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Filed pursuant to Rule 424(b)(5)
File No. 33-91148
PROSPECTUS SUPPLEMENT
(To Prospectus dated August 4, 1995)
$10,373,000 6.300% CLASS A-1 CERTIFICATES
$20,730,000 7.225% CLASS A-2 CERTIFICATES
$23,000,000 7.175% CLASS A-3 CERTIFICATES
PRUDENTIAL SECURITIES
SECURED FINANCING CORPORATION
(DEPOSITOR)
HOME LOAN AND INVESTMENT BANK, F.S.B.
(SERVICER)
Mortgage Pass-Through Certificates, Series 1996-1
Principal and interest payable monthly, commencing April 15, 1996
The Series 1996-1 Mortgage Pass-Through Certificates (the "Certificates") will
consist of three classes of senior Certificates, the Class A-1 Certificates,
the Class A-2 Certificates and the Class A-3 Certificates (together, the "Class
A Certificates") and one class of subordinated Certificates (the "Class R
Certificates"). Only the Class A Certificates are being offered hereby.
The Certificates will evidence in the aggregate the entire beneficial ownership
interest in a trust fund ("Trust Fund") consisting primarily of a pool of
residential mortgage loans (the "Mortgage Pool"). In addition, the Originator
has caused Financial Security Assurance Inc. (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 payments to the Class A Certificateholders as described herein.
The Class A Certificates will represent undivided ownership interests in the
Trust Fund, which will consist of one- to four-family fixed rate, conventional,
monthly pay, first and second lien mortgage loans (the "Mortgage Loans"). All
of the Mortgage Loans will be acquired by Prudential Securities Secured
Financing Corporation (the "Depositor") from Home Loan and Investment Bank,
F.S.B. (the "Originator"). The Trust Fund will be comprised of a pool of
Mortgage Loans having an Original Pool Principal Balance as of the close of
business on February 29, 1996 (the "Cut-Off Date") of $54,103,729.22.
[FSA LOGO]
The Class A Certificates are entitled to a certain priority, relative to Class
R Certificates, in right of distributions on the Mortgage Loans. See
"Description of the Certificates -- Spread Account" and " -- Flow of Funds."
(Cover continued on next page)
THESE SECURITIES DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE
DEPOSITOR, THE ORIGINATOR, THE SERVICER, THE CERTIFICATE INSURER,
THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THESE
SECURITIES NOR THE UNDERLYING MORTGAGE LOANS WILL BE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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 equal to the sum of 99.584375% of the original principal balance
of the Class A-1 Certificates, 99.615625% of the original principal balance of
the Class A-2 Certificates and 99.584375% of the original principal balance of
the Class A-3 Certificates before deducting expenses payable by the Depositor
estimated to be approximately $180,000 in the aggregate. See "Plan of
Distribution" in this Prospectus Supplement.
The Class A Certificates are offered by the Underwriter when, as and if issued,
subject to delivery by the Depositor and acceptance by the Underwriter, to
prior sale and to withdrawal, cancellation or modification of the offer without
notice. It is expected that the Class A Certificates will be available for
delivery through the facilities of The Depository Trust Company, CEDEL S.A. and
Euroclear on or about March 20, 1996.
PRUDENTIAL SECURITIES INCORPORATED
March 14, 1996
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(Cover continued from previous page)
Distributions in respect of interest will be made on the 15th day of
each month or, if the 15th day is not a Business Day, on the next succeeding
Business Day, commencing on April 15, 1996 (each, a "Remittance Date"), to the
holders of Certificates to the extent described herein. On each Remittance
Date, the amount of interest distributed in respect of the Class A-1
Certificates will equal the interest accrued at the Class A-1 Pass-Through Rate
during the prior calendar month on the Class A-1 Principal Balance immediately
prior to such Remittance Date, the amount of interest distributed in respect of
the Class A-2 Certificates will equal the interest accrued at the Class A-2
Pass-Through Rate during the prior calendar month on the Class A-2 Principal
Balance immediately prior to such Remittance Date, and the amount of interest
distributed in respect of the Class A-3 Certificates will equal the interest
accrued at the Class A-3 Pass-Through Rate during the prior calendar month on
the Class A-3 Principal Balance immediately prior to such Remittance Date, each
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, 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, THE RISK THAT A SLOWER 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 -- INTEREST" AND " -- 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.
An election will be made to treat the Trust Fund (other than the
Spread Account) as a real estate mortgage investment conduit (a "REMIC") for
federal income tax purposes. As described more fully herein and in the
Prospectus, the Class A Certificates will constitute "regular interests" in the
REMIC and the Class R Certificates will constitute a "residual interest" in the
REMIC. See "Summary Terms of the Certificates -- Federal Income Tax Status"
and "Certain Federal Income Tax Considerations" in this Prospectus Supplement
and "Certain Federal Income Tax Consequences -- Federal Income Tax Consequences
for REMIC Certificates" in the Prospectus.
The Class A Certificates described herein represent a class of a
separate series of Certificates being offered by the Depositor from time to
time pursuant to the Prospectus dated August 4, 1995 accompanying this
Prospectus Supplement. The Prospectus shall not be considered complete without
this Prospectus Supplement. Any prospective investor should not purchase any
Class A Certificates described herein unless it shall have received the
Prospectus and this Prospectus Supplement. The Prospectus contains important
information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
UNTIL NINETY DAYS FROM THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described in the accompanying Prospectus
under "Incorporation of Certain Documents by Reference," the financial
statements of the Certificate Insurer included in, or as exhibits to, the
following documents which have been filed with the Securities and Exchange
Commission by Financial Security Assurance Holdings Ltd. ("Holdings"), are
hereby incorporated by reference in the Registration Statement, of which this
Prospectus and Prospectus Supplement form a part:
(a) Annual Report on Form 10-K for the period ended December 31,
1994, which Report included as an exhibit the Certificate
Insurer's financial statements for the year ended December 31,
1994, and
(b) Quarterly Report on Form 10-Q for the period ended September
30, 1995, which report included as an exhibit the Certificate
Insurer's unaudited financial statements for the quarter ended
September 30, 1995.
All financial statements of the Certificate Insurer included in
documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this Prospectus Supplement and prior
to the termination of the offering of the Securities shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing of such documents.
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SUMMARY TERMS OF THE CERTIFICATES
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
Prospectus. Capitalized terms used herein and not otherwise defined herein
have the meanings assigned in the Prospectus. See "Index of Significant
Prospectus Supplement Definitions" herein and "Index of Significant
Definitions" in the Prospectus.
Title of Securities
Mortgage Pass-Through Certificates, Series 1996-1 (the "Certificates").
Trust
Prudential Securities Secured Financing Corporation 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.
Servicer
Home Loan and Investment Bank, F.S.B. (in its capacity as servicer, the
"Servicer") will act as Servicer for the Trust Fund and, in that capacity, will
provide customary servicing functions with respect to the Mortgage Loans
pursuant to a Pooling and Servicing Agreement (the "Pooling and Servicing
Agreement") among the Depositor, the Servicer and Bankers Trust Company of
California, N.A., a national banking association (the "Trustee"), will provide
certain reports to the Trustee and will make certain advances to the extent
described in this Prospectus Supplement. See "The Originator" in this
Prospectus Supplement and "Servicing of the Mortgage Loans and Contracts -- The
Servicer" in the Prospectus.
Originator
The Depositor will acquire the Mortgage Loans from Home Loan and Investment
Bank, F.S.B. (in its capacity as originator, the "Originator"). See "The
Originator" in this Prospectus Supplement.
Certificates Offered
The Certificates will consist of three classes of senior Certificates, the
Class A-1 Certificates, the Class A-2 Certificates and the Class A-3
Certificates (together, the "Class A Certificates") and one class of
subordinate Certificates (the "Class R Certificates"). Only the Class A
Certificates are offered hereby.
Original Class A-1 Principal Balance
$10,373,000.
Original Class A-2 Principal Balance
$20,730,000.
Original Class A-3 Principal Balance
$23,000,000.
Cut-Off Date
February 29, 1996 (close of business).
Issue Date
On or about March 20, 1996 (the "Issue Date").
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First Remittance Date
April 15, 1996. Distributions on the Certificates will be made on the 15th day
of each month (or, if such 15th day is not a Business Day, on the next
succeeding Business Day) (each, a "Remittance Date").
Record Date
All distributions, other than the final distribution on a class of
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
Remittance Date occurs.
Description of Certificates; Denominations
General. The Certificates will represent the entire beneficial ownership
interest in a trust fund ("Trust Fund"). The assets of the Trust Fund will
consist primarily of a pool of Mortgage Loans (the "Mortgage Pool"). See "The
Mortgage Pool" in this Prospectus Supplement. In addition, the Originator has
caused Financial Security Assurance Inc. (the "Certificate Insurer") to issue a
certificate guaranty insurance policy (the "Certificate Insurance Policy"),
relating to the Class A Certificates, for the benefit of the Class A
Certificateholders, pursuant to which it will guarantee payments to the Class A
Certificateholders as described herein. The Trust Fund and the Mortgage Pool
will be formed and the Certificates will be issued pursuant to the Pooling and
Servicing Agreement.
On each Remittance Date, payments and other receipts with respect to principal
of and interest on the Mortgage Loans after paying certain fees and expenses
owed to the Servicer (as described in the Pooling and Servicing Agreement),
together with any amounts transferred from the Spread Account with respect to
the Class A Certificates, and any Class A Insured Payment (such amounts,
together and with respect to any Remittance Date, the "Class A Available
Funds"), will be distributed to holders of the Class A Certificates. The
portion of the Available Funds with respect to any Remittance Date to be
distributed in respect of interest on or in reduction of the principal balance
of the Certificates on any Remittance Date is described under "Description of
the Certificates -- Flow of Funds" in this Prospectus Supplement.
Book-Entry Form. The Class A Certificates initially will be issued in
book-entry form, in denominations of $25,000 initial principal balance and
integral multiples of $1,000 in excess thereof (except for one Class A
Certificate which may be issued in a lesser amount). The Class A Certificates
are sometimes referred to in this Prospectus Supplement as "Book-Entry
Certificates." No person acquiring an interest in the Book-Entry Certificates
(a "Beneficial Certificate 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 Certificate Owners may
elect to hold their interests through The Depository Trust Company ("DTC" or
the "Depository"), in the United States, or Centrale de Livraison de Valeurs
Mobiliers, S.A. ("CEDEL") or the Euroclear System ("Euroclear"), in Europe.
Transfers within DTC, CEDEL or Euroclear, as the case may be, will be in
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accordance with the usual rules and operating procedures of the relevant
system. So long as the Class A Certificates are book-entry certificates, such
Class A Certificates will be evidenced by one or more Class A Certificates
registered in the name of Cede & Co. ("Cede"), which will be the "Holder" or
"Certificateholder" of such Certificates, as the nominee of DTC or one of the
relevant depositories (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 Citibank N.A.
("Citibank") or Morgan Guaranty Trust Company of New York ("Morgan"), the
relevant depositories of CEDEL or Euroclear, respectively, and each a
participating member of DTC. The Class A Certificates will initially be
registered in the name of Cede. The interests of the Owners of such Class A
Certificates will be represented by book-entries on the records of DTC and
participating members thereof. No Beneficial Certificate Owner will be
entitled to receive a definitive certificate representing such person's
interest, except in the event that Definitive Certificates (as defined herein)
are issued under the limited circumstances described herein. All references
herein to any Class A Certificates reflect the rights of Beneficial Certificate
Owners only as such rights may be exercised through DTC and its participating
organizations for so long as such Class A Certificates are held by DTC. See
"Description of the Certificates -- Book-Entry Registration" and " --
Definitive Certificates" in this Prospectus Supplement.
The Mortgage Pool
The Trust Fund will be comprised of a pool (the "Mortgage Pool") of one- to
four-family, fixed rate, conventional, monthly pay, first and second lien
Mortgage Loans secured by liens ("Mortgages") on residential real properties
(the "Mortgaged Properties"). The Mortgage Pool will consist of 980 Mortgage
Loans having an aggregate principal balance as of the close of business on the
Cut-Off Date of $54,103,729.22 (the "Original Pool Principal Balance"). See
"The Mortgage Pool" in this Prospectus Supplement.
Interest on each Mortgage Loan is payable monthly on the outstanding Principal
Balance thereof at a fixed rate per annum (the "Mortgage Interest Rate") and is
due on the related Due Date for each such Mortgage Loan (which Due Date shall
vary among the Mortgage Loans).
Class A-1 Pass-Through Rate
The "Class A-1 Pass-Through Rate" is 6.300% per annum, payable monthly at
one-twelfth the annual rate.
Class A-2 Pass-Through Rate
The "Class A-2 Pass-Through Rate" is 7.225% per annum, payable monthly at
one-twelfth the annual rate; provided, however, that if, on the first date on
which the then-outstanding aggregate principal balance of the Mortgage Loans
has declined to 5% or less of the aggregate principal balance of the Mortgage
Loans as of the Cut-Off Date, the Servicer has not exercised its purchase
option described in "Optional Termination by
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the Servicer" in the Summary or in "Description of the Certificate --
Termination; Purchase of Mortgage Loans" herein, then the Class A-2
Pass-Through Rate, on each Remittance Date after such date, will be 7.975% per
annum, payable monthly at one-twelfth the annual rate.
Class A-3 Pass-Through Rate
The "Class A-3 Pass-Through Rate" is 7.175% per annum, payable monthly at
one-twelfth the annual rate; provided, however, that if, on the first date on
which the then-outstanding aggregate principal balance of the Mortgage Loans
has declined to 5% or less of the aggregate principal balance of the Mortgage
Loans as of the Cut-Off Date, the Servicer has not exercised its purchase
option described in "Optional Termination by the Servicer" in the Summary or in
"Description of the Certificate -- Termination; Purchase of Mortgage Loans"
herein, then the Class A-3 Pass-Through Rate, on each Remittance Date after
such date, will be 7.925% per annum, payable monthly at one-twelfth the annual
rate.
Interest
Interest will be payable on the Class A-1 Certificates, the Class A-2
Certificates, and the Class A-3 Certificates on each Remittance Date at the
related Pass-Through Rate (as reduced by an amount equal to the aggregate of
the Prepayment Interest Shortfalls and the Civil Relief Act Interest Shortfalls
(together, the "Mortgage Loan Interest Shortfalls"), if any, for such
Remittance Date, to the extent, in the case of Prepayment Interest Shortfalls,
not covered by the Servicing Fee as described herein), 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 April 15, 1996. The
amount of interest (as described above) payable on each Remittance Date with
respect to the Class A-1 Certificates constitutes the "Class A-1 Interest
Remittance Amount," the amount of interest (as described above) payable with
respect to the Class A-2 Certificates constitutes the "Class A-2 Interest
Remittance Amount" and the amount of interest (as described above) payable with
respect to the Class A-3 Certificates constitutes the "Class A-3 Interest
Remittance Amount." Mortgage Loan Interest Shortfalls will not be covered by
payments from the Spread Account or under the Certificate Insurance Policy.
Interest on the Class A Certificates in respect of any Remittance Date will
accrue thereon during the calendar month immediately preceding the calendar
month in which such Remittance Date occurs (such period, the "Class A Interest
Period") on the basis of a 360-day year consisting of twelve 30-day months.
See "Description of the Certificates" in this Prospectus Supplement.
Principal
Holders of the Class A Certificates will be entitled to receive on each
Remittance Date distributions in respect of principal in the amounts described
herein.
The "Class A-1 Principal Balance" is equal to the Original Class A-1 Principal
Balance minus the aggregate of amounts actually distributed as principal to the
Class A-1 Certificateholders, the "Class A-2 Principal Balance" is equal to the
Original Class A-2 Principal Balance minus the aggregate of amounts actually
distributed as principal to the Class A-2
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Certificateholders and the "Class A-3 Principal Balance" is equal to the
Original Class A-3 Principal Balance minus the aggregate of amounts actually
distributed as principal to the Class A-3 Certificateholders.
Principal will be distributed on each Remittance Date pro rata between the
Class A-1 Certificates and the Class A-2 Certificates, together, on one hand
and the Class A-3 Certificates on the other hand. Between themselves, the
Class A-1 Certificates and the Class A-2 Certificates will receive the
principal to which both such classes are together entitled in a "sequential
pay" fashion.
On each Remittance Date until the Remittance Date on which the Class A-1
Principal Balance is reduced to zero, the Holders of the Class A-1 Certificates
will be entitled to receive the lesser of (i) the Class A-1 Certificate
Principal Balance or (ii) the sum of (a) the product of (x) 57.488494% (the
"Combined Percentage") and (y) the Class A Principal Remittance Amount and (b)
the Class A-1 Carry-Forward Amount as of such Remittance Date. On each
Remittance Date on or after the Remittance Date on which the Class A-1
Principal Balance is reduced to zero, the Holders of the Class A-2 Certificates
will be entitled to receive the lesser of (i) the Class A-2 Certificate
Principal Balance or (ii) the sum of (a) the product of (x) the Combined
Percentage and (y) the Class A Principal Remittance Amount, less the Class A-1
Principal Remittance Amount, if any, distributed to the Class A-1
Certificateholders on such Remittance Date and (b) the Class A-2 Carry-Forward
Amount as of such Remittance Date. On each Remittance Date, the Holders of the
Class A-3 Certificates will be entitled to receive the lesser of (i) the Class
A-3 Certificate Principal Balance or (ii) the sum of (a) the product of (x)
42.511506% (the "Class A-3 Percentage") and (y) the Class A Principal
Remittance Amount and (b) the Class A-3 Carry-Forward Amount as of such
Remittance Date.
The "Class A Principal Remittance Amount" is the sum of (i) each payment of
principal on a Mortgage Loan received by the Servicer (exclusive of amounts
described in clauses (ii) and (iii) below) during the calendar month preceding
the calendar month in which such Remittance Date occurs (with respect to any
Remittance Date, the "Due Period"); (ii) curtailments (i.e., partial
prepayments) and prepayments in full received during the related Due Period;
(iii) the principal portion of all insurance proceeds, released mortgaged
property proceeds and net liquidation proceeds received during the related Due
Period; (iv) an amount equal to the excess, if any, of the principal balance of
Mortgage Loans liquidated during the related Due Period over the principal
portion of net liquidation proceeds which will be distributed to the Class A
Certificateholders (the "Unrecovered Class A Portion"); and (v) the sum of (a)
the outstanding principal balance of any Mortgage Loan purchased by the
Originator because of a breach of a representation and warranty or other defect
and (b) any excess of the outstanding principal balance of a defective Mortgage
Loan repurchased by the Originator or any affiliate thereof, together with the
greater of (x) all accrued and unpaid interest thereon and (y) 30 days'
interest thereon, computed at the
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Mortgage Interest Rate, net of the Servicing Fee if the Originator is the
Servicer, plus the amount of any unreimbursed Servicing Advances (defined
herein) made by the Servicer with respect to the Mortgage Loan over the balance
of a substituted loan in connection with such a breach thereon (a "Substitution
Adjustment"), the purchase price or Substitution Adjustment for which was
transferred to the Certificate Account as of the related Determination Date.
The amount of principal payable with respect to the Class A-1 Certificates on
each Remittance Date (the "Class A-1 Principal Remittance Amount"), together
with the Class A-1 Interest Remittance Amount and the Class A-1 Carry-Forward
Amount (defined below), constitutes the "Class A-1 Remittance Amount" for such
Remittance Date. The amount of principal payable with respect to the Class A-2
Certificates on each Remittance Date (the "Class A-2 Principal Remittance
Amount"), together with the Class A-2 Interest Remittance Amount and the Class
A-2 Carry-Forward Amount (defined below), constitutes the "Class A-2 Remittance
Amount" for such Remittance Date. The amount of principal payable with respect
to the Class A-3 Certificates on each Remittance Date (the "Class A-3 Principal
Remittance Amount"), together with the Class A-3 Interest Remittance Amount and
the Class A-3 Carry-Forward Amount (defined below), constitutes the "Class A-3
Remittance Amount" for such Remittance Date.
On any Remittance Date, the sum of (i) the amount, if any, by which (A) the
Class A-1 Remittance Amount, the Class A-2 Remittance Amount or the Class A-3
Remittance Amount as of the preceding Remittance Date exceeded (B) the amount
of the actual distribution, exclusive of any Insured Payment, to the Class A-1
Certificateholders, the Class A-2 Certificateholders or the Class A-3
Certificateholders, respectively, made on such preceding Remittance Date and
not reimbursed and (ii) 30 days' interest (calculated on the basis of a 360-day
year consisting of twelve 30 day months) on the amount of Insured Payments, if
any, previously made and not reimbursed at an interest rate equal to the Class
A-1 Pass-Through Rate in the case of Insured Payments made with respect to the
Class A-1 Certificates, or the Class A-2 Pass-Through Rate, in the case of
Insured Payments made with respect to the Class A-2 Certificates, or the Class
A-3 Pass-Through Rate, in the case of Insured Payments made with respect to the
Class A-3 Certificates, the amount of such sum (the "Class A-1 Carry-Forward
Amount", the "Class A-2 Carry-Forward Amount" and the "Class A-3 Carry-Forward
Amount", as applicable), will be distributed to the Holders of the Class A-1
Certificates, the Class A-2 Certificates and the Class A-3 Certificates or
Certificate Insurer, as the case may be, on such Remittance Date, or, if the
Class A Available Remittance Amount is insufficient to distribute such Class
A-1 Carry-Forward Amount, Class A-2 Carry-Forward Amount and Class A-3
Carry-Forward Amount in full on such Remittance Date, then on succeeding
Remittance Dates. NOTWITHSTANDING THE FOREGOING, THE CERTIFICATE INSURER HAS
AGREED, PURSUANT TO THE CERTIFICATE INSURANCE POLICY, TO PAY TO THE TRUSTEE ON
BEHALF OF THE CERTIFICATEHOLDERS THE AMOUNT OF ANY INSUFFICIENCY ON EACH
REMITTANCE DATE UP TO THE FULL
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AMOUNT OF (i) THE CLASS A-1 REMITTANCE AMOUNT DUE TO THE CLASS A-1
CERTIFICATEHOLDERS (OTHER THAN THE CERTIFICATE INSURER PURSUANT TO ITS
SUBROGATION RIGHTS), (ii) THE CLASS A-2 REMITTANCE AMOUNT DUE TO THE CLASS A-2
CERTIFICATEHOLDERS (OTHER THAN THE CERTIFICATE INSURER PURSUANT TO ITS
SUBROGATION RIGHTS) AND (iii) THE CLASS A-3 REMITTANCE AMOUNT DUE TO THE CLASS
A-3 CERTIFICATEHOLDERS (other than the Certificate Insurer pursuant to its
subrogation rights) on such Remittance Date. See "Description of the
Certificates -- Flow of Funds" and " -- Certificate Insurance Policy" and "The
Certificate Insurance Policy and the Certificate Insurer" in this Prospectus
Supplement.
Spread Account
On the Issue Date, the Originator will transfer to the Depositor, which will
then transfer to the Trust Fund, the entire principal amount of each Mortgage
Loan as of the Cut-Off Date, together with the right to receive all interest
paid thereon (other than payments of interest that accrued on each Mortgage
Loan up to and including the Due Date occurring in February 1996). As of any
Remittance Date, the excess, if any, of (i) (a) the sum of all amounts received
from, or required to be paid by, the Servicer or the Originator during the
related Due Period with respect to the Mortgage Loans (exclusive of any amounts
withdrawn by the Trustee from the Certificate Account as set forth above) and
deposited into the Certificate Account as of the related Determination Date,
plus (b) the amount of any Monthly Advances and Compensating Interest payments
remitted by the Servicer for such Remittance Date (the "Class A Available
Remittance Amount") over (ii) the sum of (a) the amounts required to be
distributed to Class A Certificateholders as distributions of principal and
interest and (b) certain amounts payable to the Certificate Insurer
representing the insurance premium, amounts equal to Insured Payments
previously made and not reimbursed and amounts required to be paid to the
Certificate Insurer constituting I and I Payments (as defined herein) is
expressed as a dollar amount on each Remittance Date, and is the "Excess
Spread." The Pooling and Servicing Agreement requires the Trustee to deposit
on each Remittance Date the Excess Spread into a reserve account (the "Spread
Account") established with the Trustee. The Spread Account will be an "outside
reserve fund" under applicable Treasury regulations and will not be part of the
REMIC. The Spread Account (including any investment earnings thereon) will be
owned by the Class R Certificateholders and amounts transferred from the REMIC
to the Spread Account will be treated as amounts distributed by the REMIC to
the Class R Certificateholders and will be taxable to such Holders.
The aggregate amount required to be on deposit at any time in the Spread
Account is determined in accordance with the terms of the Pooling and Servicing
Agreement (such amount, the "Base Spread Account Requirement"). While the Base
Spread Account Requirement limits the amount on deposit in the Spread Account
at any one time, the aggregate amount available through the Spread Account over
time is not so limited. Amounts, if any, on deposit in the Spread Account will
be available to fund any shortfall (such shortfall, the "Aggregate Class A
Shortfall") between the Class A Available Remittance Amount and the
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sum of the Class A-1 Remittance Amount, the Class A-2 Remittance Amount and the
Class A-3 Remittance Amount (collectively, the "Class A Remittance Amount") on
any Remittance Date. If on any Remittance Date, the total amount available to
be transferred from the Spread Account on such Remittance Date (the "Spread
Account Available Funds") is less than the full amount of the Aggregate Class A
Shortfall for such Remittance Date, the Pooling and Servicing Agreement
requires the Trustee to apply the amount withdrawn from the Spread Account
proportionately among the Class A-1 Certificates, the Class A-2 Certificates
and the Class A-3 Certificates as set forth therein. Notwithstanding the
foregoing, on each Remittance Date, the Certificate Insurer will be obligated
to make available to the Trustee funds in the amount of the excess of (i) the
Aggregate Class A Shortfall for such Remittance Date, over (ii) the Spread
Account Available Funds on such Remittance Date.
The Pooling and Servicing Agreement provides that the Base Spread Account
Requirement may decline over time, even if no withdrawals from the Spread
Account are made. Under the terms of the Pooling and Servicing Agreement, the
Certificate Insurer may, at its sole option, reduce the Base Spread Account
Requirement set forth therein. The Pooling and Servicing Agreement also
provides that the Base Spread Account Requirement may be increased over time.
Any decline or increase in the Base Spread Account Requirement will be
dependent on delinquency and loss performance of the Mortgage Pool as further
described herein.
The Pooling and Servicing Agreement provides that amounts in the Spread Account
in excess of the amount then required to be on deposit therein will be
distributed to the Holders of the Class R Certificates (after application for
certain required payments and distributions). The Holders of the Class R
Certificates will not be required to refund any amounts previously properly
distributed to them, regardless of whether there are sufficient funds on a
subsequent Remittance Date to make a full distribution to Holders of the Class
A Certificates on such Remittance Date.
The funding and maintenance of the Spread Account is intended to enhance the
likelihood of timely payment of principal and interest to the Holders of the
Class A Certificates; however, in certain circumstances, the Spread Account
could be depleted, and shortfalls could result.
Amounts on deposit in the Spread Account constitute available funds for
distributions on the Class A Certificates. See "Description of the
Certificates -- Spread Account" herein.
Certificate Insurance Policy
The Certificate Insurer (defined below) will issue a Financial Guaranty
Insurance Policy (the "Certificate Insurance Policy"), with respect to the
Class A Certificates, pursuant to which it will irrevocably and unconditionally
guarantee payment on each Remittance Date to the
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Trustee for the benefit of the Holders of the Class A Certificates of a maximum
amount equal to the sum of the Class A-1 Remittance Amount, the Class A-2
Remittance Amount and the Class A-3 Remittance Amount for such Remittance Date,
each calculated in accordance with the original terms of the Class A
Certificates when issued and without regard to any amendment or modification of
the Class A Certificates or the Pooling and Servicing Agreement except
amendments or modifications to which the Certificate Insurer has given its
prior written consent. Mortgage Loan Interest Shortfalls will not be covered
by payments from the Spread Account or under the Certificate Insurance Policy.
The amount of the actual payment (the "Insured Payment"), if any, made by the
Certificate Insurer under the Certificate Insurance Policy on any Remittance
Date is equal to the excess, if any, of (1) the sum of the Class A-1 Remittance
Amount, the Class A-2 Remittance Amount and the Class A-3 Remittance Amount
with respect to such Remittance Date over (2) the aggregate amount on deposit
(or scheduled to be on deposit) in the Certificate Account (after giving effect
to any applications of funds from the Spread Account) that will be available
for distribution to the Class A Certificateholders on such Remittance Date,
without giving effect to any payments to be made under the Certificate
Insurance Policy.
So long as there does not exist a failure by the Certificate Insurer to make a
required payment under the Certificate Insurance Policy (such event, a
"Certificate Insurer Default"), the Certificate Insurer shall have the right to
exercise all rights of the Holders of the Class A Certificates under the
Pooling and Servicing Agreement without any consent of such Holders, and such
Holders may exercise such rights only with the prior written consent of the
Certificate Insurer except as provided in the Pooling and Servicing Agreement.
In addition, to the extent of unreimbursed payments under the Certificate
Insurance Policy, the Certificate Insurer will be subrogated to the rights of
the Holders of the related Class A Certificates on which such Insured Payments
were made. In connection with each Insured Payment on a Class A Certificate,
the Trustee as attorney-in-fact for the Holder thereof will be required to
assign to the Certificate Insurer the rights of such Holder with respect to the
Class A Certificate to the extent of such Insured Payment.
The Certificate Insurer
Financial Security Assurance Inc. (the "Certificate Insurer") is a New York
monoline insurance company engaged in the business of writing financial
guaranty insurance, principally in respect of securities offered in domestic
and foreign markets. The Certificate Insurer's claims-paying ability is rated
Aaa by Moody's Investors Service, Inc. ("Moody's") and AAA by Standard and
Poor's, a division of The McGraw-Hill Companies ("Standard & Poor's"), Nippon
Investors Service, Inc. and Standard & Poor's (Australia) Pty. Ltd. See "The
Certificate Insurance Policy and the Certificate Insurer" in this Prospectus
Supplement.
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Servicing of the Mortgage Loans
The Servicer has agreed to service 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 first and
second mortgage servicing practices, as applicable, of prudent lending
institutions and giving due consideration to the Certificate Insurer's and the
Certificateholders' reliance on the Servicer.
Monthly Advances
Subject to the Servicer's determination that such action would not constitute
a Nonrecoverable Advance (as defined herein), the Servicer is required to remit
to the Trustee no later than the close of business on the third Business Day
prior to the related Remittance Date for deposit in the Certificate Account an
amount equal to the sum of (a) interest accrued on each Mortgage Loan through
the date on which the related monthly payment was due (the "Due Date") but not
received by the Servicer as of the close of business on the last day of the
related Due Period, 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 such REO
Property at the related Mortgage Interest Rate, net of the Servicing Fee, for
the most recently ended Due Period for the related Mortgage Loan over the net
income from the REO Property transferred to the Certificate Account for such
Remittance Date pursuant to the Pooling and Servicing Agreement (the "Monthly
Advance"). Such Monthly Advances by the Servicer are reimbursable to the
Servicer subject to certain conditions and restrictions, and are intended to
provide both sufficient funds for the payment of interest to the Holders of the
Class A Certificates, plus an additional amount intended to fund the Spread
Account and to pay the premium due the Certificate Insurer. In the event that,
notwithstanding the Servicer's good faith determination at the time such
Monthly Advance was made, that it would not be a Nonrecoverable Advance, in the
event that such Monthly 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;
Distributions on the Certificates" in this Prospectus Supplement.
Prepayment Interest Shortfalls and Net Simple Interest Shortfalls
Not later than the close of business on the third Business Day prior to the
related Remittance Date, the Servicer is required to remit to the Trustee, up
to the amount otherwise payable to the Servicer as its Servicing Fee for the
related Due Period, without any right of reimbursement, an amount equal to the
sum of (i) with respect to each Mortgage Loan as to which a principal
prepayment in full was received during the related Due Period, the lesser of
(a) the excess, if any, of 30 days' interest on the outstanding principal
balance of such Mortgage Loan at a per annum
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rate equal to the related Mortgage Interest Rate (or at such lower rate as may
be in effect for such Mortgage Loan because of application of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the "Civil Relief Act"), any
reduction in the valuation of the property securing a Mortgage Loan (the
"Mortgaged Property") as a result of a bankruptcy proceeding (a "Deficient
Valuation") and/or any reduction by a court of the monthly payment due on such
Mortgage Loan (a "Debt Service Reduction")), minus the rate at which the
Servicing Fee is calculated, over the amount of interest actually paid by the
related Mortgagor in connection with such principal prepayment less the
Servicing Fee for such Mortgage Loan in such month (with respect to all such
Mortgage Loans, the "Prepayment Interest Shortfall") and (b) the aggregate
Servicing Fee received by the Servicer in the most recently ended Due Period;
and (ii) the lesser of (a) any net shortfalls ("Net Simple Interest
Shortfalls") in the amount of interest payable on Mortgage Loans that are
Simple Interest Qualifying Loans (as defined herein) during the related Due
Period that are attributable to the excess, if any, of the aggregate amount of
Simple Interest Shortfalls (as defined herein) over the aggregate amount of
Simple Interest Excess (as defined herein) for such Remittance Date (which
Simple Interest Excess is held and accumulated by the Trustee in a sub-account
of the Certificate Account and withdrawn by the Trustee on each Remittance Date
to the extent of such Net Simple Interest Shortfalls), and (b) the total amount
remaining, if any, of the aggregate Servicing Fee received in the most recently
ended Due Period after payments to cover Prepayment Interest Shortfalls for
such Remittance Date. A "Simple Interest Qualifying Loan", as of any
Remittance Date, is any Mortgage Loan that was neither prepaid in full during
the related Due Period, nor delinquent with respect to a payment that became
due during the related Due Period as of the close of business on the
Determination Date following such Due Period. "Simple Interest Shortfall"
means, as of any Remittance Date and for each Simple Interest Qualifying Loan,
the excess, if any, of 30 days' interest (calculated on the basis of a 360-day
year consisting of twelve 30-day months) at the related Mortgage Interest Rate
on the Principal Balance of such loan, over the amount of interest actually
paid on such Mortgage Loan by the Mortgagor with respect to the related Due
Period. "Simple Interest Excess" means, as of any Remittance Date and for each
Simple Interest Qualifying Loan, the excess, if any, of the amount of interest
actually paid on such loan with respect to the related Due Period, over 30
days' interest (calculated on the basis of a 360-day year consisting of twelve
30-day months) on the Principal Balance of such loan. Prepayment Interest
Shortfalls and Civil Relief Act Interest Shortfalls will not be covered by
payments from the Spread Account or the Certificate Insurance Policy, although
Net Simple Interest Shortfalls will be so covered. The Servicer is not
obligated to offset any of the Servicing Fee against, or to provide any other
funds to cover, any shortfalls in interest collections payable on the Class A
Certificates that are attributable to application of the Civil Relief Act
("Civil Relief Act Interest Shortfalls"). See "Investment Considerations --
Limitations on Interest Payments and Foreclosures" and " -- Payments on the
Mortgage
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Loans" and "Description of the Certificates -- Flow of Funds" in this
Prospectus Supplement.
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
Spread Account, the Certificate Insurance Policy or otherwise. See "Investment
Considerations -- Limitations on Interest Payments and Foreclosures".
Servicing Advances
The Servicer is entitled to reimbursement for amounts advanced by it
constituting "out-of-pocket" costs and expenses relating to (i) the
preservation and restoration of the Mortgaged Property, (ii) enforcement
proceedings, including foreclosures, (iii) expenditures relating to the
purchase or maintenance of a first lien not included in the Trust Fund on the
Mortgaged Property, and (iv) certain other customary amounts described in the
Pooling and Servicing Agreement. Such advances are reimbursable to the
Servicer subject to certain conditions and restrictions.
Servicing Fee
The Servicer is entitled to a servicing fee of 0.50% per annum (the "Servicing
Fee") of the Principal Balance of each Mortgage Loan, calculated and payable
monthly from the interest portion of scheduled monthly payments, liquidation
proceeds and certain other proceeds.
Optional Termination by the Servicer
The Servicer may, at its option, 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 aggregate principal balance of the Mortgage Loans as of the
Cut-Off Date by purchasing from the Trust Fund, on the next succeeding
Remittance Date, all of the Mortgage Loans and REO Properties at a price equal
to the sum of (x) the greater of (i) 100% of the aggregate principal balance of
each outstanding Mortgage Loan and each REO Property, and (ii) the fair market
value (disregarding accrued interest) of the Mortgage Loans and REO Properties,
determined as the average of three written bids (copies of which are to be
delivered to the Trustee and the Certificate Insurer by the Servicer) made by
nationally-recognized dealers and based on a valuation process which would be
used to value comparable mortgage loans and REO Property, and (y) the greater
of (1) the aggregate amount of accrued and unpaid interest on the Mortgage
Loans through the related Due Period and (2) 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 (z) any unreimbursed amounts due to the
Certificate Insurer under the Pooling and Servicing Agreement and any I and I
Payments. See "Description of the Certificates -- Termination; Purchase of
Mortgage Loans" herein.
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Optional Purchase of Defaulted Mortgage Loans
Any affiliate of the Originator has the option, but is not obligated, to
purchase from the Trust Fund any Mortgage Loan 90 days or more delinquent at a
purchase price equal to the outstanding principal balance as of the date of
purchase, plus the greater of (i) all accrued and unpaid interest on such
principal balance and (ii) 30 days' interest on such principal balance,
computed at the related Mortgage Interest Rate plus the amount of any
unreimbursed Servicing Advances made by the Servicer with respect to such
Mortgage Loan.
Notwithstanding the foregoing, unless the Certificate Insurer consents, any
such affiliate of the Originator may only exercise its option with respect to
the Mortgage Loan or Mortgage Loans that have been delinquent for the longest
period at the time of such repurchase. If the Certificate Insurer fails to
respond to such affiliate's request for consent within 10 Business Days after
receipt thereof, such affiliate may repurchase the Mortgage Loan or Mortgage
Loans proposed to be repurchased without the consent of, or any further action
by, the Certificate Insurer. See "Description of the Certificates -- Optional
Purchase of Defaulted Mortgage Loans" herein.
Trustee
Bankers Trust Company of California, N.A., a national banking association with
its principal place of business in California. See "The Trustee" in this
Prospectus Supplement.
Effects of Prepayments on Investment Expectations
The actual rate of repayment of principal on the Mortgage Loans cannot be
predicted. The investment performance of the Class A Certificates may vary
materially and adversely from the investment expectations of investors due to
prepayments on the Mortgage Loans being higher or lower than anticipated. It
is possible that the actual yield to the holder of a Class A Certificate may
not be equal to the yield anticipated at the time of purchase of the
Certificate or, notwithstanding that the actual yield is equal to the yield
anticipated at that time, that the total return on investment expected by the
investor or the expected weighted average life of the Certificate may not be
realized. These effects are summarized below. IN DECIDING WHETHER TO PURCHASE
ANY CLASS A CERTIFICATES, AN INVESTOR SHOULD MAKE AN INDEPENDENT DECISION AS TO
THE APPROPRIATE PREPAYMENT ASSUMPTIONS TO BE USED.
Yield. If an investor purchases a Class A Certificate at an amount equal to
its unpaid principal balance (that is, at "par"), the effective yield to that
investor (assuming there are no interest shortfalls and assuming the full
return of the purchaser's invested principal) will approximate the Pass-Through
Rate. If an investor pays less or more than the unpaid principal balance of
the Class A Certificate (that is, buys the Certificate at a "discount" or
"premium", respectively), then, based on the assumptions set forth in the
preceding sentence, the effective yield to the investor will be higher or
lower, respectively, than the stated interest rate on the Certificate, because
such discount or premium will be
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amortized over the life of the Certificate. Any deviation in the actual rate
of prepayments on the Mortgage Loans from the rate assumed by the investor will
affect the period of time over which, or the rate at which, the discount or
premium will be amortized and, consequently, will change the investor's actual
yield from that anticipated. AN INVESTOR THAT PURCHASES ANY CLASS A
CERTIFICATES AT A DISCOUNT SHOULD CAREFULLY CONSIDER THE RISK THAT A SLOWER
THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS WILL RESULT
IN AN ACTUAL YIELD THAT IS LOWER THAN SUCH INVESTOR'S EXPECTED YIELD.
Reinvestment Risk. As stated above, if a Class A Certificate is purchased at
an amount equal to its unpaid principal balance, fluctuations in the rate of
distributions of principal will generally not affect the yield to maturity of
that Certificate. However, the total return on investment to an investor,
including one who purchases at par, will be reduced to the extent that
distributions received on its Certificate cannot be reinvested at a rate as
high as the stated interest rate of the Certificate. Investors in the Class A
Certificates should consider the risk that rapid rates of prepayments on the
Mortgage Loans may coincide with periods of low prevailing market interest
rates. During periods of low prevailing market interest rates, mortgagors may
be expected to prepay or refinance Mortgage Loans that carry interest rates
significantly higher than then-current interest rates for mortgage loans.
Consequently, the amount of principal distributions available to an investor
for reinvestment at such low prevailing interest rates may be relatively large.
Conversely, slow rates of prepayments on the Mortgage Loans may coincide with
periods of high prevailing market interest rates. During such periods, it is
less likely that mortgagors will elect to prepay or refinance Mortgage Loans
and, therefore, the amount of principal distributions available to an investor
for reinvestment at such high prevailing interest rates may be relatively
small.
Weighted Average Life Volatility. One indication of the impact of varying
prepayment speeds on a security is the change in its weighted average life.
The "weighted average life" of a Certificate is the average amount of time that
will elapse from the date of issuance of the Certificate until each dollar in
reduction of the principal balance of the Certificate is distributed to the
investor. Low rates of prepayment may result in extension of the weighted
average life of a Class A Certificate; high rates, in the shortening of such
weighted average life. In general, if the weighted average life of a Class A
Certificate purchased at par is extended beyond that initially anticipated,
such Certificate's market value may be adversely affected even though the yield
to maturity on the Certificate is unaffected. The weighted average lives of
the Class A Certificates, under various prepayment scenarios are displayed in
the table appearing under the heading "Prepayment and Yield Considerations" in
this Prospectus Supplement.
See "Prepayment and Yield Considerations" and "Description of the Certificates
- -- Flow of Funds" in this Prospectus Supplement.
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ERISA Considerations
A fiduciary of any employee benefit plan or other retirement arrangement
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully review with its legal advisors whether
the purchase or holding of Class A Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or the Code.
The U.S. Department of Labor has issued an individual exemption, Prohibited
Transaction Exemption 90-32, to the Underwriter (the "Exemption"). The
Exemption generally exempts from the application of certain of the prohibited
transaction provisions of ERISA, and the excise taxes imposed on such
prohibited transactions by Section 4975(a) and (b) of the Code and Section
502(i) of ERISA, transactions relating to the purchase, sale and holding of
pass-through certificates such as the Class A Certificates and the servicing
and operation of asset pools such as the Trust Fund, provided that certain
conditions are satisfied. See "ERISA Considerations" in this Prospectus
Supplement.
Legal Investment
The Class A Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984.
In addition, there are regulatory requirements and considerations applicable to
regulated financial institutions and restrictions on the ability of such
institutions to invest in certain types of mortgage related securities.
Prospective purchasers of the Class A Certificates should consult their own
legal, tax and accounting advisors in determining the suitability of and
consequences to them of the purchase, ownership and disposition of the Class A
Certificates. See "Legal Investment" in this Prospectus Supplement.
Federal Income Tax Status
An election will be made to treat the Trust Fund (other than the Spread
Account) as a real estate mortgage investment conduit (a "REMIC") for federal
income tax purposes. The Class A Certificates will be designated as the
regular interests in the REMIC, and the Class R Certificates will be designated
as the residual interests in the REMIC.
The Class A Certificates generally will be treated as newly originated debt
instruments for federal income tax purposes. Beneficial Certificate Owners of
the Class A Certificates will be required to report income thereon in
accordance with the accrual method of accounting.
See "Certain Federal Income Tax Considerations" in this Prospectus Supplement
which supersedes the "Certain Federal Income Tax Consequences -- Federal Income
Tax Consequences for REMIC Certificates" discussion in the Prospectus.
Certificate Ratings
It is a condition to the issuance of the Class A Certificates that they shall
have been rated not lower than AAA by Standard & Poor's, a division of The
McGraw-Hill Companies ("Standard & Poor's") and Aaa by Moody's Investors
Service, Inc. ("Moody's"). A security rating is not a recommendation to buy,
sell or hold securities and may be subject to revision or withdrawal at any
time by the assigning rating organization.
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The ratings do not address the possibility that Class A Certificateholders may
suffer a lower than anticipated yield. See "Prepayment and Yield
Considerations" and "Ratings" in this Prospectus Supplement and "Prepayment and
Yield Considerations" in this Prospectus.
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INVESTMENT CONSIDERATIONS
Investors should consider, among other things, the following factors
in connection with the purchase of the Class A Certificates.
JUNIOR LIENS
Approximately 26.49% of the Mortgage Loans (measured by the Original
Pool Principal Balance) are secured by second liens and the related first liens
are not included in the Mortgage Pool.
The primary risk to holders of Mortgage Loans secured by junior liens
is the possibility that adequate funds will not be received in connection with
a foreclosure of the related senior lien(s) to satisfy fully both such senior
lien(s) and the Mortgage Loan. In the event of foreclosure on a Mortgaged
Property, the proceeds of the foreclosure sale will be applied first to the
payment of court costs and fees in connection with the foreclosure, second to
real estate taxes, third in satisfaction of all principal, interest, prepayment
or acceleration penalties, if any, and any other sums due and owing to the
holder(s) of the senior lien(s). The claims of the holder(s) of the senior
lien(s) will be satisfied in full out of proceeds of the liquidation of the
Mortgage Loan, if such proceeds are sufficient, before the Trust Fund receives
any payments in respect of the Mortgage Loan.
If the Servicer were to foreclose on any Mortgage Loan, it would do so
subject to the related senior lien(s), if any. In order for the debt related
to the Mortgage Loan to be paid in full at such sale, a bidder at the
foreclosure sale of such Mortgage Loan would have to both bid an amount
sufficient to pay off all sums due under the Mortgage Loan and the senior
lien(s) or purchase the Mortgaged Property subject to the senior lien(s).
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.
LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES
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% 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
Monthly Advances, the Certificate Insurance Policy or the Spread Account. The
Servicer is not
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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.
THE STATUS OF THE MORTGAGE LOANS IN THE EVENT OF CONSERVATORSHIP OF THE
ORIGINATOR
The Originator believes that the sale of the Mortgage Loans to the
Depositor will constitute an absolute and unconditional sale of the Mortgage
Loans. However, in the event of a conservatorship or receivership of the
Originator at a time when it holds a substantial portion of the Class R
Certificates, the Federal Deposit Insurance Corporation (the "FDIC"), as its
conservator or receiver for purposes of such a conservatorship or receivership,
could attempt to recharacterize the sale of the Mortgage Loans as a borrowing
by the Originator with the result that Certificateholders are deemed to be
creditors of the Originator, secured by a pledge of the Mortgage Loans. If
such an attempt were successful, the FDIC could elect to accelerate payment of
the Class A Certificates and liquidate the Mortgage Loans with the Class A
Certificateholders entitled to the then-outstanding principal amount thereof
together with accrued interest. Thus, the Holders of Class A Certificates
could lose the right to future payments of interest, and might suffer
reinvestment loss in a lower interest rate environment. The Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") provides,
among other things, that the FDIC as receiver or conservator may enforce
contracts notwithstanding any provision of the contract providing for a default
upon insolvency or the appointment of a conservator or receiver. As a result,
the FDIC as receiver or conservator of the Originator may resist the transfer
of the servicing of the mortgage loans in accordance with the provisions of the
Pooling and Servicing Agreement. In addition, under FIRREA, if a conservator
or receiver were appointed for the Originator, such conservator or receiver
might be able to transfer the assets and liabilities (including the servicing
of the mortgage loans) to another institution without any approval, assignment
or consent of the Trustee, the Certificateholders or the Certificate Insurer.
In addition, if the Originator is placed in conservatorship or receivership it
may be unable to repurchase mortgage loans as to which a breach of a
representation has occurred and has not been cured.
PAYMENTS ON THE MORTGAGE LOANS
When a principal prepayment in full 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. In addition, all of the Mortgage Loans are simple
interest mortgage loans ("Simple Interest Loans") pursuant to which interest is
computed and charged to the Mortgagor on the outstanding principal balance of
the related Mortgage Note based on the number of days elapsed between the date
through which interest was last paid on the Mortgage Loan through receipt of
the Mortgagor's most current payment, and the portions of each monthly payment
that are allocated to interest and principal are adjusted based on the actual
amount of interest charged on such basis. Consequently, if less than a full
month has elapsed between the interest paid to date and the next payment on a
Mortgage Loan, the amount of interest actually paid by the Mortgagor will be
less than a full month's interest on the principal balance of such Mortgage
Loan. Conversely, if more than a full month has elapsed between payment on a
Mortgage Loan, the amount of interest actually paid by the Mortgagor will be
greater than a full month's interest on the principal balance of such Mortgage
Loan. To the extent that the aggregate of such shortfalls exceeds the
aggregate of such excess, a "Net Simple Interest Shortfall" will result. The
Pooling and Servicing Agreement requires the Trustee to establish and maintain
a sub-account of the Certificate Account and to deposit and accumulate therein
all Net Simple Interest Excess. Funds on deposit therein will be withdrawn by
the Trustee on each Remittance Date to the extent of Net Simple Interest
Shortfalls. 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 Prepayment Interest Shortfalls and Net
Simple 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 from the Spread Account or under the
S-20
<PAGE> 21
Certificate Insurance Policy, although Net Simple Interest Shortfalls will be
so covered. To the extent that Prepayment Interest Shortfalls with respect to
any Remittance Date exceed the Servicing Fee for the related Due Period, the
amount of interest that is available for distribution to Class A
Certificateholders on such Distribution Date will be reduced.
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 to reduce the interest
otherwise payable on such Class A Certificates. See "Description of the
Certificates -- Flow of Funds" in this Prospectus Supplement.
THE MORTGAGE POOL
GENERAL
The statistical information presented in this Prospectus Supplement is
based on the characteristics of each Mortgage Loan as of the Cut-Off Date.
The Mortgage Loans will be evidenced by notes secured primarily by
first or second liens on the Mortgaged Properties. All of the Mortgage Loans
are originated or acquired by the Originator and its affiliates, Home Credit
Corp., Home Credit Corp. of R.I. and Home Credit Corp. of Conn. and are
underwritten by the Originator. The Mortgage Loans will be sold by the
Originator to the Depositor on or before the date of initial issuance of the
Certificates. All of the Mortgage Loans will be serviced by the Servicer.
All of the Mortgage Loans will be conventional in that they will not
be insured or guaranteed by any governmental agency or instrumentality or any
other person.
Unless otherwise set forth herein, all percentages set forth with
respect to the Mortgage Loans are measured by the respective aggregate
principal balances thereof as of the Cut-Off Date.
The Mortgage Loans consist of 980 loans, and the related Mortgaged
Properties are located in 19 states as set forth herein. As of the Cut-Off
Date, the Mortgage Loans had an aggregate principal balance of $54,103,729.22,
the maximum principal balance of any of the Mortgage Loans was $296,776.00, the
minimum principal balance thereof was $9,842.98, and the principal balance of
such Mortgage Loans averaged $55,207.89. As of the Cut-Off Date, interest
rates ("Mortgage Interest Rates") on the Mortgage Loans ranged from 7.25% to
12.99% per annum, and the weighted average Mortgage Interest Rate was 8.88%
per annum. As of the Cut-Off Date, the original term to stated maturity of the
Mortgage Loans ranged from 60 months to 360 months, the remaining term to
stated maturity ranged from 57 months to 360 months, the weighted average
original term to stated maturity was approximately 224 months, the weighted
average remaining term to stated maturity was approximately 222 months and the
CLTV (as defined herein) ranged from 9.00% to 90.00% with a weighted average
CLTV of 66.49%. No Mortgage Loan had a stated maturity later than February 1,
2026. 73.51% of the Mortgage Loans are secured by first liens, and 26.49% by
second liens. 84.78% of the aggregate principal balance of the Mortgage Loans
as of the Cut-Off Date require monthly payments of principal that will fully
amortize such Mortgage Loans by their respective maturity dates, and 15.22% of
the aggregate principal balance of the Mortgage Loans as of the Cut-Off Date
are "Balloon Loans" which are loans originated with a stated maturity date
earlier than the stated maturity date of a fully amortizing loan with the same
terms except for such maturity and the amount of the final scheduled payment.
For non-Balloon Loans, the stated maturity date is the last payment date and
for Balloon Loans the stated maturity date is the balloon payment date.
S-21
<PAGE> 22
Approximately 5.75% of the Mortgage Loans are expected to be graded in
the Originator's A1 Risk category, approximately 70.47% of the Mortgage Loans
are expected to be graded in the Originator's A2 Risk category, approximately
15.60% of the Mortgage Loans are expected to be graded in the Originator's B
Risk category, approximately 5.72% of the Mortgage Loans are expected to be
graded in the Originator's C Risk category, approximately 0.08% of the Mortgage
Loans are expected to be graded in the Originator's D Risk category and
approximately 2.38% of the Mortgage Loans are expected to be graded in the
Originator's N Risk category. For a description of each such Risk category,
see "The Originator -- Underwriting Criteria" herein.
MORTGAGE LOAN CHARACTERISTICS
The geographic distribution of the Mortgage Loans by state as of the
Cut-Off Date is as follows (the sum of the columns may not equal the totals
indicated due to rounding):
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
% of Cut-Off
Date
Cut-Off Date Aggregate
Number of Aggregate Principal
State Mortgage Loans Principal Balance Balance
----- -------------- ----------------- -------------
<S> <C> <C> <C>
Arizona 24 $ 1,021,807.26 1.89%
California 36 1,895,028.15 3.50
Colorado 105 4,537,467.98 8.39
Connecticut 30 1,908,820.76 3.53
Delaware 8 441,969.16 0.82
Florida 1 44,140.35 0.08
Illinois 7 384,862.25 0.71
Massachusetts 58 3,085,069.13 5.70
Maryland 1 63,013.82 0.12
Maine 11 445,601.29 0.82
New Hampshire 10 386,279.43 0.71
New Jersey 206 12,259,693.15 22.66
Nevada 38 1,690,306.44 3.12
New York 286 17,683,383.50 32.68
Oregon 5 238,226.00 0.44
Pennsylvania 103 4,874,114.24 9.01
Rhode Island 35 2,126,109.80 3.93
Virginia 14 872,391.07 1.61
Washington 2 145,445.44 0.27
--- -------------- ------
TOTAL . . . 980 $54,103,729.22 100.00%
=== ============== ======
</TABLE>
S-22
<PAGE> 23
The original Combined Loan-to-Value Ratios ("CLTV") of the Mortgage
Loans including the related senior lien(s), if any, were distributed as follows
(the sum of the columns may not equal the totals indicated due to rounding):
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
% of Cut-Off
Cut-Off Date
Date Aggregate
Number of Aggregate Principal
Combined Loan-to-Value Ratio Mortgage Loans Principal Balance Balance
- ---------------------------- -------------- ----------------- -----------
<S> <C> <C> <C>
5.001 to 10.000% . . . . . 1 $ 11,808.00 0.02%
10.001 to 15.000 . . . . . 3 47,021.84 0.09
15.001 to 20.000 . . . . . 13 328,914.83 0.61
20.001 to 25.000 . . . . . 14 408,509.47 0.76
25.001 to 30.000 . . . . . 16 461,052.63 0.85
30.001 to 35.000 . . . . . 28 1,228,167.03 2.27
35.001 to 40.000 . . . . . 30 1,216,721.18 2.25
40.001 to 45.000 . . . . . 45 2,296,781.31 4.25
45.001 to 50.000 . . . . . 54 3,036,226.30 5.61
50.001 to 55.000 . . . . . 38 2,081,154.73 3.85
55.001 to 60.000 . . . . . 71 3,801,423.06 7.03
60.001 to 65.000 . . . . . 90 5,042,956.25 9.32
65.001 to 70.000 . . . . . 118 7,298,168.45 13.49
70.001 to 75.000 . . . . . 140 8,924,499.88 16.50
75.001 to 80.000 . . . . . 313 17,298,462.81 31.97
80.001 to 85.000 . . . . . 1 111,709.07 0.21
85.001 to 90.000 . . . . . 5 510,152.38 0.94
--- -------------- ------
TOTAL . . . . . . 980 $54,103,729.22 100.00%
=== ============== ======
</TABLE>
The original Combined Loan-to-Value Ratios shown above are equal, with
respect to each Mortgage Loan, to (i) the sum of (a) the original principal
balance of such Mortgage Loan at the date of origination plus (b) the remaining
balance of the senior lien(s), if any, at the date of origination of such
Mortgage Loan divided by (ii) the lesser of (a) the value of the related
Mortgaged Property, based upon the appraisal made at the time of origination of
such Mortgage Loan or (b) the purchase price of such Mortgaged Property if the
Mortgage Loan proceeds from such Mortgage Loan are used to purchase such
Mortgaged Property. No assurance can be given that the values of such
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 such Mortgage Loans together with the outstanding
balances of the related first liens become equal to or greater than the value
of the related Mortgaged Properties, the actual losses could be higher than
those now generally experienced in the mortgage lending industry.
S-23
<PAGE> 24
The Mortgage Interest Rates borne by the Mortgage Notes relating to
the Mortgage Loans were distributed as follows as of the Cut-Off Date (the sum
of the columns may not equal the totals indicated due to rounding):
MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
% of Cut-Off
Cut-Off Date
Date Aggregate
Mortgage Interest Number of Aggregate Principal
Rates Mortgage Loans Principal Balance Balance
- ----------------- -------------- ----------------- ------------
<S> <C> <C> <C>
7.01% to 7.50% . . . . 4 $ 398,770.00 0.74%
7.51% to 8.00% . . . . 27 2,217,649.80 4.10
8.01% to 8.50% . . . . 286 19,291,694.33 35.66
8.51% to 9.00% . . . . 360 17,364,830.33 32.10
9.01% to 9.50% . . . . 171 8,298,677.99 15.34
9.51% to 10.00% . . . 97 4,924,704.15 9.10
10.01% to 10.50% . . . 26 1,247,939.87 2.31
10.51% to 11.00% . . . 5 248,522.85 0.46
11.01% to 11.50% . . . 1 11,500.00 0.02
12.01% to 12.50% . . . 1 43,900.22 0.08
12.51% to 13.00% . . . 2 55,539.68 0.10
--- -------------- ------
TOTAL . . . 980 $54,103,729.22 100.00%
=== ============== ======
</TABLE>
The remaining months to stated maturity of the Mortgage Loans as of
the Cut-Off Date were distributed as follows (the sum of the columns may not
equal the totals indicated due to rounding):
REMAINING MONTHS TO STATED MATURITY
<TABLE>
<CAPTION>
% of Cut-Off
Cut-Off Date
Date Aggregate
Remaining Months Number of Aggregate Principal
to Stated Maturity Mortgage Loans Principal Balance Balance
------------------ -------------- ----------------- -----------
<S> <C> <C> <C>
49 to 60 . . . . . . 10 $ 177,929.11 0.33%
73 to 84 . . . . . . 1 36,592.51 0.07
85 to 96 . . . . . . 1 35,750.02 0.07
109 to 120 . . . . . 78 2,139,317.19 3.95
157 to 168 . . . . . 2 95,255.42 0.18
169 to 180 . . . . . 397 19,678,269.17 36.37
229 to 240 . . . . . 432 26,802,110.71 49.54
349 to 360 . . . . . 59 5,138,505.09 9.50
--- -------------- ------
TOTAL . . . 980 $54,103,729.22 100.00%
=== ============== ======
</TABLE>
S-24
<PAGE> 25
The number of months since origination of the Mortgage Loans as of the
Cut-Off Date were distributed as follows:
MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION> Cut-Off % of Cut-Off
Number of Date Date Aggregate
Mortgage Aggregate Principal
Months Since Origination Loans Principal Balance Balance
- ------------------------ --------- ----------------- -----------
<S> <C> <C> <C>
0 to 12 980 $54,103,729.22 100.00%
--- -------------- ------
TOTAL . . . . . . 980 $54,103,729.22 100.00%
=== ============== ======
</TABLE>
The principal balances of the Mortgage Loans as of the Cut-Off Date
were distributed as follows (the sum of the columns may not equal the totals
indicated due to rounding):
CUT-OFF DATE PRINCIPAL BALANCES
<TABLE>
<CAPTION>
% of Cut-Off
Cut-Off Date
Number of Date Aggregate
Cut-Off Date Mortgage Aggregate Principal
Principal Balance Loans Principal Balance Balance
- ------------------------- --------- ----------------- -----------
<S> <C> <C> <C>
Less than $10,000 . . . 1 $ 9,842.98 0.02
$10,001 to $15,000 . . . 48 615,912.67 1.14
$15,001 to $20,000 . . . 61 1,079,613.64 2.00
$20,001 to $25,000 . . . 61 1,389,857.31 2.57
$25,001 to $30,000 . . . 74 2,079,477.74 3.84
$30,001 to $35,000 . . . 74 2,440,853.54 4.51
$35,001 to $40,000 . . . 61 2,310,802.14 4.27
$40,001 to $45,000 . . . 79 3,389,041.82 6.26
$45,001 to $50,000 . . . 48 2,283,020.57 4.22
$50,001 to $55,000 . . . 66 3,488,273.82 6.45
$55,001 to $60,000 . . . 54 3,122,066.72 5.77
$60,001 to $65,000 . . . 44 2,759,683.77 5.10
$65,001 to $70,000 . . . 41 2,776,939.41 5.13
$70,001 to $75,000 . . . 44 3,210,677.91 5.93
$75,001 to $80,000 . . . 30 2,337,812.93 4.32
$80,001 to $85,000 . . . 30 2,479,041.27 4.58
$85,001 to $90,000 . . . 33 2,893,090.73 5.35
$90,001 to $95,000 . . . 20 1,850,100.08 3.42
$95,001 to $100,000 . . . 27 2,641,766.77 4.88
$100,001 to $125,000 . . . 53 5,831,056.87 10.78
$125,001 to $150,000 . . . 17 2,292,871.20 4.24
$150,001 to $200,000 . . . 10 1,756,835.58 3.25
$200,001 to $250,000 . . . 1 217,969.72 0.40
$250,001 to $300,000 . . . 3 847,120.03 1.57
--- -------------- ------
TOTAL . . . . . . 980 $54,103,729.22 100.00%
=== ============== ======
</TABLE>
S-25
<PAGE> 26
PROPERTY TYPE
<TABLE>
<CAPTION>
Cut-Off Date % of Cut-Off
Aggregate Date
Number of Unpaid Aggregate
Mortgage Principal Principal
Property Type Loans Balance Balance
------------- --------- ----------- -----------
<S> <C> <C> <C>
Townhouses 4 $ 116,403.20 0.22%
Condominiums 8 440,589.59 0.81
Single Family Detached 846 46,285,441.57 85.55
Single Family Attached 71 3,331,549.71 6.16
2-4 Family 51 3,929,745.15 7.26
--- -------------- ------
TOTAL . . . . . 980 $54,103,729.22 100.00%
=== ============== ======
</TABLE>
PREPAYMENT AND YIELD CONSIDERATIONS
Principal will be distributed on each Remittance Date pro rata between
the Class A-1 Certificates and the Class A-2 Certificates, together, on the one
hand and the Class A-3 Certificates on the other hand. Between themselves, the
Class A-1 Certificates and the Class A-2 Certificates will receive the
principal to which both such classes are together entitled in a "sequential
pay" fashion.
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effects on an investor's
yield resulting from the time of the settlement date and those considerations
discussed below under "Payment Delay"), 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 Originator or an affiliate of the Originator or the Servicer as
required or permitted under the Pooling and Servicing Agreement or the Mortgage
Purchase 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.
All of the Mortgage Loans are prepayable by the related Mortgagors on
the Mortgage Notes without penalty.
The rate of prepayments with respect to conventional mortgage loans
has fluctuated significantly in recent years. In general, if prevailing
interest rates fall significantly below the interest rates at the time of
origination, mortgage loans may be subject to higher prepayment rates than if
prevailing rates remain at or above those at the time such mortgage loans were
originated. Conversely, if prevailing interest rates rise appreciably above
the interest rates at the time of origination, mortgage loans may experience a
lower prepayment rate than if prevailing rates remain at or below those at the
time such mortgage loans were originated. However, there can be no assurance
that the Mortgage Loans will conform to the prepayment experience of
conventional mortgage loans or to any past prepayment experience or any
published
S-26
<PAGE> 27
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 Scheduled Remittance Date for the Class A-1 Certificates is
expected to be May 15, 2006, the Final Scheduled Remittance Date for the Class
A-2 Certificates is expected to be August 15, 2026 and the Final Scheduled
Remittance Date for the Class A-3 Certificates is expected to be August 15,
2026. Such dates are the dates on which the Class A-1 Certificate Principal
Balance, the Class A-2 Certificate Principal Balance, or the Class A-3
Certificate Principal Balance respectively, would be reduced to zero, assuming,
among other things, that with respect to the Class A-1 Certificates (i) no
Prepayments are received on any of the Mortgage Loans, (ii) distributions of
principal and interest on each of the Mortgage Loans is timely received and
(iii) the Mortgage Loans have the applicable characteristics set forth herein.
The final scheduled Remittance Date for the Class A-2 Certificates and the
Class A-3 Certificates is the Remittance Date in the sixth month following the
final scheduled payment date on a Mortgage Loan which has the latest maturity
date permitted by the Pooling and Servicing Agreement. The weighted average
life of the Class A Certificates is likely to be shorter than would be the case
if payments actually made on the Mortgage Loans conformed to the foregoing
assumption, and the final Remittance Date with respect to the Class A
Certificates could occur significantly earlier than the Final Scheduled
Remittance Date because (i) prepayments (including, for this purpose,
prepayments attributable to foreclosure, liquidation, repurchase and the like)
on Mortgage Loans are likely to occur and (ii) the Servicer may cause a
liquidation of the Trust Fund when the aggregate outstanding principal amount
of the Mortgage Loans is less than 5% of the aggregate principal balance of the
Mortgage Loans as of the Cut-Off Date.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal
of such security is scheduled to be repaid to an investor. The weighted
average life of the Class A Certificates will be influenced by the rate at
which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes liquidations due to default). Prepayments on mortgage loans are
commonly measured relative to a prepayment standard or model. The model used
in this Prospectus Supplement (the "Home Equity Prepayment" Model or "HEP")
assumes that a pool of loans prepays in the first month at a constant
prepayment rate that corresponds in the Constant Prepayment Rate model ("CPR")
to one-tenth the given HEP percentage and increases by an additional one- tenth
each month thereafter until the tenth month, where it remains at a CPR equal to
the given HEP percentage. CPR represents an assumed annualized rate of
prepayment relative to the then outstanding principal balance on a pool of new
mortgage loans.
The following tables have been prepared assuming:
(i) the Trust Fund consists of 4 Mortgage Loans having the following
characteristics:
S-27
<PAGE> 28
MORTGAGE LOANS
<TABLE>
<CAPTION>
Original Remaining Remaining
Current Term to Stated Term to Stated Amortization
Principal Mortgage Maturity Maturity Term
Balance Rate (months) (months) (months)
--------- -------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
$13,927,451.17 8.97% 169 167 167
26,802,110.71 8.85% 240 238 238
5,138,505.09 8.97% 360 358 358
8,235,662.25 8.79% 180 178 358
</TABLE>
(ii) all scheduled monthly payments on the Mortgage Loans are
received on the first day of the month, commencing in April
1996;
(iii) all prepayments represent prepayments in full of individual
Mortgage Loans and are received on the last day of each month
commencing in March 1996 and include 30 days' interest
thereon;
(iv) distributions on the Class A Certificates are made on the 15th
day of each month, commencing in April 1996;
(v) the Class A Certificates are purchased on March 20, 1996;
(vi) no defaults or delinquencies in the payment by mortgagors of
principal and interest on the Mortgage Loans are experienced;
(vii) the initial principal balance of the Class A Certificates is
as set forth on the cover hereof;
(viii) the Servicer does exercise its option to repurchase the
Mortgage Loans described herein under "Description of the
Certificates -- Termination; Purchase of Mortgage Loans"; and
(ix) the Mortgage Loans prepay at the specified percentages of HEP.
Based upon the foregoing assumptions, certain of which may not reflect
actual experience, the following tables indicate the projected weighted average
life of the Class A Certificates at various percentages of HEP.
<TABLE>
<CAPTION>
Class A-1 Certificates
-----------------------------
Earliest
Weighted Retirement at
Average Life Servicer's
(Years)(1) Option
------------ -------------
HEP
---
<S> <C> <C>
0% . . . . . 5.864 NA
15% . . . . . 1.255 NA
19% . . . . . 1.050 NA
23% . . . . . 0.908 NA
27% . . . . . 0.806 NA
</TABLE>
- --------------------
(1) The weighted average life of the Class A-1 Certificates is determined
by (i) multiplying the amount of each principal payment by the number
of years from the Issue Date to the related Remittance Date; (ii)
adding the results; and (iii) dividing the sum by the Class A-1
Certificate Principal Balance as of the Issue Date.
S-28
<PAGE> 29
<TABLE>
<CAPTION>
Class A-2 Certificates
-------------------------------
Earliest
Weighted Retirement at
Average Life Servicer's
(Years)(1) Option(2)
------------- -------------
HEP
---
<S> <C> <C>
0% . . . . . . . . . . 15.513 July 15, 2018
15% . . . . . . . . . . 6.863 January 15, 2010
19% . . . . . . . . . . 5.695 February 15, 2008
23% . . . . . . . . . . 4.810 May 15, 2006
27% . . . . . . . . . . 4.139 January 15, 2005
</TABLE>
- --------------------
(1) The weighted average life of the Class A-2 Certificates is determined
by (i) multiplying the amount of each principal payment by the number
of years from the Issue Date to the related Remittance Date; (ii)
adding the results; and (iii) dividing the sum by the Class A-2
Certificate Principal Balance as of the Issue Date.
(2) Determined assuming early retirement of the Class A Certificates upon
termination of the Trust Fund on the Remittance Date following the
date on which the aggregate unpaid principal balance of the Mortgage
Loans declines to a level less than 5% of the aggregate principal
balance of the Mortgage Loans as of the Cut-Off Date.
<TABLE>
<CAPTION>
Class A-3 Certificates
------------------------------
Earliest
Weighted Retirement at
Average Life Servicer's
(Years)(1) Option(2)
------------ -------------
HEP
---
<S> <C> <C>
0% . . . . . . . . . 12.295 July 15, 2018
15% . . . . . . . . . 4.992 January 15, 2010
19% . . . . . . . . . 4.146 February 15, 2008
23% . . . . . . . . . 3.509 May 15, 2006
27% . . . . . . . . . 3.027 January 15, 2005
</TABLE>
- -------------------
(1) The weighted average life of the Class A-3 Certificates is determined
by (i) multiplying the amount of each principal payment by the number
of years from the Issue Date to the related Remittance Date; (ii)
adding the results; and (iii) dividing the sum by the Class A-3
Certificate Principal Balance as of the Issue Date.
(2) Determined assuming early retirement of the Class A Certificates upon
termination of the Trust Fund on the Remittance Date following the
date on which the aggregate unpaid principal balance of the Mortgage
Loans declines to a level less than 5% of the aggregate principal
balance of the Mortgage Loans as of the Cut-Off Date.
There is no assurance that prepayments will occur or, if they do
occur, that they will occur at any constant percentage of HEP.
The Pooling and Servicing Agreement provides that none of the
Certificate Insurer, the Trust Fund, the Trustee, the Originator, 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-1 Pass-Through Rate (with respect to any Holder of
Class A-1 Certificates), the Class A-2 Pass-Through Rate (with respect to any
Holder of Class A-2 Certificates) or the Class A-3 Pass-Through Rate (with
respect to any Holder of Class A-3 Certificates) upon
S-29
<PAGE> 30
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 Originator or the
Servicer.
PAYMENT DELAY
Under the Pooling and Servicing Agreement, payments of principal and
interest on the Mortgage Loans in respect of any Due Period generally will not
be passed through to Class A Certificateholders until the Remittance Date in
the following calendar month. As a result, the monthly distributions to the
Class A Certificateholders generally will reflect Mortgagor payments during the
prior calendar month. Each Remittance Date will be on the 15th day of each
month (or the next succeeding Business Day), and the first Distribution Date
will not occur until April 15, 1996. Thus, the effective yield to Class A
Certificateholders will be below that otherwise produced by the Class A-1
Pass-Through Rate (with respect to any Holder of Class A-1 Certificates), the
Class A-2 Pass- Through Rate (with respect to any Holder of Class A-2
Certificates) or the Class A-3 Pass-Through Rate (with respect to any Holder of
Class A-3 Certificates) because distributions on the Class A Certificates in
respect of any given month will not be made until on or about the 15th day of
the following month and will not bear interest during such delay.
THE ORIGINATOR
The information set forth below concerning the Originator has been
provided by the Originator. The Depositor does not make any representation as
to the accuracy or completeness of such information.
The Originator was granted a federal charter on December 30, 1994 and
merged with and became successor to Home Loan & Investment Association, which
was organized in 1958 as a loan and investment company under the laws of the
State of Rhode Island. All references to "the Originator" in respect of events
occurring or facts existing prior to December 30, 1994 shall mean Home Loan &
Investment Association and all references to "the Originator" in respect of
events occurring or facts existing after such date shall mean Home Loan and
Investment Bank, F.S.B.
As of December 31, 1995, the Originator employed 233 persons at its
Warwick, Rhode Island headquarters and an additional 13 employees in branch
offices located in Warwick and Providence, Rhode Island. As of fiscal year end
December 31, 1994 and as of December 31, 1995, the net worth of the Originator
was $42,828,524 and $50,077,306, respectively. Copies of the audited financial
statements of the Originator for the past three fiscal years, prepared on the
basis of generally accepted accounting principles, may be obtained when
available upon written request from Edwin Furtado, Executive Vice President,
Secretary and Chief Financial Officer at One Home Loan Plaza, Warwick, Rhode
Island 02886. The Originator's net income for the fiscal years ended December
31, 1995, 1994 and 1993 were $9,162,782, $6,895,172 and $5,258,560,
respectively.
LOAN ORIGINATION HISTORY
The Originator originates and purchases mortgage loans on residential
dwellings primarily in the Northeast, assembles and sells pools of mortgages to
major commercial banks and other financial institutions, and services mortgage
portfolios placed with such investors. All loans are originated or acquired by
the Originator and its affiliates, Home Credit Corp., Home Credit Corp. of
R.I. and Home Credit Corp. of Conn. and are underwritten by the Originator. At
February 1996, the Originator or its affiliates conducted loan originations and
purchased loans in a number of states including New York, New Jersey,
Pennsylvania, Massachusetts, New Hampshire, Maine, Rhode Island, Connecticut,
Vermont, Georgia, Illinois, Virginia, Delaware, Nevada, Arizona, Colorado,
California, Washington, Utah, Oregon, Florida and West Virginia.
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The dollar amount of first and second mortgage loans originated or
acquired during the fiscal years ended December 31, 1995, 1994 and 1993 were
$298,446,491, $241,462,789 and $211,660,384, respectively.
UNDERWRITING CRITERIA
The Originator endeavors to originate and acquire first and second
mortgage loans using standard underwriting criteria based upon the applicant's
general creditworthiness and the extent of real estate equity used as
collateral security.
Mortgage loan applications are underwritten, and collateral properties
appraised prior to closing. Underwriting, and the determination whether to
make specific loan originations, is centralized at the Originator's
headquarters in Warwick, Rhode Island. All loans are required to be reviewed
and approved by an underwriter, each of whom is granted specific credit limits
based on experience and seniority. Only three senior officers of the
Originator can approve loans over $150,000, and all loans over $200,000 require
written approval of the President of the Originator.
The Originator lends primarily on suburban and urban single family
homes in major metropolitan areas.
The Originator does not originate or acquire mortgage loans which
result in more than a second lien position on real estate. The Originator will
consider making a second mortgage loan in a subordinate position to a privately
held first mortgage loan provided a copy of the recorded security instrument
and note are reviewed prior to credit approval. Second mortgage loans will
also be made behind adjustable or variable rate first mortgage loans provided
the payment used when calculating the debt ratio is either: (a) in the case of
loans which adjust annually or will adjust within one year of the date of
application, based on the maximum rate provided in the note on the next
adjustment date, or (b) in the case of loans which adjust less frequently than
annually and do not have an adjustment date within one year of the date of
application, based on the current interest rate.
Loan applications are considered through a combination of reviews of
credit bureau reports and/or individual certifications. Except in the case of
non-income verified loans, income is verified through various means, including
applicant interviews, written verification, review of pay stubs and tax
returns, among other items, and the borrower's demonstration of sufficient
levels of disposable income to satisfy debt repayment requirements. The
applicant's employer is usually contacted to verify employment and employee
compensation. A Verification of Employment form (VOE) is usually presented to
the applicant's employer in addition to telephonic verification and receipt of
W-2s or the last two check stubs, among other items.
Self-Employed Applicant's Commissions/Bonuses Tax Returns: A tax
return for the most recent year or years signed by the borrower is required
from self-employed applicants and applicants who derive 25% of their income
from commissions and/or bonuses. Consistency in commission and/or bonus income
must be established. Checking account statements are used solely as additional
verification of income.
Rental Income: Rental income must be documented by lease, notarized
rental receipts, or two (2) years' tax returns. The Originator calculates 75%
of total rents received which is subtracted from total mortgage payments on
rental property to derive a cash flow, if any, which amount is then treated as
additional income in the credit review process. If the subtraction of rental
income from the mortgage payment results in a negative cash flow, such amount
is subtracted from the applicant's monthly income.
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Social Security--Veterans Administration: Social Security and VA
compensation must be supported by an awards letter from the appropriate agency.
If such a letter is unavailable, checking account statements indicating equal
deposit amounts are required.
Retirement income must be supported by an annuity letter or similar
awards document outlining all details of income. If unavailable either (i)
copies of recent checking account statements verifying direct deposit, or (ii)
the copies of most recent year's tax return or (iii) copies of the most recent
year's W-2P forms are required.
Child and/or Spousal Support: The applicant must provide the
Originator with evidence that any alimony or child support is expected to
continue for at least two (2) years after the date of the loan. A copy of the
final decree of divorce or separation agreement specifically setting the amount
and term, if any, of support is acceptable.
Appraisals: All properties are appraised by independent fee appraisers
approved by the Originator in advance of funding. Appraisers are selected
based upon a review of sample appraisals, professional experience, education,
and professional organizations to which they belong and typical or specific
properties appraised. All appraisers must be approved by the Vice President of
Underwriting and must be independent from borrowers. Management reviews
references, credentials, and examples of prior appraisals before engaging an
appraiser. Appraisals are performed after analysis of other sales of
properties in the area in which the related mortgaged property is located, and
a full interior inspection appraisal is performed using forms acceptable to
either FNMA or FHLMC in connection with each mortgaged property. If an
appraisal with respect to a Mortgaged Property appears to be inconsistent with
appraisals previously conducted on comparable properties by the same or other
appraisers, the Originator will engage a review appraiser to reappraise the
property as part of its quality control procedures.
Title Companies and Closing Agents: Loans are closed through approved
attorneys, title insurers, or agents of title insurers, and are insured by any
one or more of the following title companies: American Title Insurance
Company, Chicago Title Insurance Company, Commonwealth Land Title Insurance
Company, Fidelity National Title Insurance Company, First American Title
Insurance Company, Lawyers Title Insurance Company, Minnesota Title Company,
Security Title and Guaranty Company, Stewart Title Guaranty Company,
Transamerica Title Insurance, Mortgage Guaranty and Title Co., Nevada Title
Insurance Co. and Nations Title Insurance Co.
Variations from Underwriting Criteria: As described above, the
Originator uses the foregoing criteria as guidelines only. On a case-by-case
basis, the Originator may determine that the prospective mortgagor warrants a
debt service-to-income ratio exception, a loan-to-value exception or a pricing
exception. An exception may be allowed if the application reflects certain
compensating factors, among others: low loan-to-value ratio; pride of
ownership; stable employment of five or more years at the applicant's current
place of employment; and residence of five or more years at the applicant's
current residence.
The Originator uses the following categories and characteristics as
guidelines to grade the potential likelihood that the mortgagor will satisfy
the repayment conditions of a mortgage loan:
A1 Risk. Under the A1 Risk category, the prospective mortgagor must
have generally repaid installment or revolving debt according to its terms. No
30-day late payments within the last 12 months are acceptable on an existing
mortgage loan. An existing mortgage loan is not required to be current at the
time the application is submitted. Minor derogatory items are allowed as to
non-mortgage credit, and a letter of explanation may be required. A previous
bankruptcy filing by the prospective mortgagor is permitted but the bankruptcy
must have been dismissed or the prospective mortgagor's debts must have been
discharged for a minimum of seven years. The mortgaged property must be in at
least average condition. A maximum Loan-to-Value Ratio of 75% is permitted for
a mortgage loan on a single family owner-occupied property.
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A2 Risk. Under the A2 Risk category, the prospective mortgagor must
have generally repaid installment or revolving debt according to its terms. A
maximum of one 30-day late payment within the last 12 months is acceptable on
an existing mortgage loan. An existing mortgage loan is not required to be
current at the time the application is submitted. Minor derogatory items are
allowed as to non-mortgage credit, and a letter of explanation may be required.
A previous bankruptcy filing by the prospective mortgagor is permitted but the
bankruptcy must have been dismissed or the prospective mortgagor's debts must
have been discharged for a minimum of five years. A maximum Loan-to-Value Ratio
of 80% is permitted for a mortgage loan on an owner-occupied one or two family
property.
B Risk. Under the B Risk category, the prospective mortgagor must
have generally repaid all installment or revolving debt according to its terms.
A maximum of two 30-day late payments and no 60-day late payments within the
last 12 months is acceptable on an existing mortgage loan. An existing mortgage
loan is not required to be current at the time the application is submitted. As
to non-mortgage credit, some prior defaults may have occurred provided any open
charge-offs or collection accounts must be paid at closing. A bankruptcy filing
by the prospective mortgagor is permitted if it occurred at least two years
previously; provided, however, that the bankruptcy must have been dismissed or
the prospective mortgagor's debts must have been discharged for a minimum of
two years. The mortgaged property must be in at least average condition. A
maximum Loan-to-Value Ratio of 75% is permitted for a mortgage loan on an
owner-occupied property. A maximum Loan-to-Value Ratio of 65% is permitted for
a mortgage loan on a non-owner-occupied property.
C Risk. Under the C Risk category, the prospective mortgagor may have
experienced credit problems in the past. A maximum of three 30-day late
payments, including one 60-day late payment, within the last 12 months is
acceptable on an existing mortgage loan. An existing mortgage loan is not
required to be current at the time the application is submitted. As to
non-mortgage credit, significant prior defaults may have occurred. A bankruptcy
filing by the prospective mortgagor is permitted, if it occurred at least two
years previously. The mortgaged property must be in adequate condition. A
maximum Loan-to-Value Ratio of 70% is permitted for a mortgage loan on an
owner-occupied property.
D Risk. Under the D Risk category, the prospective mortgagor may have
experienced significant credit problems in the past. As to mortgage credit,
the borrower may have had a maximum of five 30-day late payments, including two
60-day late payments within the last 12 months on an existing mortgage loan. An
existing mortgage loan is not required to be current at the time the
application is submitted. As to non-mortgage credit, significant prior defaults
may have occurred. A bankruptcy filing by the prospective mortgagor is
permitted but the bankruptcy must be dismissed or the prospective mortgagor's
debts must be discharged prior to or concurrent with loan funding. The
mortgaged property may exhibit some deferred maintenance. A maximum
Loan-to-Value Ratio of 65% is permitted for a mortgage loan on an
owner-occupied property.
Debt Service-to-Income Ratios. In addition to the Loan-to-Value Ratio
limitations imposed under the risk categories outlined above, the Originator
also considers each prospective mortgagor's debt service-to-income ratio, based
on the loan rate. The maximum debt service- to-income ratios for each of the
above categories are as follows: A1-40%, A2-45%, B-45%, C-50%, D-50%.
N Category and Variations. As described above, the Originator uses the
foregoing categories and characteristics as guidelines only. On a case-by-case
basis, the Originator may determine that the prospective mortgagor warrants a
debt service-to-income ratio exception, a Loan-to-Value Ratio exception or a
pricing exception. Such an exception may be allowed if the application reflects
certain compensating factors, including, among others: low Loan-to-Value Ratio;
low debt service-to-income ratio; pride of ownership; stable employment and
residence of five or more years at the applicant's current residence.
Accordingly, the Originator may classify these loans in the N Risk category.
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QUALITY CONTROL PROCEDURES HIGHLIGHTS
Each month, the Originator's quality control department conducts a
review and verification of approximately 10% of the loans originated and
purchased during the previous month with specific attention to the following
areas:
Legal Documentation: Note, Mortgage, Deed of Trust, Truth-in-Lending
Disclosure, Title Policy, and all other applicable origination documents are
reviewed for existence, accuracy, and proper signatures.
Credit Documentation: All credit verifications (i.e., VOE, VOD,
etc.), credit applications, and credit reports are reviewed for existence,
accuracy, and proper signatures.
All results are reported to management on a monthly basis. Management
meets with the department supervisors in both underwriting and quality control
to review results. Quality control functions are performed separately from
loan originating and underwriting.
Quality Control Appraisals: Each appraisal for a reviewed loan is
reviewed with emphasis on the following areas: verification of occupancy,
valuation method, and review of comparable sales.
In addition to the review discussed above, re-inspections are
performed on one-half of the reviewed loans, i.e., approximately 5% of
originations. If a pattern of questionable values or methodology becomes
apparent for an appraiser, a meeting is arranged to discuss these problems, and
the appraisal firm may be replaced.
COLLECTION PROCEDURES
As of December 31, 1995, the Originator serviced a mortgage loan
portfolio with an aggregate unpaid principal balance of approximately
$512,796,879 for itself and its investor group which primarily consists of
commercial banks, savings and loan associations, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation.
Collections are conducted by the Originator's service center at its
corporate headquarters in Warwick, Rhode Island.
If foreclosure is necessary, the Originator's workout department
supervises and monitors all related procedures (including bankruptcy
proceedings) conducted by the foreclosing attorneys. If title passes to the
mortgagee, this department insures that secured property is preserved and
protected. After review and analysis, a disposition strategy is developed and
the property is marketed.
The collection department is structured in such a way that the most
senior (experienced) collectors are responsible for the accounts which are most
delinquent; i.e., 10-29 day accounts are contacted by junior personnel, 30-59
day accounts by the next most senior employees, etc. Senior collection
officers are responsible for all accounts which are sixty (60) or more days
delinquent. Workout officers are responsible for all accounts which are ninety
(90) or more days delinquent. Their duties include maintaining contact with
attorneys currently handling litigation against the borrower as well as
marketing of any property acquired through foreclosure.
Procedure on 10-29 day delinquents: The Originator's servicing
computer system automatically queues a delinquent account when a borrower is
ten (10) days delinquent. Immediately, a phone call is initiated to the
borrower regarding the delinquent payment. Each account is assigned to a
computer "tickler" file for all promises of payment. The delinquent account is
electronically filed by the appropriate promised
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date within the tickler file. Any account who has broken two (2) promises
shall be referred to a more senior collector for further collection.
Procedure on 30-59 day delinquents: As soon as an account reaches
thirty (30) days delinquent, a serious delinquency notice is sent followed by a
phone call by a collector. Between thirty (30) and forty-five (45) days
delinquent, the collector analyzes the situation of the borrower and makes a
determination for further action. These accounts are reviewed every two (2)
days with the collection supervisor as to what further action should be taken.
After all the information is compiled and analyzed a determination is made as
to the borrower's ability to repay the debt. The collection supervisor and the
servicing manager review all accounts received; if agreed, the account is
referred to an attorney for collection and possible foreclosure proceedings.
Procedure over 60 days delinquent: When an account is sixty (60) days
delinquent, it is monitored by a senior collection officer. The senior
collection officer updates information regarding the principal balance of any
senior lien(s), and taxes owed, and maintains contact with the borrower to
monitor their situation. The servicing manager will determine whether a visit
to the property is warranted. After all collection procedures have been
exhausted and the account becomes one hundred twenty (120) days delinquent, an
attorney is usually instructed to begin foreclosure proceedings. Workout
officers handle all accounts over ninety (90) days delinquent and keep in
constant contact with the borrower and the attorney. Any account which is in
excess of one hundred twenty (120) days delinquent is generally visited for
reappraisal by an approved appraiser or a senior collection officer of the
Originator to determine the condition of the collateral property and the
strength of the equity position of the Originator.
DELINQUENCY AND LOSS EXPERIENCE
The following table sets forth the Originator's delinquency and loss
experience at the date indicated, on its entire portfolio of conventional
mortgage loans serviced by the Originator at the date indicated all of which
were originated or purchased by the Originator. There can be no assurance that
the delinquency and loss experience on the Mortgage Loans (most of which have
been originated during the past year) will be consistent with the historical
information provided below. Such losses and delinquencies on the Mortgage
Loans may be higher than the historical information presented below.
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<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1992 1993 1994 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Outstanding Principal Balance . . . . . $308,493,141 $398,554,860 $448,756,685 $512,796,879
DELINQUENCY
Period of Delinquency
30-59 Days Principal Balance . . . . . . . $5,806,179 $5,606,972 $4,779,465 $6,269,156
Percent of Delinquency by Dollar . . . . . . 1.88% 1.41% 1.07% 1.22%
Period of Delinquency:
60-89 Days Principal Balance . . . . . . . $2,683,210 $1,497,662 $1,035,284 $2,096,682
Percent of Delinquency by Dollar . . . . . . 0.87% 0.38% 0.23% 0.41%
Period of Delinquency:
90 Days or More Principal Balance . . . . . $15,690,865 $12,750,625 $11,470,546 $10,588,140
Percent of Delinquency by Dollar . . . . . . 5.09% 3.20% 2.56% 2.06%
Total Delinquencies:
Principal Balance . . . . . . . . . . . . . $24,180,254 $19,855,259 $17,285,295 $18,953,978
Percent of Delinquency by Dollar . . . . . . 7.84% 4.98% 3.85% 3.70%
REO . . . . . . . . . . . . . . . . . . . . . $2,835,592 $3,004,701 $1,828,183 $2,427,482
Net Gains/(Losses) on liquidated loans . . . $(2,286,333)(1) $(3,462,633)(1) $(1,691,944) $(1,272,431)
Net Gains/(Losses) on liquidated loans on
a Percent of Total Outstanding Principal
Balance . . . . . . . . . . . . . . . . . . (0.741)% (0.869)% (0.377)% (0.248)%
</TABLE>
- --------------------
(1) The amount of losses on liquidated loans for the periods ending
December 31, 1992 and December 31, 1993 include accrued interest on
the principal amounts thereof.
The above delinquency and loss experience percentages are calculated
on the basis of the total conventional mortgage loans serviced by the
Originator at the date indicated all of which were originated or purchased by
the Originator. However, because the total amount of loans serviced by the
Originator has rapidly increased over these periods as a result of new
originations, the total amount of loans serviced as of the end of any indicated
period will include many loans that will not have been outstanding long enough
to give rise to some or all of the indicated periods of delinquency. In the
absence of such substantial continuous additions of newly originated loans to
the total amount of loans serviced, the delinquency percentages indicated above
would be higher and could be substantially higher. Because the Trust consists
of a fixed group of Mortgage Loans, the actual delinquency percentages with
respect to the Mortgage Loans may be substantially higher than the delinquency
percentages indicated above.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Class A-1 Certificates, the Class A-2 Certificates and the Class
A-3 Certificates will be issued by the Trust.
In addition to the Class A-1 Certificates, the Class A-2 Certificates
and the Class A-3 Certificates, the Trust Fund will also issue the Class R
Certificates. The Class R Certificates have been designated as the single
"residual interest" for purposes of the Code. The Class R Certificates are not
being offered hereby. The Trustee, as the designated "Tax Matters Person" of
the Trust Fund, for purposes of the Code, will retain a 0.0001% interest in the
Class R Certificates for so long as it continues to act as Trustee under the
Pooling and Servicing Agreement.
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 described below, subject to the limits and the priority
of distribution described therein. The Trust Fund consists of (i) the Mortgage
Loans, together with the mortgage files relating thereto and all collections
thereon and proceeds thereof (other than payments of interest that accrued on
each Mortgage Loan up to and including the Due Date occurring in February,
1996,
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(ii) such assets as from time to time are identified as REO Property and
collections thereon and proceeds thereof, (iii) assets that are deposited in
the Certificate Account, including amounts on deposit in the Certificate
Account (including the Simple Interest Excess Sub-Account) and invested in
Permitted Investments, (iv) 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, (v) liquidation
proceeds, (vi) released mortgaged property proceeds and (vii) the Spread
Account. In addition, the Depositor has caused the Certificate Insurer to
issue the Certificate Insurance Policy under which it will guarantee payments
to the Class A Certificateholders as described herein.
The Class A Certificates will represent undivided ownership interests
in the Trust Fund consisting of the Mortgage Loans, together with the mortgage
files relating thereto and all collections thereon and proceeds thereof (other
than payments of interest that accrued on each Mortgage Loan up to and
including the Due Date occurring in February, 1996) and each of the items
listed in clauses (ii) through (vii) in the immediately preceding paragraph.
Each of the Class A-1 Certificates, the Class A-2 Certificates and the
Class A-3 Certificates will be unconditionally and irrevocably guaranteed as to
payment of the Class A-1 Remittance Amount, the Class A-2 Remittance Amount and
the Class A-3 Remittance Amount, respectively, due to the Class A-1
Certificateholders, the Class A-2 Certificateholders and the Class A-3
Certificateholders, respectively (other than the Certificate Insurer pursuant
to its subrogation rights), on each Remittance Date. Mortgage Loan Interest
Shortfalls will not be covered by payments from the Spread Account or under the
Certificate Insurance Policy. See " -- Payments on the Mortgage Loans;
Distributions on the Certificates" and " -- Certificate Insurance Policy" and
"The Certificate Insurance Policy And The Certificate Insurer" in this
Prospectus Supplement.
The Servicer has agreed to service 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
second mortgage servicing practices of prudent lending institutions and giving
due consideration to the Certificate Insurer's and the Certificateholders'
reliance on the Servicer.
BOOK-ENTRY REGISTRATION
The Class A Certificates will be issued only in book-entry form (the
"Book-Entry Certificates"), in denominations of $25,000 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 Certificate 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 will be issued in one or more certificates per class of
Class A Certificates which in the aggregate equal the principal balance of such
Class A Certificates and will initially be registered in the name of Cede, the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for CEDEL and
Morgan will act as depositary for Euroclear (in such capacities, individually
the "Relevant Depositary" and collectively the "European Depositaries").
Investors may hold such beneficial interests in the Book-Entry Certificates in
minimum denominations representing principal amounts of $1,000. Except as
described below, no Beneficial Certificate 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 Certificate Owners will not be Owners as that term
is used in the Pooling Agreement. Beneficial Certificate Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
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The Beneficial Certificate 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 Certificate 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 Certificate 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. In direct
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 Certificate 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 Certificate Owners.
Beneficial Certificate 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 Certificate
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 Certificate Owners.
Beneficial Certificate 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 Certificate 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. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences -- Foreign Investors" and " -- Backup Withholding" in
the Prospectus and "Global Clearance, Settlement and Tax Documentation
Procedures -- Certain U.S. Federal Income Tax Documentation Requirements" in
Annex I hereto.
Transfers between Participants will occur in accordance with DTC
rules. Transfers between CEDEL Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
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Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 31 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
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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
Remittance 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 Certificate 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 Certificate Owners of the Book-Entry Certificates that it
represents.
Under a book-entry format, Beneficial Certificate 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 Certificate 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 Certificate 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 Certificate 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
Certificate 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 Certificate 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.
Neither the Depositor, the Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held
by Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
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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 Certificate Owners or their nominees, rather than to DTC or its
nominee, only if (i) the Depository or the Servicer advises the Trustee 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
(ii) the Trustee, at its option, elects to terminate the book-entry system
through DTC.
Upon the occurrence of any event described in the immediately
preceding paragraph, DTC will be required to notify all Participants of the
availability through DTC of Definitive Certificates. Upon delivery of
Definitive Certificates, the Trustee will reissue the Book-Entry Certificates
as Definitive Certificates to Beneficial Certificate 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.
ASSIGNMENT OF MORTGAGE LOANS
Pursuant to an Unaffiliated Seller's Agreement between the Originator
and the Depositor (the "Mortgage Purchase Agreement"), the Originator on the
Issue Date will sell, transfer, assign, set over and otherwise convey the
Mortgage Loans without recourse to the Depositor. 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; provided, however, that the
Originator will not convey, and the Originator reserves and retains all its
right, title and interest in and to, (a) principal (including principal
prepayments in full and curtailments (i.e., partial prepayments)) received on
each such Mortgage Loan on or prior to the Cut-Off Date, and (b) interest
accrued on each Mortgage Loan on or prior to the Due Date immediately preceding
the Cut-Off Date.
In connection with such transfer and assignment, the Depositor will
cause to be delivered to the Trustee on the Issue Date the following documents
(collectively, with respect to each Mortgage Loan, the "Trustee's Mortgage
File") with respect to each Mortgage Loan:
(a) The original note related to such Mortgage Loan
("Mortgage Note"), with all prior and intervening endorsements showing
a complete chain of endorsements from the originator of the Mortgage
Loan to the Person so endorsing the Mortgage Loan to the Trustee,
endorsed by the Originator and signed, by facsimile or manual
signature, in the name of the Originator by a Responsible Officer;
(b) Any of: (i) the original Mortgage, and related power of
attorney, if any, with evidence of recording thereon, (ii) a copy of
the Mortgage and related power of attorney, if any, certified as a
true copy of the original Mortgage or power of attorney by a
Responsible Officer of the Originator or
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by the closing attorney by facsimile or manual signature, or by an
officer of the title insurer or agent of the title insurer that issued
the related title insurance policy if the original has been
transmitted for recording until such time as the original is returned
by the public recording office or (iii) a copy of the Mortgage and
related power of attorney, if any, certified by the public recording
office;
(c) The original Assignment of Mortgage, in recordable form,
from the Originator to Bankers Trust Company of California, N.A., as
Trustee. Any such Assignments of Mortgage may be made by blanket
assignments for Mortgage Loans secured by the Mortgaged Properties
located in the same county, if permitted by applicable law;
(d) The original lender's policy of title insurance or a true
copy thereof, or if such original lender's title insurance policy has
been lost, a copy thereof certified by the appropriate title insurer
to be true and complete, or if such lender's title insurance policy
has not been issued as of the Issue Date, a marked up commitment
(binder) to issue such policy;
(e) All intervening assignments, if any, showing a complete
chain of assignments from the originator to the Originator, including
any recorded warehousing assignments, with evidence of recording
thereon, certified by a Responsible Officer of the Originator by
facsimile or manual signature as a true copy of the original of such
intervening assignments; and
(f) Originals of all assumption, written assurance,
substitution and modification agreements, if any.
The Trustee agrees to execute and deliver on or prior to the Issue
Date an acknowledgment of receipt of the Certificate Insurance Policy and, for
each Mortgage Loan, the items listed in (a)-(e) 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 15 days after the
Issue Date (or, with respect to any Qualified Substitute Mortgage Loan, within
15 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, (i) all documents required to be delivered to it
pursuant to the Mortgage Purchase Agreement are in its possession (other than
those described in clause (f) of the immediately preceding paragraph), (ii)
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 (iii) based on its examination and only as to the
foregoing documents, certain information set forth on the Mortgage Loan
Schedule accurately reflects the information set forth in the Trustee's
Mortgage File delivered on such date.
If the Trustee or the Certificate Insurer during the process of
reviewing the Trustee's Mortgage Files finds any document constituting a part
of a Trustee's Mortgage File which is not executed, has not been received or is
unrelated to the Mortgage Loans, or that any Mortgage Loan does not conform to
the requirements of (a) through (e) 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 Originator
and the Certificate Insurer. The Originator 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 Originator has not caused to be remedied the defect and the defect
materially and adversely affects the interest of the Holders in the Mortgage
Loan or the interests of the Certificate Insurer, the Originator will either
(i) substitute in lieu of such Mortgage Loan a Qualified Substitute Mortgage
Loan and, if the then outstanding principal balance of such Qualified
Substitute Mortgage Loan is less than the 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 (ii) purchase such Mortgage Loan at a price equal to the
outstanding principal balance of such Mortgage Loan as of the date of purchase,
plus the greater of (i) all accrued and unpaid interest thereon and (ii) 30
days'
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interest (calculated on the basis of a 360-day year consisting of twelve 30-day
months) thereon, computed at the related Mortgage Interest Rate, net of the
Servicing Fee if the Originator is the Servicer, plus the amount of any
unreimbursed Servicing Advances made by the Servicer, which purchase price
shall be deposited in the Certificate Account on the next succeeding
Determination Date (see " -- Flow of Funds" below); provided, however, that the
Originator may not purchase any Mortgage Loan that is not in default or as to
which no default is imminent pursuant to clause (ii) preceding unless the
Originator has theretofore caused to be delivered to the Trustee an opinion of
counsel knowledgeable in federal income tax matters which states that such a
purchase would not constitute a prohibited transaction under the Code.
A "Qualified Substitute Mortgage Loan" is defined in the Pooling and
Servicing Agreement as any mortgage loan or mortgage loans substituted for a
deleted Mortgage Loan which (i) has or have a mortgage interest rate or rates
of not less than (and not more than one percentage point more than) the
Mortgage Interest Rate for the deleted Mortgage Loan, (ii) relates or relate to
a detached one-family residence or to the same type of residential dwelling as
the deleted Mortgage Loan and in each case has or have the same or a better
lien priority as the deleted Mortgage Loan and has the same occupancy status or
is an owner-occupied Mortgaged Property, (iii) matures or mature no later than
(and not more than one year earlier than) the deleted Mortgage Loan, (iv) has
or have a Combined Loan-to-Value Ratio or Combined Loan-to-Value Ratios at the
time of such substitution no higher than the Combined Loan-to-Value Ratio of
the deleted Mortgage Loan, (v) has or have a principal balance or principal
balances (after application of all payments received on or prior to the date of
substitution) not substantially less and not more than the principal balance of
the deleted Mortgage Loan as of such date, (vi) satisfies or satisfy the
criteria set forth from time to time in the definition of "qualified
replacement mortgage" at Section 860G(a)(4) of the Code (or any successor
statute thereto), (vii) complies or comply as of the date of substitution with
each representation and warranty set forth in the Mortgage Purchase Agreement,
and (viii) bears or bear a fixed rate of interest.
REPRESENTATIONS AND WARRANTIES OF THE ORIGINATOR
The Originator will represent, among other things, with respect to
each Mortgage Loan, as of the Issue 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 as otherwise provided in the Mortgage
Purchase Agreement;
3. Each Mortgaged Property is improved by a one- to
four-family residential dwelling, which, to the best of the
Originator's knowledge, does not include cooperatives or mobile homes
other than permanently affixed, double-wide manufactured housing
units, as defined in the FNMA Selling Guide, and does not constitute
other than real property under state law;
4. Each Mortgage Note will provide for a schedule of Monthly
Payments which are, if timely paid, sufficient to fully amortize the
principal balance of such Mortgage Note on or before its maturity date
and to pay interest at the applicable Mortgage Interest Rate, except
that a limited number of "balloon" loans may be permitted by the
Certificate Insurer;
5. Each Mortgage is a valid and subsisting first or second
lien of record on the Mortgaged Property subject, in the case of any
second Mortgage Loan, only to a first lien on such Mortgaged Property
and subject in all cases to the exceptions to title set forth in the
title insurance policy or the other evidence of title enumerated in
the Mortgage Purchase Agreement, with respect to the related Mortgage
Loan, which exceptions are generally acceptable to second mortgage
lending companies,
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and such other exceptions to which similar properties are commonly
subject and which do not individually, or in the aggregate, materially
and adversely affect the benefits of the security intended to be
provided by such Mortgage. Any security agreement, chattel mortgage
or equivalent document related to the Mortgage and delivered to the
Trustee establishes in the Originator a valid and subsisting lien on
the property described therein, and the Originator has full right to
sell and assign the same to the Depositor or its assignee;
6. Except with respect to liens released immediately prior to
the transfer contemplated in the Mortgage Purchase Agreement, the
Mortgage Note and the Mortgage have not been assigned or pledged and
immediately prior to the transfer and assignment contemplated in the
Mortgage Purchase Agreement, the Originator held good, marketable and
indefeasible title to, and was the sole owner and holder of, each
Mortgage Loan subject to no liens, charges, mortgages, claims,
participation interests, equities, pledges or security interests of
any nature, encumbrances or rights of others (collectively, a "Lien");
the Originator has full right and authority, subject to no interest or
participation of, or agreement with, any party, to sell and assign the
same pursuant to the Mortgage Purchase Agreement; and immediately upon
the transfer and assignment therein contemplated, the Depositor or its
assignee will hold good, marketable and indefeasible title to, and be
the sole owner of, each Mortgage Loan subject to no Liens;
7. Except for one loan, no Mortgage Loan was 30 days or more
delinquent as of the Cut-Off Date, and no Mortgage Loan has been 30 or
more days delinquent more than twice during the twelve months prior to
such Cut-Off Date;
8. No more than 1.22% (measured by the Original Pool
Principal Balance) of the Mortgage Loans are secured by Mortgaged
Properties located within any single zip code area;
9. No Mortgage Loan was originated under a buydown plan;
10. The related first lien, if any, requires equal monthly
payments, unless such first lien is a graduated payment mortgage loan,
or if it bears an adjustable interest rate, the monthly payments for
the related first lien may adjust, but no more frequently than
monthly.
11. With respect to any first lien that provides for negative
amortization or deferred interest, the balance of such first lien used
to calculate the Combined Loan-to-Value Ratio for the Mortgage Loan is
based on the maximum amount of negative amortization or deferred
interest possible under such first lien;
12. Each Mortgage Loan conforms, and all such Mortgage Loans
in the aggregate conform, to the description thereof set forth in this
Prospectus Supplement; and
13. 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 Certificateholders, the Originator, 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, with the result that the interests
of the Certificateholders in the related Mortgage Loan or the interests of the
Certificate Insurer were materially and adversely affected (notwithstanding
that such representation and warranty was made to the Originator's best
knowledge), the party discovering such breach is required to give prompt
written notice to the other parties. Subject to certain provisions of the
Mortgage Purchase Agreement, within 60 days of the earlier to occur of the
Originator's discovery or its receipt of notice of any such breach, the
Originator will (i) promptly cure such breach in all material respects, (ii)
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remove each Mortgage Loan which has given rise to the requirement for action by
the Originator, 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 such Remittance Date the amount of such
shortfall, or (iii) 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 related Mortgage Interest Rate, net of the
Servicing Fee if the Originator is the Servicer, plus the amount of any
unreimbursed Servicing Advances made by the Servicer, and deposit such purchase
price into the Certificate Account on the next succeeding Determination Date;
provided, however, that any substitution of one or more Qualified Substitute
Mortgage Loans pursuant to clause (ii) preceding must be effected not later
than two years after the Issue Date unless the Trustee and the Certificate
Insurer receive an opinion of counsel that such substitution would not
constitute a prohibited transaction for purposes of the REMIC provisions of the
Code and, provided, further, that the Originator may not purchase such Mortgage
Loan that is not in default or as to which no default is imminent pursuant to
clause (iii) preceding unless the Originator has theretofore caused to be
delivered to the Trustee and the Certificate Insurer an opinion of counsel
knowledgeable in federal income tax matters in form and substance satisfactory
to the Trustee to the effect that such a purchase would not constitute a
prohibited transaction for purposes of the REMIC provisions of the Code or
cause the Trust to fail to qualify as a REMIC at any time any Certificates are
outstanding. The obligation of the Originator to cure such breach or to
substitute or purchase any Mortgage Loan constitutes the sole remedy respecting
a material breach of any such representation or warranty to the
Certificateholders, the Trustee and the Certificate Insurer.
PAYMENTS ON THE MORTGAGE LOANS; DISTRIBUTIONS ON THE CERTIFICATES
The Pooling and Servicing Agreement requires that the Trustee cause a
trust account or accounts in the name of the Trustee (collectively, the
"Certificate Account") to be established and maintained as an Eligible Account.
Eligible Accounts may be either (A) an account or accounts maintained with an
institution whose deposits are insured by the FDIC, the unsecured and
uncollateralized debt obligations of which institution shall be rated AA or
better by Standard & Poor's and Aa2 or better by Moody's and in the highest
short term rating category by Standard & Poor's and Moody's, and which is (i) a
federal savings and loan association duly organized, validly existing and in
good standing under the federal banking laws, (ii) an institution duly
organized, validly existing and in good standing under the applicable banking
laws of any state,(iii) a national banking association duly organized, validly
existing and in good standing under the federal banking laws, (iv) a principal
subsidiary of a bank holding company, or (v) approved in writing by the
Certificate Insurer, Standard & Poor's and Moody's or (B) a trust account or
accounts maintained with the trust department of a federal or state chartered
depository institution or trust company, having capital and surplus of not less
than $50,000,000, acting in its fiduciary capacity.
All funds in the Certificate Account shall be invested by the Trustee
pursuant to the Servicer's instructions in Permitted Instruments, as specified
in the Pooling and Servicing Agreement. So long as no Event of Default shall
have occurred and be continuing, any investment earnings on funds held in the
Certificate Account are for the account of the Servicer and otherwise shall be
deposited in the Spread Account. The Servicer shall deposit in the Certificate
Account the amount of any loss resulting from such investments from its own
funds.
The Servicer is required to use its best efforts to deposit into the
Certificate Account within one (1) Business Day and in any event to deposit
within two (2) Business Days of receipt all payments received after the Cut-Off
Date on account of principal and interest on the Mortgage Loans and all
principal prepayments in full and curtailments (i.e. partial prepayments)
collected after the Cut-Off Date (but net of the Servicing Fee with respect to
each Mortgage Loan and other servicing compensation payable to the Servicer as
permitted by the Pooling and Servicing Agreement and other than payments on
account of interest that accrued on each
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Mortgage Loan up to and including the Due Date immediately preceding the
Cut-Off Date), all liquidation proceeds, insurance proceeds, released mortgaged
property proceeds, any amounts payable in connection with the repurchase of any
Mortgage Loan, the amount of any Substitution Adjustment required to be made,
the amount of any losses incurred in connection with investments in Permitted
Instruments, certain amounts relating to insufficient insurance policies and
REO Property, all Monthly Advances and all payments of Compensating Interest.
The Trustee shall make withdrawals from the Certificate Account only
for the following purposes; provided that no funds in the Certificate Account
constituting Insured Payments or amounts transferred from the Spread Account
will be used to make payments pursuant to clauses (ii) through (ix) below:
(i) to effect distributions to Certificateholders as described
under" -- Flow of Funds" herein;
(ii) to reimburse the Servicer for any accrued unpaid Servicing
Fees and for unreimbursed Monthly Advances and Servicing Advances.
The Servicer's right to reimbursement pursuant to this subclause (ii)
for unpaid Servicing Fees and unreimbursed Servicing Advances is
limited to late collections on the related Mortgage Loan, including
liquidation proceeds, released mortgaged property proceeds, insurance
proceeds and such other amounts as may be collected by the Servicer
from the related Mortgagor or otherwise relating to the Mortgage Loan
in respect of which such unreimbursed amounts are owed. The
Servicer's right to reimbursement for unreimbursed Monthly Advances
shall be limited to late collections of interest on any Mortgage Loan
and to liquidation proceeds and insurance proceeds on related Mortgage
Loans. The Servicer's rights to such reimbursements shall be prior to
the rights of Certificateholders unless the Originator is the Servicer
and the Originator is required to repurchase or substitute a Mortgage
Loan pursuant to the Mortgage Purchase Agreement or the Pooling and
Servicing Agreement, in which case the Servicer's right to such
reimbursement shall be subsequent to the payment to the
Certificateholders of the purchase price or Substitution Adjustment;
(iii) to withdraw any amount received from a Mortgagor that is
recoverable and sought to be recovered as a voidable preference by a
trustee in bankruptcy pursuant to the United States Bankruptcy Code in
accordance with a final, nonappealable order of a court having
competent jurisdiction;
(iv) (a) to make investments in Permitted Instruments and (b)
subject to the Pooling and Servicing Agreement, to pay to the Spread
Account or the Servicer, as applicable, interest earned in respect of
Permitted Instruments or on funds deposited in the Certificate
Account;
(v) to withdraw any funds deposited in the Certificate Account
that were not required to be deposited therein (such as servicing
compensation) or were deposited therein in error and to pay such funds
to the appropriate person;
(vi) (a) to pay the Servicer the Servicing Fee and any other
permitted servicing compensation to the extent not previously retained
or paid or (b) to pay the Servicer the amount equal to the excess of
the Excess Spread over the Monthly Excess Spread Amount (the
"Remainder Excess Spread Amount") with respect to any Remittance Date
for any Reimbursable Amounts and the remainder to the Class R
Certificateholders;
(vii) to withdraw funds necessary for the conservation and
disposition of REO Property;
(viii) to reimburse the Servicer for Nonrecoverable Advances that
are not, with respect to aggregate Servicing Advances on any single
Mortgage Loan or REO Property, in excess of the principal balance
thereof;
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(ix) to pay premiums on the Certificate Insurance Policy to the
Certificate Insurer and to reimburse the Certificate Insurer for any
unreimbursed Insured Payments;
(x) to pay the Originator collections received in respect of
accrued interest on the Mortgage Loans through the related Due Date in
February, 1996; and
(xi) to clear and terminate the Certificate Account upon the
termination of the Pooling and Servicing Agreement and to pay any
amounts remaining therein to the Class R Certificateholders.
"Class A Available Remittance Amount" is defined in the Pooling and
Servicing Agreement to include, with respect to any Remittance Date:
(i) the sum of all amounts received or required to be paid by the
Servicer or the Originator during the related Due Period with respect
to the Mortgage Loans (exclusive of any amounts withdrawn by the
Trustee from the Certificate Account as set forth above) and deposited
into the Certificate Account as of the related Determination Date,
plus
(ii) the amount of any Monthly Advances and Compensating Interest
payments remitted by the Servicer for such Remittance Date.
The term Class A Available Remittance Amount does not include Insured
Payments or Net Simple Interest Excess.
Not later than the close of business on the third Business Day prior
to the related Remittance Date, the Servicer shall remit to the Trustee for
deposit in the Certificate Account an amount, to be distributed on the related
Remittance Date, equal to the sum of the interest accrued on each Mortgage Loan
through the related Due Date but not received by the Servicer as of the close
of business on the last day of the related Due Period (net of the Servicing
Fee), plus, 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 such REO Property for the most recently
ended Due Period for the related Mortgage Loan at the related Mortgage Interest
Rate (net of the Servicing Fee) over the net income from the REO Property
transferred to the Certificate Account for such Remittance Date pursuant to the
Pooling and Servicing Agreement (the "Monthly Advance").
In the course of performing its servicing obligations, the Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, the cost of (i) the preservation, restoration and protection of the
Mortgaged Properties; (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged Property
acquired in satisfaction of the related Mortgage. Each such expenditure will
constitute a "Servicing Advance".
The Servicer may recover Monthly Advances and Servicing Advances to
the extent permitted by the Mortgage Loans or, if not recovered from the
Mortgagor on whose behalf such Servicing Advance or Monthly Advance was made,
from late collections on the related Mortgage Loan, including liquidation
proceeds, released mortgaged property proceeds, insurance proceeds and such
other amounts as may be collected by the Servicer from the Mortgagor or
otherwise relating to the Mortgage Loan, or, in the case of Monthly Advances,
from late collections of interest on any Mortgage Loan.
The Servicer is not required to make any Monthly Advance or Servicing
Advance which it, in its business judgment, determines would be a
nonrecoverable Monthly Advance or nonrecoverable Servicing Advance (a
"Nonrecoverable Advance").
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On the 15th day of each month, commencing April 1996, or, if such 15th
day is not a Business Day, the first Business Day immediately following (each
such day being a "Remittance Date"), the Trustee will distribute to the persons
in whose names the Certificates are registered on the last day of the month
immediately preceding the month of the related Remittance Date (the "Record
Date"), the amount of the Available Funds (as defined herein) to which such
Holder is entitled, if any. Distributions will be made by wire transfer of
immediately available funds to the account of such Holder at a bank or other
entity having appropriate facilities therefor, if such Holder owns of record
Certificates aggregating in excess of $5,000,000, and has so notified the
Trustee, or by check mailed to the address of the person entitled thereto as it
appears on the Certificate Register; provided, however, that the final
distribution in respect of any Class A Certificate will be made only upon
presentation and surrender of such Certificate at the Corporate Trust Office of
the Trustee.
SIMPLE INTEREST EXCESS SUB-ACCOUNT
The Pooling and Servicing Agreement requires that the Trustee
establish and maintain a sub-account of the Certificate Account (the "Simple
Interest Excess Sub-Account") which must be an Eligible Account. The Trustee
will transfer to the Simple Interest Excess Sub-Account all Net Simple Interest
Excess. "Net Simple Interest Excess" means as of any Remittance Date, the
excess, if any, of the aggregate amount of Simple Interest Excess over the
amount of Simple Interest Shortfall. "Simple Interest Shortfall" means as of
any Remittance Date for each Mortgage Loan the excess, if any, of (i) 30 days'
interest (calculated on the basis of a 360-day year consisting of twelve 30-day
months) on the principal balance of such Mortgage Loan at the related Mortgage
Interest Rate, over (ii) the amount of interest actually paid on such Mortgage
Loan by the Mortgagor with respect to the related Due Period. "Simple Interest
Excess" means as of any Remittance Date the excess, if any, of (i) the amount
of interest actually paid on such Mortgage Loan with respect to the related Due
Period, over (ii) 30 days' interest (calculated on the basis of a 360-day year
consisting of twelve 30-day months) on the principal balance of such Mortgage
Loan at the related Mortgage Interest Rate.
The Trustee will withdraw amounts on deposit in the Simple Interest
Excess Sub-Account for deposit in the Certificate Account on the third Business
Day prior to each Remittance Date to pay Net Simple Interest Shortfalls.
All funds in the Simple Interest Excess Sub-Account may be invested in
Permitted Instruments. So long as no Event of Default shall have occurred and
be continuing, any investment earnings on funds held in the Simple Interest
Excess Sub-Account are for the account of the Servicer and otherwise shall be
deposited in the Spread Account. The Trustee shall notify the Servicer of any
loss resulting from such investments. Upon receipt of such notification, the
Servicer, including any predecessor Servicer which directed such investments,
shall promptly remit the amount of such loss from its own funds to the Trustee
for deposit in the Simple Interest Excess Sub-Account.
SPREAD ACCOUNT
The Pooling and Servicing Agreement requires the Trustee to establish
on the Issue Date and maintain a reserve account (the "Spread Account") and to
deposit on each Remittance Date into the Spread Account the percentage of the
Excess Spread (the "Monthly Excess Spread Amount") required by the Certificate
Insurer. Such percentage is initially 100% and may be reduced by the
Certificate Insurer as described below. The Spread Account will be an "outside
reserve fund" under applicable Treasury regulations and will not be part of the
REMIC. The Spread Account (including any investment earnings thereon) will be
owned by the Class R Certificateholders and amounts transferred from the REMIC
to the Spread Account will be treated as amounts distributed by the REMIC to
the Class R Certificateholders and will be taxable to such Holders.
The aggregate amount required to be on deposit at any time in the
Spread Account is determined in accordance with the terms of the Pooling and
Servicing Agreement (such amount, the "Base Spread Account
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Requirement"). Any decline or increase in the Base Spread Account Requirement
will be dependent on delinquency and loss performance of the Mortgage Pool as
further described in the Pooling and Servicing Agreement at the discretion of
the Certificate Insurer. In addition, the Certificate Insurer may direct that
the Spread Account be eliminated entirely. While the Base Spread Account
Requirement limits the amount on deposit in the Spread Account at any one time,
the aggregate amount available through the Spread Account over time is not so
limited. Amounts, if any, on deposit in the Spread Account will be available
to fund any shortfall (such shortfall, the "Aggregate Class A Shortfall")
between (i) the Available Remittance Amount and (ii) the Class A Remittance
Amount. If on any Remittance Date, the total amount available to be
transferred from the Spread Account on such Remittance Date (the "Spread
Account Available Funds") is less than the full amount of the Aggregate Class A
Shortfall for such Remittance Date, the Pooling and Servicing Agreement
requires the Trustee to apply the amount withdrawn from the Spread Account
proportionately among the Class A-1 Certificates, the Class A-2 Certificates
and the Class A-3 Certificates as set forth therein. On each Remittance Date,
the Certificate Insurer will be obligated to make available to the Trustee
funds in the amount of the excess of (i) the Aggregate Class A Shortfall for
such Remittance Date over (ii) the Spread Account Available Funds on such
Remittance Date.
The Pooling and Servicing Agreement does not require that any initial
deposit be made to the Spread Account on the Issue Date.
The Pooling and Servicing Agreement provides that amounts in the
Spread Account in excess of the amount then required to be on deposit therein
will be distributed to the Holders of the Class R Certificates (after
application for certain required payments and distributions). The Holders of
the Class R Certificates will not be required to refund any amounts previously
properly distributed to them, regardless of whether there are sufficient funds
on a subsequent Remittance Date to make a full distribution to Holders of the
Class A Certificates on such Remittance Date.
The funding and maintenance of the Spread Account is intended to
enhance the likelihood of timely payment of principal and interest to the
Holders of the Class A Certificates; however, in certain circumstances, the
Spread Account could be depleted, and shortfalls could result.
Amounts on deposit in the Spread Account constitute a part of the
Class A Available Funds for distributions on the Certificates.
FLOW OF FUNDS
On each Remittance Date the Trustee shall withdraw from the
Certificate Account the Class A Available Funds and make distributions thereof
in the following order of priority:
(i) without regard to priority, to the Class A-1
Certificateholders, an amount equal to the Class A-1 Interest
Remittance Amount, to the Class A-2 Certificateholders, an amount
equal to the Class A-2 Interest Remittance Amount and to the Class A-3
Certificateholders, an amount equal to the Class A-3 Interest
Remittance Amount;
(ii) then, pro rata:
(A) the Combined Percentage of the Class A Principal
Remittance Amount will be distributed sequentially, (1) to the
Class A-1 Certificateholders, to reduce the Class A-1
Principal Balance until the Class A-1 Principal Balance is
zero, in an amount equal to the sum of (a) the Class A-1
Principal Remittance Amount and (b) the Class A-1
Carry-Forward Amount, and (2) after the Class A-1 Principal
Balance has been reduced to zero, to the Class A-2
Certificateholders, to reduce the Class A-2 Principal Balance
until the Class A-2 Principal Balance is zero, in an
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amount equal to the sum of (a) the Class A-2 Principal
Remittance Amount and (b) the Class A-2 Carry-Forward Amount
and
(B) the Class A-3 Percentage of the Class A Principal
Remittance Amount will be distributed to the Class A-3
Certificateholders, to reduce the Class A-3 Principal Balance
until the Class A-3 Principal Balance is zero, in an amount
equal to the sum of (a) the Class A-3 Principal Remittance
Amount and (b) the Class A-3 Carry-Forward Amount;
(iii) then to the Certificate Insurer an amount equal to the sum of
(1) the product of (a) one-twelfth of the Premium Percentage
multiplied by (b) the sum of the outstanding Class A-1 Certificate
Principal Balance, the outstanding Class A-2 Certificate Principal
Balance and the outstanding Class A-3 Certificate Principal Balance
before giving effect to distributions to be made on such Remittance
Date, (2) any Class A-1, Class A-2 or Class A-3 Carry-Forward Amount
(as defined below) to the extent of previous Insured Payments, and (3)
any I and I Payments (as defined below);
(iv) then to the Servicer and/or the Originator, an amount equal
to the Reimbursable Amounts not previously reimbursed;
(v) then to the Servicer, an amount equal to Nonrecoverable
Advances not previously reimbursed;
(vi) then to the Spread Account, the Monthly Excess Spread Amount;
and
(vii) then to the Class R Certificateholders, the balance, if any.
"I and I Payments" means certain payments due and owing pursuant to
the Insurance and Indemnity Agreement among the Certificate Insurer, the
Depositor and the Originator, dated as of March 20, 1996.
THE CLASS A REMITTANCE AMOUNT
Distributions of principal and interest to Holders of record of Class
A Certificates as of each Record Date will be made on each related Remittance
Date in an amount equal to their respective Percentage Interests multiplied by
the amount to be distributed to the Class A Certificateholders pursuant to
"Flow of Funds," subclauses (i) and (ii), above.
The "Class A-1 Remittance Amount" for any Remittance Date will be
equal to the sum of (a) the Class A-1 Interest Remittance Amount, (b) the Class
A-1 Principal Remittance Amount, and (c) the Class A-1 Carry-Forward Amount.
The "Class A-1 Interest Remittance Amount" will be equal to 30 days'
interest (calculated on the basis of a 360-day year consisting of twelve 30-day
months) at the Class A-1 Pass-Through Rate on the Class A-1 Principal Balance
immediately prior to the related Remittance Date, reduced by its allocable
share of the Mortgage Loan Interest Shortfall, if any, for such Remittance
Date, to the extent not covered by payments by the Servicer of Compensating
Interest as provided herein.
The "Class A-1 Principal Remittance Amount" for any Remittance Date
will be equal to the lesser of (i) the Class A-1 Certificate Principal Balance
or (ii) the product of (x) the Combined Percentage and (y) the Class A
Principal Remittance Amount.
The "Class A-2 Remittance Amount" for any Remittance Date will be
equal to the sum of (a) the Class A-2 Interest Remittance Amount, (b) the Class
A-2 Principal Remittance Amount, and (c) the Class A-2 Carry-Forward Amount.
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The "Class A-2 Interest Remittance Amount" will be equal to 30 days'
interest (calculated on the basis of a 360-day year consisting of twelve 30-day
months) at the Class A-2 Pass-Through Rate on the Class A-2 Principal Balance
immediately prior to the related Remittance Date, reduced by its allocable share
of the Mortgage Loan Interest Shortfall, if any, for such Remittance Date, to
the extent not covered by payments by the Servicer of Compensating Interest as
provided herein.
The "Class A-2 Principal Remittance Amount", after the Class A-1
Principal Balance has been reduced to zero, for any Remittance Date will be
equal to the lesser of (i) the Class A-2 Certificate Principal Balance or (ii)
the product of (x) the Combined Percentage and (y) the Class A Principal
Remittance Amount, less the Class A-1 Principal Remittance Amount, if any,
distributed to the Class A-1 Certificateholders on such Remittance Date.
The "Class A-3 Remittance Amount" for any Remittance Date will be equal
to the sum of (a) the Class A-3 Interest Remittance Amount, (b) the Class A-3
Principal Remittance Amount, and (c) the Class A-3 Carry- Forward Amount.
The "Class A-3 Interest Remittance Amount" will be equal to 30 days'
interest (calculated on the basis of a 360-day year consisting of twelve 30-day
months) at the Class A-3 Pass-Through Rate on the Class A-3 Principal Balance
immediately prior to the related Remittance Date, reduced by its allocable share
of the Mortgage Loan Interest Shortfall, if any, for such Remittance Date, to
the extent not covered by payments by the Servicer of Compensating Interest as
provided herein.
The "Class A-3 Principal Remittance Amount" for any Remittance Date
will be equal to the lesser of (i) the Class A-3 Certificate Principal Balance
or (ii) the product of (x) the Class A-3 Percentage and (y) the Class A
Principal Remittance Amount.
The "Class A Principal Remittance Amount" shall be, as of any
Remittance Date, the sum of:
(i) each payment of principal on a Mortgage Loan received by the
Servicer (exclusive of amounts described in clauses (ii) and (iii)
below) in the related Due Period,
(ii) all curtailments and all principal prepayments received with
respect to the Mortgage Loans during such related Due Period,
(iii) the principal portion of all insurance proceeds, released
mortgaged property proceeds and net liquidation proceeds received with
respect to the Mortgage Loans during the related Due Period,
(iv) an amount equal to the excess, if any, of the principal
balance of Mortgage Loans liquidated during the related Due Period over
the principal portion of net liquidation proceeds which will be
distributed to Class A Certificateholders (the "Unrecovered Class A
Portion"), and
(v) (a) that portion of the purchase price paid by the Originator
for any Deleted Mortgage Loans which represents principal and (b) any
Substitution Adjustments required to be deposited in the Certificate
Account as of the related Determination Date.
On any Remittance Date, the sum of (i) the amount, if any, by which (A)
the Class A-1 Remittance Amount, the Class A-2 Remittance Amount or the Class
A-3 Remittance Amount as of the preceding Remittance Date exceeded (B) the
amount of the actual distribution, exclusive of any Insured Payment, to the
Class A-1 Certificateholders, the Class A-2 Certificateholders or the Class A-3
Certificateholders, respectively, made on such preceding Remittance Date and not
reimbursed and (ii) 30 days' interest (calculated on the basis of a 360- day
year consisting of twelve 30 day months) on the amount of Insured Payments, if
any, previously made and not reimbursed at an interest rate equal to the Class
A-1 Pass-Through Rate in the case of Insured Payments
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made with respect to the Class A-1 Certificates, or the Class A-2 Pass-Through
Rate, in the case of Insured Payments made with respect to the Class A-2
Certificates, or the Class A-3 Pass-Through Rate, in the case of Insured
Payments made with respect to the Class A-3 Certificates, the amount of such sum
(the "Class A-1 Carry-Forward Amount", the "Class A-2 Carry-Forward Amount" and
the "Class A-3 Carry-Forward Amount", as applicable), will be distributed to the
Holders of the Class A-1 Certificates, the Class A-2 Certificates and the Class
A-3 Certificates or Certificate Insurer, as the case may be, on such Remittance
Date, or, if the Class A Available Remittance Amount is insufficient to
distribute such Class A-1 Carry-Forward Amount, Class A-2 Carry-Forward Amount
and Class A-3 Carry-Forward Amount in full on such Remittance Date, then on
succeeding Remittance Dates. NOTWITHSTANDING THE FOREGOING, THE CERTIFICATE
INSURER HAS AGREED, PURSUANT TO THE CERTIFICATE INSURANCE POLICY, TO PAY TO THE
TRUSTEE ON BEHALF OF THE CERTIFICATEHOLDERS THE AMOUNT OF ANY INSUFFICIENCY ON
EACH REMITTANCE DATE UP TO THE FULL AMOUNT OF (i) THE CLASS A-1 REMITTANCE
AMOUNT DUE TO THE CLASS A-1 CERTIFICATEHOLDERS (OTHER THAN THE CERTIFICATE
INSURER PURSUANT TO ITS SUBROGATION RIGHTS), (ii) THE CLASS A-2 REMITTANCE
AMOUNT DUE TO THE CLASS A-2 CERTIFICATEHOLDERS (OTHER THAN THE CERTIFICATE
INSURER PURSUANT TO ITS SUBROGATION RIGHTS) AND (iii) THE CLASS A-3 REMITTANCE
AMOUNT DUE TO THE CLASS A-3 CERTIFICATEHOLDERS (other than the Certificate
Insurer pursuant to its subrogation rights) on such Remittance Date. See
"Description of the Certificates -- Flow of Funds" and " -- Certificate
Insurance Policy" and "The Certificate Insurance Policy and the Certificate
Insurer" in this Prospectus Supplement.
CLASS A-1 PASS-THROUGH RATE
The "Class A-1 Pass-Through Rate" is 6.300% per annum, payable monthly
at one-twelfth the annual rate.
CLASS A-2 PASS-THROUGH RATE
The Class A-2 Pass-Through Rate will be 7.225% per annum, payable
monthly at one-twelfth the annual rate; provided, however, that if, on the first
date on which the then-outstanding aggregate principal balance of the Mortgage
Loans has declined to 5% or less of the aggregate principal balance of the
Mortgage Loans as of the Cut-Off Date, the Servicer has not exercised its
purchase option described in "Optional Termination by the Servicer" in the
Summary or in "Description of the Certificate -- Termination; Purchase of
Mortgage Loans" herein, then the Class A-2 Pass-Through Rate, on each Remittance
Date after such date, will be 7.975% per annum, payable monthly at one-twelfth
the annual rate.
CLASS A-3 PASS-THROUGH RATE
The Class A-3 Pass-Through Rate will be 7.175% per annum, payable
monthly at one-twelfth the annual rate; provided, however, that if, on the first
date on which the then-outstanding aggregate principal balance of the Mortgage
Loans has declined to 5% or less of the aggregate principal balance of the
Mortgage Loans as of the Cut-Off Date, the Servicer has not exercised its
purchase option described in "Optional Termination by the Servicer" in the
Summary or in "Description of the Certificate -- Termination; Purchase of
Mortgage Loans" herein, then the Class A-3 Pass-Through Rate, on each Remittance
Date after such date, will be 7.925% per annum, payable monthly at one-twelfth
the annual rate.
INSURED PAYMENTS
The Trustee shall (i) receive as attorney-in-fact of each Holder of
Class A Certificates any Insured Payment from the Certificate Insurer and (ii)
disburse the same pursuant to the Pooling and Servicing Agreement. The Pooling
and Servicing Agreement provides that to the extent the Certificate Insurer
makes Insured Payments, either directly or indirectly (as by paying through the
Trustee), to the Holders of such Class A Certificates, the Certificate Insurer
will be subrogated to the rights of such Holders of Class A Certificates with
respect to such Insured Payments, shall be deemed to the extent of the payments
so made to be a registered Holder of such Class A Certificates and shall receive
reimbursement for such Insured Payments as
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provided in the Pooling and Servicing Agreement, but only from the sources
(other than Insured Payments) and in the manner provided in the Pooling and
Servicing Agreement for the payment of the Class A Remittance Amount, to Holders
of Class A Certificates.
FAILURE TO MAKE INSURED PAYMENTS
If as of any Remittance Date the Certificate Insurer fails to make
Insured Payments and there are insufficient funds to pay the Class A-1
Certificateholders the Class A-1 Remittance Amount, the Class A-2
Certificateholders the Class A-2 Remittance Amount and the Class A-3
Certificateholders the Class A-3 Remittance Amount, the Class A Available Funds
shall be distributed by the Trustee proportionally among the Class A-1
Certificateholders, the Class A-2 Certificateholders and the Class A-3
Certificateholders in the manner set forth in the Pooling and Servicing
Agreement, and then in the same order of priority described in clauses (i) and
(ii) in "Description of the Certificates -- Flow of Funds" above.
REMITTANCE REPORTS
Pursuant to the Pooling and Servicing Agreement, not later than 12:00
noon California time on each Determination Date, the Trustee will deliver to the
Servicer, to the Certificate Insurer and to the Depositor, by telecopy, a
statement containing information relating to the succeeding Remittance Date
including, without limitation, the deposits to and withdrawals from each of the
Accounts for each category of deposits and withdrawals specified in the Pooling
and Servicing Agreement, the aggregate unpaid principal balances of the Mortgage
Loans, the balances in each of the Accounts and such other information as
required by the Pooling and Servicing Agreement. The Trustee will forward such
report to the Certificateholders on each Remittance Date.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
In addition to the Servicing Fee, the Servicer is entitled under the
Pooling and Servicing Agreement to retain additional servicing compensation in
the form of assumption and other administrative fees, release fees, bad check
charges, any other servicing-related fees, net liquidation proceeds not
otherwise required to be deposited in the Certificate Account pursuant to the
Pooling and Servicing Agreement, earnings paid on Permitted Instruments subject
to deposit in the Spread Account if an Event of Default (as described in the
Pooling and Servicing Agreement) shall have occurred and be continuing and other
than earnings on amounts invested from the Spread Account.
HAZARD INSURANCE
The Servicer will cause to be maintained fire and hazard insurance with
extended coverage customary in the area where the Mortgaged Property is located,
in an amount which is at least equal to the lesser of (i) the outstanding
principal balance owing on the Mortgage Loan and any related senior lien(s),
(ii) the full insurable value of the premises securing the Mortgage Loan and
(iii) the minimum amount required to compensate for damage or loss on a
replacement cost basis in each case in an amount not less than such amount as is
necessary to avoid the application of any co-insurance clause contained in the
related hazard insurance policy. Generally, if the Mortgaged Property is in an
area identified in the Federal Register by the Flood Emergency Management Agency
as FLOOD ZONE "A", such flood insurance has been made available and the Servicer
determines that such insurance is necessary in accordance with accepted second
mortgage servicing practices of prudent lending institutions, the Servicer will
cause to be purchased a flood insurance policy with a generally acceptable
insurance carrier, in an amount representing coverage not less than the least of
(a) the outstanding principal balance of the Mortgage Loan and the first lien,
(b) the full insurable value of the Mortgaged Property, or (c) the maximum
amount of insurance available under the National Flood Insurance Act of 1968, as
amended. The Servicer will also maintain on REO Property, to the extent such
insurance is available, fire and hazard insurance in the applicable amounts
described above, liability insurance and, to the
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extent required and available under the National Flood Insurance Act of 1968, as
amended, and the Servicer determines that such insurance is necessary in
accordance with accepted second mortgage servicing practices of prudent lending
institutions, flood insurance in an amount equal to that required above. Any
amounts collected by the Servicer under any such policies (other than amounts to
be applied to the restoration or repair of the Mortgaged Property, or to be
released to the Mortgagor in accordance with customary second mortgage servicing
procedures) will be deposited in the Certificate Account, subject to retention
by the Servicer to the extent such amounts constitute servicing compensation or
to withdrawal pursuant to the Pooling and Servicing Agreement.
In the event that the Servicer obtains and maintains a blanket policy
as provided in the Pooling and Servicing Agreement insuring against fire and
hazards of extended coverage on all of the Mortgage Loans, then, to the extent
such policy names the Servicer as loss payee and provides coverage in an amount
equal to the aggregate unpaid principal balance of the Mortgage Loans without
coinsurance; and otherwise complies with the requirements of the first paragraph
of this subsection, the Servicer will be deemed conclusively to have satisfied
its obligations with respect to fire and hazard insurance coverage.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer, on behalf of the Trustee, shall, to the extent it has
knowledge of such conveyance or prospective conveyance, enforce the rights of
the Trustee as the mortgagee of record 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
shall 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.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer is required to foreclose upon or otherwise comparably
effect the ownership in the name of the Trustee on behalf of the
Certificateholders of Mortgaged Properties relating to defaulted Mortgage Loans
as to which no satisfactory arrangements can be made for collection of
delinquent payments; provided, however, that the Servicer is not required to
foreclose in the event that it determines that foreclosure would not be in the
best interests of the Certificateholders or the Certificate Insurer. In
connection with such foreclosure or other conversion, the Servicer shall
exercise collection and foreclosure procedures with the same degree of care and
skill in its exercise or use, as it would exercise or use under the
circumstances in the conduct of its own affairs.
SERVICING
The Servicer has agreed to service the Mortgage Loans in accordance
with the Pooling and Servicing Agreement and prudent second mortgage lender
servicing standards.
The Pooling and Servicing Agreement requires the Servicer to make
reasonable efforts to collect all payments called for under the terms and
provisions of the Mortgage Loans. Consistent with the foregoing, the Servicer
may at its own discretion waive any late payment charge, assumption fee or any
penalty interest in connection with the prepayment of a Mortgage Loan or any
other fee or charge which the Servicer would be
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entitled to retain as servicing compensation and may waive, vary or modify any
term of any Mortgage Loan or consent to the postponement of strict compliance
with any such term or in any matter grant indulgence to any Mortgagor, subject
to the limitations set forth in the Pooling and Servicing Agreement. In the
event the Servicer consents to the deferment of the due dates for payments due
on a Mortgage Note, the Servicer shall nonetheless make payment of any required
Monthly Advances with respect to the payments so extended to the same extent as
if such installment were due, owing and delinquent and had not been deferred.
The Servicer is permitted under the Pooling and Servicing Agreement to
enter into Subservicing Agreements for any servicing and administration of
Mortgage Loans with any institution which is in compliance with the laws of each
state necessary to enable it to perform its obligations under such Subservicing
Agreement and (i) is a FHLMC or FNMA approved seller-servicer for first and
second mortgage loans, or (ii) is an affiliate of the Servicer or (iii) is
otherwise approved by a majority of the Certificateholders.
Notwithstanding any Subservicing Agreement, the Servicer shall not be
relieved of its obligations under the Pooling and Servicing Agreement and the
Servicer shall be obligated to the same extent and under the same terms and
conditions as if it alone were servicing and administering the Mortgage Loans.
The Servicer shall be entitled to enter into any agreement with a Subservicer
for indemnification of the Servicer by such Subservicer and nothing contained in
the Pooling and Servicing Agreement shall be deemed to limit or modify such
indemnification.
SERVICER REPORTS
The Servicer is required to deliver to the Certificate Insurer, the
Trustee, Standard & Poor's and Moody's, not later than the last day of the fifth
month following the end of the Servicer's fiscal year an Officers' Certificate
stating that (i) the Servicer has fully complied with the servicing provisions
of the Pooling and Servicing Agreement, (ii) a review of the activities of the
Servicer during such preceding 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 1997.
Not later than the last day of the fifth month following the end of the
Servicer's fiscal year, the Servicer is required to cause to be delivered to the
Certificate Insurer, the Trustee, Standard & Poor's and Moody's a letter or
letters of a firm of independent certified public accountants reasonably
acceptable to the Certificate Insurer and the Trustee stating that such firm
has, with respect to the Servicer's overall servicing operations, examined such
operations in accordance with the requirements of the Uniform Single Attestation
Program for Mortgage Bankers, and stating such firm's conclusions relating
thereto. The first such letter or letters shall be delivered by the Servicer in
1997.
REMOVAL AND RESIGNATION OF SERVICER
The Certificate Insurer may, pursuant to the Pooling and Servicing
Agreement, remove the Servicer upon the occurrence and continuation beyond the
applicable cure period of any of the following events, other than an event
described in clause (i)(A) below, and the Trustee, at the direction of the
majority certificateholders, with the consent of the Certificate Insurer, may
remove the Servicer upon the occurrence and continuation beyond the applicable
cure period of an event described in clause (i)(B), (iii), (iv) or (v) below:
(i) (A) the failure by the Servicer to make any required Monthly
Advance to the extent of the full amount of the Class A Interest
Remittance Amount; or (B) any other failure by the Servicer to remit
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to the Trustee any payment required to be made by the Servicer under
the terms of the Pooling and Servicing Agreement, which failure
continues unremedied for one (1) Business Day after the date upon which
written notice of such failure, requiring the same to be remedied,
shall have been given to the Servicer and the Certificate Insurer by
the Trustee or to the Servicer and the Trustee by the Certificate
Insurer or Certificateholders of Class A Certificates evidencing
Percentage Interests of at least 25%; or
(ii) the failure by the Servicer to make any required Servicing
Advance, which failure continues unremedied for a period of 30 days, or
the failure by the Servicer duly to observe or perform, in any material
respect, any other covenants, obligations or agreements of the Servicer
as set forth in the Pooling and Servicing Agreement, which failure
continues unremedied for a period of 60 days after the date on which
written notice of such failure, requiring the same to be remedied,
shall have been given to the Servicer by the Trustee or to the Servicer
and the Trustee by any Certificateholder or the Certificate Insurer; or
(iii) a decree or order of a court or agency or supervisory
authority having jurisdiction in an involuntary case under any present
or future federal or state bankruptcy, insolvency or similar law or for
the appointment of a conservator or receiver or liquidator in any
insolvency, readjustment of debt, marshalling of assets and liabilities
or similar proceedings, or for the winding-up or liquidation of its
affairs, shall have been entered against the Servicer and such decree
or order shall have remained in force, undischarged or unstayed for a
period of 60 days; or
(iv) the Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings
of or relating to the Servicer or of or relating to all or
substantially all of the Servicer's property; or
(v) 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.
Upon the occurrence and continuation of the event described in clause
(i)(A), if such Monthly Advance is not made by 12:00 Noon New York time on the
second Business Day prior to the applicable Remittance Date, the Trustee or a
successor Servicer will immediately assume the duties of the Servicer.
The Servicer may not assign its obligations under the Pooling and
Servicing Agreement nor resign from the obligations and duties thereby imposed
on it except by mutual consent of the Originator (if the Originator is not the
Servicer), the Certificate Insurer and the Trustee, or upon the determination
that the Servicer's duties thereunder are no longer permissible under applicable
law and such incapacity cannot be cured by the Servicer. 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 Monthly Advances and Servicing Advances and
certain other advances unless it determines in its business judgment that such
advances would not be recoverable. If, however, the Trustee is unwilling or
unable to act as Successor Servicer, or if the majority certificateholders (with
the consent of the Certificate Insurer) or the Certificate Insurer so requests,
the Trustee may appoint, or petition a court of competent jurisdiction to
appoint, 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.
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The Trustee and any other Successor Servicer in such capacity is
entitled to the same reimbursement for advances and no more than the same
servicing compensation as the Servicer. See " -- Servicing and Other
Compensation and Payment of Expenses" above.
Pursuant to the Pooling and Servicing Agreement, the Servicer covenants
and agrees to act as the Servicer for an initial term from the Issue Date to
June 30, 1996, which term will be extendable by the Certificate Insurer by
notice to the Trustee for successive terms of three (3) calendar months
each,until the termination of the Trust Fund. The Servicer will, upon its
receipt of each such notice of extension (a "Servicer Extension Notice") become
bound for the duration of the term covered by such Servicer Extension Notice to
continue as the Servicer subject to and in accordance with the other provisions
of the Pooling and Servicing Agreement. If as of the fifteenth (15th) day prior
to the last day of any term of the Servicer the Trustee shall not have received
any Servicer Extension Notice from the Certificate Insurer, the Trustee will,
within five (5) days thereafter, give written notice of such non-receipt to the
Certificate Insurer and the Servicer. Pursuant to the Insurance and Indemnity
Agreement, the Certificate Insurer has agreed to extend each 90-day term of the
Servicer, in the absence of an Event of Default under the Insurance and
Indemnity Agreement, provided that certain criteria regarding the delinquency
and loss experience of the Mortgage Loans are satisfied. Notwithstanding the
proviso in the foregoing sentence, if the balance on deposit in the Spread
Account is equal to a certain amount set forth in the Insurance and Indemnity
Agreement, and in the absence of an Event of Default, the Certificate Insurer is
obligated to extend the 90-day term of the Servicer.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The Pooling and Servicing Agreement will terminate upon notice to the
Trustee of either: (a) the later of the distribution to Certificateholders of
the final payment or collection with respect to the last Mortgage Loan (or
Monthly Advances of same by the Servicer), or the disposition of all funds with
respect to the last Mortgage Loan and the remittance of all funds due under the
Pooling and Servicing Agreement and the payment of all amounts due and payable
to the Certificate Insurer and the Trustee or (b) mutual consent of the
Servicer, the Certificate Insurer and all Certificateholders in writing;
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, alive as of the date of the Pooling and Servicing
Agreement.
Subject to provisions in the Pooling and Servicing Agreement concerning
adopting a plan of complete liquidation, the Servicer may, at its option,
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 aggregate
principal balance of the Mortgage Loans as of the Cut-Off Date by purchasing, on
the next succeeding Remittance Date, all of the outstanding Mortgage Loans and
REO Properties at a price equal to the sum of (x) the greater of (i) 100% of the
aggregate principal balance of the Mortgage Loans and REO Properties and (ii)
the fair market value (disregarding accrued interest) of the Mortgage Loans and
REO Properties, determined as the average of three written bids (copies of which
are to be delivered to the Trustee and the Certificate Insurer by the Servicer)
made by nationally recognized dealers and based on a valuation process which
would be used to value comparable mortgage loans and REO property, plus (y) 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 at a rate equal to the related Mortgage Interest Rate, in each case net
of the Servicing Fee plus (z) any unreimbursed amounts due to the Certificate
Insurer under the Pooling and Servicing Agreement and I and I Payments.
Any such purchase shall be accomplished by deposit into the Certificate
Account of the purchase price specified above.
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OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
Any affiliate of the Originator has the option to purchase from the
Trust Fund any Mortgage Loan 90 days or more delinquent at a purchase 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 on such
principal balance and (ii) 30 days' interest on such principal balance, computed
at the related Mortgage Interest Rate, plus the amount of any unreimbursed
Servicing Advances made by the Servicer with respect to such Mortgage Loan.
Notwithstanding the foregoing, unless the Certificate Insurer consents,
any such affiliate of the Originator may only exercise its option with respect
to the Mortgage Loan or Mortgage Loans that have been delinquent for the longest
period at the time of such repurchase. If the Certificate Insurer fails to
respond to such affiliate's request for consent within 10 Business Days after
receipt thereof, such affiliate may repurchase the Mortgage Loan or Mortgage
Loans proposed to be repurchased without the consent of, or any further action
by, the Certificate Insurer.
AMENDMENT
The Pooling and Servicing Agreement may be amended from time to time by
the Depositor, the Servicer and the Trustee by written agreement, upon the prior
written consent of the Certificate Insurer (which consent shall not be withheld
if, in the opinion of counsel addressed to the Trustee and the Certificate
Insurer, failure to amend would adversely affect the interests of the
Certificateholders), 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; provided,
further, that the amendment shall not be deemed to adversely affect in any
material respect the interests of the Certificateholders and no Opinion of
Counsel to that effect shall be required if the Person requesting the amendment
obtains a letter from each of the Rating Agencies stating that the amendment
would not result in the downgrading or withdrawal of the respective ratings then
assigned to the Class A Certificates; 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, which consent will not be unreasonably
withheld.
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 (which consent shall not be withheld if, in the opinion of counsel
addressed to the Trustee and the Certificate Insurer, failure to amend would
adversely affect the interests of the Certificateholders), and the Holders of
the majority of the Percentage Interest in the Class A and Class R 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 as a REMIC or cause a tax to be imposed
on the REMIC, and provided further, that no such amendment shall reduce in any
manner the amount of, or delay the timing of, payments received on Mortgage
Loans which are required to be distributed on any Certificate without the
consent of the Holder of such Certificate or reduce the percentage for each
Class the Holders of which are required to consent to any such amendment without
the consent of the Holders of 100% of each class of Certificates affected
thereby.
The Mortgage Purchase Agreement contains substantially similar
restrictions regarding amendment.
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CERTIFICATE INSURANCE POLICY
Pursuant to the Certificate Insurance Policy, on each Remittance Date
the Certificate Insurer will make available to the Trustee funds in the amount,
if any, necessary to distribute to the Holders of the Class A Certificates the
full amount of the Class A Remittance Amount due to the Class A
Certificateholders (other than the Certificate Insurer pursuant to its
subrogation rights) on such Remittance Date after application of the Class A
Available Remittance Amount plus amounts available in the Spread Account with
respect to the Class A Certificates, as of such Remittance Date. Mortgage Loan
Interest Shortfalls will not be covered by payments from the Spread Account or
under the Certificate Insurance Policy.
Pursuant to the Pooling and Servicing Agreement, the Certificate
Insurer will be subrogated to the rights of the Holders of the Class A
Certificates to the extent of any such payment to the respective Holders under
the Certificate Insurance Policy. See "The Certificate Insurance Policy And The
Certificate Insurer" below.
THE TRUSTEE
Bankers Trust Company of California, N.A., a national banking
association with its principal place of business in California, 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 Trustee shall at all times be a banking association organized and
doing business under the laws of the United States of America or of any State,
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 Baa3 by Moody's, or such lower
rating as may be approved in writing by the Certificate Insurer and Standard &
Poor's, subject to supervision or examination by federal or state authority and
reasonably acceptable to the Certificate Insurer as evidenced in writing. If at
any time the Trustee shall cease to be eligible in accordance with the
provisions described in this paragraph, it shall resign immediately in the
manner and with the effect specified in the Pooling and Servicing Agreement.
Any resignation or removal of the Trustee and appointment of a
successor trustee shall become effective upon the acceptance of appointment by a
successor trustee.
The Trustee, or any trustee or trustees hereafter appointed, may resign
at any time in the manner set forth in the Pooling and Servicing Agreement. Upon
receiving notice of resignation, the Servicer shall promptly appoint a successor
trustee or trustees meeting the eligibility requirements set forth above in the
manner set forth in the Pooling and Servicing Agreement. The Servicer will
deliver a copy of the instrument used to appoint a successor trustee to the
Certificateholders, the Certificate Insurer and the Depositor, and upon
acceptance of appointment by a successor trustee in the manner provided in the
Pooling and Servicing Agreement, the Servicer will give notice thereof to the
Certificateholders. If no successor trustee shall have been appointed and have
accepted appointment within 60 days after the giving of such notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee. Such court may
thereupon, after such notice, if any, as it may deem proper and prescribe,
appoint a successor trustee.
If the Trustee fails to perform in accordance with the terms of the
Pooling and Servicing Agreement, the Certificate Insurer or the majority
certificateholders with the consent of the Certificate Insurer, may remove the
Trustee under the conditions set forth in the Pooling Servicing Agreement and
appoint a successor trustee in the manner set forth therein.
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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 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 Fund, or any part thereof, and, subject to the
provisions of the Pooling and Servicing Agreement, such powers, duties,
obligations, rights and trusts as the Servicer and the Trustee may consider
necessary or desirable.
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
CERTIFICATE INSURANCE POLICY
Simultaneously with the issuance of the Certificates, the Certificate
Insurer will issue a Certificate Insurance Policy with respect to the Class A
Certificates, pursuant to which it will irrevocably and unconditionally guaranty
payment on each Remittance Date to the Trustee for the benefit of the Holders of
the Class A Certificates of a maximum amount equal to the Class A Remittance
Amount, for such Remittance Date calculated in accordance with the original
terms of the Class A Certificates when issued and without regard to any
amendment or modification of the Class A Certificates or the Pooling and
Servicing Agreement except amendments or modifications to which the Certificate
Insurer has given its prior written consent. The amount of the actual payment
(the "Insured Payment"), if any, made by the Certificate Insurer under the
Certificate Insurance Policy on each Remittance Date is equal to the excess, if
any, of (1) the Class A Remittance Amount for such Remittance Date with respect
to the Class A Certificates over (2) the aggregate amount on deposit (or
scheduled to be on deposit) in the Certificate Account (after giving effect to
any applications of funds from the Spread Account) that will be available for
distribution to the Class A Certificateholders on such Remittance Date, without
giving effect to any payments to be made under the Certificate Insurance Policy.
Mortgage Loan Interest Shortfalls will not be covered by payments under the
Certificate Insurance Policy. The Certificate Insurer's obligations under the
Certificate Insurance Policy to make Insured Payments shall be discharged to the
extent funds are transferred to the Trustee as provided in the Certificate
Insurance Policy, whether or not such funds are properly applied by the Trustee.
Payment of claims under the Certificate Insurance Policy will be made
by the Certificate Insurer following Receipt by the Certificate Insurer of the
appropriate notice for payment on the later to occur of (a) 12:00 noon, New York
City time, on the second Business Day following Receipt of such notice for
payment, and (b) 12:00 noon, New York City time, on the relevant Remittance
Date.
If any payment of an amount guaranteed by the Certificate Insurer
pursuant to the Certificate Insurance Policy is avoided as a preference payment
under applicable bankruptcy, insolvency, receivership or similar law the
Certificate Insurer will pay such amount out of the funds of the Certificate
Insurer on the later of (a) the date when due to be paid pursuant to the Order
referred to below or (b) the first to occur of (i) the fourth Business Day
following Receipt by the Certificate Insurer from the Trustee of (A) a certified
copy of the order of the court or other governmental body which exercised
jurisdiction to the effect that a Class A Certificateholder is required to
return principal or interest distributed with respect to the related Class A
Certificate during the term of the applicable Certificate Insurance Policy
because such distributions were avoidable preferences under applicable
bankruptcy law (the "Order"), (B) a certificate of the Class A Certificateholder
that the Order has been entered and is not subject to any stay, and (C) an
assignment duly executed and delivered by the Class A Certificateholder, in such
form as is reasonably required by the Certificate Insurer and provided to the
Class A Certificateholder by the Certificate Insurer, irrevocably assigning to
the Certificate Insurer all rights and claims of the Class A Certificateholder
relating to or arising under the Certificates against the debtor which made such
preference payment or otherwise with respect to such preference payment, or (ii)
the date of Receipt by the Certificate Insurer from the Trustee of the items
referred
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to in clauses (A), (B) and (C) above if, at least four Business Days prior to
such date of Receipt, the Certificate Insurer shall have Received written notice
from the Trustee that such items were to be delivered on such date and such date
was specified in such notice. Such payment shall be disbursed to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order
and not to the Trustee or any Class A Certificateholder directly (unless a Class
A Certificateholder has previously paid such amount to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order,
in which case such payment shall be disbursed to the Trustee for distribution to
such Class A Certificateholder upon proof of such payment reasonably
satisfactory to the Certificate Insurer).
The terms "Receipt" and "Received," with respect to the Certificate
Insurance Policy, means actual delivery to the Certificate Insurer and to its
fiscal agent appointed by the Certificate Insurer at its option, if any, prior
to 12:00 p.m., New York City time, on a Business Day; delivery either on a day
that is not a Business Day or after 12:00 p.m., New York City time, shall be
deemed to be Receipt on the next succeeding Business Day. If any notice or
certificate given under the Certificate Insurance Policy by the Trustee is not
in proper form or is not properly completed, executed or delivered, it shall be
deemed not to have been Received, and the Certificate Insurer or the fiscal
agent shall promptly so advise the Trustee and the Trustee may submit an amended
notice.
Under the Certificate Insurance Policy, "Business Day" means any day
other than (i) a Saturday or Sunday or (ii) a day on which banking institutions
in the City of New York, New York, the State of Rhode Island or the State of
California, are authorized or obligated by law or executive order to be closed.
The Certificate Insurer shall be subrogated to the rights of each Class
A Certificateholder to receive payments of principal and interest, as
applicable, with respect to distributions on the related Class A Certificates to
the extent of any payment by the Certificate Insurer under the applicable
Certificate Insurance Policy. To the extent the Certificate Insurer makes
Insured Payments, either directly or indirectly (as by paying through the
Trustee), to either class of Class A Certificateholders, the Certificate Insurer
will be subrogated to the rights of the related Class A Certificateholders with
respect to such Insured Payment, shall be deemed to the extent of the payments
so made to be a registered Class A Certificateholder of such class for purposes
of payment and shall receive all future Class A Remittance Amounts allocated to
such Class until all such Insured Payments by the Certificate Insurer have been
fully reimbursed, provided that the Class A Certificateholders of such class
have received the full amount of the Class A Remittance Amount allocated to such
class.
Claims under the Certificate Insurance Policy will rank equally with
any other unsecured and unsubordinated obligations of the Certificate Insurer
except for certain obligations in respect of tax and other payments to which
preference is or may become afforded by statute. The terms of the Certificate
Insurance Policy cannot be modified, altered or affected by any other agreement
or instrument, or by the merger, consolidation or dissolution of the Originator.
The Certificate Insurance Policy by its terms may not be cancelled or revoked.
The Certificate Insurance Policy is governed by the laws of the State of New
York.
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 covered by the
Florida Insurance Guaranty Association created under Part II of Chapter 631 of
the Florida Insurance Code. In the event the Certificate Insurer were to become
insolvent, any claims arising under the Certificate Insurance Policy are
excluded from coverage by the California Insurance Guaranty Association,
established pursuant to Article 14.2 of Chapter I of Part 2 of Division 1 of the
California Insurance Code.
Pursuant to the terms of the Pooling and Servicing Agreement, unless a
Certificate Insurer Default exists, the Certificate Insurer shall be deemed to
be the Certificateholders for all purposes (other than with respect to payment
on the Certificates), will be entitled to exercise all rights of the
Certificateholders of the related class of Class A Certificateholders
thereunder, without the consent of such Certificateholders, and the
Certificateholders of the related class of Class A Certificateholders may
exercise such rights only with the prior
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written consent of the Certificate Insurer. In addition, the Certificate Insurer
will, as a third party beneficiary to the Pooling and Servicing Agreement and
the Mortgage Purchase Agreement, have, among others, the following rights: (i)
the right to give notices of breach or to terminate the rights and obligations
of the Servicer under the Pooling and Servicing Agreement in the event of an
Event of Default by the Servicer and to institute proceedings against the
Servicer; (ii) the right to consent to or direct any waivers of defaults by the
Servicer; (iii) the right to remove the Trustee pursuant to the Pooling and
Servicing Agreement; (iv) the right to direct the actions of the Trustee during
the continuation of a Servicer default; (v) the right to require the Originator
to repurchase Mortgage Loans for breach of representation and warranty or defect
in documentation; (vi) the right to direct foreclosures upon the failure of the
Servicer to do so in accordance with the Pooling and Servicing Agreement; and
(vii) the right to direct the Trustee to investigate certain matters. The
Certificate Insurer's consent will be required prior to, among other things, (i)
the removal of the Trustee, (ii) the appointment of any successor Trustee or
Servicer or (iii) any amendment to the Pooling and Servicing Agreement (which
consent will not be withheld if an opinion of counsel is delivered and addressed
to the Certificate Insurer and the Trustee to the effect that failure to amend
the Pooling and Servicing Agreement would adversely affect the interests of the
Certificateholders).
THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement. Accordingly, neither the Depositor
nor the Servicer makes any representation as to the accuracy and completeness of
such information.
General. Financial Security Assurance Inc. (the "Certificate Insurer")
is a monoline insurance company incorporated on March 16, 1984 under the laws of
the State of New York. The Certificate Insurer received its New York State
insurance license and commenced operations on September 23, 1985. The
Certificate Insurer is licensed, directly or through its subsidiaries, to engage
in financial guaranty insurance business in all 50 states, the District of
Columbia, Puerto Rico and the United Kingdom.
The Certificate Insurer and its subsidiaries are engaged in the
business of writing financial guaranty insurance, principally in respect of
securities offered in domestic and foreign markets. In general, financial
guaranty insurance consists of the issuance of a guaranty of scheduled payments
of an issuer's securities -- thereby enhancing the credit rating of those
securities -- in consideration for the payment of a premium to the insurer. The
Certificate Insurer and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are generally
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. The Certificate Insurer insures both newly issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy the Certificate Insurer's underwriting criteria.
The Certificate Insurer is a wholly owned subsidiary of Financial
Security Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed
company. Holdings is owned approximately 50% by US WEST Capital Corporation ("US
WEST"), 8% by Fund American Enterprises Holdings, Inc. ("Fund American") and 6%
owned by The Tokio Marine and Fire Insurance Co., Ltd. ("Tokio Marine"). US WEST
is a subsidiary of US WEST, Inc., which operates businesses involved in
communications, data solutions, marketing services and capital assets, including
the provision of telephone services in 14 states in the western and midwestern
United States. Tokio Marine is a major Japanese property and casualty insurance
company. US WEST has announced its intention to dispose of its interest in
Holdings as part of its strategic plan to withdraw from businesses not directly
involved in telecommunications. Fund American has certain rights to acquire and
vote additional shares of Holdings from US West and Holdings. No shareholder of
Holdings is obligated to pay any debt of the Certificate Insurer or any claim
under any insurance policy issued by the Certificate Insurer or to make any
additional contribution to the capital of the Certificate Insurer.
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The principal executive offices of the Certificate Insurer are located
at 350 Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100. At September 30, 1995, the Certificate Insurer and
its subsidiaries had 167 employees.
Reinsurance. Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written by the Certificate Insurer or any of its
subsidiaries are reinsured among such companies on an agreed-upon percentage
substantially proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. In addition, the Certificate
Insurer reinsures a portion of its liabilities under certain of its financial
guaranty insurance policies with other reinsurers under various quota share
treaties and on a transaction-by-transaction basis. Such reinsurance is utilized
by the Certificate Insurer as a risk management device and to comply with
certain statutory and rating agency requirements; it does not alter or limit the
Certificate Insurer's obligations under any financial guaranty insurance policy.
Ratings of Claims-Paying Ability. The Certificate Insurer's
claims-paying ability is rated Aaa by Moody's and AAA by Standard & Poor's,
Nippon Investors Service Inc. and Standard & Poor's (Australia) Pty. Ltd. Such
ratings reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies. See "Ratings" in this Prospectus
Supplement.
Capitalization. The following table sets forth the capitalization of
the Certificate Insurer and its wholly owned subsidiaries on the basis of
generally accepted accounting principles as of September 30, 1995 (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
------------------
(UNAUDITED)
<S> <C>
Unearned Premium Reserve (net of prepaid reinsurance premiums)
$216,931
--------
Shareholder's Equity:
Common Stock .................................................... 15,000
Additional Paid-In Capital ...................................... 497,506
Unrealized Loss on Investments (net of deferred income taxes) ... 7,790
Accumulated Earnings ............................................ 70,177
--------
Total Shareholder's Equity ........................................ $590,473
--------
Total Unearned Premium Reserve and Shareholder's Equity ........... $807,404
========
</TABLE>
For further information concerning the Certificate Insurer, see the
Consolidated Financial Statements of the Certificate Insurer and Subsidiaries,
and the notes thereto, included as Appendix A to this Prospectus
Supplement.Copies of the statutory quarterly and annual statements filed with
the State of New York Insurance Department by the Certificate Insurer are
available upon request to the State of New York Insurance Department.
Insurance Regulation. The Certificate Insurer and its insurance
subsidiaries are licensed and subject to regulation as insurance corporations
under the laws of the State of New York, the jurisdiction of organization of the
Certificate Insurer. In addition, the Certificate Insurer and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial guaranty
insurance corporation licensed to do business in the State of New York, the
Certificate Insurer is subject to Article 69 of the New York Insurance Law
which, among other things, limits the business of each such insurer to financial
guaranty insurance and related lines, requires that each such insurer maintain a
minimum surplus to policyholders, establishes contingency, loss and unearned
premium reserve requirements for each such insurer, and limits the size of
individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as the Certificate Insurer,
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regulate, among other things, permitted investments, payment of dividends,
transactions with affiliates, mergers, consolidations, acquisitions or sales of
assets and incurrence of liability for borrowings.
The Certificate Insurance Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of New York
Insurance Law.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion supersedes the "Certain Federal Income Tax
Consequences" discussion in the Prospectus.
GENERAL
The following is a general discussion of the material anticipated
federal income tax consequences to beneficial owners of the purchase, ownership
and disposition of the Class A Certificates offered hereby. The discussion is
based upon laws, regulations, rulings and decisions now in effect, all of which
are subject to change. The discussion below does not purport to deal with all
federal tax consequences applicable to all categories of investors, some of
which may be subject to special rules. Investors should consult their own tax
advisors in determining the federal, state, local and any other tax consequences
to them of the purchase, ownership and disposition of the Class A Certificates.
The REMIC Regulations provide some guidance regarding the federal
income tax consequences associated with the purchase, ownership and disposition
of the Class A Certificates. Generally, the Regulations apply to any REMIC the
"settlement date" of which is on or after November 12, 1991. While certain
material provisions of the Regulations are discussed below, investors should
consult their own tax advisors regarding the possible application of the
Regulations in their specific circumstances.
REMIC ELECTION
An election will be made to treat the Trust Fund (other than the Spread
Account) as a REMIC (the "REMIC") under the Internal Revenue Code (the "Code").
Qualification as a REMIC requires ongoing compliance with certain conditions.
With respect to each Series of Certificates, Dewey Ballantine, special tax
counsel to the Depositor, will deliver its opinion to the Depositor that,
assuming compliance with the Pooling and Servicing Agreement, the Trust Fund
(other than the Spread Account) will be treated as a REMIC for federal income
tax purposes. The Class A Certificates will be designated as "regular interests"
in the REMIC (the "Regular Certificates"). A separate class will be designated
as the "residual interest" in the REMIC (the "Residual Certificates").
The REMIC will not be subject to federal income tax except with respect
to income from prohibited transactions and in certain other instances described
below. See "Taxes on the REMIC" below.
TAXATION OF BENEFICIAL OWNERS OF THE CLASS A CERTIFICATES
Except as indicated below in this federal income tax discussion, the
Class A Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC on the date such Certificates are first sold to
the public (the "Settlement Date") and not as ownership interests in the REMIC
or its assets. Beneficial owners of the Class A Certificates ("Owners") that
otherwise report income under a cash method of accounting will be required to
report income with respect to such Certificates under an accrual method.
Original Issue Discount
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The Certificates may be issued with "original issue discount" within
the meaning of section 1273(a) of the Code. Owners should be aware that for
federal income tax purposes they must include in gross income original issue
discount as it accrues under a method that takes account of the compounding of
interest, generally in advance of receipt of the cash attributable to such
income. Holders of the Certificates, brokers and middlemen will be supplied, at
the time and in the manner required by the Internal Revenue Service (the "IRS"),
information with respect to the original issue discount accruing on the Class A
Certificates.
In general, a Class A Certificate will be considered to be issued with
original issue discount equal to the excess, if any, of its "stated redemption
price at maturity" over its "issue price." The issue price of a Class A
Certificate is the initial offering price to the public (excluding bond houses
and brokers) at which a substantial amount of the Class A Certificates was sold.
The issue price also includes any accrued interest attributable to the period
between the beginning of the first interest accrual period and the Settlement
Date. The stated redemption price at maturity of a Class A Certificate is its
stated principal amount, plus an amount equal to the excess (if any) of the
interest payable on the first Distribution Date, over the interest that accrues
for the period from the Settlement Date to the first Distribution Date.
Notwithstanding the general definition, original issue discount will be
treated as zero in the case of a Class A Certificate if such discount is less
than 0.25 percent of the stated redemption price at maturity of such Certificate
multiplied by its weighted average life. The weighted average life of a
Certificate is apparently computed for this purpose as the sum, of all
distributions included in the stated redemption price at maturity of the
Certificate, of the amounts determined by multiplying (i) the number of complete
years (rounding down for partial years) from the Settlement Date until the date
on which each such distribution is expected to be made under the assumption that
the Mortgage Loans prepay at 19% HEP (the "Prepayment Assumption") by (ii) a
fraction, the numerator of which is the amount of such distribution and the
denominator of which is the Certificate's stated redemption price at maturity.
If original issue discount is treated as zero under this rule, the actual amount
of original issue discount must be allocated to the principal distributions on
the Certificate and, when each such distribution is received, gain equal to the
discount allocated to such distribution will be recognized.
Section 1272(a) (6) of the Code contains special original issue
discount rules applicable to the Class A Certificates. Under these rules, (i) it
is anticipated that the amount and rate of accrual of original issue discount on
each Certificate will be based on the Prepayment Assumption, and (ii)
adjustments will be made in the amount of discount accruing in each taxable year
in which the actual prepayment rate differs from the Prepayment Assumption.
Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The legislative history of this Code provision indicates that the
regulations will provide that the assumed payment rate must be the rate used by
the parties in pricing the particular transaction. It is anticipated that the
Prepayment Assumption for the Certificates will be consistent with this
standard. No representation, however, is made hereby that the Mortgage Loans,
will prepay at the rate reflected in the Prepayment Assumption or at any other
rate. Each investor must make its own decision as to the appropriate prepayment
assumption to be used in deciding whether or not to purchase any of the
Certificates.
Each Owner must include in gross income the sum of the "daily portions"
of original issue discount on its Certificate for each day during its taxable
year on which it held such Certificate. For this purpose, in the case of an
original Owner, the daily portions of original issue discount will be determined
as follows. A calculation will first be made of the portion of the original
issue discount that accrued during each "accrual period." Final regulations
issued by the Treasury Department relating to the tax treatment of debt
instruments with original issue discount (the "OID Regulations" ) provide that
for purposes of measuring the accrual of original issue discount on a debt
instrument, each Owner may use an accrual period of any length, up to one
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year, as long as each Distribution Date falls on either the final day or the
first day of an accrual period. Original issue discount will be reported for the
Class A Certificates based on accrual periods of one month, beginning on a
Distribution Date and ending on the day before the next Distribution Date.
The portion of original issue discount treated as accruing for any
accrual period will equal the excess, if any, of (i ) the sum of (A) the present
values of all the distributions remaining to be made on the Class A Certificate,
if any, as of the end of the accrual period and (B) the distribution made on
such Certificate during the accrual period of amounts included in the stated
redemption price at maturity, over (ii) the adjusted issue price of such
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
based on (i) the yield to maturity of the Class A Certificate, calculated as of
the Settlement Date, giving effect to the Prepayment Assumption, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period and (iii) the Prepayment Assumption. The adjusted issue price of
a Class A Certificate at any time will equal the issue price of such
Certificate, increased by the aggregate amount of previously accrued original
issue discount with respect to such Certificate, and reduced by the amount of
any distributions made on such Certificate as of that time of amounts included
in the stated redemption price at maturity. The original issue discount accruing
during any accrual period will then be allocated ratably to each day during the
period to determine the daily portion of original issue discount.
A subsequent purchaser of a Class A Certificate that purchases such
Certificate at a cost less than its remaining stated redemption price at
maturity also will be required to include in gross income for each day on which
it holds such Certificate, the daily portion of original issue discount with
respect to such Certificate (but reduced, if the cost of such Certificate to
such purchaser exceeds its adjusted issue price, by an amount equal to the
product of (i) such daily portion and (ii) a constant fraction, the numerator of
which is such excess and the denominator of which is the sum of the daily
portions of original issue discount on such Certificate for all days on or after
the day of purchase).
Certificates Purchased at a Premium
The Class A Certificates may be issued at a premium. A purchaser of a
Certificate that purchases such Certificate at a cost greater than its remaining
stated redemption price at maturity will be considered to have purchased such
Certificate at a premium. Such a purchaser need not include in income any
remaining original issue discount and may elect, under section 171(c)(2) of the
Code, to treat such premium as "amortizable bond premium." If an Owner makes
such an election, the amount of any interest payment that must be included in
such Owner's income for each period ending on a Distribution Date will be
reduced by the portion of the premium allocable to such period based on the
Certificate's yield to maturity. The legislative history of the Tax Reform Act
of 1986 states that such premium amortization should be made under principles
analogous to those governing the accrual of market discount (as discussed below
under "Market Discount"). If such election is made by the Owner, the election
will also apply to all bonds (as well as all REMIC regular interests) the
interest on which is not excludable from gross income ("fully taxable bonds")
held by the Owner at the beginning of the first taxable year to which the
election applies and to all such fully taxable bonds thereafter acquired by it,
and is irrevocable without the consent of the IRS. If such an election is not
made, (i) such an Owner must include the full amount of each interest payment in
income as it accrues, and (ii) the premium must be allocated to the principal
distributions on the Certificate and, when each such distribution is received, a
loss equal to the premium allocated to such distribution will be recognized. Any
tax benefit from the premium not previously recognized will be taken into
account in computing gain or loss upon the sale or disposition of the
Certificate.
Market Discount
An Owner that purchases a Class A Certificate at a market discount,
that is, at a purchase price less than the remaining stated redemption price at
maturity of such Certificate, or in the case of a Certificate issued
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with original issue discount, less than the adjusted issue price of such
Certificate, will be required to allocate each principal distribution first to
accrued market discount on the Certificate, and recognize ordinary income to the
extent such distribution does not exceed the aggregate amount of accrued market
discount on such Certificate that was not previously included in income. With
respect to Certificates that have unaccrued original issue discount, such market
discount must be included in income in addition to original issue discount
includible under the rules described above under "Original Issue Discount." An
Owner that incurs or continues indebtedness to acquire a Certificate at a market
discount may also be required to defer the deduction of all or a portion of the
interest on such indebtedness until the corresponding amount of market discount
is included in income. In general terms, market discount on a Certificate may be
treated as accruing either (i) under a constant yield method, taking into
account the Prepayment Assumption, or (ii) in proportion to remaining accruals
of original issue discount if any, or if none, in proportion to remaining
distributions of interest on the Certificate. As required by the IRS,
information necessary to compute the accrual of market discount will be made
available to Holders of Class A Certificates .
Notwithstanding the above rules, market discount on a Class A
Certificate will be considered to be zero if such discount is less than 0.25
percent of the remaining stated redemption price at maturity of such Certificate
multiplied by its weighted average remaining life. Weighted average remaining
life presumably would be calculated in a manner similar to weighted average
life, taking into account payments (including prepayments) prior to the date of
acquisition of the Certificate by the subsequent purchaser. If market discount
on a Certificate is treated as zero under this rule, the actual amount of market
discount must be allocated to the remaining principal distributions on the
Certificate and, when each such distribution is received, gain equal to the
discount allocated to such distribution will be recognized.
Special Election
For any Class A Certificate, the OID Regulations permit an Owner to
elect to include in gross income all "interest" that accrues on the Certificate
by using a constant yield method. For purposes of the election, the term
"interest" includes stated interest, acquisition discount, original issue
discount, de minimis original issue discount, market discount, de minimis market
discount and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium. An Owner should consult its own tax advisor regarding the
time and manner of making and the scope of the election and the implementation
of the constant yield method.
SPECIAL TAX ATTRIBUTES
The Certificates will be "regular or residual interests in a REMIC"
within the meaning of section 7701(a)(19)(C)(xi) of the Code, "qualifying real
property loans" within the meaning of section 593(d) of the Code and "real
estate assets" within the meaning of section 856(c) (5) (A) of the Code. If at
any time during a calendar year less than 95 percent of the assets of the REMIC
consist of qualified mortgages, then the portion of the Regular and Residual
Certificates that are qualifying assets under those sections during such
calendar year may be limited to the portions of the assets of the REMIC that are
qualified mortgages. Similarly, income on the Certificates will be treated as
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, subject to the same limitation as
set forth in the preceding sentence. For purposes of applying this limitation,
the REMIC should be treated as owning the assets represented by the qualified
mortgages. Certificates held by a financial institution to which section 585,
586 or 593 of the Code applies will be treated as evidences of indebtedness for
purposes of section 582(c)(1) of the Code. The Class A Certificate will also be
"qualified mortgages" within the meaning of section 860G(a)(3) of the Code with
respect to other REMICs.
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TAXES ON THE REMIC
Prohibited Transactions
The Code imposes a tax on a REMIC equal to 100 percent of the net
income derived from "prohibited transactions." In general, a prohibited
transaction means the disposition of a qualified mortgage other than pursuant to
certain specified exceptions, the receipt of investment income from a source
other than a Mortgage Loan or certain other permitted investments, the receipt
of compensation for services, or the disposition of an asset purchased with the
payments on the qualified mortgages for temporary investment pending
distribution on the regular and residual interests.
Contributions to a REMIC after the Startup Day
The Code imposes a tax on a REMIC equal to 100 percent of the value of
any property contributed to a REMIC after the "startup day" (generally the same
as the Settlement Date). Exceptions are provided for cash contributions to a
REMIC (i) during the three month period beginning on the startup day, (ii) made
to a qualified reserve fund by a Holder of a residual interest, (iii) in the
nature of a guarantee, (iv) made to facilitate a qualified liquidation or
clean-up call, and (v) as otherwise permitted by Treasury regulations.
Net Income from Foreclosure Property
The Code imposes a tax on a REMIC equal to the highest corporate rate
on "net income from foreclosure property." The terms "foreclosure property"
(which includes property acquired by deed in lieu of foreclosure) and "net
income from foreclosure property" are defined by reference to the rules
applicable to real estate investment trusts. Generally, foreclosure property
would be treated as such for a period of two years, with possible extensions.
Net income from foreclosure property generally means gain from the sale of
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.
Application to the Trust Fund
It is not anticipated that the Trust Fund will engage in any
transactions that will give rise to a tax on the REMIC.
SALES OF THE CLASS A CERTIFICATES
In General
Except as provided below, if a Class A Certificate is sold, the seller
will recognize gain or loss equal to the difference between the amount realized
in the sale and its adjusted basis in the Certificate. The adjusted basis of a
Class A Certificate generally will equal the cost of such Certificate to the
seller, increased by any original issue discount or market discount included in
the seller's gross income with respect to such Certificate and reduced by
distributions on such Certificate previously reserved by the seller of amounts
included in the stated redemption price at maturity and by any premium that has
reduced the seller's interest income with respect to such Certificate. The
adjusted basis of a Certificate is determined as described above under "Taxation
of Beneficial Owners of Residual Certificates--Basic Rules and Distributions."
Except as provided in the following paragraph or under section 582(c) of the
Code, any such gain or loss will be capital gain or loss, provided such
Certificate is held as a "capital asset" (generally, property held for
investment) within the meaning of section 1221 of the Code.
Gain from the sale of a Certificate that might otherwise be capital
gain will be treated as ordinary income to the extent that such gain does not
exceed the excess, if any, of (i) the amount that would have been
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includible in the income of the Owner had income accrued at a rate equal to 110
percent of the "applicable Federal rate" (generally, an average of current
yields on Treasury securities) as of the date of purchase over (ii) the amount
actually includible in such Owner's income. In addition, gain recognized on such
a sale by an Owner who purchased a Certificate at a market discount would also
be taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period such Certificate was held by such Owner,
reduced by any market discount includible in income under the rules described
above under "Taxation of Beneficial Owners of the Class A Certificates--Market
Discount."
TERMINATION
In general, no special tax consequences will apply to an Owner upon the
termination of the REMIC by virtue of the final payment or liquidation of the
last Mortgage Loan.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
For purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and the owners of the residual interest will be
treated as partners. The Residual Holder owning the largest percentage interest
in the Residual Certificates will be obligated to act as the REMIC's "tax
matters person," as defined in applicable Treasury regulations, with respect to
the REMIC, and will be required to irrevocably designate the Trustee as its
agent to perform all of the functions of the tax matters person.
BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of
proceeds from the sale of the Class A Certificates, may be subject to the
"backup withholding tax" under section 3406 of the Code at a rate of 31 percent
if recipients of such distributions fail to furnish to the payor certain
information, including their taxpayer identification numbers, or otherwise fail
to establish an exemption from such tax. Any amounts deducted and withheld from
a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore, certain penalties may be imposed by
the IRS on a recipient of distributions that is required to supply information
but that does not do so in the proper manner.
FOREIGN INVESTORS
Distributions made on a Class A Certificate to, or on behalf of, an
Owner that is not a U.S. Person (a "Non-U.S. Person") generally will be exempt
from U.S. federal income and withholding taxes, provided (a) the Owner is not
subject to U.S. tax as a result of a connection to the United States other than
ownership of the Certificate, (b) the Owner signs a statement under penalties of
perjury that certifies that such Owner is a Non-U.S. Person, and provides the
name and address of such Owner, and (c) the last U.S. Person in the chain of
payment to the Owner receives such statement from such Owner or a financial
institution holding on its behalf and does not have actual knowledge that such
statement is false. Owners should be aware that the IRS might take the position
that this exemption does not apply to an Owner that also owns 10 percent or more
of the Class A Certificates or of the voting stock of the Depositor or to an
Owner that is a "controlled foreign corporation" described in section
881(c)(3)(C) of the Code.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a
pension, profit sharing, or other employee benefit plan from engaging in certain
transactions involving "plan assets" with persons that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to the plan.
ERISA also imposes certain duties on persons who are fiduciaries of plans
subject to ERISA and prohibits certain transactions between a plan and parties
in interest with respect to such plans. Under ERISA, any person who exercises
any authority or control respecting the management or disposition of the assets
of a plan is
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considered to be a fiduciary of such plan (subject to certain exceptions not
here relevant). A violation of these "prohibited transaction" rules may generate
excise tax and other liabilities under ERISA and the Code for such persons.
In addition to the matters described below, purchasers of Class A
Certificates that are insurance companies should consult with their counsel with
respect to the recent United States Supreme Court case interpreting the
fiduciary responsibility rules of ERISA, John Hancock Mutual Life Insurance Co.
v. Harris Trust and Savings Bank, 114 S.Ct. 517 (1993). In John Hancock, the
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be "plan assets" for ERISA purposes under certain
circumstances. Prospective purchasers should determine whether the decision
affects their ability to make purchases of the Class A Certificates.
Pursuant to a final regulation (the "Final Regulation") issued by the
Department of Labor ("DOL") concerning the definition of what constitutes the
"plan assets" of an employee benefit plan subject to ERISA or the Code, or an
individual retirement account (an "IRA"), or any entity whose underlying assets
are deemed to be assets of an employee benefit plan or an IRA by reason of such
employee benefit plan's or such IRA's investment in such entity, (collectively
referred to as "Benefit Plans"), the assets and properties of certain entities
in which a Benefit Plan makes an equity investment could be deemed to be assets
of the Benefit Plan unless certain exceptions under the Final Regulation apply
or an exemption is available. If Benefit Plans that purchase the Class A
Certificates are deemed to own an interest in the underlying assets of the
Trust, the operations of the Trust could result in prohibited transactions.
The DOL has granted to Prudential Securities Incorporated an
administrative exemption (Prohibited Transaction Exemption 90-32 (the
"Exemption") which generally exempts from the application of the prohibited
transaction provisions of Section 406(a), Section 406(b)(1), Section 406(b)(2)
and Section 407(a) of ERISA and the excise taxes imposed pursuant to Sections
4975(a) and (b) of the Code, certain transactions relating to the servicing and
operation of asset pools, including pools of residential mortgage loans such as
the Mortgage Loans and the purchase, sale and holding of asset-backed
pass-through certificates, including pass-through certificates evidencing
interests in certain receivables, loans and other obligations, such as the Class
A Certificates, provided that certain conditions set forth in the Exemption are
satisfied.
If the general conditions of Section II of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by Sections
406(a) and 407(a) of ERISA (as well as the excise taxes imposed by Sections
4975(c)(1)(A) through (D) of the Code) in connection with the direct or indirect
sale, exchange or transfer of Class A Certificates by Benefit Plans in the
initial issue of certificates, the holding of Class A Certificates by Benefit
Plans or the direct or indirect acquisition or disposition in the secondary
market of Class A Certificates by Benefit Plans. However, no exemption is
provided from the restrictions of Section 406(a)(1)(E), 406(a)(2) and 407 of
ERISA for the acquisition or holding of a Class A Certificate on behalf of an
"Excluded Plan" by any person who has discretionary authority or renders
investment advice with respect to the assets of such Excluded Plan. For purposes
of the Class A Certificates, an Excluded Plan is a Benefit Plan sponsored by (1)
Prudential Securities Incorporated, (2) the Originator, (3) the Servicer, (4)
the Trustee, (5) the Seller, (6) the Depositor, (7) any Obligor with respect to
Receivables constituting more than 5 percent of the aggregate unamortized
principal balance of the Receivables as of the date of initial issuance, (8) the
Certificate Insurer and (9) any affiliate or successor of a person described in
(1) to (8) above (the "Restricted Group").
If the specific conditions of paragraph I.B. of Section I of the
Exemption are also satisfied, the Exemption may provide an exemption from the
restrictions imposed by Sections 406(b)(1) and (b)(2) of ERISA and the taxes
imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c)(1)(E) of the Code in connection with (1) the direct or indirect sale,
exchange or transfer of Class A Certificates in the initial issuance of Class A
Certificates to a Benefit Plan when the person who has discretionary authority
or renders investment advice with respect to the investment of plan assets in
Class A Certificates is (a) an Obligor with respect to 5 percent or less of the
fair market value of the Receivables or (b) an affiliate of such a person, (2)
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the direct or indirect acquisition or disposition in the secondary market of
Class A Certificates by Benefit Plans and (3) the holding of Class A
Certificates by Benefit Plans. Among the specific conditions that must be
satisfied is the condition that immediately after the acquisition of the Class A
Certificates no more than 25% of the assets of the Benefit Plan with respect to
which the person is a fiduciary are invested in certificates representing an
interest in a trust containing assets sold or serviced by the same entity. As of
the date hereof, the Seller believes no Obligor with respect to Receivables
included in the Trust constitutes more than 5 percent of the aggregate
unamortized principal balance of the Trust.
If the specific conditions of paragraph I.C. of Section I of the
Exemption are satisfied, the Exemption may provide an exemption from the
restrictions imposed by Sections 406(a), 406(b) and 407(a) of ERISA, and the
taxes imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c) of the Code for transactions in connection with the servicing,
management and operation of the Trust.
The Exemption may provide an exemption from the restrictions imposed by
Section 406(a) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if such restrictions are deemed to otherwise apply merely because a person is
deemed to be a "party in interest" or a "disqualified person" with respect to an
investing Benefit Plan by virtue of providing services to the Benefit Plan (or
by virtue of having certain specified relationships to such a person) solely as
a result of such Benefit Plan's ownership of Class A Certificates.
The Exemption sets forth the following six general conditions which
must be satisfied for a transaction to be eligible for exemptive relief
thereunder:
(1) The acquisition of the certificates by a Benefit Plan is on terms
(including the price for the certificates) that are at least as favorable to the
Benefit Plan as they would be in an arm's length transaction with an unrelated
party;
(2) The rights and interests evidenced by the certificates acquired by
the Benefit Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust;
(3) The certificates acquired by the Benefit Plan have received a
rating at the time of such acquisition that is one of the three highest general
rating categories from either S&P, Moody's, Duff & Phelps Rating Co.
("D&P") or Fitch Investors Service, Inc. ("Fitch");
(4) The Trustee is not an affiliate of any other member of the
Restricted Group;
(5) The sum of all payments made to and retained by Prudential
Securities Incorporated in connection with the distribution of Certificates
represents not more than reasonable compensation for its services. The sum of
all payments made and retained by the Seller pursuant to the assignment of the
Receivables to the Trust represents not more than the fair market value of such
Receivables. The sum of all payments made to and retained by the Servicer
represents not more than reasonable compensation for such person's services
under the Pooling and Servicing Agreement and reimbursement of such person's
reasonable expenses in connection therewith; and
(6) The Benefit 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 1933 Act.
The Trust Estate must also meet the following requirements:
(i) the Receivables must consist solely of assets of the type that
have been included in other investment pools;
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<PAGE> 72
(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories of S&P, Moody's, Fitch or D&P for
at least one year prior to the Benefit Plan's acquisition of certificates; and
(iii) certificates evidencing interest in such other investment pools
must have been purchased by investors other than Benefit Plans for at least one
year prior to the Benefit Plan's acquisition of certificates.
It is a condition of issuance of the Class A Certificates that they be
rated AAA or its equivalent by a nationally recognized rating agency. Before
purchasing a Class A Certificate based on the Exemption, a fiduciary of a
Benefit Plan should itself confirm (1) that such Certificate constitutes a
"certificate" for purposes of the Exemption and (2) that the specific conditions
and other requirements set forth in the Exemption would be satisfied.
Any Benefit Plan fiduciary considering the purchase of a Class A
Certificate should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment. Moreover, each Benefit
Plan fiduciary should determine whether, under the general fiduciary standards
of investment prudence and diversification, an investment in the Class A
Certificates is appropriate for the Benefit Plan, taking into account the
overall investment policy of the Benefit Plan and the composition of the Benefit
Plan's investment portfolio.
LEGAL INVESTMENT
The Class A Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"), because the Mortgage Loan Pool includes junior lien mortgages.
In addition, institutions subject to the jurisdiction of the Office of
the Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the National Credit Union Administration or state banking or
insurance authorities should review applicable rules, supervisory policies and
guidelines of these agencies before purchasing any of the Class A Certificates,
since the Class A Certificates may be deemed to be unsuitable investments under
one or more of these rules, policies and guidelines and certain restrictions may
apply to such investments. It should also be noted that certain states have
enacted legislation limiting to varying extents the ability of certain entities
(in particular, insurance companies) to invest in mortgage related securities.
Investors should consult with their own legal advisors in determining whether
and to what extent the Class A Certificates constitute legal investments for
such investors. See "Legal Investment" in the Prospectus.
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the Underwriting Agreement dated
as of March 14, 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
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<PAGE> 73
Underwriter may effect such transactions by selling such Certificates to or
through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter or
purchasers of the Class A Certificates for whom they may act as agent. Any
dealers that participate with the Underwriter in the distribution of the Class A
Certificates purchased by the Underwriter may be deemed to be underwriters, and
any discounts or commissions received by them or the Underwriter and any profit
on the resale of Class A Certificates by them or the Underwriter may be deemed
to be underwriting discounts or commissions under the Securities Act.
For further information regarding any offer or sale of the Class A
Certificates pursuant to this Prospectus Supplement and the Prospectus, see
"Plan of Distribution" in the Prospectus.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter or contribute to losses arising out of certain liabilities,
including liabilities under the Act.
Prudential Securities Incorporated is an affiliate of the Depositor.
RATINGS
It is a condition to the original issuance of the Class A Certificates
that they each receive ratings of AAA by Standard & Poor's and Aaa by Moody's.
The ratings assigned to the Class A Certificates will be based on the
claims-paying ability of the Certificate Insurer. Explanations of the
significance of such ratings may be obtained from Moody's Investors Services,
Inc., 99 Church Street, New York, New York 10007 and Standard & Poor's, a
division of The McGraw-Hill Companies, 25 Broadway, New York, New York 10004.
Such ratings will be the views only of such rating agencies. There is no
assurance that any such ratings will continue for any period of time or that
such ratings will not be revised or withdrawn. Any such revision or withdrawal
of such ratings may have an adverse effect on the market price of the Class A
Certificates.
LEGAL MATTERS
Certain legal matters in connection with the Class A Certificates will
be passed upon for the Originator and the Servicer by Thacher Proffitt & Wood,
New York, New York, and for the Depositor and the Underwriter by Dewey
Ballantine, New York, New York.
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<PAGE> 74
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Access
Financial Mortgage Loan Trust 1996-1 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 DTC, CEDEL or
Euroclear. The Global Securities will be tradeable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their Relevant Depository
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
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Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depository, 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
Relevant Depository to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depository for the benefit of CEDEL
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depository, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective Depository, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist 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.
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The payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). In the event that the CEDEL Participant or Euroclear Participant has
a line of credit with its respective clearing system and elects to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear account
in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Certificate
Owners of Global Securities that are Non-U.S. Persons (as defined below) can
obtain a complete exemption from the withholding tax by filing a signed Form W-8
(Certificate of Foreign Status). If the information shown on Form W-8 changes, a
new Form W-8 must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Owners or their agent.
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Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not a
U.S. Person. This summary does not deal with all aspects of U.S. Federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
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INDEX OF SIGNIFICANT PROSPECTUS
SUPPLEMENT DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Aggregate Class A Shortfall ........................... S-9, S-49
Balloon Loans ......................................... S-21
Base Spread Account Requirement ....................... S-9, S-48
Beneficial Certificate Owner .......................... S-4
Benefit Plans ......................................... S-70
Book-Entry Certificates ............................... S-4, S-37
Business Day .......................................... S-61
Cede .................................................. S-5
CEDEL ................................................. S-4
CEDEL Participants .................................... S-39
Certificate Account ................................... S-45
Certificate Insurance Policies ........................ S-1
Certificate Insurance Policy .......................... S-4, S-10
Certificate Insurer ................................... S-1, S-4, S-11, S-62
Certificate Insurer Default ........................... S-11
Certificates .......................................... S-1
Citibank .............................................. S-5
Civil Relief Act ...................................... S-13
Civil Relief Act Interest Shortfall ................... S-19
Civil Relief Act Interest Shortfalls .................. S-13
Class A Available Funds ............................... S-4
Class A Available Remittance Amount ................... S-9, S-47
Class A Carry-Forward Amount .......................... S-8
Class A Certificates .................................. S-1, S-3
Class A Interest Period ............................... S-6
Class A Principal Remittance Amount ................... S-7, S-8, S-51
Class A Remittance Amount ............................. S-8, S-10
Class A-1 Carry-Forward Amount ........................ S-8, S-52
Class A-1 Interest Remittance Amount .................. S-6, S-50
Class A-1 Pass-Through Rate ........................... S-5, S-52
Class A-1 Principal Balance ........................... S-6
Class A-1 Principal Remittance Amount ................. S-50
Class A-1 Remittance Amount ........................... S-50
Class A-2 Carry-Forward Amount ........................ S-8
Class A-2 Interest Remittance Amount .................. S-6, S-51
Class A-2 Pass-Through Rate ........................... S-5
Class A-2 Principal Balance ........................... S-6
Class A-2 Principal Remittance Amount ................. S-51
Class A-2 Remittance Amount ........................... S-50
Class A-3 Carry-Forward Amount ........................ S-8
Class A-3 Interest Remittance Amount .................. S-6, S-51
Class A-3 Pass-Through Rate ........................... S-6
Class A-3 Percentage .................................. S-7
Class A-3 Principal Balance ........................... S-7
Class A-3 Principal Remittance Amount ................. S-51
Class A-3 Remittance Amount ........................... S-51
Class R Certificates .................................. S-1, S-3
</TABLE>
i
<PAGE> 79
<TABLE>
<S> <C>
CLTV ...................................................... S-23
Code ...................................................... S-64
Combined Percentage ....................................... S-7
Compensating Interest ..................................... S-20
Cooperative ............................................... S-39
CPR ....................................................... S-27
Cut-Off Date .............................................. S-1
D&P ....................................................... S-71
Debt Service Reduction .................................... S-13
Deficient Valuation ....................................... S-13
Definitive Certificate .................................... S-37
Depositor ................................................. S-1, S-3
Depository ................................................ S-4
DOL ....................................................... S-70
DTC ....................................................... S-4
Due Date .................................................. S-12
Due Period ................................................ S-7
ERISA ..................................................... S-17
Euroclear ................................................. S-4
Euroclear Operator ........................................ S-39
Euroclear Participants .................................... S-39
European Depositaries ..................................... S-37
European Depositories ..................................... S-5
Excess Spread ............................................. S-9
Excluded Plan ............................................. S-70
Exemption ................................................. S-17, S-70
FDIC ...................................................... S-20
Final Regulation .......................................... S-70
Financial Intermediary .................................... S-38
FIRREA .................................................... S-20
Fitch ..................................................... S-71
Fund American ............................................. S-62
Global Securities ......................................... S-1
Group I Mortgage Interest Rate ............................ S-5
HEP ....................................................... S-27
Holdings .................................................. S-2, S-62
Home Equity Prepayment" Model ............................. S-27
Indirect Participants ..................................... S-38
Insured Payment ........................................... S-11, S-60
IRA ....................................................... S-70
IRS ....................................................... S-65
Issue Date ................................................ S-3
Lien ...................................................... S-44
Monthly Advance ........................................... S-12, S-47
Monthly Excess Spread Amount .............................. S-48
Moody's ................................................... S-11, S-17, S-71
Morgan .................................................... S-5
Mortgage Interest Rates ................................... S-21
Mortgage Loan Interest Shortfalls ......................... S-6
Mortgage Loans ............................................ S-1
Mortgage Note ............................................. S-41
Mortgage Pool ............................................. S-1, S-4, S-5
</TABLE>
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<PAGE> 80
<TABLE>
<S> <C>
Mortgage Purchase Agreement ................................ S-41
Mortgaged Properties ....................................... S-5
Mortgaged Property ......................................... S-13
Mortgages .................................................. S-5
Net Simple Interest Excess ................................. S-48
Net Simple Interest Shortfall .............................. S-20
Net Simple Interest Shortfalls ............................. S-13
Non-U S Person ............................................ S-69, S-4
Nonrecoverable Advance ..................................... S-47
OID Regulations ............................................ S-65
Order ...................................................... S-60
Original Pool Principal Balance ............................ S-5
Originator ................................................. S-1, S-3
Owners ..................................................... S-64
Participants ............................................... S-37, S-38
Payment Delay .............................................. S-26
Pooling and Servicing Agreement ............................ S-3
Prepayment Assumption ...................................... S-65
Prepayment Interest Shortfall .............................. S-13
Qualified Substitute Mortgage Loan ......................... S-43
Receipt .................................................... S-61
Received ................................................... S-61
Record Date ................................................ S-48
Regular Certificates ....................................... S-64
Relevant Depositary ........................................ S-37
Remainder Excess Spread Amount ............................. S-46
REMIC ...................................................... S-2, S-17, S-64
Remittance Date ............................................ S-2, S-4, S-48
Residual Certificates ...................................... S-64
Restricted Group ........................................... S-70
Rules ...................................................... S-38
Servicer ................................................... S-3
Servicer Extension Notice .................................. S-57
Servicing Advance .......................................... S-47
Servicing Fee .............................................. S-14
Settlement Date ............................................ S-64
Simple Interest Excess ..................................... S-13, S-48
Simple Interest Excess Sub-Account ......................... S-48
Simple Interest Loans ...................................... S-20
Simple Interest Qualifying Loan ............................ S-13
Simple Interest Shortfall .................................. S-13, S-48
SMMEA ...................................................... S-72
Spread Account ............................................. S-9, S-48
Spread Account Available Funds ............................. S-10, S-49
Standard & Poor's .......................................... S-11, S-17
Substitution Adjustment .................................... S-8, S-42
Successor Servicer ......................................... S-56
Tax Matters Person ......................................... S-36
Terms and Conditions ....................................... S-39
Tokio Marine ............................................... S-62
Trust Fund ................................................. S-1, S-4
Trustee .................................................... S-3
</TABLE>
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<TABLE>
<S> <C>
Trustee's Mortgage File ......................................... S-41
U S WEST ........................................................ S-62
U S Person ..................................................... S-4
Underwriter ..................................................... S-1, S-72
Underwriting Agreement .......................................... S-72
Unrecovered Class A Portion ..................................... S-7, S-51
</TABLE>
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PROSPECTUS
- --------------------------------------------------------------------------------
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
(Depositor)
Pass-Through Certificates
(Issuable in Series)
- --------------------------------------------------------------------------------
Prudential Securities Secured Financing Corporation (the
"Depositor") may sell from time to time under this Prospectus and related
Prospectus Supplements Pass-Through Certificates or Notes (such Pass-Through
Certificates or such Notes, together the "Certificates"), issuable in series
(each, a "Series") consisting of one or more classes (each, a "Class") of
Certificates on terms to be determined at the time of sale.
The Certificates of a Series will evidence the beneficial
ownership interests in a separate trust formed by the Depositor for the benefit
of the holders of the related Series of Certificates (the "Certificateholders").
Unless otherwise specified in the applicable Prospectus Supplement, the property
of each such trust (for each Series, the "Trust Fund") will consist of a
segregated pool (the "Pool") of (i) promissory notes or other evidences of
indebtedness secured by first, second or more junior liens on fee simple or
leasehold interests in the Mortgaged Properties (as defined herein), including
installment sale contracts with respect to any such properties, or participation
in any of the foregoing (the "Mortgage Loans") or (ii) manufactured housing
conditional sales contracts and installment agreements (the "Contracts"). The
Mortgage Loans or Contracts included in a Trust Fund will have been acquired
from one or more affiliates of the Depositor or from one or more Unaffiliated
Sellers (as defined herein) by the Depositor and conveyed by the Depositor to
such Trust Fund. The Mortgage Loans included in a Mortgage Pool or the Contracts
included in a Contract Pool of a Series will be serviced by a servicer (the
"Servicer") described in the applicable Prospectus Supplement.
The Certificates of a Series will consist of (i) one or more
Classes of Certificates representing fractional undivided interests in all the
principal payments and the interest payments, to the extent of the related Net
Mortgage Rates (as defined herein) or Net Contract Rates (as defined herein), on
the related Mortgage Loans or Contracts ("Standard Certificates"), (ii) one or
more Classes of Certificates ("Multi-Class Certificates") each of which will be
assigned a principal balance (a "Stated Amount") based on the value of future
cash flows from the related Trust Fund without distinction as to principal or
interest or may have no principal amount but may instead be assigned a notional
amount (a "Notional Amount") on which interest accrues, and each of which will
bear interest on the Stated Amount or Notional Amount thereof at a fixed rate
(which may be zero) specified in, or a variable rate determined as specified in,
the applicable Prospectus Supplement (the "Interest Rate") or (iii) one or more
Classes of Certificates representing fractional undivided interests in all or
specified portions of the principal payments and/or interest payments, to the
extent of the related Net Mortgage Interest Rate, on the related Mortgage Loans
("Stripped Certificates"). Any Class of Certificates may be divided into two or
more subclasses (each, a "Subclass") and any Class of Standard Certificates may
be divided into two or more Subclasses that consist of Multi-Class Certificates.
In addition, a Series of Certificates for which a REMIC (as defined herein)
election has been made will also include one Class or one Subclass of Residual
Certificates (as defined herein).
(Cover continued on next page)
-----------------------------------
THE ASSETS OF THE RELATED TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE
RELATED SECURITIES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE DEPOSITOR, THE SERVICER OR ANY OF THEIR AFFILIATES, EXCEPT AS
SET FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE
CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SELLER, THE SERVICER OR ANY
OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT.
SEE "RISK FACTORS" PAGE 13.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------------------------
The Certificates may be sold from time to time by the
Depositor through dealers or agents designated from time to time, through
underwriting syndicates led by one or more managing underwriters or through one
or more underwriters acting alone. See "Plan of Distribution." Affiliates of the
Depositor may from time to time act as agents or underwriters in connection with
the sale of Certificates. The terms of a particular offering will be set forth
in the Prospectus Supplement related to such offering.
Retain this Prospectus for future reference. This Prospectus
may not be used to consummate sales of Certificates unless accompanied by the
Prospectus Supplement relating to the offering of such Certificates.
- --------------------------------------------------------------------------------
The date of this Prospectus is August 4, 1995
<PAGE> 83
(Cover continued from previous page)
Each Series of Certificates will include one or more classes.
The Certificates of any particular class may represent beneficial ownership
interests in the related Mortgage Loans held by the related Trust Fund, or may
represent debt secured by such Mortgage Loans, as described herein and in the
related Prospectus Supplement. Any Series of Certificates may include one or
more Classes or Subclasses of Certificates (the "Subordinated Certificates")
that are subordinate in right of distributions to such rights of one or more of
other Classes or Subclasses of such Series (the "Senior Certificates"). If
specified in the applicable Prospectus Supplement, the relative interests of the
Senior Certificates and the Subordinated Certificates of a Series in the Trust
Fund may be subject to adjustment from time to time on the basis of
distributions received in respect thereof (the "Shifting Interest
Certificates"). If so specified in the applicable Prospectus Supplement, credit
support may also be provided for any Series of Certificates in the form of a
guarantee, letter of credit, mortgage pool insurance policy or other form of
credit enhancement as described herein.
Neither the Mortgage Loans nor the Contracts will be
guaranteed or insured by any governmental agency or instrumentality or, except
as specified in the related Prospectus Supplement, by any other person. The only
obligations of the Depositor with respect to a Series of Certificates will be
pursuant to certain limited representations and warranties made by the
Depositor, to the extent described herein and in the related Prospectus
Supplement. The Servicer with respect to a Series of Certificates relating to
Mortgage Loans or Contracts will be named in the related Prospectus Supplement.
The principal obligations of a Servicer will be limited to certain obligations
pursuant to certain representations and warranties and to its contractual
servicing obligations.
An election may be made to treat each Trust Fund (or one or
more segregated pools of assets therein) underlying a Series which includes
MultiClass Certificates as a "real estate mortgage investment conduit" (a
"REMIC") for federal income tax purposes. Series of Certificates for which a
REMIC election has been made will include one or more Classes or Subclasses
which constitute "regular interests" in the REMIC ("Regular Certificates") and
one Class or Subclass with respect to each REMIC which constitutes the "residual
interest" therein (the "Residual Certificates"). Alternatively, a Trust Fund may
be treated as a grantor trust or as a partnership for federal income tax
purposes, or may be treated for federal income tax purposes as a mere security
device which constitutes a collateral arrangement for the issuance of debt. See
"Certain Federal Income Tax Consequences."
There will have been no public market for the Certificates of
any Series prior to the offering thereof. No assurance can be given that such a
market will develop, or that if such a market does develop, it will provide
Certificateholders with liquidity of investment or will continue for the life of
the Certificates.
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<PAGE> 84
REPORTS
In connection with each distribution and annually,
Certificateholders will be furnished with statements containing information with
respect to principal and interest payments and the related Trust Fund, as
described herein and in the applicable Prospectus Supplement for such Series.
Any financial information contained in such reports will not have been examined
or reported upon by an independent public accountant. See "Servicing of the
Mortgage Loans and Contracts -- Reports to Certificateholders." The Servicer for
each Series relating to Mortgage Loans or Contracts will furnish periodic
statements setting forth certain specified information to the related Trustee
and, in addition, annually will furnish such Trustee with a statement from a
firm of independent public accounts with respect to the examination of certain
documents and records relating to the servicing of the Mortgage Loans or
Contracts in the related Trust Fund. See "Servicing of the Mortgage Loans and
Contracts -- Reports to the Trustee" and "Evidence as to Compliance." Copies of
the monthly and annual statements provided by the Servicer to the Trustee will
be furnished to Certificateholders of each Series upon request addressed to
Prudential Securities Secured Financing Corporation, One Seaport Plaza, 26th
Floor, New York, New York 10292, Attention: James Fadel (212) 214-1000.
AVAILABLE INFORMATION
The Depositor has filed a Registration Statement (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with the Securities and Exchange Commission (the
"Commission") with respect to the Certificates offered pursuant to this
Prospectus. This Prospectus contains, and the Prospectus Supplement for each
Series of Certificates will contain, a summary of the material terms of the
documents referred to herein and therein, but neither contains nor will contain
all of the information set forth in the Registration Statement of which this
Prospectus is a part. For further information, reference is made to such
Registration Statement and any amendments thereof and to the exhibits thereto.
Copies of the Registration Statement may be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 upon
payment of the prescribed charges, or may be examined free of charge at the
Commission's offices, 450 Fifth Street, N.W., Washington, D.C. 20549 or at the
regional offices of the Commission located at Room 1400, 75 Park Place, New
York, New York 10007 and Northwestern Atrium Center, 500 West Madison Street,
Suite 400, Chicago, Illinois 60661-2511.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and
reports filed or caused to be filed by the Depositor with respect to a Trust
Fund pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to
the termination of any offering of Certificates evidencing interests therein.
The Depositor will provide or cause to be provided without charge to each person
to whom this Prospectus is delivered in connection with the offering of one or
more Classes of Certificates, a list identifying, all filings with respect to a
Trust Fund pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act,
since the Depositor's latest fiscal year covered by its annual report on Form
10-K and a copy of any or all documents or reports incorporated herein by
reference, in each case to the extent such documents or reports relate to one or
more of such Classes of such Certificates, other than the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Requests to the Depositor should be directed to: Prudential
Securities Secured Financing Corporation, One Seaport Plaza, 26th Floor, New
York, New York 10292, telephone number (212) 214-1000, Attention: James Fadel.
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<PAGE> 85
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.
<TABLE>
<S> <C>
Title of Securities............................... Pass-Through Certificates (Issuable in Series).
Depositor......................................... Prudential Securities Secured Financing Corporation,
formerly known as P-B Secured Financing Corporation (the
"Depositor"), a Delaware corporation, is a whollyowned
limited purpose finance subsidiary of Prudential Securities
Group Inc. The Depositor's principal executive offices are
located at One Seaport Plaza, 26th Floor, New York, New
York 10292, and its telephone number is (212) 214-1000.
See "The Depositor."
Unaffiliated Sellers.............................. The Depositor will acquire the Mortgage Loans and
Contracts from one or
more institutions
unaffiliated with the
Depositor ("Unaffiliated
Sellers").
Trustee ......................................... The Trustee with respect to a Series will be specified in the
related Prospectus Supplement.
Servicer ......................................... The Servicer for each Series relating to Mortgage Loans or
Contracts will be specified in the applicable Prospectus
Supplement. The Servicer will service the Mortgage Loans
or Contracts comprising each Trust Fund and administer
each Trust Fund pursuant to a separate Pooling and
Servicing Agreement (each, a "Pooling and Servicing
Agreement"). The Servicer may subcontract all or any
portion of its obligations as Servicer under each Pooling and
Servicing Agreement to qualified subservicers (each, a
"Sub-Servicer") but the Servicer will not be relieved thereby
of its liability with respect thereto. See "Servicing of the
Mortgage Loans and Contracts."
The Trust Funds................................... The Trust Fund for each Series of Certificates may consist
of any combination of Mortgage Pool and/or Contract Pools
(each as defined herein) and certain other related property,
as specified herein and in the applicable Prospectus
Supplement. Unless otherwise specified in the applicable
Prospectus Supplement, each Mortgage Pool will be
comprised of Mortgage Loans or Contracts or participations
therein.
Unless otherwise specified in the applicable Prospectus
Supplement, each Contract Pool will consist of fixed or
adjustable rate manufactured housing installment sale,
contracts and installment loan agreements. Each Contract
may be secured by a new or used Manufactured Home (as
defined herein).
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Neither the Certificates, the interest thereon, nor the
underlying Mortgage Loans are guaranteed by the United
States nor do they constitute debts or obligations of the
United States or any agency or instrumentality of the United
States.
The particular characteristics of each Trust Fund will be set
forth in the applicable Prospectus Supplement.
Description of the
Certificates...................................... The Certificates issued by any Trust Fund may represent
beneficial ownership interests in the related Mortgage Loans
held by the related Trust Fund, or may represent debt
secured by such Mortgage Loans, as described herein and in
the related Prospectus Supplement. Certificates which
represent beneficial ownership interests in the related Trust
Fund will be referred to as "Certificates" in the related
Prospectus Supplement; Certificates which represent debt
issued by the related Trust Fund will be referred to as
"Notes" in the related Prospectus Supplement.
With respect to Notes issued by the related Trust Fund, the
related Trust Fund will enter into an indenture by and
between such Trust Fund and the trustee named on such
indenture, as set forth in the related Prospectus Supplement.
Each Series of Certificates will be recourse to the assets of
the related Trust Fund only. The sole source of payment for
any Series of Certificates will be the assets of the related
Trust Fund. The Certificates will not be obligations, either
recourse or non-recourse (except for certain non-recourse
debt described under "Certain Federal Income Tax
Consequences"), of the Depositor, the Servicer or any
Person other than the related Trust Fund. In the case of
Certificates that represent beneficial ownership interest in the
related Trust Fund, such Certificates will represent the
ownership of such Trust Fund; with respect to Certificates
which are Notes, such Notes will be secured by the related
Trust Fund. Notwithstanding the foregoing, and as to be
described in the related Prospectus Supplement, certain types
of credit enhancement, such as a financial guaranty insurance
policy or a letter of credit, may constitute a full recourse
obligation of the issue of such credit enhancement.
Each Series will consist of one or more Classes of
Certificates which may be (i) Standard Certificates,
(ii) Multi-Class Certificates or (iii) Stripped Certificates.
Any Class of Certificates may be divided into two or more
Subclasses and any Class of Standard Certificates may be
divided into Subclasses which consist of Multi-Class
Certificates. The Depositor will cause each Trust Fund (or
one or more segregated pools of assets therein) with respect
to a Series which includes Standard Certificates redeemable
on a random lot basis, Multi-Class Certificates or Shifting
Interest Certificates to elect to be treated as a REMIC. In
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addition, any Series with respect to which an election has been
made to treat the Trust Fund (or one or more segregated pools of
assets therein) as a REMIC will include one Class or one Subclass
of Residual Certificates as to each REMIC. The Residual
Certificates of a Series, if offered hereby, will represent the
right to receive distributions with respect to the related Trust
Fund as specified in the related Prospectus Supplement. Unless
otherwise specified in the applicable Prospectus Supplement, the
Certificates will be offered only in fully registered form.
A. Standard
Certificates............................. Unless otherwise provided in the applicable Prospectus
Supplement, Standard Certificates of a Series will each
evidence a fractional undivided beneficial ownership interest
in the related Trust Fund and will entitle the holder thereof
to its proportionate share of a percentage of all of the
payments and other receipts with respect to the principal of
and interest (to the extent of the applicable Net Mortgage
Rate or Net Contract Rate) on the related Mortgage Loans
or Contracts. If specified in the applicable Prospectus
Supplement, with respect to any Class of Standard
Certificates of a Series for which a REMIC election has
been made, distributions of principal may be allocated
among the Certificateholders of such Class on a pro rata,
random lot or such other basis as is specified in such
Prospectus Supplement.
B. Multi-Class
Certificates............................. Multi-Class Certificates of a Series will consist of
Certificates each of which evidences a beneficial ownership
interest in the related Trust Fund and will be assigned a
Stated Amount, which may be based on an amount of
principal of the underlying Mortgage Loans or Contracts or
on the value of future cash flows from the related Trust
Fund without distinction as to principal or interest and an
Interest Rate which may be a fixed rate (which may be zero)
or a variable rate or which will otherwise accrue interest as
specified in the applicable Prospectus Supplement. The
holder of a Multi-Class Certificate will be entitled to receive,
to the extent funds are available therefor, interest payments
on the outstanding Stated Amount thereof at the applicable
Interest Rate or as otherwise specified in the applicable
Prospectus Supplement and distributions in reduction of such
Stated Amount determined in the manner and applied in the
priority set forth in the applicable Prospectus Supplement.
C. Stripped
Certificates............................. Stripped Certificates will each evidence an undivided
beneficial ownership interest in the related Trust Fund and
will entitle the holder thereof to its proportionate share of a
specified portion (which may be zero) of principal payments
and/or a specified portion (which may be zero) of interest
payments (to the extent of the applicable Net Mortgage
Interest Rate) on the related Mortgage Loans.
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Pooling and Servicing
Agreement......................................... The Certificates of each Series will be issued pursuant to a
Pooling and Servicing Agreement among the Depositor, the
Servicer, if any, and the Trustee.
Cut-Off Date...................................... The date specified in the applicable Prospectus Supplement.
Distribution Dates................................ Unless otherwise specified in the applicable Prospectus
Supplement, distributions on Standard Certificates or
Stripped Certificates will be made on the 25th day (or, if
such day is not a business day, the business day following
the 25th day) of each month, commencing with the month
following the month in which the applicable Cut-Off Date
occurs. Distributions on Multi-Class Certificates will be
made monthly, quarterly, or semiannually, on the dates
specified in the applicable Prospectus Supplement. The
dates upon which such distributions are made are referred to
herein as the "Distribution Dates."
Record Dates...................................... Distributions will be made on each Distribution Date set
forth in the Prospectus Supplement to Certificateholders of
record at the close of business on the last business day of the
month preceding the month in which such Distribution Date
occurs or such other date as may be set forth in the
Prospectus Supplement (the "Record Date").
Interest ......................................... With respect to a Series of Certificates consisting of
Standard Certificates or Stripped Certificates, unless
otherwise specified in the applicable Prospectus Supplement,
interest on the related Mortgage Loans, Mortgage
Certificates or Contracts at the applicable pass-through rate
(the "Pass-Through Rate"), as set forth in the applicable
Prospectus Supplement, will be passed through monthly on
each Distribution Date to holders thereof, in accordance with
the particular terms of each such Certificate. Holders of
Multi-Class Certificates will receive distributions of interest
at the applicable Interest Rate, if any, on the Stated Amount
or Notional Amount of such Certificates, or as otherwise
specified in the applicable Prospectus Supplement, without
regard to the Net Mortgage Rates or Net Contract Rates on
the underlying Mortgage Loans or Contracts. Unless
otherwise specified in the applicable Prospectus Supplement,
the "Net Mortgage Rate" for each Mortgage Loan in a given
period will equal the Mortgage Rate for such Mortgage Loan
in such period (the "Mortgage Rate") less any Fixed
Retained Yield, and less the Servicing Fee (as defined
herein). Unless otherwise specified in the applicable
Prospectus Supplement, the "Net Contract Rate" for each
Contract in a given period will equal the Contract Rate for
such Contract in such period (the "Contract Rate") less any
Fixed Retained Yield, and less the Servicing Fee. The
"Servicing Fee" with respect to each Mortgage Loan or
Contract is an amount reserved for servicing such Mortgage
Loan or Contract and administration of the related Trust
Fund.
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<TABLE>
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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
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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
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Rate, or at such other rate specified in the applicable
Prospectus Supplement, as the case may be, on the next
Distribution Date. Senior Certificateholders will bear their pro
rata share of any losses realized on the related Mortgage Loans
or Contracts in excess of the applicable Subordinated Amount. If
so specified in the applicable Prospectus Supplement, the
protection afforded to holders of Senior Certificates of a Series
by the subordination of certain rights of holders of Subordinated
Certificates of such Series to distributions on the related
Mortgage Loans or Contracts may be effected by a method other
than that described above, such as, in the event that the
applicable Trust Fund (or one or more segregated pools of assets
therein) elects to be treated as a REMIC, the reallocation from
time to time, on the basis of distributions previously received,
of the respective percentage interests of the Senior Certificates
and the Subordinated Certificates in the related Trust Fund. See
"Description of the Certificates -- Distributions to Percentage
Certificateholders -- Shifting Interest Certificates."
B. By Other Methods......................... The Certificates of any Series, or any one or more Classes
thereof, may be entitled to the benefits of a guarantee, letter
of credit, mortgage pool insurance policy, surety bond,
reserve fund, spread account, application of excess interest
to principal or other form of credit enhancement as specified
in the applicable Prospectus Supplement. See "Description
of the Certificates" and "Credit Support."
Advances.......................................... Under the Pooling and Servicing Agreement for each Series
relating to Mortgage Loans or Contracts, unless otherwise
provided in the applicable Prospectus Supplement, the
related Servicer will be obligated to make advances of cash
("Advances") to the Certificate Account (as defined herein)
in the event of delinquencies in payments on the Mortgage
Loans or Contracts to the extent described herein and in the
applicable Prospectus Supplement and only to the extent that
the Servicer determines such Advances would be recoverable
from future payments and collections on the Mortgage Loans
or Contracts. Any Advances made by the Servicer will
ultimately be reimbursable to the Servicer from the
Certificate Account. See "Servicing of the Mortgage Loans
and Contracts -- Advances and Limitations Thereon."
Early Termination................................. If so specified in the related Prospectus Supplement, a Series
of Certificates may be subject to early termination through
the repurchase of the assets in the related Trust Fund by the
person or persons, under the circumstances and in the
manner specified in such Prospectus Supplement. See
"Prepayment and Yield Considerations."
Legal Investment.................................. If so specified in the Prospectus Supplement, one or more
classes of Certificates offered pursuant to this Prospectus
will constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984
("SMMEA"), so long as they are rated in one of the two
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highest rating categories by at least one "nationally recognized
statistical rating organization. As "mortgage related
securities," such Certificates offered pursuant to this
Prospectus will constitute legal investments for certain types of
institutional investors to the extent provided in SMMEA subject,
in any case, to any other regulations which may govern
investments by such institutional investors. Since certain other
classes of Certificates offered pursuant to this Prospectus will
not either represent interests in, or be secured by, qualifying
mortgage loans, such Certificates will not constitute "mortgage
related securities" under SMMEA. No representation is made as to
the appropriate characterization of any Certificates under any
laws relating to investment restrictions, as to which investors
should consult their legal advisors. See "Legal Investment".
ERISA Limitations................................. A fiduciary of any employee benefit plan subject to the
fiduciary responsibility provisions of the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), including the prohibited transaction rules
thereunder, and to the corresponding provisions of the
Internal Revenue Code of 1986, as amended (the "Code"),
should carefully review with its own legal advisors whether
the purchase or holding of Certificates could give rise to a
transaction prohibited or otherwise impermissible under
ERISA or the Code. See "ERISA Considerations."
Federal Income Tax
Status ......................................... The federal income tax consequences of investment in a
Certificate of any Series will vary depending upon the
characteristics of such Certificate. If so specified in the
applicable Prospectus Supplement, an election may be made
to have the Trust Fund (or one or more segregated pools of
assets therein) with respect to a Series of Certificates treated
as a REMIC for federal income tax purposes. See "Certain
Federal Income Tax Consequences."
Rating ......................................... At the date of issuance of each Series of Certificates, the
Certificates offered pursuant to the related Prospectus
Supplement will be rated in one of the four highest rating
categories by at least one statistical rating organization that
has been requested by the Depositor to rate such Certificates
(a "Rating Agency"). Such ratings will address, in the
opinion of such Rating Agency, the likelihood that the
related Trust Fund will be able to make timely payment of
all amounts due on the related Series of Certificates in
accordance with the terms thereof. Such ratings will neither
address any prepayment or yield considerations applicable to
any Certificates nor constitute a recommendation to buy, sell
or hold any Certificates.
The ratings expected to be received with respect to any
Certificates will be set forth in the related Prospectus
Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Certificates.
Limited Liquidity. There can be no assurance that a secondary market
for the Certificates of any series or class will develop or, if it does develop,
that it will provide Certificateholders with liquidity of investment or that it
will continue for the life of the Certificates of any series. The Prospectus
Supplement for any series of Certificates may indicate that an underwriter
specified therein intends to establish a secondary market in such Certificates;
however, no underwriter will be obligated to do so. Unless otherwise specified
in the related Prospectus Supplement, the Certificates will not be listed on any
securities exchange.
Limited Obligations. The Certificates will not represent an interest in
or obligation, either recourse or non-recourse (except for certain non-recourse
debt described under "Certain Federal Income Tax Consequences"), of the
Depositor, the Servicer or any person other than the related Trust. The only
obligations of the foregoing entities with respect to the Certificates or the
Mortgage Loans will be the obligations (if any) of the Depositor and the
Servicer pursuant to certain limited representations and warranties made with
respect to the Mortgage Loans, the Servicer's servicing obligations under the
related Pooling and Servicing Agreement (including its limited obligation, if
any, to make certain advances in the event of delinquencies on the Mortgage
Loans, but only to the extent deemed recoverable) and, if and to the extent
expressly described in the related Prospectus Supplement, certain limited
obligations of the Depositor, Servicer, applicable Sub-Servicer, or another
party in connection with a purchase obligation ("Purchase Obligation") or an
agreement to purchase or act as remarketing agent with respect to a Convertible
Mortgage Loan upon conversion to a fixed rate. Notwithstanding the foregoing,
and as to be described in the related Prospectus Supplement, certain types of
Credit Enhancement, such as a financial guaranty insurance policy or a letter of
credit, may constitute a full recourse obligation of the issuer of such Credit
Enhancement. Except as described in the related Prospectus Supplement, neither
the Certificates nor the underlying Mortgage Loans will be guaranteed or insured
by any governmental agency or instrumentality, or by the Depositor, the
Servicer, any Sub-Servicer or any of their affiliates. Proceeds of the assets
included in the related Trust Fund for each series of Certificates (including
the Mortgage Loans and any form of Credit Enhancement) will be the sole source
of payments on the Certificates, and there will be no recourse to the Depositor
or any other entity in the event that such proceeds are insufficient or
otherwise unavailable to make all payments provided for under the Certificates.
Limitations, Reduction and Substitution of Credit Enhancement. With
respect to each series of Certificates, Credit Enhancement will be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit Enhancement will be provided in one or more of the forms referred
to herein, including, but not limited to: a letter of credit; a Purchase
Obligation; a mortgage pool insurance policy; a special hazard insurance policy;
a bankruptcy bond; a reserve fund; a financial guaranty insurance policy or
other type of Credit Enhancement to provide partial coverage for certain
defaults and losses relating to the Mortgage Loans. Credit Enhancement also may
be provided in the form of the related class of Certificates, subordination of
one or more classes of Certificates in a series under which losses in excess of
those absorbed by any related class of Certificates are first allocated to any
Subordinate Certificates up to a specified limit, cross-support among Trust Fund
Assets and/or overcollateralization. See "Credit Support -- Subordination" and
"Other Credit Enhancement." Regardless of the form of Credit Enhancement
provided, the coverage will be limited in amount and in most cases will be
subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such Credit Enhancements may provide only very limited coverage as
to certain types of losses, and may provide no coverage as to certain other
types of losses. Generally, Credit Enhancements do not directly or indirectly
guarantee to the investors any specified rate of prepayments. The Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the Credit Enhancement for any series of Certificates, if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. To the extent not set forth herein, the amount and types of coverage,
the identification of any entity providing the coverage, the terms of any
subordination and related information will be set forth in the Prospectus
Supplement relating to a series of Certificates. See "Credit Support - -
Subordination" and "Other Credit Enhancement."
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RISKS OF THE MORTGAGE LOANS
Risk of the Losses Associated with Junior Liens. Certain of the
Mortgage Loans will be secured by junior Liens subordinate to the rights of the
mortgagee or beneficiary under each related senior mortgage or deed of trust. As
a result, the proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the principal balance of a mortgage
loan only to the extent that the claims, if any, of each such senior mortgagee
or beneficiary are satisfied in full, including any related foreclosure costs.
In addition, a mortgagee secured by a junior Lien may not foreclose on the
related mortgaged property unless it forecloses subject to the related senior
mortgage or mortgages, in which case it must either pay the entire amount of
each senior mortgage to the applicable mortgagee at or prior to the foreclosure
sale or undertake the obligation to make payments on each senior mortgage in the
event of default thereunder. In servicing junior lien loans in its portfolio, it
has been the practice of the Servicer to satisfy each such senior mortgage at or
prior to the foreclosure sale only to the extent that it determines any amounts
so paid will be recoverable from future payments and collections on such junior
Lien loans or otherwise. The Trusts will not have any source of funds to satisfy
any such senior mortgage or make payments due to any senior mortgagee. See
"Certain Legal Aspects of Mortgage Loans and Contracts -- Foreclosure."
Risk of Losses Associated with Declining Real Estate Values. An
investment in securities such as the Certificates that generally represent
beneficial ownership interests in the Mortgage Loans or debt secured by such
Mortgage Loans may be affected by, among other things, a decline in real estate
values and changes in the borrowers' financial condition. No assurance can be
given that values of the Mortgaged Properties have remained or will remain at
their levels on the dates of origination of the related Mortgage Loans. If the
residential real estate market should experience an overall decline in property
values such that the outstanding balances of any senior Liens, the Mortgage
Loans and any secondary financing on the Mortgaged Properties in a particular
Mortgage Pool become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the nonconforming credit mortgage
lending industry. Such a decline could extinguish the interest of the related
Trust in the Mortgaged Properties before having any effect on the interest of
the related senior mortgagee. In addition, in the case of Mortgage Loans that
are subject to negative amortization, due to the addition to principal balance
of deferred interest ("Deferred Interest"), the principal balances of such
Mortgage Loans could be increased to an amount equal to or in excess of the
value of the underlying Mortgaged Properties, thereby increasing the likelihood
of default. To the extent that such losses are not covered by the applicable
Credit Enhancement, holders of Certificates of the series evidencing interests
in the related Mortgage Pool will bear all risk of loss resulting from default
by Mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans.
Risk of Losses Associated with Certain Non-Conforming and
Non-Traditional Loans. The Depositor's underwriting standards consider, among
other things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the value of the property; however, the
Depositor's Mortgage Loan program generally provides for the origination of
Mortgage Loans relating to non-conforming credits. Certain of the types of loans
that may be included in the Pools may involve additional uncertainties not
present in traditional types of loans. For example, certain of the Mortgage
Loans may provide for escalating or variable payments by the borrower under the
Mortgage Loan (the "Mortgagor"), as to which the Mortgagor is generally
qualified on the basis of the initial payment amount. In some instances the
Mortgagors' income may not be sufficient to enable them to continue to make
their loan payments as such payments increase and thus the likelihood of default
will increase. For a more detailed discussion, see "Underwriting Guidelines."
Risk of Losses Associated with Balloon Loans. Certain of the Mortgage
Loans may constitute "Balloon Loans." Balloon Loans are originated with a stated
maturity of less than the period of time of the corresponding amortization
schedule. Consequently, upon the maturity of a Balloon Loan, the Mortgagor will
be required to make a "balloon" payment that will be significantly larger than
such Mortgagor's previous monthly payments. The ability of such a Mortgagor to
repay a Balloon Loan at maturity frequently will depend on such borrower's
ability to refinance the Mortgage Loan. The ability of a Mortgagor to refinance
such a Mortgage Loan will be affected by a number of factors, including the
level of available mortgage rates at the time, the value of the related
Mortgaged Property, the Mortgagor's equity in the related Mortgaged Property,
the financial condition of the Mortgagor, the tax laws and general economic
conditions at the time.
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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."
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Certain of the Mortgaged Properties relating to Mortgage Loans may not
be owner occupied. It is possible that the rate of delinquencies, foreclosures
and losses on Mortgage Loans secured by nonowner occupied properties could be
higher than for loans secured by the primary residence of the borrower.
Litigation. Any material litigation relating to the Depositor or the
Servicer will be specified in the related Prospectus Supplement.
Geographic Concentration of Mortgaged Properties. Certain geographic
regions from time to time will experience weaker regional economic conditions
and housing markets than will other regions, and, consequently, will experience
higher rates of loss and delinquency on mortgage loans generally. The Mortgage
Loans underlying certain series of Certificates may be concentrated in such
regions, and such concentrations may present risk considerations in addition to
those generally present for similar mortgage loan asset-backed securities
without such concentrations. Information with respect to geographic
concentration of Mortgaged Properties will be specified in the related
Prospectus Supplement or related current report on Form 8-K.
Legal Considerations. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures, and require licensing of
the Depositor and the Servicer and Sub-Servicers. In addition, most states have
other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices that may
apply to the origination, servicing and collection of the Mortgage Loans.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Servicer to collect all or part of the principal of or
interest on the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Servicer to damages and
administrative sanctions. See "Certain Legal Aspects of Mortgage Loans and
Contracts."
The Mortgage Loans may also be subject to federal laws, including: (i)
the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X promulgated thereunder,
which require certain disclosures to the borrowers regarding the terms of the
Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and general
principles of equity may limit the ability of the Servicer to collect all or
part of the principal of or interest on the Mortgage Loans, may entitle the
borrower to rescind the loan or to a refund of amounts previously paid and, in
addition, could subject the Servicer to damages and administrative sanctions. If
the Servicer is unable to collect all or part of the principal or interest on
the Mortgage Loans because of a violation of the aforementioned laws, public
policies or general principles of equity then the Trust may be delayed or unable
to repay all amounts owed to Investors. Furthermore, depending upon whether
damages and sanctions are assessed against the Servicer or the Depositor, such
violations may materially impact the financial ability of the Depositor to
continue to act as Servicer or the ability of the Depositor to repurchase or
replace Mortgage Loans if such violation breaches a representation or warranty
contained in a Pooling and Servicing Agreement.
Collections on the Mortgage Loans may vary due to the level of
incidence of delinquent payments and of prepayments. Collections on the Mortgage
Loans may also vary due to seasonal purchasing and payment habits of borrowers.
Book-Entry Registration. Issuance of the Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary trading
market since investors may be unwilling to purchase Certificates for which they
cannot obtain definitive physical securities representing such
Certificateholders' interests, except in certain circumstances described in the
related Prospectus Supplement.
Since transactions in Certificates will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
system ("Direct or Indirect Participants") and certain banks, the ability
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of a Certificateholder to pledge a Certificate to persons or entities that do
not participate in the DTC system, or otherwise to take actions in respect of
such Certificates, may be limited due to lack of a physical certificate
representing the Certificates.
Certificateholders may experience some delay in their receipt of
distributions of interest on and principal of the Certificates since
distributions may be required to be forwarded by the Trustee to DTC and, in such
a case, DTC will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable class of Certificateholders either directly or indirectly through
Indirect Participants. See "Description of the Certificates."
The Status of the Mortgage Loans in the Event of Bankruptcy of the
Depositor. In the event of the bankruptcy of the Depositor at a time when it or
any affiliate thereof holds a Certificate, a trustee in bankruptcy of the
Depositor, or its creditors could attempt to recharacterize the sale of the
Mortgage Loans to the related Trust as a borrowing by the Depositor or such
affiliate with the result, if such recharacterization is upheld, that the
Certificateholders would be deemed creditors of the Depositor or such affiliate,
secured by a pledge of the Mortgage Loans. If such an attempt were successful,
it could prevent timely payments of amounts due to the Trust.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such action
could have an effect, for an indeterminate period of time, on the ability of the
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
In addition, the Relief Act imposes limitations that would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan during the Mortgagor's
period of active duty status. Thus, in the event that such a Mortgage Loan goes
into default, there may be delays and losses occasioned by the inability to
realize upon the Mortgaged Property in a timely fashion.
Certificate Rating. The rating of Certificates credit enhanced through
external Credit Enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external Credit Enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to the
Certificates would likely result in a reduction in the rating of the
Certificates. See "Ratings" in the Prospectus Supplement.
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THE TRUST FUNDS
GENERAL
The Trust Fund for each Series of Certificates will consist
primarily of a Pool of Mortgage Loans (a "Mortgage Pool") and/or Contracts (a
"Contract Pool"). In addition, a Trust Fund will also include (i) amounts held
from time to time in the related Certificate Account, (ii) the Depositor's
interest in any primary mortgage insurance, hazard insurance, title insurance
and/or other insurance policies relating to a Mortgage Loan or Contract, (iii)
any property which initially secured a Mortgage Loan and which has been acquired
by foreclosure or trustee's sale or deed in lieu of foreclosure or trustee's
sale, (iv) any Manufactured Home which initially secured a Contract and which is
acquired by repossession, (v) if applicable, and to the extent set forth in the
applicable Prospectus Supplement, any Subordination Reserve Fund and/or any
other reserve fund, (vi) if applicable, and to the extent set forth in the
applicable Prospectus Supplement, one or more guarantees, letters of credit,
insurance policies, or any other credit enhancement arrangement, and (vii) such
other assets as may be specified in the related Prospectus Supplement. Unless
otherwise specified in the applicable Prospectus Supplement, the Trust Fund will
not include, however, the portion of interest on the Mortgage Loans or Contracts
which constitutes the Fixed Retained Yield, if any. See "Fixed Retained Yield"
below. If specified in the related Prospectus Supplement, certain Certificates
will evidence the entire fractional undivided ownership interest in the related
Mortgage Loans held by the related Trust Fund or may represent debt secured by
the related Mortgage Loans.
THE MORTGAGE LOANS
Unless otherwise specified in the related Prospectus
Supplement, each Mortgage Pool will consist of Mortgage Loans evidenced by
promissory notes or other evidences of indebtedness (the "Mortgage Notes") that
provide for an original term to maturity of not more than 40 years, for monthly
payments and for interest on the outstanding principal amounts thereof at a rate
that is either fixed or subject to adjustment as described in the related
Prospectus Supplement. If so specified in the applicable Prospectus Supplement,
the adjustable interest rate on certain of the Mortgage Loans will be
convertible into a fixed interest rate at the option of the mortgagor at the
times and upon the conditions specified therein ("Convertible Mortgage Loans").
The Mortgage Loans may provide for fixed level payments or be GPM Loans, GEM
Loans, Balloon Loans or Buy-Down Loans (each as defined herein) or Mortgage
Loans with other payment characteristics as described in the related Prospectus
Supplement. In addition, the Mortgage Pools may include participation interests
in Mortgage Loans, in which event references herein to payments on Mortgage
Loans underlying, such participations shall mean payments thereon allocable to
such participation interests, and the meaning of other terms relating to
Mortgage Loans will be similarly adjusted. Similarly, the Mortgage Pools may
include Mortgage Loans with respect to which a Fixed Retained Yield has been
retained, in which event references herein to Mortgage Loans and payments
thereon shall mean the Mortgage Loans exclusive of such Fixed Retained Yield. A
"Fixed Retained Yield" in a Mortgage Loan or Contract represents a specified
portion of the interest payable thereon. The Prospectus Supplement for a Series
will specify whether there will be any Fixed Retained Yield in any Mortgage Loan
or Contract and, if so, the owner thereof. See "Servicing of the Mortgage Loans
and Contracts -- Fixed Retained Yield." Unless otherwise specified in the
related Prospectus Supplement, the Mortgage Loans will be secured by promissory
notes or other evidences of indebtedness (the "Mortgages") creating first,
second or more junior liens on conventional one-to four-family residential
properties (which may include mixed-use or vacation properties), all of which
will be located in any of the fifty states or the District of Columbia. The
Mortgage Loans may also consist of installment contracts for the sale of real
estate. If so provided in the applicable Prospectus Supplement, a Mortgage Pool
may also contain cooperative apartment loans (the "Cooperative Loans") evidenced
by promissory notes (the "Cooperative Notes") secured by security interests in
shares issued by private, non-profit, cooperative housing corporations (the
"cooperatives") and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific Cooperative Dwellings in such
cooperatives' buildings. In the case of a Cooperative Loan, the proprietary
lease or occupancy agreement securing such Cooperative Loan is generally
subordinate to any blanket mortgage on the related cooperative apartment
building and/or the underlying land. Additionally, the proprietary lease or
occupancy agreement is subject to termination and the cooperative shares are
subject to cancellation by the cooperative if the tenant-stockholder fails to
pay maintenance or other obligations or charges owed by such tenant-stockholder.
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Mortgage Loans may be entitled to the benefit of external
credit enhancement. Residential Mortgage Loans may be insured by the Federal
Housing Administration or its successors against defaults by the borrower in the
payment of principal and interest thereon, have a portion of principal and
interest payments guaranteed by the Department of Veterans Affairs or its
successors or be subject to other payment guarantees, including guarantees under
the National Housing Act.
Unless otherwise specified in the Prospectus Supplement for a
Series, each Mortgage Loan must have an original term of maturity of not less
than 5 years and not more than 40 years. Unless otherwise specified in the
Prospectus Supplement for a Series, no Mortgage Loan for residential property
will have had, at origination, a principal balance in excess of $5,000,000 or a
Loan-to-Value Ratio in excess of 95%, and Mortgage Loans having Loan-to-Value
Ratios at the time of origination exceeding 80% will be supported by external
credit enhancement or be covered by primary mortgage insurance providing,
coverage on at least the amount of each such mortgage loan in excess of 75% of
the original fair market value of the mortgaged property and remaining in force
until the principal balance of such Mortgage Loan is reduced to 80% of such
original fair market value. The "Loan-to-Value Ratio" is the ratio, expressed as
a percentage, of the principal amount of the Mortgage Loan outstanding at the
origination of such loan divided by the fair market value of the Mortgaged
Property. The fair market value of the Mortgaged Property securing any Mortgage
Loan is, unless otherwise specified in the applicable Prospectus Supplement, the
lesser of (x) the appraised value of the related Mortgaged Property determined
in an appraisal obtained by the originator at origination (or, in the case of a
refinancing, an appraisal obtained at the origination of the refinanced mortgage
loan) and (y) the sale price for such property.
No assurance can be given that values of the Mortgaged
Properties have remained or will remain at the levels which existed on the dates
of origination of the related Mortgage Loans. If the residential real estate
market should experience an overall decline in property values such that the
outstanding balances of the Mortgage Loans and any secondary financing on the
Mortgaged Properties in a particular Trust Fund become equal to or greater than
the value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. To the extent that such losses are not covered by
the methods of credit support or the insurance policies described herein, they
will be borne by holders of the Certificates of the Series evidencing interests
in such Trust Fund. Furthermore, in a declining real estate market a new
appraisal could render the Cut-Off Date Loan-to-Value Ratios as unreliable
measures of leverage.
The Prospectus Supplement for each Series will set forth
certain characteristics of the related Mortgage Loans, which may include the
aggregate principal balance of the Mortgage Loans in the Mortgage Pool
underlying such Series as of the Cut-Off Date for such Series (the "Cut-Off Date
Aggregate Principal Balance"), the range of original terms to maturity of the
Mortgage Loans in the Mortgage Pool, the weighted average remaining term to
stated maturity at the Cut-Off Date of such Mortgage Loans, the earliest and
latest origination dates of such Mortgage Loans, the range of Mortgage Rates and
Net Mortgage Rates borne by such Mortgage Loans, the weighted average Net
Mortgage Rate at the Cut-Off Date of such Mortgage Loans, the percentage of such
Mortgage Loans which had Loan-to-Value Ratios at the time of origination of 80%
or less, the percentage of such Mortgage Loans that had Loan-to-Value Ratios at
origination in excess of 80% and the highest outstanding, principal balance at
origination of any such Mortgage Loan.
Unless otherwise specified in the applicable Prospectus
Supplement, all of the Mortgage Loans in a Trust Fund will have monthly payments
due on a specified day of each month (each, a "Due Date") and will, with respect
to Mortgage Loans secured by residential properties, require at least monthly
payments of interest on any outstanding balance. If so specified in the
applicable Prospectus Supplement, the Mortgage Pools may include adjustable rate
Mortgage Loans that provide for payment adjustments to be made less frequently
than adjustments in the Mortgage Rates. Each adjustment in the Mortgage Rate
which is not made at the time of a corresponding adjustment in payments (and
which adjusted amount of interest is not paid currently on a voluntary basis by
the mortgagor) will result in a decrease (if the Mortgage Rate rises) or an
increase (if the Mortgage Rate declines) in the rate of amortization of the
Mortgage Loan. Moreover, such payment adjustments on the Mortgage Loans may be
subject to certain limitations, as specified in the Prospectus Supplement, which
may also affect the rate of amortization on the Mortgage Loan. As a result of
such provisions, or in accordance with the payment schedules of certain GPM
Loans and other Mortgage Loans, the amount of interest accrued in any month may
equal or exceed
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the scheduled monthly payment on the Mortgage Loan. In any such month, no
principal would be payable on the Mortgage Loan, and if the accrued interest
exceeded the scheduled monthly payment, such excess interest due would become
"Deferred Interest" that is added to the principal balance of the Mortgage Loan.
Deferred Interest will bear interest at the Mortgage Rate until paid. If such
limitations prevent the payments from being sufficient to amortize fully the
Mortgage Loan by its stated maturity dare, a lump sum payment equal to the
remaining unpaid principal balance will be due on such stated maturity date. See
"Prepayment and Yield Considerations."
Unless otherwise specified in the applicable Prospectus
Supplement, the Mortgage Loans in each Mortgage Pool will be permanent loans (as
opposed to construction and land development loans) secured by Mortgages on
Mortgaged Properties. The Mortgaged Properties will consist of residential
properties only, including detached homes, townhouses, units in planned unit
developments, condominium units, mixed-use properties, vacation homes and small
scale multifamily properties, all of which constitute a "dwelling or mixed
residential and commercial structure" within the meaning of Section
3(a)(41)(A)(i) of the Securities Exchange Act of 1934, as amended (the
"Mortgaged Properties"). The Mortgage Loans will be secured by liens on fee
simple or leasehold interests (in those states in which long-term ground leases
are used as an alternative to fee interests) in such Mortgaged Properties, or
liens on shares issued by cooperatives and the related proprietary leases or
occupancy agreements occupy specified units in such cooperatives' buildings. The
geographic distribution of Mortgaged Properties will be set forth in the
Prospectus Supplement. Each Prospectus Supplement will also set forth the
percentage of the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans
in the related Mortgage Pool representing the refinancing of existing mortgage
indebtedness and the types of Mortgaged Properties.
If so specified in the applicable Prospectus Supplement, a
Trust Fund may contain Mortgage Loans subject to temporary buy-down plans (the
"Buy-Down Loans") pursuant to which the monthly payments made by the mortgagor
during the early years of the Mortgage Loan will be less than the scheduled
monthly payments on the Mortgage Loan. The resulting difference in payment will
be compensated for from an amount contributed by the seller of the related
Mortgaged Property or another source and, if so specified in the related
Prospectus Supplement, placed in a custodial account (the "Buy-Down Account") by
the Servicer. If the mortgagor on a Buy-Down Loan prepays such Mortgage Loan in
its entirety, or defaults on such Mortgage Loan and the Mortgaged Property is
sold in liquidation thereof, during the period when the mortgagor is not
obligated, on account of the buy-down plan, to pay the full monthly payment
otherwise due on such loan, the unpaid principal balance of such Buy-Down Loan
will be reduced by the amounts remaining in the Buy-Down Account with respect to
such Buy-Down Loan, and such amounts shall be deposited in the Certificate
Account (as defined herein), net of any amounts paid with respect to such
Buy-Down Loan by any insurer, guarantor or other person pursuant to a credit
enhancement arrangement described in the applicable Prospectus Supplement.
If so specified in the applicable Prospectus Supplement, a
Trust Fund may include Mortgage Loans which are amortized over 30 years or some
other term, or which do not provide for amortization prior to maturity, but
which have a shorter term (each such Mortgage Loan, a "Balloon Loan") that
causes the outstanding principal balance of such Mortgage Loan to be due and
payable at the end of a certain specified period (the "Balloon Period"). If
specified in the applicable Prospectus Supplement, the originator of such
Balloon Loan will be obligated to refinance each such Balloon Loan at the end of
its Balloon Period at a new interest rate determined prior to the end of such
Balloon Period by reference to an index plus a margin specified in the related
Mortgage Note. The mortgagor is not, however, obligated to refinance the Balloon
Loan through such originator. In the event a mortgagor refinances a Balloon
Loan, the new loan will not be included in the Trust Fund. See "Prepayment and
Yield Considerations."
If specified in the Prospectus Supplement for any Series, the
Mortgage Loans included in the Trust Fund for such Series may be what are
commonly referred to as "home equity revolving lines of credit" ("Home Equity
Lines"). Home Equity Lines are generally evidenced by a loan agreement ("Loan
Agreement") rather than a note. Home Equity Lines generally may be drawn down
from time to time by the borrower writing a check against the account, or
acknowledging the advance in a supplement to the Loan Agreement (the amount of
such drawn down, an "Additional Balance"). A Home Equity Line will establish a
maximum credit limit with respect to the related borrower, and will permit the
borrower to draw down Additional Balances, and repay the aggregate balance
outstanding in each case from time to time in such a manner so that the
aggregate balance outstanding does
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not exceed the maximum credit limit. A Home Equity Line will be secured by
either a senior or a junior lien Mortgage, and will bear interest at either a
fixed or an adjustable rate.
In certain states the borrower must, on the opening of an
account, draw an initial advance of not less than a specified amount. Home
Equity Lines generally amortize according to an amortization basis established
at the time of the initial advance. The "amortization basis" is the length of
time in which the initial advance plus interest will be repaid in full. The
amortization bases of the Home Equity Lines generally range from 60 months (5
years) to 180 months (15 years) depending on the credit limit assigned.
Generally, the amortization basis will be longer the higher the credit limit.
The minimum monthly payment on a Home Equity Line will generally be equal to the
sum of the following: (i) an amount necessary to completely repay the
then-outstanding balance and the applicable finance charge in equal installments
over the assigned amortization basis ("Basic Monthly Amount"); (ii) any monthly
escrow charges; (iii) any delinquency or other similar charges; and (iv) any
past due amounts, including past due finance charges. The Basic Monthly Amount
typically is recomputed each time the related Mortgage Rate adjusts and whenever
an Additional Balance is advanced; such recomputation in the case of an
Additional Advance may also reset the amortization schedule. The effect of each
such advance on the related Home Equity Line is to reset the commencement date
of the original maturity term to the date of the later advance. For example, a
Home Equity Line made originally with a 15-year maturity from date of
origination changes at the time of the next adjustment or advance to a Home
Equity Line with a maturity of 15 years from the date of such advance. For
certain Home Equity Lines, the same type of recomputation exists for adjustments
of the related Mortgage Rate.
Prior to the expiration of a specified period, the reduction
of the account to a zero balance and the closing of a Home Equity Line account
may result in a prepayment penalty. A prepayment penalty also may be assessed
against the borrower if a Home Equity Line account is closed by the Servicer due
to a default by the borrower under the Loan Agreement.
Each Loan Agreement will provide that the Servicer has the
right to require the borrower to pay the entire balance plus all other accrued
but unpaid charges immediately, and to cancel the borrower's credit privileges
under the Loan Agreement if, among other things, the borrower fails to make any
minimum payment when due under the Loan Agreement, if there is a material change
in the borrower's ability to repay the Home Equity Line, or if the borrower
sells any interest in the property securing the Loan Agreement, thereby causing
the "due-on-sale" clause in the trust deed or mortgage to become effective.
Mortgage Loans which are secured by junior mortgages are
subordinate to the rights of the mortgagees under the related senior mortgage or
mortgages. Accordingly, liquidation, insurance and condemnation proceeds
received with respect to the related mortgaged property will be available to
satisfy the outstanding balance of such a Mortgage Loan only to the extent that
the claims of the senior mortgages have been satisfied in full, including any
related liquidation and foreclosure costs. In addition, a junior mortgagee
foreclosing on its mort,age may be required to purchase the related mortgaged
property for a price sufficient to satisfy the claims of the holders of any
senior mortgages which are also being foreclosed. In the alternative, a junior
mortgagee which acquires title to a related mortgaged property, through
foreclosure, deed-in-lieu of foreclosure or otherwise may take the property
subject to any senior mortgages and continue to perform with respect to any
senior mortgages, in which case the junior mortgagee must comply with the terms
of any senior mortgages or risk foreclosure by the senior mortgagee.
If so specified in the applicable Prospectus Supplement, a
loan pool may include graduated equity mortgage loans ("GEM Loans"). GEM Loans
are fixed rate, fully amortizing mortgage loans which provide for monthly
payments based on a 10-to 30-year amortization schedule, and which provide for
scheduled annual payment increases for a number of years and level payments
thereafter. The full amount of the scheduled payment increases during the early
years is applied to reduce the outstanding principal balance of such loans.
If so specified in the applicable Prospectus Supplement, a
Mortgage Pool may include graduated payment mortgage loans ("GPM Mortgage
Loans"). GPM Mortgage Loans provide for payments of monthly installments which
increase annually in each of a specified number of initial years and level
monthly payments thereafter. Payments during the early years are required in
amounts lower than the amounts which would be payable on a level debt service
basis due to the deferral of a portion of the interest accrued on the mortgage
loan.
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Such deferred interest is added to the principal balance of the mortgage loan
and is paid, together with interest thereon, in the later years of the
obligation. Because the monthly payments during the early years of such a GPM
Mortgage Loan are not sufficient to pay the full interest accruing on the GPM
Mortgage Loan, the interest payments on such GPM Mortgage Loan may not be
sufficient in its early years to meet its proportionate share of the
distributions expected to be made on the related Certificates. Thus, if the
Mortgage Loans include GPM Mortgage Loans, the Servicer will, unless otherwise
specified in the Prospectus Supplement, establish a reserve fund (the "GPM
Fund") which (together with, if specified in the related Prospectus Supplement,
reinvestment income thereon) will be sufficient to cover the amount by which
payments of interest on such GPM Mortgage Loan assumed in calculating,
distributions expected to be made on the Certificates of such Series exceed
scheduled interest payments according to the relevant graduated payment mortgage
plan for the period during which excess occurs.
If so specified in the applicable Prospectus Supplement, a
Trust Fund may contain ARM buy-out loans ("ARM Buy-Outs") which are
automatically repurchased by the Depositor upon the occurrence of either(i) a
switch from a fixed-rate mortgage to an adjustable rate mortgage pursuant to the
terms of the underlying note or (ii) a switch from an adjustable rate to a fixed
rate mortgage pursuant to the terms of the underlying note.
If specific information respecting the Mortgage Loans to be
included in a Trust Fund is not known to the Depositor at the time the
Certificates of a Series are initially offered, more general information of the
nature described above will be provided in the Prospectus Supplement and final
specific information will be set forth in a Current Report on Form 8-K to be
available to investors on the date of issuance thereof and to be filed with the
Commission promptly after the initial issuance of such Certificates.
THE CONTRACTS
Unless otherwise specified in the applicable Prospectus
Supplement, each Contract Pool will consist of conventional manufactured housing
installment sales contracts and installment loan agreements (collectively, the
"Contracts") originated by a manufactured housing dealer in the ordinary course
of business and purchased by the Unaffiliated Seller. Unless otherwise specified
in the applicable Prospectus Supplement, each Contract will be secured by
Manufactured Homes (as defined below), each of which will be located in any of
the fifty states or the District of Columbia. Unless otherwise specified in the
applicable Prospectus Supplement, the Contracts will be fully amortizing and
will bear interest at a fixed or adjustable annual percentage rate (the "APR" or
"Contract Rate"). The Contract Pool may include Contracts with respect to which
a Fixed Retained Yield has been retained, in which event references herein to
Contracts and payments thereon shall mean the Contracts exclusive of such Fixed
Retained Yield. The Prospectus Supplement for a Series will specify whether
there will be any Fixed Retained Yield in any Contract, and if so, the owner
thereof. See "Fixed Retained Yield" below.
The Unaffiliated Seller of the Contracts will represent that
the Manufactured Homes securing the Contracts consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis designed to be used
as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air-conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
Unless otherwise specified in the Prospectus Supplement for a
Series, each Contract must have an original term to maturity of not less than 1
year and not more than 40 years. Unless otherwise specified in the Prospectus
Supplement for a Series, no Contract will have had, at origination, a principal
balance in excess of $5,000,000 or a Loan-to-Value Ratio in excess of 95%. The
"Loan-to-Value Ratio" is the ratio, expressed as a percentage, of the principal
amount of the Contract outstanding at the origination of such loan divided by
the fair market value of the Manufactured Home. The fair market value of the
Manufactured Home securing any Contract is, unless otherwise specified in the
applicable Prospectus Supplement, either (x) the appraised value of the related
Manufactured Home determined in an appraisal obtained by the originator at
origination and (y) the sale price for
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such property, plus, in either case, sales and other taxes and, to the extent
financed, filing and recording fees imposed by law, premiums for related
insurance and prepaid finance charges.
Manufactured Homes, unlike site-built homes, generally
depreciate in value. Consequently, at any time after origination it is possible,
especially in the case of Contracts with high Loan-to-Value Ratios at
origination, that the market value of a Manufactured Home may be lower than the
principal amount outstanding under the related Contract.
The Prospectus Supplement for each Series will set forth
certain characteristics of the related Contracts, which may include the
aggregate principal balance of the Contracts in the Contract Pool underlying
such Series as of the Cut-Off Date for such Series (the "Cut-Off Date Aggregate
Principal Balance"), the range of original terms to maturity of the Contracts in
the Contract Pool, the weighted average remaining term to stated maturity at the
Cut-Off Date of such Contracts, the earliest and latest origination dates of
such Contracts, the range of Contract Rates and Net Contract Rates borne by such
Contracts, the weighted average Net Contract Rate at the Cut-Off Date of such
Contracts, the percentage of such Contracts which had Loan-to-Value Ratios at
the time of origination of 80% or less, the percentage of such Contracts that
had Loan-to-Value Ratios at origination in excess of 80% and the highest
outstanding principal balance at origination of any such Contract.
Unless otherwise specified in the applicable Prospectus
Supplement, all of the Contracts in a Trust Fund will have monthly payments due
on the first of each month (each, a "Due Date") and will be fully-amortizing
Contracts. If so specified in the applicable Prospectus Supplement, Contracts
may have Due Dates which occur on a date other than the first of each month. If
so specified in the applicable Prospectus Supplement, the Contract Pools may
include adjustable rate Contracts that provide for payment adjustments to be
made less frequently than adjustments in the Contract Rates. Each adjustment in
the Contract Rate which is not made at the time of a corresponding adjustment in
payments (and which adjusted amount of interest is not paid currently on a
voluntary basis by the obligor) will result in a decrease (if the Contract Rate
rises) or an increase (if the Contract Rate declines) in the rate of
amortization of the Contract. Moreover, such payment adjustments on the
Contracts may be subject to certain limitations, as specified in the Prospectus
Supplement, which may also affect the rate of amortization on the Contract. As a
result of such provisions, the amount of interest accrued in any month may equal
or exceed the scheduled monthly payment on the Contract. In any such month, no
principal would be payable on the Contract, and if the accrued interest exceeded
the scheduled monthly payment, such excess interest due would become "Deferred
Interest" that is added to the principal balance of the Contract. Deferred
Interest will bear interest at the Contract Rate until paid. If such limitations
prevent the payments from being sufficient to amortize fully the Contract by its
stated maturity date, a lump sum payment equal to the remaining unpaid principal
balance will be due on such stated maturity date. See "Prepayment and Yield
Considerations."
The geographic distribution of Manufactured Homes will be set
forth in the Prospectus Supplement. Each Prospectus Supplement will set forth
the percentage of the Cut-Off Date Aggregate Principal Balance of any Contracts
in the Contract Pool which are secured by Manufactured Homes which have become
permanently affixed to real estate. Each Prospectus Supplement will also set
forth the percentage of the Cut-Off Date Aggregate Principal Balance of the
Contracts in the related Contract Pool representing the refinancing of existing
mortgage indebtedness. Unless otherwise specified in a Prospectus Supplement, no
Contract in the Contract Pool will be more than 30 days past due as of the
Cut-Off Date.
If specific information respecting the Contracts to be
included in a Trust Fund is not known to the Depositor at the time the
Certificates of a Series are initially offered, more general information of the
nature described above will be provided in the Prospectus Supplement and final
specific information will be set forth in a Current Report on Form 8-K to be
available to investors on the date of issuance thereof and to be filed with the
Commission promptly after the initial issuance of such Certificates.
FIXED RETAINED YIELD
Fixed Retained Yield with respect to any Mortgage Loan or
Contract is that portion, if any, of interest at the Mortgage Rate or Contract
Rate that is retained by the Depositor or other owner thereof and not included
in the related Trust Fund. The Prospectus Supplement for a Series will specify
whether a Fixed Retained
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Yield has been retained with respect to the Mortgage Loans or Contracts of such
Series, and, if so, the owner thereof. If so, the Fixed Retained Yield will be
established on a loan-by-loan basis with respect to the Mortgage Loans or
Contracts and will be specified in the schedule of Mortgage Loans or Contracts
attached as an exhibit to the applicable Pooling and Servicing Agreement. The
Servicer, with respect to Mortgage Loans or Contracts, may deduct the Fixed
Retained Yield from payments as received and prior to deposit of such payments
in the Certificate Account for such Series or may (unless an election has been
made to treat the Trust Fund (or one or more segregated pools of assets therein)
as a REMIC) withdraw the Fixed Retained Yield from the Certificate Account after
the entire payment has been deposited in the Certificate Account.
Notwithstanding the foregoing, any partial payment or recovery of interest
received by the Servicer relating to a Mortgage Loan or Contract (whether paid
by the mortgagor or obligor or received as Liquidation Proceeds, Insurance
Proceeds or otherwise), after deduction of all applicable servicing fees, will
be allocated between Fixed Retained Yield (if any) and interest at the Net
Mortgage Rate or Net Contract Rate on a pari passu basis.
INSURANCE POLICIES
Unless otherwise specified in the applicable Prospectus
Supplement, the Pooling and Servicing Agreement will require the Servicer to
cause to be maintained for each Mortgage Loan or Contract an insurance policy
issued by a generally acceptable insurer insuring the Mortgaged Property
underlying such Mortgage Loan or the Manufactured Home underlying such Contract
against loss by fire, with extended coverage (a "Standard Hazard Insurance
Policy"). Unless otherwise specified in the applicable Prospectus Supplement,
the Pooling and Servicing Agreement will require that such Standard Hazard
Insurance Policy be in an amount at least equal to the lesser of 100% of the
insurable value of the improvements which are a part of such Mortgaged Property
or Manufactured Home or the principal balance of such Mortgage Loan or Contract;
provided, however, that such insurance may not be less than the minimum amount
required to fully compensate for any damage or loss on a replacement cost basis.
The Servicer will also maintain on property acquired upon foreclosure, or deed
in lieu of foreclosure, of any Mortgage Loan, and on any Manufactured Home
acquired by repossession a Standard Hazard Insurance Policy in an amount that is
at least equal to the lesser of 100% of the insurable value of the improvements
which are a part of such property or the insurable value of such Manufactured
Home or the principal balance of the related Mortgage Loan or Contract plus, if
required by the applicable Pooling and Servicing Agreement, accrued interest and
liquidation expenses; provided, however, that such insurance may not be less
than the minimum amount required to fully compensate for any damage or loss on a
replacement cost basis. Any amounts collected under any such policies (other
than amounts to be applied to the restoration or repair of the Mortgaged
Property or Manufactured Home or released to the borrower in accordance with
normal servicing procedures) will be deposited in the Certificate Account.
The Standard Hazard Insurance Policies covering the Mortgaged
Properties generally will cover physical damage to, or destruction of, the
improvements on the Mortgaged Property caused by fire, lightning, explosion,
smoke, windstorm, hail, riot, strike and civil commotion, subject to the
conditions and exclusions particularized in each policy. Because the Standard
Hazard Insurance Policies relating to such Mortgage Loans will be underwritten
by different insurers and will cover Mortgaged Properties located in various
states, such policies will not contain identical terms and conditions. The most
significant terms thereof, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mudflows), nuclear reaction, wet or dry rot, vermin,
rodents, insects or domestic animals, hazardous wastes or hazardous substances,
theft and, in certain cases, vandalism. The foregoing list is merely indicative
of certain kinds of uninsured risks and is not intended to be all-inclusive.
The Standard Hazard Insurance Policies covering the Contracts
will provide, at a minimum, the same coverage as a standard form fire and
extended coverage insurance policy that is customary for manufactured housing in
the state in which the Manufactured Home is located.
The Servicer may maintain a blanket policy insuring against
hazard losses on all of the Mortgaged Properties or Manufactured Homes in lieu
of maintaining the required Standard Hazard Insurance Policies. The Servicer
will be liable for the amount of any deductible under a blanket policy if such
amount would have been covered by a required Standard Hazard Insurance Policy,
had it been maintained.
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In general, if a Mortgaged Property or Manufactured Home is
located in an area identified in the Federal Register by the Federal Emergency
Management Agency as having special flood hazards (and such flood insurance has
been made available) the Pooling and Servicing Agreement will require the
Servicer to cause to be maintained a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration
with a generally acceptable insurance carrier. Generally, the Pooling and
Servicing Agreement will require that such flood insurance be in an amount not
less than the lesser of (i) the amount required to compensate for any loss or
damage to the Mortgaged Property on a replacement cost basis and (ii) the
maximum amount of insurance which is available under the federal flood insurance
program.
Any losses incurred with respect to Mortgage Loans or
Contracts due to uninsured risks (including earthquakes, mudflows, floods,
hazardous wastes and hazardous substances) or insufficient hazard insurance
proceeds could affect distributions to the Certificateholders.
The Servicer will maintain or cause to be maintained with
respect to each Mortgage Loan a primary mortgage insurance policy in accordance
with the standards described in the "Mortgage Loans" above.
The Servicer shall obtain and maintain at its own expense and
keep in full force and effect a blanket fidelity bond and an error and omissions
insurance policy covering the Servicer's officers and employees as well as
office persons acting on behalf of the Servicer in connection with the servicing
of the Mortgage Loans.
Although the terms and conditions of primary mortgage
insurance policies differ, each primary mortgage insurance policy will generally
cover losses up to an amount equal to the excess of the unpaid principal amount
of a defaulted Mortgage Loan (plus accrued and unpaid interest thereon and
certain approved expenses) over a specified percentage of the value of the
related Mortgage Property.
As conditions precedent to the filing or payment of a claim
under a primary mortgage insurance policy, the insured will typically be
required, in the event of default by the mortgagor, among other things, to: (i)
advance or discharge (a) hazard insurance premiums and (b) as necessary and
approved in advance by the insurer, real estate taxes, protection and
preservation expenses and foreclosure and related costs; (ii) in the event of
any physical loss or damage to the Mortgaged Property, have the Mortgaged
Property restored to at least its condition at the effective date of the primary
mortgage insurance policy (ordinary wear and tear excepted); and (iii) if the
insurer pays the entire amount of the loss or damage, tender to the insurer good
and merchantable title to, and possession of, the Mortgaged Property.
Any mortgage insurance relating to the Contracts underlying a
Series of Certificates will be described in the related Prospectus Supplement.
ACQUISITION OF THE MORTGAGE LOANS AND CONTRACTS FROM UNAFFILIATED SELLERS
The Mortgage Loans or Contracts underlying a Series of
Certificates will be purchased by the Depositor, either directly or through
affiliates, from Unaffiliated Sellers pursuant to a separate agreement (a "Loan
Sale Agreement") between the Depositor or such affiliate and each such
Unaffiliated Seller. The Depositor expects that, unless otherwise specified in
the applicable Prospectus Supplement, each Mortgage Loan or Contract so acquired
will have been originated by the originator thereof in accordance with the
underwriting criteria specified under "Underwriting Guidelines." Unless
otherwise specified in the applicable Prospectus Supplement, each Unaffiliated
Seller must be an institution experienced in originating and servicing
conventional mortgage loans or manufactured housing contracts in accordance with
accepted practices and prudent guidelines, and must maintain facilities to
originate and service those loans satisfactory to the Depositor. In addition,
each Unaffiliated Seller must satisfy certain criteria as to financial stability
evaluated on a case by case basis by the Depositor. Unless otherwise provided in
the applicable Prospectus Supplement, each Unaffiliated Seller pursuant to the
related Loan Sale Agreement will make certain representations and warranties to
the Depositor in respect of the Mortgage Loans or Contracts sold by such
Unaffiliated Seller to the Depositor as described herein under "Representations
and Warranties" below. Unless otherwise provided in the applicable Prospectus
Supplement with respect to each Series, the Depositor will assign all of its
rights (except certain rights of indemnification) and interest in the related
Loan Sale Agreement to the related Trustee for the benefit of the
Certificateholders of such Series, and the Unaffiliated
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Seller shall thereupon be liable to the Trustee for defective Mortgage Loan or
Contract documents or an uncured breach of such Unaffiliated Seller's
representations or warranties, to the extent described below under "Assignment
of the Mortgage Loans and Contracts" and "Representations and Warranties."
ASSIGNMENT OF THE MORTGAGE LOANS AND CONTRACTS
At the time of the issuance of the Certificates of a Series,
the Depositor will cause the Mortgage Loans comprising the Mortgage Pool
(including any related rights to, or security interests in, leases, rents and
personal property) or the Contracts comprising the Contract Pool included in the
related Trust Fund to be assigned to the Trustee, together with all principal
and interest received by or on behalf of the Depositor on or with respect to
such Mortgage Loans or Contracts after the Cut-Off Date, other than principal
and interest due on or before the Cut-Off Date and other than any Fixed Retained
Yield. The Trustee or its accent will, concurrently with such assignment,
authenticate and deliver the Certificates evidencing such Series to the
Depositor in exchange for the Mortgage Loans or Contracts. Each Mortgage Loan or
Contract will be identified in a schedule appearing as an exhibit to the
applicable Pooling and Servicing, Agreement. Each such schedule will include,
among other things, the unpaid principal balance as of the close of business on
the applicable Cut-Off Date, the scheduled monthly payment of principal, if any,
and interest, the maturity date and the Mortgage Rate or Contract Rate for each
Mortgage Loan or Contract in the related Trust Fund.
With respect to each Mortgage Loan in a Trust Fund, the
mortgage or other promissory note, any assumption, modification or conversion to
fixed interest rate agreement, a copy of any recorded UCC-1 financing statements
and related continuation statements, together with original executed UCC-2 or
UCC-3 financing statements disclosing an assignment of a security interest in
any personal property constituting security for repayment of the Mortgage Loan
to the Trustee, an executed re-assignment of assignment of leases, rents and
profits to the Trustee if the assignment of leases, rents and profits is
separate from the Mortgage, a mortgage assignment in recordable form and the
recorded Mortgage (or other documents as are required under applicable law to
create a perfected security interest in the Mortgaged Property in favor of the
Trustee) will be delivered to the Trustee (or to a designated custodian);
provided that, in instances where recorded documents cannot be delivered due to
delays in connection with recording, copies thereof, certified by the Depositor
to be true and complete copies of such documents, sent for recording, may be
delivered and the original recorded documents will be delivered promptly upon
receipt. As to each Mortgage Loan for which there is primary mortgage insurance,
the certificate of primary mortgage insurance will be delivered to the Trustee.
The assignment of each Mortgage will be recorded promptly after the initial
issuance of Certificates for the related Trust Fund, except in states where, in
the opinion of counsel acceptable to the Trustee, such recording is not required
to protect the Trustee's interest in the Mortgage Loan against the claim of any
subsequent transferee or any successor to or creditor of the Depositor, any
affiliate of the Depositor or the originator of such Mortgage Loan.
With respect to any Mortgage Loans which are Cooperative
Loans, the Depositor will cause to be delivered to the Trustee (or to a
designated custodian) the related original Cooperative Note, the security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Depositor will cause to be filed in the
appropriate office an assignment and a refinancing statement evidencing the
Trustee's security interest in each Cooperative Loan.
With respect to each Contract, there will be delivered to the
Trustee (or to a designated Custodian) the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the property securing each Contract. In order to give notice of the right, title
and interest of Certificateholders to the Contracts, the Depositor will cause a
UCC-1 financing statement to be executed by the Depositor or the Unaffiliated
Seller identifying the Trustee as the secured party and identifying all
Contracts as collateral. Unless otherwise specified in the related Prospectus
Supplement, the Contracts will not be stamped or otherwise marked to reflect
their assignment to the Trust. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Contracts without notice of such assignment, the interest of Certificateholders
in the Contracts could be defeated. See "Certain Legal Aspects of the Mortgage
Loans and Contracts."
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The Trustee (or the custodian hereinafter referred to) will
hold such documents relating to Mortgage Loans or Contracts in trust for the
benefit of Certificateholders of the related Series and will review such
documents within 45 days of the date of the applicable Pooling and Servicing
Agreement. Unless otherwise provided in the applicable Prospectus Supplement, if
any document is not delivered or is found to be defective in any material
respect or has not been recorded as required by the applicable Loan Sale
Agreement, the Trustee (or such custodian) shall immediately notify the Servicer
and the Depositor, and the Servicer shall immediately notify the related
Unaffiliated Seller. If the Unaffiliated Seller cannot cure such omission or
defect within 60 days after receipt of such notice, the Unaffiliated Seller will
be obligated, pursuant to the related Loan Sale Agreement, either to repurchase
the related Mortgage Loan or Contract from the Trustee within 60 days after
receipt of such notice, at a price (the "Purchase Price") equal to the then
unpaid principal balance thereof, plus accrued and unpaid interest at the
applicable Mortgage Rate or Contract Rate (less any Fixed Retained Yield with
respect to such Mortgage Loan or Contract and less the rate, if any, of
servicing compensation payable to the Unaffiliated Seller with respect to such
Mortgage Loan or Contract) through the last day of the month in which such
repurchase takes place or to substitute one or more new Mortgage Loans or
Contracts for such Mortgage Loan or Contract. In the case of a Mortgage Loan or
Contract so repurchased by an Unaffiliated Seller, the Purchase Price will be
deposited in the related Certificate Account. In the case of a substitution,
such substitution will be made in accordance with the standards described in
"Representations and Warranties" below.
There can be no assurance that an Unaffiliated Seller will
fulfill this repurchase or substitution obligation. The Servicer will be
obligated to enforce such obligation to the same extent as it must enforce the
obligation of an Unaffiliated Seller for a breach of representation or warranty
as described below under "Representations and Warranties." However, as in the
case of an uncured breach of such a representation or warranty, neither the
Servicer (unless the Servicer is the Unaffiliated Seller) nor the Depositor will
be obligated to purchase or substitute for such Mortgage Loan or Contract if the
Unaffiliated Seller defaults on its repurchase or substitution obligation,
unless such breach also constitutes a breach of the representations or
warranties of the Servicer or the Depositor, as the case may be. Unless
otherwise specified in the related Prospectus Supplement, this repurchase or
substitution obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for omission of, or a material defect in, a
constituent document.
The Trustee will be authorized to appoint a custodian to
maintain possession of the documents relating to the Mortgage Loans or
Contracts. The custodian will keep such documents as the Trustee's agent under a
custodial agreement.
REPRESENTATIONS AND WARRANTIES
Each Unaffiliated Seller, pursuant to the related Loan Sale
Agreement, will have made representations and warranties in respect of the
Mortgage Loans sold by such Unaffiliated Seller. Unless otherwise specified in
the related Prospectus Supplement, each Unaffiliated Seller of Mortgage Loans
will have represented, among other things, substantially to the effect that (i)
immediately prior to the sale and transfer of such Mortgage Loans, the
Unaffiliated Seller had good title to, and was the sole owner of, each such
Mortgage Loan and there had been no other assignment or pledge thereof, (ii) as
of the date of such transfer, such Mortgage Loans are subject to no offsets,
defenses or counterclaims, (iii) each Mortgage Loan at the tune it was made
complied in all material respects with applicable state and federal laws,
including, usury, equal credit opportunity and disclosure laws, (iv) a lender's
policy of title insurance was issued on the date of the origination of each
Mortgage Loan and each such policy is valid and remains in full force and
effect, (v) as of the date of such transfer, each related Mortgage is a valid
lien on the related Mortgaged Property (subject only to (a) the lien of current
real property taxes and assessments, (b) covenants, conditions and restrictions,
rights of way, easements and other matters of public record as of the date of
the recording of such Mortgage, such exceptions appearing of record and either
being acceptable to mortgage lending institutions generally or specifically
reflected in the lender's policy of title insurance issued on the date of
origination and either (A) specifically referred to in the appraisal made in
connection with the origination of the related Mortgage Loan or (B) which do not
adversely affect the appraised value of the Mortgaged Property as set forth in
such appraisal, (c) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security intended to
be provided by the Mortgage and (d) in the case of second or more junior loans
any senior loans of record as of the date of recording of the Equity Loan) and
such property is free of material damage and is in good repair, (vi) as of the
date of such transfer, no Mortgage Loan
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is 30 days or more delinquent in payment and there are no delinquent tax or
assessment liens against the related Mortgaged Property that would permit taxing
authority to initiate foreclosure proceedings, and (vii) with respect to each
Mortgage Loan, if the Mortgaged Property is located in an area identified by the
Federal Emergency Management Agency as having special flood hazards and subject
in certain circumstances to the availability of flood insurance under the
federal flood insurance program, such Mortgaged Property is covered by flood
insurance meeting the requirements of the applicable Pooling and Servicing
Agreement.
Each Unaffiliated Seller, pursuant to the related Loan Sale
Agreement, will have made representations and warranties in respect of the
Contracts sold by such Unaffiliated Seller. Unless otherwise specified in the
related Prospectus Supplement, each Unaffiliated Seller of Contracts will have
represented, among other digs, substantially to the effect that (i) immediately
prior to the sale and transfer of such Contracts, the Unaffiliated Seller had
good title to, and was the sole owner of, each such Contract and there had been
no other assignment or pledge thereof, (ii) as of the date of such transfer,
such Contracts are subject to no offsets, defenses or counterclaims, (iii) each
Contract at the time it was made complied in all material respects with
applicable state and federal laws, including usury, equal credit opportunity and
disclosure laws, (iv) as of the date of such transfer, each related Contract is
a valid first lien on the related Manufactured Home and such Manufactured Home
is free of material damage and is in good repair, (v) as of the date of such
transfer, no Contract is 30 days or more delinquent in payment and there are no
delinquent tax or assessment liens against the related Manufactured Home, and
(vi) with respect to each Contract, the Manufactured Home securing the Contract
is covered by a Standard Hazard Insurance Policy in the amount required by the
Pooling and Servicing Agreement and all premiums then due on such insurance have
been paid in full.
All of the representations and warranties of an Unaffiliated
Seller in respect of a Mortgage Loan or Contract will have been made as of the
date on which such Unaffiliated Seller sold the Mortgage Loan or Contract to the
Depositor. A substantial period of time may have elapsed between the date as of
which the representations and warranties were made and the later date of initial
issuance of the related Series of Certificates. Since the representations and
warranties referred to in the preceding paragraphs are the only representations
and warranties that will be made by an Unaffiliated Seller, the Unaffiliated
Seller's repurchase obligation described below will not arise if, during the
period commencing on the date of sale of a Mortgage Loan or Contract by the
Unaffiliated Seller to the Depositor, the relevant event occurs that would have
given rise to such an obligation had the event occurred prior to sale of the
affected Mortgage Loan or Contract. However, the Depositor will not include any
Mortgage Loan or Contract in the Trust Fund for any series of Certificates if
anything has come to the Depositor's attention that would cause it to believe
that the representations and warranties of an Unaffiliated Seller will not be
accurate and complete in all material respects in respect of such Mortgage Loan
or Contract as of the date of initial issuance of the related Series of
Certificates.
The Depositor will, unless otherwise provided in the
applicable Prospectus Supplement, assign all of its rights (except certain
rights to indemnification) with respect to such representations and warranties
pursuant to any related Loan Sale Agreement to the Trustee for the benefit of
the Certificateholders of the related Series. The Servicer, or the Trustee if
the Servicer is the Unaffiliated Seller, will promptly notify the relevant
Unaffiliated Seller of any breach of any representation or warranty made by it
in respect of a Mortgage Loan or Contract which materially and adversely affects
the interests of the Certificateholders in such Mortgage Loan or Contract.
Unless otherwise specified in the related Prospectus Supplement, if such
Unaffiliated Seller cannot cure such breach within 60 days after notice from the
Servicer or the Trustee, as the case may be, then such Unaffiliated Seller will
be obligated either (i) to repurchase such Mortgage Loan or Contract from the
Trust Fund at the applicable Purchase Price or (ii) subject to the Trustee's
approval and to the extent permitted by the Pooling and Servicing Agreement, to
substitute for such Mortgage Loan or Contract (a "Deleted Loan") one or more
Mortgage Loans or Contracts, as the case may be (each, a "Substitute Loan"), but
only if (i) with respect to a Trust Fund (or one or more segregated pools of
assets therein) for which a REMIC election is to be made, such substitution is
effected within two years of the date of initial issuance of the Certificates or
(ii) with respect to a Trust Fund for which no REMIC election is to be made,
such substitution is effected within 120 days of the date of initial issuance of
the Certificates. Except as otherwise provided in the related Prospectus
Supplement, any Substitute Loan will, on the date of substitution, (i) have a
Loan-to-Value Ratio no greater than that of the Deleted Loan, (ii) have a
Mortgage Rate or Contract Rate not less than (and not more than 1% greater than)
the Mortgage Rate or Contract Rate of the Deleted Loan, (iii) have a Net
Mortgage Rate or Net Contract Rate not less than (and not more than 1% greater
than) the
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Net Mortgage Rate or Net Contract Rate of the Deleted Loan, (iv) have a
remaining term to maturity not greater than (and not more than one year less
than) that of the Deleted Loan and (v) comply with all of the representations
and warranties set forth in the related Loan Sale Agreement as of the date of
substitution. If substitution is to be made for a Deleted Loan with an
adjustable Mortgage Rate or Contract Rate, the Substitute Loan will also bear
interest based on the same index, margin, frequency and month of adjustment as
the Deleted Loan. In the event that one Substitute Loan is substituted for more
than one Deleted Loan, or more than one Substitute Loan is substituted for one
or more Deleted Loans, then the amount described in clause (i) will be
determined on the basis of aggregate principal balances (provided that in all
events the tests for a "qualified mortgage" as described in the second paragraph
under the heading "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates -- Qualification as a REMIC" are met as to
each Substituted Loan), the rates described in clauses (ii) and (iii) with
respect to Deleted Loans will be determined on the basis of weighted average
Mortgage Rates and Net Mortgage Rates or Contract Rates and Net Contract Rates,
as the case may be, and the terms described in clause (iv) will be determined on
the basis of weighted average remaining terms to maturity. In the case of a
Substitute Loan, the mortgage file relating, thereto will be delivered to the
Trustee (or the custodian) and the Unaffiliated Seller will pay an amount equal
to the excess of (i) the unpaid principal balance of the Deleted Loan, over (ii)
the unpaid principal balance of the Substitute Loan or Loans, together with
interest on such excess at the Mortgage Rate or Contract Rate to the next
scheduled Due Date of the Deleted Loan. Such amount will be deposited in the
Certificate Account for distribution to Certificateholders. Except in those
cases in which the Servicer is the Unaffiliated Seller, the Servicer will be
required under the applicable Pooling and Servicing Agreement to enforce this
repurchase or substitution obligation for the benefit of the Trustee and the
holders of the Certificates, following the practices it would employ in its good
faith business judgment were it the owner of such Mortgage Loan or Contract.
This repurchase or substitution obligation will constitute the sole remedy
available to holders of Certificates or the Trustee for a breach of
representation by an Unaffiliated Seller.
Neither the Depositor nor the Servicer (unless the Servicer is
the Unaffiliated Seller) will be obligated to purchase or substitute for a
Mortgage Loan or Contract if an Unaffiliated Seller defaults on its obligation
to do so, and no assurance can be given that Unaffiliated Sellers will carry out
their respective repurchase obligations with respect to Mortgage Loans or
Contracts.
If so specified in the applicable Prospectus Supplement, the
Depositor, the Servicer or another entity specified in the applicable Prospectus
Supplement, will make such representations and warranties as to the types and
geographical concentration of the Mortgage Loans or Contracts in the related
Mortgage Pool or Contract Pool and as to such other matters concerning such
Mortgage Loans or Contracts as may be described therein. Upon a breach of any
such representation or warranty which materially and adversely affects the
interests of the Certificateholders in a Mortgage Loan or Contract, the entity
making such representation or warranty will be obligated either to cure the
breach in all material respects, repurchase the Mortgage Loan or Contract at the
Purchase Price or substitute for such Mortgage Loan or Contract in the manner,
and subject to the conditions, described above regarding the obligations of
Unaffiliated Sellers with respect to missing or defective loan documents or the
breach of such Unaffiliated Sellers' representations and warranties. This
repurchase or substitution obligation constitutes the sole remedy available to
the Certificateholders or the Trustee for a breach of a representation or
warranty by the Depositor, the Servicer or such other party, respectively.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each Series of Certificates will be issued pursuant to a
Pooling and Servicing Agreement among the Depositor, the Servicer, if the Series
relates to Mortgage Loans or Contracts, and the Trustee named in the related
Prospectus Supplement. The provisions of each Pooling and Servicing Agreement
will vary depending upon the nature of the Certificates to be issued thereunder
and the nature of the related Trust Fund. Forms of the Pooling and Servicing
Agreements have been filed as exhibits to the Registration Statement of which
this Prospectus is a part. The following summaries describe certain provisions
of the Certificates and the Pooling and Servicing Agreements; however, the
summaries do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, all of the provisions of the Pooling and
Servicing Agreement for each Series of Certificates
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and the applicable Prospectus Supplement. Each Pooling and Servicing Agreement
executed and delivered with respect to each Series will be filed with the
Commission as an exhibit to a Current Report on Form 8-K promptly after issuance
of the Certificates of such Series. The Depositor will provide a copy of the
Pooling and Servicing Agreement (without exhibits) relating to any Series
without charge upon written request of a holder of a Certificate of such Series
addressed to Prudential Securities Secured Financing Corporation, One Seaport
Plaza, 26th Floor, New York, New York 10292, Attention: James Fadel.
Each Series of Certificates will evidence the beneficial
ownership interest in the related Trust Fund created by the Depositor pursuant
to the related Pooling and Servicing Agreement. Each Series of Certificates will
consist of one or more Classes of Standard Certificates, Stripped Certificates
or Multi-Class Certificates. Any Class of Certificates may be divided into two
or more Subclasses and any Class of Standard Certificates may be divided into
two or more Subclasses that consist of Multi-Class Certificates. Any Class or
Subclass of Multi-Class Certificates may be Compound Interest Certificates. In
addition, each Series for which the Depositor has caused the related Trust Fund
(or one or more segregated pools of assets therein) to elect to be treated as a
REMIC will include one Class or one Subclass of Residual Certificates with
respect to each such REMIC which, if offered hereby, will represent the right to
receive distributions with respect to such Trust Fund as specified in the
related Prospectus Supplement.
Each Series of Certificates may include one or more Classes or
Subclasses of Certificates (the "Subordinated Certificates") that are
subordinate in right of distributions to one or more other Classes or Subclasses
of Certificates (the "Senior Certificates"). Two types of subordination
arrangements for a Series which consists of two Classes of Standard Certificates
are described herein. See "Distributions to Standard Certificateholders." Any
other type of subordination arrangement for Standard Certificates, or any
subordination arrangement for any Class of Multi-Class Certificates or Stripped
Certificates, will be described in the applicable Prospectus Supplement. Certain
Series or Classes of Certificates may be covered by insurance policies or other
forms of credit enhancement, in each case as described herein and in the related
Prospectus Supplement.
Except as described in the related Prospectus Supplement, the
Mortgage Loans or Contracts included in a Trust Fund will not be guaranteed or
insured by any governmental agency or instrumentality or any other insurer.
The Depositor will cause each Trust Fund (or one or more
segregated pools of assets therein) with respect to a Series which includes
Standard Certificates redeemable on a random lot basis, Multi-Class Certificates
or Shifting Interest Certificates to elect to be treated as a REMIC. The
Depositor may cause any other Trust Fund (or segregated pool of assets therein)
to elect to be treated as a REMIC. If such an election is made, such Series will
consist of one or more Classes or Subclasses of Certificates that will represent
"regular interests" within the meaning of Code Section 860G(a)(1) (such
Certificates collectively referred to as the "Regular Certificates") and one
Class or one Subclass of Certificates that will be designated as the "residual
interest" with respect to each REMIC within the meaning of Code Section
860G(a)(2) (the "Residual Certificates") representing the right to receive
distributions as specified in the Prospectus Supplement for such Series. See
"Certain Federal Income Tax Consequences" herein. The related Prospectus
Supplement will specify whether one or more REMIC elections are to be made.
Alternatively, the Pooling and Servicing Agreement for a Series may provide that
a REMIC election is to be made at the discretion of the Depositor or the
Servicer and may only be made if certain conditions are satisfied. As to each
Series with respect to which a REMIC election is to be made, the Servicer and
the Trustee will be obligated to take certain actions in order to comply with
applicable REMIC laws and regulations, and no Certificateholder other than a
holder of a Residual Certificate will be liable for any prohibited transaction
taxes under applicable REMIC laws and regulations.
The Depositor may sell certain Classes or Subclasses of the
Certificates of a Series, including one or more Classes or Subclasses of
Subordinated Certificates or one Class or one Subclass of Residual Certificates,
in privately negotiated transactions exempt from registration under the
Securities Act. Alternatively, if so specified in the applicable Prospectus
Supplement, the Depositor may offer one or more Classes or Subclasses of the
Subordinated Certificates or the one Class or one Subclass of Residual
Certificates of a Series by means of this Prospectus and such Prospectus
Supplement.
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Unless otherwise specified in the applicable Prospectus
Supplement with respect to a Series of Certificates, each Certificate offered
hereby and by the applicable Prospectus Supplement will be issued in fully
registered form (each, a "Definitive Certificate") and will be issued in the
authorized denominations as specified in the applicable Prospectus Supplement.
The Certificates of a Series offered hereby and by means of the applicable
Prospectus Supplement will be transferable and exchangeable at the office or
agency maintained by the Trustee or such other entity for such purpose set forth
in the related Prospectus Supplement. No service charge will be made for any
transfer or exchange of Certificates, but the Trustee or such other entity may
require payment of a sum sufficient to cover any tax or other governmental
charge in connection with such transfer or exchange. In the event that an
election is made to treat the Trust Fund (or one or more segregated pools of
assets therein) as a REMIC, no legal or beneficial interest in all or any
portion of the "Residual Certificates" thereof may be transferred without the
receipt by the transferor of any affidavit signed by the transferee stating that
the transferee is not a "Disqualified Organization" within the meaning of Code
Section 860E(e)(5) or an agent (including a broker, nominee, or other middleman)
thereof. The Prospectus Supplement with respect to a Series may specify
additional transfer restrictions with respect to the Residual Certificates. See
"Certain Federal Income Tax Consequences -- Federal Income Tax Consequences for
REMIC Certificates -- Taxation of Residual Certificates -- Tax-Related
Restrictions on Transfer of Residual Certificates." If so specified in the
related Prospectus Supplement, the Certificates of specified Classes or
Subclasses of a Series may be issued in the form of book entries on the records
of The Depository Trust Company ("DTC") and participating members thereof.
Distributions will be made on each of the Distribution Dates
specified in the applicable Prospectus Supplement for a Series to persons in
whose name the Certificates of such Series are registered at the close of
business on the related Record Date. Unless otherwise specified in the
applicable Prospectus Supplement, distributions to Certificateholders of all
Series (other than the final distribution in retirement of the Certificates)
will be made by check mailed to the address of the person entitled thereto as it
appears on the certificate register, except that, with respect to any holder of
a Certificate evidencing not less than the specified fractional undivided
interest, notional amount or Stated Amount set forth in such Prospectus
Supplement, distributions will be made by wire transfer in immediately available
funds, provided that the Trustee shall have been furnished with appropriate
wiring instructions not less than three business days (or such longer period as
may be specified in the related Prospectus Supplement) prior to the related
Distribution Date. The final distribution in retirement of Certificates will be
made only upon presentation and surrender of the Certificates at the office or
agency maintained by the Trustee or such other entity for such purpose, as
specified in the final distribution notice to Certificateholders.
A Series of Certificates will consist of one or more Classes
of Standard Certificates or Stripped Certificates (referred to hereinafter
sometimes collectively as "Percentage Certificates") or two or more Classes of
Multi-Class Certificates (each as described below).
PERCENTAGE CERTIFICATES
Each Series of Percentage Certificates may include one or more
Classes of Standard Certificates or Stripped Certificates, any Class of which
may be divided into two or more Subclasses. The Standard Certificates of each
Class will evidence fractional undivided interests in all of the principal and
interest (to the extent of the Net Mortgage Interest Rate) payments on the
Mortgage Loans comprising the Trust Fund related to such Series. Each holder of
a Standard Certificate of a Class will be entitled to receive its Certificate's
percentage interest of the portion of the Pool Distribution Amount (as defined
below) allocated to such Class. The percentage interest of each Standard
Certificate will be equal to the percentage obtained by dividing the aggregate
unpaid principal balance of the Mortgage Loans represented by such Standard
Certificate as of the Cut-Off Date by the aggregate unpaid principal balance of
the Mortgage Loans represented by all the Standard Certificates of the same
Class as of the Cut-Off Date.
The Stripped Certificates of each Class will evidence
fractional undivided interests in specified portions of the principal and/or
interest payments on the Mortgage Loans comprising the Trust Fund related to
such Series. The holders of the Stripped Certificates of each Class will be
entitled to receive a portion (which may be zero) as specified in the applicable
Prospectus Supplement of the principal distributions comprising the Pool
Distribution Amount, and a portion (which may be zero) as specified in the
applicable Prospectus Supplement of the interest distributions comprising the
Pool Distribution Amount on each Distribution Date.
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In the case of Classes of Stripped Certificates representing
interests in interest distributions on the Mortgage Loans and not in principal
distributions on the Mortgage Loans, such Certificates will be denominated in
notional amounts. The aggregate original notional amount for a Class of such
Certificates will be equal to the aggregate unpaid principal balance (or a
specified portion thereof) of the Mortgage Loans as of the Cut-Off Date
specified in the applicable Prospectus Supplement. The notional amount of each
such Stripped Certificate will be used to calculate the holder's pro rata share
of the interest distributions on the Mortgage Loans allocated to that Class and
for the determination of certain other rights of holders of such Class of
Stripped Certificates and will not represent an interest in, or entitle any such
holder to any distribution with respect to, any principal distributions on the
Mortgage Loans. Each such Certificate's pro rata share of the interest
distribution on the Mortgage Loans on each Distribution Date will be calculated
by multiplying the interest distributions on the Mortgage Loans allocated to its
Class by a fraction, the numerator of which is the original notional amount of
such Stripped Certificates and the denominator of which is the aggregate
original notional amount of all the Stripped Certificates of its Class.
The interest of a Class of Percentage Certificates
representing an interest in a Trust Fund (or a segregated pool of assets
therein) with respect to which an election to be treated as a REMIC has been
made may be fixed as described above or may vary over time as a result of
prepayments received and losses realized on the underlying Mortgage Loans. A
Series of Percentage Certificates comprised of Classes whose percentage
interests in the Trust Fund may vary is referred to herein as a Series of
"Shifting Interest Certificates." Distributions on, and subordination
arrangements with respect to, Shifting Interest Certificates are discussed below
under the headings "Description of the Certificates -- Distributions to
Percentage Certificateholders -- Shifting Interest Certificates" and "Credit
Support -- Subordination -- Shifting Interest Certificates."
MULTI-CLASS CERTIFICATES
Each Series may include one or more Classes or Subclasses of
Multi-Class Certificates. Each Multi-Class Certificate will be assigned a Stated
Amount or Notional Amount. The Stated Amount may be based on an amount of
principal of the underlying Mortgage Loans or Contracts or on the value of
future cash flows from the related Trust Fund, without distinction as to
principal and interest received on the Mortgage Loans or Contracts. Interest on
the Classes or Subclasses of Multi-Class Certificates will be paid at rates
specified in or determined as specified in the applicable Prospectus Supplement,
and will accrue in the manner specified therein. Any Class or Subclass of
Multi-Class Certificates may consist of Certificates on which interest accrues
but is not payable until such time as specified in the applicable Prospectus
Supplement ("Compound Interest Certificates"), and interest accrued on any such
Certificate will be added to the Stated Amount thereof in the manner described
therein.
The Stated Amount of a Multi-Class Certificate of a Series at
any time will represent the maximum specified dollar amount (exclusive of
interest at the related Interest Rate, if any) to which the holder thereof is
entitled from the cash flow on the Mortgage Loans or Contracts and other assets
in the Trust Fund for such Series and will decline to the extent distributions
in reduction of Stated Amount are received by such holder. The initial Stated
Amount of each Class within a Series of Multi-Class Certificates will be
specified in the applicable Prospectus Supplement.
FORWARD COMMITMENTS; PRE-FUNDING
A Trust Fund may enter into an agreement (each, a "Forward
Purchase Agreement") with the Depositor whereby the Depositor will agree to
transfer additional Mortgage Loans to such Trust Fund following the date on
which such Trust Fund is established and the related Certificates are issued.
The Trust Fund may enter into Forward Purchase Agreements to permit the
acquisition of additional Mortgage Loans that could not be delivered by the
Depositor or have not formally completed the origination process, in each case
prior to the date on which the Certificates are delivered to the
Certificateholders (the "Closing Date"). Any Forward Purchase Agreement will
require that any Mortgage Loans so transferred to the Trust Fund conform to the
requirements specified in such Forward Purchase Agreement.
If a Forward Purchase Agreement is to be utilized, and unless
otherwise specified in the related Prospectus Supplement, the related Trustee
will be required to deposit in a segregated account (each, a "Pre-Funding
Account") up to 100% of the net proceeds received by the Trustee in connection
with the sale of one or more
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classes of Certificates of the related Series; the additional Mortgage Loans
will be transferred to the related Trust Fund in exchange for money released to
the Depositor from the related Pre-Funding Account. Each Forward Purchase
Agreement will set a specified period (the "Funding Period") during which any
such transfers must occur; for a Trust Fund which elects federal income
treatment as REMIC or as a grantor trust, the related Funding Period will be
limited to three months from the date such Trust Fund is established; for a
Trust Fund which is treated as a mere security device for federal income tax
purposes, the related Funding Period will be limited to nine months from the
date such Trust Fund is established. The Forward Purchase Agreement or the
related Pooling and Servicing Agreement will require that, if all moneys
originally deposited to such Pre-Funding Account are not so used by the end of
the related Funding Period, then any remaining moneys will be applied as a
mandatory prepayment of the related class or classes of Certificates as
specified in the related Prospectus Supplement.
During the Funding Period the moneys deposited to the
Pre-Funding Account will either (i) be held uninvested or (ii) will be invested
in cash-equivalent investments rated in one of the four highest rating
categories by at least one nationally recognized statistical rating orgnaization
and which will either mature prior to the end of the Funding Period, or will be
drawable on demand and in any event, will not constitute the type of investment
which would require registration of the related Trust Funds as an "investment
company" under the Investment Company Act of 1940, as amended.
DISTRIBUTIONS TO PERCENTAGE CERTIFICATEHOLDERS
Except as otherwise specified in the applicable Prospectus
Supplement, on or about the 15th day of each month in which a Distribution Date
occurs (the "Determination Date"), the Servicer will determine the amount of the
payments or other receipts on account of principal and interest on the Mortgage
Loans or Contracts which have been received and which will be distributable to
holders of Certificates on the next Distribution Date (as further described
below, the "Pool Distribution Amount"). The Pool Distribution Amount will be
allocated among the Classes or Subclasses of Percentage Certificates of such
Series in the manner described herein under "Description of the Certificates --
Standard Certificates"; however, if such Certificates are also composed of
Senior Certificates and Subordinated Certificates, then the Pool Distribution
Amount will be allocated in accordance with the terms of the applicable
subordination arrangement. Two types of subordination arrangements are described
below for a Series which consists of two Classes of Standard Certificates. Any
other type of subordination arrangement employed for Certificates of a Series
will be described in the related Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus
Supplement, the "Pool Distribution Amount" for a Distribution Date with respect
to a Series of Certificates as to which the relevant Trust Fund consists of
Mortgage Loans or Contracts will be the sum of all previously undistributed
payments or other receipts on account of principal (including principal
prepayments, Net Liquidation Proceeds (as defined herein), and Net Insurance
Proceeds (as defined herein), if any) and interest on the related Mortgage Loans
or Contracts received by the Servicer after the related Cut-Off Date (except for
amounts due on or prior to such Cut-Off Date), or received by the Servicer on or
prior to the Cut-Off Date but due after the Cut-Off Date, in either case
received on or prior to the Determination Date in the month in which such
Distribution Date occurs, plus (i) all Advances made by the Servicer, (ii) all
withdrawals from any Buy-Down Fund or other fund described in the related
Prospectus Supplement, if applicable, and (iii) all proceeds of Mortgage Loans
or Contracts or property acquired in respect thereof purchased or repurchased
from the Trust Fund as provided in the Pooling and Servicing Agreement
("Repurchase Proceeds"), but excluding the following:
(a) amounts received as late payments of principal or interest
respecting which the Servicer previously has made one or more
unreimbursed Advances;
(b) any unreimbursed Advances with respect to Liquidated
Mortgage Loans (as defined herein) or Liquidated Contracts (as defined
herein);
(c) those portions of each payment of interest on a particular
Mortgage Loan or Contract which represents (i) the Fixed Retained
Yield, if any, and (ii) the applicable Servicing Fee, as adjusted in
respect of Prepayment Interest Shortfalls as described in "Servicing of
the Mortgage Loans and Contracts -
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- Adjustment to Servicing Compensation in Connection with Prepaid and
Liquidated Mortgage Loans and Contracts";
(d) all amounts representing scheduled payments of principal
and interest due after the Due Date occurring in the month in which
such Distribution Date occurs;
(e) all principal prepayments and all proceeds (including
Liquidation Proceeds, Insurance Proceeds and Repurchase Proceeds) of
any Mortgage Loans or Contracts, or property acquired in respect
thereof, liquidated, foreclosed, purchased or repurchased pursuant to
the applicable Pooling and Servicing Agreement, received on or after
the Due Date occurring in the month in which such Distribution Date
occurs, and all related payments of interest on such amounts;
(f) where permitted by the related Pooling and Servicing
Agreement, that portion of Liquidation Proceeds or Insurance Proceeds
which represents Fixed Retained Yield, if any, or any unpaid Servicing
Fee to which the Servicer is entitled;
(g) all amounts representing certain expenses reimbursable to
the Servicer and other amounts pertained to be withdrawn by the
Servicer from the Certificate Account, in each case pursuant to the
applicable Pooling and Servicing Agreement;
(h) all amounts in the nature of late fees, assumption fees,
prepayment fees and similar fees which the Servicer is entitled to
retain pursuant to the applicable Pooling and Servicing Agreement; and
(i) where permitted by the applicable Pooling and Servicing
Agreement, reinvestment earnings on payments received in respect of the
Mortgage Loans or Contracts.
CERTIFICATES OTHER THAN SHIFTING INTEREST CERTIFICATES
With respect to a Series of Certificates which is comprised of
one Class of Standard Certificates which are Senior Certificates and one Class
of Standard Certificates which are Subordinated Certificates, the Servicer shall
determine the aggregate amount which would have been distributable to such Class
of Senior Certificates (the "Senior Class Distributable Amount") and the
aggregate amount which would have been distributable to such Class of
Subordinated Certificates (the "Subordinated Class Distributable Amount")
assuming, among other things, no delinquencies or losses on the Mortgage Loans
or Contracts preceding such Distribution Date and, based on the Pool
Distribution Amount and such Distributable Amounts, will determine the amount
actually to be distributed to each Class and Subclass.
Calculation of Distributable Amounts. If a Series of
Certificates includes one Class of Standard Certificates which are Senior
Certificates and one Class of Standard Certificates which are Subordinated
Certificates, unless otherwise specified in the applicable Prospectus
Supplement, the Senior Class Distributable Amount with respect to such Senior
Certificates on a Distribution Date will be an amount equal to the sum of:
(i) the aggregate undivided interest, expressed as a
percentage and specified in the applicable Prospectus Supplement,
evidenced by such Class of Senior Certificates (the "Senior Class
Principal Portion") of:
(a) all scheduled payments of principal on each
outstanding Mortgage Loan or Contract that became due on the
Due Date immediately preceding such Distribution Date in
accordance with the amortization schedules of the related
Mortgage Loans or Contracts (as adjusted to give effect to any
previous prepayments), whether or not such payments were
actually received by the Servicer (the aggregate of such
scheduled payments due on any such Due Date being referred to
herein as "Scheduled Principal");
(b) all principal prepayments received by the
Servicer in the month preceding the month in which such
Distribution Date occurs;
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<PAGE> 115
(c) the Scheduled Principal Balance (as defined
herein) of each Mortgage Loan or Contract which was purchased
from the Trust Fund as provided in the Pooling and Servicing
Agreement (as described in "The Trust Funds" and "The Pooling
and Servicing Agreement"), and of each Mortgage Loan or
Contract as to which the Servicer has determined that all
recoveries of Liquidation Proceeds and Insurance Proceeds have
been received (a "Liquidated Mortgage Loan" or "Liquidated
Contract"), in each case during the month preceding the month
in which such Distribution Date occurs, calculated as of the
date each such Mortgage Loan or Contract was purchased or
calculated as of the date each such Mortgage Loan or Contract
became a Liquidated Mortgage Loan or Liquidated Contract, as
the case may be; and
(d) with respect to (1) the disposition of the
Mortgaged Property or Manufactured Home in connection with any
Liquidated Mortgage Loan or Contract, the amount by which Net
Liquidation Proceeds and Net Insurance Proceeds exceed the
unpaid principal balance of such Mortgage Loan or Contract and
accrued but unpaid interest on such Mortgage Loan or Contract
at the Mortgage Rate or Contract Rate to the Due Date next
succeeding the last date of receipt of the Liquidation
Proceeds and Insurance Proceeds, and (2) the repurchase of
Mortgage Loans or Contracts in connection with an early
termination of the Trust Fund (see "The Pooling and Servicing
Agreement -- Termination; Purchase of Mortgage Loans and
Contracts"), the amount by which the repurchase price exceeds
the aggregate unpaid principal balances of the Mortgage Loans
or Contracts in the related Trust Fund and accrued but unpaid
interest at the weighted average Mortgage Rate or Contract
Rate through the end of the month in which such repurchase
occurs (collectively, "Gain From Acquired Property"); and
(ii) interest at the Pass-Through Rate for the Class of Senior
Certificates from the second preceding Due Date (or the Cut-Off Date in
the case of the first Distribution Date) to the Due Date immediately
preceding such Distribution Date on the Senior Class Principal Portion
of the aggregate Scheduled Principal Balance of the Mortgage Loans or
Contracts as of the second preceding Due Date (or as of the Cut-Off
Date in the case of the first Distribution Date) whether or not such
interest was actually received by the Servicer; provided that
Prepayment Interest Shortfall is included only to the extent that funds
for such purposes are available out of Servicing Compensation; less
(iii) the Senior Class Principal Portion of any
indemnification payments made to the Servicer, the Depositor, or any
officer, director, employee or agent of either the Servicer or the
Depositor since the preceding Distribution Date as described under
"Servicing of the Mortgage Loans and Contracts -- Certain Matters
Regarding the Servicer and the Depositor" below (the "Indemnification
Payments").
Unless otherwise specified in the applicable Prospectus
Supplement, the Subordinated Class Distributable Amount with respect to a
Distribution Date for Percentage Certificates which are Subordinated
Certificates will be an amount equal to the sum of:
(i) the aggregate undivided interest, expressed as a
percentage and specified in the applicable Prospectus Supplement,
evidenced by such Subordinated Certificates (the "Subordinated Class
Principal Portion") of:
(a) all Scheduled Principal;
(b) all principal prepayments received by the
Servicer during the month preceding the month in which such
Distribution Date occurs;
(c) the Scheduled Principal Balance of each Mortgage
Loan or Contract which was purchased from the Trust Fund as
provided in the Pooling and Servicing Agreement (as described
in "The Trust Funds" and "The Pooling and Servicing
Agreement"), and of each Mortgage Loan or Contract which
became a Liquidated Mortgage Loan or Liquidated Contract, in
each case during the month preceding the month in which such
Distribution Date occurs, determined as of the date each such
Mortgage Loan or Contract was purchased, or as of the date
each such
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<PAGE> 116
Mortgage Loan or Contract became a Liquidated Mortgage Loan or
Liquidated Contract, as the case may be; and
(d) Gain From Acquired Property; and
(ii) interest at the Pass-Through Rate for the Class of
Subordinated Certificates from the second preceding Due Date (or from
the Cut-Off Date in the case of the first Distribution Date) to the Due
Date immediately preceding such Distribution Date on the Subordinated
Class Principal Portion of the Scheduled Principal Balance of the
Mortgage Loans or Contracts as of the second preceding Due Date (or as
of the Cut-Off Date in the case of the first Distribution Date),
whether or not such interest was actually received with respect to the
Mortgage Loans or Contracts; provided that Prepayment Interest
Shortfall is included only to the extent that funds for such purposes
are available out of Servicing Compensation; less
(iii) the Subordinated Class Principal Portion of any
Indemnification Payments.
The foregoing is subject to the proviso that if one or more
REMIC elections are made with respect to a Series of Certificates, any Gain From
Acquired Property will not be included in the Distributable Amount of the Class
of such Series which consist of Regular Interests, but shall instead be paid in
full to the holders of the Residual Certificates of such Series.
Calculation of Amounts To Be Distributed. The Servicer will
calculate, on the related Determination Date, the portion of the Distributable
Amount for each Class of the Series that is actually available to be paid out of
the Pool Distribution Amount on the Distribution Date prior to any adjustments
with respect to subordination. The portion so available on a Distribution Date
to the Senior Certificateholders and to the Subordinated Certificateholders
(respectively, the "Senior Class Pro Rata Share" and the "Subordinated Class Pro
Rata Share") will, unless otherwise specified in the applicable Prospectus
Supplement, be the amount equal to the product of the Pool Distribution Amount
for such Distribution Date and a fraction, the numerator of which is the
Distributable Amount for such Class on such Distribution Date and the
denominator of which is the sum of the Distributable Amounts for such Series on
such Distribution Date.
So long as the Subordinated Amount is greater than zero, the
holders of Senior Certificates will be entitled to receive on any Distribution
Date the lesser of (a) the sum of the Senior Class Distributable Amount and the
Senior Class Carryover Shortfall (as defined below) and (b) the Senior Class Pro
Rata Share on such Distribution Date (the "Basic Senior Class Distribution"). In
addition, to the extent Senior Class Credit Enhancement is available, the
holders of Senior Certificates will be entitled to receive the amount, if any,
by which the Senior Class Distributable Amount plus any Senior Class Carryover
Shortfall (as defined below) on such Distribution Date exceeds the Basic Senior
Class Distribution on such Distribution Date (such excess being referred to
herein as the "Senior Class Shortfall"). "Senior Class Credit Enhancement"
includes: (a) amounts otherwise distributable to the holders of Subordinated
Certificates on such Distribution Date and amounts available for such purpose in
any Subordination Reserve Fund pursuant to any subordination of the rights of
any holders of Subordinated Certificates as described below; and (b) any other
credit enhancement arrangement which shall be specified in the related
Prospectus Supplement. See "Credit Support". The "Senior Class Carryover
Shortfall" on any Distribution Date means the amount the holders of Senior
Certificates were entitled to receive on the prior Distribution Date over the
amount the holders of Senior Certificates actually received on such prior
Distribution Date, together with interest on the difference at Pass-Through Rate
for the Senior Certificates from such prior Distribution Date through the
current Distribution Date.
At the time the Subordinated Amount, if any, is reduced to
zero, Senior Certificateholders will be entitled to the Senior Class Pro Rata
Share on each Distribution Date. In such event any remaining Senior Class
Shortfall will cease to be payable from available sources of credit enhancement,
except that the portion of such Senior Class Shortfall which is attributable to
the account of interest on any previous Senior Class Carryover Shortfall (the
"Senior Class Shortfall Accruals") shall continue to bear interest at the
Pass-Through Rate for the Senior Certificates, and the holders of Senior
Certificates shall continue to have a preferential right to be paid such amount
from distributions otherwise available for distribution to any holders of
Subordinated Certificates, until such
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amount (including interest thereon at the Pass-Through Rate for the Senior
Certificates) is paid in full. See "Credit Support -- Subordination."
So long as the Subordinated Amount is greater than zero, the
holders of Subordinated Certificates will be entitled to receive on any
Distribution Date an amount equal to the excess of (a) the sum of (i) the Pool
Distribution Amount and (ii) all amounts released from the Subordination Reserve
Fund for distribution to the holders of Subordinated Certificates on such
Distribution Date over (b) the sum of (i) the Basic Senior Class Distribution,
(ii) any amounts required to be distributed to the holders of Senior
Certificates pursuant to the subordination of the rights of the holders of
Subordinated Certificates and (iii) amounts required to be deposited in the
Subordination Reserve Fund. See "Credit Support." At the time the Subordinated
Amount, if any, is reduced to zero, Subordinated Certificateholders will be
entitled to the Subordinated Class Pro Rata Share on each Distribution Date;
provided, however, that such amount to be distributed to the holders of
Subordinated Certificates shall be decreased to give effect to the preferential
right of the holders of Senior Certificates to receive Senior Class Shortfall
Accruals as provided herein.
The foregoing is subject to the proviso that if a REMIC
election has been made with respect to a Trust Fund (or a segregated pool of
assets therein), the Subordinated Certificateholders of the related Series will
be entitled to the sum of (a) the Subordinated Class Pro Rata Share, (b) all
amounts in the Subordination Reserve Fund (net of any amount required to be
maintained as liquidity for Advances) and (c) such other amounts, if any, as may
be specified in the related Prospectus Supplement (including, if such
Certificates are Residual Certificates, any Gain From Acquired Property).
SHIFTING INTEREST CERTIFICATES
On each Distribution Date for a Series which is comprised of
two Classes of Standard Certificates which are Shifting Interest Certificates,
the holders of record on the Record Date of the Senior Certificates thereof will
be entitled to receive, to the extent of the Pool Distribution Amount with
respect to such Distribution Date and prior to any distribution being made on
the related Subordinated Certificates, an amount equal to the Senior Class
Distribution Amount. The Senior Class Distribution Amount will (except as
otherwise set forth in the applicable Prospectus Supplement) be calculated for
any Distribution Date as the lesser of (x) the Pool Distribution Amount for such
Distribution Date and (y) the sum of:
(i) one month's interest at the applicable Pass-Through Rate
on such Class's outstanding principal balance (less, if specified in
the applicable Prospectus Supplement, (a) the amount of such interest
constituting Deferred Interest, if any, not then payable on the
Mortgage Loans or Contracts and (b) the amount by which the Prepayment
Interest Shortfall with respect to the preceding month exceeds the
aggregate Servicing Fees relating to mortgagor or obligor payments or
other recoveries distributed on such Distribution Date, in each case
allocated to such Class on the basis set forth in the related
Prospectus Supplement);
(ii) if distribution of the amount of interest calculated
pursuant to clause (i) above on prior Distribution Dates was not made
in full on such prior Distribution Dates, an amount equal to (a) the
difference between (x) the amount of interest which the holders of such
Certificates would have received on such prior Distribution Dates if
there had been sufficient funds available in the Certificate Account
and (y) the amount of interest actually distributed to such holders on
such prior Distribution Dates, together with interest on such
difference (to the extent permitted by applicable law) at the
applicable Pass-Through Rate of such Class (the "Unpaid Interest
Shortfall") less (b) the aggregate amount distributed on Distribution
Dates subsequent to such prior Distribution Dates with respect to the
Unpaid Interest Shortfall;
(iii) such Class's percentage, calculated as provided in the
related Prospectus Supplement, of (a) all scheduled payments of
principal due on each outstanding Mortgage Loan or Contract that became
due on the Due Date occurring in the month in which such Distribution
Date occurs, (b) all partial principal prepayments received in the
month preceding the month in which such Distribution Date occurs and
(c) except for Special Hazard Mortgage Loans or Special Hazard
Contracts covered by clause (iv) below, the Scheduled Principal Balance
of each Mortgage Loan or Contract which, during the month preceding the
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month in which such Distribution Date occurs, (i) was the subject of a
principal prepayment in full, (ii) became a Liquidated Mortgage Loan or
Liquidated Contract or (iii) was purchased from the Trust Fund as
provided in the Pooling and Servicing Agreement (as described in "The
Trust Funds" and "The Pooling and Servicing Agreement"); and
(iv) if the Special Hazard Termination Date (as defined below)
has occurred as a result of cumulative net losses on Special Hazard
Mortgage Loans or Special Hazard Contracts exceeding the applicable
Special Hazard Loss Amount (as defined below), such Class's specified
percentage of the Net Liquidation Proceeds and Net Insurance Proceeds
from any Mortgage Loan or Contract that became a Special Hazard
Mortgage Loan or Special Hazard Contract during the month preceding the
month in which such Distribution Date occurs, less the total amount of
delinquent installments of principal in respect of such Special Hazard
Mortgage Loan or Special Hazard Contract that were previously the
subject of distributions to the holders of such Class of Certificates
out of amounts otherwise distributable to the holders of the related
Subordinated Certificates and less the portion of such Net Liquidation
Proceeds and Net Insurance Proceeds allocable to interest on the Senior
Certificates;
provided that, if such Distribution Date falls on or after the Cross-Over Date
(i.e., the date on which the amount of principal payments on the Mortgage Loans
or Contracts to which the holders of the related Subordinated Certificates are
entitled has been reduced to zero as a result of the allocation of losses to the
Subordinated Certificates), then the Senior Class Distribution Amount will
instead equal the lesser of (x) the Pool Distribution Amount and (y) the sum of
the items referred to above plus the amount by which such Senior Certificates'
outstanding principal balance as of such Distribution Date exceeds the Pool
Scheduled Principal Balance as of such Distribution Date. The "Scheduled
Principal Balance" of a Mortgage Loan or Contract for any Distribution Date is
the unpaid principal balance of such Mortgage Loan or Contract as specified in
the amortization schedule at the time relating thereto (before any adjustment to
such schedule by reason of bankruptcy, moratorium or similar waiver or grace
period) as of the first day of the month preceding the month in which such
Distribution Date occurs after giving effect to the payment of principal due on
such first day of the month, any partial prepayments applied on or prior to such
first day of the month, the addition to the principal of such Mortgage Loan or
Contract on or prior to such first day of the month of any Deferred Interest,
and irrespective of any delinquency in payment by the mortgagor or obligor. The
"Pool Scheduled Principal Balance" as of any Distribution Date is the aggregate
of the Scheduled Principal Balances of all Mortgage Loans or Contracts in a
Trust Fund for such Distribution Date.
If so provided in the applicable Prospectus Supplement, the
Class of Senior Certificates will also be entitled to receive its specified
percentage, referred to in clauses (y)(iii)(b) and (y)(iii)(c)(i) above, of all
partial principal prepayments and all principal prepayments in full on the
Mortgage Loans or Contracts in the related Trust Fund under the circumstances or
for the period of time specified therein, which will have the effect of
accelerating the amortization of the Class of Senior Certificates while
increasing the respective interest evidenced by the Class of Subordinated
Certificates in the related Trust Fund. Increasing the respective interest of
the Subordinated Certificates relative to that of the Senior Certificates is
intended to preserve the availability of the subordination provided by the
Subordinated Certificates.
If the Special Hazard Termination Date would occur on any
Distribution Date under the circumstances referred to in "Credit Support --
Subordination," the Senior Class Distribution Amount for each Class and Subclass
of Senior Certificates of such Series calculated as set forth in the two
preceding paragraphs will be modified to the extent described in such section.
Amounts distributed to the Class of Senior Certificates on a
Distribution Date will be deemed to be applied first to the payment of current
interest, if any, due on such Certificates (i.e., the amount calculated pursuant
to clause (y)(i) of the third preceding paragraph), second to the payment of any
Unpaid Interest Shortfall (i.e., the amount calculated pursuant to clause
(y)(ii) of such paragraph) and third to the payment of principal, if any, due on
such Certificates (i.e., the aggregate of the amounts calculated pursuant to
clauses (y)(iii) and (y)(iv) of such paragraph).
As indicated above, in the event that the Pool Distribution
Amount on any Distribution Date is not sufficient to make the full distribution
of current interest to the holders of Senior Certificates entitled to payments
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of interest, the difference between the amount of current interest which the
holders of such Certificates would have received on such Distribution Date if
there had been sufficient funds available and the amount actually distributed
will be added to the amount of interest which the holders of such Certificates
are entitled to receive on the next Distribution Date. Unless otherwise
specified in the related Prospectus Supplement, the amount of any such interest
shortfall so carried forward will bear interest (to the extent permitted by
applicable law) at the Pass-Through Rate applicable to such Certificates or at
such other rate as specified in the applicable Prospectus Supplement.
If the Pool Distribution Amount is insufficient on any
Distribution Date to make the full distribution of principal due to the holders
of Senior Certificates, the percentage of principal payments to which the
holders of the Senior Certificates would be entitled on the immediately
succeeding Distribution Date will be increased, as more fully described below
under "Credit Support -- Subordination -- Shifting Interest Certificates." This
increase will have the effect of reducing, as a relative matter, the respective
interest of the holders of the related Subordinated Certificates in future
payments of principal on the related Mortgage Loans or Contracts. If the Pool
Distribution Amount is not sufficient to make full distribution described above
to the holders of the Class of Senior Certificates on any Distribution Date,
unless otherwise provided in the applicable Prospectus Supplement, the holders
of such Class will share in the funds actually available in proportion to the
respective amounts that such Class would have received had the Pool Distribution
Amount been sufficient to make the full distribution of interest and principal
due to such Class.
Unless otherwise provided in the related Prospectus
Supplement, on each Distribution Date the holders of the related Class of
Subordinated Certificates of a Series will be entitled to receive, out of the
Pool Distribution Amount, all amounts remaining and available for distribution
to them after deduction of the amounts required to be distributed to the holders
of all Senior Certificates of such Series.
EXAMPLE OF DISTRIBUTION TO STANDARD CERTIFICATEHOLDERS
The following chart sets forth an example of the application
of the foregoing provisions to the first two months of the related Trust Fund's
existence, assuming the Certificates are issued in the month of January, with a
Distribution Date on the 25th of each month and a Determination Date on the 15th
of each month:
<TABLE>
<S> <C>
January 1(A)....................... Cut-Off Date.
January 2 -- January 31(B)......... The Servicer receives any
principal prepayments, Net Liquidation Proceeds, Net
Insurance Proceeds and Repurchase Proceeds.
January 31(C)...................... Record Date.
February 1 -- February 15(D)....... The Servicer receives
scheduled payments of principal and interest due on
February 1.
February 15(E)..................... Determination Date.
February 25(F)..................... Distribution Date.
</TABLE>
Succeeding monthly periods follow the pattern of (B) through (F), except that
the period in (B) begins on the first of the month.
(A) The initial unpaid principal balance of the Mortgage Loans or Contracts
in a Trust Fund would be the aggregate unpaid principal balance of the
Mortgage Loans or Contracts at the close of business on January 1,
after deducting principal payments due on or before such date. Those
principal payments due on or before January 1 and the related interest
payments would not be part of the Trust Fund and would be remitted by
the Servicer to the Depositor when received.
(B) Principal prepayments, Net Liquidation Proceeds, Net Insurance Proceeds
and Repurchase Proceeds received during this period would be credited
to the Certificate Account for distribution to Certificateholders on
the February 25 Distribution Date. To the extent funds are available
from the aggregate Servicing Fees relating to mortgagor payments or
other recoveries distributed on the related
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Distribution Date, the Servicer would make an additional payment to
Certificateholders with respect to any Prepayment Interest Shortfall
realized during this period.
(C) Distributions in the month of February will be made to
Certificateholders of record at the close of business on this date.
(D) Scheduled monthly payments on the Mortgage Loans or Contracts due on
February 1 will be deposited in the Certificate Account as received by
the Servicer. Principal prepayments, Net Liquidation Proceeds, Net
Insurance Proceeds and Repurchase Proceeds received during this period,
will be deposited in the Certificate Account but will not be
distributed to Certificateholders on the February 25 Distribution Date.
Instead, such amounts will be credited to the Certificate Account for
distribution to Certificateholders on the March 25 Distribution Date.
(E) As of the close of business on February 15, a determination will be
made of the amounts of Advances and the amounts of principal and
interest which will be distributed to the Certificateholders. Those
scheduled payments due on or before February 1 which have been received
on or before February 15 and those principal prepayments, Net
Liquidation Proceeds, Net Insurance Proceeds and Repurchase Proceeds
received during the period commencing January 2 and ending on January
31 will be distributed to Certificateholders on the February 25
Distribution Date. In addition, the amounts payable in respect of any
form of credit enhancement will be calculated in accordance with the
related Pooling and Servicing Agreement.
(F) Unless otherwise so specified in the related Prospectus Supplement, the
Servicer or the Paying Agent, will make distributions to
Certificateholders on the 25th day of each month, or if such 25th day
is not a business day, on the next business day.
DISTRIBUTIONS TO MULTI-CLASS CERTIFICATEHOLDERS
VALUATION OF MORTGAGE LOANS AND CONTRACTS
If specified in the Prospectus Supplement relating to a Series
of Certificates having one or more Classes or Subclasses of Multi-Class
Certificates, for purposes of establishing the principal amount of Mortgage
Loans or Contracts that will be included in a Trust Fund for such Series, each
Mortgage Loan or Contract to be included in such Trust Fund will be assigned an
initial "Pool Value." Unless otherwise specified in the applicable Prospectus
Supplement, the Pool Value of each Mortgage Loan or Contract in the Trust Fund
for such Series will be the Stated Amount of Certificates of such Series which,
based upon certain assumptions and regardless of any prepayments on such
Mortgage Loans or Contracts, can be supported by the scheduled payments of
principal and interest on such Mortgage Loans or Contracts (net of the Fixed
Retained Yield on such Mortgage Loans or Contracts, if any, and the applicable
Servicing Fee), together with reinvestment earnings thereon, if any, at the
Assumed Reinvestment Rate for the period specified in the related Prospectus
Supplement and amounts available to be withdrawn (if applicable) from any
reserve fund for such Series, all as specified in the applicable Prospectus
Supplement. In calculating the Pool Value of a Mortgage Loan or Contract
included in the Trust Fund, future distributions on such Mortgage Loan or
Contract will be determined based on scheduled payments on such Mortgage Loan or
Contract. Any similar Mortgage Loans or Contracts may be aggregated into one or
more groups (each, a "Pool Value Group") each of which will be assigned an
aggregate Pool Value calculated as if all such Mortgage Loans or Contracts in
the Pool Value Group constituted a single loan having the highest interest rate
and the longest maturity of any such loan for such Pool Value Group. There are a
number of alternative means of determining the Pool Value of a Mortgage Loan,
Contract or Pool Value Group, including determinations based on the discounted
present value of the remaining scheduled payments of principal and interest
thereon and determinations based on the relationship between the Mortgage Rates
or Contract Rates borne thereby and the Interest Rates of the Multi-Class
Certificates of the related Series. The Prospectus Supplement for each Series
will describe the method or methods (and related assumptions) used to determine
the Pool Values of the Mortgage Loans or Contracts or the Pool Value Groups for
such Series.
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<PAGE> 121
The "Assumed Reinvestment Rate" for a Series of Multi-Class
Certificates will be the highest rate permitted by the nationally recognized
statistical rating agency or agencies rating such Series of Multi-Class
Certificates or a rate insured by means of a surety bond, guaranteed investment
contract or similar arrangement satisfactory to such rating agency or agencies.
If the Assumed Reinvestment Rate is so insured, the related Prospectus
Supplement will set forth the terms of such arrangement.
DISTRIBUTIONS OF INTEREST
The Trustee will make distributions of interest on each Class
of the Multi-Class Certificates from the date and at the rates per annum
(calculated on the Stated Amount or Notional Amount of such Class) specified in,
or as otherwise determined in the manner set forth in, the related Prospectus
Supplement (and unless otherwise specified in such Prospectus Supplement,
calculated on the basis of a 360-day year of twelve 30-day months) and in
accordance with the priorities set forth in the related Prospectus Supplement.
Interest on all Classes of Multi-Class Certificates of a Series, other than
Compound Interest Certificates, will be distributed on the Distribution Dates
for such Series specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, distributions of interest on
each Class of Compound Interest Certificates will be made on each Distribution
Date after the Stated Amount of all Multi-Class Certificates of such Series
having a Last Scheduled Distribution Date prior to the Last Scheduled
Distribution Date of such Class of Compound Interest Certificates has been
reduced to zero. Prior to that time, interest on such Class of Compound Interest
Certificates will be added to the Stated Amount thereof on each Distribution
Date. Such Class of Compound Interest Certificates will thereafter receive
distributions of interest on the Stated Amount thereof as so adjusted.
DISTRIBUTIONS IN REDUCTION OF STATED AMOUNT FOR A SERIES OF MULTI-CLASS
CERTIFICATES NOT INCLUDING A SUBORDINATION FEATURE
The Stated Amount of a Multi-Class Certificate of a Series at
any time will represent the maximum specified dollar amount (excluding interest
distributions, but including, in the case of Compound Interest Certificates,
interest which has not been distributed and which has been added to the Stated
Amount thereof) to which the holder thereof is entitled from the cash flow on
the assets included in the Trust Fund for such Series and will decline to the
extent distributions in reduction of Stated Amount are received by such holder.
The initial Stated Amount of each Class of Multi-Class Certificates will be
specified in the applicable Prospectus Supplement. On each Distribution Date,
distributions in reduction of Stated Amount of the Classes of Multi-Class
Certificates will be made, to the extent funds are available, to the holders of
the Multi-Class Certificates of such Series then entitled to receive such
distributions, in the order and in the amounts specified in the related
Prospectus Supplement. Distributions in reduction of Stated Amount may be
allocated among Classes of Multi-Class Certificates in order to provide limited
protection to certain Classes against an increase in the weighted average life
of such Classes as a result of a slower than expected or scheduled rate of
principal prepayments on the Mortgage Loans ("extension protection"). In
addition, distributions in reduction of Stated Amount may be allocated among
Classes of Multi-Class Certificates in order to provide limited protection to
certain Classes against a reduction in the weighted average life of such Classes
as a result of a faster than expected or scheduled rate or principal prepayments
on the Mortgage Loans ("call protection"). By virtue of such allocations of
distributions in reduction of Stated Amount to provide extension protection and
call protection to some Classes, the weighted average lives of certain other
Classes may be more greatly affected by a faster or slower than expected or
scheduled rate of principal prepayments on the Mortgage Loans. See "Prepayment
and Yield Considerations -- Weighted Average Life of Certificates."
Distributions in reduction of Stated Amount with respect to any Class or
Subclass of Multi-Class Certificates will be made on a pro rata or random lot or
such other basis as is specified in the applicable Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement
relating to a Series of Certificates, the aggregate amount that will be
distributed in reduction of Stated Amount to holders of Multi-Class Certificates
of a Series then entitled thereto on any Distribution Date for such Series will
equal, to the extent funds are available, the sum of (i) the Multi-Class
Certificate Distribution Amount (as defined herein) and (ii) if and to the
extent specified in the related Prospectus Supplement, the applicable percentage
of the Spread specified in such Prospectus Supplement.
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Unless otherwise specified in the applicable Prospectus
Supplement, the "Multi-Class Certificate Distribution Amount" with respect to a
Distribution Date for a Series of Multi-Class Certificates will equal the
amount, if any, by which the Stated Amount of the Multi-Class Certificates of
such Series (after taking into account the amount of interest to be added to the
Stated Amount of any Class of Compound Interest Certificates on such
Distribution Date and before giving effect to any distributions in reduction of
Stated Amount on such Distribution Date) exceeds the Pool Value (as defined
herein) of the Mortgage Loans or Contracts included in the Trust Fund for such
Series as of the end of the period (a "Due Period") specified in the related
Prospectus Supplement. For purposes of determining the Multi-Class Certificate
Distribution Amount with respect to a Distribution Date for a Series of
Certificates having one or more Classes of Multi-Class Certificates, the Pool
Value of the Mortgage Loans or Contracts included in the Trust Fund for such
Certificates will be reduced to take into account all distributions thereon
received by the Trustee during the applicable Due Period.
Unless otherwise specified in the applicable Prospectus
Supplement, "Spread" with respect to a Distribution Date for a Series of
Multi-Class Certificates will be the excess of (a) the sum of (i) all payments
of principal and interest received on the related Mortgage Loans or Contracts
(net of the Fixed Retained Yield, if any, and the applicable Servicing Fee, if
any, with respect to such Mortgage Loans or Contracts) in the Due Period
applicable to such Distribution Date and, in the case of the first Due Period,
any amount deposited by the Depositor in the Certificate Account on the Closing
Date, (ii) income from reinvestment thereof, if any, and (iii) to the extent
specified in the applicable Prospectus Supplement, the amount of cash withdrawn
from any reserve fund or available under any other form of credit enhancement
for such Series since the prior Distribution Date (or since the Closing Date, in
the case of the first Distribution Date) and required to be deposited in the
Certificate Account for such Series, over (b) the sum of (i) all required to be
deposited on the Multi-Class Certificates of such Series on such Distribution
Date, (ii) the Multi-Class Certificate Distribution Amount for such Distribution
Date, (iii) if applicable, any Special Distributions (as described below) in
reduction of the Stated Amount of the Multi-Class Certificates of such Series
made since the preceding Distribution Date (or since the Closing Date in the
case of the first Distribution Date), including any accrued interest distributed
with such Special Distributions, (iv) all administrative and other expenses
relating to the Trust Fund payable during the Due Period preceding such
Distribution Date, other than such expenses which are payable by the Servicer,
if any, and (v) any amount required to be deposited into any reserve fund.
Reinvestment income on any reserve fund will not be included in Spread except to
the extent that reinvestment income is taken into account in calculating the
initial amount required to be deposited in such reserve fund, if any.
SUBORDINATION
The Prospectus Supplement relating to a Series which includes
one or more Classes or Subclasses of Multi-Class Certificates may specify that
the rights of one or more of such Classes or Subclasses (or the related Residual
Certificates of such Series) will be Senior to, or subordinated to, the rights
of one or more other Classes of Certificates of such Series.
If a Series which includes one or more Classes or Subclasses
of Multi-Class Certificates includes a subordination feature, on each
Distribution Date, distributions of interest, if any, will be made in accordance
with the preferential priorities specified in the related Prospectus Supplement
and from the date and at the Interest Rates specified therein or as otherwise
specified therein and distributions in reduction of Stated Amount, if any, will
be made to the holders of the Multi-Class Certificates in the amount and in the
manner specified in and in accordance with the preferential distribution
provisions described in the related Prospectus Supplement. If so specified in
the related Prospectus Supplement the Subordinated Amount will be reduced as the
pool experiences losses, as well as through seasoning and prepayment of the
Mortgage Loans or Contracts included in the Trust Fund.
SPECIAL DISTRIBUTIONS
To the extent specified in the Prospectus Supplement relating
to a Series which includes Multi-Class Certificates which have less frequent
than monthly Distribution Dates, any such Class or Subclass having Stated
Amounts may receive special distributions in reduction of Stated Amount,
together with accrued interest on the amount of such reduction ("Special
Distributions") in any month, other than a month in which a Distribution Date
occurs, if, as a result of principal prepayments on the Mortgage Loans or
Contracts, the Trustee determines,
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based on assumptions specified in the applicable Pooling and Servicing
Agreement, that the amount of cash anticipated to be available on the next
Distribution Date for such Series to be distributed to the holders of such
Multi-Class Certificates may be less than the sum of (i) the interest scheduled
to be distributed to such holders and (ii) the amount to be distributed in
reduction of Stated Amount of such Multi-Class Certificates on such Distribution
Date. Any such Special Distributions will be made in the same priority and
manner as distributions in reduction of Stated Amount would be made on the next
Distribution Date.
To the extent specified in the related Prospectus Supplement,
one or more Classes of Certificates of a Series may be subject to special
distributions in reduction of the Stated Amount thereof at the option of the
holders of such Certificates, or to mandatory distributions by the Servicer. Any
such distributions with respect to a Series will be described in the applicable
Prospectus Supplement and will be on such terms and conditions as described
therein and specified in the Pooling and Servicing Agreement for such Series.
LAST SCHEDULED DISTRIBUTION DATE
The "Last Scheduled Distribution Date" for each Class of
Multi-Class Certificates of a Series having a Stated Amount, to the extent Last
Scheduled Distribution Dates are specified in the applicable Prospectus
Supplement, is the latest date on which (based upon the assumptions set forth in
the applicable Prospectus Supplement) the Stated Amount of such Class is
expected to be reduced to zero. Since the rate of distributions in reduction of
Stated Amount of each such Class of Multi-Class Certificates will depend upon,
among other things, the rate of payment (including prepayments) of the principal
of the Mortgage Loans or Contracts, the actual last Distribution Date for any
such Class may occur significantly earlier than its Last Scheduled Distribution
Date. To the extent of any delays in receipt of any payments, insurance proceeds
or liquidation proceeds with respect to the Mortgage Loans or Contracts included
in any Trust Fund, the last Distribution Date for any such Class may occur later
than its Last Scheduled Distribution Date. The rate of payments on the Mortgage
Loans or Contracts in the Trust Fund for any Series of Certificates will depend
upon their particular characteristics, as well as on the prevailing level of
Interest Rates from time to time and other economic factors, and no assurance
can be given as to the actual prepayment experience of the Mortgage Loans or
Contracts. See "Prepayment and Yield Considerations."
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CREDIT SUPPORT
SUBORDINATION
CERTIFICATES OTHER THAN SHIFTING INTEREST CERTIFICATES
If so specified in the Prospectus Supplement relating to a
Series of Certificates as to which the related Trust Fund consists of Mortgage
Loans or Contracts, other than a Series of Shifting Interest Certificates, the
rights of the holders of a Class of Subordinated Certificates to receive
distributions will be subordinated to the rights of the holders of a Class of
Senior Certificates, to the extent of the Subordinated Amount specified in such
Prospectus Supplement. The Subordinated Amount will be reduced by an amount
equal to Aggregate Losses and will be further reduced in accordance with a
schedule described in the applicable Prospectus Supplement. Aggregate Losses as
defined in the applicable Pooling and Servicing Agreement for any given period
will equal the aggregate amount of delinquencies, losses and other deficiencies
in the amounts due to the Senior Certificateholders paid or borne by the
Subordinated Certificateholders (but excluding any payments of Senior Class
Shortfall Accruals or interest thereon) ("Payment Deficiencies") during such
period, whether such aggregate amount results by way of withdrawals from the
Subordination Reserve Fund (including, prior to the time that the Subordinated
Amount is reduced to zero, any such withdrawal of amounts attributable to the
Initial Deposit, if any), reductions in amounts that would otherwise have been
distributable to the Subordinated Certificateholders on any Distribution Date,
or otherwise; less the aggregate amount of previous Payment Deficiencies
recovered by the related Trust Fund during such period in respect of the
Mortgage Loans or Contracts giving rise to such Previous Payment Deficiencies,
including, without limitation, such recoveries resulting from the receipt of
delinquent principal or interest payments, Liquidation Proceeds and insurance
proceeds (net, in each case, of any applicable Fixed Retained Yield and any
unpaid Servicing Fee to which the Servicer is entitled, foreclosure costs and
other servicing costs, expenses and advances relating to such Mortgage Loans or
Contracts).
The protection afforded to the Senior Certificateholders by
the subordination feature described above will be effected both by the
preferential right, to the extent specified in the applicable Prospectus
Supplement, of such Senior Certificateholders to receive current distributions
on the related Mortgage Loans or Contracts that, but for such subordination,
would otherwise have been distributable to the Subordinated Certificateholders
from the related Trust Fund (to the extent of the Subordinated Amount for such
Series) and (unless otherwise specified in the applicable Prospectus Supplement)
by the establishment and maintenance of a Subordination Reserve Fund for such
Series. Unless otherwise specified in the applicable Prospectus Supplement, the
Subordination Reserve Fund will not be a part of the Trust Fund. The
Subordination Reserve Fund may be funded initially with an initial deposit by
the Depositor (the "Initial Deposit") in an amount set forth in the applicable
Prospectus Supplement. Following the initial issuance of the Certificates of a
Series and until the balance of the Subordination Reserve Fund (without taking
into account the amount of any Initial Deposit) first equals or exceeds the
Specified Subordination Reserve Fund Balance set forth in the applicable
Prospectus Supplement, the Servicer will withhold all amounts that would
otherwise have been distributable to the Subordinated Certificateholders and
deposit such amounts (less any portions thereof required to be distributed to
Senior Certificateholders as described below) in the Subordination Reserve Fund.
The time necessary for the Subordination Reserve Fund of a Series to reach the
applicable Specified Subordination Reserve Fund Balance for such Series after
the initial issuance of the Certificates, and the period for which such balance
is maintained, will be affected by the prepayment, delinquency and foreclosure
or repossession experience of the Mortgage Loans or Contracts in the related
Trust Fund and cannot be accurately predicted. Unless otherwise specified in the
applicable Prospectus Supplement, after the amount in the Subordination Reserve
Fund (without taking into account the amount of any Initial Deposit) for a
Series first equals or exceeds the applicable Specified Subordination Reserve
Fund Balance, the Servicer will withhold from the Subordinated
Certificateholders and will deposit in the Subordination Reserve Fund such
portion of the principal payments on the Mortgage Loans or Contracts otherwise
distributable to the Subordinated Certificateholders as may be necessary to
maintain the Subordination Reserve Fund (without taking into account the amount
of any Initial Deposit) at the Specified Subordination Reserve Fund Balance. The
Prospectus Supplement for each Series will set forth the amount of the Specified
Subordination Reserve Fund Balance applicable from time to time and the extent,
if any, to which the Specified Subordination Reserve Fund Balance may be
reduced. Unless otherwise specified in the applicable Prospectus Supplement, the
Specified Subordination Reserve Fund Balance for a Series will not be required
to exceed the Subordinated Amount.
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If on any Distribution Date while the Subordinated Amount
exceeds zero, there is a Senior Class Shortfall, the Senior Class
Certificateholders will be entitled to receive from current payments on the
Mortgage Loans or Contracts that would otherwise have been distributable to
Subordinated Certificateholders the amount of such Senior Class Shortfall. If
such current payments are insufficient, an amount equal to the lesser of: (i)
the entire amount on deposit in the Subordination Reserve Fund available for
such purpose; or (ii) the amount necessary to cover the Senior Class Shortfall
will be withdrawn from the Subordination Reserve Fund. Amounts representing
investment earnings on amounts held in the Subordination Reserve Fund will not
be available to make payments to the Senior Certificateholders. If current
payments on the Mortgage Loans or Contracts and amounts available in the
Subordination Reserve Fund are insufficient to pay the entire Senior Class
Shortfall, then amounts held in the Certificate Account for future distributions
will be distributed as necessary to the Senior Certificateholders.
In the event the Subordination Reserve Fund is depleted before
the Subordinated Amount is reduced to zero, the Senior Certificateholders will
continue to have a preferential right, to the extent specified in the applicable
Prospectus Supplement, to receive current distributions of amounts that would
otherwise have been distributable to the Subordinated Certificateholders to the
extent of the then Subordinated Amount.
After the Subordinated Amount is reduced to zero, the Senior
Certificateholders of a Series will, unless otherwise specified in the
applicable Prospectus Supplement, nonetheless have a preferential right to
receive payment of Senior Class Shortfall Accruals and interest which has
accrued thereon from amounts that would otherwise have been distributable to the
Subordinated Certificateholders. The Senior Certificateholders will otherwise
bear their proportionate share of any losses realized on the Trust Fund in
excess of the Subordinated Amount.
Unless otherwise specified in the related Prospectus
Supplement, amounts held from time to time in the Subordination Reserve Fund for
a Series will be held for the benefit of the Senior Certificateholders and
Subordinated Certificateholders of such Series until withdrawn from the
Subordination Reserve Fund as described below; provided, however, that the
portion of the Initial Deposit, if any, which has not been recovered by the
Servicer and any undistributed investment earnings attributable thereto will
continue to be the property of the Servicer and will ultimately be recoverable
by the Servicer.
Amounts withdrawn from the Subordination Reserve Fund for a
Series and deposited in the Certificate Account for such Series will be charged
first against amounts in the Subordination Reserve Fund other than the Initial
Deposit, if any, for such Series, and thereafter against such Initial Deposit.
If so specified in the related Prospectus Supplement, if the
Subordinated Amount for a Series is reduced to zero and funds remain in the
Subordination Reserve Fund, an amount (the "Advance Reserve") equal to the
lesser of (i) the amount of the Initial Deposit and (ii) such funds remaining in
the Subordination Reserve Fund at the time the Subordinated Amount is reduced to
zero, will remain in the Subordination Reserve Fund and be available in certain
circumstances for withdrawal to make Advances.
Any amounts in the Subordination Reserve Fund for a Series on
a Distribution Date in excess of the Specified Subordination Reserve Fund
Balance on such date prior to the time the Subordinated Amount for such Series
is reduced to zero, and any amounts remaining in the Subordination Reserve Fund
for such Series upon termination of the trust created by the applicable Pooling
and Servicing Agreement, will be paid, unless otherwise specified in the
applicable Prospectus Supplement, to the Subordinated Certificateholders of such
Series in accordance with their pro rata ownership thereof, or, in the case of a
Series with respect to which an election has been made to treat the Trust Fund
as a REMIC, first to the Residual Certificateholders (to the extent of any
portion of the Initial Deposit, if any, and undistributed reinvestment earnings
attributable thereto), and second to the Subordinated Certificateholders of such
Series, in each case in accordance with their pro rata ownership thereof.
Amounts permitted to be distributed from the Subordination Reserve Fund for a
Series will no longer be subject to any claims or rights of the Senior
Certificateholders of such Series.
Funds in the Subordination Reserve Fund for a Series will be
invested as provided in the applicable Pooling and Servicing Agreement in
certain types of eligible investments ("Eligible Investments"). If an election
has been made to treat the Trust Fund (or one or more pools of segregated assets
therein) as a REMIC, no more
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than 30% of the income or gain of the Subordination Reserve Fund in any taxable
year may be derived from the sale or other disposition of investments held for
less than three months in the Subordination Reserve Fund. The earnings on such
investments will be withdrawn and paid to the Subordinated Certificateholders of
such Series or to the holders of the Residual Certificates, in the event that an
election has been made to treat the Trust Fund (or a pool of segregated assets
therein) with respect to such Series as a REMIC, in accordance with their
respective interests. Investment income earned on amounts held in the
Subordination Reserve Fund will not be available for distribution to the Senior
Certificateholders or otherwise subject to any claims or rights of the Senior
Certificateholders.
Eligible Investments for monies deposited in the Subordination
Reserve Fund will be specified in the applicable Pooling and Servicing Agreement
and, unless otherwise provided in the applicable Prospectus Supplement, will
mature no later than the next Distribution Date.
Holders of Subordinated Certificates of a Series will not be
required to refund any amounts which have been properly distributed to them,
regardless of whether there are sufficient funds to distribute to Senior
Certificateholders the amounts to which they are entitled.
If specified in the related Prospectus Supplement, the
Subordination Reserve Fund may be funded in any other manner acceptable to each
Rating Agency and consistent with an election, if any, to treat the Trust Fund
(or one or more pools of segregated assets therein) for such Series as a REMIC,
as will be more fully described in such Prospectus Supplement.
SHIFTING INTEREST CERTIFICATES
If specified in the applicable Prospectus Supplement, the
rights of the holders of the Subordinated Certificates of a Series of Shifting
Interest Certificates to receive distributions with respect to the Mortgage
Loans or Contracts in the related Trust Fund will be subordinated to such rights
of the holders of the Senior Certificates of such Series to the extent described
below, except as otherwise set forth in such Prospectus Supplement. This
subordination is intended to enhance the likelihood of regular receipt by
holders of Senior Certificates of the full amount of scheduled monthly payments
of principal and interest due them and to provide limited protection to the
holders of the Senior Certificates against losses due to mortgagor or obligor
defaults.
The protection afforded to the holders of Senior Certificates
of such a Series by the subordination feature described above will be effected
by the preferential right of such holders to receive, prior to any distribution
being made in respect of the related Subordinated Certificates, current
distributions on the related Mortgage Loans or Contracts of principal and
interest due them on each Distribution Date out of the funds available for
distribution on such date in the related Certificate Account and, to the extent
described below, by the right of such holders to receive future distributions on
the Mortgage Loans or Contracts that would otherwise have been payable to the
holders of Subordinated Certificates.
Losses realized on Liquidated Mortgage Loans or Liquidated
Contracts (other than certain Liquidated Mortgage Loans that are Special Hazard
Mortgage Loans or Liquidated Contracts that are Special Hazard Contracts as
described below) will be allocated to the holders of Subordinated Certificates
through a reduction of the amount of principal payments on the Mortgage Loans or
Contracts to which such holders are entitled. Prior to the Cross-Over Date,
holders of Senior Certificates of each Class entitled to a percentage of
principal payments on the related Mortgage Loans or Contracts will be entitled
to receive, as part of their respective Senior Class Distribution Amounts
payable on each Distribution Date in respect of each Mortgage Loan or Contract
that became a Liquidated Mortgage Loan or Liquidated Contract in the preceding
month (subject to the additional limitation described below applicable to
Liquidated Mortgage Loans that are Special Hazard Mortgage Loans or Liquidated
Contracts that are Special Hazard Contracts), their respective shares of the
Scheduled Principal Balance of each such Liquidated Mortgage Loan or Liquidated
Contract, together with interest accrued at the Pass-Through Rate for such
Class, irrespective of whether Net Liquidation Proceeds and Net Insurance
Proceeds realized thereon are sufficient to cover such amount. For a description
of the full Senior Class Distribution Amount payable to holders of Senior
Certificates of each Series, see "Description of the Certificates --
Distributions to Standard Certificateholders --Shifting Interest Certificates."
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On each Distribution Date occurring on or after the Cross-Over
Date, holders of Senior Certificates of each Class entitled to a percentage of
principal payments will generally receive, as part of their respective Senior
Class Distribution Amounts, only their respective shares of the Net Liquidation
Proceeds and Net Insurance Proceeds actually realized in respect of the
applicable Liquidated Mortgage Loans or Liquidated Contracts after reimbursement
to the Servicer of any previously reimbursed Advances made in respect of such
Liquidated Mortgage Loans or Liquidated Contracts. See "Description of the
Certificates -- Distributions to Standard Certificateholders -- Shifting
Interest Certificates."
In the event that a Mortgage Loan becomes a Liquidated
Mortgage Loan or a Contract becomes a Liquidated Contract as a result of a
hazard not insured against under a Standard Hazard Insurance Policy (a "Special
Hazard Mortgage Loan" or "Special Hazard Contract"), the holders of Senior
Certificates of each Class entitled to a percentage of principal payments on the
related Mortgage Loans or Contracts will be entitled to receive in respect of
each Mortgage Loan or Contract which became a Special Hazard Mortgage Loan or
Special Hazard Contract in the preceding month, as part of their respective
Senior Class Distribution Amounts payable on each Distribution Date prior to the
Special Hazard Termination Date, their respective shares of the Scheduled
Principal Balance of such Mortgage Loan or Contract, together with interest
accrued at the applicable Pass-Through Rate, rather than their respective shares
of Net Liquidation Proceeds and Net Insurance Proceeds actually realized. The
Special Hazard Termination Date for a Series of Certificates will be the earlier
to occur of (i) the date on which cumulative net losses in respect of Special
Hazard Mortgage Loans or Special Hazard Contracts exceed the Special Hazard Loss
Amount specified in the applicable Prospectus Supplement or (ii) the Cross-Over
Date. Since the amount of the Special Hazard Loss Amount for a Series of
Certificates is expected to be significantly less than the amount of principal
payments on the Mortgage Loans or Contracts to which the holders of the
Subordinated Certificates of such Series are initially entitled (such amount
being subject to reduction, as described above, as a result of allocation of
losses on other Liquidated Mortgage Loans or Liquidated Contracts as well as
Special Hazard Mortgage Loans or Special Hazard Contracts), the holders of
Subordinated Certificates of such Series will bear the risk of losses in the
case of Special Hazard Mortgage Loans or Special Hazard Contracts to a lesser
extent than they will bear losses on other Liquidated Mortgage Loans or
Liquidated Contracts. Once the Special Hazard Termination Date has occurred,
holders of Senior Certificates of each Class entitled to payments of principal
will be entitled to receive, as part of their respective Senior Class
Distribution Amounts, only their respective shares of Net Liquidation Proceeds
and Net Insurance Proceeds realized on Special Hazard Mortgage Loans or Special
Hazard Contracts (less the total amount of delinquent installments in respect of
each Special Hazard Mortgage Loan or Special Hazard Contract that were
previously the subject of distributions to the holders of the Senior
Certificates and less the portion of such Net Liquidation Proceeds and Net
Insurance Proceeds allocable to interest). The outstanding principal balance or
notional amount of each such Class will, however, be reduced by such Class's
specified percentage of the Scheduled Principal Balance of each such Special
Hazard Mortgage Loan or Special Hazard Contract. See "Description of the
Certificates -- Distributions to Standard Certificateholders -- Shifting
Interest Certificates."
If the cumulative net losses on all Mortgage Loans or
Contracts in a Trust Fund that have become Special Hazard Mortgage Loans or
Special Hazard Contracts in the months prior to the month in which a
Distribution Date occurs would exceed the Special Hazard Loss Amount for a
Series of Certificates, that portion of the Senior Class Distribution Amount as
of such Distribution Date for each Class of Senior Certificates of such Series
entitled to a percentage of principal payments on the Mortgage Loans or
Contracts in the related Trust Fund attributable to Mortgage Loans or Contracts
which became Special Hazard Mortgage Loans or Special Hazard Contracts in the
month preceding the month of such Distribution Date will be calculated not on
the basis of the Scheduled Principal Balances of such Special Hazard Mortgage
Loans or Special Hazard Contracts but rather will be computed as an amount equal
to the lesser of (a) such Class's percentage, calculated as provided in the
related Prospectus Supplement, of the Scheduled Principal Balance of such
Special Hazard Mortgage Loans or Special Hazard Contracts and (b) the sum of (i)
the excess of the Special Hazard Loss Amount over the cumulative net losses on
all Mortgage Loans or Contracts that became Special Hazard Mortgage Loans or
Special Hazard Contracts in months prior to the month of such Distribution Date
and (ii) the excess of (a) the product of the percentage of principal payments
to which such Class is entitled multiplied by the aggregate Net Liquidation
Proceeds and Net Insurance Proceeds (net of the portion of each thereof
allocable to interest) of the Mortgage Loans or Contracts which became Special
Hazard Mortgage Loans or Special Hazard Contracts in the month preceding the
month of such Distribution Date over (b) the total amount of delinquent
installments in respect of such Special Hazard
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Mortgage Loans or Special Hazard Contracts that were previously the subject of
distributions to such Class paid out of amounts otherwise distributable to the
holders of the related Subordinated Certificates.
Although the subordination feature described above is intended
to enhance the likelihood of timely payment of principal and interest to the
holders of Senior Certificates, shortfalls could result in certain
circumstances. For example, a shortfall in the payment of principal otherwise
due the holders of Senior Certificates could occur if losses realized on the
Mortgage Loans or Contracts in a Trust Fund were exceptionally high and were
concentrated in a particular month. See "Description of the Certificates --
Distributions to Standard Certificateholders -- Shifting Interest Certificates"
for a description of the consequences of any shortfall of principal or interest.
The holders of Subordinated Certificates will not be required
to refund any amounts previously properly distributed to them, regardless of
whether there are sufficient funds on a subsequent Distribution Date to make a
full distribution to holders of each Class of Senior Certificates of the same
Series.
OTHER CREDIT ENHANCEMENT
In addition to subordination as discussed above, credit
enhancement may be provided with respect to any Series of Certificates in any
other manner which may be described in the applicable Prospectus Supplement,
including, but not limited to, credit enhancement through an alterative form of
subordination and/or one or more of the methods described below.
LIMITED GUARANTEE
If so specified in the Prospectus Supplement with respect to a
Series of Certificates, credit enhancement may be provided in the form of a
limited guarantee issued by a guarantor named therein.
LETTER OF CREDIT
Alternative credit support with respect to a Series of
Certificates may be provided by the issuance of a letter of credit by the bank
or financial institution specified in the applicable Prospectus Supplement. The
coverage, amount and frequency of any reduction in coverage provided by a letter
of credit issued with respect to a Series of Certificates will be set forth in
the Prospectus Supplement relating to such Series.
POOL INSURANCE POLICIES
If so specified in the Prospectus Supplement relating to a
Series of Certificates, the Depositor will obtain a pool insurance policy for
the Mortgage Loans or Contracts in the related Trust Fund. The pool insurance
policy will cover any loss (subject to the limitations described in a related
Prospectus Supplement) by reason of default to the extent a related Mortgage
Loan or Contract is not covered by any primary mortgage insurance policy. The
amount and terms of any such coverage will be set forth in the Prospectus
Supplement.
SPECIAL HAZARD INSURANCE POLICIES OR OTHER FORMS OF SUPPORT FOR SPECIAL
HAZARD LOSSES
If so specified in the applicable Prospectus Supplement, for
each Series of Certificates as to which a pool insurance policy is provided, the
Depositor will also obtain a special hazard insurance policy for the related
Trust Fund in the amount set forth in such Prospectus Supplement. The special
hazard insurance policy will, subject to the limitations described in the
applicable Prospectus Supplement, protect against loss by reason of damage to
Mortgaged Properties or Manufactured Homes caused by certain hazards not insured
against under the standard form of hazard insurance policy for the respective
states in which the Mortgaged Properties or Manufactured Homes are located. The
amount and terms of any such coverage will be set forth in the Prospectus
Supplement.
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SURETY BONDS
If so specified in the Prospectus Supplement relating to a
Series of Certificates, credit support with respect to one or more Classes of
Certificates of a Series may be provided by the issuance of a surety bond issued
by a financial guarantee insurance company specified in the applicable
Prospectus Supplement. The coverage, amount and frequency of any reduction in
coverage provided by a surety bond will be set forth in the Prospectus
Supplement relating to such Series.
FRAUD COVERAGE
If so specified in the applicable Prospectus Supplement,
losses resulting fraud, dishonesty or misrepresentation in connection with the
origination or sale of the Mortgage Loans or Contracts may be covered to a
limited extent by representations and warranties to the effect that no such
fraud, dishonesty or misrepresentation had occurred, by a reserve fund, letter
of credit, or other method. The amount and terms of any such coverage will be
set forth in the Prospectus Supplement.
MORTGAGOR BANKRUPTCY BOND
If so specified in the applicable Prospectus Supplement,
losses resulting from a bankruptcy proceeding relating to a mortgagor or obligor
affecting the Mortgage Loans or Contracts in a Trust Fund with respect to a
Series of Certificates will be covered under a mortgagor bankruptcy bond (or any
other instrument that will not result in a downgrading of the rating of the
Certificates of a Series by the Rating Agency that rated such Series). Any
mortgagor bankruptcy bond or such other instrument will provide for coverage in
an amount meeting the criteria of the Rating Agency rating the Certificates of
the related Series, which amount will be set forth in the related Prospectus
Supplement. The amount and terms of any such coverage will be set forth in the
Prospectus Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust
Fund may include in lieu of some or all of the foregoing or in addition thereto
third party guarantees, and other arrangements for maintaining timely payments
or providing additional protection against losses on the assets included in such
Trust Fund, paying administrative expenses, or accomplishing such other purpose
as may be described in the Prospectus Supplement. The Trust Fund may include a
guaranteed investment contract or reinvestment agreement pursuant to which funds
held in one or more accounts will be invested at a specified rate. If any Class
of Certificates has a floating interest rate, or if any of the Mortgage Loans or
Contracts in the related Trust Fund has a floating interest rate, the Trust Fund
may include an interest rate swap contract, an interest rate cap agreement or
similar contract providing limited protection against interest rate risks.
PREPAYMENT AND YIELD CONSIDERATIONS
PASS-THROUGH RATES AND INTEREST RATES
Any Class of Certificates of a Series may have a fixed
Pass-Through Rate or Interest Rate, or a Pass-Through Rate or Interest Rate
which varies based on changes in an index or based on changes with respect to
the underlying Mortgage Loans or Contracts (such as, for example, varying on the
basis of changes in the weighted average Net Mortgage Rate or Net Contract Rate
of the underlying Mortgage Loans or Contracts) or may receive interest payments
with respect to the underlying Mortgage Loans or Contracts in such other manner
specified in the applicable Prospectus Supplement.
The Prospectus Supplement for each Series will specify the
range and the weighted average of the Mortgage Rates or Contract Rates and Net
Mortgage Rates or Net Contract Rates for the Mortgage Loans or Contracts
underlying such Series as of the Cut-Off Date. Unless otherwise specified in the
related Prospectus Supplement, each monthly interest payment on a Mortgage Loan
or Contract will generally be calculated as the product of one-twelfth of the
applicable Mortgage Rate or Contract Rate at the time of such calculation and
the then
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unpaid principal balance on such Mortgage Loan or Contract. The Net Mortgage
Rate or Net Contract Rate with respect to each Mortgage Loan or Contract will be
similarly calculated on a loan-by-loan basis, by subtracting from the applicable
Mortgage Rate or Contract Rate, the Fixed Retained Yield, if any, payable to the
Depositor or other person or entity specified in the Prospectus Supplement and
any Servicing Fee applicable to each Mortgage Loan or Contract. If the Trust
Fund includes adjustable-rate Mortgage Loans or Contracts or includes Mortgage
Loans or Contracts with different Net Mortgage Rates or Net Contract Rates, the
weighted average Net Mortgage Rate or Net Contract Rate may vary from time to
time as set forth below. See "The Trust Funds." The Prospectus Supplement for a
Series will also specify the initial Pass-Through Rate or Interest Rate for each
Class of Certificates of such Series having a Pass-Through Rate or Interest Rate
and will specify whether each such Pass-Through Rate or Interest Rate is fixed
or is variable.
The Net Mortgage Rate or Net Contract Rate for any adjustable
rate Mortgage Loan or Contract will change with any changes in the index
specified in the related Prospectus Supplement on which such Mortgage Rate or
Contract Rate adjustments are based, subject to any applicable periodic or
aggregate caps or floors on the related Mortgage Rate or Contract Rate or other
limitations described in the related Prospectus Supplement. The weighted average
Net Mortgage Rate or Net Contract Rate with respect to any Series may vary due
to changes in the Net Mortgage Rates or Net Contract Rates of adjustable rate
Mortgage Loans or Contracts, to the timing of the Mortgage Rate or Contract Rate
readjustments of such Mortgage Loans or Contracts and to different rates of
payment of principal of fixed or adjustable rate Mortgage Loans or Contracts
bearing different Mortgage Rates or Contract Rates.
If the Trust Fund for a Series includes adjustable rate
Mortgage Loans or Contracts, any limitations on the periodic changes in a
mortgagor's or obligor's monthly payment, any limitations on the adjustments to
the Net Mortgage Rates or Mortgage Rates or to the Net Contract Rates or
Contract Rates, any provision that could result in Deferred Interest and the
effects, if any, thereof on the yield on Certificates of the related Series will
be discussed in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus
Supplement, no distribution of principal and only a partial distribution of
interest will be made to Certificateholders with respect to a negatively
amortizing Mortgage Loan or Contract. Distribution of the portion of scheduled
interest at the applicable Net Mortgage Rate or Net Contract Rate representing
Deferred Interest with respect to such Mortgage Loan or Contract will be passed
through to the Certificateholders on the Distribution Date following the Due
Date on which it is received. Such Deferred Interest will bear interest at the
Net Mortgage Rate or Net Contract Rate for such Mortgage Loan or Contract. For
federal income tax purposes, Deferred Interest may constitute interest income to
the Trust Fund and to Certificateholders at the time that it accrues, rather
than at the time that it is paid. See "Certain Federal Income Tax Consequences
- -- Federal Income Tax Consequences for Certificates as to Which No REMIC
Election Is Made -- Deferred Interest," "-- Federal Income Tax Consequences for
REMIC Certificates -- Taxation of Regular Certificates -- Deferred Interest" and
"-- Taxation of Residual Certificates -- Deferred Interest."
SCHEDULED DELAYS IN DISTRIBUTIONS
At the date of initial issuance of the Certificates of each
Series offered hereby, the initial purchasers of a Class of Certificates (other
than certain Classes of Residual Certificates) will be required to pay accrued
interest at the applicable Pass-Through Rate or Interest Rate for such Class
from the Cut-Off Date for such Series to, but not including the date of
issuance. With respect to Standard Certificates, the effective yield to
Certificateholders will be below the yield otherwise produced by the applicable
Pass-Through Rate because while interest will accrue at such Pass-Through Rate
from the first day of each month through the last day of such month (unless
otherwise specified in the related Prospectus Supplement), principal and
interest distributions with respect to such month will not be made until the
25th day (or if such 25th day is not a business day, the business day
immediately following such 25th day) of the month following the month of accrual
(or until such other Distribution Date specified in the applicable Prospectus
Supplement). If so specified in the related Prospectus Supplement, a Class of
Multi-Class Certificates may be entitled to distributions on each Distribution
Date of interest accrued during a period (an "Interest Accrual Period" specified
in such Prospectus Supplement ending on such Distribution Date or ending on a
date preceding such Distribution Date. In the latter case the effective yield to
such Certificateholders will be below the yield otherwise produced by the
applicable initial public offering prices and Interest Rates because
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(i) on the first Distribution Date the time period upon which interest payable
is calculated will be less than the time elapsed since the commencement of
accrual of interest, (ii) the interest that accrues during the Interest Accrual
Period will not be paid until a date following such Interest Accrual Period
specified in the related Prospectus Supplement, and (iii) during each Interest
Accrual Period following the first Interest Accrual Period, in the case of a
Class of Multi-Class Certificates currently receiving distributions in reduction
of Stated Amount, interest is based upon a Stated Amount which is less than the
Stated Amount of such Certificates actually outstanding, since the distribution
in reduction of Stated Amount made on the following Distribution Date is deemed
to have been made, for interest accrual purposes only, at the end of the
preceding Interest Accrual Period. The Prospectus Supplement for each Series of
Certificates will set forth the nature of any scheduled delays in distribution
and the impact on the yield of such Certificates.
INTEREST SHORTFALLS DUE TO PRINCIPAL PREPAYMENTS
When a Mortgage Loan or Contract is prepaid in full, the
mortgagor or obligor pays interest on the amount prepaid only to the date of
prepayment and not thereafter. Similarly, Liquidation Proceeds and Insurance
Proceeds are also likely to include interest only to the time of payment. When a
Mortgage Loan or Contract is prepaid in part, and such prepayment is applied as
of a date other than the Due Date occurring in the month of receipt or the Due
Date occurring in the month following the month of receipt, the mortgagor or
obligor pays interest on the amount prepaid only to the date of prepayment and
not thereafter. The effect of the foregoing is to reduce the aggregate amount of
interest which would otherwise be passed through to Certificateholders if such
Mortgage Loan or Contract were outstanding, or if such partial prepayment were
applied, on the succeeding Due Date. To mitigate this reduction in yield, the
Pooling and Servicing Agreement relating to a Series will provide, unless
otherwise specified in the applicable Prospectus Supplement, that with respect
to any principal prepayment or liquidation of any Mortgage Loan or Contract
underlying the Certificates of such Series, the Servicer will pay into the
Certificate Account for such Series to the extent funds are available for such
purpose from the related aggregate Servicing Fees (or portion thereof as
specified in the related Prospectus Supplement) which the Servicer is entitled
to receive relating to mortgagor or obligor payments or other recoveries
distributed on the related Distribution Date, such amount, if any, as may be
necessary to assure that the amount paid into the Certificate Account with
respect to such Mortgage Loan or Contract includes an amount equal to interest
at the Net Mortgage Rate or Net Contract Rate for such Mortgage Loan or Contract
for the period from the date of such prepayment or liquidation to but not
including the next Due Date. See "Servicing of the Mortgage Loans and Contracts
- --Adjustment to Servicing Compensation in Connection with Prepaid and Liquidated
Mortgage Loans and Contracts."
WEIGHTED AVERAGE LIFE OF CERTIFICATES
Weighted average life of a Certificate refers to the average
amount of time that will elapse from the date of issuance of the Certificate
until each dollar in reduction of the principal amount or Stated Amount of such
Certificate is distributed to the investor. The weighted average life and the
yield to maturity of any Class of the Certificates of a Series will be
influenced by, among other things, the rate at which principal on the Mortgage
Loans or Contracts included in the Mortgage Pool or Contract Pool for such
Certificate is paid, which is determined by scheduled amortization and
prepayments (for this purpose, the term "prepayments" includes prepayments and
liquidations due to default, casualty, condemnation and the like).
The Mortgage Loans or Contracts may be prepaid in full or in
part at any time. Unless otherwise specified in the applicable Prospectus
Supplement or as described in the following paragraph, no Mortgage Loan or
Contract will provide for a prepayment penalty and all fixed rate Mortgage Loans
or Contracts will contain due-on-sale clauses permitting the holder to
accelerate the maturity of the Mortgage Loan or Contract upon conveyance of the
Mortgaged Property or Manufactured Home.
Some of the Mortgage Loans may call for Balloon Payments.
Balloon Payments involve a greater degree of risk than fully amortizing loans
because the ability of the borrower to make a Balloon Payment typically will
depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property. The ability of a borrower to accomplish either of these
goals will be affected by a number of factors, including the level of available
mortgage rates at the time of the attempted sale or refinancing, the borrower's
equity in the related Mortgaged Property, the financial condition of the
borrower and operating history of the related Mortgaged
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Property, tax laws, prevailing economic conditions and the availability of
credit for commercial real estate projects generally.
Some of the Mortgage Loans included in the Trust Fund may, in
the event one or more are required to be repurchased or otherwise removed from
the Trust Fund, require the payment of a release premium.
Prepayments on mortgage loans are commonly measured relative
to a prepayment standard or model. The Prospectus Supplement for each Series
which includes more than one Class or Subclass of Multi-Class Certificates will
describe one or more such prepayment standards or models and will contain tables
setting forth the weighted average life of each such Class or Subclass and the
percentage of the original aggregate Stated Amount of each such Class or
Subclass that would be outstanding on specified Distribution Dates for such
Series based on the assumptions stated in such Prospectus Supplement, including
assumptions that prepayments on the Mortgage Loans or Contracts are made at
rates corresponding to various percentages of the prepayment standard or model
specified in the related Prospectus Supplement.
There is, however, no assurance that prepayment of the
Mortgage Loans or Contracts underlying a Series of Certificates will conform to
any level of the prepayment standard or model specified in the related
Prospectus Supplement. A number of economic, geographic, social and other
factors may affect prepayment experience. These factors may include homeowner
mobility, economic conditions, changes in mortgagor's or obligor's housing
needs, job transfers, unemployment, mortgagor's or obligor's net equity in the
properties securing the mortgages or contracts, servicing decisions,
enforceability of due-on-sale clauses , market interest rates, the magnitude of
related taxes, and the availability of funds for refinancing. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Rates or Contract Rates on the Mortgage Loans or Contracts underlying a Series
of Certificates, the prepayment rates of such Mortgage Loans or Contracts are
likely to be higher than if prevailing rates remain at or above the rates borne
by such Mortgage Loans or Contracts. It should be noted that Certificates of a
Series may evidence an interest in a Trust Fund with different Mortgage Rates or
Contract Rates. Accordingly, the prepayment experience of such Certificates will
to some extent be a function of the mix of Mortgage Rates or Contract Rates of
the Mortgage Loans or Contracts. In addition, the terms of the Pooling and
Servicing Agreement will require the Servicer to enforce any due-on-sale clause
to the extent specified therein. See "Servicing of the Mortgage Loans and
Contracts -- Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted
Mortgage Loans and Contracts" and "Certain Legal Aspects of the Mortgage Loans
and Contracts --Due-On-Sale Clauses" for a description of certain provisions of
each Pooling and Servicing Agreement and certain legal developments that may
affect the prepayment experience on the Mortgage Loans or Contracts.
A lower rate of principal prepayments than anticipated would
negatively affect the total return to investors in any Certificates of a Series
that are offered at a discount to their principal amount or, if applicable,
their parity price, and a higher rate of principal prepayments than anticipated
would negatively affect the total return to investors in the Certificates of a
Series that are offered at a premium to their principal amount or, if
applicable, their parity price. Parity price is the price at which a Certificate
will yield its coupon, after giving effect to any payment delay. In addition,
the yield to investors in a Class of Certificates which bears interest at a
variable Interest Rate or at a variable Pass-Through Rate, will also be affected
by changes in the index on which any such variable Interest Rate, or variable
Pass-Through Rate is based. Changes in the index may not correlate with changes
in prevailing mortgage interest rates or financing rates for manufactured
housing, and the effect, if any, thereof on the yield of the Certificates will
be discussed in the related Prospectus Supplement. The yield on certain types of
Certificates may be particularly sensitive to prepayment rates, and further
information with respect to yield on such Certificates will be included in the
applicable Prospectus Supplement.
At the request of the mortgagor or obligor, the Servicer may
refinance the Mortgage Loans or Contracts in any Trust Fund by accepting
prepayments thereon and making new loans secured by a Mortgage on the same
property or a security interest in the same Manufactured Home. Upon such
refinancing, the new loans will not be included in the Trust Fund. A mortgagor
or obligor may be legally entitled to require the Servicer to allow such a
refinancing. Any such refinancing will have the same effect as a prepayment in
full of the related Mortgage Loan or Contract.
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The Depositor may be obligated and the applicable Unaffiliated
Seller will be obligated, under certain circumstances, to repurchase certain of
the Mortgage Loans or Contracts. In addition, the terms of certain insurance
policies relating to the Mortgage Loans or Contracts may permit the applicable
insurer to purchase delinquent Mortgage Loans or Contracts. The proceeds of any
such repurchase will be deposited in the related Certificate Account and such
repurchase will have the same effect as a prepayment in full of the related
Mortgage Loan or Contract. See "The Trust Funds -- Assignment of the Mortgage
Loans and Contracts." In addition, if so specified in the applicable Prospectus
Supplement, the Servicer will have the option to purchase all, but not less than
all, of the Mortgage Loans or Contracts in any Trust Fund under the limited
conditions specified in such Prospectus Supplement. For any Series of
Certificates for which an election has been made to treat the Trust Fund (or one
or more segregated pools of assets therein) as a REMIC, any such purchase may be
effected only pursuant to a "qualified liquidation," as defined in Code Section
86OF(a)(4)(A). See "The Pooling and Servicing Agreement --Termination; Purchase
or other Disposition of Mortgage Loans and Contracts."
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus
Supplement, substantially all of the net proceeds from the sale of each Series
of Certificates will be used by the Depositor for the purchase of the Mortgage
Loans or Contracts represented by the Certificates of such Series or to
reimburse amounts previously used to effect such a purchase, the costs of
carrying the related Mortgage Loans or Contracts until the sale of the
Certificates and other expenses connected with pooling the related Mortgage
Loans or Contracts and issuing the Certificates.
THE DEPOSITOR
Prudential Securities Secured Financing Corporation, formerly
known as P-B Secured Financing Corporation (the "Depositor"), was incorporated
in the State of Delaware on August 26, 1988 as a wholly-owned, limited purpose
finance subsidiary of Prudential Securities Group Inc. (a wholly-owned indirect
subsidiary of The Prudential Insurance Company of America). The Depositor's
principal executive offices are located at 199 Water Street, New York, New York
10292. Its telephone number is (212) 214-7435.
As described herein under "The Trust Funds -- Assignment of
the Mortgage Loans and Contracts" and "-- Representations and Warranties", the
only obligations, if any, of the Depositor with respect to a Series of
Certificates may be pursuant to certain limited representations and warranties
and limited undertakings to repurchase or substitute Mortgage Loans or Contracts
under certain circumstances. Unless otherwise specified in the applicable
Prospectus Supplement, the Depositor will have no servicing obligations or
responsibilities with respect to any Mortgage Pool, Contract Pool or Trust Fund.
The Depositor does not have, nor is it expected in the future to have, any
significant assets.
As specified in the related Prospectus Supplement the Servicer
with respect to any Series of Certificates relating to Mortgage Loans or
Contracts may be an affiliate of the Depositor. As described under "The Trust
Funds," the Depositor anticipates that it may acquire Mortgage Loans and
Contracts through or from an affiliate.
Neither the Depositor nor Prudential Securities Group Inc. nor
any of its affiliates, including The Prudential Insurance Company of America,
will insure or guarantee the Certificates of any Series.
UNDERWRITING GUIDELINES
MORTGAGE LOANS SECURED BY RESIDENTIAL PROPERTIES
The Depositor expects that all Mortgage Loans included in a
Mortgage Pool will have been originated in accordance with the underwriting
procedures described herein, subject to such variations as are specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement,
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all or a representative sample of the Mortgage Loans comprising the Mortgage
Pool for a Series will be reviewed by or on behalf of the Depositor to determine
compliance with such underwriting procedures and standards and compliance with
other requirements for inclusion in the related Mortgage Pool.
Except as otherwise set forth in the related Prospectus
Supplement, it is expected that each originator of Mortgage Loans will have
applied, in a standard procedure which complies with applicable federal and
state law and regulations, underwriting procedures that are intended to evaluate
the mortgagor's credit standing and repayment ability, and the value and
adequacy of the Mortgaged Property as collateral. A prospective mortgagor will
have been required to fill out an application designed to provide to the
original lender pertinent credit information. As part of the description of the
mortgagor's financial condition, the mortgagor will have been required to
provide a current balance sheet describing assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the mortgagor's credit history with local
merchants and lenders and any record of bankruptcy. In addition, an employment
verification will have been obtained in the case of individual borrowers which
reports the mortgagor's current salary, length of such employment and whether it
was expected that the mortgagor will continue such employment in the future. If
a prospective borrower was self-employed, the mortgagor will have been required
to submit copies of signed tax returns. The mortgagor may also have been
required to authorize verification of deposits at financial institutions where
the mortgagor has demand or savings accounts.
In determining the adequacy of the Mortgaged Property as
collateral, except in the instance of certain small second loan applications, an
appraisal will have been made of each Mortgaged Property considered for
financing. Each appraiser will have been selected in accordance with
predetermined guidelines established by or acceptable to the Unaffiliated Seller
for appraisers. The appraiser will have been required to inspect the Mortgaged
Property and verify that it was in good condition and that construction, if new,
has been completed. The appraisal is based on the market value of the comparable
properties, the estimated rental income (if considered applicable by the
appraiser) and the cost of replacing the Mortgaged Property.
In determining the adequacy of the Mortgaged Property as
collateral, the originator shall, in the case of second or more junior loans,
look at the combined Loan-to-Value Ratio in determining whether the Mortgage
Loan exceeds lending guidelines. Furthermore, when considering such second or
more junior loans, confirm that payment has been timely made on the senior
liens.
Once all applicable employment, credit and property
information was received, a determination would have been made as to whether the
prospective mortgagor had sufficient monthly income available (i) to meet its
monthly obligations on the Mortgage Loan (determined on the basis of the monthly
payments due in the year of origination and taking into consideration, payments
due on any senior liens) and other expenses related to the Mortgaged Property
(such as property taxes and hazard insurance) and (ii) in the case of individual
mortgagors, to meet monthly housing expenses and other financial obligations and
monthly living expenses. When two individuals cosign loan documents, the income
and expenses of both individuals may be included in the computation.
Underwriting guidelines generally similar to traditional underwriting guidelines
used by FNMA and FHLMC which were in effect at the time of origination of each
Mortgage Loan will generally have been used, except that the ratios at
origination of the amounts described in clauses (i) and (ii) above to the
applicant's stable monthly gross income may exceed in certain cases the then
applicable FNMA and FHLMC guidelines. With respect to a vacation or second home,
no income derived from the property will have been considered for underwriting
purposes.
Other credit considerations may cause departure from the
traditional guidelines. If the Loan-to-Value Ratio and/or term of the Mortgage
Loan is less than a percentage specified in the related Prospectus Supplement,
certain aspects of review relating to monthly income assets may be foregone and
standard ratios of monthly or total expenses to gross income may not be applied.
The Depositor may permit an Unaffiliated Seller's underwriting standards to
otherwise vary in certain cases to the extent specified in the related
Prospectus Supplement.
The Mortgaged Properties may be located in states where, in
general, a lender providing credit on a single-family property may not seek a
deficiency judgment against the mortgagor but rather must look solely to the
property for repayment in the event of foreclosure. The Depositor will require
that the Unaffiliated Sellers
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represent and warrant that underwriting standards applied to each Mortgage Loan
purchased by the Depositor from such Unaffiliated Seller (including Mortgage
Loans secured by Mortgaged Properties located in anti-deficiency states) require
that the value of the property being financed, as indicated by the appraisal,
currently supports and is anticipated to support in the future the outstanding
principal balance of such Mortgage Loan.
Certain of the types of loans which may be included in the
Mortgage Pools are recently developed and may involve additional uncertainties
not present in traditional types of loans. For example, certain of such Mortgage
Loans may provide for escalating or variable payments by the mortgagor. These
types of Mortgage Loans are underwritten on the basis of a judgment that
mortgagors will have the ability to make larger monthly payments in subsequent
years. In some instances, however, a mortgagor's income may not be sufficient to
make loan payments as such payments increase.
No assurance can be given that values of the Mortgaged
Properties have remained or will remain at their levels on the dates of
origination of the related Mortgage Loans. If the real estate market should
experience an overall decline in property values such that the outstanding
principal balances of the Mortgage Loans, and any secondary financing on the
Mortgaged Properties, in a particular Mortgage Pool become equal to or greater
than the value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions (which
may or may not affect real property values) may affect the timely payment by
mortgagors of scheduled payments of principal and interest on the Mortgage Loans
and, accordingly, the actual rates of delinquencies, foreclosures and losses
with respect to any Mortgage Pool. To the extent that such losses are not
covered by subordination provisions, insurance policies or other credit support,
such losses will be borne, at least in part, by the holders of the Certificates
of the related series.
CONTRACTS
The underwriting guidelines utilized in connection with the
origination of the Contracts underlying a Series of Certificates will be
described in the related Prospectus Supplement.
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS
The following summaries describe certain provisions of the
Pooling and Servicing Agreements which relate to Trust Funds comprised of
Mortgage Loans or Contracts. The summaries do not purport to be complete and are
subject to and are qualified in their entirety by reference to, all the
provisions of the Pooling and Servicing Agreement for each Series and the
related Prospectus Supplement, which may further modify the provisions
summarized below. The provisions of each Pooling and Servicing Agreement will
vary depending upon the nature of the Certificates to be issued thereunder and
the nature of the related Trust Fund. Each Pooling and Servicing Agreement
executed and delivered with respect to each Series will be filed with the
Commission as an exhibit to a Current Report on Form 8-K promptly after issuance
of the Certificates of such Series.
THE SERVICER
The Servicer under each Pooling and Servicing Agreement will
be named in the related Prospectus Supplement. The entity serving as Servicer
may be an affiliate of the Depositor and may have other normal business
relationships with the Depositor or the Depositor's affiliates. The Servicer
with respect to each Series will service the Mortgage Loans or Contracts
contained in the Trust Fund for such Series. For Trust Funds comprised of
Mortgage Loans, the Servicer will be a seller/servicer approved by FNMA or
FHLMC. Any Servicer may delegate its servicing responsibilities to one or more
sub-servicers (each a "Sub-Servicer"), but will not be relieved of its
liabilities with respect thereto.
The Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Pooling and Servicing Agreement. An uncured
breach of such a representation or warranty that in any respect materially and
adversely affects the interests of the Certificateholders will constitute an
Event of Default by the Servicer under the related Pooling and Servicing
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Agreement. See "The Pooling and Servicing Agreement -- Events of Default --
Mortgage Loans or Contracts" and " -- Rights Upon Event of Default -- Mortgage
Loans or Contracts."
PAYMENTS ON MORTGAGE LOANS AND CONTRACTS
The Servicer or the Trustee will, as to each Series of
Certificates, establish and maintain, or cause to be established and maintained,
a separate trust account or accounts in the name of the Trustee (collectively,
the "Certificate Account"), which must be maintained with a depository
institution (the "Certificate Account Depository") acceptable to the Rating
Agency rating the Certificates of such Series. Such account or accounts will be
maintained with a Certificate Account Depository (i) whose long-term debt
obligations at the time of any deposit therein are rated not lower than the
rating on the related Series of Certificates at the time of the initial issuance
thereof, (ii) the deposits in which are insured by the Federal Deposit Insurance
Corporation (the "FDIC") through either the Bank Insurance Fund or the Savings
Association Insurance Fund (to the limit established by the FDIC) and the
uninsured deposits in which accounts are otherwise secured such that, as
evidenced by an opinion of counsel, the Trustee for the benefit of the
Certificateholders of the related Series has a claim with respect to funds in
the Certificate Account for such Series, or a perfected security interest in any
collateral (which shall be limited to Eligible Investments) securing such funds,
that is superior to the claims of any other depositor or general creditor of the
Certificate Account Depository with which the Certificate Account is maintained
or (iii) which is otherwise acceptable to the Rating Agency or Agencies.
A Certificate Account may be maintained as an interest bearing
or a non-interest bearing account, or the funds held therein may be invested
pending each succeeding Distribution Date in certain Eligible Investments. Any
such Eligible Investments shall mature not later than the business day preceding
the next Distribution Date and no such investment shall be sold or disposed of
prior to the maturity date of such Eligible Investment; however, in the event
that an election has been made to treat the Trust Fund (or a segregated pool of
assets therein) with respect to a Series as a REMIC, no such Eligible
Investments will be sold or disposed of at a gain prior to maturity unless the
Servicer has received an opinion of counsel or other evidence satisfactory to it
that such sale or disposition will not cause the Trust Fund (or segregated pool
of assets) to be subject to the tax on "prohibited transactions" imposed by Code
Section 860F(a)(1), otherwise subject the Trust Fund (or segregated pool of
assets) to tax, or cause the Trust Fund (or segregated pool of assets) to fail
to qualify as a REMIC. Unless otherwise provided in the related Prospectus
Supplement, any interest or other income earned on funds in the Certificate
Account will be paid to the Servicer or its designee as additional servicing
compensation. All losses from any such investment will be deposited by the
Servicer into the Certificate Account immediately as realized. If permitted by
the Rating Agency or Agencies and so specified in the related Prospectus
Supplement, a Certificate Account may contain funds relating to more than one
Series of Certificates.
Each Sub-Servicer servicing a Mortgage Loan or Contract will
be required by the Servicer to establish and maintain one or more separate
accounts which may be interest bearing and which comply with the standards with
respect to Certificate Accounts set forth above (collectively, the
"Sub-Servicing Account"). Each Sub-Servicer will be required to credit to the
related Sub-Servicing Account on a daily basis the amount of all proceeds of
Mortgage Loans or Contracts received by the Sub-Servicer, less its servicing
compensation. The Sub-Servicer shall remit to the Servicer by wire transfer of
immediately available funds all funds held in the Sub-Servicing Account with
respect to each Mortgage Loan or Contract on a monthly remittance date which
shall occur on or before two business days preceding the Determination Date
occurring in such month.
The Servicer will deposit in the Certificate Account for each
Series of Certificates any amounts representing scheduled payments of principal
and interest on the Mortgage Loans or Contracts due after the applicable Cut-Off
Date but received prior thereto, and, on a dally basis, the following payments
and collections received or made by it with respect to the Mortgage Loans or
Contracts subsequent to the applicable Cut-Off Date (other than payments due on
or before the Cut-Off Date):
(i) all payments on account of principal, including
prepayments, and interest, net of any portion thereof retained by a
Sub-Servicer as its servicing compensation and net of any Fixed
Retained Yield;
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(ii) all amounts received by the Servicer in connection with
the liquidation of defaulted Mortgage Loans or Contracts or property
acquired in respect thereof, whether through foreclosure sale or
otherwise, including payments in connection with defaulted Mortgage
Loans or Contracts received from the mortgagor or obligor other than
amounts required to be paid to the mortgagor or obligor pursuant to the
terms of the applicable Mortgage Loan or Contract or otherwise pursuant
to law ("Liquidation Proceeds"), and further reduced by expenses
incurred in connection with such liquidation, other reimbursed
servicing costs associated with such liquidation, certain amounts
applied to the restoration, preservation or repair of the Mortgaged
Property or Manufactured Home, any unreimbursed Advances with respect
to such Mortgage Loan or Contract and, in the discretion of the
Servicer, but only to the extent of the amount permitted to be
withdrawn from the Certificate Account, any unpaid Servicing Fees, in
respect of the related Mortgage Loans or Contracts or the related
Mortgaged Properties or Manufactured Homes ("Net Liquidation
Proceeds");
(iii) all proceeds received by the Servicer under any title,
hazard or other insurance policy covering any such Mortgage Loan or
Contract ("Insurance Proceeds"), other than proceeds to be applied to
the restoration or repair of the related Mortgaged Property or
Manufactured Home or released to the mortgagor or obligor in accordance
with the applicable Pooling and Servicing Agreement, and further
reduced by expenses incurred in connection with collecting on related
insurance policies, any unreimbursed Advances with respect to such
Mortgage Loan or Contract and in the discretion of the Servicer, but
only to the extent of the amount permitted to be withdrawn from the
Certificate Account, any unpaid Servicing Fees, in respect of such
Mortgage Loan or Contract ("Net Insurance Proceeds");
(iv) all amounts required to be deposited therein from any
related reserve fund, and amounts available under any other form of
credit enhancement applicable to such Series;
(v) all Advances made by the Servicer;
(vi) all amounts withdrawn from Buy-Down Funds or other funds
described in the related Prospectus Supplement, if any, with respect to
the Mortgage Loans or Contracts, in accordance with the terms of the
respective agreements applicable thereto;
(vii) all Repurchase Proceeds; and
(viii) all other amounts required to be deposited therein
pursuant to the applicable Pooling and Servicing Agreement.
Notwithstanding the foregoing, the Servicer will be entitled,
at its election, either (a) to withhold and pay itself the applicable Servicing
Fee and/or to withhold and pay to the owner thereof any Fixed Retained Yield
from any payment or other recovery on account of interest as received and prior
to deposit in the Certificate Account or (b) to withdraw the applicable
Servicing Fee and/or any Fixed Retained Yield from the Certificate Account after
the entire payment or recovery has been deposited therein; however, with respect
to each Trust Fund (or a segregated pool of assets therein) as to which a REMIC
election has been made, the Servicer will, in each instance, withhold and pay to
the owner thereof the Fixed Retained Yield prior to deposit of the related
payment or recovery in the Certificate Account.
Advances, amounts withdrawn from any reserve fund, and amounts
available under any other form of credit enhancement will be deposited in the
Certificate Account not later than the business day preceding the Distribution
Date on which such amounts are required to be distributed. All other amounts
will be deposited in the Certificate Account not later than the business day
next following the day of receipt and posting by the Servicer.
If the Servicer deposits in the Certificate Account for a
Series any amount not required to be deposited therein, it may at any time
withdraw such amount from such Certificate Account.
The Servicer is permitted, from time to time, to make
withdrawals from the Certificate Account for the following purposes, to the
extent permitted in the applicable Pooling and Servicing Agreement:
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(i) to reimburse itself for Advances;
(ii) to reimburse itself from Liquidation Proceeds for
expenses incurred by the Servicer in connection with the liquidation of
any defaulted Mortgage Loan or Contract or property acquired in respect
thereof and for amounts expended in good faith in connection with the
restoration of damaged property, to reimburse itself from Insurance
Proceeds for expenses incurred by the Servicer in connection with the
restoration, preservation or repair of the related Mortgage Properties
or Manufactured Homes and expenses incurred in connection with
collecting on the related insurance policies and, to the extent that
Liquidation Proceeds or Insurance Proceeds after such reimbursement are
in excess of the unpaid principal balance of the related Mortgage Loans
or Contracts together with accrued and unpaid interest thereon at the
applicable Net Mortgage Rate or Net Contract Rate through the last day
of the month in which such Liquidation Proceeds or Insurance Proceeds
were received, to pay to itself out of such excess the amount of any
unpaid Servicing Fees and any assumption fees, late payment charges or
other mortgagor or obligor charges on the related Mortgage Loans or
Contracts;
(iii) to pay to itself the applicable Servicing Fee and/or pay
the owner thereof any Fixed Retained Yield, in the event the Servicer
is not required, and has elected not, to withhold such amounts out of
any payment or other recovery with respect to a particular Mortgage
Loan or Contract prior to the deposit of such payment or recovery in
the Certificate Account;
(iv) to reimburse itself and the Depositor for certain
expenses (including taxes paid on behalf of the Trust Fund) incurred by
and recoverable by or reimbursable to it or the Depositor, as the case
may be;
(v) to pay to the Depositor or the Unaffiliated Seller with
respect to each Mortgage Loan or Contract or property acquired in
respect thereof that has been repurchased by the Depositor or the
Unaffiliated Seller, as the case may be, all amounts received thereon
and not distributed as of the date as of which the purchase price of
such Mortgage Loan or Contract was determined;
(vi) to pay itself any interest earned on or investment income
earned with respect to funds in the Certificate Account (all such
interest or income to be withdrawn not later than the next Distribution
Date);
(vii) to make withdrawals from the Certificate Account in
order to make distributions to Certificateholders; and
(viii) to clear and terminate the Certificate Account.
The Servicer will be authorized to appoint a paying agent (the
"Paying Agent") to make distributions, as agent for the Servicer, to
Certificateholders of a Series. If the Paying Agent for a Series is the Trustee
of such Series, such Paying Agent will be authorized to make withdrawals from
the Certificate Account in order to make distributions to Certificateholders. If
the Paying Agent for a Series is not the Trustee for such Series, the Servicer
will, prior to each Distribution Date, deposit in immediately available funds in
an account designated by the Paying Agent the amount required to be distributed
to the Certificateholders on such Distribution Date.
The Servicer will cause any Paying Agent which is not the
Trustee to execute and deliver to the Trustee an instrument in which such Paying
Agent agrees with the Trustee that such Paying Agent will:
(1) hold all amounts deposited with it by the Servicer for
distribution to Certificateholders in trust for the benefit of
Certificateholders until such amounts are distributed to
Certificateholders or otherwise disposed of as provided in the
applicable Pooling and Servicing Agreement;
(2) give the Trustee notice of any default by the Servicer in
the making of such deposit; and
(3) at any time during the continuance of any such default,
upon written request of the Trustee, forthwith pay to the Trustee all
amounts held in trust by such Paying Agent.
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ADVANCES AND LIMITATIONS THEREON
Unless otherwise provided in the applicable Prospectus
Supplement, the Servicer will advance on or before the business day preceding
each Distribution Date its own funds (an "Advance") or funds held in the
Certificate Account for future distribution or withdrawal and which are not
included in the Pool Distribution Amount for such Distribution Date, in an
amount equal to the aggregate of payments of principal and interest which were
due during the related Due Period, that were delinquent on the Determination
Date and were not advanced by any Sub-Servicer, to the extent that the Servicer
determines that such advances will be reimbursable from late collections,
Insurance Proceeds, Liquidation Proceeds or otherwise.
Advances are intended to maintain a regular flow of scheduled
interest and principal payments to holders of the Class or Classes of
Certificates entitled thereto, rather than to guarantee or insure against
losses. Unless otherwise provided in the applicable Prospectus Supplement,
advances of the Servicer's funds will be reimbursable only out of related
recoveries on the Mortgage Loans or Contracts respecting which such amounts were
advanced, or from any amounts in the Certificate Account to the extent that the
Servicer shall determine that any such advances previously made are not
ultimately recoverable from late collections, Insurance Proceeds, Liquidation
Proceeds or otherwise. If advances have been made by the Servicer from excess
funds in the Certificate Account, the Servicer will replace such funds in the
Certificate Account on any future Distribution Date to the extent that funds in
the Certificate Account on such Distribution Date are less than payments
required to be made to Certificateholders on such date.
ADJUSTMENT TO SERVICING COMPENSATION IN CONNECTION WITH PREPAID AND LIQUIDATED
MORTGAGE LOANS AND CONTRACTS
When a mortgagor or obligor prepays a Mortgage Loan or
Contract in full, the mortgagor or obligor pays interest on the amount prepaid
only to the date on which such principal prepayment is made. Similarly,
Liquidation Proceeds from a Mortgaged Property or Manufactured Home will not
include interest for any period after the date on which the liquidation took
place, and Insurance Proceeds may include interest only to the date of
settlement of the related claims. Further, when a Mortgage Loan or Contract is
prepaid in part, and such prepayment is applied as of a date other than a Due
Date, the mortgagor or obligor pays interest on the amount prepaid only to the
date of prepayment and not thereafter. The effect of the foregoing is to reduce
the aggregate amount of interest which would otherwise be passed through to
Certificateholders if such Mortgage Loan or Contract were outstanding, or if
such partial prepayment were applied, on the succeeding Due Date. Unless
otherwise specified in the applicable Prospectus Supplement, in order to
mitigate the adverse effect to Certificateholders of a Series resulting from the
prepayment or liquidation of a Mortgage Loan or Contract or settlement of an
insurance claim with respect thereto, the amount of the aggregate Servicing Fees
will be reduced by an amount equal to the accrual of interest on any prepaid or
liquidated Mortgage Loan or Contract at the Net Mortgage Rate for such Mortgage
Loan or the Net Contract Rate for such Contract from the date of its prepayment
or liquidation or the date of such insurance settlement to the next Due Date
(the "Prepayment Interest Shortfall"). Such reductions in the aggregate
Servicing Fees will be made by the Servicer with respect to the Mortgage Loans
or Contracts under the applicable Pooling and Servicing Agreement, but only to
the extent that the aggregate Prepayment Interest Shortfall does not exceed the
aggregate Servicing Fees relating to mortgagor or obligor payments or other
recoveries distributed on the related Distribution Date. The amount of the
offset against the aggregate Servicing Fees will be included in the scheduled
distributions to Certificateholders on the Distribution Date on which the
related principal prepayments, Liquidation Proceeds or Insurance Proceeds are
passed through to Certificateholders. See "Prepayment and Yield Considerations."
Payments with respect to any Prepayment Interest Shortfall will not be obtained
by means of any subordination of the rights of Subordinated Certificateholders
or any other credit enhancement arrangement (except to the extent such credit
enhancement pays interest with respect to a Mortgage Loan or Contract in excess
of the related Net Mortgage Rate or Net Contract Rate and such excess would
otherwise be paid to the Servicer as a Servicing Fee).
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REPORTS TO CERTIFICATEHOLDERS
Unless otherwise specified or modified in the related Pooling
and Servicing Agreement for each Series, a statement setting forth the following
information, if applicable, will be included with each distribution to
Certificateholders of record of such Series:
(i) to each holder of a Certificate other than a Multi-Class
Certificate, the amount of such distribution allocable to principal of
the related Mortgage Loans or Contracts, separately identifying the
aggregate amount of any principal prepayments included therein, the
amount of such distribution allocable to interest on the related
Mortgage Loans or Contracts, and the aggregate unpaid principal balance
of the Mortgage Loans or Contracts after giving effect to the principal
distributions on such Distribution Date;
(ii) to each holder of a Multi-Class Certificate on which an
interest distribution and a distribution in reduction of Stated Amount
are then being made, the amount of such interest distribution and
distribution in reduction of Stated Amount, and the Stated Amount of
each Class after giving effect to the distribution in reduction of
Stated Amount made on such Distribution Date;
(iii) to each holder of a Multi-Class Certificate on which a
distribution of interest only is then being made, the aggregate Stated
Amount of Certificates outstanding of each Class after giving effect to
the distribution in reduction of Stated Amount made on such
Distribution Date and on any Special Distribution Date occurring
subsequent to the last such report and after including in the aggregate
Stated Amount the Stated Amount of the Compound Interest Certificates,
if any, outstanding and the amount of any accrued interest added to the
Stated Amount of such Compound Interest Certificates on such
Distribution Date;
(iv) to each holder of a Multi-Class Certificate which is a
Compound Interest Certificate (but only if such holder shall not have
received a distribution of interest equal to the entire amount of
interest accrued on such Certificate with respect to such Distribution
Date),
(a) the information contained in the report delivered
pursuant to clause (ii) above;
(b) the interest accrued on such Class of Compound
Interest Certificates with respect to such Distribution Date
and added to the Stated Amount of such Compound Interest
Certificate; and
(c) the Stated Amount of such Class of Compound
Interest Certificates after giving effect to the addition
thereto of all interest accrued thereon;
(v) to each holder of a Certificate, the aggregate amount of
the Servicing Fees paid with respect to such Distribution Date;
(vi) to each holder of a Certificate, the amount by which the
Servicing Fee has been reduced by the aggregate Prepayment Interest
Shortfall for the related Distribution Date;
(vii) the aggregate amount of any Advances by the Servicer
included in the amounts actually distributed to the Certificateholders;
(viii) to each holder of each Senior Certificate (other than a
Shifting Interest Certificate):
(a) the amount of funds, if any, otherwise
distributable to Subordinated Certificateholders and the
amount of any withdrawal from the Subordination Reserve Fund,
if any, included in amounts actually distributed to Senior
Certificateholders;
(b) the Subordinated Amount remaining and the balance
in the Subordination Reserve Fund, if any, following such
distribution; and
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(c) the amount of any Senior Class Shortfall with
respect to, and the amount of any Senior Class Carryover
Shortfall outstanding prior to, such Distribution Date;
(ix) to each holder of a Certificate entitled to the benefits
of payments under any form of credit enhancement or from any reserve
fund other than the Subordination Reserve Fund:
(a) the amounts so distributed under any such form of
credit enhancement or from any such reserve fund on the
applicable Distribution Date; and
(b) the amount of coverage remaining under any such
form of credit enhancement and the balance in any such fund,
after giving effect to any payments thereunder and other
amounts charged thereto on the Distribution Date;
(x) in the case of a Series of Certificates with a variable
Pass-Through Rate, such Pass-Through Rate;
(xi) the book value of any collateral acquired by the Trust
Fund through foreclosure or otherwise; and
(xii) the number and aggregate principal amount of Mortgage
Loans or Contracts one month and two or more months delinquent.
In addition, within a reasonable period of time after the end
of each calendar year, a report will be furnished to each Certificateholder of
record at any time during such calendar year (a) as to the aggregate of amounts
reported pursuant to clauses (i) through (xii) above, as applicable, for such
calendar year or, in the event such person was a Certificateholder of record
during a portion of such calendar year, for the applicable portion of such year
and (b) such other information as required to enable Certificateholders to
prepare their tax returns. In the event that an election has been made to treat
the Trust Fund (or one or more segregated pools of assets therein) as a REMIC,
the Trustee with respect to a Series will be required to sign the federal income
tax returns with respect to such REMIC. See "Certain Federal Income Tax
Consequences -- Federal Income Tax Consequences for REMIC Certificates --
Administrative Matters."
REPORTS TO THE TRUSTEE
No later than 15 days after each Distribution Date for a
Series, the Servicer will provide the Trustee of such Series with a report
setting forth the status of the related Certificate Account and the related
Subordination Reserve Fund, if any, and any other reserve fund as of the close
of business on such Distribution Date, stating that all distributions required
to be made by the Servicer under the applicable Pooling and Servicing Agreement
have been made (or if any required distribution has not been made by the
Servicer, specifying the nature and status thereof) and showing, for the period
covered by such statement, the aggregate of deposits to and withdrawals from the
Certificate Account for each category of deposits and withdrawals specified in
the Pooling and Servicing Agreement. Such statement shall also include
information as to (i) the aggregate unpaid principal balances of all the
Mortgage Loans or Contracts as of the close of business on the last day of the
month preceding the month in which such Distribution Date occurs (or such other
day as may be specified in the applicable Pooling and Servicing Agreement); and
(ii) the amount of any Subordination Reserve Fund and any other reserve fund, as
of such Distribution Date (after giving effect to the distributions on such
Distribution Date). Copies of such reports may be obtained by Certificateholders
upon request in writing addressed to the related Trustee at its mailing address
provided in the related Prospectus Supplement.
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COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer, directly or through Sub-Servicers, will make
reasonable efforts to collect all payments called for under the Mortgage Loans
or Contracts and will, consistent with the applicable Pooling and Servicing
Agreement and any applicable agreement governing any form of credit enhancement,
follow such collection procedures as it follows with respect to mortgage loans
or manufactured housing contracts serviced by it that are comparable to the
Mortgage Loans or Contracts, as the case may be. Consistent with the above, the
Servicer may, in its discretion, (i) waive any prepayment charge, assumption
fee, late payment charge or any other charge in connection with the prepayment
of a Mortgage Loan or Contract and (ii) arrange with a mortgagor or obligor a
schedule for the liquidation of deficiencies running for not more than six
months after the applicable Due Date.
Pursuant to the Pooling and Servicing Agreement, the Servicer,
to the extent permitted by law, will establish and maintain or will cause to be
established and maintained one or more escrow accounts (collectively, the
"Servicing Account") in which the Servicer will be required to deposit or cause
to be deposited payments by mortgagors or obligors, as applicable, for taxes,
assessments, mortgage and hazard insurance premiums and other comparable items.
Withdrawals from the Servicing Account may be made to effect timely payment of
taxes, assessments, mortgage and hazard insurance, to refund to mortgagors or
obligors amounts determined to be overages, to pay interest to mortgagors or
obligors on balances in the Servicing Account, if required, to repair or
otherwise protect the Mortgaged Properties or Manufactured Homes and to clear
and terminate such account. The Servicer will be responsible for the
administration of each Servicing Account. The Servicer will be obligated to
advance certain amounts which are not timely paid by mortgagors or obligors, to
the extent that the Servicer determines that such amounts will be recoverable
out of Insurance Proceeds, Liquidation Proceeds, or otherwise. Alternatively, if
specified in the applicable Pooling and Servicing Agreement, in lieu of
establishing a Servicing Account, the Servicer may procure a performance bond or
other form of insurance coverage, in an amount acceptable to the Rating Agency
rating the related Series of Certificates, covering loss occasioned by the
failure to escrow such amounts.
ENFORCEMENT OF DUE-ON-SALE CLAUSES; REALIZATION UPON DEFAULTED MORTGAGE LOANS
AND CONTRACTS
Each Pooling and Servicing Agreement will provide that, when
any Mortgaged Property or Manufactured Home is conveyed by the mortgagor or
obligor, the Servicer will exercise its rights to accelerate the maturity of
such Mortgage Loan or Contract under any "due-on-sale" clause applicable
thereto, if any, unless (a) it is not exercisable under applicable law or (b)
such exercise would result in loss of insurance coverage with respect to such
Mortgage Loan or Contract. In any such case, the Servicer is authorized to take
or enter into an assumption and modification agreement from or with the person
to whom such Mortgaged Property or Manufactured Home has been or is about to be
conveyed, pursuant to which such person becomes liable under the Mortgage Note
or Contract and, unless prohibited by applicable state law, the mortgagor or
obligor remains liable thereon, provided that the Mortgage Loan or Contract will
continue to be covered by any pool insurance policy and any related primary
mortgage insurance policy, and the Mortgage Rate or Contract Rate with respect
to such Mortgage Loan or Contract and the payment terms shall remain unchanged.
The Servicer will also be authorized, with the prior approval of any pool
insurer and any primary mortgage insurer, if any, to enter into a substitution
of liability agreement with such person, pursuant to which the original
mortgagor or obligor is released from liability and such person is substituted
as mortgagor or obligor and becomes liable under the Mortgage Note or Contract.
The Servicer is obligated under the Pooling and Servicing
Agreement for each Series to realize upon defaulted Mortgage Loans or Contracts
to the extent provided therein. However, in the case of foreclosure or of damage
to a Mortgaged Property or Manufactured Home from an uninsured cause, the
Servicer is not required to expend its own funds to foreclose, repossess or
restore any damaged property, unless it reasonably determines (i) that such
foreclosure, repossession or restoration will increase the proceeds to
Certificateholders of such Series of liquidation of the Mortgage Loan or
Contract after reimbursement of the Servicer for its expenses and (ii) that such
expenses will be recoverable to it through Liquidation Proceeds or Insurance
Proceeds. In the event that the Servicer has expended its own funds for
foreclosure or to restore damaged property, it will be entitled to charge the
Certificate Account for such Series an amount equal to all costs and expenses
incurred by it.
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The Servicer may foreclose against property securing a
defaulted Mortgage Loan either by foreclosure, by sale or by strict foreclosure
and in the event a deficiency judgment is available against the mortgagor or
other person (see "Certain Legal Aspects of the Mortgage Loans and Contracts --
The Mortgage Loans -- Anti-Deficiency Legislation and Other Limitations on
Lenders" for a description of the availability of deficiency judgments), may
proceed for the deficiency. It is anticipated that in most cases the Servicer
will not seek deficiency judgments against any mortgagor or obligor, and the
Servicer is not required under the Pooling and Servicing Agreement to seek
deficiency judgments.
With respect to a Trust Fund (or one or more segregated pools
of assets therein) as to which a REMIC election has been made, if the Trustee
acquires ownership of any Mortgaged Property or Manufactured Home as a result of
a default or imminent default of any Mortgage Loan or Contract secured by such
Mortgaged Property or Manufactured Home, the Trustee generally will be required
to dispose of such property with two years following its acquisition by the
Trust Fund. The Servicer also will be required to administer the Mortgaged
Property or Manufactured Home in a manner which does not cause the Mortgaged
Property or Manufactured Home to fail to qualify as "foreclosure property"
within the meaning of Code Section 860G(a)(8) or result in the receipt by the
Trust Fund of any "net income from foreclosure property" within the meaning of
Code Section 860G(c). In general, this would preclude the holding of the
Mortgaged Property or Manufactured Home as a dealer in such property or the
receipt of rental income based on the profits of the lessee.
The Servicer may modify, waive or amend the terms of any
Mortgage Loan or Contract without the consent of the Trustee or any
Certificateholder. Such modification, waiver or amendment shall only be given if
the Servicer determines that it is in the best interests of Certificateholders
and, generally, only if the Mortgage Loan is in default or the Service has
determined that default is reasonably foreseeable.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
For each Series of Certificates, the Servicer will be entitled
to be paid the Servicing Fee on the related Mortgage Loans or Contracts until
termination of the applicable Pooling and Servicing Agreement, subject, unless
otherwise specified in the applicable Prospectus Supplement, to adjustment as
described under "Adjustment to Servicing Compensation in Connection with Prepaid
and Liquidated Mortgage Loans and Contracts" above. The Servicer, at its
election, will pay itself the Servicing Fee for a Series with respect to each
Mortgage Loan or Contract by (a) withholding the Servicing Fee from any
scheduled payment of interest prior to deposit of such payment in the
Certificate Account for such Series or (b) withdrawing the Servicing Fee from
the Certificate Account after the entire interest payment has been deposited in
the Certificate Account. The Servicer may also pay itself out of the Liquidation
Proceeds or Insurance Proceeds with respect to a Mortgage Loan or Contract, or
withdraw from the Certificate Account, the Servicing Fee in respect of such
Mortgage Loan or Contract or other recoveries with respect thereto to the extent
provided in the applicable Pooling and Servicing Agreement. The Servicing Fee
with respect to the Mortgage Loans or Contracts underlying the Certificates of a
Series will be specified in the applicable Prospectus Supplement. Any additional
servicing compensation in the form of prepayment charges, assumption fees, late
payment charges or otherwise will be retained by the Servicer to the extent not
required to be deposited in the Certificate Account.
In addition to amounts payable to any Sub-Servicer, the
Servicer will pay all expenses incurred in connection with the servicing of the
Mortgage Loans or Contracts underlying a Series, including, without limitation,
payment of the hazard insurance policy premiums and fees or other amounts
payable pursuant to any applicable agreement for the provision of credit
enhancement for such Series, payment of the fees and disbursements of the
Trustee and any custodian, fees due to the independent accountants and expenses
incurred in connection with distributions and reports to Certificateholders.
However, certain of these expenses may be reimbursable to the Servicer pursuant
to the terms of the applicable Pooling and Servicing Agreement. In addition, the
Servicer will be entitled to reimbursement for certain expenses incurred by it
in connection with the liquidation of defaulted Mortgage Loans or Contracts. In
the event that claims are either not made or are not fully paid from any
applicable form of credit enhancement, the related Trust Fund will suffer a loss
to the extent that Net Liquidation Proceeds and Net Insurance Proceeds are less
than the principal balance of the related Mortgage Loan or Contract, plus
accrued interest thereon at the Net Mortgage Rate or Net Contract Rate. In
addition, the Servicer will be entitled to reimbursement of expenditures
incurred by it in connection with the restoration of any Mortgaged Property or
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Manufactured Home, such right of reimbursement being prior to the rights of the
Certificateholders to receive Liquidation Proceeds and Insurance Proceeds. The
Servicer is also entitled to reimbursement from the Certificate Account of
Advances, of advances made by it to pay taxes or insurance premiums with respect
to any Mortgaged Property or Manufactured Home and of certain losses against
which it is indemnified by the Trust Fund.
EVIDENCE AS TO COMPLIANCE
THE MORTGAGE LOANS
Each Pooling and Servicing Agreement will provide that on or
before a specified date in each year, beginning with the first such date
occurring at least six months after the related Cut-Off Date, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that, on the basis of the examination by such firm conducted
substantially in compliance with either the Uniform Single Audit Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
servicing by or on behalf of the Servicer of mortgage loans under pooling and
servicing agreements substantially similar to each other (including the related
Pooling and Servicing Agreement) was conducted in compliance with the terms of
such agreements other than exceptions that are immaterial and any significant
exceptions of errors in records that, in the opinion of the firm, either the
Audit Program for Mortgages serviced for FHLMC, or paragraph 4 of the Uniform
Single Audit Program for Mortgage Bankers, requires it to report. In rendering
its statement such firm may rely, as to matters relating to the direct servicing
of mortgage loans by Sub-Servicers, upon comparable statements for examinations
conducted substantially in compliance with the Uniform Single Audit Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC (rendered
within one year of such statement) of firms of independent public accountants
with respect to the related Sub-Servicer.
THE CONTRACTS
Each Pooling and Servicing Agreement relating to a Series of
Certificates representing interests in a Contract Pool will provide that on or
before a specified date in each year, beginning with the first such date after
the related Cut-Off Date, a firm of independent public accountants will furnish
a statement to the Trustee to the effect that such firm is of the opinion that
the system of internal accounting controls in effect on the date of such
statement relating to the servicing procedures performed by the Servicer under
the Pooling and Servicing Agreement, taken as a whole, was sufficient for the
prevention and detection of errors and irregularities which would be material to
the assets of the Trust Fund and that nothing has come to their attention that
would cause them to believe that such servicing has not been conducted in
compliance with the provisions of the Pooling and Servicing Agreement, other
than such exceptions as shall be set forth in such report.
Each Pooling and Servicing Agreement will also provide for
delivery to the Trustee annually on or before the specified date therein, a
statement signed by two officers of the Servicer to the effect that the Servicer
has fulfilled its obligations under the Pooling and Servicing Agreement
throughout the preceding year or, if there has been a default in the fulfillment
of any such obligation, describing each such default.
Copies of the annual accountants' statement and the statement
of officers of the Servicer may be obtained by Certificateholders without charge
upon written request to the Servicer at the address of the Servicer set forth in
the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE SERVICER AND THE DEPOSITOR
The Servicer may not resign from its obligations and duties
under the Pooling and Servicing Agreement for each Series (other than its duties
as Certificate Registrar for such Series, if it is acting as such), except upon
its determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities of a type and nature presently carried on by it. No such
resignation will become effective until the Trustee for such Series or a
successor Servicer has assumed the Servicer's obligations and duties under the
Pooling and Servicing Agreement. If the Servicer resigns for any of the
foregoing reasons and the Trustee is unable or unwilling to assume
responsibility for servicing the Mortgage
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Loans or Contracts, it may appoint another institution as Servicer, as described
under "The Pooling and Servicing Agreement -- Rights Upon Event of Default --
Mortgage Loans or Contracts" below.
The Pooling and Servicing Agreement will provide that neither
the Depositor, the Servicer (if the Series of Certificates relates to Mortgage
Loans or Mortgage Contracts) nor any director, officer, employee or agent of
either of them will be under any liability to the Trust Fund or the
Certificateholders, for the taking of any action or for refraining from the
taking of any action in good faith pursuant to the Pooling and Servicing
Agreement, or for errors in judgment; provided, however, that none of the
Depositor, the Servicer or any director, officer, employee or agent of the
Depositor or Servicer will be protected against any liability that would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of his or its duties or by reason of reckless
disregard of his or its obligations and duties thereunder. The Pooling and
Servicing Agreement will further provide that the Depositor, the Servicer and
any director, officer, employee or agent of either of them shall be entitled to
indemnification by the Trust Fund and will be held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
the Pooling and Servicing Agreement or the Certificates other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of his or its duties thereunder or by reason
of reckless disregard of his or its obligations and duties thereunder. In
addition, the Pooling and Servicing Agreement will provide that the Depositor
and the Servicer will not be under any obligation to appear in, prosecute or
defend any legal action that is not incidental to its duties under the Pooling
and Servicing Agreement and that in its opinion may involve it in any expense or
liability. The Depositor and the Servicer may, however, in its discretion,
undertake any such action deemed by it necessary or desirable with respect to
the Pooling and Servicing Agreement and the rights and duties of the parties
thereto and the interests of the Certificateholders thereunder. In such event,
the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund, and the
Servicer will be entitled to be reimbursed therefor out of the Certificate
Account, and any loss to the Trust Fund arising from such right of reimbursement
will be allocated pro rata among the various Classes of Certificates unless
otherwise specified in the applicable Pooling and Servicing Agreement.
Any person into which the Servicer may be merged or
consolidated, or any person resulting from any merger, conversion or
consolidation to which the Servicer is a party, or any person succeeding to the
business through the transfer of substantially all of its assets, or otherwise,
of the Servicer will be the successor of the Servicer under the Pooling and
Servicing Agreement for each Series provided that such successor or resulting
entity is qualified to service mortgage loans for FNMA or FHLMC and that the
applicable Rating Agency's rating of any Certificates for such Series in effect
immediately prior to such event is not adversely affected thereby.
The Servicer also has the right to assign its rights and
delegate its duties and obligations under the Pooling and Servicing Agreement
for each Series (A) in connection with a sale or transfer of a substantial
portion of its mortgage or manufactured housing servicing portfolio; provided
that (i) in the case of a transfer by a Servicer of Mortgage Loans, the
purchaser or transferee accepting such assignment or delegation is qualified to
service mortgage loans for FNMA or FHLMC, (ii) the purchaser or transferee is
reasonably satisfactory to the Depositor and the Trustee for such Series and
executes and delivers to the Depositor and the Trustee an agreement, in form and
substance reasonably satisfactory to the Depositor and the Trustee, which
contains an assumption by such purchaser or transferee of the due and punctual
performance and observance of each covenant and condition to be performed or
observed by the Servicer under the Pooling and Servicing Agreement from and
after the date of such agreement; and (iii) the applicable Rating Agency's
rating of any Certificates for such Series in effect immediately prior to such
assignment, sale or transfer is not qualified, downgraded or withdrawn as a
result of such assignment, sale or transfer or (B) to any affiliate of the
Servicer, provided that the conditions contained in clauses (i) through (iii)
above are met. In the case of any such assignment or delegation, the Servicer
will be released from its obligations under the Pooling and Servicing Agreement
except for liabilities and obligations incurred prior to such assignment and
delegation.
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THE POOLING AND SERVICING AGREEMENT
EVENTS OF DEFAULT
MORTGAGE LOANS OR CONTRACTS
Events of Default under the Pooling and Servicing Agreement
for each Series of Certificates relating to Mortgage Loans or Contracts include
(i) any failure by the Servicer to remit to the Trustee or to any Paying Agent
for distribution to Certificateholders any required payment which continues
unremedied for 5 days; (ii) any failure by the Servicer duly to observe or
perform in any material respect any other of its covenants or agreements in the
Pooling and Servicing Agreement which continues unremedied for 30 days (or 10
days in the case of a failure to maintain any pool insurance policy required to
be maintained pursuant to the Pooling and Servicing Agreement) after the giving
of written notice of such failure to the Servicer by the Trustee, or to the
Servicer and Trustee by the holders of Certificates of such Series having voting
rights allocated to such Certificates ("Voting Interests") aggregating not less
than 25% of the Voting Interests represented by all Certificates for such
Series; (iii) any breach of representation or warranty of the Servicer relating
to such Servicer's authority to enter into, and its ability to perform its
obligations under, such Pooling and Servicing Agreement; (iv) certain events of
insolvency, readjustments of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by the Servicer indicating its
insolvency, reorganization or inability to any its obligations and (v) if
specified in the applicable Pooling and Servicing Agreement, any failure by the
Servicer to remit to the Trustee the amount of any Advance by the business day
preceding the applicable Distribution Date.
RIGHTS UPON EVENT OF DEFAULT
MORTGAGE LOANS OR CONTRACTS
So long as Event of Default remains unremedied under the
Pooling and Servicing Agreement for a Series of Certificates relating to
Mortgage Loans or Contracts, the Trustee for such Series or holders of
Certificates of such Series evidencing not less than 25% of the Voting Interests
in the Trust Fund for such Series may terminate all of the rights and
obligations of the Servicer under the Pooling and Servicing Agreement and in and
to the Mortgage Loans or Contracts (other than the Servicer's right to recovery
of any Initial Deposit for such Series and other expenses and amounts advanced
pursuant to the terms of the Pooling and Servicing Agreement, which rights the
Servicer will retain under all circumstances), whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under the Pooling and Servicing Agreement and will be entitled to monthly
servicing compensation not to exceed the aggregate Servicing Fees, together with
the other servicing compensation in the form of assumption fees, late payment
charges or otherwise as provided in the Pooling and Servicing Agreement. In the
event that the Trustee is unwilling or unable so to act, it may select, pursuant
to the private or public bid procedure described in the applicable Pooling and
Servicing Agreement, or petition a court of competent jurisdiction to appoint,
(i) in the case of a Servicer of Mortgage Loans, a housing and home finance
institution, bank or mortgage servicing institution with a net worth of at least
$15,000,000 and which is a FNMA- and FHLMC-approved seller/servicer or (ii) in
the case of a Servicer of Contracts, an institution with a net worth of at least
$15,000,000 which has serviced for at least one year immediately prior thereto a
portfolio of manufactured housing loans of not less than $100,000,000, to act as
successor to the Servicer under the provisions of the Pooling and Servicing
Agreement relating to the servicing of the Mortgage Loans or Contracts. In the
event such public bid procedure is utilized, the successor Servicer would be
entitled to servicing compensation in an amount equal to the aggregate Servicing
Fees, together with the other servicing compensation in the form of assumption
fees, late payment charges or otherwise, as provided in the Pooling and
Servicing Agreement, and the Servicer would be entitled to receive the net
profits, if any, received from the sale of its servicing rights and obligations
under the Pooling and Servicing Agreement.
During the continuance of any Event of Default under the
Pooling and Servicing Agreement for a Series of Certificates relating to
Mortgage Loans or Contracts, the Trustee for such Series will have the right to
take action to enforce its rights and remedies and to protect and enforce the
rights and remedies of the Certificateholders of such Series, and holders of
Certificates evidencing not less than 25% of the Voting Interests for such
Series may direct the time, method and place of conducting any proceeding for
any remedy available to
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the Trustee or exercising any trust or power conferred upon the Trustee.
However, the Trustee will not be under any obligation to pursue any such remedy
or to exercise any of such trusts or powers unless such Certificateholders have
offered the Trustee reasonable security or indemnity against the costs, expenses
and liabilities which may be incurred by the Trustee thereby. Also, the Trustee
may decline to follow any such direction if the Trustee determines that the
action or proceeding so directed may not lawfully be taken or would be unjustly
prejudicial to the nonassenting Certificateholders or if, under certain
circumstances, the Trustee receives conflicting directions from different groups
of Certificateholders.
No Certificateholders of a Series, solely by virtue of such
holder's status as a Certificateholder, will have any right under the Pooling
and Servicing Agreement for such Series to institute any proceeding with respect
to the Pooling and Servicing Agreement, unless such holder previously has given
to the Trustee for such Series written notice of default and unless the holders
of Certificates evidencing not less than 25% of the Voting Interests for such
Series have made written request upon the Trustee to institute such proceeding
in its own name as Trustee thereunder and have offered to the Trustee reasonable
indemnity and the Trustee for 60 days has neglected or refused to institute any
such proceeding.
AMENDMENT
Each Pooling and Servicing Agreement may be amended by the
Depositor, the Servicer (with respect to a Series of Certificates relating, to
the Mortgage Loans or Contracts) and the Trustee without the consent of the
Certificateholders, (i) to cure any ambiguity, (ii) to correct or supplement any
provision therein that may be inconsistent with any over provision therein,
(iii) to modify, eliminate or add to any of its provisions to such extent as
shall be necessary to maintain the qualification of the Trust Fund (or one or
more segregated pools of assets therein) as a REMIC at all times that any
Certificates are outstanding or to avoid or modify the risk of the imposition of
any tax on the Trust Fund pursuant to the Code that would be a claim against the
Trust Fund, provided that the Trustee has received an opinion of counsel to the
effect that such action is necessary or desirable to maintain such qualification
or to avoid or minimize the risk of the imposition of any such tax and such
action will not, as evidenced by such opinion of counsel, adversely affect in
any material respect the interests of any Certificateholder, (iv) to change the
timing and/or nature of deposits into the Certificate Account, provided that
such change will not, as evidenced by an opinion of counsel, adversely affect in
any material respect the interests of any Certificateholder and that such change
will not adversely affect the then current rating assigned to any Certificates,
as evidenced by a letter from each Rating Agency to such effect, (v) to add to,
modify or eliminate any provisions therein restricting transfers of certain
Certificates, which are inserted in response to the Code provisions described
below under "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates -- Taxation of Residual Certificates --
Tax-Related Restrictions on Transfer of Residual Certificates," or (vi) to make
any other provisions with respect to matters or questions arising under such
Pooling and Servicing Agreement that are not inconsistent with the provisions
thereof, provided that such action will not, as evidenced by an opinion of
counsel, adversely affect in any material respect the interests of the
Certificateholders of the related Series. The Pooling and Servicing Agreement
may also be amended by the Depositor, the Servicer, where applicable, and the
Trustee with the consent of the holders of Certificates evidencing interests
aggregating not less than 66 2/3% of the Voting Interests evidenced by the
Certificates affected thereby, for the purpose of adding any provisions to or
changing in any manner or eliminating, any of the provisions of such Pooling and
Servicing Agreement or of modifying in any manner the rights of the
Certificateholders; provided, however, that no such amendment may (i) reduce in
any manner the amount of, or delay the timing of, any payments received on or
with respect to Mortgage Loans or Contracts that are required to be distributed
on any Certificates, without the consent of the holder of such Certificate, (ii)
adversely affect in any material respect the interests of the holders of a Class
or Subclass of Certificates of a Series in a manner other than that set forth in
clause (i) above without the consent of the holders of Certificates aggregating
not less than 66-2/3% of the Voting Interests evidenced by such Class or
Subclass, or (iii) reduce the aforesaid percentage of the Certificates, the
holders of which are required to consent to such amendment, without the consent
of the holders of all Certificates of the Class or Subclass affected then
outstanding. Notwithstanding the foregoing, the Pooling and Servicing Agreement
may be amended by the Depositor, the Servicer, where applicable, and the Trustee
provided that such action is approved by holders of Certificates evidencing 100%
of the Percentage Interest of each Class that, as evidenced by an opinion of
counsel, is adversely affected in any material respect by such action. For
purposes of giving any such consent (other than a consent to an action which
would adversely affect in any material respect the interests of the
Certificateholders
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of any Class, while the Servicer or any affiliate thereof is the holder of
Certificates aggregating not less than 66- 2/3% of the Percentage Interest of
such Class), any Certificates registered in the name of the Servicer or any
affiliate thereof shall be deemed not to be outstanding. Notwithstanding the
foregoing, the Trustee will not consent to any such amendment if such amendment
would subject the Trust Fund to tax or cause the Trust Fund (or one or more
segregated pools of assets therein) to fail to qualify as a REMIC.
TERMINATION; PURCHASE OR OTHER DISPOSITION OF MORTGAGE LOANS AND CONTRACTS
The obligations created by the Pooling and Servicing Agreement
for a Series of Certificates will terminate upon the earlier of (i) the later of
the final payment or other liquidation of the last Mortgage Loan or Contract
subject thereto and the disposition of all property acquired upon foreclosure of
any such Mortgage Loan or Contract and (ii) any purchase or disposition
described in the following paragraph. In no event, however, will the trust
created by the Pooling and Servicing Agreement continue beyond the expiration of
21 years from the death of the late survivor of certain persons named in such
Pooling and Servicing Agreement. For each Series of Certificates, the Trustee
will give written notice of termination of the Pooling and Servicing Agreement
to each Certificateholder, and the final distribution will be made only upon
surrender and cancellation of the Certificates at an office or agency appointed
by the Depositor and specified in the notice of termination.
If so provided in the related Prospectus Supplement, the
Pooling and Servicing Agreement for each Series of Certificates will permit, but
not require, the person or persons specified in such Prospectus Supplement to
purchase from the Trust Fund for such Series, or will require the Trust Fund to
sell, all remaining Mortgage Loans or Contracts at the time subject to the
Pooling and Servicing Agreement at a price specified in such Prospectus
Supplement. In the event that an election has been made to treat the related
Trust Fund (or one or more segregated pools of assets therein) as a REMIC, any
such purchase or disposition will be effected only upon receipt by the Trustee
of an opinion of counsel that such purchase (i) will be part of a "qualified
liquidation" or other evidence as defined in Code Section 860F(a)(4)(A), (ii)
will not otherwise subject the Trust Fund (or segregated asset pool) to tax, or
(iii) will not cause the Trust Fund (or segregated asset pool) to fail to
qualify as a REMIC. The exercise of such right or such disposition will effect
early retirement of the Certificates of that Series, but the right so to
purchase may be exercised, or the obligation to sell will arise, only after the
aggregate principal balance of the Mortgage Loans or Contracts for such Series
at the time of purchase is less than a specified percentage of the aggregate
principal balance at the Cut-Off Date for the Series, or after the date set
forth in the related Prospectus Supplement. See "Prepayment and Yield
Considerations."
THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement will be
named in the applicable Prospectus Supplement. The commercial bank or trust
company serving as Trustee may have normal banking relationships with the
Depositor, the Servicer or any of their respective affiliates.
With respect to a Series of Certificates relating to Mortgage
Loans or Contracts, the Trustee may resign at any time, in which event the
Servicer will be obligated to appoint a successor trustee. The Servicer (with
respect to a Series of Certificates relating to Mortgage Loans or Contracts) may
also remove the Trustee if the Trustee ceases to be eligible to act as Trustee
under the Pooling and Servicing Agreement, if the Trustee becomes insolvent or
in order to change the situs of the Trust Fund for state-tax reasons. Upon
becoming aware of such circumstances, the Servicer or Depositor, as the case may
be, will become obligated to appoint a successor trustee. The Trustee may also
be removed at any time by the holders of Certificates evidencing not less than
51% of the Voting Interest in the Trust Fund, except that, any Certificate
registered in the name of the Depositor, the Servicer or any affiliate thereof
will not be taken into account in determining whether the requisite Voting
Interest in the Trust Fund necessary to effect any such removal has been
obtained. Any resignation and removal of the Trustee, and the appointment of a
successor trustee, will not become effective until acceptance of such
appointment by the successor trustee. The Trustee, and any successor trustee,
will have a combined capital and surplus, or shall be a member of a bank holding
system with an aggregate combined capital and surplus, of at least $50,000,000
and will be subject to supervision or examination by federal or state
authorities.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS
The following discussion contains summaries of certain legal
aspects of mortgage loans and manufactured housing contracts which are general
in nature. Because such legal aspects are governed by applicable state law
(which laws may differ substantially), the summaries do not purport to be
complete nor to reflect the laws of any particular state, nor to encompass the
laws of all states in which the security for the Mortgage Loans or Contracts is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans or Contracts.
THE MORTGAGE LOANS
GENERAL
The Mortgage Loans will, in general, be secured by either
first, second or more junior mortgages, deeds of trust, or other similar
security agreements depending upon the prevailing practice in the state in which
the underlying property is located. A mortgage creates a lien upon the real
property described in the mortgage. There are two parties to a mortgage: the
mortgagor, who is the borrower; and the mortgagee, who is the lender. In a
mortgage state instrument, the mortgagor delivers to the mortgagee a note or
bond evidencing the loan and the mortgage. Although a deed of trust is similar
to a mortgage, a deed of trust has three parties: a borrower called the trustor
(similar to a mortgagor), a lender called the beneficiary (similar to a
mortgagee), and a third-party grantee called the trustee. Under a deed of trust,
the borrower grant the property, irrevocably until the debt is paid,, in trust,
generally with a power of sale, to the trustee to secure payment of the loan.
The trustee's authority under a deed of trust and the mortgage's authority under
a mortgage are governed by the express provisions of the deed of trust or
mortgage, applicable law, and, in some cases, with respect to the deed of trust,
the directions of the beneficiary.
The real property covered by a mortgage is most often the fee
estate in land and improvements. However, a mortgage may encumber other
interests in real property such as a tenant's interest in a lease of land or
improvements, or both, and the leasehold estate created by such lease. A
mortgage covering an interest in real property other than the fee estate
requires special provisions in the instrument creating such interest or in the
mortgage to protect the mortgagee against termination of such interest before
the mortgage is paid.
FORECLOSURE
Foreclosure of a mortgage is generally accomplished by
judicial action. Generally, the action is initiated by the service of legal
pleadings upon all parties having an interest of record in the real property.
Delays in completion of the foreclosure occasionally may result from
difficulties in locating necessary parties defendant. When the mortgagee's right
of foreclosure is contested, the legal proceedings necessary to resolve the
issue can be time-consuming. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property to a third party upon any default by
the borrower under the terms of the note or deed of trust. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In some states, the trustee must record a
notice of default and send a copy to the borrower-trustor and to any person who
has recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other individual
having an interest of record in the real property, including any junior
lienholders. If the deed of trust is not reinstated within any applicable cure
period, a notice of sale must be posted in a public place and, in most states,
published for a specified period of time in one or more newspapers. In addition,
some state be laws require that a copy of the notice of sale be posted on the
property and sent to all parties having an interest of record in the property.
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In some states, the borrower-trustor has the right to
reinstate the loan at any time following default until shortly before the
trustee's sale. In general, the borrower, or any other person having, a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Certain state laws control the amount of
foreclosure expenses and costs, including attorneys' fees, which may be
recovered by a lender.
In case of foreclosure under either a mortgage or a deed of
trust, the sale by the receiver or other designated officer, or by the trustee,
is a public sale. However, because of the difficulty a potential buyer at the
sale would have in determining the exact status of title and because the
physical condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at the
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or receiver for an amount equal to the unpaid principal amount
of the note, accrued and unpaid interest and the expenses of foreclosure.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume the burdens of
ownership, including obtaining hazard insurance and making such repairs at its
own expense as are necessary to render the property suitable for sale. The
lender commonly will obtain the services of a real estate broker and pay the
broker a commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of mortgage insurance proceeds.
FORECLOSURE ON SHARES OF COOPERATIVES
The cooperative shares owned by the tenant-stockholder and
pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's certificate of incorporation and
by-laws, as well as the proprietary lease of occupancy agreement, and may be
cancelled by the cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the
event that the tenantstockholder has defaulted under the proprietary lease or
occupancy agreement, the cooperative will take no action to terminate such lease
or agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a
foreclosure on a cooperative loan, the lender must obtain the approval or
consent of the cooperative as required by the proprietary lease before
transferring the cooperative shares or assigning the proprietary lease.
Generally, the lender is not limited in any rights it may have to dispossess the
tenantstockholders.
Foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner,
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time, place and terms of the foreclosure. Generally, a sale conducted according
to the usual practice of banks selling similar collateral will be considered
reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale
will be applied first to pay the costs and expenses of the sale and then to
satisfy the indebtedness secured by the lender's security interest. The
recognition agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative corporation to receive
sums due under the proprietary lease or occupancy agreement. If there are
proceeds remaining, the lender must account to the tenant-stockholder for the
surplus. Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See
"Anti-Deficiency Legislation and Other Limitations on Lenders" below.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust and/or
foreclosure of a mortgage, the borrower and certain foreclosed junior lienors
are given a statutory period in which to redeem the property from the
foreclosure sale. In most states where the right of redemption is available,
statutory redemption may occur upon payment of the foreclosure purchase price,
accrued interest and taxes. In some states, the right to redeem is an equitable
right. The effect of a right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser at a foreclosure sale, or of any
purchaser from the lender subsequent to judicial foreclosure or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has run.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The Mortgage Loans are secured by mortgages or deeds of trust
some of which are junior to other mortgages or deeds of trust held by other
lenders or institutional investors. The rights of the Trust (and therefore the
Certificateholders), as mortgagee under a junior mortgage or beneficiary under a
junior deed of trust, are subordinate to those of the mortgagee under the senior
mortgage or beneficiary under the senior deed of trust, including the prior
rights of the senior mortgagee to receive hazard insurance and condemnation
proceeds and to cause the property securing the Mortgage Loan to be sold upon
default of the mortgagor or trustor, thereby extinguishing the junior
mortgagee's or junior beneficiary's lien unless the junior mortgagee or junior
beneficiary asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage or deed of
trust. As discussed more fully below, a junior mortgagee or junior beneficiary
may satisfy a defaulted senior loan in full and, in some states, may cure such
default and loan. In most states, no notice of default is required to be given
to a junior mortgagee or junior beneficiary and junior mortgagees or junior
beneficiaries are seldom given notice of defaults or senior mortgages. In order
for a foreclosure action in some states to be effective against a junior
mortgagee or junior beneficiary, the junior mortgagee or junior beneficiary must
be named in any foreclosure action, thus giving notice to junior lienors. It is
standard practice of the Sellers to protect their interest by attending any sale
of which they have notice or appearing and bidding for, or redeeming, the
property if it is in their best interest to do so.
The standard form of the mortgage or deed of trust used by
most institutional lenders, (including the sellers) confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event the
property is taken by condemnation, the mortgagee or beneficiary under any
underlying senior mortgages will have the prior right to collect and apply any
insurance proceeds payable under a hazard insurance policy to restore or repair
the property if feasible, and to collect any remaining insurance proceeds or any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages or deeds of trust. Proceeds in
excess of the amount of senior mortgage indebtedness, in most cases, may be
applied to the indebtedness of a junior mortgage or trust deed.
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The form of mortgage or deed of trust used by most
institutional lenders typically contains a "future advance" clause, which
provides, in essence, that additional amounts advanced to or on behalf of the
mortgagor or trustor by the mortgagee or beneficiary are to be secured by the
mortgage or deed of trust. The priority of any advance made under the clause
depends, in some states, on whether the advance was an "obligatory" or
"optional" advance. If the mortgagee or beneficiary is obligated to advance the
additional amounts, the advance is entitled to receive the same priority as
amounts initially advanced under the mortgage or deed of trust, notwithstanding
the fact that there may be junior mortgages or deeds of trust and other liens
which intervene between the date of recording of the mortgage or deed of trust
and the date of the future advance, and, in some states, notwithstanding that
the mortgagee or beneficiary had actual knowledge of such intervening junior
mortgages or deeds of trust and other liens at the time of the advance. Where
the mortgagee or beneficiary is not obligated to advance additional amounts or,
in some states, has actual knowledge of the intervening junior mortgages or
deeds of trust and other liens, the advance will be subordinate to such
intervening junior mortgages or deeds of trust and other liens. Priority of
advances under a "future advance" cause rests, in some states, on state statutes
giving priority to all advances made under the loan agreement to a "credit
limit" amount stated in the recorded mortgage.
Another provision sometimes included in the form of the
mortgage or deed of trust used by institutional lenders (and included in some of
the forms used by the Sellers) obligates the mortgagor or trustor to pay, before
delinquency, all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary is given the right under
certain mortgages or deeds of trust to perform the obligations itself, at its
election, with the mortgagor or trustor agreeing to reimburse the mortgagee or
beneficiary for any sums expended by the mortgagee or beneficiary on behalf of
the mortgagor or trustor. All sums so expended by the mortgagee or beneficiary
become part of the indebtedness secured by the mortgage or deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory restrictions that limit
the remedies of a beneficiary under a deed of trust or a mortgage under a
mortgage. In some states, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment is a personal
judgment against the former borrower equal in most cases to the difference
between the amount due to the lender and the net amount realized upon the
foreclosure sale.
Some state statutes may require the beneficiary or mortgagee
to exhaust the security afforded under a deed of trust or mortgage by
foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the borrower. In certain other states, the lender has the option
of bringing a personal action against the borrower on the debt without first
exhausting such security; however, in some of these states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. Consequently, the practical effect of the election requirement, when
applicable, is that lenders will usually proceed first against the security
rather than bringing a personal action against the borrower.
Other statutory provisions may limit any deficiency judgment
against the former borrower following a foreclosure sale to the excess of the
outstanding debt over the fair market value of the property at the time of such
sale. The purpose of these statutes is to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are
provided for in certain instances where the value of the lender's security has
been impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
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Generally, Article 9 of the UCC governs foreclosure on
cooperative shares and the related proprietary lease or occupancy agreement and
foreclosure on the beneficial interest in a land trust. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Mortgage Loan secured by shares of a cooperative, would be such shares and the
related proprietary lease or occupancy agreement) was conducted in a
commercially reasonable manner.
In addition to anti-deficiency and related legislation,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws, the federal Soldiers' and Sailors' Civil Relief Act of 1940 and
state laws affording relief to debtors, may interfere with or affect the ability
of a secured mortgage lender to realize upon its security. For example, in a
Chapter 13 proceeding under the Federal Bankruptcy Code, when a court determines
that the value of a home is less than the principal balance of the loan, the
court may prevent a lender from foreclosing on the home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the value
of the home as it exists at the time of the proceeding, leaving the lender as a
general unsecured creditor for the difference between that value and the amount
of outstanding indebtedness. A bankruptcy court may grant the debtor a
reasonable time to cure a payment default, and in the case of a mortgage loan
not secured by the debtor's principal residence, also may reduce the monthly
payments due under such mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule. Certain court decisions have applied such
relief to claims secured by the debtor's principal residence.
The Internal Revenue Code of 1986, as amended, provides
priority to certain tax liens over the lien of the mortgage or deed of trust.
The laws of some states provide priority to certain tax liens over the lien of
the mortgage of deed of trust. Certain environmental protection laws may also
impose liability for cleanup expenses on owners by foreclosure on real property,
which liability may exceed the value of the property involved. Numerous federal
and some state consumer protection laws impose substantive requirements upon
mortgage lenders in connection with the origination, servicing and the
enforcement of mortgage loans. These laws include the federal Truth in Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act, and related statutes and
regulations. These federal laws and state laws impose specific statutory
liabilities upon lenders who originate or service mortgage loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the mortgage loans.
"DUE-ON-SALE" CLAUSES
The forms of note, mortgage and deed of trust relating to
conventional Mortgage Loans may contain a "due-on-sale" clause permitting
acceleration of the maturity of a loan if the borrower transfers its interest in
the property. In recent years, court decisions and legislative actions placed
substantial restrictions on the right of lenders to enforce such clauses in many
states. However, effective October 15, 1982, Congress enacted the Garn-St
Germain Depository Institutions Act of 1982 (the "Act") which purports to
preempt state laws which prohibit the enforcement of "due-on-sale" clauses by
providing among other matters, that "due-on-sale" clauses in certain loans
(which loans may include the Mortgage Loans) made after the effective date of
the Act are enforceable, within certain limitations as set forth in the Act and
the regulations promulgated thereunder. "Due-on-sale" clauses contained in
mortgage loans originated by federal savings and loan associations or federal
savings banks are fully enforceable pursuant to regulations of the Office of
Thrift Supervision ("OTS"), as successor to the Federal Home Loan Bank Board
("FHLBB"), which preempt state law restrictions on the enforcement of such
clauses. Similarly, "due-on-sale" clauses in mortgage loans made by national
banks and federal credit unions are now fully enforceable pursuant to preemptive
regulations of the Office of the Comptroller of the Currency and the National
Credit Union Administration, respectively.
The Act created a limited exemption from its general rule of
enforceability for "due-on-sale" clauses in certain mortgage loans ("Window
Period Loans") which were originated by non-federal lenders and made or assumed
in certain states ("Window Period States") during the period, prior to October
15, 1982, in which that state prohibited the enforcement of "due-on-sale"
clauses by constitutional provision, statute or statewide court decision (the
"Window Period"). Though neither the Act nor the FHLBB regulations promulgated
thereunder actually names the Window Period States, FHLMC has taken the
position, in prescribing mortgage loan servicing standards with respect to
mortgage loans which it has purchased, that the Window Period States were:
Arizona, Arkansas, California, Colorado, Georgia, Iowa, Michigan, Minnesota, New
Mexico, Utah and Washington. Under
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the Act, unless a Window Period State took action by October 15, 1985, the end
of the Window Period, to further regulate enforcement of "due-on-sale" clauses
in Window Period Loans, "due-on-sale" clauses would become enforceable even in
Window Period Loans. Five of the Window Period States (Arizona, Minnesota,
Michigan, New Mexico and Utah) have taken actions which restrict the
enforceability of "due-on-sale" clauses in Window Period Loans beyond October
15, 1985. The actions taken vary among such states.
By virtue of the Act, the Servicer may generally be permitted
to accelerate any conventional Mortgage Loan which contains a "due-on-sale"
clause upon transfer of an interest in the property subject to the mortgage or
deed of trust. With respect to any Mortgage Loan secured by a residence occupied
or to be occupied by the borrower, this ability to accelerate will not apply to
certain types of transfers, including (i) the granting of a leasehold interest
which has a term of three years or less and which does not contain an option to
purchase, (ii) a transfer to a relative resulting from the death of a borrower,
or a transfer where the spouse or children becomes an owner of the property in
each case where the transferee(s) will occupy the property, (iii) a number
resulting from a decree of dissolution of marriage, legal separation agreement
or from an incidental property settlement agreement by which the spouse becomes
an owner of the property, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the property (provided that such lien or
encumbrance is not created pursuant to a contract for deed), (v) a transfer by
devise, descent or operation of law on the death of a joint tenant or tenant by
the entirety, and (vi) other transfers as set forth in the Act and the
regulations thereunder. The extent of the effect of the Act on the average lives
and delinquency rates of the Mortgage Loans cannot be predicted. See "Prepayment
and Yield Considerations."
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980, as amended ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The OTS (as successor to the
FHLBB) is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. The statute authorized any
state to reimpose Stated Rate limits by adopting before April 1, 1983, a law or
constitutional provision which expressly rejects application of the federal law.
Fifteen states have adopted laws reimposing or reserving the right to impose
interest rate limits. In addition, even where Title V is not so rejected, any
state is authorized to adopt a provision limiting certain other loan charges.
Unless otherwise specified in the applicable Prospectus
Supplement, each Unaffiliated Seller will represent and warrant in the related
Loan Sale Agreement that all Mortgage Loans sold by such Unaffiliated Seller to
the Depositor were originated in full compliance with applicable state laws,
including usury laws. See "The Trust Funds -- Representations and Warranties."
ADJUSTABLE RATE LOANS
The laws of certain states may provide that mortgage notes
relating to adjustable rate loans are not negotiable instruments under the
Uniform Commercial Code. In such event, the Trustee will not be deemed to be a
"holder in due course" within the meaning of the Uniform Commercial Code and may
take such a mortgage note subject to certain restrictions on its ability to
foreclose and to certain contractual defenses available to a mortgagor.
ENFORCEABILITY OF CERTAIN PROVISIONS
Standard forms of note, mortgage and deed of trust generally
contain provisions obligating the borrower to pay a late charge if payments are
not timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under the Pooling and Servicing Agreement, late charges and prepayment
fees (to the extent permitted by law and not waived by the Servicer) will be
retained by the Servicer as additional servicing compensation.
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Courts have Unposed general equitable principles upon
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of defaults under the loan documents. Examples of
judicial remedies that may be fashioned include judicial requirements that the
lender undertake affirmative and expensive actions to determine the causes for
the borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have sustained their judgment for the
lender's judgment and have required lenders to reinstate loans or recast payment
schedules to accommodate borrowers who are suffering from temporary financial
disability. In some cases, courts have limited the right of lenders to foreclose
if the default under the mortgage instrument is not monetary, such as the
borrower failing to adequately maintain the property or the borrower executing a
second mortgage or deed of trust affecting the property. In other cases, some
courts have been faced with the issue whether federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under deeds of trust receive notices in addition to the
statutorily-prescribed minimum requirements. For the most part, these cases have
upheld the notice provisions as being reasonable or have found that the sale by
a trustee under a deed of trust or under a mortgage having a power of sale does
not involve sufficient state action to afford constitutional protections to the
borrower.
THE CONTRACTS
GENERAL
As a result of the assignment of the Contracts to the Trustee,
the Trust Fund will succeed collectively to all of the rights (including the
right to receive payment on the Contracts) and will assume the obligations of
the obligee under the Contracts. Each Contract evidences both (a) the obligation
of the obligor to repay the loan evidenced thereby, and (b) the grant of a
security interest in the Manufactured Home to secure repayment of such loan.
Certain aspects of both features of the Contracts are described more fully
below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code (the "UCC") in effect in the states in which the Manufactured
Homes initially were registered. Pursuant to the UCC, the sale of chattel paper
is treated in a manner similar to perfection of a security interest in chattel
paper. Under the Pooling and Servicing Agreement, the Servicer will transfer
physical possession of the Contracts to the Trustee or a designated custodian or
may retain possession of the Contracts as custodian for the Trustee. In
addition, the Servicer will make an appropriate filing of a UCC-1 financing
statement in the appropriate states to give notice of the Trustee's ownership of
the Contracts. Unless otherwise specified in the related Prospectus Supplement,
the Contracts will not be stamped or marked otherwise to reflect their
assignment from the Depositor to the Trustee. Therefore, if through negligence,
fraud or otherwise, a subsequent purchaser were able to take physical possession
of the Contracts without notice of such assignment, the Trustee's interest in
Contracts could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the Contracts may be located
in all 50 states. Security interests in manufactured homes may be perfected
either by notation of the secured party's lien on the certificate of title or by
delivery of the required documents and payment of a fee to the state motor
vehicle authority, depending on state law. In some non-title states, perfection
pursuant to the provisions of the UCC is required. The Servicer may effect such
notation or delivery of the required documents and fees, and obtain possession
of the certificate of title, as appropriate under the laws of the state in which
any manufactured home securing a manufactured housing conditional sales contract
is registered. In the event the Servicer fails, due to clerical errors, to
effect such notation or delivery, or files the security interest under the wrong
law (for example, under a motor vehicle title statute rather than under the UCC,
in a few states), the Certificateholders may not have a first priority security
interest in the Manufactured Home securing a Contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the secured party must file either a "fixture filing" under the provisions
of the UCC or a real estate mortgage under the real estate laws of the state
where the home is located. These filings must be made in
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the real estate records office of the county where the home is located.
Substantially all of the Contracts contain provisions prohibiting the borrower
from permanently attaching the Manufactured Home to its site. So long as the
borrower does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the security interest in the Manufactured Home. If, however, a Manufactured
Home is permanently attached to its site, other parties could obtain an interest
in the Manufactured Home which is prior to the security interest originally
retained by the Unaffiliated Seller and transferred to the Depositor. With
respect to a Series of Certificates and if so described in the related
Prospectus Supplement, the Servicer may be required to perfect a security
interest in the Manufactured Home under applicable real estate laws. The
Servicer will represent that at the date of the initial issuance of the related
Certificates it has obtained a perfected first priority security interest by
proper notation or delivery of the required documents and fees with respect to
substantially all of the Manufactured Homes securing the Contracts.
The Depositor will cause the security interests in the
Manufactured Homes to be assigned to the Trustee on behalf of the
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, neither the Depositor nor the Trustee will amend the certificates of
title to identify the Trustee or the Trust Fund as the new secured party, and
neither the Depositor nor the Servicer will deliver the certificates of title to
the Trustee or note thereon the interest of the Trustee. Accordingly, the
Servicer (or the Unaffiliated Seller) which continue to be named as the secured
party on the certificates of title relating to the Manufactured Homes. In many
states, such assignment is an effective conveyance of such security interest
without amendment of any lien noted on the related certificate of title and the
new secured party succeeds to the Depositor's rights as the secured party.
However, in some states there exists a risk that, in the absence of an amendment
to the certificate of title, such assignment of the security interest in the
Manufactured Home might not be effective or perfected or that, in the absence of
such notation or delivery to the Trustee, the assignment of the security
interest in the Manufactured Home might not be effective against creditors of
the Servicer (or the Unaffiliated Seller) or a trustee in bankruptcy of the
Servicer (or the Unaffiliated Seller).
In the absence of fraud, forgery or permanent affixation of
the Manufactured Home to its site by the Manufactured Home owner, or
administrative error by state recording officials, the notation of the lien of
the Servicer (or the Unaffiliated Seller) on the certificate of title or
delivery of the required documents and fees will be sufficient to protect the
Certificateholders against the rights of subsequent purchasers of a Manufactured
Home or subsequent lenders who take a security interest in the Manufactured
Home. If there are any Manufactured Homes as to which the security interest
assigned to the Trustee is not perfected, such security interest would be
subordinate to, among others, subsequent purchasers for value of Manufactured
Homes and holders of perfected security interests. There also exists a risk in
not identifying the Trustee as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the
Certificateholders could be released.
In the event that the owner of a Manufactured Home moves it to
a state other than the state in which such Manufactured Home initially is
registered, under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and not
re-register the Manufactured Home in such state, and if steps are not taken to
re-perfect the Trustee's security interest in such state, the security interest
in the Manufactured Home would cease to be perfected. A majority of states
generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien, the
Servicer would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the Trustee
would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing conditional sales contracts, the Servicer takes steps to effect such
re-perfection upon receipt of notice of registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a manufactured home, the Trustee (or
its custodian) must surrender possession of the certificate of title or the
Servicer will receive notice as a result of its lien noted thereon and
accordingly will have an opportunity to require satisfaction of the related
manufactured housing conditional sales contract before
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release of the lien. Under the Pooling and Servicing Agreement, the Servicer is
obligated to take steps, at the Servicer's expense, as are necessary to maintain
perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on
a Manufacturer Home and liens for personal property taxes take priority over a
perfected security interest. The Unaffiliated Seller will represent in the
Pooling and Servicing Agreement that it has no knowledge of any such liens with
respect to any Manufactured Home securing payment on any Contract. However, such
liens could arise at any time during the term of a Contract. No notice will be
given to the Trustee or Certificateholders in the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Servicer on behalf of the Trustee, to the extent required
by the related Pooling and Servicing Agreement, may take action to enforce the
Trustee's security interest with respect to Contracts in default by repossession
and resale of the Manufactured Homes securing such defaulted Contracts. So long
as the Manufactured Home has not become subject to the real estate law, a
creditor can repossess a Manufactured Home securing a Contract by voluntary
surrender, by "self-help" repossession that is "peaceful" (i.e., without breach
of the peace) or, in the absence of voluntary surrender and the ability to
repossess without breach of the peace, by judicial process. The holder of a
Contract must give the debtor a number of days' notice, which varies from 10 to
30 days depending on the state, prior to commencement of any repossession. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states also
requires that the debtor be given notice of any sale prior to resale of the unit
so that the debtor may redeem at or before such resale. In the event of such
repossession and resale of a Manufactured Home, the Trustee would be entitled to
be paid out of the sale proceeds before such proceeds could be applied to the
payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is
entitled to obtain a deficiency judgment from a debtor for any deficiency on
repossession and resale of the manufactured home securing such a debtor's loan.
However, some states impose prohibitions or limitations on deficiency judgments,
and in many cases the defaulting borrower would have no assets with which to pay
a judgment.
Certain other statutory provisions, including federal and
state bankruptcy and insolvency laws and general equitable principles, may limit
or delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract which is the seller of goods which gave rise to the transaction
(and certain related lenders and assignees) to transfer such contract free of
notice of claims by the debted thereunder. The effect of this rule is to subject
the assignee of such a contract to all claims and defenses which the debtor
could assert against the seller of goods. Liability under this rule is limited
to amounts paid under a Contract; however, the obligor also may be able to asset
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
Contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE"
CLAUSES
The Contracts, in general, prohibit the sale or transfer of
the related Manufactured Homes without the consent of the Servicer and permit
the acceleration of the maturity of the Contracts by the Servicer upon any such
sale or transfer that is not consented to.
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In the case of a transfer of a Manufactured Home after which
the Servicer desires to accelerate the maturity of the related Contract, the
Servicer's ability to do so will depend on the enforceability under state law of
the "due-on-sale" clause. The Garn-St Germain Depository Institutions Act of
1982 preempts, subject to certain exceptions and conditions, state laws
prohibiting enforcement of "due-on-sale" clauses applicable to the Manufactured
Homes. Consequently, in some states the Servicer may be prohibited from
enforcing a "due-on-sale" clause in respect of certain Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980, as amended ("Title V"), provides that, subject to
the following conditions, state usury limitations shall not apply to any loan
which is secured by a first lien on certain kinds of manufactured housing. The
Contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action leading to
repossession of the related unit.
Title V authorized any state to reimpose limitations on
interest rates and finance charges by adopting before April 1, 1983 a law or
constitutional provision which expressly rejects application of the federal law.
Fifteen states adopted such a law prior to the April 1, 1983 deadline. In
addition, even where Title V was not so rejected, and state is authorized by the
law to adopt a provision limiting discount points or other charges on loans
covered by Title V. The Unaffiliated Seller will represent that all of the
Contracts comply with applicable usury law.
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS
A number of lawsuits have been brought in the United States
alleging personal injury from exposure to the chemical formaldehyde, which is
preset in many building materials, including such components of manufactured
housing as plywood flooring and wall paneling. Some of these lawsuits were
brought against manufacturers of manufactured housing, suppliers of component
parts, and related persons in the distribution process. Depositor is aware of a
limited number of cases in which plaintiffs have won judgments in these
lawsuits.
The holder of any Contract secured by a Manufactured Home with
respect to which a formaldehyde claim has been successfully asserted may be
liable to the obligor for the amount paid by the obligor on the related Contract
and may be unable to collect amounts still due under the Contract. The
successful assertion of such claim constitutes a breach of a representation or
warranty of the person specified in the related Prospectus Supplement, and the
Certificateholders would suffer a loss only to the extent that (i) such person
breached its obligation to repurchase the Contract in the event an obligor is
successful in asserting such a claim, and (ii) such person, the Servicer or the
Trustee were unsuccessful in asserting any claim of contribution or subrogation
on behalf of the Certificateholders against the manufacturer or other persons
who were directly liable to the plaintiff for the damages. Typical products
liability insurance policies held by manufacturers and component suppliers of
manufactured homes may not cover liabilities arising from formaldehyde in
manufactured housing, with the result that recoveries from such manufacturers,
suppliers or other persons may be limited to their corporate assets without the
benefit of insurance.
INSTALLMENT CONTRACTS
MORTGAGE LOANS AND CONTRACTS
The Mortgage Loan and Contracts may also consist of
Installment Contracts. Under an Installment Contract the seller (hereinafter
referred to in this Section as the "lender") retains legal title to the property
and enters into an agreement with the purchaser (hereinafter referred to in this
Section as the "borrower" for the payment of the purchase price, plus interest,
over the term of such contract. Only after full performance by the borrower of
the contract is the lender obligated to convey title to the real estate to the
purchaser. As with mortgage or deed of trust financing, during the effective
period of the Installment Contract, the borrower is generally responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
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The method of enforcing the rights of the lender under an
Installment Contract varies on a state-by-state basis depending upon the extent
to which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated, and
the buyer's equitable interest in the property is forfeited. The lender in such
a situation does not have to foreclosure in order to obtain title to the
property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of forfeiture.
Under such statute, a judicial or nonjudicial foreclosure may be required, the
lender may be required to give notice of default and the borrower may be granted
some grace period during which the contract may be reinstated upon full payment
of the default amount and the borrower may have a post-foreclosure statutory
redemption right. In other states, courts in equity may permit a borrower with
significant investment in the property under an Installment Contract for the
sale of real estate to share in the proceeds of sale of the property after the
indebtedness is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an Installment Contract for the sale of real
estate in a given state are simpler and less time-consuming and costly than are
the procedures for foreclosing and obtaining clear title to a mortgaged
property.
ENVIRONMENTAL RISKS
Real property pledged for a Mortgaged Loan or Contract as
security to a lender may be subject to unforeseen environmental risks. Of
particular concern may be those mortgaged properties which have been the site of
manufacturing, industrial or disposal activity. Such environmental risks may
give rise to (a) a diminution in value of property securing any Mortgage Loan or
the inability to foreclose against such property or (b) in certain circumstances
as more fully described below, liability for clean-up costs or other remedial
actions, which liability could exceed the value of such property or the
principal balance of the related Mortgage Loan.
Under the laws of certain states, failure to perform the
remediation required or demanded by the state of any condition or circumstance
that (i) may pose an imminent or substantial endangerment to the public health
or welfare or the environment, (ii) may result in a release or threatened
release of any Hazardous Material, or (iii) may give rise to any environmental
claim or demand (each such condition or circumstance, or "Environmental
Condition") may give rise to a lien on the property to ensure the reimbursement
of remedial costs incurred by the state. In several states such lien has
priority over the lien of an existing mortgage against such property. The value
of a Mortgaged Property as collateral for a Mortgage Loan could therefore be
adversely affected by the existence of any such Environmental Condition.
The state of the law is currently unclear as to whether and
under what circumstances clean-up costs, or the obligation to take remedial
actions, could be Unposed on a secured lender such as the Trust Fund. Under the
laws of some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), a lender may be
liable as an "owner or operator" for costs of addressing releases or threatened
releases of hazardous substances on a mortgaged property if such lender or its
agents or employees have participated in the management of the operations of the
borrower, even though CERCLA's definition of "owner or operator," however, is a
person "who without participating in the management of the facility, holds
indicia of ownership primarily to protect his security interest" (the
"secured-creditor exemption"). This exemption for holders of a security interest
such as a secured lender applies only when the lender seeks to protect its
security interest in the contaminated facility or property. Thus, if a lender's
activities begin to encroach on the actual management of such facility or
property, the lender faces potential liability as an "owner or operator" under
CERCLA. Similarly, when a lender forecloses and takes title to a contaminated
facility or property (whether it holds the facility or property as an investment
or leases it to a third party), the lender may incur potential CERCLA liability.
A decision in May 1990 of the United States Court of Appeals
for the Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly
contained CERCLA's secured-creditor exemption. The court held that
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a lender need not have involved itself in the day-to-day operations of the
facility or participated in decisions relating to hazardous waste to be liable
under CERCLA; rather, liability could attach to a lender if its involvement with
the management of the facility is broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence such decisions
could be inferred from the extent of its involvement in the facility's financial
management. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in In re Bergsoe Metal Corp., disagreeing with the Fleet Factors
court, held that a secured lender had no liability absent "some actual
management of the facility" on the part of the lender. On April 29, 1992, the
United States Environmental Protection Agency (the "EPA") issued a final rule
interpreting and delineating CERCLA's secured-creditor exemption. The final rule
defines a specific the range of permissible actions that may be undertaken by a
holder of a contaminated facility without exceeding the bounds of the
secured-creditor exemption. Issuance of this rule by the EPA under CERCLA would
not necessarily affect the potential for liability in actions by either a state
or a private party under CERCLA or in actions under other federal or state laws
which may impose liability on "owners or operators" but do not incorporate the
second-creditor exemption.
If a lender is or becomes liable for clean-up costs, it may
bring an action for contribution against the current owners or operators, the
owners or operators at the time of on-site disposal activity or any other party
who contributed to the environmental hazard, but such persons or entities may be
bankrupt or otherwise judgment proof. Furthermore, such action against the
borrower may be adversely affected by the limitations on recourse in the
documents in the Mortgage Document File. Similarly, in some states
anti-deficiency legislation and other statues requiring the lender to exhaust
its security before bringing a personal action against the borrower-trustor (see
"Anti-Deficiency Legislation and Other Limitations on Lenders" below) may
curtail the lender's ability to recover from its borrower the environmental
clean-up and other related costs and liabilities by the lender.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended (the "Relief Act"), a borrower who enters
military service after the origination of such borrower's Mortgage Loan or
Contract (including a borrower who is a member of the National Guard or is in
reserve status at the time of the origination of the Mortgage Loan or Contract
and is later called to active duty) may not be charged interest above an annual
rate of 6% during the period of such borrower's active duty status, unless a
court orders otherwise upon application of the lender. It is possible that such
action could have an effect, for an indeterminate period of time, on the ability
of the Servicer to collect full amounts of interest on certain of the Mortgage
Loans or Contracts in a Trust Fund. Any shortfall in interest collections
resulting from the application of the Relief Act could result in losses to the
holders of the Certificates of the related Series. In addition, the Relief Act
imposes limitations which would impair the ability of the Servicer to foreclose
on an affected Mortgage Loan or Contract during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan or Contract goes into
default, there may be delays and losses occasioned by the inability to realize
upon the Mortgaged Property or Manufactured Home in a timely fashion.
TYPE OF MORTGAGED PROPERTY
The lender may be subject to additional risk depending upon
the type and use of the Mortgaged Property in question. For instance, Mortgaged
Properties which are hospitals, nursing homes or convalescent homes may present
special risks to lenders in large part due to significant governmental
regulation of the operation, maintenance, control and financing of health care
institutions. Mortgages on Mortgaged Properties which are owned by the Borrower
under a condominium form of ownership are subject to the declaration, by-laws
and other rules and regulations of the condominium association. Mortgaged
Properties which are hotels or motels may present additional risk to the lender
in that: (i) hotels and motels are typically operated pursuant to franchise,
management and operating agreements which may be terminable by the operator; and
(ii) the transferability of the hotel's operating, liquor and other licenses to
the entity acquiring the hotel either through purchase or foreclosure is subject
to the vagaries of local law requirements. In addition, Mortgaged Properties
which are multifamily residential properties may be subject to rent control
laws, which could impact the future cash flows of such properties. Finally,
Mortgaged Properties which are financed in the installment sales contract method
may leave the holder of the note
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exposed to tort and other claims as the true owner of the property which could
impact the availability of cash to pass through to investors.
CERTAIN MATTERS RELATING TO INSOLVENCY
The Unaffiliated Seller of the Mortgage Loans or Contracts and
the Depositor intend that the transfer of such Mortgage Loans or Contracts to
the Trust Fund constitute a sale rather for a pledge of the Mortgage Loans or
Contracts to secure indebtedness of the seller of the Mortgage Loans or
Contracts. However, if the Unaffiliated Seller were to become a debtor under the
federal bankruptcy code or be placed in a conservatorship or receivership under
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), as the case may be, it is possible that a creditor, receiver,
conservator or trustee-in-bankruptcy of such seller may argue that the sale of
the Mortgage Loans or Contracts by the Unaffiliated Seller is a pledge of the
Mortgage Loans or Contracts rather than a sale. This position, if argued or
accepted by a court, could result in a delay in or reduction of distributions to
the related Certificateholders.
Under FIRREA the FDIC as receiver or conservator of a Servicer
subject to its jurisdiction may enforce a contract notwithstanding any provision
of the contract providing for termination thereof by reason of the insolvency
of, or appointment of a receiver or conservator for, the Servicer. Consequently,
provisions in a Pooling and Servicing Agreement providing for an Event of
Default upon certain events of insolvency, receivership or conservatorship of
the Servicer may not be enforceable against the FDIC as receiver or conservator
to the extent that the exercise of such rights is based solely upon the
insolvency of or appointment of a receiver or conservator for the Servicer. In
addition, the FDIC may transfer the assets and liabilities of an institution in
receivership or conservatorship to another institution.
BANKRUPTCY LAWS
Numerous statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to obtain payment of the loan, to
realize upon collateral and/or enforce a deficiency judgment. For example, under
federal bankruptcy law, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of the
bankruptcy petition, and, often, no interest or principal payments are made
during the course of the bankruptcy proceeding. The delay and the consequences
thereof caused by or on behalf of a junior lienor may stay the senior lender
from taking action to foreclose out such junior lien. In a case under the
Bankruptcy Code, the lender is precluded from foreclosing without authorization
from the bankruptcy court. In addition, a court with federal bankruptcy
jurisdiction may permit a debtor through his or her Chapter 11 or Chapter 13
rehabilitative plan to cure a monetary default in respect of a mortgage loan on
the debtor's residence by paying arrearage within a reasonable time period and
reinstating the original mortgage loan payment schedule even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been entered
in state court (provided no sale of the residence had yet occurred) prior to the
filing of the debtor's petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a mortgage loan default by
paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also
indicated that the terms of a mortgage loan secured by property of the debtor
may be modified. These courts have suggested that such modifications may include
reducing the amount of each monthly payment, changing the rate of interest,
altering the repayment schedule, and reducing the lender's security interest to
the value of the residence, thus leaving the lender in the position of a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan.
Federal bankruptcy law may also interfere with or affect the
ability of the secured mortgage lender to enforce an assignment by a mortgagor
of rent and leases related to the Mortgaged Property if the related mortgagor is
in a bankruptcy proceeding. Under Section 362 of the Bankruptcy Code, the
mortgagee will be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue can be time-consuming and may result
in significant delays in the receipt of the rents. Rents may also escape an
assignment thereof (i) if the assignment is not fully perfected under state law
prior to commencement of the bankruptcy proceeding, (ii) to the
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extent such rents are used by the borrower to maintain the mortgaged property,
or for other court authorized expenses, or (iii) to the extent other collateral
may be substituted for the rents.
To the extent a mortgagor's ability to make payment on a
mortgage loan is dependent on payments under a lease of the related property,
such ability may be impaired by the commencement of a bankruptcy proceeding
relating to a lessee under such lease. Under the federal bankruptcy laws, the
filing of a petition in bankruptcy by or on behalf of a lessee results in a stay
in bankruptcy against the commencement or continuation of any state court
proceeding for past due rent, for accelerated rent, for damages or for a summary
eviction order with respect to a default under the lease that occurred prior to
the filing of the lessee's petition.
In addition, federal bankruptcy law generally provides that a
trustee or debtor in possession in a bankruptcy or reorganization case under the
Bankruptcy Code may, subject to approval of the court (a) assume the lease and
retain it or assign it to a third party or (b) reject the lease. If the lease is
assumed, the trustee or debtor in possession (or assignee, if applicable) must
cure any defaults under the lease, compensate the lessor for its losses and
provide the lessor with "adequate assurance" of future performance. Such
remedies may be insufficient, however, as the lessor may be forced to continue
under the lease with a lessee that is a poor credit risk or an unfamiliar tenant
if the lease was assigned, and any assurances provided to the lessor may, in
fact, be inadequate. Furthermore, there is likely to be a period of time between
the date upon which a lessee files a bankruptcy petition and the date upon which
the lease is assumed or rejected. Although the lessee is obligated to make all
lease payments currently with respect to the post-petition period, there is a
risk that such payments will not be made due to the lessee's poor financial
condition. If the lease is rejected, the lessor will be treated as an unsecured
creditor with respect to its claim for damages for termination of the lease and
the mortgagor must relet the mortgage property before the flow of lease payments
will recommence. In addition, pursuant to Section 502(b)(6) of the Bankruptcy
Code, a lessor's damages for lease rejection are limited by a formula.
In a bankruptcy or similar proceeding, action may be taken
seeking the recovery as a preferential transfer to the Trust Fund of any
payments made by the mortgagor under the related Mortgage Loan. Moreover, some
recent court decisions suggest that even a non-collusive, regularly conducted
foreclosure sale may be challenged in a bankruptcy proceeding as a "fraudulent
conveyance," regardless of the parties' intent, if a bankruptcy court determines
that the mortgaged property has been sold for less than fair consideration while
the mortgagor was insolvent and within one year (or within any longer state
statutes of limitations if the trustee in bankruptcy elects to proceed under
state fraudulent conveyance law) of the filing of bankruptcy.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated
material federal income consequences of the purchase, ownership, and disposition
of the Certificates. The discussion below does not purport to address all
federal income consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules. The discussion is
based upon laws, regulations, rulings and decisions now in effect all of which
are subject to change. This discussion reflects the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as regulations
(the "REMIC Regulations") promulgated by the U.S. Department of the Treasury on
December 23, 1992. Investors should consult their own tax advisors in
determining the federal, state, local, and any other tax consequences to them of
the purchase, ownership, and disposition of the Certificates.
For purposes of this discussion, where the applicable
Prospectus Supplement provides for a Fixed Retained Yield with respect to the
Mortgage Loans or Contracts of a Series of Certificates, references to the
Mortgage Loans or Contracts will be deemed to refer to that portion of the
Mortgage Loans or Contracts held by the Trust Fund, which does not include the
Fixed Retained Yield. For purposes of this discussion, references to the
"principal amount" or "principal balance" of a Certificate will be deemed to
refer to the Stated Amount in the case of Multi-Class Certificates. For purposes
of this discussion, unless otherwise specified, the term "Mortgage
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Loans" will be used to refer to Mortgage Loans and Contracts. References to a
"holder" or "Certificateholder" in this discussion generally mean the beneficial
owner of a Certificate.
The following discussion addresses securities of three general
types: (i) securities ("REMIC Certificates") representing interests in a Trust
Fund, or a portion thereof, which the Depositor will covenant to elect to have
treated as a real estate mortgage investment conduit ("REMIC") under sections
860A through 860G of the Code; (ii) securities ("Non-REMIC Certificates")
representing interests in a Trust Fund (a "Grantor Trust Estate") which the
Depositor will covenant not to elect to have treated as a REMIC; and (iii)
securities ("Notes") that are intended to be treated for federal income tax
purposes as indebtedness secured by the underlying Mortgage Loans. This
Prospectus does not address the tax treatment of partnership interests. Such a
discussion will be set forth in the applicable Prospectus Supplement for any
trust issuing securities characterized as partnership interests. The Prospectus
Supplement for each series of securities will indicate whether a REMIC election
(or elections) will be made for the related Trust Estate and, if a REMIC
election is to be made, will identify all "regular interests" and "residual
interests" in the REMIC.
REMIC CERTIFICATES
GENERAL
With respect to a particular Series of Certificates, an
election may be made to treat the Trust Fund (or one or more segregated pools of
assets therein) as one or more REMICs within the meaning of Code Section 860D. A
Trust Fund or a portion or portions thereof as to which one or more REMIC
elections will be made will be referred to as a "REMIC Pool." For purposes of
this discussion, Certificates of a Series as to which one or more REMIC
elections are made, which will include all Multi-Class Certificates and may
include Standard Certificates or Stripped Certificates or both, are referred to
as "REMIC Certificates" and will consist of one or more Classes of "Regular
Certificates" and one Class of "Residual Certificates" in the case of each REMIC
Pool. Qualification as a REMIC requires ongoing compliance with certain
conditions. With respect to each Series of REMIC Certificates, the Depositor's
Counsel has advised the Depositor that in the firm's opinion, assuming (i) the
making of such an election, (ii) compliance with the Pooling and Servicing
Agreement, and (iii) compliance with any changes in the law, including any
amendments to the Code or applicable Treasury regulations thereunder, each REMIC
Pool will qualify as a REMIC. In such case, the Regular Certificates will be
considered to be "regular interests" in the REMIC Pool and generally will be
treated for federal income tax purposes as if they were newly originated debt
instruments, and the Residual Certificates will be considered to be "residual
interests" in the REMIC Pool. The Prospectus Supplement for each Series of
Certificates will indicate whether one or more REMIC elections with respect to
the related Trust Fund will be made, in which event references to REMIC or
"REMIC Pool" herein shall be deemed to refer to each such REMIC Pool.
STATUS OF REMIC CERTIFICATES
REMIC Certificates held by a mutual savings bank or a domestic
building and loan association will constitute "qualifying real property loans"
within the meaning of Code Section 593(d)(1) in the same proportion that the
assets of the REMIC Pool would be so treated. REMIC Certificates held by a
domestic building and loan association will constitute either "a regular or
residual interest in a REMIC" within the meaning of Code Section
7701(a)(19)(C)(xi), but only in the same proportion that the assets of the REMIC
Pool would be treated as "loans . . . secured by an interest in real property
which is . . . residential real property" (such as single family or multifamily
properties, but not commercial properties) within the meaning of Code Section
7701(a)(19)(C)(v) or as other assets described in Code Section 7701(a)(19)(C),
and otherwise will not qualify for such treatment. REMIC Certificates held by a
real estate investment trust will constitute "real estate assets" within the
meaning of Code Section 856(C)(5)(A), and interest on the Regular Certificates
and income with respect to Residual Certificates will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(C)(3)(B) in the same proportion
that, for both purposes, the assets and income of the REMIC Pool would be so
treated. If at all times 95% or more of the assets of the REMIC Pool qualify for
the foregoing respective treatments, the REMIC Certificates will qualify for the
corresponding status in their entirety. For purposes of Code Sections 593(d)(1)
and 856(c)(5)(A), payments of principal and interest on the Mortgage Loans that
are reinvested pending distribution to holders of Certificates qualify for such
treatment. Where
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two REMIC Pools are part of a tiered structure they will be treated as one REMIC
for purposes of the tests described above respecting asset ownership of more or
less than 95%. In addition, if the assets of a REMIC include Buy-Down Loans, it
is possible that the percentage of such assets constituting "qualifying real
property loans" or "loans . . . secured by an interest in real property" for
purposes of Code Section 593(d)(1) and 7701(a)(19)(c)(v), respectively, may be
required to be reduced by the amount of the related Buy-Down Fund. REMIC
Certificates held by a regulated investment company will not constitute
"Government securities" within the meaning of Code Section 851(b)(4)(A)(i).
REMIC Certificates held by certain financial institutions will constitute an
"evidence of indebtedness" within the meaning of Code Section 582(c)(1).
QUALIFICATION AS A REMIC
In order for the REMIC Pool to qualify as a REMIC, there must
be ongoing compliance on the part of the REMIC Pool with the requirements set
forth in the Code. The REMIC Pool must fulfill an asset test, which requires
that no more than a de minimis portion of the assets of the REMIC Pool, as of
the close of the third calendar month beginning after the "Startup Day" (which
for purposes of this discussion is the date of issuance of the REMIC
Certificates) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments." The REMIC Regulations provide
a "safe harbor" pursuant to which the de minimis requirement is met if at all
times the aggregate adjusted basis of the nonqualified assets in less than 1
percent of the aggregate adjusted basis of all the REMIC Pool's assets. An
entity that fails to meet the safe harbor may nevertheless demonstrate that it
holds no more than a de minimis amount of nonqualified assets. A REMIC also must
provide "reasonable arrangements" to prevent its residual interest from being
held by "disqualified organizations" and applicable tax information to
transferors or agents that violate this requirement. See "Taxation of Residual
Certificates -- Tax-Related Restrictions on Transfers of Residual Certificates
- -- Disqualified Organizations."
A qualified mortgage is any obligation that is principally
secured by an interest in real property and that is either transferred to the
REMIC Pool on the Startup Day or is purchased by the REMIC Pool within a
three-month period thereafter pursuant to a fixed-price contract in effect on
the Startup Day. Qualified mortgages include whole mortgage loans, such as the
Mortgage Loans, certificates of beneficial interest in a grantor trust that
holds mortgage loans, regular interests in another REMIC, loans secured by
timeshare interests and loans secured by shares held by a tenant stockholder in
a cooperative housing corporation, provided, in general, (i) the fair market
value of the real property security (including buildings and structural
components thereof) is at least 80% of the principal balance of the related
Mortgage Loan either at origination or as of the Startup Day (an original
loan-to-value ratio of not more than 125% with respect to the real property
security) or (ii) substantially all the proceeds of the Mortgage Loan or the
underlying mortgage loan were used to acquire, improve or protect an interest in
real property that, at the origination date, was the only security for the
Mortgage Loan or underlying mortgage loan. A qualified mortgage includes a
qualified replacement mortgage, which is any property that would have been
treated as a qualified mortgage if it were transferred to the REMIC Pool on the
Startup Day and that is received either (i) in exchange for any qualified
mortgage within a three-month period thereafter or (ii) in exchange for a
"defective obligation" within a two-year period thereafter. A "defective
obligation" includes (i) a mortgage in default or as to which default is
reasonably foreseeable, (ii) a mortgage as to which a representation or warranty
made at the time of transfer to the REMIC Pool has been breached, (iii) a
mortgage that was fraudulently procured by the mortgagor, and (iv) a mortgage
that was not in fact principally secured by real property (but only if such
mortgage is disposed of within 90 days of discovery). A mortgage loan that is
"defective" as described in clause (iv) that is not sold or, if within two years
of the Startup Day, exchanged, within 90 days of discovery, ceases to be a
qualified mortgage after such 90-day period.
The REMIC Regulations provide that obligations secured by
interests in manufactured housing which qualify as "single family residences"
within the meaning of Code Section 25(e)(10) may be treated as "qualified
mortgages" of a REMIC. Under Code Section 25(e)(10), the term "single family
residence" includes any manufactured home which has a minimum of 400 square feet
of living space and a minimum width in excess of 102 inches and which is of a
kind customarily used at a fixed location. The Depositor will represent and
warrant that each of the Manufactured Homes securing the Contracts meets this
definition of "single family residence."
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Permitted investments include cash flow investments, qualified
reserve assets and foreclosure property. A cash flow investment is any
instrument, earning a return in the nature of interest, of amounts received on
or with respect to qualified mortgages for a temporary period, not exceeding 13
months, until the next scheduled distribution to holders of interests in the
REMIC Pool. A qualified reserve asset is any intangible property held for
investment that is part of any reasonably required reserve maintained by the
REMIC Pool to provide for payments of expenses of the REMIC Pool or to provide
additional security for payments due on the regular or residual interests that
otherwise may be delayed or defaulted upon because of default (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and certain other contingencies. The
reserve fund will be disqualified if more than 30 percent of the gross income
from the assets in such fund for the year is derived from the sale of property
held for less than three months, unless required to prevent a default on the
regular interests caused by a default on one or more qualified mortgages. A
reserve fund must be reduced "promptly and appropriately" as payments on the
Mortgage Loans are received. Foreclosure property is real property acquired by
the REMIC Pool in connection with default or imminent default of a qualified
mortgage and generally held for not more than two years, with extensions granted
by the Internal Revenue Service.
In addition to the foregoing requirements, the various
interests in a REMIC Pool also must meet certain requirements. All of the
interests in a REMIC Pool must be either of the following: (i) one or more
classes of regular interests or (ii) a class of residual interests on which
distributions, if any, are made pro rata. A regular interest is an interest in a
REMIC Pool that is issued on the Startup Day with fixed terms, is designated as
a regular interest, and unconditionally entitles the holder to receive a
specified principal amount (or other similar amount), and provides that interest
payments (or other similar amounts), if any, at or before maturity either are
payable based on a fixed rate or at a qualified variable rate or consist of a
specified, nonvarying portion of the interest payments on qualified mortgages.
The specified principal amount of a regular interest that provides for interest
payments consisting of a specified, nonvarying portion of interest payments on
qualified mortgages may be zero. A residual interest is an interest in a REMIC
Pool other than a regular interest that is issued on the Startup Day and is
designated as a residual interest. An interest in a REMIC Pool may be treated as
a regular interest even if payments of principal with respect to such interest
are subordinated to payments on other regular interests or the residual interest
in the REMIC Pool, and are dependent on the absence of defaults or delinquencies
on qualified mortgages or permitted investments, lower than reasonably expected
returns on permitted investments, unanticipated expenses incurred by the REMIC
Pool or prepayment interest shortfalls. Accordingly, the Regular Certificates of
a Series will constitute one or more classes of regular interests, and the
Residual Certificates with respect to each REMIC Pool in that Series will
constitute a single class of residual interests on which distributions are made
pro rata.
If an entity, such as the REMIC Pool, fails to comply with one
or more of the ongoing requirements of the Code for REMIC status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for such year and thereafter. In this event, an entity with multiple classes of
ownership interests may be treated as a separate association taxable as a
corporation under Treasury regulations, and the Regular Certificates may be
treated as equity interests therein. The Code, however, authorizes the Treasury
Department to issue regulations that address situations where failure to meet
one or more of the requirements for REMIC status occurs inadvertently and in
good faith, and disqualification of the REMIC Pool would occur absent regulatory
relief. Investors should be aware, however, that the Conference Committee Report
to the 1986 Act indicates that the relief may be accompanied by sanctions, such
as the imposition of a corporate tax on all or a portion of the REMIC Pool's
income for the period of time in which the requirements for REMIC status are not
satisfied.
TAXATION OF REGULAR CERTIFICATES
GENERAL
In general, interest paid or accrued, original issue discount,
and market discount on a Regular Certificate will be treated as ordinary income
to a holder of the Regular Certificate (the "Regular Certificateholder"), and
principal payments on a Regular Certificate will be treated as a return of
capital to the extent of the Regular Certificateholder's basis in the Regular
Certificate allocable thereto. Regular Certificateholders must use the accrual
method of accounting with regard to Regular Certificates, regardless of the
method of accounting otherwise used by such Regular Certificateholders.
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ORIGINAL ISSUE DISCOUNT
Compound Interest Certificates will be, and certain of the
Regular Certificates of other Classes of a Series may be, issued with "original
issue discount" within the meaning of Code Section 1273(a). Holders of any Class
or Subclass of Regular Certificates having original issue discount generally
must include original issue discount in ordinary income for federal income
purposes as it accrues, in accordance with the constant yield method that takes
into account the compounding of interest. Such accrual may be in advance of
receipt of the cash attributable to such income. The following discussion is
based in part on temporary and final Treasury regulations issued on February 2,
1994 under Code Sections 1271 through 1273 and 1275 (the "OID Regulations") and
in part on the provisions of the 1986 Act. Regular Certificateholders should be
aware, however, that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the Regular Certificates. To
the extent such issues are not addressed in the OID Regulations, the Depositor
intends to apply the methodology described in the Conference Committee Report to
the 1986 Act. No assurance can be provided that the Internal Revenue Service
will not take a different position as to those matters not currently addressed
by the OID Regulations. Moreover, the OID Regulations include an anti-abuse rule
allowing the Internal Revenue Service to apply or depart from the OID
Regulations where necessary or appropriate to ensure a reasonable result in
light of the applicable statutory provisions. A tax result will not be
considered unreasonable under the anti-abuse rule in the absence of a
substantial effect on the present value of a taxpayer's tax liability. Investors
are advised to consult their own tax advisors as to the discussion herein and
the appropriate method for reporting interest and original issue discount with
respect to the Regular Certificates.
Each Regular Certificate (except to the extent described below
with respect to a Regular Certificate on which principal is distributed in a
single installment or by lots of specified principal amounts upon the request of
a Certificateholder or by random lot (a "Retail Class Certificate")) will be
treated as a single installment obligation for purposes of determining the
original issue discount includible in a Regular Certificateholder's income. The
total amount of original issue discount on a Regular Certificate is the excess
of the "stated redemption price at maturity" of the Regular Certificate over its
"issue price." The issue price of a Regular Certificate offered pursuant to this
Prospectus generally is the first price at which a substantial amount of Regular
Certificates of that Class is sold to the public (excluding bond houses, brokers
and underwriters). Although unclear under the OID Regulations, the Depositor
intends to treat the issue price of a Class as to which there is no substantial
sale as of the issue date or that is retained by the Depositor as the fair
market value of that Class as of the issue date. The issue price of a Regular
Certificate also includes any amount paid by an initial Regular
Certificateholder for accrued interest that relates to a period prior to the
issue date of the Regular Certificate, unless the Regular Certificateholder
elects on its federal income tax return to exclude such amount from the issue
price and to recover it on the first Distribution Date. The stated redemption
price at maturity of a Regular Certificate always includes the principal amount
of the Regular Certificate, but generally will not include distributions of
interest if such interest distributions constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means interest
payable at a single fixed rate or a qualified variable rate as described below,
provided that such interest payments are unconditionally payable at intervals of
one year or less during the entire term of the Regular Certificate. No
distributions on a Compound Interest Certificate, or on other Regular
Certificates with respect to which interest distributions may be deferred and
added to principal, will constitute qualified stated interest, and, accordingly,
the stated redemption price at maturity of such Regular Certificates includes
not only their principal balances but also all other distributions (whether
denominated as accrued interest or current interest) to be received thereon.
Likewise, the Depositor intends to treat an "interest only" Class, or a Class on
which interest is substantially disproportionate to its principal amount (a
so-called "super-premium") Class as having no qualified stated interest. Where
the interval between the issue date and the first Distribution Date on a Regular
Certificate is shorter than the interval between subsequent Distribution Dates,
the interest attributable to the additional days will be included in the stated
redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular
Certificate will be considered to be zero if such original issue discount is
less than 0.25% of the stated redemption price at maturity of the Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate. For this purpose, the weighted average maturity of the Regular
Certificate is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution is scheduled to be made by a fraction, the numerator of
which is the amount of each distribution included in the stated redemption
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price at maturity of the Regular Certificate and the denominator of which is the
stated redemption price at maturity of the Regular Certificate. The Conference
Committee Report to the 1986 Act provides that the schedule of such
distributions should be determined in accordance with the assumed rate of
prepayment of the Mortgage Loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Certificates. The
Prepayment Assumption with respect of a Series of Regular Certificates will be
set forth in the related Prospectus Supplement. Holders generally must report de
minimis original issue discount pro rata as principal payments are received, and
such income will be capital gain if the Regular Certificate is held as a capital
asset. However, under the OID Regulations, Regular Certificateholders may elect
to accrue all de minimis original issue discount (other than de minimis issue
discount attributable to a "teaser" interest rate or an initial interest
holiday) as well as market discount and market premium, under the constant yield
method. See "Election to Treat All Interest Under the Constant Yield Method."
A Regular Certificateholder generally must include in gross
income for any taxable year the sum of the "daily portions," as defined below,
of the original issue discount on the Regular Certificate accrued during an
accrual period for each day on which it holds the Regular Certificate, including
the date of purchase but excluding the date of disposition. The Depositor will
treat the monthly period ending on the day before each Distribution Date as the
accrual period. With respect to each Regular Certificate, a calculation will be
made of the original issue discount that accrues during each successive full
accrual period (or shorter period from the date of original issue) that ends on
the day before the related Distribution Date on the Regular Certificate. The
Conference Committee Report to the 1986 Act states that the rate of accrual of
original issue discount is intended to be based on the Prepayment Assumption.
Other than as discussed below with respect to a Retail Class Certificate, the
original issue discount accruing in a full accruing period would be the excess,
if any, of (i) the sum of (a) the present value of all of the remaining
distributions to be made on the Regular Certificate as of the end of that
accrual period that are included in the Regular Certificate's stated redemption
price at maturity, and (b) the distributions made on the Regular Certificate
during the accrual period that are included in the Regular Certificate's stated
redemption price at maturity, over (ii) the adjusted issue price of the Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence is calculated
based on (i) the yield to maturity of the Regular Certificate at the issue date,
(ii) events (including actual prepayments) that have occurred prior to the end
of the accrual period, and (iii) the Prepayment Assumption. For these purposes,
the adjusted issued price of a Regular Certificate at the beginning of any
accrual period equals the issue price of the Regular Certificate, increased by
the aggregate amount of original issue discount with respect to the Regular
Certificate that accrued in all such prior periods, and reduced by the amount of
distributions included in the Regular Certificate's stated redemption price at
maturity that were made on the Regular Certificate in such prior periods. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of
original issue discount required to be included in income by a Regular
Certificateholder generally will increase to take into account prepayments on
the Mortgage Loans that exceed the Prepayment Assumption, and generally will
decrease (but not below zero for any period) if the prepayments are slower than
the Prepayment Assumption.
In the case of a Retail Class Certificate, the Depositor
intends to determine the yield to maturity of such Certificate based upon the
anticipated payment characteristics of the Class as a whole under the Prepayment
Assumption. In general, the original issue discount accruing on each Retail
Class Certificate in a full accrual period would be its allocable share of the
original issue discount with respect to the entire Class, as determined in
accordance with the preceding paragraph. However, in the case of a distribution
in retirement of the entire unpaid principal balance of any Retail Class
Certificate (or portion of such unpaid principal balance), (a) the remaining
unaccrued original issue discount allocable to such Certificate (or to such
portion) will accrue at the time of such distribution, and (b) the accrual of
original issue discount allocable to each remaining Certificate of such Class
(or the remaining unpaid principal balance of a partially redeemed Retail Class
Certificate after a distribution of principal has been received) will be
adjusted by reducing the present value of the remaining payments on such Class
and the adjusted issue price of such Class to the extent attributable to the
portion of the unpaid principal balance thereof that was distributed. The
Depositor believes that the foregoing treatment is consistent with the "pro-rata
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prepayment" rules of the OID Regulations, but with the rate of accrual of
original issue discount determined based on the Prepayment Assumption for a
Class as a whole. Investors are advised to consult their tax advisors as to this
treatment.
A purchaser of a Regular Certificate at a price greater than
its adjusted issue price but less than its stated redemption price at maturity
will be required to include in gross income the daily portions of the original
issue discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted issue
price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively, such
a subsequent purchaser may elect to treat all such acquisition premium under the
constant yield method, as described below under the heading "Election to Treat
All Interest Under the Constant Yield Method."
VARIABLE RATE REGULAR CERTIFICATES
Regular Certificates may provide for interest based on a
variable rate. Under the OID Regulations, interest is treated as payable at a
variable rate if, generally, (i) the issue price does not exceed the original
principal balance by more than a specified amount, and (ii) the interest
compounds or is payable at least annually at current values of (a) one or more
"qualified floating rates," (b) a single fixed rate followed by one or more
qualified floating rates, (c) a single "objective rate" or (d) a single fixed
rate and a single objective rate that is a "qualified inverse floating rate." A
floating rate is a qualified floating rate if variations in the rate can
reasonably be expected to measure contemporaneous variations in the cost of
newly borrowed funds, where such rate is subject to a multiple of not less than
zero nor more than 1.35. Such rate may also be increased or decreased by a fixed
spread or subject to a fixed cap or floor, or a cap or floor that is not
reasonably expected as of the issue date to affect the yield of the instrument
significantly. An objective rate includes a rate determined using a single fixed
formula and that is based on one or more qualified floating rates or the yield
or changes in the price of actively traded personal property. A qualified
inverse floating rate is a rate equal to a fixed rate minus a qualified floating
rate that inversely reflects the contemporaneous variations in the cost of newly
borrowed funds; an inverse floating rate that is not a qualified inverse
floating rate may nevertheless be an objective rate. A Class of Regular
Certificates may be issued under this Prospectus that does not have a variable
rate under the foregoing rules, for example, a Class that bears an interest-only
or super-premium floating rate, or a fixed rate for one year or more followed by
the inverse of an index multiplied by more than 1.35. It is possible that such a
Class may be considered to bear "contingent interest," within the meaning of
proposed Treasury regulations issued on December 16, 1994. These proposed
regulations under certain circumstances could result in a deferral of the timing
of reporting of such interest income when compared to the original issue
discount rules. However, the proposed regulations regarding contingent interest
have not been adopted in final form and may not currently by relied upon.
Moreover, under the REMIC Regulations, a Regular Certificate (i) bearing a rate
that qualifies as a variable rate under the OID Regulations that is tied to
current values of a variable rate (or the highest, lowest or average of two or
more variable rates) including a rate based on the average cost of funds of one
or more financial institutions, or a positive or negative multiple of such a
rate (plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the qualified mortgages that bear
either a fixed rate or a variable rate, including such a rate that is subject to
one or more caps or floors, or (ii) bearing one or more such variable rates for
one or more periods, or one or more fixed rates for one or more periods, and a
different variable or fixed rate for other periods, qualifies as a regular
interest in a REMIC. Accordingly, unless otherwise indicated in the applicable
Prospectus Supplement, the Depositor intends to treat Regular Certificates that
qualify as regular interests under this rule in the same manner as obligations
bearing a variable rate for original issue discount reporting purposes, with
regular interests that do not meet the definition of a variable rate in the OID
Regulations being treated as having all non-qualified stated interest.
The amount of original issue discount with respect to a
Regular Certificate bearing a variable rate of interest will accrue in the
manner described above under "Original Issue Discount," with the yield to
maturity and future payments on such Regular Certificate generally to be
determined by assuming that interest will be payable for the life of the Regular
Certificate based on the initial rate (or, if different, the value of the
applicable variable rate as of the pricing date). Unless otherwise specified in
the applicable Prospectus Supplement, the Depositor intends to treat such
variable interest as qualified stated interest, other than variable interest on
an interest-only Class, which will be treated as non-qualified stated interest
includible in the stated redemption price at maturity.
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Ordinary income reportable for any period will be adjusted based on subsequent
changes in the applicable interest rate index.
DEFERRED INTEREST
Any Deferred Interest that accrues with respect to a Class of
Regular Certificates will constitute income to the holders of such Regular
Certificates prior to the time distributions of cash with respect to such
Deferred Interest are made. The Depositor will treat all interest on a Regular
Certificate as to which there may be Deferred Interest as includible in the
stated redemption price at maturity thereof.
MARKET DISCOUNT
A purchaser of a Regular Certificate also may be subject to
the market discount rules of Code Sections 1276 through 1278. Under these Code
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which the
purchaser's original basis in the Regular Certificate (i) is exceeded by the
then-current principal amount of the Regular Certificate, or (ii) in the case of
a Regular Certificate having original issue discount, is exceeded by the
adjusted issue price of such Regular Certificate at the time of purchase. Such
purchaser generally will be required to recognize ordinary income to the extent
of accrued market discount on such Regular Certificate as distributions
includible in the stated redemption price at maturity thereof are received, in
an amount not exceeding any such distribution. Such market discount would accrue
in a manner to be provided in Treasury regulations and should take into account
the Prepayment Assumption. The Conference Committee Report to the 1986 Act
provides that until such regulations are issued, such market discount would
accrue either (i) on the basis of a constant interest rate, or (ii) in the ratio
of stated interest allocable to the relevant period to the sum of the interest
for such period plus the remaining interest as of the end of such period, or in
the case of a Regular Certificate issued with original issue discount, in the
ratio of original issue discount accrued for the relevant period to the sum of
the original issue discount accrued for such period plus the remaining original
issue discount as of the end of such period. Such purchaser also generally will
be required to treat a portion of any gain on a sale or exchange of the Regular
Certificate as ordinary income to the extent of the market discount accrued to
the date of disposition under one of the foregoing methods, less any accrued
market discount previously reported as ordinary income as partial distributions
in reduction of the stated redemption price at maturity were received. Such
purchaser will be required to defer deduction of all or a portion of the excess
of the interest paid or accrued on indebtedness incurred or continued to
purchase or carry the Regular Certificate over the interest distributable
thereon. The deferred portion of such interest expense in any taxable year
generally will not exceed the accrued market discount on the Regular Certificate
for such year. Any such deferred interest expense is, in general, allowed as a
deduction not later than the year in which the related market discount income is
recognized or the Regular Certificate is disposed of. As an alternative to the
inclusion of market discount in income on the foregoing basis, the Regular
Certificateholder may elect to include market discount in income currently as it
accrues on all market discount instruments acquired by such Regular
Certificateholder in that taxable year or thereafter, in which case the interest
deferral rule will not apply. See "Election to Treat All Interest Under the
Constant Yield Method" below regarding an alternative manner in which such
election may be deemed to be made.
By analogy to the OID Regulations, market discount with
respect to a Regular Certificate will be considered to be zero if such market
discount is less than 0.25% of the remaining stated redemption price at maturity
of such Regular Certificate multiplied by the weighted average maturity of the
Regular Certificate (determined as described above in the fourth paragraph under
"Original Issue Discount") remaining after the date of purchase. It appears that
de minimis market discount would generally be reported pro rata as principal
payments are received. Treasury regulations implementing the market discount
rules have not yet been issued, and therefore investors should consult their own
tax advisors regarding the application of these rules as well as the
advisability of making any of the elections with respect thereto.
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PREMIUM
A Regular Certificate purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Certificateholder holds such Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
Regular Certificateholder may elect under Code Section 171 to amortize such
premium under the constant yield method. The Conference Committee Report to the
1986 Act indicates a Congressional intent that the same rules that will apply to
the accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations such
as the Regular Certificates, although it is unclear whether the alternatives to
the constant yield method described above under "Market Discount" are available.
Amortizable bond premium will be treated as an offset to interest income on the
Regular Certificates, rather than a separate deduction item. See "Election to
Treat All Interest Under the Constant Yield Method" below regarding an
alternative manner in which the Code Section 171 election may be deemed to be
made.
TREATMENT OF LOSSES
Regular Certificateholders will be required to report income
with respect to Regular Certificates on the accrual method of accounting,
without giving effect to delays or reductions in distributions attributable to
defaults or delinquencies on the Mortgage Loans, except to the extent it can be
established that such losses are uncollectible. Accordingly, the holder of a
Regular Certificate, particularly a Subordinate Certificate, may have income, or
may incur a diminution in cash flow as a result of a default or delinquency, but
may not be able to take a deduction (subject to the discussion below) for the
corresponding loss until a subsequent taxable year. Although not entirely clear,
it appears that Regular Certificateholders that are corporations should in
general be allowed to deduct as an ordinary loss such loss with respect to
principal sustained during the taxable year on account of any Regular
Certificates becoming wholly or partially worthless, and that, in general,
Regular Certificateholders that are not corporations will be allowed to deduct
as a short-term capital loss any loss sustained during the taxable year on
account of a portion of any such Regular Certificates becoming wholly worthless.
Although the matter is not free from doubt, non-corporate Regular
Certificateholders should be allowed a bad debt deduction at such time as the
principal balance of such Regular Certificates is reduced to reflect losses
resulting from any liquidated Mortgage Loans. The Internal Revenue Service,
however, could take the position that non-corporate holders will be allowed a
bad debt deduction to reflect such losses only after all the Mortgage Loans
remaining in the Trust Fund have been liquidated or the applicable Class of
Regular Certificates has been otherwise retired. The Internal Revenue Service
could also assert that losses on the Regular Certificates are deductible on some
other method that may defer such deductions for all holders, such as reducing
future cash flow for purposes of computing original issue discount. This may
have the effect of creating "negative" original issue discount which would be
deductible only against future positive original issue discount or otherwise
upon termination of the Class. Regular Certificateholders are urged to consult
their own tax advisors regarding the appropriate timing, amount and character of
any loss sustained with respect to such Regular Certificates. Losses
attributable to interest previously reported as income should be deductible as
ordinary losses by both corporate and non-corporate holders. Special loss rules
are applicable to banks and thrift institutions, including rules regarding
reserves for bad debts. Such taxpayers are advised to consult their tax advisors
regarding the treatment of losses on Regular Certificates.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD METHOD
A holder of a debt instrument such as a Regular Certificate may
elect to treat all interest that accrues on the instrument using the constant
yield method, with none of the interest being treated as qualified stated
interest. For purposes of applying the constant yield method to a debt
instrument subject to such an election, (i) "interest" includes stated interest,
original issue discount, de minimis original issue discount, market discount and
de minimis market discount, as adjusted by any amortizable bond premium or
acquisition premium and (ii) the debt instrument is treated as if the instrument
were issued on the holder's acquisition date in the amount of the holder's
adjusted basis immediately after acquisition. A holder generally may make such
an election on an instrument by instrument basis or for a class or group of debt
instruments. However, if the holder makes such an election with respect to a
debt instrument with amortizable bond premium or with market discount, the
holder is deemed to have made elections to amortize bond premium or to report
market discount income currently as it accrues under the constant yield method,
respectively, for all premium bonds held or market discount bonds acquired by
the holder in the same
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taxable year or thereafter. The election is made on the holder's federal income
tax return for the year in which the debt instrument is acquired and is
irrevocable except with the approval of the Internal Revenue Service. Investors
should consult their own tax advisors regarding the advisability of making such
an election.
SALE OR EXCHANGE OF REGULAR CERTIFICATES
If a Regular Certificateholder sells or exchanges a Regular
Certificate, the Regular Certificateholder will recognize gain or loss equal to
the difference, if any, between the amount received and its adjusted basis in
the Regular Certificate. The adjusted basis of a Regular Certificate generally
will equal the cost of the Regular Certificate to the seller, increased by any
original issue discount or market discount previously included in the seller's
gross income with respect to the Regular Certificate and reduced by amounts
included in the state redemption price at maturity of the Regular Certificate
that were previously received by the seller and by any amortized premium.
Except as described above with respect to market discount, and
except as provided in this paragraph, any gain or loss on the sale or exchange
of a Regular Certificate realized by an investor who holds the Regular
Certificate as a capital asset will be capital gain or loss and will be
long-term or short-term depending on whether the Regular Certificate has been
held for the long-term capital gain holding period (currently more than one
year). Such gain will be treated as ordinary income (i) if a Regular Certificate
is held as part of a "conversion transaction" as defined in Code Section
1258(c), up to the amount of interest that would have accrued on the Regular
Certificateholder's net investment in the conversion transaction at 120% of the
appropriate applicable Federal rate under Code Section 1274(d) in effect at the
time the taxpayer entered into the transaction minus any amount previously
treated as ordinary income with respect to any prior disposition of property
that was held as a part of such transaction, (ii) in the case of a non-corporate
taxpayer, to the extent such taxpayer has made an election under Code Section
163(d)(4) to have net capital gains taxed as investment income at ordinary
income rates, or (iii) to the extent that such gain does not exceed the excess,
if any, of (a) the amount that would have been includible in the gross income of
the holder if his yield on such Regular Certificate were 110 percent of the
applicable Federal rate as of the date of purchase, over (b) the amount of
income actually includible in the gross income of such holder with respect to
the Regular Certificate. In addition, gain or loss recognized from the sale of a
Regular Certificate by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c). Pursuant to the Revenue
Reconciliation Act of 1993, capital gains of certain non-corporate taxpayers are
subject to a lower maximum tax rate than ordinary income of such taxpayers. The
maximum tax rate for corporations is the same with respect to both ordinary
income and capital gains.
TAXATION OF RESIDUAL CERTIFICATES
TAXATION OF REMIC INCOME
Generally, the "daily portions" of REMIC taxable income or net
loss will be includible as ordinary income or loss in determining the federal
taxable income of holders of Residual Certificates ("Residual Holders"), and
will not be taxed separately to the REMIC Pool. The daily portions of REMIC
taxable income or net loss of a Residual Holder are determined by allocating the
REMIC Pool's taxable income or net loss for each calendar quarter ratably to
each day in such quarter and by allocating such daily portion among the Residual
Holders in proportion to their respective holdings of Residual Certificates in
the REMIC Pool on such day. REMIC taxable income is generally determined in the
same manner as the taxable income of an individual using the accrual method of
accounting except that (i) the limitation on deductibility of investment
interest expense and expenses for the production of income do not apply, (ii)
all bad loans will be deductible as business bad debts, and (iii) the limitation
on the deductibility of interest and expenses related to tax-exempt income will
apply. The REMIC Pool's gross income includes interest, original issue discount
income, and market discount income, if any, on the Mortgage Loans, reduced by
amortization of any premium on the Mortgage Loans, plus income on reinvestment
of cash flows and reserve assets plus any cancellation of indebtedness income
upon allocation of realized losses to the Regular Certificates. The REMIC Pool's
deductions include interest and original issue discount expense on the Regular
Certificates, servicing fees on the Mortgage Loans, other administrative
expenses of the REMIC Pool and realized losses on the Mortgage Loans. The
requirement that Residual Holders report their pro rata share of taxable income
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or net loss of the REMIC Pool will continue until there are no Certificates of
any class of the related Series outstanding.
The taxable income recognized by a Residual Holder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Loans,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates, on the other hand. In the event
that an interest in the Mortgage Loans is acquired by the REMIC Pool at a
discount, and one or more of such Mortgage Loans is prepaid, the Residual Holder
may recognize taxable income without being entitled to receive a corresponding
amount of cash because (i) the prepayment may be used in whole or in part to
make distributions in reduction of principal on the Regular Certificates, and
(ii) the discount on the Mortgage Loans which is includible in income may exceed
the deduction allowed upon such distributions on those Regular Certificates on
account of any unaccrued original issue discount relating to those Regular
Certificates. When there is more than one Class of Regular Certificates that
distribute payments in reduction of principal balance sequentially, this
mismatching of income and deductions is particularly likely to occur in the
early years following issuance of the Regular Certificates when distributions in
reduction of principal are being made in respect of earlier Classes of Regular
Certificates to the extent that such Classes are not issued with substantial
discount. If taxable income attributable to such a mismatching is realized, in
general, losses would be allowed in later years as payments on the later Classes
of Regular Certificates are made. Taxable income may also be greater in earlier
years than in later years as a result of the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of
such a Series of Regular Certificates, may increase over time as distributions
of principal are made on the lower yielding Classes of Regular Certificates,
whereas, to the extent the REMIC Pool contains fixed rate Mortgage Loans,
interest income with respect to any given Mortgage Loan will remain constant
over time as a percentage of the outstanding principal amount of that loan.
Consequently, Residual Holders must have sufficient other sources of cash to pay
any federal, state, or local income taxes due as a result of such mismatching or
unrelated deductions against which to offset such income, subject to the
discussion of "excess inclusions" below under "Limitations on Offset or
Exemption of REMIC Income." The timing of such mismatching of income and
deductions described in this paragraph, if present with respect to a Series of
Certificates, may have a significant adverse effect upon a Residual Holder's
after-tax rate of return. In addition, a Residual Holder's taxable income during
certain periods may exceed the income reflected by such Residual Holder for such
periods in accordance with generally accepted accounting principles. Investors
should consult their own accountants concerning the accounting treatment of
their investment in Residual Certificates.
BASIS AND LOSSES
The amount of any net loss of the REMIC Pool that may be taken
into account by the Residual Holder is limited to the adjusted basis of the
Residual Certificate as of the close of the quarter (or time of disposition of
the Residual Certificate if earlier), determined without taking into account the
net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Certificate is the amount paid for such Residual Certificate. Such
adjusted basis will be increased by the amount of taxable income of the REMIC
Pool reportable by the Residual Holder and will be decreased (but not below
zero), first, by a cash distribution from the REMIC Pool and, second, by the
amount of loss of the REMIC Pool reportable by the Residual Holder. Any loss
that is disallowed on account of this limitation may be carried over
indefinitely by the Residual Holder for whom such loss was disallowed and may be
used by such Residual Holder only to offset any income generated by the same
REMIC Pool.
A Residual Holder will not be permitted to amortize directly
the cost of its Residual Certificate as an offset to its share of the taxable
income of the related REMIC Pool. However, that taxable income will not include
cash received by the REMIC Pool that represents a recovery of the REMIC Pool's
basis in its assets. Such recovery of basis by the REMIC Pool will have the
effect of amortization of the issue price of the Residual Certificates over
their life. However, in view of the possible acceleration of the income of
Residual Holders described above under "Taxation of REMIC Income," the period of
time over which such issue price is effectively amortized may be longer than the
economic life of the Residual Certificates.
A Residual Certificate may have a negative value if the net
present value of anticipated tax liabilities exceeds the present value of
anticipated cash flows. The REMIC Regulations appear to treat the issue
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price of such residual interest as zero rather than such negative amount for
purposes of determining the REMIC Pool's basis in its assets. The preamble to
the REMIC Regulations states that the Internal Revenue Service may provide
future guidance on the proper tax treatment of payments made by a transferor of
such a residual interest to induce the transferee to acquire the interest, and
Residual Holders should consult their own tax advisors in this regard.
Further, to the extent the initial adjusted basis of the
Residual Holder (other than the original holder) in the Residual Certificate is
greater than the corresponding portion of the REMIC Pool's basis in the Mortgage
Loans, the Residual Holder will not recover a portion of such basis until
termination of the REMIC Pool unless future Treasury regulations provide for
periodic adjustments to the REMIC income otherwise reportable by such holder.
The REMIC Regulations currently in effect do not so provide. See "Treatment of
Certain Items of REMIC Income and Expense -- Market Discount" below regarding
the basis of Mortgage Loans to the REMIC Pool and "Sale or Exchange of a
Residual Certificate" below regarding possible treatment of a loss upon
termination of the REMIC Pool as a capital loss.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
Although the Depositor intends to compute REMIC income and
expense in accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are subject
to uncertainty and differing interpretations. The Depositor makes no
representation as to the specific method that it will use for reporting income
with respect to the Mortgage Loans and expenses with respect to the Regular
Certificates and different methods could result in different timing of reporting
of taxable income or net loss to Residual Holders or differences in capital gain
versus ordinary income.
Original Issue Discount. Generally, the REMIC Pool's
deductions for original issue discount will be determined in the same manner as
original issue discount income on Regular Certificates as described above under
"Taxation of Regular Certificates -- Original Issue Discount" and "--Variable
Rate Regular Certificates," without regard to the de minimis rule described
therein.
Deferred Interest. Any Deferred Interest that accrues with
respect to any adjustable rate Mortgage Loans held by the REMIC Pool will
constitute income to the REMIC Pool and will be treated in a manner similar to
the Deferred Interest that accrues with respect to Regular Certificates as
described above under "Taxation of Regular Certificates - Deferred Interest."
Market Discount. The REMIC Pool will have market discount
income in respect of Mortgage Loans if, in general, the basis of the REMIC Pool
allocable to such Mortgage Loans is exceeded by their unpaid principal balances.
The REMIC Pool's basis in such Mortgage Loans is generally their fair market
value immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool (or the fair
market value thereof at the Closing Date in the case of a retained Class). The
accrued portion of such market discount would be recognized currently as an item
of ordinary income in a manner similar to original issue discount. Market
discount income generally should accrue in the manner described above under
"Taxation of Regular Certificates-- Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the
Mortgage Loans exceeds the unpaid principal balances thereof, the REMIC Pool
will be considered to have acquired such Mortgage Loans at a premium equal to
the amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans immediately after the
transfer thereof to the REMIC Pool based on the aggregate of the issue prices
(or the fair market value of retained Classes) of the regular and residual
interests in the REMIC Pool. In a manner analogous to the discussion above under
"Taxation of Regular Certificates -- Premium," a REMIC Pool that holds a
Mortgage Loan as a capital asset under Code Section 1221 may elect under Code
Section 171 to amortize premium on the Mortgage Loans originated after September
27, 1985 under the constant yield method. Amortizable bond premium will be
treated as an offset to interest income on the Mortgage Loans, rather than as a
separate deduction item. To the extent that mortgagors on the Mortgage Loans are
individuals, Code Section 171 will not be available for premium on Mortgage
Loans originated on or prior to September 27, 1985.
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Premium with respect to such Mortgage Loans may be deductible in accordance with
a reasonable method regularly employed by the holder thereof. The allocation of
such premium pro rata among principal payments should be considered a reasonable
method; however, the Internal Revenue Service may argue that such premium should
be allocated in a different manner, such as allocating such premium entirely to
the final payment of principal.
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME
Except in the case of certain thrift institutions, a portion
(or all) of the REMIC taxable income includible in determining the federal
income tax liability of a Residual Holder will be subject to special treatment.
That portion, referred to as the "excess inclusion," is equal to the excess of
REMIC taxable income for the calendar quarter allocable to a Residual
Certificate over the daily accruals for such quarterly period of (i) 120% of the
long-term applicable Federal rate that would have applied to the Residual
Certificate (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (ii) the adjusted issue price of such Residual
Certificate at the beginning of such quarterly period. For this purpose, the
adjusted issue price of a Residual Certificate at the beginning of a quarter is
the issue price of the Residual Certificate, plus the amount of the daily
accruals of REMIC income described in this paragraph for all prior quarters,
decreased by any distributions made with respect to such Residual Certificate
prior to the beginning of such quarterly period. Accordingly, the portion of the
REMIC's taxable income that will be treated as excess inclusions will be a
larger portion of such income as the adjusted issue price of the Residual
Certificates diminishes.
The portion of a Residual Holder's REMIC taxable income
consisting of the "excess inclusion" generally may not be offset by other
deductions, including net operating loss carryforwards, on such Residual
Holder's return. Further, if the Residual Holder is an organization subject to
the tax on unrelated business income imposed by Code Section 511, the Residual
Holder's excess inclusion will be treated as unrelated business taxable income
of such Residual Holder for purposes of Code Section 511. In addition, REMIC
taxable income is subject to 30% withholding tax with respect to certain persons
who are not U.S. Persons (as defined below under "Tax-Related Restrictions on
Transfer of REMIC Residual Certificates -- Foreign Investors"), and the portion
thereof attributable to excess inclusions is not eligible for any reduction in
the rate of withholding tax (by treaty or otherwise). See "Taxation of Certain
Foreign Investors -- Residual Certificates" below. Finally, if a real estate
investment trust or a regulated investment company owns a Residual Certificate,
a portion (allocated under Treasury regulations yet to be issued) of dividends
paid by the real estate investment trust or regulated investment company could
not be offset by net operating losses of its shareholders, would constitute
unrelated business taxable income for tax-exempt shareholders, and would be
ineligible for reduction of withholding to certain persons who are not U.S.
Persons.
An exception to the inability of a Residual Holder to offset
excess inclusions with unrelated deductions and net operating losses applied to
Code Section 593 institutions ("thrift institutions"). For purposes of applying
this rule, all members of an affiliated group filing a consolidated return are
treated as one taxpayer, except that thrift institutions to which Code Section
593 applies, together with their subsidiaries formed to issue REMICs, are
treated as separate corporations. Furthermore, the Code provides that
regulations may disallow the ability of a thrift institution to use deductions
to offset excess inclusions necessary or appropriate to prevent avoidance of
tax. A thrift institution may not so offset its excess inclusions unless the
Residual Certificates have "significant value," which requires that (i) the
Residual Certificates have an issue price that is at least equal to 2% of the
aggregate of the issue prices of all Residual Certificates and Regular
Certificates with respect to the REMIC Pool, and (ii) the anticipated weighted
average life of the Residual Certificates is at least 20% of the anticipated
weighted average life of the REMIC Pool. The anticipated weighted average life
of the Residual Certificates is based on all distributions anticipated to be
received with respect thereto (using the Prepayment Assumption). The anticipated
weighted average life of the REMIC Pool is the aggregate weighted average life
of all classes of interests therein (computed using all anticipated
distributions on a regular interest with nominal or no principal). Finally, an
ordering rule under the REMIC Regulations provides that a thrift institution may
only offset its excess inclusion income with deductions after it has first
applied its deductions against income that is not excess inclusion income. If
applicable, the Prospectus Supplement with respect to a Series will set forth
whether the Residual Certificates are expected to have "significant value"
within the meaning of the REMIC Regulations.
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TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL CERTIFICATES
Disqualified Organizations. If any legal or beneficial
interest in a Residual Certificate is transferred to a Disqualified Organization
(as defined below), a tax would be imposed in an amount equal to the product of
(i) the present value of the total anticipated excess inclusions with respect to
such Residual Certificate for periods after the transfer and (ii) the highest
marginal federal income tax rate applicable to corporations. The REMIC
Regulations provide that the anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and that projected payments
are based on the Prepayment Assumption. The present value rate equals the
applicable Federal rate under Code Section 1274(d) as of the date of the
transfer for a term ending with the last calendar quarter in which excess
inclusions are expected to accrue. Such a tax generally would be imposed on the
transferor of the Residual Certificate, except that where such transfer is
through an agent (including a broker, nominee or other middleman) for a
Disqualified Organization, the tax would instead be imposed on such agent.
However, a transferor of a Residual Certificate would in no event be liable for
such tax with respect to a transfer if the transferee furnishes to the
transferor an affidavit that the transferee is not a Disqualified Organization
and, as of the time of the transfer, the transferor does not have actual
knowledge that such affidavit is false. The tax also may be waived by the
Treasury Department if the Disqualified Organization promptly disposes of the
residual interest and the transferor pays income tax at the highest corporate
rate on the excess inclusion for the period the residual interest is actually
held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has
excess inclusion income with respect to a Residual Certificate during a taxable
year and a Disqualified Organization is the record holder of an equity interest
in such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that is allocable to
the interest in the Pass-Through Entity during the period such interest is held
by such Disqualified Organization, and (ii) the highest marginal federal
corporate income tax rate. Such tax would be deductible from the ordinary gross
income of the Pass-Through Entity for the taxable year. The Pass-Through Entity
would not be liable for such tax if it has received an affidavit from such
record holder that it is not a Disqualified Organization or stating such
holder's taxpayer identification number, and during the period such person is
the record holder of the Residual Certificate, the Pass-Through Entity does not
have actual knowledge that such affidavit is false.
For these purposes, (i) "Disqualified Organization" means the
United States, any state or political subdivision thereof, any foreign
government, any international organization, any agency or instrumentality of any
of the foregoing (provided, that such term does not include an instrumentality
if all of its activities are subject to tax and a majority of its board of
directors is not selected by any such governmental entity), any cooperative
organization furnishing electric energy or providing telephone service to
persons in rural areas as described in Code Section 1381(a)(2)(C), and any
organization (other than a farmers' cooperative described in Code Section 521)
that is exempt from taxation under the Code unless such organization is subject
to the tax or unrelated business income imposed by Code Section 511, and (ii)
"Pass-Through Entity" means any regulated investment company, real estate
investment trust, common trust fund, partnership, trust, or estate and certain
corporations operating on a cooperative basis. Except as may be provided in
Treasury regulations, any person holding an interest in a Pass-Through Entity as
a nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity.
The Pooling and Servicing Agreement with respect to a Series
will provide that no legal or beneficial interest in a Residual Certificate may
be transferred unless (i) the proposed transferee provides to the transferor,
the Depositor and the Trustee an affidavit providing its taxpayer identification
number and stating such transferee is the beneficial owner of the Residual
Certificate, is not a Disqualified Organization and is not purchasing such
Residual Certificate on behalf of a Disqualified Organization (i.e., as a
broker, nominee or middleman thereof), and (ii) the transferor provides a
statement in writing to the Depositor and the Trustee that it has no actual
knowledge that such affidavit is false. Moreover, the Pooling and Servicing
Agreement will provide that any attempted or purported transfer in violation of
these transfer restrictions will be null and void and will vest no rights in any
purported Transferee. Each Residual Certificate with respect to a Series will
bear a legend referring to such restrictions on transfer, and each holder of a
Residual Certificate will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Pooling and Servicing Agreement
required under the Code or applicable Treasury regulations to effectuate the
foregoing restrictions. Information necessary to compute an
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applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Depositor or the
Trustee may charge a fee for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would
disregard certain transfers of Residual Certificates, in which case the
transferor would continue to be treated as the owner of the Residual
Certificates and thus would continue to be subject to tax on its allocable
portion of the net income of the REMIC Pool. Under the REMIC Regulations, a
transfer of a "noneconomic residual interest" (as defined below) to a Residual
Holder (other than a Residual Holder who is not a U.S. Person, as defined below
under "Foreign Investors") is disregarded for all federal income tax purposes if
a significant purpose of the transferor is to impede the assessment or
collection of tax. A residual interest in a REMIC (including a residual interest
with a positive value at issuance) is a "noneconomic residual interest" unless,
at the time of the transfer, (i) the present value of the expected future
distributions on the residual interest at least equals the product of the
present value of the anticipated excess inclusions and the highest corporate
income tax rate in effect for the year in which the transfer occurs, and (ii)
the transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. The
anticipated excess inclusions and the present value rate are determined in the
same manner as set forth above under "Disqualified Organizations." The REMIC
Regulations explain that a significant purpose of a transfer will be deemed to
impede the assessment or collection of tax if the transferor, at the time of the
transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. A safe harbor is provided if (i) the transferor conducted, at the time of
the transfer, a reasonable investigation of the financial condition of the
transferee and found that the transferee historically had paid its debts as they
came due and found no significant evidence to indicate that the transferee would
not continue to pay its debts as they came due in the future, and (ii) the
transferee represents to the transferor that it understands that, as the holder
of the noneconomic residual interest, the transferee may incur tax liabilities
in excess of cash flows generated by the interest and that the transferee
intends to pay taxes associated with holding the residual interest as they
become due. The Pooling and Servicing Agreement with respect to a Series will
require the transferee of a REMIC Residual Certificate to certify to the matters
in the preceding sentence as part of the affidavit described above under the
heading "Disqualified Organizations." The transferor must have no actual
knowledge or reason to know that such statements are false.
Foreign Investors. The REMIC Regulations provide that the
transfer of a Residual Certificate that has "tax avoidance potential" to a
"foreign person" will be disregarded for all federal tax purposes. This rule
appears intended to apply to a transferee who is not a "U.S. Person" (as defined
below), unless such transferee's income is effectively connected with the
conduct of a trade or business within the United States. A Residual Certificate
is deemed to have tax avoidance potential unless, at the time of the transfer,
(i) the future value of expected distributions equals at least 30% of the
anticipated excess inclusions after the transfer, and (ii) the transferor
reasonably expects that the transferee will receive sufficient distributions
from the REMIC Pool at or after the time at which the excess inclusions accrue
and prior to the end of the succeeding taxable year for the accumulated
withholding tax liability to be paid. If the non-U.S. Person transfers the
Residual Certificate back to the U.S. Person, the transfer will be disregarded
and the foreign transferor will continue to be treated as the owner unless
arrangements are made so that the transfer does not have the effect of allowing
the transferor to avoid tax on accrued excess inclusions.
The Prospectus Supplement relating to the Certificates of a
Series may provide that a Residual Certificate may not be purchased by or
transferred to any person that is not a U.S. Person or may describe the
circumstances and restrictions pursuant to which such a transfer may be made.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate or
trust that is subject to U.S. federal income tax regardless of the source of its
income.
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SALE OR EXCHANGE OF A RESIDUAL CERTIFICATE
Upon the sale or exchange of a Residual Certificate, the
Residual Holder will recognize gain or loss equal to the excess, if any, of the
amount realized over the adjusted basis (as described above under "Taxation of
Residual Certificates -- Basis and Losses") of such Residual Holder in such
Residual Certificate at the time of the sale or exchange. In addition to
reporting the taxable income of the REMIC Pool, a Residual Holder will have
taxable income to the extent that any cash distribution to it from the REMIC
Pool exceeds such adjusted basis on that Distribution Date. Such income will be
treated as gain from the sale or exchange of the Residual Certificate. It is
possible that the termination of the REMIC Pool may be treated as a sale or
exchange of a Residual Holder's Residual Certificate, in which case, if the
Residual Holder has an adjusted basis in such Residual Holder's Residual
Certificate remaining when its interest in the REMIC Pool terminates, and if
such Residual Holder holds such Residual Certificate as a capital asset under
Code Section 1221, then such Residual Holder will recognize a capital loss at
that time in the amount of such remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated
as ordinary income (i) if a Residual Certificate is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Residual Certificateholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any prior
disposition of property that was held as a part of such transaction or (ii) in
the case of a non-corporate taxpayer, to the extent such taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. In addition, gain or loss recognized
from the sale of a Residual Certificate by certain banks or thrift institutions
will be treated as ordinary income or loss pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that,
except as provided in Treasury regulations yet to be issued, the wash sale rules
of Code Section 1091 will apply to dispositions of Residual Certificates where
the seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six months
after such sale or disposition, acquires (or enters into any other transaction
that results in the application of Section 1091) any residual interest in any
REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC owner
trust) that is economically comparable to a Residual Certificate.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
PROHIBITED TRANSACTIONS
Income from certain transactions entered into by the REMIC
Pool, called prohibited transactions, will not be part of the calculation of
income or loss includible in the federal income tax returns of Residual Holders,
but rather will be taxed directly to the REMIC Pool at a 100% rate. Prohibited
transactions generally include (i) the disposition of a qualified mortgage other
than for (a) substitution within two years of the Startup Day for a defective,
including a defaulted, obligation (or the repurchase in lieu of substitution of
a defective, including a defaulted, obligation at any time), or for any
qualified mortgage within three months of the Startup Day, (b) foreclosure,
default, or reasonably foreseeable default of a qualified mortgage, (c)
bankruptcy or insolvency of the REMIC Pool, or (d) a qualified (complete)
liquidation, (ii) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold, (iii) the
receipt of compensation for services, or (iv) the receipt of gain from
disposition of cash flow investments other than pursuant to a qualified
liquidation. Notwithstanding (i) and (iv), it is not a prohibited transaction to
sell REMIC Pool property to prevent a default on Regular Certificates as a
result of a default on qualified mortgages or to facilitate a clean-up call
(generally, an optional termination to save administrative costs when no more
than a small percentage of the Certificates is outstanding). The REMIC
Regulations indicate that the modification of a Mortgage Loan generally will not
be treated as a disposition if it is occasioned by a default or reasonably
foreseeable default, an assumption of the Mortgage Loan, the waiver of a
due-on-sale or due-on-encumbrance clause or the conversion of an interest rate
by a mortgagor pursuant to the terms of a convertible adjustable rate Mortgage
Loan.
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CONTRIBUTIONS TO THE REMIC POOL AFTER THE STARTUP DAY
In general, a REMIC Pool will be subject to tax at a 100% rate
on the value of any property contributed to the REMIC Pool after the Startup
Day. Exceptions are provided for cash contributions to a REMIC Pool (i) during
the three months following the Startup Day, (ii) made to a qualified reserve
fund by a Residual Holder, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call, and (v) as otherwise
permitted in Treasury regulations yet to be issued.
NET INCOME FROM FORECLOSURE PROPERTY
The REMIC Pool will be subject to federal income tax at the
highest corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period of two years, with possible extensions. Net
income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool adopts a plan of complete liquidation, within
the meaning of Code Section 860F(a)(4)(A)(i), which may be accomplished by
designating in the REMIC Pool's final tax return a date on which such adoption
is deemed to occur, and sells all of its assets (other than cash) within a
90-day period beginning on the date of the adoption of the plan of liquidation,
then the REMIC Pool will not be subject to the prohibited transaction rules on
the sale of its assets, provided that the REMIC Pool credits or distributes in
liquidation all of the sale proceeds plus its cash (other than the amounts
retained to meet claims) to holders of Regular Certificates and Residual Holders
within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a
calendar year basis and to file tax returns for federal income tax purposes in a
manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. Treasury
regulations provide that, except where there is a single Residual Holder for an
entire taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The Residual Holder owning the largest percentage
interest in the Residual Certificates will be obligated to act as the REMIC
Pool's "tax matters person," as defined in applicable Treasury regulations, with
respect to the REMIC Pool, and will be required to irrevocably designate the
Trustee as its agent to perform all of the functions of the tax matters person.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate, or trust will be
subject to limitation with respect to certain itemized deductions described in
Code Section 67, to the extent that such itemized deductions, in the aggregate,
do not exceed two percent of the investor's adjusted gross income. In addition,
Code Section 68 provides that itemized deductions otherwise allowable for a
taxable year of an individual taxpayer will be reduced by the lesser of (i) 3%
of the excess, if any, of adjusted gross income over $100,000 ($50,000 in the
case of a married individual filing a separate return) (in each case, subject to
adjustment for inflation), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such deductions
may include deductions under Code Section 212 for the Servicing Fee and all
administrative and other expenses relating to the REMIC Pool, or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Certificates either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax and may
cause such investors to be subject to significant
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additional tax liability. Temporary Treasury regulations provide that the
additional gross income and corresponding amount of expenses generally are to be
allocated entirely to the holders of Residual Certificates in the case of a
REMIC Pool that would not qualify as a fixed investment trust in the absence of
a REMIC election. However, such additional income and limitation on deductions
will apply to the allocable portion of such expenses to holders of Regular
Certificates, as well as to holders of Residual Certificates, where such Regular
Certificates are similar to pass-through certificates in a fixed investment
trust. Unless indicated otherwise in the applicable Prospectus Supplement, all
such expenses will be allocable to the Residual Certificates. In general, such
allocable portion will be determined based on the ratio that a Regular
Certificateholder's income, determined on a daily basis, bears to the income of
all holders of Regular Certificates and Residual Certificates with respect to
the REMIC Pool. As a result, individuals, estates, or trusts holding REMIC
Certificates (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing temporary Treasury regulations), may have taxable
income in excess of the interest income at the pass-through rate on Regular
Certificates that are issued in a single Class or otherwise consistently with
fixed investment trust status or in excess of distributions of cash for the
related period on Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
REGULAR CERTIFICATES
Interest, including original issue discount, distributable to
Regular Certificateholders who are nonresident aliens, foreign corporations, or
other Non-U.S. Persons (i.e., any persons who are not U.S. Persons, as defined
above), will be considered "portfolio interest" and, therefore, generally, will
not be subject to 30% United States withholding provided that such Non-U.S.
Person (i) is not a "10-percent shareholder" within the meaning of Code Section
871(h)(3)(B) with respect to the Depositor, or a controlled foreign corporation
described in Code Section 881(c)(3)(C) and (ii) provides the Trustee, or the
person who would otherwise be required to withhold tax from such distributions
under Code Section 1441 or 1442, with an appropriate statement, signed under
penalties of perjury, identifying the beneficial owner and stating, among other
things, that the beneficial owner of the Regular Certificate is a Non-U.S.
Person. If such statement, or any other required statement, is not provided, 30%
withholding will apply unless reduced or eliminated pursuant to an applicable
tax treaty or unless the interest on the Regular Certificate is effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Person. In the latter case, such Non-U.S. Person will be subject
to United States federal income tax at regular rates. Investors who are Non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning a Regular Certificate.
RESIDUAL CERTIFICATES
The Conference Committee Report to the 1986 Act indicates that
amounts paid to Residual Holders who are Non-U.S. Persons are treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Certificates" above, but only to the extent that (i) the
Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Fund or
segregated pool of assets therein (as to which a separate REMIC election will be
made), to which the Residual Certificate relates, consists of obligations issued
in "registered form" within the meaning of Code Section 163(f)(1). Generally,
Mortgage Loans will not be, but regular interests in another REMIC Pool will be,
considered obligations issued in registered form. Furthermore, a Residual Holder
will not be entitled to any exemption from the 30% withholding tax (or lower
treaty rate) to the extent of that portion of REMIC taxable income that
constitutes an "excess inclusion." See "Taxation of Residual
Certificates--Limitations on Offset or Exemption of REMIC Income." If the
amounts paid to Residual Holders who are Non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts will be taken into account for purposes
of withholding only when paid or otherwise distributed (or when the Residual
Certificate is disposed of) under rules similar to withholding upon disposition
of debt instruments that have original issue discount. See "Taxation of Residual
Certificates -- Tax-Related Restrictions on Transfer of Residual Certificates --
Foreign Investor Investors" above concerning the
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disregard of certain transfers having "tax avoidance potential." Investors who
are Non-U.S. Persons should consult their own tax advisors regarding the
specific tax consequences to them of owning a Residual Certificate.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds
from the sale of the Regular Certificates to or through certain brokers, may be
subject to a "backup" withholding tax under Code Section 3406 of 31% on
"reportable payments" (including interest distributions, original issue
discount, and, under certain circumstances, principal distributions) unless the
Regular Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to the
Trustee, its agent, or the broker who effected the sale of the Regular
Certificates, or such Regular Certificateholder is otherwise an exempt recipient
under applicable provisions of the Code. Any amounts to be withheld from
distribution on the Regular Certificates would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Certificateholder's
federal income tax liability.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and
information necessary to compute the accrual of market discount will be made
annually to the Internal Revenue Service and to individuals, estates, non-exempt
and non-charitable trusts, and partnerships who are either holders of records of
Regular Certificates or beneficial owners who own Regular Certificates through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Certificates (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar year by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 with respect to a particular Series of Regular
Certificates. Holders through nominees must request such information from the
nominee.
The Internal Revenue Service's Form 1066 has an accompanying
Schedule Q, Quarterly Notice to Residual Interest Holders of REMIC Taxable
Income or Net Loss Allocation. Treasury regulations require that Schedule Q be
furnished by the REMIC Pool to each Residual Holder by the end of the month
following the close of each calendar quarter (41 days after the end of a quarter
under proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the
foregoing requirements, information must be furnished quarterly to Residual
Holders, furnished annually, if applicable, to holders of Regular Certificates,
and filed annually with the Internal Revenue Service concerning Code Section 67
expenses (see "Limitations on Deduction of Certain Expenses" above) allocable to
such holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Certificates, and filed annually with the Internal Revenue Service concerning
the percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "Status of REMIC Certificates."
NON-REMIC CERTIFICATES
STANDARD CERTIFICATES
GENERAL
In the event that a Trust Fund (or a segregated pool of assets
therein) with respect to a Series of Standard Certificates does not elect to be
treated as a REMIC, the Trust Fund will be classified as a grantor trust under
subpart E, Part 1 of subchapter J of the Code and not as an association taxable
as a corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Where there is no Fixed Retained Yield with respect to the Mortgage
Loans underlying such Series of Standard Certificates and where such
Certificates are not designated as Stripped Certificates, as described below
under "Stripped Certificates," the holder of each such
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Certificate will be treated as the owner of a pro rata undivided interest in the
ordinary income and corpus portions of the Trust Fund represented by the
Standard Certificate and will be considered the beneficial owner of a pro rata
undivided interest in each of the Mortgage Loans, subject to the discussion
below under "Recharacterization of Servicing Fees." Accordingly, the holder of a
Standard Certificate of a particular Series (a "Standard Certificateholder")
will be required to report on its federal income tax return its pro rata share
of the entire income from the Mortgage Loans represented by its Standard
Certificate, including interest at the coupon rate, original issue discount (if
any,) prepayment fees, assumption fees, and late payment charges received by the
Servicer, in accordance with such Standard Certificateholder's method of
accounting. A Standard Certificateholder generally will be able to deduct its
share of the Servicing Fee and all administrative and other expenses of the
Trust Fund in accordance with its method of accounting, provided that such
amounts are reasonable compensation for services rendered to that Trust Fund.
However, investors who are individuals, estates, or trusts who own Standard
Certificates, either directly or indirectly through certain pass-through
entities, will be subject to limitations with respect to certain itemized
deductions described in Code Section 67, including deductions under Code Section
212, for the Servicing Fee and all such administrative and other expenses of the
Trust Fund, to the extent that such deductions, in the aggregate, do not exceed
two percent of an investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000 ($50,000 in the case of a married
individual filing a separate return) (in each case, subject to adjustment for
inflation), or (ii) 80% of the amount of itemized deductions otherwise allowable
for such year. As a result, such investors holding Standard Certificates,
directly or indirectly through a pass-through entity, might have aggregate
taxable income in excess of the aggregate amount of cash received as interest or
discount on such Standard Certificates. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax and may
cause such investors to be subject to significant additional tax liability.
Moreover, where there is Fixed Retained Yield with respect to the Mortgage Loans
underlying a Series of Standard Certificates or where the servicing fees are in
excess of reasonable servicing compensation, the transaction may be subject to
the application of the "stripped bond" and "stripped coupon" rules of the Code,
as described below under "Stripped Certificates" and "Recharacterization of
Servicing Fees," respectively.
TAX STATUS
The Depositor's Counsel has advised the Depositor that, except
as discussed below with respect to Buy-Down Loans:
1. A Standard Certificate owned by a "domestic building and
loan association" within the meaning of Code Section 7701(a)(19) will
be considered to represent "loans ... secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v),
provided that the property securing the Mortgage Loans represented by
that Standard Certificate is of the type described in such section of
the Code.
2. A Standard Certificate owned by a financial institution
described in Code Section 593(a) will be considered to represent
"qualifying real property loans" within the meaning of Code Section
593(d)(1), provided that the property securing the Mortgage Loans
represented by that Standard Certificate is of the type described in
such section of the Code.
3. A Standard Certificate owned by a real estate investment
trust will be considered to represent "real estate assets" within the
meaning of Code Section 856(c)(5)(A) to the extent that the assets of
the related Trust Fund consist of qualified assets, and interest income
of such assets will be considered "interest on obligations secured by
mortgages on real property" to such extent within the meaning of Code
Section 856(c)(3)(B).
4. A Standard Certificate owned by a REMIC will be considered
to represent an "obligation (including any participation or certificate
of beneficial ownership therein) which is principally secured by an
interest in real property" within the meaning of Code Section
860G(a)(3)(A) to the extent that the assets of the related trust fund
consist of "qualified mortgages" within the meaning of Code Section
860G(a)(3).
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An issue arises as to whether Buy-Down Loans may be
characterized in their entirety under the Code provisions cited in clauses 1, 2
and 3 of the immediately preceding paragraph. Code Section 593(d)(1)(C) provides
that the term "qualifying real property loan" does not include a loan "to the
extent secured by a deposit in or share of the taxpayer." The application of
this provision to a Buy-Down Fund is uncertain, but it may require that a
taxpayer's investment in a Buy-Down Loan be reduced by the Buy-Down Fund. As to
the treatment of Buy-Down Loans as "qualifying real property loans" under Code
Section 593(d)(1) if the exception of Code Section 593(d)(1)(C) is inapplicable,
as "loans ... secured by an interest in real property" under Code Section
7701(a)(19)(C)(v), or as "real estate assets" under Code Section 856(c)(5)(A),
there is indirect authority supporting treatment of an investment in a Buy-Down
Loan as entirely secured by real property if the fair market value of the real
property securing the loan exceeds the principal amount of the loan at the time
of issuance or acquisition, as the case may be. There is no assurance that the
treatment described above is proper. Accordingly, Standard Certificateholders
are urged to consult their own tax advisors concerning the effects of such
arrangements on the characterization of such Standard Certificateholder's
investment for federal income tax purposes.
PREMIUM AND DISCOUNT
Standard Certificateholders are advised to consult with their
tax advisors as to the federal income tax treatment of premium and discount
arising either upon initial acquisition of Standard Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase
of a Standard Certificate will be determined generally as described above under
"Federal Income Tax Consequences for REMIC Certificates -- Taxation of Residual
Certificates -- Premium."
Original Issue Discount. Original issue discount generally
must be reported as gross income as it accrues under a constant interest method,
in advance of the cash attributable to such income. Unless indicated otherwise
in the applicable Prospectus Supplement, no prepayment assumption will be
assumed for purposes of such accrual. However, Code Section 1272 provides for a
reduction in the amount of original issue discount includible in the income of
an obligation holder that acquires the obligation after its initial issuance at
a price greater than the sum of the original issue price and the previously
accrued original issue discount, less prior payments of principal. Accordingly,
if such Mortgage Loans acquired by a Standard Certificateholder are purchased at
a price equal to the then unpaid principal amount of such Mortgage Loans, no
original issue discount attributable to the difference between the issue price
and the original principal amount of such Mortgage Loans (i.e., points) will be
includible by such holder.
Market Discount. Market discount on the Mortgage Loans will be
determined and will be reported as ordinary income generally in the manner
described above under "Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Market Discount," except that
the ratable accrual methods described therein will not apply. Rather, the holder
will accrue market discount pro rata over the life of the Mortgage Loans, unless
the constant yield method is elected. Unless indicated otherwise in the
applicable Prospectus Supplement, no prepayment assumption will be assumed for
purposes of such accrual.
Deferred Interest. Any Deferred Interest that accrues with
respect to a Standard Certificate will constitute income to the holder of such
Standard Certificate prior to the time distributions of cash with respect to
such Deferred Interest are made under the OID Regulations. The Depositor will
treat all interest on a Standard Certificate as to which there may be Deferred
Interest as includible in the stated redemption price at maturity of the
Mortgage Loans.
RECHARACTERIZATION OF SERVICING FEES
If the Servicing Fee paid to the Servicer were deemed to
exceed reasonable servicing compensation, the amount of such excess would
represent neither income nor a deduction to Certificateholders. In this regard,
there are no authoritative guidelines for federal income tax purposes as to
either the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions or whether, in the
case of the Mortgage Loans, the reasonableness of servicing compensation should
be determined
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on a weighted average or loan-by-loan basis. If a loan-by-loan basis is
appropriate, the likelihood that such amount would exceed reasonable servicing
compensation as to some of the Mortgage Loans would be increased.
Internal Revenue Service guidance indicates that a servicing
fee in excess of reasonable compensation ("excess servicing") will cause the
Mortgage Loans to be treated under the "stripped bond" rules. Such guidance
provides safe harbors for servicing deemed to be reasonable and requires
taxpayers to demonstrate that the value of servicing fees in excess of such
amounts is not greater than the value of the services provided.
Accordingly, if the Internal Revenue Service's approach is
upheld, a Servicer who receives a servicing fee in excess of such amounts would
be viewed as retaining an ownership interest in a portion of the interest
payments on the Mortgage Loans. Under the rules of Code Section 1286, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from the right to receive some or all of the principal
payments on the obligation would result in treatment of such Mortgage Loans as
"stripped coupons" and "stripped bonds." Subject to the de minimis rule
discussed below under "--Stripped Certificates," each stripped bond or stripped
coupon could be considered for this purpose as a non-interest bearing obligation
issued on the date of issue of the Standard Certificates, and the original issue
discount rules of the Code would apply to the holder thereof. While Standard
Certificateholders would still be treated as owners of beneficial interests in a
grantor trust for federal income tax purposes, the corpus of such trust could be
viewed as excluding the portion of the Mortgage Loans the ownership of which is
attributed to the Servicer, or as including such portion as a second class of
equitable interest. Applicable Treasury regulations treat such an arrangement as
a fixed investment trust, since the multiple classes of trust interests should
be treated as merely facilitating direct investments in the trust assets and the
existence of multiple classes of ownership interests is incidental to that
purpose. In general, such a recharacterization should not have any significant
effect upon the timing of amount of income reported by a Standard
Certificateholder, except that the income reported by a cash method holder may
be slightly accelerated. See "Stripped Certificates" below for a further
description of the federal income tax treatment of stripped bonds and stripped
coupons.
SALE OR EXCHANGE OF STANDARD CERTIFICATES
Upon sale or exchange of a Standard Certificate, a Standard
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its aggregate adjusted basis in the Mortgage
Loans and other assets represented by the Standard Certificate. In general, the
aggregate adjusted basis will equal the Standard Certificateholder's cost of the
Standard Certificate, increased by the amount of any income previously reported
with respect to the Standard Certificate and decreased by the amount of any
losses previously reported with respect to the Standard Certificate and the
amount of any distributions received thereon. Except as provided above with
respect to market discount on any Mortgage Loans, and except for certain
financial institutions subject to the provisions of Code Section 582(c), any
such gain or loss would be capital gain or loss if the Standard Certificate was
held as a capital asset. However, gain on the sale of a Standard Certificate
will be treated as ordinary income (i) if a Standard Certificate is held as part
of a "conversion transaction" as defined in Code Section 1258(c), up to the
amount of interest that would have accrued on the Standard Certificateholder's
net investment in the conversion transaction at 120% of the appropriate
applicable Federal rate in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with respect
to any prior disposition of property that was held as a part of such transaction
or (ii) is in the case of a non-corporate taxpayer, to the extent such taxpayer
has made an election under Code Section 163(d)(4) to have net capital gains tax
as investment income at ordinary income rates. Pursuant to the Revenue
Reconciliation Act of 1993, capital gains of certain non-corporate taxpayers are
subject to a lower maximum tax rate than ordinary income of such taxpayers. The
maximum tax rate for corporations is the same with respect to both ordinary
income and capital gains.
STRIPPED CERTIFICATES
GENERAL
Pursuant to Code Section 1286, the separation of ownership of
the right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect
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to interest payments. For purposes of this discussion, Certificates that are
subject to those rules will be referred to as "Stripped Certificates." The
Certificates will be subject to those rules if (i) the Depositor or any of its
affiliates retains (for its own account or for purposes of resale), in the form
of Fixed Retained Yield or otherwise, an ownership interest in a portion of the
payments on the Mortgage Loans, (ii) the Depositor or any of its affiliates is
treated as having an ownership interest in the Mortgage Loans to the extent it
is paid (or retains) servicing compensation in an amount greater than arm's
length consideration for servicing the Mortgage Loans (see "Standard
Certificates--Recharacterization of Servicing Fees" above), and (iii)
Certificates are issued in two or more Classes or Subclasses representing the
right to non-pro rata percentages of the interest and principal payments on the
Mortgage Loans.
In general, a holder of a Stripped Certificate (a "Stripped
Certificateholder") will be considered to own "stripped bonds" with respect to
its pro rata share of all or a portion of the interest payments on each Mortgage
Loan, including the Stripped Certificate's allocable share of the servicing fees
paid to the Servicer, to the extent that such fees represent reasonable
compensation for services rendered. See the discussion above under "Standard
Certificates--Recharacterization of Servicing Fees." Although not free from
doubt, for purposes of reporting to Stripped Certificateholders, the servicing
fees will be allocated to the Stripped Certificates in proportion to the
respective entitlements to distributions of each Class (or Subclass) of Stripped
Certificates for the related period or periods. The holder of a Stripped
Certificate generally will be entitled to a deduction each year in respect of
the servicing fees, as described above under "Standard Certificates--General,"
subject to the limitation described therein.
Code Section 1286 generally treats a stripped bond or a
stripped coupon as an obligation issued at an original issue discount on the
date that such stripped interest is purchased. Although the treatment of
Stripped Certificates for federal income tax purposes is not clear in certain
respects at this time, particularly where such Stripped Certificates are issued
with respect to a Mortgage Pool containing variable-rate Mortgage Loans, the
Depositor has been advised by counsel that (i) the Trust Fund will be treated as
a grantor trust under subpart E, Part I of subchapter J of the Code and not as
an association taxable as a corporation or a "taxable mortgage pool" within the
meaning of Code Section 7701(i), and (ii) each Stripped Certificate should be
treated as a single installment obligation for purposes of calculating original
issue discount and gain or loss on disposition. This treatment is based on the
interrelationship of Code Section 1286, Code Sections 1272 through 1275, and the
OID Regulations. Although it is possible that computations with respect to
Stripped Certificates could be made in one of the ways described below under
"Taxation of Stripped Certificates -- Possible Alternative Characterizations,"
the OID Regulations state, in general, that two or more debt instruments issued
by a single issuer to a single investor in a single transaction should be
treated as a single debt instrument for original issue discount purposes.
Accordingly, all payments on any Stripped Certificates should be aggregated and
treated as though they were made on a single debt instrument. The Pooling and
Servicing Agreement requires that the Trustee make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, Treasury regulations issued December 28, 1992
provide for treatment of a Stripped Certificate as a single debt instrument
issued on the date it is purchased for purposes of calculating any original
issue discount. In addition, under these regulations, a stripped Certificate
that represents a right to payments of both interest and principal may be viewed
either as issued with original issue discount or market discount (as described
below), at a de minimis original issue discount, or, presumably, at a premium.
This treatment suggests that the interest component of such a Stripped
Certificate would be treated as qualified stated interest under the OID
Regulations. Further, these final regulations provide that the purchaser of such
a Stripped Certificate will be required to account for any discount as market
discount rather than original issue discount if either (i) the initial discount
with respect to the Stripped Certificates was treated as zero under the de
minimis rule, or (ii) no more than 100 basis points in excess of reasonable
servicing is stripped off the related Mortgage Loans. Any such market discount
would be reportable as described above under "Federal Income Tax Consequences
for REMIC Certificates--Taxation of Regular Certificates -- Market Discount,"
without regard to the de minimis rule therein, assuming that a prepayment
assumption is employed in such computation.
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TAXATION OF STRIPPED CERTIFICATES
Original Issue Discount. Except as described above under
"General," each Stripped Certificate will be considered to have been issued at
an original issue discount for federal income tax purposes. Original issue
discount with respect to a Stripped Certificate must be included in ordinary
income as it accrues, in accordance with a constant interest method that takes
into account the compounding of interest, which may be prior to the receipt of
the cash attributable to such income. Based in part on the OID Regulations and
the amendments to the original issue discount sections of the Code made by the
1986 Act, the amount of original issue discount required to be included in the
income of a holder of a Stripped Certificate in any taxable year likely will be
computed generally as described above under "Federal Income Tax Consequences for
REMIC Certificates--Original Issue Discount" and "--Variable Rate Regular
Certificates." However, with the apparent exception of a Stripped Certificate
issued with de minimis original issue discount, as described above under
"General," the issue price of a Stripped Certificate will be the purchase price
paid by each holder thereof, and the stated redemption price at maturity will
include the aggregate amount of the payments to be made on the Stripped
Certificate to such Stripped Certificateholder, presumably under the Prepayment
Assumption.
If the Mortgage Loans prepay at a rate either faster or slower
than that under the Prepayment Assumption, a Stripped Certificateholder's
recognition of original issue discount will be either accelerated or decelerated
and the amount of such original issue discount will be either increased or
decreased depending on the relative interests in principal and interest on each
Mortgage Loan represented by such Stripped Certificateholder's Stripped
Certificate. While the matter is not free from doubt, the holder of a Stripped
Certificate should be entitled in the year that it becomes Certain (assuming no
further prepayments) that the holder will not recover a portion of its adjusted
basis in such Stripped Certificate to recognize a loss (which may be a capital
loss) equal to such portion of unrecovered basis.
Sale or Exchange of Stripped Certificates. Sale or exchange of
a Stripped Certificate prior to its maturity will result in gain or loss equal
to the difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Certificates -- Taxation
of Regular Certificates--Sale or Exchange of Regular Certificates." To the
extent that a subsequent purchaser's purchase price is exceeded by the remaining
payments on the Stripped Certificates, such subsequent purchaser will be
required for federal income tax purposes to accrue and report such excess as if
it were original issue discount in the manner described above. It is not clear
for this purpose whether the assumed prepayment rate that is to be used in the
case of a Stripped Certificateholder other than an original Stripped
Certificateholder should be the Prepayment Assumption or a new rate based on the
circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. When
an investor purchases more than one Class of Stripped Certificates, it is
currently unclear whether for federal income tax purposes such Classes of
Stripped Certificates should be treated separately or aggregated for purposes of
the rules described above.
Possible Alternative Characterizations. The characterizations
of the Stripped Certificates discussed above are not the only possible
interpretations of the applicable Code provisions. For example, the Stripped
Certificateholder may be treated as the owner of (i) one installment obligation
consisting of such Stripped Certificate's pro rata share of the payments
attributable to principal on each Mortgage Loan and a second installment
obligation consisting of such Stripped Certificate's pro rata share of the
payments attributable to interest on each Mortgage Loan, (ii) as many stripped
bonds or stripped coupons as there are scheduled payments of principal and/or
interest on each Mortgage Loan, or (iii) a separate installment obligation for
each Mortgage Loan, representing the Stripped Certificate's pro rata share of
payments of principal and/or interest to be made with respect thereto.
Alternatively, the holder of one or more Classes of Stripped Certificates may be
treated as the owner of a pro rata fractional undivided interest in each
Mortgage Loan to the extent that such Stripped Certificate, or Classes of
Stripped Certificates in the aggregate, represent the same pro rata portion of
principal and interest on each such Mortgage Loan, and a stripped bond or
stripped coupon (as the case may be), treated as an installment obligation or
contingent payment obligation, as to the remainder. Final regulations issued on
December 28, 1992 regarding original issue discount on stripped obligations make
the foregoing interpretations less likely to be applicable. The preamble to
those regulations states that they are premised on the assumption that an
aggregation approach is
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appropriate for determining whether original issue discount on a stripped bond
or stripped coupon is de minimis, and solicits comments on appropriate rules for
aggregating stripped bonds and stripped coupons under Code Section 1286.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the
end of each calendar year, to each Standard Certificateholder or Stripped
Certificateholder at any time during such year, such information (prepared on
the basis described above) as the Trustee deems to be necessary or desirable to
enable such Certificateholders to prepare their federal income tax returns. Such
information will include the amount of original issue discount accrued on
Certificates held by persons other than Certificateholders exempted from the
reporting requirements. The amount required to be reported by the Trustee may
not be equal to the proper amount of original issue discount required to be
reported as taxable income by a Certificateholder, other than an original
Certificateholder that purchased at the issue price. In particular, in the case
of Stripped Certificates, unless provided otherwise in the applicable Prospectus
Supplement, such reporting will be based upon a representative initial offering
price of each Class of Stripped Certificates. The Trustee will also file such
original issue discount information with the Internal Revenue Service. If a
Certificateholder fails to supply an accurate taxpayer identification number or
if the Secretary of the Treasury determines that a Certificateholder has not
reported all interest and dividend income required to be shown on his federal
income tax return, 31% backup withholding may be required in respect of any
payments, as described above under "Federal Income Tax Consequences for REMIC
Certificates -- Backup Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Standard Certificate or Stripped
Certificate evidences ownership in Mortgage Loans that are issued on or before
July 18, 1984, interest or original issue discount paid by the person required
to withhold tax under Code Section 1441 or 1442 to nonresident aliens, foreign
corporations, or other non-U.S. persons ("foreign persons") generally will be
subject to 30% United States withholding tax, or such lower rate as may be
provided for interest by an applicable tax treaty. Accrued original issue
discount or market discount recognized by the Standard Certificateholder or
Stripped Certificateholder on the sale or exchange of such a Certificate also
will be subject to federal income tax at the same rate.
Treasury Regulations provide that interest or original issue
discount paid by the Trustee or other withholding agent to a foreign person
evidencing ownership interest in Mortgage Loans issued after July 18, 1984 will
be "portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements, described above under
"Federal Income Tax Consequences for REMIC Certificates--Taxation of Certain
Foreign Investors--Regular Certificates."
NOTES
GENERAL
With respect to each Series of Notes, the Depositor's Counsel
will deliver its opinion to the Depositor that (unless otherwise limited in the
applicable Prospectus Supplement) such securities will be classified as debt
secured by the related Mortgage Loans. Consequently, Notes will not be treated
as ownership interests in the Mortgage Loans or the Trust Fund. Holders will be
required to report income received with respect to Notes in accordance with
their normal method of accounting. For additional tax consequences relating to
Notes purchased at a discount or with premium, see "Non-REMIC Certificates --
Premium and Discount."
SPECIAL TAX ATTRIBUTES
As described above, Non-REMIC Certificates will possess
certain special tax attributes by virtue of their being ownership interests in
the underlying Mortgage Loans. Similarly, REMIC Certificates will possess
similar attributes by virtue of the REMIC provisions of the Code. In general,
Notes will not possess such special tax attributes. Investors to whom such
attributes are important should consult their own tax advisors regarding
investment in Notes.
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SALE OR EXCHANGE
If a holder of a Note sells or exchanges such security, the
holder will recognize gain or loss equal to the difference, in any, between the
amount received and the holder's adjusted basis in the security. The adjusted
basis in the security generally will equal its initial cost, increased by any
original issue discount or market discount previously included in the seller's
gross income with respect to the security and reduced by the payments previously
received on the security, other than payments of qualified stated interest, and
by any amortized premium.
In general (except as described in "Non-REMIC Certificates --
Premium and Discount -- Market Discount") except for certain financial
institutions subject to section 582(c) of the Code, any gain or loss on the sale
or exchange of a Note recognized by an investor who holds the security as a
capital asset (within the meaning of section 1221 of the Code), will be capital
gain or loss and will be long-term or short-term depending on whether the
security has been held for more than one year.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Code impose certain requirements on
those employee benefit plans to which they apply ("Plans") and on those persons
who are fiduciaries with respect to such Plans. The following is a general
discussion of such requirements, and certain applicable exceptions to and
administrative exemptions from such requirements.
Before purchasing any Certificates, a Plan fiduciary should
determine whether there exists any prohibition to such purchase under the
requirements of ERISA, whether prohibited transaction exemptions such as PTE
83-1 or any individual administrative exemption (as described below) applies,
including whether the appropriate conditions set forth therein would be met, or
whether any statutory prohibited transaction exemption is applicable, and
further should consult the applicable Prospectus Supplement relating to such
Series of Certificates.
CERTAIN REQUIREMENTS UNDER ERISA
GENERAL
In accordance with ERISA's general fiduciary standards, before
investing in a Certificate a Plan fiduciary should determine whether to do so is
permitted under the governing Plan instruments and is appropriate for the Plan
in view of its overall investment policy and the composition and diversification
of its portfolio. A Plan fiduciary should especially consider the ERISA
requirement of investment prudence and the sensitivity of the return on the
Certificates to the rate of principal repayments (including prepayments) on the
Mortgage Loans or Contracts, as discussed in the related Prospectus Supplement
and in "Prepayment and Yield Considerations" herein.
Parties in Interest/Disqualified Persons. Other provisions of
ERISA (and corresponding provisions of the Code) prohibit certain transactions
involving the assets of a Plan and persons who have certain specified
relationships to the Plan (so-called "parties in interest" within the meaning of
ERISA or "disqualified persons" within the meaning of the Code). The Depositor,
the Servicer (if any) or the Trustee or certain affiliates thereof might be
considered or might become "parties in interest" or "disqualified persons" with
respect to a Plan. If so, the acquisition or holding of Certificates by or on
behalf of such Plan could be considered to give rise to a "prohibited
transaction" within the meaning of ERISA and the Code unless an administrative
exemption described below or some other exemption is available.
Special caution should be exercised before the assets of a
Plan are used to purchase a Certificate if, with respect to such assets, the
Depositor, the Servicer (if any) or the Trustee or an affiliate thereof either:
(a) has investment discretion with respect to the investment of such assets of
such Plan; or (b) has authority or responsibility to give, or regularly gives
investment advice with respect to such assets for a fee and pursuant to an
agreement or understanding that such advice will serve as a primary basis for
investment decisions with respect to such assets and that such advice will be
based on the particular investment needs of the Plan.
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DELEGATION OF FIDUCIARY DUTY
Further, if the assets included in a Trust Fund were deemed to
constitute Plan assets, it is possible that a Plan's investment in the
Certificates might be deemed to constitute a delegation, under ERISA, of the
duty to manage Plan assets by the fiduciary deciding to invest in the
Certificates, and certain transactions involved in the operation of the Trust
Fund might be deemed to constitute prohibited transactions under ERISA and the
Code.
The U.S. Department of Labor (the "Department") has published
final regulations (the "Regulations") concerning whether or not a Plan's assets
would be deemed to include an interest in the underlying assets of an entity
(such as a Trust Fund) for purposes of the reporting and disclosure and general
fiduciary responsibility provisions of ERISA, as well as for the prohibited
transaction provisions of ERISA and the Code, if the Plan acquires an "equity
interest" (such as a Certificate) in such entity.
Certain exceptions are provided in the Regulations whereby an
investing Plan's assets would be deemed merely to include its interest in the
Certificates instead of being deemed to include an interest in the assets of a
Trust Fund. However, it cannot be predicted in advance nor can there be any
continuing assurance whether such exceptions may be met. For example, one of the
exceptions in the Regulations states that the underlying assets of an entity
will not be considered "plan assets" if, immediately after the most recent
acquisition of any equity interest in the entity, whether or not from the issuer
or an underwriter, less than 25% of the value of each class of equity interest
is held by "benefit plan investors," which are defined as Plans, individual
retirement accounts, and employee benefit plans not subject to ERISA (for
example, governmental plans), but this exception is tested immediately after
each acquisition of an equity interest in the entity whether upon initial
issuance or in the secondary market.
ADMINISTRATIVE EXEMPTIONS
Individual Administrative Exemptions. Several underwriters of
mortgage-backed securities have applied for and obtained ERISA prohibited
transaction exemptions (each, an "Individual Exemption") which are in some
respects broader than Prohibited Transaction Class Exemption 83-1 (described
below). Such exemptions can only apply to mortgage-backed securities which among
other conditions, are sold in an offering with respect to which such underwriter
serves as the sole or a managing underwriter, or as a selling or placement
agent. If such an Individual Exemption might be applicable to a Series of
Certificates, the related Prospectus Supplement will refer to such possibility.
An Individual Exemption does not apply to Plans sponsored by the Restricted
Group (as defined below) or the Trustee.
Some of the conditions that must be satisfied for an
Individual Exemption to apply are the following:
(1) The rights and interests evidenced by Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other Certificates of the Trust Fund;
(2) The Certificates acquired by the Plan have received a
rating at the time of such acquisition that is one of the three highest
generic rating categories from either Standard & Poor's Corporation
("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps
Rating Co. ("D&P") or Fitch Investors Service, Inc. ("Fitch");
(3) The Trustee is not an affiliate of any of the Depositor,
the underwriter specified in the applicable Prospectus Supplement, the
Servicer (if any), any obligor with respect to Mortgage Loans included
in the Trust Fund constituting more than five percent of the aggregate
unamortized principal balance of the assets in the Trust Fund, or any
affiliate of such parties (the "Restricted Group"); and
(4) The Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
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<PAGE> 189
If the conditions to an Individual Exemption are met, whether
or not a Plan's assets would be deemed to include an ownership interest in the
Mortgage Loans in a Mortgage Pool, the acquisition, holding and resale of the
Certificates by Plans would be exempt from the prohibited transaction provisions
of ERISA and the Code.
Moreover, an Individual Exemption can provide relief from
certain self-dealing/conflict of interest prohibited transactions, only if,
among other requirements, (i) a Plan's investment in Certificates of any class
does not exceed twenty-five percent of all of the Certificates of that Class
outstanding at the time of the acquisition and (ii) immediately after the
acquisition no more than twenty-five percent of the assets of the Plan with
respect to which such person is a fiduciary are invested in Certificates
representing an interest in one or more trusts containing assets sold or served
by the same person.
PTE 83-1. Prohibited Transaction Class Exemption 83-1 for
Certain Transactions Involving Mortgage Pool Investment Trusts ("PTE 83-1")
permits certain transactions involving the creation, maintenance and termination
of certain residential mortgage pools and the acquisition and holding of certain
residential mortgage pool pass-through certificates by Plans, whether or not the
Plan's assets would be deemed to include an ownership interest in the mortgages
in the mortgage pool, and whether or not such transactions would otherwise be
prohibited under ERISA.
The term "mortgage pool pass-through certificate" is defined
in PTE 83-1 as "a certificate representing a beneficial undivided fractional
interest in a mortgage pool and entitling the holder of such a certificate to
pass-through payment of principal and interest from the pooled mortgage loans,
less any fees retained by the pool sponsor." It appears that, for purposes of
PTE 83-1, the term "mortgage pool pass-through certificate" would include
Certificates issued in a single Class or in multiple classes that evidence a
beneficial undivided fractional interest in a mortgage pool of one- to
four-family residential mortgage loans and entitle the holder thereof to both a
specified percentage of future interest payments (after permitted deductions)
and a specified percentage of future principal payments.
However, it appears that PTE 83-1 does or might not apply to
the purchase and holding of (a) Certificates that evidence the beneficial
ownership only of a specified percentage of future interest payments (after
permitted deductions) on a Trust Fund or only of a specified percentage of
future principal payments on a Trust Fund, (b) Residual Certificates, (c)
Certificates evidencing ownership interests in a Trust Fund which includes
Mortgage Loans secured by multifamily residential properties or shares issued by
cooperative housing corporations, or (d) Certificates which are subordinated to
other classes of Certificates of such Series. Accordingly, unless exemptive
relief other than PTE 83-1 applies, Plans should not purchase any such
Certificates.
PTE 83-1 sets forth certain "general conditions" and "specific
conditions" to its applicability. Section 11 of PTE 83-1 sets forth the
following general conditions to the application of the exemption: (i) the
maintenance of a system of insurance or other protection for the pooled mortgage
loans or the property securing such loans, and for indemnifying
certificateholders against reductions in pass-through payments due to property
damage or defaults in loan payments; (ii) the existence of a pool trustee who is
not an affiliate of the pool sponsor; and (iii) a requirement that the sum of
all payments made to and retained by the pool sponsor, and all funds inuring to
the benefit of the pool sponsor as a result of the administration of the
mortgage pool, must represent not more than adequate consideration for selling
the mortgage loans plus reasonable compensation for services provided by the
pool sponsor to the pool. The system of insurance or protection referred to in
clause (i) above must provide such protection and indemnification up to an
amount not less than the greater of 1% of the aggregate unpaid principal balance
of the pooled mortgages or the unpaid principal balance of the largest mortgage
in the pool. It should be noted that in promulgating PTE 83-1 (and a predecessor
exemption), the Department did not have under its consideration interests in
pools of the exact nature as some of the Certificates described herein.
108
<PAGE> 190
EXEMPT PLANS
Employee benefit plans which are governmental plans (as
defined in Section 3(32) of ERISA), and certain church plans (as defined in
Section 3(33) of ERISA) are not subject to ERISA requirements and assets of such
plans may be invested in Senior Certificates without regard to the ERISA
considerations described above, subject to the provisions of other applicable
federal and state law.
UNRELATED BUSINESS TAXABLE INCOME -- RESIDUAL CERTIFICATES
The purchase of a Residual Certificate by such plans, or by
most varieties of ERISA Plans, may give rise to "unrelated business taxable
income" as described in Code Sections 511-515 and 860E. Further, prior to the
purchase of Residual Certificates, a prospective transferee may be required to
provide an affidavit to a transferor that it is not a "Disqualified
Organization" which term includes certain tax-exempt entities not subject to
Code Section 511, including certain governmental plans, as discussed herein
under the caption "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for REMIC Certificates--Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates--Tax-Related Restrictions on
Transfer of Residual Certificates."
Due to the complexity of these rules and the penalties imposed
upon persons involved in prohibited transactions, it is particularly important
that potential investors who are Plan fiduciaries carefully consider the
consequences under ERISA of their acquisition and ownership of Certificates.
The sale of Certificates to a Plan is in no respect a
representation by the Depositor or the applicable underwriter that this
investment meets all relevant legal requirements with respect to investments by
Plan generally or any particular Plan, or that this investment is appropriate
for Plans generally or any particular Plan.
LEGAL INVESTMENT
If specified in the related Prospectus Supplement, the
Certificates of one or more classes offered pursuant to this Prospectus will
constitute "mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as amended ("SMMEA"), so long as they are rated
in one of the two highest rating categories by at least one nationally
recognized statistical rating organization. As "mortgage related securities,"
such Certificates will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including, but not limited to, state-chartered savings banks, commercial banks,
savings and loan associations and insurance companies, as well as trustees and
state government employee retirement systems) created pursuant to or existing
under the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Pursuant
to SMMEA, a number of states enacted legislation, on or before the October 3,
1991 cutoff for such enactments, limiting to varying extents the ability of
certain entities (in particular, insurance companies) to invest in "mortgage
related securities," in most cases by requiring the affected investors to rely
solely upon existing state law, and not SMMEA. Accordingly, the investors
affected by such legislation will be authorized to invest in the Certificates
only to the extent provided in such legislation.
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with mortgage related securities without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in mortgage
related securities, and national banks may purchase mortgage related securities
for their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. ss. 24 (Seventh), subject in each
case to such regulations as the applicable federal regulatory authority may
prescribe. In this connection, federal credit unions should review National
Credit Union Administration (the "NCUA") Letter to Credit Unions No. 96, as
modified by Letter No. 108, which includes guidelines to assist federal credit
unions in making investment decisions for mortgage related securities. The NCUA
has adopted rules,
109
<PAGE> 191
effective December 2, 1991, which prohibit federal credit unions from investing
in certain mortgage related securities (including securities such as certain
series, Classes or Subclasses of Certificates), except under limited
circumstances.
All depository institutions considering an investment in the
Certificates should review the "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992 (the "Policy Statement") of the Federal
Financial Institutions Examination Council. The Policy Statement, which has been
adopted by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Comptroller of the Currency and the Office of
Thrift Supervision, effective February 10, 1992, and by the NCUA (with certain
modifications), effective June 26, 1992, prohibits depository institutions from
investing in certain "high-risk" mortgage securities (including securities such
as certain series, Classes or Subclasses of Certificates), except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions.
Institutions whose investment activities are subject to
regulation by federal or state authorities should review rules, policies and
guidelines adopted from time to time by such authorities before purchasing any
Certificates, as certain series, Classes or Subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the
applicability of statutes, rules, regulations, orders, guidelines or agreements
generally governing investments made by a particular investor, including, but
not limited to, "prudent investor" provisions, percentage-of-assets limits,
provisions which may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying" and, with regard to any Certificates
issued in book-entry form, provisions which may restrict or prohibit investment
in securities which are issued in book-entry form.
OTHER CLASSES OF CERTIFICATES OFFERED PURSUANT TO THIS
PROSPECTUS WILL NOT CONSTITUTE "MORTGAGE RELATED SECURITIES" UNDER SMMEA BECAUSE
THEY WILL NOT REPRESENT BENEFICIAL OWNERSHIP INTERESTS IN QUALIFYING MORTGAGE
LOANS UNDER SMMEA. THE APPROPRIATE CHARACTERIZATION OF THOSE CERTIFICATES UNDER
VARIOUS LEGAL INVESTMENT RESTRICTIONS, AND THUS THE ABILITY OF INVESTORS SUBJECT
TO THESE RESTRICTIONS TO PURCHASE THE CERTIFICATES, MAY BE SUBJECT TO
SIGNIFICANT INTERPRETIVE UNCERTAINTIES. ALL INVESTORS WHOSE INVESTMENT AUTHORITY
IS SUBJECT TO LEGAL RESTRICTIONS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO
DETERMINE WHETHER, AND TO WHAT EXTENT, THE CERTIFICATES WILL CONSTITUTE LEGAL
INVESTMENTS FOR THEM.
NO REPRESENTATION IS MADE AS TO THE PROPER CHARACTERIZATION OF
THE CERTIFICATES FOR LEGAL INVESTMENT OR FINANCIAL INSTITUTION REGULATORY
PURPOSES, OR AS TO THE ABILITY OF PARTICULAR INVESTORS TO PURCHASE CERTIFICATES
UNDER APPLICABLE LEGAL INVESTMENT RESTRICTIONS. THE UNCERTAINTIES DESCRIBED
ABOVE MAY (AND ANY UNFAVORABLE FUTURE DETERMINATIONS CONCERNING LEGAL INVESTMENT
OR FINANCIAL INSTITUTION REGULATORY CHARACTERISTICS OF THE CERTIFICATES
ADVERSELY AFFECT THE LIQUIDITY OF THE NON-SMMEA CERTIFICATES.
INVESTORS SHOULD CONSULT WITH THEIR OWN LEGAL ADVISORS IN
DETERMINING WHETHER AND TO WHAT EXTENT THE CERTIFICATES CONSTITUTE LEGAL
INVESTMENTS FOR SUCH INVESTORS.
PLAN OF DISTRIBUTION
The Depositor may sell the Certificates offered hereby in
Series either directly or through underwriters. The related Prospectus
Supplement or Prospectus Supplements for each Series will describe the terms of
the offering for that Series and will state the public offering or purchase
price of each Class of Certificates of such Series, or the method by which such
price is to be determined, and the net proceeds to the Depositor from such sale.
If the sale of any Certificates is made pursuant to an
underwriting agreement pursuant to which one or more underwriters agree to act
in such capacity, such Certificates will be acquired by such underwriters for
their own account and may be resold from time to time in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices to be determined at the time of sale or at the time
110
<PAGE> 192
of commitment therefor. Firm commitment underwriting and public reoffering by
underwriters may be done through underwriting syndicates or through one or more
firms acting alone. The specific managing underwriter or underwriters, if any,
with respect to the offer and sale of a particular Series of Certificates will
be set forth on the cover of the Prospectus Supplement related to such Series
and the members of the underwriting syndicate, if any, will be named in such
Prospectus Supplement. The Prospectus Supplement will describe any discounts and
commissions to be allowed or paid by the Depositor to the underwriters, any
other items constituting underwriting compensation and any discounts and
commissions to be allowed or paid to the dealers. The obligations of the
underwriters will be subject to certain conditions precedent. Unless otherwise
provided in the related Prospectus Supplement, the underwriters with respect to
a sale of any Class of Certificates will be obligated to purchase all such
Certificates if any are purchased. Pursuant to each such underwriting agreement,
the Depositor will indemnity the related underwriters against certain civil
liabilities, including liabilities under the Securities Act.
If any Certificates are offered other than through
underwriters pursuant to such underwriting agreements, the related Prospectus
Supplement or Prospectus Supplements will contain information regarding the
terms of such offering and any agreements to be entered into in connection with
such offering.
Purchasers of Certificates, including dealers, may, depending
on the facts and circumstances of such purchases, be deemed to be "underwriters"
within the meaning of the Securities Act of 1933 in connection with reoffers and
sales by them of Certificates. Certificateholders should consult with their
legal advisors in this regard prior to any such reoffer and sale.
If specified in the Prospectus Supplement relating to a Series
of Certificates, the Depositor, any affiliate thereof or any other person or
persons specified therein may purchase some or all of one or more Classes of
Certificates of such Series from the underwriter or underwriters or such other
person or persons specified in such Prospectus Supplement. Such purchaser may
thereafter from time to time offer and sell, pursuant to this Prospectus and the
related Prospectus Supplement, some or all of such Certificates so purchased,
directly, through one or more underwriters to be designated at the time of the
offering of such Certificates, through dealers acting as agent and/or principal
as in such other manner as may be specified in the related Prospectus
Supplement. Such offering may be restricted in the manner specified in such
Prospectus Supplement. Such transactions may be effected at market prices
prevailing at the time of sale, at negotiated prices or at fixed prices. Any
underwriters and dealers participating in such purchaser's offering of such
Certificates may receive compensation in the form of underwriting discounts or
commissions from such purchaser and such dealers may receive commissions from
the investors purchasing such Certificates for whom they may act as agent (which
discounts or commissions will not exceed those customary in those types of
transactions involved). Any dealer that participates in the distribution of such
Certificates may be deemed to be an "underwriter" within the meaning of the
Securities Act of 1933, and any commissions and discounts received by such
dealer and any profit on the resale of such Certificates by such dealer might be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
LEGAL MATTERS
Certain legal matters and certain tax matters will be passed
upon for the Depositor by Dewey Ballantine, New York, New York and/or such other
counsel as will be named on the related Prospectus Supplement.
RATING
At the date of issuance of each Series of Certificates, the
Certificates offered hereby will be rated in one of the four highest categories
by at least one Rating Agency. See "Ratings" in the related Prospectus
Supplement. A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. Each securities rating should be evaluated
independently of any other rating.
111
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ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus
forms a part and the exhibits thereto are on file at the offices of the
Commission in Washington, D.C. Copies may be obtained at rates prescribed by the
Commission upon request to the Commission, and may be inspected, without charge,
at the offices of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. See "Available Information."
Copies of FHLMC's most recent Offering Circular for FHLMC
Certificates, FHLMCs Information Statement and the most recent Supplement to
such Information Statement and any quarterly report made available by FHLMC can
be obtained by writing or calling the Investor Inquiry Department at FHLMC at
8200 Jones Branch Drive, McLean Virginia 22102 (outside Washington, D.C.
metropolitan area, telephone 800-336-FMPC; within Washington, D.C. metropolitan
area, telephone 703-759-8160). The Depositor has not and will not participate in
the preparation of FHLMC's Offering Circulars, Information Statements or
Supplements.
Copies of FNMA's most recent Prospectus for FNMA Certificates
and FNMA's annual report and quarterly financial statements as well as other
financial information are available from the Senior Vice President for Investor
Relations of FNMA, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016
(202-752-7115). The Depositor has not and will not participate in the
preparation of FNMA's Prospectuses.
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INDEX OF SIGNIFICANT DEFINITIONS
<TABLE>
<CAPTION>
Term Page
- ---- ----
<S> <C>
Act .................................................................. 75
Advance .............................................................. 60
Advance Reserve ...................................................... 46
Advances ............................................................. 10
APR .................................................................. 22
ARM Buy-Outs ......................................................... 22
Balloon Loan ......................................................... 20
Balloon Loans ........................................................ 14
Balloon Period ....................................................... 20
Basic Senior Class Distribution ...................................... 37
Buy-Down Account ..................................................... 20
Buy-Down Loans ....................................................... 20
Call protection ...................................................... 42
CERCLA ............................................................... 81
Certificate Account .................................................. 57
Certificate Account Depository ....................................... 57
Certificateholder .................................................... 1
Certificates ......................................................... 1
Class ................................................................ 1
Code ................................................................. 11, 84
Commission ........................................................... 3
Compound Interest Certificates ....................................... 32
Contract Pool ........................................................ 18
Contract Rate ........................................................ 8, 22
Contracts ............................................................ 1, 22
Convertible Mortgage Loans ........................................... 18
Cooperative Loans .................................................... 18
Cooperative Notes .................................................... 18
Cooperatives ......................................................... 18
Credit Enhancer ...................................................... 17
Cut-Off Date Aggregate Principal Balance ............................. 19, 23
D&P .................................................................. 111
Debt Securities ...................................................... 85
Deferred Interest .................................................... 14, 20
Definitive Certificate ............................................... 31
Deleted Loan ......................................................... 29
Depositor ............................................................ 1, 4, 54
Determination Date ................................................... 33
Direct or Indirect Participants ...................................... 17
Disqualified Organization ............................................ 97
Distribution Dates ................................................... 7
DTC .................................................................. 31
Due Date ............................................................. 19, 23
Due Period ........................................................... 42
Eligible Investments ................................................. 47
Environmental Condition .............................................. 81
EPA .................................................................. 82
ERISA ................................................................ 11, 109
Excess servicing ..................................................... 105
Extension protection ................................................. 42
</TABLE>
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<TABLE>
<S> <C>
FDIC ................................................................. 57
FHLBB ................................................................ 75
FIRREA ............................................................... 83
Fitch ................................................................ 111
Foreign persons ...................................................... 108
Funding Period ....................................................... 33
Gain From Acquired Property .......................................... 35
GEM Loans ............................................................ 21
GPM Fund ............................................................. 22
GPM Mortgage Loans ................................................... 21
Grantor Trust Estate ................................................. 85
Indemnification Payments ............................................. 36
Initial Deposit ...................................................... 45
Insurance Proceeds ................................................... 58
Interest Accrual Period .............................................. 52
Interest Rate ........................................................ 1
Liquidated Contract .................................................. 35
Liquidated Mortgage Loan ............................................. 15, 35
Liquidation Proceeds ................................................. 15, 58
Loan Sale Agreement .................................................. 25
Loan-to-Value Ratio .................................................. 19, 22
Moody's .............................................................. 111
Mortgage Certificate Pool ............................................ 18
Mortgage Loans ....................................................... 1
Mortgage Notes ....................................................... 18
Mortgage Pool ........................................................ 18
Mortgage Rate ........................................................ 7
Mortgaged Properties ................................................. 20
Mortgages ............................................................ 18
Mortgagor ............................................................ 14
Multi-Class Certificates ............................................. 1
Net Contract Rate .................................................... 8
Net Insurance Proceeds ............................................... 58
Net Liquidation Proceeds ............................................. 58
Net Mortgage Rate .................................................... 7
Non-REMIC Certificates ............................................... 85
Notional Amount ...................................................... 1
OTS .................................................................. 75
Pass-Through Entity .................................................. 97
Pass-Through Rate .................................................... 7
Paying Agent ......................................................... 60
Payment Deficiencies ................................................. 45
Percentage Certificates .............................................. 31
Plans ................................................................ 109
Pool ................................................................. 1
Pool Distribution Amount ............................................. 33
Pool Value Group ..................................................... 41
Pooling and Servicing Agreement ...................................... 4
Prepayment Interest Shortfall ........................................ 61
PTE 83-1 ............................................................. 111
Purchase Obligation .................................................. 13
Purchase Price ....................................................... 27
Rating Agency ........................................................ 12
Record Date .......................................................... 7
Registration Statement ............................................... 3
</TABLE>
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<PAGE> 196
<TABLE>
<S> <C>
Regular Certificates ................................................. 30
Relief Act ........................................................... 17, 82
REMIC ................................................................ 85
REMIC Certificates ................................................... 85
REMIC Regulations .................................................... 84
Repurchase Proceeds .................................................. 34
Residual Certificates ................................................ 30
Residual Holders ..................................................... 93
Scheduled Principal .................................................. 35
Secured-creditor exemption ........................................... 81
Securities Act ....................................................... 3
Senior Certificates .................................................. 2, 30
Senior Class Credit Enhancement ...................................... 37
Senior Class Distributable Amount .................................... 35
Senior Class Principal Portion ....................................... 35
Senior Class Shortfall ............................................... 37
Senior Class Shortfall Accruals ...................................... 37
Series ............................................................... 1
Servicer ............................................................. 1
Servicing Account .................................................... 63
Servicing Fee ........................................................ 8
Shifting Interest Certificates ....................................... 2
SMMEA ................................................................ 11, 112
Special Distributions ................................................ 43
Special Hazard Contract .............................................. 48
Special Hazard Mortgage Loan ......................................... 48
Standard Certificateholder ........................................... 103
Standard Certificates ................................................ 1
Standard Hazard Insurance Policy ..................................... 24
Stated Amount ........................................................ 1
Stripped Certificates ................................................ 1
Sub-Servicer ......................................................... 4, 57
Sub-Servicing Account ................................................ 58
Subclass ............................................................. 1
Subordinated Amount .................................................. 9
Subordinated Certificates ............................................ 2, 30
Subordinated Class Distributable Amount .............................. 35
Subordinated Class Principal Portion ................................. 36
Subordination Reserve Fund ........................................... 9
Substitute Loan ...................................................... 29
Thrift institutions .................................................. 96
Title V .............................................................. 76, 80
Trust Fund ........................................................... 1
U S Person .......................................................... 98
UCC .................................................................. 72, 77
Unaffiliated Sellers ................................................. 4
Unpaid Interest Shortfall ............................................ 38
Voting Interests ..................................................... 67
Window Period ........................................................ 75
Window Period Loans .................................................. 75
Window Period States ................................................. 75
</TABLE>
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<PAGE> 197
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus and,
if given or made, such information or representations must not be relied upon as
having been authorized by the Depositor or by the Underwriter. This Prospectus
Supplement and the prospectus do not constitute an offer to sell, or a
solicitation of an offer to buy, the securities offered hereby by anyone in any
jurisdiction in which such an offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so or
to anyone to whom it is unlawful to make any such offer or solicitation. Neither
the delivery of this Prospectus Supplement and the Prospectus nor any sale made
hereunder shall, under any circumstances, create an implication that information
herein or therein is correct as of any time since the date of this Prospectus
Supplement or the Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary Terms of the Certificates ....................................... S-3
Investment Considerations ............................................... S-19
The Mortgage Pool ....................................................... S-21
Prepayment and Yield Considerations ..................................... S-26
The Originator .......................................................... S-30
Description of the Certificates ......................................... S-36
The Trustee ............................................................. S-59
The Certificate Insurance Policy and
the Certificate Insurer ............................................... S-60
Certain Federal Income Tax Considerations ............................... S-64
ERISA Considerations .................................................... S-69
Legal Investment ........................................................ S-72
Plan of Distribution .................................................... S-72
Ratings ................................................................. S-73
Legal Matters ........................................................... S-73
Annex I ................................................................. I-1
Index of Significant Prospectus Supplement Definitions .................. i
PROSPECTUS
Reports ................................................................. 3
Available Information ................................................... 3
Incorporation of Certain Information by Reference ....................... 3
Summary of Prospectus ................................................... 4
Risk Factors ............................................................ 12
The Trust Funds ......................................................... 17
Description of the Certificates ......................................... 28
Credit Support .......................................................... 43
Prepayment and Yield Considerations ..................................... 48
Use of Proceeds ......................................................... 52
The Depositor ........................................................... 52
Underwriting Guidelines ................................................. 52
Servicing of the Mortgage Loans and Contracts ........................... 54
The Pooling and Servicing Agreement ..................................... 65
Certain Legal Aspects of the Mortgage Loans and Contracts ............... 68
Certain Federal Income Tax Consequences ................................. 81
ERISA Considerations .................................................... 106
Legal Investment ........................................................ 109
Plan of Distribution .................................................... 110
Legal Matters ........................................................... 111
Rating .................................................................. 111
Addtional Information ................................................... 112
Index of Significant Definitions ........................................ 113
</TABLE>
PRUDENTIAL
SECURITIES
SECURED FINANCING
CORPORATION
$10,373,000
CLASS A-1 CERTIFICATES
$20,730,000
CLASS A-2 CERRTIFICATES
$23,000,000
CLASS A-3 CERTIFICATES
MORTGAGE PASS-THROUGH
CERTIFICATES, SERIES 1996-1
--------------
PROSPECTUS SUPPLEMENT
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PRUDENTIAL SECURITIES INCORPORATED
MARCH 15, 1996
