PROSPECTUS SUPPLEMENT
(To Prospectus Dated June 10, 1997)
Emergent Home Equity Loan Trust 1997-4
$148,500,000
$36,000,000 Class A-1 Variable Rate Notes
$22,000,000 Class A-2 6.470% Fixed Rate Notes
$20,000,000 Class A-3 6.505% Fixed Rate Notes
$29,000,000 Class A-4 6.700% Fixed Rate Notes
$26,500,000 Class A-5 7.080% Fixed Rate Notes
$15,000,000 Class A-6 6.685% Fixed Rate Notes
Emergent Group, Inc.
(Parent of Originator)
[LOGO OMITTED] [LOGO OMITTED]
Emergent Mortgage Corp.
(Servicer & Originator)
Prudential Securities Secured Financing Corporation
(Depositor)
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The Emergent Home Equity Loan Asset Backed Securities, Series 1997-4
(collectively, the "Securities") will consist of six classes of Notes
(collectively the "Notes" or the "Class A Notes") of Emergent Home Equity Loan
Trust 1997-4 (the "Trust"), designated as (i) the Class A-1 Variable Rate Notes
(the "Class A-1 Variable Rate Notes" or the "Variable Rate Notes"), (ii) the
Class A-2 6.470% Fixed Rate Notes (the "Class A-2 Fixed Rate Notes"), (iii) the
Class A-3 6.505% Fixed Rate Notes (the "Class A-3 Fixed Rate Notes"), (iv) the
Class A-4 6.700% Fixed Rate Notes (the "Class A-4 Fixed Rate Notes"), (v) the
Class A-5 7.080% Fixed Rate Notes (the "Class A-5 Fixed Rate Notes") and the
Class A-6 6.685% Fixed Rate Notes (the "Class A-6 Fixed Rate Notes" and,
collectively with the Class A-2 Fixed Rate Notes, the Class A-3 Fixed Rate
Notes, the Class A-4 Fixed Rate Notes and the Class A-5 Fixed Rate Notes, the
"Fixed Rate Notes"), together with certificates (collectively, the
"Certificates") representing beneficial ownership interests in the Trust. The
rights of the holders of the Certificates to receive distributions with respect
to the Mortgage Loans (defined below) will be subordinate to the rights of the
holders of the Class A Notes to the extent described herein. Only the Class A
Notes are offered hereby.
Payments in respect of principal and interest on the Class A Notes will be
made, to the extent described herein, on the 15th day of each month or, if such
day is not a business day, on the next succeeding business day, beginning on
January 15, 1998 (each, a "Payment Date"). Interest payable with respect to each
Payment Date will accrue, in the case of the Variable Rate Notes, during the
period from and including each Payment Date (or, with respect to the January 15,
1998 Payment Date, the Closing Date) to and including the day preceding the
current Payment Date, and, in the case of the Fixed Rate Notes, during the
calendar month immediately preceding the month in which the current Payment Date
shall occur. Interest will be calculated, in the case of the Variable Rate
Notes, on the basis of the actual number of days elapsed in the related Interest
Accrual Period (defined below) and a 360 day year, and, in the case of the Fixed
Rate Notes, on the basis of a 360-day year consisting of twelve 30-day months,
and will be based on the then outstanding applicable Note Principal Balance
(defined below) and the applicable Interest Rate (defined below) thereon,
subject to deferral as described herein based on certain interest shortfalls.
On or before the date of issuance of the Notes, Financial Security
Assurance Inc. (the "Insurer") will issue a Financial Guaranty Insurance Policy
(the "Policy") relating to the Notes in favor of the Indenture Trustee. The
Policy will require the Insurer to make certain Insured Payments (as defined
herein) on the Notes. See "Description of the Notes -- Financial Guaranty
Insurance Policy" herein.
FSA [LOGO]
PROCEEDS OF THE ASSETS COMPRISING THE TRUST PROPERTY (DEFINED BELOW) AND
PROCEEDS FROM THE POLICY ARE THE SOLE SOURCE OF PAYMENTS ON THE CLASS A NOTES.
THE CLASS A NOTES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN THE
DEPOSITOR, THE ORIGINATOR, THE CONTRIBUTOR, THE SPONSOR, THE SERVICER, THE
INDENTURE TRUSTEE, THE OWNER TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES.
NEITHER THE CLASS A NOTES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS"
BEGINNING ON PAGE S-20 OF THIS PROSPECTUS SUPPLEMENT.
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The Class A Notes will be purchased by Prudential Securities Incorporated
(the "Underwriter") and will be offered by the Underwriter from time to time to
the public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds from the sale of the Class A Notes will
be approximately $147,980,250, before deducting expenses estimated to be
approximately $600,000 in the aggregate, and before adding accrued interest. See
"Use of Proceeds" herein.
The Class A Notes are offered by the Underwriter when, as and if issued,
subject to delivery by the Trust and acceptance by the Underwriter, to prior
sale and to withdrawal, cancellation or modification of the offer without
notice. It is expected that the Class A Notes will be available for delivery
through the facilities of The Depository Trust Company, CEDEL S.A. and Euroclear
on or about December 23, 1997.
Prudential Securities Incorporated
The date of this Prospectus Supplement is December 4, 1997
<PAGE>
The Trust is a business trust formed under the Delaware Business Trust Act
pursuant to a Trust Agreement dated as of November 26, 1997 (the "Trust
Agreement") between Emergent Residual Holding Corp., as Sponsor, and Wilmington
Trust Company, as Owner Trustee (the "Owner Trustee").
The Notes are limited recourse debt obligations of the Trust payable solely
from Trust Property and the Policy. The property of the Trust (the "Trust
Property") consists primarily of a segregated pool (the "Mortgage Pool") of
closed end, fixed rate home equity loans secured by mortgages on single family
residences (which may be attached, detached, part of a two-to-four family
dwelling, a condominium unit, townhouse or unit in a planned unit development)
and manufactured housing (the "Mortgage Loans"). The Mortgage Loans were or will
be originated or acquired by Emergent Mortgage Corp. (the "Originator") in the
ordinary course of its business. The Originator will contribute all of its
right, title and interest in and to the Mortgage Loans to Emergent Mortgage
Holdings Corporation (the "Contributor") pursuant to a "Contribution Agreement
and Assignment" dated as of December 1, 1997 between the Originator, the
Contributor and Emergent Group, Inc. The Contributor will then contribute all of
its right, title and interest in and to the Mortgage Loans and any rights
against the Originator under the Contribution Agreement and Assignment to the
Sponsor pursuant to a "Contribution Agreement and Assignment" dated as of
December 1, 1997 between the Contributor, the Sponsor and Emergent Group, Inc.
The Sponsor will then sell all of its right, title and interest in and to the
Mortgage Loans and any rights against the Originator and/or the Contributor
under the relevant Contribution Agreement and Assignment to the Depositor
pursuant to an "Unaffiliated Seller's Agreement" dated as of December 1, 1997
between the Sponsor and the Depositor. The Depositor will transfer the Mortgage
Loans and its rights against the Originator, Contributor and Sponsor to the
Trust pursuant to a "Sale and Servicing Agreement," dated as of December 1, 1997
(the "Sale and Servicing Agreement"), among the Trust, the Depositor, Emergent
Mortgage Corp., as Servicer, and First Union National Bank, as Indenture Trustee
(the "Indenture Trustee"). The Notes will be issued by the Trust, and will be
secured by the Mortgage Loans and entitled to the benefits of the Policy, under
an Indenture dated as of December 1, 1997 between the Trust and the Indenture
Trustee (the "Indenture").
The yield to maturity on the Class A Notes will be sensitive to the rate
and timing of principal payments (including prepayments, defaults and
repurchases) on the Mortgage Loans. The Mortgage Loans may be prepaid in full or
in part at any time, generally without penalty. See "Summary of Prospectus
Supplement -- Special Prepayment Considerations", "-- Special Yield
Considerations" and "Yield on the Notes" herein.
An election will be made to treat the Trust as a "real estate investment
trust" ("REIT") for federal income tax purposes. As described more fully herein
and in the Prospectus, the Class A Notes will be treated as indebtedness of the
Trust for federal income tax purposes. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
Prior to their issuance, there has been no market for the Class A Notes.
There is no assurance that a market for the Class A Notes will develop or, if it
does develop, that it will provide the holders of the Class A Notes (the "Class
A Noteholders") with liquidity or will continue for the life of the Class A
Notes. The Underwriter intends, but is not obligated, to make a market in the
Class A Notes. See "Risk Factors" herein.
As provided herein under "The Insurer -- Incorporation of Certain Documents
by Reference," the Originator will provide without charge to any person to whom
this Prospectus Supplement is delivered, upon oral or written request of such
person, a copy of any or all financial statements incorporated herein by
reference. Requests for such copies should be directed as provided under "The
Insurer -- Incorporation of Certain Documents by Reference" herein.
The Class A Notes offered by this Prospectus Supplement are being offered
pursuant to its Prospectus dated June 10, 1997, of which this Prospectus
Supplement is a part and which accompanies this Prospectus Supplement. The
Prospectus contains important information regarding this offering which is not
contained herein, and prospective investors are urged to read the Prospectus and
this Prospectus Supplement in full. Sales of the Class A Notes may not be
consummated unless the purchaser has received both this Prospectus Supplement
and the Prospectus.
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Class A Notes, whether or not participating in
this distribution, may be required to deliver a Prospectus Supplement and the
Prospectus to which it relates. This delivery requirement is in addition to the
obligation of dealers to deliver a Prospectus Supplement and Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
To the extent that any statements in this Prospectus Supplement modify
statements contained in the Prospectus, the statements in this Prospectus
Supplement shall control.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Depositor or the
Underwriter will promptly deliver, or cause to be delivered, without charge, a
paper copy of this Prospectus Supplement and Prospectus.
On the Closing Date, the mortgage loans identified as of December 1, 1997
having an aggregate Stated Principal Balance of $92,034,591.56, will be
transferred to the Trust (such mortgage loans being referred to herein as the
"Initial Mortgage Loans"). Additional closed end, fixed rate mortgage loans,
having an expected aggregate Stated Principal Balance of $20,465,408.44 and a
maximum aggregate Stated Principal Balance of $57,965,408.44, may be deposited
in the Trust on the Closing Date (such mortgage loans being referred to as the
"Additional Mortgage Loans"). On the Closing Date, cash equal to the difference
between $150,000,000 and the sum of the Stated Principal Balances of the Initial
Mortgage Loans and the Additional Mortgage Loans, but not in excess of 33.333%
of the sum of the Stated Principal Balances of the Initial Mortgage Loans and
the Additional Mortgage Loans (the "Pre-Funding Limit"), will be deposited from
the proceeds of the sale of the Class A Notes into the Pre-Funding Account (as
defined herein). The Sale and Servicing Agreement provides that additional
mortgage loans, having an aggregate Stated Principal Balance not to exceed the
Pre-Funding Limit, shall, subject to availability and certain other conditions
described herein, be purchased from time to time on or before February 28, 1998
from funds deposited on the Closing Date in the Pre-Funding Account (the
mortgage loans so purchased being referred to as the "Pre-Funded Mortgage
Loans"). Funds so deposited in the Pre-Funding Account and not so used will be
distributed on the March 16, 1998 Payment Date, if less than $100,000, as a
principal payment to Noteholders then entitled to principal or, if $100,000 or
more, as a prepayment of principal of the Class A Notes, pro rata, on the basis
of the respective Note Principal Balances of the Notes of each Class. In the
event the difference between $150,000,000 and the sum of the Stated Principal
Balances of the Initial Mortgage Loans and the Additional Mortgage Loans is
greater than the Pre-Funding Limit, cash in an amount equal to the excess over
the Pre-Funding Limit shall be deposited on the Closing Date into the Redemption
Account (hereinafter defined). Amounts so deposited in the Redemption Account on
the Closing Date will be distributed on the first Payment Date, if less than
$100,000, as a principal payment to Noteholders then entitled to principal or,
if $100,000 or more, as a prepayment of principal of the Class A Notes, pro
rata, on the basis of the respective Note Principal Balances of the Notes of
each Class.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR AFFECT THE MARKET PRICE OF THE CLASS A
NOTES, INCLUDING PURCHASES OF CLASS A NOTES TO STABILIZE THE MARKET PRICE AND
THE IMPOSITION OF BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES SEE "PLAN OF
DISTRIBUTION" IN THIS PROSPECTUS SUPPLEMENT.
<PAGE>
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SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used but not defined herein are defined elsewhere in this
Prospectus Supplement on the pages indicated in the "Index of Defined Terms" or,
to the extent not defined therein, shall have the meanings assigned thereto in
the Prospectus.
Title of Series............... Emergent Home Equity Loan Asset Backed
Securities, Series 1997-4 (the "Securities"),
consisting of six classes of Notes
(collectively, the "Notes" or "Class A Notes")
and certificates (the "Certificates")
representing beneficial ownership interests in
the Trust. The Notes will be issued pursuant to
the Indenture. The Notes will consist of six
classes of notes, designated as (i) the Class
A-1 Variable Rate Notes, (ii) the Class A-2
Fixed Rate Notes, (iii) the Class A-3 Fixed
Rate Notes, (iv) the Class A-4 Fixed Rate
Notes, (v) the Class A-5 Fixed Rate Notes and
(vi) the Class A-6 Fixed Rate Notes. Only the
Class A Notes are offered hereby.
Offered Notes................. The Class A-1 Variable Rate Notes will have an
initial principal balance of $36,000,000 (the
"Original Class A-1 Note Principal Balance");
the Class A-2 Fixed Rate Notes will have an
initial principal balance of $22,000,000 (the
"Original Class A-2 Note Principal Balance");
the Class A-3 Fixed Rate Notes will have an
initial principal balance of $20,000,000 (the
"Original Class A-3 Note Principal Balance");
the Class A-4 Fixed Rate Notes will have an
initial principal balance of $29,000,000 (the
"Original Class A-4 Note Principal Balance");
the Class A-5 Fixed Rate Notes will have an
initial principal balance of $26,500,000 (the
"Original Class A-5 Note Principal Balance");
and the Class A-6 Fixed Rate Notes will have an
initial principal balance of $15,000,000 (the
"Original Class A-6 Note Principal Balance").
Cut-off Date.................. The opening of business on December 1, 1997 for
any Initial Mortgage Loan and the respective
origination dates thereof for any Additional
Mortgage Loan or any Pre-Funded Mortgage Loan.
Closing Date.................. On or about December 23, 1997.
Final Maturity Date........... May 15, 2007 for the Class A-1 Variable Rate
Notes, October 15, 2010 for the Class A-2 Fixed
Rate Notes,
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S-1
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December 15, 2012 for the Class A-3 Fixed Rate
Notes, January 15, 2013 for the Class A-4 Fixed
Rate Notes, December 15, 2028 for the Class A-5
Fixed Rate Notes, and December 15, 2028 for the
Class A-6 Fixed Rate Notes.
Trust......................... Emergent Home Equity Loan Trust 1997-4, a
Delaware business trust formed pursuant to a
Trust Agreement dated as of November 26, 1997
between Emergent Residual Holding Corp., as
Sponsor, and Wilmington Trust Company, as Owner
Trustee (the "Owner Trustee").
Depositor .................... The Trust will acquire the Mortgage Loans from
Prudential Securities Secured Financing
Corporation (the "Depositor"). The Depositor
will acquire the Mortgage Loans from the
Sponsor and sell the Mortgage Loans to the
Trust. See "The Depositor" in the Prospectus.
Sponsor....................... Emergent Residual Holding Corp. (in its
capacity as seller to the Depositor, the
"Sponsor"). The Sponsor will acquire the
Mortgage Loans from the Contributor and sell
the Mortgage Loans to the Depositor.
Contributor................... Emergent Mortgage Holdings Corporation (in its
capacity as contributor of the Mortgage Loans
to the Sponsor, the "Contributor"). The
Contributor will acquire the Mortgage Loans
from Emergent Mortgage Corp. and contribute
them to the Sponsor.
Originator and Servicer....... Emergent Mortgage Corp., a South Carolina
corporation (in its capacity as originator of
the Mortgage Loans, the "Originator" and, in
its capacity as servicer of the Mortgage Loans,
the "Servicer"). The principal executive
offices of Emergent Mortgage Corp. are located
at 15 South Main Street, Greenville, SC 29601,
and its telephone number is (864) 235-8056. See
"The Servicer and the Originator" and "Sale and
Servicing Agreement--The Servicer" herein.
Indenture Trustee............. First Union National Bank, as trustee (the
"Indenture Trustee"). See "Description of the
Notes--The Indenture Trustee" herein.
The Mortgage Pool............. The Mortgage Pool will consist of closed end,
fixed rate home equity loans evidenced by
promissory notes and secured by first lien
mortgages or deeds of trust on single-family
residences (which may be attached, detached,
part of a two-to-four family dwelling, a
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condominium unit, townhouse or a unit in a
planned unit development) and manufactured
housing (the "Mortgaged Properties").
There are 1,366 Initial Mortgage Loans secured
by Mortgaged Properties located in 35 states
and the District of Columbia. With respect to
the Initial Mortgage Loans as of the Cut-off
Date: the aggregate Stated Principal Balance
was $92,034,591.56; the Stated Principal
Balances ranged from $11,000.00 to $550,000.00;
the average Stated Principal Balance was
$67,375.25; the Mortgage Rates ranged from
8.500% to 15.803%; the weighted average
Mortgage Rate was 11.250%; 100% of the Initial
Mortgage Loans are secured by first lien
mortgages; 96.13% of the aggregate Stated
Principal Balances of the Mortgage Loans were
secured by mortgages on owner-occupied
properties; 73.68% of the aggregate Stated
Principal Balance of the Initial Mortgage Loans
were fully amortizing; 26.32% of the aggregate
Stated Principal Balances of the Initial
Mortgage Loans contained "balloon" payments;
the original Loan-to-Value Ratios ranged from
11.000% to 96.000%; the weighted average
original Loan-to-Value Ratio was 76.445%; the
original terms to stated maturity ranged from
120 months to 361 months; the weighted average
original term to stated maturity was
approximately 203 months; the remaining terms
to stated maturity ranged from 118 months to
361 months; the weighted average remaining term
to stated maturity was approximately 202
months; and no more than 0.60% of the Initial
Mortgage Loans are secured by Mortgaged
Properties located in any one postal ZIP code
area. While all of the Mortgage Loans are
secured by first liens on the related Mortgaged
Properties, approximately 66.25% of the
Mortgaged Properties with respect to the
Initial Mortgage Loans are also encumbered by
second liens originated or acquired by the
Originator (the "Piggy Back Mortgage Loans").
The combined Loan-to-Value Ratios of the Piggy
Back Mortgage Loans (when taking into
consideration the additional liens) is
approximately 95.519% and the combined
Loan-to-Value Ratios of the Initial Mortgage
Loans (when taking into consideration the
additional liens) is approximately 94.472%.
The Additional Mortgage Loans (as defined
herein) and the Pre-Funded Mortgage Loans (as
defined
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S-3
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herein) to be purchased by the Trust, if
available, will be originated or purchased by
the Originator, contributed by the Originator
to the Contributor, contributed by the
Contributor to the Sponsor, sold by the Sponsor
to the Depositor and then sold by the Depositor
to the Trust. The Sale and Servicing Agreement
will provide that the Additional Mortgage Loans
and Pre-Funded Mortgage Loans, as well as all
of the Mortgage Loans following the conveyance
of such Additional Mortgage Loans and
Pre-Funded Mortgage Loans to the Trust, must
conform to certain specified characteristics.
See "The Mortgage Pool -- Conveyance of
Additional Mortgage Loans and Pre-Funded
Mortgage Loans" in this Prospectus Supplement.
The Initial Mortgage Loans, Additional Mortgage
Loans and Pre-Funded Mortgage Loans shall be
sold to the Trust subject to certain security
interests and liens securing certain warehouse
or other loan facilities (the "Warehouse
Liens"). However, pursuant to the Sale and
Servicing Agreement, the Trust shall be
obligated to satisfy and discharge the
Warehouse Liens from the net proceeds of the
issuance of the Notes or from the Pre-Funding
Account, as the case may be.
The Trust will be obligated to purchase the
Pre-Funded Mortgage Loans from time to time on
or before February 28, 1998, subject to the
availability thereof (the date of conveyance of
any Pre-Funded Mortgage Loan to the Trust being
a "Pre-Funded Loan Transfer Date" in request of
such Pre-Funded Mortgage Loan). In connection
with each purchase of Pre-Funded Mortgage
Loans, the Trust will be required to apply no
more than 100% of the aggregate Stated
Principal Balance of such Pre-Funded Mortgage
Loans, as of their respective Cut-off Dates,
from the Pre-Funding Account to the
satisfaction and discharge of any Warehouse
Liens with respect to such Pre-Funded Mortgage
Loans. Under the Sale and Servicing Agreement,
the Depositor will be obligated to sell
Pre-Funded Mortgage Loans to the Trust and the
Trust will be obligated, subject to the
satisfaction of certain conditions described
therein, to purchase such Pre-Funded Mortgage
Loans. The Trust may purchase the Pre-Funded
Mortgage Loans only from the Depositor and not
from any other person. See "The Mortgage Pool
-- Conveyance of
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S-4
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Additional Mortgage Loans and Pre-Funded
Mortgage Loans" in this Prospectus Supplement.
Interest Coverage
Account.................... On the Closing Date, cash will be deposited in
a trust account (the "Interest Coverage
Account") in the name of the Indenture Trustee
on behalf of the Trust. The amount on deposit
in the Interest Coverage Account, including
reinvestment income thereon, will be used by
the Indenture Trustee to fund certain interest
shortfalls during the Pre-Funding Period as
described herein under "Description of the
Notes--Interest Coverage Account." Amounts
remaining in the Interest Coverage Account
after the first Payment Date following the end
of the Pre-Funding Period and not used for such
purpose are required to be paid to the Sponsor.
The Interest Coverage Account will terminate
immediately following such Payment Date.
Pre-Funding Account........... On the Closing Date, cash equal to the
difference between $150,000,000 and the sum of
the Stated Principal Balances of the Initial
Mortgage Loans and the Additional Mortgage
Loans as of their respective Cut-off Dates, but
not in excess of 33.333% of the sum of the
Stated Principal Balances of the Initial
Mortgage Loans and the Additional Mortgage
Loans (the "Pre-Funding Limit"), will be
deposited by the Indenture Trustee in an
account (the "Pre-Funding Account") held in the
name of the Indenture Trustee on behalf of the
Trust (the amount so deposited being referred
to herein as the "Original Pre-Funded Amount").
Such Original Pre-Funded Amount will be funded
from the sale of the Class A Notes, and may be
used to acquire additional mortgage loans (the
"Pre-Funded Mortgage Loans") during the period
(the "Pre-Funding Period") from the Closing
Date until February 28, 1998. The Original
Pre-Funded Amount will be reduced during the
Pre-Funding Period by the amount thereof used
to purchase Pre-Funded Mortgage Loans in
accordance with the terms of the Sale and
Servicing Agreement. Any portion of the
Original Pre-Funded Amount remaining in the
Pre-Funding Account at the end of the
Pre-Funding Period will be distributed on the
March 16, 1998 Payment Date, if less than
$100,000, as a principal payment to Noteholders
then entitled to distributions of principal or,
if $100,000 or more, as a prepayment of
principal of the Class A Notes, pro rata, on
the basis of the respective Note Principal
Balances
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S-5
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of the Notes of each Class. See "Yield on the
Notes--General Prepayment Considerations", "The
Mortgage Pool--Conveyance of Additional
Mortgage Loans and Pre-Funded Mortgage Loans"
and "Descriptions of the Notes--Pre-Funding
Account".
Redemption Account............ On the Closing Date, it is expected that
approximately $20,465,408.44 of Additional
Mortgage Loans will be transferred to the Trust
and that the difference between $150,000,000
and the sum of the Stated Principal Balances of
the Initial Mortgage Loans and the Additional
Mortgage Loans as of their respective Cut-off
Dates will not exceed the Pre-Funding Limit.
However, in the event that such difference is
greater than the Pre-Funding Limit, cash in the
amount of the excess over the Pre-Funding Limit
shall be deposited from the proceeds of the
sale of the Class A Notes into an account in
the name of, and maintained by, the Indenture
Trustee on behalf of the Trust (the "Redemption
Account"). Any amounts on deposit in the
Redemption Account will be transferred by the
Indenture Trustee on the first Payment Date
into the Distribution Account, and will be
distributed, if less than $100,000, as a
principal payment to Noteholders then entitled
to distributions of principal or, if $100,000
or more, as a prepayment of principal of the
Class A Notes, pro rata, on the basis of the
respective Note Principal Balances of the Notes
of each Class. See "Yield on the Notes--General
Prepayment Considerations" and "The Mortgage
Pool--Conveyance of Additional Mortgage Loans
and Pre-Funded Mortgage Loans".
Underwriting Standards;
Representations............ The Mortgage Loans will be contributed by the
Originator to the Contributor, contributed by
the Contributor to the Sponsor, sold by Sponsor
to Depositor and sold by the Depositor to the
Trust. All of the Mortgage Loans were or will
have been originated or acquired by the
Originator, generally in accordance with the
underwriting criteria described herein.
Registration of Offered
Notes...................... Holders of the Class A Notes may hold their
interest in the Class A Notes through The
Depository Trust Company ("DTC"), in the United
States, or CEDEL, S.A. ("CEDEL") or the
Euroclear System ("Euroclear"), in Europe.
Transfers within DTC,
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CEDEL or Euroclear, as the case may be, will be
in accordance with the usual rules and
operating procedures of the relevant system.
Cross-market transfers between persons holding
directly or indirectly through DTC, on the one
hand, and counterparties holding directly or
indirectly through CEDEL or Euroclear, on the
other, will be effected in DTC through
Citibank, N.A. or The Chase Manhattan Bank, the
relevant depositaries (collectively, the
"Depositaries") of CEDEL or Euroclear,
respectively, and each a participating member
of DTC. The Class A Notes will be initially
registered in the name of CEDE & Co., the
nominee of DTC. The interests of the Class A
Noteholders will be represented by book entries
on the records of DTC, its Participants
(defined below) and Indirect Participants
(defined below) for the benefit of the
beneficial owners of the Class A Notes (the
"Note Owners"). Notes representing the Class A
Notes will be issued in definitive form only
under the limited circumstances described in
the Prospectus. In the case of the Class A
Notes, all references herein to "Holders" or
"Noteholders" reflect the rights of Note Owners
as they may indirectly exercise such rights
through DTC, CEDEL, Euroclear and participating
members thereof, except as otherwise specified
herein. The Class A Notes are issuable in
minimum denominations of $1,000 and increments
of $1,000 in excess thereof, except that any
Note in book-entry form in an amount less than
$1,000 shall be issued in a minimum
denomination equal to the amount represented by
such Note.
Interest Rate................. The "Interest Rate" on the Class A Notes on
each Payment Date will be a rate per annum
equal to: (i) in the case of the Class A-1
Variable Rate Notes, the lesser of (a) the
London interbank offered rate for one-month
United States dollar deposits ("LIBOR")
(calculated as described under "Description of
the Certificates--Calculation of LIBOR") as of
the second business day prior to the
immediately preceding Payment Date (or in the
case of the January 15, 1998 Payment Date, as
of the second business day prior to the Closing
Date) plus 0.16% per annum and (b) 10.50% (the
"Class A-1 Interest Rate"), (ii) in the case of
the Class A-2 Fixed Rate Notes, 6.470% (the
"Class A-2 Interest Rate"), (iii) in the case
of the Class A-3 Fixed Rate Notes, 6.505% (the
"Class A-3 Interest Rate"), (iv) in the case of
the Class A-4 Fixed
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Rate Notes, 6.700% (the "Class A-4 Interest
Rate"), (v) in the case of the Class A-5 Fixed
Rate Notes, 7.080% (the "Class A-5 Interest
Rate") and (vi) in the case of the Class A-6
Fixed Rate Notes, 6.685% (the "Class A-6
Interest Rate").
Payments-General.............. Payments on the Class A Notes will be made on
the 15th day of each month or, if such day is
not a business day, on the next succeeding
business day, beginning on January 15, 1998.
The "Collection Period" with respect to any
Payment Date is the calendar month immediately
preceding the month in which such Payment Date
occurs. The "Determination Date" with respect
to any Payment Date is the 5th business day
prior to such Payment Date. The "Interest
Accrual Period" for any Payment Date is (i) in
the case of the Class A-1 Variable Rate Notes,
the period from and including each Payment Date
(or, with respect to the January 15, 1998
Payment Date, the Closing Date) to and
including the day preceding the current Payment
Date, and (ii) in the case of the Fixed Rate
Notes, the calendar month immediately preceding
the month in which such Payment Date occurs.
All calculations of interest on the Class A
Notes will be based, in the case of the
Variable Rate Notes, on the actual number of
days elapsed in the related Interest Accrual
Period and a 360-day year, and in the case of
the Fixed Rate Notes, on a 360-day year
consisting of twelve 30-day months. See
"Description of the Notes--Interest Rates" and
"Description of the Notes--Interest Payments"
herein.
Interest Payments............. On each Payment Date, holders of the Class A
Notes will be entitled to receive interest
payments (the "Interest Distribution Amount")
in an amount equal to (i) interest accrued
during the related Interest Accrual Period on
the Note Principal Balance of the applicable
Class A Note at the related Interest Rate,
reduced by the Shortfall Interest Deferred
Amount, if any, for such Payment Date with
respect to the applicable Class A Note, plus
(ii) to the extent the remaining Available
Distribution Amount for such Payment Date is
sufficient for the payment thereof, the Accrued
Shortfall Interest Carry Forward Amount, if
any, for such Payment Date with respect to the
applicable Class A Note. The "Shortfall
Interest Deferred Amount" for any Payment Date
with respect to any Class A Note is the amount,
if any, of interest accrued during the related
Interest Accrual Period on the Note
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Principal Balance of such Class A Note at the
related Interest Rate that is not available for
payment on such Payment Date out of the
Available Distribution Amount due to Relief Act
Shortfalls and Prepayment Interest Shortfalls.
The "Accrued Shortfall Interest Carry Forward
Amount" with respect to any Payment Date shall
be the amount of the Shortfall Interest
Deferred Amounts carried over from preceding
Payment Dates together with interest thereon at
the related Interest Rate from such preceding
Payment Dates to the current Payment Date.
Interest accrued on any Class A Note during the
Interest Accrual Period with respect to any
Payment Date, at the applicable Interest Rate,
less the Shortfall Interest Deferred Amount for
such Payment Date, shall be due and payable on
such Payment Date. The Accrued Shortfall
Interest Carry Forward Amount for any Payment
Date in respect of any Class A Note shall be
due and payable on each Payment Date (to the
extent sufficient funds are available for the
payment thereof) and on the final Payment Date.
The Policy does not cover the Shortfall
Interest Deferred Amount or the Accrued
Shortfall Interest Carry Forward Amount. The
effect of the foregoing provisions is that
payment of any Accrued Shortfall Interest Carry
Forward Amount may be funded only from any Net
Monthly Excess Cashflow (as defined below) that
would otherwise be paid to holders of the
Certificates. See "Description of the
Notes--Interest Payments" herein.
Principal Payments............ On each Payment Date, the Class A Notes, in the
order and in the amount the respective Classes
are entitled to payment, will receive the
Principal Distribution Amount in reduction of
the Note Principal Balance of each such Class.
Any remaining unpaid principal of the Notes
will be due and payable on their respective
Final Maturity Dates. The Class A Notes (other
than the Class A-6 Fixed Rate Notes and except
to the extent of any prepayment of the Class A
Notes resulting from distributions from the
Redemption Account or the Pre-Funding Account)
are "sequential pay" in that the Holders of the
Class A-5 Fixed Rate Notes will receive no
payments of principal until the Class A-4 Note
Principal Balance (as defined below) has been
reduced to zero, the Holders of the Class A-4
Fixed Rate Notes will receive no payments of
principal until the Class A-3 Note Principal
Balance (as defined below) has been
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reduced to zero, the Holders of the Class A-3
Fixed Rate Notes will receive no payments of
principal until the Class A-2 Note Principal
Balance (as defined below) has been reduced to
zero and the Holders of the Class A-2 Fixed
Rate Notes will receive no payments until the
Class A-1 Note Principal Balance has been
reduced to zero. The Holders of the Class A-6
Fixed Rate Notes are entitled to receive on
each Payment Date, in respect of principal,
payment of the Class A-6 Lockout Distribution
Amount (as defined below) for such Payment Date
to the extent such Lockout Distribution Amount
does not exceed the lesser of the Principal
Distribution Amount or the remaining Class A-6
Note Principal Balance (as defined below) for
such Payment Date; provided, that if on any
Payment Date the Class A-5 Note Principal
Balance is zero, holders of the Class A-6 Fixed
Rate Notes will be entitled to receive the
entire Principal Distribution Amount for such
Payment Date, up to the remaining Class A-6
Note Principal Balance.
On each Payment Date an amount equal to the
Principal Distribution Amount (defined below),
less any amount to be distributed on such
Payment Date from the Redemption Account or the
Pre-Funding Account as a prepayment of the
Class A Notes, pro rata, on the basis of the
respective Note Principal Balances of the Notes
of each Class, will be paid in the following
order: first, to the Holders of the Class A-6
Fixed Rate Notes, to the extent of the least of
(x) the Principal Distribution Amount, (y) the
Class A-6 Note Principal Balance, and (z) the
Class A-6 Lockout Distribution Amount, second,
to the Holders of the Class A-1 Variable Rate
Notes until the Class A-1 Note Principal
Balance has been reduced to zero, third, to the
Holders of the Class A-2 Fixed Rate Notes until
the Class A-2 Note Principal Balance has been
reduced to zero, fourth, to the Holders of the
Class A-3 Fixed Rate Notes until the Class A-3
Note Principal Balance has been reduced to
zero, fifth, to the Holders of the Class A-4
Fixed Rate Notes until the Class A-4 Note
Principal Balance has been reduced to zero,
sixth, to the Holders of the Class A-5 Fixed
Rate Notes until the Class A-5 Note Principal
Balance has been reduced to zero, and seventh,
to the Holders of the Class A-6 Fixed Rate
Notes until the Class A-6 Note Principal
Balance has been reduced to zero.
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The Principal Distribution Amount will include,
to the extent of available funds from the
Mortgage Pool and except as otherwise described
herein, the principal portion of all monthly
payments on the Mortgage Loans to the extent
received during the related Collection Period,
all unscheduled amounts received in respect of
the Mortgage Loans during the related
Collection Period that are allocable to
principal (including proceeds of repurchases,
prepayments, liquidations and insurance
(excluding payments made under the Policy)),
principal adjustments on account of shortfalls
relating to substitutions of Mortgage Loans,
deposits to the Distribution Account from the
Redemption Account (if any), and deposits to
the Distribution Account from the Pre-Funding
Account, and in the event that the Class A Note
Principal Balance exceeds the aggregate Stated
Principal Balance of the Mortgage Loans, the
amount of such excess (the
"Overcollateralization Deficit"), and will be
adjusted as a result of the related required
level of subordination, all as described
herein. The "Class A-1 Note Principal Balance"
as of any date of determination is equal to the
Original Class A-1 Note Principal Balance,
reduced by the aggregate of all amounts
allocable to principal previously distributed
with respect to the Class A-1 Variable Rate
Notes. The "Class A-2 Note Principal Balance"
as of any date of determination is equal to the
Original Class A-2 Note Principal Balance,
reduced by the aggregate of all amounts
allocable to principal previously distributed
with respect to the Class A-2 Fixed Rate Notes.
The "Class A-3 Note Principal Balance" as of
any date of determination is equal to the
Original Class A-3 Note Principal Balance,
reduced by the aggregate of all amounts
allocable to principal previously distributed
with respect to the Class A-3 Fixed Rate Notes.
The "Class A-4 Note Principal Balance" as of
any determination date is equal to the Original
Class A-4 Note Principal Balance, reduced by
the aggregate of all amounts allocable to
principal previously distributed with respect
to the Class A-4 Fixed Rate Notes. The "Class
A-5 Note Principal Balance" as of any
determination date is equal to the Original
Class A-5 Note Principal Balance, reduced by
the aggregate of all amounts allocable to
principal previously distributed with respect
to the Class A-5 Fixed Rate Notes. The "Class
A-6 Note Principal
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Balance" as of any determination date is equal
to the Original Class A-6 Note Principal
Balance, reduced by the aggregate of all
amounts allocable to principal previously
distributed with respect to the Class A-6 Fixed
Rate Notes.
The "Class A-6 Lockout Distribution Amount" for
any Payment Date will be the product of (i) the
applicable Class A-6 Lockout Percentage for
such Payment Date (as set out below) and (ii)
the Class A-6 Lockout Pro-Rata Distribution
Amount for such Payment Date. The "Class A-6
Lockout Percentage" for each Payment Date shall
be as follows:
Payment Date Lockout Percentage
------------ ------------------
January 1998 - December 2000 0%
January 2001 - December 2002 45%
January 2003 - December 2003 80%
January 2004 - December 2004 100%
Subsequent to December 2004 300%
The "Class A-6 Lockout Pro Rata Distribution
Amount" for any Payment Date will be an amount
equal to the product of (x) a fraction, the
numerator of which is the Class A-6 Note
Principal Balance immediately prior to such
Payment Date and the denominator of which is
the aggregate of the Class A-1 Note Principal
Balance, Class A-2 Note Principal Balance,
Class A-3 Note Principal Balance, Class A-4
Note Principal Balance, Class A-5 Note
Principal Balance and Class A-6 Note Principal
Balance (collectively, the "Class A Note
Principal Balance"), in each case immediately
prior to such Payment Date, and (y) the
Principal Distribution Amount for such Payment
Date.
In addition, on each Payment Date, funds
received as a result of a claim under the
Policy in the event the Overcollateralization
Deficit exceeds the Net Monthly Excess Cashflow
(defined below) as of such Payment Date (a
"Remaining Overcollateralization Deficit") will
be distributed, as a component of the Principal
Distribution Amount, by or on behalf of the
Indenture Trustee to the holders of the Class A
Notes. See "Description of the Notes--Financial
Guaranty Insurance Policy" herein.
"Net Monthly Excess Cashflow" for any Payment
Date is equal to the excess of (x) the
Available Distribution Amount for such Payment
Date over (y)
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the sum for such Payment Date of (A) the
Accrued Note Interest and any Accrued Shortfall
Interest Carry Forward Amount payable to the
holders of the Class A Notes and (B) the amount
described in clauses (b)(i) through (iii) of
the definition of Principal Distribution Amount
set forth under "Description of the
Notes--Principal Distributions of the Class A
Notes" herein.
The subordination and cash flow provisions
applicable to the Securities will, to the
extent of available funds, result in a limited
acceleration of the principal payments to the
holders of the Class A Notes relative to the
principal payments received on the Mortgage
Loans, to the extent the amount of
overcollateralization is less than the Required
Subordinated Amount. The subordination
provisions are more fully described under
"--Credit Enhancement" below and "Description
of the Notes-Overcollateralization Provisions"
herein. Such subordination provisions may have
the effect of shortening the weighted average
life of the Class A Notes by increasing the
rate at which principal is distributed to the
Class A Noteholders.
Servicing Fee................. The "Servicing Fee" as of any Payment Date, to
be retained by the Servicer each month, will be
an amount equal to 0.50% per annum on the
Stated Principal Balance of each Mortgage Loan
on the related Determination Date.
Credit Enhancement............ The credit enhancement provided for the benefit
of the Class A Noteholders consists of
overcollateralization and the Policy, each as
described below and herein.
Overcollateralization: On the Closing Date, the
aggregate principal balance of the Mortgage
Loans as of the Cut-off Date plus the Original
Pre-Funded Amount and the amount (if any) in
the Redemption Account will exceed the Class A
Note Principal Balance by $1,500,000. Under the
Indenture, the principal balance of the
Mortgage Loans plus the remaining unused amount
of the Original Pre-Funded Amount will be
required subsequent to the Closing Date to
exceed the Class A Note Principal Balance by a
specified amount (i.e., the Required
Subordinated Amount). Until the actual level of
overcollateralization increases to such
required level, to the extent of available
funds, a temporary period of accelerated
amortization of the Class A Notes relative
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to the amortization of the Mortgage Loan Pool
will occur.
The Indenture provides that, subject to certain
trigger tests set forth therein, the required
level of overcollateralization may increase or
decrease over time. An increase would result in
a temporary or permanent period of accelerated
amortization of the Class A Notes to increase
the actual level of overcollateralization to
equal its increased required level; a decrease
would result in a temporary period of
decelerated amortization of the Class A Notes
to decrease the actual level of
overcollateralization to equal its required
level. See "Description of the
Notes--Overcollateralization Provisions"
herein.
The Financial Guaranty Insurance Policy: The
Class A Notes will be entitled to the benefit
of a financial guaranty insurance policy (the
"Policy") to be issued by Financial Security
Assurance Inc., discussed more fully under
"--Financial Guaranty Insurance Policy" below.
See also "Description of the Notes" herein.
Financial Guaranty
Insurance Policy............ The Insurer will issue the Policy as a means of
providing credit enhancement to the Class A
Notes. Under the Policy, the Insurer will
irrevocably and unconditionally guarantee
payment to the Indenture Trustee, for the
benefit of the holders of the Class A Notes, on
each Payment Date, as further described herein,
of an amount that will cover any shortfalls
(except for the Shortfall Interest Deferred
Amount and Accrued Shortfall Interest Carry
Forward Amount) in amounts available for the
Interest Distribution Amount for the Class A
Notes plus any Remaining Overcollateralization
Deficits. The Policy will also guarantee
payment to the Indenture Trustee, for the
benefit of the holders of the Class A Notes, of
the Class A Note Principal Balance to the
extent unpaid on the final Payment Date or
earlier termination of the Trust. A payment by
the Insurer under the Policy is referred to
herein as an "Insured Payment." The Policy does
not guarantee the holders of the Class A Notes
any specified rate of principal payments. See
"Description of the Notes--Financial Guaranty
Insurance Policy" herein.
Monthly Advances.............. The Servicer is required to make advances in
respect of delinquent payments of interest on
the Mortgage Loans, to the extent described
herein and only to the extent that the Servicer
determines such advances
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would be recoverable from future payments and
collections on the Mortgage Loans. As further
described herein, the credit enhancement will
provide protection to the holders of the Class
A Notes against any shortfalls resulting from
delinquencies as to which a Monthly Advance is
not made or is determined to be nonrecoverable.
See "Description of the Notes--Monthly
Advances" herein and "Servicing of the Mortgage
Loans and Contracts--Advances and Limitations
Thereon" in the Prospectus.
Record Date................... The Record Date for each Payment Date will be
the close of business on the last business day
of the month preceding the month in which such
Payment Date occurs. See "Description of the
Notes--General" herein.
Redemption of Notes........... Optional Redemption: At its option, the Trust
(with the consent of the Insurer, if the
exercise of such option would result in a draw
on the Policy or would result in outstanding
amounts due to the Insurer under the Insurance
Agreement) may effect the early retirement and
redemption of the Notes, in whole but not in
part, on any Payment Date after which the
aggregate Class A Note Principal Balance is
$14,850,000 or less. In the event the Trust
exercises such option, the redemption price
payable in connection therewith generally will
be (i) 100% of the then outstanding Class A
Note Principal Balance, plus (ii) one month's
interest on the then outstanding Class A-1 Note
Principal Balance thereof at the Class A-1
Interest Rate, one month's interest on the then
outstanding Class A-2 Note Principal Balance at
the Class A-2 Interest Rate, one month's
interest on the then outstanding Class A-3 Note
Principal Balance at the Class A-3 Interest
Rate, one month's interest on the then
outstanding Class A-4 Note Principal Balance at
the Class A-4 Interest Rate, one month's
interest on the then outstanding Class A-5 Note
Principal Balance at the Class A-5 Interest
Rate and one month's interest on the then
outstanding Class A-6 Note Principal Balance at
the Class A-6 Interest Rate, plus (iii) any
previously accrued but unpaid interest thereon
(the "Redemption Price").
Redemption in Certain Events: Following a final
determination by the Internal Revenue Service
(the "IRS") or by a court of competent
jurisdiction, in each case from which no appeal
is taken within the
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permitted time for such appeal, or if any
appeal is taken, following a final
determination of such appeal from which no
further appeal can be taken, to the effect that
the Trust does not and will no longer qualify
as a REIT pursuant to Section 856 et seq. of
the Internal Revenue Code of 1986, as amended
(the "Code"), at any time on or after the date
which is 30 calendar days following such final
determination, the Insurer may direct the Trust
to redeem all of the Classes of Notes
then-outstanding at the Redemption Price. The
Trust may fund such redemption through a sale
of some or all of the assets of the Trust. If
the Trust has not effected such redemption
within sixty (60) days of receipt of the
direction from the Insurer to redeem the Notes,
the Insurer may purchase from the Trust some or
all of the assets of the Trust sufficient to
fund the redemption of the Notes at the
Redemption Price.
Any redemption of the Notes pursuant to the
above described provisions may affect the yield
on the Notes. See "Yield on the Notes--Early
Payment or Redemption of Notes" herein.
Purchase Options.............. At its option, the Servicer (with the consent
of the Insurer, if such purchase would result
in a draw on the Policy or would result in
outstanding amounts due the Insurer under the
Insurance Agreement) or the Insurer may
purchase all of the Mortgage Loans, together
with any properties in respect thereof acquired
by the Trust, on any Payment Date on which the
aggregate principal balance of the Mortgage
Loans and such properties remaining is 10% or
less, in the case of a purchase by the
Servicer, and 5% or less, in the case of a
purchase by the Insurer, of the aggregate
Stated Principal Balance of the Mortgage Loans
as of the Cut-off Dates thereof. In the event
the Servicer or the Insurer exercises such
option, the purchase price payable in
connection therewith generally will be equal to
par plus accrued interest for each Mortgage
Loan at the related mortgage rate (the
"Mortgage Rate") to but not including the first
day of the month in which such repurchase price
is distributed, together with any amounts due
to the Servicer for servicing compensation at
the Servicing Fee rate, but in the case of the
exercise of the option in favor of the
Servicer, not less than the Redemption Price.
See "Description of the Notes--Purchase
Options" herein.
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Special Prepayment
Considerations.............. The rate and timing of distributions allocable
to principal on the Class A Notes will depend,
in general, on the rate and timing of principal
payments (including prepayments and collections
upon defaults, liquidations, insured payments
and repurchases) on the Mortgage Loans and the
allocation thereof to pay principal on the
Class A Notes as provided herein. As is the
case with asset backed securities generally,
the Class A Notes are subject to substantial
inherent cashflow uncertainties because the
related Mortgage Loans may be prepaid at any
time. See "The Mortgage Pool" herein.
Generally, when prevailing interest rates are
increasing, prepayment rates on mortgage loans
tend to decrease; a decrease in the prepayment
rates on the Mortgage Loans will result in a
reduced rate of principal payments to investors
in the Class A Notes at a time when
reinvestment at such higher prevailing rates
would be desirable. Conversely, when prevailing
interest rates are declining, prepayment rates
on mortgage loans tend to increase; an increase
in the prepayment rates on the Mortgage Loans
will result in a greater rate of return of
principal to investors in the Class A Notes at
a time when reinvestment at comparable yields
may not be possible.
Special Yield Considerations.. The yield to maturity on the Class A Notes will
depend, in general, on (i) the purchase price
and (ii) the rate and timing of principal
payments (including insured payments,
prepayments and collections upon defaults,
liquidations and repurchases) on the Mortgage
Loans and the application thereof to reduce the
Class A Note Principal Balance, as well as
other factors.
In general, if the Class A Notes are purchased
at a premium and principal distributions
thereon occur at a rate faster than anticipated
at the time of purchase, the investor's actual
yield to maturity will be lower than that
assumed at the time of purchase. Also, if the
Class A Notes are purchased at a discount and
principal distributions thereon occur at a rate
slower than that assumed at the time of
purchase, the investor's actual yield to
maturity will be lower than that originally
anticipated.
The yield on the Notes may also be affected by
the operation of the provisions of the
Indenture relating to
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optional redemption of the Notes, redemption of
the Notes in connection with a final
determination that the Trust does not qualify
and will no longer qualify as a REIT, payments
on the Notes from the Redemption Account and/or
the Pre-Funding Account and payments on the
Notes upon exercise by the Insurer or the
Servicer of its right to purchase the Mortgage
Loans and properties acquired in respect
thereof. See "Yield on the Notes--Early Payment
or Redemption of Notes".
Certain Federal Income
Tax Consequences........... An election will be made to treat the Trust as
a real estate investment trust ("REIT") for
federal income tax purposes. The Class A Notes
will be treated as indebtedness of the Trust
for federal income tax purposes. See "Certain
Federal Income Tax Consequences" herein and in
the Prospectus.
Ratings....................... It is a condition to the issuance of the Notes
that the Class A Notes be rated "AAA" by
Standard & Poor's Ratings Services, a division
of The McGraw-Hill Companies, Inc. ("Standard &
Poor's"), and "Aaa" by Moody's Investors
Service, Inc. ("Moody's"). The ratings on the
Class A Notes are based in part on the ratings
of the claims-paying ability of the Insurer by
Standard & Poor's and Moody's. Any change in
the ratings of the Insurer by Standard & Poor's
and Moody's may result in a change in the
ratings on the Class A Notes. The Depositor has
not requested that any rating agency rate the
Class A Notes other than as stated above. If
another rating agency were to rate the Class A
Notes, such rating agency may assign a rating
different from the ratings described above. A
security rating is not a recommendation to buy,
sell or hold securities and may be subject to
revision or withdrawal at any time by the
assigning rating organization. A security
rating does not address the frequency of
prepayments on the Mortgage Loans or the
corresponding effect on yield to investors. See
"Yield on the Notes" and "Ratings" herein.
Legal Investment.............. The Class A Notes will not be "mortgage related
securities" within the meaning of the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA"). The appropriate characterization of
the Class A Notes under various legal
investment restrictions, and thus the ability
of investors subject to these restrictions to
purchase the Class A Notes, may
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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 Class
A Notes constitute legal investments for them.
See "Legal Investment" herein and in the
Prospectus.
ERISA Considerations.......... The Employee Retirement Income Security Act of
1974, as amended ("ERISA") places certain
restrictions on those pension and other
employee benefits plans to which it applies.
Pursuant to regulations issued by the United
States Department of Labor defining "plan
assets," if the Notes are considered to be
indebtedness without substantial equity
features under local law, the assets of the
Trust will not be considered assets of any
ERISA plan holding the Notes, thereby generally
avoiding potential application of ERISA's
prohibited transaction rules. However, in
certain circumstances, the prohibited
transaction rules may be applicable to the
purchase of the Notes even if the Notes are not
deemed to have substantial equity features.
Certain exemptions from the prohibited
transaction rules could be applicable, however,
with respect to the acquisition and holding of
the Notes. Accordingly, the Notes may be
acquired by ERISA plans, subject to certain
restrictions. Before purchasing any of the
Notes, fiduciaries of such plans should
determine whether an investment in the Notes is
appropriate under ERISA. See "ERISA
Considerations."
Use of Proceeds............... Substantially all of the net proceeds to be
received from the sale of the Class A Notes
will be used to repay indebtedness secured by
the Mortgage Loans (including indebtedness
under facilities with the Indenture Trustee and
the Underwriter or their affiliates) and to
satisfy and discharge the related Warehouse
Liens, to fund the Pre-Funding Account and
Redemption Account and to pay expenses incurred
in connection with the pooling of the Mortgage
Loans and the issuance of the Securities.
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RISK FACTORS
In addition to the matters described elsewhere in this Prospectus
Supplement and the Prospectus, prospective investors should carefully consider
the following factors before deciding to invest in the Class A Notes.
Underwriting Standards and Potential Delinquencies
The Originator acquires/originates mortgage loans made to borrowers who
have limited access to credit or who may be considered credit-impaired by
conventional lending standards and accordingly do not qualify for loans
conforming to FNMA or FHLMC guidelines. A borrower's past credit history may not
preclude the Originator from acquiring/originating a loan; however, it will
reduce the size (and consequently the Loan-to-Value Ratio) of the loan that the
Originator is willing to make. As a result of this approach to underwriting, the
Mortgage Loans included in the Trust Property may experience higher rates of
delinquencies, defaults and foreclosures than mortgage loans underwritten in
conformance with FNMA or FHLMC guidelines. In addition, changes in the values of
Mortgaged Properties may have a greater effect on the delinquency, foreclosure,
bankruptcy and loss experience of the Mortgage Loans than on mortgage loans
originated to conform to FNMA or FHLMC guidelines. No assurance can be given
that the values of the Mortgaged Properties have remained or will remain at the
levels in effect on the dates of origination of the related Mortgage Loans.
Limited Operating History
The Originator was incorporated in June 1995 and commenced originating and
acquiring sub-prime mortgage loans in September 1995. Accordingly, the
Originator, as an originator or acquirer of mortgage loans, does not have
representative historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of the Mortgage Loans. A majority of the
Mortgage Loans in the Mortgage Pool are originated on a retail basis (directly
by the Originator) out of the Originator's retail offices located in
Indianapolis, Indiana, Phoenix, Arizona, Greenville, South Carolina and Houston,
Texas. The Originator's retail operation began in the Indianapolis office in
April 1996, the Phoenix office was opened in November 1996, the Greenville
office in January 1997 and the Houston office in September, 1997. Prior to this
time the Originator originated mortgage loans only on a wholesale basis. Most of
the personnel who underwrite loans for the Originator in the Indianapolis,
Phoenix, Greenville and Houston offices have not been associated with the
Originator for more than two years. Those loans that are originated on a retail
basis are underwritten at the respective retail offices by the respective office
personnel thereof. Because the retail mortgage lending operations were only
recently established and have a limited operating history, the delinquency,
foreclosure, bankruptcy and loss experience of such retail Mortgage Loans is not
available.
Limited Servicing History
Historically, the Originator has been in the business of originating or
acquiring mortgage loans and selling those loans in the secondary market on a
servicing released basis, generally within two to three months after
origination/acquisition. In January 1997, the Originator began accumulating
mortgage loans for sale on a servicing retained basis and will continue to
service the
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Mortgage Loans that will constitute the Mortgage Pool. Accordingly, the
Originator does not have the representative historical delinquency, bankruptcy,
foreclosure or default experience that may be referred to for purposes of future
delinquency and loss experience of the Mortgage Loans. However, the Mortgage
Loan Division of its parent, Emergent Group, Inc., has been servicing mortgage
loans (primarily in the State of South Carolina) since 1991 and such historical
delinquency, bankruptcy, foreclosure or default experience is contained in the
tables under the section "The Servicer." Much of the same personnel that have
been involved in servicing mortgage loans for affiliates of the Originator (in
the Parent's Mortgage Loan Division) will act in similar capacities with respect
to the servicing of the Mortgage Loans by the Servicer.
Sensitivity to Prepayments
A majority of the Mortgage Loans may be prepaid in whole or in part at any
time without penalty. In addition, a substantial portion of the Mortgage Loans
contain due-on-sale provisions which, to the extent enforced by the Servicer,
will result in prepayment of such Mortgage Loans. See "Yield on the
Notes--General Prepayment Considerations" herein. Although all of the Mortgage
Loans in the Mortgage Pool will be secured by first lien mortgages, certain
Mortgaged Properties are also encumbered by second liens. Mortgage loans secured
by mortgaged properties with second liens may have different prepayment
characteristics than those with only first liens. The rate of prepayments on
fixed-rate mortgage loans is sensitive to prevailing interest rates. Generally,
if prevailing interest rates fall significantly below the interest rates on the
Mortgage Loans, the Mortgage Loans are likely to be subject to higher prepayment
rates than if prevailing rates remain at or above the interest rates on the
Mortgage Loans. Conversely, if prevailing interest rates rise significantly
above the interest rates on the Mortgage Loans, the rate of prepayments is
likely to decrease. The average life of the Notes and, if purchased at other
than par, the yields realized by Note Owners will be sensitive to levels of
payment (including prepayments relating to the Mortgage Loans (the
"Prepayments")) on the Mortgage Loans. In general, the yield on a Note that is
purchased at a premium from the outstanding principal amount thereof may be
adversely affected by a higher than anticipated level of Prepayments of the
Mortgage Loans. Conversely, the yield on a Note that is purchased at a discount
from the outstanding principal amount thereof may be adversely affected by a
lower than anticipated level. See "Yield on the Notes" herein.
Geographic Concentration
Approximately 56.18% of the Initial Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, are secured by Mortgaged Properties located in
the States of Florida, Georgia, Illinois, Louisiana, Michigan, North Carolina
and Virginia (each of which states accounts for in excess of 5% of the aggregate
principal balance of the Initial Mortgage as of the Cut-off Date). If the
residential real estate markets in any of such States should experience an
overall decline in property values after the dates of origination of the Initial
Mortgage Loans, the rates of delinquencies, foreclosures, bankruptcies and
losses on the Initial Mortgage Loans may increase, perhaps substantially. See
"The Mortgage Pool--Underwriting Standards; Representations" herein.
Limited Liquidity
Prior to their issuance, there has been no market for the Class A Notes
and there can be no assurance that one will develop or, if it does develop, that
it will provide Note Owners with liquidity
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or will continue for the life of the Class A Notes. The Underwriter intends, but
is not obligated, to make a market in the Class A Notes.
Difficulty in Pledging
Since transactions in Class A Notes can be effected only through DTC,
CEDEL or Euroclear, their Participants and Indirect Participants, the ability of
a Note Owner to pledge a Class A Note to persons or entities that do not
participate in the DTC, CEDEL or Euroclear systems, or otherwise to take actions
in respect of such Notes, may be limited due to lack of a physical certificate
representing such Notes. See "Description of the Notes-Book-Entry Registration
and Definitive Notes" herein.
Potential Delays in Receipt of Distributions
Note Owners may experience some delay in their receipt of distributions of
interest and principal on the Class A Notes since such distributions will be
forwarded by the Indenture Trustee to DTC and DTC will credit such distributions
to the accounts of its Participants which will thereafter credit them to the
accounts of Note Owners either directly or indirectly through Indirect
Participants. See "Description of the Notes-Book-Entry Registration and
Definitive Notes" herein.
Additional Risks Associated with the Mortgage Loans
Approximately 22.75% of the Initial Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, had an original Loan-to-Value Ratio at
origination in excess of 80% (but none of the Initial Mortgage Loans had a
Loan-to-Value Ratio in excess of 100%). Mortgage Loans with higher Loan-to-Value
Ratios may present a greater risk of loss. None of the Mortgage Loans will be
covered by a primary mortgage insurance policy. Substantially all of the
Mortgage Loans were originated or acquired within the last three months and
therefore have limited seasoning. Accordingly, there can be no assurance as to
the likelihood of default by the mortgagors or as to the likelihood of
delinquency. See "The Mortgage Pool--General" herein.
Although all of the Mortgage Loans will be secured by first liens on the
related Mortgaged Property, certain of the Mortgaged Properties are also
encumbered by second liens (which will not be held by the Trust Fund). A
mortgagee with 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. As a result, the prepayment, delinquency and foreclosure experience
of mortgage loans with second liens on the related mortgaged properties may
differ from those with first mortgages only.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments
26.32% of the Initial Mortgage Loans by aggregate Stated Principal Balance
as of the Cut-off Date are loans that provide for the payment of the unamortized
Stated Principal Balance of such Mortgage Loan in a single payment at maturity
("Balloon Loans"). Such Balloon Loans provide for equal monthly payments,
consisting of principal and interest, generally based on a 30-year amortization
schedule, and a single payment of the remaining balance of the Balloon Loan 15
years after origination. Amortization of a Balloon Loan based on a scheduled
period that is longer than the
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term of the loan results in a remaining principal balance at maturity that is
substantially larger than the regular scheduled payments. The Depositor does not
have any information regarding the default history or prepayment history of
payments on Balloon Loans. Because borrowers of Balloon Loans are required to
make substantial single payments upon maturity, it is possible that the default
risk associated with the Balloon Loans is greater than that associated with
fully-amortizing Mortgage Loans.
Limited Obligations
The Class A Notes are limited recourse obligations of the Trust. The Notes
will not represent an interest in or obligation of the Originator, the
Depositor, the Sponsor, the Contributor, the Servicer, the Indenture Trustee,
the Owner Trustee or any of their respective affiliates. The only obligations of
the foregoing entities with respect to the Notes or any Mortgage Loan will be
the obligations of the Depositor, the Contributor, and the Servicer (in its
capacity as Originator) pursuant to certain limited representations and
warranties made with respect to the Mortgage Loans and of the Servicer with
respect to its servicing obligations under the Sale and Servicing Agreement
(including the limited obligation to make certain Monthly Advances). Neither the
Notes nor the underlying Mortgage Loans will be guaranteed or insured by any
governmental agency or instrumentality, or by the Originator, Depositor, the
Sponsor, the Contributor, the Servicer, the Indenture Trustee, the Owner Trustee
or any of their respective affiliates. The Class A Notes are covered by the
Policy, as and to the extent described under the caption, "Description of the
Notes--Financial Guaranty Insurance Policy" herein. Proceeds of the assets
included in the Trust (including the Mortgage Loans) and of the Policy will be
the sole source of payments on the Class A Notes, and there will be no recourse
to Depositor, the Sponsor, the Contributor, the Servicer, the Indenture Trustee,
the Owner Trustee or any other entity in the event that such proceeds are
insufficient or otherwise unavailable to make all payments provided for under
the Class A Notes.
Risk of Potential Early Redemption or Payment of Notes
The Notes may be redeemed by the Trust (with the consent of the Insurer,
if such purchase would result in a draw on the Policy or would result in the
outstanding amounts due to the Insurer under the Insurance Agreement) on any
Payment Date after which the aggregate Class A Note Principal Balance is
$14,850,000 or less. See "Description of the Notes--Redemption." In the event
the Trust exercises such option, the redemption price payable in connection
therewith generally will be (i) 100% of the then outstanding Class A Note
Principal Balance, plus (ii) one month's interest on the then outstanding Class
A-1 Note Principal Balance thereof at the Class A-1 Interest Rate, one month's
interest on the then outstanding Class A-2 Note Principal Balance at the Class
A-2 Interest Rate, one month's interest on the then outstanding Class A-3 Note
Principal Balance at the Class A-3 Interest Rate, one month's interest on the
then outstanding Class A-4 Note Principal Balance at the Class A-4 Interest
Rate, one month's interest on the then outstanding Class A-5 Note Principal
Balance at the Class A-5 Interest Rate and one month's interest on the then
outstanding Class A-6 Note Principal Balance at the Class A-6 Interest Rate,
plus (iii) any previously accrued but unpaid interest thereon (the "Redemption
Price"). Any such redemption of the Notes may reduce the yield to maturity on
the Class A Notes.
Following a final determination by the IRS or by a court of competent
jurisdiction, in each case from which no appeal is taken within the permitted
time for such appeal, or if any appeal is taken, following a final determination
of such appeal from which no further appeal can be taken, to the effect that the
Trust does not and will no longer quality as a REIT pursuant to Section 856 et
seq.
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of the Internal Revenue Code of 1986, as amended (the "Code"), at any time on or
after the date which is 30 calendar days following such final determination, the
Insurer may direct the Trust to redeem all of the Classes of Notes
then-outstanding at the Redemption Price. The Trust may fund such redemption
through a sale of some or all of the assets of the Trust. If the Trust has not
effected such redemption within sixty (60) days of receipt of the direction from
the Insurer to redeem the Notes, the Insurer may purchase from the Trust some or
all of the assets of the Trust sufficient to fund the redemption of the Notes at
the Redemption Price.
Pursuant to the Sale and Servicing Agreement, each of the Insurer and the
Servicer shall have the right to purchase all of the Mortgage Loans and
properties acquired in respect thereof if the aggregate principal balance
thereof is reduced to 5% or less (in the case of the Insurer) or 10% or less (in
the case of the Servicer) of the aggregate principal balance thereof as of their
respective Cut-off Dates. See "Description of the Notes--Insurer's Purchase
Option". In the event of such purchase, the Insurer or the Servicer, as the case
may be, shall be required to deliver the purchase price to the Indenture Trustee
for deposit into the Distribution Account and payment to the Noteholders and
others as described herein. Accordingly, any such purchase may result in
accelerated payments in respect of the principal of the Notes and reduce the
yield to maturity thereof.
The Status of the Mortgage Loans in the Event of Insolvency of the Originator
The Originator has taken steps in structuring the transactions
contemplated hereby that are intended to make it unlikely that the voluntary or
involuntary application for relief by the Originator under the United States
Bankruptcy Code or similar applicable state laws ("Insolvency Laws") will result
in the consolidation of the assets and liabilities of the Contributor or the
Sponsor with those of the Originator. These steps include the creation of the
Contributor and the Sponsor as separate, limited-purpose entities pursuant to
their respective Certificates of Incorporation, which contain certain
limitations (including restrictions on the nature of the Contributor's and
Sponsor's businesses) and a restriction on the ability of each of the
Contributor and the Sponsor to commence a voluntary case or proceeding under any
Insolvency Law without the unanimous affirmative vote of all of the members of
the board of directors of the Contributor or the Sponsor, as the case may be.
The Certificate of Incorporation of the Contributor and the Sponsor also include
a provision that requires each of the Contributor and the Sponsor to have at
least two directors who qualify under the Certificate of Incorporation as
"independent directors."
The Contributor and the Sponsor have received the advice of counsel,
concluding on the basis of a reasoned analysis of analogous case law (although
there is no precedent based on directly similar facts) to the effect that,
subject to certain facts, assumptions and qualifications specified therein, a
court would conclude that the assets and liabilities of the Contributor and the
Sponsor would not be consolidated with the assets and liabilities of the
Originator in the event of the application of the federal bankruptcy laws to the
Originator. If a court concluded otherwise, or a filing were made under any
Insolvency Law by or against the Contributor or the Sponsor, or if an attempt
were made to litigate any of the foregoing issues, delays in the distributions
on the Notes (and possible reductions in the amount of such distributions) could
occur. Neither Contributor nor the Sponsor expected to have any significant
assets or sources of funds.
The Pre-Funded Account and Redemption Account
If the principal amount of eligible Mortgage Loans available during the
Pre-Funding Period and sold to the Trust is less than 100% of the Original
Pre-Funded Amount, there will be a balance in
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the Pre-Funding Account at the end of the Pre-Funding Period. To the extent that
amounts on deposit in the Pre-Funding Account will not be fully applied to the
purchase of Pre-Funded Mortgage Loans by the Trust by the end of the Pre-Funding
Period, such remaining amount (exclusive of investment earnings) will be applied
on the March 16, 1998 Payment Date, if less than $100,000, as a payment of
principal to the Holders of the Class A Notes then entitled to principal or, if
$100,000 or more, as a prepayment of principal of the Class A Notes, pro rata,
on the basis of the respective Note Principal Balances of the Notes of each
Class. Although no assurances can be given, it is anticipated by the Depositor
that the principal amount of Pre-Funded Mortgage Loans sold to the Trust will
require the application of substantially all amounts deposited in the
Pre-Funding Account and that there will be no material principal prepayment to
the Holders of the Class A Notes from amounts on deposit in the Pre-Funding
Account.
It is expected that on the Closing Date approximately $20,465,408.44 of
Additional Mortgage Loans will be transferred to the Trust and that the
difference between $150,000,000 and the Stated Principal Balance of the Initial
Mortgage Loans and the Additional Mortgage Loans as of the Cut-off Date will not
exceed the Pre-Funding Limit. However, in the event that such difference is
greater than the Pre-Funding Limit, cash in the amount of the excess over the
Pre-Funding Limit shall be deposited into the Redemption Account and distributed
on the initial Payment Date, if less than $100,000, as a principal payment to
Noteholders then entitled to distributions of principal or, if $100,000 or more,
as a prepayment of principal of the Class A Notes, pro rata, on the basis of the
respective Note Principal Balances of the Notes of each Class.
Variations in Additional Mortgage Loans and Pre-Funded Mortgage Loans from
Initial Mortgage Loans
Each Additional Mortgage Loan and Pre-Funded Mortgage Loan must satisfy
the eligibility criteria referred to herein at the time of its addition.
However, Additional Mortgage Loans and Pre-Funded Mortgage Loans may have been
originated or acquired by the Originator using credit criteria different from
those which were applied to the Initial Mortgage Loans and may be of a different
credit quality. Therefore, following the transfer of Additional Mortgage Loans
and Pre-Funded Mortgage Loans to the Trust, the aggregate characteristics of the
Mortgage Loans then held by the Trust may vary from those of the Initial
Mortgage Loans included in the Trust Property. See "The Mortgage
Pool--Conveyance of Additional Mortgage Loans and Pre-Funded Mortgage Loans."
Piggy Back Mortgage Loans
Approximately 66.25% of the Initial Mortgage Loans are secured by
Mortgaged Properties which are also encumbered by second lien mortgages that
were originated or acquired by the Originator (the "Piggy Back Mortgage Loans").
Such second lien mortgages will not be included in the Trust Property, but will
be (or have been) sold on a servicing released basis in the secondary market.
Piggy Back Mortgage Loans may experience different rates of delinquency,
foreclosure and losses than the Mortgage Loans secured by Mortgaged Properties
not encumbered by second lien mortgages. In addition, Piggy Back Mortgage Loans
may have different prepayment characteristics than the Mortgage Loans secured by
Mortgaged Properties not encumbered by second lien mortgages. See "The Mortgage
Pool--Statistical Information" herein.
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THE INSURER
The following information has been supplied by Financial Security
Assurance Inc. (the "Insurer") for inclusion in this Prospectus Supplement.
General
The Insurer is a monoline insurance company incorporated in 1984 under the
laws of the State of New York. The Insurer is licensed to engage in financial
guaranty insurance business in all 50 states, the District of Columbia and
Puerto Rico.
The Insurer and its subsidiaries are engaged in the business of writing
financial guaranty insurance, principally in respect of securities offered in
domestic and foreign markets. In general, financial guaranty insurance consists
of the issuance of a guaranty of scheduled payments of an issuer's securities,
thereby enhancing the credit rating of those securities in consideration for the
payment of a premium to the insurer. The Insurer and its subsidiaries
principally insure asset-backed, collateralized and municipal securities.
Asset-backed securities are generally supported by residential mortgage loans,
consumer or trade receivables, securities or other assets having an
ascertainable cash flow or market value. Collateralized securities include
public utility first mortgage bonds and sale/leaseback obligation bonds.
Municipal securities consist largely of general obligation bonds, special
revenue bonds and other special obligations of state and local governments. The
Insurer insures both newly-issued securities sold in the primary market and
outstanding securities sold in the secondary market that satisfy the Insurer's
underwriting criteria.
The Insurer is a wholly-owned subsidiary of Financial Security Assurance
Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company. Major
shareholders of Holdings include Fund American Enterprises Holdings, Inc., US
WEST Capital Corporation and The Tokio Marine and Fire Insurance Co., Ltd. No
shareholder of Holdings is obligated to pay any debt of the Insurer or any claim
under any insurance policy issued by the Insurer or to make any additional
contribution to the capital of the Insurer.
The principal executive offices of the Insurer are located at 350 Park
Avenue, New York, New York 10022, and its telephone number at that location is
(212) 826-0100.
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the Insurer or any of its
domestic operating insurance company subsidiaries are reinsured among such
companies on an agreed-upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable statutory risk
limitations. In addition, the Insurer reinsures a portion of its liabilities
under certain of its financial guaranty insurance policies with other reinsurers
under various quota share treaties and on a transaction-by-transaction basis.
Such reinsurance is utilized by the Insurer as a risk management device and to
comply with certain statutory and rating agency requirements; it does not alter
or limit the Insurer's obligations under any financial guaranty insurance
policy.
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Ratings of Claims-Paying Ability
The Insurer's claims-paying ability is rated "Aaa" by Moody's and "AAA" by
each of Standard & Poor's, Fitch Investors Service, L.P., Nippon Investors
Service Inc. and Standard & Poor's (Australia) Pty. Ltd. Such ratings reflect
only the views of the respective rating agencies, are not recommendations to
buy, sell or hold securities and are subject to revision or withdrawal at any
time by such rating agencies. See "Ratings."
Capitalization
The following table sets forth the capitalization of the Insurer and its
wholly owned subsidiaries on the basis of generally accepted accounting
principles as of September 30, 1997 (in thousands):
September 30, 1997
------------------
(Unaudited)
Deferred Premium Revenue (net of prepaid reinsurance
premiums)................................................. $ 402,891
----------
Shareholder's Equity:
Common Stock.............................................. 15,000
Additional Paid-In Capital................................ 646,620
Unrealized Gain on Investments (net of deferred
income taxes)........................................... 20,808
Accumulated Earnings...................................... 212,033
-------
Total Shareholder's Equity................................... 894,461
-------
Total Deferred Premium Revenue and Shareholder's Equity...... $1,297,352
==========
For further information concerning the Insurer and its subsidiaries, see
the Consolidated Financial Statements of the Insurer and its subsidiaries, and
the notes thereto, incorporated by reference herein. Copies of the statutory
quarterly and annual financial statements filed with the State of New York
Insurance Department by the Insurer are available upon request to the State of
New York Insurance Department.
Incorporation of Certain Documents by Reference
The consolidated financial statements of the Insurer and its subsidiaries
included in or as exhibits to the following documents which have been filed with
the Securities and Exchange Commission by Holdings, are hereby incorporated by
reference in this Prospectus Supplement, which together with the Prospectus,
forms a part of the Depositor's Registration Statement: (a) the Annual Report on
Form 10-K for the year ended December 31, 1996 and (b) the Quarterly Reports on
Form 10-Q for the three-month periods ended March 31, 1997, June 30, 1997 and
September 30, 1997.
All financial statements of the Insurer and its subsidiaries included in
documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the Class
A Notes shall be deemed to be incorporated by reference into this Prospectus
Supplement and to be a part hereof from the respective dates of filing such
documents.
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The Originator has informed the Insurer that the Originator will provide
without charge to any person to whom this Prospectus Supplement is delivered,
upon oral or written request of such person, a copy of any or all of the
foregoing financial statements incorporated by reference. Requests for such
copies should be directed to Emergent Mortgage Corp., 15 S. Main Street, Suite
750, Greenville, South Carolina, 29601, Attn: Wade Hall.
Insurance Regulation
The Insurer is licensed and subject to regulation as a financial guaranty
insurance corporation under the laws of the State of New York, its state of
domicile. In addition, the Insurer and its insurance subsidiaries are subject to
regulation by insurance laws of the various other jurisdictions in which they
are licensed to do business. As a financial guaranty insurance corporation
licensed to do business in the State of New York, the Insurer is subject to
Article 69 of the New York Insurance Law which, among other things, limits the
business of each such insurer to financial guaranty insurance and related lines,
requires that each such insurer maintain a minimum surplus to policyholders,
establishes contingency, loss and unearned premium reserve requirements for each
such insurer, and limits the size of individual transactions ("Single Risks")
and the volume of transactions ("Aggregate Risks") that may be underwritten by
each such insurer. Other provisions of the New York Insurance Law, applicable to
non-life insurance companies such as the Insurer, regulate, among other things,
permitted investments, payment of dividends, transactions with affiliates,
mergers, consolidations, acquisitions or sales of assets and incurrence of
liability for borrowings.
THE TRUST
The Trust has been formed under the Delaware Business Trust Act pursuant
to the Trust Agreement for the sole purpose of acquiring the Trust Property,
issuing the Securities and engaging in activities incidental thereto. The Trust
has no prior operating experience. Wilmington Trust Company has been named as
Owner Trustee under the Trust Agreement. Substantially all of the beneficial
ownership interests in the Trust are owned by Emergent Residual Holding Corp.,
in its capacity as Sponsor. The Trust Property consists primarily of the
Mortgage Loans.
In order that the Trust may meet the requirements for qualification as a
REIT, the Trust Agreement prohibits any person from acquiring or holding,
directly or constructively, ownership of a percentage of the Certificates in
excess of the amount that would cause the Trust to no longer qualify as a REIT
under the REIT Rules (the "Ownership Limit"). See "Certain Federal Income Tax
Consideration--Taxation of the Trust--REIT Election--Stock Ownership Tests." For
this purpose, the term "ownership" generally means either direct ownership or
constructive ownership in accordance with the constructive ownership provisions
of section 544 of the Code. These provisions attribute ownership of securities
owned by a corporation, partnership, estate or trust proportionately to its
stockholders, partners or beneficiaries; attribute ownership of securities owned
by family members to other members of the same family; and set forth rules as to
when securities constructively owned by a person are considered to be actually
owned for the application of such attribution provisions. Any transfer of
Certificates that would result in disqualification of the Trust as a REIT will
be null and void, and the intended transferee will acquire no rights to such
Certificate.
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THE SERVICER AND THE ORIGINATOR
Emergent Mortgage Corp., a South Carolina corporation, headquartered in
Greenville, South Carolina, will serve as the Servicer for the Mortgage Loans
pursuant to the Sale and Servicing Agreement. Emergent Mortgage Corp. is a
wholly-owned subsidiary of Emergent Group, Inc. At September 30, 1997, Emergent
Mortgage Corp. had approximately $191.9 million in assets, approximately $139.7
million in liabilities and approximately $52.2 million in stockholders' equity.
EMERGENT GROUP, INC.
Emergent Group, Inc., (the "Parent") is a diversified financial services
company headquartered in Greenville, South Carolina, that, through its
subsidiaries, originates, services and sells mortgage loans, small business
loans, and auto loans. The Parent, through its subsidiaries, makes substantially
all of its loans to non-prime borrowers.
The Parent was incorporated in South Carolina in 1968 under the name
Golden Tye Corporation and conducted operations related to the railroad
transportation industry. During the period from 1980 through 1990, the Parent's
business suffered significant operating losses. In December 1990, approximately
40% of the Parent's equity was acquired by a small group of investors, including
the Parent's current Chairman and Chief Executive Officer. In connection with
such acquisition, a substantially new Board of Directors was elected and new
executive officers were appointed. In 1991, the Parent changed its name to
Emergent Group, Inc. and began operating its financial services business.
The Parent began its transformation to a financial services company with
its acquisition of Carolina Investors, Inc. ("CII") in May 1991. At the time of
acquisition, CII had approximately $32 million in mortgage loans (located
primarily in the state of South Carolina) and did not sell any loans in the
secondary market. Since the Parent acquired CII, it has expanded its Mortgage
Loan Division significantly. In connection with this expansion, the Originator
was formed by the Parent to expand its mortgage origination business outside of
the State of South Carolina. The Parent's mortgage loan division is principally
comprised of the Originator and CII (the "Mortgage Loan Division"). In
particular, the Mortgage Loan Division has significantly increased its loan
originations, initially through establishing relationships with mortgage bankers
and mortgage brokers through which it originated mortgage loans on a wholesale
basis and, beginning in April 1996, through its retail operations. During 1994,
1995 and 1996, mortgage loan originations totaled $99.4 million, $192.8 million,
and $328.6 million, respectively. For the nine months ended September 30, 1997,
mortgage loan originations totaled $774.5 million. During 1994, 1995 and 1996,
the Mortgage Loan Division sold $54.6 million, $127.6 million and $284.8
million, respectively, in mortgage loans. During the nine months ended September
30, 1997, the Mortgage Loan Division sold or securitized $655.9 million in
mortgage loans.
At September 30, 1997, the Parent had approximately $358.7 million in
assets, approximately $296.9 million in liabilities (including minority
interest) and approximately $61.8 million in stockholder's equity.
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THE MORTGAGE POOL
General
The Mortgage Pool will consist of closed end, fixed rate home equity
loans. The Initial Mortgage Loans are secured by first lien mortgages or deeds
of trust or other similar security instruments on single family residences
(which may be attached, detached, part of a two-to-four family dwelling, a
condominium, townhouse or a unit in a planned unit development) and manufactured
housing. The Mortgage Loans to be included in the Mortgage Pool were originated
or acquired by the Originator in the ordinary course of business and will be
contributed by the Originator to the Contributor, contributed by the Contributor
to the Sponsor, sold by the Sponsor to the Depositor, sold by the Depositor to
the Trust and then pledged by the Trust to the Indenture Trustee. See
"--Underwriting Standards; Representations" herein. The Originator will act as
the Servicer for the Mortgage Loans pursuant to the Sale and Servicing
Agreement.
A large number of Mortgaged Properties are also encumbered by second lien
mortgages held by the Originator ("Piggy Back Mortgage Loans"). The second lien
mortgages will not be sold to the Trust but will be sold in the secondary market
on a servicing released basis.
The statistical information presented in this Prospectus Supplement is
only with respect to the Initial Mortgage Loans and describes the Initial
Mortgage Loans and the characteristics of such Initial Mortgage Loan as of the
Cut-off Date.
The Additional Mortgage Loans are intended to be purchased by the Trust on
the Closing Date. The Mortgage Loans, following the conveyance of the Additional
Mortgage Loans, must in the aggregate conform to certain specified
characteristics described below under "--Conveyance of Additional Mortgage Loans
and Pre-Funded Mortgage Loans."
The Pre-Funded Mortgage Loans are intended to be purchased by the Trust
from the Depositor from time to time on or before February 28, 1998 from funds
on deposit in the Pre-Funding Account. The Pre-Funded Mortgage Loans to be
purchased by the Trust, if available, will be originated or purchased by the
Originator, contributed by the Originator to the Contributor, contributed by the
Contributor to the Sponsor, sold by the Sponsor to the Depositor and then sold
by the Depositor to the Trust. The Sale and Servicing Agreement will provide
that the Mortgage Loans, following the conveyance of the Pre-Funded Mortgage
Loans, must in the aggregate conform to certain specified characteristics
described below under " -- Conveyance of Additional Mortgage Loans and
Pre-Funded Mortgage Loans."
Statistical Information
Set forth below is certain summary statistical information regarding the
Initial Mortgage Loans expected to be included in the Trust as of the Closing
Date. All such information is approximate and is given as of the Cut-off Date.
It is expected that the actual Mortgage Loan pool as of the Closing Date will
represent approximately $112,500,000, including approximately $20,465,408.44 of
Additional Mortgage Loans acquired or to be acquired on or prior to the Closing
Date. Prior to the Closing Date, Mortgage Loans may be removed from the Trust
Property and other Mortgage Loans may be substituted therefor. In addition,
Mortgage Loans may be prepaid at any time. As a result, certain characteristics
of the Mortgage Loans included in the Trust Property may
S-30
<PAGE>
vary from the characteristics set forth below in respect of the Initial Mortgage
Loans as of the Cut-off Date.
There are 1,366 Initial Mortgage Loans secured by Mortgaged Properties
located in 35 states and the District of Columbia. With respect to the Initial
Mortgage Loans as of the Cut-off Date: the aggregate Stated Principal Balance
was $92,034,591.56; the Stated Principal Balances ranged from $11,000.00 to
$550,000.00; the average Stated Principal Balance was $67,375.25; the Mortgage
Rates ranged from 8.500% to 15.803%; the weighted average Mortgage Rate was
11.250%; 100% of the Initial Mortgage Loans are secured by first lien mortgages;
96.13% of the aggregate Stated Principal Balances of the Initial Mortgage Loans
were secured by mortgages on owner-occupied properties; 73.68% of the aggregate
Stated Principal Balances of the Initial Mortgage Loans were fully amortizing;
26.32% of the aggregate Stated Principal Balances of the Initial Mortgage Loans
were partially amortizing ("Balloon Loans"); the original Loan-to-Value Ratios
ranged from 11.000% to 96.000%; the weighted average Loan-to-Value Ratio was
76.445%; the original terms to stated maturity ranged from 120 months to 361
months; the weighted average original term to stated maturity was approximately
203 months; the remaining terms to stated maturity ranged from 118 months to 361
months; the weighted average remaining term to stated maturity was approximately
202 months; and no more than 0.60% of the Initial Mortgage Loans are secured by
Mortgaged Properties located in any one postal zip code area. While all of the
Mortgage Loans are secured by first liens on the related Mortgaged Properties,
approximately 66.25% of the Mortgaged Properties with respect to the Initial
Mortgage Loans are also encumbered by second liens originated or acquired by the
Originator (the "Piggy Back Mortgage Loans"). The combined Loan-to-Value Ratios
of the Piggy Back Mortgage Loans is approximately 95.519% and the weighted
average combined Loan-to-Value Ratios of the Initial Mortgage Loans is
approximately 94.472%.
S-31
<PAGE>
Principal Balances of the Initial Mortgage Loans as of the Cut-off Date
<TABLE>
<CAPTION>
Number of Percentage of Cut-
Range of Cut-off Date Initial Aggregate Unpaid Off Date Aggregate
Principal Balances Mortgage Loans Principal Balance Principal Balance
------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
10,000 <= 15,000 3 $ 36,298.23 0.04%
15,000 <= 20,000 21 379,035.29 0.41
20,000 <= 25,000 38 877,893.92 0.95
25,000 <= 30,000 56 1,541,942.10 1.68
30,000 <= 35,000 92 3,009,734.37 3.27
35,000 <= 40,000 80 3,019,964.44 3.28
40,000 <= 45,000 117 4,984,043.46 5.42
45,000 <= 50,000 114 5,415,401.00 5.88
50,000 <= 55,000 111 5,821,292.93 6.33
55,000 <= 60,000 117 6,753,946.43 7.34
60,000 <= 65,000 87 5,460,589.63 5.93
65,000 <= 70,000 81 5,471,870.81 5.95
70,000 <= 75,000 67 4,865,946.83 5.29
75,000 <= 80,000 60 4,646,936.12 5.05
80,000 <= 85,000 46 3,793,264.92 4.12
85,000 <= 90,000 30 2,636,063.66 2.86
90,000 <= 95,000 29 2,682,455.99 2.91
95,000 <= 100,000 26 2,539,111.72 2.76
100,000 <= 105,000 23 2,358,448.77 2.56
105,000 <= 110,000 27 2,898,463.05 3.15
110,000 <= 115,000 18 2,025,601.59 2.20
115,000 <= 120,000 17 2,000,400.56 2.17
120,000 <= 125,000 3 370,576.83 0.40
125,000 <= 130,000 13 1,647,765.08 1.79
130,000 <= 135,000 10 1,327,038.27 1.44
135,000 <= 140,000 9 1,243,698.62 1.35
140,000 <= 145,000 7 998,977.75 1.09
145,000 <= 150,000 5 733,517.25 0.80
150,000 <= 200,000 35 6,039,477.00 6.56
200,000 <= 250,000 8 1,809,510.34 1.97
250,000 <= 300,000 13 3,446,186.49 3.74
300,000 <= 350,000 2 649,138.11 0.71
500,000 <= 550,000 1 550,000.00 0.60
- -----------------------------------------------------------------------------------------
Total.................. 1,366 $ 92,034,591.56 100.00%
=========================================================================================
</TABLE>
S-32
<PAGE>
Loan Summary Stratified by Amortization
Number of Percentage of Cut-
Mortgage Aggregate Unpaid Off Date Aggregate
Amortization Loans Principal Balance Principal Balance
------------ ----- ----------------- -----------------
Fully Amortizing 1065 $67,811,694.59 73.68%
Partially Amortizing 301 24,222,896.97 26.32
- --------------------------------------------------------------------------------
Total................ 1,366 $92,034,591.56 100.00%
================================================================================
Property Types of the Initial Mortgage Loans
as of the Cut-off Date
Percentage of Cut-
Number of Aggregate Unpaid Off Date Aggregate
Property Type Mortgage Loans Principal Balance Principal Balance
------------- -------------- ----------------- -----------------
Investor/
Rental Property 47 $ 3,058,176.67 3.32%
Mobile/
Manufactured Homes 153 8,371,507.54 9.10
Primary Financing Only 2 94,251.21 0.10
Residential Property 1164 80,510,656.14 87.48
- --------------------------------------------------------------------------------
Total.................. 1,366 $ 92,034,591.56 100.00%
================================================================================
Occupancy Status for the Initial Mortgage Loans
as of the Cut-off Date(1)
Percentage of Cut-
Number of Aggregate Unpaid Off Date Aggregate
Occupancy Status Mortgage Loans Principal Balance Principal Balance
---------------- -------------- ----------------- -----------------
Owner-Occupied 1311 $88,470,046.89 96.13%
Non-Owner-Occupied 55 3,564,544.67 3.87
- --------------------------------------------------------------------------------
Total................. 1,366 $92,034,591.56 100.00%
================================================================================
(1) The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
S-33
<PAGE>
Mortgage Rates of the Initial Mortgage Loans as of the Cut-off Date
Number of
Initial
Range of Mortgage Aggregate Unpaid Percentage of Cut-off Date
Mortgage Rates Loans Principal Balance Aggregate Principal Balance
-------------- ----- ----------------- ---------------------------
8.25% <= 8.50% 4 $ 216,779.84 0.24%
8.75% <= 9.00% 45 3,412,848.67 3.71
9.00% <= 9.25% 4 437,321.90 0.48
9.25% <= 9.50% 98 6,816,756.78 7.41
9.50% <= 9.75% 32 2,483,095.63 2.70
9.75% <= 10.00% 90 6,128,826.86 6.66
10.00% <= 10.25% 25 2,044,340.42 2.22
10.25% <= 10.50% 72 5,449,838.03 5.92
10.50% <= 10.75% 59 3,656,896.26 3.97
10.75% <= 11.00% 89 6,312,599.90 6.86
11.00% <= 11.25% 199 13,020,829.91 14.15
11.25% <= 11.50% 61 5,087,990.72 5.53
11.50% <= 11.75% 94 5,671,717.97 6.16
11.75% <= 12.00% 97 6,504,990.03 7.07
12.00% <= 12.25% 75 5,019,087.29 5.45
12.25% <= 12.50% 75 5,039,859.34 5.48
12.50% <= 12.75% 47 3,016,945.27 3.28
12.75% <= 13.00% 56 3,298,234.88 3.58
13.00% <= 13.25% 23 1,828,510.64 1.99
13.25% <= 13.50% 37 1,974,065.26 2.14
13.50% <= 13.75% 9 669,229.07 0.73
13.75% <= 14.00% 27 1,235,243.16 1.34
14.00% <= 14.25% 6 373,134.79 0.41
14.25% <= 14.50% 14 853,189.23 0.93
14.50% <= 14.75% 13 748,932.48 0.81
14.75% <= 15.00% 2 78,138.75 0.08
15.25% <= 15.50% 5 297,031.12 0.32
15.50% <= 15.75% 6 287,149.30 0.31
15.75% <= 16.00% 2 71,008.06 0.08
- --------------------------------------------------------------------------------
Total............... 1,366 $92,034,591.56 100.00%
================================================================================
S-34
<PAGE>
Original Loan-to-Value Ratios for the Initial Mortgage Loans
Number of
Initial
Range of Original Mortgage Aggregate Unpaid Percentage of Cut-off Date
Loan-To-Value Ratios Loans Principal Balance Aggregate Principal Balance
- -------------------- ----- ----------------- ---------------------------
10.00 <= 15.00 2 $ 45,358.52 0.05%
20.00 <= 25.00 1 11,148.38 0.01
25.00 <= 30.00 11 279,528.84 0.30
30.00 <= 35.00 4 94,927.93 0.10
35.00 <= 40.00 6 232,293.43 0.25
40.00 <= 45.00 3 121,712.11 0.13
45.00 <= 50.00 10 275,427.79 0.30
50.00 <= 55.00 12 383,122.16 0.42
55.00 <= 60.00 22 1,797,814.76 1.95
60.00 <= 65.00 50 2,550,616.50 2.77
65.00 <= 70.00 362 20,484,731.07 22.26
70.00 <= 75.00 303 21,766,302.15 23.65
75.00 <= 80.00 338 23,061,663.17 25.06
80.00 <= 85.00 104 7,510,025.85 8.16
85.00 <= 90.00 135 13,157,181.91 14.30
90.00 <= 95.00 2 200,570.94 0.22
95.00 <= 100.00 1 62,166.05 0.07
-------------------------------------------------------------------------------
Total........... 1,366 $92,034,591.56 100.00%
===============================================================================
S-35
<PAGE>
Geographic Distribution of the Mortgaged Properties
with respect to the Initial Mortgage Loans
as of the Cut-off Date
Number of
Initial
Mortgage Aggregate Unpaid Percentage of Cut-off Date
State Loans Principal Balance Aggregate Principal Balance
----- ----- ----------------- ---------------------------
AR 1 $ 41,117.04 0.04%
AZ 29 2,000,900.35 2.17
CO 11 999,386.33 1.09
DC 1 110,500.00 0.12
FL 135 8,212,669.62 8.92
GA 86 7,311,898.79 7.94
IA 26 1,216,862.52 1.32
ID 9 860,768.04 0.94
IL 67 4,986,128.79 5.42
IN 53 3,449,921.41 3.75
KS 40 2,398,184.07 2.61
KY 21 1,266,410.85 1.38
LA 101 5,330,186.03 5.79
MD 40 3,528,249.22 3.83
ME 5 258,197.33 0.28
MI 97 6,535,493.34 7.10
MO 58 3,953,403.08 4.30
MS 67 3,332,877.35 3.62
MT 11 796,878.28 0.87
NC 202 13,663,363.63 14.85
ND 7 356,216.21 0.39
NE 25 1,942,808.57 2.11
NM 26 1,823,822.04 1.98
OH 6 309,818.53 0.34
OK 22 1,032,206.12 1.12
OR 5 461,978.24 0.50
PA 19 1,352,371.21 1.47
RI 1 68,778.83 0.07
SC 9 578,975.77 0.63
SD 3 213,819.83 0.23
TN 55 3,699,949.69 4.02
UT 10 1,318,107.68 1.43
VA 71 5,665,469.30 6.16
WI 2 645,120.00 0.70
WV 39 1,880,882.77 2.04
WY 6 430,870.70 0.47
- --------------------------------------------------------------------------------
Total....... 1,366 $ 92,034,591.56 100.00%
================================================================================
S-36
<PAGE>
Purpose for Initial Mortgage Loans
Percentage of
Aggregate Cut-off Date
Number of Unpaid Aggregate
Initial Mortgage Principal Principal
Loan Purpose Loans Balance Balance
------------ ---------------- ------- -------
Debt Consolidation--Cash Out 390 $25,252,107.53 27.44%
Debt Consolidation--No Cash Out 321 21,381,530.66 23.23
Home Improvement--Cash Out 16 804,951.25 0.87
Home Improvement--No Cash Out 16 861,627.41 0.94
Multi-purpose REFI--Cash Out 174 11,354,023.44 12.34
Multi-purpose REFI--No Cash Out 94 7,011,472.15 7.62
Purchase Money--Cash Out 8 470,593.08 0.51
Purchase Money--No Cash Out 145 10,139,172.18 11.02
Refinance--Cash Out 96 7,204,299.32 7.83
Refinance--No Cash Out 106 7,554,814.54 8.21
- --------------------------------------------------------------------------------
Total ............................. 1,366 $92,034,591.56 100.00%
================================================================================
Loan Summary Stratified By Documentation Level
Percentage of
Aggregate Cut-off Date
Number of Unpaid Aggregate
Mortgage Principal Principal
Documentation Level Loans Balance Balance
------------------- ---------------- ------- -------
Full Documentation 1319 $87,210,954.94 94.76%
Stated Documentation 18 1,736,290.06 1.89
Lite Documentation 29 3,087,346.56 3.35
- --------------------------------------------------------------------------------
Total.................. 1,366 $92,034,591.56 100.00%
================================================================================
S-37
<PAGE>
Risk Categories for Initial Mortgage Loans
as of Cut-off Date (1)
Percentage of
Aggregate Cut-off Date
Number of Unpaid Aggregate
Mortgage Principal Principal
Risk Categories Loans Balance Balance
--------------- ---------------- ------- -------
AA 151 $11,798,665.93 12.82%
A 832 58,320,707.08 63.37
B 230 13,933,279.38 15.14
C 91 4,784,495.37 5.20
D 62 3,197,443.80 3.47
- --------------------------------------------------------------------------------
Total............................ 1,366 $92,034,591.56 100.00%
================================================================================
(1) Per the Originator's Underwriting Guidelines. See "Underwriting Standards;
Representations" herein.
Remaining Months To Stated Maturity for Initial Mortgage Loans
as of the Cut-off Date
Percentage of
Aggregate Cut-off Date
Number of Unpaid Aggregate
Mortgage Principal Principal
Remaining Term (months) Loans Balance Balance
- ----------------------- ---------------- ------- -------
108 <= 120 111 $4,791,046.02 5.21%
120 <= 132 1 73,879.31 0.08
132 <= 144 23 1,288,183.13 1.40
144 <= 156 3 222,298.78 0.24
156 <= 168 14 1,057,776.47 1.15
168 <= 180 912 62,543,403.62 67.96
180 <= 192 4 306,675.24 0.33
192 <= 204 2 83,170.13 0.09
228 <= 240 172 11,729,398.92 12.74
240 <= 252 2 140,428.09 0.15
252 <= 264 2 202,156.79 0.22
264 <= 276 1 106,263.00 0.12
276 <= 288 1 180,001.00 0.20
288 <= 300 10 672,460.71 0.73
348 <= 360 107 8,483,100.35 9.22
360 <= 365 1 154,350.00 0.17
- --------------------------------------------------------------------------------
Total...................... 1,366 $92,034,591.56 100.00%
================================================================================
S-38
<PAGE>
Loan Summary Stratified By Origination Method
Percentage of
Aggregate Cut-off Date
Number of Unpaid Aggregate
Initial Mortgage Principal Principal
Origination Method Loans Balance Balance
------------------ ---------------- --------- ------------
Retail:
Greenville Home Gold 259 $16,997,140.24 18.47%
Houston Home Gold 61 3,673,600.82 3.99
Indiana Home Gold 250 16,388,194.49 17.81
Phoenix Home Gold 262 17,400,013.58 18.91
Sterling Mortgage 112 5,570,577.13 6.05
--- ------------ ----
Total Retail 944 $60,029,526.26 65.22
=== ============== =====
Wholesale 422 32,005,065.30 34.78
=== ============= =====
- --------------------------------------------------------------------------------
Total.......................... 1,366 $ 92,034,591.56 100.00%
===== =============== =======
================================================================================
Conveyance of Additional Mortgage Loans and Pre-Funded Mortgage Loans
The Trust may acquire up to approximately $57,965,408.44 aggregate
Principal Balance of Additional Mortgage Loans pursuant to the Sale and
Servicing Agreement. The Trust may also acquire Pre-Funded Mortgage Loans during
the Pre-Funding Period. Accordingly, the statistical characteristics of the
Mortgage Pool will vary as of the Closing Date, upon the acquisition of
Additional Mortgage Loans and subsequently upon the acquisition of any
Pre-Funded Mortgage Loans.
The Contributor will not select Additional Mortgage Loans or Pre-Funded
Mortgage Loans in a manner that it believes is adverse to the interests of the
Holders of the Class A Notes or the Insurer. Each Pre-Funded Mortgage Loan must
also satisfy the representations and warranties specified in the Unaffiliated
Seller's Agreement (as defined herein) and the Sale and Servicing Agreement and
the Depositor is required to deliver certain opinions of counsel with respect to
the conveyance of such Pre-Funded Mortgage Loans.
In addition, the obligation of the Trust to accept the Additional
Mortgage Loans or Pre-Funded Mortgage Loans is subject to the following
requirements, any of which requirements (except for the requirement stated in
clause (v) of this paragraph) may be waived or modified in any respect by the
Insurer; (i) such Additional Mortgage or Pre-Funded Mortgage Loan may not be 60
or more days contractually delinquent as of the related Cut-off Date; (ii) the
remaining term to stated maturity of such Additional Mortgage Loan or Pre-Funded
Mortgage Loan will not exceed 30 years for fully amortizing loans or 15 years
for Balloon Loans; (iii) such Additional Mortgage Loan or Pre-Funded Mortgage
Loan will be secured by a Mortgage in a first lien position; (iv) such
Additional Mortgage Loan or Pre-Funded Mortgage Loan will not have a Mortgage
Rate less than 8.0%; (v) such Additional Mortgage Loan or Pre-Funded Mortgage
Loan will be otherwise acceptable to the Depositor and the Insurer; and (vi)
following the purchase of such Additional Mortgage Loan or Pre-Funded Mortgage
Loan by the Trust, the Mortgage Loans (including such Additional Mortgage Loans
or Pre-Funded Mortgage Loans): (a) will have a weighted average Mortgage Rate of
at least 11.00%; (b) will have a weighted average remaining term to stated
maturity of less than 205 months;
S-39
<PAGE>
(c) will not have more than 40% by aggregate principal balance Balloon Loans;
(d) will have no Mortgage Loan with a principal balance in excess of $600,000;
(e) will have a state concentration not in excess of 20% for any one state; (f)
will have not more than 2% in aggregate principal balance of the Mortgage Loans
concentrated in any single ZIP code; and (g) will have no more than 5% Mortgage
Loans relating to non-owner occupied properties.
Underwriting Standards; Representations
The Mortgage Loans will be contributed by the Originator to the
Contributor, contributed by the Contributor to the Sponsor, sold by the Sponsor
to the Depositor, sold by the Depositor to the Trust and then pledged by the
Trust to the Indenture Trustee. All of the Mortgage Loans were or will be
originated by the Originator or acquired by the Originator from mortgage bankers
or brokers generally in accordance with the underwriting criteria described
herein.
The Originator's underwriting standards are primarily intended to assess
the ability and willingness of the borrower to repay the debt and to evaluate
the adequacy of the mortgaged property as collateral for the mortgage loan. All
of the Mortgage Loans were or will be underwritten with a view toward the resale
thereof in the secondary mortgage market. The Originator considers, among other
things, a mortgagor's credit history, repayment ability and debt service to
income ratio ("debt-to-income ratio"), as well as the value, type and use of the
mortgaged property. The Mortgage Loans generally bear higher rates of interest
than mortgage loans that are originated in accordance with FNMA and FHLMC
standards, and may experience rates of delinquency and foreclosure that are
higher, and that may be substantially higher, than those experienced by
portfolios of mortgage loans underwritten in accordance with such FNMA or FHLMC
standards.
Approximately 34.78% of the Initial Mortgage Loans originated by the
Originator are based on loan application packages submitted through mortgage
brokerage companies with whom the Originator has a relationship ("Wholesale
Mortgage Loans"). These brokers and/or companies must meet minimum standards
based on an analysis of information submitted with an application for approval,
including resumes of the principals, financial statements, valid real estate
license, satisfactory credit report (brokers with open tax liens of $1,000 or
more are not eligible for approval unless an established payment plan is in
place). Once approved, mortgage brokerage companies are eligible to submit loan
application packages in compliance with the terms of a signed broker agreement.
Wholesale Mortgage Loans are originated and underwritten by the Originator in
Greenville, South Carolina with a focus on four sales areas: Atlantic,
Southeast, Midwest and Rocky Mountain. Wholesale Mortgage Loans are initially
reviewed by a conditional underwriter for preapproval. If preapproved, the loan
is reviewed by a final, more senior underwriter.
Approximately 65.22% of the Initial Mortgage Loans were originated by the
Originator directly ("Retail Mortgage Loans"). Retail Mortgage Loans are
underwritten based on the Originator's underwriting guidelines by the Originator
from the following locations: Indianapolis, Indiana; Baton Rouge, Louisiana; New
Orleans, Louisiana; Phoenix, Arizona; Greenville, South Carolina; Atlanta,
Georgia; Jackson, Mississippi; Houston, Texas; and Jacksonville, Florida. All
Retail Mortgage Loans are originated at the various retail centers. Loans
originated in the Indianapolis, Phoenix, Houston and Greenville centers are also
underwritten and processed through those centers. Retail Mortgage Loans
originated in Baton Rouge, New Orleans, Atlanta, Jackson and Jacksonville are
processed and underwritten in the Baton Rouge location. Retail Mortgage Loans
are initially reviewed by a loan officer to determine whether the loan meets the
underwriting guidelines. If so, an underwriter will review the file and approve
or disapprove the loan. If the loan is not
S-40
<PAGE>
approved, the loan officer reviews the loan a second time to see if it can be
reworked, in which case it will be reviewed by an underwriter again. Generally,
the underwriting department completes its review of Retail Mortgage Loans within
one day after procurement of all necessary loan documentation.
On a case-by-case basis, the Originator may determine that, based upon
compensating factors, a prospective mortgagor not strictly qualifying under the
underwriting risk category guidelines described below warrants an underwriting
exception. Compensating factors may include, but are not limited to, low
loan-to-value ratio and/or a large down payment, proven ability to handle high
debt-to-income, low debt-to-income ratio, large cash flow, significant verified
savings, history of defaults outweighed by good credit history, stable
employment, excellent mortgage history, a large reduction in monthly outflows
and time in residence at the applicant's current address. It is expected that a
number of the Mortgage Loans to be included in the mortgage pool will contain
one or more of such underwriting exceptions.
The Originator's underwriters verify the income of each applicant from
various sources in the following manner: salaried and hourly borrowers and those
borrowers on commission, whether at a full time or part time job, are required
to submit W-2 forms for the past two years of employment and pay stubs from
within the past 30 days; rental income must be shown from two years of tax
returns; pension income must be verified from a check or direct deposit slip, a
W-2 form or a letter from the pension administrator; bonus income must be
demonstrated over two years of W-2 forms and by a statement from the employer as
to the likelihood of future bonuses; alimony and child support must be
documented by a court order and proof of receipt of payment; and self-employed
individuals must submit two years of tax returns with all schedules attached.
The applicant must have a sufficiently established credit history to
qualify for the appropriate credit grade (as described below). This credit
history is substantiated by a report prepared by an independent credit report
agency. The report typically considers the applicant's entire credit history and
contains information relating to such matters as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcy, repossession, suits or judgments. The applicant must
generally provide a letter explaining all late payments on mortgage debt and
other consumer (non-mortgage) debt within the last two years, as well as
detailing all credit inquires made within the last 90 days.
The Originator originates loans secured by single-family residences (which
may be detached, attached, part of a two-to-four unit dwelling, a condominium
unit, townhouse or a unit in a planned unit development) and manufactured
housing. The Originator's guidelines are applied in accordance with a procedure
which complies with applicable federal and state laws and regulations and
require an appraisal of the mortgaged property which conforms to FNMA, USPAP,
and FIRREA standards. Appraisals may only be provided by independent appraisers
approved by the Originator who meet any necessary licensing standards.
Each appraisal includes a market data analysis based on recent sales of
comparable homes in the area and, where deemed appropriate, replacement cost
analysis based on the current cost of constructing a similar home. The review
appraisal may be a desk, field, or drive-by review of the mortgaged property.
The Originator requires title insurance on all mortgage loans. The
Originator also requires that fire and extended coverage casualty insurance be
maintained on the mortgaged property in an amount at least equal to the
principal balance of the related residential loan or the replacement costs
S-41
<PAGE>
of the property, whichever is less. None of the Mortgage Loans will be covered
by a primary mortgage insurance policy.
A quality control department performs a monthly quality control audit of a
sample of all loans. The monthly underwriting analysis consists of a review of a
random sample of 70% of closed loans.
In addition to the quality control audit, at least one loan will be
selected from each broker each month. The loan review confirms the existence and
accuracy of legal documents, credit documentation, appraisal analysis, and
underwriting decision. The review function allows the Originator to assess
programs for potential guideline changes, program enhancements, appraisal
policies, areas of risk to be reduced or eliminated, and need for additional
underwriter training.
Under the mortgage loan programs, various risk categories are used to
grade the likelihood that the applicant will satisfy the repayment conditions of
the loan. These risk categories establish the maximum permitted loan-to-value
ratio and loan amount, given the occupancy status of the mortgaged property and
the applicant's credit history and debt ratio. In general, higher credit risk
mortgage loans are graded in categories which reflect higher debt ratios and
more (or more recent) major derogatory credit items such as outstanding
judgments or prior bankruptcies; however, as compensating factors, these loan
programs establish lower maximum loan-to-value ratios and maximum loan amounts
for loans graded in such categories.
The Originator's guidelines have the following categories and criteria for
grading the potential likelihood that an applicant will satisfy the repayment
obligations of a mortgage loan, however, on a case-by-case basis, the Originator
may determine that, based upon compensating factors, a prospective mortgagor not
strictly qualifying under such underwriting risk category guidelines warrants an
underwriting exception:
"AA": Under the AA risk category, the applicant generally must have repaid
installment and revolving debt according to its terms with a maximum of 2
payments no more than 30 days delinquent in the past 24 months. No 30-day late
payments within the last 24 months are permitted on an existing mortgage loan.
Judgments or liens must have been paid off within 2 years prior to the funding
of the loan. No bankruptcy discharge or foreclosures may be in the borrower's
credit file. Generally, the mortgaged property must be in at least average
condition. Generally, a maximum loan-to-value ratio of 90% is permitted for
owner occupied one- to four-unit and townhouse properties secured by first or
second mortgages. The maximum loan-to-value ratio generally is reduced by 10% on
a mortgaged property consisting of condominium properties and second houses with
proof of owner occupancy for part of the year and reduced by 5% on properties
with rural characteristics. Loan-to-value ratios for nonowner-occupied
properties generally are limited to 80% in the case of one- to two-unit
properties and 75% for three- to four-unit properties, each with a first
mortgage. The debt-to-income ratio may not exceed 45%.
"A": Under the A risk category, the applicant must have generally repaid
installment and revolving debt according to its terms with minimal payments no
more than 30 days delinquent in the past 24 months and only one 60-day late
payment within the last 24 months. A maximum of two 30-day late payments within
the past 12 months and one 60-day late payment within the last 24 months is
permitted on an existing mortgage loan that is currently no more than 30 days
past due. Generally, a loan-to-value ratio for the applied-for mortgage of 90%
or less is required on all owner occupied one-to-four unit properties secured by
a first or second mortgage. For purposes of determining whether a prospective
mortgagor has been 30 days late, the Originator uses a "rolling 30-day period,"
S-42
<PAGE>
i.e., a continuous sequence of 30-day late payments will be considered as a
single 30-day late payment. Judgments or liens must have been paid off within
two years prior to the funding of the loan. No collection accounts or
charge-offs may remain open after the funding of the loan except that those
under $500 are treated on a case by case basis. No bankruptcy, discharge or
notice of default filings may have occurred during the preceding five years and
no foreclosures may be in the applicant's file. Generally, the mortgaged
property must be in at least average condition. The maximum loan-to-value ratio
generally is reduced by 10% on a mortgaged property consisting of condominium
properties and reduced by 5% on properties with rural characteristics;
loan-to-value ratios for nonowner-occupied properties and second homes are
limited to 75%. The debt-to-income ratio generally may not exceed 45% but may
increase to 50% with additional disposable income.
"B": Under the B risk category, the applicant must have generally repaid
installment and revolving debt according to its terms with a maximum of one
90-day late payment permitted on any account in the last 24 months for minor
creditors. A maximum of three 30-day late payments within the last 12 months and
one 60-day late payment within the last 24 months are permitted on an existing
mortgage loan. No bankruptcy, discharge or notice of default filings may have
occurred during the preceding two years and no foreclosures may be in the
applicant's file. No judgment or liens of more than $500 may remain open after
the funding of the loan. No collections or charge-offs of more than $500 may
remain open after the funding of the loan unless the time elapsed since the
collection or charge-off exceeds four years. Generally, the mortgaged property
must be in at least average condition. Generally, a maximum loan-to-value ratio
of 85% is permitted for an owner-occupied one- to four- unit or townhouse
property with a first or second mortgage. The maximum loan-to-value ratio
generally is reduced by 10% on a mortgaged property consisting of condominium
properties and second houses with proof of owner occupancy for part of the year
and reduced by 5% on properties with rural characteristics. Loan-to-value ratios
for nonowner-occupied properties generally are limited to 70%. Generally, the
debt-to-income ratio must be 45% or less, but this may increase to 50% with
additional disposable income.
"C": Under the C risk category, the applicant may have experienced
significant credit problems in the past. A maximum of four 30-day and one 60-day
late payments within the last 12 months and one 90-day within past 12 to 24
months are permitted on an existing mortgage loan. An existing mortgage loan is
not required to be current at the time the application is submitted. However, an
existing mortgage loan can be no more than 60 days delinquent at the time of
loan closing. No notice of foreclosure filing may have occurred during the
preceding 5 years. No bankruptcy filing or discharge may have occurred during
the preceding 24 months. Judgments or liens must be paid with the proceeds of
the loan. No collections or charge-offs of more than $250 may remain open after
the funding of the loan unless the time elapsed since the collection or
charge-off exceeds three years. Generally, the mortgaged property must be in at
least average condition. Generally, a maximum loan-to-value ratio of 80% is
permitted for an owner-occupied one-to-four unit or townhouse property secured
by a first or second mortgage, while 65% is permitted for nonowner-occupied
properties on one-to-two unit properties or second homes with proof of owner
occupancy for part of the year. The maximum loan-to-value ratio generally is
reduced by 5% on properties in rural areas. Loan-to-value ratios for condominium
units generally are restricted to 65%. Generally, the debt-to-income ratio must
be 50% or less, but this may increase to 55% with additional disposable income.
"D": Under the D risk category, the applicant may have experienced
significant credit problems in the past. An existing mortgage loan is not
required to be current at the time the application is submitted. Judgment or
liens must be paid with the proceeds of the loan. No
S-43
<PAGE>
collections or charge-offs of more than $250 may remain open after the funding
of the loan unless the time elapsed since the collection or charge-off exceeds
one year. Generally, the mortgaged property must be in at least average
condition. Generally, a maximum loan-to-value ratio of 70% is permitted for an
owner-occupied one-to-four unit or townhouse property secured by a first
mortgage only. The maximum loan-to-value ratio generally is reduced by 10% on a
mortgaged property consisting of condominium properties. Generally, the
debt-to-income ratio may not exceed 50%. Debt ratios greater than 50% require
increased disposable income.
The Originator will make certain representations and warranties with
respect to the Mortgage Loans as of the Closing Date. The Originator will be
obligated to repurchase Mortgage Loans in respect of which a material breach of
the representations and warranties it has made has occurred (other than those
breaches which have been cured). For a discussion of the representations and
warranties made and the repurchase obligation, see "The Trust-Representations
and Warranties".
Piggy Back Mortgage Loans
At the time of origination or acquisition of the Mortgage Loans, the
Originator may make a Piggy Back Loan to the borrower, which Piggy Back Loan
will be subordinate to the first mortgage securing the related Mortgage Loan.
These Piggy Back Loans may be subsequently sold in bulk pools in the secondary
market on a servicing released basis. Approximately 66.25% of the Initial
Mortgage Loans have Piggy Back Mortgage Loans.
Servicing
The Mortgage Loans will be serviced by Emergent Mortgage Corp., as
Servicer (the "Servicer"). The information set forth in the following paragraphs
has been provided by the Servicer and the Parent.
The Servicer was incorporated in June 1995, commenced its regular lending
program in September 1995 and began funding such mortgage loans indirectly in
the same month. The principal business of the Servicer historically has been the
origination and sale of non-conforming mortgage loans on a servicing released
basis. Recently, the Servicer began accumulating mortgage loans for sale on a
servicing retained basis. The Servicer does not have a significant history of
servicing mortgage loans. However, the Parent has been servicing mortgage loans
through affiliates of the Servicer in its Mortgage Loan Division since 1991. The
majority of the loans serviced by the Mortgage Loan Division were loans made
primarily to South Carolina residents.
The Mortgage Loan Division maintains a centralized portfolio management
department which services the Mortgage Loans that are not sold, as well as
securitized loans. Servicing includes collecting payments from borrowers,
accounting for principal and interest, contacting delinquent borrowers, ensuring
that insurance is in place, monitoring payment of real estate property taxes,
and supervising foreclosures and bankruptcies in the event of unremedied
defaults. The Parent has increased its servicing capabilities and staffing
significantly since 1995 in light of its origination growth.
Collection efforts generally begin when an account is over five days past
due. At that time, the Mortgage Loan Division attempts to contact the borrower
to determine the reason for the delinquency and cause the account to become
current. After an account becomes 15 days past due, weekly letters are sent to
the borrower. In general, at 30 days past due, a right to cure letter is sent;
at
S-44
<PAGE>
61 days a five-day demand letter is sent; and at 68 days, the account is turned
over to an attorney. In addition to written notices, the Company attempts to
maintain telephone contact with the Borrower throughout the Delinquency Period.
If the status of the account continues to deteriorate, the Mortgage Loan
Division undertakes an analysis to determine the appropriate action. In limited
circumstances, when a borrower is experiencing difficulty in making timely
payments, the Mortgage Loan Division may temporarily adjust the borrower's
payment schedule without changing the loan's delinquency status. The
determination of how to work out a delinquent loan is based upon a number of
factors, including the borrower's payment history and the reason for the current
inability to make timely payments.
When a loan is 90 days past due in accordance with its original terms, it
is placed on non-accrual status and foreclosure proceedings are generally
initiated. In connection with such foreclosure, the loan and the facts
surrounding its delinquency are reviewed, and the underlying property may be
reappraised. Regulations and practices regarding foreclosures and the rights of
the mortgagor in default vary greatly from state to state. See "Certain Legal
Aspects of the Mortgage Loans and Contracts -- The Mortgage Loans" in the
Prospectus.
The servicing procedures utilized by the Servicer are substantially
similar to those cited above and the management is largely the same as those who
work directly with the Parent or with CII.
The following tables set forth, as of December 31, 1993, 1994, 1995 and
1996, and as of September 30, 1997, certain information relating to the
delinquency experience (including imminent foreclosures, foreclosures in
progress and bankruptcies) of one-to-four family residential mortgage loans
included in the Mortgage Loan Division of the Parent's entire mortgage loan
serviced portfolio (which portfolio includes mortgage loans originated under the
Servicer's guidelines) at the end of the indicated periods. The majority of such
mortgage loans are made to South Carolina residents. The indicated periods of
delinquency are based on the number of days past due on a contractual basis. No
mortgage loan is considered delinquent for these purposes unless it is at least
one month past due on a contractual basis.
Mortgage Loan Division
Delinquencies and Foreclosure
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31, At December 31, At December 31, At December 31, At September 30,
1993 1994 1995 1996 1997
---------------- ------------------- ----------------- ---------------- --------------------
Percent Percent Percent Percent Percent
By by By by By by By by By by
Dollar Dollar Dollar Dollar Dollar Dollar Dollar Dollar Dollar Dollar
Amount Amount Amount Amount Amount Amount Amount Amount Amount Amount
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Serviced
Portfolio(1) ......... $42,335 100.00% $60,151 100.00% $88,165 100.00% $146,231 100.00% $527,256 100.00%
Period of
Delinquency
30-59 days ......... $3,424 8.09% $4,789 7.96% $6,833 7.75% $4,450 3.04% $ 20,537 3.90%
60-89 days ......... $869 2.05% $1,724 2.87% $1,588 1.80% $1,530 1.05% $ 6,729 1.28%
90 days or more..... $5,670 13.39% $4,109 6.83% $4,299 4.88% $4,634 3.17% $ 14,753 2.80%
------ ----- ------ ---- ------ ---- ------ ---- --------- ----
Total Delinquent
Loans................. $9,963 25.53% $10,622 17.66% $12,720 14.43% $10,614 7.26% $42,019 7.97%
------ ----- ------- ----- ------- ----- ------- ---- ------- ----
</TABLE>
- -------------------
(1) Excludes loans serviced for others for which no credit risk has been
retained.
S-45
<PAGE>
Mortgage Loan Division
Other Real Estate Owned
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31, At December 31, At December 31, At December 31, At September 30,
1993 1994 1995 1996 1997
---------------------------------------------------------------------------------------------
By Dollar Amount By Dollar Amount By Dollar Amount By Dollar Amount By Dollar Amount
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Serviced $42,335 $60,151 $88,165 $146,231 $527,256
Portfolio(1).........
OREO (Acq. through $2,812 $3,361 $3,049 $2,959 $ 3,261
Foreclosure)(2)......
OREO to Total 6.64% 5.59% 3.46% 2.02% 0.62%
Serviced Portfolio(3)
</TABLE>
- ------------------
(1) Excludes loans serviced for others for which no credit risk has been
retained.
(2) For the purposes of these tables, Foreclosed Loans means the lesser of (i)
the principal balance or (ii) the appraised value minus selling costs of
mortgage loans secured by mortgaged properties the title of which has been
acquired by the Parent or a subsidiary thereof, by investors or by an
insurer following foreclosure or delivery of a deed in lieu of
foreclosure.
(3) The OREO to Total Portfolio Ratio is equal to the lower of (i) aggregate
principal balance of Foreclosed Loans or (ii) appraised value less selling
costs of the mortgaged properties divided by the aggregate principal
balance of mortgage loans in the Total Portfolio at the end of the
indicated period.
Loan Loss Experience on
Mortgage Loan Division's Servicing Portfolio
of Mortgage Loans
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months
Ending
Year Ending December 31, September 30,
---------------------------------------------------------------------
1993 1994 1995 1996 1997
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average Serviced Portfolio(1) $42,397 $51,243 $74,158 $97,281 $336,600
Net Charge Offs $446 $1,518 $771 $792 $978
Net Charge Offs as a Percentage of Average 1.05% 2.96% 1.04% 0.81% 0.39%
Serviced Portfolio(2)
</TABLE>
- ----------------
(1) "Average Serviced Portfolio" on the date stated above is the average
principal balances of the total mortgage loans serviced during the period
indicated. "Average Serviced Portfolio" excludes loans serviced for others
for which no credit risk has been retained. Averages are computed using
beginning and ending balances for the period presented.
(2) Annualized for 1997.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the Mortgage Loan Division's mortgage portfolio set forth in the foregoing
tables. The statistics shown above represent the delinquency experience for the
Mortgage Loan Division's mortgage servicing portfolio (which may differ
substantially from the Mortgage Pool with respect to credit underwriting
standards and other factors) only for the periods presented, whereas the
aggregate delinquency experience on the Mortgage Loans comprising the Mortgage
Pool will depend on the results obtained over the life of the Mortgage Pool.
S-46
<PAGE>
The Originator commenced its sub-prime mortgage loan business in 1995.
Accordingly, the Originator (whether as an originator or acquirer of mortgage
loans or as a servicer of such mortgage loans) does not have significant
historical delinquency, bankruptcy, foreclosure or default experience that may
be referred to for purposes of estimating the future delinquency and loss
experience of the Mortgage Loans. There can be no assurance that the Mortgage
Loans comprising the Mortgage Pool will perform consistently with the
delinquency or foreclosure experience described herein. It should be noted that
if the residential real estate market should experience an overall decline in
property values, the actual rates of delinquencies and foreclosures could be
higher than those previously experienced by the Mortgage Loan Division. In
addition, adverse economic conditions 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 and foreclosures with
respect to the Mortgage Pool.
YIELD ON THE NOTES
Certain Shortfalls in Collections of Interest
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of such prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan, the
mortgagor is not charged interest on the amount of such prepayment for the month
in which such prepayment is made. Regarding those interest shortfalls
attributable to full and partial prepayments by the mortgagors on the Mortgage
Loans, the Servicer will be obligated to pay from its own funds such shortfalls,
but only to the extent of its Servicing Fee for the related Collection Period
(the net amount of such shortfalls, the "Prepayment Interest Shortfalls"). See
"Sale and Servicing Agreement--Servicing and Other Compensation and Payment of
Expenses" herein. In addition, the application of the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended (the "Relief Act"), to any Mortgage Loan
will adversely affect, for an indeterminate period of time, the ability of the
Servicer to collect full amounts of interest on such Mortgage Loan. The effect
of any shortfalls resulting from Prepayment Interest Shortfalls or from the
application of the Relief Act ("Relief Act Shortfalls") will be to reduce the
aggregate amount of interest collected that is available for distribution to
Noteholders. The Policy does not cover Prepayment Interest Shortfalls or Relief
Act Shortfalls. See "Certain Legal Aspects of the Mortgage Loans and
Contracts--Soldiers' and Sailors' Civil Relief Act" in the Prospectus. Any such
shortfalls may cause a deferral of the payment of a portion of the accrued
interest on the Notes as provided herein under "Description of the
Notes--Interest Payments" and "--Overcollateralization Provisions."
General Prepayment Considerations
The rate of principal payments on the Class A Notes, the aggregate amount
of distributions on the Class A Notes and the yield to maturity of the Class A
Notes will be related to the rate and timing of payments of principal on the
Mortgage Loans. The rate of principal payments on the Mortgage Loans will in
turn be affected by the rate of principal prepayments thereon (including for
this purpose payments resulting from refinancings, liquidations of the Mortgage
Loans due to defaults, casualties, condemnations and repurchases, whether
optional or required, by the Depositor, the Sponsor or the Contributor, as the
case may be). The Mortgage Loans may be prepaid by the mortgagors at any time,
generally without penalty.
S-47
<PAGE>
Prepayments, liquidations and repurchases of the Mortgage Loans will
result in distributions in respect of principal to the holders of the Class A
Notes then entitled to receive such distributions that otherwise would have been
distributed over the remaining terms of the Mortgage Loans. Since the rates of
payment of principal on the Mortgage Loans will depend on future events and a
variety of factors (as described more fully herein and in the Prospectus under
"Prepayment and Yield Considerations"), no assurance can be given as to such
rate or the rate of principal prepayments. The extent to which the yield to
maturity of the Class A Notes may vary from the anticipated yield will depend
upon the degree to which such Notes are purchased at a discount or premium and
the degree to which the timing of payments thereon is sensitive to prepayments
on the related Mortgage Loans. Further, in the case of Class A Notes purchased
at a discount, an investor should consider the risk that a slower than
anticipated rate of principal payments on the related Mortgage Loans could
result in an actual yield to such investor that is lower than the anticipated
yield and, in the case of Class A Notes purchased at a premium, an investor
should consider the risk that a faster than anticipated rate of principal
payments could result in an actual yield to such investor that is lower than the
anticipated yield. In general, the earlier a prepayment of principal on the
Mortgage Loans, the greater will be the effect on the yield to maturity of an
investor in the Class A Notes. As a result, the effect on an investor's yield of
principal payments occurring on the Mortgage Loans at a rate higher (or lower)
than the rate anticipated by the investor during the period immediately
following the issuance of the Class A Notes would not be fully offset by a
subsequent like reduction (or increase) in the rate of principal payments.
It is highly unlikely that the Mortgage Loans will prepay at any constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate. Moreover, the timing of prepayments on the Mortgage Loans may
significantly affect the actual yield to maturity on the Class A Notes, even if
the average rate of principal payments experienced over time is consistent with
an investor's expectation.
The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. If
prevailing mortgage rates fall significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayment (and refinancing) would be expected to
increase. Conversely, if prevailing mortgage rates rise significantly above the
Mortgage Rates on the Mortgage Loans, the rate of prepayment on the Mortgage
Loans would be expected to decrease. Other factors affecting prepayment of
mortgage loans include changes in mortgagors' housing needs, job transfers,
unemployment, mortgagors' net equity in the mortgaged properties and servicing
decisions. There can be no certainty as to the rate of prepayments on the
Mortgage Loans during any period or over the life of the Notes. See "Prepayment
and Yield Considerations" in the Prospectus.
In general, defaults on mortgage loans are expected to occur with greater
frequency in their early years. In addition, default rates generally are higher
for mortgage loans used to refinance an existing mortgage loan compared to
default rates on purchase-money mortgage loans. In the event of a mortgagor's
default on a Mortgage Loan, other than as provided by the overcollateralization
provisions of the Trust or by the Policy as described herein, there can be no
assurance that recourse will be available beyond the specific Mortgaged Property
pledged as security for repayment. See "The Mortgage Pool--Underwriting
Standards; Representations" herein.
S-48
<PAGE>
Early Payment or Redemption of Notes
In the event that on the Closing Date the difference between $150,000,000
and the aggregate principal balance of the Initial Mortgage Loans and the
Additional Mortgage Loans as of their respective Cut-off Dates is greater than
the Pre-Funding Limit, the excess over the Pre-Funding Limit shall be applied on
the initial Payment Date, if less than $100,000, as a principal payment to
Noteholders then entitled to principal or, if $100,000 or more, as a prepayment
of principal of the Class A Notes, pro rata, on the basis of the respective Note
Principal Balances of the Notes of each Class. In addition, any amount remaining
in the Pre-Funding Account (exclusive of investment earnings) at the end of the
Pre-Funding Period will be applied on the first Payment Date subsequent to the
end of the Pre-Funding Period, if less than $100,000, as a payment of principal
to Noteholders then entitled to principal or, if $100,000 or more, as a
prepayment of principal of the Class A Notes, pro rata, on the basis of the
respective Note Principal Balances of the Notes of each Class.
Subject to certain conditions, the Class A Notes are subject to redemption
when the aggregate Class A Note Principal Balance has been reduced to
$14,850,000 or less or following a determination that the Trust does not and
will no longer qualify as a REIT. See "Description of the Notes--Redemption".
Pursuant to the Sale and Servicing Agreement, each of the Insurer and the
Servicer shall have the right to purchase all of the Mortgage Loans and
properties acquired in respect thereof if the aggregate principal balance
thereof is reduced to 5% or less (in the case of the Insurer) or 10% or less (in
the case of the Servicer) of the aggregate principal balance thereof as of their
respective Cut-off Dates. See "Description of the Notes--Purchase Options". In
the event of such purchase, the Insurer or the Servicer shall be required to
deliver the purchase price to the Indenture Trustee for deposit into the
Distribution Account and payment to the Noteholders and other as described
herein.
The operation of the foregoing early payment and redemption provisions may
affect the yield on the Notes.
Overcollateralization
The cash flow provisions of the Indenture are intended to create
overcollateralization through the application of Net Monthly Excess Cashflow to
accelerate payments of principal of the Class A Notes relative to principal
payments on the Mortgage Loans. The accelerated distributions of principal will
continue until the level of overcollateralization reaches the required level at
which time such distributions will stop unless and until necessary to restore
the actual level of overcollateralization to its required level. As long as the
required level of overcollateralization is maintained, certain amounts in
respect of principal of the Mortgage Loans that otherwise would be payable to
the Holders of the Class A Notes will instead be paid to the holders of the
Certificates. In addition, if in the future the required level of
overcollateralization is permitted to "step down," there may be one or more
Payment Dates on which holders of the Class A Notes may receive little or no
payments in respect of principal. Conversely, if the required level of
overcollateralization is required to "step up," Holders of the Class A Notes may
receive accelerated payments of principal. As a result of these provisions, it
may be more difficult to predict the weighted average life and yield to maturity
of the Class A Notes than if the Indenture did not include such provisions.
S-49
<PAGE>
Weighted Average Lives
Weighted average life refers to the amount of time that will elapse from
the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average lives of the Class
A Notes will be influenced by the rate at which principal on the related
Mortgage Loans is paid, which may be in the form of scheduled payments or
prepayments (including prepayments of principal by the borrower as well as
amounts received by virtue of condemnation, insurance or foreclosure with
respect to the Mortgage Loans), and the timing thereof.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement
("Home Equity Prepayment" or "HEP") assumes that the pool of loans prepays in
the first month at a constant annual prepayment rate of 1.7% and increases by an
additional 1.7% each month thereafter until the tenth month, where it remains at
a constant annual prepayment rate equal to 17% (the "Prepayment Assumption").
HEP represents an assumed annualized rate of prepayment relative to the then
outstanding principal balance on a pool of new mortgage loans. Neither the
prepayment model used herein nor any other prepayment model or assumption
purports to be an historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans included in the Mortgage Pool.
The table following the next paragraph indicates the percentage of the
initial Class A Note Principal Balance that would be outstanding after each of
the dates shown at various percentage HEPs and the corresponding weighted
average lives of the Class A Notes. The table is based on the following
assumptions (the "Modeling Assumptions"): (i) the Mortgage Pool consists of
Mortgage Loans with the characteristics set forth in the table below, (ii)
distributions on such Notes are received, in cash, on the 15th day of each
month, commencing in January 1998, (iii) the Mortgage Loans prepay at the
percentage HEP indicated, (iv) the Class A Notes are not redeemed, (v) no
defaults or delinquencies occur in the payment by mortgagors of principal and
interest on the Mortgage Loans and no shortfalls due to the application of the
Relief Act are incurred, (vi) none of the Depositor, the Originator, the
Contributor, the Sponsor, the majority holder of the Certificates, the Insurer,
the Servicer or any other person purchases from the Trust any Mortgage Loan
pursuant to any obligation or option under the Sale and Servicing Agreement,
(vii) scheduled monthly payments on the Mortgage Loans are received on the first
day of each month commencing with the month indicated in the table below, and
are computed prior to giving effect to any prepayments received in the prior
month, (viii) prepayments representing payment in full of individual Mortgage
Loans are received on the last day of each month, and include 30 days' interest
thereon, (ix) the scheduled monthly payment for each Mortgage Loan is calculated
based on its principal balance, Mortgage Rate, original term to maturity and
remaining term to maturity such that the Mortgage Loan will amortize in amounts
sufficient to repay the remaining principal balance of such Mortgage Loan by its
remaining term to maturity, (x) the coupon on the Class A-1 Variable Rate Notes
remains constant at 6.16%, and (xi) the Notes are purchased on December 23,
1997.
S-50
<PAGE>
Characteristics
<TABLE>
<CAPTION>
Remaining
Amortization
Pool Principal Net Coupon Original Remaining Months To Amortization Assumed Initial
Number(1) Balance ($) Rate (%)(1) Term (months) Term (months) Maturity Method Payment Month
------- ----------- ---------- ------------- ------------- -------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 4,922,567.91 10.94700 120 120 120 Level Pay December 1997
2 13,993,994.87 11.03100 240 240 240 Level Pay December 1997
3 48,717,318.26 11.16900 178 178 178 Level Pay December 1997
4 14,288,705.59 10.75000 351 351 351 Level Pay December 1997
5 30,577,413.38 9.90000 180 180 360 Balloon December 1997
6 1,640,855.97 10.94700 120 120 120 Level Pay January 1998
7 16,239,106.09 11.16900 178 178 178 Level Pay January 1998
8 4,762,901.86 10.75000 351 351 351 Level Pay January 1998
9 4,664,664.96 11.03100 240 240 240 Level Pay January 1998
10 10,192,471.13 9.90000 180 180 360 Balloon January 1998
</TABLE>
- -----------------
(1) Assumes for Pool Numbers 6, 7, 8, 9 and 10 thirty days of interest at the
indicated Net Coupon Rate during the Initial Collection Period.
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the table. Any such
discrepancy may have an effect upon the percentages of the initial Class A Note
Principal Balance outstanding (and the weighted average life) of the Class A
Notes set forth in the table. In addition, since the actual Mortgage Loans will
have characteristics that differ from those assumed in preparing the table set
forth below the Class A Notes may mature earlier or later than indicated by the
table. Based on the foregoing assumptions, the table indicates the weighted
average life of the Class A Notes and sets forth the percentages of the initial
Class A Note Principal Balance that would be outstanding after each of the
Payment Dates shown, at various percentage HEPs. Variations in the prepayment
experience and the balance of the related Mortgage Loans that prepay may
increase or decrease the percentages of initial Class A Note Principal Balances
(and weighted average lives) shown in the following table. Such variations may
occur even if the average prepayment experience of all such Mortgage Loans
equals any of the specified percentage HEPs.
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Percent of Stated Principal Balance Outstanding at the Following Percentage HEPs
CLASS A1
Payment Date 0.00% 10.00% 15.00% 17.00% 20.00% 25.00% 30.00%
- ------------ ---------------------------------------------------=-------
Initial Balance 100 100 100 100 100 100 100
December 15, 1998 81 56 44 39 31 18 5
December 15, 1999 73 11 0 0 0 0 0
December 15, 2000 64 0 0 0 0 0 0
December 15, 2001 54 0 0 0 0 0 0
December 15, 2002 43 0 0 0 0 0 0
December 15, 2003 31 0 0 0 0 0 0
December 15, 2004 18 0 0 0 0 0 0
December 15, 2005 7 0 0 0 0 0 0
December 15, 2006 0 0 0 0 0 0 0
December 15, 2007 0 0 0 0 0 0 0
December 15, 2008 0 0 0 0 0 0 0
December 15, 2009 0 0 0 0 0 0 0
December 15, 2010 0 0 0 0 0 0 0
December 15, 2011 0 0 0 0 0 0 0
December 15, 2012 0 0 0 0 0 0 0
December 15, 2013 0 0 0 0 0 0 0
December 15, 2014 0 0 0 0 0 0 0
December 15, 2015 0 0 0 0 0 0 0
December 15, 2016 0 0 0 0 0 0 0
December 15, 2017 0 0 0 0 0 0 0
December 15, 2018 0 0 0 0 0 0 0
December 15, 2019 0 0 0 0 0 0 0
December 15, 2020 0 0 0 0 0 0 0
December 15, 2021 0 0 0 0 0 0 0
December 15, 2022 0 0 0 0 0 0 0
December 15, 2023 0 0 0 0 0 0 0
December 15, 2024 0 0 0 0 0 0 0
December 15, 2025 0 0 0 0 0 0 0
December 15, 2026 0 0 0 0 0 0 0
December 15, 2027 0 0 0 0 0 0 0
December 15, 2028 0 0 0 0 0 0 0
Weighted Average 4.2 1.2 1.0 0.9 0.8 0.7 0.7
Life (1)
CLASS A2
Payment Date 0.00% 10.00% 15.00% 17.00% 20.00% 25.00% 30.00%
- ------------ ----------------------------------------------------=-------
Initial Balance 100 100 100 100 100 100 100
December 15, 1998 100 100 100 100 100 100 100
December 15, 1999 100 100 70 51 24 0 0
December 15, 2000 100 51 0 0 0 0 0
December 15, 2001 100 0 0 0 0 0 0
December 15, 2002 100 0 0 0 0 0 0
December 15, 2003 100 0 0 0 0 0 0
December 15, 2004 100 0 0 0 0 0 0
December 15, 2005 100 0 0 0 0 0 0
December 15, 2006 90 0 0 0 0 0 0
December 15, 2007 65 0 0 0 0 0 0
December 15, 2008 39 0 0 0 0 0 0
December 15, 2009 9 0 0 0 0 0 0
December 15, 2010 0 0 0 0 0 0 0
December 15, 2011 0 0 0 0 0 0 0
December 15, 2012 0 0 0 0 0 0 0
December 15, 2013 0 0 0 0 0 0 0
December 15, 2014 0 0 0 0 0 0 0
December 15, 2015 0 0 0 0 0 0 0
December 15, 2016 0 0 0 0 0 0 0
December 15, 2017 0 0 0 0 0 0 0
December 15, 2018 0 0 0 0 0 0 0
December 15, 2019 0 0 0 0 0 0 0
December 15, 2020 0 0 0 0 0 0 0
December 15, 2021 0 0 0 0 0 0 0
December 15, 2022 0 0 0 0 0 0 0
December 15, 2023 0 0 0 0 0 0 0
December 15, 2024 0 0 0 0 0 0 0
December 15, 2025 0 0 0 0 0 0 0
December 15, 2026 0 0 0 0 0 0 0
December 15, 2027 0 0 0 0 0 0 0
December 15, 2028 0 0 0 0 0 0 0
Weighted Average 10.6 3.1 2.2 2.0 1.8 1.5 1.3
Life (1)
(1) The weighted average life of each Class of Class A Notes is determined by
(a) multiplying the amount of each principal payment by the number of years
from the Closing Date to the related Payment Date; (b) adding the results;
and (c) dividing the sum by the Original Class A Note Principal Balance.
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Percent of Stated Principal Balance Outstanding at the Following Percentage HEPs
CLASS A3
Payment Date 0.00% 10.00% 15.00% 17.00% 20.00% 25.00% 30.00%
- ------------ -------------------------------------------------------
Initial Balance 100 100 100 100 100 100 100
December 15, 1998 100 100 100 100 100 100 100
December 15, 1999 100 100 100 100 100 77 30
December 15, 2000 100 100 82 55 15 0 0
December 15, 2001 100 94 9 0 0 0 0
December 15, 2002 100 39 0 0 0 0 0
December 15, 2003 100 0 0 0 0 0 0
December 15, 2004 100 0 0 0 0 0 0
December 15, 2005 100 0 0 0 0 0 0
December 15, 2006 100 0 0 0 0 0 0
December 15, 2007 100 0 0 0 0 0 0
December 15, 2008 100 0 0 0 0 0 0
December 15, 2009 100 0 0 0 0 0 0
December 15, 2010 72 0 0 0 0 0 0
December 15, 2011 29 0 0 0 0 0 0
December 15, 2012 0 0 0 0 0 0 0
December 15, 2013 0 0 0 0 0 0 0
December 15, 2014 0 0 0 0 0 0 0
December 15, 2015 0 0 0 0 0 0 0
December 15, 2016 0 0 0 0 0 0 0
December 15, 2017 0 0 0 0 0 0 0
December 15, 2018 0 0 0 0 0 0 0
December 15, 2019 0 0 0 0 0 0 0
December 15, 2020 0 0 0 0 0 0 0
December 15, 2021 0 0 0 0 0 0 0
December 15, 2022 0 0 0 0 0 0 0
December 15, 2023 0 0 0 0 0 0 0
December 15, 2024 0 0 0 0 0 0 0
December 15, 2025 0 0 0 0 0 0 0
December 15, 2026 0 0 0 0 0 0 0
December 15, 2027 0 0 0 0 0 0 0
December 15, 2028 0 0 0 0 0 0 0
Weighted Average 13.5 4.8 3.5 3.1 2.7 2.2 1.9
Life (1)
CLASS A4
Payment Date 0.00% 10.00% 15.00% 17.00% 20.00% 25.00% 30.00%
- ------------ -------------------------------------------------------
Initial Balance 100 100 100 100 100 100 100
December 15, 1998 100 100 100 100 100 100 100
December 15, 1999 100 100 100 100 100 100 100
December 15, 2000 100 100 100 100 100 71 36
December 15, 2001 100 100 100 86 59 20 0
December 15, 2002 100 100 67 47 20 0 0
December 15, 2003 100 95 37 18 0 0 0
December 15, 2004 100 70 13 0 0 0 0
December 15, 2005 100 55 2 0 0 0 0
December 15, 2006 100 38 0 0 0 0 0
December 15, 2007 100 20 0 0 0 0 0
December 15, 2008 100 4 0 0 0 0 0
December 15, 2009 100 0 0 0 0 0 0
December 15, 2010 100 0 0 0 0 0 0
December 15, 2011 100 0 0 0 0 0 0
December 15, 2012 15 0 0 0 0 0 0
December 15, 2013 0 0 0 0 0 0 0
December 15, 2014 0 0 0 0 0 0 0
December 15, 2015 0 0 0 0 0 0 0
December 15, 2016 0 0 0 0 0 0 0
December 15, 2017 0 0 0 0 0 0 0
December 15, 2018 0 0 0 0 0 0 0
December 15, 2019 0 0 0 0 0 0 0
December 15, 2020 0 0 0 0 0 0 0
December 15, 2021 0 0 0 0 0 0 0
December 15, 2022 0 0 0 0 0 0 0
December 15, 2023 0 0 0 0 0 0 0
December 15, 2024 0 0 0 0 0 0 0
December 15, 2025 0 0 0 0 0 0 0
December 15, 2026 0 0 0 0 0 0 0
December 15, 2027 0 0 0 0 0 0 0
December 15, 2028 0 0 0 0 0 0 0
Weighted Average 15.0 8.3 5.7 5.0 4.3 3.4 2.9
Life (1)
(1) The weighted average life of each Class of Class A Notes is determined by
(a) multiplying the amount of each principal payment by the number of years
from the Closing Date to the related Payment Date; (b) adding the results;
and (c) dividing the sum by the Original Class A Note Principal Balance.
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Percent of Stated Principal Balance Outstanding at the Following Percentage HEPs
CLASS A5
Payment Date 0.00% 10.00% 15.00% 17.00% 20.00% 25.00% 30.00%
- ------------ --------------------------------------------------------
Initial Balance 100 100 100 100 100 100 100
December 15, 1998 100 100 100 100 100 100 100
December 15, 1999 100 100 100 100 100 100 100
December 15, 2000 100 100 100 100 100 100 100
December 15, 2001 100 100 100 100 100 100 86
December 15, 2002 100 100 100 100 100 82 51
December 15, 2003 100 100 100 100 92 57 32
December 15, 2004 100 100 100 95 71 41 21
December 15, 2005 100 100 100 84 63 38 21
December 15, 2006 100 100 87 71 52 30 15
December 15, 2007 100 100 71 57 40 21 10
December 15, 2008 100 100 58 45 30 14 5
December 15, 2009 100 88 46 35 22 9 2
December 15, 2010 100 71 35 25 15 5 1
December 15, 2011 100 56 25 18 10 2 0
December 15, 2012 100 24 9 5 2 0 0
December 15, 2013 80 14 4 2 0 0 0
December 15, 2014 73 11 2 1 0 0 0
December 15, 2015 65 8 1 0 0 0 0
December 15, 2016 55 6 0 0 0 0 0
December 15, 2017 45 3 0 0 0 0 0
December 15, 2018 42 2 0 0 0 0 0
December 15, 2019 38 1 0 0 0 0 0
December 15, 2020 35 1 0 0 0 0 0
December 15, 2021 30 0 0 0 0 0 0
December 15, 2022 26 0 0 0 0 0 0
December 15, 2023 20 0 0 0 0 0 0
December 15, 2024 14 0 0 0 0 0 0
December 15, 2025 7 0 0 0 0 0 0
December 15, 2026 0 0 0 0 0 0 0
December 15, 2027 0 0 0 0 0 0 0
December 15, 2028 0 0 0 0 0 0 0
Weighted Average 20.8 14.4 11.9 10.9 9.5 7.5 6.0
Life (1)
CLASS A6
Payment Date 0.00% 10.00% 15.00% 17.00% 20.00% 25.00% 30.00%
- ------------ --------------------------------------------------------
Initial Balance 100 100 100 100 100 100 100
December 15, 1998 100 100 100 100 100 100 100
December 15, 1999 100 100 100 100 100 100 100
December 15, 2000 100 100 100 100 100 100 100
December 15, 2001 99 94 91 90 89 87 84
December 15, 2002 97 88 84 82 80 75 71
December 15, 2003 94 78 71 69 65 58 52
December 15, 2004 90 67 58 55 50 42 35
December 15, 2005 77 42 30 27 22 15 11
December 15, 2006 64 26 16 13 9 5 2
December 15, 2007 51 15 8 6 4 1 0
December 15, 2008 41 9 4 3 1 0 0
December 15, 2009 31 5 2 1 0 0 0
December 15, 2010 22 3 1 0 0 0 0
December 15, 2011 14 1 0 0 0 0 0
December 15, 2012 0 0 0 0 0 0 0
December 15, 2013 0 0 0 0 0 0 0
December 15, 2014 0 0 0 0 0 0 0
December 15, 2015 0 0 0 0 0 0 0
December 15, 2016 0 0 0 0 0 0 0
December 15, 2017 0 0 0 0 0 0 0
December 15, 2018 0 0 0 0 0 0 0
December 15, 2019 0 0 0 0 0 0 0
December 15, 2020 0 0 0 0 0 0 0
December 15, 2021 0 0 0 0 0 0 0
December 15, 2022 0 0 0 0 0 0 0
December 15, 2023 0 0 0 0 0 0 0
December 15, 2024 0 0 0 0 0 0 0
December 15, 2025 0 0 0 0 0 0 0
December 15, 2026 0 0 0 0 0 0 0
December 15, 2027 0 0 0 0 0 0 0
December 15, 2028 0 0 0 0 0 0 0
Weighted Average 10.4 7.8 7.1 6.9 6.7 6.3 6.0
Life (1)
(1) The weighted average life of each Class of Class A Notes is determined by
(a) multiplying the amount of each principal payment by the number of years
from the Closing Date to the related Payment Date; (b) adding the results;
and (c) dividing the sum by the Original Class A Note Principal Balance.
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There is no assurance that prepayments of the Mortgage Loans will conform
to any of the levels of the Prepayment Assumption indicated in the table above,
or to any other level, or that the actual weighted average life of the Class A
Notes will conform to any of the weighted average lives set forth in the table
above. Furthermore, the information contained in the table with respect to the
weighted average life of the Class A Notes is not necessarily indicative of the
weighted average life that might be calculated or projected under different or
varying prepayment assumptions.
The characteristics of the Mortgage Loans will differ from those assumed
in preparing the table above. In addition, it is unlikely that any Mortgage Loan
will prepay at any constant percentage until maturity or that all of the
Mortgage Loans will prepay at the same rate. The timing of changes in the rate
of prepayments may significantly affect the actual yield to maturity to
investors, even if the average rate of principal prepayments is consistent with
the expectations of investors.
DESCRIPTION OF THE NOTES
The Notes will be issued, and will be secured by the Trust Property and
entitled to the benefits of the Policy, pursuant to the Indenture, a form of
which is filed as an exhibit to the Registration Statement. A Current Report on
Form 8-K relating to the Notes containing a copy of the Indenture and the Sale
and Servicing Agreement as executed will be filed by the Depositor with the
Securities and Exchange Commission within fifteen days of initial issuance of
the Notes. The Originator will provide to a prospective or actual Noteholder
without charge, on written request, a copy (without exhibits) of the Indenture
and Sale and Servicing Agreement. Requests should be addressed to Emergent
Mortgage Corp., 15 S. Main Street, Suite 750, Greenville, South Carolina 29601,
Attn: Wade Hall. The following summaries describe certain provisions of the
Indenture and the Sale and Servicing Agreement. 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 Indenture and the Sale and Servicing Agreement.
Reference is made to the Prospectus for important information in addition to
that set forth herein regarding the Trust Property, the terms and conditions of
the Sale and Servicing Agreement and the Indenture and the Class A Notes.
General
The Notes will consist of six classes of Notes, designated as (i) the
Class A-1 Variable Rate Notes, (ii) the Class A-2 Fixed Rate Notes, (iii) the
Class A-3 Fixed Rate Notes, (iv) the Class A-4 Fixed Rate Notes, (v) the Class
A-5 Fixed Rate Notes and (vi) the Class A-6 Fixed Rate Notes. The Trust will
also issue Certificates, representing beneficial ownership interests in the
Trust, pursuant to the Trust Agreement. Only the Class A Notes are offered
hereby. The Certificates, which are not being offered hereby, may be sold at any
time on or after the Closing Date in accordance with the Trust Agreement.
The Notes are limited recourse debt obligations of the Trust payable
solely from the Trust Property and the Policy. The Trust Property will consist
primarily of the Mortgage Loans. Pursuant to the Indenture, the Trust will grant
to the Indenture Trustee a first priority perfected security interest in the
Trust Property to secure the Trust's obligations under the Indenture and the
Notes.
The final maturity dates of the Class A-1 Variable Rate Notes, Class A-2
Fixed Rate Notes and Class A-3 Fixed Rate Notes, Class A-4 Fixed Rate Notes,
Class A-5 Fixed Rate Notes and Class A-6 Fixed Rate Notes are May 15, 2007,
October 15, 2010, December 15, 2012, January 15, 2013, December 15, 2028 and
December 15, 2028, respectively. Such dates are the dates on which the related
Class A Note Balance would be reduced to zero, assuming, among other things,
that with respect to the Class A-1 Variable Rate, and A-2, A-3 and A-4 Fixed
Rate Notes, (i) no Prepayments
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are received on any of the Mortgage Loans, (ii) distributions of principal and
interest on each of the Mortgage Loans is timely received, (iii) excess interest
will not be used to make accelerated payments of principal to the Holders of the
Class A Notes and (iv) the Mortgage Loans have the applicable characteristics
set forth in the "Weighted Average Lives" section herein. The final maturity
date for the Class A-5 Fixed Rate Notes and the Class A-6 Fixed Rate Notes is
the Payment Date in the calendar month which is eleven calendar months after the
stated maturity of the Mortgage Loan having the latest stated maturity occurs.
All payments to Holders of the Class A Notes, other than the final payment
on the Class A Notes, will be made by or on behalf of the Indenture Trustee to
the persons in whose names such Class A Notes are registered at the close of
business on each Record Date, which will be the last business day of the month
preceding the month in which the related Payment Date occurs. Payments on Notes
held in book-entry form will be made by wire transfer in immediately available
funds to the Clearing Agency (as defined below) or its nominee. Payments on
Notes held in certificated form by their beneficial owners will be made either
(i) by check mailed to the address of each such Noteholder as it appears in the
note register or (ii) upon written request to the Indenture Trustee at least
five business days prior to the relevant Record Date by any Holder of Class A
Notes having an aggregate initial Note Principal Balance that is in excess of
$5,000,000 by wire transfer in immediately available funds to the account of
such Noteholder specified in the request, provided that the Indenture Trustee
may deduct a reasonable wire transfer fee from any payment made by wire
transfer. The final payment on the Class A Notes will be made in like manner,
but only upon presentment and surrender of such Class A Notes at the corporate
trust office of the Indenture Trustee or such other location specified in the
notice to Noteholders of such final distribution.
Book-Entry Registration and Definitive Notes
The Class A Notes will be issued, maintained and transferred on the
book-entry records of DTC and its Participants in minimum denominations of
$1,000 and integral multiples of $1,000 in excess thereof. The Class A Notes
will initially be represented by one or more global notes registered in the name
of the nominee of DTC (together with any successor clearing agency selected by
the Depositor, the "Clearing Agency"), except as provided below. The Depositor
has been informed by DTC that DTC's nominee will be CEDE & Co. ("CEDE"). No Note
Owner will be entitled to receive a Note representing such person's interest,
except as set forth below. Unless and until Definitive Notes are issued under
the limited circumstances described herein, all references to actions by
Noteholders with respect to the Class A Notes refer to actions taken by DTC upon
instructions from its Participants (as defined below), and all references herein
to payments, distributions, notices, reports and statements to Noteholders with
respect to the Class A Notes refer to payments, distributions, notices, reports
and statements to DTC or CEDE, as the registered holder of the Class A Notes,
for distribution to Note Owners in accordance with DTC procedures.
Holders of Notes may hold their Notes through DTC (in the United States)
or CEDEL, S.A. ("CEDEL") or the Euroclear System ("Euroclear") in Europe.
Transfers within DTC, CEDEL or Euroclear, as the case may be, will be in
accordance with the usual rules and operating procedures of the relevant system
(in Europe) if they are participants of such systems, or indirectly through
organizations which are participants in such systems.
CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective depositaries which, in turn, will hold
such positions in customers' securities accounts in the depositaries' names on
the books of DTC. Citibank, N.A. will act as depositary for CEDEL and The Chase
Manhattan Bank will act as depositary for Euroclear (in such capacities,
individually the "Depositary" and collectively the "Depositaries").
S-56
<PAGE>
Transfers between Participants (defined below) will occur in accordance
with DTC rules. Transfers between CEDEL Participants and Euroclear Participants
(each as defined below) will occur in accordance with their respective rules and
operating procedures.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations ("Participants") and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of Notes. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations. Indirect access to the DTC system
also is available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly ("Indirect Participants").
Note Owners or prospective owners, as the case may be, that are not
Participants or Indirect Participants but desire to purchase, sell or otherwise
transfer ownership of, or other interests in, the Class A Notes may do so only
through Participants and Indirect Participants. In addition, such Note Owners
will receive all payments of principal and interest on the Class A Notes from
the Indenture Trustee or the applicable paying agent through DTC and its
Participants. Under a book-entry format, Noteholders may receive payments after
the related Payment Date because, while payments are required to be forwarded to
CEDE & Co., as nominee for DTC, on each such date, DTC will forward such
payments to its Participants which thereafter will be required to forward them
to Indirect Participants or Note Owners. The only "Noteholder" (as such term is
used in the Indenture) will be CEDE & Co., as nominee of DTC, and the Note
Owners will not be recognized by the Indenture Trustee as Noteholders under the
Indenture. Note Owners will be permitted to exercise the rights of Note Owners
under the Indenture only indirectly through DTC and its Participants who in turn
will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Notes and is required to receive and
transmit payments of principal of and interest on the Notes. Participants and
Indirect Participants with which Note Owners have accounts with respect to the
Notes similarly are required to make book-entry transfers and receive and
transmit such payments on behalf of their respective Note Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain other entities, the ability of a
Note Owner to pledge Notes to persons or entities that do not participate in the
DTC system, or otherwise take actions in respect of such Notes, may be limited
due to the lack of a physical Note for such Notes.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
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Because of time-zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or Euroclear
Participant to a Participant will be received with value on the DTC settlement
date but will be available in the relevant CEDEL or Euroclear cash account only
as of the business day following settlement in DTC.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of Notes. Transactions may be settled in CEDEL in any of 28 currencies,
including United States dollars. CEDEL provides to its CEDEL Participants, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing. CEDEL
interfaces with domestic markets in several countries. As a professional
depository, CEDEL is subject to regulation by the Luxembourg Monetary Institute.
CEDEL Participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Indirect access to CEDEL
is also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a CEDEL
Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
Notes and any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 32 currencies, including United States
dollars. Euroclear includes various other services, including securities lending
and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash with Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific Notes to specific clearance
S-58
<PAGE>
accounts. The Euroclear Operator acts under the Terms and Conditions only on
behalf of Euroclear Participants, and has no record of or relationship with
persons holding through Euroclear Participants.
Payments with respect to Notes held through CEDEL or Euroclear will be
credited to the cash accounts of CEDEL Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by its Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See "Certain
Federal Income Tax Consequences". CEDEL or the Euroclear Operator, as the case
may be, will take any other action permitted to be taken by a Noteholder under
the Indenture on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to its
Depositary's ability to effect such actions on its behalf through DTC.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Notes among participants of DTC, CEDEL and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Noteholder under the Indenture only at the direction of one or more
Participants to whose account with DTC the Notes are credited.
Notes initially issued in book-entry form will be issued as Definitive
Notes only if (i) DTC or the Depositor advises the Indenture Trustee in writing
that DTC is no longer willing or able to properly discharge its responsibilities
as nominee and depository with respect to the Notes and the Servicer is unable
to locate a qualified successor or (ii) the Depositor, at its option, elects to
terminate the book-entry system through DTC or (iii) after the occurrence of an
event of default by the Servicer under the Sale and Servicing Agreement, if
Holders of Class A Notes evidencing not less than 51% of the Note Principal
Balance of the then outstanding Notes advise the Indenture Trustee in writing
that the continuation of a book-entry system through DTC (or a successor
thereto) to the exclusion of any physical Notes being issued to Note Owners is
no longer in the best interests of Note Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Notes for the Notes. Upon surrender by
DTC of the certificate or certificates representing such Notes and instructions
for reregistration, the Indenture Trustee will issue such Notes in the form of
Definitive Notes, and thereafter the Indenture Trustee will recognize the
holders of such Definitive Notes as Noteholders under the Indenture and such
holders of Definitive Notes will deal directly with the Indenture Trustee with
respect to transfers, notices and payments. In the event that Definitive Notes
are issued or DTC ceases to be the clearing agency for the Notes, the Indenture
will provide that the applicable Noteholders will be notified of such event.
Definitive Class A Notes will be transferable and exchangeable at the
corporate trust offices of the Indenture Trustee, located in Charlotte, North
Carolina.
Trust Property: Assignment of the Mortgage Loans
The Trust Property will consist of (i) all of the Depositor's right, title
and interest in the Mortgage Loans, the related Mortgage Notes, Mortgages and
other related documents, (ii) all payments on or collections in respect of the
Mortgage Loans received on and after the related Cut-off Date, together with any
proceeds thereof, (iii) any Mortgaged Properties acquired on behalf of
Noteholders by foreclosure or by deed in lieu of foreclosure, and any revenues
received thereon, (iv) the rights of the Indenture Trustee under all insurance
policies required to be maintained pursuant to
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the Sale and Servicing Agreement and (v) the rights of the Contributor under the
Contribution Agreement and Assignment between the Contributor and the Originator
and the rights of the Sponsor under the Contribution and Assignment Agreement
between the Contributor and the Sponsor.
At the time of issuance of the Notes and subsequently on each Pre-Funded
Transfer Date, the Depositor will transfer to the Trust all of its right, title
and interest in and to the related Mortgage Loans and other Trust Property. The
Trust will, in turn, pledge to the Indenture Trustee under the Indenture all of
the trust's right, title and interest in and to such Trust Property as
collateral for the Class A Notes. The Indenture Trustee, concurrently with such
pledge in respect of the Initial Mortgage Loans and the Additional Mortgage
Loans, will deliver the Notes on behalf of the Trust. The Sale and Servicing
Agreement will require, in connection with each transfer of Mortgage Loans and
other Trust Property to the Trust, the delivery to the Indenture Trustee with
respect to each Mortgage Loan of (i) the original mortgage note (or certified
copy thereof) endorsed without recourse to the Indenture Trustee to reflect the
transfer of the Mortgage Loan, (ii) the original mortgage (or certified copy
thereof) with evidence of recording indicated thereon and (iii) an original
assignment of the mortgage in recordable form to the Indenture Trustee,
reflecting the pledge of the Mortgage Loan. Such assignments of Mortgage Loans
are required to be recorded by or on behalf of the Originator in the appropriate
offices for real property records.
Interest Rates
The "Interest Rate" on the Class A Notes on each Payment Date will be a
rate per annum equal to: (i) in the case of the Class A-1 Variable Rate Notes,
the lesser of (a) the London Interbank offered rate for one-month United States
dollar deposits ("LIBOR") (calculated as described under "Description of the
Notes--Calculation of LIBOR") as of the second business day prior to the
immediately preceding Payment Date (or, in the case of the January 15, 1998
Payment Date, as of the second business day prior to the Closing Date) plus
0.16% per annum and (b) 10.50%. (the "Class A-1 Interest Rate"), (ii) in the
case of the Class A-2 Fixed Rate Notes, 6.470% (the "Class A-2 Interest Rate"),
(iii) in the case of the Class A-3 Fixed Rate Notes, 6.505% (the "Class A-3
Interest Rate"), (iv) in the case of the Class A-4 Fixed Rate Notes, 6.700% (the
"Class A-4 Interest Rate"), (v) in the case of the Class A-5 Fixed Rate Notes,
7.080% (the "Class A-5 Interest Rate") and (vi) in the case of the Class A-6
Fixed Rate Notes, 6.685% (the "Class A-6 Interest Rate").
Calculation of LIBOR
On the second business day preceding each Payment Date or, in the case of
the January 15, 1998 Distribution Date, on the second business day preceding the
Closing Date (each such date, an "Interest Determination Date"), the Indenture
Trustee will determine the London Interbank offered rate for one-month U.S.
dollar deposits ("LIBOR") for the next Interest Accrual Period for the Variable
Rate Notes on the basis of the offered rates of the Reference Banks for
one-month U.S. dollar deposits, as such rates appear on the Telerate Page 3750,
as of 11:00 a.m. (London time) on such Interest Determination Date. As used in
this section, "business day" means a day on which banks are open for dealing in
foreign currency and exchange in London and New York City; "Telerate Page 3750"
means the display currently so designated on the Dow Jones Telerate Service (or
such other page as may replace that page on that service for the purpose of
displaying comparable rates or prices); and "Reference Banks" means leading
banks selected by the Indenture Trustee and engaged in transactions in
Eurodollar deposits in the international Eurocurrency market (i) with an
established place of business in London, (ii) whose quotations appear on
Telerate Page 3750 on the Interest Determination Date in question, (iii) which
have been designated as such by the Indenture Trustee and (iv) not controlling,
controlled by, or under common control with, the Servicer or the Indenture
Trustee.
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On each Interest Determination Date, LIBOR for the related Interest
Accrual Period for the Variable Rate Notes will be established by the Indenture
Trustee as follows:
(a) If on such Interest Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the related Interest Accrual
period for the Variable Rate Notes shall be the arithmetic mean of such
offered quotations (rounded upwards if necessary to the nearest whole
multiple of 0.0625%).
(b) If on such Interest Determination Date fewer than two Reference
Banks provide such offered quotations, LIBOR for the related Interest
Accrual Period for the Variable Rate Notes shall be the higher of (x) LIBOR
as determined on the previous Interest Determination Date and (y) the
Reserve Interest Rate. The "Reserve Interest Rate" shall be the rate per
annum that the Indenture Trustee determines to be either (i) the arithmetic
mean (rounded upwards if necessary to the nearest whole multiple of 0.0625%
of the one-month U.S. dollar lending rates which New York City banks
selected by the Indenture Trustee are quoting on the relevant Interest
Determination Date to the principal London offices of leading banks in the
London interbank market or, in the event that the Indenture Trustee can
determine no such arithmetic mean, (ii) the lowest one-month U.S. dollar
lending rate which New York City banks selected by the Indenture Trustee
are quoting on such Interest Determination Date to leading European banks.
The establishment of LIBOR on each Interest Determination Date by the
Indenture Trustee and the Indenture Trustee's calculation of the rate of
interest applicable to the Variable Rate Notes for the related Interest Accrual
Period shall (in the absence of manifest error) be final and binding.
Interest Payments
Payments in respect of interest on each Payment Date will be made
concurrently: to the Holders of the Class A-1 Variable Rate Notes in an amount
equal to the Class A-1 Interest Distribution Amount, to the Holders of the Class
A-2 Fixed Rate Notes in an amount equal to the Class A-2 Interest Distribution
Amount, to the Holders of the Class A-3 Fixed Rate Notes in an amount equal to
the Class A-3 Interest Distribution Amount, to the holders of the Class A-4
Fixed Rate Notes in an amount equal to the Class A-4 Interest Distribution
Amount, to the Holders of the Class A-5 Fixed Rate Notes in an amount equal to
the Class A-5 Interest Distribution Amount and to the Holders of the Class A-6
Fixed Rate Notes in an amount equal to the Class A-6 Interest Distribution
Amount.
The "Class A-1 Interest Distribution Amount" on any Payment Date is equal
to (i) interest accrued during the related Interest Accrual Period on the Class
A-1 Note Principal Balance immediately prior to such Payment Date at the Class
A-1 Interest Rate, reduced by the Shortfall Interest Deferred Amount, if any,
for such Payment Date, plus (ii) to the extent the remaining Available
Distribution Amount for such Payment Date is sufficient for the payment thereof,
the Accrued Shortfall Interest Carry Forward Amount, if any, for such Payment
Date.
The "Class A-2 Interest Distribution Amount" on any Payment Date is equal
to (i) interest accrued during the related Interest Accrual Period on the Class
A-2 Note Principal Balance immediately prior to such Payment Date at the Class
A-2 Interest Rate, reduced by the Shortfall Interest Deferred Amount, if any,
for such Payment Date, plus (ii) to the extent the remaining Available
Distribution Amount is sufficient for the payment thereof, the Accrued Shortfall
Interest Carry Forward Amount, if any, for such Payment Date.
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The "Class A-3 Interest Distribution Amount" on any Payment Date is equal
to (i) interest accrued during the related Interest Accrual Period on the Class
A-3 Note Principal Balance immediately prior to such Payment Date at the Class
A-3 Interest Rate, reduced by the Shortfall Interest Deferred Amount, if any,
for such Payment Date, plus (ii) to the extent the remaining Available
Distribution Amount is sufficient for the payment thereof, the Accrued Shortfall
Interest Carry Forward Amount, if any, for such Payment Date.
The "Class A-4 Interest Distribution Amount" on any Payment Date is equal
to (i) interest accrued during the related Interest Accrual Period on the Class
A-4 Note Principal Balance immediately prior to such Payment Date at the Class
A-4 Interest Rate, reduced by the Shortfall Interest Deferred Amount, if any,
for such Payment Date, plus (ii) to the extent the remaining Available
Distribution Amount is sufficient for the payment thereof, the Accrued Shortfall
Interest Carry Forward Amount, if any, for such Payment Date.
The "Class A-5 Interest Distribution Amount" on any Payment Date is equal
to (i) interest accrued during the related Interest Accrual Period on the Class
A-5 Note Principal Balance immediately prior to such Payment Date at the Class
A-5 Interest Rate, reduced by the Shortfall Interest Deferred Amount, if any,
for such Payment Date, plus (ii) to the extent the remaining Available
Distribution Amount is sufficient for the payment thereof, the Accrued Shortfall
Interest Carry Forward Amount, if any, for such Payment Date.
The "Class A-6 Interest Distribution Amount" on any Payment Date is equal
to (i) interest accrued during the related Interest Accrual Period on the Class
A-6 Note Principal Balance immediately prior to such Payment Date at the Class
A-6 Interest Rate, reduced by the Shortfall Interest Deferred Amount, if any,
for such Payment Date, plus (ii) to the extent the remaining Available
Distribution Amount is sufficient for the payment thereof, the Accrued Shortfall
Interest Carry Forward Amount, if any, for such Payment Date.
The "Shortfall Interest Deferred Amount" for any Payment Date is the
amount, if any, of interest accrued during the related Interest Accrual Period
on the Note Principal Balance of the applicable Class A Note at the related
Interest Rate that is not available for payment on such Payment Date out of the
Available Distribution Amount due to Relief Act Shortfalls and Prepayment
Interest Shortfalls. The "Accrued Shortfall Interest Carry Forward Amount" with
respect to any Payment Date is the amount of the Shortfall Interest Deferred
Amounts carried over from preceding Payment Dates together with interest thereon
at the related Interest Rate from such preceding Payment Dates to the current
Payment Date. Interest accrued during the Interest Accrual Period with respect
to any Payment Date, at the applicable Interest Rate, less the Shortfall
Interest Deferred Amount for such Payment Date, shall be due and payable on such
Payment Date. The Accrued Shortfall Interest Carry Forward Amount for any
Payment Date in respect of any Class A Note shall be due and payable on such
Payment Date (to the extent sufficient funds are available for the payment
thereof) and on the final Payment Date. The Policy does not cover the Shortfall
Interest Deferred Amount or the Accrued Shortfall Interest Carry Forward Amount.
The effect of the foregoing provisions is that payment of any Accrued Shortfall
Interest Carry Forward Amount may be funded only from any Net Monthly Excess
Cashflow that would otherwise be paid to holders of the Certificates.
Payments of the Interest Distribution Amount will be made on each Payment
Date, commencing with the first Payment Date. The Interest Accrual Period for
any Payment Date is (i) in the case of the Variable Rate Notes, the period from
and including the immediately preceding Payment Date (or, with respect to the
January 15, 1998 Payment Date, the Closing Date) to the day immediately
preceding such Payment Date, and (ii) in the case of the Fixed Rate Notes, the
calendar month immediately preceding the month in which such Payment Date
occurs. Payments of interest will be based (i) in the case of the Variable Rate
Notes, the actual number of days elapsed in the
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related Interest Accrual Period and a 360-day year, and, in the case of the
Fixed Rate Notes, on a 360-day year consisting of twelve 30-day months.
Principal Payments
On each Payment Date, an amount equal to the Principal Distribution Amount
(defined below), less any amount to be distributed on such Payment Date from the
Redemption Account or Pre-Funding Account as a prepayment of the Class A Notes,
pro rata, on the basis of the respective Note Principal Balances of the Notes of
each Class, will be paid in the following order: first, to the Holders of the
Class A-6 Fixed Rate Notes, to the extent of the least of (x) the Principal
Distribution Amount, (y) the Class A-6 Note Principal Balance, and (z) the Class
A-6 Lockout Distribution Amount, second, to the Holders of the Class A-1
Variable Rate Notes until the Class A-1 Note Principal Balance has been reduced
to zero, third, to the Holders of the Class A-2 Fixed Rate Notes until the Class
A-2 Note Principal Balance has been reduced to zero, fourth, to the Holders of
the Class A-3 Fixed Rate Notes until the Class A-3 Note Principal Balance has
been reduced to zero, fifth, to the Holders of the Class A-4 Fixed Rate Notes
until the Class A-4 Note Principal Balance has been reduced to zero, sixth, to
the Holders of the Class A-5 Fixed Rate Notes until the Class A-5 Note Principal
Balance has been reduced to zero, and seventh, to the Holders of the Class A-6
Fixed Rate Notes until the Class A-6 Note Principal Balance has been reduced to
zero.
The "Principal Distribution Amount" for any Payment Date will be the
lesser of:
(a) the excess of the Available Distribution Amount over the Accrued
Note Interest and any Accrued Shortfall Interest Carry Forward
Amount for such Payment Date; and
(b) the sum of:
(i) the principal portion of all monthly payments on the Mortgage
Loans received during the related Collection Period;
(ii) the principal portion of all proceeds of the repurchase of a
related Mortgage Loan (or, in the case of a substitution,
certain amounts representing a principal adjustment) as
required by the Sale and Servicing Agreement during the
related Collection Period;
(iii) the principal portion of all other unscheduled collections,
including insurance proceeds, liquidation proceeds and all
full and partial principal prepayments, received during the
related Collection Period, to the extent applied as recoveries
of principal on the related Mortgage Loans, net of any portion
that represents a recovery of principal for which a Monthly
Advance was made by the Servicer and deposits during the
related Collection Period into the Distribution Account from
the Pre-Funding Account and Redemption Account;
(iv) the amount of any Overcollateralization Deficit for such
Payment Date; and
(v) the amount of any Subordination Increase Amount (defined
below) for the Class A Notes for such Payment Date;
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minus
(vi) the amount of any Subordination Reduction Amount (defined
below) for such Payment Date.
Notwithstanding the foregoing, as described under "--Overcollateralization
Provisions" herein, no amounts will be paid to the Holders of the Class A Notes
pursuant to clause (v) above except to the extent of any Net Monthly Excess
Cashflow remaining after payment to the Insurer of the full amount of any
Cumulative Insurance Payments. As of any Payment Date, "Cumulative Insurance
Payments" refers to the aggregate of any payments made by the Insurer under the
Policy to the extent not previously reimbursed, plus interest thereon.
In no event will the Principal Distribution Amount with respect to any
Payment Date be (x) less than zero or (y) greater than the then outstanding
Class A Note Principal Balance.
The "Available Distribution Amount" for the Class A Notes for any Payment
Date is equal to the sum, net of amounts reimbursable therefrom to the Servicer,
of (i) the aggregate amount of monthly payments on the related Mortgage Loans
received by the Indenture Trustee during the related Collection Period, after
deduction of the Servicing Fee, the Indenture Trustee fee and the premium
payable with respect to the Policy, (ii) certain unscheduled payments in respect
of the related Mortgage Loans, including prepayments, insurance proceeds,
liquidation proceeds, proceeds from repurchases of and substitutions for such
Mortgage Loans occurring during the preceding calendar month and deposits into
the Distribution Account from the Pre-Funding Account, the Redemption Account
and the Interest Coverage Account, if any, (iii) all Monthly Advances with
respect to the related Mortgage Loans received by the Indenture Trustee for such
Payment Date and (iv) Prepayment Interest Shortfalls for such Payment Date to
the extent of the Servicing Fee for such Payment Date.
Overcollateralization Provisions
The Indenture requires that, on each Payment Date, the Net Monthly Excess
Cashflow, if any, be applied on such Payment Date as an accelerated payment of
principal on the Class A Notes, but only to the limited extent hereinafter
described. The "Net Monthly Excess Cashflow" for any Payment Date is equal to
the excess of (x) the Available Distribution Amount for such Payment Date over
(y) the sum for such Payment Date of (A) the Accrued Note Interest and any
Accrued Shortfall Interest Carry Forward Amount payable to the Holders of the
Class A Notes on such Payment Date and (B) the amount described in clauses
(b)(i) through (iii) of the definition of Principal Distribution Amount.
With respect to any Payment Date, any Net Monthly Excess Cashflow will be
paid as follows:
first, to the Holders of the Class A Notes as a payment of the
Overcollateralization Deficit, if any;
second, to the Insurer, in an amount equal to any Cumulative
Insurance Payments;
third, to the Holders of the class of Class A Notes then receiving
distributions of principal in an amount equal to the Subordination
Increase Amount;
fourth, to the Insurer, any amounts remaining due to the Insurer
under the terms of the Insurance Agreement; and
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fifth, to the Trust for distribution to the Certificateholders as
provided in the Trust Agreement.
With respect to any Payment Date, the excess, if any, of (a) the aggregate
Stated Principal Balance of the Mortgage Loans immediately following such
Payment Date over (b) the Class A Note Principal Balance as of such date (after
taking into account the payment of the amounts described in clauses (b)(i)
through (iv) of the definition of Principal Distribution Amount, on such Payment
Date) is the "Subordinated Amount" as of such Payment Date. The "Stated
Principal Balance" of any Mortgage Loan as of any date of determination is equal
to the principal balance thereof as of its Cut-off Date, reduced by all amounts
allocable to principal that have been distributed to Noteholders with respect to
such Mortgage Loan on or before such date. Any amount of Net Monthly Excess
Cashflow actually applied as an accelerated payment of principal to the extent
the Required Subordinated Amount exceeds the Subordinated Amount as of such
Payment Date is a "Subordination Increase Amount." The required level of the
Subordinated Amount with respect to a Payment Date is the "Required Subordinated
Amount" with respect to such Payment Date.
In the event that the Required Subordinated Amount is required to step up
on any Payment Date, the Indenture provides that all Net Monthly Excess Cashflow
remaining after the distributions described in clauses first through second
above will be distributed in respect of the Subordination Increase Amount until
the Subordinated Amount equals the Required Subordinated Amount.
In the event that the Required Subordinated Amount is permitted to step
down on any Payment Date, the Indenture provides that a portion of the principal
which would otherwise be distributed to the Holders of the Class A Notes on such
Payment Date will be distributed to the holders of the Certificates on such
Payment Date. This has the effect of decelerating the amortization of the Class
A Notes relative to the amortization of the Mortgage Loans, and of reducing the
Subordinated Amount. With respect to any Payment Date, the excess, if any, of
(a) the Subordinated Amount over (b) the Required Subordinated Amount is the
"Excess Subordinated Amount". If, on any Payment Date, the Excess Subordinated
Amount is, or, after taking into account all other distributions to be made on
such Payment Date would be, greater than zero (i.e., the Subordinated Amount is
or would be greater that the Required Subordinated Amount), then any amounts
relating to principal which would otherwise be paid to the Holders of the Class
A Notes on such Payment Date will instead be distributed to the holders of the
Certificates in an amount equal to the lesser of (x) the Excess Subordinated
Amount and (y) the amount available for distribution specified in clauses (b)(i)
through (iii) of the definition of Principal Distribution Amount, on such
Payment Date; such amount being the "Subordination Reduction Amount" for such
Payment Date.
Redemption of Notes
The Trust will have the option (with the consent of the Insurer, if the
exercise of such option would result in a draw on the Policy or would result in
outstanding amounts due to the Insurer under the Insurance Agreement) to redeem
the Notes, in whole but not in part, on any Payment Date after which the
aggregate Class A Note Principal Balance is $14,850,000 or less. In the event
the Trust exercises such option, the redemption price payable in connection
therewith generally will be equal to (i) 100% of the then outstanding Class A
Note Principal Balance thereof, plus (ii) one month's interest on the then
outstanding Class A-1 Note Principal Balance thereof at the Class A-1 Interest
Rate, one month's interest on the then outstanding Class A-2 Note Principal
Balance at the Class A-2 Interest Rate, one month's interest on the then
outstanding Class A-3 Note Principal Balance of the Class A-3 Interest Rate, one
month's interest on the then outstanding Class A-4 Note Principal Balance at the
Class A-4 Interest Rate, one month's interest on the then outstanding Class A-5
Note Principal Balance at the Class A-5 Interest Rate and one month's interest
on the then outstanding Class A-6 Note Principal Balance at the Class A-6
Interest Rate plus (iii) any previously accrued but unpaid interest thereon (the
"Redemption Price"). No such redemption shall be permitted without the
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prior written consent of the Insurer if it would result in a draw under the
Policy or in any outstanding amounts due the Insurer under the Insurance
Agreement remaining unpaid.
Following a final determination by the IRS or by a court of competent
jurisdiction, in each case from which no appeal is taken within the permitted
time for such appeal, or if any appeal is taken, following a final determination
of such appeal from which no further appeal can be taken, to the effect that the
Trust does not and will no longer qualify as a REIT pursuant to Section 856 et
seq. of the Code, at any time on or after the date with is 30 calendar days
following such final determination, the Insurer may direct the Trust to redeem
all of the Classes of Notes then-outstanding at the Redemption Price. The Trust
may fund such redemption through a sale of some or all of the assets of the
Trust. If the Trust has not effected such redemption within sixty (60) days of
receipt of the direction from the Insurer to redeem the Notes, the Insurer may
purchase from the Trust some or all of the assets of the Trust sufficient to
fund the redemption of the Notes at the Redemption Price.
Pursuant to the Sale and Servicing Agreement, the Trust may fund any
redemption of the Notes pursuant to the provisions described above through the
sale of some or all of the Mortgage Loans and related properties, provided such
sale is at a price generally equal to the greater of (A) par plus accrued
interest for each Mortgage Loan at the related mortgage rate, together with any
amounts due to the Servicer for servicing compensation at the Servicing Fee rate
and (B) the aggregate fair market value of all of the assets to be sold (as
determined by the Issuer, the purchaser, the Insurer (to the extent the Insurer
is not the purchaser) and the Indenture Trustee) as of the close of business on
the third Business Day next preceding the date upon which notice of any such
Note Redemption is furnished to Noteholders, and provided that the Trust will
not exercise its right to redeem the Notes prior to any sale of Mortgage Loans
or any related properties for the purpose of funding any redemption of the Class
A Notes unless it shall have received an opinion of counsel to the effect that
such sale will not otherwise subject the Trust to tax or, in the case of a
redemption other than on account of a final determination that the Trust does
not qualify and will no longer qualify as a REIT, cause the Trust to fail to
qualify as a REIT.
Purchase Options
Pursuant to the Sale and Servicing Agreement, each of the Insurer and the
Servicer shall have the right to purchase all of the Mortgage Loans and any
properties acquired in respect thereof if the aggregate principal balance of the
Mortgage Loans and such properties is equal to or less than 5% (in case of the
Insurer) or 10% (in the case of the Servicer) of the aggregate principal balance
thereof as of their respective Cut-off Dates. In the event the Insurer exercises
such option, the purchase price payable in connection therewith generally will
be equal to par plus accrued interest for each Mortgage Loan at the related
mortgage rate, together with any amounts due to the Servicer for servicing
compensation at the Servicing Fee rate and any unreimbursed advances, but, in
the case of the exercise of the option in favor of the Servicer, not less than
the Redemption Price. In the event of such purchase, the Insurer or the
Servicer, as the case may be, shall be required to deliver the purchase price to
the Indenture Trustee for deposit in the Distribution Account and payment to the
Noteholders and others as described herein.
Financial Guaranty Insurance Policy
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy. A form of
the Policy may be obtained, upon request, from the Indenture Trustee.
Simultaneously with the issuance of the Class A Notes, the Insurer will
deliver the Policy to the Indenture Trustee for the benefit of the Holders of
the Class A Notes. Under the Policy, the
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Insurer will irrevocably and unconditionally guarantee payment on each Payment
Date to the Indenture Trustee for the benefit of the holders of the Class A
Notes of Insured Payments with respect to the Class A Notes for such Payment
Date, calculated in accordance with the original terms of the Class A Notes when
issued and without regard to any amendment or modification of the Class A Notes
or the Indenture except amendments or modifications to which the Insurer has
given its prior written consent. "Insured Payments" shall mean with respect to
the Class A Notes as of any Payment Date (i) any shortfall in amounts available
in the Distribution Account (as defined in the Indenture) to pay the Interest
Distribution Amount (other than the Shortfall Interest Deferred Amount and the
Accrued Shortfall Interest Carry Forward Amount) for the related Interest
Accrual Period, (ii) the Remaining Overcollateralization Deficit, if any, for
such Payment Date and (iii) without duplication of the amount specified in
clause (ii), the Class A Note Principal Balance to the extent unpaid on the
final Payment Date or earlier termination of the Trust pursuant to the terms of
the Trust Agreement; provided, however, that the Insurer is permitted at its
sole option, but not required, to pay any losses in connection with the
liquidation of a Mortgage Loan in accordance with the Policy. Insured Payments
do not cover the Servicer's failure to make Monthly Advances pursuant to the
Sale and Servicing Agreement, except to the extent that a Remaining
Overcollateralization Deficit would otherwise result therefrom. Nevertheless,
the effect of the Policy is to guaranty the timely payment of interest on and
the ultimate principal amount of all classes of the Class A Notes. The Policy
does not cover the Shortfall Interest Deferred Amount or the Accrued Shortfall
Interest Carry Forward Amount.
If any Insured Payment is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law, the Insurer will pay such
amount out of funds of the Insurer on the later of (a) the date when due to be
paid pursuant to the Order referred to below or (b) the first to occur of (i)
the fourth Business Day following Receipt (defined below) by the Insurer from
the Indenture Trustee of (A) a certified copy of the order of the court or other
governmental body which exercised jurisdiction to the effect that a holder of
Class A Notes is required to return principal or interest distributed with
respect to a Class A Note during the Term of the Policy (defined below) because
such distributions were avoidable preferences under applicable bankruptcy law
(the "Order"), (B) a certificate of such Holder of Class A Notes that the Order
has been entered and is not subject to any stay, and (C) an assignment duly
executed and delivered by such Holder of Class A Notes, in such form as is
reasonably required by the Insurer and provided to such Holder of Class A Notes
by the Insurer, irrevocably assigning to the Insurer all rights and claims of
such Holder of Class A Notes against the debtor which made such preference
payment or otherwise with respect to such preference payment, or (ii) the date
of Receipt by the Insurer from the Indenture Trustee of the items referred to in
clauses (A), (B) and (C) above if, at least four Business Days prior to such
date of Receipt, the Insurer shall have Received written notice from the
Indenture Trustee that such items were to be delivered on such date and such
date was specified in such notice. Such payment shall be disbursed to the
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the Order and not to the Indenture Trustee or Holder of Class A Notes directly
(unless a Holder of Class A Notes has previously paid such amount to the
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the Order, in which case such payment shall be disbursed to the Indenture
Trustee for distribution to such Noteholder upon proof of such payment
reasonably satisfactory to the Insurer). In connection with the foregoing, the
Insurer shall have the rights provided pursuant to the Sale and Servicing
Agreement and the Indenture.
Payment of claims under the Policy will be made by the Insurer following
Receipt by the Insurer of the appropriate notice for payment on the later to
occur of (a) 12:00 noon, New York City time, on the second Business Day
following Receipt of such notice for payment, and (b) 12:00 noon, New York City
time, on the relevant Payment Date.
The terms "Receipt" and "Received" with respect to the Policy, means
actual delivery to the Insurer and to its fiscal agent appointed by the Insurer
at its option, if any, prior to 12:00 p.m., New
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York City time, on a Business Day; delivery either on a day that is not a
Business Day or after 12:00 p.m., New York City time, shall be deemed to be
Receipt on the next succeeding Business Day. If any notice or certificate given
under the Policy by the Indenture Trustee is not in proper form or is not
properly completed, executed or delivered, it shall be deemed not to have been
Received, and the Insurer or the fiscal agent shall promptly so advise the
Indenture Trustee and the Indenture Trustee may submit an amended notice.
Under the Policy, "Business Day" means any day other than (i) a Saturday
or Sunday or (ii) a day on which banking institutions in the City of New York,
New York, the State of New York, are authorized or obligated by law or executive
order to be closed. The Insurer's obligations under the Policy to make Insured
Payments shall be discharged to the extent funds are transferred to the
Indenture Trustee as provided in the Policy, whether or not such funds are
properly applied by the Indenture Trustee.
"Term of the Policy" means the period from and including the date of
issuance of the Policy to and including the date on which the Class A Note
Principal Balance is zero, plus such additional period, to the extent specified
in the Policy, during which any payment on the Class A Notes could be avoided in
whole or in part as a preference payment.
The Insurer shall be subrogated to the rights of the holders of the Class
A Notes to receive payments of principal and interest, as applicable, with
respect to distributions on the Class A Notes to the extent of any payment by
the Insurer under the Policy. To the extent the Insurer makes Insured Payments,
either directly or indirectly (as by paying through the Indenture Trustee), to
the Holders of the Class A Notes, the Insurer will be subrogated to the rights
of the Holders of the Class A Notes, as applicable, with respect to such Insured
Payment and shall be deemed to the extent of the payments so made to be a
registered holder of Class A Notes for purposes of payment.
Claims under the Policy constitute direct unsecured and unsubordinated
obligations of the Insurer, and will rank equally with any other unsecured and
unsubordinated obligations of the Insurer except for certain obligations in
respect to tax and other payments to which preference is or may become afforded
by statute. The terms of the Policy cannot be modified, altered or affected by
any other agreement or instrument, or by the merger, consolidation or
dissolution of the Depositor. The Policy by its terms may not be canceled or
revoked prior to distribution in full of all Guaranteed Distributions. The
Policy is governed by the laws of the State of New York. The Policy is not
covered by the Property/Casualty Insurance Security Fund specified in Article 76
of the New York Insurance Law.
To the fullest extent permitted by applicable law, the Insurer agrees
under the Policy not to assert, and waives, for the benefit of each Holder of
Class A Notes, all its rights (whether by counterclaim, setoff or otherwise) and
defenses (including, without limitation, the defense of fraud), whether acquired
by subrogation, assignment or otherwise, to the extent that such rights and
defenses may be available to the Insurer to avoid payment of its obligations
under the Policy in accordance with the express provisions of the Policy.
Pursuant to the terms of the Sale and Servicing Agreement and the
Indenture, unless an Insurer Default (defined below) exists, the Insurer will be
entitled to exercise certain rights of the Holders of the Class A Notes, without
the consent of such Noteholders, and the Holders of the Class A Notes may
exercise such rights only with the prior written consent of the Insurer. See
"Indenture and Sale and Servicing Agreement--Voting Rights" and "--Certain
Matters Regarding the Insurer" herein.
The Depositor, the Originator, the Servicer, the Contributor, the Sponsor,
Emergent Group, Inc., the Trust and the Insurer will enter into an Insurance and
Indemnity Agreement (the "Insurance
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Agreement") pursuant to which the Depositor and the Originator will agree to
reimburse, with interest, the Insurer for amounts paid pursuant to claims under
the Policy. The Depositor and the Originator will further agree to pay the
Insurer all reasonable charges and expenses which the Insurer may pay or incur
relative to any amounts paid under the Policy or otherwise in connection with
the transaction and to indemnify the Insurer against certain liabilities. Except
to the extent provided therein, amounts owing under the Insurance Agreement will
be payable solely from the Trust Property. An event of default by the Originator
under the Insurance Agreement will constitute an event of default by the
Originator (in its capacity as Servicer) under the Sale and Servicing Agreement
and allow the Insurer, among other things, to direct the Indenture Trustee to
terminate the Servicer. An "event of default" by the Originator under the
Insurance Agreement includes (i) the Originator's failure to pay when due any
amount owed under the Insurance Agreement or certain other documents, (ii) the
Originator's untruth or incorrectness in any material respect of any
representation or warranty of the Originator in the Insurance Agreement, the
Sale and Servicing Agreement (in its capacity as Servicer) or certain other
documents, (iii) the Originator's failure to perform or to observe any covenant
or agreement in the Insurance Agreement, the Sale and Servicing Agreement (in
its capacity as Servicer) and certain other documents, (iv) the Originator's
failure to pay its debts in general or the occurrence of certain events of
insolvency or bankruptcy with respect to the Originator, and (v) the occurrence
of an event of default under the Sale and Servicing Agreement (in its capacity
as Servicer) or certain other documents.
Monthly Advances
Subject to the following limitations, the Servicer will be obligated to
advance or cause to be advanced before each Payment Date its own funds, or funds
in the Note Account that are not included in the Available Distribution Amount
for such Payment Date, in an amount equal to the aggregate of all payments of
interest, net of the Servicing Fee rate, that were due during the related
Collection Period on the Mortgage Loans and that were delinquent on the related
Determination Date, plus certain amounts representing assumed payments of
interest not covered by any current net income on the Mortgaged Properties
acquired by foreclosure or deed in lieu of foreclosure (any such advance, a
"Monthly Advance").
Monthly Advances are required to be made only to the extent they are
deemed by the Servicer to be recoverable from related late collections,
insurance proceeds or liquidation proceeds. The purpose of making such Monthly
Advances is to maintain a regular cash flow to the Noteholders, rather than to
guarantee or insure against losses. The Servicer will not be required to make
any Monthly Advances with respect to reductions in the amount of the monthly
payments on the Mortgage Loans due to bankruptcy proceedings or the application
of the Relief Act.
All Monthly Advances will be reimbursable to the Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which such unreimbursed Monthly Advance was made. In addition, any Monthly
Advances previously made in respect of any Mortgage Loan that are deemed by the
Servicer to be nonrecoverable from related late collections, insurance proceeds
or liquidation proceeds may be reimbursed to the Servicer out of any funds in
the Note Account prior to the distributions on the Notes. In the event the
Servicer fails in its obligation to make any such advance, the Indenture Trustee
will be obligated to make any such advance, to the extent required in the Sale
and Servicing Agreement.
Determination of Losses; Subordination
The Policy will cover all Remaining Overcollateralization Deficits, if
any.
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With respect to any defaulted Mortgage Loan that is finally liquidated
through foreclosure sale, disposition of the related Mortgaged Property (if
acquired on behalf of the Noteholders by deed-in-lieu of foreclosure) or
otherwise, the amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the
Servicer for Monthly Advances and expenses, including attorneys' fees) towards
interest and principal owing on the Mortgage Loan. Such amount of loss realized
is referred to herein as "Realized Losses."
Interest Coverage Account
On the Closing Date cash will be deposited in the Interest Coverage
Account, which account will be in the name of and maintained by the Indenture
Trustee and will be part of the Trust Property. The amount on deposit in the
Interest Coverage Account, including reinvestment income thereon, will be used
by the Indenture Trustee to fund, through the first Payment Date following the
end of the Pre-Funding Period, the amount of interest accruing during the
Pre-Funding Period at the weighted average Interest Rate of all Class A Notes on
the amount by which the aggregate Class A Note Principal Balance exceeds the
aggregate Stated Principal Balances of the Initial Mortgage Loans and the
Additional Mortgage Loans. Any amounts remaining in the Interest Coverage
Account after such Payment Date and not needed for such purpose will be paid to
the Sponsor and will not thereafter be available for distribution to the Holders
of the Class A Notes. The Interest Coverage Account will terminate immediately
following such Payment Date.
Amounts on deposit in the Interest Coverage Account will be invested in
Eligible Investments.
Pre-Funding Account
On the Closing Date, cash equal to the difference between $150,000,000 and
the sum of the Stated Principal Balances of the Initial Mortgage Loans and the
Additional Mortgage Loans, but not in excess of the Pre-Funding Limit, will be
deposited by the Indenture Trustee into the Pre-Funding Account. The Original
Pre-Funded Amount will be funded from the sale of the Class A Notes, and may be
used to acquire the Pre-Funded Mortgage Loans during the Pre-Funding Period. The
amount on deposit in the Pre-Funding Account will be reduced during the
Pre-Funding Period by the amount thereof used to purchase Pre-Funded Mortgage
Loans in accordance with the terms of the Sale and Servicing Agreement. Any
amount remaining in the Pre-Funding Account (exclusive of investment earnings)
at the end of the Pre-Funding Period will be distributed on the March 16, 1998
Payment Date, if less than $100,000, as a principal payment to Noteholders then
entitled to distributions of principal or, if $100,000 or more, as a prepayment
of principal of the Class A Notes, pro rata, on the basis of the respective Note
Principal Balances of the Notes of each Class. See "Risk Factors--The
Pre-Funding Account and Redemption Account" and "Yield on the Notes--General
Prepayment Considerations."
Redemption Account
It is expected that on the Closing Date, approximately $20,465,408.44 of
Additional Mortgage Loans will be transferred to the Trust Fund and that the
difference between $150,000,000 and the Stated Principal Balances of the Initial
Loans and the Additional Mortgage Loans will not exceed the Pre-Funding Limit.
However, in the event that such difference is greater than the Pre-Funding
Limit, cash in the amount of the excess over the Pre-Funding Limit shall be
deposited from the proceeds of the sale of the Class A Notes into an account
which will be in the name of, and
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maintained by, the Indenture Trustee on behalf of the Trust (the "Redemption
Account"). Any amounts on deposit in the Redemption Account will be transferred
by the Indenture Trustee on the first Payment Date into the Distribution Account
and will be distributed, if less than $100,000, as a principal payment to
Noteholders then entitled to distributions of principal or, if $100,000 or more,
as a prepayment of principal of the Class A Notes, pro rata, on the basis of the
respective Note Principal Balances of the Notes of each Class. See "Risk
Factors--The Pre-Funding Account and Redemption Account" and "Yield on the
Notes--General Prepayment Considerations."
The Indenture Trustee
First Union National Bank, a national banking association with its
principal corporate trust office located in Charlotte, North Carolina, has been
named the Indenture Trustee pursuant to the Indenture and the Sale and Servicing
Agreement.
The principal compensation to be paid to the Indenture Trustee in respect
of its obligations under the Indenture and the Sale and Servicing Agreement will
be equal to accrued interest at the Indenture Trustee fee rate of 0.015% per
annum on the Stated Principal Balance of each Mortgage Loan. The Indenture and
the Sale and Servicing Agreement will provide that the Indenture Trustee and any
director, officer, employee or agent of the Indenture Trustee will be
indemnified by the Trust and will be held harmless against any loss, liability
or expense (not including expenses, disbursements and advances incurred or made
by the Indenture Trustee, including the compensation and the expenses and
disbursements of its agents and counsel, in the ordinary course of the Indenture
Trustee's performance in accordance with the provisions of the Sale and
Servicing Agreement and the Indenture) incurred by the Indenture Trustee arising
out of or in connection with the acceptance or administration of its obligations
and duties under the Sale and Servicing Agreement and the Indenture, other than
any loss, liability or expense (i) resulting from the Servicer's actions or
omissions in connection with the Sale and Servicing Agreement, the Indenture and
the Mortgage Loans (but only to the extent the Indenture Trustee is actually
indemnified by the Servicer pursuant to the Sale and Servicing Agreement), (ii)
that constitutes a specific liability of the Indenture Trustee under the Sale
and Servicing Agreement or the Indenture or (iii) incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of the Indenture
Trustee's duties under the Sale and Servicing Agreement or the Indenture or as a
result of a breach, or by reason of reckless disregard, of the Indenture
Trustee's obligations and duties under the Sale and Servicing Agreement or the
Indenture.
Servicing and Other Compensation and Payment of Expenses
The principal compensation to be paid to the Servicer in respect of its
servicing activities for the Notes will be equal to accrued interest at the
Servicing Fee rate of 0.50% per annum on the Stated Principal Balance of each
Mortgage Loan. As additional servicing compensation, the Servicer is entitled to
retain all late payment charges, to the extent collected from mortgagors,
together with any interest or other income earned on funds held in the Note
Account and any escrow accounts. The Servicer will be obligated to offset any
Prepayment Interest Shortfall on any Payment Date (payments made by the Servicer
in satisfaction of such obligation, "Compensating Interest") to the extent of
the Servicing Fee for such Payment Date. The Servicer is obligated to pay
certain insurance premiums and certain ongoing expenses associated with the
Mortgage Pool and incurred by the Servicer in connection with its
responsibilities under the Sale and Servicing Agreement and is entitled to
reimbursement therefor as provided in the Sale and Servicing Agreement. See
"Servicing of the Mortgage Loans and Contracts-Servicing Compensation and
Payment of Expenses" in the Prospectus for information regarding expenses
payable by the Servicer and "Certain Federal Income Tax Consequences" herein
regarding certain taxes payable by the Servicer.
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Events of Default
An "Event of Default" is defined in the Indenture to include:
(i) default in the payment of any interest due and payable on or in
respect of any Note on any Payment Date (excluding any Shortfall Interest
Deferred Amount and Accrued Shortfall Interest Carry Forward Amount),
which default shall continue for a period of five days; or
(ii) the failure to apply funds which are available for payment in
accordance with the priority of distribution prescribed in the Indenture
as described herein, which failure shall continue for a period of five
days; or
(iii) default in the payment of principal or any Shortfall Interest
Deferred Amount or Accrued Shortfall Interest Carry Forward Amount due on
any Class of Notes on the Final Maturity Date thereof; or
(iv) failure of the Insurer to make a payment required under the
Policy or certain events of bankruptcy, insolvency, receivership or
reorganization affecting the Insurer; or
(v) certain events of bankruptcy, insolvency, receivership or
reorganization affecting the Trust.
Prior to the occurrence of any Insurer Default (defined below), the
Insurer shall have the right to direct the Indenture Trustee in respect of all
matters relating to any Event of Default and may exercise the rights of the
Noteholders in thereof.
If an Event of Default of the kind referred to in clause (v) above occurs,
the unpaid principal amount of the Notes shall automatically become due and
payable at par together with all accrued and unpaid interest thereon. If an
Event of Default (other than an Event of Default of the kind described in clause
(v) above) occurs and is continuing, the Indenture Trustee may, and if so
directed by the holders of Class A Notes evidencing more than 50% of the
aggregate Class A Note Principal Balance (or, if no Insurer Default has
occurred, by the Insurer rather than the Noteholders) shall, declare the unpaid
principal amount of all the Notes to be due and payable immediately, by notice
in writing to the Trust, the Servicer and the Insurer. Any declaration of
acceleration may under certain circumstances be rescinded by Holders of a
majority of the outstanding Class A Notes.
Following any acceleration of the Notes, the Indenture Trustee (or the
Insurer) shall have all of the rights, powers and remedies with respect to the
Trust Property as are available to secured parties under the Uniform Commercial
Code or other applicable law; except that, to the extent permitted by applicable
law, the Indenture Trustee shall not in any private sale sell to a third party
the Trust Property, or any portion thereof, unless,
(i) until such time as there has been a final liquidation or payment
of the Mortgage Loans and properties acquired in respect thereof or the
Insurer shall have exercised its right to purchase the Mortgage Loans and
properties acquired in respect thereof pursuant to the Sale and Servicing
Agreement, the Holders of Class A Notes evidencing not less than 66-2/3%
of the then outstanding Class A Note Principal Balance consent to or
direct the Indenture Trustee in writing to make such sale; or
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(ii) the proceeds of such sale would be not less than the sum of all
amounts due to the Indenture Trustee and the entire unpaid principal
amount of the Notes and interest due or to become due thereon on the
Payment Date next succeeding the date of such sale.
Right of the Insurer to Direct Voting and Other Rights
Pursuant to the terms of the Sale and Servicing Agreement and the
Indenture, unless there exists a continuance of any failure by the Insurer to
make a required payment under the Policy or there exists a proceeding in
bankruptcy by or against the Insurer (either such condition, an "Insurer
Default"), the Insurer will be entitled to exercise, among others, the following
rights of the Holders of the Class A Notes, without the consent of such Holders,
and the Holders of the Class A Notes may exercise such rights only with the
prior written consent of the Insurer: (i) the right to direct the Indenture
Trustee to terminate the rights and obligations of the Servicer under the Sale
and Servicing Agreement in the event of a default by the Servicer; (ii) the
right to consent to or direct any waivers of defaults by the Servicer; (iii) the
right to remove the Indenture Trustee pursuant to the Sale and Servicing
Agreement and/or the Indenture; (iv) the right to institute proceedings against
the Servicer in the event of default by the Servicer and refusal of the
Indenture Trustee to institute such proceedings; and (v) the right to direct the
Indenture Trustee in respect of all matters relating to an Event of Default
under the Indenture. In addition, unless an Insurer Default exists, the Insurer
will have the right to direct all matters relating to any proceeding seeking the
avoidance as a preferential transfer under applicable bankruptcy, insolvency,
receivership or similar law of any distribution made with respect to the Class A
Notes, and, unless an Insurer Default exists, the Insurer's consent will be
required prior to, among other things, (i) the removal of the Indenture Trustee,
(ii) the appointment of any successor Indenture Trustee or Servicer or (iii) any
amendment to the Sale and Servicing Agreement or the Indenture.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the material federal income tax consequences
of the purchase, ownership and disposition of the Class A Notes is to be
considered only in connection with "Certain Federal Income Tax
Consequences--Debt Securities" in the Prospectus. The discussion herein and in
the Prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Class A Notes.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Noteholders will agree by
their purchase of the Notes to treat the Notes as debt for all federal, state
and local income and franchise tax purposes. There are no regulations or
published rulings or judicial decisions involving the characterization for
federal income tax purposes of securities with terms substantially the same as
the Notes. In general, whether instruments such as the Notes constitute
indebtedness for federal income tax purposes is a question of fact, the
resolution of which is based primarily upon the economic substance of the
instruments and the transaction pursuant to which they are issued rather than
merely upon the form of the transaction or the manner in which the securities
are labeled. The IRS and the courts have set forth various factors to be taken
into account in determining, for federal income tax purposes, whether or not an
instrument constitutes indebtedness and whether a transfer of property is a sale
because the transferor has relinquished substantial incidents of ownership in
the property or whether
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such transfer is a borrowing secured by the property. On the basis of its
analysis of such factors as applied to the facts and its analysis of the
economic substance of the contemplated transaction, Dewey Ballantine LLP,
counsel to the Depositor, is of the opinion that the Notes will be treated as
indebtedness of the Trust.
Interest paid or accrued on a Note will be treated as ordinary income to
the Noteholders and principal payments on a Note will be treated as a return of
capital to the extent of the Noteholder's basis in the Note allocable thereto.
An accrual method taxpayer will be required to include income interest on the
Notes when earned, even if not paid, unless it is determined to be
uncollectible. The Trust will report to Noteholders of record and the IRS in
respect of the interest paid and original issue discount, if any, accrued on the
Notes to the extent required by law.
Taxation of the Trust
REIT Election
In the opinion of Dewey Ballantine LLP, tax counsel to the Depositor, the
Trust will meet the requirements for qualification as a REIT under the Code
commencing with the Trust's taxable year ending December 31, 1997, and the
Trust's current and contemplated method of operation as represented by the
Servicer will enable it to continue to satisfy the requirements for such
qualification. This opinion is based on various assumptions relating to the
organization and operation of the Trust and is conditioned upon certain
representations made by the Servicer as to certain factual matters. The
continued qualification and taxation of the Trust as a REIT will depend upon the
Trust's ability to meet, on a continuing basis, distribution levels and
diversity of stock ownership, and the various qualification tests imposed by the
Code as discussed below. This opinion is based on the law existing and in effect
on the date hereof which is subject to change, possibly retroactively.
The following is a brief summary of certain technical requirements that
the Trust must meet on an ongoing basis in order to qualify, and remain
qualified, as a REIT under the Code:
Stock Ownership Tests. (i) The Certificates, the ownership interests of
the Trust, must be transferable, (ii) the Certificates must be held by at least
100 persons during at least 335 days of a taxable year of 12 months (or during a
proportionate part of a taxable year of less than 12 months), and (iii) no more
than 50% of the value of such capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) at any time during the last half of the taxable year. The
Trust Agreement provides restrictions regarding the transfer of the Certificates
in order to aid in meeting REIT ownership requirements. See "The Trust" herein.
Asset Tests. The Trust must generally meet the following asset tests (the
"REIT Asset Tests") at the close of each quarter of each taxable year:
(a) at least 75% of the value of the Trust's total assets must
consist of Qualified REIT Real Estate Assets, government securities, cash
and cash items (the "75% Asset Test"); and
(b) the value of securities held by the Trust but not taken into
account for purposes of the 75% Asset Test must not exceed (i) 5% of the
value of the Trust's total assets in the case of securities of any one
issuer, or (ii) 10% of the outstanding voting securities of any such
issuer.
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As of the Closing Date, more than 95% of the Trust's assets will be "real
estate assets" as defined in Section 856(c)(5) of the Code. The Trust expects
that substantially all of its assets will continue to be real estate assets. In
addition, the Trust does not expect that the value of any security of any one
entity would ever exceed 5% of the Trust's total assets, and the Trust does not
expect to own more than 10% of any one issuer's voting securities.
The Trust intends to monitor closely the purchase, holding and disposition
of its assets in order to comply with the REIT Asset Tests.
Gross Income Tests. The Trust must generally meeting the following gross
income tests (the "REIT Gross Income Tests") for each taxable year:
(a) at least 75% of the Trust's gross income must be derived from
certain specified real estate sources, including interest income and gain
from the disposition of Qualified REIT Real Estate Assets or "qualified
temporary investment income" (i.e., income derived from "new capital"
within one year of the receipt of such capital) (the "75% Gross Income
Test"); and
(b) at least 95% of the Trust's gross income for each taxable year
must be derived from sources of income qualifying for the 75% Gross Income
Test, dividends, interest, and gains from the sale of stock or other
securities not held for sale in the ordinary course of business (the "95%
Gross Income Test").
The Trust intends to monitor closely its income in order to comply with
and maintain its REIT status by carefully monitoring its income to comply with
the Gross Income Tests.
Distribution Requirement. The Trust must generally distribute to its
certificateholders an amount equal to at least 95% of the Trust's REIT taxable
income before deductions of dividends paid and excluding net capital gain. In
any year in which the Trust qualified as a REIT, the Trust will generally not be
subject to Federal income tax on that portion of its REIT taxable income or
capital gain which is distributed to the Certificateholders. The Trust will,
however, be subject to Federal income tax at normal corporate income tax rates
upon any undistributed taxable income or capital gain.
Taxes on a REIT. Notwithstanding its qualification as a REIT, the Trust
may also be subject to tax in certain other circumstances. For example, the
Trust will be subject to a tax of 100% on net income derived from any
"prohibited transaction," and if the Trust has (i) net income from the sale or
other disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying income
from foreclosure property, it will be subject to Federal income tax on such
income at the highest corporate income tax rate.
The Trust intends to monitor on an ongoing basis its compliance with the
REIT requirements described above. In order to maintain its REIT status, the
Trust will be required to limit the types of assets that the Trust might
otherwise acquire, or hold certain assets at times when the Trust might
otherwise have determined that the sale or other disposition of such assets
would have been more prudent.
Treatment as a TMP/REIT
Because the Trust is issuing classes of debt instruments with multiple
maturity dates, the Trust will be treated as a taxable mortgage pool (a "TMP")
under the Code. A TMP electing to be treated as a REIT, such as the Trust, will
not be subject to corporate taxation on its distributed
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earnings. Certificateholders of the Trust will be subject, however, to tax on
any excess inclusion income generated by the Trust. The Certificates may not be
held by disqualified organizations. See "Certain Federal Income Tax
Consequences--REMIC Securities--Taxation of Holders of REMIC Residual
Securities" in the Prospectus.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of the
Class A Notes will be used to repay indebtedness secured by the Mortgage Loans
(including indebtedness under facilities with the Indenture Trustee and the
Underwriter or their affiliates) and to satisfy and discharge the related
Warehouse Liens), to fund the Pre-Funding Account and Redemption Account, and to
pay expenses in connection with the pooling of the Mortgage Loans and the
issuance of the Securities.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter, the Class A Notes will be
purchased by the Underwriter, an affiliate of the Depositor, upon issuance.
The Underwriter has advised the Depositor that it proposes to offer the
Class A Notes purchased by the Underwriter for sale from time to time in one or
more negotiated transactions or otherwise, at market prices prevailing at the
time of sale, at prices related to such market prices or at negotiated prices.
The Underwriter may effect such transactions by selling such Notes to or through
dealers, and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Underwriter or purchasers of the
Class A Notes for whom they may act as agent. Any dealers that participate with
the Underwriter in the distribution of the Class A Notes purchased by the
Underwriter may be deemed to be underwriters, and any discounts or commissions
received by them or the Underwriter and any profit on the resale of Class A
Notes by them or the Underwriter may be deemed to be underwriting discounts or
commissions under the Securities Act of 1933.
In connection with the offering of the Class A Notes, the Underwriter and
dealers and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Class A Notes.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such person may bid for or
purchase the Class A Notes for the purpose of stabilizing its market price. In
addition, the Underwriter may impose "penalty bids" under contractual
arrangements with the dealers whereby it may reclaim from an Underwriter (or
dealer participating in the offering) for its account, the selling concession
with respect to the Offered Notes that it distributed in the offering but
subsequently purchased in the open market. Any transaction described in this
paragraph may result in the maintenance of the price of the Offered Notes at a
level above that which might otherwise prevail in the open market. No
transaction described in this paragraph is required, and, if taken, may be
discontinued at any time without notice.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933.
All of the Mortgage Loans included in the Trust Property will have been
acquired by the Depositor in a privately negotiated transaction with the
Sponsor.
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LEGAL MATTERS
Certain legal matters relating to the Class A Notes will be passed upon
for the Depositor and for the Underwriter by Dewey Ballantine LLP, New York, New
York.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
its subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1996 incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
RATINGS
It is a condition to the issuance of the Notes that the Class A Notes be
rated "AAA" by Standard & Poor's and "Aaa" by Moody's.
The ratings of Moody's and Standard & Poor's assigned to the Notes address
the likelihood of the receipt by Noteholders of all distributions to which such
Noteholders are entitled. The rating process addresses structural and legal
aspects associated with the Notes, including the nature of the underlying
mortgage loans. The ratings assigned to asset-backed securities such as the
Notes do not represent any assessment of the likelihood that principal
prepayments will be made by the mortgagors or the degree to which such
prepayments will differ from that originally anticipated. The ratings assigned
by Moody's and Standard & Poor's on the Class A Notes are based in part upon the
Insurer's claims paying ability. Any change in the ratings of the Insurer by
Standard & Poor's and Moody's may result in a change in the ratings on the Class
A Notes. The ratings do not address the possibility that Noteholders might
suffer a lower than anticipated yield.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Class A Notes are subsequently lowered for any reason, no person or entity is
obligated to provide any additional credit support or credit enhancement with
respect to the Class A Notes.
The Depositor has not requested that any rating agency rate the Class A
Notes other than as stated above. However, there can be no assurance as to
whether any other rating agency will rate the Class A Notes, or, if it does,
what rating would be assigned by any such other rating agency. A rating on the
Class A Notes by another rating agency, if assigned at all, may be lower than
the ratings assigned to the Class A Notes as stated above.
LEGAL INVESTMENT
The Class A Notes will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
S-77
<PAGE>
The Depositor makes no representations as to the proper characterization
of the Class A Notes for legal investment or other purposes, or as to the
ability of particular investors to purchase the Class A Notes under applicable
legal investment restrictions. These uncertainties may adversely affect the
liquidity of the Class A Notes. Accordingly, all institutions whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the Class A
Notes constitute legal investments for them. See "Legal Investment" in the
Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements and restrictions on those pension and other
employee benefits plans to which it applies and on those persons who are
fiduciaries with respect to such plans. In accordance with ERISA's fiduciary
standards, before purchasing the Notes, a fiduciary should determine whether
such an investment is permitted under the documents and instruments governing
the plan and is appropriate for the plan in view of its overall investment
policy and the composition of its portfolio.
Section 406 of ERISA and Section 4975 of the Code prohibit certain
transactions involving the assets of certain plans subject thereto (each, a
"Benefit Plan") and persons who are "parties in interest," within the meaning of
ERISA, or "disqualified persons," within the meaning of the Code. Certain
transactions involving the purchase, holding or transfer of the Notes might be
deemed to constitute prohibited transactions under ERISA and the Code if assets
of the Trust were deemed to be assets of a Benefit Plan. Under regulations
issued by the United States Department of Labor set forth in 29 C.F.R.
ss.2510.3101 (the "Plan Asset Regulations"), the assets of the Trust would be
treated as plan assets of a Benefit Plan for the purposes of ERISA and the Code
only if the Benefit Plan acquires an "Equity Interest" in the Trust and none of
the exceptions contained in the Plan Asset Regulations is applicable. An Equity
Interest is defined under the Plan Asset Regulations as an interest other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. It is anticipated that the Notes
should be treated as indebtedness without substantial equity features for
purposes of the Plan Asset Regulations. However, even if the Notes are treated
as indebtedness without substantial equity features for such purposes, the
acquisition or holding of Notes by or on behalf of a Benefit Plan could be
considered to give rise to a prohibited transaction if the Trust or any of its
affiliates is or becomes a party in interest or disqualified person with respect
to such Benefit Plan. In this event, certain exemptions from the prohibited
transaction rules could be applicable depending on the type and circumstances of
the plan fiduciary making the decision to acquire a Note. Included among these
exemptions are: Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding
investments by insurance company pooled separate accounts; PTCE 91-38, regarding
investments by bank collective investment funds; PTCE 84-14, regarding
transactions effected by "qualified professional asset managers;" PTCE 95-60,
regarding investments by insurance company general accounts; and PTCE 96-23,
regarding transactions effected by In-House Asset Managers. Each investor using
assets of a Benefit Plan which acquires the Notes, or to whom the Notes are
transferred, will be deemed to have represented that the acquisition and
continued holding of the Notes will be covered by one of the exemptions listed
above or another Department of Labor class exemption.
S-78
<PAGE>
Due to the complexity of these rules and the penalties imposed upon
persons involved in prohibited transactions, it is particularly important that a
fiduciary investing assets of an ERISA plan consult with counsel regarding the
consequences under ERISA of the acquisition and holding of Notes, including the
availability of any administrative exemptions from the prohibited transaction
rules.
S-79
<PAGE>
INDEX OF DEFINED TERMS
A
Accrued Shortfall Interest Carry Forward Amount ........................ 9
Additional Mortgage Loans .............................................. Cover
Aggregate Risks ........................................................ 28
Available Distribution Amount .......................................... 64
B
Balloon Loans .......................................................... 22
Benefit Plan ........................................................... 78
Business Day ........................................................... 68
C
CEDE ................................................................... 56
CEDEL .................................................................. 6, 56
CEDEL Participants ..................................................... 58
Certificates ...........................................................1, Cover
CII .................................................................... 29
Class A Noteholders .................................................... Cover
Class A Notes .......................................................... 1
Class A-1 Interest Distribution Amount ................................. 61
Class A-1 Interest Rate ................................................ 7, 60
Class A-1 Note Principal Balance ....................................... 11
Class A-1 Variable Rate Notes .......................................... Cover
Class A-2 Fixed Rate Notes ............................................. Cover
Class A-2 Interest Distribution Amount ................................. 61
Class A-2 Interest Rate ................................................ 7, 60
Class A-2 Note Principal Balance ....................................... 11
Class A-3 Fixed Rate Notes ............................................. Cover
Class A-3 Interest Distribution Amount ................................. 62
Class A-3 Interest Rate ................................................ 7, 60
Class A-3 Note Principal Balance ....................................... 11
Class A-4 Fixed Rate Notes ............................................. Cover
Class A-4 Interest Distribution Amount ................................. 62
Class A-4 Interest Rate ................................................ 8, 60
Class A-4 Note Principal Balance ....................................... 11
Class A-5 Fixed Rate Notes ............................................. Cover
Class A-5 Interest Distribution Amount ................................. 62
Class A-5 Interest Rate ................................................ 8, 60
Class A-5 Note Principal Balance ....................................... 11
Class A-6 Fixed Rate Notes ............................................. Cover
Class A-6 Interest Distribution Amount ................................. 62
Class A-6 Interest Rate ................................................ 8, 60
Class A-6 Lockout Distribution Amount .................................. 12
Class A-6 Lockout Pro Rata Distribution ................................ 12
Class A-6 Note Principal Balance ....................................... 12
Clearing Agency ........................................................ 56
Code ................................................................... 16
Collection Period ...................................................... 8
Compensating Interest .................................................. 71
Contribution and Assignment Agreement .................................. 2
Contributor ............................................................ Cover
Cooperative ............................................................ 58
Cumulative Insurance Payments .......................................... 64
D
Debt Ratio ............................................................. 40
Depositaries ........................................................... 7, 56
Depositary ............................................................. 56
Depositor .............................................................. Cover
Determination Date ..................................................... 8
DTC .................................................................... 6
E
ERISA .................................................................. 19, 78
Euroclear .............................................................. 6, 56
Euroclear Operator ..................................................... 58
Euroclear Participants ................................................. 58
Excess Subordinated Amount ............................................. 65
F
Fixed Rate Notes ....................................................... Cover
H
HEP .................................................................... 50
Holders ................................................................ 7
Holdings ............................................................... 26
Home Equity Prepayment ................................................. 50
I
Indenture .............................................................. Cover
Indenture Trustee ...................................................... Cover
Indirect Participants .................................................. 57
Initial Mortgage Loans ................................................. Cover
Insolvency Laws ........................................................ 24
Insurance Agreement .................................................... 69
Insured Payment ........................................................ 14
Insured Payments ....................................................... 67
Insurer ...............................................................26, Cover
Insurer Default ........................................................ 73
Interest Accrual Period ................................................ 8
Interest Coverage Account .............................................. 5
Interest Distribution Amount ........................................... 8
Interest Rate .......................................................... 7
L
LIBOR .................................................................. 7
M
Modeling Assumptions ................................................... 50
Monthly Advance ........................................................ 69
Moody's ................................................................ 18
Mortgage Loan Division ................................................. 29
Mortgage Loans ......................................................... Cover
Mortgage Pool .......................................................... Cover
Mortgage Rate .......................................................... 16
Mortgaged Properties ................................................... 3
N
Net Monthly Excess Cashflow ............................................ 12
Note Owners ............................................................ 7
Noteholders ............................................................ 7
Notes .................................................................. 1
O
Order .................................................................. 67
<PAGE>
Original Class A-1 Note Principal Balance .............................. 1
Original Class A-2 Note Principal Balance .............................. 1
Original Class A-3 Note Principal Balance .............................. 1
Original Class A-4 Note Principal Balance .............................. 1
Original Class A-5 Note Principal Balance .............................. 1
Original Class A-6 Note Principal Balance .............................. 1
Original Pre-Funded Amount ............................................. 5
Originator .............................................................2, Cover
Overcollateralization Deficit .......................................... 11
Owner Trustee .......................................................... 2
Ownership Limit ........................................................ 28
P
Parent ................................................................. 29
Participants ........................................................... 57
Payment Date ........................................................... Cover
Piggy Back Mortgage Loans .............................................. 3, 25
Plan Asset Regulations ................................................. 78
Policy ................................................................14, Cover
Pre-Funded Loan Transfer Date .......................................... 4
Pre-Funded Mortgage Loans .............................................. 5
Pre-Funding Account .................................................... 5
Pre-Funding Limit ......................................................5, Cover
Pre-Funding Period ..................................................... 5
Prepayment Assumption .................................................. 50
Prepayments ............................................................ 21
Principal Distribution Amount .......................................... 63
PTCE ................................................................... 78
R
Realized Losses ........................................................ 70
Receipt ................................................................ 67
Received ............................................................... 67
Redemption Account ..................................................... 6, 71
Redemption Price ....................................................... 15
Reference Banks ........................................................ 60
REIT ................................................................... 2
REIT Asset Tests ....................................................... 74
REIT Gross Income Tests ................................................ 75
Relief Act Shortfalls .................................................. 47
Remaining Overcollateralization Deficit ................................ 12
Required Subordinated Amount ........................................... 65
Reserve Interest Rate .................................................. 61
Retail Mortgage Loans .................................................. 40
S
Sale and Servicing Agreement ........................................... Cover
Securities .............................................................1, Cover
Servicer ............................................................... 2, 44
Servicing Fee .......................................................... 13
Shortfall Interest Deferred Amount ..................................... 8, 62
Single Risks ........................................................... 28
SMMEA .................................................................. 18, 77
Sponsor ................................................................ 2
Standard & Poor's ...................................................... 18
Stated Principal Balance ............................................... 65
Subordinated Amount .................................................... 65
Subordination Increase Amount .......................................... 65
Subordination Reduction Amount ......................................... 65
T
Term of the Policy ..................................................... 68
Terms and Conditions ................................................... 58
TMP .................................................................... 75
Trust .................................................................. 1
Trust Property ......................................................... Cover
U
Unaffiliated Seller's Agreement ........................................ Cover
Underwriter ............................................................ Cover
V
Variable Rate Notes .................................................... Cover
W
Warehouse Liens ........................................................ 4
Wholesale Mortgage Loans ............................................... 40
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<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 June 10, 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
REMIC. In addition, any Series with
respect to which an election has
5
<PAGE>
been made to treat the Trust Fund (or one
or more segregated pools of assets
therein) as a REMIC will include one
Class or one Subclass of Residual
Certificates as to each REMIC. The
Residual Certificates of a Series, if
offered hereby, will represent the right
to receive distributions with respect to
the related Trust Fund as specified in
the related Prospectus Supplement. Unless
otherwise specified in the applicable
Prospectus Supplement, the Certificates
will be offered only in fully registered
form.
A. Standard
Certificates.................... Unless otherwise provided in the
applicable Prospectus Supplement,
Standard Certificates of a Series will
each evidence a fractional undivided
beneficial ownership interest in the
related Trust Fund and will entitle the
holder thereof to its proportionate share
of a percentage of all of the payments
and other receipts with respect to the
principal of and interest (to the extent
of the applicable Net Mortgage Rate or
Net Contract Rate) on the related
Mortgage Loans or Contracts. If specified
in the applicable Prospectus Supplement,
with respect to any Class of Standard
Certificates of a Series for which a
REMIC election has been made,
distributions of principal may be
allocated among the Certificateholders of
such Class on a pro rata, random lot or
such other basis as is specified in such
Prospectus Supplement.
B. Multi-Class
Certificates.................... Multi-Class Certificates of a Series will
consist of Certificates each of which
evidences a beneficial ownership interest
in the related Trust Fund and will be
assigned a Stated Amount, which may be
based on an amount of principal of the
underlying Mortgage Loans or Contracts or
on the value of future cash flows from
the related Trust Fund without
distinction as to principal or interest
and an Interest Rate which may be a fixed
rate (which may be zero) or a variable
rate or which will otherwise accrue
interest as specified in the applicable
Prospectus Supplement. The holder of a
Multi-Class Certificate will be entitled
to receive, to the extent funds are
available therefor, interest payments on
the outstanding Stated Amount thereof at
the applicable Interest Rate or as
otherwise specified in the applicable
Prospectus Supplement and distributions
in reduction of such Stated Amount
determined in the manner and applied in
the priority set forth in the applicable
Prospectus Supplement.
C. Stripped
Certificates.................... Stripped Certificates will each evidence
an undivided beneficial ownership
interest in the related Trust Fund and
will entitle the holder thereof to its
proportionate share of a specified
portion (which may be zero) of principal
payments and/or a specified portion
(which may be zero) of interest payments
(to the extent of the applicable Net
Mortgage Interest Rate) on the related
Mortgage Loans.
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Pooling and Servicing
Agreement........................... The Certificates of each Series will be
issued pursuant to a Pooling and
Servicing Agreement among the Depositor,
the Servicer, if any, and the Trustee.
Cut-Off Date........................ The date specified in the applicable
Prospectus Supplement.
Distribution Dates.................. Unless otherwise specified in the
applicable Prospectus Supplement,
distributions on Standard Certificates or
Stripped Certificates will be made on the
25th day (or, if such day is not a
business day, the business day following
the 25th day) of each month, commencing
with the month following the month in
which the applicable Cut-Off Date occurs.
Distributions on Multi-Class Certificates
will be made monthly, quarterly, or
semiannually, on the dates specified in
the applicable Prospectus Supplement. The
dates upon which such distributions are
made are referred to herein as the
"Distribution Dates."
Record Dates........................ Distributions will be made on each
Distribution Date set forth in the
Prospectus Supplement to
Certificateholders of record at the close
of business on the last business day of
the month preceding the month in which
such Distribution Date occurs or such
other date as may be set forth in the
Prospectus Supplement (the "Record
Date").
Interest ........................... With respect to a Series of Certificates
consisting of Standard Certificates or
Stripped Certificates, unless otherwise
specified in the applicable Prospectus
Supplement, interest on the related
Mortgage Loans, Mortgage Certificates or
Contracts at the applicable pass-through
rate (the "Pass-Through Rate"), as set
forth in the applicable Prospectus
Supplement, will be passed through
monthly on each Distribution Date to
holders thereof, in accordance with the
particular terms of each such
Certificate. Holders of Multi-Class
Certificates will receive distributions
of interest at the applicable Interest
Rate, if any, on the Stated Amount or
Notional Amount of such Certificates, or
as otherwise specified in the applicable
Prospectus Supplement, without regard to
the Net Mortgage Rates or Net Contract
Rates on the underlying Mortgage Loans or
Contracts. Unless otherwise specified in
the applicable Prospectus Supplement, the
"Net Mortgage Rate" for each Mortgage
Loan in a given period will equal the
Mortgage Rate for such Mortgage Loan in
such period (the "Mortgage Rate") less
any Fixed Retained Yield, and less the
Servicing Fee (as defined herein). Unless
otherwise specified in the applicable
Prospectus Supplement, the "Net Contract
Rate" for each Contract in a given period
will equal the Contract Rate for such
Contract in such period (the "Contract
Rate") less any Fixed Retained Yield, and
less the Servicing Fee. The "Servicing
Fee" with respect to each Mortgage Loan
or Contract is an amount reserved for
servicing such Mortgage Loan or Contract
and administration of the related Trust
Fund.
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<PAGE>
Principal (including
prepayments)........................ With respect to a Series of Certificates
consisting of Standard Certificates or
Stripped Certificates, unless otherwise
specified in the applicable Prospectus
Supplement, principal payments (including
prepayments received on each related
Mortgage Loan or Contract during the
month preceding the month in which a
Distribution Date occurs) will be passed
through to holders on such Distribution
Date, in accordance with the particular
terms of each such Certificate.
Distributions in
Reduction of
Stated Amount....................... With respect to each Class and Subclass
of Multi-Class Certificates,
distributions in reduction of Stated
Amount will be made on each Distribution
Date to the holders of the Certificates
of such Class and Subclass then entitled
to receive such distributions until the
aggregate amount of such distributions
have reduced the Stated Amount of each
such Class and Subclass of Certificates
to zero. Distributions in reduction of
Stated Amount will be allocated among the
Classes or Subclasses of such
Certificates in the manner specified in
the applicable Prospectus Supplement.
Distributions in reduction of Stated
Amount with respect to any Class or
Subclass of Multi-Class Certificates of a
Series may be made on a pro rata or
random lot or such other basis as is
specified in the applicable Prospectus
Supplement. See "Description of the
Certificates -- Distributions to
Multi-Class Certificateholders."
Forward Commitments;
Pre-Funding......................... A Trust Fund may enter into an agreement
(each, a "Forward Purchase Agreement")
with the Depositor whereby the Depositor
will agree to transfer additional
Mortgage Loans to such Trust Fund
following the date on which such Trust
Fund is established and the related
Certificates are issued. Any Forward
Purchase Agreement will require that any
Mortgage Loans so transferred to a Trust
Fund conform to the requirements
specified in such Forward Purchase
Agreement. If a Forward Purchase
Agreement is to be utilized, and unless
otherwise specified in the related
Prospectus Supplement, the related
Trustee will be required to deposit in a
segregated account (each, a "Pre-Funding
Account") all or a portion of the
proceeds received by the Trustee in
connection with the sale of one or more
classes of Certificates of the related
Series; subsequently, the additional
Mortgage Loans will be transferred to the
related Trust Fund in exchange for money
released to the Depositor from the
related Pre-Funding Account in one or
more transfers. Each Forward Purchase
Agreement will set a specified period
during which any such transfers must
occur. The Forward Purchase Agreement or
the related Pooling and Servicing
Agreement will require that, if all
moneys originally deposited to such
Pre-Funding Account are not so used by
the end of such specified period, then
any remaining moneys will be applied as a
mandatory prepayment of the related
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class or classes of Certificates as
specified in the related Prospectus
Supplement.
Credit Enhancement
A. By Subordination........ A Series of Certificates may include one
or more Classes or Subclasses of Senior
Certificates and one or more Classes or
Subclasses of Subordinated Certificates.
The rights of the holders of Subordinated
Certificates of a Series to receive
distributions with respect to the related
Mortgage Loans or Contracts will be
subordinated to such rights of the
holders of the Senior Certificates of the
same Series to the extent (the
"Subordinated Amount") specified herein
and in the applicable Prospectus
Supplement. This subordination is
intended to enhance the likelihood of the
timely receipt by the Senior
Certificateholders of their proportionate
share of scheduled monthly principal and
interest payments on the related Mortgage
Loans or Contracts and to reduce the
likelihood that the Senior
Certificateholders will experience
losses. The Prospectus Supplement for
Series of Certificates including a
subordination feature may also specify
the allocation of distributions and
priority of payments of principal, or
Stated Amount, and interest among one or
more Classes or Subclasses of Senior
Certificates of such Series. The
protection afforded to Senior
Certificateholders of a Series will be
effected by a preferential right, as
specified in the applicable Prospectus
Supplement, of such Senior
Certificateholders to receive, on any
Distribution Date, current distributions
on the related Mortgage Loans or
Contracts and (if so specified in the
applicable Prospectus Supplement) by the
establishment of a reserve fund (the
"Subordination Reserve Fund") for such
Series. Any Subordination Reserve Fund
may be funded initially with a deposit of
cash, instruments or securities in an
amount specified in the applicable
Prospectus Supplement and, if so
specified in the related Prospectus
Supplement, may be augmented by the
retention of distributions which
otherwise would have been available for
distribution to the Subordinated
Certificateholders in the manner and to
the extent specified in the applicable
Prospectus Supplement. The Subordination
Reserve Fund for a Series may be funded
and maintained in such other manner as is
specified in the related Prospectus
Supplement. The maintenance of any
Subordination Reserve Fund would be
intended to preserve the availability of
the subordination provided by the
Subordinated Certificates and to provide
liquidity, but in certain circumstances
the Subordination Reserve Fund could be
depleted and, if other amounts available
for distribution are insufficient,
shortfalls in distributions to the Senior
Certificateholders could result. Unless
otherwise specified in the related
Prospectus Supplement, until the
Subordinated Amount is reduced to zero,
Senior Certificateholders will be
entitled to receive the amount of any
such shortfall, together with interest at
the applicable Pass-Through Rate,
Interest Rate, or at such other rate
specified in the applicable Prospectus
Supplement, as the case may be, on the
next
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<PAGE>
Distribution Date. Senior
Certificateholders will bear their pro
rata share of any losses realized on the
related Mortgage Loans or Contracts in
excess of the applicable Subordinated
Amount. If so specified in the applicable
Prospectus Supplement, the protection
afforded to holders of Senior
Certificates of a Series by the
subordination of certain rights of
holders of Subordinated Certificates of
such Series to distributions on the
related Mortgage Loans or Contracts may
be effected by a method other than that
described above, such as, in the event
that the applicable Trust Fund (or one or
more segregated pools of assets therein)
elects to be treated as a REMIC, the
reallocation from time to time, on the
basis of distributions previously
received, of the respective percentage
interests of the Senior Certificates and
the Subordinated Certificates in the
related Trust Fund. See "Description of
the Certificates -- Distributions to
Percentage Certificateholders -- Shifting
Interest Certificates."
B. By Other Methods........... The Certificates of any Series, or any
one or more Classes thereof, may be
entitled to the benefits of a guarantee,
letter of credit, mortgage pool insurance
policy, surety bond, reserve fund, spread
account, application of excess interest
to principal or other form of credit
enhancement as specified in the
applicable Prospectus Supplement. See
"Description of the Certificates" and
"Credit Support."
Advances ........................... Under the Pooling and Servicing Agreement
for each Series relating to Mortgage
Loans or Contracts, unless otherwise
provided in the applicable Prospectus
Supplement, the related Servicer will be
obligated to make advances of cash
("Advances") to the Certificate Account
(as defined herein) in the event of
delinquencies in payments on the Mortgage
Loans or Contracts to the extent
described herein and in the applicable
Prospectus Supplement and only to the
extent that the Servicer determines such
Advances would be recoverable from future
payments and collections on the Mortgage
Loans or Contracts. Any Advances made by
the Servicer will ultimately be
reimbursable to the Servicer from the
Certificate Account. See "Servicing of
the Mortgage Loans and Contracts --
Advances and Limitations Thereon."
Early Termination................... If so specified in the related Prospectus
Supplement, a Series of Certificates may
be subject to early termination through
the repurchase of the assets in the
related Trust Fund by the person or
persons, under the circumstances and in
the manner specified in such Prospectus
Supplement. See "Prepayment and Yield
Considerations."
Legal Investment.................... If so specified in the Prospectus
Supplement, one or more classes of
Certificates offered pursuant to this
Prospectus will constitute "mortgage
related securities" under the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA"), so long as they are rated in
one of the two highest rating categories
by at least one "nationally recognized
statistical rating organization. As
"mortgage related securities," such
Certificates offered pursuant to this
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<PAGE>
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, (v) on or
after September 1, 1997, "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
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<PAGE>
address any prepayment or yield
considerations applicable to any
Certificates nor constitute a
recommendation to buy, sell or hold any
Certificates.
The ratings expected to be received with
respect to any Certificates will be set
forth in the related Prospectus
Supplement.
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Certificates.
Limited Liquidity. There can be no assurance that a secondary market
for the Certificates of any series or class will develop or, if it does develop,
that it will provide Certificateholders with liquidity of investment or that it
will continue for the life of the Certificates of any series. The Prospectus
Supplement for any series of Certificates may indicate that an underwriter
specified therein intends to establish a secondary market in such Certificates;
however, no underwriter will be obligated to do so. Unless otherwise specified
in the related Prospectus Supplement, the Certificates will not be listed on any
securities exchange.
Limited Obligations. The Certificates will not represent an interest in
or obligation, either recourse or non-recourse (except for certain non-recourse
debt described under "Certain Federal Income Tax Consequences"), of the
Depositor, the Servicer or any person other than the related Trust. The only
obligations of the foregoing entities with respect to the Certificates or the
Mortgage Loans will be the obligations (if any) of the Depositor and the
Servicer pursuant to certain limited representations and warranties made with
respect to the Mortgage Loans, the Servicer's servicing obligations under the
related Pooling and Servicing Agreement (including its limited obligation, if
any, to make certain advances in the event of delinquencies on the Mortgage
Loans, but only to the extent deemed recoverable) and, if and to the extent
expressly described in the related Prospectus Supplement, certain limited
obligations of the Depositor, Servicer, applicable Sub-Servicer, or another
party in connection with a purchase obligation ("Purchase Obligation") or an
agreement to purchase or act as remarketing agent with respect to a Convertible
Mortgage Loan upon conversion to a fixed rate. Notwithstanding the foregoing,
and as to be described in the related Prospectus Supplement, certain types of
Credit Enhancement, such as a financial guaranty insurance policy or a letter of
credit, may constitute a full recourse obligation of the issuer of such Credit
Enhancement. Except as described in the related Prospectus Supplement, neither
the Certificates nor the underlying Mortgage Loans will be guaranteed or insured
by any governmental agency or instrumentality, or by the Depositor, the
Servicer, any Sub-Servicer or any of their affiliates. Proceeds of the assets
included in the related Trust Fund for each series of Certificates (including
the Mortgage Loans and any form of Credit Enhancement) will be the sole source
of payments on the Certificates, and there will be no recourse to the Depositor
or any other entity in the event that such proceeds are insufficient or
otherwise unavailable to make all payments provided for under the Certificates.
Limitations, Reduction and Substitution of Credit Enhancement. With
respect to each series of Certificates, Credit Enhancement will be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit Enhancement will be provided in one or more of the forms referred
to herein, including, but not limited to: a letter of credit; a Purchase
Obligation; a mortgage pool insurance policy; a special hazard insurance policy;
a bankruptcy bond; a reserve fund; a financial guaranty insurance policy or
other type of Credit Enhancement to provide partial coverage for certain
defaults and losses relating to the Mortgage Loans. Credit Enhancement also may
be provided in the form of the related class of Certificates, subordination of
one or more classes of Certificates in a series under which losses in excess of
those absorbed by any related class of Certificates are first allocated to any
Subordinate Certificates up to a specified limit, cross-support among Trust Fund
Assets and/or overcollateralization. See "Credit Support -- Subordination" and
"Other Credit Enhancement." Regardless of the form of Credit Enhancement
provided, the coverage will be limited in amount and in most cases will be
subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such Credit Enhancements may provide only very limited coverage as
to certain types of losses, and may provide no coverage as to certain other
types of losses. Generally, Credit Enhancements do not directly or indirectly
guarantee to the investors any specified rate of prepayments. The Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the Credit Enhancement for any series of Certificates, if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. To the extent not set forth herein, the amount and types of coverage,
the identification of any entity providing the coverage, the terms of any
subordination and related information will be set forth in the Prospectus
Supplement relating to a series of Certificates. See "Credit Support --
Subordination" and "Other Credit Enhancement."
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<PAGE>
Risks of the Mortgage Loans
Risk of the Losses Associated with Junior Liens. Certain of the
Mortgage Loans will be secured by junior Liens subordinate to the rights of the
mortgagee or beneficiary under each related senior mortgage or deed of trust. As
a result, the proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the principal balance of a mortgage
loan only to the extent that the claims, if any, of each such senior mortgagee
or beneficiary are satisfied in full, including any related foreclosure costs.
In addition, a mortgagee secured by a junior Lien may not foreclose on the
related mortgaged property unless it forecloses subject to the related senior
mortgage or mortgages, in which case it must either pay the entire amount of
each senior mortgage to the applicable mortgagee at or prior to the foreclosure
sale or undertake the obligation to make payments on each senior mortgage in the
event of default thereunder. In servicing junior lien loans in its portfolio, it
has been the practice of the Servicer to satisfy each such senior mortgage at or
prior to the foreclosure sale only to the extent that it determines any amounts
so paid will be recoverable from future payments and collections on such junior
Lien loans or otherwise. The Trusts will not have any source of funds to satisfy
any such senior mortgage or make payments due to any senior mortgagee. See
"Certain Legal Aspects of Mortgage Loans and Contracts -- Foreclosure."
Risk of Losses Associated with Declining Real Estate Values. An
investment in securities such as the Certificates that generally represent
beneficial ownership interests in the Mortgage Loans or debt secured by such
Mortgage Loans may be affected by, among other things, a decline in real estate
values and changes in the borrowers' financial condition. No assurance can be
given that values of the Mortgaged Properties have remained or will remain at
their levels on the dates of origination of the related Mortgage Loans. If the
residential real estate market should experience an overall decline in property
values such that the outstanding balances of any senior Liens, the Mortgage
Loans and any secondary financing on the Mortgaged Properties in a particular
Mortgage Pool become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the nonconforming credit mortgage
lending industry. Such a decline could extinguish the interest of the related
Trust in the Mortgaged Properties before having any effect on the interest of
the related senior mortgagee. In addition, in the case of Mortgage Loans that
are subject to negative amortization, due to the addition to principal balance
of deferred interest ("Deferred Interest"), the principal balances of such
Mortgage Loans could be increased to an amount equal to or in excess of the
value of the underlying Mortgaged Properties, thereby increasing the likelihood
of default. To the extent that such losses are not covered by the applicable
Credit Enhancement, holders of Certificates of the series evidencing interests
in the related Mortgage Pool will bear all risk of loss resulting from default
by Mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans.
Risk of Losses Associated with Certain Non-Conforming and
Non-Traditional Loans. The Depositor's underwriting standards consider, among
other things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the value of the property; however, the
Depositor's Mortgage Loan program generally provides for the origination of
Mortgage Loans relating to non-conforming credits. Certain of the types of loans
that may be included in the Pools may involve additional uncertainties not
present in traditional types of loans. For example, certain of the Mortgage
Loans may provide for escalating or variable payments by the borrower under the
Mortgage Loan (the "Mortgagor"), as to which the Mortgagor is generally
qualified on the basis of the initial payment amount. In some instances the
Mortgagors' income may not be sufficient to enable them to continue to make
their loan payments as such payments increase and thus the likelihood of default
will increase. For a more detailed discussion, see "Underwriting Guidelines."
Risk of Losses Associated with Balloon Loans. Certain of the Mortgage
Loans may constitute "Balloon Loans." Balloon Loans are originated with a stated
maturity of less than the period of time of the corresponding amortization
schedule. Consequently, upon the maturity of a Balloon Loan, the Mortgagor will
be required to make a "balloon" payment that will be significantly larger than
such Mortgagor's previous monthly payments. The ability of such a Mortgagor to
repay a Balloon Loan at maturity frequently will depend on such borrower's
ability to refinance the Mortgage Loan. The ability of a Mortgagor to refinance
such a Mortgage Loan will be affected by a number of factors, including the
level of available mortgage rates at the time, the value of the related
Mortgaged Property, the Mortgagor's equity in the related Mortgaged Property,
the financial condition of the Mortgagor, the tax laws and general economic
conditions at the time.
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<PAGE>
Although a low interest rate environment may facilitate the refinancing
of a balloon payment, the receipt and reinvestment by Certificateholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the Depositor,
the Servicer, any Sub- Servicer or the Trustee will be obligated to provide
funds to refinance any Mortgage Loan, including Balloon Loans.
Risk of Losses Associated with ARM Loans. ARM Loans may be underwritten
on the basis of an assessment that Mortgagors will have the ability to make
payments in higher amounts after relatively short periods of time. In some
instances, Mortgagors' income may not be sufficient to enable them to continue
to make their loan payments as such payments increase and thus the likelihood of
default will increase.
Risk of Losses Associated with Bankruptcy of Mortgagors. General
economic conditions have an impact on the ability of borrowers to repay Mortgage
Loans. Loss of earnings, illness and other similar factors also may lead to an
increase in delinquencies and bankruptcy filings by borrowers. In the event of
personal bankruptcy of a Mortgagor, it is possible that a Trust could experience
a loss with respect to such Mortgagor's Mortgage Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan thereby either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
Risk of Losses Associated with Foreclosure of Mortgaged Properties.
Even assuming that the Mortgaged Properties provide adequate security for the
Mortgage Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Mortgage Loans and corresponding delays in the receipt
of related proceeds by the Certificateholders could occur. An action to
foreclose on a Mortgaged Property securing a Mortgage Loan is regulated by state
statutes, rules and judicial decisions and is subject to many of the delays and
expenses of other lawsuits if defenses or counterclaims are interposed,
sometimes requiring several years to complete. Furthermore, in some states an
action to obtain a deficiency judgment is not permitted following a nonjudicial
sale of a Mortgaged Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the Servicer to
foreclose on or sell the Mortgaged Property or to obtain liquidation proceeds
(net of expenses) ("Liquidation Proceeds") sufficient to repay all amounts due
on the related Mortgage Loan. The Servicer will be entitled to deduct from
Liquidation Proceeds all expenses reasonably incurred in attempting to recover
amounts due on the related liquidated Mortgage Loan ("Liquidated Mortgage Loan")
and not yet repaid, including payments to prior lienholders, accrued Servicing
Fees, legal fees and costs of legal action, real estate taxes, and maintenance
and preservation expenses. In the event that any Mortgaged Properties fail to
provide adequate security for the related Mortgage Loans and insufficient funds
are available from any applicable Credit Enhancement, Certificateholders could
experience a loss on their investment.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
Under environmental legislation and judicial decisions applicable in
various states, a secured party that takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a mortgaged property that, prior to foreclosure,
has been involved in decisions or actions which may lead to contamination of a
property, may be liable for the costs of cleaning up the purportedly
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a holder of a mortgage note (such as a Trust)
which, under the terms of the Pooling and Servicing Agreement, is not required
to take an active role in operating the Mortgaged Properties. See "Certain Legal
Aspects of Mortgage Loans and Contracts -- Environmental Risks."
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<PAGE>
Certain of the Mortgaged Properties relating to Mortgage Loans may not
be owner occupied. It is possible that the rate of delinquencies, foreclosures
and losses on Mortgage Loans secured by nonowner occupied properties could be
higher than for loans secured by the primary residence of the borrower.
Litigation. Any material litigation relating to the Depositor or the
Servicer will be specified in the related Prospectus Supplement.
Geographic Concentration of Mortgaged Properties. Certain geographic
regions from time to time will experience weaker regional economic conditions
and housing markets than will other regions, and, consequently, will experience
higher rates of loss and delinquency on mortgage loans generally. The Mortgage
Loans underlying certain series of Certificates may be concentrated in such
regions, and such concentrations may present risk considerations in addition to
those generally present for similar mortgage loan asset-backed securities
without such concentrations. Information with respect to geographic
concentration of Mortgaged Properties will be specified in the related
Prospectus Supplement or related current report on Form 8-K.
Legal Considerations. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures, and require licensing of
the Depositor and the Servicer and Sub-Servicers. In addition, most states have
other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices that may
apply to the origination, servicing and collection of the Mortgage Loans.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Servicer to collect all or part of the principal of or
interest on the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Servicer to damages and
administrative sanctions. See "Certain Legal Aspects of Mortgage Loans and
Contracts."
The Mortgage Loans may also be subject to federal laws, including: (i)
the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X promulgated thereunder,
which require certain disclosures to the borrowers regarding the terms of the
Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and general
principles of equity may limit the ability of the Servicer to collect all or
part of the principal of or interest on the Mortgage Loans, may entitle the
borrower to rescind the loan or to a refund of amounts previously paid and, in
addition, could subject the Servicer to damages and administrative sanctions. If
the Servicer is unable to collect all or part of the principal or interest on
the Mortgage Loans because of a violation of the aforementioned laws, public
policies or general principles of equity then the Trust may be delayed or unable
to repay all amounts owed to Investors. Furthermore, depending upon whether
damages and sanctions are assessed against the Servicer or the Depositor, such
violations may materially impact the financial ability of the Depositor to
continue to act as Servicer or the ability of the Depositor to repurchase or
replace Mortgage Loans if such violation breaches a representation or warranty
contained in a Pooling and Servicing Agreement.
Collections on the Mortgage Loans may vary due to the level of
incidence of delinquent payments and of prepayments. Collections on the Mortgage
Loans may also vary due to seasonal purchasing and payment habits of borrowers.
Book-Entry Registration. Issuance of the Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary trading
market since investors may be unwilling to purchase Certificates for which they
cannot obtain definitive physical securities representing such
Certificateholders' interests, except in certain circumstances described in the
related Prospectus Supplement.
Since transactions in Certificates will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
system ("Direct or Indirect Participants") and certain banks, the ability of a
Certificateholder to pledge a Certificate to persons or entities that do not
participate in the DTC system, or
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otherwise to take actions in respect of such Certificates, may be limited due to
lack of a physical certificate representing the Certificates.
Certificateholders may experience some delay in their receipt of
distributions of interest on and principal of the Certificates since
distributions may be required to be forwarded by the Trustee to DTC and, in such
a case, DTC will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable class of Certificateholders either directly or indirectly through
Indirect Participants. See "Description of the Certificates."
The Status of the Mortgage Loans in the Event of Bankruptcy of the
Depositor. In the event of the bankruptcy of the Depositor at a time when it or
any affiliate thereof holds a Certificate, a trustee in bankruptcy of the
Depositor, or its creditors could attempt to recharacterize the sale of the
Mortgage Loans to the related Trust as a borrowing by the Depositor or such
affiliate with the result, if such recharacterization is upheld, that the
Certificateholders would be deemed creditors of the Depositor or such affiliate,
secured by a pledge of the Mortgage Loans. If such an attempt were successful,
it could prevent timely payments of amounts due to the Trust.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such action
could have an effect, for an indeterminate period of time, on the ability of the
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
In addition, the Relief Act imposes limitations that would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan during the Mortgagor's
period of active duty status. Thus, in the event that such a Mortgage Loan goes
into default, there may be delays and losses occasioned by the inability to
realize upon the Mortgaged Property in a timely fashion.
Certificate Rating. The rating of Certificates credit enhanced through
external Credit Enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external Credit Enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to the
Certificates would likely result in a reduction in the rating of the
Certificates. See "Ratings" in the Prospectus Supplement.
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THE TRUST FUNDS
General
The Trust Fund for each Series of Certificates will consist primarily
of a Pool of Mortgage Loans (a "Mortgage Pool") and/or Contracts (a "Contract
Pool"). In addition, a Trust Fund will also include (i) amounts held from time
to time in the related Certificate Account, (ii) the Depositor's interest in any
primary mortgage insurance, hazard insurance, title insurance and/or other
insurance policies relating to a Mortgage Loan or Contract, (iii) any property
which initially secured a Mortgage Loan and which has been acquired by
foreclosure or trustee's sale or deed in lieu of foreclosure or trustee's sale,
(iv) any Manufactured Home which initially secured a Contract and which is
acquired by repossession, (v) if applicable, and to the extent set forth in the
applicable Prospectus Supplement, any Subordination Reserve Fund and/or any
other reserve fund, (vi) if applicable, and to the extent set forth in the
applicable Prospectus Supplement, one or more guarantees, letters of credit,
insurance policies, or any other credit enhancement arrangement, and (vii) such
other assets as may be specified in the related Prospectus Supplement. Unless
otherwise specified in the applicable Prospectus Supplement, the Trust Fund will
not include, however, the portion of interest on the Mortgage Loans or Contracts
which constitutes the Fixed Retained Yield, if any. See "Fixed Retained Yield"
below. If specified in the related Prospectus Supplement, certain Certificates
will evidence the entire fractional undivided ownership interest in the related
Mortgage Loans held by the related Trust Fund or may represent debt secured by
the related Mortgage Loans.
The Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist of Mortgage Loans evidenced by promissory notes or
other evidences of indebtedness (the "Mortgage Notes") that provide for an
original term to maturity of not more than 40 years, for monthly payments and
for interest on the outstanding principal amounts thereof at a rate that is
either fixed or subject to adjustment as described in the related Prospectus
Supplement. If so specified in the applicable Prospectus Supplement, the
adjustable interest rate on certain of the Mortgage Loans will be convertible
into a fixed interest rate at the option of the mortgagor at the times and upon
the conditions specified therein ("Convertible Mortgage Loans"). The Mortgage
Loans may provide for fixed level payments or be GPM Loans, GEM Loans, Balloon
Loans or Buy-Down Loans (each as defined herein) or Mortgage Loans with other
payment characteristics as described in the related Prospectus Supplement. In
addition, the Mortgage Pools may include participation interests in Mortgage
Loans, in which event references herein to payments on Mortgage Loans
underlying, such participations shall mean payments thereon allocable to such
participation interests, and the meaning of other terms relating to Mortgage
Loans will be similarly adjusted. Similarly, the Mortgage Pools may include
Mortgage Loans with respect to which a Fixed Retained Yield has been retained,
in which event references herein to Mortgage Loans and payments thereon shall
mean the Mortgage Loans exclusive of such Fixed Retained Yield. A "Fixed
Retained Yield" in a Mortgage Loan or Contract represents a specified portion of
the interest payable thereon. The Prospectus Supplement for a Series will
specify whether there will be any Fixed Retained Yield in any Mortgage Loan or
Contract and, if so, the owner thereof. See "Servicing of the Mortgage Loans and
Contracts -- Fixed Retained Yield." Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Loans will be secured by promissory notes or
other evidences of indebtedness (the "Mortgages") creating first, second or more
junior liens on conventional one-to four-family residential properties (which
may include mixed-use or vacation properties), all of which will be located in
any of the fifty states or the District of Columbia. The Mortgage Loans may also
consist of installment contracts for the sale of real estate. If so provided in
the applicable Prospectus Supplement, a Mortgage Pool may also contain
cooperative apartment loans (the "Cooperative Loans") evidenced by promissory
notes (the "Cooperative Notes") secured by security interests in shares issued
by private, non-profit, cooperative housing corporations (the "cooperatives")
and in the related proprietary leases or occupancy agreements granting exclusive
rights to occupy specific Cooperative Dwellings in such cooperatives' buildings.
In the case of a Cooperative Loan, the proprietary lease or occupancy agreement
securing such Cooperative Loan is generally subordinate to any blanket mortgage
on the related cooperative apartment building and/or the underlying land.
Additionally, the proprietary lease or occupancy agreement is subject to
termination and the cooperative shares are subject to cancellation by the
cooperative if the tenant-stockholder fails to pay maintenance or other
obligations or charges owed by such tenant-stockholder.
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Mortgage Loans may be entitled to the benefit of external credit
enhancement. Residential Mortgage Loans may be insured by the Federal Housing
Administration or its successors against defaults by the borrower in the payment
of principal and interest thereon, have a portion of principal and interest
payments guaranteed by the Department of Veterans Affairs or its successors or
be subject to other payment guarantees, including guarantees under the National
Housing Act.
Unless otherwise specified in the Prospectus Supplement for a Series,
each Mortgage Loan must have an original term of maturity of not less than 5
years and not more than 40 years. Unless otherwise specified in the Prospectus
Supplement for a Series, no Mortgage Loan for residential property will have
had, at origination, a principal balance in excess of $5,000,000 or a
Loan-to-Value Ratio in excess of 95%, and Mortgage Loans having Loan-to-Value
Ratios at the time of origination exceeding 80% will be supported by external
credit enhancement or be covered by primary mortgage insurance providing,
coverage on at least the amount of each such mortgage loan in excess of 75% of
the original fair market value of the mortgaged property and remaining in force
until the principal balance of such Mortgage Loan is reduced to 80% of such
original fair market value. The "Loan-to-Value Ratio" is the ratio, expressed as
a percentage, of the principal amount of the Mortgage Loan outstanding at the
origination of such loan divided by the fair market value of the Mortgaged
Property. The fair market value of the Mortgaged Property securing any Mortgage
Loan is, unless otherwise specified in the applicable Prospectus Supplement, the
lesser of (x) the appraised value of the related Mortgaged Property determined
in an appraisal obtained by the originator at origination (or, in the case of a
refinancing, an appraisal obtained at the origination of the refinanced mortgage
loan) and (y) the sale price for such property.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at the levels which existed on the dates of origination
of the related Mortgage Loans. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans and any secondary financing on the Mortgaged
Properties in a particular Trust Fund become equal to or greater than the value
of the Mortgaged Properties, the actual rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the mortgage
lending industry. To the extent that such losses are not covered by the methods
of credit support or the insurance policies described herein, they will be borne
by holders of the Certificates of the Series evidencing interests in such Trust
Fund. Furthermore, in a declining real estate market a new appraisal could
render the Cut-Off Date Loan-to-Value Ratios as unreliable measures of leverage.
The Prospectus Supplement for each Series will set forth certain
characteristics of the related Mortgage Loans, which may include the aggregate
principal balance of the Mortgage Loans in the Mortgage Pool underlying such
Series as of the Cut-Off Date for such Series (the "Cut-Off Date Aggregate
Principal Balance"), the range of original terms to maturity of the Mortgage
Loans in the Mortgage Pool, the weighted average remaining term to stated
maturity at the Cut-Off
Date of such Mortgage Loans, the earliest and latest origination dates of such
Mortgage Loans, the range of Mortgage Rates and Net Mortgage Rates borne by such
Mortgage Loans, the weighted average Net Mortgage Rate at the Cut-Off Date of
such Mortgage Loans, the percentage of such Mortgage Loans which had
Loan-to-Value Ratios at the time of origination of 80% or less, the percentage
of such Mortgage Loans that had Loan-to-Value Ratios at origination in excess of
80% and the highest outstanding, principal balance at origination of any such
Mortgage Loan.
Unless otherwise specified in the applicable Prospectus Supplement, all
of the Mortgage Loans in a Trust Fund will have monthly payments due on a
specified day of each month (each, a "Due Date") and will, with respect to
Mortgage Loans secured by residential properties, require at least monthly
payments of interest on any outstanding balance. If so specified in the
applicable Prospectus Supplement, the Mortgage Pools may include adjustable rate
Mortgage Loans that provide for payment adjustments to be made less frequently
than adjustments in the Mortgage Rates. Each adjustment in the Mortgage Rate
which is not made at the time of a corresponding adjustment in payments (and
which adjusted amount of interest is not paid currently on a voluntary basis by
the mortgagor) will result in a decrease (if the Mortgage Rate rises) or an
increase (if the Mortgage Rate declines) in the rate of amortization of the
Mortgage Loan. Moreover, such payment adjustments on the Mortgage Loans may be
subject to certain limitations, as specified in the Prospectus Supplement, which
may also affect the rate of amortization on the Mortgage Loan. As a result of
such provisions, or in accordance with the payment schedules of certain GPM
Loans and other Mortgage Loans, the amount of interest accrued in any month may
equal or exceed the scheduled monthly payment on the Mortgage Loan. In any such
month, no principal would be payable on the
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Mortgage Loan, and if the accrued interest exceeded the scheduled monthly
payment, such excess interest due would become "Deferred Interest" that is added
to the principal balance of the Mortgage Loan. Deferred Interest will bear
interest at the Mortgage Rate until paid. If such limitations prevent the
payments from being sufficient to amortize fully the Mortgage Loan by its stated
maturity dare, a lump sum payment equal to the remaining unpaid principal
balance will be due on such stated maturity date. See "Prepayment and Yield
Considerations.
Unless otherwise specified in the applicable Prospectus Supplement, the
Mortgage Loans in each Mortgage Pool will be permanent loans (as opposed to
construction and land development loans) secured by Mortgages on Mortgaged
Properties. The Mortgaged Properties will consist of residential properties
only, including detached homes, townhouses, units in planned unit developments,
condominium units, mixed-use properties, vacation homes and small scale
multifamily properties, all of which constitute a "dwelling or mixed residential
and commercial structure" within the meaning of Section 3(a)(41)(A)(i) of the
Securities Exchange Act of 1934, as amended (the "Mortgaged Properties"). The
Mortgage Loans will be secured by liens on fee simple or leasehold interests (in
those states in which long-term ground leases are used as an alternative to fee
interests) in such Mortgaged Properties, or liens on shares issued by
cooperatives and the related proprietary leases or occupancy agreements occupy
specified units in such cooperatives' buildings. The geographic distribution of
Mortgaged Properties will be set forth in the Prospectus Supplement. Each
Prospectus Supplement will also set forth the percentage of the Cut-Off Date
Aggregate Principal Balance of the Mortgage Loans in the related Mortgage Pool
representing the refinancing of existing mortgage indebtedness and the types of
Mortgaged Properties.
If so specified in the applicable Prospectus Supplement, a Trust Fund
may contain Mortgage Loans subject to temporary buy-down plans (the "Buy-Down
Loans") pursuant to which the monthly payments made by the mortgagor during the
early years of the Mortgage Loan will be less than the scheduled monthly
payments on the Mortgage Loan. The resulting difference in payment will be
compensated for from an amount contributed by the seller of the related
Mortgaged Property or another source and, if so specified in the related
Prospectus Supplement, placed in a custodial account (the "Buy-Down Account") by
the Servicer. If the mortgagor on a Buy-Down Loan prepays such Mortgage Loan in
its entirety, or defaults on such Mortgage Loan and the Mortgaged Property is
sold in liquidation thereof, during the period when the mortgagor is not
obligated, on account of the buy-down plan, to pay the full monthly payment
otherwise due on such loan, the unpaid principal balance of such Buy-Down Loan
will be reduced by the amounts remaining in the Buy-Down Account with respect to
such Buy-Down Loan, and such amounts shall be deposited in the Certificate
Account (as defined herein), net of any amounts paid with respect to such
Buy-Down Loan by any insurer, guarantor or other person pursuant to a credit
enhancement arrangement described in the applicable Prospectus Supplement.
If so specified in the applicable Prospectus Supplement, a Trust Fund
may include Mortgage Loans which are amortized over 30 years or some other term,
or which do not provide for amortization prior to maturity, but which have a
shorter term (each such Mortgage Loan, a "Balloon Loan") that causes the
outstanding principal balance of such Mortgage Loan to be due and payable at the
end of a certain specified period (the "Balloon Period"). If specified in the
applicable Prospectus Supplement, the originator of such Balloon Loan will be
obligated to refinance each such Balloon Loan at the end of its Balloon Period
at a new interest rate determined prior to the end of such Balloon Period by
reference to an index plus a margin specified in the related Mortgage Note. The
mortgagor is not, however, obligated to refinance the Balloon Loan through such
originator. In the event a mortgagor refinances a Balloon Loan, the new loan
will not be included in the Trust Fund. See "Prepayment and Yield
Considerations."
If specified in the Prospectus Supplement for any Series, the Mortgage
Loans included in the Trust Fund for such Series may be what are commonly
referred to as "home equity revolving lines of credit" ("Home Equity Lines").
Home Equity Lines are generally evidenced by a loan agreement ("Loan Agreement")
rather than a note. Home Equity Lines generally may be drawn down from time to
time by the borrower writing a check against the account, or acknowledging the
advance in a supplement to the Loan Agreement (the amount of such drawn down, an
"Additional Balance"). A Home Equity Line will establish a maximum credit limit
with respect to the related borrower, and will permit the borrower to draw down
Additional Balances, and repay the aggregate balance outstanding in each case
from time to time in such a manner so that the aggregate balance outstanding
does 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.
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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. 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
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distributions expected to be made on the related Certificates. Thus, if the
Mortgage Loans include GPM Mortgage Loans, the Servicer will, unless otherwise
specified in the Prospectus Supplement, establish a reserve fund (the "GPM
Fund") which (together with, if specified in the related Prospectus Supplement,
reinvestment income thereon) will be sufficient to cover the amount by which
payments of interest on such GPM Mortgage Loan assumed in calculating,
distributions expected to be made on the Certificates of such Series exceed
scheduled interest payments according to the relevant graduated payment mortgage
plan for the period during which excess occurs.
If so specified in the applicable Prospectus Supplement, a Trust Fund
may contain ARM buy-out loans ("ARM Buy-Outs") which are automatically
repurchased by the Depositor upon the occurrence of either(i) a switch from a
fixed-rate mortgage to an adjustable rate mortgage pursuant to the terms of the
underlying note or (ii) a switch from an adjustable rate to a fixed rate
mortgage pursuant to the terms of the underlying note.
If specific information respecting the Mortgage Loans to be included in
a Trust Fund is not known to the Depositor at the time the Certificates of a
Series are initially offered, more general information of the nature described
above will be provided in the Prospectus Supplement and final specific
information will be set forth in a Current Report on Form 8-K to be available to
investors on the date of issuance thereof and to be filed with the Commission
promptly after the initial issuance of such Certificates.
The Contracts
Unless otherwise specified in the applicable Prospectus Supplement,
each Contract Pool will consist of conventional manufactured housing installment
sales contracts and installment loan agreements (collectively, the "Contracts")
originated by a manufactured housing dealer in the ordinary course of business
and purchased by the Unaffiliated Seller. Unless otherwise specified in the
applicable Prospectus Supplement, each Contract will be secured by Manufactured
Homes (as defined below), each of which will be located in any of the fifty
states or the District of Columbia. Unless otherwise specified in the applicable
Prospectus Supplement, the Contracts will be fully amortizing and will bear
interest at a fixed or adjustable annual percentage rate (the "APR" or "Contract
Rate"). The Contract Pool may include Contracts with respect to which a Fixed
Retained Yield has been retained, in which event references herein to Contracts
and payments thereon shall mean the Contracts exclusive of such Fixed Retained
Yield. The Prospectus Supplement for a Series will specify whether there will be
any Fixed Retained Yield in any Contract, and if so, the owner thereof. See
"Fixed Retained Yield" below.
The Unaffiliated Seller of the Contracts will represent that the
Manufactured Homes securing the Contracts consist of manufactured homes within
the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis designed to be used
as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air-conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
Unless otherwise specified in the Prospectus Supplement for a Series,
each Contract must have an original term to maturity of not less than 1 year and
not more than 40 years. Unless otherwise specified in the Prospectus Supplement
for a Series, no Contract will have had, at origination, a principal balance in
excess of $5,000,000 or a Loan-to-Value Ratio in excess of 95%. The
"Loan-to-Value Ratio" is the ratio, expressed as a percentage, of the principal
amount of the Contract outstanding at the origination of such loan divided by
the fair market value of the Manufactured Home. The fair market value of the
Manufactured Home securing any Contract is, unless otherwise specified in the
applicable Prospectus Supplement, either (x) the appraised value of the related
Manufactured Home determined in an appraisal obtained by the originator at
origination and (y) the sale price for such property, plus, in either case,
sales and other taxes and, to the extent financed, filing and recording fees
imposed by law, premiums for related insurance and prepaid finance charges.
Manufactured Homes, unlike site-built homes, generally depreciate in
value. Consequently, at any time after origination
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it is possible, especially in the case of Contracts with high Loan-to-Value
Ratios at origination, that the market value of a Manufactured Home may be lower
than the principal amount outstanding under the related Contract.
The Prospectus Supplement for each Series will set forth certain
characteristics of the related Contracts, which may include the aggregate
principal balance of the Contracts in the Contract Pool underlying such Series
as of the Cut-Off Date for such Series (the "Cut-Off Date Aggregate Principal
Balance"), the range of original terms to maturity of the Contracts in the
Contract Pool, the weighted average remaining term to stated maturity at the
Cut-Off Date of such Contracts, the earliest and latest origination dates of
such Contracts, the range of Contract Rates and Net Contract Rates borne by such
Contracts, the weighted average Net Contract Rate at the Cut-Off Date of such
Contracts, the percentage of such Contracts which had Loan-to-Value Ratios at
the time of origination of 80% or less, the percentage of such Contracts that
had Loan-to-Value Ratios at origination in excess of 80% and the highest
outstanding principal balance at origination of any such Contract.
Unless otherwise specified in the applicable Prospectus Supplement, all
of the Contracts in a Trust Fund will have monthly payments due on the first of
each month (each, a "Due Date") and will be fully-amortizing Contracts. If so
specified in the applicable Prospectus Supplement, Contracts may have Due Dates
which occur on a date other than the first of each month. If so specified in the
applicable Prospectus Supplement, the Contract Pools may include adjustable rate
Contracts that provide for payment adjustments to be made less frequently than
adjustments in the Contract Rates. Each adjustment in the Contract Rate which is
not made at the time of a corresponding adjustment in payments (and which
adjusted amount of interest is not paid currently on a voluntary basis by the
obligor) will result in a decrease (if the Contract Rate rises) or an increase
(if the Contract Rate declines) in the rate of amortization of the Contract.
Moreover, such payment adjustments on the Contracts may be subject to certain
limitations, as specified in the Prospectus Supplement, which may also affect
the rate of amortization on the Contract. As a result of such provisions, the
amount of interest accrued in any month may equal or exceed the scheduled
monthly payment on the Contract. In any such month, no principal would be
payable on the Contract, and if the accrued interest exceeded the scheduled
monthly payment, such excess interest due would become "Deferred Interest" that
is added to the principal balance of the Contract. Deferred Interest will bear
interest at the Contract Rate until paid. If such limitations prevent the
payments from being sufficient to amortize fully the Contract by its stated
maturity date, a lump sum payment equal to the remaining unpaid principal
balance will be due on such stated maturity date. See "Prepayment and Yield
Considerations."
The geographic distribution of Manufactured Homes will be set forth in
the Prospectus Supplement. Each Prospectus Supplement will set forth the
percentage of the Cut-Off Date Aggregate Principal Balance of any Contracts in
the Contract Pool which are secured by Manufactured Homes which have become
permanently affixed to real estate. Each Prospectus Supplement will also set
forth the percentage of the Cut-Off Date Aggregate Principal Balance of the
Contracts in the related Contract Pool representing the refinancing of existing
mortgage indebtedness. Unless otherwise specified in a Prospectus Supplement, no
Contract in the Contract Pool will be more than 30 days past due as of the
Cut-Off Date.
If specific information respecting the Contracts to be included in a
Trust Fund is not known to the Depositor at the time the Certificates of a
Series are initially offered, more general information of the nature described
above will be provided in the Prospectus Supplement and final specific
information will be set forth in a Current Report on Form 8-K to be available to
investors on the date of issuance thereof and to be filed with the Commission
promptly after the initial issuance of such Certificates.
Fixed Retained Yield
Fixed Retained Yield with respect to any Mortgage Loan or Contract is
that portion, if any, of interest at the Mortgage Rate or Contract Rate that is
retained by the Depositor or other owner thereof and not included in the related
Trust Fund. The Prospectus Supplement for a Series will specify whether a Fixed
Retained 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
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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.
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
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for any loss or damage to the Mortgaged Property on a replacement cost basis and
(ii) the maximum amount of insurance which is available under the federal flood
insurance program.
Any losses incurred with respect to Mortgage Loans or Contracts due to
uninsured risks (including earthquakes, mudflows, floods, hazardous wastes and
hazardous substances) or insufficient hazard insurance proceeds could affect
distributions to the Certificateholders.
The Servicer will maintain or cause to be maintained with respect to
each Mortgage Loan a primary mortgage insurance policy in accordance with the
standards described in the "Mortgage Loans" above.
The Servicer shall obtain and maintain at its own expense and keep in
full force and effect a blanket fidelity bond and an error and omissions
insurance policy covering the Servicer's officers and employees as well as
office persons acting on behalf of the Servicer in connection with the servicing
of the Mortgage Loans.
Although the terms and conditions of primary mortgage insurance
policies differ, each primary mortgage insurance policy will generally cover
losses up to an amount equal to the excess of the unpaid principal amount of a
defaulted Mortgage Loan (plus accrued and unpaid interest thereon and certain
approved expenses) over a specified percentage of the value of the related
Mortgage Property.
As conditions precedent to the filing or payment of a claim under a
primary mortgage insurance policy, the insured will typically be required, in
the event of default by the mortgagor, among other things, to: (i) advance or
discharge (a) hazard insurance premiums and (b) as necessary and approved in
advance by the insurer, real estate taxes, protection and preservation expenses
and foreclosure and related costs; (ii) in the event of any physical loss or
damage to the Mortgaged Property, have the Mortgaged Property restored to at
least its condition at the effective date of the primary mortgage insurance
policy (ordinary wear and tear excepted); and (iii) if the insurer pays the
entire amount of the loss or damage, tender to the insurer good and merchantable
title to, and possession of, the Mortgaged Property.
Any mortgage insurance relating to the Contracts underlying a Series of
Certificates will be described in the related Prospectus Supplement.
Acquisition of the Mortgage Loans and Contracts From Unaffiliated Sellers
The Mortgage Loans or Contracts underlying a Series of Certificates
will be purchased by the Depositor, either directly or through affiliates, from
Unaffiliated Sellers pursuant to a separate agreement (a "Loan Sale Agreement")
between the Depositor or such affiliate and each such Unaffiliated Seller. The
Depositor expects that, unless otherwise specified in the applicable Prospectus
Supplement, each Mortgage Loan or Contract so acquired will have been originated
by the originator thereof in accordance with the underwriting criteria specified
under "Underwriting Guidelines." Unless otherwise specified in the applicable
Prospectus Supplement, each Unaffiliated Seller must be an institution
experienced in originating and servicing conventional mortgage loans or
manufactured housing contracts in accordance with accepted practices and prudent
guidelines, and must maintain facilities to originate and service those loans
satisfactory to the Depositor. In addition, each Unaffiliated Seller must
satisfy certain criteria as to financial stability evaluated on a case by case
basis by the Depositor. Unless otherwise provided in the applicable Prospectus
Supplement, each Unaffiliated Seller pursuant to the related Loan Sale Agreement
will make certain representations and warranties to the Depositor in respect of
the Mortgage Loans or Contracts sold by such Unaffiliated Seller to the
Depositor as described herein under "Representations and Warranties" below.
Unless otherwise provided in the applicable Prospectus Supplement with respect
to each Series, the Depositor will assign all of its rights (except certain
rights of indemnification) and interest in the related Loan Sale Agreement to
the related Trustee for the benefit of the Certificateholders of such Series,
and the Unaffiliated 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."
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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."
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
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such custodian) shall immediately notify the Servicer and the Depositor, and the
Servicer shall immediately notify the related Unaffiliated Seller. If the
Unaffiliated Seller cannot cure such omission or defect within 60 days after
receipt of such notice, the Unaffiliated Seller will be obligated, pursuant to
the related Loan Sale Agreement, either to repurchase the related Mortgage Loan
or Contract from the Trustee within 60 days after receipt of such notice, at a
price (the "Purchase Price") equal to the then unpaid principal balance thereof,
plus accrued and unpaid interest at the applicable Mortgage Rate or Contract
Rate (less any Fixed Retained Yield with respect to such Mortgage Loan or
Contract and less the rate, if any, of servicing compensation payable to the
Unaffiliated Seller with respect to such Mortgage Loan or Contract) through the
last day of the month in which such repurchase takes place or to substitute one
or more new Mortgage Loans or Contracts for such Mortgage Loan or Contract. In
the case of a Mortgage Loan or Contract so repurchased by an Unaffiliated
Seller, the Purchase Price will be deposited in the related Certificate Account.
In the case of a substitution, such substitution will be made in accordance with
the standards described in "Representations and Warranties" below.
There can be no assurance that an Unaffiliated Seller will fulfill this
repurchase or substitution obligation. The Servicer will be obligated to enforce
such obligation to the same extent as it must enforce the obligation of an
Unaffiliated Seller for a breach of representation or warranty as described
below under "Representations and Warranties." However, as in the case of an
uncured breach of such a representation or warranty, neither the Servicer
(unless the Servicer is the Unaffiliated Seller) nor the Depositor will be
obligated to purchase or substitute for such Mortgage Loan or Contract if the
Unaffiliated Seller defaults on its repurchase or substitution obligation,
unless such breach also constitutes a breach of the representations or
warranties of the Servicer or the Depositor, as the case may be. Unless
otherwise specified in the related Prospectus Supplement, this repurchase or
substitution obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for omission of, or a material defect in, a
constituent document.
The Trustee will be authorized to appoint a custodian to maintain
possession of the documents relating to the Mortgage Loans or Contracts. The
custodian will keep such documents as the Trustee's agent under a custodial
agreement.
Representations and Warranties
Each Unaffiliated Seller, pursuant to the related Loan Sale Agreement,
will have made representations and warranties in respect of the Mortgage Loans
sold by such Unaffiliated Seller. Unless otherwise specified in the related
Prospectus Supplement, each Unaffiliated Seller of Mortgage Loans will have
represented, among other things, substantially to the effect that (i)
immediately prior to the sale and transfer of such Mortgage Loans, the
Unaffiliated Seller had good title to, and was the sole owner of, each such
Mortgage Loan and there had been no other assignment or pledge thereof, (ii) as
of the date of such transfer, such Mortgage Loans are subject to no offsets,
defenses or counterclaims, (iii) each Mortgage Loan at the tune it was made
complied in all material respects with applicable state and federal laws,
including, usury, equal credit opportunity and disclosure laws, (iv) a lender's
policy of title insurance was issued on the date of the origination of each
Mortgage Loan and each such policy is valid and remains in full force and
effect, (v) as of the date of such transfer, each related Mortgage is a valid
lien on the related Mortgaged Property (subject only to (a) the lien of current
real property taxes and assessments, (b) covenants, conditions and restrictions,
rights of way, easements and other matters of public record as of the date of
the recording of such Mortgage, such exceptions appearing of record and either
being acceptable to mortgage lending institutions generally or specifically
reflected in the lender's policy of title insurance issued on the date of
origination and either (A) specifically referred to in the appraisal made in
connection with the origination of the related Mortgage Loan or (B) which do not
adversely affect the appraised value of the Mortgaged Property as set forth in
such appraisal, (c) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security intended to
be provided by the Mortgage and (d) in the case of second or more junior loans
any senior loans of record as of the date of recording of the Equity Loan) and
such property is free of material damage and is in good repair, (vi) as of the
date of such transfer, no Mortgage Loan is 30 days or more delinquent in payment
and there are no delinquent tax or assessment liens against the related
Mortgaged Property that would permit taxing authority to initiate foreclosure
proceedings, and (vii) with respect to each Mortgage Loan, if the Mortgaged
Property is located in an area identified by the Federal Emergency Management
Agency as having special flood hazards and subject in certain circumstances to
the availability of flood insurance under the federal flood insurance program,
such Mortgaged Property is covered by flood insurance meeting the requirements
of the applicable Pooling and Servicing Agreement.
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Each Unaffiliated Seller, pursuant to the related Loan Sale Agreement,
will have made representations and warranties in respect of the Contracts sold
by such Unaffiliated Seller. Unless otherwise specified in the related
Prospectus Supplement, each Unaffiliated Seller of Contracts will have
represented, among other digs, substantially to the effect that (i) immediately
prior to the sale and transfer of such Contracts, the Unaffiliated Seller had
good title to, and was the sole owner of, each such Contract and there had been
no other assignment or pledge thereof, (ii) as of the date of such transfer,
such Contracts are subject to no offsets, defenses or counterclaims, (iii) each
Contract at the time it was made complied in all material respects with
applicable state and federal laws, including usury, equal credit opportunity and
disclosure laws, (iv) as of the date of such transfer, each related Contract is
a valid first lien on the related Manufactured Home and such Manufactured Home
is free of material damage and is in good repair, (v) as of the date of such
transfer, no Contract is 30 days or more delinquent in payment and there are no
delinquent tax or assessment liens against the related Manufactured Home, and
(vi) with respect to each Contract, the Manufactured Home securing the Contract
is covered by a Standard Hazard Insurance Policy in the amount required by the
Pooling and Servicing Agreement and all premiums then due on such insurance have
been paid in full.
All of the representations and warranties of an Unaffiliated Seller in
respect of a Mortgage Loan or Contract will have been made as of the date on
which such Unaffiliated Seller sold the Mortgage Loan or Contract to the
Depositor. A substantial period of time may have elapsed between the date as of
which the representations and warranties were made and the later date of initial
issuance of the related Series of Certificates. Since the representations and
warranties referred to in the preceding paragraphs are the only representations
and warranties that will be made by an Unaffiliated Seller, the Unaffiliated
Seller's repurchase obligation described below will not arise if, during the
period commencing on the date of sale of a Mortgage Loan or Contract by the
Unaffiliated Seller to the Depositor, the relevant event occurs that would have
given rise to such an obligation had the event occurred prior to sale of the
affected Mortgage Loan or Contract. However, the Depositor will not include any
Mortgage Loan or Contract in the Trust Fund for any series of Certificates if
anything has come to the Depositor's attention that would cause it to believe
that the representations and warranties of an Unaffiliated Seller will not be
accurate and complete in all material respects in respect of such Mortgage Loan
or Contract as of the date of initial issuance of the related Series of
Certificates.
The Depositor will, unless otherwise provided in the applicable
Prospectus Supplement, assign all of its rights (except certain rights to
indemnification) with respect to such representations and warranties pursuant to
any related Loan Sale Agreement to the Trustee for the benefit of the
Certificateholders of the related Series. The Servicer, or the Trustee if the
Servicer is the Unaffiliated Seller, will promptly notify the relevant
Unaffiliated Seller of any breach of any representation or warranty made by it
in respect of a Mortgage Loan or Contract which materially and adversely affects
the interests of the Certificateholders in such Mortgage Loan or Contract.
Unless otherwise specified in the related Prospectus Supplement, if such
Unaffiliated Seller cannot cure such breach within 60 days after notice from the
Servicer or the Trustee, as the case may be, then such Unaffiliated Seller will
be obligated either (i) to repurchase such Mortgage Loan or Contract from the
Trust Fund at the applicable Purchase Price or (ii) subject to the Trustee's
approval and to the extent permitted by the Pooling and Servicing Agreement, to
substitute for such Mortgage Loan or Contract (a "Deleted Loan") one or more
Mortgage Loans or Contracts, as the case may be (each, a "Substitute Loan"), but
only if (i) with respect to a Trust Fund (or one or more segregated pools of
assets therein) for which a REMIC election is to be made, such substitution is
effected within two years of the date of initial issuance of the Certificates or
(ii) with respect to a Trust Fund for which no REMIC election is to be made,
such substitution is effected within 120 days of the date of initial issuance of
the Certificates. Except as otherwise provided in the related Prospectus
Supplement, any Substitute Loan will, on the date of substitution, (i) have a
Loan-to-Value Ratio no greater than that of the Deleted Loan, (ii) have a
Mortgage Rate or Contract Rate not less than (and not more than 1% greater than)
the Mortgage Rate or Contract Rate of the Deleted Loan, (iii) have a Net
Mortgage Rate or Net Contract Rate not less than (and not more than 1% greater
than) the Net Mortgage Rate or Net Contract Rate of the Deleted Loan, (iv) have
a remaining term to maturity not greater than (and not more than one year less
than) that of the Deleted Loan and (v) comply with all of the representations
and warranties set forth in the related Loan Sale Agreement as of the date of
substitution. If substitution is to be made for a Deleted Loan with an
adjustable Mortgage Rate or Contract Rate, the Substitute Loan will also bear
interest based on the same index, margin, frequency and month of adjustment as
the Deleted Loan. In the event that one Substitute Loan is substituted for more
than one Deleted Loan, or more than one Substitute Loan is substituted for one
or more Deleted Loans, then the amount described in clause (i) will be
determined on the basis of aggregate principal balances (provided that in all
events the tests for a "qualified mortgage" as described in the
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second paragraph under the heading "Certain Federal Income Tax Consequences --
Federal Income Tax Consequences for REMIC Certificates -- Qualification as a
REMIC" are met as to each Substituted Loan), the rates described in clauses (ii)
and (iii) with respect to Deleted Loans will be determined on the basis of
weighted average Mortgage Rates and Net Mortgage Rates or Contract Rates and Net
Contract Rates, as the case may be, and the terms described in clause (iv) will
be determined on the basis of weighted average remaining terms to maturity. In
the case of a Substitute Loan, the mortgage file relating, thereto will be
delivered to the Trustee (or the custodian) and the Unaffiliated Seller will pay
an amount equal to the excess of (i) the unpaid principal balance of the Deleted
Loan, over (ii) the unpaid principal balance of the Substitute Loan or Loans,
together with interest on such excess at the Mortgage Rate or Contract Rate to
the next scheduled Due Date of the Deleted Loan. Such amount will be deposited
in the Certificate Account for distribution to Certificateholders. Except in
those cases in which the Servicer is the Unaffiliated Seller, the Servicer will
be required under the applicable Pooling and Servicing Agreement to enforce this
repurchase or substitution obligation for the benefit of the Trustee and the
holders of the Certificates, following the practices it would employ in its good
faith business judgment were it the owner of such Mortgage Loan or Contract.
This repurchase or substitution obligation will constitute the sole remedy
available to holders of Certificates or the Trustee for a breach of
representation by an Unaffiliated Seller.
Neither the Depositor nor the Servicer (unless the Servicer is the
Unaffiliated Seller) will be obligated to purchase or substitute for a Mortgage
Loan or Contract if an Unaffiliated Seller defaults on its obligation to do so,
and no assurance can be given that Unaffiliated Sellers will carry out their
respective repurchase obligations with respect to Mortgage Loans or Contracts.
If so specified in the applicable Prospectus Supplement, the Depositor,
the Servicer or another entity specified in the applicable Prospectus
Supplement, will make such representations and warranties as to the types and
geographical concentration of the Mortgage Loans or Contracts in the related
Mortgage Pool or Contract Pool and as to such other matters concerning such
Mortgage Loans or Contracts as may be described therein. Upon a breach of any
such representation or warranty which materially and adversely affects the
interests of the Certificateholders in a Mortgage Loan or Contract, the entity
making such representation or warranty will be obligated either to cure the
breach in all material respects, repurchase the Mortgage Loan or Contract at the
Purchase Price or substitute for such Mortgage Loan or Contract in the manner,
and subject to the conditions, described above regarding the obligations of
Unaffiliated Sellers with respect to missing or defective loan documents or the
breach of such Unaffiliated Sellers' representations and warranties. This
repurchase or substitution obligation constitutes the sole remedy available to
the Certificateholders or the Trustee for a breach of a representation or
warranty by the Depositor, the Servicer or such other party, respectively.
DESCRIPTION OF THE CERTIFICATES
General
Each Series of Certificates will be issued pursuant to a Pooling and
Servicing Agreement among the Depositor, the Servicer, if the Series relates to
Mortgage Loans or Contracts, and the Trustee named in the related Prospectus
Supplement. The provisions of each Pooling and Servicing Agreement will vary
depending upon the nature of the Certificates to be issued thereunder and the
nature of the related Trust Fund. Forms of the Pooling and Servicing Agreements
have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. The following summaries describe certain provisions of the
Certificates and the Pooling and Servicing Agreements; however, the summaries do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Pooling and Servicing
Agreement for each Series of Certificates and the applicable Prospectus
Supplement. Each Pooling and Servicing Agreement executed and delivered with
respect to each Series will be filed with the Commission as an exhibit to a
Current Report on Form 8-K promptly after issuance of the Certificates of such
Series. The Depositor will provide a copy of the Pooling and Servicing Agreement
(without exhibits) relating to any Series without charge upon written request of
a holder of a Certificate of such Series addressed to Prudential Securities
Secured Financing Corporation, One New York Plaza, 15th Floor, New York, New
York 10292, Attention: Len Blum.
Each Series of Certificates will evidence the beneficial ownership
interest in the related Trust Fund created by the Depositor pursuant to the
related Pooling and Servicing Agreement. Each Series of Certificates will
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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.
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
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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.
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
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to its Class by a fraction, the numerator of which is the original notional
amount of such Stripped Certificates and the denominator of which is the
aggregate original notional amount of all the Stripped Certificates of its
Class.
The interest of a Class of Percentage Certificates representing an
interest in a Trust Fund (or a segregated pool of assets therein) with respect
to which an election to be treated as a REMIC has been made may be fixed as
described above or may vary over time as a result of prepayments received and
losses realized on the underlying Mortgage Loans. A Series of Percentage
Certificates comprised of Classes whose percentage interests in the Trust Fund
may vary is referred to herein as a Series of "Shifting Interest Certificates."
Distributions on, and subordination arrangements with respect to, Shifting
Interest Certificates are discussed below under the headings "Description of the
Certificates -- Distributions to Percentage Certificateholders -- Shifting
Interest Certificates" and "Credit Support -- Subordination -- Shifting Interest
Certificates."
Multi-Class Certificates
Each Series may include one or more Classes or Subclasses of
Multi-Class Certificates. Each Multi-Class Certificate will be assigned a Stated
Amount or Notional Amount. The Stated Amount may be based on an amount of
principal of the underlying Mortgage Loans or Contracts or on the value of
future cash flows from the related Trust Fund, without distinction as to
principal and interest received on the Mortgage Loans or Contracts. Interest on
the Classes or Subclasses of Multi-Class Certificates will be paid at rates
specified in or determined as specified in the applicable Prospectus Supplement,
and will accrue in the manner specified therein. Any Class or Subclass of
Multi-Class Certificates may consist of Certificates on which interest accrues
but is not payable until such time as specified in the applicable Prospectus
Supplement ("Compound Interest Certificates"), and interest accrued on any such
Certificate will be added to the Stated Amount thereof in the manner described
therein.
The Stated Amount of a Multi-Class Certificate of a Series at any time
will represent the maximum specified dollar amount (exclusive of interest at the
related Interest Rate, if any) to which the holder thereof is entitled from the
cash flow on the Mortgage Loans or Contracts and other assets in the Trust Fund
for such Series and will decline to the extent distributions in reduction of
Stated Amount are received by such holder. The initial Stated Amount of each
Class within a Series of Multi-Class Certificates will be specified in the
applicable Prospectus Supplement.
Forward Commitments; Pre-Funding
A Trust Fund may enter into an agreement (each, a "Forward Purchase
Agreement") with the Depositor whereby the Depositor will agree to transfer
additional Mortgage Loans to such Trust Fund following the date on which such
Trust Fund is established and the related Certificates are issued. The Trust
Fund may enter into Forward Purchase Agreements to permit the acquisition of
additional Mortgage Loans that could not be delivered by the Depositor or have
not formally completed the origination process, in each case prior to the date
on which the Certificates are delivered to the Certificateholders (the "Closing
Date"). Any Forward Purchase Agreement will require that any Mortgage Loans so
transferred to the Trust Fund conform to the requirements specified in such
Forward Purchase Agreement.
If a Forward Purchase Agreement is to be utilized, and unless otherwise
specified in the related Prospectus Supplement, the related Trustee will be
required to deposit in a segregated account (each, a "Pre-Funding Account") up
to 100% of the net proceeds received by the Trustee in connection with the sale
of one or more 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.
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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
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;
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(f) where permitted by the related Pooling and Servicing Agreement,
that portion of Liquidation Proceeds or Insurance Proceeds which represents
Fixed Retained Yield, if any, or any unpaid Servicing Fee to which the
Servicer is entitled;
(g) all amounts representing certain expenses reimbursable to the
Servicer and other amounts pertained to be withdrawn by the Servicer from
the Certificate Account, in each case pursuant to the applicable Pooling
and Servicing Agreement;
(h) all amounts in the nature of late fees, assumption fees,
prepayment fees and similar fees which the Servicer is entitled to retain
pursuant to the applicable Pooling and Servicing Agreement; and
(i) where permitted by the applicable Pooling and Servicing Agreement,
reinvestment earnings on payments received in respect of the Mortgage Loans
or Contracts.
Certificates other than Shifting Interest Certificates
With respect to a Series of Certificates which is comprised of one
Class of Standard Certificates which are Senior Certificates and one Class of
Standard Certificates which are Subordinated Certificates, the Servicer shall
determine the aggregate amount which would have been distributable to such Class
of Senior Certificates (the "Senior Class Distributable Amount") and the
aggregate amount which would have been distributable to such Class of
Subordinated Certificates (the "Subordinated Class Distributable Amount")
assuming, among other things, no delinquencies or losses on the Mortgage Loans
or Contracts preceding such Distribution Date and, based on the Pool
Distribution Amount and such Distributable Amounts, will determine the amount
actually to be distributed to each Class and Subclass.
Calculation of Distributable Amounts. If a Series of Certificates
includes one Class of Standard Certificates which are Senior Certificates and
one Class of Standard Certificates which are Subordinated Certificates, unless
otherwise specified in the applicable Prospectus Supplement, the Senior Class
Distributable Amount with respect to such Senior Certificates on a Distribution
Date will be an amount equal to the sum of:
(i) the aggregate undivided interest, expressed as a percentage and
specified in the applicable Prospectus Supplement, evidenced by such Class
of Senior Certificates (the "Senior Class Principal Portion") of:
(a) all scheduled payments of principal on each outstanding
Mortgage Loan or Contract that became due on the Due Date immediately
preceding such Distribution Date in accordance with the amortization
schedules of the related Mortgage Loans or Contracts (as adjusted to
give effect to any previous prepayments), whether or not such payments
were actually received by the Servicer (the aggregate of such
scheduled payments due on any such Due Date being referred to herein
as "Scheduled Principal");
(b) all principal prepayments received by the Servicer in the
month preceding the month in which such Distribution Date occurs;
(c) the Scheduled Principal Balance (as defined herein) of each
Mortgage Loan or Contract which was purchased from the Trust Fund as
provided in the Pooling and Servicing Agreement (as described in "The
Trust Funds" and "The Pooling and Servicing Agreement"), and of each
Mortgage Loan or Contract as to which the Servicer has determined that
all recoveries of Liquidation Proceeds and Insurance Proceeds have
been received (a "Liquidated Mortgage Loan" or "Liquidated Contract"),
in each case during the month preceding the month in which such
Distribution Date occurs, calculated as of the date each such Mortgage
Loan or Contract was purchased or calculated as of the date each such
Mortgage Loan or Contract became a Liquidated Mortgage Loan or
Liquidated Contract, as the case may be; and
(d) with respect to (1) the disposition of the Mortgaged Property
or Manufactured Home in connection with any Liquidated Mortgage Loan
or Contract, the amount by which Net
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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
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
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(iii) the Subordinated Class Principal Portion of any Indemnification
Payments.
The foregoing is subject to the proviso that if one or more REMIC
elections are made with respect to a Series of Certificates, any Gain From
Acquired Property will not be included in the Distributable Amount of the Class
of such Series which consist of Regular Interests, but shall instead be paid in
full to the holders of the Residual Certificates of such Series.
Calculation of Amounts To Be Distributed. The Servicer will calculate,
on the related Determination Date, the portion of the Distributable Amount for
each Class of the Series that is actually available to be paid out of the Pool
Distribution Amount on the Distribution Date prior to any adjustments with
respect to subordination. The portion so available on a Distribution Date to the
Senior Certificateholders and to the Subordinated Certificateholders
(respectively, the "Senior Class Pro Rata Share" and the "Subordinated Class Pro
Rata Share") will, unless otherwise specified in the applicable Prospectus
Supplement, be the amount equal to the product of the Pool Distribution Amount
for such Distribution Date and a fraction, the numerator of which is the
Distributable Amount for such Class on such Distribution Date and the
denominator of which is the sum of the Distributable Amounts for such Series on
such Distribution Date.
So long as the Subordinated Amount is greater than zero, the holders of
Senior Certificates will be entitled to receive on any Distribution Date the
lesser of (a) the sum of the Senior Class Distributable Amount and the Senior
Class Carryover Shortfall (as defined below) and (b) the Senior Class Pro Rata
Share on such Distribution Date (the "Basic Senior Class Distribution"). In
addition, to the extent Senior Class Credit Enhancement is available, the
holders of Senior Certificates will be entitled to receive the amount, if any,
by which the Senior Class Distributable Amount plus any Senior Class Carryover
Shortfall (as defined below) on such Distribution Date exceeds the Basic Senior
Class Distribution on such Distribution Date (such excess being referred to
herein as the "Senior Class Shortfall"). "Senior Class Credit Enhancement"
includes: (a) amounts otherwise distributable to the holders of Subordinated
Certificates on such Distribution Date and amounts available for such purpose in
any Subordination Reserve Fund pursuant to any subordination of the rights of
any holders of Subordinated Certificates as described below; and (b) any other
credit enhancement arrangement which shall be specified in the related
Prospectus Supplement. See "Credit Support". The "Senior Class Carryover
Shortfall" on any Distribution Date means the amount the holders of Senior
Certificates were entitled to receive on the prior Distribution Date over the
amount the holders of Senior Certificates actually received on such prior
Distribution Date, together with interest on the difference at Pass-Through Rate
for the Senior Certificates from such prior Distribution Date through the
current Distribution Date.
At the time the Subordinated Amount, if any, is reduced to zero, Senior
Certificateholders will be entitled to the Senior Class Pro Rata Share on each
Distribution Date. In such event any remaining Senior Class Shortfall will cease
to be payable from available sources of credit enhancement, except that the
portion of such Senior Class Shortfall which is attributable to the account of
interest on any previous Senior Class Carryover Shortfall (the "Senior Class
Shortfall Accruals") shall continue to bear interest at the Pass-Through Rate
for the Senior Certificates, and the holders of Senior Certificates shall
continue to have a preferential right to be paid such amount from distributions
otherwise available for distribution to any holders of Subordinated
Certificates, until such amount (including interest thereon at the Pass-Through
Rate for the Senior Certificates) is paid in full. See "Credit Support --
Subordination."
So long as the Subordinated Amount is greater than zero, the holders of
Subordinated Certificates will be entitled to receive on any Distribution Date
an amount equal to the excess of (a) the sum of (i) the Pool Distribution Amount
and (ii) all amounts released from the Subordination Reserve Fund for
distribution to the holders of Subordinated Certificates on such Distribution
Date over (b) the sum of (i) the Basic Senior Class Distribution, (ii) any
amounts required to be distributed to the holders of Senior Certificates
pursuant to the subordination of the rights of the holders of Subordinated
Certificates and (iii) amounts required to be deposited in the Subordination
Reserve Fund. See "Credit Support." At the time the Subordinated Amount, if any,
is reduced to zero, Subordinated Certificateholders will be entitled to the
Subordinated Class Pro Rata Share on each Distribution Date; provided, however,
that such amount to be distributed to the holders of Subordinated Certificates
shall be decreased to give effect to the preferential right of the holders of
Senior Certificates to receive Senior Class Shortfall Accruals as provided
herein.
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The foregoing is subject to the proviso that if a REMIC election has
been made with respect to a Trust Fund (or a segregated pool of assets therein),
the Subordinated Certificateholders of the related Series will be entitled to
the sum of (a) the Subordinated Class Pro Rata Share, (b) all amounts in the
Subordination Reserve Fund (net of any amount required to be maintained as
liquidity for Advances) and (c) such other amounts, if any, as may be specified
in the related Prospectus Supplement (including, if such Certificates are
Residual Certificates, any Gain From Acquired Property).
Shifting Interest Certificates
On each Distribution Date for a Series which is comprised of two
Classes of Standard Certificates which are Shifting Interest Certificates, the
holders of record on the Record Date of the Senior Certificates thereof will be
entitled to receive, to the extent of the Pool Distribution Amount with respect
to such Distribution Date and prior to any distribution being made on the
related Subordinated Certificates, an amount equal to the Senior Class
Distribution Amount. The Senior Class Distribution Amount will (except as
otherwise set forth in the applicable Prospectus Supplement) be calculated for
any Distribution Date as the lesser of (x) the Pool Distribution Amount for such
Distribution Date and (y) the sum of:
(i) one month's interest at the applicable Pass-Through Rate on such
Class's outstanding principal balance (less, if specified in the applicable
Prospectus Supplement, (a) the amount of such interest constituting
Deferred Interest, if any, not then payable on the Mortgage Loans or
Contracts and (b) the amount by which the Prepayment Interest Shortfall
with respect to the preceding month exceeds the aggregate Servicing Fees
relating to mortgagor or obligor payments or other recoveries distributed
on such Distribution Date, in each case allocated to such Class on the
basis set forth in the related Prospectus Supplement);
(ii) if distribution of the amount of interest calculated pursuant to
clause (i) above on prior Distribution Dates was not made in full on such
prior Distribution Dates, an amount equal to (a) the difference between (x)
the amount of interest which the holders of such Certificates would have
received on such prior Distribution Dates if there had been sufficient
funds available in the Certificate Account and (y) the amount of interest
actually distributed to such holders on such prior Distribution Dates,
together with interest on such difference (to the extent permitted by
applicable law) at the applicable Pass-Through Rate of such Class (the
"Unpaid Interest Shortfall") less (b) the aggregate amount distributed on
Distribution Dates subsequent to such prior Distribution Dates with respect
to the Unpaid Interest Shortfall;
(iii) such Class's percentage, calculated as provided in the related
Prospectus Supplement, of (a) all scheduled payments of principal due on
each outstanding Mortgage Loan or Contract that became due on the Due Date
occurring in the month in which such Distribution Date occurs, (b) all
partial principal prepayments received in the month preceding the month in
which such Distribution Date occurs and (c) except for Special Hazard
Mortgage Loans or Special Hazard Contracts covered by clause (iv) below,
the Scheduled Principal Balance of each Mortgage Loan or Contract which,
during the month preceding the 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;
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provided that, if such Distribution Date falls on or after the Cross-Over Date
(i.e., the date on which the amount of principal payments on the Mortgage Loans
or Contracts to which the holders of the related Subordinated Certificates are
entitled has been reduced to zero as a result of the allocation of losses to the
Subordinated Certificates), then the Senior Class Distribution Amount will
instead equal the lesser of (x) the Pool Distribution Amount and (y) the sum of
the items referred to above plus the amount by which such Senior Certificates'
outstanding principal balance as of such Distribution Date exceeds the Pool
Scheduled Principal Balance as of such Distribution Date. The "Scheduled
Principal Balance" of a Mortgage Loan or Contract for any Distribution Date is
the unpaid principal balance of such Mortgage Loan or Contract as specified in
the amortization schedule at the time relating thereto (before any adjustment to
such schedule by reason of bankruptcy, moratorium or similar waiver or grace
period) as of the first day of the month preceding the month in which such
Distribution Date occurs after giving effect to the payment of principal due on
such first day of the month, any partial prepayments applied on or prior to such
first day of the month, the addition to the principal of such Mortgage Loan or
Contract on or prior to such first day of the month of any Deferred Interest,
and irrespective of any delinquency in payment by the mortgagor or obligor. The
"Pool Scheduled Principal Balance" as of any Distribution Date is the aggregate
of the Scheduled Principal Balances of all Mortgage Loans or Contracts in a
Trust Fund for such Distribution Date.
If so provided in the applicable Prospectus Supplement, the Class of
Senior Certificates will also be entitled to receive its specified percentage,
referred to in clauses (y)(iii)(b) and (y)(iii)(c)(i) above, of all partial
principal prepayments and all principal prepayments in full on the Mortgage
Loans or Contracts in the related Trust Fund under the circumstances or for the
period of time specified therein, which will have the effect of accelerating the
amortization of the Class of Senior Certificates while increasing the respective
interest evidenced by the Class of Subordinated Certificates in the related
Trust Fund. Increasing the respective interest of the Subordinated Certificates
relative to that of the Senior Certificates is intended to preserve the
availability of the subordination provided by the Subordinated Certificates.
If the Special Hazard Termination Date would occur on any Distribution
Date under the circumstances referred to in "Credit Support -- Subordination,"
the Senior Class Distribution Amount for each Class and Subclass of Senior
Certificates of such Series calculated as set forth in the two preceding
paragraphs will be modified to the extent described in such section.
Amounts distributed to the Class of Senior Certificates on a
Distribution Date will be deemed to be applied first to the payment of current
interest, if any, due on such Certificates (i.e., the amount calculated pursuant
to clause (y)(i) of the third preceding paragraph), second to the payment of any
Unpaid Interest Shortfall (i.e., the amount calculated pursuant to clause
(y)(ii) of such paragraph) and third to the payment of principal, if any, due on
such Certificates (i.e., the aggregate of the amounts calculated pursuant to
clauses (y)(iii) and (y)(iv) of such paragraph).
As indicated above, in the event that the Pool Distribution Amount on
any Distribution Date is not sufficient to make the full distribution of current
interest to the holders of Senior Certificates entitled to payments 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
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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
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
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Certificateholders on the February 25 Distribution Date. In addition, the
amounts payable in respect of any form of credit enhancement will be
calculated in accordance with the related Pooling and Servicing Agreement.
(F) Unless otherwise so specified in the related Prospectus Supplement, the
Servicer or the Paying Agent, will make distributions to Certificateholders
on the 25th day of each month, or if such 25th day is not a business day,
on the next business day.
Distributions to Multi-Class Certificateholders
Valuation of Mortgage Loans and Contracts
If specified in the Prospectus Supplement relating to a Series of
Certificates having one or more Classes or Subclasses of Multi-Class
Certificates, for purposes of establishing the principal amount of Mortgage
Loans or Contracts that will be included in a Trust Fund for such Series, each
Mortgage Loan or Contract to be included in such Trust Fund will be assigned an
initial "Pool Value." Unless otherwise specified in the applicable Prospectus
Supplement, the Pool Value of each Mortgage Loan or Contract in the Trust Fund
for such Series will be the Stated Amount of Certificates of such Series which,
based upon certain assumptions and regardless of any prepayments on such
Mortgage Loans or Contracts, can be supported by the scheduled payments of
principal and interest on such Mortgage Loans or Contracts (net of the Fixed
Retained Yield on such Mortgage Loans or Contracts, if any, and the applicable
Servicing Fee), together with reinvestment earnings thereon, if any, at the
Assumed Reinvestment Rate for the period specified in the related Prospectus
Supplement and amounts available to be withdrawn (if applicable) from any
reserve fund for such Series, all as specified in the applicable Prospectus
Supplement. In calculating the Pool Value of a Mortgage Loan or Contract
included in the Trust Fund, future distributions on such Mortgage Loan or
Contract will be determined based on scheduled payments on such Mortgage Loan or
Contract. Any similar Mortgage Loans or Contracts may be aggregated into one or
more groups (each, a "Pool Value Group") each of which will be assigned an
aggregate Pool Value calculated as if all such Mortgage Loans or Contracts in
the Pool Value Group constituted a single loan having the highest interest rate
and the longest maturity of any such loan for such Pool Value Group. There are a
number of alternative means of determining the Pool Value of a Mortgage Loan,
Contract or Pool Value Group, including determinations based on the discounted
present value of the remaining scheduled payments of principal and interest
thereon and determinations based on the relationship between the Mortgage Rates
or Contract Rates borne thereby and the Interest Rates of the Multi-Class
Certificates of the related Series. The Prospectus Supplement for each Series
will describe the method or methods (and related assumptions) used to determine
the Pool Values of the Mortgage Loans or Contracts or the Pool Value Groups for
such Series.
The "Assumed Reinvestment Rate" for a Series of Multi-Class
Certificates will be the highest rate permitted by the nationally recognized
statistical rating agency or agencies rating such Series of Multi-Class
Certificates or a rate insured by means of a surety bond, guaranteed investment
contract or similar arrangement satisfactory to such rating agency or agencies.
If the Assumed Reinvestment Rate is so insured, the related Prospectus
Supplement will set forth the terms of such arrangement.
Distributions of Interest
The Trustee will make distributions of interest on each Class of the
Multi-Class Certificates from the date and at the rates per annum (calculated on
the Stated Amount or Notional Amount of such Class) specified in, or as
otherwise determined in the manner set forth in, the related Prospectus
Supplement (and unless otherwise specified in such Prospectus Supplement,
calculated on the basis of a 360-day year of twelve 30-day months) and in
accordance with the priorities set forth in the related Prospectus Supplement.
Interest on all Classes of Multi-Class Certificates of a Series, other than
Compound Interest Certificates, will be distributed on the Distribution Dates
for such Series specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, distributions of interest on
each Class of Compound Interest Certificates will be made on each Distribution
Date after the Stated Amount of all Multi-Class Certificates of such Series
having a Last Scheduled Distribution Date prior to the Last Scheduled
Distribution Date of such Class of Compound Interest Certificates has been
reduced to zero. Prior to that time, interest on such Class of Compound Interest
Certificates will be added
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to the Stated Amount thereof on each Distribution Date. Such Class of Compound
Interest Certificates will thereafter receive distributions of interest on the
Stated Amount thereof as so adjusted.
Distributions in Reduction of Stated Amount for a Series of Multi-Class
Certificates not including a Subordination Feature
The Stated Amount of a Multi-Class Certificate of a Series at any time
will represent the maximum specified dollar amount (excluding interest
distributions, but including, in the case of Compound Interest Certificates,
interest which has not been distributed and which has been added to the Stated
Amount thereof) to which the holder thereof is entitled from the cash flow on
the assets included in the Trust Fund for such Series and will decline to the
extent distributions in reduction of Stated Amount are received by such holder.
The initial Stated Amount of each Class of Multi-Class Certificates will be
specified in the applicable Prospectus Supplement. On each Distribution Date,
distributions in reduction of Stated Amount of the Classes of Multi-Class
Certificates will be made, to the extent funds are available, to the holders of
the Multi-Class Certificates of such Series then entitled to receive such
distributions, in the order and in the amounts specified in the related
Prospectus Supplement. Distributions in reduction of Stated Amount may be
allocated among Classes of Multi-Class Certificates in order to provide limited
protection to certain Classes against an increase in the weighted average life
of such Classes as a result of a slower than expected or scheduled rate of
principal prepayments on the Mortgage Loans ("extension protection"). In
addition, distributions in reduction of Stated Amount may be allocated among
Classes of Multi-Class Certificates in order to provide limited protection to
certain Classes against a reduction in the weighted average life of such Classes
as a result of a faster than expected or scheduled rate or principal prepayments
on the Mortgage Loans ("call protection"). By virtue of such allocations of
distributions in reduction of Stated Amount to provide extension protection and
call protection to some Classes, the weighted average lives of certain other
Classes may be more greatly affected by a faster or slower than expected or
scheduled rate of principal prepayments on the Mortgage Loans. See "Prepayment
and Yield Considerations -- Weighted Average Life of Certificates."
Distributions in reduction of Stated Amount with respect to any Class or
Subclass of Multi-Class Certificates will be made on a pro rata or random lot or
such other basis as is specified in the applicable Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Certificates, the aggregate amount that will be distributed in
reduction of Stated Amount to holders of Multi-Class Certificates of a Series
then entitled thereto on any Distribution Date for such Series will equal, to
the extent funds are available, the sum of (i) the Multi-Class Certificate
Distribution Amount (as defined herein) and (ii) if and to the extent specified
in the related Prospectus Supplement, the applicable percentage of the Spread
specified in such Prospectus Supplement.
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
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Series since the prior Distribution Date (or since the Closing Date, in the case
of the first Distribution Date) and required to be deposited in the Certificate
Account for such Series, over (b) the sum of (i) all required to be deposited on
the Multi-Class Certificates of such Series on such Distribution Date, (ii) the
Multi-Class Certificate Distribution Amount for such Distribution Date, (iii) if
applicable, any Special Distributions (as described below) in reduction of the
Stated Amount of the Multi-Class Certificates of such Series made since the
preceding Distribution Date (or since the Closing Date in the case of the first
Distribution Date), including any accrued interest distributed with such Special
Distributions, (iv) all administrative and other expenses relating to the Trust
Fund payable during the Due Period preceding such Distribution Date, other than
such expenses which are payable by the Servicer, if any, and (v) any amount
required to be deposited into any reserve fund. Reinvestment income on any
reserve fund will not be included in Spread except to the extent that
reinvestment income is taken into account in calculating the initial amount
required to be deposited in such reserve fund, if any.
Subordination
The Prospectus Supplement relating to a Series which includes one or
more Classes or Subclasses of Multi-Class Certificates may specify that the
rights of one or more of such Classes or Subclasses (or the related Residual
Certificates of such Series) will be Senior to, or subordinated to, the rights
of one or more other Classes of Certificates of such Series.
If a Series which includes one or more Classes or Subclasses of
Multi-Class Certificates includes a subordination feature, on each Distribution
Date, distributions of interest, if any, will be made in accordance with the
preferential priorities specified in the related Prospectus Supplement and from
the date and at the Interest Rates specified therein or as otherwise specified
therein and distributions in reduction of Stated Amount, if any, will be made to
the holders of the Multi-Class Certificates in the amount and in the manner
specified in and in accordance with the preferential distribution provisions
described in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement the Subordinated Amount will be reduced as the pool
experiences losses, as well as through seasoning and prepayment of the Mortgage
Loans or Contracts included in the Trust Fund.
Special Distributions
To the extent specified in the Prospectus Supplement relating to a
Series which includes Multi-Class Certificates which have less frequent than
monthly Distribution Dates, any such Class or Subclass having Stated Amounts may
receive special distributions in reduction of Stated Amount, together with
accrued interest on the amount of such reduction ("Special Distributions") in
any month, other than a month in which a Distribution Date occurs, if, as a
result of principal prepayments on the Mortgage Loans or Contracts, the Trustee
determines, 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
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the extent of any delays in receipt of any payments, insurance proceeds or
liquidation proceeds with respect to the Mortgage Loans or Contracts included in
any Trust Fund, the last Distribution Date for any such Class may occur later
than its Last Scheduled Distribution Date. The rate of payments on the Mortgage
Loans or Contracts in the Trust Fund for any Series of Certificates will depend
upon their particular characteristics, as well as on the prevailing level of
Interest Rates from time to time and other economic factors, and no assurance
can be given as to the actual prepayment experience of the Mortgage Loans or
Contracts. See "Prepayment and Yield Considerations."
CREDIT SUPPORT
Subordination
Certificates other than Shifting Interest Certificates
If so specified in the Prospectus Supplement relating to a Series of
Certificates as to which the related Trust Fund consists of Mortgage Loans or
Contracts, other than a Series of Shifting Interest Certificates, the rights of
the holders of a Class of Subordinated Certificates to receive distributions
will be subordinated to the rights of the holders of a Class of Senior
Certificates, to the extent of the Subordinated Amount specified in such
Prospectus Supplement. The Subordinated Amount will be reduced by an amount
equal to Aggregate Losses and will be further reduced in accordance with a
schedule described in the applicable Prospectus Supplement. Aggregate Losses as
defined in the applicable Pooling and Servicing Agreement for any given period
will equal the aggregate amount of delinquencies, losses and other deficiencies
in the amounts due to the Senior Certificateholders paid or borne by the
Subordinated Certificateholders (but excluding any payments of Senior Class
Shortfall Accruals or interest thereon) ("Payment Deficiencies") during such
period, whether such aggregate amount results by way of withdrawals from the
Subordination Reserve Fund (including, prior to the time that the Subordinated
Amount is reduced to zero, any such withdrawal of amounts attributable to the
Initial Deposit, if any), reductions in amounts that would otherwise have been
distributable to the Subordinated Certificateholders on any Distribution Date,
or otherwise; less the aggregate amount of previous Payment Deficiencies
recovered by the related Trust Fund during such period in respect of the
Mortgage Loans or Contracts giving rise to such Previous Payment Deficiencies,
including, without limitation, such recoveries resulting from the receipt of
delinquent principal or interest payments, Liquidation Proceeds and insurance
proceeds (net, in each case, of any applicable Fixed Retained Yield and any
unpaid Servicing Fee to which the Servicer is entitled, foreclosure costs and
other servicing costs, expenses and advances relating to such Mortgage Loans or
Contracts).
The protection afforded to the Senior Certificateholders by the
subordination feature described above will be effected both by the preferential
right, to the extent specified in the applicable Prospectus Supplement, of such
Senior Certificateholders to receive current distributions on the related
Mortgage Loans or Contracts that, but for such subordination, would otherwise
have been distributable to the Subordinated Certificateholders from the related
Trust Fund (to the extent of the Subordinated Amount for such Series) and
(unless otherwise specified in the applicable Prospectus Supplement) by the
establishment and maintenance of a Subordination Reserve Fund for such Series.
Unless otherwise specified in the applicable Prospectus Supplement, the
Subordination Reserve Fund will not be a part of the Trust Fund. The
Subordination Reserve Fund may be funded initially with an initial deposit by
the Depositor (the "Initial Deposit") in an amount set forth in the applicable
Prospectus Supplement. Following the initial issuance of the Certificates of a
Series and until the balance of the Subordination Reserve Fund (without taking
into account the amount of any Initial Deposit) first equals or exceeds the
Specified Subordination Reserve Fund Balance set forth in the applicable
Prospectus Supplement, the Servicer will withhold all amounts that would
otherwise have been distributable to the Subordinated 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
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and will deposit in the Subordination Reserve Fund such portion of the principal
payments on the Mortgage Loans or Contracts otherwise distributable to the
Subordinated Certificateholders as may be necessary to maintain the
Subordination Reserve Fund (without taking into account the amount of any
Initial Deposit) at the Specified Subordination Reserve Fund Balance. The
Prospectus Supplement for each Series will set forth the amount of the Specified
Subordination Reserve Fund Balance applicable from time to time and the extent,
if any, to which the Specified Subordination Reserve Fund Balance may be
reduced. Unless otherwise specified in the applicable Prospectus Supplement, the
Specified Subordination Reserve Fund Balance for a Series will not be required
to exceed the Subordinated Amount.
If on any Distribution Date while the Subordinated Amount exceeds zero,
there is a Senior Class Shortfall, the Senior Class Certificateholders will be
entitled to receive from current payments on the Mortgage Loans or Contracts
that would otherwise have been distributable to Subordinated Certificateholders
the amount of such Senior Class Shortfall. If such current payments are
insufficient, an amount equal to the lesser of: (i) the entire amount on deposit
in the Subordination Reserve Fund available for such purpose; or (ii) the amount
necessary to cover the Senior Class Shortfall will be withdrawn from the
Subordination Reserve Fund. Amounts representing investment earnings on amounts
held in the Subordination Reserve Fund will not be available to make payments to
the Senior Certificateholders. If current payments on the Mortgage Loans or
Contracts and amounts available in the Subordination Reserve Fund are
insufficient to pay the entire Senior Class Shortfall, then amounts held in the
Certificate Account for future distributions will be distributed as necessary to
the Senior Certificateholders.
In the event the Subordination Reserve Fund is depleted before the
Subordinated Amount is reduced to zero, the Senior Certificateholders will
continue to have a preferential right, to the extent specified in the applicable
Prospectus Supplement, to receive current distributions of amounts that would
otherwise have been distributable to the Subordinated Certificateholders to the
extent of the then Subordinated Amount.
After the Subordinated Amount is reduced to zero, the Senior
Certificateholders of a Series will, unless otherwise specified in the
applicable Prospectus Supplement, nonetheless have a preferential right to
receive payment of Senior Class Shortfall Accruals and interest which has
accrued thereon from amounts that would otherwise have been distributable to the
Subordinated Certificateholders. The Senior Certificateholders will otherwise
bear their proportionate share of any losses realized on the Trust Fund in
excess of the Subordinated Amount.
Unless otherwise specified in the related Prospectus Supplement,
amounts held from time to time in the Subordination Reserve Fund for a Series
will be held for the benefit of the Senior Certificateholders and Subordinated
Certificateholders of such Series until withdrawn from the Subordination Reserve
Fund as described below; provided, however, that the portion of the Initial
Deposit, if any, which has not been recovered by the Servicer and any
undistributed investment earnings attributable thereto will continue to be the
property of the Servicer and will ultimately be recoverable by the Servicer.
Amounts withdrawn from the Subordination Reserve Fund for a Series and
deposited in the Certificate Account for such Series will be charged first
against amounts in the Subordination Reserve Fund other than the Initial
Deposit, if any, for such Series, and thereafter against such Initial Deposit.
If so specified in the related Prospectus Supplement, if the
Subordinated Amount for a Series is reduced to zero and funds remain in the
Subordination Reserve Fund, an amount (the "Advance Reserve") equal to the
lesser of (i) the amount of the Initial Deposit and (ii) such funds remaining in
the Subordination Reserve Fund at the time the Subordinated Amount is reduced to
zero, will remain in the Subordination Reserve Fund and be available in certain
circumstances for withdrawal to make Advances.
Any amounts in the Subordination Reserve Fund for a Series on a
Distribution Date in excess of the Specified Subordination Reserve Fund Balance
on such date prior to the time the Subordinated Amount for such Series is
reduced to zero, and any amounts remaining in the Subordination Reserve Fund for
such Series upon termination of the trust created by the applicable Pooling and
Servicing Agreement, will be paid, unless otherwise specified in the applicable
Prospectus Supplement, to the Subordinated Certificateholders of such Series in
accordance with their pro rata ownership thereof, or, in the case of a Series
with respect to which an election has been made to treat the Trust Fund as a
REMIC, first to the Residual Certificateholders (to the extent of any portion
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of the Initial Deposit, if any, and undistributed reinvestment earnings
attributable thereto), and second to the Subordinated Certificateholders of such
Series, in each case in accordance with their pro rata ownership thereof.
Amounts permitted to be distributed from the Subordination Reserve Fund for a
Series will no longer be subject to any claims or rights of the Senior
Certificateholders of such Series.
Funds in the Subordination Reserve Fund for a Series will be invested
as provided in the applicable Pooling and Servicing Agreement in certain types
of eligible investments ("Eligible Investments"). If an election has been made
to treat the Trust Fund (or one or more pools of segregated assets therein) as a
REMIC, no more than 30% of the income or gain of the Subordination Reserve Fund
in any taxable year may be derived from the sale or other disposition of
investments held for less than three months in the Subordination Reserve Fund.
The earnings on such investments will be withdrawn and paid to the Subordinated
Certificateholders of such Series or to the holders of the Residual
Certificates, in the event that an election has been made to treat the Trust
Fund (or a pool of segregated assets therein) with respect to such Series as a
REMIC, in accordance with their respective interests. Investment income earned
on amounts held in the Subordination Reserve Fund will not be available for
distribution to the Senior Certificateholders or otherwise subject to any claims
or rights of the Senior Certificateholders.
Eligible Investments for monies deposited in the Subordination Reserve
Fund will be specified in the applicable Pooling and Servicing Agreement and,
unless otherwise provided in the applicable Prospectus Supplement, will mature
no later than the next Distribution Date.
Holders of Subordinated Certificates of a Series will not be required
to refund any amounts which have been properly distributed to them, regardless
of whether there are sufficient funds to distribute to Senior Certificateholders
the amounts to which they are entitled.
If specified in the related Prospectus Supplement, the Subordination
Reserve Fund may be funded in any other manner acceptable to each Rating Agency
and consistent with an election, if any, to treat the Trust Fund (or one or more
pools of segregated assets therein) for such Series as a REMIC, as will be more
fully described in such Prospectus Supplement.
Shifting Interest Certificates
If specified in the applicable Prospectus Supplement, the rights of the
holders of the Subordinated Certificates of a Series of Shifting Interest
Certificates to receive distributions with respect to the Mortgage Loans or
Contracts in the related Trust Fund will be subordinated to such rights of the
holders of the Senior Certificates of such Series to the extent described below,
except as otherwise set forth in such Prospectus Supplement. This subordination
is intended to enhance the likelihood of regular receipt by holders of Senior
Certificates of the full amount of scheduled monthly payments of principal and
interest due them and to provide limited protection to the holders of the Senior
Certificates against losses due to mortgagor or obligor defaults.
The protection afforded to the holders of Senior Certificates of such a
Series by the subordination feature described above will be effected by the
preferential right of such holders to receive, prior to any distribution being
made in respect of the related Subordinated Certificates, current distributions
on the related Mortgage Loans or Contracts of principal and interest due them on
each Distribution Date out of the funds available for distribution on such date
in the related Certificate Account and, to the extent 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
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described below applicable to Liquidated Mortgage Loans that are Special Hazard
Mortgage Loans or Liquidated Contracts that are Special Hazard Contracts), their
respective shares of the Scheduled Principal Balance of each such Liquidated
Mortgage Loan or Liquidated Contract, together with interest accrued at the
Pass-Through Rate for such Class, irrespective of whether Net Liquidation
Proceeds and Net Insurance Proceeds realized thereon are sufficient to cover
such amount. For a description of the full Senior Class Distribution Amount
payable to holders of Senior Certificates of each Series, see "Description of
the Certificates -- Distributions to Standard Certificateholders -- Shifting
Interest Certificates."
On each Distribution Date occurring on or after the Cross-Over Date,
holders of Senior Certificates of each Class entitled to a percentage of
principal payments will generally receive, as part of their respective Senior
Class Distribution Amounts, only their respective shares of the Net Liquidation
Proceeds and Net Insurance Proceeds actually realized in respect of the
applicable Liquidated Mortgage Loans or Liquidated Contracts after reimbursement
to the Servicer of any previously reimbursed Advances made in respect of such
Liquidated Mortgage Loans or Liquidated Contracts. See "Description of the
Certificates -- Distributions to Standard Certificateholders -- Shifting
Interest Certificates."
In the event that a Mortgage Loan becomes a Liquidated Mortgage Loan or
a Contract becomes a Liquidated Contract as a result of a hazard not insured
against under a Standard Hazard Insurance Policy (a "Special Hazard Mortgage
Loan" or "Special Hazard Contract"), the holders of Senior Certificates of each
Class entitled to a percentage of principal payments on the related Mortgage
Loans or Contracts will be entitled to receive in respect of each Mortgage Loan
or Contract which became a Special Hazard Mortgage Loan or Special Hazard
Contract in the preceding month, as part of their respective Senior Class
Distribution Amounts payable on each Distribution Date prior to the Special
Hazard Termination Date, their respective shares of the Scheduled Principal
Balance of such Mortgage Loan or Contract, together with interest accrued at the
applicable Pass-Through Rate, rather than their respective shares of Net
Liquidation Proceeds and Net Insurance Proceeds actually realized. The Special
Hazard Termination Date for a Series of Certificates will be the earlier to
occur of (i) the date on which cumulative net losses in respect of Special
Hazard Mortgage Loans or Special Hazard Contracts exceed the Special Hazard Loss
Amount specified in the applicable Prospectus Supplement or (ii) the Cross-Over
Date. Since the amount of the Special Hazard Loss Amount for a Series of
Certificates is expected to be significantly less than the amount of principal
payments on the Mortgage Loans or Contracts to which the holders of the
Subordinated Certificates of such Series are initially entitled (such amount
being subject to reduction, as described above, as a result of allocation of
losses on other Liquidated Mortgage Loans or Liquidated Contracts as well as
Special Hazard Mortgage Loans or Special Hazard Contracts), the holders of
Subordinated Certificates of such Series will bear the risk of losses in the
case of Special Hazard Mortgage Loans or Special Hazard Contracts to a lesser
extent than they will bear losses on other Liquidated Mortgage Loans or
Liquidated Contracts. Once the Special Hazard Termination Date has occurred,
holders of Senior Certificates of each Class entitled to payments of principal
will be entitled to receive, as part of their respective Senior Class
Distribution Amounts, only their respective shares of Net Liquidation Proceeds
and Net Insurance Proceeds realized on Special Hazard Mortgage Loans or Special
Hazard Contracts (less the total amount of delinquent installments in respect of
each Special Hazard Mortgage Loan or Special Hazard Contract that were
previously the subject of distributions to the holders of the Senior
Certificates and less the portion of such Net Liquidation Proceeds and Net
Insurance Proceeds allocable to interest). The outstanding principal balance or
notional amount of each such Class will, however, be reduced by such Class's
specified percentage of the Scheduled Principal Balance of each such Special
Hazard Mortgage Loan or Special Hazard Contract. See "Description of the
Certificates -- Distributions to Standard Certificateholders -- Shifting
Interest Certificates."
If the cumulative net losses on all Mortgage Loans or Contracts in a
Trust Fund that have become Special Hazard Mortgage Loans or Special Hazard
Contracts in the months prior to the month in which a Distribution Date occurs
would exceed the Special Hazard Loss Amount for a Series of Certificates, that
portion of the Senior Class Distribution Amount as of such Distribution Date for
each Class of Senior Certificates of such Series entitled to a percentage of
principal payments on the Mortgage Loans or Contracts in the related Trust Fund
attributable to Mortgage Loans or Contracts which became Special Hazard Mortgage
Loans or Special Hazard Contracts in the month preceding the month of such
Distribution Date will be calculated not on the basis of the Scheduled Principal
Balances of such Special Hazard Mortgage Loans or Special Hazard Contracts but
rather will be computed as an amount equal to the lesser of (a) such Class's
percentage, calculated as provided in the related Prospectus Supplement, of the
Scheduled Principal Balance of such Special Hazard Mortgage Loans or Special
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Hazard Contracts and (b) the sum of (i) the excess of the Special Hazard Loss
Amount over the cumulative net losses on all Mortgage Loans or Contracts that
became Special Hazard Mortgage Loans or Special Hazard Contracts in months prior
to the month of such Distribution Date and (ii) the excess of (a) the product of
the percentage of principal payments to which such Class is entitled multiplied
by the aggregate Net Liquidation Proceeds and Net Insurance Proceeds (net of the
portion of each thereof allocable to interest) of the Mortgage Loans or
Contracts which became Special Hazard Mortgage Loans or Special Hazard Contracts
in the month preceding the month of such Distribution Date over (b) the total
amount of delinquent installments in respect of such Special Hazard Mortgage
Loans or Special Hazard Contracts that were previously the subject of
distributions to such Class paid out of amounts otherwise distributable to the
holders of the related Subordinated Certificates.
Although the subordination feature described above is intended to
enhance the likelihood of timely payment of principal and interest to the
holders of Senior Certificates, shortfalls could result in certain
circumstances. For example, a shortfall in the payment of principal otherwise
due the holders of Senior Certificates could occur if losses realized on the
Mortgage Loans or Contracts in a Trust Fund were exceptionally high and were
concentrated in a particular month. See "Description of the Certificates --
Distributions to Standard Certificateholders -- Shifting Interest Certificates"
for a description of the consequences of any shortfall of principal or interest.
The holders of Subordinated Certificates will not be required to refund
any amounts previously properly distributed to them, regardless of whether there
are sufficient funds on a subsequent Distribution Date to make a full
distribution to holders of each Class of Senior Certificates of the same Series.
Other Credit Enhancement
In addition to subordination as discussed above, credit enhancement may
be provided with respect to any Series of Certificates in any other manner which
may be described in the applicable Prospectus Supplement, including, but not
limited to, credit enhancement through an alterative form of subordination
and/or one or more of the methods described below.
Limited Guarantee
If so specified in the Prospectus Supplement with respect to a Series
of Certificates, credit enhancement may be provided in the form of a limited
guarantee issued by a guarantor named therein.
Letter of Credit
Alternative credit support with respect to a Series of Certificates may
be provided by the issuance of a letter of credit by the bank or financial
institution specified in the applicable Prospectus Supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of credit
issued with respect to a Series of Certificates will be set forth in the
Prospectus Supplement relating to such Series.
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
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of hazard insurance policy for the respective states in which the Mortgaged
Properties or Manufactured Homes are located. The amount and terms of any such
coverage will be set forth in the Prospectus Supplement.
Surety Bonds
If so specified in the Prospectus Supplement relating to a Series of
Certificates, credit support with respect to one or more Classes of Certificates
of a Series may be provided by the issuance of a surety bond issued by a
financial guarantee insurance company specified in the applicable Prospectus
Supplement. The coverage, amount and frequency of any reduction in coverage
provided by a surety bond will be set forth in the Prospectus Supplement
relating to such Series.
Fraud Coverage
If so specified in the applicable Prospectus Supplement, losses
resulting fraud, dishonesty or misrepresentation in connection with the
origination or sale of the Mortgage Loans or Contracts may be covered to a
limited extent by representations and warranties to the effect that no such
fraud, dishonesty or misrepresentation had occurred, by a reserve fund, letter
of credit, or other method. The amount and terms of any such coverage will be
set forth in the Prospectus Supplement.
Mortgagor Bankruptcy Bond
If so specified in the applicable Prospectus Supplement, losses
resulting from a bankruptcy proceeding relating to a mortgagor or obligor
affecting the Mortgage Loans or Contracts in a Trust Fund with respect to a
Series of Certificates will be covered under a mortgagor bankruptcy bond (or any
other instrument that will not result in a downgrading of the rating of the
Certificates of a Series by the Rating Agency that rated such Series). Any
mortgagor bankruptcy bond or such other instrument will provide for coverage in
an amount meeting the criteria of the Rating Agency rating the Certificates of
the related Series, which amount will be set forth in the related Prospectus
Supplement. The amount and terms of any such coverage will be set forth in the
Prospectus Supplement.
Other Insurance, Guarantees and Similar Instruments or Agreements
If specified in the related Prospectus Supplement, a Trust Fund may
include in lieu of some or all of the foregoing or in addition thereto third
party guarantees, and other arrangements for maintaining timely payments or
providing additional protection against losses on the assets included in such
Trust Fund, paying administrative expenses, or accomplishing such other purpose
as may be described in the Prospectus Supplement. The Trust Fund may include a
guaranteed investment contract or reinvestment agreement pursuant to which funds
held in one or more accounts will be invested at a specified rate. If 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
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Supplement, each monthly interest payment on a Mortgage Loan or Contract will
generally be calculated as the product of one-twelfth of the applicable Mortgage
Rate or Contract Rate at the time of such calculation and the then unpaid
principal balance on such Mortgage Loan or Contract. The Net Mortgage Rate or
Net Contract Rate with respect to each Mortgage Loan or Contract will be
similarly calculated on a loan-by-loan basis, by subtracting from the applicable
Mortgage Rate or Contract Rate, the Fixed Retained Yield, if any, payable to the
Depositor or other person or entity specified in the Prospectus Supplement and
any Servicing Fee applicable to each Mortgage Loan or Contract. If the Trust
Fund includes adjustable-rate Mortgage Loans or Contracts or includes Mortgage
Loans or Contracts with different Net Mortgage Rates or Net Contract Rates, the
weighted average Net Mortgage Rate or Net Contract Rate may vary from time to
time as set forth below. See "The Trust Funds." The Prospectus Supplement for a
Series will also specify the initial Pass-Through Rate or Interest Rate for each
Class of Certificates of such Series having a Pass-Through Rate or Interest Rate
and will specify whether each such Pass-Through Rate or Interest Rate is fixed
or is variable.
The Net Mortgage Rate or Net Contract Rate for any adjustable rate
Mortgage Loan or Contract will change with any changes in the index specified in
the related Prospectus Supplement on which such Mortgage Rate or Contract Rate
adjustments are based, subject to any applicable periodic or aggregate caps or
floors on the related Mortgage Rate or Contract Rate or other limitations
described in the related Prospectus Supplement. The weighted average Net
Mortgage Rate or Net Contract Rate with respect to any Series may vary due to
changes in the Net Mortgage Rates or Net Contract Rates of adjustable rate
Mortgage Loans or Contracts, to the timing of the Mortgage Rate or Contract Rate
readjustments of such Mortgage Loans or Contracts and to different rates of
payment of principal of fixed or adjustable rate Mortgage Loans or Contracts
bearing different Mortgage Rates or Contract Rates.
If the Trust Fund for a Series includes adjustable rate Mortgage Loans
or Contracts, any limitations on the periodic changes in a mortgagor's or
obligor's monthly payment, any limitations on the adjustments to the Net
Mortgage Rates or Mortgage Rates or to the Net Contract Rates or Contract Rates,
any provision that could result in Deferred Interest and the effects, if any,
thereof on the yield on Certificates of the related Series will be discussed in
the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, no
distribution of principal and only a partial distribution of interest will be
made to Certificateholders with respect to a negatively amortizing Mortgage Loan
or Contract. Distribution of the portion of scheduled interest at the applicable
Net Mortgage Rate or Net Contract Rate representing Deferred Interest with
respect to such Mortgage Loan or Contract will be passed through to the
Certificateholders on the Distribution Date following the Due Date on which it
is received. Such Deferred Interest will bear interest at the Net Mortgage Rate
or Net Contract Rate for such Mortgage Loan or Contract. For federal income tax
purposes, Deferred Interest may constitute interest income to the Trust Fund and
to Certificateholders at the time that it accrues, rather than at the time that
it is paid. See "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for Certificates as to Which No REMIC Election Is Made -- Deferred
Interest," "-- Federal Income Tax Consequences for REMIC Certificates --
Taxation of Regular Certificates -- Deferred Interest" and "-- Taxation of
Residual Certificates -- Deferred Interest."
Scheduled Delays in Distributions
At the date of initial issuance of the Certificates of each Series
offered hereby, the initial purchasers of a Class of Certificates (other than
certain Classes of Residual Certificates) will be required to pay accrued
interest at the applicable Pass-Through Rate or Interest Rate for such Class
from the Cut-Off Date for such Series to, but not including the date of
issuance. With respect to Standard Certificates, the effective yield to
Certificateholders will be below the yield otherwise produced by the applicable
Pass-Through Rate because while interest will accrue at such Pass-Through Rate
from the first day of each month through the last day of such month (unless
otherwise specified in the related Prospectus Supplement), principal and
interest distributions with respect to such month will not be made until the
25th day (or if such 25th day is not a business day, the business day
immediately following such 25th day) of the month following the month of accrual
(or until such other Distribution Date specified in the applicable Prospectus
Supplement). If so specified in the related Prospectus Supplement, a Class of
Multi-Class Certificates may be entitled to distributions on each Distribution
Date of interest accrued during a period (an "Interest Accrual Period" specified
in such Prospectus Supplement ending on such Distribution Date or ending on a
date preceding such Distribution Date. In the latter case the effective yield to
such Certificateholders
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will be below the yield otherwise produced by the applicable initial public
offering prices and Interest Rates because (i) on the first Distribution Date
the time period upon which the interest payable is calculated will be less than
the time elapsed since the commencement of accrual of interest, (ii) the
interest that accrues during the Interest Accrual Period will not be paid until
a date following such Interest Accrual Period specified in the related
Prospectus Supplement, and (iii) during each Interest Accrual Period following
the first Interest Accrual Period, in the case of a Class of Multi-Class
Certificates currently receiving distributions in reduction of Stated Amount,
interest is based upon a Stated Amount which is less than the Stated Amount of
such Certificates actually outstanding, since the distribution in reduction of
Stated Amount made on the following Distribution Date is deemed to have been
made, for interest accrual purposes only, at the end of the preceding Interest
Accrual Period. The Prospectus Supplement for each Series of Certificates will
set forth the nature of any scheduled delays in distribution and the impact on
the yield of such Certificates.
Interest Shortfalls Due to Principal Prepayments
When a Mortgage Loan or Contract is prepaid in full, the mortgagor or
obligor pays interest on the amount prepaid only to the date of prepayment and
not thereafter. Similarly, Liquidation Proceeds and Insurance Proceeds are also
likely to include interest only to the time of payment. When a Mortgage Loan or
Contract is prepaid in part, and such prepayment is applied as of a date other
than the Due Date occurring in the month of receipt or the Due Date occurring in
the month following the month of receipt, the mortgagor or obligor pays interest
on the amount prepaid only to the date of prepayment and not thereafter. The
effect of the foregoing is to reduce the aggregate amount of interest which
would otherwise be passed through to Certificateholders if such Mortgage Loan or
Contract were outstanding, or if such partial prepayment were applied, on the
succeeding Due Date. To mitigate this reduction in yield, the Pooling and
Servicing Agreement relating to a Series will provide, unless otherwise
specified in the applicable Prospectus Supplement, that with respect to any
principal prepayment or liquidation of any Mortgage Loan or Contract underlying
the Certificates of such Series, the Servicer will pay into the Certificate
Account for such Series to the extent funds are available for such purpose from
the related aggregate Servicing Fees (or portion thereof as specified in the
related Prospectus Supplement) which the Servicer is entitled to receive
relating to mortgagor or obligor payments or other recoveries distributed on the
related Distribution Date, such amount, if any, as may be necessary to assure
that the amount paid into the Certificate Account with respect to such Mortgage
Loan or Contract includes an amount equal to interest at the Net Mortgage Rate
or Net Contract Rate for such Mortgage Loan or Contract for the period from the
date of such prepayment or liquidation to but not including the next Due Date.
See "Servicing of the Mortgage Loans and Contracts -Adjustment to Servicing
Compensation in Connection with Prepaid and Liquidated Mortgage Loans and
Contracts."
Weighted Average Life of Certificates
Weighted average life of a Certificate refers to the average amount of
time that will elapse from the date of issuance of the Certificate until each
dollar in reduction of the principal amount or Stated Amount of such Certificate
is distributed to the investor. The weighted average life and the yield to
maturity of any Class of the Certificates of a Series will be influenced by,
among other things, the rate at which principal on the Mortgage Loans or
Contracts included in the Mortgage Pool or Contract Pool for such Certificate is
paid, which is determined by scheduled amortization and prepayments (for this
purpose, the term "prepayments" includes prepayments and liquidations due to
default, casualty, condemnation and the like).
The Mortgage Loans or Contracts may be prepaid in full or in part at
any time. Unless otherwise specified in the applicable Prospectus Supplement or
as described in the following paragraph, no Mortgage Loan or Contract will
provide for a prepayment penalty and all fixed rate Mortgage Loans or Contracts
will contain due-on-sale clauses permitting the holder to accelerate the
maturity of the Mortgage Loan or Contract upon conveyance of the Mortgaged
Property or Manufactured Home.
Some of the Mortgage Loans may call for Balloon Payments. Balloon
Payments involve a greater degree of risk than fully amortizing loans because
the ability of the borrower to make a Balloon Payment typically will depend upon
its ability either to refinance the loan or to sell the related Mortgaged
Property. The ability of a borrower to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage rates
at the time of the attempted sale or refinancing, the borrower's equity in the
related Mortgaged Property, the financial condition of the borrower and
operating history of the related Mortgaged
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Property, tax laws, prevailing economic conditions and the availability of
credit for commercial real estate projects generally.
Some of the Mortgage Loans included in the Trust Fund may, in the event
one or more are required to be repurchased or otherwise removed from the Trust
Fund, require the payment of a release premium.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The Prospectus Supplement for each Series which
includes more than one Class or Subclass of Multi-Class Certificates will
describe one or more such prepayment standards or models and will contain tables
setting forth the weighted average life of each such Class or Subclass and the
percentage of the original aggregate Stated Amount of each such Class or
Subclass that would be outstanding on specified Distribution Dates for such
Series based on the assumptions stated in such Prospectus Supplement, including
assumptions that prepayments on the Mortgage Loans or Contracts are made at
rates corresponding to various percentages of the prepayment standard or model
specified in the related Prospectus Supplement.
There is, however, no assurance that prepayment of the Mortgage Loans
or Contracts underlying a Series of Certificates will conform to any level of
the prepayment standard or model specified in the related Prospectus Supplement.
A number of economic, geographic, social and other factors may affect prepayment
experience. These factors may include homeowner mobility, economic conditions,
changes in mortgagor's or obligor's housing needs, job transfers, unemployment,
mortgagor's or obligor's net equity in the properties securing the mortgages or
contracts, servicing decisions, enforceability of due-on-sale clauses , market
interest rates, the magnitude of related taxes, and the availability of funds
for refinancing. In general, however, if prevailing interest rates fall
significantly below the Mortgage Rates or Contract Rates on the Mortgage Loans
or Contracts underlying a Series of Certificates, the prepayment rates of such
Mortgage Loans or Contracts are likely to be higher than if prevailing rates
remain at or above the rates borne by such Mortgage Loans or Contracts. It
should be noted that Certificates of a Series may evidence an interest in a
Trust Fund with different Mortgage Rates or Contract Rates. Accordingly, the
prepayment experience of such Certificates will to some extent be a function of
the mix of Mortgage Rates or Contract Rates of the Mortgage Loans or Contracts.
In addition, the terms of the Pooling and Servicing Agreement will require the
Servicer to enforce any due-on-sale clause to the extent specified therein. See
"Servicing of the Mortgage Loans and Contracts -- Enforcement of Due-on-Sale
Clauses; Realization Upon Defaulted Mortgage Loans and Contracts" and "Certain
Legal Aspects of the Mortgage Loans and Contracts -- Due-On-Sale Clauses" for a
description of certain provisions of each Pooling and Servicing Agreement and
certain legal developments that may affect the prepayment experience on the
Mortgage Loans or Contracts.
A lower rate of principal prepayments than anticipated would negatively
affect the total return to investors in any Certificates of a Series that are
offered at a discount to their principal amount or, if applicable, their parity
price, and a higher rate of principal prepayments than anticipated would
negatively affect the total return to investors in the Certificates of a Series
that are offered at a premium to their principal amount or, if applicable, their
parity price. Parity price is the price at which a Certificate will yield its
coupon, after giving effect to any payment delay. In addition, the yield to
investors in a Class of Certificates which bears interest at a variable Interest
Rate or at a variable Pass-Through Rate, will also be affected by changes in the
index on which any such variable Interest Rate, or variable Pass-Through Rate is
based. Changes in the index may not correlate with changes in prevailing
mortgage interest rates or financing rates for manufactured housing, and the
effect, if any, thereof on the yield of the Certificates will be discussed in
the related Prospectus Supplement. The yield on certain types of Certificates
may be particularly sensitive to prepayment rates, and further information with
respect to yield on such Certificates will be included in the applicable
Prospectus Supplement.
At the request of the mortgagor or obligor, the Servicer may refinance
the Mortgage Loans or Contracts in any Trust Fund by accepting prepayments
thereon and making new loans secured by a Mortgage on the same property or a
security interest in the same Manufactured Home. Upon such refinancing, the new
loans will not be included in the Trust Fund. A mortgagor or obligor may be
legally entitled to require the Servicer to allow such a refinancing. Any such
refinancing will have the same effect as a prepayment in full of the related
Mortgage Loan or Contract.
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
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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 One New York Plaza, 15th Floor, New
York, New York 10292. Its telephone number is (212) 778-1000.
As described herein under "The Trust Funds -- Assignment of the
Mortgage Loans and Contracts" and "-- Representations and Warranties", the only
obligations, if any, of the Depositor with respect to a Series of Certificates
may be pursuant to certain limited representations and warranties and limited
undertakings to repurchase or substitute Mortgage Loans or Contracts under
certain circumstances. Unless otherwise specified in the applicable Prospectus
Supplement, the Depositor will have no servicing obligations or responsibilities
with respect to any Mortgage Pool, Contract Pool or Trust Fund. The Depositor
does not have, nor is it expected in the future to have, any significant assets.
As specified in the related Prospectus Supplement the Servicer with
respect to any Series of Certificates relating to Mortgage Loans or Contracts
may be an affiliate of the Depositor. As described under "The Trust Funds," the
Depositor anticipates that it may acquire Mortgage Loans and Contracts through
or from an affiliate.
Neither the Depositor nor Prudential Securities Group Inc. nor any of
its affiliates, including The Prudential Insurance Company of America, will
insure or guarantee the Certificates of any Series.
UNDERWRITING GUIDELINES
Mortgage Loans Secured by Residential Properties
The Depositor expects that all Mortgage Loans included in a Mortgage
Pool will have been originated in accordance with the underwriting procedures
described herein, subject to such variations as are specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, all or a representative sample of the Mortgage Loans comprising the
Mortgage Pool for a Series will be reviewed by or on behalf of the Depositor to
determine compliance with such underwriting procedures and standards and
compliance with other requirements for inclusion in the related Mortgage Pool.
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Except as otherwise set forth in the related Prospectus Supplement, it
is expected that each originator of Mortgage Loans will have applied, in a
standard procedure which complies with applicable federal and state law and
regulations, underwriting procedures that are intended to evaluate the
mortgagor's credit standing and repayment ability, and the value and adequacy of
the Mortgaged Property as collateral. A prospective mortgagor will have been
required to fill out an application designed to provide to the original lender
pertinent credit information. As part of the description of the mortgagor's
financial condition, the mortgagor will have been required to provide a current
balance sheet describing assets and liabilities and a statement of income and
expenses, as well as an authorization to apply for a credit report which
summarizes the mortgagor's credit history with local merchants and lenders and
any record of bankruptcy. In addition, an employment verification will have been
obtained in the case of individual borrowers which reports the mortgagor's
current salary, length of such employment and whether it was expected that the
mortgagor will continue such employment in the future. If a prospective borrower
was self-employed, the mortgagor will have been required to submit copies of
signed tax returns. The mortgagor may also have been required to authorize
verification of deposits at financial institutions where the mortgagor has
demand or savings accounts.
In determining the adequacy of the Mortgaged Property as collateral,
except in the instance of certain small second loan applications, an appraisal
will have been made of each Mortgaged Property considered for financing. Each
appraiser will have been selected in accordance with predetermined guidelines
established by or acceptable to the Unaffiliated Seller for appraisers. The
appraiser will have been required to inspect the Mortgaged Property and verify
that it was in good condition and that construction, if new, has been completed.
The appraisal is based on the market value of the comparable properties, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the Mortgaged Property.
In determining the adequacy of the Mortgaged Property as collateral,
the originator shall, in the case of second or more junior loans, look at the
combined Loan-to-Value Ratio in determining whether the Mortgage Loan exceeds
lending guidelines. Furthermore, when considering such second or more junior
loans, confirm that payment has been timely made on the senior liens.
Once all applicable employment, credit and property information was
received, a determination would have been made as to whether the prospective
mortgagor had sufficient monthly income available (i) to meet its monthly
obligations on the Mortgage Loan (determined on the basis of the monthly
payments due in the year of origination and taking into consideration, payments
due on any senior liens) and other expenses related to the Mortgaged Property
(such as property taxes and hazard insurance) and (ii) in the case of individual
mortgagors, to meet monthly housing expenses and other financial obligations and
monthly living expenses. When two individuals cosign loan documents, the income
and expenses of both individuals may be included in the computation.
Underwriting guidelines generally similar to traditional underwriting guidelines
used by FNMA and FHLMC which were in effect at the time of origination of each
Mortgage Loan will generally have been used, except that the ratios at
origination of the amounts described in clauses (i) and (ii) above to the
applicant's stable monthly gross income may exceed in certain cases the then
applicable FNMA and FHLMC guidelines. With respect to a vacation or second home,
no income derived from the property will have been considered for underwriting
purposes.
Other credit considerations may cause departure from the traditional
guidelines. If the Loan-to-Value Ratio and/or term of the Mortgage Loan is less
than a percentage specified in the related Prospectus Supplement, certain
aspects of review relating to monthly income assets may be foregone and standard
ratios of monthly or total expenses to gross income may not be applied. The
Depositor may permit an Unaffiliated Seller's underwriting standards to
otherwise vary in certain cases to the extent specified in the related
Prospectus Supplement.
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the mortgagor but rather must look solely to the property for
repayment in the event of foreclosure. The Depositor will require that the
Unaffiliated Sellers 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.
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Certain of the types of loans which may be included in the Mortgage
Pools are recently developed and may involve additional uncertainties not
present in traditional types of loans. For example, certain of such Mortgage
Loans may provide for escalating or variable payments by the mortgagor. These
types of Mortgage Loans are underwritten on the basis of a judgment that
mortgagors will have the ability to make larger monthly payments in subsequent
years. In some instances, however, a mortgagor's income may not be sufficient to
make loan payments as such payments increase.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the real estate market should experience an overall
decline in property values such that the outstanding principal balances of the
Mortgage Loans, and any secondary financing on the Mortgaged Properties, in a
particular Mortgage Pool become equal to or greater than the value of the
Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In addition, adverse economic conditions (which may or may not affect
real property values) may affect the timely payment by mortgagors of scheduled
payments of principal and interest on the Mortgage Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to any
Mortgage Pool. To the extent that such losses are not covered by subordination
provisions, insurance policies or other credit support, such losses will be
borne, at least in part, by the holders of the Certificates of the related
series.
Contracts
The underwriting guidelines utilized in connection with the origination
of the Contracts underlying a Series of Certificates will be described in the
related Prospectus Supplement.
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS
The following summaries describe certain provisions of the Pooling and
Servicing Agreements which relate to Trust Funds comprised of Mortgage Loans or
Contracts. The summaries do not purport to be complete and are subject to and
are qualified in their entirety by reference to, all the provisions of the
Pooling and Servicing Agreement for each Series and the related Prospectus
Supplement, which may further modify the provisions summarized below. The
provisions of each Pooling and Servicing Agreement will vary depending upon the
nature of the Certificates to be issued thereunder and the nature of the related
Trust Fund. Each Pooling and Servicing Agreement executed and delivered with
respect to each Series will be filed with the Commission as an exhibit to a
Current Report on Form 8-K promptly after issuance of the Certificates of such
Series.
The Servicer
The Servicer under each Pooling and Servicing Agreement will be named
in the related Prospectus Supplement. The entity serving as Servicer may be an
affiliate of the Depositor and may have other normal business relationships with
the Depositor or the Depositor's affiliates. The Servicer with respect to each
Series will service the Mortgage Loans or Contracts contained in the Trust Fund
for such Series. For Trust Funds comprised of Mortgage Loans, the Servicer will
be a seller/servicer approved by FNMA or FHLMC. Any Servicer may delegate its
servicing responsibilities to one or more sub-servicers (each a "Sub-Servicer"),
but will not be relieved of its liabilities with respect thereto.
The Servicer will make certain representations and warranties regarding
its authority to enter into, and its ability to perform its obligations under,
the related Pooling and Servicing Agreement. An uncured breach of such a
representation or warranty that in any respect materially and adversely affects
the interests of the Certificateholders will constitute an Event of Default by
the Servicer under the related Pooling and Servicing Agreement. See "The Pooling
and Servicing Agreement -- Events of Default -- Mortgage Loans or Contracts" and
" -- Rights Upon Event of Default -- Mortgage Loans or Contracts."
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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;
(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
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reduced by expenses incurred in connection with such liquidation, other
reimbursed servicing costs associated with such liquidation, certain
amounts applied to the restoration, preservation or repair of the Mortgaged
Property or Manufactured Home, any unreimbursed Advances with respect to
such Mortgage Loan or Contract and, in the discretion of the Servicer, but
only to the extent of the amount permitted to be withdrawn from the
Certificate Account, any unpaid Servicing Fees, in respect of the related
Mortgage Loans or Contracts or the related Mortgaged Properties or
Manufactured Homes ("Net Liquidation Proceeds");
(iii) all proceeds received by the Servicer under any title, hazard or
other insurance policy covering any such Mortgage Loan or Contract
("Insurance Proceeds"), other than proceeds to be applied to the
restoration or repair of the related Mortgaged Property or Manufactured
Home or released to the mortgagor or obligor in accordance with the
applicable Pooling and Servicing Agreement, and further reduced by expenses
incurred in connection with collecting on related insurance policies, any
unreimbursed Advances with respect to such Mortgage Loan or Contract and in
the discretion of the Servicer, but only to the extent of the amount
permitted to be withdrawn from the Certificate Account, any unpaid
Servicing Fees, in respect of such Mortgage Loan or Contract ("Net
Insurance Proceeds");
(iv) all amounts required to be deposited therein from any related
reserve fund, and amounts available under any other form of credit
enhancement applicable to such Series;
(v) all Advances made by the Servicer;
(vi) all amounts withdrawn from Buy-Down Funds or other funds
described in the related Prospectus Supplement, if any, with respect to the
Mortgage Loans or Contracts, in accordance with the terms of the respective
agreements applicable thereto;
(vii) all Repurchase Proceeds; and
(viii) all other amounts required to be deposited therein pursuant to
the applicable Pooling and Servicing Agreement.
Notwithstanding the foregoing, the Servicer will be entitled, at its
election, either (a) to withhold and pay itself the applicable Servicing Fee
and/or to withhold and pay to the owner thereof any Fixed Retained Yield from
any payment or other recovery on account of interest as received and prior to
deposit in the Certificate Account or (b) to withdraw the applicable Servicing
Fee and/or any Fixed Retained Yield from the Certificate Account after the
entire payment or recovery has been deposited therein; however, with respect to
each Trust Fund (or a segregated pool of assets therein) as to which a REMIC
election has been made, the Servicer will, in each instance, withhold and pay to
the owner thereof the Fixed Retained Yield prior to deposit of the related
payment or recovery in the Certificate Account.
Advances, amounts withdrawn from any reserve fund, and amounts
available under any other form of credit enhancement will be deposited in the
Certificate Account not later than the business day preceding the Distribution
Date on which such amounts are required to be distributed. All other amounts
will be deposited in the Certificate Account not later than the business day
next following the day of receipt and posting by the Servicer.
If the Servicer deposits in the Certificate Account for a Series any
amount not required to be deposited therein, it may at any time withdraw such
amount from such Certificate Account.
The Servicer is permitted, from time to time, to make withdrawals from
the Certificate Account for the following purposes, to the extent permitted in
the applicable Pooling and Servicing Agreement:
(i) to reimburse itself for Advances;
(ii) to reimburse itself from Liquidation Proceeds for expenses
incurred by the Servicer in connection with the liquidation of any
defaulted Mortgage Loan or Contract or property acquired in respect thereof
and for amounts expended in good faith in connection with the restoration
of damaged property,
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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.
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
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Servicer may, in its discretion, (i) waive any prepayment charge, assumption
fee, late payment charge or any other charge in connection with the prepayment
of a Mortgage Loan or Contract and (ii) arrange with a mortgagor or obligor a
schedule for the liquidation of deficiencies running for not more than six
months after the applicable Due Date.
Pursuant to the Pooling and Servicing Agreement, the Servicer, to the
extent permitted by law, will establish and maintain or will cause to be
established and maintained one or more escrow accounts (collectively, the
"Servicing Account") in which the Servicer will be required to deposit or cause
to be deposited payments by mortgagors or obligors, as applicable, for taxes,
assessments, mortgage and hazard insurance premiums and other comparable items.
Withdrawals from the Servicing Account may be made to effect timely payment of
taxes, assessments, mortgage and hazard insurance, to refund to mortgagors or
obligors amounts determined to be overages, to pay interest to mortgagors or
obligors on balances in the Servicing Account, if required, to repair or
otherwise protect the Mortgaged Properties or Manufactured Homes and to clear
and terminate such account. The Servicer will be responsible for the
administration of each Servicing Account. The Servicer will be obligated to
advance certain amounts which are not timely paid by mortgagors or obligors, to
the extent that the Servicer determines that such amounts will be recoverable
out of Insurance Proceeds, Liquidation Proceeds, or otherwise. Alternatively, if
specified in the applicable Pooling and Servicing Agreement, in lieu of
establishing a Servicing Account, the Servicer may procure a performance bond or
other form of insurance coverage, in an amount acceptable to the Rating Agency
rating the related Series of Certificates, covering loss occasioned by the
failure to escrow such amounts.
Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage Loans
and Contracts
Each Pooling and Servicing Agreement will provide that, when any
Mortgaged Property or Manufactured Home is conveyed by the mortgagor or obligor,
the Servicer will exercise its rights to accelerate the maturity of such
Mortgage Loan or Contract under any "due-on-sale" clause applicable thereto, if
any, unless (a) it is not exercisable under applicable law or (b) such exercise
would result in loss of insurance coverage with respect to such Mortgage Loan or
Contract. In any such case, the Servicer is authorized to take or enter into an
assumption and modification agreement from or with the person to whom such
Mortgaged Property or Manufactured Home has been or is about to be conveyed,
pursuant to which such person becomes liable under the Mortgage Note or Contract
and, unless prohibited by applicable state law, the mortgagor or obligor remains
liable thereon, provided that the Mortgage Loan or Contract will continue to be
covered by any pool insurance policy and any related primary mortgage insurance
policy, and the Mortgage Rate or Contract Rate with respect to such Mortgage
Loan or Contract and the payment terms shall remain unchanged. The Servicer will
also be authorized, with the prior approval of any pool insurer and any primary
mortgage insurer, if any, to enter into a substitution of liability agreement
with such person, pursuant to which the original mortgagor or obligor is
released from liability and such person is substituted as mortgagor or obligor
and becomes liable under the Mortgage Note or Contract.
The Servicer is obligated under the Pooling and Servicing Agreement for
each Series to realize upon defaulted Mortgage Loans or Contracts to the extent
provided therein. However, in the case of foreclosure or of damage to a
Mortgaged Property or Manufactured Home from an uninsured cause, the Servicer is
not required to expend its own funds to foreclose, repossess or restore any
damaged property, unless it reasonably determines (i) that such foreclosure,
repossession or restoration will increase the proceeds to Certificateholders of
such Series of liquidation of the Mortgage Loan or Contract after reimbursement
of the Servicer for its expenses and (ii) that such expenses will be recoverable
to it through Liquidation Proceeds or Insurance Proceeds. In the event that the
Servicer has expended its own funds for foreclosure or to restore damaged
property, it will be entitled to charge the Certificate Account for such Series
an amount equal to all costs and expenses incurred by it.
The Servicer may foreclose against property securing a defaulted
Mortgage Loan either by foreclosure, by sale or by strict foreclosure and in the
event a deficiency judgment is available against the mortgagor or other person
(see "Certain Legal Aspects of the Mortgage Loans and Contracts -- The Mortgage
Loans -- Anti-Deficiency Legislation and Other Limitations on Lenders" for a
description of the availability of deficiency judgments), may proceed for the
deficiency.
It is anticipated that in most cases the Servicer will not seek
deficiency judgments against any mortgagor or obligor, and the Servicer is not
required under the Pooling and Servicing Agreement to seek deficiency judgments.
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With respect to a Trust Fund (or one or more segregated pools of assets
therein) as to which a REMIC election has been made, if the Trustee acquires
ownership of any Mortgaged Property or Manufactured Home as a result of a
default or imminent default of any Mortgage Loan or Contract secured by such
Mortgaged Property or Manufactured Home, the Trustee generally will be required
to dispose of such property with two years following its acquisition by the
Trust Fund. The Servicer also will be required to administer the Mortgaged
Property or Manufactured Home in a manner which does not cause the Mortgaged
Property or Manufactured Home to fail to qualify as "foreclosure property"
within the meaning of Code Section 860G(a)(8) or result in the receipt by the
Trust Fund of any "net income from foreclosure property" within the meaning of
Code Section 860G(c). In general, this would preclude the holding of the
Mortgaged Property or Manufactured Home as a dealer in such property or the
receipt of rental income based on the profits of the lessee.
The Servicer may modify, waive or amend the terms of any Mortgage Loan
or Contract without the consent of the Trustee or any Certificateholder. Such
modification, waiver or amendment shall only be given if the Servicer determines
that it is in the best interests of Certificateholders and, generally, only if
the Mortgage Loan is in default or the Service has determined that default is
reasonably foreseeable.
Servicing Compensation and Payment of Expenses
For each Series of Certificates, the Servicer will be entitled to be
paid the Servicing Fee on the related Mortgage Loans or Contracts until
termination of the applicable Pooling and Servicing Agreement, subject, unless
otherwise specified in the applicable Prospectus Supplement, to adjustment as
described under "Adjustment to Servicing Compensation in Connection with Prepaid
and Liquidated Mortgage Loans and Contracts" above. The Servicer, at its
election, will pay itself the Servicing Fee for a Series with respect to each
Mortgage Loan or Contract by (a) withholding the Servicing Fee from any
scheduled payment of interest prior to deposit of such payment in the
Certificate Account for such Series or (b) withdrawing the Servicing Fee from
the Certificate Account after the entire interest payment has been deposited in
the Certificate Account. The Servicer may also pay itself out of the Liquidation
Proceeds or Insurance Proceeds with respect to a Mortgage Loan or Contract, or
withdraw from the Certificate Account, the Servicing Fee in respect of such
Mortgage Loan or Contract or other recoveries with respect thereto to the extent
provided in the applicable Pooling and Servicing Agreement. The Servicing Fee
with respect to the Mortgage Loans or Contracts underlying the Certificates of a
Series will be specified in the applicable Prospectus Supplement. Any additional
servicing compensation in the form of prepayment charges, assumption fees, late
payment charges or otherwise will be retained by the Servicer to the extent not
required to be deposited in the Certificate Account.
In addition to amounts payable to any Sub-Servicer, the Servicer will
pay all expenses incurred in connection with the servicing of the Mortgage Loans
or Contracts underlying a Series, including, without limitation, payment of the
hazard insurance policy premiums and fees or other amounts payable pursuant to
any applicable agreement for the provision of credit enhancement for such
Series, payment of the fees and disbursements of the Trustee and any custodian,
fees due to the independent accountants and expenses incurred in connection with
distributions and reports to Certificateholders. However, certain of these
expenses may be reimbursable to the Servicer pursuant to the terms of the
applicable Pooling and Servicing Agreement. In addition, the Servicer will be
entitled to reimbursement for certain expenses incurred by it in connection with
the liquidation of defaulted Mortgage Loans or Contracts. In the event that
claims are either not made or are not fully paid from any applicable form of
credit enhancement, the related Trust Fund will suffer a loss to the extent that
Net Liquidation Proceeds and Net Insurance Proceeds are less than the principal
balance of the related Mortgage Loan or Contract, plus accrued interest thereon
at the Net Mortgage Rate or Net Contract Rate. In addition, the Servicer will be
entitled to reimbursement of expenditures incurred by it in connection with the
restoration of any Mortgaged Property or 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.
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Evidence as to Compliance
The Mortgage Loans
Each Pooling and Servicing Agreement will provide that on or before a
specified date in each year, beginning with the first such date occurring at
least six months after the related Cut-Off Date, a firm of independent public
accountants will furnish a statement to the Trustee to the effect that, on the
basis of the examination by such firm conducted substantially in compliance with
either the Uniform Single Audit Program for Mortgage Bankers or the Audit
Program for Mortgages serviced for FHLMC, the servicing by or on behalf of the
Servicer of mortgage loans under pooling and servicing agreements substantially
similar to each other (including the related Pooling and Servicing Agreement)
was conducted in compliance with the terms of such agreements other than
exceptions that are immaterial and any significant exceptions of errors in
records that, in the opinion of the firm, either the Audit Program for Mortgages
serviced for FHLMC, or paragraph 4 of the Uniform Single Audit Program for
Mortgage Bankers, requires it to report. In rendering its statement such firm
may rely, as to matters relating to the direct servicing of mortgage loans by
Sub-Servicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Audit Program for Mortgage
Bankers or the Audit Program for Mortgages serviced for FHLMC (rendered within
one year of such statement) of firms of independent public accountants with
respect to the related Sub-Servicer.
The Contracts
Each Pooling and Servicing Agreement relating to a Series of
Certificates representing interests in a Contract Pool will provide that on or
before a specified date in each year, beginning with the first such date after
the related Cut-Off Date, a firm of independent public accountants will furnish
a statement to the Trustee to the effect that such firm is of the opinion that
the system of internal accounting controls in effect on the date of such
statement relating to the servicing procedures performed by the Servicer under
the Pooling and Servicing Agreement, taken as a whole, was sufficient for the
prevention and detection of errors and irregularities which would be material to
the assets of the Trust Fund and that nothing has come to their attention that
would cause them to believe that such servicing has not been conducted in
compliance with the provisions of the Pooling and Servicing Agreement, other
than such exceptions as shall be set forth in such report.
Each Pooling and Servicing Agreement will also provide for delivery to
the Trustee annually on or before the specified date therein, a statement signed
by two officers of the Servicer to the effect that the Servicer has fulfilled
its obligations under the Pooling and Servicing Agreement throughout the
preceding year or, if there has been a default in the fulfillment of any such
obligation, describing each such default.
Copies of the annual accountants' statement and the statement of
officers of the Servicer may be obtained by Certificateholders without charge
upon written request to the Servicer at the address of the Servicer set forth in
the related Prospectus Supplement.
Certain Matters Regarding the Servicer and the Depositor
The Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement for each Series (other than its duties as
Certificate Registrar for such Series, if it is acting as such), except upon its
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities of a type and nature presently carried on by it. No such
resignation will become effective until the Trustee for such Series or a
successor Servicer has assumed the Servicer's obligations and duties under the
Pooling and Servicing Agreement. If the Servicer resigns for any of the
foregoing reasons and the Trustee is unable or unwilling to assume
responsibility for servicing the Mortgage 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
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for errors in judgment; provided, however, that none of the Depositor, the
Servicer or any director, officer, employee or agent of the Depositor or
Servicer will be protected against any liability that would otherwise be imposed
by reason of willful misfeasance, bad faith or gross negligence in the
performance of his or its duties or by reason of reckless disregard of his or
its obligations and duties thereunder. The Pooling and Servicing Agreement will
further provide that the Depositor, the Servicer and any director, officer,
employee or agent of either of them shall be entitled to indemnification by the
Trust Fund and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the Pooling and
Servicing Agreement or the Certificates other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or gross negligence
in the performance of his or its duties thereunder or by reason of reckless
disregard of his or its obligations and duties thereunder. In addition, the
Pooling and Servicing Agreement will provide that the Depositor and the Servicer
will not be under any obligation to appear in, prosecute or defend any legal
action that is not incidental to its duties under the Pooling and Servicing
Agreement and that in its opinion may involve it in any expense or liability.
The Depositor and the Servicer may, however, in its discretion, undertake any
such action deemed by it necessary or desirable with respect to the Pooling and
Servicing Agreement and the rights and duties of the parties thereto and the
interests of the Certificateholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
expenses, costs and liabilities of the Trust Fund, and the Servicer will be
entitled to be reimbursed therefor out of the Certificate Account, and any loss
to the Trust Fund arising from such right of reimbursement will be allocated pro
rata among the various Classes of Certificates unless otherwise specified in the
applicable Pooling and Servicing Agreement.
Any person into which the Servicer may be merged or consolidated, or
any person resulting from any merger, conversion or consolidation to which the
Servicer is a party, or any person succeeding to the business through the
transfer of substantially all of its assets, or otherwise, of the Servicer will
be the successor of the Servicer under the Pooling and Servicing Agreement for
each Series provided that such successor or resulting entity is qualified to
service mortgage loans for FNMA or FHLMC and that the applicable Rating Agency's
rating of any Certificates for such Series in effect immediately prior to such
event is not adversely affected thereby.
The Servicer also has the right to assign its rights and delegate its
duties and obligations under the Pooling and Servicing Agreement for each Series
(A) in connection with a sale or transfer of a substantial portion of its
mortgage or manufactured housing servicing portfolio; provided that (i) in the
case of a transfer by a Servicer of Mortgage Loans, the purchaser or transferee
accepting such assignment or delegation is qualified to service mortgage loans
for FNMA or FHLMC, (ii) the purchaser or transferee is reasonably satisfactory
to the Depositor and the Trustee for such Series and executes and delivers to
the Depositor and the Trustee an agreement, in form and substance reasonably
satisfactory to the Depositor and the Trustee, which contains an assumption by
such purchaser or transferee of the due and punctual performance and observance
of each covenant and condition to be performed or observed by the Servicer under
the Pooling and Servicing Agreement from and after the date of such agreement;
and (iii) the applicable Rating Agency's rating of any Certificates for such
Series in effect immediately prior to such assignment, sale or transfer is not
qualified, downgraded or withdrawn as a result of such assignment, sale or
transfer or (B) to any affiliate of the Servicer, provided that the conditions
contained in clauses (i) through (iii) above are met. In the case of any such
assignment or delegation, the Servicer will be released from its obligations
under the Pooling and Servicing Agreement except for liabilities and obligations
incurred prior to such assignment and delegation.
THE POOLING AND SERVICING AGREEMENT
Events of Default
Mortgage Loans or Contracts
Events of Default under the Pooling and Servicing Agreement for each
Series of Certificates relating to Mortgage Loans or Contracts include (i) any
failure by the Servicer to remit to the Trustee or to any Paying Agent for
distribution to Certificateholders any required payment which continues
unremedied for 5 days; (ii) any failure by the Servicer duly to observe or
perform in any material respect any other of its covenants or agreements in the
Pooling and Servicing Agreement which continues unremedied for 30 days (or 10
days in the case of a failure to maintain any pool insurance policy required to
be maintained pursuant to the Pooling and Servicing
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Agreement) after the giving of written notice of such failure to the Servicer by
the Trustee, or to the Servicer and Trustee by the holders of Certificates of
such Series having voting rights allocated to such Certificates ("Voting
Interests") aggregating not less than 25% of the Voting Interests represented by
all Certificates for such Series; (iii) any breach of representation or warranty
of the Servicer relating to such Servicer's authority to enter into, and its
ability to perform its obligations under, such Pooling and Servicing Agreement;
(iv) certain events of insolvency, readjustments of debt, marshalling of assets
and liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to any its obligations
and (v) if specified in the applicable Pooling and Servicing Agreement, any
failure by the Servicer to remit to the Trustee the amount of any Advance by the
business day preceding the applicable Distribution Date.
Rights Upon Event of Default
Mortgage Loans or Contracts
So long as Event of Default remains unremedied under the Pooling and
Servicing Agreement for a Series of Certificates relating to Mortgage Loans or
Contracts, the Trustee for such Series or holders of Certificates of such Series
evidencing not less than 25% of the Voting Interests in the Trust Fund for such
Series may terminate all of the rights and obligations of the Servicer under the
Pooling and Servicing Agreement and in and to the Mortgage Loans or Contracts
(other than the Servicer's right to recovery of any Initial Deposit for such
Series and other expenses and amounts advanced pursuant to the terms of the
Pooling and Servicing Agreement, which rights the Servicer will retain under all
circumstances), whereupon the Trustee will succeed to all the responsibilities,
duties and liabilities of the Servicer under the Pooling and Servicing Agreement
and will be entitled to monthly servicing compensation not to exceed the
aggregate Servicing Fees, together with the other servicing compensation in the
form of assumption fees, late payment charges or otherwise as provided in the
Pooling and Servicing Agreement. In the event that the Trustee is unwilling or
unable so to act, it may select, pursuant to the private or public bid procedure
described in the applicable Pooling and Servicing Agreement, or petition a court
of competent jurisdiction to appoint, (i) in the case of a Servicer of Mortgage
Loans, a housing and home finance institution, bank or mortgage servicing
institution with a net worth of at least $15,000,000 and which is a FNMA- and
FHLMC-approved seller/servicer or (ii) in the case of a Servicer of Contracts,
an institution with a net worth of at least $15,000,000 which has serviced for
at least one year immediately prior thereto a portfolio of manufactured housing
loans of not less than $100,000,000, to act as successor to the Servicer under
the provisions of the Pooling and Servicing Agreement relating to the servicing
of the Mortgage Loans or Contracts. In the event such public bid procedure is
utilized, the successor Servicer would be entitled to servicing compensation in
an amount equal to the aggregate Servicing Fees, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in the Pooling and Servicing Agreement, and the Servicer
would be entitled to receive the net profits, if any, received from the sale of
its servicing rights and obligations under the Pooling and Servicing Agreement.
During the continuance of any Event of Default under the Pooling and
Servicing Agreement for a Series of Certificates relating to Mortgage Loans or
Contracts, the Trustee for such Series will have the right to take action to
enforce its rights and remedies and to protect and enforce the rights and
remedies of the Certificateholders of such Series, and holders of Certificates
evidencing not less than 25% of the Voting Interests for such Series may direct
the time, method and place of conducting any proceeding for any remedy available
to 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
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as Trustee thereunder and have offered to the Trustee reasonable indemnity and
the Trustee for 60 days has neglected or refused to institute any such
proceeding.
Amendment
Each Pooling and Servicing Agreement may be amended by the Depositor,
the Servicer (with respect to a Series of Certificates relating, to the Mortgage
Loans or Contracts) and the Trustee without the consent of the
Certificateholders, (i) to cure any ambiguity, (ii) to correct or supplement any
provision therein that may be inconsistent with any over provision therein,
(iii) to modify, eliminate or add to any of its provisions to such extent as
shall be necessary to maintain the qualification of the Trust Fund (or one or
more segregated pools of assets therein) as a REMIC at all times that any
Certificates are outstanding or to avoid or modify the risk of the imposition of
any tax on the Trust Fund pursuant to the Code that would be a claim against the
Trust Fund, provided that the Trustee has received an opinion of counsel to the
effect that such action is necessary or desirable to maintain such qualification
or to avoid or minimize the risk of the imposition of any such tax and such
action will not, as evidenced by such opinion of counsel, adversely affect in
any material respect the interests of any Certificateholder, (iv) to change the
timing and/or nature of deposits into the Certificate Account, provided that
such change will not, as evidenced by an opinion of counsel, adversely affect in
any material respect the interests of any Certificateholder and that such change
will not adversely affect the then current rating assigned to any Certificates,
as evidenced by a letter from each Rating Agency to such effect, (v) to add to,
modify or eliminate any provisions therein restricting transfers of certain
Certificates, which are inserted in response to the Code provisions described
below under "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates -- Taxation of Residual Certificates --
Tax-Related Restrictions on Transfer of Residual Certificates," or (vi) to make
any other provisions with respect to matters or questions arising under such
Pooling and Servicing Agreement that are not inconsistent with the provisions
thereof, provided that such action will not, as evidenced by an opinion of
counsel, adversely affect in any material respect the interests of the
Certificateholders of the related Series. The Pooling and Servicing Agreement
may also be amended by the Depositor, the Servicer, where applicable, and the
Trustee with the consent of the holders of Certificates evidencing interests
aggregating not less than 66 2/3% of the Voting Interests evidenced by the
Certificates affected thereby, for the purpose of adding any provisions to or
changing in any manner or eliminating, any of the provisions of such Pooling and
Servicing Agreement or of modifying in any manner the rights of the
Certificateholders; provided, however, that no such amendment may (i) reduce in
any manner the amount of, or delay the timing of, any payments received on or
with respect to Mortgage Loans or Contracts that are required to be distributed
on any Certificates, without the consent of the holder of such Certificate, (ii)
adversely affect in any material respect the interests of the holders of a Class
or Subclass of Certificates of a Series in a manner other than that set forth in
clause (i) above without the consent of the holders of Certificates aggregating
not less than 66-2/3% of the Voting Interests evidenced by such Class or
Subclass, or (iii) reduce the aforesaid percentage of the Certificates, the
holders of which are required to consent to such amendment, without the consent
of the holders of all Certificates of the Class or Subclass affected then
outstanding. Notwithstanding the foregoing, the Pooling and Servicing Agreement
may be amended by the Depositor, the Servicer, where applicable, and the Trustee
provided that such action is approved by holders of Certificates evidencing 100%
of the Percentage Interest of each Class that, as evidenced by an opinion of
counsel, is adversely affected in any material respect by such action. For
purposes of giving any such consent (other than a consent to an action which
would adversely affect in any material respect the interests of the
Certificateholders of any Class, while the Servicer or any affiliate thereof is
the holder of Certificates aggregating not less than 66-2/3% of the Percentage
Interest of such Class), any Certificates registered in the name of the Servicer
or any affiliate thereof shall be deemed not to be outstanding. Notwithstanding
the foregoing, the Trustee will not consent to any such amendment if such
amendment would subject the Trust Fund to tax or cause the Trust Fund (or one or
more segregated pools of assets therein) to fail to qualify as a REMIC.
Termination; Purchase or Other Disposition of Mortgage Loans and Contracts
The obligations created by the Pooling and Servicing Agreement for a
Series of Certificates will terminate upon the earlier of (i) the later of the
final payment or other liquidation of the last Mortgage Loan or Contract subject
thereto and the disposition of all property acquired 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
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Certificates, the Trustee will give written notice of termination of the Pooling
and Servicing Agreement to each Certificateholder, and the final distribution
will be made only upon surrender and cancellation of the Certificates at an
office or agency appointed by the Depositor and specified in the notice of
termination
If so provided in the related Prospectus Supplement, the Pooling and
Servicing Agreement for each Series of Certificates will permit, but not
require, the person or persons specified in such Prospectus Supplement to
purchase from the Trust Fund for such Series, or will require the Trust Fund to
sell, all remaining Mortgage Loans or Contracts at the time subject to the
Pooling and Servicing Agreement at a price specified in such Prospectus
Supplement. In the event that an election has been made to treat the related
Trust Fund (or one or more segregated pools of assets therein) as a REMIC, any
such purchase or disposition will be effected only upon receipt by the Trustee
of an opinion of counsel that such purchase (i) will be part of a "qualified
liquidation" or other evidence as defined in Code Section 860F(a)(4)(A), (ii)
will not otherwise subject the Trust Fund (or segregated asset pool) to tax, or
(iii) will not cause the Trust Fund (or segregated asset pool) to fail to
qualify as a REMIC. The exercise of such right or such disposition will effect
early retirement of the Certificates of that Series, but the right so to
purchase may be exercised, or the obligation to sell will arise, only after the
aggregate principal balance of the Mortgage Loans or Contracts for such Series
at the time of purchase is less than a specified percentage of the aggregate
principal balance at the Cut-Off Date for the Series, or after the date set
forth in the related Prospectus Supplement. See "Prepayment and Yield
Considerations."
The Trustee
The Trustee under each Pooling and Servicing Agreement will be named in
the applicable Prospectus Supplement. The commercial bank or trust company
serving as Trustee may have normal banking relationships with the Depositor, the
Servicer or any of their respective affiliates.
With respect to a Series of Certificates relating to Mortgage Loans or
Contracts, the Trustee may resign at any time, in which event the Servicer will
be obligated to appoint a successor trustee. The Servicer (with respect to a
Series of Certificates relating to Mortgage Loans or Contracts) may also remove
the Trustee if the Trustee ceases to be eligible to act as Trustee under the
Pooling and Servicing Agreement, if the Trustee becomes insolvent or in order to
change the situs of the Trust Fund for state-tax reasons. Upon becoming aware of
such circumstances, the Servicer or Depositor, as the case may be, will become
obligated to appoint a successor trustee. The Trustee may also be removed at any
time by the holders of Certificates evidencing not less than 51% of the Voting
Interest in the Trust Fund, except that, any Certificate registered in the name
of the Depositor, the Servicer or any affiliate thereof will not be taken into
account in determining whether the requisite Voting Interest in the Trust Fund
necessary to effect any such removal has been obtained. Any resignation and
removal of the Trustee, and the appointment of a successor trustee, will not
become effective until acceptance of such appointment by the successor trustee.
The Trustee, and any successor trustee, will have a combined capital and
surplus, or shall be a member of a bank holding system with an aggregate
combined capital and surplus, of at least $50,000,000 and will be subject to
supervision or examination by federal or state authorities.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts which are general in nature.
Because such legal aspects are governed by applicable state law (which laws may
differ substantially), the summaries do not purport 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
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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.
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
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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
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
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property. The exercise of a right of redemption would defeat the title of any
purchaser at a foreclosure sale, or of any purchaser from the lender subsequent
to judicial foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has run.
Junior Mortgages; Rights of Senior Mortgages
The Mortgage Loans are secured by mortgages or deeds of trust some of
which are junior to other mortgages or deeds of trust held by other lenders or
institutional investors. The rights of the Trust (and therefore the
Certificateholders), as mortgagee under a junior mortgage or beneficiary under a
junior deed of trust, are subordinate to those of the mortgagee under the senior
mortgage or beneficiary under the senior deed of trust, including the prior
rights of the senior mortgagee to receive hazard insurance and condemnation
proceeds and to cause the property securing the Mortgage Loan to be sold upon
default of the mortgagor or trustor, thereby extinguishing the junior
mortgagee's or junior beneficiary's lien unless the junior mortgagee or junior
beneficiary asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage or deed of
trust. As discussed more fully below, a junior mortgagee or junior beneficiary
may satisfy a defaulted senior loan in full and, in some states, may cure such
default and loan. In most states, no notice of default is required to be given
to a junior mortgagee or junior beneficiary and junior mortgagees or junior
beneficiaries are seldom given notice of defaults or senior mortgages. In order
for a foreclosure action in some states to be effective against a junior
mortgagee or junior beneficiary, the junior mortgagee or junior beneficiary must
be named in any foreclosure action, thus giving notice to junior lienors. It is
standard practice of the Sellers to protect their interest by attending any sale
of which they have notice or appearing and bidding for, or redeeming, the
property if it is in their best interest to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, (including the sellers) confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event the
property is taken by condemnation, the mortgagee or beneficiary under any
underlying senior mortgages will have the prior right to collect and apply any
insurance proceeds payable under a hazard insurance policy to restore or repair
the property if feasible, and to collect any remaining insurance proceeds or any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages or deeds of trust. Proceeds in
excess of the amount of senior mortgage indebtedness, in most cases, may be
applied to the indebtedness of a junior mortgage or trust deed.
The form of mortgage or deed of trust used by most institutional
lenders typically contains a "future advance" clause, which provides, in
essence, that additional amounts advanced to or on behalf of the mortgagor or
trustor by the mortgagee or beneficiary are to be secured by the mortgage or
deed of trust. The priority of any advance made under the clause depends, in
some states, on whether the advance was an "obligatory" or "optional" advance.
If the mortgagee or beneficiary is obligated to advance the additional amounts,
the advance is entitled to receive the same priority as amounts initially
advanced under the mortgage or deed of trust, notwithstanding the fact that
there may be junior mortgages or deeds of trust and other liens which intervene
between the date of recording of the mortgage or deed of trust and the date of
the future advance, and, in some states, notwithstanding that the mortgagee or
beneficiary had actual knowledge of such intervening junior mortgages or deeds
of trust and other liens at the time of the advance. Where the mortgagee or
beneficiary is not obligated to advance additional amounts or, in some states,
has actual knowledge of the intervening junior mortgages or deeds of trust and
other liens, the advance will be subordinate to such intervening junior
mortgages or deeds of trust and other liens. Priority of advances under a
"future advance" cause rests, in some states, on state statutes giving priority
to all advances made under the loan agreement to a "credit limit" amount stated
in the recorded mortgage.
Another provision sometimes included in the form of the mortgage or
deed of trust used by institutional lenders (and included in some of the forms
used by the Sellers) obligates the mortgagor or trustor to pay, before
delinquency, all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear
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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.
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
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on owners by foreclosure on real property, which liability may exceed the value
of the property involved. Numerous federal and some state consumer protection
laws impose substantive requirements upon mortgage lenders in connection with
the origination, servicing and the enforcement of mortgage loans. These laws
include the federal Truth in Lending Act, Real Estate Settlement Procedures Act,
Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting
Act, and related statutes and regulations. These federal laws and state laws
impose specific statutory liabilities upon lenders who originate or service
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
"Due-on-Sale" Clauses
The forms of note, mortgage and deed of trust relating to conventional
Mortgage Loans may contain a "due-on-sale" clause permitting acceleration of the
maturity of a loan if the borrower transfers its interest in the property. In
recent years, court decisions and legislative actions placed substantial
restrictions on the right of lenders to enforce such clauses in many states.
However, effective October 15, 1982, Congress enacted the Garn-St Germain
Depository Institutions Act of 1982 (the "Act") which purports to preempt state
laws which prohibit the enforcement of "due-on-sale" clauses by providing among
other matters, that "due-on-sale" clauses in certain loans (which loans may
include the Mortgage Loans) made after the effective date of the Act are
enforceable, within certain limitations as set forth in the Act and the
regulations promulgated thereunder. "Due-on-sale" clauses contained in mortgage
loans originated by federal savings and loan associations or federal savings
banks are fully enforceable pursuant to regulations of the Office of Thrift
Supervision ("OTS"), as successor to the Federal Home Loan Bank Board ("FHLBB"),
which preempt state law restrictions on the enforcement of such clauses.
Similarly, "due-on-sale" clauses in mortgage loans made by national banks and
federal credit unions are now fully enforceable pursuant to preemptive
regulations of the Office of the Comptroller of the Currency and the National
Credit Union Administration, respectively.
The Act created a limited exemption from its general rule of
enforceability for "due-on-sale" clauses in certain mortgage loans ("Window
Period Loans") which were originated by non-federal lenders and made or assumed
in certain states ("Window Period States") during the period, prior to October
15, 1982, in which that state prohibited the enforcement of "due-on-sale"
clauses by constitutional provision, statute or statewide court decision (the
"Window Period"). Though neither the Act nor the FHLBB regulations promulgated
thereunder actually names the Window Period States, FHLMC has taken the
position, in prescribing mortgage loan servicing standards with respect to
mortgage loans which it has purchased, that the Window Period States were:
Arizona, Arkansas, California, Colorado, Georgia, Iowa, Michigan, Minnesota, New
Mexico, Utah and Washington. Under 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."
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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.
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
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obligations of the obligee under the Contracts. Each Contract evidences both (a)
the obligation of the obligor to repay the loan evidenced thereby, and (b) the
grant of a security interest in the Manufactured Home to secure repayment of
such loan. Certain aspects of both features of the Contracts are described more
fully below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code (the "UCC") in effect in the states in which the Manufactured
Homes initially were registered. Pursuant to the UCC, the sale of chattel paper
is treated in a manner similar to perfection of a security interest in chattel
paper. Under the Pooling and Servicing Agreement, the Servicer will transfer
physical possession of the Contracts to the Trustee or a designated custodian or
may retain possession of the Contracts as custodian for the Trustee. In
addition, the Servicer will make an appropriate filing of a UCC-1 financing
statement in the appropriate states to give notice of the Trustee's ownership of
the Contracts. Unless otherwise specified in the related Prospectus Supplement,
the Contracts will not be stamped or marked otherwise to reflect their
assignment from the Depositor to the Trustee. Therefore, if through negligence,
fraud or otherwise, a subsequent purchaser were able to take physical possession
of the Contracts without notice of such assignment, the Trustee's interest in
Contracts could be defeated.
Security Interests in the Manufactured Homes
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some non-title states, perfection pursuant
to the provisions of the UCC is required. The Servicer may effect such notation
or delivery of the required documents and fees, and obtain possession of the
certificate of title, as appropriate under the laws of the state in which any
manufactured home securing a manufactured housing conditional sales contract is
registered. In the event the Servicer fails, due to clerical errors, to effect
such notation or delivery, or files the security interest under the wrong law
(for example, under a motor vehicle title statute rather than under the UCC, in
a few states), the Certificateholders may not have a first priority security
interest in the Manufactured Home securing a Contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the secured party must file either a "fixture filing" under the provisions
of the UCC or a real estate mortgage under the real estate laws of the state
where the home is located. These filings must be made in the real estate records
office of the county where the home is located. Substantially all of the
Contracts contain provisions prohibiting the borrower from permanently attaching
the Manufactured Home to its site. So long as the borrower does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to its site,
other parties could obtain an interest in the Manufactured Home which is prior
to the security interest originally retained by the Unaffiliated Seller and
transferred to the Depositor. With respect to a Series of Certificates and if so
described in the related Prospectus Supplement, the Servicer may be required to
perfect a security interest in the Manufactured Home under applicable real
estate laws. The Servicer will represent that at the date of the initial
issuance of the related Certificates it has obtained a perfected first priority
security interest by proper notation or delivery of the required documents and
fees with respect to substantially all of the Manufactured Homes securing the
Contracts.
The Depositor will cause the security interests in the Manufactured
Homes to be assigned to the Trustee on behalf of the Certificateholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Depositor
nor the Trustee will amend the certificates of title to identify the Trustee or
the Trust Fund as the new secured party, and neither the Depositor nor the
Servicer will deliver the certificates of title to the Trustee or note thereon
the interest of the Trustee. Accordingly, the Servicer (or the Unaffiliated
Seller) which continue to be named as the secured party on the certificates of
title relating to the Manufactured Homes. In many states, such assignment is an
effective conveyance of such security interest without amendment of any lien
noted on the related certificate of title and the new secured party succeeds to
the Depositor's rights as the secured party. However, in some states there
exists a risk that, in the absence of an amendment to the certificate of title,
such assignment of the security interest in the Manufactured Home might not be
effective or perfected or that, in the absence of such
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notation or delivery to the Trustee, the assignment of the security interest in
the Manufactured Home might not be effective against creditors of the Servicer
(or the Unaffiliated Seller) or a trustee in bankruptcy of the Servicer (or the
Unaffiliated Seller).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Servicer (or
the Unaffiliated Seller) on the certificate of title or delivery of the required
documents and fees will be sufficient to protect the Certificateholders against
the rights of subsequent purchasers of a Manufactured Home or subsequent lenders
who take a security interest in the Manufactured Home. If there are any
Manufactured Homes as to which the security interest assigned to the Trustee is
not perfected, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the Trustee as
the new secured party on the certificate of title that, through fraud or
negligence, the security interest of the Certificateholders could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and not
re-register the Manufactured Home in such state, and if steps are not taken to
re-perfect the Trustee's security interest in such state, the security interest
in the Manufactured Home would cease to be perfected. A majority of states
generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien, the
Servicer would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the Trustee
would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing conditional sales contracts, the Servicer takes steps to effect such
re-perfection upon receipt of notice of registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a manufactured home, the Trustee (or
its custodian) must surrender possession of the certificate of title or the
Servicer will receive notice as a result of its lien noted thereon and
accordingly will have an opportunity to require satisfaction of the related
manufactured housing conditional sales contract before release of the lien.
Under the Pooling and Servicing Agreement, the Servicer is obligated to take
steps, at the Servicer's expense, as are necessary to maintain perfection of
security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufacturer Home and liens for personal property taxes take priority over a
perfected security interest. The Unaffiliated Seller will represent in the
Pooling and Servicing Agreement that it has no knowledge of any such liens with
respect to any Manufactured Home securing payment on any Contract. However, such
liens could arise at any time during the term of a Contract. No notice will be
given to the Trustee or Certificateholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes
The Servicer on behalf of the Trustee, to the extent required by the
related Pooling and Servicing Agreement, may take action to enforce the
Trustee's security interest with respect to Contracts in default by repossession
and resale of the Manufactured Homes securing such defaulted Contracts. So long
as the Manufactured Home has not become subject to the real estate law, a
creditor can repossess a Manufactured Home securing a Contract by voluntary
surrender, by "self-help" repossession that is "peaceful" (i.e., without breach
of the peace) or, in the absence of voluntary surrender and the ability to
repossess without breach of the peace, by judicial process. The holder of a
Contract must give the debtor a number of days' notice, which varies from 10 to
30 days depending on the state, prior to commencement of any repossession. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states also
requires that the debtor be given notice of any sale prior to resale of the unit
so that the debtor may redeem at or before such resale. In the event of such
repossession and resale of a Manufactured Home, the Trustee would be entitled to
be paid out of the sale proceeds
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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.
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.
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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.
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.
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Environmental Risks
Real property pledged for a Mortgaged Loan or Contract as security to a
lender may be subject to unforeseen environmental risks. Of particular concern
may be those mortgaged properties which have been the site of manufacturing,
industrial or disposal activity. Such environmental risks may give rise to (a) a
diminution in value of property securing any Mortgage Loan or the inability to
foreclose against such property or (b) in certain circumstances as more fully
described below, liability for clean-up costs or other remedial actions, which
liability could exceed the value of such property or the principal balance of
the related Mortgage Loan.
Under the laws of certain states, failure to perform the remediation
required or demanded by the state of any condition or circumstance that (i) may
pose an imminent or substantial endangerment to the public health or welfare or
the environment, (ii) may result in a release or threatened release of any
Hazardous Material, or (iii) may give rise to any environmental claim or demand
(each such condition or circumstance, or "Environmental Condition") may give
rise to a lien on the property to ensure the reimbursement of remedial costs
incurred by the state. In several states such lien has priority over the lien of
an existing mortgage against such property. The value of a Mortgaged Property as
collateral for a Mortgage Loan could therefore be adversely affected by the
existence of any such Environmental Condition.
The state of the law is currently unclear as to whether and under what
circumstances clean-up costs, or the obligation to take remedial actions, could
be Unposed on a secured lender such as the Trust Fund. Under the laws of some
states and under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), a lender may be liable as an
"owner or operator" for costs of addressing releases or threatened releases of
hazardous substances on a mortgaged property if such lender or its agents or
employees have participated in the management of the operations of the borrower,
even though CERCLA's definition of "owner or operator," however, is a person
"who without participating in the management of the facility, holds indicia of
ownership primarily to protect his security interest" (the "secured-creditor
exemption"). This exemption for holders of a security interest such as a secured
lender applies only when the lender seeks to protect its security interest in
the contaminated facility or property. Thus, if a lender's activities begin to
encroach on the actual management of such facility or property, the lender faces
potential liability as an "owner or operator" under CERCLA. Similarly, when a
lender forecloses and takes title to a contaminated facility or property
(whether it holds the facility or property as an investment or leases it to a
third party), the lender may incur potential CERCLA liability.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly contained
CERCLA's secured-creditor exemption. The court held that a lender need not have
involved itself in the day-to-day operations of the facility or participated in
decisions relating to hazardous waste to be liable under CERCLA; rather,
liability could attach to a lender if its involvement with the management of the
facility is broad enough to support the inference that the lender had the
capacity to influence the borrower's treatment of hazardous waste. The court
added that a lender's capacity to influence such decisions could be inferred
from the extent of its involvement in the facility's financial management. A
subsequent decision by the United States Court of Appeals for the Ninth Circuit
in In re Bergsoe Metal Corp., disagreeing with the Fleet Factors court, held
that a secured lender had no liability absent "some actual management of the
facility" on the part of the lender. On April 29, 1992, the United States
Environmental Protection Agency (the "EPA") issued a final rule interpreting and
delineating CERCLA's secured-creditor exemption. The final rule defines a
specific the range of permissible actions that may be undertaken by a holder of
a contaminated facility without exceeding the bounds of the secured-creditor
exemption. Issuance of this rule by the EPA under CERCLA would not necessarily
affect the potential for liability in actions by either a state or a private
party under CERCLA or in actions under other federal or state laws which may
impose liability on "owners or operators" but do not incorporate the
second-creditor exemption.
If a lender is or becomes liable for clean-up costs, it may bring an
action for contribution against the current owners or operators, the owners or
operators at the time of on-site disposal activity or any other party who
contributed to the environmental hazard, but such persons or entities may be
bankrupt or otherwise judgment proof. Furthermore, such action against the
borrower may be adversely affected by the limitations on recourse in the
documents in the Mortgage Document File. Similarly, in some states
anti-deficiency legislation and other statues requiring the lender to exhaust
its security before bringing a personal action against the borrower-trustor (see
"Anti-
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Deficiency Legislation and Other Limitations on Lenders" below) may curtail the
lender's ability to recover from its borrower the environmental clean-up and
other related costs and liabilities by the lender.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's Mortgage Loan or Contract
(including a borrower who is a member of the National Guard or is in reserve
status at the time of the origination of the Mortgage Loan or Contract and is
later called to active duty) may not be charged interest above an annual rate of
6% during the period of such borrower's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such action
could have an effect, for an indeterminate period of time, on the ability of the
Servicer to collect full amounts of interest on certain of the Mortgage Loans or
Contracts in a Trust Fund. Any shortfall in interest collections resulting from
the application of the Relief Act could result in losses to the holders of the
Certificates of the related Series. In addition, the Relief Act imposes
limitations which would impair the ability of the Servicer to foreclose on an
affected Mortgage Loan or Contract during the borrower's period of active duty
status. Thus, in the event that such a Mortgage Loan or Contract goes into
default, there may be delays and losses occasioned by the inability to realize
upon the Mortgaged Property or Manufactured Home in a timely fashion.
Type of Mortgaged Property
The lender may be subject to additional risk depending upon the type
and use of the Mortgaged Property in question. For instance, Mortgaged
Properties which are hospitals, nursing homes or convalescent homes may present
special risks to lenders in large part due to significant governmental
regulation of the operation, maintenance, control and financing of health care
institutions. Mortgages on Mortgaged Properties which are owned by the Borrower
under a condominium form of ownership are subject to the declaration, by-laws
and other rules and regulations of the condominium association. Mortgaged
Properties which are hotels or motels may present additional risk to the lender
in that: (i) hotels and motels are typically operated pursuant to franchise,
management and operating agreements which may be terminable by the operator; and
(ii) the transferability of the hotel's operating, liquor and other licenses to
the entity acquiring the hotel either through purchase or foreclosure is subject
to the vagaries of local law requirements. In addition, Mortgaged Properties
which are multifamily residential properties may be subject to rent control
laws, which could impact the future cash flows of such properties. Finally,
Mortgaged Properties which are financed in the installment sales contract method
may leave the holder of the note exposed to tort and other claims as the true
owner of the property which could impact the availability of cash to pass
through to investors.
Certain Matters Relating to Insolvency
The Unaffiliated Seller of the Mortgage Loans or Contracts and the
Depositor intend that the transfer of such Mortgage Loans or Contracts to the
Trust Fund constitute a sale rather for a pledge of the Mortgage Loans or
Contracts to secure indebtedness of the seller of the Mortgage Loans or
Contracts. However, if the Unaffiliated Seller were to become a debtor under the
federal bankruptcy code or be placed in a conservatorship or receivership under
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), as the case may be, it is possible that a creditor, receiver,
conservator or trustee-in-bankruptcy of such seller may argue that the sale of
the Mortgage Loans or Contracts by the Unaffiliated Seller is a pledge of the
Mortgage Loans or Contracts rather than a sale. This position, if argued or
accepted by a court, could result in a delay in or reduction of distributions to
the related Certificateholders.
Under FIRREA the FDIC as receiver or conservator of a Servicer subject
to its jurisdiction may enforce a contract notwithstanding any provision of the
contract providing for termination thereof by reason of the insolvency of, or
appointment of a receiver or conservator for, the Servicer. Consequently,
provisions in a Pooling and Servicing Agreement providing for an Event of
Default upon certain events of insolvency, receivership or conservatorship of
the Servicer may not be enforceable against the FDIC as receiver or conservator
to the extent that the exercise of such rights is based solely upon the
insolvency of or appointment of a receiver or conservator for the Servicer. In
addition, the FDIC may transfer the assets and liabilities of an institution in
receivership or conservatorship to another institution.
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Bankruptcy Laws
Numerous statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to obtain payment of the loan, to realize
upon collateral and/or enforce a deficiency judgment. For example, under federal
bankruptcy law, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of the
bankruptcy petition, and, often, no interest or principal payments are made
during the course of the bankruptcy proceeding. The delay and the consequences
thereof caused by or on behalf of a junior lienor may stay the senior lender
from taking action to foreclose out such junior lien. In a case under the
Bankruptcy Code, the lender is precluded from foreclosing without authorization
from the bankruptcy court. In addition, a court with federal bankruptcy
jurisdiction may permit a debtor through his or her Chapter 11 or Chapter 13
rehabilitative plan to cure a monetary default in respect of a mortgage loan on
the debtor's residence by paying arrearage within a reasonable time period and
reinstating the original mortgage loan payment schedule even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been entered
in state court (provided no sale of the residence had yet occurred) prior to the
filing of the debtor's petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a mortgage loan default by
paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule, and reducing the lender's security interest to the value of
the residence, thus leaving the lender in the position of a general unsecured
creditor for the difference between the value of the residence and the
outstanding balance of the loan.
Federal bankruptcy law may also interfere with or affect the ability of
the secured mortgage lender to enforce an assignment by a mortgagor of rent and
leases related to the Mortgaged Property if the related mortgagor is in a
bankruptcy proceeding. Under Section 362 of the Bankruptcy Code, the mortgagee
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue can be time-consuming and may result in
significant delays in the receipt of the rents. Rents may also escape an
assignment thereof (i) if the assignment is not fully perfected under state law
prior to commencement of the bankruptcy proceeding, (ii) to the extent such
rents are used by the borrower to maintain the mortgaged property, or for other
court authorized expenses, or (iii) to the extent other collateral may be
substituted for the rents.
To the extent a mortgagor's ability to make payment on a mortgage loan
is dependent on payments under a lease of the related property, such ability may
be impaired by the commencement of a bankruptcy proceeding relating to a lessee
under such lease. Under the federal bankruptcy laws, the filing of a petition in
bankruptcy by or on behalf of a lessee results in a stay in bankruptcy against
the commencement or continuation of any state court proceeding for past due
rent, for accelerated rent, for damages or for a summary eviction order with
respect to a default under the lease that occurred prior to the filing of the
lessee's petition.
In addition, federal bankruptcy law generally provides that a trustee
or debtor in possession in a bankruptcy or reorganization case under the
Bankruptcy Code may, subject to approval of the court (a) assume the lease and
retain it or assign it to a third party or (b) reject the lease. If the lease is
assumed, the trustee or debtor in possession (or assignee, if applicable) must
cure any defaults under the lease, compensate the lessor for its losses and
provide the lessor with "adequate assurance" of future performance. Such
remedies may be insufficient, however, as the lessor may be forced to continue
under the lease with a lessee that is a poor credit risk or an unfamiliar tenant
if the lease was assigned, and any assurances provided to the lessor may, in
fact, be inadequate. Furthermore, there is likely to be a period of time between
the date upon which a lessee files a bankruptcy petition and the date upon which
the lease is assumed or rejected. Although the lessee is obligated to make all
lease payments currently with respect to the post-petition period, there is a
risk that such payments will not be made due to the lessee's poor financial
condition. If the lease is rejected, the lessor will be treated as an unsecured
creditor with respect to its claim for damages for termination of the lease and
the mortgagor must release the mortgage property before the flow of lease
payments will recommence. In addition, pursuant to Section 502(b)(6) of the
Bankruptcy Code, a lessor's damages for lease rejection are limited by a
formula.
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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
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)
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"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 servicing fees and other expenses but excluding amounts payable to
Holders of any corresponding Grantor 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.
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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 distribution 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.
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.
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."
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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 interests 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. Except 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
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
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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.
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
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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.
Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a REMIC 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
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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."
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
record-holder. 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 pas 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.
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
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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 special 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, Dewey Ballantine,
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 Securities 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
special 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 exchanges 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 price 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
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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.
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
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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.
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 allocate 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
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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.
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 all "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 original 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
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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 for 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.
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
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"prohibited transaction" within the meaning of ERISA and the Code unless an
administrative exemption described below or some other exemption is available.
Special caution should be exercised before the assets of a Plan are
used to purchase a Certificate if, with respect to such assets, the Depositor,
the Servicer (if any) or the Trustee or an affiliate thereof either: (a) has
investment discretion with respect to the investment of such assets of such
Plan; or (b) has authority or responsibility to give, or regularly gives
investment advice with respect to such assets for a fee and pursuant to an
agreement or understanding that such advice will serve as a primary basis for
investment decisions with respect to such assets and that such advice will be
based on the particular investment needs of the Plan.
Delegation of Fiduciary Duty
Further, if the assets included in a Trust Fund were deemed to
constitute Plan assets, it is possible that a Plan's investment in the
Certificates might be deemed to constitute a delegation, under ERISA, of the
duty to manage Plan assets by the fiduciary deciding to invest in the
Certificates, and certain transactions involved in the operation of the Trust
Fund might be deemed to constitute prohibited transactions under ERISA and the
Code.
The U.S. Department of Labor (the "Department") has published final
regulations (the "Regulations") concerning whether or not a Plan's assets would
be deemed to include an interest in the underlying assets of an entity (such as
a Trust Fund) for purposes of the reporting and disclosure and general fiduciary
responsibility provisions of ERISA, as well as for the prohibited transaction
provisions of ERISA and the Code, if the Plan acquires an "equity interest"
(such as a Certificate) in such entity.
Certain exceptions are provided in the Regulations whereby an investing
Plan's assets would be deemed merely to include its interest in the Certificates
instead of being deemed to include an interest in the assets of a Trust Fund.
However, it cannot be predicted in advance nor can there be any continuing
assurance whether such exceptions may be met. For example, one of the exceptions
in the Regulations states that the underlying assets of an entity will not be
considered "plan assets" if, immediately after the most recent acquisition of
any equity interest in the entity, whether or not from the issuer or an
underwriter, less than 25% of the value of each class of equity interest is held
by "benefit plan investors," which are defined as Plans, individual retirement
accounts, and employee benefit plans not subject to ERISA (for example,
governmental plans), but this exception is tested immediately after each
acquisition of an equity interest in the entity whether upon initial issuance or
in the secondary market.
Administrative Exemptions
Individual Administrative Exemptions. Several underwriters of
mortgage-backed securities have applied for and obtained ERISA prohibited
transaction exemptions (each, an "Individual Exemption") which are in some
respects broader than Prohibited Transaction Class Exemption 83-1 (described
below). Such exemptions can only apply to mortgage-backed securities which among
other conditions, are sold in an offering with respect to which such underwriter
serves as the sole or a managing underwriter, or as a selling or placement
agent. If such an Individual Exemption might be applicable to a Series of
Certificates, the related Prospectus Supplement will refer to such possibility.
An Individual Exemption does not apply to Plans sponsored by the Restricted
Group (as defined below) or the Trustee.
Some of the conditions that must be satisfied for an Individual
Exemption to apply are the following:
(1) The rights and interests evidenced by Certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by other
Certificates of the Trust Fund;
(2) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from any of Standard & Poor's Structural Ratings Group,
Moody's Investors Service, Inc., Duff & Phelps Credit Rating Co., or Fitch
Investors Service, L.P. ("National Credit Rating Agencies");
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(3) The Trustee is not an affiliate of any of the Depositor, the
underwriter specified in the applicable Prospectus Supplement, the Servicer
(if any), any obligor with respect to Mortgage Loans included in the Trust
Fund constituting more than five percent of the aggregate unamortized
principal balance of the assets in the Trust Fund, or any affiliate of such
parties (the "Restricted Group"); and
(4) The Plan investing in the Certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
(5) The sum of all payments made to and retained by such underwriters
must represent not more than reasonable compensation for underwriting the
Certificates; the sum of all payments made to and retained by the Seller
pursuant to the assignment of the obligations or receivables to the related
Trust Fund must represent not more than the fair market value of such
obligations; and the sum of all payments made to and retained by the
Servicer and any Sub-service must represent not more than reasonable
compensation for such person's services under the Pooling and Servicing
Agreement and reimbursement of such person's reasonable expenses in
connection there with;
(6) (i) the investment pool consists only of assets of the type
enumerated in the exemption and which have bene included in other
investment pools; (ii) certificates evidencing interests in such other
investment pools have been rated in one of the three highest generic rating
categories by one of the National Credit Rating agencies for at least one
year prior to a Plan's acquisition of certificates; and (iii) certificates
evidencing interests in such other investment pools have been purchased by
investors other than Plans for at least one year prior to a Plan's
acquisition of certificates; and
(7) The acquisition of Certificates by certain Plans must be on terms
that are at least as favorable to the Plan as they would be in any arm's
length transaction with an unrelated party.
If the conditions to an Individual Exemption are met, whether or not a
Plan's assets would be deemed to include an ownership interest in the Mortgage
Loans in a Mortgage Pool, the acquisition, holding and resale of the
Certificates by Plans would be exempt from the prohibited transaction provisions
of ERISA and the Code.
Moreover, an Individual Exemption can provide relief from certain
self-dealing/conflict of interest prohibited transactions, only if, among other
requirements, (i) a Plan's investment in Certificates of any class does not
exceed twenty-five percent of all of the Certificates of that Class outstanding
at the time of the acquisition and (ii) immediately after the acquisition no
more than twenty-five percent of the assets of the Plan with respect to which
such person is a fiduciary are invested in Certificates representing an interest
in one or more trusts containing assets sold or served by the same person.
PTE 83-1. Prohibited Transaction Class Exemption 83-1 for Certain
Transactions Involving Mortgage Pool Investment Trusts ("PTE 83-1") permits
certain transactions involving the creation, maintenance and termination of
certain residential mortgage pools and the acquisition and 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
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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.
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
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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 extends the ability of certain entities
(in particular, insurance companies) to invest in "mortgage related securities,"
in most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Accordingly, the investors affected by such
legislation will be authorized to invest in the Certificates only to the extent
provided in such legislation.
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with mortgage related securities without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in mortgage
related securities, and national banks may purchase mortgage related securities
for their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. ss. 24 (Seventh), subject in each
case to such regulations as the applicable federal regulatory authority may
prescribe. In this connection, federal credit unions should review National
Credit Union Administration (the "NCUA") Letter to Credit Unions No. 96, as
modified by Letter No. 108, which includes guidelines to assist federal credit
unions in making investment decisions for mortgage related securities. The NCUA
has adopted rules, 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
97
<PAGE>
unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Certificates adversely affect the
liquidity of the non-SMMEA Certificates.
Investors should consult with their own legal advisors in determining
whether and to what extent the Certificates constitute legal investments for
such investors.
PLAN OF DISTRIBUTION
The Depositor may sell the Certificates offered hereby in Series either
directly or through underwriters. The related Prospectus Supplement or
Prospectus Supplements for each Series will describe the terms of the offering
for that Series and will state the public offering or purchase price of each
Class of Certificates of such Series, or the method by which such price is to be
determined, and the net proceeds to the Depositor from such sale.
If the sale of any Certificates is made pursuant to an underwriting
agreement pursuant to which one or more underwriters agree to act in such
capacity, such Certificates will be acquired by such underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices to be determined at the time of sale or at the time of commitment
therefor. Firm commitment underwriting and public reoffering by underwriters may
be done through underwriting syndicates or through one or more firms acting
alone. The specific managing underwriter or underwriters, if any, with respect
to the offer and sale of a particular Series of Certificates will be set forth
on the cover of the Prospectus Supplement related to such Series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement. The Prospectus Supplement will describe any discounts and
commissions to be allowed or paid by the Depositor to the underwriters, any
other items constituting underwriting compensation and any discounts and
commissions to be allowed or paid to the dealers. The obligations of the
underwriters will be subject to certain conditions precedent. Unless otherwise
provided in the related Prospectus Supplement, the underwriters with respect to
a sale of any Class of Certificates will be obligated to purchase all such
Certificates if any are purchased. Pursuant to each such underwriting agreement,
the Depositor will indemnity the related underwriters against certain civil
liabilities, including liabilities under the Securities Act.
If any Certificates are offered other than through underwriters
pursuant to such underwriting agreements, the related Prospectus Supplement or
Prospectus Supplements will contain information regarding the terms of such
offering and any agreements to be entered into in connection 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.
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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.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a
part and the exhibits thereto are on file at the offices of the Commission in
Washington, D.C. Copies may be obtained at rates prescribed by the Commission
upon request to the Commission, and may be inspected, without charge, at the
offices of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. See
"Available Information."
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMCs Information Statement and the most recent Supplement to such Information
Statement and any quarterly report made available by FHLMC can be obtained by
writing or calling the Investor Inquiry Department at FHLMC at 8200 Jones Branch
Drive, McLean Virginia 22102 (outside Washington, D.C. metropolitan area,
telephone 800-336-FMPC; within Washington, D.C. metropolitan area, telephone
703-759-8160). The Depositor has not and will not participate in the preparation
of FHLMC's Offering Circulars, Information Statements or Supplements.
Copies of FNMA's most recent Prospectus for FNMA Certificates and
FNMA's annual report and quarterly financial statements as well as other
financial information are available from the Senior Vice President for Investor
Relations of FNMA, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016
(202-752-7115). The Depositor has not and will not participate in the
preparation of FNMA's Prospectuses.
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INDEX OF SIGNIFICANT DEFINITIONS
Term Page
---- ----
1996 Act .....................................................................81
Act ..........................................................................72
Advance ......................................................................58
Advance Reserve ..............................................................44
Advances .....................................................................10
APR ..........................................................................22
ARM Buy-Outs .................................................................22
Balloon Loan .................................................................20
Balloon Loans. ...............................................................14
Balloon Period ...............................................................20
Basic Senior Class Distribution ..............................................36
Buy-Down Account .............................................................20
Buy-Down Loans ...............................................................20
Call protection ..............................................................41
CERCLA .......................................................................78
Certificate Account ..........................................................55
Certificate Account Depository ...............................................55
Certificateholder .............................................................1
Certificates ..................................................................1
Class .........................................................................1
Code .....................................................................11, 81
Commission ....................................................................3
Compound Interest Certificates ...............................................32
Contract Pool ................................................................18
Contract Rate .............................................................7, 22
Contracts .................................................................1, 22
Convertible Mortgage Loans ...................................................18
Cooperative Loans ............................................................18
Cooperative Notes ............................................................18
Cooperatives .................................................................18
Credit Enhancer ..............................................................17
Cut-Off Date Aggregate Principal Balance..................................19, 23
D&P ..........................................................................94
Debt Securities ..........................................................11, 81
Deferred Interest ........................................................14, 20
Definitive Certificate .......................................................30
Deleted Loan .................................................................28
Depositor ..............................................................1, 4, 52
Determination Date ...........................................................33
Direct or Indirect Participants ..............................................16
Distribution Dates ............................................................7
DTC ..........................................................................31
Due Date .................................................................19, 23
Due Period ...................................................................41
Eligible Investments .........................................................45
Environmental Condition ......................................................78
EPA ..........................................................................78
ERISA ....................................................................11, 93
Extension protection .........................................................41
FASIT .........................................................................2
FASIT High-Yield Securities ...............................................2, 11
100
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FASIT Ownership Interest ......................................................2
FASIT Regular Securities ..................................................2, 11
FDIC .........................................................................55
FHLBB ........................................................................72
FIRREA .......................................................................79
Fitch ........................................................................94
Funding Period ...............................................................32
Gain From Acquired Property ..................................................35
GEM Loans ....................................................................21
GPM Fund .....................................................................22
GPM Mortgage Loans ...........................................................21
Grantor Trust Estate .........................................................81
Grantor Trust Fractional Interest Security....................................81
Grantor Trust Securities .....................................................11
Grantor Trust Strip Security .................................................81
Holder .......................................................................81
Indemnification Payments .....................................................35
Initial Deposit ..............................................................43
Insurance Proceeds ...........................................................56
Interest Accrual Period ......................................................49
Interest Rate .................................................................1
IRS ..........................................................................83
Liquidated Contract ..........................................................34
Liquidated Mortgage Loan .................................................15, 34
Liquidation Proceeds .....................................................15, 55
Loan Sale Agreement ..........................................................25
Loan-to-Value Ratio ......................................................19, 22
Moody's ......................................................................94
Mortgage Certificate Pool ....................................................18
Mortgage Loans ................................................................1
Mortgage Notes ...............................................................18
Mortgage Pool ................................................................18
Mortgage Rate .................................................................7
Mortgaged Properties .........................................................20
Mortgages ....................................................................18
Mortgagor ....................................................................14
Multi-Class Certificates ......................................................1
Net Contract Rate .............................................................7
Net Insurance Proceeds .......................................................56
Net Liquidation Proceeds .....................................................56
Net Mortgage Rate .............................................................7
Notional Amount ...............................................................1
OTS ..........................................................................72
Partnership Interests ........................................................11
Pass-Through Rate .............................................................7
Paying Agent .................................................................57
Payment Deficiencies .........................................................43
Percentage Certificates ......................................................31
Plans ........................................................................93
Pool ..........................................................................1
Pool Distribution Amount .....................................................33
Pool Value Group .............................................................40
Pooling and Servicing Agreement ...............................................4
Premium Security .............................................................91
Prepayment Assumption ....................................................84, 90
Prepayment Interest Shortfall ................................................58
101
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PTE 83-1 .....................................................................95
Purchase Obligation ..........................................................13
Purchase Price ...............................................................27
Rating Agency ................................................................11
Record Date ...................................................................7
Registration Statement ........................................................3
Regular Certificates ......................................................2, 30
Relief Act ...............................................................17, 79
REMIC .....................................................................2, 81
REMIC Regular Securities .....................................................11
REMIC Regular Security .......................................................83
REMIC Regulations ............................................................83
REMIC Residual Securities ....................................................11
REMIC Residual Security ......................................................83
REMIC Securities .............................................................81
REMIC Trust ..................................................................83
Repurchase Proceeds ..........................................................33
Residual Certificates .....................................................2, 30
Scheduled Principal ..........................................................34
Secured-creditor exemption ...................................................78
Securities Act ................................................................3
Senior Certificates .......................................................2, 30
Senior Class Credit Enhancement ..............................................36
Senior Class Distributable Amount ............................................34
Senior Class Principal Portion ...............................................34
Senior Class Shortfall .......................................................36
Senior Class Shortfall Accruals ..............................................36
Series ........................................................................1
Servicer ......................................................................1
Servicing Account ............................................................61
Servicing Fee .................................................................7
Settlement Date ..............................................................84
Shifting Interest Certificates ................................................2
SMMEA ....................................................................10, 96
Special Distributions ........................................................42
Special Hazard Contract ......................................................46
Special Hazard Mortgage Loan .................................................46
Standard Certificates .........................................................1
Standard Hazard Insurance Policy .............................................24
Stated Amount .................................................................1
Stripped Certificates .........................................................1
Sub-Servicer ..............................................................4, 54
Sub-Servicing Account ........................................................55
Subclass ......................................................................1
Subordinated Amount ...........................................................9
Subordinated Certificates .................................................2, 30
Subordinated Class Distributable Amount.......................................34
Subordinated Class Principal Portion..........................................35
Subordination Reserve Fund ....................................................9
Substitute Loan ..............................................................28
Title V ..................................................................73, 76
Trust Fund ....................................................................1
UCC ......................................................................69, 74
Unaffiliated Sellers ..........................................................4
United States person .........................................................92
Unpaid Interest Shortfall ....................................................37
102
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Voting Interests .............................................................65
Window Period ................................................................72
Window Period Loans ..........................................................72
Window Period States .........................................................72
103
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================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus and,
if given or made, such information or representations must not be relied upon as
having been authorized by the Depositor or by the Underwriter. This Prospectus
Supplement and the Prospectus do not constitute an offer to sell, or a
solicitation of an offer to buy, the securities offered hereby by anyone in any
jurisdiction in which such an offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so or
to anyone to whom it is unlawful to make any such offer or solicitation. Neither
the delivery of this Prospectus Supplement and the Prospectus nor any sale made
hereunder shall, under any circumstances, create an implication that information
herein or therein is correct as of any time since the date of this Prospectus
Supplement or the Prospectus.
TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
Summary Of Prospectus Supplement .......................................... 1
Risk Factors .............................................................. 20
The Insurer ............................................................... 26
The Trust ................................................................. 28
The Servicer And The Originator ........................................... 29
Emergent Group, Inc. ...................................................... 29
The Mortgage Pool ......................................................... 30
Yield On The Notes ........................................................ 47
Description Of The Notes .................................................. 55
Certain Federal Income Tax Consequences ................................... 73
Use Of Proceeds ........................................................... 76
Plan Of Distribution ...................................................... 76
Legal Matters ............................................................. 77
Experts ................................................................... 77
Ratings ................................................................... 77
Legal Investment .......................................................... 77
Erisa Considerations ...................................................... 78
Index Of Defined Terms .................................................... 80
PROSPECTUS
Reports .................................................................. 3
Available Information .................................................... 3
Incorporation of Certain Information by Reference ........................ 3
Summary of Prospectus .................................................... 4
Risk Factors ............................................................. 13
The Trust Funds .......................................................... 18
Description of the Certificates .......................................... 29
Credit Support ........................................................... 43
Prepayment and Yield Considerations ...................................... 48
Use of Proceeds .......................................................... 52
The Depositor ............................................................ 52
Underwriting Guidelines .................................................. 52
Servicing of the Mortgage Loans and Contracts ............................ 54
The Pooling and Servicing Agreement ...................................... 64
Certain Legal Aspects of the Mortgage Loans and Contracts ................ 67
Certain Federal Income Tax Consequences .................................. 81
ERISA Considerations ..................................................... 93
Legal Investment ......................................................... 96
Plan of Distribution ..................................................... 98
Legal Matters ............................................................ 99
Rating ................................................................... 99
Additional Information ................................................... 99
Index of Significant Definitions ......................................... 100
================================================================================
================================================================================
Emergent Home Equity Loan Trust
1997-4
Emergent Mortgage Corp.
(Servicer & Originator)
Prudential Securities
Secured Financing Corporation
(Depositor)
$148,500,000
$36,000,000 Class A-1 Variable Rate Notes
$22,000,000 Class A-2 6.470% Fixed Rate Notes
$20,000,000 Class A-3 6.505% Fixed Rate Notes
$29,000,000 Class A-4 6.700% Fixed Rate Notes
$26,500,000 Class A-5 7.080% Fixed Rate Notes
$15,000,000 Class A-6 6.685% Fixed Rate Notes
Emergent Home Equity Loan
Asset Backed Securities,
Series 1997-4
------------------
PROSPECTUS SUPPLEMENT
------------------
Prudential Securities Incorporated
December 4, 1997
================================================================================
