origination of the related mortgage loan, no information can
be provided as to the number of loans that may be affected by the Civil Relief
Act. Application of the Civil Relief Act would adversely affect, for an
indeterminate period of time until cessation of active duty status, the ability
of the Servicer to collect full amounts of interest on certain of the Mortgage
Loans to which it applies, if any. Any shortfall (such shortfall, a "Civil
Relief Act Interest Shortfall") in interest collections on any Mortgage Loan
resulting from the application of the Civil Relief Act will result in a
reduction of the amounts distributable to the Class A Certificateholders, and
would not be covered by Periodic Advances or the Certificate Insurance Policy.
The Servicer is not obligated to offset any of the Servicing Fee against, or to
provide any other funds to cover, any Civil Relief Act Interest Shortfall. In
addition, the Civil Relief Act imposes limitations which would impair the
ability of the Servicer to foreclose on an affected Mortgage Loan during the
Mortgagor's period of active duty status and, under certain circumstances,
during an additional period thereafter. See "Certain Legal Aspects of the
Mortgage Loans" in the Prospectus.
It is possible that some 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 the Truth in Lending Act
which additions are reflected in Regulation Z, the implementing regulation of
the Truth in Lending Act. These provisions impose additional disclosure and
other requirements on creditors with respect to certain non-purchase money
mortgage loans with high interest rates or high upfront fees and charges. In
general, mortgage loans within the purview of the Riegle Act have annual
percentage rates 10 percentage points over the yield on United States treasury
securities of comparable maturity and/or fees and points which exceed the
greater of 8.0% of the total loan amount or $400. These provisions of the Riegle
Act apply on a mandatory basis to all mortgage 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 mortgage loan.
<PAGE>
THE MORTGAGE POOL
Difference between Statistical Calculation Date and Issue Date Pools.
The statistical information presented in this Prospectus Supplement
concerning the Mortgage Loans is based on a preliminary pool as of November 15,
1996 (such date, the "Statistical Calculation Date"). The pool aggregated
$27,646,202.91 as of the Statistical Calculation Date. The actual pool of
Mortgage Loans as of the Issue Date will have an aggregate Principal Balance as
of the applicable CutOff Date (which for a Mortgage Loan originated after
November 30, 1996 will be the date of origination) of between approximately
$44,000,000 and $55,000,000. The additional Mortgage Loans will represent
Mortgage Loans acquired or to be acquired by the Depositor on or prior to the
Issue Date. The difference between $55,000,000 (i.e., the original principal
amount of the Class A Certificates) and the principal amount of the loans
actually delivered on the Issue Date will be the Pre-Funded Amount. In addition,
with respect to the pool as of the Statistical Calculation Date as to which
statistical information is presented herein, some amortization of the pool will
occur prior to the Issue Date. Moreover, certain loans included in the pool as
of the Statistical Calculation Date may prepay in full, or may be determined not
to meet the eligibility requirements for the final pool, and may not be included
in the final pool. As a result of the foregoing, the statistical distribution of
characteristics as of the Issue Date for the Mortgage Loan pool will vary
somewhat from the statistical distribution of such characteristics as of the
Statistical Calculation Date as presented in this Prospectus Supplement,
although the Depositor does not believe that such variance will be material
except that up to 30.5% of such Mortgage Loans may be secured by Mortgaged
Properties located in California.
Further, Subsequent Mortgage Loans are intended to be purchased by the
Trust from the Depositor from time to time on or before February 13, 1997 from
funds on deposit in the Pre-Funding Account. The Initial Mortgage Loans and the
Subsequent Mortgage Loans are referred to herein collectively as the "Mortgage
Loans." The Subsequent Mortgage Loans to be purchased by the Trust, if
available, will be originated or purchased by the Seller, sold by the Seller to
the Depositor and then sold by the Depositor to the Trust. The Pooling and
Servicing Agreement will provide that the Mortgage Loans, following the
conveyance of the Subsequent Mortgage Loans, must in the aggregate conform to
certain specified characteristics described below under "-- Conveyance of
Subsequent Mortgage Loans."
Unless otherwise noted, all statistical percentages in this Prospectus
Supplement are approximate and are measured by the aggregate Principal Balance
of the related Mortgage Loans in relation to the Statistical Calculation Date
Aggregate Principal Balance, in each case, as of the Statistical Calculation
Date.
The Mortgage Loans will be residential home equity loans originated or
purchased as part of the Seller's Portfolio Series and Liberator Series mortgage
loans. The proceeds of the Portfolio Series Mortgage Loans will have been used
principally to consolidate debt and the proceeds of the Liberator Series
Mortgage Loans will have been used principally to purchase or refinance the
related Mortgaged Property. The Mortgaged Properties securing the Mortgage Loans
consist primarily 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) and non-owner occupied investment properties. As of
the Statistical Calculation Date, the pool of Mortgage Loans consists of 13.92%
of loans secured by first lien mortgages on the related Mortgaged Properties and
86.08% of loans secured by second lien mortgages on the related Mortgaged
Properties.
As of the Statistical Calculation Date, the Mortgage Loans had
remaining terms to maturity of no greater than 360 months and were not 30 or
more days delinquent.
The combined loan-to-value ratio's ("CLTV's") described herein were
calculated based upon the appraised values of the related 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 liens,
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 below under "The
Seller and the Servicer -- Delinquency and Loan Loss Experience," and in the
mortgage lending industry. Further, with respect to substantially all of the
Portfolio Series Mortgage Loans, at the date of origination, the CLTV exceeded
100%. Therefore, the related Mortgagor had no equity in the Mortgaged Property.
The CLTV of a Mortgage Loan is the ratio, expressed as a percentage, equal to
the sum of any outstanding first mortgage balance as of the date of origination
plus the Principal Balance of the Mortgage Loan as of the Statistical
Calculation Date divided by the Appraised Value.
As of the Statistical Calculation Date, the Mortgage Loans consist of
787 loans under which the related Mortgaged Properties are located in 36 states
and the District of Columbia. As of the Statistical Calculation Date, the
Mortgage Loans had an aggregate principal balance of $27,646,202.91, the minimum
principal balance of any of the Mortgage Loans was $7,310.87, the maximum
principal balance thereof was $381,374.24 and the average principal balance of
the Mortgage Loans was $35,128.59. As of the Statistical Calculation Date, the
weighted average Mortgage Interest Rate of the Mortgage Loans was 13.501% per
annum. As of the Statistical Calculation Date, the original term to stated
maturity of the Mortgage Loans ranged from 144 months to 360 months, the
remaining term to stated maturity ranged from 144 months to 360 months, the
weighted average original term to stated maturity was 212 months and the
weighted average remaining term to stated maturity was 211 months. No Mortgage
Loan had a stated maturity later than December 1, 2026. Based upon the principal
balance of the Mortgage Loans as of the Statistical Calculation Date
approximately 83% of the Mortgage Loans require monthly payments of principal
that will fully amortize the Mortgage Loans by their respective maturity dates,
and 17% of the aggregate principal balance of the Mortgage Loans are Balloon
Loans. The weighted average CLTV of the Mortgage Loans as of the Statistical
Calculation Date was 100.04%.
Set forth below is a description of certain additional characteristics
of the Mortgage Loans as of the Statistical Calculation Date. Dollar amounts and
percentages may not add up to totals due to rounding. Within 15 days of the
Issue Date, the Depositor will file with the Securities and Exchange Commission
a Current Report on Form 8-K setting forth as of the applicable Cut-Off Date,
the information presented on the following charts for the Initial Mortgage Loans
actually delivered to the Trustee on the Issue Date.
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
Aggregate % of Aggregate
Number of Principal Balance as of Principal Balance as of
State Mortgage Loans the Statistical Calculation Date the Statistical Calculation Date
- -------------------------------- -------------------- --------------------------------- --------------------------------
<S> <C> <C> <C>
Alabama 18 $ 548,015.14 1.98%
Arizona 3 182,569.40 0.66
Arkansas 1 40,153.71 0.15
California 179 6,965,364.00 25.19
Colorado 22 711,497.81 2.57
Connecticut 2 81,389.53 0.29
Delaware 5 139,614.50 0.51
District of Columbia 2 49,677.18 0.18
Florida 53 1,588,451.50 5.75
Georgia 23 678,637.65 2.45
Hawaii 11 623,326.90 2.25
Idaho 14 390,944.86 1.41
Illinois 12 593,504.26 2.15
Indiana 23 632,500.94 2.29
Kansas 1 17,000.00 0.06
Maryland 67 2,338,485.88 8.46
Massachusetts 2 55,559.67 0.20
Michigan 4 105,733.28 0.38
Montana 1 122,762.43 0.44
Nevada 8 252,940.82 0.91
New Jersey 6 257,599.23 0.93
New Mexico 1 30,976.14 0.11
New York 1 50,000.00 0.18
North Carolina 46 1,469,140.98 5.31
Ohio 3 73,400.00 0.27
Oklahoma 9 239,091.27 0.86
Oregon 5 240,052.76 0.87
Pennsylvania 35 984,657.46 3.56
South Carolina 11 370,806.28 1.34
Tennessee 7 148,800.00 0.54
Texas 3 482,845.34 1.75
Utah 122 3,953,235.11 14.30
Vermont 2 73,390.79 0.27
Virginia 75 2,691,494.23 9.74
Washington 7 387,056.04 1.40
Wisconsin 1 38,273.76 0.14
Wyoming 2 37,254.06 0.13
-------------------- ------------------------------ -----------------------------------
Total 787 $27,646,202.91 100.00%
==================== ============================== ===================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF CLTV'S
Aggregate % of Aggregate
Range of Number of Principal Balance as of the Principal Balance as of
CLTV Ratios (%) Mortgage Loans Statistical Calculation Date the Statistical Calculation Date
- --------------------------------- -------------------- ------------------------------ ----------------------------------
<S> <C> <C> <C>
20.01 - 25.00% 1 $ 44,950.00 0.16%
30.01 - 35.00 1 24,989.14 0.09
35.01 - 40.00 2 173,959.42 0.63
40.01 - 45.00 1 55,000.00 0.20
45.01 - 50.00 5 339,736.00 1.23
50.01 - 55.00 2 125,519.57 0.45
55.01 - 60.00 8 257,484.71 0.93
60.01 - 65.00 13 696,006.27 2.52
65.01 - 70.00 7 395,842.20 1.43
70.01 - 75.00 14 1,141,438.76 4.13
75.01 - 80.00 10 694,056.35 2.51
80.01 - 85.00 10 769,188.25 2.78
85.01 - 90.00 95 3,478,707.09 12.58
90.01 - 95.00 44 1,338,147.58 4.84
95.01 - 100.00 199 5,619,284.20 20.33
100.01 - 105.00 32 1,056,495.72 3.82
105.01 - 110.00 59 1,759,861.34 6.37
110.01 - 115.00 63 2,112,665.23 7.64
115.01 - 120.00 77 2,702,994.32 9.78
120.01 - 125.06 144 4,859,876.76 17.58
--------------------- ------------------------- ----------------------------------
Total 787 $27,646,202.91 100.00%
===================== ========================= ==================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GROSS MORTGAGE INTEREST RATE RANGE
Aggregate % of Aggregate
Range of Number of Principal Balance as of Principal Balance as of
Mortgage Interest Rates Mortgage Loans the Statistical Calculation Date the Statistical Calculation Date
----------------------- -------------------- -------------------------------- ---------------------------------
<S> <C> <C> <C>
Less than or equal to 9.50% 2 $ 438,745.34 1.59%
9.51 - 9.75 2 382,961.66 1.39
9.76 - 10.00 1 104,850.00 0.38
10.01 - 10.25 2 169,772.85 0.61
10.26 - 10.50 5 431,526.62 1.56
10.51 - 10.75 7 359,668.55 1.30
10.76 - 11.00 5 429,411.83 1.55
11.01 - 11.25 6 469,606.94 1.70
11.26 - 11.50 9 368,223.90 1.33
11.51 - 11.75 10 335,500.06 1.21
11.76 - 12.00 14 573,270.60 2.07
12.01 - 12.25 34 1,068,398.43 3.86
12.26 - 12.50 31 1,359,827.36 4.92
12.51 - 12.75 26 831,915.11 3.01
12.76 - 13.00 29 1,093,536.79 3.96
13.01 - 13.25 27 994,587.83 3.60
13.26 - 13.50 57 1,888,806.94 6.83
13.51 - 13.75 73 2,353,960.14 8.51
13.76 - 14.00 87 2,779,497.10 10.05
14.01 - 14.25 53 1,686,608.18 6.10
14.26 - 14.50 60 1,757,203.23 6.36
14.51 - 14.75 53 1,559,682.21 5.64
14.76 - 15.00 83 2,683,714.41 9.71
15.01 - 15.25 35 1,009,658.97 3.65
15.26 - 15.50 32 965,979.29 3.49
15.51 - 15.75 24 867,137.03 3.14
15.76 - 16.00 10 321,834.04 1.16
16.01 - 16.25 6 170,472.63 0.62
16.26 - 16.50 2 44,932.78 0.16
16.51 - 16.75 1 119,936.00 0.43
17.26 - 17.50 1 24,976.09 0.09
--------------------- ----------------------------- --------------------
Total 787 $27,646,202.91 100.00%
===================== ============================= ==================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF REMAINING TERMS TO MATURITY
Range of Remaining Aggregate % of Aggregate
Terms to Maturity Number of Principal Balance as of Principal Balance as of
(in months) Mortgage Loans the Statistical Calculation Date the Statistical Calculation Date
- ------------------------------------ --------------------- --------------------------------- --------------------------------
<S> <C> <C> <C> <C>
144 1 $ 24,750.00 0.09%
157 1 9,961.49 0.04
166 1 48,120.01 0.17
167 3 81,410.75 0.29
168 2 104,293.15 0.38
169 2 56,104.08 0.20
170 2 41,323.08 0.15
171 2 70,542.97 0.26
172 5 143,037.00 0.52
173 9 273,878.38 0.99
174 16 576,638.09 2.09
175 11 399,618.88 1.45
176 13 381,229.08 1.38
177 21 661,950.96 2.39
178 68 2,255,314.08 8.16
179 124 4,011,607.95 14.51
180 180 6,449,442.40 23.33
236 3 99,372.83 0.36
237 13 427,474.71 1.55
238 54 1,857,446.01 6.72
239 85 3,087,578.78 11.17
240 156 5,112,560.00 18.49
249 1 57,371.10 0.21
321 1 381,374.24 1.38
353 1 70,961.66 0.26
359 2 185,487.89 0.67
360 10 777,353.34 2.81
-------------------- ----------------------------- ----------------
Total 787 $27,646,202.91 100.00%
==================== ============================= ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF CURRENT PRINCIPAL BALANCES
Range of Aggregate % of Aggregate
Current Number of Principal Balance as of Principal Balance as of
Principal Balance s Mortgage Loans the Statistical Calculation Date the Statistical Calculation Date
- ------------------------------------ --------------------- ---------------------------------- --------------------------------
<S> <C> <C> <C>
$ 0.01 - 25,000.00 339 $ 7,309,673.86 26.44%
25,000.01 - 50,000.00 387 14,832,857.20 53.65
50,000.01 - 75,000.00 37 2,220,117.91 8.03
75,000.01 - 100,000.00 10 914,055.77 3.31
100,000.01 - 150,000.00 9 1,091,166.54 3.95
150,000.01 - 200,000.00 2 356,957.39 1.29
200,000.01 - 250,000.00 1 228,000.00 0.82
300,000.01 - 350,000.00 1 312,000.00 1.13
350,000.01 - 400,000.00 1 381,374.24 1.38
-------------------- ------------------------------ ----------------------------
Total 787 $27,646,202.91 100.00%
==================== ============================== ==============================
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY LIEN STATUS/OCCUPANCY TYPE
Aggregate % of Aggregate
Lien Status/Occupancy Number of Principal Balance as of Principal Balance as of
Type Mortgage Loans the Statistical Calculation Date the Statistical Calculation Date
<S> <C> <C> <C>
First Lien - Owner
Occupied 39 $ 3,376,385.15 12.21%
First Lien - Non-Owner
Occupied 7 473,107.85 1.71
Second Lien - Owner
Occupied 736 23,478,941.50 84.93
Second Lien - Non-
Owner Occupied 5 317,768.41 1.15
------------------------- -------------------------------- -------------------------
Total 787 $27,646,202.91 100.00%
========================= ================================ =========================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF PROPERTY TYPES
Aggregate % of Aggregate
Number of Principal Balance as of Principal Balance as of
Property Type Mortgage Loans the Statistical Calculation Date the Statistical Calculation Date
- ------------------------------------ --------------------- --------------------------------- --------------------------------
<S> <C> <C> <C>
Single Family Detached 725 $25,278,204.38 91.43%
Planned Unit Development 19 736,157.74 2.66
Condominium 37 1,224,604.46 4.43
Apartment, Two to Four Units 6 407,236.33 1.47
-------------------- ----------------------------- ----------------------------
Total 787 $27,646,202.91 100.00%
==================== ============================= ============================
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF LOAN SEASONING
Aggregate % of Aggregate
Number of Number of Principal Balance as of Principal Balance as of
Months Since Origination Mortgage Loans the Statistical Calculation Date the Statistical Calculation Date
- ------------------------------------ --------------------- --------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
0 347 $12,364,105.74 44.72%
1 - 12 434 14,761,230.68 53.39
13 - 24 5 139,492.25 0.50
37 - 48 1 381,374.24 1.38
-------------------- ------------------------------ --------------------
Total 787 $27,646,202.91 100.00%
==================== ============================== ====================
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF LOANS BY AMORTIZATION
Aggregate % of Aggregate
Number of Principal Balance as of Principal Balance as of
Amortization Mortgage Loans the Statistical Calculation Date the Statistical Calculation Date
- ------------------------------------ --------------------- --------------------------------- ---------------------------------
<S> <C> <C> <C>
Fully Amortizing - Non-Balloon 683 $22,897,994.14 82.83%
Partially Amortizing - Balloon 104 4,748,208.77 17.17
-------------------- ------------------------------ --------
Total 787 $27,646,202.91 100.00%
==================== ============================== ============================
</TABLE>
<PAGE>
Conveyance of Subsequent Mortgage Loans
The Pooling and Servicing Agreement permits the Trust to acquire
Subsequent Mortgage Loans with an aggregate principal balance equal to the
difference between $55,000,000 (i.e., the original principal amount of the Class
A Certificates) and the aggregate Principal Balance as of the applicable Cut-Off
Date of the Initial Mortgage Loans. Accordingly, the statistical characteristics
of the Mortgage Pool will vary upon the acquisition of Subsequent Mortgage
Loans.
The obligation of the Trust to purchase the Subsequent Mortgage Loans
on a Subsequent Transfer Date is subject to the following requirements: (i) each
such Subsequent Mortgage Loan may not be 30 or more days contractually
delinquent as of the related Subsequent Cut-Off Date; (ii) the original term to
maturity of such Subsequent Mortgage Loan may not exceed 360 months; (iii) such
Subsequent Mortgage Loan has a Mortgage Interest Rate of at least 8.85%; (iv)
the purchase of the Subsequent Mortgage Loans is consented to by the Certificate
Insurer and will not cause the Rating Agencies to lower the ratings assigned to
the Class A Certificates; (v) the principal balance of any such Subsequent
Mortgage Loan that is a first lien may not exceed $380,000 and the principal
balance of any such Subsequent Mortgage Loan that is a second lien may not
exceed $130,000; (vi) no more than 85% of such Subsequent Mortgage Loans may be
second liens; (vii) no such Subsequent Mortgage Loan shall have a CLTV of more
than 125%; (viii) no more than 50% of such Subsequent Mortgage Loans that are
first lien Mortgage Loans and no more than 10% of such Subsequent Mortgage Loans
that are second lien Mortgage Loans may be Balloon Loans; (ix) the Subsequent
Mortgage Loans that are first liens will have a weighted average Mortgage
Interest Rate of at least 10.75%, the Subsequent Mortgage Loans that are second
liens will have a weighted average Mortgage Interest Rate of at least 13.50% and
following the purchase of the Subsequent Mortgage Loans by the Trust, the
Mortgage Loans will have a weighted average Mortgage Interest Rate of at least
13.35%, and (x) following the purchase of the Subsequent Mortgage Loans by the
Trust, the Mortgage Loans will.have a weighted average CLTV of not more than
105%. The Pooling and Servicing Agreement, the Mortgage Loans will provide that
any of such requirements may be waived or modified in any respect upon prior
written consent of the Certificate Insurer. The Pooling and Servicing Agreement
will permit the Certificate Insurer, in its sole discretion, to require an
increase in the Required Reserve Account Level as a condition to any such
consent.
Prior to the investment of the Original Pre-Funded Amount in
Subsequent Mortgage Loans, such amount will be invested in one or more Permitted
Investments. A "Permitted Investment" is any of the following: (a) direct
general obligations of, or obligations fully and unconditionally guaranteed as
to the timely payment of principal and interest by, the United States or any
agency or instrumentality thereof, provided such obligations are backed by the
full faith and credit of the United States and any obligation of, or guaranties
by, FHLMC or FNMA (other than senior debt obligations and mortgage pass-through
certificates guaranteed by FHLMC or FNMA) shall be a Permitted Investment;
provided, that at the time of such investment, such investment is acceptable to
the Certificate Insurer, but excluding any of such securities whose terms do not
provide for payment of a fixed dollar amount upon maturity or call for
redemption; (b) federal funds and certificates of deposit, time and demand
deposits and banker's acceptances issued by any bank or trust company
incorporated under the laws of the United States or any state thereof and
subject to supervision and examination by federal or state banking authorities
having an original term to maturity of not more than 365 days, provided that at
the time of such investment or contractual commitment providing for such
investment the short-term debt obligations of such bank or trust company at the
date of acquisition thereof have been rated A-1+ by S&P and P-1 by Moody's; (c)
commercial paper (having original maturities of not more than 180 days) rated
A-1+ by S&P and P-1 by Moody's; (d) investments in money market funds rated
"AAAm" or "AAAm-G" by S&P and Aaa by Moody's that invest only in other Permitted
Investments; and (e) investments approved by S&P, Moody's and the Certificate
Insurer in writing delivered to the Trustee; provided, that each such Permitted
Investment shall evidence either the right to receive (x) only interest with
respect to the obligations underlying such instrument or (y) both principal and
interest payments derived from obligations underlying such instrument and the
interest and principal payments with respect to such instrument provided a yield
to maturity at par greater than 120% of the yield to maturity at par of the
underlying obligations; and provided, further, that no instrument described
hereunder may be purchased at a price greater than par if such instrument may be
prepaid or called at a price less than its purchase price prior to stated
maturity. Any Permitted Investment must mature no later than the Business Day
prior to the next Distribution Date.
THE SELLER AND THE SERVICER
General
Life Savings Bank, Federal Savings Bank (the "Seller") was originally
chartered as a stock savings and loan association under the laws of the State of
California in 1983 and became a federally chartered stock savings bank in 1991.
The Seller conducts its business from a retail bank branch located in San
Bernardino, California, as well as from loan centers in Riverside, California,
and Jacksonville, Florida. The Seller is in the process of opening an additional
loan center in Denver, Colorado. At September 30, 1996, the Seller had total
assets of $84.4 million, total deposits of $73.3 million and total equity of
$7.9 million.
The Seller reorganized its lending operations in 1994, changing
strategies from a lending strategy which emphasized traditional mortgage banking
operations and traditional portfolio lending to a financial services operation
strategy which focuses on the origination for sale of Portfolio Series loans,
Liberator Series loans and commercial and multifamily loans. In addition, the
Seller has hired management and other personnel experienced in the types of
lending in which the Seller now engages. To date, the Seller's origination of
Portfolio Series and Liberator Series loans, which are the types of loans
included as Mortgage Loans, primarily has been through its nationwide network of
correspondents, other third party originators and mortgage brokers.
The Seller's Portfolio Series loans are targeted as debt consolidation
loans for repeat or frequent borrowers with generally strong credit ratings.
Such loans have a combined loan to value ratio of up to 125%. Lending decisions
for these loans are based on an analysis of the prospective borrower's
documented cash flow and credit history supplemented by a collateral evaluation
deemed appropriate by the Seller.
The Seller's Liberator Series loans are targeted for the purchase or
refinance of residential real property by borrowers who because of prior credit
problems or the absence of a credit history are considered sub-prime borrowers
or other borrowers whose application does not conform for a loan under FNMA or
FHLMC underwriting guidelines. These loans have loan to value ratios which
generally are 80% or less, but such ratio may be as high as 90%. Lending
decisions, subject to certain limited exceptions, are based on an analysis of
the prospective borrower's documented cash flow and credit history combined with
an evaluation of the value of the collateral.
At September 30, 1996, the Seller had approximately 104 employees. The
Seller's headquarters are located at 1508 E. Highland Avenue, San Bernardino,
California 92404 and its telephone number is (909) 886-9751. The Seller's
servicing office is located at 4110 Tigris Way, Riverside, California 92503 and
its telephone number is (909) 280-4100.
Loan Originations
The Seller originates and purchases loans underwritten to the Seller's
guidelines. A substantial portion of the Seller's loans are originated for or
purchased by the Seller from its nationwide network of correspondents, other
third party originators and mortgage brokers. Correspondents have an audited net
worth in excess of $250,000, a minimum errors and omissions insurance policy of
$1,000,000, a warehouse line of credit for the funding of loan production, and
at least a two-year business history. Third party originators and junior
correspondents have an unaudited net worth of at least $50,000 and $100,000,
respectively. They must have a two year business track record, and junior
correspondents have errors and omissions insurance of $300,000 and a warehouse
line of credit. Brokers generally have no significant net worth, but have
demonstrated an ability to originate and process mortgage and consumer loans.
Their personal standing in the lending community is verified with acceptable
credit and finance industry references.
Correspondents, third party originators, junior correspondents and
brokers are identified through either existing personal relationships with the
Seller and its officers, extensive marketing by the Seller in various media
venues or referral to the Seller.
As of September 30, 1996, the Seller had business relationships with
115 correspondents and junior correspondents and 526 mortgage brokers and other
third party originators.
Underwriting Guidelines
General. The Seller attempts to maintain its interest rates and other
charges competitive with the lending rates of other lending institutions and
finance companies. Generally, its consumer home equity loans are made at fixed
rates for fixed terms and may extend for a term of up to thirty (30) years. Its
residential mortgage loans are offered in varied forms. In all instances, the
Seller permits borrowers to prepay such loans. Where permitted by applicable
law, the Seller may impose a prepayment fee. Whether a prepayment fee is imposed
and the amount of such penalty, if any, is negotiated between the Seller and the
individual borrower prior to closing the loan. In the majority of cases, the
Seller does not impose a prepayment fee.
Underwriting Procedures. The following is a brief description of
certain of the underwriting standards and procedures used by the Seller to
underwrite its Portfolio Series and Liberator Series loans. The Seller conducts
its own underwriting review of each loan, including those loans originated for
or purchased by the Seller from its correspondents, other third party
originators and brokers. This underwriting process is intended to assess both
the prospective borrower's ability to repay the loan and the adequacy of the
real property security as collateral for the loan granted, tailored to the
general nature of the Portfolio Series and the Liberator Series loans,
respectively. In certain cases deemed appropriate by the Seller, loans may be
made outside of the Seller's general guidelines with the prior approval of
pre-designated senior officers.
Each prospective borrower is required to complete a mortgage loan
application that may include (depending on the program requirement) information
detailing the applicant's liabilities, income, credit history, employment
history and personal information. Since most of the loan applications are
presented through the Seller's network of correspondents, other third party
originators and brokers, the Seller completes an additional credit report on all
applications received. Such report typically contains information relating to
such matters as credit history with local and national merchants and lenders,
installment debt payments and any record of defaults, bankruptcies,
repossessions or judgments. This credit report is obtained through a
sophisticated computer program that accesses the most appropriate credit bureau
in a particular zip code and combines that information with a credit risk score.
This application and review procedure is used by the Seller to analyze
the applicant's creditworthiness (i.e., a determination of the applicant's
ability to repay the loan). Creditworthiness is assessed by examination of a
number of factors, including calculating a debt-to-income ratio obtained by
dividing a borrower's fixed monthly debt by the borrower's gross monthly income.
Fixed monthly debt generally includes (i) the monthly payment under any related
prior mortgages (which generally includes an escrow for real estate taxes), (ii)
the monthly payment on the loan applied for and (iii) other installment debt,
including, for revolving debt, the required monthly payment thereon, or, if no
such payment is specified, 5% of the balance as of the date of calculation.
Fixed monthly debt does not include any debt (other than revolving credit debt)
described above that matures within less than 10 months of the date of
calculation.
Several procedures are used to verify information obtained from an
applicant. The applicant's outstanding balance and payment history on any senior
mortgage may be verified by calling the senior mortgage lender. If the senior
mortgage lender cannot be reached by telephone to verify this information, the
Seller or other originator may rely upon information provided by the applicant,
such as a recent statement from the senior lender and verification of payment,
such as canceled checks, or upon information provided by national credit
bureaus. In order to verify an applicant's employment status, the Seller or
other originator may obtain from the applicant recent tax returns or other tax
forms (e.g., W-2 forms) or current pay stubs or may telephone the applicant's
employer or obtain written verification from the employer. As in the case of the
senior mortgage lender verification procedures, if the employer
will not verify employment history over the telephone, the Seller or other
originator may rely solely on the other information provided by the applicant.
However, the Seller does offer certain Liberator Series loans at reduced
loan-to-value ratios in lieu of documenting cash flow of the borrower.
Debt to income ratios for Portfolio Series mortgage loans generally do
not exceed 45%, but in certain instances where deemed appropriate by the Seller,
the ratio may go as high as 50%. For Liberator Series mortgage loans, debt to
income ratios may vary depending upon a number of other factors used to
ascertain the creditworthiness of the related borrower.
The Seller has adopted policies that set forth specific lending
requirements as they relate to the underwriting and property appraisal of loans
to the sub-prime borrowers in the Liberator Series loans. These policies include
an analysis based on five classes of such loans, designated Ax, A-, B, C and Cx
loans. Class Ax denominated loans generally relate to borrowers who have no or
limited adverse incidents in their credit histories (typically conforming
loans), whereas Class A-, B, C and Cx loans relate to descending degrees of
sub-prime borrowers. Factors which are considered in evaluating a borrower in
this regard are the presence or absence of a credit history, prior delinquencies
in the payment of mortgage and consumer credit and personal bankruptcies. Class
A- denominated loans generally relate to borrowers with overall good credit who
have had minimal adverse credit issues with less than 25% of their outstanding
credit exhibiting some form of 30-day delinquency in the past 24 months. Class B
denominated loans generally relate to borrowers who have credit delinquencies in
their credit histories, are currently past due on consumer debt payments, have
30 to 60 day delinquencies related to mortgage payment or have been at their
current employment for less than one year or have a history of late payments on
consumer debt payments and mortgage payments. Class C borrowers have shown a
willingness to pay their obligations in a timely manner with no more than 70% of
their previous obligations reporting a derogatory credit history and currently
no obligation is more than 60 days past due at application. Class Cx denominated
loans generally relate to borrowers who have many adverse incidents in their
credit histories and are generally considered to have a bad credit history.
Although the Seller will originate Class Cx loans, the vast majority of the
Liberator Series loans originated or purchased by the Seller are Class Ax
through Class C loans.
All mortgaged properties relating to mortgage loans where collateral
assessment is an integral part of the evaluation process are appraised by
licensed or certified appraisers. All of the appraisals are either performed or
reviewed by the Seller's approved appraisers. The Seller requires the appraiser
to address neighborhood conditions, site and zoning status and the condition and
valuation of improvements. Following each appraisal, the appraiser prepares a
report which (when appropriate) includes a reproduction cost analysis based on
the current cost of constructing a similar home and a market value analysis
based on recent sales of comparable homes in the area. Title insurance policies
are required on all first mortgage liens, with a limited judgment lien report
required on all second lien loans under $100,000.
For Liberator Series loans, because of the sub-prime quality of the
creditworthiness of the borrowers, the evaluation of the value of the property
securing the loans and the ratio of loans secured by such property to its value
become of greater importance in the underwriting process. The specific
procedures and criteria utilized in the appraisal process range from a desk
review, a field review, to a second appraisal, depending on the size of the loan
and its loan-to-value ratio.
The value of the mortgaged property has lesser importance with respect
to the Portfolio Series loans in light of their high mortgaged loan-to-value
ratios. As a result, Portfolio Series loans generally have little or no equity
in the mortgaged property available to repay the loan if it is in default. For
Portfolio Series loans, the Seller accepts the homeowner/mortgagee's "as stated"
value on loans to $25,000. On loans in excess of $25,000 to a maximum of
$50,000, the Seller requires a current tax assessment, a broker price opinion, a
statistical appraisal or a HUD-1 conformed closing statement where purchase of
the subject property has occurred within the previous 12 months. For loans in
excess of $50,000, a drive-by appraisal including comparable analysis on a FHLMC
form 704 is required.
Terms of the Mortgage Loans. Each Mortgage Loan originated or purchased
by the Seller bears interest at a fixed rate as indicated on the related
mortgage notes. Interest with respect to each of the Mortgage Loans included or
to be included in the Mortgage Pool accrues on an actuarial interest method. The
actuarial interest method provides that interest is charged and payments are due
as of a scheduled day of each month which is fixed at the time of origination.
Scheduled monthly payments on such Mortgage Loans received either earlier or
later (other than delinquent) than the scheduled due dates thereof will not
affect the amortization schedule of the relative application of such payments to
principal and interest. Approximately 83% of the Mortgage Loans are fully
amortizing in accordance with their terms. The remaining approximately 17% of
the Mortgage Loans are not fully amortized over their terms and instead require
substantial balloon payments on their maturity dates. Payments received on a
Mortgage Loan are applied first to interest accrued to the date of payment, then
to late fees and other charges and then to reduce the unpaid principal balance
of the related loan.
The Mortgage Notes provide the holder with the right to require the
borrower to make immediate payment of the entire principal balance plus all
accrued but unpaid interest under the loan agreement if, among other things, the
borrower fails to make any payment under the loan agreement when due (subject to
a grace period or right to cure a default required by state law), or, where
permitted by applicable law, if the borrower transfers any interest in the
property securing the loan agreement.
In the event of default on a mortgage that is senior to a Mortgage
Loan, the junior mortgagee has the right in many states to satisfy the defaulted
senior mortgage in full, or to cure such default and make the defaulted senior
mortgage current as to payment, in either event adding any amounts expended in
connection with such satisfaction or cure to the then current principal balance
for such Mortgage Loan. In such an event of default, the Servicer will either
take the actions described above, take other appropriate actions, or refrain
from taking any action based upon the Servicer's practices in connection with
servicing loans for itself and others. See "Certain Legal Aspects of the
Mortgage Loans and Contracts--The Mortgage Loans" in the Prospectus.
The Servicer
The Seller, as servicer of the Mortgage Loans under the Pooling and
Servicing Agreement (the "Servicer"), will be required to service the Mortgage
Loans with the same degree of skill and care that it exercises with respect to
all comparable loans and assets that it services for its own account. See
"Servicing of the Mortgage Loans."
The Servicer's loan servicing activities include (i) the collection and
remittance of mortgage loan payments, (ii) accounting for principal and interest
and other collections and expenses, (iii) holding and disbursing escrow or
impounding funds for real estate taxes and insurance premiums, (iv) inspecting
properties when appropriate, (v) contacting delinquent borrowers, and (vi)
acting as fiduciary in foreclosing on and disposing of collateral properties. As
of September 30, 1996, the Servicer serviced an aggregate of 2,525 loans having
an aggregate outstanding principal balance of $186.3 million, of which
approximately 66.2%, based on outstanding principal balance were serviced for
others.
The following information briefly describes certain aspects of the
Servicer's servicing process. Borrowers are sent payment coupon books that
specify the fixed payment due and the late payment amount, if any. Due dates
predominantly occur on the first day of the calendar month. If a payment is not
received within fifteen days of the due date, an initial collection effort is
made both by telephone and mail in an attempt to bring the delinquent account
current. The various stages of delinquency are monitored and evaluated on a
weekly basis.
Means of contacting delinquent accounts include, but are not limited
to, telephone calls and collection letters. When an account is 17 or more days
past due, the collection supervisor analyzes the account to determine the
appropriate course of action. If a borrower is experiencing difficulty in making
payments on time, the Servicer may modify the payment schedule (as permitted by
the Agreement) but will not remove the loan from a delinquency status.
The course of action taken by the Servicer is dependent upon a number
of factors including the borrower's payment history, the amount of equity, if
any, in the related mortgage property and the reason for the current inability
to make timely payments.
When a loan is 59 days past due, the related mortgaged property is
required to be reassessed to determine the current value with the results being
evaluated by the Servicer to determine a course of action. Foreclosure
regulations and practices and the rights of the owner in default vary from state
to state, but generally procedures may be initiated if: (i) the loan is 45 days
or more delinquent; (ii) a notice of default on a senior lien is received or
(iii) the Servicer discovers circumstances indicating potential loss exposure.
During the foreclosures process, expenses incurred by the Servicer may be added
to the amount owed by the borrower, as permitted by applicable law. Upon
completion of the foreclosure, the property may be sold to an outside bidder, or
pass to the mortgagee, in which case the Servicer proceeds to liquidate the
asset.
The Servicer may not foreclose on the property securing a junior
mortgage loan unless it forecloses subject to the related senior mortgage. In
such cases, the Servicer generally will pay the amount due on the senior
mortgage to the senior mortgagee, if the Servicer considers such action
appropriate. In the event that foreclosure proceedings have been instituted on a
senior mortgage prior to the initiation of the Servicer's foreclosure action,
the Servicer will either satisfy such mortgage at the time of the foreclosure
sale or take other appropriate action.
Servicing and charge-off policies and collection practices may change
over time in accordance with the Servicer's business judgment, changes in its
real-estate loan portfolio and applicable laws and regulations, as well as other
items.
Regulations and practices regarding the liquidation of properties
(e.g., foreclosure) and the rights of the borrower in default vary greatly from
state to state. Only if a delinquency cannot otherwise be cured will the
Servicer decide that liquidation is the appropriate course of action. If, the
Servicer determines that purchasing a property securing a mortgage loan will
minimize the loss associated with such defaulted loan, the Servicer may bid at
the foreclosure sale for such property or accept a deed in lieu of foreclosure.
Delinquency and Loan Loss Experience
The following tables set forth information relating to the delinquency
and loan loss experience on the mortgage loans included in the Servicer's
servicing portfolio for the periods shown. The delinquency and loan loss
experience represents the historical experience of the Servicer, and there can
be no assurance that the future experience on the Mortgage Loans in the Trust
will be the same as, or more favorable than, that of the total mortgage loans in
the Servicer's servicing portfolio. See "Risk Factors - Underwriting Standards,
Limited Operating History and Potential Delinquencies."
<PAGE>
<TABLE>
<CAPTION>
Delinquency and Foreclosure Experience
(Dollars in Thousands)
At December 31, 1995 At September 30, 1996
----------------------------------------------------- ---------------------------------------------------
Number of % of % of Number of % of % of
Delinquency Loans Loans Amount Amount Loans Loans Amount Amount
Status (1) Serviced Serviced Serviced Serviced Serviced Serviced Serviced Serviced
---------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30-59 22 0.74% 2,117,830 0.83% 4 0.16% 399,933 0.21%
60-89 9 0.30% 481,518 0.19% 2 0.08% 122,760 0.07%
90 + 10 0.33% 761,518 0.30% 4 0.16% 199,406 0.11%
Bankruptcy 2 0.07% 287,977 0.11% 6 0.24% 543,384 0.29%
Foreclosure 7 0.23% 792,798 0.31% 45 1.78% 4,695,833 2.52%
REO (2) 7 0.23% 1,216,308 0.48% 15 0.59% 2,043,401 1.10%
(1) The past due period is based on the actual number of days that a
payment is contractually past due. A loan as to which a monthly payment
was due 60-89 days prior to the reporting period is considered 60-89
days past due, etc.
(2) An "REO Property" is a property acquired and held as a result of foreclosure or deed in lieu of foreclosure.
</TABLE>
<TABLE>
<CAPTION>
Loan Charge-Off Experience
(Dollars in Thousands)
Year Ended Nine Months Ended
December 31, 1995 September 30, 1996
----------------- ------------------
<S> <C> <C>
Servicing portfolio at period end $ 253,714 $ 186,323
Average outstanding (1) $ 147,145 $ 220,019
Number of loans outstanding 2,986 2,525
Gross losses (2) $ 915 $ 632
Loan recoveries $ 61 $ 124
Net loan charge-offs $ 854 $ 508
Net loan charge-offs as a percentage of the
average outstanding 0.58% 0.23%
Net loan charge-offs as a percentage of the
portfolio at period end 0.34% 0.27%
(1) "Average outstanding" presented is the arithmetic average of the
principal balances of the loans in the Seller's servicing portfolio
outstanding at the close of business for such period.
(2) "Gross losses" means the outstanding principal balance plus accrued but
unpaid interest on liquidated mortgage loans.
</TABLE>
While the above delinquency and foreclosure and loan charge-off
experiences reflect the Servicer's historical experiences at the dates and for
the periods indicated, there can be no assurance that the delinquency and
foreclosure and loan charge-off experiences on the Mortgage Loans will be
similar. See "Risk Factors - Underwriting Standards, Limiting Operating History
and Potential Delinquencies." Accordingly, the information should not be
considered to reflect the credit quality of the Mortgage Loans included in the
Trust, or as a basis of assessing the likelihood, amount or severity of losses
on the Mortgage Loans. The statistical data in the tables is based on all of the
loans in the Servicer's servicing portfolio. The Mortgage Loans, in general, are
likely to have characteristics which distinguish them from the majority of the
loans in the Servicer's servicing portfolio.
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, a Class A Certificate will be directly related to the rate
of payment of principal of the Mortgage Loans, including for this purpose
voluntary payment in full of Mortgage Loans prior to stated maturity,
liquidations due to defaults, casualties and condemnations, and repurchases of
or substitutions for Mortgage Loans by the Servicer as required or permitted
under the Pooling and Servicing Agreement or the Purchase and Sale Agreement.
The actual rate of principal prepayments on pools of mortgage loans is
influenced by a variety of economic, tax, geographic, demographic, social, legal
and other factors and has fluctuated considerably in recent years. In addition,
the rate of principal prepayments may differ among pools of mortgage loans at
any time because of specific factors relating to the mortgage loans in the
particular pool, including, among other things, the age of the mortgage loans,
the geographic locations of the properties securing the loans and the extent of
the mortgagors' equity in such properties, and changes in the mortgagors'
housing needs, job transfers and unemployment.
The rate of prepayments with respect to conventional mortgage loans
has fluctuated significantly in recent years. In general, if prevailing interest
rates fall significantly below the interest rates at the time of origination,
mortgage loans may be subject to higher prepayment rates than if prevailing
rates remain at or above those at the time such mortgage loans were originated.
Conversely, if prevailing interest rates rise appreciably above the interest
rates at the time of origination, mortgage loans may experience a lower
prepayment rate than if prevailing rates remain at or below those at the time
such mortgage loans were originated. However, there can be no assurance that the
Mortgage Loans will conform to the prepayment experience of conventional
mortgage loans or to any past prepayment experience or any published prepayment
forecast. No assurance can be given as to the level of prepayments on Mortgage
Loans that the Trust Fund will experience.
As indicated above, if purchased at other than par, the yield to
maturity on a Class A Certificate will be affected by the rate of the payment of
principal on the Mortgage Loans. If the actual rate of payments on the Mortgage
Loans is slower than the rate anticipated by an investor who purchases a Class A
Certificate at a discount, the actual yield to such investor will be lower than
such investor's anticipated yield. If the actual rate of payments on the
Mortgage Loans is faster than the rate anticipated by an investor who purchases
a Class A Certificate at a premium, the actual yield to such investor will be
lower than such investor's anticipated yield.
The final distribution date for the Class A Certificates is scheduled
to be January 1, 2028 (the "Final Scheduled Maturity Date"), which is 13 months
after the final stated maturity date of the Mortgage Loan having the latest
maturity date. The weighted average life of the Class A Certificates is likely
to be shorter than would be the case if payments actually made on the Mortgage
Loans conformed to the foregoing assumption, and the final Distribution Date
with respect to the Class A Certificates could occur significantly earlier than
the Final Scheduled Maturity Date because (i) prepayments (including, for this
purpose, prepayments attributable to foreclosure, liquidation, repurchase and
the like) on Mortgage Loans are likely to occur, (ii) thirteen months have been
added to obtain the Final Scheduled Maturity Date above, and (iii) the Servicer
or the Certificate Insurer may cause a liquidation of the Trust Fund when the
aggregate outstanding principal amount of the Mortgage Loans is less than 5% of
the sum of (a) the aggregate Original Principal Balance and (b) the Original
Pre-Funded Amount.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security is scheduled to be repaid to an investor. The weighted average
life of the Class A Certificates will be influenced by the rate at which
principal of the Mortgage Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
liquidations due to default).
Prepayments on mortgage loans are commonly measured relative to a
prepayment 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 mortgage loans for the life
of such mortgage loans. 17% HEP assumes prepayment rates of 1.7% per annum of
the then outstanding principal balance of the Mortgage Loans in the first month
of life of the Mortgage Loans and an additional 1.7% 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, 17% HEP
assumes a constant prepayment rate of 17% per annum. Neither the Prepayment
Assumption nor any other prepayment model or assumption purports to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
related Mortgage Loans. Variations in the actual prepayment experience and the
balance of the Mortgage Loans that prepay may increase or decrease each weighted
average life shown in the following tables. Such variations may occur even if
the average prepayment experience of all such Mortgage Loans equals any of the
specified percentages of the Prepayment Assumption.
The following table has been prepared on the basis of the following
assumptions (collectively the "Modeling Assumptions"):
(i) The Mortgage Loans prepay at the indicated percentage of the
Prepayment Assumption, (ii) distributions on the Certificates are received in
cash on the 15th day of each month commencing in January 1997, (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 December 1996 (or as set forth in the following table) and
prepayments represent payments in full of individual Mortgage Loans and are
assumed to be received on the last day of each month, commencing in December
1996 (or as set forth in the following table) and include 30 days' interest
thereon, (v) the Class A Pass-Through Rate remains constant at 6.95% per annum,
(vi) the Certificates are purchased on December 18, 1996, (vii) all calculations
are made on the basis of a 360 day year consisting of twelve 30 day months, and
(viii) the Mortgage Pool consists of Mortgage Loans having the following
characteristics:
<PAGE>
<TABLE>
<CAPTION>
Original
Term to Remaining Remaining Amortizing
Principal Mortgage Maturity Term to Maturity Term
Balance($) Interest Rate(%) (in months) (in months) (in months)
<S> <C> <C> <C> <C>
$ 21,638,562.55 13.844% 180 178 178
21,099,127.94 14.297 240 239 239
2,932,950.59 11.320 357 355 355
9,329,358.96 11.996 180 177 357
</TABLE>
Based upon the foregoing Modeling Assumptions, certain of which might
not reflect actual experience, the tables below indicate the projected weighted
average life and earliest retirement date of the Class A Certificates assuming
that the Mortgage Loans prepay according to the indicated percentages of the
Prepayment Assumption.
Class A Certificates
Percentage of Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life (1)(2) Date (3)
- ------------------------ ---------------- -------------------
10% 6.833 April 15, 2012
15 5.291 January 15, 2011
17(4) 4.821 February 15, 2010
22 3.902 November 15, 2007
27 3.241 January 15, 2006
- ----------------------
(1) The weighted average life of the Class A Certificates is determined by
(a) multiplying the amount of each principal payment by the number of
years from the Issue Date to the related Distribution Date; (b) adding
the results; and (c) dividing the sum by the Original Class A Principal
Balance.
(2) Determined assuming no early termination of the Trust Fund occurs.
(3) Determined assuming early termination of the Trust Fund occurs on
the Clean-up Call Date as described herein.
(4) Pricing speed.
----------------------
There is no assurance that prepayments will occur or, if they do occur,
that they will occur at any percentage of HEP.
The Pooling and Servicing Agreement provides that none of the
Certificate Insurer, the Trust, the Trustee, the Seller, the Depositor or the
Servicer will be liable to any Certificateholder or Holder for any loss or
damage incurred by such Certificateholder or Holder as a result of any
difference in the rate of return received by such Certificateholder or Holder as
compared to the Class A Pass-Through Rate, with respect to any Holder of Class A
Certificates upon reinvestments of the funds received in connection with any
premature repayment of principal on the Certificates, including any such
repayment resulting from any prepayment by the Mortgagor, any liquidation of
such Mortgage Loan, or any repurchase of or substitution for any Mortgage Loan
by the Seller or the Servicer.
<PAGE>
DESCRIPTION OF THE CERTIFICATES
General
The Class A Certificates will be issued by the Trust. Each Class A
Certificate represents a certain fractional undivided ownership interest in the
Trust Fund created and held pursuant to the Pooling and Servicing Agreement,
subject to the limits and the priority of distribution described therein. The
Trust Fund consists of (a) the Mortgage Loans, together with the mortgage files
relating thereto and all collections thereon and proceeds thereof collected
after the Cut-Off Date or Subsequent Cut-Off Date, as the case may be, (other
than Monthly Payments due on each Mortgage Loan up to and including any Due Date
occurring on or prior to the Cut-Off Date or Subsequent Cut-Off Date, as the
case may be), (b) such assets as from time to time are identified as REO
Property and collections thereon and proceeds thereof, (c) assets that are
deposited in the Accounts (as defined herein), including amounts on deposit in
the Accounts and invested in certain investments in accordance with the Pooling
and Servicing Agreement ("Permitted Investments"), (d) the Trustee's rights with
respect to the Mortgage Loans under all insurance policies required to be
maintained pursuant to the Pooling and Servicing Agreement and any insurance
proceeds, (e) liquidation proceeds and (f) released mortgaged property proceeds.
In addition, the Depositor will cause the Certificate Insurer to issue the
Certificate Insurance Policy under which it will guarantee payments to the Class
A Certificateholders as described herein. Also, the Class A Certificateholders
will have the benefit of the Reserve Account, which will be pledged to the
Trustee for the benefit of the Certificateholders and the Certificate Insurer
but will not constitute part of the Trust Fund.
Book-Entry Registration
The Class A Certificates will be issued only in book-entry form, in
denominations of $1,000 initial principal balance and integral multiples of
$1,000 in excess thereof, except that one Class A Certificate may be issued in a
different amount.
The Beneficial Owners may elect to hold their Class A Certificates
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 in such systems. The Book-Entry
Certificates initially will be represented by a single Class A Certificate
registered in the name of Cede, 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 depositories, which in turn will hold such positions in customers'
securities accounts in the depositories' names on the books of DTC. Chase will
act as depositary for CEDEL and Morgan Guaranty Trust Company of New York,
Brussels Office, will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositories"). Investors may hold such beneficial interests in the Book-Entry
Certificates in minimum denominations representing principal amounts of $1,000.
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 Class A Certificates will be Cede, as nominee of DTC.
Beneficial Owners will not be Owners as that term is used in the Pooling and
Servicing Agreement. Beneficial Owners are only permitted to exercise their
rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's Ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of CEDEL or Euroclear, as appropriate).
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Securities Exchange Act of 1934, as
amended. DTC was created to hold securities for its participating organizations
("Participants") and to facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entries, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers (including the Underwriter), banks, trust
companies and clearing corporations. Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Book-Entry Certificates, such as the Class A Certificates, among Participants
on whose behalf it acts with respect to the Book-Entry Certificates and to
receive and transmit distributions of principal of and interest on the
Book-Entry Certificates. Participants and Indirect Participants with which
Beneficial Owners have accounts with respect to the Book-Entry Certificates
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Beneficial Owners.
Beneficial Owners that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Certificates may do so only through Participants and
Indirect Participants. In addition, Beneficial Owners will receive all
distributions of principal and interest from the Trustee, or a paying agent on
behalf of the Trustee, through DTC Participants. DTC will forward such
distributions to its Participants, which thereafter will forward them to
Indirect Participants or Beneficial Owners. Beneficial Owners will not be
recognized by the Trustee, the Servicer or any paying agent as
Certificateholders, as such term is used in the Pooling and Servicing Agreement,
and Beneficial Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its Participants.
Because 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.
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 Depositories.
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 many
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 many currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear Securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to Cede, as nominee of 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, as nominee of DTC.
Distributions with respect to Class A Certificates held through CEDEL or
Euroclear will be credited to the cash accounts of CEDEL 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 Trustee 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.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Beneficial
Owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Book-Entry Certificates, may be limited due to the lack of a physical
certificate for such Book-Entry Certificates. In addition, under a book-entry
format, Beneficial Owners may experience delays in their receipt of payments,
since distributions will be made by the Trustee, to Cede, as nominee for DTC.
DTC has advised the Depositor and the Servicer that it will take any
action permitted to be taken by a Certificateholder under the Pooling and
Servicing Agreement only at the direction of one or more Participants to whose
accounts with DTC the Book-Entry Certificates are credited. Additionally, DTC
has advised the Depositor that it will take such actions with respect to
specified percentages of voting rights only at the direction of and on behalf of
Participants whose holdings of Book-Entry Certificates evidence such specified
percentages of voting rights. DTC may take conflicting actions with respect to
percentages of voting rights to the extent that Participants whose holdings of
Book-Entry Certificates evidence such percentages of voting rights authorize
divergent action.
None of the Depositor, the Servicer 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.
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.
Definitive Certificates
The Class A Certificates, which will be issued initially as Book-Entry
Certificates, will be converted to Definitive Certificates and reissued to
Beneficial Owners or their nominees, rather than to DTC or its nominee, only if
(a) the Depository or the Servicer advises the Trustee and the Certificate
Insurer in writing that DTC is no longer willing or able to discharge properly
its responsibilities as depository with respect to the Book-Entry Certificates
and the Depository or the Servicer is unable to locate a qualified successor or
(b) the Trustee, at its option, after notice to the Certificate Insurer, elects
to terminate the book-entry system through DTC.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify all Participants of the availability
through DTC of Definitive Certificates. Upon delivery of Definitive
Certificates, the Trustee will reissue the Book-Entry Certificates as Definitive
Certificates to Beneficial Owners. Distributions of principal of, and interest
on, the Book-Entry Certificates will thereafter be made by the Trustee, or a
paying agent on behalf of the Trustee, directly to holders of Definitive
Certificates in accordance with the procedures set forth in the Pooling and
Servicing Agreement.
Definitive Certificates will be transferable and exchangeable at the
offices of the Trustee or the certificate registrar. No service charge will be
imposed for any registration of transfer or exchange, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
<PAGE>
Assignment of Mortgage Loans
Pursuant to a Mortgage Purchase Agreement between the Depositor and the
Seller (the "Mortgage Purchase Agreement"), the Seller will sell, transfer,
assign, set over and otherwise convey the Mortgage Loans without recourse to the
Depositor on the Issue Date (or with respect to the Subsequent Mortgage Loans,
the applicable Subsequent Transfer Date). Pursuant to the Pooling and Servicing
Agreement, the Depositor will sell, transfer, assign, set over and otherwise
convey without recourse to the Trustee in trust for the benefit of the
Certificateholders and the Certificate Insurer all right, title and interest in
and to each Mortgage Loan. Each such transfer will convey all right, title and
interest in and to (a) principal due and (b) interest accruing on each such
Mortgage Loan after the Cut-Off Date (or with respect to the Subsequent Mortgage
Loans, on or after the applicable Subsequent Cut-Off Date); provided, however,
that the Seller will not convey, and the Seller reserves and retains all its
right, title and interest in and to, (i) principal (including principal
prepayments in full and curtailments (i.e., partial prepayments)) received on
each such Mortgage Loan on or prior to the Cut-Off Date (or with respect to the
Subsequent Mortgage Loans, prior to the applicable Subsequent Cut-Off Date) and
(ii) interest accrued on each Mortgage Loan on or prior to the Due Date
immediately preceding the Cut-Off Date (or with respect to the Subsequent
Mortgage Loans, the applicable Subsequent Cut-Off Date).
In connection with such transfer and assignment, the Depositor will
cause to be delivered to the Trustee on the Issue Date (or with respect to the
Subsequent Mortgage Loans, the applicable Subsequent Transfer Date) the
following documents (collectively, with respect to each Mortgage Loan, the
"Trustee's Mortgage File") with respect to each Mortgage Loan:
(a) The original Mortgage Note, endorsed without recourse in
blank by the Seller, including all intervening endorsements showing a
complete chain of endorsement;
(b) The related original Mortgage with evidence of recording
indicated thereon or a copy thereof certified by the applicable
recording office;
(c) The recorded mortgage assignment(s), or copies thereof
certified by the applicable recording office, if any, showing a
complete chain of assignment from the originator of the related
Mortgage Loan to the Seller (which assignment may, at the Seller's
option, be combined with the assignment referred to in clause (d)
below);
(d) A mortgage assignment in recordable form (which, if
acceptable for recording in the relevant jurisdiction, may be included
in a blanket assignment or assignments) of each Mortgage from the
Seller to the Trustee;
(e) Originals of all assumption, modification and substitution
agreements in those instances where the terms or provisions of a
Mortgage or Mortgage Note have been modified or such Mortgage or
Mortgage Note has been assumed; and
(f) Evidence of title insurance (which may consist of (A) a
copy of the title insurance or PERT policy, or (B) a binder thereof or
copy of such binder) together with a certificate from the Seller that
the original Mortgage has been delivered to the title insurance
company that issued such binder for recordation.
Pursuant to the Pooling and Servicing Agreement, the Trustee agrees to
execute and deliver on or prior to the Issue Date an acknowledgment of receipt
of the Certificate Insurance Policy and, for each Initial Mortgage Loan, the
original Mortgage Note, item (a) above, with respect to the Mortgage Loans (with
any exceptions noted). The Trustee agrees, for the benefit of the
Certificateholders and the Certificate Insurer, to review (or cause to be
reviewed) each Trustee's Mortgage File within 30 days after the Issue Date (or,
with respect to any Subsequent Mortgage Loan or Qualified Substitute Mortgage
Loan, within 30 days after the receipt by the Trustee thereof) and to deliver a
certification generally to the effect that, as to each Mortgage Loan listed in
the Mortgage Loan Schedule, (a) all documents required to be delivered to it
pursuant to the Mortgage Purchase Agreement are in its possession, (b) each such
document has been reviewed by it and has not been mutilated, damaged, torn or
otherwise physically altered, appears regular on its face and relates to such
Mortgage Loan, and (c) based on its examination and only as to the foregoing
documents, certain information set forth on the Mortgage Loan Schedule
accurately reflects the information set forth in the Trustee's Mortgage File
delivered on such date.
If the Trustee or the Certificate Insurer, during the process of
reviewing the Trustee's Mortgage Files, finds any document constituting a part
of a Trustee's Mortgage File which is not executed, has not been received, is
unrelated to the Mortgage Loans, or does not conform to the requirements above
or to the description thereof as set forth in the Mortgage Loan Schedule, the
Trustee or the Certificate Insurer, as applicable, shall promptly so notify the
Trustee, the Servicer, the Seller and the Certificate Insurer in writing with
details thereof. The Seller agrees to use reasonable efforts to cause to be
remedied a material defect in a document constituting part of a Trustee's
Mortgage File of which it is so notified by the Trustee. If, however, within 60
days after the Trustee's notice to it respecting such defect the Seller has not
caused to be remedied the defect and the defect materially and adversely affects
the value of the Mortgage Loan or the interest of the Holders in the Mortgage
Loan or the interests of the Certificate Insurer, the Seller will either (a)
substitute in lieu of such Mortgage Loan a Qualified Substitute Mortgage Loan
and, if the then outstanding principal balance of such Qualified Substitute
Mortgage Loan is less than the principal balance of such Mortgage Loan as of the
date of such substitution plus accrued and unpaid interest thereon, deliver to
the Servicer as part of the related monthly remittance remitted by the Servicer
the amount of any such shortfall (the "Substitution Adjustment") or (b) purchase
such Mortgage Loan at a price equal to the outstanding principal balance of such
Mortgage Loan as of the date of purchase, plus the greater of (i) all accrued
and unpaid interest thereon and (ii) 30 days' interest thereon, computed at the
related Mortgage Interest Rate, net of the Servicing Fee, plus the amount of any
unreimbursed Servicing Advances made by the Servicer, which purchase price shall
be deposited in the Collection Account on the next succeeding Servicer
Distribution Date after deducting therefrom any amounts received in respect of
such repurchased Mortgage Loan or Loans and being held in the Collection Account
for future distribution to the extent such amounts have not yet been applied to
principal or interest on such Mortgage Loan (see "Flow of Funds" below).
A "Qualified Substitute Mortgage Loan" is defined in the Pooling and
Servicing Agreement as any mortgage loan or mortgage loans substituted for a
deleted Mortgage Loan and which, among other things, (i) relates or relate to a
detached one-family residence or to the same type of residential dwelling as the
deleted Mortgage Loan and in each case has or have the same or a better lien
priority as the deleted Mortgage Loan and has the same occupancy status or is an
owner-occupied Mortgaged Property, (ii) matures or mature no later than (and not
more than one year earlier than) the deleted Mortgage Loan, (iii) has or have a
CLTV or CLTV's at the time of such substitution no higher than the CLTV of the
deleted Mortgage Loan, (iv) has or have a principal balance or principal
balances (after application of all payments received on or prior to the date of
substitution) not substantially less and not more than the principal balance of
the deleted Mortgage Loan as of such date, (v) has a mortgage interest rate of
at least the same interest rate as the deleted Mortgage Loan and (vi) complies
or comply as of the date of substitution with each representation and warranty
set forth in the Mortgage Purchase Agreement.
Representations and Warranties of the Seller
The Seller will represent, among other things, with respect to each
Mortgage Loan, as of the Issue Date (or with respect to the Subsequent Mortgage
Loans, the applicable Subsequent Transfer Date), the following:
1. The information set forth in the Mortgage Loan Schedule
with respect to each Mortgage Loan is true and correct;
2. All of the original or certified documentation constituting
the Trustee's Mortgage Files (including all material documents related
thereto) has been or will be delivered to the Trustee on the Issue
Date (or with respect to the Subsequent Mortgage Loans, the applicable
Subsequent Transfer Date) or as otherwise provided in the Mortgage
Purchase Agreement;
3. Each Mortgaged Property is improved by a one-to four-family
residential dwelling, which does not include (i) a unit in a
cooperative apartment, (ii) a property constituting part of a
syndication, (iii) a time share unit, (iv) a property held in trust,
(v) a mobile home, (vi) a manufactured dwelling, (vii) a
log-constructed home, or (viii) a recreational vehicle, and each such
Mortgaged Property does not constitute other than real property under
applicable state law;
4. Each Mortgage is a valid first or second lien on a fee
simple (or its equivalent under applicable state law) estate in the
real property securing the amount owed by the Mortgagor under the
Mortgage Note subject only to (i) the lien of current real property
taxes and assessments which are not delinquent, (ii) any related first
mortgage loan, (iii) covenants, conditions and restrictions, rights of
way, easements and other matters of public record as of the date of
recording of such Mortgage, such exceptions appearing of record being
acceptable to prudent mortgage lending institutions generally in the
area wherein the property subject to the Mortgage is located and
specifically referred to in the Lender's title insurance policy
delivered to the originator of the Mortgage Loan and referred to or
otherwise considered in the appraisal obtained in connection with the
origination of the related Mortgage Loan and (iv) 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
such Mortgage or the use, enjoyment, value or marketability of the
related Mortgaged Property;
5. Immediately prior to the sale of the Mortgage Loan to the
Depositor under the Mortgage Purchase Agreement, (i) the Seller was the
sole owner and holder of each Mortgage Loan, (ii) each Mortgage Loan
was not otherwise assigned or pledged, (iii) the Seller had good,
indefeasible and marketable title thereto, (iv) the Seller had full
right to transfer and sell the Mortgage Loan therein to the Depositor
under such Mortgage Purchase Agreement free and clear of any
encumbrance, equity interest, participation interest, lien, pledge,
charge, claim or security interest, and (v) the Seller had full right
and authority subject to no interest or participation of, or agreement
with, any other party, to sell and assign each Mortgage Loan to the
Depositor under such Mortgage Purchase Agreement, and following the
sale of each Mortgage Loan by the Depositor, the Trustee will own such
Mortgage Loan free and clear of any encumbrance, equity interest,
participation interest, lien, pledge, charge, claim or security
interest;
6. Each Mortgage Loan conforms, and all such Mortgage Loans in
the aggregate conform, to the description thereof set forth in this
Prospectus Supplement; and
7. All of the Mortgage Loans were originated in accordance
with the underwriting criteria set forth in this Prospectus
Supplement.
Pursuant to the Pooling and Servicing Agreement, upon the discovery by
any of the Seller, the Servicer, any Subservicer, the Certificate Insurer, or
the Trustee that any of the representations and warranties contained in the
Mortgage Purchase Agreement have been breached in any material respect as of the
Issue Date (or with respect to the Subsequent Mortgage Loans, the applicable
Subsequent Transfer Date), with the result that the value of any Mortgage Loan
is reduced or the interests of the Certificateholders in the related Mortgage
Loan or the interests of the Certificate Insurer were materially and adversely
affected (notwithstanding that such representation and warranty was made to the
Seller's best knowledge and the Seller lacked knowledge of such breach), the
party discovering such breach is required to give prompt written notice to the
other parties. Subject to certain provisions of the Mortgage Purchase Agreement,
within 60 days of the earlier to occur of the Seller's discovery or its receipt
of notice of any such breach, the Seller will (a) promptly cure such breach in
all material respects, (b) remove each Mortgage Loan which has given rise to the
requirement for action by the Seller, substitute one or more Qualified
Substitute Mortgage Loans and, if the outstanding principal amount of such
Qualified Substitute Mortgage Loans as of the date of such substitution is less
than the outstanding principal balance, plus accrued and unpaid interest thereon
of the replaced Mortgage Loans as of the date of substitution, deliver to the
Trust Fund as part of the amounts remitted by the Servicer on the next
succeeding Servicer Distribution Date the amount of such shortfall, or (c)
purchase such Mortgage Loan at a price equal to the principal balance of such
Mortgage Loan as of the date of purchase plus the greater of (i) all accrued and
unpaid interest thereon and (ii) 30 days' interest thereon computed at the
Mortgage Interest Rate, net of the Servicing Fee, plus the amount of any
unreimbursed Servicing Advances made by the Servicer, and deposit such purchase
price into the Collection Account on the next succeeding Servicer Distribution
Date after deducting therefrom any amounts received in respect of such
repurchased Mortgage Loan or Loans and being held in the Collection Account for
future distribution to the extent such amounts have not yet been applied to
principal or interest on such Mortgage Loan; provided, however, that any
substitution of one or more Qualified Substitute Mortgage Loans pursuant to
clause (b) preceding must be effected not later than two years after the Issue
Date unless the Trustee and the Certificate Insurer receive an opinion of
counsel that such substitution would not cause the Trust Fund to fail to qualify
as a "grantor trust" at any time any certificates are outstanding. In addition,
the Seller shall be obligated to indemnify the Trustee, the Trust, the
Certificateholders and the Certificate Insurer for any claims or damages arising
out of a breach by the Seller of representations or warranties regarding the
Mortgage Loans. The obligation of the Seller to cure such breach or to
substitute or purchase any Mortgage Loan and to indemnify constitute the sole
remedies respecting a material breach of any such representation or warranty to
the Certificateholders, the Trustee and the Certificate Insurer.
Payments on the Mortgage Loans
The Pooling and Servicing Agreement provides that the Servicer for the
benefit of the Certificateholders and the Certificate Insurer shall establish
and maintain a Collection Account (the "Collection Account"), which will
generally be (i) a segregated account maintained with a depository institution
or trust company whose deposits are insured by the FDIC, whose long term
unsecured debt obligations are rated by each Rating Agency in one of its two
highest rating categories and whose short term unsecured debt obligations are
rated in the highest rating category by each Rating Agency at the time of any
deposit therein or (ii) a trust account maintained with the trust department of
a federal or state chartered depository institution or trust company acceptable
to the Certificate Insurer (which may include the Trustee), having capital or
surplus of not less than $50,000,000, acting in its fiduciary capacity (any such
account, an "Eligible Account"). The Pooling and Servicing Agreement permits the
Servicer to direct any depository institution maintaining the Collection Account
to invest the funds in the Collection Account solely in one or more Permitted
Investments that mature, unless payable on demand, no later than the Business
Day preceding the date on which the Servicer is required to transfer the
Servicer Distribution Amount from the Collection Account to the Certificate
Account described below.
The Servicer is obligated to deposit or cause to be deposited in the
Collection Account on a daily basis, amounts representing the following payments
received and collections made by it after the Cut-Off Date (other than in
respect of Monthly Payments on the Mortgage Loans due on each Mortgage Loan up
to and including any Due Date occurring on or prior to the applicable Cut-Off
Date (or with respect to the Subsequent Mortgage Loans, prior to the applicable
Subsequent Cut-Off Date)): (i) all payments on account of principal, including
prepayments of principal ("Principal Prepayments"); (ii) all payments on account
of interest on the Mortgage Loans, (iii) all Liquidation Proceeds and all
Insurance Proceeds to the extent such proceeds are not to be applied to the
restoration of the related Mortgaged Property or released to the related
borrower in accordance with the express requirements of law or in accordance
with prudent and customary servicing practices; (iv) amounts paid in connection
with the repurchase or substitution of a Mortgage Loan pursuant to the Pooling
and Servicing Agreement; (v) all Net REO Proceeds; (vi) all other amounts
required to be deposited in the Collection Account pursuant to the Pooling and
Servicing Agreement including prepayment fees; and (vii) any amounts required to
be deposited in connection with net losses realized on investments of funds in
the Collection Account.
The Trustee will be obligated to set up an account (the "Certificate
Account", and together with the Collection Account, the "Accounts"), which is
required to be an Eligible Account, into which the Servicer will deposit or
cause to be deposited the Servicer Distribution Amount on the 10th day of each
month, or if such 10th day is not a Business Day, the Business Day immediately
preceding such 10th day (the "Servicer Distribution Date"). On each Servicer
Distribution Date the Servicer also will deposit into the Certificate Account
any Compensating Interest Payments to be made with respect to the upcoming
Distribution Date.
The "Servicer Distribution Amount" for a Servicer Distribution Date is
equal to the sum of (i) all unscheduled collections of principal and interest on
the Mortgage Loans (including Principal Prepayments, Net REO Proceeds and
Liquidation Proceeds, if any) collected by the Servicer during the related Due
Period and all scheduled Monthly Payments due during the preceding month and
received on or prior to the Business Day preceding such Servicer Distribution
Date, (ii) all Periodic Advances made by the Servicer with respect to payments
due to be received on the Mortgage Loans on the related Due Date and (iii) any
other amounts required to be placed in the Collection Account by the Servicer
pursuant to the Pooling and Servicing Agreement but excluding the following:
(a) amounts received on particular Mortgage Loans as late
payments of principal or interest, or as Net Liquidation Proceeds, with
respect to which the Servicer has previously made an unreimbursed
Periodic Advance to the extent of such Periodic Advance;
(b) amounts received on a particular Mortgage Loan with
respect to which the Servicer has previously made an unreimbursed
Servicing Advance to the extent of such Servicing Advance;
(c) for such Servicer Distribution Date, the aggregate
Servicing Fee;
(d) all net income from Permitted Investments that is held in
the Collection Account for the account of the Servicer;
(e) all amounts in respect of late fees, assumption fees,
prepayment fees and similar fees;
(f) Net Foreclosure Profits; and
(g) certain other amounts which are reimbursable to the
Servicer, as provided in the Pooling and Servicing Agreement.
The amounts described in clauses (a) through (g) above may be withdrawn
by the Servicer from the Collection Account on or prior to each Servicer
Distribution Date.
"Foreclosure Profits" as to any Servicer Distribution Date, are the
excess, if any, of (i) Net Liquidation Proceeds in respect of each Mortgage Loan
that became a Liquidated Mortgage Loan during the month immediately preceding
the month of such Servicer Distribution Date over (ii) the sum of such unpaid
principal balance of each such Liquidated Mortgage Loan plus accrued and unpaid
interest on the unpaid principal balance from the Due Date to which interest was
last paid by the Mortgagor.
"Insurance Proceeds" are proceeds paid by any insurer pursuant to any
insurance policy covering a Mortgage Loan to the extent such proceeds are not
applied to the restoration of the related Mortgaged Property or released to the
related Mortgagor in accordance with the express requirements of law or in
accordance with prudent and customary servicing practices. "Insurance Proceeds"
do not include "Insured Payments."
"Liquidation Expenses" as to any Liquidated Mortgage Loan are all
expenses incurred by the Servicer in connection with the liquidation of such
Mortgage Loan, including, without duplication, unreimbursed expenses for real
property taxes and unreimbursed Servicing Advances with respect to such Mortgage
Loan. In no event may Liquidation Expenses with respect to a Liquidated Mortgage
Loan exceed the related Liquidation Proceeds.
"Liquidated Loan Loss" as to any Liquidated Mortgage Loan is the
excess, if any, of (i) the unpaid principal balance of such Liquidated Mortgage
Loan plus accrued and unpaid interest on such unpaid principal balance from the
Due Date to which interest was last paid by the Mortgagor over (ii) Net
Liquidation Proceeds.
"Liquidation Proceeds" are amounts (other than Insurance Proceeds)
received by the Servicer in connection with (i) the taking of all or a part of a
Mortgaged Property by exercise of the power of eminent domain or condemnation or
(ii) the liquidation of a defaulted Mortgage Loan through a trustee's sale,
foreclosure sale, REO Disposition or otherwise.
"Net Foreclosure Profits" as to any Servicer Distribution Date, are
the excess, if any, of (i) the aggregate Foreclosure Profits with respect to
such Servicer Distribution Date over (ii) Liquidated Loan Losses with respect to
such Servicer Distribution Date.
"Net Liquidation Proceeds" as to any Liquidated Mortgage Loan, are
Liquidation Proceeds net of Liquidation Expenses and net of any unreimbursed
Periodic Advances made by the Servicer with respect to such Liquidated Mortgage
Loan.
"Net REO Proceeds" as to any REO Property, are REO Proceeds net of any
related expenses of the Servicer related to such REO Property.
"REO Disposition" as to any REO Property, is the final sale by the
Servicer of a Mortgaged Property acquired by the Servicer in foreclosure or by
deed in lieu of foreclosure.
"REO Proceeds" are monies received in respect of any REO Property
(including, without limitation, proceeds from the rental of the related
Mortgaged Property).
Servicing Fees and Other Compensation and Payment of Expenses
As compensation for its activities as Servicer under the Pooling and
Servicing Agreement, the Servicer shall be entitled with respect to each
Mortgage Loan to the Servicing Fee, which shall be payable monthly from amounts
on deposit in the Collection Account. The "Monthly Servicing Fee" shall be an
amount equal to interest at 1/12th of the Servicing Fee Rate for such Mortgage
Loan on the scheduled Principal Balance on such Mortgage Loan (the "Scheduled
Principal Balance") less prepayments received. The "Servicing Fee Rate" with
respect to each Mortgage Loan will be 1.0% per annum. In addition to the
Servicing Fee, the Servicer is entitled under the Pooling and Servicing
Agreement to retain additional servicing compensation in the form of assumption
and other administrative fees, release fees, bad check charges, and other
similar servicing-related fees. Net Liquidation Proceeds not otherwise required
to be deposited in the Certificate Account pursuant to the Pooling and Servicing
Agreement, earnings paid on Permitted Investments and amounts held on deposit as
investment earnings on the Collection Account shall be retained by or remitted
to the Servicer to the extent not required to be remitted to the Trustee for
deposit in the Certificate Account or the Collection Account. The Servicer shall
pay all expenses incurred by it in connection with its servicing activities
under the Pooling and Servicing Agreement and shall not be entitled to
reimbursement therefor except as specifically provided in the Pooling and
Servicing Agreement.
The Servicer may recover Periodic Advances and Servicing Advances to
the extent permitted by the Pooling and Servicing Agreement and by the terms of
the Mortgage Loans or, if not recovered from the Mortgagor on whose behalf such
Servicing Advance or Periodic Advance was made, from late collections on the
related Mortgage Loan, including Liquidation Proceeds, Insurance Proceeds and
such other amounts as may be collected by the Servicer from the Mortgagor or
otherwise relating to the Mortgage Loan. In the event a Periodic Advance becomes
a Nonrecoverable Advance, the Servicer may be reimbursed for such advance from
the Certificate Account.
The Servicer shall not be required to make any Periodic Advance or
Servicing Advance which it determines would be a nonrecoverable Periodic Advance
or nonrecoverable Servicing Advance (a "Nonrecoverable Advance"). A Periodic
Advance or Servicing Advance is "nonrecoverable" if in the good faith judgment
of the Servicer, such Periodic Advance or Servicing Advance is not ultimately
recoverable.
Reserve Account
The Reserve Account. On the Issue Date, an initial cash deposit in an
amount required by the Certificate Insurer will be made into the Reserve Account
to be maintained with the Trustee. The Reserve Account will not be a part of the
Trust Fund but will be held in trust by the Trustee for the benefit of the
Certificateholders and the Certificate Insurer. On each Distribution Date the
Trustee will deposit into the Reserve Account the cash, if any, remaining after
payment of interest and principal to the holders of the Certificates and payment
of Trust expenses and certain amounts reimbursable to the Servicer and the
Certificate Insurer, until the aggregate amount then on deposit in the Reserve
Account equals the amount required by the Certificate Insurer. With respect to
the Certificates, the Pooling and Servicing Agreement generally provides that,
subject to certain floors and triggers, the Required Reserve Account Level may
be reduced or eliminated. In addition, certain triggers or conditions may cause
the Required Reserve Account Level to be increased. On each Distribution Date,
amounts on deposit in the Reserve Account will be withdrawn to make any
necessary payments of the Credit Enhancement Distribution Amount. Withdrawals
from the Reserve Account will be replenished from the flow of funds. Subject to
certain limitations and requirements described in the Pooling and Servicing
Agreement, distributions may be made by the Trustee to the Seller from amounts
on deposit in the Reserve Account in excess of the Required Reserve Account
Level. Amounts on deposit in the Reserve Account will be invested in Permitted
Investments. See "-Flow of Funds" below.
The Seller will not be required to refund any amounts previously
properly distributed to it, regardless of whether there are sufficient funds on
a subsequent Distribution Date to make a full distribution to holders of the
Certificates on such Distribution Date.
The Certificate Insurance Policy. The Pooling and Servicing Agreement
requires the Trustee to make a claim for an Insured Payment under the
Certificate Insurance Policy not later than the second Business Day prior to any
Distribution Date as to which the Trustee has determined that an Insured Payment
with respect to the Class A Certificates will be necessary.
Flow of Funds
On each Distribution Date, the Trustee shall distribute, to the extent
of funds on deposit in the Certificate Account and with respect to (c) and (d)
below, Insured Payments on deposit in the Certificate Account, as follows:
(a) to the Trustee, an amount equal to the fees then due to
it;
(b) to the Certificate Insurer, the premium amount then due to
it;
(c) from amounts then on deposit in the Certificate Account
(including any Insured Payments and amounts withdrawn from the Reserve
Account and, on any Distribution Date on or before the Distribution
Date immediately following the end of the Pre-Funding Period, any
amounts withdrawn from the Capitalized Interest Account pursuant to
the terms of the Pooling and Servicing Agreement), to the Class A
Certificateholders an amount equal to the Class A Interest
Distribution Amount;
(d) from amounts then on deposit in the Certificate Account
(including any Insured Payments and amounts withdrawn from the Reserve
Account), to the Class A Certificateholders an amount equal to the
Class A Principal Distribution Amount until the Class A Principal
Balance has been reduced to zero;
(e) from amounts then on deposit in the Certificate Account
(excluding any Insured Payments but including amounts withdrawn from
the Reserve Account) to the Certificate Insurer the sum of (i) the
amount of all Insured Payments and other payments made by the
Certificate Insurer pursuant to the Certificate Insurance Policy which
have not been previously repaid, (ii) any other amounts owing to the
Certificate Insurer pursuant to the Insurance Agreement and (iii)
interest on such amounts at the Late Payment Rate (as defined in the
Insurance Agreement) (the "Reimbursement Amount"); and
(f) an amount equal to any amount then remaining in the
Certificate Account after the applications described in clauses (a)
through (e) above (such amount, the "Reserve Account Deposit") shall be
deposited in the Reserve Account.
Notwithstanding the foregoing, the aggregate amount paid on all Distribution
Dates to the Holders of the Class A Certificates on account of principal shall
not exceed the Original Class A Principal Balance.
Report to Certificateholders
Pursuant to the Pooling and Servicing Agreement, on each Distribution
Date the Trustee will deliver to the Servicer, the Certificate Insurer, each
Certificateholder and the Depositor a written report containing information
including, without limitation, the amount of the distribution on such
Distribution Date, the amount of such distribution allocable to principal and
allocable to interest, the aggregate outstanding principal balance of the Class
A Certificates as of such Distribution Date, the amount of any Insured Payment
included in such distributions on such Distribution Date and such other
information as required by the Pooling and Servicing Agreement.
Amendment
The Pooling and Servicing Agreement may be amended from time to time by
the Depositor, the Servicer and the Trustee by written agreement, with the prior
written consent of the Certificate Insurer, without notice to, or consent of,
the Certificateholders, to cure any ambiguity, to correct or supplement any
provisions herein, to comply with any changes in the Code, or to make any other
provisions with respect to matters or questions arising under the Pooling and
Servicing Agreement which shall not be inconsistent with the provisions of the
Pooling and Servicing Agreement, provided that such action shall not, as
evidenced by an Opinion of Counsel delivered to, but not obtained at the expense
of, the Trustee, adversely affect in any material respect the interests of any
Certificateholder; and provided, further, that no such amendment shall reduce in
any manner the amount of, or delay the timing of, payments received on Mortgage
Loans which are required to be distributed on any Certificate without the
consent of the Holder of such Certificate, or change the rights or obligations
of any other party to the Pooling and Servicing Agreement without the consent of
such party.
The Pooling and Servicing Agreement may be amended from time to time by
the Depositor, the Servicer and the Trustee with the consent of the Certificate
Insurer, and the Holders of 66-2/3% of the aggregate principal amount of the
Class A Certificates for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of the Pooling and Servicing
Agreement or of modifying in any manner the rights of the Holders; provided,
however, that no such amendment shall be made unless the Trustee receives an
Opinion of Counsel, at the expense of the party requesting the change, that such
change will not adversely affect the status of the Trust Fund as a "grantor
trust" or cause a tax to be imposed on the Trust Fund, and provided further,
that no such amendment shall reduce in any manner the amount of, or delay the
timing of, payments received on Mortgage Loans which are required to be
distributed on any Certificate without the consent of the Holder of such
Certificate or reduce the percentage for each Class whose Holders are required
to consent to any such amendment without the consent of the Holders of 100% of
the Certificates affected thereby.
The Mortgage Purchase Agreement contains substantially similar
restrictions regarding amendment.
SERVICING OF THE MORTGAGE LOANS
The Servicer
Life Savings Bank, Federal Savings Bank will act as the Servicer of
the Mortgage Pool. See "The Seller and the Servicer."
Servicer Reports
The Servicer is required to deliver to the Certificate Insurer, the
Trustee, and each Rating Agency, not later than April 30th of each year, an
Officer's Certificate stating that (i) the Servicer has fully complied with the
servicing provisions of the Pooling and Servicing Agreement, (ii) a review of
the activities of the Servicer during the preceding calendar year and of
performance under the Pooling and Servicing Agreement has been made under such
officers' supervision, and (iii) to the best of such officers' knowledge, based
on such review, the Servicer has fulfilled all its obligations under the Pooling
and Servicing Agreement for such year, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officers and the nature and status thereof including the steps being taken by
the Servicer to remedy such default. The first such Officer's Certificate shall
be delivered by the Servicer in 1998.
Not later than April 30th of each year, the Servicer, at its expense,
is required to cause to be delivered to the Certificate Insurer, the Trustee,
and each Rating Agency, from a firm of independent certified public accountants
(who may also render other services to the Servicer) a statement to the effect
that such firm has examined certain documents and records relating to the
servicing of the Mortgage Loans during the preceding calendar year (or such
longer period from the Issue Date to the end of the following calendar year) and
that, on the basis of such examination conducted substantially in compliance
with generally accepted auditing standards and the requirements of the Uniform
Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC, such servicing has been conducted in compliance
with the Pooling and Servicing Agreement except for such significant exceptions
or errors in records that, in the opinion of such firm, generally accepted
auditing standards and the Uniform Single Attestation Program for Mortgage
Bankers or the Audit Program for Mortgages serviced for FHLMC require it to
report, in which case such exceptions and errors shall be so reported.
Collection and Other Servicing Procedures
The Servicer will be obligated under the Pooling and Servicing
Agreement to service and administer the Mortgage Loans, on behalf of the Trust
Fund, solely in the best interests of and for the benefit of the
Certificateholders and the Certificate Insurer in accordance with the terms of
the Pooling and Servicing Agreement, and will have full power and authority to
do any and all things in connection with such servicing and administration which
it may deem necessary or desirable. The Servicer may perform any of its
obligations under the Pooling and Servicing Agreement through one or more
subservicers which have been approved in writing by the Certificate Insurer.
Notwithstanding any such subservicing arrangement, the Servicer will remain
liable for its servicing duties and obligations under the Pooling and Servicing
Agreement as if the Servicer alone were servicing the Mortgage Loans. The
Servicer will be obligated under the Pooling and Servicing Agreement to make
reasonable efforts to collect all payments called for under the terms and
provisions of the Mortgage Notes and will be obligated, consistent with the
other terms of the Pooling and Servicing Agreement, to follow such collection
procedures as it would normally follow with respect to mortgage loans comparable
to the Mortgage Loans and which are required to generally conform to the
mortgage servicing practices of prudent mortgage lending institutions which
service mortgage loans of the same type as the Mortgage Loans for their own
account in the jurisdictions in which the related Mortgaged Properties are
located. Consistent with the above, the Servicer may, in its discretion, (i)
waive any late payment charge and (ii) arrange with a mortgagor a schedule for
the liquidation of delinquencies, subject to the provisions of the Pooling and
Servicing Agreement.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated to accelerate the maturity of the
Mortgage Loan, unless it reasonably believes, based upon an opinion of counsel,
that it is unable to enforce that Mortgage Loan's "due-on-sale" clause under
applicable law. If it reasonably believes it may be restricted for any reason
from enforcing such a "due-on-sale" clause, the Servicer may enter into an
assumption and modification agreement with the person to whom such property has
been or is about to be conveyed, pursuant to which such person becomes liable
under the Mortgage Note. The Servicer, however, shall not enter into an
assumption, modification or substitution of liability agreement unless it has
received an opinion of counsel that such assumption, modification or
substitution of liability will not adversely affect the status of the Trust Fund
as a grantor trust for federal income tax purposes.
Any fee collected by the Servicer for entering into an assumption
agreement will be retained by the Servicer as additional servicing compensation.
For a description of circumstances in which the Servicer may be unable to
enforce "due-on-sale" clauses, see "Certain Legal Aspects of the Mortgage Loans
and Contracts - The Mortgage Loans - 'Due-on-Sale' Clauses" in the Prospectus.
In connection with any such assumption, the interest rate (the "Mortgage
Interest Rate") borne by the mortgage note relating to each Mortgage Loan may
not be decreased.
Maintenance of Insurance Policies and Errors and Omissions and Fidelity Coverage
The Servicer is required to cause to be maintained for each Mortgage
Loan a fire and hazard insurance policy with extended coverage on the related
Mortgaged Property in an amount which is not less than the full insurable value
of the Mortgaged Property securing such Mortgage Loan or the unpaid principal
balance of such Mortgage Loan, whichever is less. The Servicer will also be
required to maintain or cause to be maintained fire and hazard insurance with
extended coverage on each property acquired by the Trust by foreclosure or by
deed in lieu of foreclosure in an amount which is at least equal to the lesser
of (i) the full insurable value of the improvements which are a part of such
property and (ii) the principal balance owing on such Mortgage Loan at the time
of such foreclosure or grant in lieu of foreclosure plus accrued interest and
related liquidation expenses; provided, however, that such insurance may not be
less than the minimum amount required to fully compensate for any loss or damage
on a replacement cost basis. Any cost incurred by the Servicer in maintaining
any such insurance shall not, for the purpose of calculating distributions to
Certificateholders, be added to the unpaid principal balance of the related
Mortgage Loan, notwithstanding that the terms of such Mortgage Loan so permit.
No earthquake or other additional insurance other than flood insurance is, under
the Pooling and Servicing Agreement, to be required of any Mortgagor or to be
maintained by the Servicer other than pursuant to the terms of the related
Mortgage Note or Mortgage and pursuant to such applicable laws and regulations
as shall at any time be in force and as shall require such additional insurance.
If the Mortgaged Property was located at the time of origination in a
federally designated special flood hazard area, the Servicer will be obligated
to cause to be maintained flood insurance in respect thereof to the extent
available. Such flood insurance shall be in an amount equal to the lesser of (i)
the unpaid principal balance of the related Mortgage Loan, (ii) the full
insurable value, and (iii) the maximum amount of such insurance required by the
terms of the related Mortgage Note or Mortgage and as is available for the
related property under the national flood insurance program (assuming that the
area in which such property is located in participating in such program. If a
Mortgaged Property was, at origination of the related Mortgage Loan, in a
federally designated special flood hazard area, the Servicer will obtain flood
insurance in respect thereof providing substantially the same coverage as
described in the preceding sentence.
Alternatively, the Servicer may obtain, at its own expense, a blanket
insurance policy with an insurer insuring against fire and hazard losses on all
of the Mortgage Loans, which policy may contain a deductible clause, in which
case the Servicer shall, in the event that (i) there shall not have been
maintained on the related Mortgaged Property a policy otherwise complying with
the provisions described above, and (ii) there shall have been one or more
losses which would have been covered by such a policy had it been maintained,
deposit into the Certificate Account from its own funds the amount not otherwise
payable under the blanket policy because of such deductible clause.
The Servicer will also be required under the Pooling and Servicing
Agreement to maintain in force (i) a policy or policies of insurance covering
errors and omissions in the performance of its obligations as Servicer and (ii)
a fidelity bond in respect of its officers, employees or agents. Each such
policy or policies and bond will, together, be substantially comparable to a
policy or policies and bond otherwise complying with the requirements of FNMA
for persons performing servicing for mortgage loans purchased by FNMA.
Realization Upon Defaulted Mortgage Loans
Except as described below, the Servicer will foreclose upon or
otherwise comparably convert to ownership Mortgaged Properties securing such of
the Mortgage Loans as come into default when, in the opinion of the Servicer, no
satisfactory arrangements can be made for the collection of delinquent payments.
In connection with such foreclosure or other conversion, the Servicer will
follow such practices as it deems necessary or advisable and as are in keeping
with the Servicer's general loan servicing activities and the Pooling and
Servicing Agreement, provided the Servicer will not expend its own funds in
connection with foreclosure or other conversion, correction of a default on a
senior mortgage or restoration of any property unless such foreclosure,
correction or restoration is determined to increase Net Liquidation Proceeds.
Any Mortgaged Property so acquired by the Trust is required to be disposed of in
accordance with applicable federal income tax regulations and consistent with
the status of the Trust as a "grantor trust."
The Servicer will be permitted to foreclose against the Mortgaged
Property securing a defaulted Mortgage Loan either by foreclosure, by sale or by
strict foreclosure, and in the event a deficiency judgment is available against
the Mortgagor or any other person, may proceed for the deficiency.
In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
will be required to be issued to the Trustee, or to the Servicer on behalf of
the Trustee, the Certificate Insurer and the Certificateholders. Notwithstanding
any such acquisition of title and cancellation of the related Mortgage Loan,
such Mortgage Loan is required to be considered to be a Mortgage Loan held in
the Trust Fund until such time as the related Mortgaged Property is sold and
such Mortgage Loan becomes a Liquidated Mortgage Loan. Consistent with the
foregoing, for purposes of all calculations under the Pooling and Servicing
Agreement, so long as such Mortgage Loan is an outstanding Mortgage Loan:
(i) It will be assumed that, notwithstanding that the
indebtedness evidenced by the related Mortgage Note shall have been
discharged, such Mortgage Note and the related amortization schedule in
effect at the time of any such acquisition of title (after giving
effect to any previous partial prepayments and before any adjustment
thereto by reason of any bankruptcy or similar proceeding or any
moratorium or similar waiver or grace period) remain in effect, except
that such schedule shall be adjusted to reflect the application of
proceeds received in any month pursuant to the succeeding clause.
(ii) Net proceeds (after payment of Servicer's expenses
related to disposition) from such property received in any month shall
be deemed to have been received first in payment of the accrued
interest that remained unpaid on the date that title to the related
Mortgaged Property was acquired by the Trust Fund, with the excess
thereof, if any, being deemed to have been received in respect of the
delinquent principal installments that remained unpaid on such date.
Thereafter, net proceeds from such property received in any month shall
be applied to the payment of installments of principal and accrued
interest on such Mortgage Loan deemed to be due and payable in
accordance with the terms of such Mortgage Note and such amortization
schedule. If such net proceeds exceed the then unpaid REO amortization,
the excess shall be treated as a partial principal prepayment received
in respect of such Mortgage Loan.
(iii) Only that portion of such net proceeds on such a
Mortgage Loan allocable to interest that bears the same relationship to
the total amount of net proceeds allocable to interest as the rate at
which the Servicing Fee is determined bears to the Mortgage Interest
Rate borne by such Mortgage Loan shall be allocated to the Servicing
Fee with respect thereto.
In lieu of foreclosing upon any defaulted Mortgage Loan, the Servicer
may, in its discretion, permit the assumption of such Mortgage Loan if, in the
Servicer's reasonable judgment, such default is unlikely to be cured and if the
assuming borrower satisfies the Servicer's underwriting guidelines with respect
to mortgage loans owned by the Servicer and, if in the reasonable judgment of
the Servicer, such assumption will result in greater proceeds on the Mortgage
Loan than liquidation. In connection with any such assumption, the Mortgage
Interest Rate of the related Mortgage Note and the payment terms will not be
permitted to be changed. Any fee collected by the Servicer for entering into an
assumption agreement will be retained by the Servicer as servicing compensation.
Alternatively, the Servicer may encourage the refinancing of any defaulted
Mortgage Loan by the Mortgagor. The Servicer, however, shall not enter into an
assumption, modification or substitution of liability agreement unless it has
received an opinion of counsel that such assumption, modification or
substitution of liability will not adversely affect the status of the Trust Fund
as a grantor trust for federal income tax purposes.
Notwithstanding the foregoing, prior to instituting foreclosure
proceedings or accepting a deed- in-lieu of foreclosure with respect to any
Mortgaged Property, the Servicer shall make, or cause to be made, inspection of
the Mortgaged Property in accordance with accepted servicing procedures, and,
with respect to environmental hazards, substantially comparable to such
procedures as are required by the provisions of the Federal National Mortgage
Association's Selling and Servicing Guide applicable to single-family homes and
in effect on the date hereof. The Servicer shall be entitled to rely upon the
results of any such inspection made by others. In cases where the inspection
reveals that such Mortgaged Property is potentially contaminated with or
affected by hazardous wastes or hazardous substances, the Servicer shall
promptly give written notice of such fact to the Certificate Insurer, the
Trustee and each Class A Certificateholder. The Servicer shall not commence
foreclosure proceedings or accept a deed-in-lieu of foreclosure for any
Mortgaged Property where such inspection reveals potential contamination by
hazardous waste without obtaining the consent of the Certificate Insurer.
Enforcement of Due-on-Sale Clauses
When a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer shall, to the extent it has knowledge of such conveyance
or prospective conveyance, exercise its rights to accelerate the maturity of the
related Mortgage Loan under any "due-on-sale" clause contained in the related
Mortgage or Mortgage Note; provided, however, that the Servicer shall not
exercise any such right if the "due-on-sale" clause, in the reasonable belief of
the Servicer, is not enforceable under applicable law. In such event, the
Servicer, with the consent of the Certificate Insurer, may enter into an
assumption and modification agreement with the person to whom such property has
been or is about to be conveyed, pursuant to which such person becomes liable
under the Mortgage Note and, unless prohibited by applicable law or the Mortgage
or Mortgage Note, the Mortgagor remains liable thereon. The Servicer is also
authorized, with the prior approval of the Certificate Insurer except as
provided in the Pooling and Servicing Agreement, to enter into a substitution of
liability agreement with such person, pursuant to which the original Mortgagor
is released from liability and such person is substituted as Mortgagor and
becomes liable under the Mortgage Note. The Servicer, however, shall not enter
into an assumption, modification or substitution of liability agreement unless
it has received an opinion of counsel that such assumption, modification or
substitution of liability will not adversely affect the status of the Trust Fund
as a grantor trust for federal income tax purposes.
Removal and Resignation of the Servicer
The Trustee, only at the direction of the Certificate Insurer or the
majority Certificateholders, with the consent of the Certificate Insurer (in the
case of any direction of the majority Certificateholders), may remove the
Servicer upon the occurrence and continuation beyond the applicable cure period
of an event below:
(a) any failure by the Servicer to remit to the Trustee any
payment (including Periodic Advances) required to be made by the
Servicer under the terms of the Pooling and Servicing Agreement which
continues unremedied for one (1) Business Day; or
(b) the failure by the Servicer to make any required Servicing
Advance which failure continues unremedied for a period of one (1)
Business Day after the date on which written notice of such failure,
requiring the same to be remedied, shall have been given to the
Servicer by the Trustee or to the Servicer and the Trustee by any
Certificateholder or the Certificate Insurer; or
(c) any failure on the part of the Servicer or Seller duly to
observe or perform in any material respect any other of the covenants
or agreements on the part of the Servicer or Seller, as the case may
be, contained in the Pooling and Servicing Agreement or the Insurance
Agreement, respectively, or the breach of any representation and
warranty set forth in the Pooling and Servicing Agreement or the
Insurance Agreement, as the case may be, which continues unremedied for
a period of 30 days after the date on which written notice of such
failure, requiring the same to be remedied, shall have been given to
the Servicer or the Seller by the Depositor or the Trustee, or to the
Servicer or the Seller, as the case may be, and the Trustee by any
Certificateholder or the Certificate Insurer;
(d) a decree or order of a court or agency or supervisory
authority having jurisdiction in an involuntary case under any present
or future federal or state bankruptcy, insolvency or similar law or for
the appointment of a conservator or receiver or liquidator in any
insolvency, readjustment of debt, marshaling of assets and liabilities
or similar proceedings, or for the winding-up or liquidation of its
affairs, shall have been entered against the Servicer and such decree
or order shall have remained in force, undischarged or unstayed for a
period of 60 days; or
(e) the Servicer shall consent to the appointment of a
conservator or receiver or liquidator in, or otherwise voluntarily
consent to, any insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings of or relating to the Servicer
or of or relating to all or substantially all of the Servicer's
property;
(f) the Servicer shall admit in writing its inability to pay
its debts as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for
the benefit of its creditors, or voluntarily suspend payment of its
obligations;
(g) the delinquency or loss experience of the Mortgage Loan
pool exceeds certain levels specified in the Pooling and Servicing
Agreement; or
(h) so long as the Seller is the Servicer, any failure of the
Seller to repurchase, substitute or to indemnify the Certificate
Insurer or the Trust for any Mortgage Loan as required by the Mortgage
Loan Purchase Agreement.
Additionally, the Certificate Insurer may direct the Trustee to remove
the Servicer if, upon the death, incapacity or termination of employment of
Daniel L. Perl, President and Chief Executive Officer of the Servicer, the
Certificate Insurer, at its expense, causes a full and complete review of the
servicing capabilities of the Servicer by a nationally-recognized public
accounting firm, and the report of such review concludes that the Servicer does
not have the ability to service adequately the Mortgage Loans and the Servicer
does not correct identified material deficiencies within 90 days of
notification.
The Servicer may not assign its obligations under the Pooling and
Servicing Agreement nor resign from the obligations and duties thereby imposed
on it except by mutual consent of the Servicer, the Certificate Insurer and the
Trustee, or upon the determination that the Servicer's duties thereunder are no
longer permissible under applicable law and such incapacity cannot be cured by
the Servicer without the incurrence, in the reasonable judgment of the
Certificate Insurer, of unreasonable expense. No such resignation shall become
effective until a successor has assumed the Servicer's responsibilities and
obligations in accordance with the Pooling and Servicing Agreement.
Upon removal or resignation of the Servicer, the Trustee will be the
Successor Servicer (the "Successor Servicer"). The Trustee, as Successor
Servicer, will be obligated to make Periodic Advances and Servicing Advances and
certain other advances unless it determines reasonably and in good faith that
such advances would not be recoverable. If, however, the Trustee is unable to
act as Successor Servicer, or if the majority Certificateholders (with the
consent of the Certificate Insurer) or the Certificate Insurer so requests, the
Trustee shall appoint, or petition a court of competent jurisdiction to appoint,
in accordance with the provisions of the Pooling and Servicing Agreement and
subject to the approval of the Certificate Insurer, any established mortgage
loan servicing institution acceptable to the Certificate Insurer having a net
worth of not less than $15,000,000 as the Successor Servicer in the assumption
of all or any part of the responsibilities, duties or liabilities of the
Servicer.
The Trustee and any other Successor Servicer in such capacity is
entitled to the same reimbursement for advances and no more than the same
servicing compensation as the Servicer. See " -- Servicing Fees and Other
Compensation and Payment of Expenses" above.
Termination; Purchase of Mortgage Loans
The Pooling and Servicing Agreement will terminate upon notice to the
Trustee and the Certificate Insurer of either: (a) the later (i) of the
distribution to Certificateholders of the final payment or collection with
respect to the last Mortgage Loan (or Periodic Advances of same by the Servicer)
or (ii) the disposition of all funds with respect to the last Mortgage Loan and
the remittance of all funds due
under the Pooling and Servicing Agreement or (iii) the payment of all amounts
due and payable to the Certificate Insurer and the Trustee or (b) mutual consent
of the Servicer, the Certificate Insurer and all Certificateholders in writing;
provided, however, that in no event will the Trust established by the Pooling
and Servicing Agreement terminate later than twenty-one years after the death of
the last surviving lineal descendant of the person named in the Pooling and
Servicing Agreement.
The Servicer may, at its option (or if the Servicer fails to exercise
such option, the Certificate Insurer may, at its option) and at its sole cost
and expense, terminate the Pooling and Servicing Agreement on any date on which
the aggregate Principal Balance of the Mortgage Loans is less than 5% of the sum
of (a) the Cut-Off Date Aggregate Principal Balance and (b) the Original
Pre-Funded Amount, by purchasing from the Trust, on the next succeeding
Distribution Date, all of the outstanding Mortgage Loans and REO Properties at a
price equal to the sum of (a) 100% of the aggregate Principal Balance of each
outstanding Mortgage Loan and each REO Property, (b) the greater of (i) the
aggregate amount of accrued and unpaid interest on the Mortgage Loans through
the related Due Period and (ii) 30 days' accrued interest thereon computed at a
rate equal to the Mortgage Interest Rate, in each case net of the Servicing Fee,
and (c) any amounts due to the Certificate Insurer under the Pooling and
Servicing Agreement and the Insurance Agreement and any accrued and unpaid
Insured Payments. Any such purchase shall be accomplished by deposit into the
Certificate Account of the purchase price specified above. No such termination
is permitted without the prior written consent of the Certificate Insurer if it
would result in a draw on the Certificate Insurance Policy.
THE TRUSTEE
Norwest Bank Minnesota, National Association, a national banking
association, has been named Trustee pursuant to the Pooling and Servicing
Agreement. The Trustee will serve initially as the custodian of the Trustee's
Mortgage Files. The Pooling and Servicing Agreement provides that the Trustee
shall be entitled to a fee (the "Trustee Fee") in respect of its services as
Trustee.
The Trustee shall at all times be a banking association organized and
doing business under the laws of any State or the United States of America
subject to suspension or examination by federal or state authority, authorized
under such laws to exercise corporate trust powers, having a combined capital
and surplus of at least $50,000,000, whose long-term deposits, if any, are rated
at least "BBB" by Standard & Poor's and Baa2 by Moody's, or such lower rating as
may be approved in writing by the Certificate Insurer and reasonably acceptable
to the Certificate Insurer as evidenced in writing. If at anytime the Trustee
shall cease to be eligible in accordance with the provisions described in this
paragraph, it shall resign immediately in the manner and with the effect
specified in the Pooling and Servicing Agreement.
Any resignation or removal of the Trustee and appointment of a
successor trustee shall become effective upon the acceptance of appointment by a
successor trustee acceptable to the Certificate Insurer.
The Trustee, or any trustee or trustees hereafter appointed, may
resign at any time in the manner set forth in the Pooling and Servicing
Agreement. Upon receiving notice of resignation, the Servicer shall promptly
appoint a successor trustee or trustees meeting the eligibility requirements set
forth above in the manner set forth in the Pooling and Servicing Agreement. The
Servicer will deliver a copy of the instrument used to appoint a successor
trustee to the Certificateholders, the Certificate Insurer and the Depositor,
and upon acceptance of appointment by a successor trustee in the manner provided
in the Pooling and Servicing Agreement, the Servicer will give notice thereof to
the Certificateholders. If no successor trustee shall have been appointed and
have accepted appointment within 30 days after the giving of such notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee. Such court may
thereupon, after such notice, if any, as it may deem proper and prescribe,
appoint a successor trustee acceptable to the Certificate Insurer.
If the Trustee fails to perform in accordance with the terms of the
Pooling and Servicing Agreement, the Certificate Insurer or the majority
Certificateholders with the consent of the Certificate Insurer, may remove the
Trustee under the conditions set forth in the Pooling and Servicing Agreement
and appoint a successor trustee in the manner set forth therein.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Trust Fund or property securing the same
may at the time be located, the Servicer and the Trustee acting jointly and with
the prior written consent of the Certificate Insurer shall have the power and
shall execute and deliver all instruments to appoint one or more persons
approved by the Trustee to act as co-trustee or co-trustees, jointly with the
Trustee, or separate trustee or separate trustees, of all or any part of the
Trust Fund, and to vest in such person or persons, in such capacity, such title
to the Trust Find, or any part thereof, and, subject to the provisions of the
Pooling and Servicing Agreement, such powers, duties, obligations, rights and
trusts as the Servicer, the Trustee and the Certificate Insurer may consider
necessary or desirable.
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement.
The Certificate Insurer, in consideration of the payment of the premium
and subject to the terms of the Certificate Insurance Policy, thereby
unconditionally and irrevocably guarantees to any Owner (as defined below) that
an amount equal to each full and complete Insured Payment will be received by
Norwest Bank Minnesota, National Association, or its successor, as trustee for
the Owners (the "Trustee"), on behalf of the Owners from the Certificate
Insurer, for distribution by the Trustee to each Owner of each Owner's
proportionate share of the Insured Payment. The Certificate Insurer's
obligations under the Certificate Insurance Policy with respect to a particular
Insured Payment shall be discharged to the extent funds equal to the applicable
Insured Payment are received by the Trustee, whether or not such funds are
properly applied by the Trustee. Insured Payments shall be made only at the time
set forth in the Certificate Insurance Policy and no accelerated Insured
Payments shall be made regardless of any acceleration of the Class A
Certificates, unless such acceleration is at the sole option of the Certificate
Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance
Policy does not cover shortfalls, if any, attributable to the liability of the
Trust Fund or the Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability) or Mortgage Loan Interest
Shortfalls.
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount (as described below) on the Business Day following receipt on
a Business Day by the Fiscal Agent (as described below) of (i) a certified copy
of the order requiring the return of a preference payment, (ii) an opinion of
counsel satisfactory to the Certificate Insurer that such order is final and not
subject to appeal, (iii) an assignment in such form as is reasonably required by
the Certificate Insurer, irrevocably assigning to the Certificate Insurer all
rights and claims of the Owner relating to or arising under the Class A
Certificates against the debtor which made such preference payment or otherwise
with respect to such preference payment and (iv) appropriate instruments to
effect the appointment of the Certificate Insurer as agent for such Owner in any
legal proceeding related to such preference payment, such instruments being in a
form satisfactory to the Certificate Insurer, provided that if such documents
are received after 12:00 noon New York City time on such Business Day, they will
be deemed to be received on the following Business Day. Such payments shall be
disbursed to the receiver or trustee in bankruptcy named in the final order of
the court exercising jurisdiction on behalf of the Owner and not to any Owner
directly unless such Owner has returned principal or interest paid on the Class
A Certificates to such receiver or trustee in bankruptcy, in which case such
payment shall be disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policy no later than 12:00 noon New York City time on the
later of (i) the Distribution Date on which the related Class A Distribution
Amount is due or (ii) the second Business Day following receipt in New York, New
York on a Business Day by State Street Bank and Trust Company, N.A., as fiscal
agent for the Certificate Insurer or any successor fiscal agent appointed by the
Certificate Insurer (the "Fiscal Agent") of a Notice (as described below);
provided that if such Notice is received after 12:00 noon New York City time on
such Business Day, it will be deemed to be received on the following Business
Day. If any such Notice received by the Fiscal Agent is not in proper form or is
otherwise insufficient for the purpose of making a claim under the Certificate
Insurance Policy it shall be deemed not to have been received by the Fiscal
Agent for purposes of this paragraph, and the Certificate Insurer or the Fiscal
Agent, as the case may be, shall promptly so advise the Trustee and the Trustee
may submit an amended Notice.
Insured Payments due under the Certificate Insurance Policy, unless
otherwise stated therein, will be disbursed by the Fiscal Agent to the Trustee
on behalf of the Owners by wire transfer of immediately available funds in the
amount of the Insured Payment less, in respect of Insured Payments related to
Preference Amounts, any amount held by the Trustee for the payment of such
Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Certificate Insurer to deposit or cause to be
deposited, sufficient funds to make payments due under the Certificate Insurance
Policy.
As used in the Certificate Insurance Policy, the following terms shall
have the following meanings:
"Agreement" means the Pooling and Servicing Agreement, without
regard to any amendment or supplement 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 Certificate Insurer or the corporate trust office of the
Trustee under the Agreement is located are authorized or obligated by
law or executive order to close.
"Deficiency Amount" means, as of any Distribution Date the
excess, if any, of the Credit Enhancement Distribution Amount over any
remaining amounts on deposit in and available to be withdrawn from the
Reserve Account.
"Insured Payment" means (i) as of any Distribution Date, the
Deficiency Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit A
attached to the Certificate Insurance Policy, the original of which is
subsequently delivered by registered or certified mail, from the
Trustee specifying the Insured Payment which shall be due and owing on
the applicable Distribution Date.
"Owner" means each Holder (as defined in the Agreement) who,
on the applicable Distribution Date, is entitled under the terms of the
applicable Class A Certificates to payment thereunder.
"Preference Amount" means any amount previously distributed to
an Owner on the Class A Certificates that is recoverable and sought to
be recovered as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended
from time to time, in accordance with a final nonappealable order of a
court having competent jurisdiction.
Capitalized terms used in the Certificate Insurance Policy and not
otherwise defined in the Certificate Insurance Policy shall have the respective
meanings set forth in the Agreement as of the date of execution of the
Certificate Insurance Policy, without giving effect to any subsequent amendment
or modification to the Agreement unless such amendment or modification has been
approved in writing by the Certificate Insurer.
Any notice under the Certificate Insurance Policy or service of process
on the Fiscal Agent may be made at the address listed below for the Fiscal Agent
or such other address as the Certificate Insurer shall specify in writing to the
Trustee.
The notice address of the Fiscal Agent of the Certificate Insurer is
15th Floor, 61 Broadway, New York, New York 10006 Attention: Municipal Registrar
and Paying Agency, or such other address as the Fiscal Agent shall specify to
the Trustee in writing.
The Certificate Insurance Policy is being issued under and pursuant to,
and shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
The insurance provided by the Certificate Insurance Policy is not
covered by the Property/Casualty Insurance Security Fund specified in Article 76
of the New York Insurance Law.
The Certificate Insurance Policy is not cancelable for any reason. The
premium on the Certificate Insurance Policy is not refundable for any reason
including payment, or provision being made for payment, prior to maturity of the
Class A Certificates.
The Certificate Insurer 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 and
is subject to regulation under the laws of all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. The Certificate Insurer has two European branches, one in the Republic of
France and the other in the Kingdom of Spain. New York has laws prescribing
minimum capital requirements, limiting classes and concentrations of investments
and requiring the approval of policy rates and forms. State laws also regulate
the amount of both the aggregate and individual risks that may be insured, the
payment of dividends by the Certificate Insurer, changes in control and
transactions among affiliates. Additionally, the Certificate Insurer is required
to maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.
The consolidated financial statements of the Certificate Insurer, a
wholly owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1995 and December 31, 1994 and for the three years ended December 31, 1995,
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, 1995 and the consolidated financial statements of the Certificate Insurer
and its subsidiaries for the nine months ended September 30, 1996 and for the
periods ending September 30, 1996 and September 30, 1995 included in the
Quarterly Report on Form 10-Q of MBIA Inc. for the period ending September 30,
1996, are hereby incorporated by reference into this Prospectus Supplement and
shall be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes of
this Prospectus Supplement to the extent that a statement contained herein or in
any other subsequently filed document which is also 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.
All financial statements of the Certificate Insurer and its
subsidiaries included in documents filed by MBIA Inc. pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Class A Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The 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, 1995 September 30, 1996
(Audited) (Unaudited)
(In Millions)
Admitted Assets $3,814 $4,348
Liabilities 2,540 2,911
Capital and Surplus 1,274 1,437
GAAP
December 31, 1995 September 30, 1996
(Audited) (Unaudited)
(In Millions)
Assets $4,463 $4,861
Liabilities 1,937 2,161
Shareholder's Equity 2,526 2,700
Copies of the financial statements of the Certificate Insurer
incorporated by reference herein and copies of the Certificate Insurer's 1995
year-end audited financial statements prepared in accordance with statutory
accounting practices are available, without charge, from the Certificate
Insurer. The address of the Certificate Insurer is 113 King Street, Armonk, New
York 10504. The telephone number of the Certificate Insurer is (914) 273-4545.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to the
accuracy of the information regarding the Certificate Insurance Policy and
Certificate Insurer set forth under the heading "The Certificate Insurance
Policy and the Certificate Insurer." Additionally, the Certificate Insurer makes
no representation regarding the Class A Certificates or the advisability of
investing in the Class A Certificates.
Moody's Investors Service, Inc. ("Moody's") rates the claims paying
ability of the Certificate Insurer "Aaa".
Standard & Poor's Ratings Group, a division of The McGraw-Hill
Companies, Inc. ("Standard & Poor's"), rates the claims paying ability of the
Certificate Insurer "AAA."
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability to
pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold the
Class A Certificates, and such ratings may be subject to revision or withdrawal
at any time by the rating agencies. Any downward 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 revised or withdrawn.
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Tax Status of the Trust Fund
Upon the issuance of the Certificates, Stroock & Stroock & Lavan will
deliver its opinion that under current law, assuming compliance with the Pooling
and Servicing Agreement, the Trust Fund will be classified for federal income
tax purposes as a grantor trust and not as an association taxable as a
corporation or a taxable mortgage pool. For purposes of federal income tax, the
Reserve Fund Depositor will be deemed to have retained a fixed portion of the
interest due on each Mortgage Loan (the "Spread"). The Spread will be treated as
"stripped coupons" within the meaning of Section 1286 of the Code. The Servicer
may also be deemed to have retained a "stripped coupon" if and to the extent
that the Servicing Fee is determined to be unreasonable. Accordingly, each
Certificateholder will be subject to federal income taxation as if it owned
directly its interest in each asset owned by the Trust Fund and paid directly
its share of expenses paid by the Trust Fund, but subject to the stripped bond
rules discussed in the Prospectus. For additional information regarding the
federal tax treatment of the Certificates see "Certain Federal Income Tax
Consequences -- Non-REMIC Certificates" in the Prospectus.
To the extent the principal amount of a Mortgage Loan exceeds the fair
market value of the property securing the Mortgage Loan, such Mortgage Loan may
not constitute a loan described in Code Section 7701(a)(19)(C)(v) or a real
estate asset within the meaning of Code Section 856(c)(5)(A). Further, because
certain of the Mortgage Loans are not "principally secured" by an interest in
real property within the meaning of Treasury Regulations Section 1.860G-2(a) and
consequently will not constitute "qualified mortgages" within the meaning of
Code Section 860G(a)(3)(A), a Class A Certificate may not be a suitable
investment for a real estate mortgage investment conduit.
ERISA CONSIDERATIONS
Neither an Underwriter Exemption (as defined in the Prospectus) nor
Prohibited Transaction Class Exemption 83-1 is applicable to the purchase,
holding or transfer of the Certificates. Therefore, no Certificates may be
purchased for, or on behalf of, any employee benefit plan or other retirement
arrangement which is subject to Title I of the Employee Retirement Income
Security Act of 1974, as amended, and/or Section 4975 of the Internal Revenue
Code of 1986, as amended, or any entity whose underlying assets include plan
assets by reason of such plan or account investing in such entity (including
insurance company separate or general accounts and collective investment funds).
Each Certificateholder will be deemed to have represented and warranted that it
is not subject to the foregoing limitations. See "ERISA Considerations" in the
Prospectus.
LEGAL INVESTMENT
The Class A Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA").
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the Underwriting Agreement dated
as of December 10, 1996 (the "Underwriting Agreement") between the Depositor and
Prudential Securities Incorporated (the "Underwriter"), the Depositor has agreed
to sell to the Underwriter and the Underwriter has agreed to purchase from the
Depositor the Class A Certificates.
The Depositor is obligated to sell, and the Underwriter is obligated to
purchase, all of the Class A Certificates offered hereby if any are purchased.
The Underwriter has advised the Depositor that it proposes to offer the
Class A Certificates purchased by the Underwriter for sale from time to time in
one or more negotiated transactions or otherwise, at market prices prevailing at
the time of sale, at prices related to such market prices or at negotiated
prices. The Underwriter may effect such transactions by selling such
Certificates to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
Underwriter or purchasers of the Class A Certificates for whom they may act as
agent. Any dealers that participate with the Underwriter in the distribution of
the Class A Certificates purchased by the Underwriter may be deemed to be
underwriters, and any discounts or commissions received by them or the
Underwriter and any profit on the resale of Class A Certificates by them or the
Underwriter may be deemed to be underwriting discounts or commissions under the
Securities Act.
For further information regarding any offer or sale of the Class A
Certificates pursuant to this Prospectus Supplement and the Prospectus, see
"Plan of Distribution" in the Prospectus.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter or contribute to losses arising out of certain liabilities,
including liabilities under the Act.
Prudential Securities Incorporated is an affiliate of the Depositor.
EXPERTS
The consolidated financial statements of MBIA Insurance Corporation as
of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994
and 1993, incorporated by reference in this Prospectus Supplement, have been
audited by Coopers & Lybrand L.L.P., independent accountants, as set forth in
their report incorporated by reference herein in reliance upon the authority of
such firm as experts in accounting and auditing.
RATINGS
It is a condition to the issuance of the Class A Certificates that
they shall have been rated "AAA" by Standard & Poor's Rating Services, a
division of The McGraw-Hill Companies, Inc. and "Aaa" by Moody's Investors
Services, Inc. The ratings assigned to the Class A Certificates are based upon
the claims-paying ability of the Certificate Insurer. 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 Rating
Services, 25 Broadway, New York, New York 10004. Such ratings will be the views
only of such rating agencies. There is no assurance that any such ratings will
continue for any period of time or that such ratings will not be revised or
withdrawn. Any such revision or withdrawal of such ratings may have an adverse
effect on the market price of the Class A Certificates.
LEGAL MATTERS
Certain legal matters in connection with the Class A Certificates will
be passed upon for the Seller and the Servicer by Muldoon, Murphy & Faucette,
Washington, D.C., and for the Underwriter by Stroock & Stroock & Lavan, New York
, New York. Certain legal matters relating to the Certificate Insurer and the
Certificate Insurance Policy will be passed upon for the Certificate Insurer by
Kutak Rock, Omaha, Nebraska.
<PAGE>
INDEX OF SIGNIFICANT PROSPECTUS
SUPPLEMENT DEFINITIONS
Term Page
Accounts..............................................................S-52
Appraised Values......................................................S-25
Available Amount.......................................................S-9
Back-Up Servicer.......................................................S-3
Beneficial Owner.......................................................S-4
Book-Entry Certificates................................................S-6
Business Day...........................................................S-4
Capitalized Interest Account..........................................S-10
CEDEL..................................................................S-5
CEDEL Participants....................................................S-45
Certificate Account...................................................S-52
Certificate Insurance Policy...........................................S-1
Certificate Insurer....................................................S-1
Certificateholder......................................................S-5
Certificates...........................................................S-1
Civil Relief Act......................................................S-13
Civil Relief Act Interest Shortfall...................................S-22
Class.................................................................S-10
Class A Certificates...................................................S-1
Class A Distribution Amount............................................S-9
Class A Formula Distribution Amount....................................S-8
Class A Interest Distribution Amount...................................S-7
Class A Pass-Through Rate..............................................S-1
Class A Principal Balance..............................................S-7
Class A Principal Distribution Amount..................................S-8
Clean-up Call Date....................................................S-14
CLTV's................................................................S-25
Code..................................................................S-14
Collection Account....................................................S-52
Compensating Interest.................................................S-13
Cooperative...........................................................S-45
Current Interest.......................................................S-7
Cut-Off Date...........................................................S-3
Cut-Off Date Aggregate Principal Balance..............................S-14
Definitive Certificate................................................S-43
Depositor..............................................................S-1
Distribution Date......................................................S-2
DTC....................................................................S-5
Due Date...............................................................S-6
Due Period.............................................................S-8
Eligible Account......................................................S-45
Euroclear..............................................................S-5
Euroclear Participants................................................S-47
European Depositories..................................................S-5
FHLMC.................................................................S-18
Final Scheduled Maturity Date.........................................S-40
Financial Intermediary................................................S-44
FNMA..................................................................S-18
Foreclosure Profits...................................................S-53
HEP...................................................................S-41
Holder.................................................................S-5
Home Equity Prepayment................................................S-43
Indirect Participants.................................................S-44
Initial Mortgage Loans.................................................S-1
Insurance Proceeds....................................................S-53
Insured Payment.......................................................S-11
Interest...............................................................S-8
Issue Date.............................................................S-3
Liberator Series......................................................S-18
Liquidated Loan Loss...................................................S-9
Liquidation Expenses..................................................S-53
Liquidation Proceeds..................................................S-54
LTV...................................................................S-51
Modeling Assumptions..................................................S-41
Monthly Payments......................................................S-14
Monthly Servicing Fee.................................................S-54
Mortgage Interest Rate................................................S-13
Mortgage Loan Interest Shortfalls......................................S-7
Mortgage Loans.........................................................S-1
Mortgage Pool..........................................................S-4
Mortgage Purchase Agreement...........................................S-48
Mortgaged Properties...................................................S-5
Mortgages..............................................................S-5
Net Foreclosure Proceeds..............................................S-56
Net Foreclosure Profits...............................................S-54
Net Liquidation Proceeds..............................................S-54
Net REO Proceeds......................................................S-54
Nonrecoverable Advance................................................S-55
Original Class A Principal Balance.....................................S-8
Original Pre-Funded Amount.............................................S-1
Participants..........................................................S-43
Periodic Advance......................................................S-12
Permitted Investments.................................................S-32
Pooling and Servicing Agreement........................................S-1
Portfolio Series......................................................S-18
Pre-Funding Period.....................................................S-9
Prepayment Assumption.................................................S-41
Prepayment Interest Shortfall.........................................S-13
Principal Balance......................................................S-9
Principal Prepayments.................................................S-52
Qualified Substitute Mortgage Loan....................................S-49
Rating Agency.........................................................S-15
Record Date............................................................S-4
Reimbursement Amount..................................................S-56
Relevant Depositary...................................................S-45
REMIC.................................................................S-14
REO Disposition.......................................................S-54
REO Proceeds..........................................................S-54
REO Property..........................................................S-41
Required Reserve Account Level........................................S-11
Reserve ..............................................................S-10
Reserve Account Deposit...............................................S-56
Riegle Act............................................................S-23
Scheduled Principal Balance...........................................S-54
Seller.................................................................S-3
Servicer...............................................................S-1
Servicer Distribution Amount..........................................S-12
Servicer Distribution Date............................................S-52
Servicing Advances....................................................S-13
Servicing Fee.........................................................S-13
Servicing Fee Rate....................................................S-54
SMMEA..................................................................S-70
Statistic Calculation Date.............................................S-24
Statistical Calculation Date Aggregate Principal Balance...............S-5
Subsequent Cut-Off Date................................................S-8
Subsequent Mortgage Loans..............................................S-1
Subsequent Transfer Date...............................................S-6
Terms and Conditions...................................................S-46
Trust..................................................................S-1
Trust Fund.............................................................S-1
Trustee................................................................S-1
Trustee Fee............................................................S-64
Trustee's Mortgage File................................................S-50
Underwriter............................................................S-1
Underwriting Agreement.................................................S-71
Weighted average life..................................................S-41
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Class A
Certificates (the "Global Securities") will be available only in book-entry
form. Investors in the Global Securities may hold such Global Securities through
any of The Depository Trust Company, Cedel Bank or Euroclear. The Global
Securities will be tradeable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel Bank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional Eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Asset-Backed Certificates issues.
Secondary, cross-market trading between Cedel Bank or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositories of Cedel Bank 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 Bank and
Euroclear will hold positions on behalf of their participants through their
respective Depositories, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior Asset-Backed Certificates
issues. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel Bank
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 Home
Equity Loan Asset-Backed Certificates issues in same-day funds.
Trading between Cedel Bank and/or Euroclear Participants. Secondary
market trading between Cedel Bank Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC Seller and Cedel Bank or Euroclear Purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Bank Participant or a Euroclear Participant, the
purchaser will send instructions to Cedel Bank or Euroclear through a Cedel Bank
Participant or Euroclear Participant at least one business day prior to
settlement. Cedel Bank or Euroclear will instruct the respective Depositary, as
the case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the respective Depositary of the DTC Participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Cedel Bank 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 Bank, or Euroclear cash debt will be valued instead as
of the actual settlement date.
Cedel Bank 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 Bank or Euroclear. Under
this approach, they may take on credit exposure to Cedel Bank or Euroclear until
the Global Securities are credited to their accounts one day later.
As an alternative, if Cedel Bank or Euroclear has extended a line of
credit to them, Cedel Bank Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedel Bank Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Cedel Bank Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Cedel Bank 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 Bank or Euroclear Seller and DTC Purchaser. Due
to time zone differences in their favor, Cedel Bank 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 Bank or Euroclear through a Cedel Bank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Cedel Bank or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
Cedel Bank Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Cedel Bank 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 Bank 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 Bank Participant's
or Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Cedel Bank or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Bank Participants
or Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel Bank or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel Bank 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 Bank 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 Bank Participant or
Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedel Bank, or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate.
Exception for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W- 8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries. (Form 1001). Non-U.S. Persons that are Certificate Owners residing in
a country that has a tax treaty with the United States can obtain an exemption
or reduced tax rate (depending on the treaty terms) by filing Form 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 the Certificate
Owners or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is includable in gross income for United States tax purposes,
regardless of its source or (iv) a trust other than a "Foreign Trust," as
defined in Section 7701(a)(31) of the Code. 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 advise concerning their holding and disposing of the
Global Securities.
<PAGE>
============================================================================
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this Prospectus Supplement and
the accompanying Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Depositor or by the Underwriter. This Prospectus Supplement and the Prospectus
do not constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby by anyone in any jurisdiction in which such an offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make any such offer or solicitation. Neither the delivery of this Prospectus
Supplement and the Prospectus nor any sale made hereunder shall, under any
circumstances, create an implication that information herein or therein is
correct as of any time since the date of this Prospectus Supplement or the
Prospectus.
TABLE OF CONTENTS
Page
PROSPECTUS SUPPLEMENT
Summary Terms of the Certificates........................S-3
Risk Factors............................................S-16
The Mortgage Pool.......................................S-22
The Seller and the Servicer ............................S-30
Prepayment and Yield Considerations.....................S-35
Description of the Certificates.........................S-38
Servicing of the Mortgage Loans.........................S-51
The Certificate Insurance Policy and the
Certificate Insurer.....................................S-55
The Trustee.............................................S-58
Certain Federal Income Tax Considerations...............S-59
ERISA Considerations....................................S-60
Legal Investment........................................S-62
Plan of Distribution....................................S-62
Experts.................................................S-63
Ratings.................................................S-63
Legal Matters...........................................S-63
Index of Significant Prospectus Supplement Definitions..S-64
Annex I - Global Clearance, Settlement and Tax
Documentation Procedures...............................I-1
PROSPECTUS
Reports.................................................. 1
Available Information.................................... 1
Incorporation of Certain Information by Reference..........1
Summary of Prospectus.................................... 2
Risk Factors............................................ 11
The Trust Funds.......................................... 16
Description of the Certificates.......................... 28
Credit Support........................................... 43
Prepayment and Yield Considerations...................... 49
Use of Proceeds.......................................... 53
The Depositor............................................ 53
Underwriting Guidelines.................................. 53
Servicing of the Mortgage Loans and Contracts............ 55
The Pooling and Servicing Agreement...................... 66
Certain Legal Aspects of the Mortgage Loans and
Contracts.............................................. 70
Certain Federal Income Tax Consequences.................. 84
ERISA Considerations.....................................109
Legal Investment.........................................113
Plan of Distribution.....................................114
Legal Matters............................................115
Rating...................................................115
Additional Information...................................115
Index of Significant Definitions.........................116
Life Financial Services Trust 1996-1
Live Savings Bank, Federal Savings
Bank
(Seller and Servicer)
Norwest Bank Minnesota,
National Association
(Back-Up Servicer)
&
Prudential Securities
Secured Financing Corporation
(Depositor)
$55,000,000
Class A Certificates
Mortgage
Pass-Through Certificates,
Series 1996-1
------------------
PROSPECTUS SUPPLEMENT
------------------
Prudential Securities Incorporated
December ___, 1996
==========================================================================
<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 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 December 16, 1996
<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 here 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.
<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 New York Plaza, 15th Floor, New
York, New York 10292, Attention: Len Blum (212) 778-1000.
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.
The Commission maintains a Web site that contains reprots, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of such site is http://www.sec.gov.
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 New York Plaza, 15th Floor, New York, New York 10292,
telephone number (212) 778-1000, Attention: Len Blum.
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 wholly owned limited
purpose finance subsidiary of Prudential
Securities Group Inc. The Depositor's principal
executive offices are located at One New York
Plaza, 15th Floor, New York, New York 10292,
and its telephone number is (212) 778-1000.
See "The Depositor."
Unaffiliated Sellers The Depositor will acquire the Mortgage Loans
and Contracts from one or more institutions
unaffiliated with the Depositor ("Unaffiliated
Sellers").
Trustee The Trustee with respect to a Series will be
specified in the related Prospectus Supplement.
Servicer The Servicer for each Series relating to
Mortgage Loans or Contracts will be specified in
the applicable Prospectus Supplement. The
Servicer will service the Mortgage Loans or
Contracts comprising each Trust Fund and
administer each Trust Fund pursuant to a
separate Pooling and Servicing Agreement (each,
a "Pooling and Servicing Agreement"). The
Servicer may subcontract all or any portion of
its obligations as Servicer under each Pooling
and Servicing Agreement to qualified
subservicers (each, a "Sub-Servicer") but the
Servicer will not be relieved thereby of its
liability with respect thereto. See "Servicing
of the Mortgage Loans and Contracts."
The Trust Funds The Trust Fund for each Series of Certificates
may consist of any combination of Mortgage Pool
and/or Contract Pools (each as defined herein)
and certain other related property, as specified
herein and in the applicable Prospectus
Supplement. Unless otherwise specified in the
applicable Prospectus Supplement, each Mortgage
Pool will be comprised of Mortgage Loans or
Contracts or participations therein.
Unless otherwise specified in the applicable
Prospectus Supplement, each Contract Pool will
consist of fixed or adjustable rate manufactured
housing installment sale, contracts and
installment loan agreements. Each Contract may
be secured by a new or used Manufactured Home
(as defined herein).
Neither the Certificates, the interest thereon,
nor the underlying Mortgage Loans are guaranteed
by the United States nor do they constitute
debts or obligations of the United States or any
agency or instrumentality of the United States.
The particular characteristics of each Trust
Fund will be set forth in the applicable
Prospectus Supplement.
Description of the
Certificates The Certificates issued by any Trust Fund may
represent beneficial ownership interests in the
related Mortgage Loans held by the related Trust
Fund, or may represent debt secured by such
Mortgage Loans, as described herein and in
the related Prospectus Supplement.
Certificates which represent beneficial
ownership interests in the related Trust Fund
will be referred to as "Certificates" in the
related Prospectus Supplement; Certificates
which represent debt issued by the related Trust
Fund will be referred to as "Notes" in the
related Prospectus Supplement.
With respect to Notes issued by the related
Trust Fund, the related Trust Fund will
enter into an indenture by and between such
Trust Fund and the trustee named on such
indenture, as set forth in the related
Prospectus Supplement.
Each Series of Certificates will be recourse to
the assets of the related Trust Fund only.
The sole source of payment for any Series of
Certificates will be the assets of the
related Trust Fund. The Certificates will
not be obligations, either recourse or
non-recourse (except for certain non-recourse
debt described under "Certain Federal
Income Tax Consequences"), of the Depositor,
the Servicer or any Person other than the
related Trust Fund. In the case of Certificates
that represent beneficial ownership interest in
the related Trust Fund, such Certificates will
represent the ownership of such Trust Fund;
with respect to Certificates which are Notes,
such Notes will be secured by the related
Trust Fund. Notwithstanding the foregoing, and
as to be described in the related Prospectus
Supplement, certain types of credit enhancement,
such as a financial guaranty insurance policy or
a letter of credit, may constitute a full
recourse obligation of the issue of such credit
enhancement.
Each Series will consist of one or more Classes
of Certificates which may be (i) Standard
Certificates, (ii) Multi-Class Certificates or
(iii) Stripped Certificates. Any Class of
Certificates may be divided into two or more
Subclasses and any Class of Standard
Certificates may be divided into Subclasses
which consist of Multi-Class Certificates.
The Depositor will cause each Trust Fund
(or one or more segregated pools of assets
therein) with respect to a Series which
includes Standard Certificates redeemable on a
random lot basis, Multi-Class Certificates or
Shifting Interest Certificates to elect to be
treated as a REMIC. In addition, any Series with
respect to which an election has been made to
treat the Trust Fund (or one or more segregated
pools of assets therein) as a REMIC will include
one Class or one Subclass of Residual
Certificates as to each REMIC. The Residual
Certificates of a Series, if offered hereby,
will represent the right to receive
distributions with respect to the related Trust
Fund as specified in the related Prospectus
Supplement. Unless otherwise specified in the
applicable Prospectus Supplement, the
Certificates will be offered only in fully
registered form.
A. Standard
Certificates Unless otherwise provided in the applicable
Prospectus Supplement, Standard Certificates of
a Series will each evidence a fractional
undivided beneficial ownership interest
in the related Trust Fund and will entitle the
holder thereof to its proportionate share of a
percentage of all of the payments and other
receipts with respect to the principal of and
interest (to the extent of the applicable Net
Mortgage Rate or Net Contract Rate) on the
related Mortgage Loans or Contracts. If
specified in the applicable Prospectus
Supplement, with respect to any Class of
Standard Certificates of a Series for
which a REMIC election has been made,
distributions of principal may be allocated
among the Certificateholders of such
Class on a pro rata, random lot or such
other basis as is specified in such Prospectus
Supplement.
B. Multi-Class
Certificates Multi-Class Certificates of a Series will
consist of Certificates each of which
evidences a beneficial ownership interest in the
related Trust Fund and will be assigned a Stated
Amount, which may be based on an amount
of principal of the underlying Mortgage Loans or
Contracts or on the value of future cash flows
from the related Trust Fund without distinction
as to principal or interest and an Interest
Rate which may be a fixed rate (which may
be zero) or a variable rate or which will
otherwise accrue interest as specified in the
applicable Prospectus Supplement. The holder of
a Multi-Class Certificate will be entitled to
receive, to the extent funds are available
therefor, interest payments on the outstanding
Stated Amount thereof at the applicable
Interest Rate or as otherwise specified in the
applicable Prospectus Supplement and
distributions in reduction of such Stated Amount
determined in the manner and applied in the
priority set forth in the applicable Prospectus
Supplement.
C. Stripped
Certificates Stripped Certificates will each evidence an
undivided beneficial ownership interest in the
related Trust Fund and will entitle the
holder thereof to its proportionate share of a
specified portion (which may be zero) of
principal payments and/or a specified portion
(which may be zero) of interest payments (to the
extent of the applicable Net Mortgage Interest
Rate) on the related Mortgage Loans.
Pooling and Servicing
Agreement The Certificates of each Series will be issued
pursuant to a Pooling and Servicing Agreement
among the Depositor, the Servicer, if any, and
the Trustee.
Cut-Off Date The date specified in the applicable Prospectus
Supplement.
Distribution Dates Unless otherwise specified in the applicable
Prospectus Supplement, distributions on Standard
Certificates or Stripped Certificates will
be made on the 25th day (or, if such day is not
a business day, the business day following the
25th day) of each month, commencing with the
month following the month in which the
applicable Cut-Off Date occurs. Distributions on
Multi-Class Certificates will be made monthly,
quarterly, or semiannually, on the dates
specified in the applicable Prospectus
Supplement. The dates upon which such
distributions are made are referred to herein
as the "Distribution Dates."
Record Dates Distributions will be made on each Distribution
Date set forth in the Prospectus Supplement to
Certificateholders of record at the close of
business on the last business day of the month
preceding the month in which such Distribution
Date occurs or such other date as may be set
forth in the Prospectus Supplement (the "Record
Date").
Interest With respect to a Series of Certificates
consisting of Standard Certificates or
Stripped Certificates, unless otherwise
specified in the applicable Prospectus
Supplement, interest on the related Mortgage
Loans, Mortgage Certificates or Contracts at the
applicable pass-through rate (the "Pass-Through
Rate"), as set forth in the applicable
Prospectus Supplement, will be passed through
monthly on each Distribution Date to holders
thereof, in accordance with the particular
terms of each such Certificate. Holders of
Multi-Class Certificates will receive
distributions of interest at the applicable
Interest Rate, if any, on the Stated Amount or
Notional Amount of such Certificates, or as
otherwise specified in the applicable Prospectus
Supplement, without regard to the Net Mortgage
Rates or Net Contract Rates on the underlying
Mortgage Loans or Contracts. Unless otherwise
specified in the applicable Prospectus
Supplement, the "Net Mortgage Rate" for each
Mortgage Loan in a given period will equal the
Mortgage Rate for such Mortgage Loan in such
period (the "Mortgage Rate") less any Fixed
Retained Yield, and less the Servicing Fee
(as defined herein). Unless otherwise specified
in the applicable Prospectus Supplement, the
"Net Contract Rate" for each Contract in a given
period will equal the Contract Rate for such
Contract in such period (the "Contract Rate")
less any Fixed Retained Yield, and less the
Servicing Fee. The "Servicing Fee" with respect
to each Mortgage Loan or Contract is an amount
reserved for servicing such Mortgage Loan or
Contract and administration of the related
Trust Fund.
Principal (including
prepayments) With respect to a Series of Certificates
consisting of Standard Certificates or
Stripped Certificates, unless otherwise
specified in the applicable Prospectus
Supplement, principal payments (including
prepayments received on each related Mortgage
Loan or Contract during the month preceding
the month in which a Distribution Date occurs)
will be passed through to holders on such
Distribution Date, in accordance with the
particular terms of each such Certificate.
Distributions in
Reduction of
Stated Amount With respect to each Class and Subclass of
Multi-Class Certificates, distributions in
reduction of Stated Amount will be made on each
Distribution Date to the holders of the
Certificates of such Class and Subclass
then entitled to receive such distributions
until the aggregate amount of such
distributions have reduced the Stated Amount of
each such Class and Subclass of Certificates
to zero. Distributions in reduction of Stated
Amount will be allocated among the Classes or
Subclasses of such Certificates in the manner
specified in the applicable Prospectus
Supplement. Distributions in reduction of
Stated Amount with respect to any Class
or Subclass of Multi-Class Certificates
of a Series may be made on a pro rata or random
lot or such other basis as is specified in
the applicable Prospectus Supplement. See
"Description of the Certificates --
Distributions to Multi-Class
Certificateholders."
Forward Commitments;
Pre-Funding A Trust Fund may enter into an agreement (each,
a "Forward Purchase Agreement") with the
Depositor whereby the Depositor will agree to
transfer additional Mortgage Loans to such
Trust Fund following the date on which such
Trust Fund is established and the related
Certificates are issued. Any Forward
Purchase Agreement will require that any
Mortgage Loans so transferred to a Trust Fund
conform to the requirements specified in such
Forward Purchase Agreement. If a Forward
Purchase Agreement is to be utilized, and unless
otherwise specified in the related Prospectus
Supplement, the related Trustee will be
required to deposit in a segregated account
(each, a "Pre-Funding Account") all or a portion
of the proceeds received by the Trustee in
connection with the sale of one or more
classes of Certificates of the related Series;
subsequently, the additional Mortgage Loans will
be transferred to the related Trust Fund
in exchange for money released to the Depositor
from the related Pre-Funding Account in one or
more transfers. Each Forward Purchase Agreement
will set a specified period during which any
such transfers must occur. The Forward
Purchase Agreement or the related Pooling and
Servicing Agreement will require that, if all
moneys originally deposited to such Pre-Funding
Account are not so used by the end of such
specified period, then any remaining moneys will
be applied as a mandatory prepayment of the
related class or classes of Certificates as
specified in the related Prospectus Supplement.
Credit Enhancement
A. By Subordination A Series of Certificates may include one or more
Classes or Subclasses of Senior Certificates and
one or more Classes or Subclasses of
Subordinated Certificates. The rights of the
holders of Subordinated Certificates of a
Series to receive distributions with respect to
the related Mortgage Loans or Contracts will be
subordinated to such rights of the holders of
the Senior Certificates of the same Series
to the extent (the "Subordinated Amount")
specified herein and in the applicable
Prospectus Supplement. This subordination is
intended to enhance the likelihood of the
timely receipt by the Senior Certificateholders
of their proportionate share of scheduled
monthly principal and interest payments on the
related Mortgage Loans or Contracts and
to reduce the likelihood that the Senior
Certificateholders will experience losses.
The Prospectus Supplement for Series of
Certificates including a subordination feature
may also specify the allocation of
distributions and priority of payments of
principal, or Stated Amount, and interest among
one or more Classes or Subclasses of Senior
Certificates of such Series. The protection
afforded to Senior Certificateholders of a
Series will be effected by a preferential right,
as specified in the applicable Prospectus
Supplement, of such Senior Certificateholders to
receive, on any Distribution Date, current
distributions on the related Mortgage Loans or
Contracts and (if so specified in the applicable
Prospectus Supplement) by the establishment of a
reserve fund (the "Subordination Reserve Fund")
for such Series. Any Subordination Reserve
Fund may be funded initially with a deposit of
cash, instruments or securities in an amount
specified in the applicable Prospectus
Supplement and, if so specified in the related
Prospectus Supplement, may be augmented by the
retention of distributions which otherwise would
have been available for distribution to the
Subordinated Certificateholders in the manner
and to the extent specified in the applicable
Prospectus Supplement. The Subordination Reserve
Fund for a Series may be funded and maintained
in such other manner as is specified in the
related Prospectus Supplement. The
maintenance of any Subordination Reserve Fund
would be intended to preserve the
availability of the subordination provided by
the Subordinated Certificates and to provide
liquidity, but in certain circumstances the
Subordination Reserve Fund could be depleted
and, if other amounts available for distribution
are insufficient, shortfalls in distributions to
the Senior Certificateholders could result.
Unless otherwise specified in the related
Prospectus Supplement, until the Subordinated
Amount is reduced to zero, Senior
Certificateholders will be entitled to receive
the amount of any such shortfall, together with
interest at the applicable Pass-Through Rate,
Interest Rate, or at such other rate specified
in the applicable Prospectus Supplement, as the
case may be, on the next Distribution Date.
Senior Certificateholders will bear their pro
rata share of any losses realized on the related
Mortgage Loans or Contracts in excess of the
applicable Subordinated Amount. If so specified
in the applicable Prospectus Supplement, the
protection afforded to holders of Senior
Certificates of a Series by the subordination
of certain rights of holders of Subordinated
Certificates of such 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 the two highest rating
categories by at least one "nationally
recognized statistical rating organization.
As "mortgage related securities," such
Certificates offered pursuant to this Prospectus
will constitute legal investments for certain
types of institutional investors to the
extent provided in SMMEA subject, in any case,
to any other regulations which may govern
investments by such institutional 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.
<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."
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.
Although a low interest rate environment may facilitate the
refinancing of a balloon payment, the receipt and reinvestment by
Certificateholders of the proceeds in such an environment may produce a lower
return than that previously received in respect of the related Mortgage Loan.
Conversely, a high interest rate environment may make it more difficult for the
Mortgagor to accomplish a refinancing and may result in delinquencies or
defaults. None of the Depositor, the Servicer, any Sub-Servicer or the Trustee
will be obligated to provide funds to refinance any Mortgage Loan, including
Balloon Loans.
Risk of Losses Associated with ARM Loans. ARM Loans may be
underwritten on the basis of an assessment that Mortgagors will have the ability
to make payments in higher amounts after relatively short periods of time. In
some instances, Mortgagors' income may not be sufficient to enable them to
continue to make their loan payments as such payments increase and thus the
likelihood of default will increase.
Risk of Losses Associated with Bankruptcy of Mortgagors. General
economic conditions have an impact on the ability of borrowers to repay Mortgage
Loans. Loss of earnings, illness and other similar factors also may lead to an
increase in delinquencies and bankruptcy filings by borrowers. In the event of
personal bankruptcy of a Mortgagor, it is possible that a Trust could experience
a loss with respect to such Mortgagor's Mortgage Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan thereby either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
Risk of Losses Associated with Foreclosure of Mortgaged Properties.
Even assuming that the Mortgaged Properties provide adequate security for the
Mortgage Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Mortgage Loans and corresponding delays in the receipt
of related proceeds by the Certificateholders could occur. An action to
foreclose on a Mortgaged Property securing a Mortgage Loan is regulated by state
statutes, rules and judicial decisions and is subject to many of the delays and
expenses of other lawsuits if defenses or counterclaims are interposed,
sometimes requiring several years to complete. Furthermore, in some states an
action to obtain a deficiency judgment is not permitted following a nonjudicial
sale of a Mortgaged Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the Servicer to
foreclose on or sell the Mortgaged Property or to obtain liquidation proceeds
(net of expenses) ("Liquidation Proceeds") sufficient to repay all amounts due
on the related Mortgage Loan. The Servicer will be entitled to deduct from
Liquidation Proceeds all expenses reasonably incurred in attempting to recover
amounts due on the related liquidated Mortgage Loan ("Liquidated Mortgage Loan")
and not yet repaid, including payments to prior lienholders, accrued Servicing
Fees, legal fees and costs of legal action, real estate taxes, and maintenance
and preservation expenses. In the event that any Mortgaged Properties fail to
provide adequate security for the related Mortgage Loans and insufficient funds
are available from any applicable Credit Enhancement, Certificateholders could
experience a loss on their investment.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
Under environmental legislation and judicial decisions applicable in
various states, a secured party that takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a mortgaged property that, prior to foreclosure,
has been involved in decisions or actions which may lead to contamination of a
property, may be liable for the costs of cleaning up the purportedly
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a holder of a mortgage note (such as a Trust)
which, under the terms of the Pooling and Servicing Agreement, is not required
to take an active role in operating the Mortgaged Properties. See "Certain Legal
Aspects of Mortgage Loans and Contracts -- Environmental Risks."
Certain of the Mortgaged Properties relating to Mortgage Loans may not
be owner occupied. It is possible that the rate of delinquencies, foreclosures
and losses on Mortgage Loans secured by nonowner occupied properties could be
higher than for loans secured by the primary residence of the borrower.
Litigation. Any material litigation relating to the Depositor or the
Servicer will be specified in the related Prospectus Supplement.
Geographic Concentration of Mortgaged Properties. Certain geographic
regions from time to time will experience weaker regional economic conditions
and housing markets than will other regions, and, consequently, will experience
higher rates of loss and delinquency on mortgage loans generally. The Mortgage
Loans underlying certain series of Certificates may be concentrated in such
regions, and such concentrations may present risk considerations in addition to
those generally present for similar mortgage loan asset-backed securities
without such concentrations. Information with respect to geographic
concentration of Mortgaged Properties will be specified in the related
Prospectus Supplement or related current report on Form 8-K.
Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures, and require
licensing of the Depositor and the Servicer and Sub-Servicers. In addition, most
states have other laws, public policy and general principles of equity relating
to the protection of consumers, unfair and deceptive practices and practices
that may apply to the origination, servicing and collection of the Mortgage
Loans. Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability of the Servicer to collect all or part of the principal of
or interest on the Mortgage Loans, may entitle the borrower to a refund of
amounts previously paid and, in addition, could subject the Servicer to damages
and administrative sanctions. See "Certain Legal Aspects of Mortgage Loans and
Contracts."
The Mortgage Loans may also be subject to federal laws, including: (i)
the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X promulgated thereunder,
which require certain disclosures to the borrowers regarding the terms of the
Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and general
principles of equity may limit the ability of the Servicer to collect all or
part of the principal of or interest on the Mortgage Loans, may entitle the
borrower to rescind the loan or to a refund of amounts previously paid and, in
addition, could subject the Servicer to damages and administrative sanctions. If
the Servicer is unable to collect all or part of the principal or interest on
the Mortgage Loans because of a violation of the aforementioned laws, public
policies or general principles of equity then the Trust may be delayed or unable
to repay all amounts owed to Investors. Furthermore, depending upon whether
damages and sanctions are assessed against the Servicer or the Depositor, such
violations may materially impact the financial ability of the Depositor to
continue to act as Servicer or the ability of the Depositor to repurchase or
replace Mortgage Loans if such violation breaches a representation or warranty
contained in a Pooling and Servicing Agreement.
Collections on the Mortgage Loans may vary due to the level of
incidence of delinquent payments and of prepayments. Collections on the Mortgage
Loans may also vary due to seasonal purchasing and payment habits of borrowers.
Book-Entry Registration. Issuance of the Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary trading
market since investors may be unwilling to purchase Certificates for which they
cannot obtain definitive physical securities representing such
Certificateholders' interests, except in certain circumstances described in the
related Prospectus Supplement.
Since transactions in Certificates will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
system ("Direct or Indirect Participants") and certain banks, the ability of a
Certificateholder to pledge a Certificate to persons or entities that do not
participate in the DTC system, or otherwise to take actions in respect of such
Certificates, may be limited due to lack of a physical certificate representing
the Certificates.
Certificateholders may experience some delay in their receipt of
distributions of interest on and principal of the Certificates since
distributions may be required to be forwarded by the Trustee to DTC and, in such
a case, DTC will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable class of Certificateholders either directly or indirectly through
Indirect Participants. See "Description of the Certificates."
The Status of the Mortgage Loans in the Event of Bankruptcy of the
Depositor. In the event of the bankruptcy of the Depositor at a time when it or
any affiliate thereof holds a Certificate, a trustee in bankruptcy of the
Depositor, or its creditors could attempt to recharacterize the sale of the
Mortgage Loans to the related Trust as a borrowing by the Depositor or such
affiliate with the result, if such recharacterization is upheld, that the
Certificateholders would be deemed creditors of the Depositor or such affiliate,
secured by a pledge of the Mortgage Loans. If such an attempt were successful,
it could prevent timely payments of amounts due to the Trust.
Limitations on Interest Payments and Foreclosures. Generally, under
the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended
(the "Relief Act"), or similar state legislation, a Mortgagor who enters
military service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such action
could have an effect, for an indeterminate period of time, on the ability of the
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
In addition, the Relief Act imposes limitations that would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan during the Mortgagor's
period of active duty status. Thus, in the event that such a Mortgage Loan goes
into default, there may be delays and losses occasioned by the inability to
realize upon the Mortgaged Property in a timely fashion.
Certificate Rating. The rating of Certificates credit enhanced through
external Credit Enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external Credit Enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to the
Certificates would likely result in a reduction in the rating of the
Certificates. See "Ratings" in the Prospectus Supplement.
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.
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 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 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 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 agreemet ("Loan Agreement")
rather than a note. Home Equity Lines generally may be drawn down from time to
time by the borrower writing a check against the account, or acknowledging the
advance in a supplement to the Loan Agreement (the amount of such drawn down, an
"Additional Balance"). A Home Equity Line will establish a maximum credit limit
with respect to the related borrower, and will permit the borrower to draw down
Additional Balances, and repay the aggregate balance outstanding in each case
from time to time in such a manner so that the aggregate balance outstanding
does not exceed the maximum credit limit. A Home Equity Line will be secured by
either a senior or a junior lien Mortgage, and will bear interest at either a
fixed or an adjustable rate.
In certain states the borrower must, on the opening of an account,
draw an initial advance of not less than a specified amount. Home Equity Lines
generally amortize according to an amortization basis established at the time of
the initial advance. The "amortization basis" is the length of time in which the
initial advance plus interest will be repaid in full. The amortization bases of
the Home Equity Lines generally range from 60 months (5 years) to 180 months (15
years) depending on the credit limit assigned. Generally, the amortization basis
will be longer the higher the credit limit. The minimum monthly payment on a
Home Equity Line will generally be equal to the sum of the following: (i) an
amount necessary to completely repay the then-outstanding balance and the
applicable finance charge in equal installments over the assigned amortization
basis ("Basic Monthly Amount"); (ii) any monthly escrow charges; (iii) any
delinquency or other similar charges; and (iv) any past due amounts, including
past due finance charges. The Basic Monthly Amount typically is recomputed each
time the related Mortgage Rate adjusts and whenever an Additional Balance is
advanced; such recomputation in the case of an Additional Advance may also reset
the amortization schedule. The effect of each such advance on the related Home
Equity Line is to reset the commencement date of the original maturity term to
the date of the later advance. For example, a Home Equity Line made originally
with a 15-year maturity from date of origination changes at the time of the next
adjustment or advance to a Home Equity Line with a maturity of 15 years from the
date of such advance. For certain Home Equity Lines, the same type of
recomputation exists for adjustments of the related Mortgage Rate.
Prior to the expiration of a specified period, the reduction of the
account to a zero balance and the closing of a Home Equity Line account may
result in a prepayment penalty. A prepayment penalty also may be assessed
against the borrower if a Home Equity Line account is closed by 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 fail 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 mortgage 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. 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 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 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 find a specific
information will be set forth in a Current Report on Form 8-K to be available to
investors on the date of issuance thereof and to be filed with the Commission
promptly after the initial issuance of such Certificates.
Fixed Retained Yield
Fixed Retained Yield with respect to any Mortgage Loan or Contract is
that portion, if any, of interest at the Mortgage Rate or Contract Rate that is
retained by the Depositor or other owner thereof and not included in the related
Trust Fund. The Prospectus Supplement for a Series will specify whether a Fixed
Retained Yield has been retained with respect to the Mortgage Loans or Contracts
of such Series, and, if so, the owner thereof. If so, the Fixed Retained Yield
will be established on a loan-by-loan basis with respect to the Mortgage Loans
or Contracts and will be specified in the schedule of Mortgage Loans or
Contracts attached as an exhibit to the applicable Pooling and Servicing
Agreement. The Servicer, with respect to Mortgage Loans or Contracts, may deduct
the Fixed Retained Yield from payments as received and prior to deposit of such
payments in the Certificate Account for such Series or may (unless an election
has been made to treat the Trust Fund (or one or more segregated pools of assets
therein) as a REMIC) withdraw the Fixed Retained Yield from the Certificate
Account after the entire payment has been deposited in the Certificate Account.
Notwithstanding the foregoing, any partial payment or recovery of interest
received by the Servicer relating to a Mortgage Loan or Contract (whether paid
by the mortgagor or obligor or received as Liquidation Proceeds, Insurance
Proceeds or otherwise), after deduction of all applicable servicing fees, will
be allocated between Fixed Retained Yield (if any) and interest at the Net
Mortgage Rate or Net Contract Rate on a pari passu basis.
Insurance Policies
Unless otherwise specified in the applicable Prospectus Supplement,
the Pooling and Servicing Agreement will require the Servicer to cause to be
maintained for each Mortgage Loan or Contract an insurance policy issued by a
generally acceptable insurer insuring the Mortgaged Property underlying such
Mortgage Loan or the Manufactured Home underlying such Contract against loss by
fire, with extended coverage (a "Standard Hazard Insurance Policy"). Unless
otherwise specified in the applicable Prospectus Supplement, the Pooling and
Servicing Agreement will require that such Standard Hazard Insurance Policy be
in an amount at least equal to the lesser of 100% of the insurable value of the
improvements which are a part of such Mortgaged Property or Manufactured Home or
the principal balance of such Mortgage Loan or Contract; provided, however, that
such insurance may not be less than the minimum amount required to fully
compensate for any damage or loss on a replacement cost basis. The Servicer will
also maintain on property acquired upon foreclosure, or deed in lieu of
foreclosure, of any Mortgage Loan, and on any Manufactured Home acquired by
repossession a Standard Hazard Insurance Policy in an amount that is at least
equal to the lesser of 100% of the insurable value of the improvements which are
a part of such property or the insurable value of such Manufactured Home or the
principal balance of the related Mortgage Loan or Contract plus, if required by
the applicable Pooling and Servicing Agreement, accrued interest and liquidation
expenses; provided, however, that such insurance may not be less than the
minimum amount required to fully compensate for any damage or loss on a
replacement cost basis. Any amounts collected under any such policies (other
than amounts to be applied to the restoration or repair of the Mortgaged
Property or Manufactured Home or released to the borrower in accordance with
normal servicing procedures) will be deposited in the Certificate Account.
The Standard Hazard Insurance Policies covering the Mortgaged
Properties generally will cover physical damage to, or destruction of, the
improvements on the Mortgaged Property caused by fire, lightning, explosion,
smoke, windstorm, hail, riot, strike and civil commotion, subject to conditions
and exclusions particularized in each policy. Because the Standard Hazard
Insurance Policies relating to such Mortgage Loans will be underwritten by
different insurers and will cover Mortgaged Properties located in various
states, such policies will not contain identical terms and conditions. The most
significant terms thereof, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mudflows), nuclear reaction, wet or dry rot, vermin,
rodents, insects or domestic animals, hazardous wastes or hazardous substances,
theft and, in certain cases, vandalism. The foregoing list is merely indicative
of certain kinds of uninsured risks and is not intended to be all-inclusive.
The Standard Hazard Insurance Policies covering the Contracts will
provide, at a minimum, the same coverage as a standard form fire and extended
coverage insurance policy that is customary for manufactured housing in the
state in which the Manufactured Home is located.
The Servicer may maintain a blanket policy insuring against hazard
losses on all of the Mortgaged Properties or Manufactured Homes in lieu of
maintaining the required Standard Hazard Insurance Policies. The Servicer will
be liable for the amount of any deductible under a blanket policy if such amount
would have been covered by a required Standard Hazard Insurance Policy, had it
been maintained.
In general, if a Mortgaged Property or Manufactured Home is located in
an area identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards (and such flood insurance has been made
available) the Pooling and Servicing Agreement will require the Servicer to
cause to be maintained a flood insurance policy meeting the requirements of the
current guidelines of the Federal Insurance Administration with a generally
acceptable insurance carrier. Generally, the Pooling and Servicing Agreement
will require that such flood insurance be in an amount not less than the lesser
of (i) the amount required to compensate for any loss or damage to the Mortgaged
Property on a replacement cost basis and (ii) the maximum amount of insurance
which is available under the federal flood insurance program.
Any losses incurred with respect to Mortgage Loans or Contracts due to
uninsured risks (including earthquakes, mudflows, floods, hazardous wastes and
hazardous substances) or insufficient hazard insurance proceeds could affect
distributions to the Certificateholders.
The Servicer will maintain or cause to be maintained with respect to
each Mortgage Loan a primary mortgage insurance policy in accordance with the
standards described in the "Mortgage Loans" above.
The Servicer shall obtain and maintain at its own expense and keep in
full force and effect a blanket fidelity bond and an error and omissions
insurance policy covering the Servicer's officers and employees as well as
office persons acting on behalf of the Servicer in connection wit 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 there 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 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 include 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 execute 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."
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 Service 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 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 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 i 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 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 New York Plaza, 15th Floor, New York, New
York 10292, Attention: Len Blum.
Each Series of Certificates will evidence the beneficial ownership
interest in the related Trust Fund created by 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 subordinant
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.
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 b entitled to
receive a portion (which may be zero) as specified in the applicable Prospectus
Supplement of the principal distributions comprising the Pool Distribution
Amount, and a portion (which may be zero) as specified in the applicable
Prospectus Supplement of the interest distributions comprising the Pool
Distribution Amount on each Distribution Date.
In the case of Classes of Stripped Certificates representing interests
in interest distributions on the Mortgage Loans and not in principal
distributions on the Mortgage Loans, such Certificates will be denominated in
notional amounts. The aggregate original notional amount for a Class of such
Certificates will be equal to the aggregate unpaid principal balance (or a
specified portion thereof) of the Mortgage Loans as of the Cut-Off Date
specified in the applicable Prospectus Supplement. The notional amount of each
such Stripped Certificate will be used to calculate the holder's pro rata share
of the interest distributions on the Mortgage Loans allocated to that Class and
for the determination of certain other rights of holders of such Class of
Stripped Certificates and will not represent an interest in, or entitle any such
holder to any distribution with respect to, any principal distributions on the
Mortgage Loans. Each such Certificate's pro rata share of the interest
distribution on the Mortgage Loans on each Distribution Date will be calculated
by multiplying the interest distributions on the Mortgage Loans allocated to its
Class by a fraction, the numerator of which is the original notional amount of
such Stripped Certificates and the denominator of which is the aggregate
original notional amount of all the Stripped Certificates of its Class.
The interest of a Class of Percentage Certificates representing an
interest in a Trust Fund (or a segregated pool of assets therein) with respect
to which an election to be treated as a REMIC has been made may be fixed as
described above or may vary over time as a result of prepayment 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 or assets in the Trust Fund for
such Series and will decline to the extent distributions in reduction of Stated
Amount are received by such holder. The initial Stated Amount of each Class
within a Series of Multi-Class Certificates will be specified in the applicable
Prospectus Supplement.
Forward Commitments; Pre-Funding
A Trust Fund may enter into an agreement (each, a "Forward Purchase
Agreement") with the Depositor whereby the Depositor will agree to transfer
additional Mortgage Loans to such Trust Fund following the date on which such
Trust Fund is established and the related Certificates are issued. The Trust
Fund may enter into Forward Purchase Agreements to permit the acquisition of
additional Mortgage Loans that could not be delivered by the Depositor or have
not formally completed the origination process, in each case prior to the date
on which the Certificates are delivered to the Certificateholders (the "Closing
Date"). Any Forward Purchase Agreement will require that any Mortgage Loans so
transferred to the Trust Fund conform to the requirements specified in such
Forward Purchase Agreement.
If a Forward Purchase Agreement is to be utilized, and unless
otherwise specified in the related Prospectus Supplement, the related Trustee
will be required to deposit in a segregated account (each, a "Pre-Funding
Account") up to 100% of the net proceeds received by the Trustee in connection
with the sale of one or more classes of Certificates of the related Series; the
additional Mortgage Loans will be transferred to the related Trust Fund in
exchange for money released to the Depositor from the related Pre-Funding
Account. Each Forward Purchase Agreement will set a specified period (the
"Funding Period") during which any such transfers must occur; for a Trust Fund
which elects federal income treatment as REMIC or as a grantor trust, the
related Funding Period will be limited to three months from the date such Trust
Fund is established; for a Trust Fund which is treated as a mere security device
for federal income tax purposes, the related Funding Period will be limited to
nine months from the date such Trust Fund is established. The Forward Purchase
Agreement or the related Pooling and Servicing Agreement will require that, if
all moneys originally deposited to such Pre-Funding Account are not so used by
the end of the related Funding Period, then any remaining moneys will be applied
as a mandatory prepayment of the related class or classes of Certificates as
specified in the related Prospectus Supplement.
During the Funding Period the moneys deposited to the Pre-Funding
Account will either (i) be held uninvested or (ii) will be invested in
cash-equivalent investments rated in one of the four highest rating categories
by at least one nationally recognized statistical rating organization 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 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";
(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 Pool 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;
(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
Loan 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 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 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, ( 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 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 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 payment of any
Unpaid Interest Shortfall (i.e., the amount calculated pursuant to clause
(y)(ii) of such paragraph) and third to the payment of principal, if any, due on
such Certificates (i.e., the aggregate of the amounts calculated pursuant to
clauses (y)(iii) and (y)(iv) of such paragraph).
As indicated above, in the event that the Pool Distribution Amount on
any Distribution Date is not sufficient to make the full distribution of current
interest to the holders of Senior Certificates entitled to payments of interest,
the difference between the amount of current interest which the holders of such
Certificates would have received on such Distribution Date if there had been
sufficient funds available and the amount actually distributed will be added to
the amount of interest which the holders of such Certificates are entitled to
receive on the next Distribution Date. Unless otherwise specified in the related
Prospectus Supplement, the amount of any such interest shortfall so carried
forward will bear interest (to the extent permitted by applicable law) at the
Pass-Through Rate applicable to such Certificates or at such other rate as
specified in the applicable Prospectus Supplement.
If the Pool Distribution Amount is insufficient on any Distribution
Date to make the full distribution of principal due to the holders of Senior
Certificates, the percentage of principal payments to which the holders of the
Senior Certificates would be entitled on the immediately succeeding Distribution
Date will be increased, as more fully described below under "Credit Support --
Subordination -- Shifting Interest Certificates." This increase will have the
effect of reducing, as a relative matter, the respective interest of the holders
of the related Subordinated Certificates in future payments of principal on the
related Mortgage Loans or Contracts. If the Pool Distribution Amount is not
sufficient to make full distribution described above to the holders of the Class
of Senior Certificates on any Distribution Date, unless otherwise provided in
the applicable Prospectus Supplement, the holders of such Class will share in
the funds actually available in proportion to the respective amounts that such
Class would have received had the Pool Distribution Amount been sufficient to
make the full distribution of interest and principal due to such Class.
Unless otherwise provided in the related Prospectus Supplement, on
each Distribution Date the holders of the related Class of Subordinated
Certificates of a Series will be entitled to receive, out of the Pool
Distribution Amount, all amounts remaining and available for distribution 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:
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.
Succeeding monthly periods follow the pattern of (B) through (F), except that
the period in (B) begins on the first of the month.
(A) The initial unpaid principal balance of the Mortgage Loans or Contracts in
a Trust Fund would be the aggregate unpaid principal balance of the
Mortgage Loans or Contracts at the close of business on January 1, after
deducting principal payments due on or before such date. Those principal
payments due on or before January 1 and the related interest payments would
not be part of the Trust Fund and would be remitted by the Servicer to the
Depositor when received.
(B) Principal prepayments, Net Liquidation Proceeds, Net Insurance Proceeds and
Repurchase Proceeds received during this period would be credited to the
Certificate Account for distribution to Certificateholders on the February
25 Distribution Date. To the extent funds are available from the aggregate
Servicing Fees relating to mortgagor payments or other recoveries
distributed on the related Distribution Date, the Servicer would make an
additional payment to Certificateholders with respect to any Prepayment
Interest Shortfall realized during this period.
(C) Distributions in the month of February will be made to Certificateholders
of record at the close of business on this date.
(D) Scheduled monthly payments on the Mortgage Loans or Contracts due on
February 1 will be deposited in the Certificate Account as received by the
Servicer. Principal prepayments, Net Liquidation Proceeds, Net Insurance
Proceeds and Repurchase Proceeds received during this period, will be
deposited in the Certificate Account but will not be distributed to
Certificateholders on the February 25 Distribution Date. Instead, such
amounts will be credited to the Certificate Account for distribution to
Certificateholders on the March 25 Distribution Date.
(E) As of the close of business on February 15, a determination will be made of
the amounts of Advances and the amounts of principal and interest which
will be distributed to the Certificateholders. Those scheduled payments due
on or before February 1 which have been received on or before February 15
and those principal prepayments, Net Liquidation Proceeds, Net Insurance
Proceeds and Repurchase Proceeds received during the period commencing
January 2 and ending on January 31 will be distributed to
Certificateholders on the February 25 Distribution Date. In addition, the
amounts payable in respect of any form of credit enhancement will be
calculated in accordance with the related Pooling and Servicing Agreement.
(F) Unless otherwise so specified in the related Prospectus Supplement, the
Servicer or the Paying Agent, will make distributions to Certificateholders
on the 25th day of each month, or if such 25th day is not a business day,
on the next business day.
Distributions to Multi-Class Certificateholders
Valuation of Mortgage Loans and Contracts
If specified in the Prospectus Supplement relating to a Series of
Certificates having one or more Classes or Subclasses of Multi-Class
Certificates, for purposes of establishing the principal amount of Mortgage
Loans or Contracts that will be included in a Trust Fund for such Series each
Mortgage Loan or Contract to be included in such Trust Fund will be assigned an
initial "Pool Value." Unless otherwise specified in the applicable Prospectus
Supplement, the Pool Value of each Mortgage Loan or Contract in the Trust Fund
for such Series will be the Stated Amount of Certificates of such Series which,
based upon certain assumptions and regardless of any prepayments on such
Mortgage Loans or Contracts, can be supported by the scheduled payments of
principal and interest on such Mortgage Loans or Contracts (net of the Fixed
Retained Yield on such Mortgage Loans or Contracts, if any, and the applicable
Servicing Fee), together with reinvestment earnings thereon, if any, at the
Assumed Reinvestment Rate for the period specified in the related Prospectus
Supplement and amounts available to be withdrawn (if applicable) from any
reserve fund for such Series, all as specified in the applicable Prospectus
Supplement. In calculating the Pool Value of a Mortgage Loan or Contract
included in the Trust Fund, future distributions on such Mortgage Loan or
Contract will be determined based on scheduled payments on such Mortgage Loan or
Contract. Any similar Mortgage Loans or Contracts may be aggregated into one or
more groups (each, a "Pool Value Group") each of which will be assigned an
aggregate Pool Value calculated as if all such Mortgage Loans or Contracts in
the Pool Value Group constituted a single loan having the highest interest rate
and the longest maturity of any such loan for such Pool Value Group. There are a
number of alternative means of determining the Pool Value of a Mortgage Loan,
Contract or Pool Value Group, including determinations based on the discounted
present value of the remaining scheduled payments of principal and interest
thereon and determinations based on the relationship between the Mortgage Rates
or Contract Rates borne thereby and the Interest Rates of the Multi-Class
Certificates of the related Series. The Prospectus Supplement for each Series
will describe the method or methods (and related assumptions) used to determine
the Pool Values of the Mortgage Loans or Contracts or the Pool Value Groups for
such Series.
The "Assumed Reinvestment Rate" for a Series of Multi-Class
Certificates will be the highest rate permitted by the nationally recognized
statistical rating agency or agencies rating such Series of Multi-Class
Certificates or a rate insured by means of a surety bond, guaranteed investment
contract or similar arrangement satisfactory to such rating agency or agencies.
If the Assumed Reinvestment Rate is so insured, the related Prospectus
Supplement will set forth the terms of such arrangement.
Distributions of Interest
The Trustee will make distributions of interest on each Class of the
Multi-Class Certificates from the date and at the rates per annum (calculated on
the Stated Amount or Notional Amount of such Class) specified in, or as
otherwise determined in the manner set forth in, the related Prospectus
Supplement (and unless otherwise specified in such Prospectus Supplement,
calculated on the basis of a 360-day year of twelve 30-day months) and in
accordance with the priorities set forth in the related Prospectus Supplement.
Interest on all Classes of Multi-Class Certificates of a Series, other than
Compound Interest Certificates, will be distributed on the Distribution Dates
for such Series specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, distributions of interest on
each Class of Compound Interest Certificates will be made on each Distribution
Date after the Stated Amount of all Multi-Class Certificates of such Series
having a Last Scheduled Distribution Date prior to the Last Scheduled
Distribution Date of such Class of Compound Interest Certificates has been
reduced to zero. Prior to that time, interest on such Class of Compound Interest
Certificates will be added to the Stated Amount thereof on each Distribution
Date. Such Class of Compound Interest Certificates will thereafter receive
distributions of interest on the Stated Amount thereof as so adjusted.
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 the Stated
Amount thereof) to which the holder thereof is entitled from the cash flow on
the assets included in the Trust Fund for such Series and will decline to the
extent distributions in reduction of Stated Amount are received by such holder.
The initial Stated Amount of each Class of Multi-Class Certificates will be
specified in the applicable Prospectus Supplement. On each Distribution Date,
distributions in reduction of Stated Amount of the Classes of Multi-Class
Certificates will be made, to the extent funds are available, to the holders of
the Multi-Class Certificates of such Series then entitled to receive such
distributions, in the order and in the amounts specified in the related
Prospectus Supplement. Distributions in reduction of Stated Amount may be
allocated among Classes of Multi-Class Certificates in order to provide limited
protection to certain Classes against an increase in the weighted average life
of such Classes as a result of a slower than expected or scheduled rate of
principal prepayments on the Mortgage Loans ("extension protection"). In
addition, distributions in reduction of Stated Amount may be allocated among
Classes of Multi-Class Certificates in order to provide limited protection to
certain Classes against a reduction in the weighted average life of such Classes
as a result of a faster than expected or scheduled rate or principal prepayments
on the Mortgage Loans ("call protection"). By virtue of such allocations of
distributions in reduction of Stated Amount to provide extension protection and
call protection to some Classes, the weighted average lives of certain other
Classes may be more greatly affected by a faster or slower than expected or
scheduled rate of principal prepayments on the Mortgage Loans. See "Prepayment
and Yield Considerations -- Weighted Average Life of Certificates."
Distributions in reduction of Stated Amount with respect to any Class or
Subclass of Multi-Class Certificates will be made on a pro rata or random lot or
such other basis as is specified in the applicable Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Certificates, the aggregate amount that will be distributed in
reduction of Stated Amount to holders of Multi-Class Certificates of a Series
then entitled thereto on any Distribution Date for such Series will equal, to
the extent funds are available, the sum of (i) the Multi-Class Certificate
Distribution Amount (as defined herein) and (ii) if and to the extent specified
in the related Prospectus Supplement, the applicable percentage of the Spread
specified in such Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement,
the "Multi-Class Certificate Distribution Amount" with respect to a Distribution
Date for a Series of Multi-Class Certificates will equal the amount, if any, by
which the Stated Amount of the Multi-Class Certificate 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 Contract (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 subordinate to, the rights of
one or more other Classes of Certificates of such Series.
If a Series which includes one or more Classes or Subclasses of
Multi-Class Certificates includes a subordination feature, on each Distribution
Date, distributions of interest, if any, will be made in accordance with the
preferential priorities specified in the related Prospectus Supplement and from
the date and at the Interest Rates specified therein or as otherwise specified
therein and distributions in reduction of Stated Amount, if any, will be made to
the holders of the Multi-Class Certificates in the amount and in the manner
specified in and in accordance with the preferential distribution provisions
described in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement the Subordinated Amount will be reduced as the pool
experiences losses, as well as through seasoning and prepayment of the Mortgage
Loans or Contracts included in the Trust Fund.
Special Distributions
To the extent specified in the Prospectus Supplement relating to a
Series which includes Multi-Class Certificates which have less frequent than
monthly Distribution Dates, any such Class or Subclass having Stated Amounts may
receive special distributions in reduction of Stated Amount together with
accrued interest on the amount of such reduction ("Special Distributions") in
any month, other than a month in which a Distribution Date occurs, if, as a
result of principal prepayments on the Mortgage Loans or Contracts, the Trustee
determines, based on assumptions specified in the applicable Pooling and
Servicing Agreement, that the amount of cash anticipated to be available on the
next Distribution Date for such Series to be distributed to the holders of such
Multi-Class Certificates may be less than the sum of (i) the interest scheduled
to be distributed to such holders and (ii) the amount to be distributed in
reduction of Stated Amount of such Multi-Class Certificates on such Distribution
Date. Any such Special Distributions will be made in the same priority and
manner as distributions in reduction of Stated Amount would be made on the next
Distribution Date.
To the extent specified in the related Prospectus Supplement, one or
more Classes of Certificates of a Series may be subject to special distributions
in reduction of the Stated Amount thereof at the option of the holders of such
Certificates, or to mandatory distributions by the Servicer. Any such
distributions with respect to a Series will be described in the applicable
Prospectus Supplement and will be on such terms and conditions as described
therein and specified in the Pooling and Servicing Agreement for such Series.
Last Scheduled Distribution Date
The "Last Scheduled Distribution Date" for each Class of Multi-Class
Certificates of a Series having a Stated Amount, to the extent Last Scheduled
Distribution Dates are specified in the applicable Prospectus Supplement, is the
latest date on which (based upon the assumptions set forth in the applicable
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."
<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 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.
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 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 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 s 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."
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 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 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 alternative 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 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 i related Prospectus
Supplement) by reason of default to the extent a related Mortgage Loan or
Contract is not covered by any primary mortgage insurance policy. The amount and
terms of any such coverage will be set forth in the Prospectus Supplement.
Special Hazard Insurance Policies or Other Forms of Support for
Special Hazard Losses
If so specified in the applicable Prospectus Supplement, for each
Series of Certificates as to which a pool insurance policy is provided, the
Depositor will also obtain a special hazard insurance policy for the related
Trust Fund in the amount set forth in such Prospectus Supplement The special
hazard insurance policy will, subject to the limitations described in the
applicable Prospectus Supplement, protect against loss by reason of damage to
Mortgaged Properties or Manufactured Homes caused by certain hazards not insured
against under the standard form of hazard insurance policy for the respective
states in which the Mortgaged Properties or Manufactured Homes are located. The
amount and terms of any such coverage will be set forth in the Prospectus
Supplement.
Surety Bonds
If so specified in the Prospectus Supplement relating to a Series of
Certificates, credit support with respect to one or more Classes of Certificates
of a Series may be provided by the issuance of a surety bond issued by a
financial guarantee insurance company specified in the applicable Prospectus
Supplement. The coverage, amount and frequency of any reduction in coverage
provided by a surety bond will be set forth in the Prospectus Supplement
relating to such Series.
Fraud Coverage
If so specified in the applicable Prospectus Supplement, losses
resulting fraud, dishonesty or misrepresentation in connection with the
origination or sale of the Mortgage Loans or Contracts may be covered to a
limited extent by representations and warranties to the effect that no s 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 b (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 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 specific in the related
Prospectus Supplement, each monthly interest payment on a Mortgage Loan or
Contract will generally be calculated as the product of one-twelfth of the
applicable Mortgage Rate or Contract Rate at the time of such calculation and
the then unpaid principal balance on such Mortgage Loan or Contract. The Net
Mortgage Rate or Net Contract Rate with respect to each Mortgage Loan or
Contract will be similarly calculated on a loan-by-loan basis, by subtracting
from the applicable Mortgage Rate or Contract Rate, the Fixed Retained Yield, if
any, payable to the Depositor or other person or entity specified in the
Prospectus Supplement and any Servicing Fee applicable to each Mortgage Loan or
Contract. If the Trust Fund includes adjustable-rate Mortgage Loans or Contracts
or includes Mortgage Loans or Contracts with different Net Mortgage Rates or Net
Contract Rates, the weighted average Net Mortgage Rate or Net Contract Rate may
vary from time to time as set forth below. See "The Trust Funds." The Prospectus
Supplement for a Series will also specify the initial Pass-Through Rate or
Interest Rate for each Class of Certificates of such Series having a
Pass-Through Rate or Interest Rate and will specify whether each such
Pass-Through Rate or Interest Rate is fixed or is variable.
The Net Mortgage Rate or Net Contract Rate for any adjustable rate
Mortgage Loan or Contract will change with any changes in the index specified in
the related Prospectus Supplement on which such Mortgage Rate or Contract Rate
adjustments are based, subject to any applicable periodic or aggregate caps or
floors on the related Mortgage Rate or Contract Rate or other limitations
described in the related Prospectus Supplement. The weighted average Net
Mortgage Rate or Net Contract Rate with respect to any Series may vary due to
changes in the Net Mortgage Rates or Net Contract Rates of adjustable rate
Mortgage Loans or Contracts, to the timing of the Mortgage Rate or Contract Rate
readjustments of such Mortgage Loans or Contracts and to different rates of
payment of principal of fixed or adjustable rate Mortgage Loans or Contracts
bearing different Mortgage Rates or Contract Rates.
If the Trust Fund for a Series includes adjustable rate Mortgage Loans
or Contracts, any limitations on the periodic changes in a mortgagor's or
obligor's monthly payment, any limitations on the adjustments to the Net
Mortgage Rates or Mortgage Rates or to the Net Contract Rates or Contract Rates,
any provision that could result in Deferred Interest and the effects, if any,
thereof on the yield on Certificates of the related Series will be discussed in
the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, no
distribution of principal and only a partial distribution of interest will be
made to Certificateholders with respect to a negatively amortizing Mortgage Loan
or Contract. Distribution of the portion of scheduled interest at the applicable
Net Mortgage Rate or Net Contract Rate representing Deferred Interest with
respect to such Mortgage Loan or Contract will be passed through to the
Certificateholders on the Distribution Date following the Due Date on which it
is received. Such Deferred Interest will bear interest at the Net Mortgage Rate
or Net Contract Rate for such Mortgage Loan or Contract. For federal income tax
purposes, Deferred Interest may constitute interest income to the Trust Fund and
to Certificateholders at the time that it accrues, rather than at the time that
it is paid. See "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for Certificates as to Which No REMIC Election Is Made --Deferred
Interest," "-- Federal Income Tax Consequences for REMIC Certificates --
Taxation of Regular Certificates -- Deferred Interest" and "--Taxation of
Residual Certificates -- Deferred Interest."
Scheduled Delays in Distributions
At the date of initial issuance of the Certificates of each Series
offered hereby, the initial purchasers of a Class of Certificates (other than
certain Classes of Residual Certificates) will be required to pay accrued
interest at the applicable Pass-Through Rate or Interest Rate for such Class
from the Cut-Off Date for such Series to, but not including the date of
issuance. With respect to Standard Certificates, the effective yield to
Certificateholders will be below the yield otherwise produced by the applicable
Pass-Through Rate because while interest will accrue at such Pass-Through Rate
from the first day of each month through the last day of such month (unless
otherwise specified in the related Prospectus Supplement), principal and
interest distributions with respect to such month will not be made until the
25th day (or if such 25th day is not a business day, the business day
immediately following such 25th day) of the month following the month of accrual
(or until such other Distribution Date specified in the applicable Prospectus
Supplement). If so specified in the related Prospectus Supplement, a Class of
Multi-Class Certificates may be entitled to distributions on each Distribution
Date of interest accrued during a period (an "Interest Accrual Period" specified
in such Prospectus Supplement ending on such Distribution Date or ending on a
date preceding such Distribution Date. In the latter case the effective yield to
such Certificateholders will be below the yield otherwise produced by the
applicable initial public offering prices and Interest Rates because (i) on the
first Distribution Date the time period upon which interest payable is
calculated will be less than the time elapsed since the commencement of accrual
of interest, (ii) the interest that accrues during the Interest Accrual Period
will not be paid until a date following such Interest Accrual Period specified
in the related Prospectus Supplement, and (iii) during each Interest Accrual
Period following the first Interest Accrual Period, in the case of a Class of
Multi-Class Certificates currently receiving distributions in reduction of
Stated Amount, interest is based upon a Stated Amount which is less than the
Stated Amount of such Certificates actually outstanding, since the distribution
in reduction of Stated Amount made on the following Distribution Date is deemed
to have been made, for interest accrual purposes only, at the end of the
preceding Interest Accrual Period. The Prospectus Supplement for each Series of
Certificates will set forth the nature of any scheduled delays in distribution
and the impact on the yield of such Certificates.
Interest Shortfalls Due to Principal Prepayments
When a Mortgage Loan or Contract is prepaid in full, the mortgagor or
obligor pays interest on the amount prepaid only to the date of prepayment and
not thereafter. Similarly, Liquidation Proceeds and Insurance Proceeds are also
likely to include interest only to the time of payment When a Mortgage Loan or
Contract is prepaid in part, and such prepayment is applied as of a date other
than the Due Date occurring in the month of receipt or the Due Date occurring in
the month following the month of receipt, the mortgagor or obligor pays interest
on the amount prepaid only to the date of prepayment and not thereafter. The
effect of the foregoing is to reduce the aggregate amount of interest which
would otherwise be passed through to Certificateholders if such Mortgage Loan or
Contract were outstanding, or if such partial prepayment were applied, on the
succeeding Due Date. To mitigate this reduction in yield, the Pooling and
Servicing Agreement relating to a Series will provide, unless otherwise
specified in the applicable Prospectus Supplement, that with respect to any
principal prepayment or liquidation of any Mortgage Loan or Contract underlying
the Certificates of such Series, the Servicer will pay into the Certificate
Account for such Series to the extent funds are available for such purpose from
the related aggregate Servicing Fees (or portion thereof as specified in the
related Prospectus Supplement) which the Servicer is entitled to receive
relating to mortgagor or obligor payments or other recoveries distributed on the
related Distribution Date, such amount, if any, as may be necessary to assure
that the amount paid into the Certificate Account with respect to such Mortgage
Loan or Contract includes an amount equal to interest at the Net Mortgage Rate
or Net Contract Rate for such Mortgage Loan or Contract for the period from the
date of such prepayment or liquidation to but not including the next Due Date.
See "Servicing of the Mortgage Loans and Contracts -- Adjustment to Servicing
Compensation in Connection with Prepaid and Liquidated Mortgage Loans and
Contracts."
Weighted Average Life of Certificates
Weighted average life of a Certificate refers to the average amount of
time that will elapse from the date of issuance of the Certificate until each
dollar in reduction of the principal amount or Stated Amount of such Certificate
is distributed to the investor. The weighted average life and the yield to
maturity of any Class of the Certificates of a Series will be influenced by,
among other things, the rate at which principal on the Mortgage Loans or
Contracts included in the Mortgage Pool or Contract Pool for such Certificate is
paid, which is determined by scheduled amortization and prepayments (for this
purpose, the term "prepayments" includes prepayments and liquidations due to
default, casualty, condemnation and the like).
The Mortgage Loans or Contracts may be prepaid in full or in part at
any time. Unless otherwise specified in the applicable Prospectus Supplement or
as described in the following paragraph, no Mortgage Loan or Contract will
provide for a prepayment penalty and all fixed rate Mortgage Loans or Contracts
will contain due-on-sale clauses permitting the holder to accelerate the
maturity of the Mortgage Loan or Contract upon conveyance of the Mortgaged
Property or Manufactured Home.
Some of the Mortgage Loans may call for Balloon Payments. Balloon
Payments involve a greater degree of risk than fully amortizing loans because
the ability of the borrower to make a Balloon Payment typically will depend upon
its ability either to refinance the loan or to sell the related Mortgaged
Property. The ability of a borrower to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage rates
at the time of the attempted sale or refinancing, the borrower's equity in the
related Mortgaged Property, the financial condition of the borrower and
operating history of the related Mortgaged Property, tax laws, prevailing
economic conditions and the availability of credit for commercial real estate
projects generally.
Some of the Mortgage Loans included in the Trust Fund may, in the
event one or more are required to be repurchased or otherwise removed from the
Trust Fund, require the payment of a release premium.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The Prospectus Supplement for each Series which
includes more than one Class or Subclass of Multi-Class Certificates will
describe one or more such prepayment standards or models and will contain tables
setting forth the weighted average life of each such Class or Subclass and the
percentage of the original aggregate Stated Amount of each such Class or
Subclass that would be outstanding on specified Distribution Dates for such
Series based on the assumptions stated in such Prospectus Supplement, including
assumptions that prepayments on the Mortgage Loans or Contracts are made at
rates corresponding to various percentages of the prepayment standard or model
specified in the related Prospectus Supplement.
There is, however, no assurance that prepayment of the Mortgage Loans
or Contracts underlying a Series of Certificates will conform to any level of
the prepayment standard or model specified in the related Prospectus Supplement.
A number of economic, geographic, social and other factors may affect prepayment
experience. These factors may include homeowner mobility, economic conditions,
changes in mortgagor's or obligor's housing needs, job transfers, unemployment,
mortgagor's or obligor's net equity in the properties securing the mortgages or
contracts, servicing decisions, enforceability of due-on-sale clauses , market
interest rates, the magnitude of related taxes, and the availability of funds
for refinancing. In general, however, if prevailing interest rates fall
significantly below the Mortgage Rates or Contract Rates on the Mortgage Loans
or Contracts underlying a Series of Certificates, the prepayment rates of such
Mortgage Loans or Contracts are likely to be higher than if prevailing rates
remain at or above the rates borne by such Mortgage Loans or Contracts. It
should be noted that Certificates of a Series may evidence an interest in a
Trust Fund with different Mortgage Rates or Contract Rates. Accordingly, the
prepayment experience of such Certificates will to some extent be a function of
the mix of Mortgage Rates or Contract Rates of the Mortgage Loans or Contracts.
In addition, the terms of the Pooling and Servicing Agreement will require the
Servicer to enforce any due-on-sale clause to the extent specified therein. See
"Servicing of the Mortgage Loans and Contracts -- Enforcement of Due-on-Sale
Clauses; Realization 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 that anticipated
would negatively affect the total return to investors in the Certificates of a
Series that are offered at a premium to their principal amount or, if
applicable, their parity price. Parity price is the price at which a Certificate
will yield its coupon, after giving effect to any payment delay. In addition,
the yield to investors in a Class of Certificates which bears interest at a
variable Interest Rate or at a variable Pass-Through Rate, will also be affected
by changes in the index on which any such variable Interest Rate, or variable
Pass-Through Rate is based. Changes in the index may not correlate with changes
in prevailing mortgage interest rates or financing rates for manufactured
housing, and the effect, if any, thereof on the yield of the Certificates will
be discussed in the related Prospectus Supplement. The yield on certain types of
Certificates may be particularly sensitive to prepayment rates, and further
information with respect to yield on such Certificates will be included in the
applicable Prospectus Supplement.
At the request of the mortgagor or obligor, the Servicer may refinance
the Mortgage Loans or Contracts in any Trust Fund by accepting prepayments
thereon and making new loans secured by a Mortgage on the same property or a
security interest in the same Manufactured Home. Upon such refinancing, the new
loans will not be included in the Trust Fund. A mortgagor or obligor may be
legally entitled to require the Servicer to allow such a refinancing. Any such
refinancing will have the same effect as a prepayment in full of the related
Mortgage Loan or Contract.
The Depositor may be obligated and the applicable Unaffiliated Seller
will be obligated, under certain circumstances, to repurchase certain of the
Mortgage Loans or Contracts. In addition, the terms of certain insurance
policies relating to the Mortgage Loans or Contracts may permit the applicable
insurer to purchase delinquent Mortgage Loans or Contracts. The proceeds of any
such repurchase will be deposited in the related Certificate Account and such
repurchase will have the same effect as a prepayment in full of the related
Mortgage Loan or Contract. See "The Trust Funds -- Assignment of the Mortgage
Loans and Contracts." In addition, if so specified in the applicable Prospectus
Supplement, the Servicer will have the option to purchase all, but not less than
all, of the Mortgage Loans or Contracts in any Trust Fund under the limited
conditions specified in such Prospectus Supplement. For any Series of
Certificates for which an election has been made to treat the Trust Fund (or one
or more segregated pools of assets therein) as a REMIC, any such purchase may be
effected only pursuant to a "qualified liquidation," as defined in Code Section
86OF(a)(4)(A). See "The Pooling and Servicing Agreement -- Termination; Purchase
or other Disposition of Mortgage Loans and Contracts."
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 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 One New York Plaza, 15th Floor, New
York, New York 10292. Its telephone number is (212) 778-1000.
As described herein under "The Trust Funds -- Assignment of the
Mortgage Loans and Contracts" and "-- Representations and Warranties", the only
obligations, if any, of the Depositor with respect to a Series of Certificates
may be pursuant to certain limited representations and warranties and limited
undertakings to repurchase or substitute Mortgage Loans or Contracts under
certain circumstances. Unless otherwise specified in the applicable Prospectus
Supplement, the Depositor will have no servicing obligations or responsibilities
with respect to any Mortgage Pool, Contract Pool or Trust Fund. The Depositor
does not have, nor is it expected in the future to have, any significant assets.
As specified in the related Prospectus Supplement the Servicer with
respect to any Series of Certificates relating to Mortgage Loans or Contracts
may be an affiliate of the Depositor. As described under "The Trust Funds," the
Depositor anticipates that it may acquire Mortgage Loans and Contracts through
or from an affiliate.
Neither the Depositor nor Prudential Securities Group Inc. nor any of
its affiliates, including The Prudential Insurance Company of America, will
insure or guarantee the Certificates of any Series.
UNDERWRITING GUIDELINES
Mortgage Loans Secured by Residential Properties
The Depositor expects that all Mortgage Loans included in a Mortgage
Pool will have been originated in accordance with the underwriting procedures
described herein, subject to such variations as are specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, all or a representative sample of the Mortgage Loans comprising the
Mortgage Pool for a Series will be reviewed by or on behalf of the Depositor to
determine compliance with such underwriting procedures and standards and
compliance with other requirements for inclusion in the related Mortgage Pool.
Except as otherwise set forth in the related Prospectus Supplement, it
is expected that each originator of Mortgage Loans will have applied, in a
standard procedure which complies with applicable federal and state law and
regulations, underwriting procedures that are intended to evaluate the
mortgagor's credit standing and repayment ability, and the value and adequacy of
the Mortgaged Property as collateral. A prospective mortgagor will have been
required to fill out an application designed to provide to the original lender
pertinent credit information. As part of the description of the mortgagor's
financial condition, the mortgagor will have been required to provide a current
balance sheet describing assets and liabilities and a statement of income and
expenses, as well as an authorization to apply for a credit report which
summarizes the mortgagor's credit history with local merchants and lenders and
any record of bankruptcy. In addition, an employment verification will have been
obtained in the case of individual borrowers which reports the mortgagor's
current salary, length of such employment and whether it was expected that the
mortgagor will continue such employment in the future. If a prospective borrower
was self-employed, the 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 closing loan documents, the income
and expenses of both individuals may be included in the computation.
Underwriting guidelines generally similar to traditional underwriting guidelines
used by FNMA and FHLMC which were in effect at the time of origination of each
Mortgage Loan will generally have been used, except that the ratios at
origination of the amounts described in clauses (i) and (ii) above to the
applicant's stable monthly gross income may exceed in certain cases the then
applicable FNMA and FHLMC guidelines. With respect to a vacation or second home,
no income derived from the property will have been considered for underwriting
purposes.
Other credit considerations may cause departure from the traditional
guidelines. If the Loan-to-Value Ratio and/or term of the Mortgage Loan is less
than a percentage specified in the related Prospectus Supplement, certain
aspects of review relating to monthly income assets may be foregone and standard
ratios of monthly or total expenses to gross income may not be applied. The
Depositor may permit an Unaffiliated Seller's underwriting standards to
otherwise vary in certain cases to the extent specified in the related
Prospectus Supplement.
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the mortgagor but rather must look solely to the property for
repayment in the event of foreclosure. The Depositor will require that the
Unaffiliated Sellers represent and warrant that underwriting standards applied
to each Mortgage Loan purchased by the Depositor from such Unaffiliated Seller
(including Mortgage Loans secured by Mortgaged Properties located in
anti-deficiency states) require that the value of the property being financed,
as indicated by the appraisal, currently supports and is anticipated to support
in the future the outstanding principal balance of such Mortgage Loan.
Certain of the types of loans which may be included in the Mortgage
Pools are recently developed and may involve additional uncertainties not
present in traditional types of loans. For example, certain of such Mortgage
Loans may provide for escalating or variable payments by the mortgagor. These
types of Mortgage Loans are underwritten on the basis of a judgment that
mortgagors will have the ability to make larger monthly payments in subsequent
years. In some instances, however, a mortgagor's income may not be sufficient to
make loan payments as such payments increase.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the real estate market should 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 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
adversely affects the interests of the Certificateholders will constitute an
Event of Default by the Servicer under the related Pooling and Servicing
Agreement. See "The Pooling and Servicing Agreement -- Events of Default --
Mortgage Loans or Contracts" and " -- Rights Upon Event of Default -- Mortgage
Loans or Contracts."
Payments on Mortgage Loans and Contracts
The Servicer or the Trustee will, as to each Series of Certificates,
establish and maintain, or cause to be established and maintained, a separate
trust account or accounts in the name of the Trustee (collectively, the
"Certificate Account"), which must be maintained with a deposition 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;
(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:
(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 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 withdrawn from the Certificate
Account in order to make distributions to Certificateholders. If the Paying
Agent for a Series is not the Trustee for such Series, the Servicer will, prior
to each Distribution Date, deposit in immediately available funds in an account
designated by the Paying Agent the amount required to be distributed to the
Certificateholders on such Distribution Date.
The Servicer will cause any Paying Agent which is not the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
agrees with the Trustee that such Paying Agent will:
(1) hold all amounts deposited with it by the Servicer for
distribution to Certificateholders in trust for the benefit of
Certificateholders until such amounts are distributed to Certificateholders
or otherwise disposed of as provided in the applicable Pooling and
Servicing Agreement;
(2) give the Trustee notice of any default by the Servicer in the
making of such deposit; and
(3) at any time during the continuance of any such default, upon
written request of the Trustee, forthwith pay to the Trustee all amounts
held in trust by such Paying Agent.
Advances and Limitations Thereon
Unless otherwise provided in the applicable Prospectus Supplement, the
Servicer will advance on or before the business day preceding each Distribution
Date its own funds (an "Advance") or funds held in the Certificate Account for
future distribution or withdrawal and which are not included in the Pool
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of payments of principal and interest which were due during the
related Due Period, that were delinquent on the Determination Date and were not
advanced by any Sub-Servicer, to the extent that the Servicer determines that
such advances will be reimbursable from late collections, Insurance Proceeds,
Liquidation Proceeds or otherwise.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the Class or Classes of Certificates
entitled thereto, rather than to guarantee or insure against losses. Unless
otherwise provided in the applicable Prospectus Supplement, advances of the
Servicer's funds will be reimbursable only out of related recoveries on the
Mortgage Loans or Contracts respecting which such amounts were advanced, or from
any amounts in the Certificate Account to the extent that the Servicer shall
determine that any such advances previously made are not ultimately recoverable
from late collections, Insurance Proceeds, Liquidation Proceeds or otherwise. If
advances have been made by the Servicer from excess funds in the Certificate
Account, the Servicer will replace such funds in the Certificate Account on any
future Distribution Date to the extent that funds in the Certificate Account on
such Distribution Date are less than payments required to be made to
Certificateholders on such date.
Adjustment to Servicing Compensation in Connection with Prepaid and
Liquidated Mortgage Loans and Contracts
When a mortgagor or obligor prepays a Mortgage Loan or Contract in
full, the mortgagor or obligor pays interest on the amount prepaid only to the
date on which such principal prepayment is made. Similarly, Liquidation Proceeds
from a Mortgaged Property or Manufactured Home will not include interest for any
period after the date on which the liquidation took place, and Insurance
Proceeds may include interest only to the date of settlement of the related
claims. Further, when a Mortgage Loan or Contract is prepaid in part, and such
prepayment is applied as of a date other than a Due Date, the mortgagor or
obligor pays interest on the amount prepaid only to the date of prepayment and
not thereafter. The effect of the foregoing is to reduce the aggregate amount of
interest which would otherwise be passed through to Certificateholders if such
Mortgage Loan or Contract were outstanding, or if such partial prepayment were
applied, on the succeeding Due Date. Unless otherwise specified in the
applicable Prospectus Supplement, in order to mitigate the adverse effect to
Certificateholders of a Series resulting from the prepayment or liquidation of a
Mortgage Loan or Contract or settlement of an insurance claim with respect
thereto, the amount of the aggregate Servicing Fees will be reduced by an amount
equal to the accrual of interest on any prepaid or liquidated Mortgage Loan or
Contract at the Net Mortgage Rate for such Mortgage Loan or the Net Contract
Rate for such Contract from the date of its prepayment or liquidation or the
date of such insurance settlement to the next Due Date (the "Prepayment Interest
Shortfall"). Such reductions in the aggregate Servicing Fees will be made by the
Servicer with respect to the Mortgage Loans or Contracts under the applicable
Pooling and Servicing Agreement, but only to the extent that the aggregate
Prepayment Interest Shortfall does not exceed the aggregate Servicing Fees
relating to mortgagor or obligor payments or other recoveries distributed on the
related Distribution Date. The amount of the offset against the aggregate
Servicing Fees will be included in the scheduled distributions to
Certificateholders on the Distribution Date on which the related principal
prepayments, Liquidation Proceeds or Insurance Proceeds are passed through to
Certificateholders. See "Prepayment and Yield Considerations." Payments with
respect to any Prepayment Interest Shortfall will not be obtained by means of
any subordination of the rights of Subordinated Certificateholders or any other
credit enhancement arrangement (except to the extent such credit enhancement
pays interest with respect to a Mortgage Loan or Contract in excess of the
related Net Mortgage Rate or Net Contract Rate and such excess would otherwise
be paid to the Servicer as a Servicing Fee).
Reports to Certificateholders
Unless otherwise specified or modified in the related Pooling and
Servicing Agreement for each Series, a statement setting forth the following
information, if applicable, will be included with each distribution to
Certificateholders of record of such Series:
(i) to each holder of a Certificate other than a Multi-Class
Certificate, the amount of such distribution allocable to principal of the
related Mortgage Loans or Contracts, separately identifying the aggregate
amount of any principal prepayments included therein, the amount of such
distribution allocable to interest on the related Mortgage Loans or
Contracts, and the aggregate unpaid principal balance of the Mortgage Loans
or Contracts after giving effect to the principal distributions on such
Distribution Date;
(ii) to each holder of a Multi-Class Certificate on which an interest
distribution and a distribution in reduction of Stated Amount are then
being made, the amount of such interest distribution and distribution in
reduction of Stated Amount, and the Stated Amount of each Class after
giving effect to the distribution in reduction of Stated Amount made on
such Distribution Date;
(iii) to each holder of a Multi-Class Certificate on which a
distribution of interest only is then being made, the aggregate Stated
Amount of Certificates outstanding of each Class after giving effect to the
distribution in reduction of Stated Amount made on such Distribution Date
on any Special Distribution Date occurring subsequent to the last such
report and after including in the aggregate Stated Amount the Stated Amount
of the Compound Interest Certificates, if any, outstanding and the amount
of any accrued interest added to the Stated Amount of such Compound
Interest Certificates on such Distribution Date;
(iv) to each holder of a Multi-Class Certificate which is a Compound
Interest Certificate (but only if such holder shall not have received a
distribution of interest equal to the entire amount of interest accrued on
such Certificate with respect to such Distribution Date),
(a) the information contained in the report delivered pursuant to
clause (ii) above;
(b) the interest accrued on such Class of Compound Interest
Certificates with respect to such Distribution Date and added to the
Stated Amount of such Compound Interest Certificate; and
(c) the Stated Amount of such Class of Compound Interest
Certificates after giving effect to the addition thereto of all
interest accrued thereon;
(v) to each holder of a Certificate, the aggregate amount of the
Servicing Fees paid with respect to such Distribution Date;
(vi) to each holder of a Certificate, the amount by which the
Servicing Fee has been reduced by the aggregate Prepayment Interest
Shortfall for the related Distribution Date;
(vii) the aggregate amount of any Advances by the Servicer included in
the amounts actually distributed to the Certificateholders;
(viii) to each holder of each Senior Certificate (other than a
Shifting Interest Certificate):
(a) the amount of funds, if any, otherwise distributable to
Subordinated Certificateholders and the amount of any withdrawal from
the Subordination Reserve Fund, if any, included in amounts actually
distributed to Senior Certificateholders;
(b) the Subordinated Amount remaining and the balance in the
Subordination Reserve Fund, if any, following such distribution; and
(c) the amount of any Senior Class Shortfall with respect to, and
the amount of any Senior Class Carryover Shortfall outstanding prior
to, such Distribution Date;
(ix) to each holder of a Certificate entitled to the benefits of
payments under any form of credit enhancement or from any reserve fund
other than the Subordination Reserve Fund:
(a) the amounts so distributed under any such form of credit
enhancement or from any such reserve fund on the applicable
Distribution Date; and
(b) the amount of coverage remaining under any such form of
credit enhancement and the balance in any such fund, after giving
effect to any payments thereunder and other amounts charged thereto on
the Distribution Date;
(x) in the case of a Series of Certificates with a variable
Pass-Through Rate, such Pass-Through Rate;
(xi) the book value of any collateral acquired by the Trust Fund
through foreclosure or otherwise; and
(xii) the number and aggregate principal amount of Mortgage Loans or
Contracts one month and two or more months delinquent.
In addition, within a reasonable period of time after the end of each
calendar year, a report will be furnished to each Certificateholder of record at
any time during such calendar year (a) as to the aggregate of amounts reported
pursuant to clauses (i) through (xii) above, as applicable, for such calendar
year or, in the event such person was a Certificateholder of record during a
portion of such calendar year, for the 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 class of business on such
Distribution Date, stating that all distributions required to be made by the
Servicer under the applicable Pooling and Servicing Agreement have been made (or
if any required distribution has not been made by the Servicer, specifying the
nature and status thereof) and showing, for the period covered by such
statement, the aggregate of deposits to and withdrawals from the Certificate
Account for each category of deposits and withdrawals specified in the Pooling
and Servicing Agreement. Such statement shall also include information as to (i)
the aggregate unpaid principal balances of all the Mortgage Loans or Contracts
as of the close of business on the last day of the month preceding the month in
which such Distribution Date occurs (or such other day as may be specified in
the applicable Pooling and Servicing Agreement); and (ii) the amount of any
Subordination Reserve Fund and any other reserve fund, as of such Distribution
Date (after giving effect to the distributions on such Distribution Date).
Copies of such reports may be obtained by Certificateholders upon request in
writing addressed to the related Trustee at its mailing address provided in the
related Prospectus Supplement.
Collection and Other Servicing Procedures
The Servicer, directly or through Sub-Servicers, will make reasonable
efforts to collect all payments called for under the Mortgage Loans or Contracts
and will, consistent with the applicable Pooling and Servicing Agreement and any
applicable agreement governing any form of credit enhancement, follow such
collection procedures as it follows with respect to mortgage loans or
manufactured housing contracts serviced by it that are comparable to the
Mortgage Loans or Contracts, as the case may be. Consistent with the above, the
Servicer may, in its discretion, (i) waive any prepayment charge, assumption
fee, late payment charge or any other charge in connection with the prepayment
of a Mortgage Loan or Contract and (ii) arrange with a mortgagor or obligor a
schedule for the liquidation of deficiencies running for not more than six
months after the applicable Due Date.
Pursuant to the Pooling and Servicing Agreement, the Servicer, to the
extent permitted by law, will establish and maintain or will cause to be
established and maintained one or more escrow accounts (collectively, the
"Servicing Account") in which the Servicer will be required to deposit or cause
to be deposited payments by mortgagors or obligors, as applicable, for taxes,
assessments, mortgage and hazard insurance premiums and other comparable items.
Withdrawals from the Servicing Account may be made to effect timely payment of
taxes, assessments, mortgage and hazard insurance, to refund to mortgagors or
obligors amounts determined to be overages, to pay interest to mortgagors or
obligors on balances in the Servicing Account, if required, to repair or
otherwise protect the Mortgaged Properties or Manufactured Homes and to clear
and terminate such account. The Servicer will be responsible for the
administration of each Servicing Account. The Servicer will be obligated to
advance certain amounts which are not timely paid by mortgagors or obligors, to
the extent that the Servicer determines that such amounts will be recoverable
out of Insurance Proceeds, Liquidation Proceeds, or otherwise. Alternatively, if
specified in the applicable Pooling and Servicing Agreement, in lieu of
establishing a Servicing Account, the Servicer may procure a performance bond or
other form of insurance coverage, in an amount acceptable to the Rating Agency
rating the related Series of Certificates, covering loss occasioned by the
failure to escrow such amounts.
Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted
Mortgage Loans and Contracts
Each Pooling and Servicing Agreement will provide that, when any
Mortgaged Property or Manufactured Home is conveyed by the mortgagor or obligor,
the Servicer will exercise its rights to accelerate the maturity of such
Mortgage Loan or Contract under any "due-on-sale" clause applicable thereto, if
any, unless (a) it is not exercisable under applicable law or (b) such exercise
would result in loss of insurance coverage with respect to such Mortgage Loan or
Contract. In any such case, the Servicer is authorized to take or enter into an
assumption and modification agreement from or with the person to whom such
Mortgaged Property or Manufactured Home has been or is about to be conveyed,
pursuant to which such person becomes liable under the Mortgage Note or Contract
and, unless prohibited by applicable state law, the mortgagor or obligor remains
liable thereon, provided that the Mortgage Loan or Contract will continue to be
covered by any pool insurance policy and any related primary mortgage insurance
policy, and the Mortgage Rate or Contract Rate with respect to such Mortgage
Loan or Contract and the payment terms shall remain unchanged. The Servicer will
also be authorized, with the prior approval of any pool insurer and any primary
mortgage insurer, if any, to enter into a substitution of liability agreement
with such person, pursuant to which the original mortgagor or obligor is
released from liability and such person is substituted as mortgagor or obligor
and becomes liable under the Mortgage Note or Contract.
The Servicer is obligated under the Pooling and Servicing Agreement
for each Series to realize upon defaulted Mortgage Loans or Contracts to the
extent provided therein. However, in the case of foreclosure or of damage to a
Mortgaged Property or Manufactured Home from an uninsured cause, the Servicer is
not required to expend its own funds to foreclose, repossess or restore any
damaged property, unless it reasonably determines (i) that such foreclosure,
repossession or restoration will increase the proceeds to Certificateholders of
such Series of liquidation of the Mortgage Loan or Contract after reimbursement
of the Servicer for its expenses and (ii) that such expenses will be recoverable
to it through Liquidation Proceeds or Insurance Proceeds. In the event that the
Servicer has expended its own funds for foreclosure or to restore damaged
property, it will be entitled to charge the Certificate Account for such Series
an amount equal to all costs and expenses incurred by it.
The Servicer may foreclose against property securing a defaulted
Mortgage Loan either by foreclosure, by sale or by strict foreclosure and in the
event a deficiency judgment is available against the mortgagor or other person
(see "Certain Legal Aspects of the Mortgage Loans and Contracts -- The Mortgage
Loans -- Anti-Deficiency Legislation and Other Limitations on Lenders" for a
description of the availability of deficiency judgments), may proceed for the
deficiency. It is anticipated that in most cases the Servicer will not seek
deficiency judgments against any mortgagor or obligor, and the Servicer is not
required under the Pooling and Servicing Agreement to seek deficiency judgments.
With respect to a Trust Fund (or one or more segregated pools of
assets therein) as to which a REMIC election has been made, if the Trustee
acquires ownership of any Mortgaged Property or Manufactured Home as a result of
a default or imminent default of any Mortgage Loan or Contract secured by such
Mortgaged Property or Manufactured Home, the Trustee generally will be required
to dispose of such property with two years following its acquisition by the
Trust Fund. The Servicer also will be required to administer the Mortgaged
Property or Manufactured Home in a manner which does not cause the Mortgaged
Property or Manufactured Home to fail to qualify as "foreclosure property"
within the meaning of Code Section 860G(a)(8) or result in the receipt by the
Trust Fund of any "net income from foreclosure property" within the meaning of
Code Section 860G(c). In general, this would preclude the holding of the
Mortgaged Property or Manufactured Home as a dealer in such property or the
receipt of rental income based on the profits of the lessee.
The Servicer may modify, waive or amend the terms of any Mortgage Loan
or Contract without the consent of the Trustee or any Certificateholder. Such
modification, waiver or amendment shall only be given if the Servicer determines
that it is in the best interests of Certificateholder 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 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 accountant will furnish a
statement to the Trustee to the effect that such firm is of the opinion that the
system of internal accounting controls in effect on the date of such statement
relating to the servicing procedures performed by the Servicer under the Pooling
and Servicing Agreement, taken as a whole, was sufficient for the prevention and
detection of errors and irregularities which would be material to the assets of
the Trust Fund and that nothing has come to their attention that would cause
them to believe that such servicing has not been conducted in compliance with
the provisions of the Pooling and Servicing Agreement, other than such
exceptions as shall be set forth in such report.
Each Pooling and Servicing Agreement will also provide for delivery to
the Trustee annually on or before the specified date therein, a statement signed
by two officers of the Servicer to the effect that the Servicer has fulfilled
its obligations under the Pooling and Servicing Agreement throughout the
preceding year or, if there has been a default in the fulfillment of any such
obligation, describing each such default.
Copies of the annual accountants' statement and the statement of
officers of the Servicer may be obtained by Certificateholders without charge
upon written request to the Servicer at the address of the Servicer set forth in
the related Prospectus Supplement.
Certain Matters Regarding the Servicer and the Depositor
The Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement for each Series (other than its duties as
Certificate Registrar for such Series, if it is acting as such), except upon its
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities of a type and nature presently carried on by it. No such
resignation will become effective until the Trustee for such Series or a
successor Servicer has assumed the Servicer's obligations and duties under the
Pooling and Servicing Agreement. If the Servicer resigns for any of the
foregoing reasons and the Trustee is unable or unwilling to assume
responsibility for servicing the Mortgage Loans or Contracts, it may appoint
another institution as Servicer, as described under "The Pooling and Servicing
Agreement -- Rights Upon Event of Default -- Mortgage Loans or Contracts" below.
The Pooling and Servicing Agreement will provide that neither the
Depositor, the Servicer (if the Series of Certificates relates to Mortgage Loans
or Mortgage Contracts) nor any director, officer, employee or agent of either of
them will be under any liability to the Trust Fund or the Certificateholders,
for the taking of any action or for refraining from the taking of any action in
good faith pursuant to the Pooling and Servicing Agreement, or for errors in
judgment; provided, however, that none of the Depositor, the Servicer or any
director, officer, employee or agent of the Depositor or Servicer will be
protected against any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of his or
its duties or by reason of reckless disregard of his or its obligations and
duties thereunder. The Pooling and Servicing Agreement will further provide that
the Depositor, the Servicer and any director, officer, employee or agent of
either of them shall be entitled to indemnification by the Trust Fund and will
be held harmless against any loss, liability or expense incurred in connection
with any legal action relating to the Pooling and Servicing Agreement or the
Certificates other than any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of his or
its duties thereunder or by reason of reckless disregard of his or its
obligations and duties thereunder. In addition, the Pooling and Servicing
Agreement will provide that the Depositor and the Servicer will not be under any
obligation to appear in, prosecute or defend any legal action that is not
incidental to its duties under the Pooling and Servicing Agreement and that in
its opinion may involve it in any expense or liability. The Depositor and the
Servicer may, however, in its discretion, undertake any such action deemed by it
necessary or desirable with respect to the Pooling and Servicing Agreement and
the rights and duties of the parties thereto and the interests of the
Certificateholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust Fund, and the Servicer will be entitled to be
reimbursed therefor out of the Certificate Account, and any loss to the Trust
Fund arising from such right of reimbursement will be allocated pro rata among
the various Classes of Certificates unless otherwise specified in the applicable
Pooling and Servicing Agreement.
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.
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 i 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 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 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 under 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.
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 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. 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.
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 canceled 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 tenant-stockholders.
Foreclosure on the cooperative shares is accomplished by a sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code (the
"UCC") and the security agreement relating to those shares. Article 9 of the UCC
requires that a sale be conducted in a "commercially reasonable" manner. Whether
a foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to the
usual practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right 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.
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 a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are
provided for in certain instances where the value of the lender's security has
been impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement and foreclosure
on the beneficial interest in a land trust. Some courts have interpreted section
9-504 of the UCC to prohibit a deficiency award unless the creditor establishes
that the sale of the collateral (which, in the case of a Mortgage Loan secured
by shares of a cooperative, would be such shares and the related proprietary
lease or occupancy agreement) was conducted in a commercially reasonable manner.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect 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 action 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 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 C and may take such
a mortgage note subject to certain restrictions on its ability to foreclose and
to certain contractual defenses available to a mortgagor.
Enforceability of Certain Provisions
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under the Pooling and Servicing Agreement, late charges and prepayment
fees (to the extent permitted by law and not waived by the Servicer) will be
retained by the Servicer as additional servicing compensation.
Courts have imposed 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 requirement 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 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 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 debtor thereunder. The effect of this rule is to subject
the assignee of such a contract to all claims and defenses which the debtor
could assert against the seller of goods. Liability under this rule is limited
to amounts paid under a Contract; however, the obligor also may be able to asset
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
Contract.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses
The Contracts, in general, prohibit the sale or transfer of the
related Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer that is not consented to.
In the case of a transfer of a Manufactured Home after which the
Servicer desires to accelerate the maturity of the related Contract, the
Servicer's ability to do so will depend on the enforceability under state law of
the "due-on-sale" clause. The Garn-St Germain Depository Institutions Act of
1982 preempts, subject to certain exceptions and conditions, state laws
prohibiting enforcement of "due-on-sale" clauses applicable to the Manufactured
Homes. Consequently, in some states the Servicer may be prohibited from
enforcing a "due-on-sale" clause in respect of certain Manufactured Homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("Title V"), provides that, subject to the
following conditions, state usury limitations shall not apply to any loan which
is secured by a first lien on certain kinds of manufactured housing. The
Contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action leading to
repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, and state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The Unaffiliated Seller will represent that all of the Contracts comply with
applicable usury law.
Formaldehyde Litigation with Respect to Contracts
A number of lawsuits have been brought in the United States alleging
personal injury from exposure to the chemical formaldehyde, which is preset in
many building materials, including such components of manufactured housing as
plywood flooring and wall paneling. Some of these lawsuit 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 this Section as
the "borrower" for the payment of the purchase price, plus interest, over the
term of such contract. Only after full performance by the borrower of the
contract is the lender obligated to convey title to the real estate to the
purchaser. As with mortgage or deed of trust financing, during the effective
period of the Installment Contract, the borrower is generally responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated, and
the buyer's equitable interest in the property is forfeited. The lender in such
a situation does not have to foreclosure in order to obtain title to the
property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of forfeiture.
Under such statute, a judicial or nonjudicial foreclosure may be required, the
lender may be required to give notice of default and the borrower may be granted
some grace period during which the contract may be reinstated upon full payment
of the default amount and the borrower may have a post-foreclosure statutory
redemption right. In other states, courts in equity may permit a borrower with
significant investment in the property under an Installment Contract for the
sale of real estate to share in the proceeds of sale of the property after the
indebtedness is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an Installment Contract for the sale of real
estate in a given state are simpler and less time-consuming and costly than are
the procedures for foreclosing and obtaining clear title to a mortgaged
property.
Environmental Risks
Real property pledged for a Mortgaged Loan or Contract as security to
a lender may be subject to unforeseen environmental risks. Of particular concern
may be those mortgaged properties which have been the site of manufacturing,
industrial or disposal activity. Such environmental risks may give rise to (a) a
diminution in value of property securing any Mortgage Loan or the inability to
foreclose against such property or (b) in certain circumstances as more fully
described below, liability for clean-up costs or other remedial actions, which
liability could exceed the value of such property or the principal balance of
the related Mortgage Loan.
Under the laws of certain states, failure to perform the remediation
required or demanded by the state of any condition or circumstance that (i) may
pose an imminent or substantial endangerment to the public health or welfare or
the environment, (ii) may result in a release or threatened release of any
Hazardous Material, or (iii) may give rise to any environmental claim or demand
(each such condition or circumstance, or "Environmental Condition") may give
rise to a lien on the property to ensure the reimbursement of remedial costs
incurred by the state. In several states such lien has priority over the lien of
an existing mortgage against such property. The value of a Mortgaged Property as
collateral for a Mortgage Loan could therefore be adversely affected by the
existence of any such Environmental Condition.
The state of the law is currently unclear as to whether and under what
circumstances clean-up costs, or the obligation to take remedial actions, could
be Unposed on a secured lender such as the Trust Fund. Under the laws of some
states and under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), a lender may be liable as an
"owner or operator" for costs of addressing releases or threatened releases of
hazardous substances on a mortgaged property if such lender or its agents or
employees have participated in the management of the operations of the borrower,
even though CERCLA's definition of "owner or operator," however, is a person
"who without participating in the management of the facility, holds indicia of
ownership primarily to protect his security interest" (the "secured-creditor
exemption"). This exemption for holders of a security interest such as a secured
lender applies only when the lender seeks to protect its security interest in
the contaminated facility or property. Thus, if a lender's activities begin to
encroach on the actual management of such facility or property, the lender faces
potential liability as an "owner or operator" under CERCLA. Similarly, when a
lender forecloses and takes title to a contaminated facility or property
(whether it holds the facility or property as an investment or leases it to a
third party), the lender may incur potential CERCLA liability.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly contained
CERCLA's secured-creditor exemption. The court held that a lender need not have
involved itself in the day-to-day operations of the facility or participated in
decisions relating to hazardous waste to be liable under CERCLA; rather,
liability could attach to a lender if its involvement with the management of the
facility is broad enough to support the inference that the lender had the
capacity to influence the borrower's treatment of hazardous waste. The court
added that a lender's capacity to influence such decisions could be inferred
from the extent of its involvement in the facility's financial management. A
subsequent decision by the United States Court of Appeals for the Ninth Circuit
in In re Bergsoe Metal Corp., disagreeing with the Fleet Factors court, held
that a secured lender had no liability absent "some actual management of the
facility" on the part of the lender. On April 29, 1992, the United States
Environmental Protection Agency (the "EPA") issued a final rule interpreting and
delineating CERCLA's secured-creditor exemption. The final rule defines a
specific the range of permissible actions that may be undertaken by a holder of
a contaminated facility without exceeding the bounds of the secured-creditor
exemption. Issuance of this rule by the EPA under CERCLA would not necessarily
affect the potential for liability in actions by either a state or a private
party under CERCLA or in actions under other federal or state laws which may
impose liability on "owners or operators" but do not incorporate the
second-creditor exemption.
If a lender is or becomes liable for clean-up costs, it may bring an
action for contribution against the current owners or operators, the owners or
operators at the time of on-site disposal activity or any other party who
contributed to the environmental hazard, but such persons or entities may be
bankrupt or otherwise judgment proof. Furthermore, such action against the
borrower may be adversely affected by the limitations on recourse in the
documents in the Mortgage Document File. Similarly, in some states
anti-deficiency legislation and other statues requiring the lender to exhaust
its security before bringing a personal action against the borrower-trustor (see
"Anti-Deficiency Legislation and Other Limitations on Lenders" below) may
curtail the lender's ability to recover from its borrower the environmental
clean-up and other related costs and liabilities by the lender.
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 in reserve status
at the time of the origination of the Mortgage Loan or Contract and is later
called to active duty) may not be charged interest above an annual rate of 6%
during the period of such borrower's active duty status, unless a court orders
otherwise upon application of the lender. It is possible that such action could
have an effect, for an indeterminate period of time, on the ability of the
Servicer to collect full amounts of interest on certain of the Mortgage Loans or
Contracts in a Trust Fund. Any shortfall in interest collections resulting from
the application of the Relief Act could result in losses to the holders of the
Certificates of the related Series. In addition, the Relief Act imposes
limitations which would impair the ability of the Servicer to foreclose on an
affected Mortgage Loan or Contract during the borrower's period of active duty
status. Thus, in the event that such a Mortgage Loan or Contract goes into
default, there may be delays and losses occasioned by the inability to realize
upon the Mortgaged Property or Manufactured Home in a timely fashion.
Type of Mortgaged Property
The lender may be subject to additional risk depending upon the type
and use of the Mortgaged Property in question. For instance, Mortgaged
Properties which are hospitals, nursing homes or convalescent homes may present
special risks to lenders in large part due to significant governmental
regulation of the operation, maintenance, control and financing of health care
institutions. Mortgages on Mortgaged Properties which are owned by the Borrower
under a condominium form of ownership are subject to the declaration, by-laws
and other rules and regulations of the condominium association. Mortgaged
Properties which are hotels or motels may present additional risk to the lender
in that: (i) hotels and motels are typically operated pursuant to franchise,
management and operating agreements which may be terminable by the operator; and
(ii) the transferability of the hotel's operating, liquor and other licenses to
the entity acquiring the hotel either through purchase or foreclosure is subject
to the vagaries of local law requirements. In addition, Mortgaged Properties
which are multifamily residential properties may be subject to rent control
laws, which could impact the future cash flows of such properties. Finally,
Mortgaged Properties which are financed in the installment sales contract method
may leave the holder of the note exposed to tort and other claims as the true
owner of the property which could impact the availability of cash to pass
through to investors.
Certain Matters Relating to Insolvency
The Unaffiliated Seller of the Mortgage Loans or Contracts and the
Depositor intend that the transfer of such Mortgage Loans or Contracts to the
Trust Fund constitute a sale rather for a pledge of the Mortgage Loans or
Contracts to secure indebtedness of the seller of the Mortgage Loans or
Contracts. However, if the Unaffiliated Seller were to become a debtor under the
federal bankruptcy code or be placed in a conservatorship or receivership under
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), as the case may be, it is possible that a creditor, receiver,
conservator or trustee-in-bankruptcy of such seller may argue that the sale of
the Mortgage Loans or Contracts by the Unaffiliated Seller is a pledge of the
Mortgage Loans or Contracts rather than a sale. This position, if argued or
accepted by a court, could result in a delay in or reduction of distributions to
the related Certificateholders.
Under FIRREA the FDIC as receiver or conservator of a Servicer subject
to its jurisdiction may enforce a contract notwithstanding any provision of the
contract providing for termination thereof by reason of the insolvency of, or
appointment of a receiver or conservator for, the Servicer. Consequently,
provisions in a Pooling and Servicing Agreement providing for an Event of
Default upon certain events of insolvency, receivership or conservatorship of
the Servicer may not be enforceable against the FDIC as receiver or conservator
to the extent that the exercise of such rights is based solely upon the
insolvency of or appointment of a receiver or conservator for the Servicer. In
addition, the FDIC may transfer the assets and liabilities of an institution in
receivership or conservatorship to another institution.
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. F 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 Bankrupt Code, the mortgagee
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue can be time-consuming and may result in
significant delays in the receipt of the rents. Rents may also escape an
assignment thereof (i) if the assignment is not fully perfected under state law
prior to commencement of the bankruptcy proceeding, (ii) to the extent such
rents are used by the borrower to maintain the mortgaged property, or for other
court authorized expenses, or (iii) to the extent other collateral may be
substituted for the rents.
To the extent a mortgagor's ability to make payment on a mortgage loan
is dependent on payments under a lease of the related property, such ability may
be impaired by the commencement of a bankruptcy proceeding relating to a lessee
under such lease. Under the federal bankruptcy law 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 release the mortgage property before the flow of lease
payments will recommence. In addition, pursuant to Section 502(b)(6) of the
Bankruptcy Code, a lessor's damages for lease rejection are limited by a
formula.
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer to the Trust Fund of any payments made by
the mortgagor under the related Mortgage Loan. Moreover, some recent court
decisions suggest that even a non-collusive, regularly conducted foreclosure
sale may be challenged in a bankruptcy proceeding as a "fraudulent conveyance,"
regardless of the parties' intent, if a bankruptcy court determines that the
mortgaged property has been sold for less than fair consideration while the
mortgagor was insolvent and within one year (or within any longer state statutes
of limitations if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law) of the filing of bankruptcy.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of the anticipated material
federal income consequences of the purchase, ownership, and disposition of the
Certificates. The discussion below does not purport to address all federal
income consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules. The discussion is
based upon laws, regulations, rulings and decisions now in effect all of which
are subject to change. This discussion reflects the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as regulations
(the "REMIC Regulations") promulgated by the U.S. Department of the Treasury on
December 23, 1992. Investors should consult their own tax advisors in
determining the federal, state, local, and any other tax consequences to them of
the purchase, ownership, and disposition of the Certificates.
For purposes of this discussion, where the applicable Prospectus
Supplement provides for a Fixed Retained Yield with respect to the Mortgage
Loans or Contracts of a Series of Certificates, references to the Mortgage Loans
or Contracts will be deemed to refer to that portion of the Mortgage Loans or
Contracts held by the Trust Fund, which does not include the Fixed Retained
Yield. For purposes of this discussion, references to the "principal amount" or
"principal balance" of a Certificate will be deemed to refer to the Stated
Amount in the case of Multi-Class Certificates. For purposes of this discussion,
unless otherwise specified, the term "Mortgage Loans" will be used to refer to
Mortgage Loans and Contracts. References to a "holder" or "Certificateholder" in
this discussion generally mean the beneficial owner of a Certificate.
The following discussion addresses securities of three general types: (i)
securities ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, which the Depositor will covenant to elect to have treated as a
real estate mortgage investment conduit ("REMIC" under sections 860A through
860G of the Code and the regulations promulgated thereunder (the "REMIC
Regulations"); (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 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 Section 856(c)(5)(A), payments of principal and interest on the Mortgage
Loans that are reinvested pending distribution to holders of Certificates
qualify for such treatment. Where two REMIC Pools are part of a tiered structure
they will be treated as one REMIC for purposes of the tests described above
respecting asset ownership of more or less than 95%. In addition, if the assets
of a REMIC include Buy-Down Loans, it is possible that the percentage of such
assets constituting "loans . . . secured by an interest in real property" for
purposes of Code Section 7701(a)(19)(c)(v) may be required to be
reduced by the amount of the related Buy-Down Fund. 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. Effective
September 1, 1997, a qualified mortgage will include any regular interest in a
financial asset securitization investment trust ("FASIT") transferred to the
REMIC on the Startup Day or purchased by the REMIC within a three month period
thereafter pursuant to a fixed-price contract in effect on the Startup Day, but
only if 95% or more of the value of the FASIT's assets is at all times
attributable to obligations that are principally secured by an interest in real
property as described above.
The REMIC Regulations provide that obligations secured by interests in
manufactured housing which qualify as "single family residences" within the
meaning of Code Section 25(e)(10) may be treated as "qualified mortgages" of a
REMIC. Under Code Section 25(e)(10), the term "single family residence" includes
any manufactured home which has a minimum of 400 square feet of living space and
a minimum width in excess of 102 inches and which is of a kind customarily used
at a fixed location. The Depositor will represent and warrant that each of the
Manufactured Homes securing the Contracts meets this definition of "single
family residence."
Permitted investments include cash flow investments, qualified reserve
assets and foreclosure property. A cash flow investment is any instrument,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or to provide additional security for
payments due on the regular or residual interests that otherwise may be delayed
or defaulted upon because of default (including delinquencies) on the qualified
mortgages, lower than expected reinvestment returns, prepayment interest
shortfalls and certain other contingencies. The reserve fund will be
disqualified if more than 30 percent of the gross income from the assets in such
fund for the year is derived from the sale of property held for less than three
months, unless required to prevent a default on the 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, provides that in certain 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, the Secretary of the Treasury may determine that
the REMIC shall continue to be treated as a REMIC or that the period of
cessation of REMIC status shall be disregarded. Investors should be aware,
however, 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 return of capital
to the extent of the Regular Certificateholder's basis in the Regular
Certificate allocable thereto. Regular Certificateholders must use the accrual
method of accounting with regard to Regular Certificates, regardless of the
method of accounting otherwise used by such Regular Certificateholders.
Original Issue Discount
Compound Interest Certificates will be, and certain of the Regular
Certificates of other Classes of a Series may be, issued with "original issue
discount" within the meaning of Code Section 1273(a). Holders of any Class or
Subclass of Regular Certificates having original issue discount generally must
include original issue discount in ordinary income for federal income purposes
as it accrues, in accordance with the constant yield method that takes into
account the compounding of interest. Such accrual may be in advance of receipt
of the cash attributable to such income. The following discussion is based in
part on Treasury regulations issued under Code Sections 1271 through 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.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Certificate multiplied
by the weighted average maturity of the Regular Certificate. For this purpose,
the weighted average maturity of the Regular Certificate is computed as the sum
of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution is
scheduled to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Regular
Certificate and the denominator of which is the stated redemption price at
maturity of the Regular Certificate. The Conference Committee Report to the 1986
Act provides that the schedule of such distributions should be 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, 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 accrual 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
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 total contingent principal
Payments by more than a specified amount, (ii) the inter 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, and (iii) the
instrument does not provide for any principal payments that are contingent, as
defined in the OID Regulations, except as provided in (i) above. Because the OID
Regulations relating to contingent payment debt instruments do not apply to
REMIC regular interests, principal payments on the Regular Certificates should
not be considered contingent for this purpose. 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, and such rate
may be subject to a multiple that is greater than 0.65, but not 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 objective financial or economic information. However, a rate will constitute
an objective rate if it is reasonably expected that the average value of the
rate during the first half of the instrument's term will be significantly less
than or greater than the average value of the rate during the final half of the
instrument's term. Further, an objective rate does not include a rate that is
based on information within the control of or unique to the circumstances of the
issuer or a related party. 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. Under the REMIC Regulations, a Regular Certificate (i)
bearing a rate that qualifies as a qualified floating 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 qualified floating 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 a rate determined by substituting a fixed rate for each qualified
floating rate, objective rate, or initial fixed interest rate, in a manner
determined under Treasury regulations. 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 or similar Class, which will be treated as non-qualified stated
interest includible in the stated redemption price at maturity. Ordinary income
reportable for any period will be adjusted based on subsequent changes in the
applicable interest rate index.
Deferred Interest
Any Deferred Interest that accrues with respect to a Class of Regular
Certificates will constitute income to the holders of such Regular Certificates
prior to the time distributions of cash with respect to such Deferred Interest
are made. The Depositor will treat all interest on a Regular Certificate as to
which there may be Deferred Interest as includible in the stated redemption
price at maturity thereof.
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these Code sections and
the principles applied by the OID Regulations in the context of original issue
discount, "market discount" is the amount by which 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 market of the Regular
Certificate (determined as described above in the third 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.
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 122 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 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
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 b 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 portion 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) a limitation on the deductibility of
interest and expenses related to tax-exempt income similar to the general
limitation imposed on financial institutions. will apply. The REMIC Pool's gross
income includes interest, original issue discount income, and market discount
income, if any, on the Mortgage Loans, reduced by amortization of any premium on
the Mortgage Loans, plus income on reinvestment of cash flows and reserve assets
plus any cancellation of indebtedness income upon allocation of realized losses
to the Regular Certificates. The REMIC Pool's deductions include interest and
original issue discount expense on the Regular Certificates, servicing fees on
the Mortgage Loans, other administrative expenses of the REMIC Pool and realized
losses on the Mortgage Loans. The requirement that Residual Holders report their
pro rata share of taxable income or net loss of the REMIC Pool will continue
until there are no Certificates of any class of the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest and original issue discount or market discount income or
amortization of premium with respect to the Mortgage Loans, on the one hand, and
the timing of deductions for interest (including original issue discount) on the
Regular Certificates, on the other hand. In the event that an interest in the
Mortgage Loans is acquired by the REMIC Pool at a discount, and one or more of
such Mortgage Loans is prepaid, the Residual Holder may recognize taxable income
without being entitled to receive a corresponding amount of cash because (i) the
prepayment may be used in whole or in part to make distributions in reduction of
principal on the Regular Certificates, and (ii) the discount on the Mortgage
Loans which is includible in income may exceed the deduction allowed upon such
distributions on those Regular Certificates on account of any unaccrued original
issue discount relating to those Regular Certificates. When there is more than
one Class of Regular Certificates that distribute payments in reduction of
principal balance sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Certificates when distributions in reduction of principal are being made
in respect of earlier Classes of Regular Certificates. 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 i 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 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 base 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 make 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 Certificate 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 (presumably, allocated based on the
relative fair market values of the Mortgage Loans) is exceeded by their
unpaid principal balances. The REMIC Pool's basis in such Mortgage Loans is
generally the 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 i Mortgage Loans is the
fair market value of the Mortgage Loans immediately after the transfer thereof
to the REMIC Pool based on the aggregate of the issue prices (or the fair market
value of retained Classes) of the regular and residual interests in the REMIC
Pool. In a manner analogous to the discussion above under "Taxation of Regular
Certificates -- Premium," a REMIC Pool that holds a Mortgage Loan as a capital
asset under Code Section 1221 may elect under Code Section 171 to amortize
premium on the Mortgage Loans originated after September 27, 1985 under the
constant yield method. Amortizable bond premium will be treated as an offset to
interest income on the Mortgage Loans, rather than as a separate deduction item.
To the extent that mortgagors on the Mortgage Loans are individuals, Code
Section 171 will not be available for premium on Mortgage Loans originated on or
prior to September 27, 1985. Premium with respect to such Mortgage Loans may be
deductible in accordance with a reasonable method regularly employed by the
holder thereof.
Limitations on Offset or Exemption of REMIC Income
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 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.
Provisions governing the relationship between excess inclusions and the
alternative minimum tax provide that (i) the alternative minimum taxable income
of a taxpayer is based on the taxpayer's regular taxable income computed without
regard to the rule that taxable income cannot be less than the amount of excess
inclusions, (ii) the alternative minimum taxable income of a taxpayer for a
taxable year cannot be less than the amount of excess inclusions for that year,
and (iii) the amount of any alternative minimum tax net operating loss is
computed without regard to any excess inclusions. While these provisions are
generally effective for tax years beginning after December 31, 1986, a taxpayer
may elect to have these provisions apply only with respect to tax years
beginning after August 20, 1996.
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 of the
United States or any state or political subdivision thereof 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 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 disregard certain
transfers of Residual Certificates, in which case the transferor continues to be
treated as the owner of the Residual Certificates and thus continues 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" (a 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 a 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, or
any foreign trust that is not a "foreign trust" as defined in Section
7701(a)(3)) of the Code.
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 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 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 Code 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.
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 treat 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 Expense
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
two percent of the investor's adjusted gross income In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000 ($50,000 in the case of a married
individual filing a separate return) (in each case, subject to adjustment for
inflation), or (ii) 80% of the amount of itemized deductions otherwise allowable
for such year. In the case of a REMIC Pool, such deductions may include
deductions under Code Section 212 for the Servicing Fee and all administrative
and other expenses relating to the REMIC Pool, or any similar expenses allocated
to the REMIC Pool with respect to a regular interest it holds in another REMIC.
Such investors who hold REMIC Certificates either directly or indirectly through
certain pass-through entities may have their pro rata share of such expenses
allocated to them as additional gross income, but may be subject to such
limitation on deductions. In addition, such expenses are not deductible at all
for purposes of computing the alternative minimum tax and may cause such
investors to be subject to significant additional tax liability. Temporary
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to the holders of
Residual Certificates in the case of a REMIC Pool that would not qualify as a
fixed investment trust in the absence of a REMIC election. However, such
additional income and limitation on deductions will apply to the allocable
portion of such expenses to holders of Regular Certificates, as well as to
holders of Residual Certificates, where such Regular Certificates are similar to
pass-through certificates in a fixed investment trust. Unless indicated
otherwise in the applicable Prospectus Supplement, all such expenses will be
allocable to the Residual Certificates. In general, such allocable portion will
be determined based on the ratio that a Regular Certificateholder's income,
determined on a daily basis, bears to the income of all holders of Regular
Certificates and Residual Certificates with respect to the REMIC Pool. As a
result, individuals, estates, or trusts holding REMIC Certificates (either
directly or indirectly through a grantor trust, partnership, S corporation,
REMIC, or certain other pass-through entities described in the foregoing
temporary Treasury regulations), may have taxable income in excess of the
interest income at the pass-through rate on Regular Certificates that are issued
in a single Class or otherwise consistently with fixed investment trust status
or in excess of distributions of cash for the related period on Residual
Certificates.
Taxation of Certain Foreign Investors
Regular Certificates
Interest, including original issue discount, distributable to Regular
Certificateholders who are nonresident aliens, foreign corporations, or other
Non-U.S. Persons (i.e., any persons who are not U.S. Persons, as defined above),
will be considered "portfolio interest" and, therefore generally, will not be
subject to 30% United States withholding provided that such Non-U.S. Person (i)
is not a "10-percent shareholder" within the meaning of Code Section
871(h)(3)(B) with respect to the Depositor, or a controlled foreign corporation
described in Code Section 881(c)(3)(C) and (ii) provides the Trustee, or the
person who would otherwise be required to withhold tax from such distributions
under Code Section 1441 or 1442, with an appropriate statement, signed under
penalties of perjury, identifying the beneficial 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. Proposed Treasury
regulations, which would be effective for payments made after December 31, 1997
if adopted in their current form, would provide alternative certification
requirements and means for claiming the exemption from federal income and
withholding tax. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Certificate.
Residual Certificates
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Holders who are Non-U.S. Persons are treated as interest for
purposes of the 30% (or lower treaty rate) United States withholding tax.
Treasury regulations provide that amounts distributed to Residual Holders may
qualify as "portfolio interest," subject to the conditions described in "Regular
Certificates" above, but only to the extent that (i) the Mortgage Loans were
issued after July 18, 1984 and (ii) the Trust Fund or segregated pool of assets
therein (as to which a separate REMIC election will be made), to which the
Residual Certificate relates, consists of obligations issued in "registered
form" within the meaning of Code Section 163(f)(1). Generally, Mortgage Loans
will not be, but regular interests in another REMIC Pool will be, considered
obligations issued in registered form. Furthermore, a Residual Holder will not
be entitled to any exemption from the 30% withholding tax (or lower treaty rate)
to the extent of that portion of REMIC taxable income that constitutes an
"excess inclusion." See "Taxation of Residual Certificates--Limitations on
Offset or Exemption of REMIC Income." If the amounts paid to Residual Holders
who are Non-U.S. Persons are effectively connected with the conduct of a trade
or business within the United States by such Non-U.S. Persons, 30% (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to such
Non-U.S. Persons will be subject to United States federal income tax at regular
rates. If 30% (or lower treaty rate) withholding is applicable, such amounts
will be taken into account for purposes of withholding only when paid or
otherwise distributed (or when the Residual Certificate is disposed of) under
rules similar to withholding upon disposition of debt instruments that have
original issue discount. See "Taxation of Residual Certificates -- Tax-Related
Restrictions on Transfer of Residual Certificates -- Foreign Investor Investors"
above concerning the disregard of certain transfers having "tax avoidance
potential." Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Residual
Certificate.
Backup Withholding
Distributions made on the Regular Certificates, and proceeds from the
sale of the Regular Certificates to or through certain brokers, may be subject
to a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and, under
certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to the
Trustee, its agent, or the broker who effected the sale of the Regular
Certificates, or such Regular Certificateholder is otherwise an exempt recipient
under applicable provisions of the Code. Any amounts to be withheld from
distribution on the Regular Certificates would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Certificateholder's
federal income tax liability.
Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to the
Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of records of
Regular Certificates or beneficial owners who own Regular Certificates through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Certificates (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar year by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 (which will be available on the IRS electronic bulletin
board) 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 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 Sect 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 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) extent
that the assets of the related trust fund consist of "qualified mortgages"
within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buy-Down Loans may be characterized in
their entirety under the Code provisions cited in clauses 1 and 2 of the
immediately preceding paragraph. 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 Regular
Certificates -- Treatment of Certain Items of REMIC Income and Expense --
Premium," as if the purchaser had purchased the Mortgage Loans directly.
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. Unless
indicated otherwise in the applicable Prospectus Supplement, a 0% 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 a to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of the
Mortgage Loans, the reasonableness of servicing compensation should be
determined on a weighted average or loan-by-loan basis. If a loan-by-loan basis
is appropriate, the likelihood that such amount would exceed reasonable
servicing compensation as to some of the Mortgage Loans would be increased.
Internal Revenue Service guidance indicates that a servicing fee in
excess of reasonable compensation ("excess servicing") will cause the Mortgage
Loans to be treated under the "stripped bond" rules. Such guidance provides safe
harbors for servicing deemed to be reasonable and requires taxpayers to
demonstrate that the value of servicing fees in excess of such amounts is not
greater than the value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
Servicer who receives a servicing fee in excess of such amounts would be viewed
as retaining an ownership interest in a portion of the interest payments on the
Mortgage Loans. Under the rules of Code Section 1286, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of such Mortgage Loans as "stripped
coupons" and "stripped bonds." Subject to the de minimis rule discussed below
under "--Stripped Certificates," each stripped bond or stripped coupon could be
considered for this purpose as a non-interest bearing obligation issued on the
date of issue of the Standard Certificates, and the original issue discount
rules of the Code would apply to the holder thereof. While Standard
Certificateholders would still be treated as owners of beneficial interests in a
grantor trust for federal income tax purposes, the corpus of such trust could be
viewed as excluding the portion of the Mortgage Loans the ownership of which is
attributed to the Servicer, or as including such portion as a second class of
equitable interest. Applicable Treasury regulations treat such an arrangement as
a fixed investment trust, since the multiple classes of trust interests should
be treated as merely facilitating direct investments in the trust assets and the
existence of multiple classes of ownership interests is incidental to that
purpose. In general, such a recharacterization should not have any significant
effect upon the timing of amount of income reported by a Standard
Certificateholder, except that the income reported by a cash method holder may
be slightly accelerated. See "Stripped Certificates" below for a further
description of the federal income tax treatment of stripped bonds and stripped
coupons.
Sale or Exchange of Standard Certificates
Upon sale or exchange of a Standard Certificate, a Standard
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its aggregate adjusted basis in the Mortgage
Loans and other assets represented by the Standard Certificate. 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) 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. Pursuant to the Revenue
Reconciliation Act of 1993, capital gains of certain non-corporate taxpayers are
subject to a lower maximum tax rate than ordinary income of such taxpayers. The
maximum tax rate for corporations is the same with respect to both ordinary
income and capital gains.
Stripped Certificates
General
Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, Certificates that are subject to those rules will be referred to as
"Stripped Certificates." The Certificates will be subject to those rules if (i)
the Depositor or any of its affiliates retains (for its own account or for
purposes of resale), in the form of Fixed Retained Yield or otherwise, an
ownership interest in a portion of the payments on the Mortgage Loans, (ii) the
Depositor or any of its affiliates is treated as having an ownership interest in
the Mortgage Loans to the extent it is paid (or retains) servicing compensation
in an amount greater than arm's length consideration for servicing the Mortgage
Loans (see "Standard Certificates--Recharacterization of Servicing Fees" above),
or (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 is stripped off the related Mortgage Loans. Any such market
discount generally would be reportable as described above under "Federal Income
Tax Consequences for REMIC Certificates--Taxation of Regular Certificates --
Market Discount." It is unclear whether discount attributable to a stripped
Mortgage Loan the principal amount of which exceeds the value of real property
securing the Mortgage Loan will be eligible for treatment as market discount.
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 "Non-REMIC -- Certificates Standard Certificates -- Sale or Exchange
of Standard 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 a separate installment obligation for each
Mortgage Loan, representing the Stripped Certificate's pro rata share of
payments of principal and/or interest to be made with respect thereto.
Alternatively, the holder of one or more Classes of Stripped Certificates may be
treated as the owner of a pro rata fractional undivided interest in each
Mortgage Loan to the extent that such Stripped Certificate, or Classes of
Stripped Certificates in the aggregate, represent the same pro rata portion of
principal and interest on each such Mortgage Loan, and a stripped bond or
stripped coupon (as the case may be), treated as an installment obligation or
contingent payment obligation, as to the remainder. Final regulations issued on
December 28, 1992 regarding original issue discount on stripped obligations make
the foregoing interpretations less likely to be applicable. The preamble to
those regulations states that they are premised on the assumption that an
aggregation approach is appropriate for determining whether original issue
discount on a stripped bond or stripped coupon is de minimis, and solicits
comments on appropriate rules for aggregating stripped bonds and stripped
coupons under Code Section 1286.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of
each calendar year, to each Standard Certificateholder or Stripped
Certificateholder at any time during such year, such information (prepared on
the basis described above) as the Trustee deems to be necessary or desirable to
enable such Certificateholders to prepare their federal income tax returns. Such
information will include the amount of original issue discount accrued on
Certificates held by persons other than Certificateholders exempted from the
reporting requirements. The amount required to be reported by the Trustee may
not be equal to the proper amount of original issue discount required to be
reported as taxable income by a Certificateholder, other than an original
Certificateholder that purchased at the issue price. In particular, in the case
of Stripped Certificates, unless provided otherwise in the applicable Prospectus
Supplement, such reporting will be based upon a representative initial offering
price of each Class of Stripped Certificates. The Trustee will also file such
original issue discount information with the Internal Revenue Service. If a
Certificateholder fails to supply an accurate taxpayer identification number or
if the Secretary of the Treasury determines that a Certificateholder has not
reported all interest and dividend income required to be shown on his federal
income tax return, 31% backup withholding may be required in respect of any
payments, as described above under "Federal Income Tax Consequences for REMIC
Certificates -- Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Standard Certificate or Stripped Certificate
evidences ownership in Mortgage Loans that are issued on or before July 18,
1984, interest or original issue discount paid by the person required to
withhold tax under Code Section 1441 or 1442 to nonresident aliens, foreign
corporations, or other non-U.S. persons ("foreign persons") generally will be
subject to 30% United States withholding tax, or such lower rate as may be
provided for interest by an applicable tax treaty. Accrued original issue
discount or market discount recognized by the Standard Certificateholder or
Stripped Certificateholder on the sale or exchange of such a Certificate also
will be subject to federal income tax at the same rate.
Treasury Regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a foreign person with respect
to an 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" and the applicable Prospectus Supplement.
Special Tax Attributes
As described above, Non-REMIC Certificates will possess certain
special tax attributes by virtue of their being ownership interests in the
underlying Mortgage Loans. Similarly, REMIC Certificates will possess similar
attributes by virtue of the REMIC provisions of the Code. In general, Notes will
not possess such special tax attributes. Investors to whom such attributes are
important should consult their own tax advisors regarding investment in Notes.
Sale or Exchange
If a holder of a Note sells or exchanges such security, the holder
will recognize gain or loss equal to the difference, in any, between the amount
received and the holder's adjusted basis in the security. The adjusted basis in
the security generally will equal its initial cost, increased by any original
issue discount or market discount previously included in the seller's gross
income with respect to the security and reduced by the payments previously
received on the security, other than payments of qualified stated interest, and
by any amortized premium.
In general (except as described in "Non-REMIC Certificates -- Premium
and Discount -- Market Discount") except for certain financial institutions
subject to section 582(c) of the Code, any gain or loss on the sale or exchange
of a Note recognized by an investor who holds the security as a capital asset
(within the meaning of section 1221 of the Code), will be capital gain or loss
and will be long-term or short-term depending on whether the security has been
held for more than one year.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Code impose certain requirements on those
employee benefit plans to which they apply ("Plans") and on those persons who
are fiduciaries with respect to such Plans. The following is a general
discussion of such requirements, and certain applicable exceptions to and
administrative exemptions from such requirements.
Before purchasing any Certificates, a Plan fiduciary should determine
whether there exists any prohibition to such purchase under the requirements of
ERISA, whether prohibited transaction exemptions such as PTE 83-1 or any
individual administrative exemption (as described below) applies, including
whether the appropriate conditions set forth therein would be met, or whether
any statutory prohibited transaction exemption is applicable, and further should
consult the applicable Prospectus Supplement relating to such Series of
Certificates.
Certain Requirements Under ERISA
General
In accordance with ERISA's general fiduciary standards, before
investing in a Certificate a Plan fiduciary should determine whether to do so is
permitted under the governing Plan instruments and is appropriate for the Plan
in view of its overall investment policy and the composition and diversification
of its portfolio. A Plan fiduciary should especially consider the ERISA
requirement of investment prudence and the sensitivity of the return on the
Certificates to the rate of principal repayments (including prepayments) on the
Mortgage Loans or Contracts, as discussed in the related Prospectus Supplement
and in "Prepayment and Yield Considerations" herein.
Parties in Interest/Disqualified Persons. Other provisions of ERISA
(and corresponding provisions of the Code) prohibit certain transactions
involving the assets of a Plan and persons who have certain specified
relationships to the Plan (so-called "parties in interest" within the meaning of
ERISA or "disqualified persons" within the meaning of the Code). The Depositor,
the Servicer (if any) or the Trustee or certain affiliates thereof might be
considered or might become "parties in interest" or "disqualified persons" with
respect to a Plan. If so, the acquisition or holding of Certificates by or on
behalf of such Plan could be considered to give rise to a "prohibited
transaction" within the meaning of ERISA and the Code unless an administrative
exemption described below or some other exemption is available.
Special caution should be exercised before the assets of a Plan are
used to purchase a Certificate if, with respect to such assets, the Depositor,
the Servicer (if any) or the Trustee or an affiliate thereof either: (a) has
investment discretion with respect to the investment of such assets of such
Plan; or (b) has authority or responsibility to give, or regularly gives
investment advice with respect to such assets for a fee and pursuant to an
agreement or understanding that such advice will serve as a primary basis for
investment decisions with respect to such assets and that such advice will be
based on the particular investment needs of the Plan.
Delegation of Fiduciary Duty
Further, if the assets included in a Trust Fund were deemed to
constitute Plan assets, it is possible that a Plan's investment in the
Certificates might be deemed to constitute a delegation, under ERISA, of the
duty to manage Plan assets by the fiduciary deciding to invest in the
Certificates, and certain transactions involved in the operation of the Trust
Fund might be deemed to constitute prohibited transactions under ERISA and the
Code.
The U.S. Department of Labor (the "Department") has published final
regulations (the "Regulations") concerning whether or not a Plan's assets would
be deemed to include an interest in the underlying assets of an entity (such as
a Trust Fund) for purposes of the reporting and disclose 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 any of Standard & Poor's Structural Rating Group,
Moody's Investors Service, Inc., Duff & Phelps Credit Rating Co.
or Fitch Investors Service, L.P. ("National Credit Rating Agencies");
(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;
(5) The sum of all payments made to and retained by such underwriters
must represent 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 obligations or receivables to the related
Trust Fund must represent not more than the fair market value of such
obligations; and the sum of all payments made to and retained by the
Servicer and any Sub-servicer must represent 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;
(6) (i) the investment pool consists only of assets of the type
enumerated in the exemption and which have been included in other
investment pools; (ii) certificates evidencing interests in such other
investment pools have been rated in one of the three highest generic rating
categories by one of the National Credit Rating Agencies for at least one
year prior to a Plan's acquisition of certificates; and (iii) certificates
evidencing interests in such other investment pools have been purchased by
investors other than Plans for at least one year prior to a Plan's
acquisition of certificates; and
(7) The acquisition of Certificates by certain Plans must be on terms
that are at least as favorable to the Plan as they would be in an arm's
length transaction with an unrelated party.
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 holder 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 future principal
payments on a Trust Fund, (b) 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 (c) Residual
or other 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.
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 ERI 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 a 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 their
assets represented thereby, federal credit unions may invest in mortgage related
securities, and national banks may purchase mortgage related securities for
their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. ' 24 (Seventh), subject in each
case to such regulations as the applicable federal regulatory authority may
prescribe. In this connection, federal credit unions should review National
Credit Union Administration (the "NCUA") Letter to Credit Unions No. 96, as
modified by Letter No. 108, which includes guidelines to assist federal credit
unions in making investment decisions for mortgage related securities. The NCUA
has adopted rules, effective December 2, 1991, which prohibit federal credit
unions from investing in certain mortgage related securities (including
securities such as certain series, Classes or Subclasses of Certificates),
except under limited circumstances.
All depository institutions considering an investment in the
Certificates should review the "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992 (the "Policy Statement") of the Federal
Financial Institutions Examination Council. The Policy Statement, which has been
adopted by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Comptroller of the Currency and the Office of
Thrift Supervision, effective February 10, 1992, and by the NCUA (with certain
modifications), effective June 26, 1992, prohibits depository institutions from
investing in certain "high-risk" mortgage securities (including securities such
as certain series, Classes or Subclasses of Certificates), except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any
Certificates, as certain series, Classes or Subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits provisions which
may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying" and, with regard to any Certificates
issued in book-entry form, provisions which may restrict or prohibit investment
in securities which are issued in book-entry form.
Other classes of Certificates offered pursuant to this Prospectus will
not constitute "mortgage related securities" under SMMEA because they will not
represent beneficial ownership interests in qualifying mortgage loans under
SMMEA. The appropriate characterization of those Certificates under various
legal investment restrictions, and thus the ability of investors subject to
these restrictions to purchase the Certificates, may be subject to significant
interpretive uncertainties. All investors whose investment authority is subject
to legal restrictions should consult their own legal advisors to determine
whether, and to what extent, the Certificates will constitute legal investments
for them.
No representation is made as to the proper characterization of the
Certificates for legal investment or financial institution regulatory purposes,
or as to the ability of particular investors to purchase Certificates under
applicable legal investment restrictions. The uncertainties described above may
(and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the Certificates adversely
affect the liquidity of the non-SMMEA Certificates.
Investors should consult with their own legal advisors in determining
whether and to what extent the Certificates constitute legal investments for
such investors.
PLAN OF DISTRIBUTION
The Depositor may sell the Certificates offered hereby in Series
either directly or through underwriters. The related Prospectus Supplement or
Prospectus Supplements for each Series will describe the terms of the offering
for that Series and will state the public offering or purchase price of each
Class of Certificates of such Series, or the method by which such price is to be
determined, and the net proceeds to the Depositor from such sale.
If the sale of any Certificates is made pursuant to an underwriting
agreement pursuant to which one or more underwriters agree to act in such
capacity, such Certificates will be acquired by such underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices to be determined at the time of sale or at the time of commitment
therefor. Firm commitment underwriting and public reoffering by underwriters may
be done through underwriting syndicates or through one or more firms acting
alone. The specific managing underwriter or underwriters, if any, with respect
to the offer and sale of a particular Series of Certificates will be set forth
on the cover of the Prospectus Supplement related to such Series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement. The Prospectus Supplement will describe any discounts and
commissions to be allowed or paid by the Depositor to the underwriters, any
other items constituting underwriting compensation and any discounts and
commissions to be allowed or paid to the dealers. The obligations of the
underwriters will be subject to certain conditions precedent. Unless otherwise
provided in the related Prospectus Supplement, the underwriters with respect to
a sale of any Class of Certificates will be obligated to purchase all such
Certificates if any are purchased. Pursuant to each such underwriting agreement,
the Depositor will indemnity the related underwriters against certain civil
liabilities, including liabilities under the Securities Act.
If any Certificates are offered other than through underwriters
pursuant to such underwriting agreements, the related Prospectus Supplement or
Prospectus Supplements will contain information regarding the terms of such
offering and any agreements to be entered into in connection wit 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 . 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 of 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 to 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.
INDEX OF SIGNIFICANT DEFINITIONS
Act..........................................................................72
Additional Balance...........................................................20
Advance......................................................................58
Advance Reserve..............................................................45
Advances.....................................................................10
APR..........................................................................22
ARM Buy-Outs.................................................................22
Balloon Loan.................................................................20
Balloon Loans................................................................14
Balloon Period...............................................................20
Basic Monthly Amount.........................................................21
Basic Senior Class Distribution..............................................36
Buy-Down Account.............................................................20
Buy-Down Loans...............................................................20
Call protection..............................................................41
CERCLA.......................................................................78
Certificate Account..........................................................55
Certificate Account Depository...............................................55
Certificateholder.............................................................1
Certificates..................................................................1
Class.........................................................................1
Closing Date.................................................................32
Code.........................................................................11
Commission....................................................................3
Compound Interest Certificates...............................................32
Contract Pool................................................................18
Contract Rate.................................................................7
Contracts.....................................................................1
Convertible Mortgage Loans...................................................18
Cooperative Loans............................................................18
Cooperative Notes............................................................18
Cooperatives.................................................................18
Credit Enhancer..............................................................17
Cut-Off Date Aggregate Principal Balance.................................19, 23
Deferred Interest........................................................14, 20
Definitive Certificate.......................................................30
Deleted Loan.................................................................28
Depositor.................................................................... 1
Determination Date...........................................................33
Direct or Indirect Participants..............................................16
Disqualified Organization....................................................93
Distribution Dates............................................................7
DTC..........................................................................31
Due Date.....................................................................19
Due Period...................................................................45
Eligible Investments.........................................................78
Environmental Condition......................................................79
EPA..........................................................................79
ERISA........................................................................11
Excess servicing............................................................101
Extension protection.........................................................41
FDIC.........................................................................56
FHLBB........................................................................75
FIRREA.......................................................................80
Foreign persons.............................................................104
Forward Purchase Agreement....................................................8
Funding Period...............................................................32
Gain From Acquired Property..................................................35
GEM Loans....................................................................21
GPM Fund.....................................................................21
GPM Mortgage Loans...........................................................22
Home Equity Lines............................................................20
Indemnification Payments.....................................................35
Initial Deposit..............................................................44
Insurance Proceeds...........................................................57
Interest Accrual Period......................................................50
Interest Rate.................................................................1
Liquidated Contract..........................................................34
Liquidated Mortgage Loan.....................................................15
Liquidation Proceeds.........................................................56
Loan Agreement...............................................................20
Loan Sale Agreement..........................................................25
Loan-to-Value Ratio..........................................................19
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.............................................................7
Net Insurance Proceeds.......................................................57
Net Liquidation Proceeds.....................................................56
Net Mortgage Rate.............................................................7
Non-REMIC Certificates.......................................................82
Notes........................................................................82
Notional Amount...............................................................1
OTS..........................................................................72
Pass-Through Entity..........................................................94
Pass-Through Rate.............................................................7
Paying Agent.................................................................58
Payment Deficiencies.........................................................44
Percentage Certificates......................................................31
Plans.......................................................................105
Pool..........................................................................1
Pool Distribution Amount.....................................................33
Pool Value Group.............................................................40
Pooling and Servicing Agreement...............................................4
Pre-Funding Account...........................................................8
Prepayment Interest Shortfall................................................59
PTE 83-1....................................................................107
Purchase Obligation..........................................................13
Purchase Price...............................................................27
Rating Agency................................................................11
Record Date...................................................................7
Registration Statement........................................................3
Regular Certificates.........................................................30
Relief Act...................................................................79
REMIC........................................................................82
REMIC Certificates...........................................................82
Repurchase Proceeds..........................................................33
Residual Certificates........................................................30
Residual Holders.............................................................90
Scheduled....................................................................37
Scheduled Principal..........................................................34
Secured-creditor exemption...................................................79
Securities Act................................................................3
Senior Certificates..........................................................30
Senior Class Carryover Shortfall............................................36
Senior Class Credit Enhancement..............................................34
Senior Class Distributable Amount............................................34
Senior Class Principal Portion...............................................36
Senior Class Pro Rata Share..................................................36
Senior Class Shortfall Accruals..............................................36
Series........................................................................1
Servicer......................................................................1
Servicing Account............................................................61
Servicing Fee.................................................................8
Shifting Interest Certificates................................................2
SMMEA........................................................................11
Special Distributions........................................................42
Special Hazard Contract......................................................47
Special Hazard Mortgage Loan.................................................47
Standard Certificateholder...................................................99
Standard Certificates.........................................................1
Standard Hazard Insurance Policy.............................................24
Stated Amount.................................................................1
Stripped Certificates.........................................................1
Subclass......................................................................1
Subordinated Amount...........................................................9
Subordinated Certificates....................................................30
Subordinated Class Distributable Amount......................................34
Subordinated Class Principal Portion.........................................35
Subordinated Class Pro Rata Share............................................36
Subordination Reserve Fund....................................................9
Sub-Servicer.................................................................55
Sub-Servicing Account........................................................56
Substitute Loan..............................................................28
Title V......................................................................73
Trust Fund....................................................................1
U.S. Person..................................................................95
UCC..........................................................................70
Unaffiliated Sellers..........................................................4
Unpaid Interest Shortfall....................................................37
Voting Interests.............................................................65
Window Period................................................................73
Window Period Loans..........................................................73
Window Period States.........................................................73
