As filed with the Securities and Exchange Commission on June 5, 1997
Registration No. 333-27355
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
(Exact name of registrant as specified in governing instruments)
A Delaware Corporation 13-3526694
(State of Incorporation) (I.R.S. Identification Number)
One New York Plaza, 15th Floor
New York, New York 10292
(212) 778-1000
(Address of principal executive offices)
LEN BLUM
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
ONE NEW YORK PLAZA, 15TH FLOOR
NEW YORK, NEW YORK 10292
(212) 778-1000
(Name and address of agent for service)
---------------------
Copies to:
Chris DiAngelo, Esq.
Dewey Ballantine
1301 Avenue of the Americas
New York, New York 10019
Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective.
If the only Securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.|_|
If any of the Securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box.|X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.|_|
If this From is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.|_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.|_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Proposed Maximum Proposed Maximum
Title of Securities Amount being Offering Price Per Aggregate Offering Amount of Registration
being Registered Registered Unit(1) Price(1) Fee
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<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates $1,500,000,000(2) 100% $1,500,000,000 $454,545.45(3)
====================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) In accordance with Rule 429 of the Securities and Exchange Commission's
Rules and Regulations under the Securities Act of 1933, as amended, the
Prospectus included herein is a combined prospectus which also relates to
the Registrant's Registration Statement on Form S-3 (Registration No.
333-16511) (the "Prior Registration Statement"). The amount of securities
eligible to be sold under the Prior Registration Statement ($172,420,810 as
of May 14, 1997) shall be carried forward to this Registration Statement.
(3) $401,515.15 is paid pursuant to this Registration Statement. The remaining
$53,030.30 of such amount is attributable to the amount carried forward
from the Prior Registration Statement for which a filing fee in the amount
of $227,273 was paid at the time of registration.
-------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
Showing Location of Items in Prospectus
Required by Items of Form S-3
Item Caption in Prospectus
---- ---------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside Front Forepart of Registration Statement and Outside Front
Cover Page of Prospectus....................................... Cover Page
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages
Prospectus.....................................................
3. Summary Information, Risk Factors and Ratio of Summary of Prospectus; Yield Considerations
Earnings to Fixed Charges......................................
4. Use of Proceeds................................................ Use of Proceeds
5. Determination of Offering Price................................ *
6. Dilution....................................................... *
7. Selling Security Holders....................................... *
8. Plan of Distribution........................................... Plan of Distribution**
9. Description of Securities to Be Registered..................... Outside Front Cover Page; The Trust Funds; Yield
Considerations; Description of the Certificates; Certain
Legal Aspects of the Mortgage Loans and Contracts;
Certain Federal Income Tax Consequences
10. Interest of Named Experts and Counsel.......................... *
11. Material Changes............................................... *
12. Incorporation of Certain Information by Reference.............. Incorporation of Certain Information by Reference
13. Disclosure of Commission Position on See Page II-3
Indemnification for Securities Act Liabilities.................
- ---------------
* Omitted, since item is not applicable or answer is negative.
** To be completed or provided from time to time by Prospectus Supplement.
</TABLE>
i
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
Prudential Securities Secured Financing Corporation
(Depositor)
Pass-Through Certificates
(Issuable in Series)
- --------------------------------------------------------------------------------
Prudential Securities Secured Financing Corporation (the "Depositor") may
sell from time to time under this Prospectus and related Prospectus Supplements
Pass-Through Certificates or Notes (such Pass-Through Certificates or such
Notes, together the "Certificates"), issuable in series (each, a "Series")
consisting of one or more classes (each, a "Class") of Certificates on terms to
be determined at the time of sale.
The Certificates of a Series will evidence the beneficial ownership
interests in a separate trust formed by the Depositor for the benefit of the
holders of the related Series of Certificates (the "Certificateholders"). Unless
otherwise specified in the applicable Prospectus Supplement, the property of
each such trust (for each Series, the "Trust Fund") will consist of a segregated
pool (the "Pool") of (i) promissory notes or other evidences of indebtedness
secured by first, second or more junior liens on fee simple or leasehold
interests in the Mortgaged Properties (as defined herein), including installment
sale contracts with respect to any such properties, or participation in any of
the foregoing (the "Mortgage Loans") or (ii) manufactured housing conditional
sales contracts and installment agreements (the "Contracts"). The Mortgage Loans
or Contracts included in a Trust Fund will have been acquired from one or more
affiliates of the Depositor or from one or more Unaffiliated Sellers (as defined
herein) by the Depositor and conveyed by the Depositor to such Trust Fund. The
Mortgage Loans included in a Mortgage Pool or the Contracts included in a
Contract Pool of a Series will be serviced by a servicer (the "Servicer")
described in the applicable Prospectus Supplement.
The Certificates of a Series will consist of (i) one or more Classes of
Certificates representing fractional undivided interests in all the principal
payments and the interest payments, to the extent of the related Net Mortgage
Rates (as defined herein) or Net Contract Rates (as defined herein), on the
related Mortgage Loans or Contracts ("Standard Certificates"), (ii) one or more
Classes of Certificates ("Multi-Class Certificates") each of which will be
assigned a principal balance (a "Stated Amount") based on the value of future
cash flows from the related Trust Fund without distinction as to principal or
interest or may have no principal amount but may instead be assigned a notional
amount (a "Notional Amount") on which interest accrues, and each of which will
bear interest on the Stated Amount or Notional Amount thereof at a fixed rate
(which may be zero) specified in, or a variable rate determined as specified in,
the applicable Prospectus Supplement (the "Interest Rate") or (iii) one or more
Classes of Certificates representing fractional undivided interests in all or
specified portions of the principal payments and/or interest payments, to the
extent of the related Net Mortgage Interest Rate, on the related Mortgage Loans
("Stripped Certificates"). Any Class of Certificates may be divided into two or
more subclasses (each, a "Subclass") and any Class of Standard Certificates may
be divided into two or more Subclasses that consist of Multi-Class Certificates.
In addition, a Series of Certificates for which a REMIC (as defined herein)
election has been made will also include one Class or one Subclass of Residual
Certificates (as defined herein).
(Cover continued on next page)
-----------------------------------
THE ASSETS OF THE RELATED TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
SECURITIES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE DEPOSITOR, THE SERVICER OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH
HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE CERTIFICATES NOR
THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR BY THE SELLER, THE SERVICER OR ANY OF THEIR
AFFILIATES, EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT. SEE "RISK
FACTORS" PAGE 13.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------------------------
The Certificates may be sold from time to time by the Depositor through
dealers or agents designated from time to time, through underwriting syndicates
led by one or more managing underwriters or through one or more underwriters
acting alone. See "Plan of Distribution." Affiliates of the Depositor may from
time to time act as agents or underwriters in connection with the sale of
Certificates. The terms of a particular offering will be set forth in the
Prospectus Supplement related to such offering.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Certificates unless accompanied by the Prospectus
Supplement relating to the offering of such Certificates.
- --------------------------------------------------------------------------------
The date of this Prospectus is _____________, 1997
<PAGE>
(Cover continued from previous page)
Each Series of Certificates will include one or more classes. The
Certificates of any particular class may represent beneficial ownership
interests in the related Mortgage Loans held by the related Trust Fund, or may
represent debt secured by such Mortgage Loans, as described herein and in the
related Prospectus Supplement. Any Series of Certificates may include one or
more Classes or Subclasses of Certificates (the "Subordinated Certificates")
that are subordinate in right of distributions to such rights of one or more of
other Classes or Subclasses of such Series (the "Senior Certificates"). If
specified in the applicable Prospectus Supplement, the relative interests of the
Senior Certificates and the Subordinated Certificates of a Series in the Trust
Fund may be subject to adjustment from time to time on the basis of
distributions received in respect thereof (the "Shifting Interest
Certificates"). If so specified in the applicable Prospectus Supplement, credit
support may also be provided for any Series of Certificates in the form of a
guarantee, letter of credit, mortgage pool insurance policy or other form of
credit enhancement as described herein.
Neither the Mortgage Loans nor the Contracts will be guaranteed or insured
by any governmental agency or instrumentality or, except as specified in the
related Prospectus Supplement, by any other person. The only obligations of the
Depositor with respect to a Series of Certificates will be pursuant to certain
limited representations and warranties made by the Depositor, to the extent
described herein and in the related Prospectus Supplement. The Servicer with
respect to a Series of Certificates relating to Mortgage Loans or Contracts will
be named in the related Prospectus Supplement. The principal obligations of a
Servicer will be limited to certain obligations pursuant to certain
representations and warranties and to its contractual servicing obligations.
An election may be made to treat each Trust Fund (or one or more segregated
pools of assets therein) underlying a Series which includes MultiClass
Certificates as a "real estate mortgage investment conduit" (a "REMIC") or, on
or after September 1, 1997, as a Financial Asset Securitization Investment Trust
("FASIT") 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"). Series of Certificates for
which a FASIT election has been made will include one or more Classes or
Subclasses which constitute "regular interests" ("FASIT Regular Securities")
and/or "high-yield interests" ("FASIT High-Yield Securities") and one Class or
Subclass with respect to each FASIT which constitutes the "ownership interest"
therein (the "FASIT Ownership Interest"). Alternatively, a Trust Fund may be
treated as a grantor trust or as a partnership for federal income tax purposes,
or may be treated for federal income tax purposes as a mere security device
which constitutes a collateral arrangement for the issuance of debt. See
"Certain Federal Income Tax Consequences."
There will have been no public market for the Certificates of any Series
prior to the offering thereof. No assurance can be given that such a market will
develop, or that if such a market does develop, it will provide
Certificateholders with liquidity of investment or will continue for the life of
the Certificates.
2
<PAGE>
REPORTS
In connection with each distribution and annually, Certificateholders will
be furnished with statements containing information with respect to principal
and interest payments and the related Trust Fund, as described herein and in the
applicable Prospectus Supplement for such Series. Any financial information
contained in such reports will not have been examined or reported upon by an
independent public accountant. See "Servicing of the Mortgage Loans and
Contracts -- Reports to Certificateholders." The Servicer for each Series
relating to Mortgage Loans or Contracts will furnish periodic statements setting
forth certain specified information to the related Trustee and, in addition,
annually will furnish such Trustee with a statement from a firm of independent
public accounts with respect to the examination of certain documents and records
relating to the servicing of the Mortgage Loans or Contracts in the related
Trust Fund. See "Servicing of the Mortgage Loans and Contracts -- Reports to the
Trustee" and "Evidence as to Compliance." Copies of the monthly and annual
statements provided by the Servicer to the Trustee will be furnished to
Certificateholders of each Series upon request addressed to Prudential
Securities Secured Financing Corporation, One New York Plaza, 15th Floor, New
York, New York 10292, Attention: Len Blum (212) 778-1000.
AVAILABLE INFORMATION
The Depositor has filed a Registration Statement (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with the Securities and Exchange Commission (the "Commission") with respect to
the Certificates offered pursuant to this Prospectus. This Prospectus contains,
and the Prospectus Supplement for each Series of Certificates will contain, a
summary of the material terms of the documents referred to herein and therein,
but neither contains nor will contain all of the information set forth in the
Registration Statement of which this Prospectus is a part. For further
information, reference is made to such Registration Statement and any amendments
thereof and to the exhibits thereto. Copies of the Registration Statement may be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 upon payment of the prescribed charges, or may be
examined free of charge at the Commission's offices, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at the regional offices of the Commission located at
Room 1400, 75 Park Place, New York, New York 10007 and Northwestern Atrium
Center, 500 West Madison Street, Suite 400, Chicago, Illinois 60661-2511.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of any offering of Certificates evidencing interests therein. The Depositor will
provide or cause to be provided without charge to each person to whom this
Prospectus is delivered in connection with the offering of one or more Classes
of Certificates, a list identifying, all filings with respect to a Trust Fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, since the
Depositor's latest fiscal year covered by its annual report on Form 10-K and a
copy of any or all documents or reports incorporated herein by reference, in
each case to the extent such documents or reports relate to one or more of such
Classes of such Certificates, other than the exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests to the Depositor should be directed to: Prudential Securities Secured
Financing Corporation, One New York Plaza, 15th Floor, New York, New York 10292,
telephone number (212) 778-1000, Attention: Len Blum.
3
<PAGE>
SUMMARY OF PROSPECTUS
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus, and by reference to the
information with respect to each Series of Certificates contained in the related
Prospectus Supplement. Certain capitalized terms used and not otherwise defined
herein shall have the meanings given elsewhere in this Prospectus. An index
indicating where certain terms used herein are defined appear at the end of this
Prospectus.
Title of Securities............ Pass-Through Certificates (Issuable in
Series).
Depositor...................... Prudential Securities Secured Financing
Corporation, formerly known as P-B Secured
Financing Corporation (the "Depositor"), a
Delaware corporation, is a wholly owned
limited purpose finance subsidiary of
Prudential Securities Group Inc. The
Depositor's principal executive offices are
located at One New York Plaza, 15th Floor,
New York, New York 10292, and its telephone
number is (212) 778-1000. See "The
Depositor."
Unaffiliated Sellers........... The Depositor will acquire the Mortgage Loans
and Contracts from one or more institutions
unaffiliated with the Depositor
("Unaffiliated Sellers").
Trustee ....................... The Trustee with respect to a Series will be
specified in the related Prospectus
Supplement.
Servicer ....................... The Servicer for each Series relating to
Mortgage Loans or Contracts will be specified
in the applicable Prospectus Supplement. The
Servicer will service the Mortgage Loans or
Contracts comprising each Trust Fund and
administer each Trust Fund pursuant to a
separate Pooling and Servicing Agreement
(each, a "Pooling and Servicing Agreement").
The Servicer may subcontract all or any
portion of its obligations as Servicer under
each Pooling and Servicing Agreement to
qualified subservicers (each, a
"Sub-Servicer") but the Servicer will not be
relieved thereby of its liability with
respect thereto. See "Servicing of the
Mortgage Loans and Contracts."
The Trust Funds................. The Trust Fund for each Series of
Certificates may consist of any combination
of Mortgage Pool and/or Contract Pools (each
as defined herein) and certain other related
property, as specified herein and in the
applicable Prospectus Supplement. Unless
otherwise specified in the applicable
Prospectus Supplement, each Mortgage Pool
will be comprised of Mortgage Loans or
Contracts or participations therein.
Unless otherwise specified in the applicable
Prospectus Supplement, each Contract Pool
will consist of fixed or adjustable rate
manufactured housing installment sale,
contracts and installment loan agreements.
Each Contract may be secured by a new or used
Manufactured Home (as defined herein).
4
<PAGE>
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
5
<PAGE>
REMIC. In addition, any Series with respect
to which an election has been made to treat
the Trust Fund (or one or more segregated
pools of assets therein) as a REMIC will
include one Class or one Subclass of Residual
Certificates as to each REMIC. The Residual
Certificates of a Series, if offered hereby,
will represent the right to receive
distributions with respect to the related
Trust Fund as specified in the related
Prospectus Supplement. Unless otherwise
specified in the applicable Prospectus
Supplement, the Certificates will be offered
only in fully registered form.
A. Standard
Certificates........... Unless otherwise provided in the applicable
Prospectus Supplement, Standard Certificates
of a Series will each evidence a fractional
undivided beneficial ownership interest in
the related Trust Fund and will entitle the
holder thereof to its proportionate share of
a percentage of all of the payments and other
receipts with respect to the principal of and
interest (to the extent of the applicable Net
Mortgage Rate or Net Contract Rate) on the
related Mortgage Loans or Contracts. If
specified in the applicable Prospectus
Supplement, with respect to any Class of
Standard Certificates of a Series for which a
REMIC election has been made, distributions
of principal may be allocated among the
Certificateholders of such Class on a pro
rata, random lot or such other basis as is
specified in such Prospectus Supplement.
B. Multi-Class
Certificates........... Multi-Class Certificates of a Series will
consist of Certificates each of which
evidences a beneficial ownership interest in
the related Trust Fund and will be assigned a
Stated Amount, which may be based on an
amount of principal of the underlying
Mortgage Loans or Contracts or on the value
of future cash flows from the related Trust
Fund without distinction as to principal or
interest and an Interest Rate which may be a
fixed rate (which may be zero) or a variable
rate or which will otherwise accrue interest
as specified in the applicable Prospectus
Supplement. The holder of a Multi-Class
Certificate will be entitled to receive, to
the extent funds are available therefor,
interest payments on the outstanding Stated
Amount thereof at the applicable Interest
Rate or as otherwise specified in the
applicable Prospectus Supplement and
distributions in reduction of such Stated
Amount determined in the manner and applied
in the priority set forth in the applicable
Prospectus Supplement.
C. Stripped
Certificates........... Stripped Certificates will each evidence an
undivided beneficial ownership interest in
the related Trust Fund and will entitle the
holder thereof to its proportionate share of
a specified portion (which may be zero) of
principal payments and/or a specified portion
(which may be zero) of interest payments (to
the extent of the applicable Net Mortgage
Interest Rate) on the related Mortgage Loans.
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<PAGE>
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.
7
<PAGE>
Principal (including
prepayments).................... With respect to a Series of Certificates
consisting of Standard Certificates or
Stripped Certificates, unless otherwise
specified in the applicable Prospectus
Supplement, principal payments (including
prepayments received on each related Mortgage
Loan or Contract during the month preceding
the month in which a Distribution Date
occurs) will be passed through to holders on
such Distribution Date, in accordance with
the particular terms of each such
Certificate.
Distributions in
Reduction of
Stated Amount................... With respect to each Class and Subclass of
Multi-Class Certificates, distributions in
reduction of Stated Amount will be made on
each Distribution Date to the holders of the
Certificates of such Class and Subclass then
entitled to receive such distributions until
the aggregate amount of such distributions
have reduced the Stated Amount of each such
Class and Subclass of Certificates to zero.
Distributions in reduction of Stated Amount
will be allocated among the Classes or
Subclasses of such Certificates in the manner
specified in the applicable Prospectus
Supplement. Distributions in reduction of
Stated Amount with respect to any Class or
Subclass of Multi-Class Certificates of a
Series may be made on a pro rata or random
lot or such other basis as is specified in
the applicable Prospectus Supplement. See
"Description of the Certificates --
Distributions to Multi-Class
Certificateholders."
Forward Commitments;
Pre-Funding..................... A Trust Fund may enter into an agreement
(each, a "Forward Purchase Agreement") with
the Depositor whereby the Depositor will
agree to transfer additional Mortgage Loans
to such Trust Fund following the date on
which such Trust Fund is established and the
related Certificates are issued. Any Forward
Purchase Agreement will require that any
Mortgage Loans so transferred to a Trust Fund
conform to the requirements specified in such
Forward Purchase Agreement. If a Forward
Purchase Agreement is to be utilized, and
unless otherwise specified in the related
Prospectus Supplement, the related Trustee
will be required to deposit in a segregated
account (each, a "Pre-Funding Account") all
or a portion of the proceeds received by the
Trustee in connection with the sale of one or
more classes of Certificates of the related
Series; subsequently, the additional Mortgage
Loans will be transferred to the related
Trust Fund in exchange for money released to
the Depositor from the related Pre-Funding
Account in one or more transfers. Each
Forward Purchase Agreement will set a
specified period during which any such
transfers must occur. The Forward Purchase
Agreement or the related Pooling and
Servicing Agreement will require that, if all
moneys originally deposited to such
Pre-Funding Account are not so used by the
end of such specified period, then any
8
<PAGE>
remaining moneys will be applied as a
mandatory prepayment of the related class or
classes of Certificates as specified in the
related Prospectus Supplement.
Credit Enhancement
A. By Subordination.... A Series of Certificates may include one or
more Classes or Subclasses of Senior
Certificates and one or more Classes or
Subclasses of Subordinated Certificates. The
rights of the holders of Subordinated
Certificates of a Series to receive
distributions with respect to the related
Mortgage Loans or Contracts will be
subordinated to such rights of the holders of
the Senior Certificates of the same Series to
the extent (the "Subordinated Amount")
specified herein and in the applicable
Prospectus Supplement. This subordination is
intended to enhance the likelihood of the
timely receipt by the Senior
Certificateholders of their proportionate
share of scheduled monthly principal and
interest payments on the related Mortgage
Loans or Contracts and to reduce the
likelihood that the Senior Certificateholders
will experience losses. The Prospectus
Supplement for Series of Certificates
including a subordination feature may also
specify the allocation of distributions and
priority of payments of principal, or Stated
Amount, and interest among one or more
Classes or Subclasses of Senior Certificates
of such Series. The protection afforded to
Senior Certificateholders of a Series will be
effected by a preferential right, as
specified in the applicable Prospectus
Supplement, of such Senior Certificateholders
to receive, on any Distribution Date, current
distributions on the related Mortgage Loans
or Contracts and (if so specified in the
applicable Prospectus Supplement) by the
establishment of a reserve fund (the
"Subordination Reserve Fund") for such
Series. Any Subordination Reserve Fund may be
funded initially with a deposit of cash,
instruments or securities in an amount
specified in the applicable Prospectus
Supplement and, if so specified in the
related Prospectus Supplement, may be
augmented by the retention of distributions
which otherwise would have been available for
distribution to the Subordinated
Certificateholders in the manner and to the
extent specified in the applicable Prospectus
Supplement. The Subordination Reserve Fund
for a Series may be funded and maintained in
such other manner as is specified in the
related Prospectus Supplement. The
maintenance of any Subordination Reserve Fund
would be intended to preserve the
availability of the subordination provided by
the Subordinated Certificates and to provide
liquidity, but in certain circumstances the
Subordination Reserve Fund could be depleted
and, if other amounts available for
distribution are insufficient, shortfalls in
distributions to the Senior
Certificateholders could result. Unless
otherwise specified in the related Prospectus
Supplement, until the Subordinated Amount is
reduced to zero, Senior Certificateholders
will be entitled to receive the amount of any
such shortfall, together with interest at the
applicable Pass-Through Rate, Interest Rate,
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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
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one of the two highest rating categories by
at least one "nationally recognized
statistical rating organization. As "mortgage
related securities," such Certificates
offered pursuant to this Prospectus will
constitute legal investments for certain
types of institutional investors to the
extent provided in SMMEA subject, in any
case, to any other regulations which may
govern investments by such institutional
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."
Certain Federal Income
Tax Consequences ............... Securities of each series offered hereby
will, for federal income tax purposes,
constitute either (i) interests ("Grantor
Trust Securities") in a Trust treated as a
grantor trust under applicable provisions of
the Code, (ii) "regular interests" ("REMIC
Regular Securities") or "residual interests"
("REMIC Residual Securities") in a Trust
treated as a REMIC (or, in certain
instances, containing one or more REMIC's)
under Sections 860A through 860G of the
Code, (iii) debt issued by a Trust ("Debt
Securities"), (iv) interests in a Trust which
is treated as a partnership ("Partnership
Interests"), or, on or after September 1,
1997, (v) "regular interests" ("FASIT
Regular Securities"), "high-yield interests"
("FASIT High-Yield Securities") or an
ownership interest in a Trust treated as a
FASIT (or, in certain circumstances
containing one or more FASITs under Sections
860H through 860L of the Code.
Investors are advised to consult their tax
advisors and to review "Certain Federal
Income Tax Consequences" herein and in the
related Prospectus Supplement.
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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<PAGE>
Although a low interest rate environment may facilitate the refinancing
of a balloon payment, the receipt and reinvestment by Certificateholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the Depositor,
the Servicer, any Sub-Servicer or the Trustee will be obligated to provide funds
to refinance any Mortgage Loan, including Balloon Loans.
Risk of Losses Associated with ARM Loans. ARM Loans may be underwritten
on the basis of an assessment that Mortgagors will have the ability to make
payments in higher amounts after relatively short periods of time. In some
instances, Mortgagors' income may not be sufficient to enable them to continue
to make their loan payments as such payments increase and thus the likelihood of
default will increase.
Risk of Losses Associated with Bankruptcy of Mortgagors. General
economic conditions have an impact on the ability of borrowers to repay Mortgage
Loans. Loss of earnings, illness and other similar factors also may lead to an
increase in delinquencies and bankruptcy filings by borrowers. In the event of
personal bankruptcy of a Mortgagor, it is possible that a Trust could experience
a loss with respect to such Mortgagor's Mortgage Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan thereby either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
Risk of Losses Associated with Foreclosure of Mortgaged Properties.
Even assuming that the Mortgaged Properties provide adequate security for the
Mortgage Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Mortgage Loans and corresponding delays in the receipt
of related proceeds by the Certificateholders could occur. An action to
foreclose on a Mortgaged Property securing a Mortgage Loan is regulated by state
statutes, rules and judicial decisions and is subject to many of the delays and
expenses of other lawsuits if defenses or counterclaims are interposed,
sometimes requiring several years to complete. Furthermore, in some states an
action to obtain a deficiency judgment is not permitted following a nonjudicial
sale of a Mortgaged Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the Servicer to
foreclose on or sell the Mortgaged Property or to obtain liquidation proceeds
(net of expenses) ("Liquidation Proceeds") sufficient to repay all amounts due
on the related Mortgage Loan. The Servicer will be entitled to deduct from
Liquidation Proceeds all expenses reasonably incurred in attempting to recover
amounts due on the related liquidated Mortgage Loan ("Liquidated Mortgage Loan")
and not yet repaid, including payments to prior lienholders, accrued Servicing
Fees, legal fees and costs of legal action, real estate taxes, and maintenance
and preservation expenses. In the event that any Mortgaged Properties fail to
provide adequate security for the related Mortgage Loans and insufficient funds
are available from any applicable Credit Enhancement, Certific- ateholders could
experience a loss on their investment.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
Under environmental legislation and judicial decisions applicable in
various states, a secured party that takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a mortgaged property that, prior to foreclosure,
has been involved in decisions or actions which may lead to contamination of a
property, may be liable for the costs of cleaning up the purportedly
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a holder of a mortgage note (such as a Trust)
which, under the terms of the Pooling and Servicing Agreement, is not required
to take an active role in operating the Mortgaged Properties. See "Certain Legal
Aspects of Mortgage Loans and Contracts -- Environmental Risks."
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Certain of the Mortgaged Properties relating to Mortgage Loans may not
be owner occupied. It is possible that the rate of delinquencies, foreclosures
and losses on Mortgage Loans secured by nonowner occupied properties could be
higher than for loans secured by the primary residence of the borrower.
Litigation. Any material litigation relating to the Depositor or the
Servicer will be specified in the related Prospectus Supplement.
Geographic Concentration of Mortgaged Properties. Certain geographic
regions from time to time will experience weaker regional economic conditions
and housing markets than will other regions, and, consequently, will experience
higher rates of loss and delinquency on mortgage loans generally. The Mortgage
Loans underlying certain series of Certificates may be concentrated in such
regions, and such concentrations may present risk considerations in addition to
those generally present for similar mortgage loan asset-backed securities
without such concentrations. Information with respect to geographic
concentration of Mortgaged Properties will be specified in the related
Prospectus Supplement or related current report on Form 8-K.
Legal Considerations. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures, and require licensing of
the Depositor and the Servicer and Sub-Servicers. In addition, most states have
other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices that may
apply to the origination, servicing and collection of the Mortgage Loans.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Servicer to collect all or part of the principal of or
interest on the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Servicer to damages and
administrative sanctions. See "Certain Legal Aspects of Mortgage Loans and
Contracts."
The Mortgage Loans may also be subject to federal laws, including: (i)
the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X promulgated thereunder,
which require certain disclosures to the borrowers regarding the terms of the
Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and general
principles of equity may limit the ability of the Servicer to collect all or
part of the principal of or interest on the Mortgage Loans, may entitle the
borrower to rescind the loan or to a refund of amounts previously paid and, in
addition, could subject the Servicer to damages and administrative sanctions. If
the Servicer is unable to collect all or part of the principal or interest on
the Mortgage Loans because of a violation of the aforementioned laws, public
policies or general principles of equity then the Trust may be delayed or unable
to repay all amounts owed to Investors. Furthermore, depending upon whether
damages and sanctions are assessed against the Servicer or the Depositor, such
violations may materially impact the financial ability of the Depositor to
continue to act as Servicer or the ability of the Depositor to repurchase or
replace Mortgage Loans if such violation breaches a representation or warranty
contained in a Pooling and Servicing Agreement.
Collections on the Mortgage Loans may vary due to the level of
incidence of delinquent payments and of prepayments. Collections on the Mortgage
Loans may also vary due to seasonal purchasing and payment habits of borrowers.
Book-Entry Registration. Issuance of the Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary trading
market since investors may be unwilling to purchase Certificates for which they
cannot obtain definitive physical securities representing such
Certificateholders' interests, except in certain circumstances described in the
related Prospectus Supplement.
Since transactions in Certificates will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
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system ("Direct or Indirect Participants") and certain banks, the ability of a
Certificateholder to pledge a Certificate to persons or entities that do not
participate in the DTC system, or otherwise to take actions in respect of such
Certificates, may be limited due to lack of a physical certificate representing
the Certificates.
Certificateholders may experience some delay in their receipt of
distributions of interest on and principal of the Certificates since
distributions may be required to be forwarded by the Trustee to DTC and, in such
a case, DTC will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable class of Certificateholders either directly or indirectly through
Indirect Participants. See "Description of the Certificates."
The Status of the Mortgage Loans in the Event of Bankruptcy of the
Depositor. In the event of the bankruptcy of the Depositor at a time when it or
any affiliate thereof holds a Certificate, a trustee in bankruptcy of the
Depositor, or its creditors could attempt to recharacterize the sale of the
Mortgage Loans to the related Trust as a borrowing by the Depositor or such
affiliate with the result, if such recharacterization is upheld, that the
Certificateholders would be deemed creditors of the Depositor or such affiliate,
secured by a pledge of the Mortgage Loans. If such an attempt were successful,
it could prevent timely payments of amounts due to the Trust.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such action
could have an effect, for an indeterminate period of time, on the ability of the
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
In addition, the Relief Act imposes limitations that would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan during the Mortgagor's
period of active duty status. Thus, in the event that such a Mortgage Loan goes
into default, there may be delays and losses occasioned by the inability to
realize upon the Mortgaged Property in a timely fashion.
Certificate Rating. The rating of Certificates credit enhanced through
external Credit Enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external Credit Enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to the
Certificates would likely result in a reduction in the rating of the
Certificates. See "Ratings" in the Prospectus Supplement.
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THE TRUST FUNDS
General
The Trust Fund for each Series of Certificates will consist primarily of a
Pool of Mortgage Loans (a "Mortgage Pool") and/or Contracts (a "Contract Pool").
In addition, a Trust Fund will also include (i) amounts held from time to time
in the related Certificate Account, (ii) the Depositor's interest in any primary
mortgage insurance, hazard insurance, title insurance and/or other insurance
policies relating to a Mortgage Loan or Contract, (iii) any property which
initially secured a Mortgage Loan and which has been acquired by foreclosure or
trustee's sale or deed in lieu of foreclosure or trustee's sale, (iv) any
Manufactured Home which initially secured a Contract and which is acquired by
repossession, (v) if applicable, and to the extent set forth in the applicable
Prospectus Supplement, any Subordination Reserve Fund and/or any other reserve
fund, (vi) if applicable, and to the extent set forth in the applicable
Prospectus Supplement, one or more guarantees, letters of credit, insurance
policies, or any other credit enhancement arrangement, and (vii) such other
assets as may be specified in the related Prospectus Supplement. Unless
otherwise specified in the applicable Prospectus Supplement, the Trust Fund will
not include, however, the portion of interest on the Mortgage Loans or Contracts
which constitutes the Fixed Retained Yield, if any. See "Fixed Retained Yield"
below. If specified in the related Prospectus Supplement, certain Certificates
will evidence the entire fractional undivided ownership interest in the related
Mortgage Loans held by the related Trust Fund or may represent debt secured by
the related Mortgage Loans.
The Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist of Mortgage Loans evidenced by promissory notes or
other evidences of indebtedness (the "Mortgage Notes") that provide for an
original term to maturity of not more than 40 years, for monthly payments and
for interest on the outstanding principal amounts thereof at a rate that is
either fixed or subject to adjustment as described in the related Prospectus
Supplement. If so specified in the applicable Prospectus Supplement, the
adjustable interest rate on certain of the Mortgage Loans will be convertible
into a fixed interest rate at the option of the mortgagor at the times and upon
the conditions specified therein ("Convertible Mortgage Loans"). The Mortgage
Loans may provide for fixed level payments or be GPM Loans, GEM Loans, Balloon
Loans or Buy-Down Loans (each as defined herein) or Mortgage Loans with other
payment characteristics as described in the related Prospectus Supplement. In
addition, the Mortgage Pools may include participation interests in Mortgage
Loans, in which event references herein to payments on Mortgage Loans
underlying, such participations shall mean payments thereon allocable to such
participation interests, and the meaning of other terms relating to Mortgage
Loans will be similarly adjusted. Similarly, the Mortgage Pools may include
Mortgage Loans with respect to which a Fixed Retained Yield has been retained,
in which event references herein to Mortgage Loans and payments thereon shall
mean the Mortgage Loans exclusive of such Fixed Retained Yield. A "Fixed
Retained Yield" in a Mortgage Loan or Contract represents a specified portion of
the interest payable thereon. The Prospectus Supplement for a Series will
specify whether there will be any Fixed Retained Yield in any Mortgage Loan or
Contract and, if so, the owner thereof. See "Servicing of the Mortgage Loans and
Contracts -- Fixed Retained Yield." Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Loans will be secured by promissory notes or
other evidences of indebtedness (the "Mortgages") creating first, second or more
junior liens on conventional one-to four-family residential properties (which
may include mixed-use or vacation properties), all of which will be located in
any of the fifty states or the District of Columbia. The Mortgage Loans may also
consist of installment contracts for the sale of real estate. If so provided in
the applicable Prospectus Supplement, a Mortgage Pool may also contain
cooperative apartment loans (the "Cooperative Loans") evidenced by promissory
notes (the "Cooperative Notes") secured by security interests in shares issued
by private, non-profit, cooperative housing corporations (the "cooperatives")
and in the related proprietary leases or occupancy agreements granting exclusive
rights to occupy specific Cooperative Dwellings in such cooperatives' buildings.
In the case of a Cooperative Loan, the proprietary lease or occupancy agreement
securing such Cooperative Loan is generally subordinate to any blanket mortgage
on the related cooperative apartment 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
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exceed the scheduled monthly payment on the Mortgage Loan. In any such month, no
principal would be payable on the Mortgage Loan, and if the accrued interest
exceeded the scheduled monthly payment, such excess interest due would become
"Deferred Interest" that is added to the principal balance of the Mortgage Loan.
Deferred Interest will bear interest at the Mortgage Rate until paid. If such
limitations prevent the payments from being sufficient to amortize fully the
Mortgage Loan by its stated maturity dare, a lump sum payment equal to the
remaining unpaid principal balance will be due on such stated maturity date. See
"Prepayment and Yield Considerations."
Unless otherwise specified in the applicable Prospectus Supplement, the
Mortgage Loans in each Mortgage Pool will be permanent loans (as opposed to
construction and land development loans) secured by Mortgages on Mortgaged
Properties. The Mortgaged Properties will consist of residential properties
only, including detached homes, townhouses, units in planned unit developments,
condominium units, mixed-use properties, vacation homes and small scale
multifamily properties, all of which constitute a "dwelling or mixed residential
and commercial structure" within the meaning of Section 3(a)(41)(A)(i) of the
Securities Exchange Act of 1934, as amended (the "Mortgaged Properties"). The
Mortgage Loans will be secured by liens on fee simple or leasehold interests (in
those states in which long-term ground leases are used as an alternative to fee
interests) in such Mortgaged Properties, or liens on shares issued by
cooperatives and the related proprietary leases or occupancy agreements occupy
specified units in such cooperatives' buildings. The geographic distribution of
Mortgaged Properties will be set forth in the Prospectus Supplement. Each
Prospectus Supplement will also set forth the percentage of the Cut-Off Date
Aggregate Principal Balance of the Mortgage Loans in the related Mortgage Pool
representing the refinancing of existing mortgage indebtedness and the types of
Mortgaged Properties.
If so specified in the applicable Prospectus Supplement, a Trust Fund may
contain Mortgage Loans subject to temporary buy-down plans (the "Buy-Down
Loans") pursuant to which the monthly payments made by the mortgagor during the
early years of the Mortgage Loan will be less than the scheduled monthly
payments on the Mortgage Loan. The resulting difference in payment will be
compensated for from an amount contributed by the seller of the related
Mortgaged Property or another source and, if so specified in the related
Prospectus Supplement, placed in a custodial account (the "Buy-Down Account") by
the Servicer. If the mortgagor on a Buy-Down Loan prepays such Mortgage Loan in
its entirety, or defaults on such Mortgage Loan and the Mortgaged Property is
sold in liquidation thereof, during the period when the mortgagor is not
obligated, on account of the buy-down plan, to pay the full monthly payment
otherwise due on such loan, the unpaid principal balance of such Buy-Down Loan
will be reduced by the amounts remaining in the Buy-Down Account with respect to
such Buy-Down Loan, and such amounts shall be deposited in the Certificate
Account (as defined herein), net of any amounts paid with respect to such
Buy-Down Loan by any insurer, guarantor or other person pursuant to a credit
enhancement arrangement described in the applicable Prospectus Supplement.
If so specified in the applicable Prospectus Supplement, a Trust Fund may
include Mortgage Loans which are amortized over 30 years or some other term, or
which do not provide for amortization prior to maturity, but which have a
shorter term (each such Mortgage Loan, a "Balloon Loan") that causes the
outstanding principal balance of such Mortgage Loan to be due and payable at the
end of a certain specified period (the "Balloon Period"). If specified in the
applicable Prospectus Supplement, the originator of such Balloon Loan will be
obligated to refinance each such Balloon Loan at the end of its Balloon Period
at a new interest rate determined prior to the end of such Balloon Period by
reference to an index plus a margin specified in the related Mortgage Note. The
mortgagor is not, however, obligated to refinance the Balloon Loan through such
originator. In the event a mortgagor refinances a Balloon Loan, the new loan
will not be included in the Trust Fund. See "Prepayment and Yield
Considerations."
If specified in the Prospectus Supplement for any Series, the Mortgage
Loans included in the Trust Fund for such Series may be what are commonly
referred to as "home equity revolving lines of credit" ("Home Equity Lines").
Home Equity Lines are generally evidenced by a loan 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
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does not exceed the maximum credit limit. A Home Equity Line will be secured by
either a senior or a junior lien Mortgage, and will bear interest at either a
fixed or an adjustable rate.
In certain states the borrower must, on the opening of an account, draw an
initial advance of not less than a specified amount. Home Equity Lines generally
amortize according to an amortization basis established at the time of the
initial advance. The "amortization basis" is the length of time in which the
initial advance plus interest will be repaid in full. The amortization bases of
the Home Equity Lines generally range from 60 months (5 years) to 180 months (15
years) depending on the credit limit assigned. Generally, the amortization basis
will be longer the higher the credit limit. The minimum monthly payment on a
Home Equity Line will generally be equal to the sum of the following: (i) an
amount necessary to completely repay the then-outstanding balance and the
applicable finance charge in equal installments over the assigned amortization
basis ("Basic Monthly Amount"); (ii) any monthly escrow charges; (iii) any
delinquency or other similar charges; and (iv) any past due amounts, including
past due finance charges. The Basic Monthly Amount typically is recomputed each
time the related Mortgage Rate adjusts and whenever an Additional Balance is
advanced; such recomputation in the case of an Additional Advance may also reset
the amortization schedule. The effect of each such advance on the related Home
Equity Line is to reset the commencement date of the original maturity term to
the date of the later advance. For example, a Home Equity Line made originally
with a 15-year maturity from date of origination changes at the time of the next
adjustment or advance to a Home Equity Line with a maturity of 15 years from the
date of such advance. For certain Home Equity Lines, the same type of
recomputation exists for adjustments of the related Mortgage Rate.
Prior to the expiration of a specified period, the reduction of the account
to a zero balance and the closing of a Home Equity Line account may result in a
prepayment penalty. A prepayment penalty also may be assessed against the
borrower if a Home Equity Line account is closed by the Servicer due to a
default by the borrower under the Loan Agreement.
Each Loan Agreement will provide that the Servicer has the right to require
the borrower to pay the entire balance plus all other accrued but unpaid charges
immediately, and to cancel the borrower's credit privileges under the Loan
Agreement if, among other things, the borrower fails to make any minimum payment
when due under the Loan Agreement, if there is a material change in the
borrower's ability to repay the Home Equity Line, or if the borrower sells any
interest in the property securing the Loan Agreement, thereby causing the
"due-on-sale" clause in the trust deed or mortgage to become effective.
Mortgage Loans which are secured by junior mortgages are subordinate to the
rights of the mortgagees under the related senior mortgage or mortgages.
Accordingly, liquidation, insurance and condemnation proceeds received with
respect to the related mortgaged property will be available to satisfy the
outstanding balance of such a Mortgage Loan only to the extent that the claims
of the senior mortgages have been satisfied in full, including any related
liquidation and foreclosure costs. In addition, a junior mortgagee foreclosing
on its mort,age may be required to purchase the related mortgaged property for a
price sufficient to satisfy the claims of the holders of any senior mortgages
which are also being foreclosed. In the alternative, a junior mortgagee which
acquires title to a related mortgaged property, through foreclosure,
deed-in-lieu of foreclosure or otherwise may take the property subject to any
senior mortgages and continue to perform with respect to any senior mortgages,
in which case the junior mortgagee must comply with the terms of any senior
mortgages or risk foreclosure by the senior mortgagee.
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
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origination and (y) the sale price for such property, plus, in either case,
sales and other taxes and, to the extent financed, filing and recording fees
imposed by law, premiums for related insurance and prepaid finance charges.
Manufactured Homes, unlike site-built homes, generally depreciate in value.
Consequently, at any time after origination it is possible, especially in the
case of Contracts with high Loan-to-Value Ratios at origination, that the market
value of a Manufactured Home may be lower than the principal amount outstanding
under the related Contract.
The Prospectus Supplement for each Series will set forth certain
characteristics of the related Contracts, which may include the aggregate
principal balance of the Contracts in the Contract Pool underlying such Series
as of the Cut-Off Date for such Series (the "Cut-Off Date Aggregate Principal
Balance"), the range of original terms to maturity of the Contracts in the
Contract Pool, the weighted average remaining term to stated maturity at the
Cut-Off Date of such Contracts, the earliest and latest origination dates of
such Contracts, the range of Contract Rates and Net Contract Rates borne by such
Contracts, the weighted average Net Contract Rate at the Cut-Off Date of such
Contracts, the percentage of such Contracts which had Loan-to-Value Ratios at
the time of origination of 80% or less, the percentage of such Contracts that
had Loan-to-Value Ratios at origination in excess of 80% and the highest
outstanding principal balance at origination of any such Contract.
Unless otherwise specified in the applicable Prospectus Supplement, all of
the Contracts in a Trust Fund will have monthly payments due on the first of
each month (each, a "Due Date") and will be fully-amortizing Contracts. If so
specified in the applicable Prospectus Supplement, Contracts may have Due Dates
which occur on a date other than the first of each month. If so specified in the
applicable Prospectus Supplement, the Contract Pools may include adjustable rate
Contracts that provide for payment adjustments to be made less frequently than
adjustments in the Contract Rates. Each adjustment in the Contract Rate which is
not made at the time of a corresponding adjustment in payments (and which
adjusted amount of interest is not paid currently on a voluntary basis by the
obligor) will result in a decrease (if the Contract Rate rises) or an increase
(if the Contract Rate declines) in the rate of amortization of the Contract.
Moreover, such payment adjustments on the Contracts may be subject to certain
limitations, as specified in the Prospectus Supplement, which may also affect
the rate of amortization on the Contract. As a result of such provisions, the
amount of interest accrued in any month may equal or exceed the scheduled
monthly payment on the Contract. In any such month, no principal would be
payable on the Contract, and if the accrued interest exceeded the scheduled
monthly payment, such excess interest due would become "Deferred Interest" that
is added to the principal balance of the Contract. Deferred Interest will bear
interest at the Contract Rate until paid. If such limitations prevent the
payments from being sufficient to amortize fully the Contract by its stated
maturity date, a lump sum payment equal to the remaining unpaid principal
balance will be due on such stated maturity date. See "Prepayment and Yield
Considerations."
The geographic distribution of Manufactured Homes will be set forth in the
Prospectus Supplement. Each Prospectus Supplement will set forth the percentage
of the Cut-Off Date Aggregate Principal 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
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Retained Yield has been retained with respect to the Mortgage Loans or Contracts
of such Series, and, if so, the owner thereof. If so, the Fixed Retained Yield
will be established on a loan-by-loan basis with respect to the Mortgage Loans
or Contracts and will be specified in the schedule of Mortgage Loans or
Contracts attached as an exhibit to the applicable Pooling and Servicing
Agreement. The Servicer, with respect to Mortgage Loans or Contracts, may deduct
the Fixed Retained Yield from payments as received and prior to deposit of such
payments in the Certificate Account for such Series or may (unless an election
has been made to treat the Trust Fund (or one or more segregated pools of assets
therein) as a REMIC) withdraw the Fixed Retained Yield from the Certificate
Account after the entire payment has been deposited in the Certificate Account.
Notwithstanding the foregoing, any partial payment or recovery of interest
received by the Servicer relating to a Mortgage Loan or Contract (whether paid
by the mortgagor or obligor or received as Liquidation Proceeds, Insurance
Proceeds or otherwise), after deduction of all applicable servicing fees, will
be allocated between Fixed Retained Yield (if any) and interest at the Net
Mortgage Rate or Net Contract Rate on a pari passu basis.
Insurance Policies
Unless otherwise specified in the applicable Prospectus Supplement, the
Pooling and Servicing Agreement will require the Servicer to cause to be
maintained for each Mortgage Loan or Contract an insurance policy issued by a
generally acceptable insurer insuring the Mortgaged Property underlying such
Mortgage Loan or the Manufactured Home underlying such Contract against loss by
fire, with extended coverage (a "Standard Hazard Insurance Policy"). Unless
otherwise specified in the applicable Prospectus Supplement, the Pooling and
Servicing Agreement will require that such Standard Hazard Insurance Policy be
in an amount at least equal to the lesser of 100% of the insurable value of the
improvements which are a part of such Mortgaged Property or Manufactured Home or
the principal balance of such Mortgage Loan or Contract; provided, however, that
such insurance may not be less than the minimum amount required to fully
compensate for any damage or loss on a replacement cost basis. The Servicer will
also maintain on property acquired upon foreclosure, or deed in lieu of
foreclosure, of any Mortgage Loan, and on any Manufactured Home acquired by
repossession a Standard Hazard Insurance Policy in an amount that is at least
equal to the lesser of 100% of the insurable value of the improvements which are
a part of such property or the insurable value of such Manufactured Home or the
principal balance of the related Mortgage Loan or Contract plus, if required by
the applicable Pooling and Servicing Agreement, accrued interest and liquidation
expenses; provided, however, that such insurance may not be less than the
minimum amount required to fully compensate for any damage or loss on a
replacement cost basis. Any amounts collected under any such policies (other
than amounts to be applied to the restoration or repair of the Mortgaged
Property or Manufactured Home or released to the borrower in accordance with
normal servicing procedures) will be deposited in the Certificate Account.
The Standard Hazard Insurance Policies covering the Mortgaged Properties
generally will cover physical damage to, or destruction of, the improvements on
the Mortgaged Property caused by fire, lightning, explosion, smoke, windstorm,
hail, riot, strike and civil commotion, subject to 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,
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and the Unaffiliated Seller shall thereupon be liable to the Trustee for
defective Mortgage Loan or Contract documents or an uncured breach of such
Unaffiliated Seller's representations or warranties, to the extent described
below under "Assignment of the Mortgage Loans and Contracts" and
"Representations and Warranties."
Assignment of the Mortgage Loans and Contracts
At the time of the issuance of the Certificates of a Series, the Depositor
will cause the Mortgage Loans comprising the Mortgage Pool (including any
related rights to, or security interests in, leases, rents and personal
property) or the Contracts comprising the Contract Pool included in the related
Trust Fund to be assigned to the Trustee, together with all principal and
interest received by or on behalf of the Depositor on or with respect to such
Mortgage Loans or Contracts after the Cut-Off Date, other than principal and
interest due on or before the Cut-Off Date and other than any Fixed Retained
Yield. The Trustee or its accent will, concurrently with such assignment,
authenticate and deliver the Certificates evidencing such Series to the
Depositor in exchange for the Mortgage Loans or Contracts. Each Mortgage Loan or
Contract will be identified in a schedule appearing as an exhibit to the
applicable Pooling and Servicing, Agreement. Each such schedule will include,
among other things, the unpaid principal balance as of the close of business on
the applicable Cut-Off Date, the scheduled monthly payment of principal, if any,
and interest, the maturity date and the Mortgage Rate or Contract Rate for each
Mortgage Loan or Contract in the related Trust Fund.
With respect to each Mortgage Loan in a Trust Fund, the mortgage or other
promissory note, any assumption, modification or conversion to fixed interest
rate agreement, a copy of any recorded UCC-1 financing statements and related
continuation statements, together with original executed UCC-2 or UCC-3
financing statements disclosing an assignment of a security interest in any
personal property constituting security for repayment of the Mortgage Loan to
the Trustee, an executed re-assignment of assignment of leases, rents and
profits to the Trustee if the assignment of leases, rents and profits is
separate from the Mortgage, a mortgage assignment in recordable form and the
recorded Mortgage (or other documents as are required under applicable law to
create a perfected security interest in the Mortgaged Property in favor of the
Trustee) will be delivered to the Trustee (or to a designated custodian);
provided that, in instances where recorded documents cannot be delivered due to
delays in connection with recording, copies thereof, certified by the Depositor
to be true and complete copies of such documents, sent for recording, may be
delivered and the original recorded documents will be delivered promptly upon
receipt. As to each Mortgage Loan for which there is primary mortgage insurance,
the certificate of primary mortgage insurance will be delivered to the Trustee.
The assignment of each Mortgage will be recorded promptly after the initial
issuance of Certificates for the related Trust Fund, except in states where, in
the opinion of counsel acceptable to the Trustee, such recording is not 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
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date of such transfer, no Mortgage Loan is 30 days or more delinquent in payment
and there are no delinquent tax or assessment liens against the related
Mortgaged Property that would permit taxing authority to initiate foreclosure
proceedings, and (vii) with respect to each Mortgage Loan, if the Mortgaged
Property is located in an area identified by the Federal Emergency Management
Agency as having special flood hazards and subject in certain circumstances to
the availability of flood insurance under the federal flood insurance program,
such Mortgaged Property is covered by flood insurance meeting the requirements
of the applicable Pooling and Servicing Agreement.
Each Unaffiliated Seller, pursuant to the related Loan Sale Agreement, will
have made representations and warranties in respect of the Contracts sold by
such Unaffiliated Seller. Unless otherwise specified in the related Prospectus
Supplement, each Unaffiliated Seller of Contracts will have represented, among
other digs, substantially to the effect that (i) immediately prior to the sale
and transfer of such Contracts, the Unaffiliated Seller had good title to, and
was the sole owner of, each such Contract and there had been no other assignment
or pledge thereof, (ii) as of the date of such transfer, such Contracts are
subject to no offsets, defenses or counterclaims, (iii) each Contract at the
time it was made complied in all material respects with applicable state and
federal laws, including usury, equal credit opportunity and disclosure laws,
(iv) as of the date of such transfer, each related Contract is a valid first
lien on the related Manufactured Home and such Manufactured Home is free of
material damage and is in good repair, (v) as of the date of such transfer, no
Contract is 30 days or more delinquent in payment and there are no delinquent
tax or assessment liens against the related Manufactured Home, and (vi) with
respect to each Contract, the Manufactured Home securing the Contract is covered
by a Standard Hazard Insurance Policy in the amount required by the Pooling and
Servicing Agreement and all premiums then due on such insurance have been paid
in full.
All of the representations and warranties of an Unaffiliated Seller in
respect of a Mortgage Loan or Contract will have been made as of the date on
which such Unaffiliated Seller sold the Mortgage Loan or Contract to the
Depositor. A substantial period of time may have elapsed between the date as of
which the representations and warranties were made and the later date of initial
issuance of the related Series of Certificates. Since the representations and
warranties referred to in the preceding paragraphs are the only representations
and warranties that will be made by an Unaffiliated Seller, the Unaffiliated
Seller's repurchase obligation described below will not arise if, during the
period commencing on the date of sale of a Mortgage Loan or Contract by the
Unaffiliated Seller to the Depositor, the relevant event occurs that would have
given rise to such an obligation had the event occurred prior to sale of the
affected Mortgage Loan or Contract. However, the Depositor will not include any
Mortgage Loan or Contract in the Trust Fund for any series of Certificates if
anything has come to the Depositor's attention that would cause it to believe
that the representations and warranties of an Unaffiliated Seller will not be
accurate and complete in all material respects in respect of such Mortgage Loan
or Contract as of the date of initial issuance of the related Series of
Certificates.
The Depositor will, unless otherwise provided in the applicable Prospectus
Supplement, assign all of its rights (except certain rights to indemnification)
with respect to such representations and warranties pursuant to any related Loan
Sale Agreement to the Trustee for the benefit of the Certificateholders of the
related Series. The Servicer, or the Trustee if the Servicer is the Unaffiliated
Seller, will promptly notify the relevant Unaffiliated Seller of any breach of
any representation or warranty made by it in respect of a Mortgage Loan or
Contract which materially and adversely affects the interests of the
Certificateholders in such Mortgage Loan or Contract. Unless otherwise specified
in the related Prospectus Supplement, if such Unaffiliated Seller cannot cure
such breach within 60 days after notice from the Servicer or the Trustee, as the
case may be, then such Unaffiliated Seller will be obligated either (i) to
repurchase such Mortgage Loan or Contract from the Trust Fund at the applicable
Purchase Price or (ii) subject to the Trustee's approval and to the extent
permitted by the Pooling and Servicing Agreement, to substitute for such
Mortgage Loan or Contract (a "Deleted Loan") one or more Mortgage Loans or
Contracts, as the case may be (each, a "Substitute Loan"), but only if (i) with
respect to a Trust Fund (or one or more segregated pools of assets therein) for
which a REMIC election is to be made, such substitution is effected within two
years of the date of initial issuance of the Certificates or (ii) with respect
to a Trust Fund for which no REMIC election is to be made, such substitution is
effected within 120 days of the date of initial issuance of the Certificates.
Except as otherwise provided in the related Prospectus Supplement, any
Substitute Loan will, on the date of substitution, (i) have a Loan-to-Value
Ratio no greater than that of the Deleted Loan, (ii) have a Mortgage Rate or
Contract Rate not less than (and not more than 1% greater than) the Mortgage
Rate or Contract Rate of the Deleted Loan, (iii) have a Net Mortgage Rate or Net
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Contract Rate not less than (and not more than 1% greater than) the Net Mortgage
Rate or Net Contract Rate of the Deleted Loan, (iv) have a remaining term to
maturity not greater than (and not more than one year less than) that of the
Deleted Loan and (v) comply with all of the representations and warranties set
forth in the related Loan Sale Agreement as of the date of substitution. If
substitution is to be made for a Deleted Loan with an adjustable Mortgage Rate
or Contract Rate, the Substitute Loan will also bear interest based on the same
index, margin, frequency and month of adjustment as the Deleted Loan. In the
event that one Substitute Loan is substituted for more than one Deleted Loan, or
more than one Substitute Loan is substituted for one or more Deleted Loans, then
the amount described in clause (i) will be determined on the basis of aggregate
principal balances (provided that in all events the tests for a "qualified
mortgage" as described in the second paragraph under the heading "Certain
Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC
Certificates -- Qualification as a REMIC" are met as to each Substituted Loan),
the rates described in clauses (ii) and (iii) with respect to Deleted Loans will
be determined on the basis of weighted average Mortgage Rates and Net Mortgage
Rates or Contract Rates and Net Contract Rates, as the case may be, and the
terms described in clause (iv) will be determined on the basis of weighted
average remaining terms to maturity. In the case of a Substitute Loan, the
mortgage file relating, thereto will be delivered to the Trustee (or the
custodian) and the Unaffiliated Seller will pay an amount equal to the excess of
(i) the unpaid principal balance of the Deleted Loan, over (ii) the unpaid
principal balance of the Substitute Loan or Loans, together with interest on
such excess at the Mortgage Rate or Contract Rate to the next scheduled Due Date
of the Deleted Loan. Such amount will be deposited in the Certificate Account
for distribution to Certificateholders. Except in those cases in which the
Servicer is the Unaffiliated Seller, the Servicer will be required under the
applicable Pooling and Servicing Agreement to enforce this repurchase or
substitution obligation for the benefit of the Trustee and the holders of the
Certificates, following the practices it would employ in its good faith business
judgment were it the owner of such Mortgage Loan or Contract. This repurchase or
substitution obligation will constitute the sole remedy available to holders of
Certificates or the Trustee for a breach of representation by an Unaffiliated
Seller.
Neither the Depositor nor the Servicer (unless the Servicer is the
Unaffiliated Seller) will be obligated to purchase or substitute for a Mortgage
Loan or Contract if an Unaffiliated Seller defaults on its obligation to do so,
and no assurance can be given that Unaffiliated Sellers will carry out their
respective repurchase obligations with respect to Mortgage Loans or Contracts.
If so specified in the applicable Prospectus Supplement, the Depositor, the
Servicer or another entity specified in the applicable Prospectus Supplement,
will make such representations and warranties as to the types and geographical
concentration of the Mortgage Loans or Contracts 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
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Agreement for each Series of Certificates and the applicable Prospectus
Supplement. Each Pooling and Servicing Agreement executed and delivered with
respect to each Series will be filed with the Commission as an exhibit to a
Current Report on Form 8-K promptly after issuance of the Certificates of such
Series. The Depositor will provide a copy of the Pooling and Servicing Agreement
(without exhibits) relating to any Series without charge upon written request of
a holder of a Certificate of such Series addressed to Prudential Securities
Secured Financing Corporation, One New York Plaza, 15th Floor, New York, New
York 10292, Attention: 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
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of one or more classes of Certificates of the related Series; the additional
Mortgage Loans will be transferred to the related Trust Fund in exchange for
money released to the Depositor from the related Pre-Funding Account. Each
Forward Purchase Agreement will set a specified period (the "Funding Period")
during which any such transfers must occur; for a Trust Fund which elects
federal income treatment as REMIC or as a grantor trust, the related Funding
Period will be limited to three months from the date such Trust Fund is
established; for a Trust Fund which is treated as a mere security device for
federal income tax purposes, the related Funding Period will be limited to nine
months from the date such Trust Fund is established. The Forward Purchase
Agreement or the related Pooling and Servicing Agreement will require that, if
all moneys originally deposited to such Pre-Funding Account are not so used by
the end of the related Funding Period, then any remaining moneys will be applied
as a mandatory prepayment of the related class or classes of Certificates as
specified in the related Prospectus Supplement.
During the Funding Period the moneys deposited to the Pre-Funding Account
will either (i) be held uninvested or (ii) will be invested in cash-equivalent
investments rated in one of the four highest rating categories by at least one
nationally recognized statistical rating organization and which will either
mature prior to the end of the Funding Period, or will be drawable on demand and
in any event, will not constitute the type of investment which would require
registration of the related Trust Funds as an "investment company" under the
Investment Company Act of 1940, as amended.
Distributions to Percentage Certificateholders
Except as otherwise specified in the applicable Prospectus Supplement, on
or about the 15th day of each month in which a Distribution Date occurs (the
"Determination Date"), the Servicer will determine the amount of the payments or
other receipts on account of principal and interest 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
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Loans and Contracts -- Adjustment to Servicing Compensation in Connection
with Prepaid and Liquidated Mortgage Loans and Contracts";
(d) all amounts representing scheduled payments of principal and
interest due after the Due Date occurring in the month in which such
Distribution Date occurs;
(e) all principal prepayments and all proceeds (including Liquidation
Proceeds, Insurance Proceeds and Repurchase Proceeds) of any Mortgage Loans
or Contracts, or property acquired in respect thereof, liquidated,
foreclosed, purchased or repurchased pursuant to the applicable Pooling and
Servicing Agreement, received on or after the Due Date occurring in the
month in which such Distribution Date occurs, and all related payments of
interest on such amounts;
(f) where permitted by the related Pooling and Servicing Agreement,
that portion of Liquidation Proceeds or Insurance Proceeds which represents
Fixed Retained Yield, if any, or any unpaid Servicing Fee to which the
Servicer is entitled;
(g) all amounts representing certain expenses reimbursable to the
Servicer and other amounts pertained to be withdrawn by the Servicer from
the Certificate Account, in each case pursuant to the applicable Pooling
and Servicing Agreement;
(h) all amounts in the nature of late fees, assumption fees,
prepayment fees and similar fees which the Servicer is entitled to retain
pursuant to the applicable Pooling and Servicing Agreement; and
(i) where permitted by the applicable Pooling and Servicing Agreement,
reinvestment earnings on payments received in respect of the Mortgage Loans
or Contracts.
Certificates other than Shifting Interest Certificates
With respect to a Series of Certificates which is comprised of one Class of
Standard Certificates which are Senior Certificates and one Class of Standard
Certificates which are Subordinated Certificates, the Servicer shall determine
the aggregate amount which would have been distributable to such Class of Senior
Certificates (the "Senior Class Distributable Amount") and the aggregate amount
which would have been distributable to such Class of Subordinated Certificates
(the "Subordinated Class Distributable Amount") assuming, among other things, no
delinquencies or losses on the Mortgage Loans or Contracts preceding such
Distribution Date and, based on the Pool Distribution Amount and such
Distributable Amounts, will determine the amount actually to be distributed to
each Class and Subclass.
Calculation of Distributable Amounts. If a Series of Certificates includes
one Class of Standard Certificates which are Senior Certificates and one Class
of Standard Certificates which are Subordinated Certificates, unless otherwise
specified in the applicable Prospectus Supplement, the Senior Class
Distributable Amount with respect to such Senior Certificates on a Distribution
Date will be an amount equal to the sum of:
(i) the aggregate undivided interest, expressed as a percentage and
specified in the applicable Prospectus Supplement, evidenced by such Class
of Senior Certificates (the "Senior Class Principal Portion") of:
(a) all scheduled payments of principal on each outstanding
Mortgage Loan or Contract that became due on the Due Date immediately
preceding such Distribution Date in accordance with the amortization
schedules of the related Mortgage Loans or Contracts (as adjusted to
give effect to any previous prepayments), whether or not such payments
were actually received by the Servicer (the aggregate of such
scheduled payments due on any such Due Date being referred to herein
as "Scheduled Principal");
(b) all principal prepayments received by the Servicer in the
month preceding the month in which such Distribution Date occurs;
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(c) the Scheduled Principal Balance (as defined herein) of each
Mortgage Loan or Contract which was purchased from the Trust Fund as
provided in the Pooling and Servicing Agreement (as described in "The
Trust Funds" and "The Pooling and Servicing Agreement"), and of each
Mortgage Loan or Contract as to which the Servicer has determined that
all recoveries of Liquidation Proceeds and Insurance Proceeds have
been received (a "Liquidated Mortgage Loan" or "Liquidated Contract"),
in each case during the month preceding the month in which such
Distribution Date occurs, calculated as of the date each such Mortgage
Loan or Contract was purchased or calculated as of the date each such
Mortgage Loan or Contract became a Liquidated Mortgage Loan or
Liquidated Contract, as the case may be; and
(d) with respect to (1) the disposition of the Mortgaged Property
or Manufactured Home in connection with any Liquidated Mortgage Loan
or Contract, the amount by which Net Liquidation Proceeds and Net
Insurance Proceeds exceed the unpaid principal balance of such
Mortgage Loan or Contract and accrued but unpaid interest on such
Mortgage Loan or Contract at the Mortgage Rate or Contract Rate to the
Due Date next succeeding the last date of receipt of the Liquidation
Proceeds and Insurance Proceeds, and (2) the repurchase of Mortgage
Loans or Contracts in connection with an early termination of the
Trust Fund (see "The Pooling and Servicing Agreement -- Termination;
Purchase of Mortgage Loans and Contracts"), the amount by which the
repurchase price exceeds the aggregate unpaid principal balances of
the Mortgage Loans or Contracts in the related Trust Fund and accrued
but unpaid interest at the weighted average Mortgage Rate or Contract
Rate through the end of the month in which such repurchase occurs
(collectively, "Gain From Acquired Property"); and
(ii) interest at the Pass-Through Rate for the Class of Senior
Certificates from the second preceding Due Date (or the Cut-Off Date in the
case of the first Distribution Date) to the Due Date immediately preceding
such Distribution Date on the Senior Class Principal Portion of the
aggregate Scheduled Principal Balance of the Mortgage Loans or Contracts as
of the second preceding Due Date (or as of the Cut-Off Date in the case of
the first Distribution Date) whether or not such interest was actually
received by the Servicer; provided that Prepayment Interest Shortfall is
included only to the extent that funds for such purposes are available out
of Servicing Compensation; less
(iii) the Senior Class Principal Portion of any indemnification
payments made to the Servicer, the Depositor, or any officer, director,
employee or agent of either the Servicer or the Depositor since the
preceding Distribution Date as described under "Servicing of the Mortgage
Loans and Contracts -- Certain Matters Regarding the Servicer and the
Depositor" below (the "Indemnification Payments").
Unless otherwise specified in the applicable Prospectus Supplement, the
Subordinated Class Distributable Amount with respect to a Distribution Date for
Percentage Certificates which are Subordinated Certificates will be an amount
equal to the sum of:
(i) the aggregate undivided interest, expressed as a percentage and
specified in the applicable Prospectus Supplement, evidenced by such
Subordinated Certificates (the "Subordinated Class Principal Portion") of:
(a) all Scheduled Principal;
(b) all principal prepayments received by the Servicer during the
month preceding the month in which such Distribution Date occurs;
(c) the Scheduled Principal Balance of each Mortgage Loan or
Contract which was purchased from the Trust Fund as provided in the
Pooling and Servicing Agreement (as described in "The Trust Funds" and
"The Pooling and Servicing Agreement"), and of each Mortgage Loan or
Contract which became a Liquidated Mortgage Loan or Liquidated
Contract, in each case during the month preceding the month in which
such Distribution Date occurs, determined as of the date each such
Mortgage Loan or Contract was purchased, or as of the date each such
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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
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Certificates, until such amount (including interest thereon at the Pass-Through
Rate for the Senior Certificates) is paid in full. See "Credit Support --
Subordination."
So long as the Subordinated Amount is greater than zero, the holders of
Subordinated Certificates will be entitled to receive on any Distribution Date
an amount equal to the excess of (a) the sum of (i) the Pool Distribution Amount
and (ii) all amounts released from the Subordination Reserve Fund for
distribution to the holders of Subordinated Certificates on such Distribution
Date over (b) the sum of (i) the Basic Senior Class Distribution, (ii) any
amounts required to be distributed to the holders of Senior Certificates
pursuant to the subordination of the rights of the holders of Subordinated
Certificates and (iii) amounts required to be deposited in the Subordination
Reserve Fund. See "Credit Support." At the time the Subordinated Amount, if any,
is reduced to zero, Subordinated Certificateholders will be entitled to the
Subordinated Class Pro Rata Share on each Distribution Date; provided, however,
that such amount to be distributed to the holders of Subordinated Certificates
shall be decreased to give effect to the preferential right of the holders of
Senior Certificates to receive Senior Class Shortfall Accruals as provided
herein.
The foregoing is subject to the proviso that if a REMIC election has been
made with respect to a Trust Fund (or a segregated pool of assets therein), the
Subordinated Certificateholders of the related Series will be entitled to the
sum of (a) the Subordinated Class Pro Rata Share, (b) all amounts in the
Subordination Reserve Fund (net of any amount required to be maintained as
liquidity for Advances) and (c) such other amounts, if any, as may be specified
in the related Prospectus Supplement (including, if such Certificates are
Residual Certificates, any Gain From Acquired Property).
Shifting Interest Certificates
On each Distribution Date for a Series which is comprised of two Classes of
Standard Certificates which are Shifting Interest Certificates, the holders of
record on the Record Date of the Senior Certificates thereof will be entitled to
receive, to the extent of the Pool Distribution Amount with respect to such
Distribution Date and prior to any distribution being made on the related
Subordinated Certificates, an amount equal to the Senior Class Distribution
Amount. The Senior Class Distribution Amount will (except as otherwise set forth
in the applicable Prospectus Supplement) be calculated for any Distribution Date
as the lesser of (x) the Pool Distribution Amount for such Distribution Date and
(y) the sum of:
(i) one month's interest at the applicable Pass-Through Rate on such
Class's outstanding principal balance (less, if specified in the applicable
Prospectus Supplement, (a) the amount of such interest constituting
Deferred Interest, if any, not then payable on the Mortgage Loans or
Contracts and (b) the amount by which the Prepayment Interest Shortfall
with respect to the preceding month exceeds the aggregate Servicing Fees
relating to mortgagor or obligor payments or other recoveries distributed
on such Distribution Date, in each case allocated to such Class on the
basis set forth in the related Prospectus Supplement);
(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,
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during the month preceding the month in which such Distribution Date
occurs, (i) was the subject of a principal prepayment in full, (ii) became
a Liquidated Mortgage Loan or Liquidated Contract or (iii) was purchased
from the Trust Fund as provided in the Pooling and Servicing Agreement (as
described in "The Trust Funds" and "The Pooling and Servicing Agreement");
and
(iv) if the Special Hazard Termination Date (as defined below) has
occurred as a result of cumulative net losses on Special Hazard Mortgage
Loans or Special Hazard Contracts exceeding the applicable Special Hazard
Loss Amount (as defined below), such Class's specified percentage of the
Net Liquidation Proceeds and Net Insurance Proceeds from any Mortgage Loan
or Contract that became a Special Hazard Mortgage Loan or Special Hazard
Contract during the month preceding the month in which such Distribution
Date occurs, less the total amount of delinquent installments of principal
in respect of such Special Hazard Mortgage Loan or Special Hazard Contract
that were previously the subject of distributions to the holders of such
Class of Certificates out of amounts otherwise distributable to the holders
of the related Subordinated Certificates and less the portion of such Net
Liquidation Proceeds and Net Insurance Proceeds allocable to interest on
the Senior Certificates;
provided that, if such Distribution Date falls on or after the Cross-Over Date
(i.e., the date on which the amount of principal payments on the Mortgage Loans
or Contracts to which the holders of the related Subordinated Certificates are
entitled has been reduced to zero as a result of the allocation of losses to the
Subordinated Certificates), then the Senior Class Distribution Amount will
instead equal the lesser of (x) the Pool Distribution Amount and (y) the sum of
the items referred to above plus the amount by which such Senior Certificates'
outstanding principal balance as of such Distribution Date exceeds the Pool
Scheduled Principal Balance as of such Distribution Date. The "Scheduled
Principal Balance" of a Mortgage Loan or Contract for any Distribution Date is
the unpaid principal balance of such Mortgage Loan or Contract as specified in
the amortization schedule at the time relating thereto (before any adjustment to
such schedule by reason of bankruptcy, moratorium or similar waiver or grace
period) as of the first day of the month preceding the month in which such
Distribution Date occurs after giving effect to the payment of principal due on
such first day of the month, any partial prepayments applied on or prior to such
first day of the month, the addition to the principal of such Mortgage Loan or
Contract on or prior to such first day of the month of any Deferred Interest,
and irrespective of any delinquency in payment by the mortgagor or obligor. The
"Pool Scheduled Principal Balance" as of any Distribution Date is the aggregate
of the Scheduled Principal Balances of all Mortgage Loans or Contracts in a
Trust Fund for such Distribution Date.
If so provided in the applicable Prospectus Supplement, the Class of Senior
Certificates will also be entitled to receive its specified percentage, referred
to in clauses (y)(iii)(b) and (y)(iii)(c)(i) above, of all partial principal
prepayments and all principal prepayments in full on the Mortgage Loans or
Contracts in the related Trust Fund under the circumstances or for the period of
time specified therein, which will have the effect of accelerating the
amortization of the Class of Senior Certificates while increasing the 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
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interest to the holders of Senior Certificates entitled to payments of interest,
the difference between the amount of current interest which the holders of such
Certificates would have received on such Distribution Date if there had been
sufficient funds available and the amount actually distributed will be added to
the amount of interest which the holders of such Certificates are entitled to
receive on the next Distribution Date. Unless otherwise specified in the related
Prospectus Supplement, the amount of any such interest shortfall so carried
forward will bear interest (to the extent permitted by applicable law) at the
Pass-Through Rate applicable to such Certificates or at such other rate as
specified in the applicable Prospectus Supplement.
If the Pool Distribution Amount is insufficient on any Distribution Date to
make the full distribution of principal due to the holders of Senior
Certificates, the percentage of principal payments to which the holders of the
Senior Certificates would be entitled on the immediately succeeding Distribution
Date will be increased, as more fully described below under "Credit Support --
Subordination -- Shifting Interest Certificates." This increase will have the
effect of reducing, as a relative matter, the respective interest of the holders
of the related Subordinated Certificates in future payments of principal on the
related Mortgage Loans or Contracts. If the Pool Distribution Amount is not
sufficient to make full distribution described above to the holders of the Class
of Senior Certificates on any Distribution Date, unless otherwise provided in
the applicable Prospectus Supplement, the holders of such Class will share in
the funds actually available in proportion to the respective amounts that such
Class would have received had the Pool Distribution Amount been sufficient to
make the full distribution of interest and principal due to such Class.
Unless otherwise provided in the related Prospectus Supplement, on each
Distribution Date the holders of the related Class of Subordinated Certificates
of a Series will be entitled to receive, out of the Pool Distribution Amount,
all amounts remaining and available for distribution to them after deduction of
the amounts required to be distributed to the holders of all Senior Certificates
of such Series.
Example of Distribution to Standard Certificateholders
The following chart sets forth an example of the application of the
foregoing provisions to the first two months of the related Trust Fund's
existence, assuming the Certificates are issued in the month of January, with a
Distribution Date on the 25th of each month and a Determination Date on the 15th
of each month:
January 1(A)............................ Cut-Off Date.
January 2 -- January 31(B).............. The Servicer receives any
principal prepayments, Net Liquidation
Proceeds, Net Insurance Proceeds and
Repurchase Proceeds.
January 31(C)........................... Record Date.
February 1 -- February 15(D)............ The Servicer receives
scheduled payments of principal and
interest due on February 1.
February 15(E).......................... Determination Date.
February 25(F).......................... Distribution Date.
Succeeding monthly periods follow the pattern of (B) through (F), except that
the period in (B) begins on the first of the month.
(A) The initial unpaid principal balance of the Mortgage Loans or Contracts in
a Trust Fund would be the aggregate unpaid principal balance of the
Mortgage Loans or Contracts at the close of business on January 1, after
deducting principal payments due on or before such date. Those principal
payments due on or before January 1 and the related interest payments would
not be part of the Trust Fund and would be remitted by the Servicer to the
Depositor when received.
(B) Principal prepayments, Net Liquidation Proceeds, Net Insurance Proceeds and
Repurchase Proceeds received during this period would be credited to the
Certificate Account for distribution to Certificateholders on the February
25 Distribution Date. To the extent funds are available from the aggregate
Servicing Fees relating to mortgagor payments or other recoveries
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distributed on the related Distribution Date, the Servicer would make an
additional payment to Certificateholders with respect to any Prepayment
Interest Shortfall realized during this period.
(C) Distributions in the month of February will be made to Certificateholders
of record at the close of business on this date.
(D) Scheduled monthly payments on the Mortgage Loans or Contracts due on
February 1 will be deposited in the Certificate Account as received by the
Servicer. Principal prepayments, Net Liquidation Proceeds, Net Insurance
Proceeds and Repurchase Proceeds received during this period, will be
deposited in the Certificate Account but will not be distributed to
Certificateholders on the February 25 Distribution Date. Instead, such
amounts will be credited to the Certificate Account for distribution to
Certificateholders on the March 25 Distribution Date.
(E) As of the close of business on February 15, a determination will be made of
the amounts of Advances and the amounts of principal and interest which
will be distributed to the Certificateholders. Those scheduled payments due
on or before February 1 which have been received on or before February 15
and those principal prepayments, Net Liquidation Proceeds, Net Insurance
Proceeds and Repurchase Proceeds received during the period commencing
January 2 and ending on January 31 will be distributed to
Certificateholders on the February 25 Distribution Date. In addition, the
amounts payable in respect of any form of credit enhancement will be
calculated in accordance with the related Pooling and Servicing Agreement.
(F) Unless otherwise so specified in the related Prospectus Supplement, the
Servicer or the Paying Agent, will make distributions to Certificateholders
on the 25th day of each month, or if such 25th day is not a business day,
on the next business day.
Distributions to Multi-Class Certificateholders
Valuation of Mortgage Loans and Contracts
If specified in the Prospectus Supplement relating to a Series of
Certificates having one or more Classes or Subclasses of Multi-Class
Certificates, for purposes of establishing the principal amount of Mortgage
Loans or Contracts that will be included in a Trust Fund for such Series, each
Mortgage Loan or Contract to be included in such Trust Fund will be assigned an
initial "Pool Value." Unless otherwise specified in the applicable Prospectus
Supplement, the Pool Value of each Mortgage Loan or Contract in the Trust Fund
for such Series will be the Stated Amount of Certificates of such Series which,
based upon certain assumptions and regardless of any prepayments on such
Mortgage Loans or Contracts, can be supported by the scheduled payments of
principal and interest on such Mortgage Loans or Contracts (net of the Fixed
Retained Yield on such Mortgage Loans or Contracts, if any, and the applicable
Servicing Fee), together with reinvestment earnings thereon, if any, at the
Assumed Reinvestment Rate for the period specified in the related Prospectus
Supplement and amounts available to be withdrawn (if applicable) from any
reserve fund for such Series, all as specified in the applicable Prospectus
Supplement. In calculating the Pool Value of a Mortgage Loan or Contract
included in the Trust Fund, future distributions on such Mortgage Loan or
Contract will be determined based on scheduled payments on such Mortgage Loan or
Contract. Any similar Mortgage Loans or Contracts may be aggregated into one or
more groups (each, a "Pool Value Group") each of which will be assigned an
aggregate Pool Value calculated as if all such Mortgage Loans or Contracts in
the Pool Value Group constituted a single loan having the highest interest rate
and the longest maturity of any such loan for such Pool Value Group. There are a
number of alternative means of determining the Pool Value of a Mortgage Loan,
Contract or Pool Value Group, including determinations based on the discounted
present value of the remaining scheduled payments of principal and interest
thereon and determinations based on the relationship between the Mortgage Rates
or Contract Rates borne thereby and the Interest Rates of the MultiClass
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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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 MultiClass 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 MultiClass
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 MultiClass 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
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determines, based on assumptions specified in the applicable Pooling and
Servicing Agreement, that the amount of cash anticipated to be available on the
next Distribution Date for such Series to be distributed to the holders of such
Multi-Class Certificates may be less than the sum of (i) the interest scheduled
to be distributed to such holders and (ii) the amount to be distributed in
reduction of Stated Amount of such Multi-Class Certificates on such Distribution
Date. Any such Special Distributions will be made in the same priority and
manner as distributions in reduction of Stated Amount would be made on the next
Distribution Date.
To the extent specified in the related Prospectus Supplement, one or more
Classes of Certificates of a Series may be subject to special distributions in
reduction of the Stated Amount thereof at the option of the holders of such
Certificates, or to mandatory distributions by the Servicer. Any such
distributions with respect to a Series will be described in the applicable
Prospectus Supplement and will be on such terms and conditions as described
therein and specified in the Pooling and Servicing Agreement for such Series.
Last Scheduled Distribution Date
The "Last Scheduled Distribution Date" for each Class of Multi-Class
Certificates of a Series having a Stated Amount, to the extent Last Scheduled
Distribution Dates are specified in the applicable Prospectus Supplement, is the
latest date on which (based upon the assumptions set forth in the applicable
Prospectus Supplement) the Stated Amount of such Class is expected to be reduced
to zero. Since the rate of distributions in reduction of Stated Amount of each
such Class of Multi-Class Certificates will depend upon, among other things, the
rate of payment (including prepayments) of the principal of the Mortgage Loans
or Contracts, the actual last Distribution Date for any such Class may occur
significantly earlier than its Last Scheduled Distribution Date. To the extent
of any delays in receipt of any payments, insurance proceeds or liquidation
proceeds with respect to the Mortgage Loans or Contracts included in any Trust
Fund, the last Distribution Date for any such Class may occur later than its
Last Scheduled Distribution Date. The rate of payments on the Mortgage Loans or
Contracts in the Trust Fund for any Series of Certificates will depend upon
their particular characteristics, as well as on the prevailing level of Interest
Rates from time to time and other economic factors, and no assurance can be
given as to the actual prepayment experience of the Mortgage Loans or Contracts.
See "Prepayment and Yield Considerations."
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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
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REMIC, no more than 30% of the income or gain of the Subordination Reserve Fund
in any taxable year may be derived from the sale or other disposition of
investments held for less than three months in the Subordination Reserve Fund.
The earnings on such investments will be withdrawn and paid to the Subordinated
Certificateholders of such Series or to the holders of the Residual
Certificates, in the event that an election has been made to treat the Trust
Fund (or a pool of segregated assets therein) with respect to such Series as a
REMIC, in accordance with their respective interests. Investment income earned
on amounts held in the Subordination Reserve Fund will not be available for
distribution to the Senior Certificateholders or otherwise subject to any claims
or rights of the Senior Certificateholders.
Eligible Investments for monies deposited in the Subordination Reserve Fund
will be specified in the applicable Pooling and Servicing Agreement and, unless
otherwise provided in the applicable Prospectus Supplement, will mature no later
than the next Distribution Date.
Holders of Subordinated Certificates of a Series will not be required to
refund any amounts which have been properly distributed to them, regardless of
whether there are sufficient funds to distribute to Senior Certificateholders
the amounts to which they are entitled.
If specified in the related Prospectus Supplement, the Subordination
Reserve Fund may be funded in any other manner acceptable to each Rating Agency
and consistent with an election, if any, to treat the Trust Fund (or one or more
pools of segregated assets therein) for such Series as a REMIC, as will be more
fully described in such Prospectus Supplement.
Shifting Interest Certificates
If specified in the applicable Prospectus Supplement, the rights of the
holders of the Subordinated Certificates of a Series of Shifting Interest
Certificates to receive distributions with respect to the Mortgage Loans or
Contracts in the related Trust Fund will be subordinated to such rights of the
holders of the Senior Certificates of such Series to the extent described below,
except as otherwise set forth in such Prospectus Supplement. This subordination
is intended to enhance the likelihood of regular receipt by holders of Senior
Certificates of the full amount of scheduled monthly payments of principal and
interest due them and to provide limited protection to the holders of the Senior
Certificates against losses due to mortgagor or obligor defaults.
The protection afforded to the holders of Senior Certificates of such a
Series by the subordination feature described above will be effected by the
preferential right of such holders to receive, prior to any distribution being
made in respect of the related Subordinated Certificates, current distributions
on the related Mortgage Loans or Contracts of principal and interest due them on
each Distribution Date out of the funds available for distribution on such date
in the related Certificate Account and, to the extent 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
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amount of delinquent installments in respect of such Special Hazard Mortgage
Loans or Special Hazard Contracts that were previously the subject of
distributions to such Class paid out of amounts otherwise distributable to the
holders of the related Subordinated Certificates.
Although the subordination feature described above is intended to enhance
the likelihood of timely payment of principal and interest to the holders of
Senior Certificates, shortfalls could result in certain circumstances. For
example, a shortfall in the payment of principal otherwise due the holders of
Senior Certificates could occur if losses realized on the Mortgage Loans or
Contracts in a Trust Fund were exceptionally high and were concentrated in a
particular month. See "Description of the Certificates--Distributions to
Standard Certificateholders--Shifting Interest Certificates" for a description
of the consequences of any shortfall of principal or interest.
The holders of Subordinated Certificates will not be required to refund any
amounts previously properly distributed to them, regardless of whether there are
sufficient funds on a subsequent Distribution Date to make a full distribution
to holders of each Class of Senior Certificates of the same Series.
Other Credit Enhancement
In addition to subordination as discussed above, credit enhancement may be
provided with respect to any Series of Certificates in any other manner which
may be described in the applicable Prospectus Supplement, including, but not
limited to, credit enhancement through an alterative form of subordination
and/or one or more of the methods described below.
Limited Guarantee
If so specified in the Prospectus Supplement with respect to a Series of
Certificates, credit enhancement may be provided in the form of a limited
guarantee issued by a guarantor named therein.
Letter of Credit
Alternative credit support with respect to a Series of Certificates may be
provided by the issuance of a letter of credit by the bank or financial
institution specified in the applicable Prospectus Supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of credit
issued with respect to a Series of Certificates will be set forth in the
Prospectus Supplement relating to such Series.
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
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Rate or Contract Rate at the time of such calculation and the then unpaid
principal balance on such Mortgage Loan or Contract. The Net Mortgage Rate or
Net Contract Rate with respect to each Mortgage Loan or Contract will be
similarly calculated on a loan-by-loan basis, by subtracting from the applicable
Mortgage Rate or Contract Rate, the Fixed Retained Yield, if any, payable to the
Depositor or other person or entity specified in the Prospectus Supplement and
any Servicing Fee applicable to each Mortgage Loan or Contract. If the Trust
Fund includes adjustable-rate Mortgage Loans or Contracts or includes Mortgage
Loans or Contracts with different Net Mortgage Rates or Net Contract Rates, the
weighted average Net Mortgage Rate or Net Contract Rate may vary from time to
time as set forth below. See "The Trust Funds." The Prospectus Supplement for a
Series will also specify the initial Pass-Through Rate or Interest Rate for each
Class of Certificates of such Series having a Pass-Through Rate or Interest Rate
and will specify whether each such Pass-Through Rate or Interest Rate is fixed
or is variable.
The Net Mortgage Rate or Net Contract Rate for any adjustable rate Mortgage
Loan or Contract will change with any changes in the index specified in the
related Prospectus Supplement on which such Mortgage Rate or Contract Rate
adjustments are based, subject to any applicable periodic or aggregate caps or
floors on the related Mortgage Rate or Contract Rate or other limitations
described in the related Prospectus Supplement. The weighted average Net
Mortgage Rate or Net Contract Rate with respect to any Series may vary due to
changes in the Net Mortgage Rates or Net Contract Rates of adjustable rate
Mortgage Loans or Contracts, to the timing of the Mortgage Rate or Contract Rate
readjustments of such Mortgage Loans or Contracts and to different rates of
payment of principal of fixed or adjustable rate Mortgage Loans or Contracts
bearing different Mortgage Rates or Contract Rates.
If the Trust Fund for a Series includes adjustable rate Mortgage Loans or
Contracts, any limitations on the periodic changes in a mortgagor's or obligor's
monthly payment, any limitations on the adjustments to the Net Mortgage Rates or
Mortgage Rates or to the Net Contract Rates or Contract Rates, any provision
that could result in Deferred Interest and the effects, if any, thereof on the
yield on Certificates of the related Series will be discussed in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, no
distribution of principal and only a partial distribution of interest will be
made to Certificateholders with respect to a negatively amortizing Mortgage Loan
or Contract. Distribution of the portion of scheduled interest at the applicable
Net Mortgage Rate or Net Contract Rate representing Deferred Interest with
respect to such Mortgage Loan or Contract will be passed through to the
Certificateholders on the Distribution Date following the Due Date on which it
is received. Such Deferred Interest will bear interest at the Net Mortgage Rate
or Net Contract Rate for such Mortgage Loan or Contract. For federal income tax
purposes, Deferred Interest may constitute interest income to the Trust Fund and
to Certificateholders at the time that it accrues, rather than at the time that
it is paid. See "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for Certificates as to Which No REMIC Election Is Made--Deferred
Interest," "--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates--Deferred Interest" and "--Taxation of Residual
Certificates--Deferred Interest."
Scheduled Delays in Distributions
At the date of initial issuance of the Certificates of each Series offered
hereby, the initial purchasers of a Class of Certificates (other than certain
Classes of Residual Certificates) will be required to pay accrued interest at
the applicable Pass-Through Rate or Interest Rate for such Class from the
Cut-Off Date for such Series to, but not including the date of issuance. With
respect to Standard Certificates, the effective yield to Certificateholders will
be below the yield otherwise produced by the applicable Pass-Through Rate
because while interest will accrue at such Pass-Through Rate from the first day
of each month through the last day of such month (unless otherwise specified in
the related Prospectus Supplement), principal and interest distributions with
respect to such month will not be made until the 25th day (or if such 25th day
is not a business day, the business day immediately following such 25th day) of
the month following the month of accrual (or until such other Distribution Date
specified in the applicable Prospectus Supplement). If so specified in the
related Prospectus Supplement, a Class of Multi-Class Certificates may be
entitled to distributions on each Distribution Date of interest accrued during a
period (an "Interest Accrual Period" specified in such Prospectus Supplement
ending on such Distribution Date or ending on a date preceding such Distribution
Date. In the latter case the effective yield to such Certificateholders will be
below the yield otherwise produced by the applicable initial public offering
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prices and Interest Rates because (i) on the first Distribution Date the time
period upon which interest payable is calculated will be less than the time
elapsed since the commencement of accrual of interest, (ii) the interest that
accrues during the Interest Accrual Period will not be paid until a date
following such Interest Accrual Period specified in the related Prospectus
Supplement, and (iii) during each Interest Accrual Period following the first
Interest Accrual Period, in the case of a Class of Multi-Class Certificates
currently receiving distributions in reduction of Stated Amount, interest is
based upon a Stated Amount which is less than the Stated Amount of such
Certificates actually outstanding, since the distribution in reduction of Stated
Amount made on the following Distribution Date is deemed to have been made, for
interest accrual purposes only, at the end of the preceding Interest Accrual
Period. The Prospectus Supplement for each Series of Certificates will set forth
the nature of any scheduled delays in distribution and the impact on the yield
of such Certificates.
Interest Shortfalls Due to Principal Prepayments
When a Mortgage Loan or Contract is prepaid in full, the mortgagor or
obligor pays interest on the amount prepaid only to the date of prepayment and
not thereafter. Similarly, Liquidation Proceeds and Insurance Proceeds are also
likely to include interest only to the time of payment. When a Mortgage Loan or
Contract is prepaid in part, and such prepayment is applied as of a date other
than the Due Date occurring in the month of receipt or the Due Date occurring in
the month following the month of receipt, the mortgagor or obligor pays interest
on the amount prepaid only to the date of prepayment and not thereafter. The
effect of the foregoing is to reduce the aggregate amount of interest which
would otherwise be passed through to Certificateholders if such Mortgage Loan or
Contract were outstanding, or if such partial prepayment were applied, on the
succeeding Due Date. To mitigate this reduction in yield, the Pooling and
Servicing Agreement relating to a Series will provide, unless otherwise
specified in the applicable Prospectus Supplement, that with respect to any
principal prepayment or liquidation of any Mortgage Loan or Contract underlying
the Certificates of such Series, the Servicer will pay into the Certificate
Account for such Series to the extent funds are available for such purpose from
the related aggregate Servicing Fees (or portion thereof as specified in the
related Prospectus Supplement) which the Servicer is entitled to receive
relating to mortgagor or obligor payments or other recoveries distributed on the
related Distribution Date, such amount, if any, as may be necessary to assure
that the amount paid into the Certificate Account with respect to such Mortgage
Loan or Contract includes an amount equal to interest at the Net Mortgage Rate
or Net Contract Rate for such Mortgage Loan or Contract for the period from the
date of such prepayment or liquidation to but not including the next Due Date.
See "Servicing of the Mortgage Loans and Contracts -- Adjustment to Servicing
Compensation in Connection with Prepaid and Liquidated Mortgage Loans and
Contracts."
Weighted Average Life of Certificates
Weighted average life of a Certificate refers to the average amount of time
that will elapse from the date of issuance of the Certificate until each dollar
in reduction of the principal amount or Stated Amount of such Certificate is
distributed to the investor. The weighted average life and the yield to maturity
of any Class of the Certificates of a Series will be influenced by, among other
things, the rate at which principal on the Mortgage Loans or Contracts included
in the Mortgage Pool or Contract Pool for such Certificate is paid, which is
determined by scheduled amortization and prepayments (for this purpose, the term
"prepayments" includes prepayments and liquidations due to default, casualty,
condemnation and the like).
The Mortgage Loans or Contracts may be prepaid in full or in part at any
time. Unless otherwise specified in the applicable Prospectus Supplement or as
described in the following paragraph, no Mortgage Loan or Contract will provide
for a prepayment penalty and all fixed rate Mortgage Loans or Contracts will
contain due-on-sale clauses permitting the holder to accelerate the maturity of
the Mortgage Loan or Contract upon conveyance of the Mortgaged Property or
Manufactured Home.
Some of the Mortgage Loans may call for Balloon Payments. Balloon Payments
involve a greater degree of risk than fully amortizing loans because the ability
of the borrower to make a Balloon Payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property. The
ability of a borrower to accomplish either of these goals will be affected by a
number of factors, including the level of available mortgage rates at the time
of the attempted sale or refinancing, the borrower's equity in the related
Mortgaged Property, the financial condition of the borrower and operating
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history of the related Mortgaged Property, tax laws, prevailing economic
conditions and the availability of credit for commercial real estate projects
generally.
Some of the Mortgage Loans included in the Trust Fund may, in the event one
or more are required to be repurchased or otherwise removed from the Trust Fund,
require the payment of a release premium.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The Prospectus Supplement for each Series which
includes more than one Class or Subclass of Multi-Class Certificates will
describe one or more such prepayment standards or models and will contain tables
setting forth the weighted average life of each such Class or Subclass and the
percentage of the original aggregate Stated Amount of each such Class or
Subclass that would be outstanding on specified Distribution Dates for such
Series based on the assumptions stated in such Prospectus Supplement, including
assumptions that prepayments on the Mortgage Loans or Contracts are made at
rates corresponding to various percentages of the prepayment standard or model
specified in the related Prospectus Supplement.
There is, however, no assurance that prepayment of the Mortgage Loans or
Contracts underlying a Series of Certificates will conform to any level of the
prepayment standard or model specified in the related Prospectus Supplement. A
number of economic, geographic, social and other factors may affect prepayment
experience. These factors may include homeowner mobility, economic conditions,
changes in mortgagor's or obligor's housing needs, job transfers, unemployment,
mortgagor's or obligor's net equity in the properties securing the mortgages or
contracts, servicing decisions, enforceability of due-on-sale clauses , market
interest rates, the magnitude of related taxes, and the availability of funds
for refinancing. In general, however, if prevailing interest rates fall
significantly below the Mortgage Rates or Contract Rates on the Mortgage Loans
or Contracts underlying a Series of Certificates, the prepayment rates of such
Mortgage Loans or Contracts are likely to be higher than if prevailing rates
remain at or above the rates borne by such Mortgage Loans or Contracts. It
should be noted that Certificates of a Series may evidence an interest in a
Trust Fund with different Mortgage Rates or Contract Rates. Accordingly, the
prepayment experience of such Certificates will to some extent be a function of
the mix of Mortgage Rates or Contract Rates of the Mortgage Loans or Contracts.
In addition, the terms of the Pooling and Servicing Agreement will require the
Servicer to enforce any due-on-sale clause to the extent specified therein. See
"Servicing of the Mortgage Loans and Contracts -- Enforcement of Due-on-Sale
Clauses; Realization Upon Defaulted Mortgage Loans and Contracts" and "Certain
Legal Aspects of the Mortgage Loans and Contracts -- Due-On-Sale Clauses" for a
description of certain provisions of each Pooling and Servicing Agreement and
certain legal developments that may affect the prepayment experience on the
Mortgage Loans or Contracts.
A lower rate of principal prepayments than anticipated would negatively
affect the total return to investors in any Certificates of a Series that are
offered at a discount to their principal amount or, if applicable, their parity
price, and a higher rate of principal prepayments 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) 214-7835.
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
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Supplement, all or a representative sample of the Mortgage Loans comprising the
Mortgage Pool for a Series will be reviewed by or on behalf of the Depositor to
determine compliance with such underwriting procedures and standards and
compliance with other requirements for inclusion in the related Mortgage Pool.
Except as otherwise set forth in the related Prospectus Supplement, it is
expected that each originator of Mortgage Loans will have applied, in a standard
procedure which complies with applicable federal and state law and regulations,
underwriting procedures that are intended to evaluate the mortgagor's credit
standing and repayment ability, and the value and adequacy of the Mortgaged
Property as collateral. A prospective mortgagor will have been required to fill
out an application designed to provide to the original lender pertinent credit
information. As part of the description of the mortgagor's financial condition,
the mortgagor will have been required to provide a current balance sheet
describing assets and liabilities and a statement of income and expenses, as
well as an authorization to apply for a credit report which summarizes the
mortgagor's credit history with local merchants and lenders and any record of
bankruptcy. In addition, an employment verification will have been obtained in
the case of individual borrowers which reports the mortgagor's current salary,
length of such employment and whether it was expected that the mortgagor will
continue such employment in the future. If a prospective borrower was
self-employed, the mortgagor will have been required to submit copies of signed
tax returns. The mortgagor may also have been required to authorize verification
of deposits at financial institutions where the mortgagor has demand or savings
accounts.
In determining the adequacy of the Mortgaged Property as collateral, except
in the instance of certain small second loan applications, an appraisal will
have been made of each Mortgaged Property considered for financing. Each
appraiser will have been selected in accordance with predetermined guidelines
established by or acceptable to the Unaffiliated Seller for appraisers. The
appraiser will have been required to inspect the Mortgaged Property and verify
that it was in good condition and that construction, if new, has been completed.
The appraisal is based on the market value of the comparable properties, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the Mortgaged Property.
In determining the adequacy of the Mortgaged Property as collateral, the
originator shall, in the case of second or more junior loans, look at the
combined Loan-to-Value Ratio in determining whether the Mortgage Loan exceeds
lending guidelines. Furthermore, when considering such second or more junior
loans, confirm that payment has been timely made on the senior liens.
Once all applicable employment, credit and property information was
received, a determination would have been made as to whether the prospective
mortgagor had sufficient monthly income available (i) to meet its monthly
obligations on the Mortgage Loan (determined on the basis of the monthly
payments due in the year of origination and taking into consideration, payments
due on any senior liens) and other expenses related to the Mortgaged Property
(such as property taxes and hazard insurance) and (ii) in the case of individual
mortgagors, to meet monthly housing expenses and other financial obligations and
monthly living expenses. When two individuals 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
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Unaffiliated Sellers represent and warrant that underwriting standards applied
to each Mortgage Loan purchased by the Depositor from such Unaffiliated Seller
(including Mortgage Loans secured by Mortgaged Properties located in
anti-deficiency states) require that the value of the property being financed,
as indicated by the appraisal, currently supports and is anticipated to support
in the future the outstanding principal balance of such Mortgage Loan.
Certain of the types of loans which may be included in the Mortgage Pools
are recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such Mortgage Loans may
provide for escalating or variable payments by the mortgagor. These types of
Mortgage Loans are underwritten on the basis of a judgment that mortgagors will
have the ability to make larger monthly payments in subsequent years. In some
instances, however, a mortgagor's income may not be sufficient to make loan
payments as such payments increase.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the real estate market should experience an overall
decline in property values such that the outstanding principal balances of the
Mortgage Loans, and any secondary financing on the Mortgaged Properties, in a
particular Mortgage Pool become equal to or greater than the value of the
Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In addition, adverse economic conditions (which may or may not affect
real property values) may affect the timely payment by mortgagors of scheduled
payments of principal and interest on the Mortgage Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to any
Mortgage Pool. To the extent that such losses are not covered by subordination
provisions, insurance policies or other credit support, such losses will be
borne, at least in part, by the holders of the Certificates of the related
series.
Contracts
The underwriting guidelines utilized in connection with the origination of
the Contracts underlying a Series of Certificates will be described in the
related Prospectus Supplement.
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS
The following summaries describe certain provisions of the Pooling and
Servicing Agreements which relate to Trust Funds comprised of Mortgage Loans or
Contracts. The summaries do not purport to be complete and are subject to and
are qualified in their entirety by reference to, all 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
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the Servicer under the related Pooling and Servicing Agreement. See "The Pooling
and Servicing Agreement -- Events of Default -- Mortgage Loans or Contracts" and
" -- Rights Upon Event of Default -- Mortgage Loans or Contracts."
Payments on Mortgage Loans and Contracts
The Servicer or the Trustee will, as to each Series of Certificates,
establish and maintain, or cause to be established and maintained, a separate
trust account or accounts in the name of the Trustee (collectively, the
"Certificate Account"), which must be maintained with a depository institution
(the "Certificate Account Depository") acceptable to the Rating Agency rating
the Certificates of such Series. Such account or accounts will be maintained
with a Certificate Account Depository (i) whose long-term debt obligations at
the time of any deposit therein are rated not lower than the rating on the
related Series of Certificates at the time of the initial issuance thereof, (ii)
the deposits in which are insured by the Federal Deposit Insurance Corporation
(the "FDIC") through either the Bank Insurance Fund or the Savings Association
Insurance Fund (to the limit established by the FDIC) and the uninsured deposits
in 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
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restoration of any Mortgaged Property or Manufactured Home, such right of
reimbursement being prior to the rights of the Certificateholders to receive
Liquidation Proceeds and Insurance Proceeds. The Servicer is also entitled to
reimbursement from the Certificate Account of Advances, of advances made by it
to pay taxes or insurance premiums with respect to any Mortgaged Property or
Manufactured Home and of certain losses against which it is indemnified by the
Trust Fund.
Evidence as to Compliance
The Mortgage Loans
Each Pooling and Servicing Agreement will provide that on or before a
specified date in each year, beginning with the first such date occurring at
least six months after the related Cut-Off Date, a firm of independent public
accountants will furnish a statement to the Trustee to the effect that, on the
basis of the examination by such firm conducted substantially in compliance with
either the Uniform Single Audit Program for Mortgage Bankers or the Audit
Program for Mortgages serviced for FHLMC, the servicing by or on behalf of the
Servicer of mortgage loans under pooling and servicing agreements substantially
similar to each other (including the related Pooling and Servicing Agreement)
was conducted in compliance with the terms of such agreements other than
exceptions that are immaterial and any significant exceptions of errors in
records that, in the opinion of the firm, either the Audit Program for Mortgages
serviced for FHLMC, or paragraph 4 of the Uniform Single Audit Program for
Mortgage Bankers, requires it to report. In rendering its statement such firm
may rely, as to matters relating to the direct servicing of mortgage loans by
Sub-Servicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Audit Program for Mortgage
Bankers or the Audit Program for Mortgages serviced for FHLMC (rendered within
one year of such statement) of firms of independent public accountants with
respect to the related Sub-Servicer.
The Contracts
Each Pooling and Servicing Agreement relating to a Series of Certificates
representing interests in a Contract Pool will provide that on or before a
specified date in each year, beginning with the first such date after the
related Cut-Off Date, a firm of independent public 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
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responsibility for servicing the Mortgage Loans or Contracts, it may appoint
another institution as Servicer, as described under "The Pooling and Servicing
Agreement -- Rights Upon Event of Default -- Mortgage Loans or Contracts" below.
The Pooling and Servicing Agreement will provide that neither the
Depositor, the Servicer (if the Series of Certificates relates to Mortgage Loans
or Mortgage Contracts) nor any director, officer, employee or agent of either of
them will be under any liability to the Trust Fund or the Certificateholders,
for the taking of any action or for refraining from the taking of any action in
good faith pursuant to the Pooling and Servicing Agreement, or for errors in
judgment; provided, however, that none of the Depositor, the Servicer or any
director, officer, employee or agent of the Depositor or Servicer will be
protected against any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of his or
its duties or by reason of reckless disregard of his or its obligations and
duties thereunder. The Pooling and Servicing Agreement will further provide that
the Depositor, the Servicer and any director, officer, employee or agent of
either of them shall be entitled to indemnification by the Trust Fund and will
be held harmless against any loss, liability or expense incurred in connection
with any legal action relating to the Pooling and Servicing Agreement or the
Certificates other than any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of his or
its duties thereunder or by reason of reckless disregard of his or its
obligations and duties thereunder. In addition, the Pooling and Servicing
Agreement will provide that the Depositor and the Servicer will not be under any
obligation to appear in, prosecute or defend any legal action that is not
incidental to its duties under the Pooling and Servicing Agreement and that in
its opinion may involve it in any expense or liability. The Depositor and the
Servicer may, however, in its discretion, undertake any such action deemed by it
necessary or desirable with respect to the Pooling and Servicing Agreement and
the rights and duties of the parties thereto and the interests of the
Certificateholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust Fund, and the Servicer will be entitled to be
reimbursed therefor out of the Certificate Account, and any loss to the Trust
Fund arising from such right of reimbursement will be allocated pro rata among
the various Classes of Certificates unless otherwise specified in the applicable
Pooling and Servicing Agreement.
Any person into which the Servicer may be merged or consolidated, or any
person resulting from any merger, conversion or consolidation to which the
Servicer is a party, or any person succeeding to the business through the
transfer of substantially all of its assets, or otherwise, of the Servicer will
be the successor of the Servicer under the Pooling and Servicing Agreement for
each Series provided that such successor or resulting entity is qualified to
service mortgage loans for FNMA or FHLMC and that the applicable Rating Agency's
rating of any Certificates for such Series in effect immediately prior to such
event is not adversely affected thereby.
The Servicer also has the right to assign its rights and delegate its
duties and obligations under the Pooling and Servicing Agreement for each Series
(A) in connection with a sale or transfer of a substantial portion of its
mortgage or manufactured housing servicing portfolio; provided that (i) in the
case of a transfer by a Servicer of Mortgage Loans, the purchaser or transferee
accepting such assignment or delegation is qualified to service mortgage loans
for FNMA or FHLMC, (ii) the purchaser or transferee is reasonably satisfactory
to the Depositor and the Trustee for such Series and executes and delivers to
the Depositor and the Trustee an agreement, in form and substance reasonably
satisfactory to the Depositor and the Trustee, which contains an assumption by
such purchaser or transferee of the due and punctual performance and observance
of each covenant and condition to be performed or observed by the Servicer under
the Pooling and Servicing Agreement from and after the date of such agreement;
and (iii) the applicable Rating Agency's rating of any Certificates for such
Series in effect immediately prior to such assignment, sale or transfer is not
qualified, downgraded or withdrawn as a result of such assignment, sale or
transfer or (B) to any affiliate of the Servicer, provided that the conditions
contained in clauses (i) through (iii) above are met. In the case of any such
assignment or delegation, the Servicer will be released from its obligations
under the Pooling and Servicing Agreement except for liabilities and obligations
incurred prior to such assignment and delegation.
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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
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to the Trustee or exercising any trust or power conferred upon the Trustee.
However, the Trustee will not be under any obligation to pursue any such remedy
or to exercise any of such trusts or powers unless such Certificateholders have
offered the Trustee reasonable security or indemnity against the costs, expenses
and liabilities which may be incurred by the Trustee thereby. Also, the Trustee
may decline to follow any such direction if the Trustee determines that the
action or proceeding so directed may not lawfully be taken or would be unjustly
prejudicial to the nonassenting Certificateholders or if, under certain
circumstances, the Trustee receives conflicting directions from different groups
of Certificateholders.
No Certificateholders of a Series, solely by virtue of such holder's status
as a Certificateholder, will have any right under the Pooling and Servicing
Agreement for such Series to institute any proceeding with respect to the
Pooling and Servicing Agreement, unless such holder previously has given to the
Trustee for such Series written notice of default and unless the holders of
Certificates evidencing not less than 25% of the Voting Interests for such
Series have made written request upon the Trustee to institute such proceeding
in its own name as Trustee thereunder and have offered to the Trustee reasonable
indemnity and the Trustee for 60 days has neglected or refused to institute any
such proceeding.
Amendment
Each Pooling and Servicing Agreement may be amended by the Depositor, the
Servicer (with respect to a Series of Certificates relating, to the Mortgage
Loans or Contracts) and the Trustee without the consent of the
Certificateholders, (i) to cure any ambiguity, (ii) to correct or supplement any
provision therein that may be inconsistent with any over provision therein,
(iii) to modify, eliminate or add to any of its provisions to such extent as
shall be necessary to maintain the qualification of the Trust Fund (or one or
more segregated pools of assets therein) as a REMIC at all times that any
Certificates are outstanding or to avoid or modify the risk of the imposition of
any tax on the Trust Fund pursuant to the Code that would be a claim against the
Trust Fund, provided that the Trustee has received an opinion of counsel to the
effect that such action is necessary or desirable to maintain such qualification
or to avoid or minimize the risk of the imposition of any such tax and such
action will not, as evidenced by such opinion of counsel, adversely affect in
any material respect the interests of any Certificateholder, (iv) to change the
timing and/or nature of deposits into the Certificate Account, provided that
such change will not, as evidenced by an opinion of counsel, adversely affect in
any material respect the interests of any Certificateholder and that such change
will not adversely affect the then current rating assigned to any Certificates,
as evidenced by a letter from each Rating Agency to such effect, (v) to add to,
modify or eliminate any provisions therein restricting transfers of certain
Certificates, which are inserted in response to the Code provisions described
below under "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates -- Taxation of Residual Certificates --
Tax-Related Restrictions on Transfer of Residual Certificates," or (vi) to make
any other provisions with respect to matters or questions arising under such
Pooling and Servicing Agreement that are not inconsistent with the provisions
thereof, provided that such action will not, as evidenced by an opinion of
counsel, adversely affect in any material respect the interests of the
Certificateholders of the related Series. The Pooling and Servicing Agreement
may also be amended by the Depositor, the Servicer, where applicable, and the
Trustee with the consent of the holders of Certificates evidencing interests
aggregating not less than 66 2/3% of the Voting Interests evidenced by the
Certificates affected thereby, for the purpose of adding any provisions to or
changing in any manner or eliminating, any of the provisions of such Pooling and
Servicing Agreement or of modifying in any manner the rights of the
Certificateholders; provided, however, that no such amendment may (i) reduce in
any manner the amount of, or delay the timing of, any payments received on or
with respect to Mortgage Loans or Contracts that are required to be distributed
on any Certificates, without the consent of the holder of such Certificate, (ii)
adversely affect in any material respect the interests of the holders of a Class
or Subclass of Certificates of a Series in a manner other than that set forth in
clause (i) above without the consent of the holders of Certificates aggregating
not less than 66-2/3% of the Voting Interests evidenced by such Class or
Subclass, or (iii) reduce the aforesaid percentage of the Certificates, the
holders of which are required to consent to such amendment, without the consent
of the holders of all Certificates of the Class or Subclass affected then
outstanding. Notwithstanding the foregoing, the Pooling and Servicing Agreement
may be amended by the Depositor, the Servicer, where applicable, and the Trustee
provided that such action is approved by holders of Certificates evidencing 100%
of the Percentage Interest of each Class that, as evidenced by an opinion of
counsel, is adversely affected in any material respect by such action. For
purposes of giving any such consent (other than a consent to an action which
would adversely affect in any material respect the interests of the
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Certificateholders of any Class, while the Servicer or any affiliate thereof is
the holder of Certificates aggregating not less than 66- 2/3% of the Percentage
Interest of such Class), any Certificates registered in the name of the Servicer
or any affiliate thereof shall be deemed not to be outstanding. Notwithstanding
the foregoing, the Trustee will not consent to any such amendment if such
amendment would subject the Trust Fund to tax or cause the Trust Fund (or one or
more segregated pools of assets therein) to fail to qualify as a REMIC.
Termination; Purchase or Other Disposition of Mortgage Loans and Contracts
The obligations created by the Pooling and Servicing Agreement for a Series
of Certificates will terminate upon the earlier of (i) the later of the final
payment or other liquidation of the last Mortgage Loan or Contract subject
thereto and the disposition of all property acquired upon foreclosure of any
such Mortgage Loan or Contract and (ii) any purchase or disposition described in
the following paragraph. In no event, however, will the trust created by the
Pooling and Servicing Agreement continue beyond the expiration of 21 years from
the death of the late survivor of certain persons named in such Pooling and
Servicing Agreement. For each Series of Certificates, the Trustee will give
written notice of termination of the Pooling and Servicing Agreement to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at an office or agency appointed by the
Depositor and specified in the notice of termination.
If so provided in the related Prospectus Supplement, the Pooling and
Servicing Agreement for each Series of Certificates will permit, but not
require, the person or persons specified in such Prospectus Supplement to
purchase from the Trust Fund for such Series, or will require the Trust Fund to
sell, all remaining Mortgage Loans or Contracts at the time subject to the
Pooling and Servicing Agreement at a price specified in such Prospectus
Supplement. In the event that an election has been made to treat the related
Trust Fund (or one or more segregated pools of assets therein) as a REMIC, any
such purchase or disposition will be effected only upon receipt by the Trustee
of an opinion of counsel that such purchase (i) will be part of a "qualified
liquidation" or other evidence as defined in Code Section 860F(a)(4)(A), (ii)
will not otherwise subject the Trust Fund (or segregated asset pool) to tax, or
(iii) will not cause the Trust Fund (or segregated asset pool) to fail to
qualify as a REMIC. The exercise of such right or such disposition will effect
early retirement of the Certificates of that Series, but the right so to
purchase may be exercised, or the obligation to sell will arise, only after the
aggregate principal balance of the Mortgage Loans or Contracts for such Series
at the time of purchase is less than a specified percentage of the aggregate
principal balance at the Cut-Off Date for the Series, or after the date set
forth in the related Prospectus Supplement. See "Prepayment and Yield
Considerations."
The Trustee
The Trustee under each Pooling and Servicing Agreement will be named in the
applicable Prospectus Supplement. The commercial bank or trust company serving
as Trustee may have normal banking relationships with the Depositor, the
Servicer or any of their respective affiliates.
With respect to a Series of Certificates relating to Mortgage Loans or
Contracts, the Trustee may resign at any time, in which event the Servicer will
be obligated to appoint a successor trustee. The Servicer (with respect to a
Series of Certificates relating to Mortgage Loans or Contracts) may also remove
the Trustee if the Trustee ceases to be eligible to act as Trustee under the
Pooling and Servicing Agreement, if the Trustee becomes insolvent or in order to
change the situs of the Trust Fund for state-tax reasons. Upon becoming aware of
such circumstances, the Servicer or Depositor, as the case may be, will become
obligated to appoint a successor trustee. The Trustee may also be removed at any
time by the holders of Certificates evidencing not less than 51% of the Voting
Interest in the Trust Fund, except that, any Certificate registered in the name
of the Depositor, the Servicer or any affiliate thereof will not be 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
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
Foreclosure on the cooperative shares is accomplished by a sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code (the
"UCC") and the security agreement relating to those shares. Article 9 of the UCC
requires that a sale be conducted in a "commercially reasonable" manner. Whether
a foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
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court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to the
usual practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti- Deficiency Legislation and
Other Limitations on Lenders" below.
Rights of Redemption
In some states, after sale pursuant to a deed of trust and/or foreclosure
of a mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
most states where the right of redemption is available, statutory redemption may
occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a right of redemption is to diminish the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser at a foreclosure sale, or of any purchaser from the
lender subsequent to judicial foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has run.
Junior Mortgages; Rights of Senior Mortgages
The Mortgage Loans are secured by mortgages or deeds of trust some of which
are junior to other mortgages or deeds of trust held by other lenders or
institutional investors. The rights of the Trust (and therefore the
Certificateholders), as mortgagee under a junior mortgage or beneficiary under a
junior deed of trust, are subordinate to those of the mortgagee under the senior
mortgage or beneficiary under the senior deed of trust, including the prior
rights of the senior mortgagee to receive hazard insurance and condemnation
proceeds and to cause the property securing the Mortgage Loan to be sold upon
default of the mortgagor or trustor, thereby extinguishing the junior
mortgagee's or junior beneficiary's lien unless the junior mortgagee or junior
beneficiary asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage or deed of
trust. As discussed more fully below, a junior mortgagee or junior beneficiary
may satisfy a defaulted senior loan in full and, in some states, may cure such
default and loan. In most states, no notice of default is required to be given
to a junior mortgagee or junior beneficiary and junior mortgagees or junior
beneficiaries are seldom given notice of defaults or senior mortgages. In order
for a foreclosure action in some states to be effective against a junior
mortgagee or junior beneficiary, the junior mortgagee or junior beneficiary must
be named in any foreclosure action, thus giving notice to junior lienors. It is
standard practice of the Sellers to protect their interest by attending any sale
of which they have notice or appearing and bidding for, or redeeming, the
property if it is in their best interest to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, (including the sellers) confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event the
property is taken by condemnation, the mortgagee or beneficiary under any
underlying senior mortgages will have the prior right to collect and apply any
insurance proceeds payable under a hazard 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
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Mexico, Utah and Washington. Under the Act, unless a Window Period State took
action by October 15, 1985, the end of the Window Period, to further regulate
enforcement of "due-on-sale" clauses in Window Period Loans, "due-on-sale"
clauses would become enforceable even in Window Period Loans. Five of the Window
Period States (Arizona, Minnesota, Michigan, New Mexico and Utah) have taken
actions which restrict the enforceability of "due-on-sale" clauses in Window
Period Loans beyond October 15, 1985. The actions taken vary among such states.
By virtue of the Act, the Servicer may generally be permitted to accelerate
any conventional Mortgage Loan which contains a "due-on-sale" clause upon
transfer of an interest in the property subject to the mortgage or deed of
trust. With respect to any Mortgage Loan secured by a residence occupied or to
be occupied by the borrower, this ability to accelerate will not apply to
certain types of transfers, including (i) the granting of a leasehold interest
which has a term of three years or less and which does not contain an option to
purchase, (ii) a transfer to a relative resulting from the death of a borrower,
or a transfer where the spouse or children becomes an owner of the property in
each case where the transferee(s) will occupy the property, (iii) a number
resulting from a decree of dissolution of marriage, legal separation agreement
or from an incidental property settlement agreement by which the spouse becomes
an owner of the property, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the property (provided that such lien or
encumbrance is not created pursuant to a contract for deed), (v) a transfer by
devise, descent or operation of law on the death of a joint tenant or tenant by
the entirety, and (vi) other transfers as set forth in the Act and the
regulations thereunder. The extent of the effect of the Act on the average lives
and delinquency rates of the Mortgage Loans cannot be predicted. See "Prepayment
and Yield Considerations."
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that state usury limitations shall
not apply to certain types of residential first mortgage loans originated by
certain lenders after March 31, 1980. The OTS (as successor to the FHLBB) is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. The statute authorized any state to
reimpose Stated Rate limits by adopting before April 1, 1983, a law or
constitutional provision which expressly rejects application of the federal law.
Fifteen states have adopted laws reimposing or reserving the right to impose
interest rate limits. In addition, even where Title V is not so rejected, any
state is authorized to adopt a provision limiting certain other loan charges.
Unless otherwise specified in the applicable Prospectus Supplement, each
Unaffiliated Seller will represent and warrant in the related Loan Sale
Agreement that all Mortgage Loans sold by such Unaffiliated Seller to the
Depositor were originated in full compliance with applicable state laws,
including usury laws. See "The Trust Funds -- Representations and Warranties."
Adjustable Rate Loans
The laws of certain states may provide that mortgage notes relating to
adjustable rate loans are not negotiable instruments under the Uniform
Commercial Code. In such event, the Trustee will not be deemed to be a "holder
in due course" within the meaning of the Uniform Commercial 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
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where the home is located. These filings must be made in the real estate records
office of the county where the home is located. Substantially all of the
Contracts contain provisions prohibiting the borrower from permanently attaching
the Manufactured Home to its site. So long as the borrower does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to its site,
other parties could obtain an interest in the Manufactured Home which is prior
to the security interest originally retained by the Unaffiliated Seller and
transferred to the Depositor. With respect to a Series of Certificates and if so
described in the related Prospectus Supplement, the Servicer may be required to
perfect a security interest in the Manufactured Home under applicable real
estate laws. The Servicer will represent that at the date of the initial
issuance of the related Certificates it has obtained a perfected first priority
security interest by proper notation or delivery of the required documents and
fees with respect to substantially all of the Manufactured Homes securing the
Contracts.
The Depositor will cause the security interests in the Manufactured Homes
to be assigned to the Trustee on behalf of the Certificateholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Depositor
nor the Trustee will amend the certificates of title to identify the Trustee or
the Trust Fund as the new secured party, and neither the Depositor nor the
Servicer will deliver the certificates of title to the Trustee or note thereon
the interest of the Trustee. Accordingly, the Servicer (or the Unaffiliated
Seller) which continue to be named as the secured party on the certificates of
title relating to the Manufactured Homes. In many states, such assignment is an
effective conveyance of such security interest without amendment of any lien
noted on the related certificate of title and the new secured party succeeds to
the Depositor's rights as the secured party. However, in some states there
exists a risk that, in the absence of an amendment to the certificate of title,
such assignment of the security interest in the Manufactured Home might not be
effective or perfected or that, in the absence of such notation or delivery to
the Trustee, the assignment of the security interest in the Manufactured Home
might not be effective against creditors of the Servicer (or the Unaffiliated
Seller) or a trustee in bankruptcy of the Servicer (or the Unaffiliated Seller).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Servicer (or
the Unaffiliated Seller) on the certificate of title or delivery of the required
documents and fees will be sufficient to protect the Certificateholders against
the rights of subsequent purchasers of a Manufactured Home or subsequent lenders
who take a security interest in the Manufactured Home. If there are any
Manufactured Homes as to which the security interest assigned to the Trustee is
not perfected, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the Trustee as
the new secured party on the certificate of title that, through fraud or
negligence, the security interest of the Certificateholders could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and not
re-register the Manufactured Home in such state, and if steps are not taken to
re-perfect the Trustee's security interest in such state, the security interest
in the Manufactured Home would cease to be perfected. A majority of states
generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien, the
Servicer would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the Trustee
would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing conditional sales contracts, the Servicer takes steps to effect such
re-perfection upon receipt of notice of registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a manufactured home, the Trustee (or
its custodian) must surrender possession of the certificate of title or the
Servicer will receive notice as a result of its lien noted thereon and
accordingly will have an opportunity to require satisfaction of the related
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manufactured housing conditional sales contract before release of the lien.
Under the Pooling and Servicing Agreement, the Servicer is obligated to take
steps, at the Servicer's expense, as are necessary to maintain perfection of
security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufacturer Home and liens for personal property taxes take priority over a
perfected security interest. The Unaffiliated Seller will represent in the
Pooling and Servicing Agreement that it has no knowledge of any such liens with
respect to any Manufactured Home securing payment on any Contract. However, such
liens could arise at any time during the term of a Contract. No notice will be
given to the Trustee or Certificateholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes
The Servicer on behalf of the Trustee, to the extent required by the
related Pooling and Servicing Agreement, may take action to enforce the
Trustee's security interest with respect to Contracts in default by repossession
and resale of the Manufactured Homes securing such defaulted Contracts. So long
as the Manufactured Home has not become subject to the real estate law, a
creditor can repossess a Manufactured Home securing a Contract by voluntary
surrender, by "self-help" repossession that is "peaceful" (i.e., without breach
of the peace) or, in the absence of voluntary surrender and the ability to
repossess without breach of the peace, by judicial process. The holder of a
Contract must give the debtor a number of days' notice, which varies from 10 to
30 days depending on the state, prior to commencement of any repossession. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states also
requires that the debtor be given notice of any sale prior to resale of the unit
so that the debtor may redeem at or before such resale. In the event of such
repossession and resale of a Manufactured Home, the Trustee would be entitled to
be paid out of the sale proceeds before such proceeds could be applied to the
payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the 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
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CERCLA's secured-creditor exemption. The court held that a lender need not have
involved itself in the day-to-day operations of the facility or participated in
decisions relating to hazardous waste to be liable under CERCLA; rather,
liability could attach to a lender if its involvement with the management of the
facility is broad enough to support the inference that the lender had the
capacity to influence the borrower's treatment of hazardous waste. The court
added that a lender's capacity to influence such decisions could be inferred
from the extent of its involvement in the facility's financial management. A
subsequent decision by the United States Court of Appeals for the Ninth Circuit
in In re Bergsoe Metal Corp., disagreeing with the Fleet Factors court, held
that a secured lender had no liability absent "some actual management of the
facility" on the part of the lender. On April 29, 1992, the United States
Environmental Protection Agency (the "EPA") issued a final rule interpreting and
delineating CERCLA's secured-creditor exemption. The final rule defines a
specific the range of permissible actions that may be undertaken by a holder of
a contaminated facility without exceeding the bounds of the secured-creditor
exemption. Issuance of this rule by the EPA under CERCLA would not necessarily
affect the potential for liability in actions by either a state or a private
party under CERCLA or in actions under other federal or state laws which may
impose liability on "owners or operators" but do not incorporate the
second-creditor exemption.
If a lender is or becomes liable for clean-up costs, it may bring an action
for contribution against the current owners or operators, the owners or
operators at the time of on-site disposal activity or any other party who
contributed to the environmental hazard, but such persons or entities may be
bankrupt or otherwise judgment proof. Furthermore, such action against the
borrower may be adversely affected by the limitations on recourse in the
documents in the Mortgage Document File. Similarly, in some states
anti-deficiency legislation and other statues requiring the lender to exhaust
its security before bringing a personal action against the borrower-trustor (see
"Anti- Deficiency Legislation and Other Limitations on Lenders" below) may
curtail the lender's ability to recover from its borrower the environmental
clean-up and other related costs and liabilities by the lender.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan or Contract (including a
borrower who is a member of the National Guard or 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
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the holder of the note exposed to tort and other claims as the true owner of the
property which could impact the availability of cash to pass through to
investors.
Certain Matters Relating to Insolvency
The Unaffiliated Seller of the Mortgage Loans or Contracts and the
Depositor intend that the transfer of such Mortgage Loans or Contracts to the
Trust Fund constitute a sale rather for a pledge of the Mortgage Loans or
Contracts to secure indebtedness of the seller of the Mortgage Loans or
Contracts. However, if the Unaffiliated Seller were to become a debtor under the
federal bankruptcy code or be placed in a conservatorship or receivership under
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), as the case may be, it is possible that a creditor, receiver,
conservator or trustee-in-bankruptcy of such seller may argue that the sale of
the Mortgage Loans or Contracts by the Unaffiliated Seller is a pledge of the
Mortgage Loans or Contracts rather than a sale. This position, if argued or
accepted by a court, could result in a delay in or reduction of distributions to
the related Certificateholders.
Under FIRREA the FDIC as receiver or conservator of a Servicer subject to
its jurisdiction may enforce a contract notwithstanding any provision of the
contract providing for termination thereof by reason of the insolvency of, or
appointment of a receiver or conservator for, the Servicer. Consequently,
provisions in a Pooling and Servicing Agreement providing for an Event of
Default upon certain events of insolvency, receivership or conservatorship of
the Servicer may not be enforceable against the FDIC as receiver or conservator
to the extent that the exercise of such rights is based solely upon the
insolvency of or appointment of a receiver or conservator for the Servicer. In
addition, the FDIC may transfer the assets and liabilities of an institution in
receivership or conservatorship to another institution.
Bankruptcy Laws
Numerous statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the ability
of the secured mortgage lender to obtain payment of the loan, to realize upon
collateral and/or enforce a deficiency judgment. 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
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prior to commencement of the bankruptcy proceeding, (ii) to the extent such
rents are used by the borrower to maintain the mortgaged property, or for other
court authorized expenses, or (iii) to the extent other collateral may be
substituted for the rents.
To the extent a mortgagor's ability to make payment on a mortgage loan is
dependent on payments under a lease of the related property, such ability may be
impaired by the commencement of a bankruptcy proceeding relating to a lessee
under such lease. Under the federal bankruptcy laws, the filing of a petition in
bankruptcy by or on behalf of a lessee results in a stay in bankruptcy against
the commencement or continuation of any state court proceeding for past due
rent, for accelerated rent, for damages or for a summary eviction order with
respect to a default under the lease that occurred prior to the filing of the
lessee's petition.
In addition, federal bankruptcy law generally provides that a trustee or
debtor in possession in a bankruptcy or reorganization case under the Bankruptcy
Code may, subject to approval of the court (a) assume the lease and retain it or
assign it to a third party or (b) reject the lease. If the lease is assumed, the
trustee or debtor in possession (or assignee, if applicable) must cure any
defaults under the lease, compensate the lessor for its losses and provide the
lessor with "adequate assurance" of future performance. Such remedies may be
insufficient, however, as the lessor may be forced to continue under the lease
with a lessee that is a poor credit risk or an unfamiliar tenant if the lease
was assigned, and any assurances provided to the lessor may, in fact, be
inadequate. Furthermore, there is likely to be a period of time between the date
upon which a lessee files a bankruptcy petition and the date upon which the
lease is assumed or rejected. Although the lessee is obligated to make all lease
payments currently with respect to the post-petition period, there is a risk
that such payments will not be made due to the lessee's poor financial
condition. If the lease is rejected, the lessor will be treated as an unsecured
creditor with respect 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 material anticipated federal
income tax consequences to investors of the purchase, ownership and disposition
of the Securities 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 Securities. For purposes of this
discussion, references to a "Securityholder" or a "Holder" are to the beneficial
owner of a Security.
The following discussion addresses securities of three general types: (i)
securities ("Grantor Trust Securities") representing interests in a Trust Estate
(a "Grantor Trust Estate") which the Sponsor will covenant not to elect to have
treated as a real estate mortgage investment conduit (REMIC); (ii) securities
("REMIC Securities") representing interests in a Trust Estate, or a portion
thereof, which the Sponsor will covenant to elect to have treated as a REMIC
under sections 860A through 860G of the Internal Revenue Code of 1986, as
amended (the "Code"); and (iii) securities ("Debt Securities") 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
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partnership interests or interests in a FASIT. Such a discussion will be set
forth in the related Prospectus Supplement for any Trust issuing Securities
characterized as partnership interests or interests in a FASIT. The Prospectus
Supplement for each series of Securities will indicate whether a REMIC or FASIT
election (or elections) will be made for the related Trust Estate and, if a
REMIC or FASIT election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC or all "regular interests," "high-yield
interests" or "ownership interest" in the FASIT. Pursuant to the Small Business
Job Protection Act of 1996, enacted on August 20, 1996 (the "1996 Act"), a FASIT
election can be made on or after September 1, 1997.
Grantor Trust Securities
With respect to each series of Grantor Trust Securities, special tax
counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless
otherwise limited in the related Prospectus Supplement) the related Grantor
Trust Estate will be classified as a grantor trust and not as a partnership or
an association taxable as a corporation. Accordingly, each Holder of a Grantor
Trust Security will generally be treated as the owner of an interest in the
Mortgage Loans included in the Grant or Trust Estate.
For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Estate, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Security." A Grantor Trust Security representing ownership
of all or a portion of the difference between interest paid on the Mortgage
Loans constituting the related Grantor Trust Estate and interest paid to the
Holders of Grantor Trust Fractional Interest Securities issued with respect to
such Grantor Trust Estate will be referred to as a "Grantor Trust Strip
Security."
Special Tax Attributes
Unless otherwise disclosed in a related Prospectus Supplement, special tax
counsel to the Sponsor, will deliver its opinion to the Sponsor that (a) Grantor
Trust Fractional Interest Securities will represent interests in (i) "loans . .
. secured by an interest in real property" within the meaning of section
7701(a)(19)(C)(v) of the Code; and (ii) "obligations (including any
participation or certificate of beneficial ownership therein) which . . . are
principally secured by an interest in real property" within the meaning of
section 860G(a)(3)(A) of the Code; and (b) interest on Grantor Trust Fractional
Interest Securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of section 856(c)(3)(B) of the Code. In addition, the Grantor Trust Strip
Securities will be "obligations (including any participation or certificate of
beneficial ownership therein) . . . principally secured by an interest in real
property" within the meaning of section 860G(a)(3)(A) of the Code.
The 1996 Act repeals the bad debt reserve method of accounting for mutual
savings banks and domestic building and loan associations for tax years
beginning after December 31, 1995. As a result, section 593(d) of the Code is no
longer applicable to treat the Certificates as "qualifying real property loans."
Taxation of Holders of Grantor Trust Securities
Holders of Grantor Trust Fractional Interest Securities generally will be
required to report on their federal income tax returns their respective shares
of the income from the Mortgage Loans (including amounts used to pay reasonable
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servicing fees and other expenses but excluding amounts payable to Holders of
any corresponding Gran or Trust Strip Securities) and, subject to the
limitations described below, will be entitled to deduct their shares of any such
reasonable servicing fees and other expenses. If a Holder acquires a Grantor
Trust Fractional Interest Security for an amount that differs from its
outstanding principal amount, the amount includible in income on a Grantor Trust
Fractional Interest Security may differ from the amount of interest
distributable thereon. See "Discount and Premium," below. Individuals holding a
Grantor Trust Fractional Interest Security directly or through certain
pass-through entities will be allowed a deduction for such reasonable servicing
fees and expenses only to the extent that the aggregate of such Holder's
miscellaneous itemized deductions exceeds 2% of such Holder's adjusted gross
income. Further, Holders (other than corporations) subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining
alternative minimum taxable income.
Holders of Grantor Trust Strip Securities generally will be required to
treat such Securities as "stripped coupons" under section 1286 of the Code.
Accordingly, such a Holder will be required to treat the excess of the total
amount of payments on such a Security over the amount paid for such Security as
original issue discount and to include such discount in income as it accrues
over the life of such Security. See "--Discount and Premium," below.
Grantor Trust Fractional Interest Securities may also be subject to the
coupon stripping rules if a class of Grantor Trust Strip Securities is issued as
part of the same series of Securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of such a Security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the Holder's income as
it accrues (regardless of the Holder's method of accounting), as described below
under "--Discount and Premium." The coupon stripping rules will not apply,
however, if (i) the pass-through rate is no more than 100 basis points lower
than the gross rate of interest payable on the underlying Mortgage Loans and
(ii) the difference between the outstanding principal balance on the Security
and the amount paid for such Security is less than 0.25% of such principal
balance times the weighted average remaining maturity of the Security.
Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a Grantor Trust Security (equal
to the difference between the amount realized on the sale and the adjusted basis
of such Grantor Trust Security) will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and in the case of banks and other financial institutions
except as provided under section 582(c) of the Code. The adjusted basis of a
Grantor Trust Security will generally equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions of principal.
Grantor Trust Reporting
The Trustee will furnish to each Holder of a Grantor Trust Fractional
Interest Security with each distribution a statement setting forth the amount of
such distribu ion allocable to principal on the underlying Mortgage Loans and to
interest thereon at the related Pass-Through Rate. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the Master Servicer, the Trustee will furnish to each Holder during
such year such customary factual information as the Master Servicer deems
necessary or desirable to enable Holders of Grantor Trust Securities to prepare
their tax returns and will furnish comparable information to the Internal
Revenue Service (the "IRS") as and when required to do so by law.
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REMIC Securities
If provided in a related Prospectus Supplement, an election will be made to
treat a Trust Estate as a REMIC under the Code. Qualification as a REMIC
requires ongoing compliance with certain conditions. With respect to each series
of Securities for which such an election is made, special tax counsel to the
Sponsor, will deliver its opinion to the Sponsor that (unless otherwise limited
in the related Prospectus Supplement), assuming compliance with the Pooling and
Servicing Agreement, the Trust Estate will be treated as a REMIC for federal
income tax purposes. A Trust Estate for which a REMIC election is made will be
referred to herein as a "REMIC Trust." The Securities of each class will be
designated as "regular interests" in the REMIC Trust except that a separate
class will be designated as the "residual interest" in the REMIC Trust. The
Prospectus Supplement for each series of Securities will state whether
Securities of each class will constitute a regular interest (a REMIC Regular
Security) or a residual interest (a REMIC Residual Security).
A REMIC Trust 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 a REMIC Trust." Generally, the total income from the
Mortgage Loans in a REMIC Trust will be taxable to the Holders of the Securities
of that series, as described below.
Regulations issued by the Treasury Department (the "REMIC Regulations")
provide some guidance regarding the federal income tax consequences associated
with the purchase, ownership and disposition of REMIC Securities. While certain
material provisions of the REMIC Regulations are discussed below, investors
should consult their own tax advisors regarding the possible application of the
REMIC Regulations in their specific circumstances.
Special Tax Attributes
REMIC Regular Securities and REMIC Residual Securities will be "regular or
residual interests in a REMIC" within the meaning of section 7701(a)(19)(C)(xi)
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% of the assets
of a REMIC Trust consist of "qualified mortgages" (within the meaning of section
860G(a)(3) of the Code) then the portion of the REMIC Regular Securities and
REMIC Residual Securities that are qualifying assets under those sections during
such calendar year may be limited to the portion of the assets of such REMIC
Trust that are qualified mortgages. Similarly, income on the REMIC Regular
Securities and REMIC Residual Securities 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, a REMIC Trust
should be treated as owning the assets represented by the qualified mortgages.
The assets of the Trust Estate will include, in addition to the Mortgage Loans,
payments on the Mortgage Loans held pending distribution on the REMIC Regular
Securities and REMIC Residual Securities and any reinvestment income thereon.
REMIC Regular Securities and REMIC Residual Securities 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.
REMIC Regular Securities will also be qualified mortgages with respect to other
REMICs.
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The 1996 Act repeals the bad debt reserve method of accounting for mutual
savings banks and domestic building and loan associations for tax years
beginning after December 31, 1995. As a result, section 593(d) of the Code is no
longer applicable to treat the Certificates as "qualifying real property loans."
Taxation of Holders of REMIC Regular Securities
Except as indicated below in this federal income tax discussion, the REMIC
Regular Securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC Trust on the date such Securities are first sold
to the public (the "Settlement Date") and not as ownership inter sts in the
REMIC Trust or its assets. Holders of REMIC Regular Securities that otherwise
report income under a cash method of accounting will be required to report
income with respect to such Securities under an accrual method. For additional
tax consequences relating to REMIC Regular Securities purchased at a discount or
with premium, see "--Discount and Premium," below.
Taxation of Holders of REMIC Residual Securities
Daily Portions. xcept as indicated below, a Holder of a REMIC Residual
Security for a REMIC Trust generally will be required to report its daily
portion of the taxable income or net loss of the REMIC Trust for each day during
a calendar quarter that the Holder owned such REMIC Residual Security. For this
purpose, the daily portion shall be determined by allocating to each day in the
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC Trust for such quarter and by allocating the amount so allocated among the
Residual Holders (on such day) in accordance with their percentage interests on
such day. Any amount included in the gross income or allowed as a loss of any
Residual Holder by virtue of this paragraph will be treated as ordinary income
or loss.
The requirement that each Holder of a REMIC Residual Security report its
daily portion of the taxable income or net loss of the REMIC Trust will continue
until there are no Securities of any class outstanding, even though the Holder
of the REMIC Residual Security may have received full payment of the stated
interest and principal on its REMIC Residual Security.
The Trustee will provide to Holders of REMIC Residual Securities of each
series of Securities (i) such information as is necessary to enable them to
prepare their federal income tax returns and (ii) any reports regarding the
Securities of such series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net loss
of a REMIC Trust will be the income from the qualified mortgages it holds and
any reinvestment earnings less deductions allowed to the REMIC Trust. Such
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
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year and using the accrual method of accounting, with certain modifications. The
first modification is that a deduction will be allowed for accruals of interest
(including any original issue discount, but without regard to the investment
interest limitation in section 163(d) of the Code) on the REMIC Regular
Securities (but not the REMIC Residual Securities), even though REMIC Regular
Securities are for non-tax purposes evidences of beneficial ownership rather
than indebtedness of a REMIC Trust. Second, market discount or premium equal to
the difference between the total stated principal balances of the qualified
mortgages and the basis to the REMIC Trust therein generally will be included in
income (in the case of discount) or deductible (in the case of premium) by the
REMIC Trust as it accrues under a constant yield method, taking into account the
"Prepayment Assumption" (as defined in the Related Prospectus Supplement, see
"--Discount and Premium--Original Issue Discount," below). The basis to a REMIC
Trust in the qualified mortgages is the aggregate of the issue prices of all the
REMIC Regular Securities and REMIC Residual Securities in the REMIC Trust on the
Settlement Date. If, however, a substantial amount of a class of REMIC Regular
Securities or REMIC Residual Securities has not been sold to the public, then
the fair market value of all the REMIC Regular Securities or REMIC Residual
Securities in that class as of the date of the Prospectus Supplement should be
substituted for the issue price.
Third, no item of income, gain, loss or deduction allocable to a prohibited
transaction (see "--Taxes on a REMIC Trust--Prohibited Transactions" below) will
be taken into account. Fourth, a REMIC Trust generally may not deduct any item
that would not be allowed in calculating the taxable income of a partnership by
virtue of section 703(a)(2) of the Code. Finally, the limitation on
miscellaneous itemized deductions imposed on individuals by section 67 of the
Code will not be applied at the REMIC Trust level to any servicing and guaranty
fees. (See, however, "--Pass-Through of Servicing and Guaranty Fees to
Individuals" below.) In addition, under the REMIC Regulations, any expenses that
are incurred in connection with the formation of a REMIC Trust and the issuance
of the REMIC Regular Securities and REMIC Residual Securities are not treated as
expenses of the REMIC Trust for which a deduction is allowed. If the deductions
allowed to a REMIC Trust exceed its gross income for a calendar quarter, such
excess will be a net loss for the REMIC Trust for that calendar quarter. The
REMIC Regulations also provide that any gain or loss to a REMIC Trust from the
disposition of any asset, including a qualified mortgage or "permitted
investment" (as defined in section 860G(a)(5) of the Code) will be treated as
ordinary gain or loss.
A Holder of a REMIC Residual Security may be required to recognize taxable
income without being entitled to receive a corresponding amount of cash. This
could occur, for example, if the qualified mortgages are considered to be
purchased by the REMIC Trust at a discount, some or all of the REMIC Regular
Securities are issued at a discount, and the discount included as a result of a
prepayment on a Mortgage Loan that is used to pay principal on the REMIC Regular
Securities exceeds the REMIC Trust's deduction for unaccrued original issue
discount relating to such REMIC Regular Securities. Taxable income may also be
greater in earlier years because interest expense deductions, expressed as a
percentage of the outstanding principal amount of the REMIC Regular Securities,
may increase over time as the earlier classes of REMIC Regular Securities are
paid, whereas interest income with respect to any given Mortgage Loan expressed
as a percentage of the outstanding principal amount of that Mortgage Loan, will
remain constant over time.
Basis Rules and Distributions. A Holder of a REMIC Residual Security has an
initial basis in its Security equal to the amount paid for such REMIC Residual
Security. Such basis is increased by amounts included in the income of the
Holder and decreased by distributions and by any net loss taken into account
with respect to such REMIC Residual Security. A distribution on a REMIC Residual
Security to a Holder is not included in gross income to the extent it does not
exceed such Holder's basis in the REMIC Residual Security (adjusted as described
above) and, to the extent it exceeds the adjusted basis of the REMIC Residual
Security, shall be treated as gain from the sale of the REMIC Residual Security.
A Holder of a REMIC Residual Security is not allowed to take into account
any net loss for any calendar quarter to the extent such net loss exceeds such
Holder's adjusted basis in its REMIC Residual Security as of the close of such
calendar quarter (determined without regard to such net loss). Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used only
to offset income from the REMIC Residual Security.
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Excess Inclusions. Any excess inclusions with respect to a REMIC Residual
Security are subject to certain special tax rules. With respect to a Holder of a
REMIC Residual Security, the excess inclusion for any calendar quarter is
defined as the excess (if any) of the daily portions of taxable income over the
sum of the "daily accruals" for each day during such quarter that such REMIC
Residual Security was held by such Holder. The daily accruals are determined by
allocating to each day during a calendar quarter its ratable portion of the
product of the "adjusted issue price" of the REMIC Residual Security at the
beginning of the calendar quarter and 120% of the "federal long-term rate" in
effect on the Settlement Date, based on quarterly compounding, and properly
adjusted for the length of such quarter. For this purpose, the adjusted issue
price of a REMIC Residual Security as of the beginning of any calendar quarter
is equal to the issue price of the REMIC Residual Security, increased by the
amount of daily accruals for all prior quarters and decreased by any
distributions made with respect to such REMIC Residual Security before the
beginning of such quarter. The issue price of a REMIC Residual Security is the
initial offering price to the public (excluding bond houses and brokers) at
which a substantial number of the REMIC Residual Securities was sold. The
federal long-term rate is a blend of current yields on Treasury securities
having a maturity of more than nine years, computed and published monthly by the
IRS.
In general, Holders of REMIC Residual Securities with excess inclusion
income cannot offset such income by losses from other activities. For Holders
that are subject to tax only on unrelated business taxable income (as defined in
section 511 of the Code), an excess inclusion of such Holder is treated as
unrelated business taxable income. With respect to variable contracts (within
the meaning of section 817 of the Code), a life insurance company cannot adjust
its reserve to the extent of any excess inclusion, except as provided in
regulations. The REMIC Regulations indicate that if a Holder of a REMIC Residual
Security is a member of an affiliated group filing a consolidated income tax
return, the taxable income of the affiliated group cannot be less than the sum
of the excess inclusions attributable to all residual interests in REMICS held
by members of the affiliated group. For a discussion of the effect of excess
inclusions on certain foreign investors that own REMIC Residual Securities, see
"--Foreign Investors" below.
The Treasury Department also has the authority to issue regulations that
would treat all taxable income of a REMIC Trust as excess inclusions if the
REMIC Residual Security does not have "significant value." Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
how significant value would be determined for these purposes. If no such rule is
applicable, excess inclusions should be calculated as discussed above.
In the case of any REMIC Residual Securities that are held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Securities reduced (but not below zero) by the real estate investment
trust taxable income (within the meaning of section 857(b)(2) of the Code,
excluding any net capital gain) will be allocated among the shareholders of such
trust in proportion to the dividends received by such shareholders from such
trust, and any amount so allocated will be treated as an excess inclusion with
respect to a REMIC Residual Security as if held directly by such shareholder.
Similar rules will apply in the case of regulated investment companies, common
trust funds and certain cooperatives that hold a REMIC Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A Holder of a
REMIC Residual Security who is an individual will be required to include in
income a share of any servicing and guaranty fees. A deduction for such fees
will be allowed to such Holder only to the extent that such fees, along with
certain of such Holder's other miscellaneous itemized deductions exceed 2% of
such Holder's adjusted gross income. In addition, a Holder of a REMIC Residual
Security may not be able to deduct any portion of such fees in computing such
Holder's alternative minimum tax liability. A Holder's share of such fees will
generally be determined by (i) allocating the amount of such expenses for each
calendar quarter on a pro rata basis to each day in the calendar quarter, and
(ii) allocating the daily amount among the Holders in proportion to their
respective holdings on such day.
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Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a RE IC equal to 100% 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% of the value of any property contributed to the 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.
Sales of REMIC Securities
General. Except as provided below, if a Regular or REMIC Residual Security
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 Security. The
adjusted basis of a REMIC Regular Security generally will equal the cost of such
Security to the seller, increased by any original issue discount or market
discount included in the seller's gross income with respect to such Security and
reduced by distributions on such Security previously received 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 Security. See
"--Discount and Premium." The adjusted basis of a REMIC Residual Security is
determined as described above under "--Taxation of Holders of REMIC Residual
Securities--Basis 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 Security is held as a "capital asset"
(generally, property held for investment) within the meaning of section 1221 of
the Code.
Gain from the sale of a REMIC Regular Security 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
includible in the income of the Holder of a REMIC Regular Security had income
accrued at a rate equal to 110% 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 Holder's income. In addition,
gain recognized on such a sale by a Holder of a REMIC Regular Security who
purchased such a Security 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 Security was held by such Holder, reduced by any market
discount includible in income under the rules described below under "--Discount
and Premium."
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If a Holder of a REMIC Residual Security sells its REMIC Residual Security
at a loss, the loss will not be recognized if, within six months before or after
the sale of the REMIC Residual Security, such Holder purchases another residual
interest in any REMIC or any interest in a taxable mortgage pool (as defined in
section 7701(i) of the Code) comparable to a residual interest in a REMIC. Such
disallowed loss would be allowed upon the sale of the other residual interest
(or comparable interest) if the rule referred to in the preceding sentence does
not apply to that sale. While this rule may be modified by Treasury regulations,
no such regulations have yet been published.
Transfers of REMIC Residual Securities. Section 860E(e) of the Code imposes
a substantial tax, payable by the transferor (or, if a transfer is through a
broker, nominee, or other middleman as the transferee's agent, payable by that
agent) upon any transfer of a REMIC Residual Security to a disqualified
organization and upon a pass-through entity (including regulated investment
companies, real estate investment trusts, common trust funds, partnerships,
trusts, estates, certain cooperatives, and nominees) that owns a REMIC Residual
Security if such pass-through entity has a disqualified organization as a
recordholder. For purposes of the preceding sentence, a transfer includes any
transfer of record or beneficial ownership, whether pursuant to a purchase, a
default under a secured lending agreement or otherwise.
The term "disqualified organization" includes the United States, any state
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of the foregoing (other than
certain taxable instrumentalities), any cooperative organization furnishing
electric energy or providing telephone service to persons in rural areas, or any
organization (other than a farmers' cooperative) that is exempt from federal
income tax, unless such organization is subject to the tax on unrelated business
income. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in such
entity are not held by disqualified organizations and (ii) information necessary
for the application of the tax described herein will be made available.
Restrictions on the transfer of a REMIC Residual Security and certain other
provisions that are intended to meet this requirement are described in the
Pooling and Servicing Agreement, and will be discussed more fully in the related
Prospectus Supplement relating to the offering of any REMIC Residual Security.
In addition, a pass-through entity (including a nominee) that holds a REMIC
Residual Security may be subject to additional taxes if a disqualified
organization is a record-holder therein. A transferor of a REMIC Residual
Security (or an agent of a transferee of a REMIC Residual Security, as the case
may be) will be relieved of such tax liability if (i) the transferee furnishes
to the transferor (or the transferee's agent) an affidavit that the transferee
is not a disqualified organization, and (ii) the transferor (or the transferee's
agent) does not have actual knowledge that the affidavit is false at the time of
the transfer. Similarly, no such tax will be imposed on a pass-through entity
for a period with respect to an interest therein owned by a disqualified
organization if (i) the record-holder of such interest furnishes to the
pass-through entity an affidavit that it is not a disqualified organization, and
(ii) during such period, the pass-through entity has no actual knowledge that
the affidavit is false.
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Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" to a U.S. Person (as defined below in "--Foreign Investors--Grantor
Trust Securities and REMIC Regular Securities") will be disregarded for all
federal tax purposes unless no significant purpose of the transfer is to impede
the assessment or collection of tax. A REMIC Residual Security would be treated
as constituting a noneconomic residual interest unless, at the time of the
transfer, (i) the present value of the expected future distributions on the
REMIC Residual Security is no less than the product of the present value of the
"anticipated excess inclusions" with respect to such Security and the highest
corporate rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the applicable REMIC Trust in an amount sufficient to satisfy the liability
for income tax on any "excess inclusions" at or after the time when such
liability accrues. Anticipated excess inclusions are the excess inclusions that
are anticipated to be allocated to each calendar quarter (or portion thereof)
following the transfer of a REMIC Residual Security, determined as of the date
such Security is transferred and based on events that have occurred as of that
date and on the Prepayment Assumption. See "--Discount and Premium" and
"--Taxation of Holders of REMIC Residual Securities-- Excess Inclusions."
The REMIC Regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC Residual Security has "improper knowledge" (i.e., 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 Trust). A
transferor is presumed not to have improper knowledge if (i) the transferor
conducts, at the time of a transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
come due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future; and (ii) the
transferee makes certain representations to the transferor in the affidavit
relating to disqualified organizations discussed above. Transferors of a REMIC
Residual Security should consult with their own tax advisors for further
information regarding such transfers.
Reporting and Other Administrative Matters. For purposes of the
administrative provisions of the Code, each REMIC Trust will be treated as a
partnership and the Holders of REMIC Residual Securities will be treated as
partners. The Trustee will prepare, sign and file federal income tax returns for
each REMIC Trust, which returns are subject to audit by the IRS. Moreover,
within a reasonable time after the end of each calendar year, the Trustee will
furnish to each Holder that received a distribution during such year a statement
setting forth the portions of any such distributions that constitute interest
distributions, original issue discount, and such other information as is
required by Treasury regulations and, with respect to Holders of REMIC Residual
Securities in a REMIC Trust, information necessary to compute the daily portions
of the taxable income (or net loss) of such REMIC Trust for each day during such
year. The Trustee will also act as the tax matters partner for each REMIC Trust,
either in its capacity as a Holder of a REMIC Residual Security or in a
fiduciary capacity. Each Holder of a REMIC Residual Security, by the acceptance
of its REMIC Residual Security, agrees that the Trustee will act as its
fiduciary in the performance of any duties required of it in the event that it
is the tax matters partner.
Each Holder of a REMIC Residual Security is required to treat items on its
return consistently with the treatment on the return of the REMIC Trust, unless
the Holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Trust. The IRS may assert a deficiency resulting from a failure to comply
with the consistency requirement without instituting an administrative
proceeding at the REMIC Trust level. Unless otherwise specified in the related
Prospectus Supplement, the Trustee does not intend to register any REMIC Trust
as a tax shelter pursuant to section 6111 of the Code.
Termination
In general, no spec al tax consequences will apply to a Holder of a REMIC
Regular Security upon the termination of a REMIC Trust by virtue of the final
payment or liquidation of the last Mortgage Loan remaining in the Trust Estate.
If a Holder of a REMIC Residual Security's adjusted basis in its REMIC Residual
Security at the time such termination occurs exceeds the amount of cash
distributed to such Holder in liquidation of its interest, although the matter
is not entirely free from doubt, it would appear that the Holder of the REMIC
Residual Security is entitled to a loss equal to the amount of such excess.
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Debt Securities
General
With respect to each series of Debt Securities, special tax counsel to the
Sponsor, will deliver its opinion to the Sponsor that (unless otherwise limited
in the related Prospectus Supplement) the Securities will be classified as debt
of the Sponsor secured by the related Mortgage Loans. Consequently, the Debt S
curities will not be treated as ownership interests in the Mortgage Loans or the
Trust. Holders will be required to report income received with respect to the
Debt Securities in accordance with their normal method of accounting. For
additional tax consequences relating to Debt Securities purchased at a discount
or with premium, see "--Discount and Premium," below.
Special Tax Attributes
As described above, Grantor Trust Securities will possess certain specia
tax attributes by virtue of their being ownership interests in the underlying
Mortgage Loans. Similarly, REMIC Securities will possess similar attributes by
virtue of the REMIC provisions of the Code. In general, Debt Securities will not
possess such special tax attributes. Investors to whom such attributes are
important should consult their own tax advisors regarding investment in Debt
Securities.
Sale or Exchange
If a Holder of a Debt Security sells or ex hanges such Security, the Holder
will recognize gain or loss equal to the difference, if 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 "--Discount and Premium--Market
Discount," below), except for certain financial institutions subject to section
582(c) of the Code, any gain or loss on the sale or exchange of a Debt Security
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.
Discount and Premium
A Security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and certain
Grantor Trust Fractional Interest Securities will be treated as having original
issue discount by virtue of the coupon stripping rules in section 1286 of the
Code. In very general terms, (i) original issue discount is treated as a form of
interest and must be included in a Holder's income as it accrues (regardless of
the Holder's regular method of accounting) using a constant yield method; (ii)
market discount is treated as ordinary income and must be included in a Holder's
income as principal payments are made on the Security (or upon a sale of a
Security); and (iii) if a Holder so elects, premium may be amortized over the
life of the Security and offset against inclusions of interest income. These tax
consequences are discussed in greater detail below.
Original Issue Discount
In general, a Security 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 Security is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial number of the Securities was sold. The issue pri e also includes any
accrued interest attributable to the period between the beginning of the first
Remittance Period and the Settlement Date. The stated redemption price at
maturity of a Security that has a notional principal amount or receives
principal only or that is or may be an Accrual Security is equal to the sum of
all distributions to be made under such Security. The stated redemption price at
maturity of any other Security is its stated principal amount, plus an amount
equal to the excess (if any) of the interest payable on the first Payment Date
over the interest that accrues for the period from the Settlement Date to the
first Payment Date.
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Notwithstanding the general definition, original issue discount will be
treated as zero if such discount is less than 0.25% of the stated redemption
price at maturity multiplied by its weighted average life. The weighted average
life of a Security is apparently computed for this purpose as the sum, for all
distributions included in the stated redemption price at maturity 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 the rate specified in the related Prospectus Supplement (the
"Prepayment Assumption") by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the Security'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 Security 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 directly applicable to REMIC Securities and Debt Securities and applicable
by analogy to Grantor Trust Securities. Investors in Grantor Trust Securities
should be aware that there can be no assurance that the rules described below
will be applied to such Securities. Under these rules (described in greater
detail below), (i) the amount and rate of accrual of original issue discount on
each series of Securities will be based on (x) the Prepayment Assumption, and
(y) in the case of a Security calling for a variable rate of interest, an
assumption that the value of the index upon which such variable rate is based
remains equal to the value of that rate on the Settlement Date, 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
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The Sponsor anticipates that the Prepayment Assumption
for each series of Securities will be consistent with this standard. The Sponsor
makes no representation, however, that the Mortgage Loans for a given series
will prepay at the rate reflected in the Prepayment Assumption for that series
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 Securities.
Each Securityholder must include in gross income the sum of the "daily
portions" of original issue discount on its Security for each day during its
taxable year on which it held such Security. For this purpose, in the case of an
original Holder, 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." The Trustee
will supply, at the time and in the manner required by the IRS, to
Securityholders, brokers and middlemen information with respect to the original
issue discount accruing on the Securities. Unless otherwise disclosed in the
related Prospectus Supplement, the Trustee will report original issue discount
based on accrual periods of one month, each beginning on a payment date (or, in
the case of the first such period, the Settlement Date) and ending on the day
before the next payment date.
Under section 1272(a)(6) of the Code, 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 Security, if any, as of the end of the accrual period and (B)
the distribution made on such Security during the accrual period of amounts
included in the stated redemption price at maturity, over (ii) the adjusted
issue price of such Security 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 Security, 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, (iii) the Prepayment Assumption, and (iv) in the case of a
Security calling for a variable rate of interest, an assumption that the value
of the index upon which such variable rate is based remains the same as its
value on the Settlement Date over the entire life of such Security. The adjusted
issue price of a Security at any time will equal the issue price of such
Security, increased by the aggregate amount of previously accrued original issue
discount with respect to such Security, and reduced by the amount of any
distributions made on such Security 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.
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In the case of Grantor Trust Strip Securities and certain REMIC Securities,
the calculation described in the preceding paragraph may produce a negative
amount of original issue discount for one or more accrual periods. No definitive
guidance has been issued regarding the treatment of such negative amounts. The
legislative history to section 1272(a)(6) indicates that such negative amounts
may be used to offset subsequent positive accruals but may not offset prior
accruals and may not be allowed as a deduction item in a taxable year in which
negative accruals exceed positive accruals. Holders of such Securities should
consult their own tax advisors concerning the treatment of such negative
accruals.
A subsequent purchaser of a Security that purchases such Security 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
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security 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 Security for all days on or after the day of purchase).
Market Discount
A Holder that purchases a Security at a market discount, that is, at a
purchase price less than the remaining stated redemption price at maturity of
such Security (or, in the case of a Security with original issue discount, its
adjusted issue price), will be required to allo ate each principal distribution
first to accrued market discount on the Security, and recognize ordinary income
to the extent such distribution does not exceed the aggregate amount of accrued
market discount on such Security not previously included in income. With respect
to Securities that have unaccrued original issue discount, such market discount
must be included in income in addition to any original issue discount. A Holder
that incurs or continues indebtedness to acquire a Security 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 Security may be
treated as accruing either (i) under a constant yield method 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 Security, in any
case taking into account the Prepayment Assumption. The Trustee will make
available, as required by the IRS, to Holders of Securities information
necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a Security will be
considered to be zero if such discount is less than 0.25% of the remaining
stated redemption price at maturity of such Security 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
Security by the subsequent purchaser. If market discount on a Security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the Security and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a Security that purchases such Security at a cost greater
than its remaining stated redemption price at maturity will be considered to
have purchased such Security (a "Premium Security") 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 a Holder makes such an election, the amount of
any interest payment that must be included in such Holder's income for each
period ending on a Payment Date will be reduced by the portion of the premium
allocable to such period based on the Premium Security'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 above under "--Market Discount"). If
such election is made by the Holder, the election will also apply to all bonds
the interest on which is not excludible from gross income ("fully taxable
bonds") held by the Holder 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 a Holder 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 Premium Security 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
Premium Security.
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Some Securities may provide for only nominal distributions of principal in
comparison to the distributions of interest thereon. It is possible that the IRS
or the Treasury Department may issue guidance excluding such Securities from the
rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that such a Security will be treated as having
original issue discount equal to the excess of the total payments to be received
thereon over its issue price. In such event, section 1272(a)(6) of the Code
would govern the accrual of such original issue discount, but a Holder would
recognize substantially the same income in any given period as would be
recognized if an election were made under section 171(c)(2) of the Code. Unless
and until the Treasury Department or the IRS publishes specific guidance
relating to the tax treatment of such Securities, the Trustee intends to furnish
tax information to Holders of such Securities in accordance with the rules
described in the preceding paragraph.
Special Election
A Holder may elect to include in gross income al "interest" that accrues on
the Security 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. A Holder 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.
Backup Withholding
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Securities, may be subject to the "backup withholding
tax" under section 3406 of the Code at a rate of 31% 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
Grantor Trust, REMIC Regular and Debt Securities
Interest, including origin l issue discount, distributable on Grantor
Trust, REMIC Regular or Debt Securities received by a Holder who or which is not
a United States person, as defined below (other than a foreign bank and certain
other persons), generally will not be subject to the normal 30 percent United
States withholding tax (or lower treaty rate) imposed with respect to such
payments, provided that such Holder fulfills certain certification requirements.
Under such requirements, the Holder must certify, under penalties of perjury,
that it is not a "United States person" and provide its name and address. If
income or gain with respect to a security is effectively connected with a United
States trade or business carried on by a Holder who or which is not a United
States person, the 30 percent withholding tax will not apply but such Holder
will be subject to United States federal income tax at graduated rates
applicable to United States persons.
For this purpose, "United States person" means a person who or which is for
United States federal income tax purposes 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 United States federal income tax, regardless
of the source of its income. Proposed Treasury regulations, which would be
effective for payments made after December 31, 1997, if adopted in their current
form, would provide alternative certification requirements and means for
claiming the exemption from federal income and withholding tax. Investors who
are Non-U.S. Persons should consult their own tax advisors regarding the
specific tax consequences to them of owning a Grantor Trust, REMIC Regular or
Debt Security.
REMIC Residual Securities
Amounts distributed to a Holder of a REMIC Residual Security that is a not
a U.S. Person generally will be treated as interest f r purposes of applying the
30% (or lower treaty rate) withholding tax on income that is not effectively
connected with a U.S. trade or business. Temporary Treasury Regulations clarify
that amounts not constituting excess inclusions that are distributed on a REMIC
Residual Security to a Holder that is not a U.S. Person generally will be exempt
from U.S. federal income and withholding tax, subject to the same conditions as
described above, but only to the extent that the obligations directly underlying
the REMIC Trust that issued the REMIC Residual Security (e.g., Mortgage Loans or
regular interests in another REMIC) were issued after July 18, 1984. In no case
will any portion of REMIC income that constitutes an excess inclusion be
entitled to any exemption from the withholding tax or a reduced treaty rate for
withholding. See "--REMIC Securities--Taxation of Holders of REMIC Residual
Securities--Excess Inclusions."
THE FEDERAL INCOME TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON AN INVESTOR'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
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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 any of Standard & Poor's Ratings Services ("S&P"),
Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Rating
Co. ("D&P") or Fitch Investors Service, L.P. ("Fitch");
(3) The Trustee is not an affiliate of any of the Depositor, the
underwriter specified in the applicable Prospectus Supplement, the Servicer
(if any), any obligor with respect to Mortgage Loans included in the Trust
Fund constituting more than five percent of the aggregate unamortized
principal balance of the assets in the Trust Fund, or any affiliate of such
parties (the "Restricted Group"); and
(4) The Plan investing in the Certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
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If the conditions to an Individual Exemption are met, whether or not a
Plan's assets would be deemed to include an ownership interest in the Mortgage
Loans in a Mortgage Pool, the acquisition, holding and resale of the
Certificates by Plans would be exempt from the prohibited transaction provisions
of ERISA and the Code.
Moreover, an Individual Exemption can provide relief from certain
self-dealing/conflict of interest prohibited transactions, only if, among other
requirements, (i) a Plan's investment in Certificates of any class does not
exceed twenty-five percent of all of the Certificates of that Class outstanding
at the time of the acquisition and (ii) immediately after the acquisition no
more than twenty-five percent of the assets of the Plan with respect to which
such person is a fiduciary are invested in Certificates representing an interest
in one or more trusts containing assets sold or served by the same person.
PTE 83-1. Prohibited Transaction Class Exemption 83-1 for Certain
Transactions Involving Mortgage Pool Investment Trusts ("PTE 83-1") permits
certain transactions involving the creation, maintenance and termination of
certain residential mortgage pools and the acquisition and holding of certain
residential mortgage pool pass-through certificates by Plans, whether or not the
Plan's assets would be deemed to include an ownership interest in the mortgages
in the mortgage pool, and whether or not such transactions would otherwise be
prohibited under ERISA.
The term "mortgage pool pass-through certificate" is defined in PTE 83-1 as
"a certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such a certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor." It appears that, for purposes of PTE 83-1, the
term "mortgage pool pass-through certificate" would include Certificates issued
in a single Class or in multiple classes that evidence a beneficial undivided
fractional interest in a mortgage pool of one- to four-family residential
mortgage loans and entitle the holder thereof to both a specified percentage of
future interest payments (after permitted deductions) and a specified percentage
of future principal payments.
However, it appears that PTE 83-1 does or might not apply to the purchase
and holding of (a) Certificates that evidence the beneficial ownership only of a
specified percentage of future interest payments (after permitted deductions) on
a Trust Fund or only of a specified percentage of future principal payments on a
Trust Fund, (b) Residual Certificates, (c) Certificates evidencing ownership
interests in a Trust Fund which includes Mortgage Loans secured by multifamily
residential properties or shares issued by cooperative housing corporations, or
(d) Certificates which are subordinated to other classes of Certificates of such
Series. Accordingly, unless exemptive relief other than PTE 83-1 applies, Plans
should not purchase any such Certificates.
PTE 83-1 sets forth certain "general conditions" and "specific conditions"
to its applicability. Section 11 of PTE 83-1 sets forth the following general
conditions to the application of the exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans or the property
securing such loans, and for indemnifying certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments;
(ii) the existence of a pool trustee who is not an affiliate of the pool
sponsor; and (iii) a requirement that the sum of all payments made to and
retained by the pool sponsor, and all funds inuring to the benefit of the pool
sponsor as a result of the administration of the mortgage pool, must represent
not more than adequate consideration for selling the mortgage loans plus
reasonable compensation for services provided by the pool sponsor to the pool.
The system of insurance or protection referred to in clause (i) above must
provide such protection and indemnification up to an amount not less than the
greater of 1% of the aggregate unpaid principal balance of the pooled mortgages
or the unpaid principal balance of the largest mortgage in the pool. It should
be noted that in promulgating PTE 83-1 (and a predecessor exemption), the
Department did not have under its consideration interests in pools of the exact
nature as some of the Certificates described herein.
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Exempt Plans
Employee benefit plans which are governmental plans (as defined in Section
3(32) of ERISA), and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements and assets of such plans may be invested
in Senior Certificates without regard to the ERISA considerations described
above, subject to the provisions of other applicable federal and state law.
Unrelated Business Taxable Income -- Residual Certificates
The purchase of a Residual Certificate by such plans, or by most varieties
of ERISA Plans, may give rise to "unrelated business taxable income" as
described in Code Sections 511-515 and 860E. Further, prior to the purchase of
Residual Certificates, a prospective transferee may be required to provide an
affidavit to a transferor that it is not a "Disqualified Organization" which
term includes certain tax-exempt entities not subject to Code Section 511,
including certain governmental plans, as discussed herein under the caption
"Certain Federal Income Tax Consequences--Federal Income Tax Consequences for
REMIC Certificates--Income Tax Consequences for REMIC Certificates--Taxation of
Residual Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates."
Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is particularly important that potential
investors who are Plan fiduciaries carefully consider the consequences under
ERISA of their acquisition and ownership of Certificates.
The sale of Certificates to a Plan is in no respect a representation by the
Depositor or the applicable underwriter that this investment meets all relevant
legal requirements with respect to investments by Plan generally or any
particular Plan, or that this investment is appropriate for Plans generally or
any particular Plan.
LEGAL INVESTMENT
If specified in the related Prospectus Supplement, the Certificates of one
or more classes offered pursuant to this Prospectus will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended ("SMMEA"), so long as they are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization. As "mortgage related securities," such Certificates will
constitute legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including, but not limited
to, state-chartered savings banks, commercial banks, savings and loan
associations and insurance companies, as well as trustees and state government
employee retirement systems) created pursuant to or existing under the laws of
the United States or of any state (including the District of Columbia and Puerto
Rico) whose authorized investments are subject to state regulation to the same
extent that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Pursuant to SMMEA, a
number of states enacted legislation, on or before the October 3, 1991 cutoff
for such enactments, limiting to varying extents the ability of certain entities
(in particular, insurance companies) to invest in "mortgage related securities,"
in most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Accordingly, the investors affected by such
legislation will be authorized to invest in the Certificates only to the extent
provided in such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with mortgage
related securities without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in mortgage related
securities, and national banks may purchase mortgage related securities for
their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. ss. 24 (Seventh), subject in each
case to such regulations as the applicable federal regulatory authority may
prescribe. In this connection, federal credit unions should review National
Credit Union Administration (the "NCUA") Letter to Credit Unions No. 96, as
modified by Letter No. 108, which includes guidelines to assist federal credit
unions in making investment decisions for mortgage related securities. The NCUA
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has adopted rules, effective December 2, 1991, which prohibit federal credit
unions from investing in certain mortgage related securities (including
securities such as certain series, Classes or Subclasses of Certificates),
except under limited circumstances.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Securities Activities" dated
January 28, 1992 (the "Policy Statement") of the Federal Financial Institutions
Examination Council. The Policy Statement, which has been adopted by the Board
of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Comptroller of the Currency and the Office of Thrift
Supervision, effective February 10, 1992, and by the NCUA (with certain
modifications), effective June 26, 1992, prohibits depository institutions from
investing in certain "high-risk" mortgage securities (including securities such
as certain series, Classes or Subclasses of Certificates), except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any
Certificates, as certain series, Classes or Subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying" and, with regard to any Certificates
issued in book-entry form, provisions which may restrict or prohibit investment
in securities which are issued in book-entry form.
Other classes of Certificates offered pursuant to this Prospectus will not
constitute "mortgage related securities" under SMMEA because they will not
represent beneficial ownership interests in qualifying mortgage loans under
SMMEA. The appropriate characterization of those Certificates under various
legal investment restrictions, and thus the ability of investors subject to
these restrictions to purchase the Certificates, may be subject to significant
interpretive uncertainties. All investors whose investment authority is subject
to legal restrictions should consult their own legal advisors to determine
whether, and to what extent, the Certificates will constitute legal investments
for them.
No representation is made as to the proper characterization of the
Certificates for legal investment or financial institution regulatory purposes,
or as to the ability of particular investors to purchase Certificates under
applicable legal investment restrictions. The uncertainties described above may
(and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the Certificates adversely
affect the liquidity of the non-SMMEA Certificates.
Investors should consult with their own legal advisors in determining
whether and to what extent the Certificates constitute legal investments for
such investors.
PLAN OF DISTRIBUTION
The Depositor may sell the Certificates offered hereby in Series either
directly or through underwriters. The related Prospectus Supplement or
Prospectus Supplements for each Series will describe the terms of the offering
for that Series and will state the public offering or purchase price of each
Class of Certificates of such Series, or the method by which such price is to be
determined, and the net proceeds to the Depositor from such sale.
If the sale of any Certificates is made pursuant to an underwriting
agreement pursuant to which one or more underwriters agree to act in such
capacity, such Certificates will be acquired by such underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
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varying prices to be determined at the time of sale or at the time of commitment
therefor. Firm commitment underwriting and public reoffering by underwriters may
be done through underwriting syndicates or through one or more firms acting
alone. The specific managing underwriter or underwriters, if any, with respect
to the offer and sale of a particular Series of Certificates will be set forth
on the cover of the Prospectus Supplement related to such Series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement. The Prospectus Supplement will describe any discounts and
commissions to be allowed or paid by the Depositor to the underwriters, any
other items constituting underwriting compensation and any discounts and
commissions to be allowed or paid to the dealers. The obligations of the
underwriters will be subject to certain conditions precedent. Unless otherwise
provided in the related Prospectus Supplement, the underwriters with respect to
a sale of any Class of Certificates will be obligated to purchase all such
Certificates if any are purchased. Pursuant to each such underwriting agreement,
the Depositor will indemnity the related underwriters against certain civil
liabilities, including liabilities under the Securities Act.
If any Certificates are offered other than through underwriters pursuant to
such underwriting agreements, the related Prospectus Supplement or Prospectus
Supplements will contain information regarding the terms of such offering and
any agreements to be entered into in connection with such offering.
Purchasers of Certificates, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the Securities Act of 1933 in connection with reoffers and sales by
them of Certificates. Certificateholders should consult with their legal
advisors in this regard prior to any such reoffer and sale.
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Depositor, any affiliate thereof or any other person or
persons specified therein may purchase some or all of one or more Classes of
Certificates of such Series from the underwriter or underwriters or such other
person or persons specified in such Prospectus Supplement. Such purchaser may
thereafter from time to time offer and sell, pursuant to this Prospectus and the
related Prospectus Supplement, some or all of such Certificates so purchased,
directly, through one or more underwriters to be designated at the time of the
offering of such Certificates, through dealers acting as agent and/or principal
as in such other manner as may be specified in the related Prospectus
Supplement. Such offering may be restricted in the manner specified in such
Prospectus Supplement. Such transactions may be effected at market prices
prevailing at the time of sale, at negotiated prices or at fixed prices. Any
underwriters and dealers participating in such purchaser's offering of such
Certificates may receive compensation in the form of underwriting discounts or
commissions from such purchaser and such dealers may receive commissions from
the investors purchasing such Certificates for whom they may act as agent (which
discounts or commissions will not exceed those customary in those types of
transactions involved). Any dealer that participates in the distribution of such
Certificates may be deemed to be an "underwriter" within the meaning of the
Securities Act of 1933, and any commissions and discounts received by such
dealer and any profit on the resale of such Certificates by such dealer might be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
LEGAL MATTERS
Certain legal matters and certain tax matters will be passed upon for the
Depositor by Dewey Ballantine, New York, New York and/or such other counsel as
will be named on the related Prospectus Supplement.
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.
99
<PAGE>
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Commission in
Washington, D.C. Copies may be obtained at rates prescribed by the Commission
upon request to the Commission, and may be inspected, without charge, at the
offices of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. See
"Available Information."
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMCs Information Statement and the most recent Supplement to such Information
Statement and any quarterly report made available by FHLMC can be obtained by
writing or calling the Investor Inquiry Department at FHLMC at 8200 Jones Branch
Drive, McLean Virginia 22102 (outside Washington, D.C. metropolitan area,
telephone 800-336-FMPC; within Washington, D.C. metropolitan area, telephone
703-759-8160). The Depositor has not and will not participate in the preparation
of FHLMC's Offering Circulars, Information Statements or Supplements.
Copies of FNMA's most recent Prospectus for FNMA Certificates and FNMA's
annual report and quarterly financial statements as well as other financial
information are available from the Senior Vice President for Investor Relations
of FNMA, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7115). The
Depositor has not and will not participate in the preparation of FNMA's
Prospectuses.
100
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
Term Page
- ---- ----
Act...........................................................................72
Advance.......................................................................58
Advance Reserve...............................................................44
Advances......................................................................10
APR...........................................................................21
ARM Buy-Outs..................................................................21
Balloon Loan..................................................................19
Balloon Loans.................................................................13
Balloon Period ...............................................................19
Basic Senior Class Distribution...............................................35
Buy-Down Account..............................................................19
Buy-Down Loans................................................................19
Call protection...............................................................40
CERCLA........................................................................78
Certificate Account...........................................................55
Certificate Account Depository................................................55
Certificateholder .............................................................1
Certificates...................................................................1
Class..........................................................................1
Code .....................................................................11, 81
Commission.....................................................................3
Compound Interest Certificates................................................31
Contract Pool ................................................................17
Contract Rate..............................................................7, 21
Contracts..................................................................1, 21
Convertible Mortgage Loans....................................................17
Cooperative Loans ............................................................17
Cooperative Notes ............................................................17
Cooperatives .................................................................17
Credit Enhancer ..............................................................16
Cut-Off Date Aggregate Principal Balance..................................18, 22
D&P..........................................................................107
Debt Securities...............................................................82
Deferred Interest.........................................................13, 19
Definitive Certificate........................................................30
Deleted Loan..................................................................27
Depositor...............................................................1, 4, 52
Determination Date............................................................32
Direct or Indirect Participants...............................................15
Disqualified Organization.....................................................94
Distribution Dates.............................................................7
DTC...........................................................................30
Due Date..................................................................18, 22
Due Period....................................................................41
Eligible Investments..........................................................44
Environmental Condition.......................................................78
EPA...........................................................................79
ERISA....................................................................11, 106
Excess servicing ...........................................................102
Extension protection..........................................................40
FASIT .........................................................................2
FASIT High-Yield Securities ................................................2,11
FASIT Ownership Interest ......................................................2
FASIT Regular Securities ...................................................2,11
101
<PAGE>
FDIC..........................................................................55
FHLBB.........................................................................72
FIRREA........................................................................80
Fitch........................................................................107
Foreign persons..............................................................105
Funding Period................................................................32
Gain From Acquired Property...................................................34
GEM Loans.....................................................................20
GPM Fund......................................................................21
GPM Mortgage Loans............................................................20
Grantor Trust Estate..........................................................82
Indemnification Payments......................................................34
Initial Deposit...............................................................43
Insurance Proceeds............................................................56
Interest Accrual Period.......................................................49
Interest Rate..................................................................1
Liquidated Contract...........................................................34
Liquidated Mortgage Loan..................................................14, 34
Liquidation Proceeds......................................................14, 56
Loan Sale Agreement...........................................................24
Loan-to-Value Ratio.......................................................18, 21
Moody's......................................................................107
Mortgage Certificate Pool.....................................................17
Mortgage Loans.................................................................1
Mortgage Notes................................................................17
Mortgage Pool.................................................................17
Mortgage Rate..................................................................7
Mortgaged Properties..........................................................19
Mortgages.....................................................................17
Mortgagor.....................................................................13
Multi-Class Certificates.......................................................1
Net Contract Rate .............................................................7
Net Insurance Proceeds........................................................56
Net Liquidation Proceeds......................................................56
Net Mortgage Rate .............................................................7
Non-REMIC Certificates........................................................82
Notional Amount................................................................1
OTS...........................................................................72
Pass-Through Entity...........................................................94
Pass-Through Rate .............................................................7
Paying Agent .................................................................57
Payment Deficiencies..........................................................43
Percentage Certificates.......................................................30
Plans........................................................................106
Pool...........................................................................1
Pool Distribution Amount......................................................32
Pool Value Group ............................................................39
Pooling and Servicing Agreement................................................4
Prepayment Interest Shortfall.................................................58
PTE 83-1.....................................................................108
Purchase Obligation...........................................................12
Purchase Price................................................................26
Rating Agency.................................................................11
Record Date....................................................................7
Registration Statement.........................................................3
102
<PAGE>
Regular Certificates..........................................................29
Relief Act................................................................16, 79
REMIC.........................................................................82
REMIC Certificates............................................................82
REMIC Regulations ............................................................81
Repurchase Proceeds...........................................................32
Residual Certificates.........................................................29
Residual Holders..............................................................90
Scheduled Principal...........................................................33
Secured-creditor exemption....................................................78
Securities Act.................................................................3
Senior Certificates........................................................2, 29
Senior Class Credit Enhancement...............................................35
Senior Class Distributable Amount.............................................33
Senior Class Principal Portion................................................33
Senior Class Shortfall........................................................35
Senior Class Shortfall Accruals...............................................35
Series.........................................................................1
Servicer.......................................................................1
Servicing Account ............................................................61
Servicing Fee..................................................................7
Shifting Interest Certificates.................................................2
SMMEA ...................................................................10, 109
Special Distributions.........................................................41
Special Hazard Contract.......................................................46
Special Hazard Mortgage Loan..................................................46
Standard Certificateholder...................................................100
Standard Certificates..........................................................1
Standard Hazard Insurance Policy..............................................23
Stated Amount..................................................................1
Stripped Certificates..........................................................1
Sub-Servicer...............................................................4, 54
Sub-Servicing Account.........................................................55
Subclass.......................................................................1
Subordinated Amount............................................................9
Subordinated Certificates..................................................2, 29
Subordinated Class Distributable Amount.......................................33
Subordinated Class Principal Portion..........................................34
Subordination Reserve Fund.....................................................9
Substitute Loan...............................................................27
Thrift institutions...........................................................93
Title V...................................................................73, 77
Trust Fund.....................................................................1
U.S. Person...................................................................95
UCC.......................................................................69, 74
Unaffiliated Sellers...........................................................4
Unpaid Interest Shortfall.....................................................36
Voting Interests..............................................................65
Window Period.................................................................72
Window Period Loans...........................................................72
Window Period States..........................................................72
103
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The expenses expected to be incurred in connection with the issuance
and distribution of the securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
SEC Registration Fee........................................ $454,545
NASD Filing Fee............................................. $ N/A
Blue Sky Fees and Expenses.................................. $ 15,000
Legal Fees and Expenses..................................... $250,000
Accounting Fees and Expenses................................ $ 75,000
Trustee's Fees and Expenses................................. $ 50,000
Printing and Engraving Fees................................. $120,000
Rating Agency Fees.......................................... $ 20,000
Miscellaneous............................................... $ 10,000
--------
Total..................................................... $769,545
========
Item 15. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law provides that a
Delaware corporation may indemnify any persons, including officers and
directors, who are, or are threatened to be made, parties to any threatened,
pending or completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such officer or
director acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, for criminal proceedings,
had no reasonable cause to believe that his conduct was illegal. A Delaware
corporation may indemnify officers and directors in an action by or in the right
of the corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer of
director actually and reasonably incurred.
The Pooling and Servicing Agreements for each series of Certificates
will provide that Prudential and any director, officer, employee or agent of
Prudential will 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 negligence in the performance of his or its
duties thereunder or by reason of reckless disregard of his or its obligations
and duties thereunder.
II-1
<PAGE>
Item 16. Exhibits.
(a) Financial statements filed as part of the Registration Statement: Not
applicable.
(b) Exhibits -
1.1(a)* Form of Underwriting Agreement (Version A).
1.1(b)* Form of Underwriting Agreement (Version B).
4.1(a)* Form of Pooling and Servicing Agreement (Straight
Pass-Through), including form of Certificates.
4.1(b)* Form of Pooling and Servicing Agreement (Senior/Subordinated),
including form of Certificates.
4.1(c)* Form of Pooling and Servicing Agreement (Multiclass),
including form of Certificates.
4.1(d)* Form of Pooling and Servicing Agreement (Senior/Subordinated),
including form of Certificates.
4.1(e)** Form of Forward Purchase Agreement.
5.1*** Opinion of Dewey Ballantine regarding legality of Certificates.
8.1*** Opinion of Dewey Ballantine regarding tax matters.
10.1* Excerpts from Purchase Agreement.
23.1*** Consent of Dewey Ballantine (included as part of Exhibit 5.1
and 8.1).
99.1(a)** Form of Prospectus Supplement.
99.1(b)** Form of Prospectus Supplement (Pre-funding).
- -------------------
* Previously filed in connection with Registration Statement on Form S-11
(Registration No. 33- 24717) and incorporated herein by reference.
** Previously filed in connection with Registration Statement on Form S-3
(Registration No. 33- 91148) and incorporated herein by reference.
*** Previously filed.
Item 17. Undertakings.
(a) Undertaking pursuant to Rule 415
The undersigned Registrant hereby undertakes:
II-2
<PAGE>
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
(iii)to include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change of such information in the
Registration Statement.
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment any
of the Securities being registered which remain unsold at the
termination of the offering.
(b) Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) Undertaking in respect of incorporation by reference.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934, as amended, that is incorporated by reference
in the Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, State of New York, on the 5th day of June, 1997.
PRUDENTIAL SECURITIES SECURED FINANCING
CORPORATION
By: /s/ Vincent T. Pica
-------------------------------
Vincent T. Pica
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 has been signed below by the following persons in the capacities indicated
on June 5, 1997.
Signature Title
- --------- -----
/s/ Vincent T. Pica Director and President
- ---------------------------- (Principal Executive Officer)
Vincent T. Pica
/s/ Norman Chaleff Director
- ----------------------------
Norman Chaleff
/s/ Leland B. Paton Director
- ----------------------------
Leland B. Paton
/s/ Alan D. Hogan Director
- ----------------------------
Alan D. Hogan
/s/ Martin Pfinsgraff Chief Financial Officer
- ---------------------------- (Principal Financial
Martin Pfinsgraff Officer and Principal
Accounting Officer)
II-4
<PAGE>
EXHIBIT INDEX
Exhibit Description
Number of Document
- ------ -----------
1.1(a)* Form of Underwriting Agreement (Version A).
1.1(b)* Form of Underwriting Agreement (Version B).
4.1(a)* Form of Pooling and Servicing Agreement
(Straight Pass-Through), including form of Certificates.
4.1(b)* Form of Pooling and Servicing Agreement
(Senior/Subordinated), including form of Certificates.
4.1(c)* Form of Pooling and Servicing Agreement (Multiclass),
including form of Certificates.
4.1(d)* Form of Pooling and Servicing Agreement
(Senior/Subordinated), including form of Certificates.
4.1(e)** Form of Forward Purchase Agreement.
5.1*** Opinion of Dewey Ballantine regarding legality
of Certificates.
8.1*** Opinion of Dewey Ballantine regarding tax matters.
10.1* Excerpts from Purchase Agreement.
23.1*** Consent of Dewey Ballantine (included as
part of Exhibit 5.1 and 8.1).
99.1(a)** Form of Prospectus Supplement.
99.1(b)** Form of Prospectus Supplement (Pre-funding).
- -------------------
* Previously filed in connection with Registration Statement on Form S-11
(Registration No. 33-24717) and incorporated herein by reference.
** Previously filed in connection with Registration Statement on Form S-3
(Registration No. 33- 91148) and incorporated herein by reference.
*** Previously filed.
