Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission and has become effective. This Prospectus
shall not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of such State.
SUBJECT TO COMPLETION, DATED MARCH 10, 1997
PROSPECTUS SUPPLEMENT
(To Prospectus Dated December 4, 1996)
Emergent Home Equity Loan Trust 1997-1
$75,000,000 (Approximate)
$_________ Class A-1 Certificates, ___% Pass-Through Rate
$_________ Class A-2 Certificates, ___% Pass-Through Rate
$_________ Class A-3 Certificates, ___% Pass-Through Rate
Emergent Group, Inc.
(Parent of Originator)
Emergent Mortgage Corp.
(Servicer & Originator)
Prudential Securities Secured Financing Corporation
(Depositor)
- -------------------------------------------------------------------------------
The Emergent Home Equity Loan Pass-Through Certificates Series 1997-1 will
consist of three classes of senior certificates (collectively, the
"Certificates"), designated as (i) the Class A-1 Certificates (the "Class A-1
Certificates"), (ii) the Class A-2 Certificates (the "Class A-2 Certificates")
and (iii) the Class A-3 Certificates (the "Class A-3 Certificates" collectively
with the Class A-1 Certificates and the Class A-2 Certificates, the "Class A
Certificates"), together with one or more classes of subordinate certificates
(collectively, the "Subordinate Certificates"). The rights of the holders of the
Subordinate 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 Certificates to the extent described herein. Only the Class A
Certificates are offered hereby.
Distributions on the Class A Certificates will be made on the 20th day of
each month or, if such day is not a business day, on the next succeeding
business day, beginning in April 1997 (each, a "Distribution Date"). As
described more fully herein, interest payable with respect to each Distribution
Date will accrue on the Class A Certificates during the calendar month
immediately preceding the month in which such Distribution Date occurs. Interest
will be calculated on the basis of a 360-day year consisting of twelve 30-day
months, and will be based on the then-outstanding applicable Certificate
Principal Balance (defined below) and the applicable Pass-Through Rate (defined
below) thereon, as reduced by certain interest shortfalls.
On or before the date of issuance of the Certificates, the Depositor will
obtain from Financial Security Assurance Inc. (the "Insurer") a Financial
Guaranty Insurance Policy (the "Policy"), which will, subject to its terms,
protect the holders of the Class A Certificates against any interest shortfalls
(except as described herein) allocated to the Class A Certificates and the
principal portion of any Realized Losses (defined below) allocated to the Class
A Certificates. See "Description of the Certificates--Financial Guaranty
Insurance Policy" herein.
[LOGO] FSA
PROCEEDS OF THE ASSETS IN THE TRUST FUND (DEFINED BELOW) AND PROCEEDS FROM THE
POLICY ARE THE SOLE SOURCE OF PAYMENTS ON THE CLASS A CERTIFICATES. THE
CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN THE DEPOSITOR, THE
ORIGINATOR, THE SELLER, THE SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
-----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
-----------------------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS"
BEGINNING ON PAGE S-18 OF THIS PROSPECTUS SUPPLEMENT.
---------------------------------------------------------------------
The Class A Certificates will be purchased by Prudential Securities
Incorporated (the "Underwriter") from the Depositor and will be offered by the
Underwriter from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of sale.
Proceeds to the Depositor from the sale of the Class A Certificates will be
approximately $_______ , before deducting expenses payable by the Depositor
estimated to be approximately $________ in the aggregate, and before adding
accrued interest. See "Use of Proceeds" herein.
The Class A Certificates are offered by the Underwriter when, as and if
issued, subject to delivery by the Depositor and acceptance by the Underwriter,
to prior sale and to withdrawal, cancellation or modification of the offer
without notice. It is expected that the Class A Certificates will be available
for delivery through the facilities of The Depository Trust Company, CEDEL S.A.
and Euroclear on or about March __, 1997.
Prudential Securities Incorporated
The date of this Prospectus Supplement is March __, 1997
<PAGE>
The Pass-Through Rates on the Class A Certificates are fixed. Distributions
in respect of principal of the Class A Certificates will be made as described
herein under "Description of the Certificates--Principal Distributions on the
Class A Certificates."
The Certificates represent in the aggregate the entire beneficial ownership
interest in a Trust Fund (the "Trust Fund") consisting 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 a unit in a
planned unit development) and manufactured housing (the "Mortgage Loans"). The
Mortgage Loans were originated or acquired by Emergent Mortgage Corp. (the
"Originator") in the ordinary course of its business. The Originator will sell
all of its right, title and interest to the Mortgage Loans to Emergent Mortgage
Holdings Corporation (the "Seller") pursuant to a "Purchase and Assignment
Agreement" dated as of March 1, 1997 between the Originator and the Seller. The
Seller will then sell all of its right, title and interest to the Mortgage Loans
and any rights against the Originator under the Purchase and Assignment
Agreement to the Depositor pursuant to an "Unaffiliated Seller's Agreement"
dated as of March 1, 1997 between the Seller and the Depositor. The Depositor
will transfer the Mortgage Loans to the Trust Fund pursuant to a "Pooling and
Servicing Agreement," dated as of March 1, 1997 (the "Agreement"), among the
Depositor, Emergent Mortgage Corp., as Servicer, and First Union National Bank
of North Carolina, as Trustee (the "Trustee"). Each Mortgage Loan is a fixed
rate loan.
The yield to maturity on the Class A Certificates 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" and "--Special Yield
Considerations" and "Yield on the Certificates" herein.
An election will be made to treat certain assets of the Trust Fund as a
"real estate mortgage investment conduit" ("REMIC") for federal income tax
purposes. As described more fully herein and in the Prospectus, the Class A
Certificates will be the "regular interests" in the REMIC. See "Certain Federal
Income Tax Consequences" herein and in the Prospectus.
Prior to their issuance, there has been no market for the Class A
Certificates. There is no assurance that a market for the Class A Certificates
will develop or, if it does develop, that it will provide the holders of the
Class A Certificates (the "Class A Certificateholders") with liquidity or will
continue for the life of the Class A Certificates. The Underwriter intends, but
is not obligated, to make a market in the Class A Certificates. 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
S-1
<PAGE>
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 Certificates offered by this Prospectus Supplement will
constitute a portion of a separate Series of Certificates issued by the
Depositor and are being offered pursuant to its Prospectus dated December 4,
1996, 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 Certificates 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 Certificates, 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.
The Mortgage Loans that were identified as of March 1, 1997 will be
collectively referred to herein as the "Initial Mortgage Loans." Additional
closed end, fixed rate mortgage loans (the "Additional Mortgage Loans") may be
deposited in the Trust Fund on, but not after, the Closing Date. The Initial
Mortgage Loans and the Additional Mortgage Loans will be collectively referred
to as the "Mortgage Loans." The maximum amount of Additional Mortgage Loans to
be transferred to the Trust Fund on the Closing Date is $ .
-------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-2
<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 Pass-Through
Certificates, Series 1997-1 (the "Certificates").
The Certificates will be issued pursuant to the
Agreement. The Certificates represent in the
aggregate the entire beneficial ownership interest
in the Trust Fund. The Certificates will consist
of four classes of certificates, designated as (i)
the Class A-1 Certificates, (ii) the Class A-2
Certificates, (iii) the Class A-3 Certificates and
(iv) the Class R Certificates. Only the Class A
Certificates are offered hereby.
Offered Certificates........ The Class A-1 Certificates will have an initial
certificate balance of $_________ (the "Original
Class A-1 Certificate Principal Balance"); the
Class A-2 Certificates will have an initial
certificate balance of $________ (the "Original
Class A-2 Certificate Principal Balance"); and the
Class A-3 Certificates will have an initial
certificate balance of $_______ (the "Original
Class A-3 Certificate Principal Balance"). The
Pass-Through Rate on the Class A-1 Certificates,
Class A-2 Certificates and Class A-3 Certificates
are fixed rates of ___%, ___% and ___% per annum,
respectively. The Class A-1 Certificates, Class
A-2 Certificates and Class A-3 Certificates in the
aggregate initially evidence an interest of ___%
in the principal of the Trust Fund.
Cut-off Date................ The opening of business on March 1, 1997 for the
Initial Mortgage Loans and with respect to the
- --------------------------------------------------------------------------------
S-3
<PAGE>
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Additional Mortgage Loans, the respective
origination dates.
Closing Date................ On or about March __, 1997.
Final Maturity Date......... _________________ for the Class A-1 Certificates,
_____________ for the Class A-2 Certificates and
________ for the Class A-3 Certificates.
Subordinate Certificates.... The certificate balance of the Subordinate
Certificates will initially equal ___% of the
principal of the Trust Fund and is subject to
increase as described herein. The Subordinate
Certificates will not have a Pass-Through Rate.
The Subordinate Certificates are not being offered
hereby.
Depositor .................. Prudential Securities Secured Financing
Corporation (the "Depositor"). See "The Depositor"
in the Prospectus.
Seller...................... The Depositor will acquire the Mortgage Loans from
Emergent Mortgage Holdings Corporation (in its
capacity as seller to the Depositor, the
"Seller"). The Seller will acquire the Mortgage
Loans from Emergent Mortgage Corp.
Servicer.................... Emergent Mortgage Corp., a South Carolina
corporation (in its capacity as servicer of the
Mortgage Loans, the "Servicer"). The principal
executive offices of the Servicer are located at
50 Datastream Plaza, Suite 201, Greenville, SC
29605, and their telephone number is (864) 422-
5800. See "Pooling and Servicing Agreement--The
Servicer" herein.
Trustee..................... First Union National Bank of North Carolina. See
"Pooling and Servicing Agreement--The 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
- --------------------------------------------------------------------------------
S-4
<PAGE>
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trust on single-family residences (which may be
attached, detached, part of a two-to-four family
dwelling, a condominium unit, townhouse or a unit
in a planned unit development) and manufactured
housing (the "Mortgaged Properties").
There are 1,020 Initial Mortgage Loans secured by
Mortgaged Properties located in 23 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
$64,553,830.89; the Stated Principal Balances
ranged from $4,405.31 to $376,250.00; the average
Stated Principal Balance was $63,288.07; the
Mortgage Rates ranged from 7.640% to 15.990%; the
weighted average Mortgage Rate was 11.006%; 100%
of the Initial Mortgage Loans are secured by first
lien mortgages; 98.60% by weighted average
principal balance were secured by mortgages on
primary residences; 64.95% by weighted average
principal balance were fully amortizing; 35.05% by
weighted average principal balance contained
"balloon" payments; the original Loan-to-Value
Ratios ranged from 30% to 95%; the weighted
average Loan-to-Value Ratio was 80.618%; the
original terms to stated maturity ranged from 60
months to 361 months; the weighted average
original term to stated maturity was 209 months;
the remaining terms to stated maturity ranged from
58 months to 360 months; the weighted average
remaining term to stated maturity was 208 months;
and no more than 1.36% of the Initial Mortgage
Loans are secured by Mortgaged Properties located
in any one postal zip code area.
Interest Coverage
Account..................... On the Closing Date, cash will be deposited in a
trust account (the "Interest Coverage Account") in
the name of the Trustee on behalf of the Trust
Fund. The amount on deposit in the Interest
Coverage Account, including reinvestment income
thereon, will be used by the Trustee to fund
certain interest
- --------------------------------------------------------------------------------
S-5
<PAGE>
- --------------------------------------------------------------------------------
shortfalls on the initial Distribution Date as
described herein under "Description of the
Certificates--Interest Coverage Account." Amounts
remaining in the Interest Coverage Account after
the initial Distribution Date and not used for
such purpose are required to be paid to the
Seller. The Interest Coverage Account will
terminate immediately following the first
Distribution Date. The Interest Coverage Account
will not be an asset of the REMIC.
Redemption Account.......... On the Closing Date, it is expected that
approximately $______ of Additional Mortgage Loans
will be transferred to the Trust Fund. See
"Description of the Mortgage Loans -- Conveyance
of Additional Mortgage Loans." In the event that
less than such amount of Additional Mortgage Loans
are transferred to the Trust Fund on the Closing
Date, an aggregate cash amount equal to the excess
of (i) $______ over (ii) the aggregate Stated
Principal Balances of the related Additional
Mortgage Loans as of the respective Cut-off Dates
will be deposited by the Originator in an account
which will be in the name of, and maintained by,
the Trustee on behalf of the Trust Fund (the
"Redemption Account"). Any amounts on deposit in
the Redemption Account will be transferred by the
Trustee on the first Distribution Date into the
Distribution Account, and will be distributed as a
principal prepayment to Certificateholders then
entitled to distributions of principal. See "Risk
Factors--The Additional Mortgage Loans" and "Yield
on the Certificates -- General Prepayment
Considerations."
Underwriting Standards;
Representations........... The Mortgage Loans will be sold by the Originator
to the Seller, from the Seller to the Depositor
and from the Depositor to the Trust. All of the
Mortgage Loans were originated or acquired by the
Originator, generally in accordance with the
underwriting criteria described herein.
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S-6
<PAGE>
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Registration of Offered
Certificates.............. Holders of the Class A Certificates may hold their
interest in the Class A Certificates 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, 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
Certificates will be initially registered in the
name of CEDE & Co., the nominee of DTC. The
interests of the Class A Certificateholders 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 Certificates
(the "Certificate Owners"). Certificates
representing the Class A Certificates will be
issued in definitive form only under the limited
circumstances described in the Prospectus. In the
case of the Class A Certificates, all references
herein to "Holders" or "Certificateholders"
reflect the rights of Certificate Owners as they
may indirectly exercise such rights through DTC,
CEDEL, Euroclear and participating members
thereof, except as otherwise specified herein. The
Class A Certificates are issuable in minimum
denominations of $100,000 and increments of $1,000
in excess thereof, except that any Certificate in
book-entry form in an amount less than $100,000
shall be issued in a minimum denomination equal to
the amount represented by such Certificate.
Pass-Through Rate........... The "Pass-Through Rate" on the Class A
Certificates
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S-7
<PAGE>
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on each Distribution Date will be a rate per annum
equal to in the case of the Class A-1
Certificates, ___% (the "Class A-1 Pass-Through
Rate"), in the case of the Class A-2 Certificates,
___% (the "Class A-2 Pass-Through Rate") and in
the case of the Class A-3 Certificates, ___% (the
"Class A-3 Pass-Through Rate").
Distributions--General...... Distributions on the Class A Certificates will be
made on the 20th day of each month or, if such day
is not a business day, on the next succeeding
business day, beginning in April 1997. The
"Collection Period" with respect to any
Distribution Date is the calendar month
immediately preceding the month in which such
Distribution Date occurs. The "Determination Date"
with respect to any Distribution Date is the 15th
day of the month in which such Distribution Date
occurs, or, if such day is not a business day,
then the immediately preceding business day. The
"Interest Accrual Period" for any Distribution
Date is the calendar month immediately preceding
the month in which such Distribution Date occurs .
All calculations of interest on the Class A
Certificates will be based on a 360-day year
consisting of twelve 30-day months. See
"Description of the Certificates" herein.
Interest Distributions...... On each Distribution Date, holders of the Class A
Certificates will be entitled to receive interest
distributions (the "Interest Distribution Amount")
in an amount equal to (i) interest accrued during
the related Interest Accrual Period on the
Certificate Principal Balance of the applicable
Class A Certificate at the related Pass-Through
Rate, subject to reduction only in the event of
shortfalls caused by the Relief Act (defined
below) ("Accrued Certificate Interest"), plus (ii)
shortfalls of Accrued Certificate Interest from
prior periods. See "Description of the
Certificates--Interest Distributions" herein.
Principal Distributions..... On each Distribution Date an amount equal to the
Principal Distribution Amount (defined below) will
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S-8
<PAGE>
- --------------------------------------------------------------------------------
be distributed in the following sequential-pay
order: first, to the Holders of the Class A-1
Certificates until the Class A-1 Certificate
Principal Balance has been reduced to zero,
second, to the Holders of the Class A-2
Certificates until the Class A-2 Certificate
Principal Balance has been reduced to zero and
third, to the Holders of the Class A-3
Certificates until the Class A-3 Certificate
Principal Balance has been reduced to zero. 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), shortfalls
relating to substitution and deposits to the
Distribution Account from the Redemption Account,
if any) and in the event that the Class A
Certificate 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 Certificate Principal Balance" as
of any date of determination is equal to the
Original Class A-1 Certificate Principal Balance
thereof, reduced by the aggregate of all amounts
allocable to principal previously distributed with
respect to such Certificate. The "Class A-2
Certificate Principal Balance" as of any date of
determination is equal to the Original Class A-2
Certificate Principal Balance thereof, reduced by
the aggregate of all amounts allocable to
principal previously distributed with respect to
such Certificate. The "Class A-3 Certificate
Principal Balance" as of any date of determination
is equal to the Original Class A-3
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S-9
<PAGE>
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Certificate Principal Balance thereof, reduced by
the aggregate of all amounts allocable to
principal previously distributed with respect to
such Certificate. The Certificate Balance of the
Subordinate Certificates as of any date of
determination is equal to the excess, if any, of
(a) the then aggregate Stated Principal Balance
over (b) the sum of the Class A-1 Certificate
Principal Balance, the Class A-2 Certificate
Principal Balance and the Class A-3 Certificate
Principal Balance.
In addition, on each Distribution 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 Distribution Date (a "Remaining
Overcollateralization Deficit") will be
distributed by or on behalf of the Trustee to the
holders of the Class A Certificates. See
"Description of the Certificates--Financial
Guaranty Insurance Policy" herein.
"Net Monthly Excess Cashflow" for any Distribution
Date is equal to the excess of (x) the Available
Distribution Amount for such Distribution Date
over (y) the sum for such Distribution Date of (A)
the Accrued Certificate Interest and any
shortfalls thereon payable to the holders of the
Class A Certificates and (B) the amount described
in clauses (b)(i)-(iii) of the definition of
Principal Distribution Amount.
The subordination and cash flow provisions of the
Subordinate Certificates will, to the extent of
available funds, result in a limited acceleration
of the principal payments to the holders of the
Class A Certificates 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
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S-10
<PAGE>
- --------------------------------------------------------------------------------
Certificates -- Overcollateralization Provisions"
herein. Such subordination provisions may have the
effect of shortening the weighted average life of
the Class A Certificates by increasing the rate at
which principal is distributed to the Class A
Certificateholders.
Servicing Fee............... The "Servicing Fee" as of any Distribution 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 Certificateholders consists of the
overcollateralization and the Policy, each as
described below and herein.
Overcollateralization: As of the Closing Date, the
sum of the Class A-1 Certificate Principal
Balance, the Class A-2 Certificate Principal
Balance and the Class A-3 Certificate Principal
Balance (collectively, the "Class A Certificate
Principal Balance") will be less than the
aggregate principal balance of the Mortgage Loans
as of the Cut-off Date. Thus, as of the Closing
Date, the Class A Certificates will be
overcollateralized. Under the Pooling and
Servicing Agreement the principal balance of the
Mortgage Loans will be required to exceed the
Class A Certificate 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 Certificates relative to the
amortization of the Mortgage Loan Pool will occur.
The Agreement 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
further
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S-11
<PAGE>
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temporary period of accelerated amortization of
the Class A Certificates to increase the actual
level of overcollateralization to its increased
required level; a decrease would result in a
temporary period of decelerated amortization of
the Class A Certificates to achieve an actual
level of overcollateralization equal to its
decreased required level. See "Description of the
Certificates--Overcollateralization Provisions"
herein.
The Financial Guaranty Insurance Policy: The Class
A Certificates will be entitled to the benefit of
a certificate guaranty insurance policy to be
issued by Financial Security Assurance Inc.,
discussed more fully under "--Financial Guaranty
Insurance Policy" below. See also "Description of
the Certificates" herein.
Financial Guaranty
Insurance Policy.......... The Insurer will issue the Policy as a means of
providing credit enhancement to the Class A
Certificates. Under the Policy, the Insurer will
irrevocably and unconditionally guarantee payment
to the Trustee, for the benefit of the holders of
the Class A Certificates, on each Distribution
Date, as further described herein, of an amount
that will cover any shortfalls (except for
shortfalls in respect of the Relief Act and
Prepayment Interest Shortfalls) in amounts
available for the Interest Distribution Amount for
the Class A Certificates plus any Remaining
Overcollateralization Deficits. The Policy will
also guarantee payment to the Trustee, for the
benefit of the holders of the Class A
Certificates, of the Class A Certificate Principal
Balance to the extent unpaid on the final
Distribution Date or earlier termination of the
Trust Fund. 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 Certificates any specified
rate of principal payments. See "Description of
the Certificates--Financial Guaranty Insurance
Policy" herein.
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<PAGE>
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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 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 Certificates 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
Certificates--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 Distribution Date will be
the close of business on the last business day of
the month preceding the month in which such
Distribution Date occurs. See "Description of the
Certificates--General" herein.
Optional Termination........ At its option, the majority holder of the
Subordinate Certificates (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 Trustee, and
thereby effect termination of the Trust Fund and
early retirement of the Certificates, on any
Distribution 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 majority holder of the Subordinate
Certificates, 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 Date. In the event the majority holder of
the Subordinate Certificates or the Insurer
exercises such option, the purchase price payable
in connection therewith generally will be equal to
par
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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.
In the event the majority holder of the
Subordinate Certificates or the Insurer exercises
such option, the portion of the purchase price
allocable to the Class A Certificates will be, to
the extent of available funds (including funds
paid under the Policy), (i) 100% of the then
outstanding Class A Certificate Principal Balance,
plus (ii) one month's interest on the then
outstanding Class A-1 Certificate Principal
Balance thereof at the Class A-1 Pass-Through
Rate, one month's interest on the then outstanding
Class A-2 Certificate Principal Balance at the
Class A-2 Pass-Through Rate and one month's
interest on the then outstanding Class A-3
Certificate Principal Balance at the Class A-3
Pass-Through Rate, plus (iii) any previously
accrued but unpaid interest thereon. See "Pooling
and Servicing Agreement--Termination" herein.
Special Prepayment
Considerations............ The rate and timing of distributions allocable to
principal on the Class A Certificates 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
Certificates as provided herein. As is the case
with mortgage pass-through certificates generally,
the Class A Certificates 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
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<PAGE>
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the Mortgage Loans will result in a reduced rate
of principal payments to investors in the Class A
Certificates 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 Certificates at a time when reinvestment
at comparable yields may not be possible.
Special Yield Considerations. The yield to maturity on the Class A Certificates
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
Certificate Principal Balance, as well as other
factors.
In general, if the Class A Certificates 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
Certificates 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.
Certain Federal Income
Tax Consequences.......... An election will be made to treat certain assets
of the Trust Fund as a REMIC for federal income
tax purposes. Each Class of the Class A
Certificates will be designated as a "regular
interest" in a REMIC and a separate class of
certificates will be designated as the "residual
interest" with respect to the REMIC.
Certificateholders that would otherwise report
income under a cash method of accounting will be
required to include in income interest on the
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<PAGE>
- --------------------------------------------------------------------------------
Class A Certificates (including original issue
discount, if any) in accordance with an accrual
method of accounting. See "Certain Federal Income
Tax Consequences" herein and in the Prospectus.
Ratings..................... It is a condition to the issuance of the
Certificates that the Class A Certificates 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 Certificates 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 Certificates. The Depositor
has not requested that any rating agency rate the
Class A Certificates other than as stated above.
If another rating agency were to rate the Class A
Certificates, 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
Certificates" and "Ratings" herein.
Legal Investment............ The Class A Certificates 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 Certificates under various legal
investment restrictions, and thus the ability of
investors subject to these restrictions to
purchase the Class A 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 Class A Certificates
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<PAGE>
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constitute legal investments for them. See "Legal
Investment" herein and in the Prospectus.
ERISA Considerations........ A fiduciary of any employee benefit plan or other
retirement arrangement subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code should
review carefully with its legal advisors whether
the purchase or holding of Class A Certificates
could give rise to a transaction that is
prohibited or is not otherwise permitted either
under ERISA or Section 4975 of the Code. The U.S.
Department of Labor has issued an individual
exemption, Prohibited Transaction Exemption 90-32,
to the Underwriter that generally exempts from the
application of certain of the prohibited
transaction provisions of Section 406 of ERISA,
and the excise taxes imposed on such prohibited
transactions by Sections 4975(a) and (b) of the
Code and Section 502(i) of ERISA, transactions
relating to the purchase, sale and holding of
pass-through certificates underwritten by the
Underwriter such as the Class A Certificates and
the servicing and operation of asset pools,
provided that certain conditions are satisfied. A
fiduciary of any employee benefit plan subject to
ERISA or the Code should consult with its legal
advisors regarding the requirements of ERISA and
the Code. See "ERISA Considerations" herein and in
the Prospectus.
Use of Proceeds............. Substantially all of the net proceeds to be
received from the sale of the Class A Certificates
will be used by the Depositor to pay the purchase
price of the Mortgage Loans to the Seller and to
pay expenses connected with the pooling of the
Mortgage Loans and issuing the Certificates.
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S-17
<PAGE>
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 Certificates.
Underwriting Standards and Potential Delinquencies
The Originator acquires/makes 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/making 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 in the Trust Fund 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 acquiror 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 and Phoenix, Arizona. The Originator's retail operation
began in the Indianapolis office in April 1996 and the Phoenix office was opened
in November 1996. 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 and Phoenix offices have not been associated with
the Originator for more than one year. Those loans that are originated on a
retail basis are underwritten at the respective retail offices by the respective
office personnel. 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.
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<PAGE>
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 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
Certificates--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 Certificates and, if purchased at
other than par, the yields realized by Certificate 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 Certificate
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 Certificate 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 Certificates" herein.
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<PAGE>
Geographic Concentration
Approximately 69% 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 North Carolina, South Carolina, Florida, Georgia and Tennessee. If
the North Carolina, South Carolina, Florida, Georgia and Tennessee residential
real estate markets 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 be expected to increase, and may increase substantially. See "The
Mortgage Pool--Underwriting Standards; Representations" herein.
Limited Liquidity
Prior to their issuance, there has been no market for the Class A
Certificates and there can be no assurance that one will develop or, if it does
develop, that it will provide Certificate Owners with liquidity or will continue
for the life of the Class A Certificates. The Underwriter intends, but is not
obligated, to make a market in the Class A Certificates.
Difficulty in Pledging
Since transactions in Class A Certificates can be effected only through
DTC, CEDEL or Euroclear, their Participants and Indirect Participants, the
ability of a Certificate Owner to pledge a Class A Certificate to persons or
entities that do not participate in the DTC, CEDEL or Euroclear systems, or
otherwise to take actions in respect of such Certificates, may be limited due to
lack of a physical certificate representing such Certificates. See "Description
of the Certificates Book-Entry Registration and Definitive Certificates" herein.
Potential Delays in Receipt of Distributions
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Class A Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants which will thereafter credit
them to the accounts of Certificate Owners either directly or indirectly through
Indirect Participants. See "Description of the Certificates--Book-Entry
Registration and Definitive Certificates" herein.
Additional Risks Associated with the Mortgage Loans
Approximately 35% 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 not in excess of 95%). 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
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<PAGE>
mortgage insurance policy. Substantially all of the Mortgage Loans were
originated or acquired within the last 3 months and are not seasoned.
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 encumbered
by first and second liens. 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. 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
35.05% of the Initial Mortgage Loans by aggregate Stated Principal Balance
as of the Cut-off Date are "balloon 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 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 Certificates will not represent an interest in or obligation of
the Originator, the Depositor, the Seller, the Servicer, the Trustee or any of
their respective affiliates. The only obligations of the foregoing entities with
respect to the Certificates or any Mortgage Loan will be the obligations of the
Depositor, the Seller, 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 Agreement (including the limited obligation to make
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<PAGE>
certain Monthly Advances). Neither the Certificates nor the underlying Mortgage
Loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the Originator, Depositor, the Seller, the Servicer, the
Trustee or any of their respective affiliates. The Class A Certificates are
covered by the Policy, as and to the extent described under the caption,
"Description of the Certificates--Financial Guaranty Insurance Policy" herein.
Proceeds of the assets included in the Trust Fund (including the Mortgage Loans)
and of the Policy will be the sole source of payments on the Class A
Certificates, and there will be no recourse to Depositor, the Seller, the
Servicer, the 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 Certificates.
Risk of Potential Termination of the Trust Fund
The Trust Fund may be terminated by the majority holder of the Subordinate
Certificates or by the Insurer, each exercising its optional termination right
when the aggregate Stated Principal Balances of the Mortgage Loans and any
Mortgaged Properties acquired by the Servicer through foreclosure or
deed-in-lieu of foreclosure and still in the Trust Fund have declined to ten
percent or less, in the case of the majority holder of the Subordinate
Certificates, or five percent or less, in the case of the Insurer, of the
aggregate Stated Principal Balance as of the Cut-off Date. See "Pooling and
Servicing Agreement--Termination." Such a termination would be the equivalent of
a prepayment of all the Mortgage Loans. The Certificate Owners would receive
from the proceeds resulting from any such termination, any interest accrued and
unpaid, together with any distribution of principal owed and unpaid, in the
order of priority set forth under "Description of Certificates--Principal
Distributions on the Class A Certificates." Any such termination of the Trust
Fund will reduce the yield to maturity on Class A Certificates purchased at a
premium.
The Status of the Mortgage Loans in the Event of Insolvency of the Originator
The Originator will take 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 Seller with those of the
Originator. These steps will include the creation of the Seller as a separate,
limited-purpose entity pursuant to the Seller's Certificate of Incorporation,
which shall contain certain limitations (including restrictions on the nature of
the Seller's business) and a restriction on its ability 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 Seller. The
Certificate of Incorporation of the Seller will include a provision that
requires the Seller to have at least two directors who qualify under the
Certificate of Incorporation as "independent directors."
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<PAGE>
The Seller has 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 Seller 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 Seller, or if an
attempt were made to litigate any of the foregoing issues, delays in the
distributions on the Certificates (and possible reductions in the amount of such
distributions) could occur. The Seller is not expected to have any significant
assets or sources of funds.
The Additional Mortgage Loans
The Originator will not select Additional Mortgage Loans in a manner that
it believes is adverse to the interest of the Class A Certificateholders and the
Insurer. The Originator anticipates that the Additional Mortgage Loans will have
substantially similar aggregate characteristics to the Initial Mortgage Loans.
See "The Mortgage Pool Conveyance of Additional Mortgage Loans" herein.
In the event that less than $__ of Additional Mortgage Loans by aggregate
Stated Principal Balance as of the respective Cut-off Dates are transferred to
the Trust Fund, an additional distribution allocable to principal in an amount
equal to the difference between the aggregate Stated Principal Balance of
Additional Mortgage Loans as of the respective Cut-off Dates and $____ will be
paid to the Class A Certificateholders then entitled to receive principal
payments.
THE INSURER
The following information has been supplied by Financial Security Assurance
Inc. 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
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<PAGE>
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., U S
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.
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, 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."
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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, 1996 (in thousands):
September 30, 1996
------------------
(Unaudited)
Deferred Premium Revenue (net of prepaid
reinsurance premiums).................................... $358,145
----------
Shareholder's Equity:
Common Stock.......................................... 15,000
Additional Paid-In Capital............................ 666,470
Unrealized Gain on Investments (net of
deferred income taxes).............................. 2,482
Accumulated Earnings.................................. 111,231
----------
Total Shareholder's Equity................................. 795,183
Total Deferred Premium Revenue and Shareholder's
Equity.................................................... $1,153,328
==========
For further information concerning the Insurer, 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
In addition to the documents described under "Incorporation of Certain
Information by Reference" in the Prospectus, the consolidated financial
statements of the Insurer and 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, 1995 and (b) the Quarterly Report on Form 10-Q for the period ended
September 30, 1996.
All financial statements of the Insurer and 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 Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
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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, 29606, 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 SERVICER AND THE ORIGINATOR
The information set forth in the following paragraphs has been provided by
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 Agreement. Emergent Mortgage Corp. is a wholly-owned subsidiary
of Emergent Group, Inc. At December 31, 1996, Emergent Mortgage Corp. had
approximately $104.6 million in assets, approximately $91.6 million in
liabilities and approximately $13.2 million in equity.
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EMERGENT GROUP, INC.
Emergent Group, Inc., (the "Parent") is a diversified financial services
company headquartered in Greenville, South Carolina, that originates, services
and sells mortgage loans, small business loans, and auto loans. The Parent 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
comprised of the Originator and CII (the "Mortgage Loan Division"). In
particular, the Mortgage Loan Division has significantly increased its loan
originations, principally through establishing relationships with mortgage
bankers and mortgage brokers through which it originated mortgage loans on a
wholesale basis. Beginning in April 1996 the Mortgage Loan Division commenced
its retail operations. During 1993, 1994 and 1995, mortgage loan originations
totaled $20.5 million, $99.4 million and $192.8 million, respectively. During
the year ended December 31, 1996, mortgage loan originations totalled $328.6
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.
At December 31, 1996, Emergent Group, Inc. had approximately $224.1 million
in assets, approximately $177.1 million in liabilities and approximately $46.6
million in equity.
S-27
<PAGE>
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 sold to the
Seller, subsequently to the Depositor and then to the Trust Fund. See
"--Underwriting Standards; Representations" herein. The Originator will act as
the Servicer for the Mortgage Loans pursuant to the Agreement.
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
Fund 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."
Statistical Information
Set forth below is certain summary statistical information regarding the
Initial Mortgage Loans expected to be included in the Trust Fund as of the
Closing Date. All such information is approximate and is given as of the Cut-off
Date. Prior to the Closing Date, Mortgage Loans may be removed from the Trust
Fund 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 in the Trust Fund may vary from the characteristics set forth
below as of the Cut-off Date.
There are 1,020 Initial Mortgage Loans secured by Mortgaged Properties
located in 23 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 $64,553,830.89; the Stated Principal Balances ranged from $4,405.31 to
$376,250.00; the average Stated Principal Balance was $63,288.07; the Mortgage
Rates ranged from 7.640% to 15.990%; the weighted average Mortgage Rate was
11.006%; 100% of the Initial Mortgage Loans are secured by first lien mortgages;
98.60% by weighted average principal balance were secured by mortgages on
primary residences; 64.95% by weighted average principal balance were fully
amortizing; 35.05% by weighted average principal balance contained "balloon"
payments; the original Loan-to-Value Ratios ranged from 30% to 95%; the weighted
average Loan-to-Value Ratio was 80.618%; the original terms to stated maturity
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<PAGE>
ranged from 60 months to 361 months; the weighted average original term to
stated maturity was 209 months; the remaining terms to stated maturity ranged
from 58 months to 360 months; the weighted average remaining term to stated
maturity was 208 months; and no more than 1.36% of the Initial Mortgage Loans
are secured by Mortgaged Properties located in any one postal zip code area.
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<PAGE>
Principal Balances of the Initial Mortgage Loans as of the Cut-of Date
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Principal
Balance Balance
Outstanding Outstanding as
Number of as of of
Range of Cut-off Date Principal Initial the Cut-off the Cut-off
Balances Mortgage Loans Date Date
- ------------------------------- -------------- ------------- -------------
<S> <C> <C> <C>
$ 0.00 <= 5,000.00 1 $ 4,405.31 0.01%
5,000.00 <= 10,000.00 1 7,800.00 0.01
10,000.00 <= 15,000.00 1 12,350.26 0.02
15,000.00 <= 20,000.00 7 124,282.55 0.19
20,000.00 <= 25,000.00 22 500,634.93 0.78
25,000.00 <= 30,000.00 28 778,282.33 1.21
30,000.00 <= 35,000.00 75 2,459,260.49 3.81
35,000.00 <= 40,000.00 94 3,545,965.73 5.49
40,000.00 <= 45,000.00 73 3,129,293.34 4.85
45,000.00 <= 50,000.00 96 4,566,618.90 7.07
50,000.00 <= 55,000.00 95 4,968,620.76 7.70
55,000.00 <= 60,000.00 99 5,732,123.72 8.88
60,000.00 <= 65,000.00 86 5,408,101.19 8.38
65,000.00 <= 70,000.00 47 3,169,507.41 4.91
70,000.00 <= 75,000.00 54 3,904,540.48 6.05
75,000.00 <= 80,000.00 52 4,031,845.13 6.25
80,000.00 <= 85,000.00 28 2,305,565.90 3.57
85,000.00 <= 90,000.00 28 2,466,837.88 3.82
90,000.00 <= 95,000.00 20 1,850,318.21 2.87
95,000.00 <= 100,000.00 19 1,841,544.81 2.85
100,000.00 <= 105,000.00 13 1,344,108.87 2.07
105,000.00 <= 110,000.00 9 966,630.27 1.50
110,000.00 <= 115,000.00 12 1,352,658.68 2.10
115,000.00 <= 120,000.00 6 708,966.84 1.10
120,000.00 <= 125,000.00 9 1,102,904.65 1.71
125,000.00 <= 130,000.00 4 509,444.75 0.79
130,000.00 <= 135,000.00 4 529,806.23 0.82
135,000.00 <= 140,000.00 6 825,425.65 1.28
140,000.00 <= 145,000.00 3 427,202.67 0.66
145,000.00 <= 150,000.00 2 293,796.92 0.46
150,000.00 <= 200,000.00 12 2,079,291.18 3.22
200,000.00 <= 250,000.00 5 1,067,503.90 1.65
250,000.00 <= 300,000.00 8 2,171,940.95 3.36
350,000.00 <= 400,000.00 1 376,250.00 0.58
- --------------------------------------------------------------------------------------------------------------
TOTAL 1020 $64,553,830.89 100.00%
==== ============== =======
</TABLE>
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<PAGE>
Property Types of the Initial Mortgage Loans
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Principal
Balance Balance
Outstanding Outstanding as
Number as of of
of Initial the Cut-off the Cut-off
Property Type Mortgage Loans Date Date
- ------------- -------------- ------------- ------------
<S> <C> <C> <C>
Single Family 980 $62,519,544.54 96.85%
Manufactured/Mobile Home 26 1,381,618.64 2.14
Rental/Investor Property 14 652,667.71 1.01
- -------------------------------------------------------------------------------------------------------------
Total 1020 $ 64,553,830.89 100.00%
==== =============== =======
</TABLE>
Occupancy Status for the Initial Mortgage Loans(1)
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Principal
Balance Balance
Outstanding Outstanding as
Number as of of
of Initial the Cut-off the Cut-off
Occupancy Mortgage Loans Date Date
- --------- -------------- ------------- ------------
<S> <C> <C> <C>
Owner-Occupied 1003 $63,650,730.84 98.60%
Non Owner-Occupied 17 903,100.05 1.40
- -------------------------------------------------------------------------------------------------------------
Total 1020 $ 64,553,830.89 100.00%
==== =============== =======
</TABLE>
(1) The occupancy status of a Mortgaged Property is as represented by the
mortgagor in its loan application.
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<PAGE>
Mortgage Rates of the Initial Mortgage Loans as of the Cut-off Date
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Principal
Balance Balance
Outstanding Outstanding as
Number as of of
of Initial the Cut-off the Cut-off
Range of Mortgage Rates Mortgage Loans Date Date
- ----------------------- -------------- ----------- -------------
<S> <C> <C> <C>
7.50% <= 7.75% 1 $ 33,870.06 0.05%
7.75% <= 8.00% 2 132,565.42 0.21
8.00% <= 8.25% 1 64,800.00 0.10
8.25% <= 8.50% 10 959,092.66 1.49
8.50% <= 8.75% 8 493,594.22 0.76
8.75% <= 9.00% 54 3,421,822.59 5.30
9.00% <= 9.25% 6 460,039.70 0.71
9.25% <= 9.50% 70 4,765,911.01 7.38
9.50% <= 9.75% 19 1,119,294.22 1.73
9.75% <= 10.00% 79 5,645,658.57 8.75
10.00% <= 10.25% 47 2,962,494.78 4.59
10.25% <= 10.50% 106 7,113,082.73 11.02
10.50% <= 10.75% 83 5,429,258.47 8.41
10.75% <= 11.00% 82 5,514,135.11 8.54
11.00% <= 11.25% 42 2,867,615.74 4.44
11.25% <= 11.50% 58 3,731,547.32 5.78
11.50% <= 11.75% 32 2,568,009.58 3.98
11.75% <= 12.00% 50 2,953,344.64 4.58
12.00% <= 12.25% 11 723,049.76 1.12
12.25% <= 12.50% 64 3,435,101.71 5.32
12.50% <= 12.75% 7 413,494.58 0.64
12.75% <= 13.00% 81 4,025,195.88 6.24
13.00% <= 13.25% 5 415,867.33 0.64
13.25% <= 13.50% 55 2,652,065.99 4.11
13.50% <= 13.75% 3 187,577.84 0.29
13.75% <= 14.00% 31 1,774,140.33 2.75
14.25% <= 14.50% 7 418,230.38 0.65
14.75% <= 15.00% 4 134,808.73 0.21
15.25% <= 15.50% 1 44,244.29 0.07
15.75% <= 16.00% 1 93,917.25 0.15
- ------------------------------------------------------------------------------------------------------
Total 1020 $ 64,553,830.89 100.00%
==== =============== =======
</TABLE>
S-32
<PAGE>
Original Loan-to-Value Ratios for the Initial Mortgage Loans
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Principal
Balance Balance
Outstanding Outstanding as
Number as of of
Range of Original Loan-to-Value of Initial the Cut-off the Cut-off
Ratios Mortgage Loans Date Date
- ------------------------------- -------------- ----------- -------------
<S> <C> <C> <C>
25.000 <= 30.000 1 $ 7,800.00 0.01%
30.000 <= 35.000 1 35,000.00 0.05
40.000 <= 45.000 1 36,971.00 0.06
45.000 <= 50.000 1 35,000.00 0.05
50.000 <= 55.000 5 264,420.13 0.41
55.000 <= 60.000 8 286,794.14 0.44
60.000 <= 65.000 21 1,083,668.20 1.68
65.000 <= 70.000 38 1,978,789.77 3.07
70.000 <= 75.000 123 7,143,678.32 11.07
75.000 <= 80.000 520 31,060,533.21 48.12
80.000 <= 85.000 151 10,408,679.47 16.12
85.000 <= 90.000 146 11,842,329.53 18.34
90.000 <= 95.000 4 370,167.12 0.57
- -----------------------------------------------------------------------------------------------------
Total 1020 $ 64,553,830.89 100.00%
==== =============== =======
</TABLE>
S-33
<PAGE>
Geographic Distribution of the Mortgaged Properties
with respect to the Initial Mortgage Loans
Aggregate % of Aggregate
Principal Principal
Balance Balance
Number of Outstanding Outstanding as
Initial as of of
Mortgage the Cut-off the Cut-off
State Loans Date Date
- ----- -------- ---------- ----------
AL 1 $ 50,154.06 0.08%
CO 11 971,743.60 1.51
DC 1 29,814.91 0.05
FL 110 7,167,797.69 11.10
GA 94 6,773,972.61 10.49
ID 4 360,724.28 0.56
IL 1 35,980.28 0.06
IN 67 3,865,014.64 5.99
KY 37 1,929,566.51 2.99
LA 64 3,655,009.12 5.66
MD 11 1,208,834.18 1.87
MI 24 1,905,671.19 2.95
MO 1 34,459.75 0.05
MS 35 1,970,030.42 3.05
MT 5 338,061.47 0.52
NC 188 12,608,777.85 19.53
NJ 1 148,446.92 0.23
NY 1 61,750.00 0.10
OR 8 779,397.44 1.21
PA 2 65,088.26 0.10
SC 227 11,907,019.49 18.45
TN 89 5,937,443.82 9.20
UT 1 50,901.08 0.08
VA 37 2,698,171.32 4.18
- ----------------------------------------------------------------------------
Total 1020 $ 64,553,830.89 100.00%
==== =============== =======
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<PAGE>
Purpose for Initial Mortgage Loans
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Principal
Balance Balance
Outstanding Outstanding as
Number of as of of
Initial the Cut-off the Cut-off
Loan Purpose Mortgage Loans Date Date
- ------------ -------------- ---------- -----------
<S> <C> <C> <C>
Debt Consol. cash out 167 $10,586,822.59 16.40%
Debt Consol. no cash out 154 10,483,885.29 16.24
Home Improv. no cash out 3 171,803.45 0.27
Multi-purpose REFI cash out 120 7,898,016.84 12.23
Multi-purpose REFI no cash out 62 4,260,070.26 6.60
Purchase cash out 94 5,070,096.37 7.85
Purchase no cash out 169 9,454,344.32 14.65
REFI cash out 103 6,601,587.25 10.23
REFI no cash out 148 10,027,204.52 15.53
- ---------------------------------------------------------------------------------------------------------------------
Total 1020 $ 64,553,830.89 100.00%
==== =============== =======
</TABLE>
Risk Categories for Initial Mortgage Loans
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Principal Principal
Balance Balance
Outstanding Outstanding as
Number of as of of
Initial the Cut-off the Cut-off
Risk Categories Mortgage Loans Date Date
- --------------- -------------- -------- ----------
<S> <C> <C> <C>
AA 82 $ 5,703,666.92 8.84%
A 553 37,868,375.49 58.66
B 284 15,405,451.77 23.86
C 101 5,576,336.71 8.64
- ---------------------------------------------------------------------------------------------------------------------
Total 1020 $ 64,553,830.89 100.00%
==== =============== =======
</TABLE>
S-35
<PAGE>
Remaining Months To Stated Maturity for Initial Mortgage Loans
Aggregate % of Aggregate
Principal Principal
Balance Balance
Outstanding Outstanding as
Number of as of of
Remaining Initial the Cut-off the Cut-off
Term Mortgage Loans Date Date
- --------- -------------- -------- ----------
48 <= 60 7 $264,359.58 0.41%
60 <= 72 4 160,923.00 0.25
72 <= 84 3 171,337.16 0.27
84 <= 96 5 233,093.97 0.36
108 <= 120 47 2,207,759.87 3.42
132 <= 144 14 865,913.23 1.34
144 <= 156 7 342,521.85 0.53
156 <= 168 1 58,763.49 0.09
168 <= 180 725 44,871,154.05 69.51
180 <= 192 1 76,541.66 0.12
228 <= 240 73 4,961,783.76 7.69
288 <= 300 7 463,069.74 0.72
312 <= 324 1 35,219.71 0.05
348 <= 360 125 9,841,389.82 15.25
- -------------------------------------------------------------------------------
Total 1020 $ 64,553,830.89 100.00%
==== =============== =======
Year of Origination for Initial Mortgage Loans
Aggregate % of Aggregate
Principal Principal
Balance Balance
Outstanding Outstanding as
Number of as of of
Initial the Cut-off the Cut-off
Year of Origination Mortgage Loans Date Date
- ------------------- -------------- ---------- ----------
1996 253 $14,974,681.29 23.20%
1997 767 49,579,149.60 76.80
- -------------------------------------------------------------------------------
Total 1020 $ 64,553,830.89 100.00%
==== =============== =======
S-36
<PAGE>
Conveyance of Additional Mortgage Loans
The Trust Fund may acquire up to approximately $__________ aggregate
principal balance of Additional Mortgage Loans. Accordingly, the statistical
characteristics of the Mortgage Loans in the Trust Fund will vary as of the
Closing Date upon the acquisition of Additional Mortgage Loans.
The obligation of the Trust Fund to purchase Additional Mortgage Loans on
the Closing Date 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 Loan may not be 30 or more days contractually delinquent as of the
related Cut-Off Date; (ii) the remaining term to stated maturity of such
Additional Mortgage Loan will not exceed 30 years for fully amortizing loans or
15 years for "Balloon Loans"; (iii) such Additional Mortgage Loan will be
secured by a Mortgage in a first lien position; (iv) such Subsequent Mortgage
Loan will not have a Mortgage Rate less than ___%; (v) such Additional Mortgage
Loan will be otherwise acceptable to the Depositor and the Insurer; (vi) such
Additional Mortgage Loan shall be secured by a mortgage on a property which at
the time of the origination of such Additional Mortgage Loan has an appraised
value of not more than $_______________; (vii) following the purchase of such
Additional Mortgage Loan by the Trust Fund, the Mortgage Loans (including such
Additional Mortgage Loans) as of the Closing Date: (a) will have a weighted
average Mortgage Rate of at least ___%; (b) will have a weighted average
remaining term to stated maturity of less than ___ months; (c) will not have
more than ___% by aggregate principal balance "Balloon Loans"; (d) will have no
Mortgage Loan with a principal balance in excess of $_________; (e) will have a
state concentration not in excess of ___% for any one state; (f) will have not
more than __% in aggregate principal balance of the Mortgage Loans concentrated
in any single zip code; and (g) will have no more than ___% Mortgage Loans
relating to non-owner occupied properties.
Underwriting Standards; Representations
The Mortgage Loans will be sold by the Originator to the Seller, from the
Seller to the Depositor and from the Depositor to the Trust Fund. All of the
Mortgage Loans were originated by the Originator or acquired by the Originator
from mortgage bankers 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 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 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,
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<PAGE>
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 27.41% 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 in Greenville, South
Carolina with a focus on three sales areas: Atlantic, Southeast and Midwest.
Wholesale Mortgage Loans are initially reviewed by a conditional underwriter for
preapproval. If preapproved, the loan is reviewed by a final, more experienced
underwriter.
Approximately 47.98% of the Initial Mortgage Loans were originated by the
Originator directly ("Retail Mortgage Loans"). Retail Mortgage Loans are
underwritten by the Originator from the following locations: Indianapolis,
Indiana, Baton Rouge, Louisiana, New Orleans, Louisiana, Phoenix, Arizona,
Greenville, South Carolina, Atlanta, Georgia, Jackson, Mississippi and
Jacksonville, Florida based on the Originator's underwriting guidelines. All
Retail Mortgage Loans are originated at the various retail centers. Loans
originated in the Indianapolis, Phoenix 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 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.
Approximately 24.61% of the Initial Mortgage Loans were acquired by the
Originator from mortgage bankers ("Strategic Alliance Mortgage Bankers") with
whom it maintains strategic alliances. Unlike a Retail Mortgage Loan or
Wholesale Mortgage Loan, a Strategic Alliance Loan is acquired, rather than
originated, by the Originator. The Strategic Alliance Mortgage Bankers
underwrite the mortgage loans (according to the Originator's underwriting
criteria) and at the closing of such loans, the loans are assigned to the
Originator. The loan file is forwarded to the Originator for review, which
review is generally completed within two weeks. In the origination process, the
Strategic Alliance Mortgage Bankers make standard representations and warranties
with respect to
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<PAGE>
the mortgage loan, as well as a representation that the mortgage loan meets the
Originator's underwriting criteria. The Originator will then independently
verify that such loans were underwritten in accordance with the Originator's
underwriting criteria. Any Strategic Alliance Loans included in the Mortgage
Pool will have been reunderwritten by the Originator prior to their transfer to
the Trust Fund.
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
S-39
<PAGE>
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 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 10% of closed loans.
Closed loans are selected for audit using a statistical methodology
designed to achieve statistically equivalent results at a 95% confidence level.
In addition to the statistical sample, 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
demonstrated steady employment over the last two years. The applicant generally
must
S-40
<PAGE>
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. The mortgaged property must be in at least average
condition. 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 generally must have
demonstrated steady employment over the last two years. 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 last 12 months is permitted on an existing mortgage loan
that is currently no more than 30 days past due. 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," 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. 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 generally must have
demonstrated steady employment over the last two years. 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
S-41
<PAGE>
$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.
The mortgaged property must be in at least average condition. 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% additional disposable income.
"C": Under the C risk category, the applicant generally must have
demonstrated steady employment over the last 12 months. 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. The mortgaged property must be in
at least average condition. 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. However, an
existing mortgage loan can be no more than 120 days delinquent at the time of
loan closing. Judgment 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
one year. The mortgaged property must be in at least average condition. 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.
S-42
<PAGE>
The Originator will make 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
Funds-Representations and Warranties".
Servicing
The Mortgage Loans will be serviced by Emergent Mortgage Corp. The
information set forth in the following paragraphs has been provided by Emergent
Mortgage Corp. and Emergent Group, Inc.
Emergent Mortgage Corp. 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 Emergent Mortgage Corp.
historically has been the origination and sale of non-conforming mortgage loans
on a servicing released basis. Recently, Emergent Mortgage Corp. began
accumulating mortgage loans for sale on a servicing retained basis. Emergent
Mortgage Corp. does not have a significant history of servicing mortgage loans.
However, the Parent has been servicing mortgage loans through affiliates of
Emergent Mortgage Corp. 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. 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 during 1996 in
anticipation of increased 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 61 days a five-day demand letter is sent; and at 68 days, the account is
turned over to an attorney. 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.
S-43
<PAGE>
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 foregoing 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 Emergent Mortgage Corp. 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, 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 Emergent Mortgage Corp.'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.
S-44
<PAGE>
Delinquencies and Foreclosures
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31, At December 31, At December 31, At December 31,
1993 1994 1995 1996
------------------------------------------------------------------------------------------------------
By Percent by By Percent by By Percent by By Percent by
Dollar Dollar Dollar Dollar Dollar Dollar Dollar Dollar
Amount Amount Amount Amount Amount Amount Amount Amount
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio........... $42,335 100.00% $60,151 100.00% $88,165 100.00% $146,231 100.00%
Period of Delinquency.....
31-59 days.............. $3,424 8.09% $4,789 7.96% $6,833 7.75% $4,450 3.04%
60-89 days.............. $869 2.05% $1,724 2.87% $1,588 1.80% $1,530 1.05%
90 days or more......... $2,996 7.08% $1,782 2.96% $3,240 3.67% $3,260 2.23%
Total Delinquent Loans.... $7,289 17.22% $8,295 13.79% $11,661 13.23% $9,240 6.32%
Loans in Foreclosure*..... $2,674 6.32% $2,327 3.87% $1,059 1.20% $1,374 0.94%
</TABLE>
- ---------------
* Loans in Foreclosure are not included under the heading "Total Delinquent
Loans."
Other Real Estate Owned
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31, At December 31, At December 31, At December 31,
1993 1994 1995 1996
-------------------------------------------------------------------------------------------
By Dollar Amount By Dollar Amount By Dollar Amount By Dollar Amount
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Portfolio.............. $42,335 $60,151 $88,165 $146,231
OREO (Acq. through $2,812 $3,361 $3,049 $2,959
Foreclosure)(1)..............
OREO to Total Portfolio(2)... 6.64% 5.59% 3.46% 2.02%
</TABLE>
- ---------------
(1) 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 Emergent Group, Inc. or a subsidiary thereof, by investors or
by an insurer following foreclosure or delivery of a deed in lieu of
foreclosure.
(2) 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.
S-45
<PAGE>
Loan Loss Experience on
Mortgage Loan Division's Servicing Portfolio
of Mortgage Loans
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ending December 31,
--------------------------------------------------------
1993 1994 1995 1996
--------------------------------------------------------
<S> <C> <C> <C> <C>
Total Portfolio(1) $42,335 $60,151 $88,165 $146,231
Net Charge Offs $447 $1,518 $771 $792
Net Charge Offs as a
Percentage of Total Portfolio 1.06% 2.52% 0.87% 0.54%
Net Charge Offs as a
Percentage of Average Portfolio 1.06% 2.96% 1.04% 0.81%
</TABLE>
- -------------------
(1) "Total Portfolio" on the date stated above is the principal balances of the
mortgage loans outstanding on the last day of the period.
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.
The Originator commenced its sub-prime mortgage loan business in 1995.
Accordingly, the Originator (whether as an originator or acquiror 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.
S-46
<PAGE>
YIELD ON THE CERTIFICATES
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 ("Prepayment Interest Shortfalls"), 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. See "Pooling 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 the application of the Relief Act will be to reduce the aggregate
amount of interest collected that is available for distribution to
Certificateholders ("Relief Act Shortfalls"). 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 will be allocated among the
Certificates as provided herein under "Description of the Certificates--Interest
Distributions" and "--Overcollateralization Provisions."
General Prepayment Considerations
The rate of principal payments on the Class A Certificates, the aggregate
amount of distributions on the Class A Certificates and the yield to maturity of
the Class A Certificates 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 or the Seller, as
the case may be). The Mortgage Loans may be prepaid by the mortgagors at any
time, generally without penalty.
Prepayments, liquidations and repurchases of the Mortgage Loans will result
in distributions in respect of principal to the holders of the Class A
Certificates 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
S-47
<PAGE>
to which the yield to maturity of the Class A Certificates may vary from the
anticipated yield will depend upon the degree to which such Certificates 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 Certificates 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 Certificates 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 Certificates. 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 Certificates 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 Certificates,
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 Certificates. 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 Fund 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>
In the event that on the Closing Date the aggregate principal balance of
the Additional Mortgage Loans as of the respective Cut-off Dates is less than
$_________, an amount equal to such difference will be paid to the Class A
Certificateholders then entitled to receive payments of principal as a principal
distribution on the initial Distribution Date.
Overcollateralization
The cash flow provisions of the Trust Fund are intended to create
overcollateralization through the application of Net Monthly Excess Cashflow to
accelerated distributions of principal of the Class A Certificates 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 distributable to the holders of the Class A Certificates will instead
be distributed to the holders of the Subordinate Certificates. In addition, if
in the future the required level of overcollateralization is permitted to "step
down," there may be one or more Distribution Dates on which holders of the Class
A Certificates may receive little or no distributions in respect of principal.
Conversely, if the required level of overcollateralization is required to "step
up," holders of the Class A Certificates may receive accelerated distributions
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
Certificates than if the Trust Fund did not include such provisions.
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 Certificates will be influenced by the rate at which principal on the related
Mortgage Loan 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 prepayment rate of ___% and increases by an
additional ____% each month thereafter until the tenth month, where it remains
at constant prepayment rate equal to ____% (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
S-49
<PAGE>
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 Certificate Principal Balance that would be outstanding after
each of the dates shown at various percentages of the Prepayment Assumption and
the corresponding weighted average lives of the Class A Certificates. 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 Certificates are received, in cash,
on the 20th day of each month, commencing in April 1997, (iii) the Mortgage
Loans prepay at the percentages of the Prepayment Assumption indicated, (iv) the
optional termination is exercised by the majority holder of the Subordinate
Certificates, (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 Seller, the majority holder of the Subordinate Certificates,
the Insurer, the Servicer or any other person purchases from the Trust Fund any
Mortgage Loan pursuant to any obligation or option under the Agreement, except
as indicated in clause (iv) above, (vii) scheduled monthly payments on the
Mortgage Loans are received on the first day of each month commencing in March
1997, 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 commencing in March
1997, 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 and
(x) the Certificates are purchased on March __, 1997.
Hypothetical Mortgage Loans
<TABLE>
<CAPTION>
Original Term to Remaining Term to
Principal Balance ($) Interest Rate (%) Maturity (Months) Maturity (Months)
- -------------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
</TABLE>
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
Certificate Principal Balance outstanding (and the weighted average life) of the
Class A Certificates set forth in the table. In addition, since the actual
Mortgage Loans will have characteristics that differ
S-50
<PAGE>
from those assumed in preparing the table set forth below the Class A
Certificates 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 Certificates and sets forth the percentages of the initial Class A
Certificate Principal Balance that would be outstanding after each of the
Distribution Dates shown, at various percentages of the Prepayment Assumption.
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
Certificate 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 percentages of
the Prepayment Assumption.
S-51
<PAGE>
Percent of Stated Principal Balance Outstanding
at the Following Percentages of the Prepayment Assumption
Distribution
Date Class A-1
- ------------- -----------------------------------------------------------------
0% 50% 100% 120% 150% 200%
-- --- ---- ---- ---- ----
Distribution
Date Class A-2
- ------------- -----------------------------------------------------------------
0% 50% 100% 120% 150% 200%
-- --- ---- ---- ---- ----
Distribution
Date Class A-3
- ------------- -----------------------------------------------------------------
0% 50% 100% 120% 150% 200%
-- --- ---- ---- ---- ----
- ----------------
(1) The weighted average life of each Class of Class A Certificates is
determined by (a) multiplying the amount of each principal payment by the
number of years from the Closing Date to the related Distribution Date; (b)
adding the results; and (c) dividing the sum by the Original Class A
Certificate Principal Balance.
S-52
<PAGE>
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
Certificates 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 Certificates 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 CERTIFICATES
General
The Certificates will consist of four classes of certificates, designated
as (i) the Class A-1 Certificates, (ii) the Class A-2 Certificates, (iii) the
Class A-3 Certificates and (iv) the Class R Certificates. Only the Class A
Certificates are offered hereby. The Subordinate Certificates, which are not
being offered hereby, may be sold at any time on or after the Closing Date in
accordance with the Agreement.
The Certificates represent in the aggregate the entire beneficial ownership
interest in the Trust Fund consisting primarily of the Mortgage Loans. The Class
A Certificates in the aggregate initially evidence an interest of __% of the sum
of the aggregate principal balance as of the Cut-off Date of the Mortgage Loans.
The final maturity dates of the Class A-1 Certificates, Class A-2
Certificates and Class A-3 Certificates are ______________, ______________, and
______________, respectively.
All distributions to holders of the Class A Certificates, other than the
final distribution on the Class A Certificates, will be made by or on behalf of
the Trustee to the persons in whose names such Class A Certificates 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 Distribution
Date occurs. Distributions on Certificates 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. Distributions on Certificates held in
certificated form by their beneficial owners will be made either (i) by check
mailed to
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the address of each such Certificateholder as it appears in the certificate
register or (ii) upon written request to the Trustee at least five business days
prior to the relevant Record Date by any holder of Class A Certificates having
an aggregate initial Certificate Principal Balance that is in excess of
$5,000,000 by wire transfer in immediately available funds to the account of
such Certificateholder specified in the request, provided that the Trustee may
deduct a reasonable wire transfer fee from any payment made by wire transfer.
The final distribution on the Class A Certificates will be made in like manner,
but only upon presentment and surrender of such Class A Certificates at the
corporate trust office of the Trustee or such other location specified in the
notice to Certificateholders of such final distribution.
Book-Entry Registration and Definitive Certificates
The Class A Certificates will be issued, maintained and transferred on the
book-entry records of DTC and its Participants in minimum denominations of
$100,000 and integral multiples of $1,000 in excess thereof. The Class A
Certificates will initially be represented by one or more global certificates
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 Certificate Owner will be entitled to receive a
certificate representing such person's interest, except as set forth below.
Unless and until Definitive Certificates are issued under the limited
circumstances described herein, all references to actions by Certificateholders
with respect to the Class A Certificates refer to actions taken by DTC upon
instructions from its Participants (as defined below), and all references herein
to distributions, notices, reports and statements to Certificateholders with
respect to the Class A Certificates refer to distributions, notices, reports and
statements to DTC or CEDE, as the registered holder of the Class A Certificates,
for distribution to Certificate Owners in accordance with DTC procedures.
Holders of Certificates may hold their Certificates 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").
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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 certificates. 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").
Certificate 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 Certificates may do so
only through Participants and Indirect Participants. In addition, such
Certificate Owners will receive all distributions of principal and interest on
the Class A Certificates from the Trustee or the applicable paying agent through
DTC and its Participants. Under a book-entry format, Certificateholders may
receive payments after the related Distribution 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 Certificate Owners. The
only "Certificateholder" (as such term is used in the Agreement) will be CEDE &
Co., as nominee of DTC, and the Certificate Owners will not be recognized by the
Trustee as Certificateholders under the Agreement. Certificate Owners will be
permitted to exercise the rights of Certificate Owners under the Agreement 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 Certificates and is required to
receive and transmit distributions of principal of and interest on the
Certificates. Participants and Indirect Participants with which Certificate
Owners have accounts with respect to the Certificates similarly are required to
make book-entry transfers and receive and transmit such payments on behalf of
their respective Certificate 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
Certificate Owner to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise
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take actions in respect of such Certificates, may be limited due to the lack of
a physical certificate for such Certificates.
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.
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 certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
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Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by 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 certificates to specific clearance accounts. The
Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by 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
Certificateholder under the Agreement 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.
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Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Certificateholder under the Agreement only at the direction of one or
more Participants to whose account with DTC the Certificates are credited.
Certificates initially issued in book-entry form will be issued as
Definitive Certificates only if (i) DTC or the Depositor advises the Trustee in
writing that DTC is no longer willing or able to properly discharge its
responsibilities as nominee and depository with respect to the Certificates 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 under the Agreement (an "Event of
Default"), if holders of Class A Certificates evidencing not less than 51% of
the Voting Rights advise the Trustee in writing that the continuation of a
book-entry system through DTC (or a successor thereto) to the exclusion of any
physical certificates being issued to Certificate Owners is no longer in the
best interests of Certificate 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 Certificates for the Certificates. Upon
surrender by DTC of the certificate or certificates representing such
Certificates and instructions for reregistration, the Trustee will issue such
Certificates in the form of Definitive Certificates, and thereafter the Trustee
will recognize the holders of such Definitive Certificates as Certificateholders
under the Agreement and such holders of Definitive Certificates will deal
directly with the Trustee with respect to transfers, notices and distributions.
In the event that Definitive Certificates are issued or DTC ceases to be the
clearing agency for the Certificates, the Agreement will provide that the
applicable Certificateholders will be notified of such event.
Pass-Through Rates
The Pass-Through Rate on the Class A-1 Certificates, Class A-2 Certificates
and Class A-3 Certificates on each Distribution Date will be a rate per annum
equal to _____%, _____% and _____%, respectively.
Interest Distributions
Distributions in respect of interest on each Distribution Date will be made
concurrently: to the holders of the Class A-1 Certificates in an amount equal to
the Class A-1 Interest Distribution Amount, to the holders of the Class A-2
Certificates in an amount equal to the Class A-2 Interest Distribution Amount,
and to the holders of the Class A-3 Certificates in an amount equal to the Class
A-3 Interest Distribution Amount.
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The "Class A-1 Interest Distribution Amount" on any Distribution Date is
equal to (i) interest accrued during the related Interest Accrual Period on the
Class A-1 Certificate Principal Balance immediately prior to such Distribution
Date at the Class A-1 Pass-Through Rate, reduced pro rata (to not less than
zero) by any shortfalls resulting from the application of the Relief Act, plus
(ii) any shortfalls of Accrued Certificate Interest from prior Interest Accrual
Periods.
The "Class A-2 Interest Distribution Amount" on any Distribution Date is
equal to (i) interest accrued during the related Interest Accrual Period on the
Class A-2 Certificate Principal Balance immediately prior to such Distribution
Date at the Class A-2 Pass-Through Rate, reduced pro rata (to not less than
zero) by any shortfalls resulting from the application of the Relief Act, plus
(ii) any shortfalls of Accrued Certificate Interest from prior Interest Accrual
Periods.
The "Class A-3 Interest Distribution Amount" on any Distribution Date is
equal to (i) interest accrued during the related Interest Accrual Period on the
Class A-3 Certificate Principal Balance immediately prior to such Distribution
Date at the Class A-3 Pass-Through Rate, reduced pro rata (to not less than
zero) by any shortfalls resulting from the application of the Relief Act, plus
(ii) any shortfalls of Accrued Certificate Interest from prior Interest Accrual
Periods.
Distributions of the Interest Distribution Amount will be made on each
Distribution Date, commencing with the first Distribution Date. The Interest
Accrual Period for any Distribution Date is the calendar month immediately
preceding the month in which such Distribution Date occurs, and all
distributions of interest will be based on a 360-day year consisting of twelve
30-day months.
Subject to the terms of the Policy, any shortfall in the Interest
Distribution Amount for the Class A Certificates on any Distribution Date (other
than Relief Act Shortfalls and Prepayment Interest Shortfalls) will be covered
under the Policy. Notwithstanding the foregoing, if payments are not made as
required under the Policy, any such interest losses may be allocated to the
Class A Certificates.
Principal Distributions on the Class A Certificates
On each Distribution Date an amount equal to the Principal Distribution
Amount (defined below) will be distributed in the following sequential-pay
order: first, to the Holders of the Class A-1 Certificates until the Class A-1
Certificate Principal Balance has been reduced to zero, second, to the Holders
of the Class A-2 Certificates until the Class A-2 Certificate Principal Balance
has been reduced to zero and third, to the Holders of the Class A-3 Certificates
until the Class A-3 Certificate Principal Balance has been reduced to zero. The
"Principal Distribution Amount" for any Distribution Date will be the lesser of:
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(a) the excess of the Available Distribution Amount over the Accrued
Certificate Interest and any shortfalls of Accrued Certificate Interest
from previous Distribution Dates; 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
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 into the Distribution Account from the Redemption Account, if
any;
(iv) the amount of any Overcollateralization Deficit for such
Distribution Date; and
(v) the amount of any Subordination Increase Amount (defined
below) for the Class A Certificates for such Distribution Date;
minus
(vi) the amount of any Subordination Reduction Amount (defined
below) for such Distribution Date.
Notwithstanding the foregoing, as described under "--Overcollateralization
Provisions" herein, no amounts will be distributed to the holders of the Class A
Certificates 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 Distribution 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.
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In no event will the Principal Distribution Amount with respect to any
Distribution Date be (x) less than zero or (y) greater than the then outstanding
Class A Certificate Principal Balance.
The "Available Distribution Amount" for the Class A Certificates for any
Distribution 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 Trustee during the related Collection Period,
after deduction of the Servicing Fee, the 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 Redemption Account and Interest Coverage Account, if any, (iii)
all Monthly Advances with respect to the related Mortgage Loans received by the
Trustee for such Distribution Date and (iv) Prepayment Interest Shortfalls for
such Distribution Date.
Overcollateralization Provisions
The Agreement requires that, on each Distribution Date, the Net Monthly
Excess Cashflow, if any, be applied on such Distribution Date as an accelerated
payment of principal on the Class A Certificates, but only to the limited extent
hereafter described. The "Net Monthly Excess Cashflow" for any Distribution Date
is equal to the excess of (x) the Available Distribution Amount for such
Distribution Date over (y) the sum for such Distribution Date of (A) the Accrued
Certificate Interest and any shortfalls thereon payable to the holders of the
Class A Certificates and (B) the amount described in clauses (b)(i)-(iii) of the
definition of Principal Distribution Amount.
With respect to any Distribution Date, any Net Monthly Excess Cashflow will
be paid as follows:
first, to the holders of the Class A Certificates 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 Certificates 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;
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fifth, to the holders of the class of Class A Certificates, an amount
equal to any shortfalls resulting from the application of the Relief Act
with respect to the Mortgage Loans; and
sixth, to the holders of the Subordinate Certificates.
With respect to any Distribution Date, the excess, if any, of (a) the
aggregate Stated Principal Balance of the Mortgage Loans immediately following
such Distribution Date over (b) the Class A Certificate 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 Distribution Date) is the "Subordinated Amount" as of such Distribution
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
Certificateholders 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 Distribution Date is a "Subordination Increase
Amount." The required level of the Subordinated Amount with respect to a
Distribution Date is the "Required Subordinated Amount" with respect to such
Distribution Date.
In the event that the Required Subordinated Amount is required to step up
on any Distribution Date, the Agreement 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 Distribution Date, the Agreement provides that a portion of the
principal which would otherwise be distributed to the holders of the Class A
Certificates on such Distribution Date will be distributed to the holders of the
Subordinate Certificates on such Distribution Date. This has the effect of
decelerating the amortization of the Class A Certificates relative to the
amortization of the Mortgage Loans, and of reducing the Subordinated Amount.
With respect to any Distribution Date, the excess, if any, of (a) the
Subordinated Amount over (b) the Required Subordinated Amount is the "Excess
Subordinated Amount". If, on any Distribution Date, the Excess Subordinated
Amount is, or, after taking into account all other distributions to be made on
such Distribution 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 distributed to the
holders of the Class A Certificates on such Distribution Date will instead be
distributed to the holders of the Subordinate 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 Distribution Date; such amount being the
"Subordination Reduction Amount" for such Distribution Date.
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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 Trustee.
Simultaneously with the issuance of the Class A Certificates, the Insurer
will deliver the Policy to the Trustee for the benefit of the holders of the
Class A Certificates. Under the Policy, the Insurer will irrevocably and
unconditionally guarantee on each Distribution Date to the Trustee for the
benefit of the holders of the Class A Certificates the full and complete payment
of Insured Payments with respect to the Class A Certificates, calculated in
accordance with the original terms of the Class A Certificates when issued and
without regard to any amendment or modification of the Class A Certificates or
the Agreement except amendments or modifications to which the Insurer has given
its prior written consent. "Insured Payments" shall mean with respect to the
Class A Certificates as of any Distribution Date (i) any shortfall in amounts
available in the Distribution Account (as defined in the Agreement) to pay the
Interest Distribution Amount (other than Prepayment Interest Shortfalls) for the
related Interest Accrual Period, (ii) the Remaining Overcollateralization
Deficit, if any, for such Distribution Date and (iii) without duplication of the
amount specified in clause (ii), the Class A Certificate Principal Balance to
the extent unpaid on the final Distribution Date or earlier termination of the
Trust Fund pursuant to the terms of the Agreement. The Policy does not cover
Relief Act Shortfalls or Prepayment Interest Shortfalls.
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 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 Certificates is required to return principal or interest distributed
with respect to a Class A Certificate 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
Certificates 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
Certificates, in such form as is reasonably required by the Insurer and provided
to such holder of Class A Certificates by the Insurer, irrevocably assigning to
the Insurer all rights and claims of such holder of Class A Certificates against
the debtor which made such preference payment or otherwise with respect to such
preference payment, or (ii) the date of Receipt by the Insurer from the 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 Trustee that such items were to be delivered on such
date and such date was specified in such notice. Such payment shall be disbursed
to the receiver, conservator, debtor-in-possession or trustee in bankruptcy
named in the Order and not to the Trustee
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or holder of Class A Certificates directly (unless a holder of Class A
Certificates has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which case
such payment shall be disbursed to the Trustee for distribution to such
Certificateholder 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 Agreement.
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 Distribution 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 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 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 shall promptly so
advise the Trustee and the 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 or in the city in which the corporate trust office
of the Trustee is located, 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 Trustee
as provided in the Policy, whether or not such funds are properly applied by the
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
Certificate Principal Balance is zero, plus such additional period, to the
extent specified in the Policy, during which any payment on the Class A
Certificates 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
Certificates to receive payments of principal and interest, as applicable, with
respect to distributions on the Class A Certificates 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 Trustee), to
the holders of the Class A Certificates, the Insurer will be subrogated to the
rights of the holders of the Class A Certificates, 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 Certificates for purposes of payment.
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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
Certificates, 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 Agreement, unless an Insurer Default (defined
below) exists, the Insurer will be entitled to exercise certain rights of the
holders of the Class A Certificates, without the consent of such
Certificateholders, and the holders of the Class A Certificates may exercise
such rights only with the prior written consent of the Insurer. See "Pooling and
Servicing Agreement--Voting Rights" and "--Certain Matters Regarding the
Insurer" herein.
The Depositor, the Originator and the Insurer will enter into an Insurance
and Indemnity Agreement (the "Insurance 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 Fund. 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 Agreement and allow the Insurer, among other things, to
direct the 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 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 Agreement (in its capacity as
Servicer) and certain other documents, (iv) the Originator's failure to pay its
debts in
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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 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 Distribution Date its own funds, or
funds in the Certificate Account that are not included in the Available
Distribution Amount for such Distribution 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 Certificateholders, 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 Certificate Account prior to the distributions on the Certificates. In the
event the Servicer fails in its obligation to make any such advance, the Trustee
will be obligated to make any such advance, to the extent required in the
Agreement.
Determination of Losses; Subordination
The Policy will cover all Remaining Overcollateralization Deficits, if any.
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 Certificateholders 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
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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 Trustee and
will be part of the Trust Fund. The amount on deposit in the Interest Coverage
Account, including reinvestment income thereon, will be used by the Trustee to
fund, on the initial Distribution Date, the amount of interest accruing at the
weighted average Pass-Through Rate of all Class A Certificates on the amount by
which the aggregate Class A Certificate Principal Balance as of the Closing Date
exceeds the aggregate Stated Principal Balance of the Initial Mortgage Loans as
of the Cut-off Date. Any amounts remaining in the Interest Coverage Account
after the initial Distribution Date and not needed for such purpose will be paid
to the Seller and will not thereafter be available for distribution to the
Holders of the Class A Certificates. The Interest Coverage Account will
terminate immediately following the first Distribution Date.
Amounts on deposit in the Interest Coverage Account will be invested in
Eligible Investments. The Interest Coverage Account will not be an asset of the
REMIC.
Redemption Account
On the Closing Date, it is expected that approximately $_________ of
Additional Mortgage Loans will be transferred to the Trust Fund. See "The
Mortgage Pool Conveyance of Additional Mortgage Loans." In the event that less
than such amount of Additional Mortgage Loans are transferred to the Trust Fund,
an aggregate cash amount equal to the excess of (i) $_____________, over (ii)
the aggregate Stated Principal Balances of the related Additional Mortgage Loans
as of the respective Cut-off Dates, will be deposited by the Seller in an
account which will be in the name of, and maintained by, the Trustee on behalf
of the Trust Fund (the "Redemption Account"). Any amounts on deposit in the
Redemption Account will be transferred by the Trustee on the first Distribution
Date into the Distribution Account, and will be distributed as a principal
prepayment to Certificateholders then entitled to distributions of principal.
See "Risk Factors - The Additional Mortgage Loans." Any reinvestment income
earned on amounts on deposit in the Redemption Account is required to be paid to
the Seller. The Redemption Account will terminate immediately after the first
Distribution Date and will not be an asset of the REMIC.
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POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to the Agreement, a form of which
is filed as an exhibit to the Registration Statement. A Current Report on Form
8-K relating to the Certificates containing a copy of the Agreement as executed
will be filed by the Depositor with the Securities and Exchange Commission
within fifteen days of initial issuance of the Certificates. The Trust Fund
created under the Agreement 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 Cut-off Date, together with any
proceeds thereof, (iii) any Mortgaged Properties acquired on behalf of
Certificateholders by foreclosure or by deed in lieu of foreclosure, and any
revenues received thereon, (iv) the rights of the Trustee under all insurance
policies required to be maintained pursuant to the Agreement and (v) the rights
of the Seller under the Purchase and Assignment Agreement between the Seller and
the Originator. Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the Trust Fund, the terms and
conditions of the Agreement and the Class A Certificates. The definitive Class A
Certificates will be transferable and exchangeable at the corporate trust
offices of the Trustee, located in Charlotte, North Carolina. The Originator
will provide to a prospective or actual Certificateholder without charge, on
written request, a copy (without exhibits) of the Agreement. Requests should be
addressed to Emergent Mortgage Corp., 15 S. Main Street, Suite 750, Greenville,
South Carolina 29606, Attn: Wade Hall.
Assignment of the Mortgage Loans
The Depositor will deliver to the Trustee with respect to each Mortgage
Loan (i) the original mortgage note endorsed without recourse to the Trustee to
reflect the transfer of the Mortgage Loan, (ii) the original mortgage with
evidence of recording indicated thereon and (iii) an original assignment of the
mortgage in recordable form to the Trustee, reflecting the transfer 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. The Trustee, concurrently with the Depositor's assignment, will deliver
the Certificates to the Depositor in exchange for the Mortgage Loans.
The Trustee
First Union National Bank of North Carolina, a national banking association
with its principal corporate trust office located in Charlotte, North Carolina,
has been named the Trustee pursuant to the Agreement.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Agreement will be equal to accrued interest at the Trustee
fee rate of _____% per annum on the Stated Principal Balance of each Mortgage
Loan. The Agreement will
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provide that the Trustee and any director, officer, employee or agent of the
Trustee will be indemnified by the Trust Fund and will be held harmless against
any loss, liability or expense (not including expenses, disbursements and
advances incurred or made by the Trustee, including the compensation and the
expenses and disbursements of its agents and counsel, in the ordinary course of
the Trustee's performance in accordance with the provisions of the Agreement)
incurred by the Trustee arising out of or in connection with the acceptance or
administration of its obligations and duties under the Agreement, other than any
loss, liability or expense (i) resulting from the Servicer's actions or
omissions in connection with the Agreement and the Mortgage Loans (but only to
the extent the Trustee is actually indemnified by the Servicer pursuant to the
Agreement), (ii) that constitutes a specific liability of Trustee under the
Agreement or (iii) incurred by reason of willful misfeasance, bad faith or gross
negligence in the performance of the Trustee's duties under the Agreement or as
a result of a breach, or by reason of reckless disregard, of the Trustee's
obligations and duties under the Agreement.
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 Certificates 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 Certificate Account and any escrow accounts. The Servicer will be obligated
to offset any Prepayment Interest Shortfall on any Distribution Date (payments
made by the Servicer in satisfaction of such obligation, "Compensating
Interest") to the extent of the Servicing Fee for such Distribution 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 Agreement and is entitled to
reimbursement therefor as provided in the 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.
Voting Rights
With respect to any date of determination, the percentage of all the voting
rights (the "Voting Rights") allocated among holders of the Class A Certificates
and of the Subordinate Certificates will be the fraction, expressed as a
percentage, the numerator of which is the aggregate certificate principal
balance (the "Certificate Principal Balance") of all the Certificates of such
class then outstanding and the denominator of which is the aggregate Stated
Principal Balance of the Mortgage Loans then outstanding. The Voting Rights
allocated to each class of Certificates will be allocated among all holders of
each such class in proportion to the outstanding Certificate Principal Balance
of such Certificates. Unless an Insurer Default exists, the Insurer will be
entitled to exercise
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certain voting and other rights of the holders of the Class A Certificates. See
"--Certain Matters Regarding the Insurer" herein.
Certain Matters Regarding the Insurer
Pursuant to the terms of the Agreement, 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 Certificates,
without the consent of such holders, and the holders of the Class A Certificates
may exercise such rights only with the prior written consent of the Insurer: (i)
the right to direct the Trustee to terminate the rights and obligations of the
Servicer under the 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 Trustee pursuant to the Agreement; and (iv) the right to
institute proceedings against the Servicer in the event of default by the
Servicer and refusal of the Trustee to institute such proceedings. 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 Certificates, and, unless an
Insurer Default exists, the Insurer's consent will be required prior to, among
other things, (i) the removal of the Trustee, (ii) the appointment of any
successor Trustee or Servicer or (iii) any amendment to the Agreement.
Termination
The circumstances under which the obligations created by the Agreement will
terminate in respect of the Certificates are described in "The Pooling and
Servicing Agreement--Termination; Purchase or Other Disposition of Mortgage
Loans and Contracts" in the Prospectus. The majority holder of the Subordinate
Certificates and the Insurer will have the right to purchase all remaining
Mortgage Loans and any properties acquired in respect thereof and thereby effect
termination of the Trust Fund and early retirement of the Certificates on any
Distribution Date following the Collection Period during which the aggregate
principal balance of the Mortgage Loans and such properties at the time of
purchase is 10% or less, in the case of a purchase by the majority holder of the
Subordinate Certificate, or 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 Date. In the event the majority holder of the Subordinate
Certificates 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 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. In the event the holder of the Subordinate Certificates or the Insurer
exercises such option, the portion of the purchase price allocable to the Class
A Certificates will be, to the extent of available funds (including funds paid
under the Policy), (i) 100% of the then
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outstanding Class A Certificate Principal Balance thereof, plus (ii) one month's
interest on the then outstanding Class A-1 Certificate Principal Balance thereof
at the Class A-1 Pass-Through Rate, one month's interest on the then outstanding
Class A-2 Certificate Principal Balance at the Class A-2 Pass-Through Rate and
one month's interest on the then outstanding Class A-3 Certificate Principal
Balance of the Class A-3 Pass-Through Rate, plus (iii) any previously accrued
but unpaid interest thereon. No such termination shall be permitted without the
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. In no event will the trust created by the Agreement
continue beyond the expiration of 21 years from the death of the survivor of the
persons named in the Agreement.
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 Certificates is to be
considered only in connection with "Certain Federal Income Tax
Consequences--REMIC CERTIFICATES" 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 Certificates.
REMIC Election
The Trustee will cause an election to be made with respect to certain
specified assets of the Trust Fund as a real estate mortgage investment conduit
("REMIC") within the meaning of Code Section 860D. Dewey Ballantine, special tax
counsel, will advise that, in its opinion, for federal income tax purposes,
assuming the REMIC election is made and compliance with the Pooling and
Servicing Agreement, each Class of Class A Certificates will be treated as a
"regular interest" in a REMIC.
For federal income tax purposes, regular interests in a REMIC are treated
as debt instruments issued by the REMIC on the date on which those interests are
created, and not as ownership interests in the REMIC or its assets. Owners of
Class A Certificates that otherwise report income under a cash method of
accounting will be required to report income with respect to such Certificates
under an accrual method. The prepayment assumption that will be used in
determining the rate of accrual of original issue discount on the Class A
Certificates is the "Prepayment Assumption." See "YIELD ON THE CERTIFICATES --
Weighted Average Lives" herein and "Certain Federal Income Tax
Consequences--REMIC CERTIFICATES--Taxation of Regular Certificates" in the
Prospectus.
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The Class A Certificates will constitute: (i) "real estate assets" within
the meaning of section 858(c)(5)(A) of the Internal Revenue Code (the "Code") if
held by a real estate investment trust; (ii) "qualified mortgages" within the
meaning of section 860G(a)(3) of the Code or "permitted investments" within the
meaning of section 860G(a)(5) of the Code if held by a REMIC, or (iii) assets
described in section 7701(a)(19)(C)(xi) of the Code if held by a thrift.
Moreover, other special rules may apply to certain investors, including dealers
in securities and dealers in notional principal contracts. See "Certain Federal
Income Tax Consequences - REMIC CERTIFICATES - Status of the REMIC Certificates
in the Prospectus.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of the
Class A Certificates will be used by the Depositor to pay the purchase price of
the Mortgage Loans to the Seller, and to pay expenses connected with pooling the
Mortgage Loans and issuing the Certificates.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Depositor and the Underwriter, the Class A Certificates will be
purchased from the Depositor by the Underwriter, an affiliate of the Depositor,
upon issuance.
The Underwriter has advised the Depositor that it proposes to offer the
Class A Certificates purchased by the Underwriter for sale from time to time in
one or more negotiated transactions or otherwise, at market prices prevailing at
the time of sale, at prices related to such market prices or at negotiated
prices. The Underwriter may effect such transactions by selling such
Certificates to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
Underwriter or purchasers of the Class A Certificates for whom they may act as
agent. Any dealers that participate with the Underwriter in the distribution of
the Class A Certificates purchased by the Underwriter may be deemed to be
underwriters, and any discounts or commissions received by them or the
Underwriter and any profit on the resale of Class A Certificates by them or the
Underwriter may be deemed to be underwriting discounts or commissions under the
Securities Act of 1933.
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 Fund will have been
acquired by the Depositor in a privately negotiated transaction with the Seller.
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LEGAL MATTERS
Certain legal matters relating to the Class A Certificates will be passed
upon for the Depositor and for the Underwriter by Dewey Ballantine, New York,
New York.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1996, 1995 and 1994 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 Certificates that the Class A
Certificates be rated "AAA" by Standard & Poor's and "Aaa" by Moody's.
The ratings of Moody's and Standard & Poor's assigned to mortgage
pass-through certificates address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled. The rating process addresses structural and legal aspects associated
with the Certificates, including the nature of the underlying mortgage loans.
The ratings assigned to mortgage pass-through certificates 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 Certificates 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 Certificates. The
ratings do not address the possibility that Certificateholders 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 Certificates 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 Certificates.
The Depositor has not requested that any rating agency rate the Class A
Certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the Class A Certificates, or, if it
does, what rating would
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be assigned by any such other rating agency. A rating on the Class A
Certificates by another rating agency, if assigned at all, may be lower than the
ratings assigned to the Class A Certificates as stated above.
LEGAL INVESTMENT
The Class A Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
The Depositor makes no representations as to the proper characterization of
the Class A Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase the Class A Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the Class A Certificates. 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 Certificates 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 on those employee benefit plans and individual
retirement arrangements to which it applies (a "Plan") and on those persons who
are fiduciaries with respect to such Plans. Any Plan fiduciary which proposes to
cause assets of a Plan to acquire any of the Class A Certificates should consult
with counsel with respect to the consequences under ERISA and the Code of the
Plan's acquisition and ownership of such Certificates. See "ERISA
Considerations" in the Prospectus.
The Department of Labor has issued to Prudential Securities Incorporated an
individual prohibited transaction exemption, Prohibited Transaction Exemption
90-32 (the "Exemption"), which generally exempts from the application of the
prohibited transaction provisions of Section 406(a), Section 406(b)(1), Section
406(b)(2) and Section 407(a) of ERISA and the excise taxes imposed pursuant to
Sections 4975(a) and (b) of the Code, certain transactions relating to the
servicing and operation of pools and the initial purchase, holding and
subsequent resale by Plans of certificates in pass-through trusts that consist
of certain secured receivables, secured loans and other secured obligations that
meet the conditions and requirements of the Exemption. The loans covered by the
Exemption include mortgage loans.
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Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an
unrelated party;
(2) the rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust;
(3) the certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from either Standard & Poor's, Moody's, Duff & Phelps
Credit Rating Co. or Fitch Investors Service, Inc. ("National Credit Rating
Agencies");
(4) the Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the Underwriter in
connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of
all payments made to and retained by the Depositor pursuant to the
assignment of the loans to the Trust Fund represents not more than the fair
market value of such loans; the sum of all payments made to and retained by
any Servicer represents not more than reasonable compensation for such
person's services under the Pooling and Servicing Agreement and
reimbursement of such person's reasonable expenses in connection therewith;
and
(6) the Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act.
The Trust Fund must also meet the following requirements:
(i) the corpus of the Trust Fund consists solely of assets of the type
that have been included in other investment pools;
(ii) certificates in such other investment pools have been rated in
one of the three highest rating categories of one of the National Credit
Rating Agencies for at least one year prior to the 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 the Plan's acquisition of certificates.
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Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire certificates in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust; provided that,
among other requirements, (i) in the case of an acquisition in connection with
the initial issuance of certificates, at least fifty percent of each class of
certificates in which Plans have invested is acquired by persons independent of
the Restricted Group and at least fifty percent of the aggregate interest in the
trust is acquired by persons independent of the Restricted Group; (ii) such
fiduciary (or its affiliate) is an obligor with respect to five percent or less
of the fair market value of the obligations contained in the trust; (iii) the
Plan's investment in certificates of any class does not exceed twenty-five
percent of all of the certificates of that class outstanding at the time of the
acquisition; and (iv) immediately after the acquisition, no more than
twenty-five percent of the assets of the Plan with respect to which such person
is a fiduciary are invested in certificates representing an interest in one or
more trusts containing assets sold or serviced by the same entity. The Exemption
does not apply to Plans sponsored by the Depositor, the Insurer, the
Underwriter, the Trustee, the Servicer, any obligor with respect to Mortgage
Loans included in the Trust Estate constituting more than five percent of the
aggregate unamortized principal balance of the assets in the Trust Estate, or
any affiliate of such parties (the "Restricted Group").
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the Exemption,
and the potential consequences in their specific circumstances, prior to making
an investment in the Class A Certificates. In addition, prospective investors
that are insurance companies should consult with their counsel with respect to
the United States Supreme Court case interpreting the fiduciary responsibility
rules of ERISA, John Hancock Mutual Life Insurance Co. v. Harris Trust and
Saving Bank, 114 S. Ct. 517 (1993). In John Hancock, the Supreme Court ruled
that assets held in an insurance Company's general account may be deemed to be
"plan assets" for ERISA purposes under certain circumstances. Moreover, each
Plan fiduciary should determine whether under the general fiduciary standards of
investment procedure and diversification an investment in the Class A
Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
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Index of Defined Terms
Accrued Certificate Interest............................................8
Additional Mortgage Loans...............................................2
Agreement...............................................................1
Available Distribution Amount..........................................61
Balloon Loans .........................................................21
CEDE ..................................................................54
CEDEL ..............................................................7, 54
CEDEL Participants.....................................................55
Certificate Owners......................................................7
Certificate Principal Balance..........................................69
Certificates.........................................................1, 3
Class A Certificate Principal Balance..................................11
Class A Certificateholders..............................................1
Class A Certificates....................................................1
Class A-1 Certificate Principal Balance.................................9
Class A-1 Certificates..................................................1
Class A-1 Interest Distribution Amount.................................59
Class A-1 Pass-Through Rate.............................................8
Class A-2 Certificate Principal Balance.............................9, 10
Class A-2 Certificates..................................................1
Class A-2 Interest Distribution Amount.................................59
Class A-2 Pass-Through Rate.............................................8
Class A-3 Certificate Principal Balance.............................9, 10
Class A-3 Certificates..................................................1
Class A-3 Interest Distribution Amount.................................59
Class A-3 Pass-Through Rate.............................................8
Clearing Agency........................................................54
Closing Date............................................................4
Collection Period ......................................................8
Compensating Interest..................................................69
Cooperative............................................................57
Cumulative Insurance Payments..........................................60
Cut-off Date............................................................3
D&P....................................................................75
Debt Ratio.............................................................37
Depositaries........................................................7, 54
Depositary.............................................................54
Depositor...............................................................4
Determination Date......................................................8
Distribution Date ......................................................1
DTC.....................................................................7
ERISA..............................................................17, 74
Euroclear...........................................................7, 54
S-77
<PAGE>
Euroclear Operator.....................................................57
Euroclear Participants.................................................57
Event of Default .....................................................58
Excess Subordinated Amount.............................................62
Exemption .............................................................74
Fitch..................................................................75
HEP....................................................................49
Holdings...............................................................24
Home Equity Prepayment.................................................49
Indirect Participants..................................................55
Initial Mortgage Loans..................................................2
Insolvency Laws........................................................22
Insurance Agreement....................................................65
Insured Payment .......................................................12
Insured Payments ......................................................63
Insurer.................................................................1
Insurer Default .......................................................70
Interest Accrual Period.................................................8
Interest Coverage Account...............................................5
Interest Distribution Amount............................................8
Modeling Assumptions...................................................50
Monthly Advance .......................................................66
Moody's................................................................16
Mortgage Loan Division.................................................27
Mortgage Loans ......................................................1, 2
Mortgage Pool ..........................................................1
Mortgage Rate .........................................................14
Mortgaged Properties....................................................5
National Credit Rating Agencies........................................75
Net Monthly Excess Cashflow........................................10, 61
Order .................................................................63
Original Class A-1 Certificate Principal Balance........................3
Original Class A-2 Certificate Principal Balance........................3
Original Class A-3 Certificate Principal Balance........................3
Originator..............................................................1
Overcollateralization Deficit...........................................9
Parent.................................................................27
Participants...........................................................55
Pass-Through Rate ......................................................7
Plan...................................................................74
Policy..................................................................1
Pooling and Servicing Agreement.........................................1
Prepayment Assumption..................................................49
Prepayment Interest Shortfalls.........................................47
Prepayments............................................................19
S-78
<PAGE>
Principal Distribution Amount..........................................59
Purchase and Assignment Agreement.......................................1
Realized Losses........................................................67
Receipt................................................................64
Received...............................................................64
Record Date............................................................13
Redemption Account......................................................6
Relief Act.............................................................47
Relief Act Shortfalls..................................................47
Remaining Overcollateralization Deficit................................10
REMIC...................................................................1
REMICs.................................................................71
Required Subordinated Amount...........................................62
Restricted Group ......................................................76
Retail Mortgage Loans..................................................38
Seller...............................................................1, 4
Servicer................................................................4
Servicing Fee..........................................................11
SMMEA..................................................................16
Standard & Poor's .....................................................16
Stated Principal Balance...............................................62
Strategic Alliance Mortgage Bankers....................................38
Subordinate Certificates................................................1
Subordinated Amount....................................................62
Subordination Increase Amount..........................................62
Subordination Reduction Amount.........................................62
Term of the Policy.....................................................64
Terms and Conditions...................................................57
Trust Fund..............................................................1
Trustee.................................................................1
Unaffiliated Seller's Agreement.........................................1
Underwriter.............................................................1
Voting Rights..........................................................69
Wholesale Mortgage Loans...............................................38
S-79
<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 December 4, 1996
<PAGE>
(Cover continued from previous page)
Each Series of Certificates will include one or more classes. The
Certificates of any particular class may represent beneficial ownership
interests in the related Mortgage Loans held by the related Trust Fund, or may
represent debt secured by such Mortgage Loans, as described herein and in the
related Prospectus Supplement. Any Series of Certificates may include one or
more Classes or Subclasses of Certificates (the "Subordinated Certificates")
that are subordinate in right of distributions to such rights of one or more of
other Classes or Subclasses of such Series (the "Senior Certificates"). If
specified in the applicable Prospectus Supplement, the relative interests of the
Senior Certificates and the Subordinated Certificates of a Series in the Trust
Fund may be subject to adjustment from time to time on the basis of
distributions received in respect thereof (the "Shifting Interest
Certificates"). If so specified in the applicable Prospectus Supplement, credit
support may also be provided for any Series of Certificates in the form of a
guarantee, letter of credit, mortgage pool insurance policy or other form of
credit enhancement as described herein.
Neither the Mortgage Loans nor the Contracts will be guaranteed or insured
by any governmental agency or instrumentality or, except as specified in the
related Prospectus Supplement, by any other person. The only obligations of the
Depositor with respect to a Series of Certificates will be pursuant to certain
limited representations and warranties made by the Depositor, to the extent
described herein and in the related Prospectus Supplement. The Servicer with
respect to a Series of Certificates relating to Mortgage Loans or Contracts will
be named in the related Prospectus Supplement. The principal obligations of a
Servicer will be limited to certain obligations pursuant to certain
representations and warranties and to its contractual servicing obligations.
An election may be made to treat each Trust Fund (or one or more segregated
pools of assets therein) underlying a Series which includes MultiClass
Certificates as a "real estate mortgage investment conduit" (a "REMIC") for
federal income tax purposes. Series of Certificates for which a REMIC election
has been made will include one or more Classes or Subclasses which constitute
"regular interests" in the REMIC ("Regular Certificates") and one Class or
Subclass with respect to each REMIC which constitutes the "residual interest"
therein (the "Residual Certificates"). Alternatively, a Trust Fund may be
treated as a grantor trust or as a partnership for federal income tax purposes,
or may be treated for federal income tax purposes as a mere security device
which constitutes a collateral arrangement for the issuance of debt. See
"Certain Federal Income Tax Consequences."
There will have been no public market for the Certificates of any Series
prior to the offering thereof. No assurance can be given that such a market will
develop, or that if such a market does develop, it will provide
Certificateholders with liquidity of investment or will continue for the life of
the Certificates.
2
<PAGE>
REPORTS
In connection with each distribution and annually, Certificateholders will
be furnished with statements containing information with respect to principal
and interest payments and the related Trust Fund, as described herein and in the
applicable Prospectus Supplement for such Series. Any financial information
contained in such reports will not have been examined or reported upon by an
independent public accountant. See "Servicing of the Mortgage Loans and
Contracts -- Reports to Certificateholders." The Servicer for each Series
relating to Mortgage Loans or Contracts will furnish periodic statements setting
forth certain specified information to the related Trustee and, in addition,
annually will furnish such Trustee with a statement from a firm of independent
public accounts with respect to the examination of certain documents and records
relating to the servicing of the Mortgage Loans or Contracts in the related
Trust Fund. See "Servicing of the Mortgage Loans and Contracts -- Reports to the
Trustee" and "Evidence as to Compliance." Copies of the monthly and annual
statements provided by the Servicer to the Trustee will be furnished to
Certificateholders of each Series upon request addressed to Prudential
Securities Secured Financing Corporation, One 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
5
<PAGE>
respect to which an election has been made to
treat the Trust Fund (or one or more segregated
pools of assets therein) as a REMIC will include
one Class or one Subclass of Residual Certificates
as to each REMIC. The Residual Certificates of a
Series, if offered hereby, will represent the
right to receive distributions with respect to the
related Trust Fund as specified in the related
Prospectus Supplement. Unless otherwise specified
in the applicable Prospectus Supplement, the
Certificates will be offered only in fully
registered form.
A. Standard
Certificates............. Unless otherwise provided in the applicable
Prospectus Supplement, Standard Certificates of a
Series will each evidence a fractional undivided
beneficial ownership interest in the related Trust
Fund and will entitle the holder thereof to its
proportionate share of a percentage of all of the
payments and other receipts with respect to the
principal of and interest (to the extent of the
applicable Net Mortgage Rate or Net Contract Rate)
on the related Mortgage Loans or Contracts. If
specified in the applicable Prospectus Supplement,
with respect to any Class of Standard Certificates
of a Series for which a REMIC election has been
made, distributions of principal may be allocated
among the Certificateholders of such Class on a
pro rata, random lot or such other basis as is
specified in such Prospectus Supplement.
B. Multi-Class
Certificates............. Multi-Class Certificates of a Series will consist
of Certificates each of which evidences a
beneficial ownership interest in the related Trust
Fund and will be assigned a Stated Amount, which
may be based on an amount of principal of the
underlying Mortgage Loans or Contracts or on the
value of future cash flows from the related Trust
Fund without distinction as to principal or
interest and an Interest Rate which may be a fixed
rate (which may be zero) or a variable rate or
which will otherwise accrue interest as specified
in the applicable Prospectus Supplement. The
holder of a Multi-Class Certificate will be
entitled to receive, to the extent funds are
available therefor, interest payments on the
outstanding Stated Amount thereof at the
applicable Interest Rate or as otherwise specified
in the applicable Prospectus Supplement and
distributions in reduction of such Stated Amount
determined in the manner and applied in the
priority set forth in the applicable Prospectus
Supplement.
C. Stripped
Certificates............. Stripped Certificates will each evidence an
undivided beneficial ownership interest in the
related Trust Fund and will entitle the holder
thereof to its proportionate share of a specified
portion (which may be zero) of principal payments
and/or a specified portion (which may be zero) of
interest payments (to the extent of the applicable
Net Mortgage Interest Rate) on the related
Mortgage Loans.
6
<PAGE>
Pooling and Servicing
Agreement................... The Certificates of each Series will be issued
pursuant to a Pooling and Servicing Agreement
among the Depositor, the Servicer, if any, and the
Trustee.
Cut-Off Date................ The date specified in the applicable Prospectus
Supplement.
Distribution Dates.......... Unless otherwise specified in the applicable
Prospectus Supplement, distributions on Standard
Certificates or Stripped Certificates will be made
on the 25th day (or, if such day is not a business
day, the business day following the 25th day) of
each month, commencing with the month following
the month in which the applicable Cut-Off Date
occurs. Distributions on Multi-Class Certificates
will be made monthly, quarterly, or semiannually,
on the dates specified in the applicable
Prospectus Supplement. The dates upon which such
distributions are made are referred to herein as
the "Distribution Dates."
Record Dates................ Distributions will be made on each Distribution
Date set forth in the Prospectus Supplement to
Certificateholders of record at the close of
business on the last business day of the month
preceding the month in which such Distribution
Date occurs or such other date as may be set forth
in the Prospectus Supplement (the "Record Date").
Interest ................... With respect to a Series of Certificates
consisting of Standard Certificates or Stripped
Certificates, unless otherwise specified in the
applicable Prospectus Supplement, interest on the
related Mortgage Loans, Mortgage Certificates or
Contracts at the applicable pass-through rate (the
"Pass-Through Rate"), as set forth in the
applicable Prospectus Supplement, will be passed
through monthly on each Distribution Date to
holders thereof, in accordance with the particular
terms of each such Certificate. Holders of
Multi-Class Certificates will receive
distributions of interest at the applicable
Interest Rate, if any, on the Stated Amount or
Notional Amount of such Certificates, or as
otherwise specified in the applicable Prospectus
Supplement, without regard to the Net Mortgage
Rates or Net Contract Rates on the underlying
Mortgage Loans or Contracts. Unless otherwise
specified in the applicable Prospectus Supplement,
the "Net Mortgage Rate" for each Mortgage Loan in
a given period will equal the Mortgage Rate for
such Mortgage Loan in such period (the "Mortgage
Rate") less any Fixed Retained Yield, and less the
Servicing Fee (as defined herein). Unless
otherwise specified in the applicable Prospectus
Supplement, the "Net Contract Rate" for each
Contract in a given period will equal the Contract
Rate for such Contract in such period (the
"Contract Rate") less any Fixed Retained Yield,
and less the Servicing Fee. The "Servicing Fee"
with respect to each Mortgage Loan or Contract is
an amount reserved for servicing such Mortgage
Loan or Contract and administration of the related
Trust Fund.
7
<PAGE>
Principal (including
prepayments)................ With respect to a Series of Certificates
consisting of Standard Certificates or Stripped
Certificates, unless otherwise specified in the
applicable Prospectus Supplement, principal
payments (including prepayments received on each
related Mortgage Loan or Contract during the month
preceding the month in which a Distribution Date
occurs) will be passed through to holders on such
Distribution Date, in accordance with the
particular terms of each such Certificate.
Distributions in
Reduction of
Stated Amount............... With respect to each Class and Subclass of
Multi-Class Certificates, distributions in
reduction of Stated Amount will be made on each
Distribution Date to the holders of the
Certificates of such Class and Subclass then
entitled to receive such distributions until the
aggregate amount of such distributions have
reduced the Stated Amount of each such Class and
Subclass of Certificates to zero. Distributions in
reduction of Stated Amount will be allocated among
the Classes or Subclasses of such Certificates in
the manner specified in the applicable Prospectus
Supplement. Distributions in reduction of Stated
Amount with respect to any Class or Subclass of
Multi-Class Certificates of a Series may be made
on a pro rata or random lot or such other basis as
is specified in the applicable Prospectus
Supplement. See "Description of the Certificates
-- Distributions to Multi-Class
Certificateholders."
Forward Commitments;
Pre-Funding................. A Trust Fund may enter into an agreement (each, a
"Forward Purchase Agreement") with the Depositor
whereby the Depositor will agree to transfer
additional Mortgage Loans to such Trust Fund
following the date on which such Trust Fund is
established and the related Certificates are
issued. Any Forward Purchase Agreement will
require that any Mortgage Loans so transferred to
a Trust Fund conform to the requirements specified
in such Forward Purchase Agreement. If a Forward
Purchase Agreement is to be utilized, and unless
otherwise specified in the related Prospectus
Supplement, the related Trustee will be required
to deposit in a segregated account (each, a
"Pre-Funding Account") all or a portion of the
proceeds received by the Trustee in connection
with the sale of one or more classes of
Certificates of the related Series; subsequently,
the additional Mortgage Loans will be transferred
to the related Trust Fund in exchange for money
released to the Depositor from the related
Pre-Funding Account in one or more transfers. Each
Forward Purchase Agreement will set a specified
period during which any such transfers must occur.
The Forward Purchase Agreement or the related
Pooling and Servicing Agreement will require that,
if all moneys originally deposited to such
Pre-Funding Account are not so used by the end of
such specified period, then any remaining moneys
8
<PAGE>
will be applied as a mandatory prepayment of the
related class or classes of Certificates as
specified in the related Prospectus Supplement.
Credit Enhancement
A. By Subordination........ A Series of Certificates may include one or more
Classes or Subclasses of Senior Certificates and
one or more Classes or Subclasses of Subordinated
Certificates. The rights of the holders of
Subordinated Certificates of a Series to receive
distributions with respect to the related Mortgage
Loans or Contracts will be subordinated to such
rights of the holders of the Senior Certificates
of the same Series to the extent (the
"Subordinated Amount") specified herein and in the
applicable Prospectus Supplement. This
subordination is intended to enhance the
likelihood of the timely receipt by the Senior
Certificateholders of their proportionate share of
scheduled monthly principal and interest payments
on the related Mortgage Loans or Contracts and to
reduce the likelihood that the Senior
Certificateholders will experience losses. The
Prospectus Supplement for Series of Certificates
including a subordination feature may also specify
the allocation of distributions and priority of
payments of principal, or Stated Amount, and
interest among one or more Classes or Subclasses
of Senior Certificates of such Series. The
protection afforded to Senior Certificateholders
of a Series will be effected by a preferential
right, as specified in the applicable Prospectus
Supplement, of such Senior Certificateholders to
receive, on any Distribution Date, current
distributions on the related Mortgage Loans or
Contracts and (if so specified in the applicable
Prospectus Supplement) by the establishment of a
reserve fund (the "Subordination Reserve Fund")
for such Series. Any Subordination Reserve Fund
may be funded initially with a deposit of cash,
instruments or securities in an amount specified
in the applicable Prospectus Supplement and, if so
specified in the related Prospectus Supplement,
may be augmented by the retention of distributions
which otherwise would have been available for
distribution to the Subordinated
Certificateholders in the manner and to the extent
specified in the applicable Prospectus Supplement.
The Subordination Reserve Fund for a Series may be
funded and maintained in such other manner as is
specified in the related Prospectus Supplement.
The maintenance of any Subordination Reserve Fund
would be intended to preserve the availability of
the subordination provided by the Subordinated
Certificates and to provide liquidity, but in
certain circumstances the Subordination Reserve
Fund could be depleted and, if other amounts
available for distribution are insufficient,
shortfalls in distributions to the Senior
Certificateholders could result. Unless otherwise
specified in the related Prospectus Supplement,
until the Subordinated Amount is reduced to zero,
Senior Certificateholders will be entitled to
receive the amount of any such shortfall, together
with interest at the applicable Pass-Through Rate,
Interest Rate, or at such other rate specified in
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the applicable Prospectus Supplement, as the case
may be, on the next Distribution Date. Senior
Certificateholders will bear their pro rata share
of any losses realized on the related Mortgage
Loans or Contracts in excess of the applicable
Subordinated Amount. If so specified in the
applicable Prospectus Supplement, the protection
afforded to holders of Senior Certificates of a
Series by the subordination of certain rights of
holders of Subordinated Certificates of such
Series to distributions on the related Mortgage
Loans or Contracts may be effected by a method
other than that described above, such as, in the
event that the applicable Trust Fund (or one or
more segregated pools of assets therein) elects to
be treated as a REMIC, the reallocation from time
to time, on the basis of distributions previously
received, of the respective percentage interests
of the Senior Certificates and the Subordinated
Certificates in the related Trust Fund. See
"Description of the Certificates -- Distributions
to Percentage Certificateholders -- Shifting
Interest Certificates."
B. By Other Methods........ The Certificates of any Series, or any one or more
Classes thereof, may be entitled to the benefits
of a guarantee, letter of credit, mortgage pool
insurance policy, surety bond, reserve fund,
spread account, application of excess interest to
principal or other form of credit enhancement as
specified in the applicable Prospectus Supplement.
See "Description of the Certificates" and "Credit
Support."
Advances.................... Under the Pooling and Servicing Agreement for each
Series relating to Mortgage Loans or Contracts,
unless otherwise provided in the applicable
Prospectus Supplement, the related Servicer will
be obligated to make advances of cash ("Advances")
to the Certificate Account (as defined herein) in
the event of delinquencies in payments on the
Mortgage Loans or Contracts to the extent
described herein and in the applicable Prospectus
Supplement and only to the extent that the
Servicer determines such Advances would be
recoverable from future payments and collections
on the Mortgage Loans or Contracts. Any Advances
made by the Servicer will ultimately be
reimbursable to the Servicer from the Certificate
Account. See "Servicing of the Mortgage Loans and
Contracts -- Advances and Limitations Thereon."
Early Termination........... If so specified in the related Prospectus
Supplement, a Series of Certificates may be
subject to early termination through the
repurchase of the assets in the related Trust Fund
by the person or persons, under the circumstances
and in the manner specified in such Prospectus
Supplement. See "Prepayment and Yield
Considerations."
Legal Investment............ If so specified in the Prospectus Supplement, one
or more classes of Certificates offered pursuant
to this Prospectus will constitute "mortgage
related securities" under the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA"), so long
as they are rated in one of the two highest rating
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categories by at least one "nationally recognized
statistical rating organization. As "mortgage
related securities," such Certificates offered
pursuant to this Prospectus will constitute legal
investments for certain types of institutional
investors to the extent provided in SMMEA subject,
in any case, to any other regulations which may
govern investments by such institutional
investors. Since certain other classes of
Certificates offered pursuant to this Prospectus
will not either represent interests in, or be
secured by, qualifying mortgage loans, such
Certificates will not constitute "mortgage related
securities" under SMMEA. No representation is made
as to the appropriate characterization of any
Certificates under any laws relating to investment
restrictions, as to which investors should consult
their legal advisors. See "Legal Investment".
ERISA Limitations........... A fiduciary of any employee benefit plan subject
to the fiduciary responsibility provisions of the
Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), including the prohibited
transaction rules thereunder, and to the
corresponding provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), should
carefully review with its own legal advisors
whether the purchase or holding of Certificates
could give rise to a transaction prohibited or
otherwise impermissible under ERISA or the Code.
See "ERISA Considerations."
Federal Income Tax
Status...................... The federal income tax consequences of investment
in a Certificate of any Series will vary depending
upon the characteristics of such Certificate. If
so specified in the applicable Prospectus
Supplement, an election may be made to have the
Trust Fund (or one or more segregated pools of
assets therein) with respect to a Series of
Certificates treated as a REMIC for federal income
tax purposes. See "Certain Federal Income Tax
Consequences."
Rating ..................... At the date of issuance of each Series of
Certificates, the Certificates offered pursuant to
the related Prospectus Supplement will be rated in
one of the four highest rating categories by at
least one statistical rating organization that has
been requested by the Depositor to rate such
Certificates (a "Rating Agency"). Such ratings
will address, in the opinion of such Rating
Agency, the likelihood that the related Trust Fund
will be able to make timely payment of all amounts
due on the related Series of Certificates in
accordance with the terms thereof. Such ratings
will neither address any prepayment or yield
considerations applicable to any Certificates nor
constitute a recommendation to buy, sell or hold
any Certificates.
The ratings expected to be received with respect
to any Certificates will be set forth in the
related Prospectus Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Certificates.
Limited Liquidity. There can be no assurance that a secondary market for
the Certificates of any series or class will develop or, if it does develop,
that it will provide Certificateholders with liquidity of investment or that it
will continue for the life of the Certificates of any series. The Prospectus
Supplement for any series of Certificates may indicate that an underwriter
specified therein intends to establish a secondary market in such Certificates;
however, no underwriter will be obligated to do so. Unless otherwise specified
in the related Prospectus Supplement, the Certificates will not be listed on any
securities exchange.
Limited Obligations. The Certificates will not represent an interest in or
obligation, either recourse or non-recourse (except for certain non-recourse
debt described under "Certain Federal Income Tax Consequences"), of the
Depositor, the Servicer or any person other than the related Trust. The only
obligations of the foregoing entities with respect to the Certificates or the
Mortgage Loans will be the obligations (if any) of the Depositor and the
Servicer pursuant to certain limited representations and warranties made with
respect to the Mortgage Loans, the Servicer's servicing obligations under the
related Pooling and Servicing Agreement (including its limited obligation, if
any, to make certain advances in the event of delinquencies on the Mortgage
Loans, but only to the extent deemed recoverable) and, if and to the extent
expressly described in the related Prospectus Supplement, certain limited
obligations of the Depositor, Servicer, applicable Sub-Servicer, or another
party in connection with a purchase obligation ("Purchase Obligation") or an
agreement to purchase or act as remarketing agent with respect to a Convertible
Mortgage Loan upon conversion to a fixed rate. Notwithstanding the foregoing,
and as to be described in the related Prospectus Supplement, certain types of
Credit Enhancement, such as a financial guaranty insurance policy or a letter of
credit, may constitute a full recourse obligation of the issuer of such Credit
Enhancement. Except as described in the related Prospectus Supplement, neither
the Certificates nor the underlying Mortgage Loans will be guaranteed or insured
by any governmental agency or instrumentality, or by the Depositor, the
Servicer, any Sub-Servicer or any of their affiliates. Proceeds of the assets
included in the related Trust Fund for each series of Certificates (including
the Mortgage Loans and any form of Credit Enhancement) will be the sole source
of payments on the Certificates, and there will be no recourse to the Depositor
or any other entity in the event that such proceeds are insufficient or
otherwise unavailable to make all payments provided for under the Certificates.
Limitations, Reduction and Substitution of Credit Enhancement. With respect
to each series of Certificates, Credit Enhancement will be provided in limited
amounts to cover certain types of losses on the underlying Mortgage Loans.
Credit Enhancement will be provided in one or more of the forms referred to
herein, including, but not limited to: a letter of credit; a Purchase
Obligation; a mortgage pool insurance policy; a special hazard insurance policy;
a bankruptcy bond; a reserve fund; a financial guaranty insurance policy or
other type of Credit Enhancement to provide partial coverage for certain
defaults and losses relating to the Mortgage Loans. Credit Enhancement also may
be provided in the form of the related class of Certificates, subordination of
one or more classes of Certificates in a series under which losses in excess of
those absorbed by any related class of Certificates are first allocated to any
Subordinate Certificates up to a specified limit, cross-support among Trust Fund
Assets and/or overcollateralization. See "Credit Support -- Subordination" and
"Other Credit Enhancement." Regardless of the form of Credit Enhancement
provided, the coverage will be limited in amount and in most cases will be
subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such Credit Enhancements may provide only very limited coverage as
to certain types of losses, and may provide no coverage as to certain other
types of losses. Generally, Credit Enhancements do not directly or indirectly
guarantee to the investors any specified rate of prepayments. The Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the Credit Enhancement for any series of Certificates, if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. To the extent not set forth herein, the amount and types of coverage,
the identification of any entity providing the coverage, the terms of any
subordination and related information will be set forth in the Prospectus
Supplement relating to a series of Certificates. See "Credit Support --
Subordination" and "Other Credit Enhancement."
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Risks of the Mortgage Loans
Risk of the Losses Associated with Junior Liens. Certain of the Mortgage
Loans will be secured by junior Liens subordinate to the rights of the mortgagee
or beneficiary under each related senior mortgage or deed of trust. As a result,
the proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the principal balance of a mortgage loan only to the extent
that the claims, if any, of each such senior mortgagee or beneficiary are
satisfied in full, including any related foreclosure costs. In addition, a
mortgagee secured by a junior Lien may not foreclose on the related mortgaged
property unless it forecloses subject to the related senior mortgage or
mortgages, in which case it must either pay the entire amount of each senior
mortgage to the applicable mortgagee at or prior to the foreclosure sale or
undertake the obligation to make payments on each senior mortgage in the event
of default thereunder. In servicing junior lien loans in its portfolio, it has
been the practice of the Servicer to satisfy each such senior mortgage at or
prior to the foreclosure sale only to the extent that it determines any amounts
so paid will be recoverable from future payments and collections on such junior
Lien loans or otherwise. The Trusts will not have any source of funds to satisfy
any such senior mortgage or make payments due to any senior mortgagee. See
"Certain Legal Aspects of Mortgage Loans and Contracts -- Foreclosure."
Risk of Losses Associated with Declining Real Estate Values. An investment
in securities such as the Certificates that generally represent beneficial
ownership interests in the Mortgage Loans or debt secured by such Mortgage Loans
may be affected by, among other things, a decline in real estate values and
changes in the borrowers' financial condition. No assurance can be given that
values of the Mortgaged Properties have remained or will remain at their levels
on the dates of origination of the related Mortgage Loans. If the residential
real estate market should experience an overall decline in property values such
that the outstanding balances of any senior Liens, the Mortgage Loans and any
secondary financing on the Mortgaged Properties in a particular Mortgage Pool
become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the nonconforming credit mortgage lending
industry. Such a decline could extinguish the interest of the related Trust in
the Mortgaged Properties before having any effect on the interest of the related
senior mortgagee. In addition, in the case of Mortgage Loans that are subject to
negative amortization, due to the addition to principal balance of deferred
interest ("Deferred Interest"), the principal balances of such Mortgage Loans
could be increased to an amount equal to or in excess of the value of the
underlying Mortgaged Properties, thereby increasing the likelihood of default.
To the extent that such losses are not covered by the applicable Credit
Enhancement, holders of Certificates of the series evidencing interests in the
related Mortgage Pool will bear all risk of loss resulting from default by
Mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans.
Risk of Losses Associated with Certain Non-Conforming and Non-Traditional
Loans. The Depositor's underwriting standards consider, among other things, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the value of the property; however, the Depositor's Mortgage Loan
program generally provides for the origination of Mortgage Loans relating to
non-conforming credits. Certain of the types of loans that may be included in
the Pools may involve additional uncertainties not present in traditional types
of loans. For example, certain of the Mortgage Loans may provide for escalating
or variable payments by the borrower under the Mortgage Loan (the "Mortgagor"),
as to which the Mortgagor is generally qualified on the basis of the initial
payment amount. In some instances the Mortgagors' income may not be sufficient
to enable them to continue to make their loan payments as such payments increase
and thus the likelihood of default will increase. For a more detailed
discussion, see "Underwriting Guidelines."
Risk of Losses Associated with Balloon Loans. Certain of the Mortgage Loans
may constitute "Balloon Loans." Balloon Loans are originated with a stated
maturity of less than the period of time of the corresponding amortization
schedule. Consequently, upon the maturity of a Balloon Loan, the Mortgagor will
be required to make a "balloon" payment that will be significantly larger than
such Mortgagor's previous monthly payments. The ability of such a Mortgagor to
repay a Balloon Loan at maturity frequently will depend on such borrower's
ability to refinance the Mortgage Loan. The ability of a Mortgagor to refinance
such a Mortgage Loan will be affected by a number of factors, including the
level of available mortgage rates at the time, the value of the related
Mortgaged Property, the Mortgagor's equity in the related Mortgaged Property,
the financial condition of the Mortgagor, the tax laws and general economic
conditions at the time.
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Although a low interest rate environment may facilitate the refinancing of
a balloon payment, the receipt and reinvestment by Certificateholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the Depositor,
the Servicer, any Sub-Servicer or the Trustee will be obligated to provide funds
to refinance any Mortgage Loan, including Balloon Loans.
Risk of Losses Associated with ARM Loans. ARM Loans may be underwritten on
the basis of an assessment that Mortgagors will have the ability to make
payments in higher amounts after relatively short periods of time. In some
instances, Mortgagors' income may not be sufficient to enable them to continue
to make their loan payments as such payments increase and thus the likelihood of
default will increase.
Risk of Losses Associated with Bankruptcy of Mortgagors. General economic
conditions have an impact on the ability of borrowers to repay Mortgage Loans.
Loss of earnings, illness and other similar factors also may lead to an increase
in delinquencies and bankruptcy filings by borrowers. In the event of personal
bankruptcy of a Mortgagor, it is possible that a Trust could experience a loss
with respect to such Mortgagor's Mortgage Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan thereby either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
Risk of Losses Associated with Foreclosure of Mortgaged Properties. Even
assuming that the Mortgaged Properties provide adequate security for the
Mortgage Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Mortgage Loans and corresponding delays in the receipt
of related proceeds by the Certificateholders could occur. An action to
foreclose on a Mortgaged Property securing a Mortgage Loan is regulated by state
statutes, rules and judicial decisions and is subject to many of the delays and
expenses of other lawsuits if defenses or counterclaims are interposed,
sometimes requiring several years to complete. Furthermore, in some states an
action to obtain a deficiency judgment is not permitted following a nonjudicial
sale of a Mortgaged Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the Servicer to
foreclose on or sell the Mortgaged Property or to obtain liquidation proceeds
(net of expenses) ("Liquidation Proceeds") sufficient to repay all amounts due
on the related Mortgage Loan. The Servicer will be entitled to deduct from
Liquidation Proceeds all expenses reasonably incurred in attempting to recover
amounts due on the related liquidated Mortgage Loan ("Liquidated Mortgage Loan")
and not yet repaid, including payments to prior lienholders, accrued Servicing
Fees, legal fees and costs of legal action, real estate taxes, and maintenance
and preservation expenses. In the event that any Mortgaged Properties fail to
provide adequate security for the related Mortgage Loans and insufficient funds
are available from any applicable Credit Enhancement, Certificateholders could
experience a loss on their investment.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
Under environmental legislation and judicial decisions applicable in
various states, a secured party that takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a mortgaged property that, prior to foreclosure,
has been involved in decisions or actions which may lead to contamination of a
property, may be liable for the costs of cleaning up the purportedly
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a holder of a mortgage note (such as a Trust)
which, under the terms of the Pooling and Servicing Agreement, is not required
to take an active role in operating the Mortgaged Properties. See "Certain Legal
Aspects of Mortgage Loans and Contracts -- Environmental Risks."
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Certain of the Mortgaged Properties relating to Mortgage Loans may not be
owner occupied. It is possible that the rate of delinquencies, foreclosures and
losses on Mortgage Loans secured by nonowner occupied properties could be higher
than for loans secured by the primary residence of the borrower.
Litigation. Any material litigation relating to the Depositor or the
Servicer will be specified in the related Prospectus Supplement.
Geographic Concentration of Mortgaged Properties. Certain geographic
regions from time to time will experience weaker regional economic conditions
and housing markets than will other regions, and, consequently, will experience
higher rates of loss and delinquency on mortgage loans generally. The Mortgage
Loans underlying certain series of Certificates may be concentrated in such
regions, and such concentrations may present risk considerations in addition to
those generally present for similar mortgage loan asset-backed securities
without such concentrations. Information with respect to geographic
concentration of Mortgaged Properties will be specified in the related
Prospectus Supplement or related current report on Form 8-K.
Legal Considerations. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures, and require licensing of
the Depositor and the Servicer and Sub-Servicers. In addition, most states have
other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices that may
apply to the origination, servicing and collection of the Mortgage Loans.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Servicer to collect all or part of the principal of or
interest on the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Servicer to damages and
administrative sanctions. See "Certain Legal Aspects of Mortgage Loans and
Contracts."
The Mortgage Loans may also be subject to federal laws, including: (i) the
Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X promulgated thereunder,
which require certain disclosures to the borrowers regarding the terms of the
Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and general
principles of equity may limit the ability of the Servicer to collect all or
part of the principal of or interest on the Mortgage Loans, may entitle the
borrower to rescind the loan or to a refund of amounts previously paid and, in
addition, could subject the Servicer to damages and administrative sanctions. If
the Servicer is unable to collect all or part of the principal or interest on
the Mortgage Loans because of a violation of the aforementioned laws, public
policies or general principles of equity then the Trust may be delayed or unable
to repay all amounts owed to Investors. Furthermore, depending upon whether
damages and sanctions are assessed against the Servicer or the Depositor, such
violations may materially impact the financial ability of the Depositor to
continue to act as Servicer or the ability of the Depositor to repurchase or
replace Mortgage Loans if such violation breaches a representation or warranty
contained in a Pooling and Servicing Agreement.
Collections on the Mortgage Loans may vary due to the level of incidence of
delinquent payments and of prepayments. Collections on the Mortgage Loans may
also vary due to seasonal purchasing and payment habits of borrowers.
Book-Entry Registration. Issuance of the Certificates in book-entry form
may reduce the liquidity of such Certificates in the secondary trading market
since investors may be unwilling to purchase Certificates for which they cannot
obtain definitive physical securities representing such Certificateholders'
interests, except in certain circumstances described in the related Prospectus
Supplement.
Since transactions in Certificates will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
system ("Direct or Indirect Participants") and certain banks, the ability of a
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Certificateholder to pledge a Certificate to persons or entities that do not
participate in the DTC system, or otherwise to take actions in respect of such
Certificates, may be limited due to lack of a physical certificate representing
the Certificates.
Certificateholders may experience some delay in their receipt of
distributions of interest on and principal of the Certificates since
distributions may be required to be forwarded by the Trustee to DTC and, in such
a case, DTC will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable class of Certificateholders either directly or indirectly through
Indirect Participants. See "Description of the Certificates."
The Status of the Mortgage Loans in the Event of Bankruptcy of the
Depositor. In the event of the bankruptcy of the Depositor at a time when it or
any affiliate thereof holds a Certificate, a trustee in bankruptcy of the
Depositor, or its creditors could attempt to recharacterize the sale of the
Mortgage Loans to the related Trust as a borrowing by the Depositor or such
affiliate with the result, if such recharacterization is upheld, that the
Certificateholders would be deemed creditors of the Depositor or such affiliate,
secured by a pledge of the Mortgage Loans. If such an attempt were successful,
it could prevent timely payments of amounts due to the Trust.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such action
could have an effect, for an indeterminate period of time, on the ability of the
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
In addition, the Relief Act imposes limitations that would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan during the Mortgagor's
period of active duty status. Thus, in the event that such a Mortgage Loan goes
into default, there may be delays and losses occasioned by the inability to
realize upon the Mortgaged Property in a timely fashion.
Certificate Rating. The rating of Certificates credit enhanced through
external Credit Enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external Credit Enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to the
Certificates would likely result in a reduction in the rating of the
Certificates. See "Ratings" in the Prospectus Supplement.
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THE TRUST FUNDS
General
The Trust Fund for each Series of Certificates will consist primarily of a
Pool of Mortgage Loans (a "Mortgage Pool") and/or Contracts (a "Contract Pool").
In addition, a Trust Fund will also include (i) amounts held from time to time
in the related Certificate Account, (ii) the Depositor's interest in any primary
mortgage insurance, hazard insurance, title insurance and/or other insurance
policies relating to a Mortgage Loan or Contract, (iii) any property which
initially secured a Mortgage Loan and which has been acquired by foreclosure or
trustee's sale or deed in lieu of foreclosure or trustee's sale, (iv) any
Manufactured Home which initially secured a Contract and which is acquired by
repossession, (v) if applicable, and to the extent set forth in the applicable
Prospectus Supplement, any Subordination Reserve Fund and/or any other reserve
fund, (vi) if applicable, and to the extent set forth in the applicable
Prospectus Supplement, one or more guarantees, letters of credit, insurance
policies, or any other credit enhancement arrangement, and (vii) such other
assets as may be specified in the related Prospectus Supplement. Unless
otherwise specified in the applicable Prospectus Supplement, the Trust Fund will
not include, however, the portion of interest on the Mortgage Loans or Contracts
which constitutes the Fixed Retained Yield, if any. See "Fixed Retained Yield"
below. If specified in the related Prospectus Supplement, certain Certificates
will evidence the entire fractional undivided ownership interest in the related
Mortgage Loans held by the related Trust Fund or may represent debt secured by
the related Mortgage Loans.
The Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist of Mortgage Loans evidenced by promissory notes or
other evidences of indebtedness (the "Mortgage Notes") that provide for an
original term to maturity of not more than 40 years, for monthly payments and
for interest on the outstanding principal amounts thereof at a rate that is
either fixed or subject to adjustment as described in the related Prospectus
Supplement. If so specified in the applicable Prospectus Supplement, the
adjustable interest rate on certain of the Mortgage Loans will be convertible
into a fixed interest rate at the option of the mortgagor at the times and upon
the conditions specified therein ("Convertible Mortgage Loans"). The Mortgage
Loans may provide for fixed level payments or be GPM Loans, GEM Loans, Balloon
Loans or Buy-Down Loans (each as defined herein) or Mortgage Loans with other
payment characteristics as described in the related Prospectus Supplement. In
addition, the Mortgage Pools may include participation interests in Mortgage
Loans, in which event references herein to payments on Mortgage Loans
underlying, such participations shall mean payments thereon allocable to such
participation interests, and the meaning of other terms relating to Mortgage
Loans will be similarly adjusted. Similarly, the Mortgage Pools may include
Mortgage Loans with respect to which a Fixed Retained Yield has been retained,
in which event references herein to Mortgage Loans and payments thereon shall
mean the Mortgage Loans exclusive of such Fixed Retained Yield. A "Fixed
Retained Yield" in a Mortgage Loan or Contract represents a specified portion of
the interest payable thereon. The Prospectus Supplement for a Series will
specify whether there will be any Fixed Retained Yield in any Mortgage Loan or
Contract and, if so, the owner thereof. See "Servicing of the Mortgage Loans and
Contracts -- Fixed Retained Yield." Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Loans will be secured by promissory notes or
other evidences of indebtedness (the "Mortgages") creating first, second or more
junior liens on conventional one-to four-family residential properties (which
may include mixed-use or vacation properties), all of which will be located in
any of the fifty states or the District of Columbia. The Mortgage Loans may also
consist of installment contracts for the sale of real estate. If so provided in
the applicable Prospectus Supplement, a Mortgage Pool may also contain
cooperative apartment loans (the "Cooperative Loans") evidenced by promissory
notes (the "Cooperative Notes") secured by security interests in shares issued
by private, non-profit, cooperative housing corporations (the "cooperatives")
and in the related proprietary leases or occupancy agreements granting exclusive
rights to occupy specific Cooperative Dwellings in such cooperatives' buildings.
In the case of a Cooperative Loan, the proprietary lease or occupancy agreement
securing such Cooperative Loan is generally subordinate to any blanket mortgage
on the related cooperative apartment building and/or the underlying land.
Additionally, the proprietary lease or occupancy agreement is subject to
termination and the cooperative shares are subject to cancellation by the
cooperative if the tenant-stockholder fails to pay maintenance or other
obligations or charges owed by such tenant-stockholder.
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Mortgage Loans may be entitled to the benefit of external credit
enhancement. Residential Mortgage Loans may be insured by the Federal Housing
Administration or its successors against defaults by the borrower in the payment
of principal and interest thereon, have a portion of principal and interest
payments guaranteed by the Department of Veterans Affairs or its successors or
be subject to other payment guarantees, including guarantees under the National
Housing Act.
Unless otherwise specified in the Prospectus Supplement for a Series, each
Mortgage Loan must have an original term of maturity of not less than 5 years
and not more than 40 years. Unless otherwise specified in the Prospectus
Supplement for a Series, no Mortgage Loan for residential property will have
had, at origination, a principal balance in excess of $5,000,000 or a
Loan-to-Value Ratio in excess of 95%, and Mortgage Loans having Loan-to-Value
Ratios at the time of origination exceeding 80% will be supported by external
credit enhancement or be covered by primary mortgage insurance providing,
coverage on at least the amount of each such mortgage loan in excess of 75% of
the original fair market value of the mortgaged property and remaining in force
until the principal balance of such Mortgage Loan is reduced to 80% of such
original fair market value. The "Loan-to-Value Ratio" is the ratio, expressed as
a percentage, of the principal amount of the Mortgage Loan outstanding at the
origination of such loan divided by the fair market value of the Mortgaged
Property. The fair market value of the Mortgaged Property securing any Mortgage
Loan is, unless otherwise specified in the applicable Prospectus Supplement, the
lesser of (x) the appraised value of the related Mortgaged Property determined
in an appraisal obtained by the originator at origination (or, in the case of a
refinancing, an appraisal obtained at the origination of the refinanced mortgage
loan) and (y) the sale price for such property.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at the levels which existed on the dates of origination
of the related Mortgage Loans. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans and any secondary financing on the Mortgaged
Properties in a particular Trust Fund become equal to or greater than the value
of the Mortgaged Properties, the actual rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the mortgage
lending industry. To the extent that such losses are not covered by the methods
of credit support or the insurance policies described herein, they will be borne
by holders of the Certificates of the Series evidencing interests in such Trust
Fund. Furthermore, in a declining real estate market a new appraisal could
render the Cut-Off Date Loan-to-Value Ratios as unreliable measures of leverage.
The Prospectus Supplement for each Series will set forth certain
characteristics of the related Mortgage Loans, which may include the aggregate
principal balance of the Mortgage Loans in the Mortgage Pool underlying such
Series as of the Cut-Off Date for such Series (the "Cut-Off Date Aggregate
Principal Balance"), the range of original terms to maturity of the Mortgage
Loans in the Mortgage Pool, the weighted average remaining term to stated
maturity at the Cut-Off Date of such Mortgage Loans, the earliest and latest
origination dates of such Mortgage Loans, the range of Mortgage Rates and Net
Mortgage Rates borne by such Mortgage Loans, the weighted average Net Mortgage
Rate at the Cut-Off Date of such Mortgage Loans, the percentage of such Mortgage
Loans which had Loan-to-Value Ratios at the time of origination of 80% or less,
the percentage of such Mortgage Loans that had Loan-to-Value Ratios at
origination in excess of 80% and the highest outstanding, principal balance at
origination of any such Mortgage Loan.
Unless otherwise specified in the applicable Prospectus Supplement, all of
the Mortgage Loans in a Trust Fund will have monthly payments due on a specified
day of each month (each, a "Due Date") and will, with respect to Mortgage Loans
secured by residential properties, require at least monthly payments of interest
on any outstanding balance. If so specified in the applicable Prospectus
Supplement, the Mortgage Pools may include adjustable rate Mortgage Loans that
provide for payment adjustments to be made less frequently than adjustments in
the Mortgage Rates. Each adjustment in the Mortgage Rate which is not made at
the time of a corresponding adjustment in payments (and which adjusted amount of
interest is not paid currently on a voluntary basis by the mortgagor) will
result in a decrease (if the Mortgage Rate rises) or an increase (if the
Mortgage Rate declines) in the rate of amortization of the Mortgage Loan.
Moreover, such payment adjustments on the Mortgage Loans may be subject to
certain limitations, as specified in the Prospectus Supplement, which may also
affect the rate of amortization on the Mortgage Loan. As a result of such
provisions, or in accordance with the payment schedules of certain GPM Loans and
other Mortgage Loans, the amount of interest accrued in any month may equal or
exceed the scheduled monthly payment on the Mortgage Loan. In any such month, no
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principal would be payable on the Mortgage Loan, and if the accrued interest
exceeded the scheduled monthly payment, such excess interest due would become
"Deferred Interest" that is added to the principal balance of the Mortgage Loan.
Deferred Interest will bear interest at the Mortgage Rate until paid. If such
limitations prevent the payments from being sufficient to amortize fully the
Mortgage Loan by its stated maturity dare, a lump sum payment equal to the
remaining unpaid principal balance will be due on such stated maturity date. See
"Prepayment and Yield Considerations."
Unless otherwise specified in the applicable Prospectus Supplement, the
Mortgage Loans in each Mortgage Pool will be permanent loans (as opposed to
construction and land development loans) secured by Mortgages on Mortgaged
Properties. The Mortgaged Properties will consist of residential properties
only, including detached homes, townhouses, units in planned unit developments,
condominium units, mixed-use properties, vacation homes and small scale
multifamily properties, all of which constitute a "dwelling or mixed residential
and commercial structure" within the meaning of Section 3(a)(41)(A)(i) of the
Securities Exchange Act of 1934, as amended (the "Mortgaged Properties"). The
Mortgage Loans will be secured by liens on fee simple or leasehold interests (in
those states in which long-term ground leases are used as an alternative to fee
interests) in such Mortgaged Properties, or liens on shares issued by
cooperatives and the related proprietary leases or occupancy agreements occupy
specified units in such cooperatives' buildings. The geographic distribution of
Mortgaged Properties will be set forth in the Prospectus Supplement. Each
Prospectus Supplement will also set forth the percentage of the Cut-Off Date
Aggregate Principal Balance of the Mortgage Loans in the related Mortgage Pool
representing the refinancing of existing mortgage indebtedness and the types of
Mortgaged Properties.
If so specified in the applicable Prospectus Supplement, a Trust Fund may
contain Mortgage Loans subject to temporary buy-down plans (the "Buy-Down
Loans") pursuant to which the monthly payments made by the mortgagor during the
early years of the Mortgage Loan will be less than the scheduled monthly
payments on the Mortgage Loan. The resulting difference in payment will be
compensated for from an amount contributed by the seller of the related
Mortgaged Property or another source and, if so specified in the related
Prospectus Supplement, placed in a custodial account (the "Buy-Down Account") by
the Servicer. If the mortgagor on a Buy-Down Loan prepays such Mortgage Loan in
its entirety, or defaults on such Mortgage Loan and the Mortgaged Property is
sold in liquidation thereof, during the period when the mortgagor is not
obligated, on account of the buy-down plan, to pay the full monthly payment
otherwise due on such loan, the unpaid principal balance of such Buy-Down Loan
will be reduced by the amounts remaining in the Buy-Down Account with respect to
such Buy-Down Loan, and such amounts shall be deposited in the Certificate
Account (as defined herein), net of any amounts paid with respect to such
Buy-Down Loan by any insurer, guarantor or other person pursuant to a credit
enhancement arrangement described in the applicable Prospectus Supplement.
If so specified in the applicable Prospectus Supplement, a Trust Fund may
include Mortgage Loans which are amortized over 30 years or some other term, or
which do not provide for amortization prior to maturity, but which have a
shorter term (each such Mortgage Loan, a "Balloon Loan") that causes the
outstanding principal balance of such Mortgage Loan to be due and payable at the
end of a certain specified period (the "Balloon Period"). If specified in the
applicable Prospectus Supplement, the originator of such Balloon Loan will be
obligated to refinance each such Balloon Loan at the end of its Balloon Period
at a new interest rate determined prior to the end of such Balloon Period by
reference to an index plus a margin specified in the related Mortgage Note. The
mortgagor is not, however, obligated to refinance the Balloon Loan through such
originator. In the event a mortgagor refinances a Balloon Loan, the new loan
will not be included in the Trust Fund. See "Prepayment and Yield
Considerations."
If specified in the Prospectus Supplement for any Series, the Mortgage
Loans included in the Trust Fund for such Series may be what are commonly
referred to as "home equity revolving lines of credit" ("Home Equity Lines").
Home Equity Lines are generally evidenced by a loan agreement ("Loan Agreement")
rather than a note. Home Equity Lines generally may be drawn down from time to
time by the borrower writing a check against the account, or acknowledging the
advance in a supplement to the Loan Agreement (the amount of such drawn down, an
"Additional Balance"). A Home Equity Line will establish a maximum credit limit
with respect to the related borrower, and will permit the borrower to draw down
Additional Balances, and repay the aggregate balance outstanding in each case
from time to time in such a manner so that the aggregate balance outstanding
does not exceed the maximum credit limit. A Home Equity Line will be secured by
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either a senior or a junior lien Mortgage, and will bear interest at either a
fixed or an adjustable rate.
In certain states the borrower must, on the opening of an account, draw an
initial advance of not less than a specified amount. Home Equity Lines generally
amortize according to an amortization basis established at the time of the
initial advance. The "amortization basis" is the length of time in which the
initial advance plus interest will be repaid in full. The amortization bases of
the Home Equity Lines generally range from 60 months (5 years) to 180 months (15
years) depending on the credit limit assigned. Generally, the amortization basis
will be longer the higher the credit limit. The minimum monthly payment on a
Home Equity Line will generally be equal to the sum of the following: (i) an
amount necessary to completely repay the then-outstanding balance and the
applicable finance charge in equal installments over the assigned amortization
basis ("Basic Monthly Amount"); (ii) any monthly escrow charges; (iii) any
delinquency or other similar charges; and (iv) any past due amounts, including
past due finance charges. The Basic Monthly Amount typically is recomputed each
time the related Mortgage Rate adjusts and whenever an Additional Balance is
advanced; such recomputation in the case of an Additional Advance may also reset
the amortization schedule. The effect of each such advance on the related Home
Equity Line is to reset the commencement date of the original maturity term to
the date of the later advance. For example, a Home Equity Line made originally
with a 15-year maturity from date of origination changes at the time of the next
adjustment or advance to a Home Equity Line with a maturity of 15 years from the
date of such advance. For certain Home Equity Lines, the same type of
recomputation exists for adjustments of the related Mortgage Rate.
Prior to the expiration of a specified period, the reduction of the account
to a zero balance and the closing of a Home Equity Line account may result in a
prepayment penalty. A prepayment penalty also may be assessed against the
borrower if a Home Equity Line account is closed by the Servicer due to a
default by the borrower under the Loan Agreement.
Each Loan Agreement will provide that the Servicer has the right to require
the borrower to pay the entire balance plus all other accrued but unpaid charges
immediately, and to cancel the borrower's credit privileges under the Loan
Agreement if, among other things, the borrower fails to make any minimum payment
when due under the Loan Agreement, if there is a material change in the
borrower's ability to repay the Home Equity Line, or if the borrower sells any
interest in the property securing the Loan Agreement, thereby causing the
"due-on-sale" clause in the trust deed or mortgage to become effective.
Mortgage Loans which are secured by junior mortgages are subordinate to the
rights of the mortgagees under the related senior mortgage or mortgages.
Accordingly, liquidation, insurance and condemnation proceeds received with
respect to the related mortgaged property will be available to satisfy the
outstanding balance of such a Mortgage Loan only to the extent that the claims
of the senior mortgages have been satisfied in full, including any related
liquidation and foreclosure costs. In addition, a junior mortgagee foreclosing
on its mort,age may be required to purchase the related mortgaged property for a
price sufficient to satisfy the claims of the holders of any senior mortgages
which are also being foreclosed. In the alternative, a junior mortgagee which
acquires title to a related mortgaged property, through foreclosure,
deed-in-lieu of foreclosure or otherwise may take the property subject to any
senior mortgages and continue to perform with respect to any senior mortgages,
in which case the junior mortgagee must comply with the terms of any senior
mortgages or risk foreclosure by the senior mortgagee.
If so specified in the applicable Prospectus Supplement, a loan pool may
include graduated equity mortgage loans ("GEM Loans"). GEM Loans are fixed rate,
fully amortizing mortgage loans which provide for monthly payments based on a
10-to 30-year amortization schedule, and which provide for scheduled annual
payment increases for a number of years and level payments thereafter. The full
amount of the scheduled payment increases during the early years is applied to
reduce the outstanding principal balance of such loans.
If so specified in the applicable Prospectus Supplement, a Mortgage Pool
may include graduated payment mortgage loans ("GPM Mortgage Loans"). GPM
Mortgage Loans provide for payments of monthly installments which increase
annually in each of a specified number of initial years and level monthly
payments thereafter. Payments during the early years are required in amounts
lower than the amounts which would be payable on a level debt service basis due
to the deferral of a portion of the interest accrued on the mortgage loan. Such
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deferred interest is added to the principal balance of the mortgage loan and is
paid, together with interest thereon, in the later years of the obligation.
Because the monthly payments during the early years of such a GPM Mortgage Loan
are not sufficient to pay the full interest accruing on the GPM Mortgage Loan,
the interest payments on such GPM Mortgage Loan may not be sufficient in its
early years to meet its proportionate share of the distributions expected to be
made on the related Certificates. Thus, if the Mortgage Loans include GPM
Mortgage Loans, the Servicer will, unless otherwise specified in the Prospectus
Supplement, establish a reserve fund (the "GPM Fund") which (together with, if
specified in the related Prospectus Supplement, reinvestment income thereon)
will be sufficient to cover the amount by which payments of interest on such GPM
Mortgage Loan assumed in calculating, distributions expected to be made on the
Certificates of such Series exceed scheduled interest payments according to the
relevant graduated payment mortgage plan for the period during which excess
occurs.
If so specified in the applicable Prospectus Supplement, a Trust Fund may
contain ARM buy-out loans ("ARM Buy-Outs") which are automatically repurchased
by the Depositor upon the occurrence of either(i) a switch from a fixed-rate
mortgage to an adjustable rate mortgage pursuant to the terms of the underlying
note or (ii) a switch from an adjustable rate to a fixed rate mortgage pursuant
to the terms of the underlying note.
If specific information respecting the Mortgage Loans to be included in a
Trust Fund is not known to the Depositor at the time the Certificates of a
Series are initially offered, more general information of the nature described
above will be provided in the Prospectus Supplement and final specific
information will be set forth in a Current Report on Form 8-K to be available to
investors on the date of issuance thereof and to be filed with the Commission
promptly after the initial issuance of such Certificates.
The Contracts
Unless otherwise specified in the applicable Prospectus Supplement, each
Contract Pool will consist of conventional manufactured housing installment
sales contracts and installment loan agreements (collectively, the "Contracts")
originated by a manufactured housing dealer in the ordinary course of business
and purchased by the Unaffiliated Seller. Unless otherwise specified in the
applicable Prospectus Supplement, each Contract will be secured by Manufactured
Homes (as defined below), each of which will be located in any of the fifty
states or the District of Columbia. Unless otherwise specified in the applicable
Prospectus Supplement, the Contracts will be fully amortizing and will bear
interest at a fixed or adjustable annual percentage rate (the "APR" or "Contract
Rate"). The Contract Pool may include Contracts with respect to which a Fixed
Retained Yield has been retained, in which event references herein to Contracts
and payments thereon shall mean the Contracts exclusive of such Fixed Retained
Yield. The Prospectus Supplement for a Series will specify whether there will be
any Fixed Retained Yield in any Contract, and if so, the owner thereof. See
"Fixed Retained Yield" below.
The Unaffiliated Seller of the Contracts will represent that the
Manufactured Homes securing the Contracts consist of manufactured homes within
the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis designed to be used
as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air-conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
Unless otherwise specified in the Prospectus Supplement for a Series, each
Contract must have an original term to maturity of not less than 1 year and not
more than 40 years. Unless otherwise specified in the Prospectus Supplement for
a Series, no Contract will have had, at origination, a principal balance in
excess of $5,000,000 or a Loan-to-Value Ratio in excess of 95%. The
"Loan-to-Value Ratio" is the ratio, expressed as a percentage, of the principal
amount of the Contract outstanding at the origination of such loan divided by
the fair market value of the Manufactured Home. The fair market value of the
Manufactured Home securing any Contract is, unless otherwise specified in the
applicable Prospectus Supplement, either (x) the appraised value of the related
Manufactured Home determined in an appraisal obtained by the originator at
origination and (y) the sale price for such property, plus, in either case,
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sales and other taxes and, to the extent financed, filing and recording fees
imposed by law, premiums for related insurance and prepaid finance charges.
Manufactured Homes, unlike site-built homes, generally depreciate in value.
Consequently, at any time after origination it is possible, especially in the
case of Contracts with high Loan-to-Value Ratios at origination, that the market
value of a Manufactured Home may be lower than the principal amount outstanding
under the related Contract.
The Prospectus Supplement for each Series will set forth certain
characteristics of the related Contracts, which may include the aggregate
principal balance of the Contracts in the Contract Pool underlying such Series
as of the Cut-Off Date for such Series (the "Cut-Off Date Aggregate Principal
Balance"), the range of original terms to maturity of the Contracts in the
Contract Pool, the weighted average remaining term to stated maturity at the
Cut-Off Date of such Contracts, the earliest and latest origination dates of
such Contracts, the range of Contract Rates and Net Contract Rates borne by such
Contracts, the weighted average Net Contract Rate at the Cut-Off Date of such
Contracts, the percentage of such Contracts which had Loan-to-Value Ratios at
the time of origination of 80% or less, the percentage of such Contracts that
had Loan-to-Value Ratios at origination in excess of 80% and the highest
outstanding principal balance at origination of any such Contract.
Unless otherwise specified in the applicable Prospectus Supplement, all of
the Contracts in a Trust Fund will have monthly payments due on the first of
each month (each, a "Due Date") and will be fully-amortizing Contracts. If so
specified in the applicable Prospectus Supplement, Contracts may have Due Dates
which occur on a date other than the first of each month. If so specified in the
applicable Prospectus Supplement, the Contract Pools may include adjustable rate
Contracts that provide for payment adjustments to be made less frequently than
adjustments in the Contract Rates. Each adjustment in the Contract Rate which is
not made at the time of a corresponding adjustment in payments (and which
adjusted amount of interest is not paid currently on a voluntary basis by the
obligor) will result in a decrease (if the Contract Rate rises) or an increase
(if the Contract Rate declines) in the rate of amortization of the Contract.
Moreover, such payment adjustments on the Contracts may be subject to certain
limitations, as specified in the Prospectus Supplement, which may also affect
the rate of amortization on the Contract. As a result of such provisions, the
amount of interest accrued in any month may equal or exceed the scheduled
monthly payment on the Contract. In any such month, no principal would be
payable on the Contract, and if the accrued interest exceeded the scheduled
monthly payment, such excess interest due would become "Deferred Interest" that
is added to the principal balance of the Contract. Deferred Interest will bear
interest at the Contract Rate until paid. If such limitations prevent the
payments from being sufficient to amortize fully the Contract by its stated
maturity date, a lump sum payment equal to the remaining unpaid principal
balance will be due on such stated maturity date. See "Prepayment and Yield
Considerations."
The geographic distribution of Manufactured Homes will be set forth in the
Prospectus Supplement. Each Prospectus Supplement will set forth the percentage
of the Cut-Off Date Aggregate Principal Balance of any Contracts in the Contract
Pool which are secured by Manufactured Homes which have become permanently
affixed to real estate. Each Prospectus Supplement will also set forth the
percentage of the Cut-Off Date Aggregate Principal Balance of the Contracts in
the related Contract Pool representing the refinancing of existing mortgage
indebtedness. Unless otherwise specified in a Prospectus Supplement, no Contract
in the Contract Pool will be more than 30 days past due as of the Cut-Off Date.
If specific information respecting the Contracts to be included in a Trust
Fund is not known to the Depositor at the time the Certificates of a Series are
initially offered, more general information of the nature described above will
be provided in the Prospectus Supplement and final specific information will be
set forth in a Current Report on Form 8-K to be available to investors on the
date of issuance thereof and to be filed with the Commission promptly after the
initial issuance of such Certificates.
Fixed Retained Yield
Fixed Retained Yield with respect to any Mortgage Loan or Contract is that
portion, if any, of interest at the Mortgage Rate or Contract Rate that is
retained by the Depositor or other owner thereof and not included in the related
Trust Fund. The Prospectus Supplement for a Series will specify whether a Fixed
Retained Yield has been retained with respect to the Mortgage Loans or Contracts
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of such Series, and, if so, the owner thereof. If so, the Fixed Retained Yield
will be established on a loan-by-loan basis with respect to the Mortgage Loans
or Contracts and will be specified in the schedule of Mortgage Loans or
Contracts attached as an exhibit to the applicable Pooling and Servicing
Agreement. The Servicer, with respect to Mortgage Loans or Contracts, may deduct
the Fixed Retained Yield from payments as received and prior to deposit of such
payments in the Certificate Account for such Series or may (unless an election
has been made to treat the Trust Fund (or one or more segregated pools of assets
therein) as a REMIC) withdraw the Fixed Retained Yield from the Certificate
Account after the entire payment has been deposited in the Certificate Account.
Notwithstanding the foregoing, any partial payment or recovery of interest
received by the Servicer relating to a Mortgage Loan or Contract (whether paid
by the mortgagor or obligor or received as Liquidation Proceeds, Insurance
Proceeds or otherwise), after deduction of all applicable servicing fees, will
be allocated between Fixed Retained Yield (if any) and interest at the Net
Mortgage Rate or Net Contract Rate on a pari passu basis.
Insurance Policies
Unless otherwise specified in the applicable Prospectus Supplement, the
Pooling and Servicing Agreement will require the Servicer to cause to be
maintained for each Mortgage Loan or Contract an insurance policy issued by a
generally acceptable insurer insuring the Mortgaged Property underlying such
Mortgage Loan or the Manufactured Home underlying such Contract against loss by
fire, with extended coverage (a "Standard Hazard Insurance Policy"). Unless
otherwise specified in the applicable Prospectus Supplement, the Pooling and
Servicing Agreement will require that such Standard Hazard Insurance Policy be
in an amount at least equal to the lesser of 100% of the insurable value of the
improvements which are a part of such Mortgaged Property or Manufactured Home or
the principal balance of such Mortgage Loan or Contract; provided, however, that
such insurance may not be less than the minimum amount required to fully
compensate for any damage or loss on a replacement cost basis. The Servicer will
also maintain on property acquired upon foreclosure, or deed in lieu of
foreclosure, of any Mortgage Loan, and on any Manufactured Home acquired by
repossession a Standard Hazard Insurance Policy in an amount that is at least
equal to the lesser of 100% of the insurable value of the improvements which are
a part of such property or the insurable value of such Manufactured Home or the
principal balance of the related Mortgage Loan or Contract plus, if required by
the applicable Pooling and Servicing Agreement, accrued interest and liquidation
expenses; provided, however, that such insurance may not be less than the
minimum amount required to fully compensate for any damage or loss on a
replacement cost basis. Any amounts collected under any such policies (other
than amounts to be applied to the restoration or repair of the Mortgaged
Property or Manufactured Home or released to the borrower in accordance with
normal servicing procedures) will be deposited in the Certificate Account.
The Standard Hazard Insurance Policies covering the Mortgaged Properties
generally will cover physical damage to, or destruction of, the improvements on
the Mortgaged Property caused by fire, lightning, explosion, smoke, windstorm,
hail, riot, strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Because the Standard Hazard Insurance Policies
relating to such Mortgage Loans will be underwritten by different insurers and
will cover Mortgaged Properties located in various states, such policies will
not contain identical terms and conditions. The most significant terms thereof,
however, generally will be determined by state law and generally will be
similar. Most such policies typically will not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, hazardous wastes or hazardous substances, theft and, in
certain cases, vandalism. The foregoing list is merely indicative of certain
kinds of uninsured risks and is not intended to be all-inclusive.
The Standard Hazard Insurance Policies covering the Contracts will provide,
at a minimum, the same coverage as a standard form fire and extended coverage
insurance policy that is customary for manufactured housing in the state in
which the Manufactured Home is located.
The Servicer may maintain a blanket policy insuring against hazard losses
on all of the Mortgaged Properties or Manufactured Homes in lieu of maintaining
the required Standard Hazard Insurance Policies. The Servicer will be liable for
the amount of any deductible under a blanket policy if such amount would have
been covered by a required Standard Hazard Insurance Policy, had it been
maintained.
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In general, if a Mortgaged Property or Manufactured Home is located in an
area identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards (and such flood insurance has been made
available) the Pooling and Servicing Agreement will require the Servicer to
cause to be maintained a flood insurance policy meeting the requirements of the
current guidelines of the Federal Insurance Administration with a generally
acceptable insurance carrier. Generally, the Pooling and Servicing Agreement
will require that such flood insurance be in an amount not less than the lesser
of (i) the amount required to compensate for any loss or damage to the Mortgaged
Property on a replacement cost basis and (ii) the maximum amount of insurance
which is available under the federal flood insurance program.
Any losses incurred with respect to Mortgage Loans or Contracts due to
uninsured risks (including earthquakes, mudflows, floods, hazardous wastes and
hazardous substances) or insufficient hazard insurance proceeds could affect
distributions to the Certificateholders.
The Servicer will maintain or cause to be maintained with respect to each
Mortgage Loan a primary mortgage insurance policy in accordance with the
standards described in the "Mortgage Loans" above.
The Servicer shall obtain and maintain at its own expense and keep in full
force and effect a blanket fidelity bond and an error and omissions insurance
policy covering the Servicer's officers and employees as well as office persons
acting on behalf of the Servicer in connection with the servicing of the
Mortgage Loans.
Although the terms and conditions of primary mortgage insurance policies
differ, each primary mortgage insurance policy will generally cover losses up to
an amount equal to the excess of the unpaid principal amount of a defaulted
Mortgage Loan (plus accrued and unpaid interest thereon and certain approved
expenses) over a specified percentage of the value of the related Mortgage
Property.
As conditions precedent to the filing or payment of a claim under a primary
mortgage insurance policy, the insured will typically be required, in the event
of default by the mortgagor, among other things, to: (i) advance or discharge
(a) hazard insurance premiums and (b) as necessary and approved in advance by
the insurer, real estate taxes, protection and preservation expenses and
foreclosure and related costs; (ii) in the event of any physical loss or damage
to the Mortgaged Property, have the Mortgaged Property restored to at least its
condition at the effective date of the primary mortgage insurance policy
(ordinary wear and tear excepted); and (iii) if the insurer pays the entire
amount of the loss or damage, tender to the insurer good and merchantable title
to, and possession of, the Mortgaged Property.
Any mortgage insurance relating to the Contracts underlying a Series of
Certificates will be described in the related Prospectus Supplement.
Acquisition of the Mortgage Loans and Contracts From Unaffiliated Sellers
The Mortgage Loans or Contracts underlying a Series of Certificates will be
purchased by the Depositor, either directly or through affiliates, from
Unaffiliated Sellers pursuant to a separate agreement (a "Loan Sale Agreement")
between the Depositor or such affiliate and each such Unaffiliated Seller. The
Depositor expects that, unless otherwise specified in the applicable Prospectus
Supplement, each Mortgage Loan or Contract so acquired will have been originated
by the originator thereof in accordance with the underwriting criteria specified
under "Underwriting Guidelines." Unless otherwise specified in the applicable
Prospectus Supplement, each Unaffiliated Seller must be an institution
experienced in originating and servicing conventional mortgage loans or
manufactured housing contracts in accordance with accepted practices and prudent
guidelines, and must maintain facilities to originate and service those loans
satisfactory to the Depositor. In addition, each Unaffiliated Seller must
satisfy certain criteria as to financial stability evaluated on a case by case
basis by the Depositor. Unless otherwise provided in the applicable Prospectus
Supplement, each Unaffiliated Seller pursuant to the related Loan Sale Agreement
will make certain representations and warranties to the Depositor in respect of
the Mortgage Loans or Contracts sold by such Unaffiliated Seller to the
Depositor as described herein under "Representations and Warranties" below.
Unless otherwise provided in the applicable Prospectus Supplement with respect
to each Series, the Depositor will assign all of its rights (except certain
rights of indemnification) and interest in the related Loan Sale Agreement to
the related Trustee for the benefit of the Certificateholders of such Series,
and the Unaffiliated Seller shall thereupon be liable to the Trustee for
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defective Mortgage Loan or Contract documents or an uncured breach of such
Unaffiliated Seller's representations or warranties, to the extent described
below under "Assignment of the Mortgage Loans and Contracts" and
"Representations and Warranties."
Assignment of the Mortgage Loans and Contracts
At the time of the issuance of the Certificates of a Series, the Depositor
will cause the Mortgage Loans comprising the Mortgage Pool (including any
related rights to, or security interests in, leases, rents and personal
property) or the Contracts comprising the Contract Pool included in the related
Trust Fund to be assigned to the Trustee, together with all principal and
interest received by or on behalf of the Depositor on or with respect to such
Mortgage Loans or Contracts after the Cut-Off Date, other than principal and
interest due on or before the Cut-Off Date and other than any Fixed Retained
Yield. The Trustee or its accent will, concurrently with such assignment,
authenticate and deliver the Certificates evidencing such Series to the
Depositor in exchange for the Mortgage Loans or Contracts. Each Mortgage Loan or
Contract will be identified in a schedule appearing as an exhibit to the
applicable Pooling and Servicing, Agreement. Each such schedule will include,
among other things, the unpaid principal balance as of the close of business on
the applicable Cut-Off Date, the scheduled monthly payment of principal, if any,
and interest, the maturity date and the Mortgage Rate or Contract Rate for each
Mortgage Loan or Contract in the related Trust Fund.
With respect to each Mortgage Loan in a Trust Fund, the mortgage or other
promissory note, any assumption, modification or conversion to fixed interest
rate agreement, a copy of any recorded UCC-1 financing statements and related
continuation statements, together with original executed UCC-2 or UCC-3
financing statements disclosing an assignment of a security interest in any
personal property constituting security for repayment of the Mortgage Loan to
the Trustee, an executed re-assignment of assignment of leases, rents and
profits to the Trustee if the assignment of leases, rents and profits is
separate from the Mortgage, a mortgage assignment in recordable form and the
recorded Mortgage (or other documents as are required under applicable law to
create a perfected security interest in the Mortgaged Property in favor of the
Trustee) will be delivered to the Trustee (or to a designated custodian);
provided that, in instances where recorded documents cannot be delivered due to
delays in connection with recording, copies thereof, certified by the Depositor
to be true and complete copies of such documents, sent for recording, may be
delivered and the original recorded documents will be delivered promptly upon
receipt. As to each Mortgage Loan for which there is primary mortgage insurance,
the certificate of primary mortgage insurance will be delivered to the Trustee.
The assignment of each Mortgage will be recorded promptly after the initial
issuance of Certificates for the related Trust Fund, except in states where, in
the opinion of counsel acceptable to the Trustee, such recording is not required
to protect the Trustee's interest in the Mortgage Loan against the claim of any
subsequent transferee or any successor to or creditor of the Depositor, any
affiliate of the Depositor or the originator of such Mortgage Loan.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee (or to a designated
custodian) the related original Cooperative Note, the security agreement, the
proprietary lease or occupancy agreement, the recognition agreement, an executed
financing agreement and the relevant stock certificate and related blank stock
powers. The Depositor will cause to be filed in the appropriate office an
assignment and a refinancing statement evidencing the Trustee's security
interest in each Cooperative Loan.
With respect to each Contract, there will be delivered to the Trustee (or
to a designated Custodian) the original Contract and copies of documents and
instruments related to each Contract and the security interest in the property
securing each Contract. In order to give notice of the right, title and interest
of Certificateholders to the Contracts, the Depositor will cause a UCC-1
financing statement to be executed by the Depositor or the Unaffiliated Seller
identifying the Trustee as the secured party and identifying all Contracts as
collateral. Unless otherwise specified in the related Prospectus Supplement, the
Contracts will not be stamped or otherwise marked to reflect their assignment to
the Trust. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Contracts without notice
of such assignment, the interest of Certificateholders in the Contracts could be
defeated. See "Certain Legal Aspects of the Mortgage Loans and Contracts."
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The Trustee (or the custodian hereinafter referred to) will hold such
documents relating to Mortgage Loans or Contracts in trust for the benefit of
Certificateholders of the related Series and will review such documents within
45 days of the date of the applicable Pooling and Servicing Agreement. Unless
otherwise provided in the applicable Prospectus Supplement, if any document is
not delivered or is found to be defective in any material respect or has not
been recorded as required by the applicable Loan Sale Agreement, the Trustee (or
such custodian) shall immediately notify the Servicer and the Depositor, and the
Servicer shall immediately notify the related Unaffiliated Seller. If the
Unaffiliated Seller cannot cure such omission or defect within 60 days after
receipt of such notice, the Unaffiliated Seller will be obligated, pursuant to
the related Loan Sale Agreement, either to repurchase the related Mortgage Loan
or Contract from the Trustee within 60 days after receipt of such notice, at a
price (the "Purchase Price") equal to the then unpaid principal balance thereof,
plus accrued and unpaid interest at the applicable Mortgage Rate or Contract
Rate (less any Fixed Retained Yield with respect to such Mortgage Loan or
Contract and less the rate, if any, of servicing compensation payable to the
Unaffiliated Seller with respect to such Mortgage Loan or Contract) through the
last day of the month in which such repurchase takes place or to substitute one
or more new Mortgage Loans or Contracts for such Mortgage Loan or Contract. In
the case of a Mortgage Loan or Contract so repurchased by an Unaffiliated
Seller, the Purchase Price will be deposited in the related Certificate Account.
In the case of a substitution, such substitution will be made in accordance with
the standards described in "Representations and Warranties" below.
There can be no assurance that an Unaffiliated Seller will fulfill this
repurchase or substitution obligation. The Servicer will be obligated to enforce
such obligation to the same extent as it must enforce the obligation of an
Unaffiliated Seller for a breach of representation or warranty as described
below under "Representations and Warranties." However, as in the case of an
uncured breach of such a representation or warranty, neither the Servicer
(unless the Servicer is the Unaffiliated Seller) nor the Depositor will be
obligated to purchase or substitute for such Mortgage Loan or Contract if the
Unaffiliated Seller defaults on its repurchase or substitution obligation,
unless such breach also constitutes a breach of the representations or
warranties of the Servicer or the Depositor, as the case may be. Unless
otherwise specified in the related Prospectus Supplement, this repurchase or
substitution obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for omission of, or a material defect in, a
constituent document.
The Trustee will be authorized to appoint a custodian to maintain
possession of the documents relating to the Mortgage Loans or Contracts. The
custodian will keep such documents as the Trustee's agent under a custodial
agreement.
Representations and Warranties
Each Unaffiliated Seller, pursuant to the related Loan Sale Agreement, will
have made representations and warranties in respect of the Mortgage Loans sold
by such Unaffiliated Seller. Unless otherwise specified in the related
Prospectus Supplement, each Unaffiliated Seller of Mortgage Loans will have
represented, among other things, substantially to the effect that (i)
immediately prior to the sale and transfer of such Mortgage Loans, the
Unaffiliated Seller had good title to, and was the sole owner of, each such
Mortgage Loan and there had been no other assignment or pledge thereof, (ii) as
of the date of such transfer, such Mortgage Loans are subject to no offsets,
defenses or counterclaims, (iii) each Mortgage Loan at the tune it was made
complied in all material respects with applicable state and federal laws,
including, usury, equal credit opportunity and disclosure laws, (iv) a lender's
policy of title insurance was issued on the date of the origination of each
Mortgage Loan and each such policy is valid and remains in full force and
effect, (v) as of the date of such transfer, each related Mortgage is a valid
lien on the related Mortgaged Property (subject only to (a) the lien of current
real property taxes and assessments, (b) covenants, conditions and restrictions,
rights of way, easements and other matters of public record as of the date of
the recording of such Mortgage, such exceptions appearing of record and either
being acceptable to mortgage lending institutions generally or specifically
reflected in the lender's policy of title insurance issued on the date of
origination and either (A) specifically referred to in the appraisal made in
connection with the origination of the related Mortgage Loan or (B) which do not
adversely affect the appraised value of the Mortgaged Property as set forth in
such appraisal, (c) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security intended to
be provided by the Mortgage and (d) in the case of second or more junior loans
any senior loans of record as of the date of recording of the Equity Loan) and
such property is free of material damage and is in good repair, (vi) as of the
date of such transfer, no Mortgage Loan is 30 days or more delinquent in payment
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and there are no delinquent tax or assessment liens against the related
Mortgaged Property that would permit taxing authority to initiate foreclosure
proceedings, and (vii) with respect to each Mortgage Loan, if the Mortgaged
Property is located in an area identified by the Federal Emergency Management
Agency as having special flood hazards and subject in certain circumstances to
the availability of flood insurance under the federal flood insurance program,
such Mortgaged Property is covered by flood insurance meeting the requirements
of the applicable Pooling and Servicing Agreement.
Each Unaffiliated Seller, pursuant to the related Loan Sale Agreement, will
have made representations and warranties in respect of the Contracts sold by
such Unaffiliated Seller. Unless otherwise specified in the related Prospectus
Supplement, each Unaffiliated Seller of Contracts will have represented, among
other digs, substantially to the effect that (i) immediately prior to the sale
and transfer of such Contracts, the Unaffiliated Seller had good title to, and
was the sole owner of, each such Contract and there had been no other assignment
or pledge thereof, (ii) as of the date of such transfer, such Contracts are
subject to no offsets, defenses or counterclaims, (iii) each Contract at the
time it was made complied in all material respects with applicable state and
federal laws, including usury, equal credit opportunity and disclosure laws,
(iv) as of the date of such transfer, each related Contract is a valid first
lien on the related Manufactured Home and such Manufactured Home is free of
material damage and is in good repair, (v) as of the date of such transfer, no
Contract is 30 days or more delinquent in payment and there are no delinquent
tax or assessment liens against the related Manufactured Home, and (vi) with
respect to each Contract, the Manufactured Home securing the Contract is covered
by a Standard Hazard Insurance Policy in the amount required by the Pooling and
Servicing Agreement and all premiums then due on such insurance have been paid
in full.
All of the representations and warranties of an Unaffiliated Seller in
respect of a Mortgage Loan or Contract will have been made as of the date on
which such Unaffiliated Seller sold the Mortgage Loan or Contract to the
Depositor. A substantial period of time may have elapsed between the date as of
which the representations and warranties were made and the later date of initial
issuance of the related Series of Certificates. Since the representations and
warranties referred to in the preceding paragraphs are the only representations
and warranties that will be made by an Unaffiliated Seller, the Unaffiliated
Seller's repurchase obligation described below will not arise if, during the
period commencing on the date of sale of a Mortgage Loan or Contract by the
Unaffiliated Seller to the Depositor, the relevant event occurs that would have
given rise to such an obligation had the event occurred prior to sale of the
affected Mortgage Loan or Contract. However, the Depositor will not include any
Mortgage Loan or Contract in the Trust Fund for any series of Certificates if
anything has come to the Depositor's attention that would cause it to believe
that the representations and warranties of an Unaffiliated Seller will not be
accurate and complete in all material respects in respect of such Mortgage Loan
or Contract as of the date of initial issuance of the related Series of
Certificates.
The Depositor will, unless otherwise provided in the applicable Prospectus
Supplement, assign all of its rights (except certain rights to indemnification)
with respect to such representations and warranties pursuant to any related Loan
Sale Agreement to the Trustee for the benefit of the Certificateholders of the
related Series. The Servicer, or the Trustee if the Servicer is the Unaffiliated
Seller, will promptly notify the relevant Unaffiliated Seller of any breach of
any representation or warranty made by it in respect of a Mortgage Loan or
Contract which materially and adversely affects the interests of the
Certificateholders in such Mortgage Loan or Contract. Unless otherwise specified
in the related Prospectus Supplement, if such Unaffiliated Seller cannot cure
such breach within 60 days after notice from the Servicer or the Trustee, as the
case may be, then such Unaffiliated Seller will be obligated either (i) to
repurchase such Mortgage Loan or Contract from the Trust Fund at the applicable
Purchase Price or (ii) subject to the Trustee's approval and to the extent
permitted by the Pooling and Servicing Agreement, to substitute for such
Mortgage Loan or Contract (a "Deleted Loan") one or more Mortgage Loans or
Contracts, as the case may be (each, a "Substitute Loan"), but only if (i) with
respect to a Trust Fund (or one or more segregated pools of assets therein) for
which a REMIC election is to be made, such substitution is effected within two
years of the date of initial issuance of the Certificates or (ii) with respect
to a Trust Fund for which no REMIC election is to be made, such substitution is
effected within 120 days of the date of initial issuance of the Certificates.
Except as otherwise provided in the related Prospectus Supplement, any
Substitute Loan will, on the date of substitution, (i) have a Loan-to-Value
Ratio no greater than that of the Deleted Loan, (ii) have a Mortgage Rate or
Contract Rate not less than (and not more than 1% greater than) the Mortgage
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Rate or Contract Rate of the Deleted Loan, (iii) have a Net Mortgage Rate or Net
Contract Rate not less than (and not more than 1% greater than) the Net Mortgage
Rate or Net Contract Rate of the Deleted Loan, (iv) have a remaining term to
maturity not greater than (and not more than one year less than) that of the
Deleted Loan and (v) comply with all of the representations and warranties set
forth in the related Loan Sale Agreement as of the date of substitution. If
substitution is to be made for a Deleted Loan with an adjustable Mortgage Rate
or Contract Rate, the Substitute Loan will also bear interest based on the same
index, margin, frequency and month of adjustment as the Deleted Loan. In the
event that one Substitute Loan is substituted for more than one Deleted Loan, or
more than one Substitute Loan is substituted for one or more Deleted Loans, then
the amount described in clause (i) will be determined on the basis of aggregate
principal balances (provided that in all events the tests for a "qualified
mortgage" as described in the second paragraph under the heading "Certain
Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC
Certificates -- Qualification as a REMIC" are met as to each Substituted Loan),
the rates described in clauses (ii) and (iii) with respect to Deleted Loans will
be determined on the basis of weighted average Mortgage Rates and Net Mortgage
Rates or Contract Rates and Net Contract Rates, as the case may be, and the
terms described in clause (iv) will be determined on the basis of weighted
average remaining terms to maturity. In the case of a Substitute Loan, the
mortgage file relating, thereto will be delivered to the Trustee (or the
custodian) and the Unaffiliated Seller will pay an amount equal to the excess of
(i) the unpaid principal balance of the Deleted Loan, over (ii) the unpaid
principal balance of the Substitute Loan or Loans, together with interest on
such excess at the Mortgage Rate or Contract Rate to the next scheduled Due Date
of the Deleted Loan. Such amount will be deposited in the Certificate Account
for distribution to Certificateholders. Except in those cases in which the
Servicer is the Unaffiliated Seller, the Servicer will be required under the
applicable Pooling and Servicing Agreement to enforce this repurchase or
substitution obligation for the benefit of the Trustee and the holders of the
Certificates, following the practices it would employ in its good faith business
judgment were it the owner of such Mortgage Loan or Contract. This repurchase or
substitution obligation will constitute the sole remedy available to holders of
Certificates or the Trustee for a breach of representation by an Unaffiliated
Seller.
Neither the Depositor nor the Servicer (unless the Servicer is the
Unaffiliated Seller) will be obligated to purchase or substitute for a Mortgage
Loan or Contract if an Unaffiliated Seller defaults on its obligation to do so,
and no assurance can be given that Unaffiliated Sellers will carry out their
respective repurchase obligations with respect to Mortgage Loans or Contracts.
If so specified in the applicable Prospectus Supplement, the Depositor, the
Servicer or another entity specified in the applicable Prospectus Supplement,
will make such representations and warranties as to the types and geographical
concentration of the Mortgage Loans or Contracts 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
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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 consist of one
or more Classes of Standard Certificates, Stripped Certificates or Multi-Class
Certificates. Any Class of Certificates may be divided into two or more
Subclasses and any Class of Standard Certificates may be divided into two or
more Subclasses that consist of Multi-Class Certificates. Any Class or Subclass
of Multi-Class Certificates may be Compound Interest Certificates. In addition,
each Series for which the Depositor has caused the related Trust Fund (or one or
more segregated pools of assets therein) to elect to be treated as a REMIC will
include one Class or one Subclass of Residual Certificates with respect to each
such REMIC which, if offered hereby, will represent the right to receive
distributions with respect to such Trust Fund as specified in the related
Prospectus Supplement.
Each Series of Certificates may include one or more Classes or Subclasses
of Certificates (the "Subordinated Certificates") that are subordinate in right
of distributions to one or more other Classes or Subclasses of Certificates (the
"Senior Certificates"). Two types of subordination arrangements for a Series
which consists of two Classes of Standard Certificates are described herein. See
"Distributions to Standard Certificateholders." Any other type of subordination
arrangement for Standard Certificates, or any subordination arrangement for any
Class of Multi-Class Certificates or Stripped Certificates, will be described in
the applicable Prospectus Supplement. Certain Series or Classes of Certificates
may be covered by insurance policies or other forms of credit enhancement, in
each case as described herein and in the related Prospectus Supplement.
Except as described in the related Prospectus Supplement, the Mortgage
Loans or Contracts included in a Trust Fund will not be guaranteed or insured by
any governmental agency or instrumentality or any other insurer.
The Depositor will cause each Trust Fund (or one or more segregated pools
of assets therein) with respect to a Series which includes Standard Certificates
redeemable on a random lot basis, Multi-Class Certificates or Shifting Interest
Certificates to elect to be treated as a REMIC. The Depositor may cause any
other Trust Fund (or segregated pool of assets therein) to elect to be treated
as a REMIC. If such an election is made, such Series will consist of one or more
Classes or Subclasses of Certificates that will represent "regular interests"
within the meaning of Code Section 860G(a)(1) (such Certificates collectively
referred to as the "Regular Certificates") and one Class or one Subclass of
Certificates that will be designated as the "residual interest" with respect to
each REMIC within the meaning of Code Section 860G(a)(2) (the "Residual
Certificates") representing the right to receive distributions as specified in
the Prospectus Supplement for such Series. See "Certain Federal Income Tax
Consequences" herein. The related Prospectus Supplement will specify whether one
or more REMIC elections are to be made. Alternatively, the Pooling and Servicing
Agreement for a Series may provide that a REMIC election is to be made at the
discretion of the Depositor or the Servicer and may only be made if certain
conditions are satisfied. As to each Series with respect to which a REMIC
election is to be made, the Servicer and the Trustee will be obligated to take
certain actions in order to comply with applicable REMIC laws and regulations,
and no Certificateholder other than a holder of a Residual Certificate will be
liable for any prohibited transaction taxes under applicable REMIC laws and
regulations.
The Depositor may sell certain Classes or Subclasses of the Certificates of
a Series, including one or more Classes or Subclasses of Subordinated
Certificates or one Class or one Subclass of Residual Certificates, in privately
negotiated transactions exempt from registration under the Securities Act.
Alternatively, if so specified in the applicable Prospectus Supplement, the
Depositor may offer one or more Classes or Subclasses of the Subordinated
Certificates or the one Class or one Subclass of Residual Certificates of a
Series by means of this Prospectus and such Prospectus Supplement.
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Unless otherwise specified in the applicable Prospectus Supplement with
respect to a Series of Certificates, each Certificate offered hereby and by the
applicable Prospectus Supplement will be issued in fully registered form (each,
a "Definitive Certificate") and will be issued in the authorized denominations
as specified in the applicable Prospectus Supplement. The Certificates of a
Series offered hereby and by means of the applicable Prospectus Supplement will
be transferable and exchangeable at the office or agency maintained by the
Trustee or such other entity for such purpose set forth in the related
Prospectus Supplement. No service charge will be made for any transfer or
exchange of Certificates, but the Trustee or such other entity may require
payment of a sum sufficient to cover any tax or other governmental charge in
connection with such transfer or exchange. In the event that an election is made
to treat the Trust Fund (or one or more segregated pools of assets therein) as a
REMIC, no legal or beneficial interest in all or any portion of the "Residual
Certificates" thereof may be transferred without the receipt by the transferor
of any affidavit signed by the transferee stating that the transferee is not a
"Disqualified Organization" within the meaning of Code Section 860E(e)(5) or an
agent (including a broker, nominee, or other middleman) thereof. The Prospectus
Supplement with respect to a Series may specify additional transfer restrictions
with respect to the Residual Certificates. See "Certain Federal Income Tax
Consequences -- Federal Income Tax Consequences for REMIC Certificates --
Taxation of Residual Certificates -- Tax-Related Restrictions on Transfer of
Residual Certificates." If so specified in the related Prospectus Supplement,
the Certificates of specified Classes or Subclasses of a Series may be issued in
the form of book entries on the records of The Depository Trust Company ("DTC")
and participating members thereof.
Distributions will be made on each of the Distribution Dates specified in
the applicable Prospectus Supplement for a Series to persons in whose name the
Certificates of such Series are registered at the close of business on the
related Record Date. Unless otherwise specified in the applicable Prospectus
Supplement, distributions to Certificateholders of all Series (other than the
final distribution in retirement of the Certificates) will be made by check
mailed to the address of the person entitled thereto as it appears on the
certificate register, except that, with respect to any holder of a Certificate
evidencing not less than the specified fractional undivided interest, notional
amount or Stated Amount set forth in such Prospectus Supplement, distributions
will be made by wire transfer in immediately available funds, provided that the
Trustee shall have been furnished with appropriate wiring instructions not less
than three business days (or such longer period as may be specified in the
related Prospectus Supplement) prior to the related Distribution Date. The final
distribution in retirement of Certificates will be made only upon presentation
and surrender of the Certificates at the office or agency maintained by the
Trustee or such other entity for such purpose, as specified in the final
distribution notice to Certificateholders.
A Series of Certificates will consist of one or more Classes of Standard
Certificates or Stripped Certificates (referred to hereinafter sometimes
collectively as "Percentage Certificates") or two or more Classes of Multi-Class
Certificates (each as described below).
Percentage Certificates
Each Series of Percentage Certificates may include one or more Classes of
Standard Certificates or Stripped Certificates, any Class of which may be
divided into two or more Subclasses. The Standard Certificates of each Class
will evidence fractional undivided interests in all of the principal and
interest (to the extent of the Net Mortgage Interest Rate) payments on the
Mortgage Loans comprising the Trust Fund related to such Series. Each holder of
a Standard Certificate of a Class will be entitled to receive its Certificate's
percentage interest of the portion of the Pool Distribution Amount (as defined
below) allocated to such Class. The percentage interest of each Standard
Certificate will be equal to the percentage obtained by dividing the aggregate
unpaid principal balance of the Mortgage Loans represented by such Standard
Certificate as of the Cut-Off Date by the aggregate unpaid principal balance of
the Mortgage Loans represented by all the Standard Certificates of the same
Class as of the Cut-Off Date.
The Stripped Certificates of each Class will evidence fractional undivided
interests in specified portions of the principal and/or interest payments on the
Mortgage Loans comprising the Trust Fund related to such Series. The holders of
the Stripped Certificates of each Class will be entitled to receive a portion
(which may be zero) as specified in the applicable Prospectus Supplement of the
principal distributions comprising the Pool Distribution Amount, and a portion
(which may be zero) as specified in the applicable Prospectus Supplement of the
interest distributions comprising the Pool Distribution Amount on each
Distribution Date.
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In the case of Classes of Stripped Certificates representing interests in
interest distributions on the Mortgage Loans and not in principal distributions
on the Mortgage Loans, such Certificates will be denominated in notional
amounts. The aggregate original notional amount for a Class of such Certificates
will be equal to the aggregate unpaid principal balance (or a specified portion
thereof) of the Mortgage Loans as of the Cut-Off Date specified in the
applicable Prospectus Supplement. The notional amount of each such Stripped
Certificate will be used to calculate the holder's pro rata share of the
interest distributions on the Mortgage Loans allocated to that Class and for the
determination of certain other rights of holders of such Class of Stripped
Certificates and will not represent an interest in, or entitle any such holder
to any distribution with respect to, any principal distributions on the Mortgage
Loans. Each such Certificate's pro rata share of the interest distribution on
the Mortgage Loans on each Distribution Date will be calculated by multiplying
the interest distributions on the Mortgage Loans allocated to its Class by a
fraction, the numerator of which is the original notional amount of such
Stripped Certificates and the denominator of which is the aggregate original
notional amount of all the Stripped Certificates of its Class.
The interest of a Class of Percentage Certificates representing an interest
in a Trust Fund (or a segregated pool of assets therein) with respect to which
an election to be treated as a REMIC has been made may be fixed as described
above or may vary over time as a result of prepayments received and losses
realized on the underlying Mortgage Loans. A Series of Percentage Certificates
comprised of Classes whose percentage interests in the Trust Fund may vary is
referred to herein as a Series of "Shifting Interest Certificates."
Distributions on, and subordination arrangements with respect to, Shifting
Interest Certificates are discussed below under the headings "Description of the
Certificates -- Distributions to Percentage Certificateholders -- Shifting
Interest Certificates" and "Credit Support -- Subordination -- Shifting Interest
Certificates."
Multi-Class Certificates
Each Series may include one or more Classes or Subclasses of Multi-Class
Certificates. Each Multi-Class Certificate will be assigned a Stated Amount or
Notional Amount. The Stated Amount may be based on an amount of principal of the
underlying Mortgage Loans or Contracts or on the value of future cash flows from
the related Trust Fund, without distinction as to principal and interest
received on the Mortgage Loans or Contracts. Interest on the Classes or
Subclasses of Multi-Class Certificates will be paid at rates specified in or
determined as specified in the applicable Prospectus Supplement, and will accrue
in the manner specified therein. Any Class or Subclass of Multi-Class
Certificates may consist of Certificates on which interest accrues but is not
payable until such time as specified in the applicable Prospectus Supplement
("Compound Interest Certificates"), and interest accrued on any such Certificate
will be added to the Stated Amount thereof in the manner described therein.
The Stated Amount of a Multi-Class Certificate of a Series at any time will
represent the maximum specified dollar amount (exclusive of interest at the
related Interest Rate, if any) to which the holder thereof is entitled from the
cash flow on the Mortgage Loans or Contracts and other assets in the Trust Fund
for such Series and will decline to the extent distributions in reduction of
Stated Amount are received by such holder. The initial Stated Amount of each
Class within a Series of Multi-Class Certificates will be specified in the
applicable Prospectus Supplement.
Forward Commitments; Pre-Funding
A Trust Fund may enter into an agreement (each, a "Forward Purchase
Agreement") with the Depositor whereby the Depositor will agree to transfer
additional Mortgage Loans to such Trust Fund following the date on which such
Trust Fund is established and the related Certificates are issued. The Trust
Fund may enter into Forward Purchase Agreements to permit the acquisition of
additional Mortgage Loans that could not be delivered by the Depositor or have
not formally completed the origination process, in each case prior to the date
on which the Certificates are delivered to the Certificateholders (the "Closing
Date"). Any Forward Purchase Agreement will require that any Mortgage Loans so
transferred to the Trust Fund conform to the requirements specified in such
Forward Purchase Agreement.
If a Forward Purchase Agreement is to be utilized, and unless otherwise
specified in the related Prospectus Supplement, the related Trustee will be
required to deposit in a segregated account (each, a "Pre-Funding Account") up
to 100% of the net proceeds received by the Trustee in connection with the sale
of one or more classes of Certificates of the related Series; the additional
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Mortgage Loans will be transferred to the related Trust Fund in exchange for
money released to the Depositor from the related Pre-Funding Account. Each
Forward Purchase Agreement will set a specified period (the "Funding Period")
during which any such transfers must occur; for a Trust Fund which elects
federal income treatment as REMIC or as a grantor trust, the related Funding
Period will be limited to three months from the date such Trust Fund is
established; for a Trust Fund which is treated as a mere security device for
federal income tax purposes, the related Funding Period will be limited to nine
months from the date such Trust Fund is established. The Forward Purchase
Agreement or the related Pooling and Servicing Agreement will require that, if
all moneys originally deposited to such Pre-Funding Account are not so used by
the end of the related Funding Period, then any remaining moneys will be applied
as a mandatory prepayment of the related class or classes of Certificates as
specified in the related Prospectus Supplement.
During the Funding Period the moneys deposited to the Pre-Funding Account
will either (i) be held uninvested or (ii) will be invested in cash-equivalent
investments rated in one of the four highest rating categories by at least one
nationally recognized statistical rating organization and which will either
mature prior to the end of the Funding Period, or will be drawable on demand and
in any event, will not constitute the type of investment which would require
registration of the related Trust Funds as an "investment company" under the
Investment Company Act of 1940, as amended.
Distributions to Percentage Certificateholders
Except as otherwise specified in the applicable Prospectus Supplement, on
or about the 15th day of each month in which a Distribution Date occurs (the
"Determination Date"), the Servicer will determine the amount of the payments or
other receipts on account of principal and interest on the Mortgage Loans or
Contracts which have been received and which will be distributable to holders of
Certificates on the next Distribution Date (as further described below, the
"Pool Distribution Amount"). The Pool Distribution Amount will be allocated
among the Classes or Subclasses of Percentage Certificates of such Series in the
manner described herein under "Description of the Certificates -- Standard
Certificates"; however, if such Certificates are also composed of Senior
Certificates and Subordinated Certificates, then the Pool Distribution Amount
will be allocated in accordance with the terms of the applicable subordination
arrangement. Two types of subordination arrangements are described below for a
Series which consists of two Classes of Standard Certificates. Any other type of
subordination arrangement employed for Certificates of a Series will be
described in the related Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, the
"Pool Distribution Amount" for a Distribution Date with respect to a Series of
Certificates as to which the relevant Trust Fund consists of Mortgage Loans or
Contracts will be the sum of all previously undistributed payments or other
receipts on account of principal (including principal prepayments, Net
Liquidation Proceeds (as defined herein), and Net Insurance Proceeds (as defined
herein), if any) and interest on the related Mortgage Loans or Contracts
received by the Servicer after the related Cut-Off Date (except for amounts due
on or prior to such Cut-Off Date), or received by the Servicer on or prior to
the Cut-Off Date but due after the Cut-Off Date, in either case received on or
prior to the Determination Date in the month in which such Distribution Date
occurs, plus (i) all Advances made by the Servicer, (ii) all withdrawals from
any Buy-Down Fund or other fund described in the related Prospectus Supplement,
if applicable, and (iii) all proceeds of Mortgage Loans or Contracts or property
acquired in respect thereof purchased or repurchased from the Trust Fund as
provided in the Pooling and Servicing Agreement ("Repurchase Proceeds"), but
excluding the following:
(a) amounts received as late payments of principal or interest
respecting which the Servicer previously has made one or more unreimbursed
Advances;
(b) any unreimbursed Advances with respect to Liquidated Mortgage
Loans (as defined herein) or Liquidated Contracts (as defined herein);
(c) those portions of each payment of interest on a particular
Mortgage Loan or Contract which represents (i) the Fixed Retained Yield, if
any, and (ii) the applicable Servicing Fee, as adjusted in respect of
Prepayment Interest Shortfalls as described in "Servicing of the Mortgage
Loans and Contracts -- Adjustment to Servicing Compensation in Connection
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with Prepaid and Liquidated Mortgage Loans and Contracts";
(d) all amounts representing scheduled payments of principal and
interest due after the Due Date occurring in the month in which such
Distribution Date occurs;
(e) all principal prepayments and all proceeds (including Liquidation
Proceeds, Insurance Proceeds and Repurchase Proceeds) of any Mortgage Loans
or Contracts, or property acquired in respect thereof, liquidated,
foreclosed, purchased or repurchased pursuant to the applicable Pooling and
Servicing Agreement, received on or after the Due Date occurring in the
month in which such Distribution Date occurs, and all related payments of
interest on such amounts;
(f) where permitted by the related Pooling and Servicing Agreement,
that portion of Liquidation Proceeds or Insurance Proceeds which represents
Fixed Retained Yield, if any, or any unpaid Servicing Fee to which the
Servicer is entitled;
(g) all amounts representing certain expenses reimbursable to the
Servicer and other amounts pertained to be withdrawn by the Servicer from
the Certificate Account, in each case pursuant to the applicable Pooling
and Servicing Agreement;
(h) all amounts in the nature of late fees, assumption fees,
prepayment fees and similar fees which the Servicer is entitled to retain
pursuant to the applicable Pooling and Servicing Agreement; and
(i) where permitted by the applicable Pooling and Servicing Agreement,
reinvestment earnings on payments received in respect of the Mortgage Loans
or Contracts.
Certificates other than Shifting Interest Certificates
With respect to a Series of Certificates which is comprised of one Class of
Standard Certificates which are Senior Certificates and one Class of Standard
Certificates which are Subordinated Certificates, the Servicer shall determine
the aggregate amount which would have been distributable to such Class of Senior
Certificates (the "Senior Class Distributable Amount") and the aggregate amount
which would have been distributable to such Class of Subordinated Certificates
(the "Subordinated Class Distributable Amount") assuming, among other things, no
delinquencies or losses on the Mortgage Loans or Contracts preceding such
Distribution Date and, based on the Pool Distribution Amount and such
Distributable Amounts, will determine the amount actually to be distributed to
each Class and Subclass.
Calculation of Distributable Amounts. If a Series of Certificates includes
one Class of Standard Certificates which are Senior Certificates and one Class
of Standard Certificates which are Subordinated Certificates, unless otherwise
specified in the applicable Prospectus Supplement, the Senior Class
Distributable Amount with respect to such Senior Certificates on a Distribution
Date will be an amount equal to the sum of:
(i) the aggregate undivided interest, expressed as a percentage and
specified in the applicable Prospectus Supplement, evidenced by such Class
of Senior Certificates (the "Senior Class Principal Portion") of:
(a) all scheduled payments of principal on each outstanding
Mortgage Loan or Contract that became due on the Due Date immediately
preceding such Distribution Date in accordance with the amortization
schedules of the related Mortgage Loans or Contracts (as adjusted to
give effect to any previous prepayments), whether or not such payments
were actually received by the Servicer (the aggregate of such
scheduled payments due on any such Due Date being referred to herein
as "Scheduled Principal");
(b) all principal prepayments received by the Servicer in the
month preceding the month in which such Distribution Date occurs;
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(c) the Scheduled Principal Balance (as defined herein) of each
Mortgage Loan or Contract which was purchased from the Trust Fund as
provided in the Pooling and Servicing Agreement (as described in "The
Trust Funds" and "The Pooling and Servicing Agreement"), and of each
Mortgage Loan or Contract as to which the Servicer has determined that
all recoveries of Liquidation Proceeds and Insurance Proceeds have
been received (a "Liquidated Mortgage Loan" or "Liquidated Contract"),
in each case during the month preceding the month in which such
Distribution Date occurs, calculated as of the date each such Mortgage
Loan or Contract was purchased or calculated as of the date each such
Mortgage Loan or Contract became a Liquidated Mortgage Loan or
Liquidated Contract, as the case may be; and
(d) with respect to (1) the disposition of the Mortgaged Property
or Manufactured Home in connection with any Liquidated Mortgage Loan
or Contract, the amount by which Net Liquidation Proceeds and Net
Insurance Proceeds exceed the unpaid principal balance of such
Mortgage Loan or Contract and accrued but unpaid interest on such
Mortgage Loan or Contract at the Mortgage Rate or Contract Rate to the
Due Date next succeeding the last date of receipt of the Liquidation
Proceeds and Insurance Proceeds, and (2) the repurchase of Mortgage
Loans or Contracts in connection with an early termination of the
Trust Fund (see "The Pooling and Servicing Agreement -- Termination;
Purchase of Mortgage Loans and Contracts"), the amount by which the
repurchase price exceeds the aggregate unpaid principal balances of
the Mortgage Loans or Contracts in the related Trust Fund and accrued
but unpaid interest at the weighted average Mortgage Rate or Contract
Rate through the end of the month in which such repurchase occurs
(collectively, "Gain From Acquired Property"); and
(ii) interest at the Pass-Through Rate for the Class of Senior
Certificates from the second preceding Due Date (or the Cut-Off Date in the
case of the first Distribution Date) to the Due Date immediately preceding
such Distribution Date on the Senior Class Principal Portion of the
aggregate Scheduled Principal Balance of the Mortgage Loans or Contracts as
of the second preceding Due Date (or as of the Cut-Off Date in the case of
the first Distribution Date) whether or not such interest was actually
received by the Servicer; provided that Prepayment Interest Shortfall is
included only to the extent that funds for such purposes are available out
of Servicing Compensation; less
(iii) the Senior Class Principal Portion of any indemnification
payments made to the Servicer, the Depositor, or any officer, director,
employee or agent of either the Servicer or the Depositor since the
preceding Distribution Date as described under "Servicing of the Mortgage
Loans and Contracts -- Certain Matters Regarding the Servicer and the
Depositor" below (the "Indemnification Payments").
Unless otherwise specified in the applicable Prospectus Supplement, the
Subordinated Class Distributable Amount with respect to a Distribution Date for
Percentage Certificates which are Subordinated Certificates will be an amount
equal to the sum of:
(i) the aggregate undivided interest, expressed as a percentage and
specified in the applicable Prospectus Supplement, evidenced by such
Subordinated Certificates (the "Subordinated Class Principal Portion") of:
(a) all Scheduled Principal;
(b) all principal prepayments received by the Servicer during the
month preceding the month in which such Distribution Date occurs;
(c) the Scheduled Principal Balance of each Mortgage Loan or
Contract which was purchased from the Trust Fund as provided in the
Pooling and Servicing Agreement (as described in "The Trust Funds" and
"The Pooling and Servicing Agreement"), and of each Mortgage Loan or
Contract which became a Liquidated Mortgage Loan or Liquidated
Contract, in each case during the month preceding the month in which
such Distribution Date occurs, determined as of the date each such
Mortgage Loan or Contract was purchased, or as of the date each such
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Mortgage Loan or Contract became a Liquidated Mortgage Loan or
Liquidated Contract, as the case may be; and
(d) Gain From Acquired Property; and
(ii) interest at the Pass-Through Rate for the Class of Subordinated
Certificates from the second preceding Due Date (or from the Cut-Off Date
in the case of the first Distribution Date) to the Due Date immediately
preceding such Distribution Date on the Subordinated Class Principal
Portion of the Scheduled Principal Balance of the Mortgage Loans or
Contracts as of the second preceding Due Date (or as of the Cut-Off Date in
the case of the first Distribution Date), whether or not such interest was
actually received with respect to the Mortgage Loans or Contracts; provided
that Prepayment Interest Shortfall is included only to the extent that
funds for such purposes are available out of Servicing Compensation; less
(iii) the Subordinated Class Principal Portion of any Indemnification
Payments.
The foregoing is subject to the proviso that if one or more REMIC elections
are made with respect to a Series of Certificates, any Gain From Acquired
Property will not be included in the Distributable Amount of the Class of such
Series which consist of Regular Interests, but shall instead be paid in full to
the holders of the Residual Certificates of such Series.
Calculation of Amounts To Be Distributed. The Servicer will calculate, on
the related Determination Date, the portion of the Distributable Amount for each
Class of the Series that is actually available to be paid out of the Pool
Distribution Amount on the Distribution Date prior to any adjustments with
respect to subordination. The portion so available on a Distribution Date to the
Senior Certificateholders and to the Subordinated Certificateholders
(respectively, the "Senior Class Pro Rata Share" and the "Subordinated Class Pro
Rata Share") will, unless otherwise specified in the applicable Prospectus
Supplement, be the amount equal to the product of the Pool Distribution Amount
for such Distribution Date and a fraction, the numerator of which is the
Distributable Amount for such Class on such Distribution Date and the
denominator of which is the sum of the Distributable Amounts for such Series on
such Distribution Date.
So long as the Subordinated Amount is greater than zero, the holders of
Senior Certificates will be entitled to receive on any Distribution Date the
lesser of (a) the sum of the Senior Class Distributable Amount and the Senior
Class Carryover Shortfall (as defined below) and (b) the Senior Class Pro Rata
Share on such Distribution Date (the "Basic Senior Class Distribution"). In
addition, to the extent Senior Class Credit Enhancement is available, the
holders of Senior Certificates will be entitled to receive the amount, if any,
by which the Senior Class Distributable Amount plus any Senior Class Carryover
Shortfall (as defined below) on such Distribution Date exceeds the Basic Senior
Class Distribution on such Distribution Date (such excess being referred to
herein as the "Senior Class Shortfall"). "Senior Class Credit Enhancement"
includes: (a) amounts otherwise distributable to the holders of Subordinated
Certificates on such Distribution Date and amounts available for such purpose in
any Subordination Reserve Fund pursuant to any subordination of the rights of
any holders of Subordinated Certificates as described below; and (b) any other
credit enhancement arrangement which shall be specified in the related
Prospectus Supplement. See "Credit Support". The "Senior Class Carryover
Shortfall" on any Distribution Date means the amount the holders of Senior
Certificates were entitled to receive on the prior Distribution Date over the
amount the holders of Senior Certificates actually received on such prior
Distribution Date, together with interest on the difference at Pass-Through Rate
for the Senior Certificates from such prior Distribution Date through the
current Distribution Date.
At the time the Subordinated Amount, if any, is reduced to zero, Senior
Certificateholders will be entitled to the Senior Class Pro Rata Share on each
Distribution Date. In such event any remaining Senior Class Shortfall will cease
to be payable from available sources of credit enhancement, except that the
portion of such Senior Class Shortfall which is attributable to the account of
interest on any previous Senior Class Carryover Shortfall (the "Senior Class
Shortfall Accruals") shall continue to bear interest at the Pass-Through Rate
for the Senior Certificates, and the holders of Senior Certificates shall
continue to have a preferential right to be paid such amount from distributions
otherwise available for distribution to any holders of Subordinated
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Certificates, until such amount (including interest thereon at the Pass-Through
Rate for the Senior Certificates) is paid in full. See "Credit Support --
Subordination."
So long as the Subordinated Amount is greater than zero, the holders of
Subordinated Certificates will be entitled to receive on any Distribution Date
an amount equal to the excess of (a) the sum of (i) the Pool Distribution Amount
and (ii) all amounts released from the Subordination Reserve Fund for
distribution to the holders of Subordinated Certificates on such Distribution
Date over (b) the sum of (i) the Basic Senior Class Distribution, (ii) any
amounts required to be distributed to the holders of Senior Certificates
pursuant to the subordination of the rights of the holders of Subordinated
Certificates and (iii) amounts required to be deposited in the Subordination
Reserve Fund. See "Credit Support." At the time the Subordinated Amount, if any,
is reduced to zero, Subordinated Certificateholders will be entitled to the
Subordinated Class Pro Rata Share on each Distribution Date; provided, however,
that such amount to be distributed to the holders of Subordinated Certificates
shall be decreased to give effect to the preferential right of the holders of
Senior Certificates to receive Senior Class Shortfall Accruals as provided
herein.
The foregoing is subject to the proviso that if a REMIC election has been
made with respect to a Trust Fund (or a segregated pool of assets therein), the
Subordinated Certificateholders of the related Series will be entitled to the
sum of (a) the Subordinated Class Pro Rata Share, (b) all amounts in the
Subordination Reserve Fund (net of any amount required to be maintained as
liquidity for Advances) and (c) such other amounts, if any, as may be specified
in the related Prospectus Supplement (including, if such Certificates are
Residual Certificates, any Gain From Acquired Property).
Shifting Interest Certificates
On each Distribution Date for a Series which is comprised of two Classes of
Standard Certificates which are Shifting Interest Certificates, the holders of
record on the Record Date of the Senior Certificates thereof will be entitled to
receive, to the extent of the Pool Distribution Amount with respect to such
Distribution Date and prior to any distribution being made on the related
Subordinated Certificates, an amount equal to the Senior Class Distribution
Amount. The Senior Class Distribution Amount will (except as otherwise set forth
in the applicable Prospectus Supplement) be calculated for any Distribution Date
as the lesser of (x) the Pool Distribution Amount for such Distribution Date and
(y) the sum of:
(i) one month's interest at the applicable Pass-Through Rate on such
Class's outstanding principal balance (less, if specified in the applicable
Prospectus Supplement, (a) the amount of such interest constituting
Deferred Interest, if any, not then payable on the Mortgage Loans or
Contracts and (b) the amount by which the Prepayment Interest Shortfall
with respect to the preceding month exceeds the aggregate Servicing Fees
relating to mortgagor or obligor payments or other recoveries distributed
on such Distribution Date, in each case allocated to such Class on the
basis set forth in the related Prospectus Supplement);
(ii) if distribution of the amount of interest calculated pursuant to
clause (i) above on prior Distribution Dates was not made in full on such
prior Distribution Dates, an amount equal to (a) the difference between (x)
the amount of interest which the holders of such Certificates would have
received on such prior Distribution Dates if there had been sufficient
funds available in the Certificate Account and (y) the amount of interest
actually distributed to such holders on such prior Distribution Dates,
together with interest on such difference (to the extent permitted by
applicable law) at the applicable Pass-Through Rate of such Class (the
"Unpaid Interest Shortfall") less (b) the aggregate amount distributed on
Distribution Dates subsequent to such prior Distribution Dates with respect
to the Unpaid Interest Shortfall;
(iii) such Class's percentage, calculated as provided in the related
Prospectus Supplement, of (a) all scheduled payments of principal due on
each outstanding Mortgage Loan or Contract that became due on the Due Date
occurring in the month in which such Distribution Date occurs, (b) all
partial principal prepayments received in the month preceding the month in
which such Distribution Date occurs and (c) except for Special Hazard
Mortgage Loans or Special Hazard Contracts covered by clause (iv) below,
the Scheduled Principal Balance of each Mortgage Loan or Contract which,
during the month preceding the month in which such Distribution Date
occurs, (i) was the subject of a principal prepayment in full, (ii) became
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a Liquidated Mortgage Loan or Liquidated Contract or (iii) was purchased
from the Trust Fund as provided in the Pooling and Servicing Agreement (as
described in "The Trust Funds" and "The Pooling and Servicing Agreement");
and
(iv) if the Special Hazard Termination Date (as defined below) has
occurred as a result of cumulative net losses on Special Hazard Mortgage
Loans or Special Hazard Contracts exceeding the applicable Special Hazard
Loss Amount (as defined below), such Class's specified percentage of the
Net Liquidation Proceeds and Net Insurance Proceeds from any Mortgage Loan
or Contract that became a Special Hazard Mortgage Loan or Special Hazard
Contract during the month preceding the month in which such Distribution
Date occurs, less the total amount of delinquent installments of principal
in respect of such Special Hazard Mortgage Loan or Special Hazard Contract
that were previously the subject of distributions to the holders of such
Class of Certificates out of amounts otherwise distributable to the holders
of the related Subordinated Certificates and less the portion of such Net
Liquidation Proceeds and Net Insurance Proceeds allocable to interest on
the Senior Certificates;
provided that, if such Distribution Date falls on or after the Cross-Over Date
(i.e., the date on which the amount of principal payments on the Mortgage Loans
or Contracts to which the holders of the related Subordinated Certificates are
entitled has been reduced to zero as a result of the allocation of losses to the
Subordinated Certificates), then the Senior Class Distribution Amount will
instead equal the lesser of (x) the Pool Distribution Amount and (y) the sum of
the items referred to above plus the amount by which such Senior Certificates'
outstanding principal balance as of such Distribution Date exceeds the Pool
Scheduled Principal Balance as of such Distribution Date. The "Scheduled
Principal Balance" of a Mortgage Loan or Contract for any Distribution Date is
the unpaid principal balance of such Mortgage Loan or Contract as specified in
the amortization schedule at the time relating thereto (before any adjustment to
such schedule by reason of bankruptcy, moratorium or similar waiver or grace
period) as of the first day of the month preceding the month in which such
Distribution Date occurs after giving effect to the payment of principal due on
such first day of the month, any partial prepayments applied on or prior to such
first day of the month, the addition to the principal of such Mortgage Loan or
Contract on or prior to such first day of the month of any Deferred Interest,
and irrespective of any delinquency in payment by the mortgagor or obligor. The
"Pool Scheduled Principal Balance" as of any Distribution Date is the aggregate
of the Scheduled Principal Balances of all Mortgage Loans or Contracts in a
Trust Fund for such Distribution Date.
If so provided in the applicable Prospectus Supplement, the Class of Senior
Certificates will also be entitled to receive its specified percentage, referred
to in clauses (y)(iii)(b) and (y)(iii)(c)(i) above, of all partial principal
prepayments and all principal prepayments in full on the Mortgage Loans or
Contracts in the related Trust Fund under the circumstances or for the period of
time specified therein, which will have the effect of accelerating the
amortization of the Class of Senior Certificates while increasing the respective
interest evidenced by the Class of Subordinated Certificates in the related
Trust Fund. Increasing the respective interest of the Subordinated Certificates
relative to that of the Senior Certificates is intended to preserve the
availability of the subordination provided by the Subordinated Certificates.
If the Special Hazard Termination Date would occur on any Distribution Date
under the circumstances referred to in "Credit Support -- Subordination," the
Senior Class Distribution Amount for each Class and Subclass of Senior
Certificates of such Series calculated as set forth in the two preceding
paragraphs will be modified to the extent described in such section.
Amounts distributed to the Class of Senior Certificates on a Distribution
Date will be deemed to be applied first to the payment of current interest, if
any, due on such Certificates (i.e., the amount calculated pursuant to clause
(y)(i) of the third preceding paragraph), second to the payment of any Unpaid
Interest Shortfall (i.e., the amount calculated pursuant to clause (y)(ii) of
such paragraph) and third to the payment of principal, if any, due on such
Certificates (i.e., the aggregate of the amounts calculated pursuant to clauses
(y)(iii) and (y)(iv) of such paragraph).
As indicated above, in the event that the Pool Distribution Amount on any
Distribution Date is not sufficient to make the full distribution of current
interest to the holders of Senior Certificates entitled to payments of interest,
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the difference between the amount of current interest which the holders of such
Certificates would have received on such Distribution Date if there had been
sufficient funds available and the amount actually distributed will be added to
the amount of interest which the holders of such Certificates are entitled to
receive on the next Distribution Date. Unless otherwise specified in the related
Prospectus Supplement, the amount of any such interest shortfall so carried
forward will bear interest (to the extent permitted by applicable law) at the
Pass-Through Rate applicable to such Certificates or at such other rate as
specified in the applicable Prospectus Supplement.
If the Pool Distribution Amount is insufficient on any Distribution Date to
make the full distribution of principal due to the holders of Senior
Certificates, the percentage of principal payments to which the holders of the
Senior Certificates would be entitled on the immediately succeeding Distribution
Date will be increased, as more fully described below under "Credit Support --
Subordination -- Shifting Interest Certificates." This increase will have the
effect of reducing, as a relative matter, the respective interest of the holders
of the related Subordinated Certificates in future payments of principal on the
related Mortgage Loans or Contracts. If the Pool Distribution Amount is not
sufficient to make full distribution described above to the holders of the Class
of Senior Certificates on any Distribution Date, unless otherwise provided in
the applicable Prospectus Supplement, the holders of such Class will share in
the funds actually available in proportion to the respective amounts that such
Class would have received had the Pool Distribution Amount been sufficient to
make the full distribution of interest and principal due to such Class.
Unless otherwise provided in the related Prospectus Supplement, on each
Distribution Date the holders of the related Class of Subordinated Certificates
of a Series will be entitled to receive, out of the Pool Distribution Amount,
all amounts remaining and available for distribution to them after deduction of
the amounts required to be distributed to the holders of all Senior Certificates
of such Series.
Example of Distribution to Standard Certificateholders
The following chart sets forth an example of the application of the
foregoing provisions to the first two months of the related Trust Fund's
existence, assuming the Certificates are issued in the month of January, with a
Distribution Date on the 25th of each month and a Determination Date on the 15th
of each month:
January 1(A)..................... Cut-Off Date.
January 2 -- January 31(B)....... The Servicer receives any principal
prepayments, Net Liquidation Proceeds, Net
Insurance Proceeds and Repurchase Proceeds.
January 31(C).................... Record Date.
February 1 -- February 15(D)..... The Servicer receives scheduled payments of
principal and interest due on February 1.
February 15(E)................... Determination Date.
February 25(F)................... Distribution Date.
Succeeding monthly periods follow the pattern of (B) through (F), except that
the period in (B) begins on the first of the month.
(A) The initial unpaid principal balance of the Mortgage Loans or Contracts in
a Trust Fund would be the aggregate unpaid principal balance of the
Mortgage Loans or Contracts at the close of business on January 1, after
deducting principal payments due on or before such date. Those principal
payments due on or before January 1 and the related interest payments would
not be part of the Trust Fund and would be remitted by the Servicer to the
Depositor when received.
(B) Principal prepayments, Net Liquidation Proceeds, Net Insurance Proceeds and
Repurchase Proceeds received during this period would be credited to the
Certificate Account for distribution to Certificateholders on the February
25 Distribution Date. To the extent funds are available from the aggregate
Servicing Fees relating to mortgagor payments or other recoveries
distributed on the related Distribution Date, the Servicer would make an
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additional payment to Certificateholders with respect to any Prepayment
Interest Shortfall realized during this period.
(C) Distributions in the month of February will be made to Certificateholders
of record at the close of business on this date.
(D) Scheduled monthly payments on the Mortgage Loans or Contracts due on
February 1 will be deposited in the Certificate Account as received by the
Servicer. Principal prepayments, Net Liquidation Proceeds, Net Insurance
Proceeds and Repurchase Proceeds received during this period, will be
deposited in the Certificate Account but will not be distributed to
Certificateholders on the February 25 Distribution Date. Instead, such
amounts will be credited to the Certificate Account for distribution to
Certificateholders on the March 25 Distribution Date.
(E) As of the close of business on February 15, a determination will be made of
the amounts of Advances and the amounts of principal and interest which
will be distributed to the Certificateholders. Those scheduled payments due
on or before February 1 which have been received on or before February 15
and those principal prepayments, Net Liquidation Proceeds, Net Insurance
Proceeds and Repurchase Proceeds received during the period commencing
January 2 and ending on January 31 will be distributed to
Certificateholders on the February 25 Distribution Date. In addition, the
amounts payable in respect of any form of credit enhancement will be
calculated in accordance with the related Pooling and Servicing Agreement.
(F) Unless otherwise so specified in the related Prospectus Supplement, the
Servicer or the Paying Agent, will make distributions to Certificateholders
on the 25th day of each month, or if such 25th day is not a business day,
on the next business day.
Distributions to Multi-Class Certificateholders
Valuation of Mortgage Loans and Contracts
If specified in the Prospectus Supplement relating to a Series of
Certificates having one or more Classes or Subclasses of Multi-Class
Certificates, for purposes of establishing the principal amount of Mortgage
Loans or Contracts that will be included in a Trust Fund for such Series, each
Mortgage Loan or Contract to be included in such Trust Fund will be assigned an
initial "Pool Value." Unless otherwise specified in the applicable Prospectus
Supplement, the Pool Value of each Mortgage Loan or Contract in the Trust Fund
for such Series will be the Stated Amount of Certificates of such Series which,
based upon certain assumptions and regardless of any prepayments on such
Mortgage Loans or Contracts, can be supported by the scheduled payments of
principal and interest on such Mortgage Loans or Contracts (net of the Fixed
Retained Yield on such Mortgage Loans or Contracts, if any, and the applicable
Servicing Fee), together with reinvestment earnings thereon, if any, at the
Assumed Reinvestment Rate for the period specified in the related Prospectus
Supplement and amounts available to be withdrawn (if applicable) from any
reserve fund for such Series, all as specified in the applicable Prospectus
Supplement. In calculating the Pool Value of a Mortgage Loan or Contract
included in the Trust Fund, future distributions on such Mortgage Loan or
Contract will be determined based on scheduled payments on such Mortgage Loan or
Contract. Any similar Mortgage Loans or Contracts may be aggregated into one or
more groups (each, a "Pool Value Group") each of which will be assigned an
aggregate Pool Value calculated as if all such Mortgage Loans or Contracts in
the Pool Value Group constituted a single loan having the highest interest rate
and the longest maturity of any such loan for such Pool Value Group. There are a
number of alternative means of determining the Pool Value of a Mortgage Loan,
Contract or Pool Value Group, including determinations based on the discounted
present value of the remaining scheduled payments of principal and interest
thereon and determinations based on the relationship between the Mortgage Rates
or Contract Rates borne thereby and the Interest Rates of the Multi-Class
Certificates of the related Series. The Prospectus Supplement for each Series
will describe the method or methods (and related assumptions) used to determine
the Pool Values of the Mortgage Loans or Contracts or the Pool Value Groups for
such Series.
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The "Assumed Reinvestment Rate" for a Series of Multi-Class Certificates
will be the highest rate permitted by the nationally recognized statistical
rating agency or agencies rating such Series of Multi-Class Certificates or a
rate insured by means of a surety bond, guaranteed investment contract or
similar arrangement satisfactory to such rating agency or agencies. If the
Assumed Reinvestment Rate is so insured, the related Prospectus Supplement will
set forth the terms of such arrangement.
Distributions of Interest
The Trustee will make distributions of interest on each Class of the
Multi-Class Certificates from the date and at the rates per annum (calculated on
the Stated Amount or Notional Amount of such Class) specified in, or as
otherwise determined in the manner set forth in, the related Prospectus
Supplement (and unless otherwise specified in such Prospectus Supplement,
calculated on the basis of a 360-day year of twelve 30-day months) and in
accordance with the priorities set forth in the related Prospectus Supplement.
Interest on all Classes of Multi-Class Certificates of a Series, other than
Compound Interest Certificates, will be distributed on the Distribution Dates
for such Series specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, distributions of interest on
each Class of Compound Interest Certificates will be made on each Distribution
Date after the Stated Amount of all Multi-Class Certificates of such Series
having a Last Scheduled Distribution Date prior to the Last Scheduled
Distribution Date of such Class of Compound Interest Certificates has been
reduced to zero. Prior to that time, interest on such Class of Compound Interest
Certificates will be added to the Stated Amount thereof on each Distribution
Date. Such Class of Compound Interest Certificates will thereafter receive
distributions of interest on the Stated Amount thereof as so adjusted.
Distributions in Reduction of Stated Amount for a Series of Multi-Class
Certificates not including a Subordination Feature
The Stated Amount of a Multi-Class Certificate of a Series at any time will
represent the maximum specified dollar amount (excluding interest distributions,
but including, in the case of Compound Interest Certificates, interest which has
not been distributed and which has been added to the Stated Amount thereof) to
which the holder thereof is entitled from the cash flow on the assets included
in the Trust Fund for such Series and will decline to the extent distributions
in reduction of Stated Amount are received by such holder. The initial Stated
Amount of each Class of Multi-Class Certificates will be specified in the
applicable Prospectus Supplement. On each Distribution Date, distributions in
reduction of Stated Amount of the Classes of Multi-Class Certificates will be
made, to the extent funds are available, to the holders of the Multi-Class
Certificates of such Series then entitled to receive such distributions, in the
order and in the amounts specified in the related Prospectus Supplement.
Distributions in reduction of Stated Amount may be allocated among Classes of
Multi-Class Certificates in order to provide limited protection to certain
Classes against an increase in the weighted average life of such Classes as a
result of a slower than expected or scheduled rate of principal prepayments on
the Mortgage Loans ("extension protection"). In addition, distributions in
reduction of Stated Amount may be allocated among Classes of Multi-Class
Certificates in order to provide limited protection to certain Classes against a
reduction in the weighted average life of such Classes as a result of a faster
than expected or scheduled rate or principal prepayments on the Mortgage Loans
("call protection"). By virtue of such allocations of distributions in reduction
of Stated Amount to provide extension protection and call protection to some
Classes, the weighted average lives of certain other Classes may be more greatly
affected by a faster or slower than expected or scheduled rate of principal
prepayments on the Mortgage Loans. See "Prepayment and Yield Considerations --
Weighted Average Life of Certificates." Distributions in reduction of Stated
Amount with respect to any Class or Subclass of Multi-Class Certificates will be
made on a pro rata or random lot or such other basis as is specified in the
applicable Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Certificates, the aggregate amount that will be distributed in
reduction of Stated Amount to holders of Multi-Class Certificates of a Series
then entitled thereto on any Distribution Date for such Series will equal, to
the extent funds are available, the sum of (i) the Multi-Class Certificate
Distribution Amount (as defined herein) and (ii) if and to the extent specified
in the related Prospectus Supplement, the applicable percentage of the Spread
specified in such Prospectus Supplement.
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Unless otherwise specified in the applicable Prospectus Supplement, the
"Multi-Class Certificate Distribution Amount" with respect to a Distribution
Date for a Series of Multi-Class Certificates will equal the amount, if any, by
which the Stated Amount of the Multi-Class Certificates of such Series (after
taking into account the amount of interest to be added to the Stated Amount of
any Class of Compound Interest Certificates on such Distribution Date and before
giving effect to any distributions in reduction of Stated Amount on such
Distribution Date) exceeds the Pool Value (as defined herein) of the Mortgage
Loans or Contracts included in the Trust Fund for such Series as of the end of
the period (a "Due Period") specified in the related Prospectus Supplement. For
purposes of determining the Multi-Class Certificate Distribution Amount with
respect to a Distribution Date for a Series of Certificates having one or more
Classes of Multi-Class Certificates, the Pool Value of the Mortgage Loans or
Contracts included in the Trust Fund for such Certificates will be reduced to
take into account all distributions thereon received by the Trustee during the
applicable Due Period.
Unless otherwise specified in the applicable Prospectus Supplement,
"Spread" with respect to a Distribution Date for a Series of Multi-Class
Certificates will be the excess of (a) the sum of (i) all payments of principal
and interest received on the related Mortgage Loans or Contracts (net of the
Fixed Retained Yield, if any, and the applicable Servicing Fee, if any, with
respect to such Mortgage Loans or Contracts) in the Due Period applicable to
such Distribution Date and, in the case of the first Due Period, any amount
deposited by the Depositor in the Certificate Account on the Closing Date, (ii)
income from reinvestment thereof, if any, and (iii) to the extent specified in
the applicable Prospectus Supplement, the amount of cash withdrawn from any
reserve fund or available under any other form of credit enhancement for such
Series since the prior Distribution Date (or since the Closing Date, in the case
of the first Distribution Date) and required to be deposited in the Certificate
Account for such Series, over (b) the sum of (i) all required to be deposited on
the Multi-Class Certificates of such Series on such Distribution Date, (ii) the
Multi-Class Certificate Distribution Amount for such Distribution Date, (iii) if
applicable, any Special Distributions (as described below) in reduction of the
Stated Amount of the Multi-Class Certificates of such Series made since the
preceding Distribution Date (or since the Closing Date in the case of the first
Distribution Date), including any accrued interest distributed with such Special
Distributions, (iv) all administrative and other expenses relating to the Trust
Fund payable during the Due Period preceding such Distribution Date, other than
such expenses which are payable by the Servicer, if any, and (v) any amount
required to be deposited into any reserve fund. Reinvestment income on any
reserve fund will not be included in Spread except to the extent that
reinvestment income is taken into account in calculating the initial amount
required to be deposited in such reserve fund, if any.
Subordination
The Prospectus Supplement relating to a Series which includes one or more
Classes or Subclasses of Multi-Class Certificates may specify that the rights of
one or more of such Classes or Subclasses (or the related Residual Certificates
of such Series) will be Senior to, or subordinated to, the rights of one or more
other Classes of Certificates of such Series.
If a Series which includes one or more Classes or Subclasses of Multi-Class
Certificates includes a subordination feature, on each Distribution Date,
distributions of interest, if any, will be made in accordance with the
preferential priorities specified in the related Prospectus Supplement and from
the date and at the Interest Rates specified therein or as otherwise specified
therein and distributions in reduction of Stated Amount, if any, will be made to
the holders of the Multi-Class Certificates in the amount and in the manner
specified in and in accordance with the preferential distribution provisions
described in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement the Subordinated Amount will be reduced as the pool
experiences losses, as well as through seasoning and prepayment of the Mortgage
Loans or Contracts included in the Trust Fund.
Special Distributions
To the extent specified in the Prospectus Supplement relating to a Series
which includes Multi-Class Certificates which have less frequent than monthly
Distribution Dates, any such Class or Subclass having Stated Amounts may receive
special distributions in reduction of Stated Amount, together with accrued
interest on the amount of such reduction ("Special Distributions") in any month,
other than a month in which a Distribution Date occurs, if, as a result of
principal prepayments on the Mortgage Loans or Contracts, the Trustee
determines, based on assumptions specified in the applicable Pooling and
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Servicing Agreement, that the amount of cash anticipated to be available on the
next Distribution Date for such Series to be distributed to the holders of such
Multi-Class Certificates may be less than the sum of (i) the interest scheduled
to be distributed to such holders and (ii) the amount to be distributed in
reduction of Stated Amount of such Multi-Class Certificates on such Distribution
Date. Any such Special Distributions will be made in the same priority and
manner as distributions in reduction of Stated Amount would be made on the next
Distribution Date.
To the extent specified in the related Prospectus Supplement, one or more
Classes of Certificates of a Series may be subject to special distributions in
reduction of the Stated Amount thereof at the option of the holders of such
Certificates, or to mandatory distributions by the Servicer. Any such
distributions with respect to a Series will be described in the applicable
Prospectus Supplement and will be on such terms and conditions as described
therein and specified in the Pooling and Servicing Agreement for such Series.
Last Scheduled Distribution Date
The "Last Scheduled Distribution Date" for each Class of Multi-Class
Certificates of a Series having a Stated Amount, to the extent Last Scheduled
Distribution Dates are specified in the applicable Prospectus Supplement, is the
latest date on which (based upon the assumptions set forth in the applicable
Prospectus Supplement) the Stated Amount of such Class is expected to be reduced
to zero. Since the rate of distributions in reduction of Stated Amount of each
such Class of Multi-Class Certificates will depend upon, among other things, the
rate of payment (including prepayments) of the principal of the Mortgage Loans
or Contracts, the actual last Distribution Date for any such Class may occur
significantly earlier than its Last Scheduled Distribution Date. To the extent
of any delays in receipt of any payments, insurance proceeds or liquidation
proceeds with respect to the Mortgage Loans or Contracts included in any Trust
Fund, the last Distribution Date for any such Class may occur later than its
Last Scheduled Distribution Date. The rate of payments on the Mortgage Loans or
Contracts in the Trust Fund for any Series of Certificates will depend upon
their particular characteristics, as well as on the prevailing level of Interest
Rates from time to time and other economic factors, and no assurance can be
given as to the actual prepayment experience of the Mortgage Loans or Contracts.
See "Prepayment and Yield Considerations."
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CREDIT SUPPORT
Subordination
Certificates other than Shifting Interest Certificates
If so specified in the Prospectus Supplement relating to a Series of
Certificates as to which the related Trust Fund consists of Mortgage Loans or
Contracts, other than a Series of Shifting Interest Certificates, the rights of
the holders of a Class of Subordinated Certificates to receive distributions
will be subordinated to the rights of the holders of a Class of Senior
Certificates, to the extent of the Subordinated Amount specified in such
Prospectus Supplement. The Subordinated Amount will be reduced by an amount
equal to Aggregate Losses and will be further reduced in accordance with a
schedule described in the applicable Prospectus Supplement. Aggregate Losses as
defined in the applicable Pooling and Servicing Agreement for any given period
will equal the aggregate amount of delinquencies, losses and other deficiencies
in the amounts due to the Senior Certificateholders paid or borne by the
Subordinated Certificateholders (but excluding any payments of Senior Class
Shortfall Accruals or interest thereon) ("Payment Deficiencies") during such
period, whether such aggregate amount results by way of withdrawals from the
Subordination Reserve Fund (including, prior to the time that the Subordinated
Amount is reduced to zero, any such withdrawal of amounts attributable to the
Initial Deposit, if any), reductions in amounts that would otherwise have been
distributable to the Subordinated Certificateholders on any Distribution Date,
or otherwise; less the aggregate amount of previous Payment Deficiencies
recovered by the related Trust Fund during such period in respect of the
Mortgage Loans or Contracts giving rise to such Previous Payment Deficiencies,
including, without limitation, such recoveries resulting from the receipt of
delinquent principal or interest payments, Liquidation Proceeds and insurance
proceeds (net, in each case, of any applicable Fixed Retained Yield and any
unpaid Servicing Fee to which the Servicer is entitled, foreclosure costs and
other servicing costs, expenses and advances relating to such Mortgage Loans or
Contracts).
The protection afforded to the Senior Certificateholders by the
subordination feature described above will be effected both by the preferential
right, to the extent specified in the applicable Prospectus Supplement, of such
Senior Certificateholders to receive current distributions on the related
Mortgage Loans or Contracts that, but for such subordination, would otherwise
have been distributable to the Subordinated Certificateholders from the related
Trust Fund (to the extent of the Subordinated Amount for such Series) and
(unless otherwise specified in the applicable Prospectus Supplement) by the
establishment and maintenance of a Subordination Reserve Fund for such Series.
Unless otherwise specified in the applicable Prospectus Supplement, the
Subordination Reserve Fund will not be a part of the Trust Fund. The
Subordination Reserve Fund may be funded initially with an initial deposit by
the Depositor (the "Initial Deposit") in an amount set forth in the applicable
Prospectus Supplement. Following the initial issuance of the Certificates of a
Series and until the balance of the Subordination Reserve Fund (without taking
into account the amount of any Initial Deposit) first equals or exceeds the
Specified Subordination Reserve Fund Balance set forth in the applicable
Prospectus Supplement, the Servicer will withhold all amounts that would
otherwise have been distributable to the Subordinated Certificateholders and
deposit such amounts (less any portions thereof required to be distributed to
Senior Certificateholders as described below) in the Subordination Reserve Fund.
The time necessary for the Subordination Reserve Fund of a Series to reach the
applicable Specified Subordination Reserve Fund Balance for such Series after
the initial issuance of the Certificates, and the period for which such balance
is maintained, will be affected by the prepayment, delinquency and foreclosure
or repossession experience of the Mortgage Loans or Contracts in the related
Trust Fund and cannot be accurately predicted. Unless otherwise specified in the
applicable Prospectus Supplement, after the amount in the Subordination Reserve
Fund (without taking into account the amount of any Initial Deposit) for a
Series first equals or exceeds the applicable Specified Subordination Reserve
Fund Balance, the Servicer will withhold from the Subordinated
Certificateholders and will deposit in the Subordination Reserve Fund such
portion of the principal payments on the Mortgage Loans or Contracts otherwise
distributable to the Subordinated Certificateholders as may be necessary to
maintain the Subordination Reserve Fund (without taking into account the amount
of any Initial Deposit) at the Specified Subordination Reserve Fund Balance. The
Prospectus Supplement for each Series will set forth the amount of the Specified
Subordination Reserve Fund Balance applicable from time to time and the extent,
if any, to which the Specified Subordination Reserve Fund Balance may be
reduced. Unless otherwise specified in the applicable Prospectus Supplement, the
Specified Subordination Reserve Fund Balance for a Series will not be required
to exceed the Subordinated Amount.
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If on any Distribution Date while the Subordinated Amount exceeds zero,
there is a Senior Class Shortfall, the Senior Class Certificateholders will be
entitled to receive from current payments on the Mortgage Loans or Contracts
that would otherwise have been distributable to Subordinated Certificateholders
the amount of such Senior Class Shortfall. If such current payments are
insufficient, an amount equal to the lesser of: (i) the entire amount on deposit
in the Subordination Reserve Fund available for such purpose; or (ii) the amount
necessary to cover the Senior Class Shortfall will be withdrawn from the
Subordination Reserve Fund. Amounts representing investment earnings on amounts
held in the Subordination Reserve Fund will not be available to make payments to
the Senior Certificateholders. If current payments on the Mortgage Loans or
Contracts and amounts available in the Subordination Reserve Fund are
insufficient to pay the entire Senior Class Shortfall, then amounts held in the
Certificate Account for future distributions will be distributed as necessary to
the Senior Certificateholders.
In the event the Subordination Reserve Fund is depleted before the
Subordinated Amount is reduced to zero, the Senior Certificateholders will
continue to have a preferential right, to the extent specified in the applicable
Prospectus Supplement, to receive current distributions of amounts that would
otherwise have been distributable to the Subordinated Certificateholders to the
extent of the then Subordinated Amount.
After the Subordinated Amount is reduced to zero, the Senior
Certificateholders of a Series will, unless otherwise specified in the
applicable Prospectus Supplement, nonetheless have a preferential right to
receive payment of Senior Class Shortfall Accruals and interest which has
accrued thereon from amounts that would otherwise have been distributable to the
Subordinated Certificateholders. The Senior Certificateholders will otherwise
bear their proportionate share of any losses realized on the Trust Fund in
excess of the Subordinated Amount.
Unless otherwise specified in the related Prospectus Supplement, amounts
held from time to time in the Subordination Reserve Fund for a Series will be
held for the benefit of the Senior Certificateholders and Subordinated
Certificateholders of such Series until withdrawn from the Subordination Reserve
Fund as described below; provided, however, that the portion of the Initial
Deposit, if any, which has not been recovered by the Servicer and any
undistributed investment earnings attributable thereto will continue to be the
property of the Servicer and will ultimately be recoverable by the Servicer.
Amounts withdrawn from the Subordination Reserve Fund for a Series and
deposited in the Certificate Account for such Series will be charged first
against amounts in the Subordination Reserve Fund other than the Initial
Deposit, if any, for such Series, and thereafter against such Initial Deposit.
If so specified in the related Prospectus Supplement, if the Subordinated
Amount for a Series is reduced to zero and funds remain in the Subordination
Reserve Fund, an amount (the "Advance Reserve") equal to the lesser of (i) the
amount of the Initial Deposit and (ii) such funds remaining in the Subordination
Reserve Fund at the time the Subordinated Amount is reduced to zero, will remain
in the Subordination Reserve Fund and be available in certain circumstances for
withdrawal to make Advances.
Any amounts in the Subordination Reserve Fund for a Series on a
Distribution Date in excess of the Specified Subordination Reserve Fund Balance
on such date prior to the time the Subordinated Amount for such Series is
reduced to zero, and any amounts remaining in the Subordination Reserve Fund for
such Series upon termination of the trust created by the applicable Pooling and
Servicing Agreement, will be paid, unless otherwise specified in the applicable
Prospectus Supplement, to the Subordinated Certificateholders of such Series in
accordance with their pro rata ownership thereof, or, in the case of a Series
with respect to which an election has been made to treat the Trust Fund as a
REMIC, first to the Residual Certificateholders (to the extent of any portion of
the Initial Deposit, if any, and undistributed reinvestment earnings
attributable thereto), and second to the Subordinated Certificateholders of such
Series, in each case in accordance with their pro rata ownership thereof.
Amounts permitted to be distributed from the Subordination Reserve Fund for a
Series will no longer be subject to any claims or rights of the Senior
Certificateholders of such Series.
Funds in the Subordination Reserve Fund for a Series will be invested as
provided in the applicable Pooling and Servicing Agreement in certain types of
eligible investments ("Eligible Investments"). If an election has been made to
treat the Trust Fund (or one or more pools of segregated assets therein) as a
REMIC, no more than 30% of the income or gain of the Subordination Reserve Fund
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in any taxable year may be derived from the sale or other disposition of
investments held for less than three months in the Subordination Reserve Fund.
The earnings on such investments will be withdrawn and paid to the Subordinated
Certificateholders of such Series or to the holders of the Residual
Certificates, in the event that an election has been made to treat the Trust
Fund (or a pool of segregated assets therein) with respect to such Series as a
REMIC, in accordance with their respective interests. Investment income earned
on amounts held in the Subordination Reserve Fund will not be available for
distribution to the Senior Certificateholders or otherwise subject to any claims
or rights of the Senior Certificateholders.
Eligible Investments for monies deposited in the Subordination Reserve Fund
will be specified in the applicable Pooling and Servicing Agreement and, unless
otherwise provided in the applicable Prospectus Supplement, will mature no later
than the next Distribution Date.
Holders of Subordinated Certificates of a Series will not be required to
refund any amounts which have been properly distributed to them, regardless of
whether there are sufficient funds to distribute to Senior Certificateholders
the amounts to which they are entitled.
If specified in the related Prospectus Supplement, the Subordination
Reserve Fund may be funded in any other manner acceptable to each Rating Agency
and consistent with an election, if any, to treat the Trust Fund (or one or more
pools of segregated assets therein) for such Series as a REMIC, as will be more
fully described in such Prospectus Supplement.
Shifting Interest Certificates
If specified in the applicable Prospectus Supplement, the rights of the
holders of the Subordinated Certificates of a Series of Shifting Interest
Certificates to receive distributions with respect to the Mortgage Loans or
Contracts in the related Trust Fund will be subordinated to such rights of the
holders of the Senior Certificates of such Series to the extent described below,
except as otherwise set forth in such Prospectus Supplement. This subordination
is intended to enhance the likelihood of regular receipt by holders of Senior
Certificates of the full amount of scheduled monthly payments of principal and
interest due them and to provide limited protection to the holders of the Senior
Certificates against losses due to mortgagor or obligor defaults.
The protection afforded to the holders of Senior Certificates of such a
Series by the subordination feature described above will be effected by the
preferential right of such holders to receive, prior to any distribution being
made in respect of the related Subordinated Certificates, current distributions
on the related Mortgage Loans or Contracts of principal and interest due them on
each Distribution Date out of the funds available for distribution on such date
in the related Certificate Account and, to the extent described below, by the
right of such holders to receive future distributions on the Mortgage Loans or
Contracts that would otherwise have been payable to the holders of Subordinated
Certificates.
Losses realized on Liquidated Mortgage Loans or Liquidated Contracts (other
than certain Liquidated Mortgage Loans that are Special Hazard Mortgage Loans or
Liquidated Contracts that are Special Hazard Contracts as described below) will
be allocated to the holders of Subordinated Certificates through a reduction of
the amount of principal payments on the Mortgage Loans or Contracts to which
such holders are entitled. Prior to the Cross-Over Date, holders of Senior
Certificates of each Class entitled to a percentage of principal payments on the
related Mortgage Loans or Contracts will be entitled to receive, as part of
their respective Senior Class Distribution Amounts payable on each Distribution
Date in respect of each Mortgage Loan or Contract that became a Liquidated
Mortgage Loan or Liquidated Contract in the preceding month (subject to the
additional limitation described below applicable to Liquidated Mortgage Loans
that are Special Hazard Mortgage Loans or Liquidated Contracts that are Special
Hazard Contracts), their respective shares of the Scheduled Principal Balance of
each such Liquidated Mortgage Loan or Liquidated Contract, together with
interest accrued at the Pass-Through Rate for such Class, irrespective of
whether Net Liquidation Proceeds and Net Insurance Proceeds realized thereon are
sufficient to cover such amount. For a description of the full Senior Class
Distribution Amount payable to holders of Senior Certificates of each Series,
see "Description of the Certificates -- Distributions to Standard
Certificateholders --Shifting Interest Certificates."
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On each Distribution Date occurring on or after the Cross-Over Date,
holders of Senior Certificates of each Class entitled to a percentage of
principal payments will generally receive, as part of their respective Senior
Class Distribution Amounts, only their respective shares of the Net Liquidation
Proceeds and Net Insurance Proceeds actually realized in respect of the
applicable Liquidated Mortgage Loans or Liquidated Contracts after reimbursement
to the Servicer of any previously reimbursed Advances made in respect of such
Liquidated Mortgage Loans or Liquidated Contracts. See "Description of the
Certificates -- Distributions to Standard Certificateholders -- Shifting
Interest Certificates."
In the event that a Mortgage Loan becomes a Liquidated
Mortgage Loan or a Contract becomes a Liquidated Contract as a result of a
hazard not insured against under a Standard Hazard Insurance Policy (a "Special
Hazard Mortgage Loan" or "Special Hazard Contract"), the holders of Senior
Certificates of each Class entitled to a percentage of principal payments on the
related Mortgage Loans or Contracts will be entitled to receive in respect of
each Mortgage Loan or Contract which became a Special Hazard Mortgage Loan or
Special Hazard Contract in the preceding month, as part of their respective
Senior Class Distribution Amounts payable on each Distribution Date prior to the
Special Hazard Termination Date, their respective shares of the Scheduled
Principal Balance of such Mortgage Loan or Contract, together with interest
accrued at the applicable Pass-Through Rate, rather than their respective shares
of Net Liquidation Proceeds and Net Insurance Proceeds actually realized. The
Special Hazard Termination Date for a Series of Certificates will be the earlier
to occur of (i) the date on which cumulative net losses in respect of Special
Hazard Mortgage Loans or Special Hazard Contracts exceed the Special Hazard Loss
Amount specified in the applicable Prospectus Supplement or (ii) the Cross-Over
Date. Since the amount of the Special Hazard Loss Amount for a Series of
Certificates is expected to be significantly less than the amount of principal
payments on the Mortgage Loans or Contracts to which the holders of the
Subordinated Certificates of such Series are initially entitled (such amount
being subject to reduction, as described above, as a result of allocation of
losses on other Liquidated Mortgage Loans or Liquidated Contracts as well as
Special Hazard Mortgage Loans or Special Hazard Contracts), the holders of
Subordinated Certificates of such Series will bear the risk of losses in the
case of Special Hazard Mortgage Loans or Special Hazard Contracts to a lesser
extent than they will bear losses on other Liquidated Mortgage Loans or
Liquidated Contracts. Once the Special Hazard Termination Date has occurred,
holders of Senior Certificates of each Class entitled to payments of principal
will be entitled to receive, as part of their respective Senior Class
Distribution Amounts, only their respective shares of Net Liquidation Proceeds
and Net Insurance Proceeds realized on Special Hazard Mortgage Loans or Special
Hazard Contracts (less the total amount of delinquent installments in respect of
each Special Hazard Mortgage Loan or Special Hazard Contract that were
previously the subject of distributions to the holders of the Senior
Certificates and less the portion of such Net Liquidation Proceeds and Net
Insurance Proceeds allocable to interest). The outstanding principal balance or
notional amount of each such Class will, however, be reduced by such Class's
specified percentage of the Scheduled Principal Balance of each such Special
Hazard Mortgage Loan or Special Hazard Contract. See "Description of the
Certificates -- Distributions to Standard Certificateholders -- Shifting
Interest Certificates."
If the cumulative net losses on all Mortgage Loans or Contracts in a Trust
Fund that have become Special Hazard Mortgage Loans or Special Hazard Contracts
in the months prior to the month in which a Distribution Date occurs would
exceed the Special Hazard Loss Amount for a Series of Certificates, that portion
of the Senior Class Distribution Amount as of such Distribution Date for each
Class of Senior Certificates of such Series entitled to a percentage of
principal payments on the Mortgage Loans or Contracts in the related Trust Fund
attributable to Mortgage Loans or Contracts which became Special Hazard Mortgage
Loans or Special Hazard Contracts in the month preceding the month of such
Distribution Date will be calculated not on the basis of the Scheduled Principal
Balances of such Special Hazard Mortgage Loans or Special Hazard Contracts but
rather will be computed as an amount equal to the lesser of (a) such Class's
percentage, calculated as provided in the related Prospectus Supplement, of the
Scheduled Principal Balance of such Special Hazard Mortgage Loans or Special
Hazard Contracts and (b) the sum of (i) the excess of the Special Hazard Loss
Amount over the cumulative net losses on all Mortgage Loans or Contracts that
became Special Hazard Mortgage Loans or Special Hazard Contracts in months prior
to the month of such Distribution Date and (ii) the excess of (a) the product of
the percentage of principal payments to which such Class is entitled multiplied
by the aggregate Net Liquidation Proceeds and Net Insurance Proceeds (net of the
portion of each thereof allocable to interest) of the Mortgage Loans or
Contracts which became Special Hazard Mortgage Loans or Special Hazard Contracts
in the month preceding the month of such Distribution Date over (b) the total
amount of delinquent installments in respect of such Special Hazard
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Mortgage Loans or Special Hazard Contracts that were previously the subject of
distributions to such Class paid out of amounts otherwise distributable to the
holders of the related Subordinated Certificates.
Although the subordination feature described above is intended to enhance
the likelihood of timely payment of principal and interest to the holders of
Senior Certificates, shortfalls could result in certain circumstances. For
example, a shortfall in the payment of principal otherwise due the holders of
Senior Certificates could occur if losses realized on the Mortgage Loans or
Contracts in a Trust Fund were exceptionally high and were concentrated in a
particular month. See "Description of the Certificates -- Distributions to
Standard Certificateholders -- Shifting Interest Certificates" for a description
of the consequences of any shortfall of principal or interest.
The holders of Subordinated Certificates will not be required to refund any
amounts previously properly distributed to them, regardless of whether there are
sufficient funds on a subsequent Distribution Date to make a full distribution
to holders of each Class of Senior Certificates of the same Series.
Other Credit Enhancement
In addition to subordination as discussed above, credit enhancement may be
provided with respect to any Series of Certificates in any other manner which
may be described in the applicable Prospectus Supplement, including, but not
limited to, credit enhancement through an alterative form of subordination
and/or one or more of the methods described below.
Limited Guarantee
If so specified in the Prospectus Supplement with respect to a Series of
Certificates, credit enhancement may be provided in the form of a limited
guarantee issued by a guarantor named therein.
Letter of Credit
Alternative credit support with respect to a Series of Certificates may be
provided by the issuance of a letter of credit by the bank or financial
institution specified in the applicable Prospectus Supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of credit
issued with respect to a Series of Certificates will be set forth in the
Prospectus Supplement relating to such Series.
Pool Insurance Policies
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Depositor will obtain a pool insurance policy for the Mortgage
Loans or Contracts in the related Trust Fund. The pool insurance policy will
cover any loss (subject to the limitations described in a related Prospectus
Supplement) by reason of default to the extent a related Mortgage Loan or
Contract is not covered by any primary mortgage insurance policy. The amount and
terms of any such coverage will be set forth in the Prospectus Supplement.
Special Hazard Insurance Policies or Other Forms of Support for Special
Hazard Losses
If so specified in the applicable Prospectus Supplement, for each Series of
Certificates as to which a pool insurance policy is provided, the Depositor will
also obtain a special hazard insurance policy for the related Trust Fund in the
amount set forth in such Prospectus Supplement. The special hazard insurance
policy will, subject to the limitations described in the applicable Prospectus
Supplement, protect against loss by reason of damage to Mortgaged Properties or
Manufactured Homes caused by certain hazards not insured against under the
standard form of hazard insurance policy for the respective states in which the
Mortgaged Properties or Manufactured Homes are located. The amount and terms of
any such coverage will be set forth in the Prospectus Supplement.
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Surety Bonds
If so specified in the Prospectus Supplement relating to a Series of
Certificates, credit support with respect to one or more Classes of Certificates
of a Series may be provided by the issuance of a surety bond issued by a
financial guarantee insurance company specified in the applicable Prospectus
Supplement. The coverage, amount and frequency of any reduction in coverage
provided by a surety bond will be set forth in the Prospectus Supplement
relating to such Series.
Fraud Coverage
If so specified in the applicable Prospectus Supplement, losses resulting
fraud, dishonesty or misrepresentation in connection with the origination or
sale of the Mortgage Loans or Contracts may be covered to a limited extent by
representations and warranties to the effect that no such fraud, dishonesty or
misrepresentation had occurred, by a reserve fund, letter of credit, or other
method. The amount and terms of any such coverage will be set forth in the
Prospectus Supplement.
Mortgagor Bankruptcy Bond
If so specified in the applicable Prospectus Supplement, losses resulting
from a bankruptcy proceeding relating to a mortgagor or obligor affecting the
Mortgage Loans or Contracts in a Trust Fund with respect to a Series of
Certificates will be covered under a mortgagor bankruptcy bond (or any other
instrument that will not result in a downgrading of the rating of the
Certificates of a Series by the Rating Agency that rated such Series). Any
mortgagor bankruptcy bond or such other instrument will provide for coverage in
an amount meeting the criteria of the Rating Agency rating the Certificates of
the related Series, which amount will be set forth in the related Prospectus
Supplement. The amount and terms of any such coverage will be set forth in the
Prospectus Supplement.
Other Insurance, Guarantees and Similar Instruments or Agreements
If specified in the related Prospectus Supplement, a Trust Fund may include
in lieu of some or all of the foregoing or in addition thereto third party
guarantees, and other arrangements for maintaining timely payments or providing
additional protection against losses on the assets included in such Trust Fund,
paying administrative expenses, or accomplishing such other purpose as may be
described in the Prospectus Supplement. The Trust Fund may include a guaranteed
investment contract or reinvestment agreement pursuant to which funds held in
one or more accounts will be invested at a specified rate. If any Class of
Certificates has a floating interest rate, or if any of the Mortgage Loans or
Contracts in the related Trust Fund has a floating interest rate, the Trust Fund
may include an interest rate swap contract, an interest rate cap agreement or
similar contract providing limited protection against interest rate risks.
PREPAYMENT AND YIELD CONSIDERATIONS
Pass-Through Rates and Interest Rates
Any Class of Certificates of a Series may have a fixed Pass-Through Rate or
Interest Rate, or a Pass-Through Rate or Interest Rate which varies based on
changes in an index or based on changes with respect to the underlying Mortgage
Loans or Contracts (such as, for example, varying on the basis of changes in the
weighted average Net Mortgage Rate or Net Contract Rate of the underlying
Mortgage Loans or Contracts) or may receive interest payments with respect to
the underlying Mortgage Loans or Contracts in such other manner specified in the
applicable Prospectus Supplement.
The Prospectus Supplement for each Series will specify the range and the
weighted average of the Mortgage Rates or Contract Rates and Net Mortgage Rates
or Net Contract Rates for the Mortgage Loans or Contracts underlying such Series
as of the Cut-Off Date. Unless otherwise specified in the related Prospectus
Supplement, each monthly interest payment on a Mortgage Loan or Contract will
generally be calculated as the product of one-twelfth of the applicable Mortgage
Rate or Contract Rate at the time of such calculation and the then unpaid
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principal balance on such Mortgage Loan or Contract. The Net Mortgage Rate or
Net Contract Rate with respect to each Mortgage Loan or Contract will be
similarly calculated on a loan-by-loan basis, by subtracting from the applicable
Mortgage Rate or Contract Rate, the Fixed Retained Yield, if any, payable to the
Depositor or other person or entity specified in the Prospectus Supplement and
any Servicing Fee applicable to each Mortgage Loan or Contract. If the Trust
Fund includes adjustable-rate Mortgage Loans or Contracts or includes Mortgage
Loans or Contracts with different Net Mortgage Rates or Net Contract Rates, the
weighted average Net Mortgage Rate or Net Contract Rate may vary from time to
time as set forth below. See "The Trust Funds." The Prospectus Supplement for a
Series will also specify the initial Pass-Through Rate or Interest Rate for each
Class of Certificates of such Series having a Pass-Through Rate or Interest Rate
and will specify whether each such Pass-Through Rate or Interest Rate is fixed
or is variable.
The Net Mortgage Rate or Net Contract Rate for any adjustable rate Mortgage
Loan or Contract will change with any changes in the index specified in the
related Prospectus Supplement on which such Mortgage Rate or Contract Rate
adjustments are based, subject to any applicable periodic or aggregate caps or
floors on the related Mortgage Rate or Contract Rate or other limitations
described in the related Prospectus Supplement. The weighted average Net
Mortgage Rate or Net Contract Rate with respect to any Series may vary due to
changes in the Net Mortgage Rates or Net Contract Rates of adjustable rate
Mortgage Loans or Contracts, to the timing of the Mortgage Rate or Contract Rate
readjustments of such Mortgage Loans or Contracts and to different rates of
payment of principal of fixed or adjustable rate Mortgage Loans or Contracts
bearing different Mortgage Rates or Contract Rates.
If the Trust Fund for a Series includes adjustable rate Mortgage Loans or
Contracts, any limitations on the periodic changes in a mortgagor's or obligor's
monthly payment, any limitations on the adjustments to the Net Mortgage Rates or
Mortgage Rates or to the Net Contract Rates or Contract Rates, any provision
that could result in Deferred Interest and the effects, if any, thereof on the
yield on Certificates of the related Series will be discussed in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, no
distribution of principal and only a partial distribution of interest will be
made to Certificateholders with respect to a negatively amortizing Mortgage Loan
or Contract. Distribution of the portion of scheduled interest at the applicable
Net Mortgage Rate or Net Contract Rate representing Deferred Interest with
respect to such Mortgage Loan or Contract will be passed through to the
Certificateholders on the Distribution Date following the Due Date on which it
is received. Such Deferred Interest will bear interest at the Net Mortgage Rate
or Net Contract Rate for such Mortgage Loan or Contract. For federal income tax
purposes, Deferred Interest may constitute interest income to the Trust Fund and
to Certificateholders at the time that it accrues, rather than at the time that
it is paid. See "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for Certificates as to Which No REMIC Election Is Made -- Deferred
Interest," "-- Federal Income Tax Consequences for REMIC Certificates --
Taxation of Regular Certificates -- Deferred Interest" and "-- Taxation of
Residual Certificates -- Deferred Interest."
Scheduled Delays in Distributions
At the date of initial issuance of the Certificates of each Series offered
hereby, the initial purchasers of a Class of Certificates (other than certain
Classes of Residual Certificates) will be required to pay accrued interest at
the applicable Pass-Through Rate or Interest Rate for such Class from the
Cut-Off Date for such Series to, but not including the date of issuance. With
respect to Standard Certificates, the effective yield to Certificateholders will
be below the yield otherwise produced by the applicable Pass-Through Rate
because while interest will accrue at such Pass-Through Rate from the first day
of each month through the last day of such month (unless otherwise specified in
the related Prospectus Supplement), principal and interest distributions with
respect to such month will not be made until the 25th day (or if such 25th day
is not a business day, the business day immediately following such 25th day) of
the month following the month of accrual (or until such other Distribution Date
specified in the applicable Prospectus Supplement). If so specified in the
related Prospectus Supplement, a Class of Multi-Class Certificates may be
entitled to distributions on each Distribution Date of interest accrued during a
period (an "Interest Accrual Period" specified in such Prospectus Supplement
ending on such Distribution Date or ending on a date preceding such Distribution
Date. In the latter case the effective yield to such Certificateholders will be
below the yield otherwise produced by the applicable initial public offering
prices and Interest Rates because (i) on the first Distribution Date the time
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period upon which interest payable is calculated will be less than the time
elapsed since the commencement of accrual of interest, (ii) the interest that
accrues during the Interest Accrual Period will not be paid until a date
following such Interest Accrual Period specified in the related Prospectus
Supplement, and (iii) during each Interest Accrual Period following the first
Interest Accrual Period, in the case of a Class of Multi-Class Certificates
currently receiving distributions in reduction of Stated Amount, interest is
based upon a Stated Amount which is less than the Stated Amount of such
Certificates actually outstanding, since the distribution in reduction of Stated
Amount made on the following Distribution Date is deemed to have been made, for
interest accrual purposes only, at the end of the preceding Interest Accrual
Period. The Prospectus Supplement for each Series of Certificates will set forth
the nature of any scheduled delays in distribution and the impact on the yield
of such Certificates.
Interest Shortfalls Due to Principal Prepayments
When a Mortgage Loan or Contract is prepaid in full, the mortgagor or
obligor pays interest on the amount prepaid only to the date of prepayment and
not thereafter. Similarly, Liquidation Proceeds and Insurance Proceeds are also
likely to include interest only to the time of payment. When a Mortgage Loan or
Contract is prepaid in part, and such prepayment is applied as of a date other
than the Due Date occurring in the month of receipt or the Due Date occurring in
the month following the month of receipt, the mortgagor or obligor pays interest
on the amount prepaid only to the date of prepayment and not thereafter. The
effect of the foregoing is to reduce the aggregate amount of interest which
would otherwise be passed through to Certificateholders if such Mortgage Loan or
Contract were outstanding, or if such partial prepayment were applied, on the
succeeding Due Date. To mitigate this reduction in yield, the Pooling and
Servicing Agreement relating to a Series will provide, unless otherwise
specified in the applicable Prospectus Supplement, that with respect to any
principal prepayment or liquidation of any Mortgage Loan or Contract underlying
the Certificates of such Series, the Servicer will pay into the Certificate
Account for such Series to the extent funds are available for such purpose from
the related aggregate Servicing Fees (or portion thereof as specified in the
related Prospectus Supplement) which the Servicer is entitled to receive
relating to mortgagor or obligor payments or other recoveries distributed on the
related Distribution Date, such amount, if any, as may be necessary to assure
that the amount paid into the Certificate Account with respect to such Mortgage
Loan or Contract includes an amount equal to interest at the Net Mortgage Rate
or Net Contract Rate for such Mortgage Loan or Contract for the period from the
date of such prepayment or liquidation to but not including the next Due Date.
See "Servicing of the Mortgage Loans and Contracts --Adjustment to Servicing
Compensation in Connection with Prepaid and Liquidated Mortgage Loans and
Contracts."
Weighted Average Life of Certificates
Weighted average life of a Certificate refers to the average amount of time
that will elapse from the date of issuance of the Certificate until each dollar
in reduction of the principal amount or Stated Amount of such Certificate is
distributed to the investor. The weighted average life and the yield to maturity
of any Class of the Certificates of a Series will be influenced by, among other
things, the rate at which principal on the Mortgage Loans or Contracts included
in the Mortgage Pool or Contract Pool for such Certificate is paid, which is
determined by scheduled amortization and prepayments (for this purpose, the term
"prepayments" includes prepayments and liquidations due to default, casualty,
condemnation and the like).
The Mortgage Loans or Contracts may be prepaid in full or in part at any
time. Unless otherwise specified in the applicable Prospectus Supplement or as
described in the following paragraph, no Mortgage Loan or Contract will provide
for a prepayment penalty and all fixed rate Mortgage Loans or Contracts will
contain due-on-sale clauses permitting the holder to accelerate the maturity of
the Mortgage Loan or Contract upon conveyance of the Mortgaged Property or
Manufactured Home.
Some of the Mortgage Loans may call for Balloon Payments. Balloon Payments
involve a greater degree of risk than fully amortizing loans because the ability
of the borrower to make a Balloon Payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property. The
ability of a borrower to accomplish either of these goals will be affected by a
number of factors, including the level of available mortgage rates at the time
of the attempted sale or refinancing, the borrower's equity in the related
Mortgaged Property, the financial condition of the borrower and operating
history of the related Mortgaged Property, tax laws, prevailing economic
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conditions and the availability of credit for commercial real estate projects
generally.
Some of the Mortgage Loans included in the Trust Fund may, in the event one
or more are required to be repurchased or otherwise removed from the Trust Fund,
require the payment of a release premium.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The Prospectus Supplement for each Series which
includes more than one Class or Subclass of Multi-Class Certificates will
describe one or more such prepayment standards or models and will contain tables
setting forth the weighted average life of each such Class or Subclass and the
percentage of the original aggregate Stated Amount of each such Class or
Subclass that would be outstanding on specified Distribution Dates for such
Series based on the assumptions stated in such Prospectus Supplement, including
assumptions that prepayments on the Mortgage Loans or Contracts are made at
rates corresponding to various percentages of the prepayment standard or model
specified in the related Prospectus Supplement.
There is, however, no assurance that prepayment of the Mortgage Loans or
Contracts underlying a Series of Certificates will conform to any level of the
prepayment standard or model specified in the related Prospectus Supplement. A
number of economic, geographic, social and other factors may affect prepayment
experience. These factors may include homeowner mobility, economic conditions,
changes in mortgagor's or obligor's housing needs, job transfers, unemployment,
mortgagor's or obligor's net equity in the properties securing the mortgages or
contracts, servicing decisions, enforceability of due-on-sale clauses , market
interest rates, the magnitude of related taxes, and the availability of funds
for refinancing. In general, however, if prevailing interest rates fall
significantly below the Mortgage Rates or Contract Rates on the Mortgage Loans
or Contracts underlying a Series of Certificates, the prepayment rates of such
Mortgage Loans or Contracts are likely to be higher than if prevailing rates
remain at or above the rates borne by such Mortgage Loans or Contracts. It
should be noted that Certificates of a Series may evidence an interest in a
Trust Fund with different Mortgage Rates or Contract Rates. Accordingly, the
prepayment experience of such Certificates will to some extent be a function of
the mix of Mortgage Rates or Contract Rates of the Mortgage Loans or Contracts.
In addition, the terms of the Pooling and Servicing Agreement will require the
Servicer to enforce any due-on-sale clause to the extent specified therein. See
"Servicing of the Mortgage Loans and Contracts -- Enforcement of Due-on-Sale
Clauses; Realization Upon Defaulted Mortgage Loans and Contracts" and "Certain
Legal Aspects of the Mortgage Loans and Contracts --Due-On-Sale Clauses" for a
description of certain provisions of each Pooling and Servicing Agreement and
certain legal developments that may affect the prepayment experience on the
Mortgage Loans or Contracts.
A lower rate of principal prepayments than anticipated would negatively
affect the total return to investors in any Certificates of a Series that are
offered at a discount to their principal amount or, if applicable, their parity
price, and a higher rate of principal prepayments than anticipated would
negatively affect the total return to investors in the Certificates of a Series
that are offered at a premium to their principal amount or, if applicable, their
parity price. Parity price is the price at which a Certificate will yield its
coupon, after giving effect to any payment delay. In addition, the yield to
investors in a Class of Certificates which bears interest at a variable Interest
Rate or at a variable Pass-Through Rate, will also be affected by changes in the
index on which any such variable Interest Rate, or variable Pass-Through Rate is
based. Changes in the index may not correlate with changes in prevailing
mortgage interest rates or financing rates for manufactured housing, and the
effect, if any, thereof on the yield of the Certificates will be discussed in
the related Prospectus Supplement. The yield on certain types of Certificates
may be particularly sensitive to prepayment rates, and further information with
respect to yield on such Certificates will be included in the applicable
Prospectus Supplement.
At the request of the mortgagor or obligor, the Servicer may refinance the
Mortgage Loans or Contracts in any Trust Fund by accepting prepayments thereon
and making new loans secured by a Mortgage on the same property or a security
interest in the same Manufactured Home. Upon such refinancing, the new loans
will not be included in the Trust Fund. A mortgagor or obligor may be legally
entitled to require the Servicer to allow such a refinancing. Any such
refinancing will have the same effect as a prepayment in full of the related
Mortgage Loan or Contract.
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The Depositor may be obligated and the applicable Unaffiliated Seller will
be obligated, under certain circumstances, to repurchase certain of the Mortgage
Loans or Contracts. In addition, the terms of certain insurance policies
relating to the Mortgage Loans or Contracts may permit the applicable insurer to
purchase delinquent Mortgage Loans or Contracts. The proceeds of any such
repurchase will be deposited in the related Certificate Account and such
repurchase will have the same effect as a prepayment in full of the related
Mortgage Loan or Contract. See "The Trust Funds -- Assignment of the Mortgage
Loans and Contracts." In addition, if so specified in the applicable Prospectus
Supplement, the Servicer will have the option to purchase all, but not less than
all, of the Mortgage Loans or Contracts in any Trust Fund under the limited
conditions specified in such Prospectus Supplement. For any Series of
Certificates for which an election has been made to treat the Trust Fund (or one
or more segregated pools of assets therein) as a REMIC, any such purchase may be
effected only pursuant to a "qualified liquidation," as defined in Code Section
86OF(a)(4)(A). See "The Pooling and Servicing Agreement --Termination; Purchase
or other Disposition of Mortgage Loans and Contracts."
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement,
substantially all of the net proceeds from the sale of each Series of
Certificates will be used by the Depositor for the purchase of the Mortgage
Loans or Contracts represented by the Certificates of such Series or to
reimburse amounts previously used to effect such a purchase, the costs of
carrying the related Mortgage Loans or Contracts until the sale of the
Certificates and other expenses connected with pooling the related Mortgage
Loans or Contracts and issuing the Certificates.
THE DEPOSITOR
Prudential Securities Secured Financing Corporation, formerly known as P-B
Secured Financing Corporation (the "Depositor"), was incorporated in the State
of Delaware on August 26, 1988 as a wholly-owned, limited purpose finance
subsidiary of Prudential Securities Group Inc. (a wholly-owned indirect
subsidiary of The Prudential Insurance Company of America). The Depositor's
principal executive offices are located at 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
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Supplement, all or a representative sample of the Mortgage Loans comprising the
Mortgage Pool for a Series will be reviewed by or on behalf of the Depositor to
determine compliance with such underwriting procedures and standards and
compliance with other requirements for inclusion in the related Mortgage Pool.
Except as otherwise set forth in the related Prospectus Supplement, it is
expected that each originator of Mortgage Loans will have applied, in a standard
procedure which complies with applicable federal and state law and regulations,
underwriting procedures that are intended to evaluate the mortgagor's credit
standing and repayment ability, and the value and adequacy of the Mortgaged
Property as collateral. A prospective mortgagor will have been required to fill
out an application designed to provide to the original lender pertinent credit
information. As part of the description of the mortgagor's financial condition,
the mortgagor will have been required to provide a current balance sheet
describing assets and liabilities and a statement of income and expenses, as
well as an authorization to apply for a credit report which summarizes the
mortgagor's credit history with local merchants and lenders and any record of
bankruptcy. In addition, an employment verification will have been obtained in
the case of individual borrowers which reports the mortgagor's current salary,
length of such employment and whether it was expected that the mortgagor will
continue such employment in the future. If a prospective borrower was
self-employed, the mortgagor will have been required to submit copies of signed
tax returns. The mortgagor may also have been required to authorize verification
of deposits at financial institutions where the mortgagor has demand or savings
accounts.
In determining the adequacy of the Mortgaged Property as collateral, except
in the instance of certain small second loan applications, an appraisal will
have been made of each Mortgaged Property considered for financing. Each
appraiser will have been selected in accordance with predetermined guidelines
established by or acceptable to the Unaffiliated Seller for appraisers. The
appraiser will have been required to inspect the Mortgaged Property and verify
that it was in good condition and that construction, if new, has been completed.
The appraisal is based on the market value of the comparable properties, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the Mortgaged Property.
In determining the adequacy of the Mortgaged Property as collateral, the
originator shall, in the case of second or more junior loans, look at the
combined Loan-to-Value Ratio in determining whether the Mortgage Loan exceeds
lending guidelines. Furthermore, when considering such second or more junior
loans, confirm that payment has been timely made on the senior liens.
Once all applicable employment, credit and property information was
received, a determination would have been made as to whether the prospective
mortgagor had sufficient monthly income available (i) to meet its monthly
obligations on the Mortgage Loan (determined on the basis of the monthly
payments due in the year of origination and taking into consideration, payments
due on any senior liens) and other expenses related to the Mortgaged Property
(such as property taxes and hazard insurance) and (ii) in the case of individual
mortgagors, to meet monthly housing expenses and other financial obligations and
monthly living expenses. When two individuals cosign loan documents, the income
and expenses of both individuals may be included in the computation.
Underwriting guidelines generally similar to traditional underwriting guidelines
used by FNMA and FHLMC which were in effect at the time of origination of each
Mortgage Loan will generally have been used, except that the ratios at
origination of the amounts described in clauses (i) and (ii) above to the
applicant's stable monthly gross income may exceed in certain cases the then
applicable FNMA and FHLMC guidelines. With respect to a vacation or second home,
no income derived from the property will have been considered for underwriting
purposes.
Other credit considerations may cause departure from the traditional
guidelines. If the Loan-to-Value Ratio and/or term of the Mortgage Loan is less
than a percentage specified in the related Prospectus Supplement, certain
aspects of review relating to monthly income assets may be foregone and standard
ratios of monthly or total expenses to gross income may not be applied. The
Depositor may permit an Unaffiliated Seller's underwriting standards to
otherwise vary in certain cases to the extent specified in the related
Prospectus Supplement.
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the mortgagor but rather must look solely to the property for
repayment in the event of foreclosure. The Depositor will require that the
Unaffiliated Sellers represent and warrant that underwriting standards applied
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to each Mortgage Loan purchased by the Depositor from such Unaffiliated Seller
(including Mortgage Loans secured by Mortgaged Properties located in
anti-deficiency states) require that the value of the property being financed,
as indicated by the appraisal, currently supports and is anticipated to support
in the future the outstanding principal balance of such Mortgage Loan.
Certain of the types of loans which may be included in the Mortgage Pools
are recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such Mortgage Loans may
provide for escalating or variable payments by the mortgagor. These types of
Mortgage Loans are underwritten on the basis of a judgment that mortgagors will
have the ability to make larger monthly payments in subsequent years. In some
instances, however, a mortgagor's income may not be sufficient to make loan
payments as such payments increase.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the real estate market should experience an overall
decline in property values such that the outstanding principal balances of the
Mortgage Loans, and any secondary financing on the Mortgaged Properties, in a
particular Mortgage Pool become equal to or greater than the value of the
Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In addition, adverse economic conditions (which may or may not affect
real property values) may affect the timely payment by mortgagors of scheduled
payments of principal and interest on the Mortgage Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to any
Mortgage Pool. To the extent that such losses are not covered by subordination
provisions, insurance policies or other credit support, such losses will be
borne, at least in part, by the holders of the Certificates of the related
series.
Contracts
The underwriting guidelines utilized in connection with the origination of
the Contracts underlying a Series of Certificates will be described in the
related Prospectus Supplement.
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS
The following summaries describe certain provisions of the Pooling and
Servicing Agreements which relate to Trust Funds comprised of Mortgage Loans or
Contracts. The summaries do not purport to be complete and are subject to and
are qualified in their entirety by reference to, all the provisions of the
Pooling and Servicing Agreement for each Series and the related Prospectus
Supplement, which may further modify the provisions summarized below. The
provisions of each Pooling and Servicing Agreement will vary depending upon the
nature of the Certificates to be issued thereunder and the nature of the related
Trust Fund. Each Pooling and Servicing Agreement executed and delivered with
respect to each Series will be filed with the Commission as an exhibit to a
Current Report on Form 8-K promptly after issuance of the Certificates of such
Series.
The Servicer
The Servicer under each Pooling and Servicing Agreement will be named in
the related Prospectus Supplement. The entity serving as Servicer may be an
affiliate of the Depositor and may have other normal business relationships with
the Depositor or the Depositor's affiliates. The Servicer with respect to each
Series will service the Mortgage Loans or Contracts contained in the Trust Fund
for such Series. For Trust Funds comprised of Mortgage Loans, the Servicer will
be a seller/servicer approved by FNMA or FHLMC. Any Servicer may delegate its
servicing responsibilities to one or more sub-servicers (each a "Sub-Servicer"),
but will not be relieved of its liabilities with respect thereto.
The Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
related Pooling and Servicing Agreement. An uncured breach of such a
representation or warranty that in any respect materially and adversely affects
the interests of the Certificateholders will constitute an Event of Default by
the Servicer under the related Pooling and Servicing Agreement. See "The Pooling
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and Servicing Agreement -- Events of Default -- Mortgage Loans or Contracts" and
" -- Rights Upon Event of Default -- Mortgage Loans or Contracts."
Payments on Mortgage Loans and Contracts
The Servicer or the Trustee will, as to each Series of Certificates,
establish and maintain, or cause to be established and maintained, a separate
trust account or accounts in the name of the Trustee (collectively, the
"Certificate Account"), which must be maintained with a depository institution
(the "Certificate Account Depository") acceptable to the Rating Agency rating
the Certificates of such Series. Such account or accounts will be maintained
with a Certificate Account Depository (i) whose long-term debt obligations at
the time of any deposit therein are rated not lower than the rating on the
related Series of Certificates at the time of the initial issuance thereof, (ii)
the deposits in which are insured by the Federal Deposit Insurance Corporation
(the "FDIC") through either the Bank Insurance Fund or the Savings Association
Insurance Fund (to the limit established by the FDIC) and the uninsured deposits
in which accounts are otherwise secured such that, as evidenced by an opinion of
counsel, the Trustee for the benefit of the Certificateholders of the related
Series has a claim with respect to funds in the Certificate Account for such
Series, or a perfected security interest in any collateral (which shall be
limited to Eligible Investments) securing such funds, that is superior to the
claims of any other depositor or general creditor of the Certificate Account
Depository with which the Certificate Account is maintained or (iii) which is
otherwise acceptable to the Rating Agency or Agencies.
A Certificate Account may be maintained as an interest bearing or a
non-interest bearing account, or the funds held therein may be invested pending
each succeeding Distribution Date in certain Eligible Investments. Any such
Eligible Investments shall mature not later than the business day preceding the
next Distribution Date and no such investment shall be sold or disposed of prior
to the maturity date of such Eligible Investment; however, in the event that an
election has been made to treat the Trust Fund (or a segregated pool of assets
therein) with respect to a Series as a REMIC, no such Eligible Investments will
be sold or disposed of at a gain prior to maturity unless the Servicer has
received an opinion of counsel or other evidence satisfactory to it that such
sale or disposition will not cause the Trust Fund (or segregated pool of assets)
to be subject to the tax on "prohibited transactions" imposed by Code Section
860F(a)(1), otherwise subject the Trust Fund (or segregated pool of assets) to
tax, or cause the Trust Fund (or segregated pool of assets) to fail to qualify
as a REMIC. Unless otherwise provided in the related Prospectus Supplement, any
interest or other income earned on funds in the Certificate Account will be paid
to the Servicer or its designee as additional servicing compensation. All losses
from any such investment will be deposited by the Servicer into the Certificate
Account immediately as realized. If permitted by the Rating Agency or Agencies
and so specified in the related Prospectus Supplement, a Certificate Account may
contain funds relating to more than one Series of Certificates.
Each Sub-Servicer servicing a Mortgage Loan or Contract will be required by
the Servicer to establish and maintain one or more separate accounts which may
be interest bearing and which comply with the standards with respect to
Certificate Accounts set forth above (collectively, the "Sub-Servicing
Account"). Each Sub-Servicer will be required to credit to the related
Sub-Servicing Account on a daily basis the amount of all proceeds of Mortgage
Loans or Contracts received by the Sub-Servicer, less its servicing
compensation. The Sub-Servicer shall remit to the Servicer by wire transfer of
immediately available funds all funds held in the Sub-Servicing Account with
respect to each Mortgage Loan or Contract on a monthly remittance date which
shall occur on or before two business days preceding the Determination Date
occurring in such month.
The Servicer will deposit in the Certificate Account for each Series of
Certificates any amounts representing scheduled payments of principal and
interest on the Mortgage Loans or Contracts due after the applicable Cut-Off
Date but received prior thereto, and, on a dally basis, the following payments
and collections received or made by it with respect to the Mortgage Loans or
Contracts subsequent to the applicable Cut-Off Date (other than payments due on
or before the Cut-Off Date):
(i) all payments on account of principal, including prepayments, and
interest, net of any portion thereof retained by a Sub-Servicer as its
servicing compensation and net of any Fixed Retained Yield;
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(ii) all amounts received by the Servicer in connection with the
liquidation of defaulted Mortgage Loans or Contracts or property acquired
in respect thereof, whether through foreclosure sale or otherwise,
including payments in connection with defaulted Mortgage Loans or Contracts
received from the mortgagor or obligor other than amounts required to be
paid to the mortgagor or obligor pursuant to the terms of the applicable
Mortgage Loan or Contract or otherwise pursuant to law ("Liquidation
Proceeds"), and further reduced by expenses incurred in connection with
such liquidation, other reimbursed servicing costs associated with such
liquidation, certain amounts applied to the restoration, preservation or
repair of the Mortgaged Property or Manufactured Home, any unreimbursed
Advances with respect to such Mortgage Loan or Contract and, in the
discretion of the Servicer, but only to the extent of the amount permitted
to be withdrawn from the Certificate Account, any unpaid Servicing Fees, in
respect of the related Mortgage Loans or Contracts or the related Mortgaged
Properties or Manufactured Homes ("Net Liquidation Proceeds");
(iii) all proceeds received by the Servicer under any title, hazard or
other insurance policy covering any such Mortgage Loan or Contract
("Insurance Proceeds"), other than proceeds to be applied to the
restoration or repair of the related Mortgaged Property or Manufactured
Home or released to the mortgagor or obligor in accordance with the
applicable Pooling and Servicing Agreement, and further reduced by expenses
incurred in connection with collecting on related insurance policies, any
unreimbursed Advances with respect to such Mortgage Loan or Contract and in
the discretion of the Servicer, but only to the extent of the amount
permitted to be withdrawn from the Certificate Account, any unpaid
Servicing Fees, in respect of such Mortgage Loan or Contract ("Net
Insurance Proceeds");
(iv) all amounts required to be deposited therein from any related
reserve fund, and amounts available under any other form of credit
enhancement applicable to such Series;
(v) all Advances made by the Servicer;
(vi) all amounts withdrawn from Buy-Down Funds or other funds
described in the related Prospectus Supplement, if any, with respect to the
Mortgage Loans or Contracts, in accordance with the terms of the respective
agreements applicable thereto;
(vii) all Repurchase Proceeds; and
(viii) all other amounts required to be deposited therein pursuant to
the applicable Pooling and Servicing Agreement.
Notwithstanding the foregoing, the Servicer will be entitled, at its
election, either (a) to withhold and pay itself the applicable Servicing Fee
and/or to withhold and pay to the owner thereof any Fixed Retained Yield from
any payment or other recovery on account of interest as received and prior to
deposit in the Certificate Account or (b) to withdraw the applicable Servicing
Fee and/or any Fixed Retained Yield from the Certificate Account after the
entire payment or recovery has been deposited therein; however, with respect to
each Trust Fund (or a segregated pool of assets therein) as to which a REMIC
election has been made, the Servicer will, in each instance, withhold and pay to
the owner thereof the Fixed Retained Yield prior to deposit of the related
payment or recovery in the Certificate Account.
Advances, amounts withdrawn from any reserve fund, and amounts available
under any other form of credit enhancement will be deposited in the Certificate
Account not later than the business day preceding the Distribution Date on which
such amounts are required to be distributed. All other amounts will be deposited
in the Certificate Account not later than the business day next following the
day of receipt and posting by the Servicer.
If the Servicer deposits in the Certificate Account for a Series any amount
not required to be deposited therein, it may at any time withdraw such amount
from such Certificate Account.
The Servicer is permitted, from time to time, to make withdrawals from the
Certificate Account for the following purposes, to the extent permitted in the
applicable Pooling and Servicing Agreement:
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(i) to reimburse itself for Advances;
(ii) to reimburse itself from Liquidation Proceeds for expenses
incurred by the Servicer in connection with the liquidation of any
defaulted Mortgage Loan or Contract or property acquired in respect thereof
and for amounts expended in good faith in connection with the restoration
of damaged property, to reimburse itself from Insurance Proceeds for
expenses incurred by the Servicer in connection with the restoration,
preservation or repair of the related Mortgage Properties or Manufactured
Homes and expenses incurred in connection with collecting on the related
insurance policies and, to the extent that Liquidation Proceeds or
Insurance Proceeds after such reimbursement are in excess of the unpaid
principal balance of the related Mortgage Loans or Contracts together with
accrued and unpaid interest thereon at the applicable Net Mortgage Rate or
Net Contract Rate through the last day of the month in which such
Liquidation Proceeds or Insurance Proceeds were received, to pay to itself
out of such excess the amount of any unpaid Servicing Fees and any
assumption fees, late payment charges or other mortgagor or obligor charges
on the related Mortgage Loans or Contracts;
(iii) to pay to itself the applicable Servicing Fee and/or pay the
owner thereof any Fixed Retained Yield, in the event the Servicer is not
required, and has elected not, to withhold such amounts out of any payment
or other recovery with respect to a particular Mortgage Loan or Contract
prior to the deposit of such payment or recovery in the Certificate
Account;
(iv) to reimburse itself and the Depositor for certain expenses
(including taxes paid on behalf of the Trust Fund) incurred by and
recoverable by or reimbursable to it or the Depositor, as the case may be;
(v) to pay to the Depositor or the Unaffiliated Seller with respect to
each Mortgage Loan or Contract or property acquired in respect thereof that
has been repurchased by the Depositor or the Unaffiliated Seller, as the
case may be, all amounts received thereon and not distributed as of the
date as of which the purchase price of such Mortgage Loan or Contract was
determined;
(vi) to pay itself any interest earned on or investment income earned
with respect to funds in the Certificate Account (all such interest or
income to be withdrawn not later than the next Distribution Date);
(vii) to make withdrawals from the Certificate Account in order to
make distributions to Certificateholders; and
(viii) to clear and terminate the Certificate Account.
The Servicer will be authorized to appoint a paying agent (the "Paying
Agent") to make distributions, as agent for the Servicer, to Certificateholders
of a Series. If the Paying Agent for a Series is the Trustee of such Series,
such Paying Agent will be authorized to make withdrawals from the Certificate
Account in order to make distributions to Certificateholders. If the Paying
Agent for a Series is not the Trustee for such Series, the Servicer will, prior
to each Distribution Date, deposit in immediately available funds in an account
designated by the Paying Agent the amount required to be distributed to the
Certificateholders on such Distribution Date.
The Servicer will cause any Paying Agent which is not the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
agrees with the Trustee that such Paying Agent will:
(1) hold all amounts deposited with it by the Servicer for
distribution to Certificateholders in trust for the benefit of
Certificateholders until such amounts are distributed to Certificateholders
or otherwise disposed of as provided in the applicable Pooling and
Servicing Agreement;
(2) give the Trustee notice of any default by the Servicer in the
making of such deposit; and
(3) at any time during the continuance of any such default, upon
written request of the Trustee, forthwith pay to the Trustee all amounts
held in trust by such Paying Agent.
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Advances and Limitations Thereon
Unless otherwise provided in the applicable Prospectus Supplement, the
Servicer will advance on or before the business day preceding each Distribution
Date its own funds (an "Advance") or funds held in the Certificate Account for
future distribution or withdrawal and which are not included in the Pool
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of payments of principal and interest which were due during the
related Due Period, that were delinquent on the Determination Date and were not
advanced by any Sub-Servicer, to the extent that the Servicer determines that
such advances will be reimbursable from late collections, Insurance Proceeds,
Liquidation Proceeds or otherwise.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the Class or Classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Unless otherwise
provided in the applicable Prospectus Supplement, advances of the Servicer's
funds will be reimbursable only out of related recoveries on the Mortgage Loans
or Contracts respecting which such amounts were advanced, or from any amounts in
the Certificate Account to the extent that the Servicer shall determine that any
such advances previously made are not ultimately recoverable from late
collections, Insurance Proceeds, Liquidation Proceeds or otherwise. If advances
have been made by the Servicer from excess funds in the Certificate Account, the
Servicer will replace such funds in the Certificate Account on any future
Distribution Date to the extent that funds in the Certificate Account on such
Distribution Date are less than payments required to be made to
Certificateholders on such date.
Adjustment to Servicing Compensation in Connection with Prepaid and Liquidated
Mortgage Loans and Contracts
When a mortgagor or obligor prepays a Mortgage Loan or Contract in full,
the mortgagor or obligor pays interest on the amount prepaid only to the date on
which such principal prepayment is made. Similarly, Liquidation Proceeds from a
Mortgaged Property or Manufactured Home will not include interest for any period
after the date on which the liquidation took place, and Insurance Proceeds may
include interest only to the date of settlement of the related claims. Further,
when a Mortgage Loan or Contract is prepaid in part, and such prepayment is
applied as of a date other than a Due Date, the mortgagor or obligor pays
interest on the amount prepaid only to the date of prepayment and not
thereafter. The effect of the foregoing is to reduce the aggregate amount of
interest which would otherwise be passed through to Certificateholders if such
Mortgage Loan or Contract were outstanding, or if such partial prepayment were
applied, on the succeeding Due Date. Unless otherwise specified in the
applicable Prospectus Supplement, in order to mitigate the adverse effect to
Certificateholders of a Series resulting from the prepayment or liquidation of a
Mortgage Loan or Contract or settlement of an insurance claim with respect
thereto, the amount of the aggregate Servicing Fees will be reduced by an amount
equal to the accrual of interest on any prepaid or liquidated Mortgage Loan or
Contract at the Net Mortgage Rate for such Mortgage Loan or the Net Contract
Rate for such Contract from the date of its prepayment or liquidation or the
date of such insurance settlement to the next Due Date (the "Prepayment Interest
Shortfall"). Such reductions in the aggregate Servicing Fees will be made by the
Servicer with respect to the Mortgage Loans or Contracts under the applicable
Pooling and Servicing Agreement, but only to the extent that the aggregate
Prepayment Interest Shortfall does not exceed the aggregate Servicing Fees
relating to mortgagor or obligor payments or other recoveries distributed on the
related Distribution Date. The amount of the offset against the aggregate
Servicing Fees will be included in the scheduled distributions to
Certificateholders on the Distribution Date on which the related principal
prepayments, Liquidation Proceeds or Insurance Proceeds are passed through to
Certificateholders. See "Prepayment and Yield Considerations." Payments with
respect to any Prepayment Interest Shortfall will not be obtained by means of
any subordination of the rights of Subordinated Certificateholders or any other
credit enhancement arrangement (except to the extent such credit enhancement
pays interest with respect to a Mortgage Loan or Contract in excess of the
related Net Mortgage Rate or Net Contract Rate and such excess would otherwise
be paid to the Servicer as a Servicing Fee).
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Reports to Certificateholders
Unless otherwise specified or modified in the related Pooling and Servicing
Agreement for each Series, a statement setting forth the following information,
if applicable, will be included with each distribution to Certificateholders of
record of such Series:
(i) to each holder of a Certificate other than a Multi-Class
Certificate, the amount of such distribution allocable to principal of the
related Mortgage Loans or Contracts, separately identifying the aggregate
amount of any principal prepayments included therein, the amount of such
distribution allocable to interest on the related Mortgage Loans or
Contracts, and the aggregate unpaid principal balance of the Mortgage Loans
or Contracts after giving effect to the principal distributions on such
Distribution Date;
(ii) to each holder of a Multi-Class Certificate on which an interest
distribution and a distribution in reduction of Stated Amount are then
being made, the amount of such interest distribution and distribution in
reduction of Stated Amount, and the Stated Amount of each Class after
giving effect to the distribution in reduction of Stated Amount made on
such Distribution Date;
(iii) to each holder of a Multi-Class Certificate on which a
distribution of interest only is then being made, the aggregate Stated
Amount of Certificates outstanding of each Class after giving effect to the
distribution in reduction of Stated Amount made on such Distribution Date
and on any Special Distribution Date occurring subsequent to the last such
report and after including in the aggregate Stated Amount the Stated Amount
of the Compound Interest Certificates, if any, outstanding and the amount
of any accrued interest added to the Stated Amount of such Compound
Interest Certificates on such Distribution Date;
(iv) to each holder of a Multi-Class Certificate which is a Compound
Interest Certificate (but only if such holder shall not have received a
distribution of interest equal to the entire amount of interest accrued on
such Certificate with respect to such Distribution Date),
(a) the information contained in the report delivered pursuant to
clause (ii) above;
(b) the interest accrued on such Class of Compound Interest
Certificates with respect to such Distribution Date and added to the
Stated Amount of such Compound Interest Certificate; and
(c) the Stated Amount of such Class of Compound Interest
Certificates after giving effect to the addition thereto of all
interest accrued thereon;
(v) to each holder of a Certificate, the aggregate amount of the
Servicing Fees paid with respect to such Distribution Date;
(vi) to each holder of a Certificate, the amount by which the
Servicing Fee has been reduced by the aggregate Prepayment Interest
Shortfall for the related Distribution Date;
(vii) the aggregate amount of any Advances by the Servicer included in
the amounts actually distributed to the Certificateholders;
(viii) to each holder of each Senior Certificate (other than a
Shifting Interest Certificate):
(a) the amount of funds, if any, otherwise distributable to
Subordinated Certificateholders and the amount of any withdrawal from
the Subordination Reserve Fund, if any, included in amounts actually
distributed to Senior Certificateholders;
(b) the Subordinated Amount remaining and the balance in the
Subordination Reserve Fund, if any, following such distribution; and
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(c) the amount of any Senior Class Shortfall with respect to, and
the amount of any Senior Class Carryover Shortfall outstanding prior
to, such Distribution Date;
(ix) to each holder of a Certificate entitled to the benefits of
payments under any form of credit enhancement or from any reserve fund
other than the Subordination Reserve Fund:
(a) the amounts so distributed under any such form of credit
enhancement or from any such reserve fund on the applicable
Distribution Date; and
(b) the amount of coverage remaining under any such form of
credit enhancement and the balance in any such fund, after giving
effect to any payments thereunder and other amounts charged thereto on
the Distribution Date;
(x) in the case of a Series of Certificates with a variable
Pass-Through Rate, such Pass-Through Rate;
(xi) the book value of any collateral acquired by the Trust Fund
through foreclosure or otherwise; and
(xii) the number and aggregate principal amount of Mortgage Loans or
Contracts one month and two or more months delinquent.
In addition, within a reasonable period of time after the end of each
calendar year, a report will be furnished to each Certificateholder of record at
any time during such calendar year (a) as to the aggregate of amounts reported
pursuant to clauses (i) through (xii) above, as applicable, for such calendar
year or, in the event such person was a Certificateholder of record during a
portion of such calendar year, for the applicable portion of such year and (b)
such other information as required to enable Certificateholders to prepare their
tax returns. In the event that an election has been made to treat the Trust Fund
(or one or more segregated pools of assets therein) as a REMIC, the Trustee with
respect to a Series will be required to sign the federal income tax returns with
respect to such REMIC. See "Certain Federal Income Tax Consequences -- Federal
Income Tax Consequences for REMIC Certificates -- Administrative Matters."
Reports to the Trustee
No later than 15 days after each Distribution Date for a Series, the
Servicer will provide the Trustee of such Series with a report setting forth the
status of the related Certificate Account and the related Subordination Reserve
Fund, if any, and any other reserve fund as of the close of business on such
Distribution Date, stating that all distributions required to be made by the
Servicer under the applicable Pooling and Servicing Agreement have been made (or
if any required distribution has not been made by the Servicer, specifying the
nature and status thereof) and showing, for the period covered by such
statement, the aggregate of deposits to and withdrawals from the Certificate
Account for each category of deposits and withdrawals specified in the Pooling
and Servicing Agreement. Such statement shall also include information as to (i)
the aggregate unpaid principal balances of all the Mortgage Loans or Contracts
as of the close of business on the last day of the month preceding the month in
which such Distribution Date occurs (or such other day as may be specified in
the applicable Pooling and Servicing Agreement); and (ii) the amount of any
Subordination Reserve Fund and any other reserve fund, as of such Distribution
Date (after giving effect to the distributions on such Distribution Date).
Copies of such reports may be obtained by Certificateholders upon request in
writing addressed to the related Trustee at its mailing address provided in the
related Prospectus Supplement.
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Collection and Other Servicing Procedures
The Servicer, directly or through Sub-Servicers, will make reasonable
efforts to collect all payments called for under the Mortgage Loans or Contracts
and will, consistent with the applicable Pooling and Servicing Agreement and any
applicable agreement governing any form of credit enhancement, follow such
collection procedures as it follows with respect to mortgage loans or
manufactured housing contracts serviced by it that are comparable to the
Mortgage Loans or Contracts, as the case may be. Consistent with the above, the
Servicer may, in its discretion, (i) waive any prepayment charge, assumption
fee, late payment charge or any other charge in connection with the prepayment
of a Mortgage Loan or Contract and (ii) arrange with a mortgagor or obligor a
schedule for the liquidation of deficiencies running for not more than six
months after the applicable Due Date.
Pursuant to the Pooling and Servicing Agreement, the Servicer, to the
extent permitted by law, will establish and maintain or will cause to be
established and maintained one or more escrow accounts (collectively, the
"Servicing Account") in which the Servicer will be required to deposit or cause
to be deposited payments by mortgagors or obligors, as applicable, for taxes,
assessments, mortgage and hazard insurance premiums and other comparable items.
Withdrawals from the Servicing Account may be made to effect timely payment of
taxes, assessments, mortgage and hazard insurance, to refund to mortgagors or
obligors amounts determined to be overages, to pay interest to mortgagors or
obligors on balances in the Servicing Account, if required, to repair or
otherwise protect the Mortgaged Properties or Manufactured Homes and to clear
and terminate such account. The Servicer will be responsible for the
administration of each Servicing Account. The Servicer will be obligated to
advance certain amounts which are not timely paid by mortgagors or obligors, to
the extent that the Servicer determines that such amounts will be recoverable
out of Insurance Proceeds, Liquidation Proceeds, or otherwise. Alternatively, if
specified in the applicable Pooling and Servicing Agreement, in lieu of
establishing a Servicing Account, the Servicer may procure a performance bond or
other form of insurance coverage, in an amount acceptable to the Rating Agency
rating the related Series of Certificates, covering loss occasioned by the
failure to escrow such amounts.
Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage Loans
and Contracts
Each Pooling and Servicing Agreement will provide that, when any Mortgaged
Property or Manufactured Home is conveyed by the mortgagor or obligor, the
Servicer will exercise its rights to accelerate the maturity of such Mortgage
Loan or Contract under any "due-on-sale" clause applicable thereto, if any,
unless (a) it is not exercisable under applicable law or (b) such exercise would
result in loss of insurance coverage with respect to such Mortgage Loan or
Contract. In any such case, the Servicer is authorized to take or enter into an
assumption and modification agreement from or with the person to whom such
Mortgaged Property or Manufactured Home has been or is about to be conveyed,
pursuant to which such person becomes liable under the Mortgage Note or Contract
and, unless prohibited by applicable state law, the mortgagor or obligor remains
liable thereon, provided that the Mortgage Loan or Contract will continue to be
covered by any pool insurance policy and any related primary mortgage insurance
policy, and the Mortgage Rate or Contract Rate with respect to such Mortgage
Loan or Contract and the payment terms shall remain unchanged. The Servicer will
also be authorized, with the prior approval of any pool insurer and any primary
mortgage insurer, if any, to enter into a substitution of liability agreement
with such person, pursuant to which the original mortgagor or obligor is
released from liability and such person is substituted as mortgagor or obligor
and becomes liable under the Mortgage Note or Contract.
The Servicer is obligated under the Pooling and Servicing Agreement for
each Series to realize upon defaulted Mortgage Loans or Contracts to the extent
provided therein. However, in the case of foreclosure or of damage to a
Mortgaged Property or Manufactured Home from an uninsured cause, the Servicer is
not required to expend its own funds to foreclose, repossess or restore any
damaged property, unless it reasonably determines (i) that such foreclosure,
repossession or restoration will increase the proceeds to Certificateholders of
such Series of liquidation of the Mortgage Loan or Contract after reimbursement
of the Servicer for its expenses and (ii) that such expenses will be recoverable
to it through Liquidation Proceeds or Insurance Proceeds. In the event that the
Servicer has expended its own funds for foreclosure or to restore damaged
property, it will be entitled to charge the Certificate Account for such Series
an amount equal to all costs and expenses incurred by it.
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The Servicer may foreclose against property securing a defaulted Mortgage
Loan either by foreclosure, by sale or by strict foreclosure and in the event a
deficiency judgment is available against the mortgagor or other person (see
"Certain Legal Aspects of the Mortgage Loans and Contracts -- The Mortgage Loans
- --Anti-Deficiency Legislation and Other Limitations on Lenders" for a
description of the availability of deficiency judgments), may proceed for the
deficiency. It is anticipated that in most cases the Servicer will not seek
deficiency judgments against any mortgagor or obligor, and the Servicer is not
required under the Pooling and Servicing Agreement to seek deficiency judgments.
With respect to a Trust Fund (or one or more segregated pools of assets
therein) as to which a REMIC election has been made, if the Trustee acquires
ownership of any Mortgaged Property or Manufactured Home as a result of a
default or imminent default of any Mortgage Loan or Contract secured by such
Mortgaged Property or Manufactured Home, the Trustee generally will be required
to dispose of such property with two years following its acquisition by the
Trust Fund. The Servicer also will be required to administer the Mortgaged
Property or Manufactured Home in a manner which does not cause the Mortgaged
Property or Manufactured Home to fail to qualify as "foreclosure property"
within the meaning of Code Section 860G(a)(8) or result in the receipt by the
Trust Fund of any "net income from foreclosure property" within the meaning of
Code Section 860G(c). In general, this would preclude the holding of the
Mortgaged Property or Manufactured Home as a dealer in such property or the
receipt of rental income based on the profits of the lessee.
The Servicer may modify, waive or amend the terms of any Mortgage Loan or
Contract without the consent of the Trustee or any Certificateholder. Such
modification, waiver or amendment shall only be given if the Servicer determines
that it is in the best interests of Certificateholders and, generally, only if
the Mortgage Loan is in default or the Service has determined that default is
reasonably foreseeable.
Servicing Compensation and Payment of Expenses
For each Series of Certificates, the Servicer will be entitled to be paid
the Servicing Fee on the related Mortgage Loans or Contracts until termination
of the applicable Pooling and Servicing Agreement, subject, unless otherwise
specified in the applicable Prospectus Supplement, to adjustment as described
under "Adjustment to Servicing Compensation in Connection with Prepaid and
Liquidated Mortgage Loans and Contracts" above. The Servicer, at its election,
will pay itself the Servicing Fee for a Series with respect to each Mortgage
Loan or Contract by (a) withholding the Servicing Fee from any scheduled payment
of interest prior to deposit of such payment in the Certificate Account for such
Series or (b) withdrawing the Servicing Fee from the Certificate Account after
the entire interest payment has been deposited in the Certificate Account. The
Servicer may also pay itself out of the Liquidation Proceeds or Insurance
Proceeds with respect to a Mortgage Loan or Contract, or withdraw from the
Certificate Account, the Servicing Fee in respect of such Mortgage Loan or
Contract or other recoveries with respect thereto to the extent provided in the
applicable Pooling and Servicing Agreement. The Servicing Fee with respect to
the Mortgage Loans or Contracts underlying the Certificates of a Series will be
specified in the applicable Prospectus Supplement. Any additional servicing
compensation in the form of prepayment charges, assumption fees, late payment
charges or otherwise will be retained by the Servicer to the extent not required
to be deposited in the Certificate Account.
In addition to amounts payable to any Sub-Servicer, the Servicer will pay
all expenses incurred in connection with the servicing of the Mortgage Loans or
Contracts underlying a Series, including, without limitation, payment of the
hazard insurance policy premiums and fees or other amounts payable pursuant to
any applicable agreement for the provision of credit enhancement for such
Series, payment of the fees and disbursements of the Trustee and any custodian,
fees due to the independent accountants and expenses incurred in connection with
distributions and reports to Certificateholders. However, certain of these
expenses may be reimbursable to the Servicer pursuant to the terms of the
applicable Pooling and Servicing Agreement. In addition, the Servicer will be
entitled to reimbursement for certain expenses incurred by it in connection with
the liquidation of defaulted Mortgage Loans or Contracts. In the event that
claims are either not made or are not fully paid from any applicable form of
credit enhancement, the related Trust Fund will suffer a loss to the extent that
Net Liquidation Proceeds and Net Insurance Proceeds are less than the principal
balance of the related Mortgage Loan or Contract, plus accrued interest thereon
at the Net Mortgage Rate or Net Contract Rate. In addition, the Servicer will be
entitled to reimbursement of expenditures incurred by it in connection with the
restoration of any Mortgaged Property or Manufactured Home, such right of
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reimbursement being prior to the rights of the Certificateholders to receive
Liquidation Proceeds and Insurance Proceeds. The Servicer is also entitled to
reimbursement from the Certificate Account of Advances, of advances made by it
to pay taxes or insurance premiums with respect to any Mortgaged Property or
Manufactured Home and of certain losses against which it is indemnified by the
Trust Fund.
Evidence as to Compliance
The Mortgage Loans
Each Pooling and Servicing Agreement will provide that on or before a
specified date in each year, beginning with the first such date occurring at
least six months after the related Cut-Off Date, a firm of independent public
accountants will furnish a statement to the Trustee to the effect that, on the
basis of the examination by such firm conducted substantially in compliance with
either the Uniform Single Audit Program for Mortgage Bankers or the Audit
Program for Mortgages serviced for FHLMC, the servicing by or on behalf of the
Servicer of mortgage loans under pooling and servicing agreements substantially
similar to each other (including the related Pooling and Servicing Agreement)
was conducted in compliance with the terms of such agreements other than
exceptions that are immaterial and any significant exceptions of errors in
records that, in the opinion of the firm, either the Audit Program for Mortgages
serviced for FHLMC, or paragraph 4 of the Uniform Single Audit Program for
Mortgage Bankers, requires it to report. In rendering its statement such firm
may rely, as to matters relating to the direct servicing of mortgage loans by
Sub-Servicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Audit Program for Mortgage
Bankers or the Audit Program for Mortgages serviced for FHLMC (rendered within
one year of such statement) of firms of independent public accountants with
respect to the related Sub-Servicer.
The Contracts
Each Pooling and Servicing Agreement relating to a Series of Certificates
representing interests in a Contract Pool will provide that on or before a
specified date in each year, beginning with the first such date after the
related Cut-Off Date, a firm of independent public accountants will furnish a
statement to the Trustee to the effect that such firm is of the opinion that the
system of internal accounting controls in effect on the date of such statement
relating to the servicing procedures performed by the Servicer under the Pooling
and Servicing Agreement, taken as a whole, was sufficient for the prevention and
detection of errors and irregularities which would be material to the assets of
the Trust Fund and that nothing has come to their attention that would cause
them to believe that such servicing has not been conducted in compliance with
the provisions of the Pooling and Servicing Agreement, other than such
exceptions as shall be set forth in such report.
Each Pooling and Servicing Agreement will also provide for delivery to the
Trustee annually on or before the specified date therein, a statement signed by
two officers of the Servicer to the effect that the Servicer has fulfilled its
obligations under the Pooling and Servicing Agreement throughout the preceding
year or, if there has been a default in the fulfillment of any such obligation,
describing each such default.
Copies of the annual accountants' statement and the statement of officers
of the Servicer may be obtained by Certificateholders without charge upon
written request to the Servicer at the address of the Servicer set forth in the
related Prospectus Supplement.
Certain Matters Regarding the Servicer and the Depositor
The Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement for each Series (other than its duties as
Certificate Registrar for such Series, if it is acting as such), except upon its
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities of a type and nature presently carried on by it. No such
resignation will become effective until the Trustee for such Series or a
successor Servicer has assumed the Servicer's obligations and duties under the
Pooling and Servicing Agreement. If the Servicer resigns for any of the
foregoing reasons and the Trustee is unable or unwilling to assume
responsibility for servicing the Mortgage Loans or Contracts, it may appoint
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another institution as Servicer, as described under "The Pooling and Servicing
Agreement -- Rights Upon Event of Default -- Mortgage Loans or Contracts" below.
The Pooling and Servicing Agreement will provide that neither the
Depositor, the Servicer (if the Series of Certificates relates to Mortgage Loans
or Mortgage Contracts) nor any director, officer, employee or agent of either of
them will be under any liability to the Trust Fund or the Certificateholders,
for the taking of any action or for refraining from the taking of any action in
good faith pursuant to the Pooling and Servicing Agreement, or for errors in
judgment; provided, however, that none of the Depositor, the Servicer or any
director, officer, employee or agent of the Depositor or Servicer will be
protected against any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of his or
its duties or by reason of reckless disregard of his or its obligations and
duties thereunder. The Pooling and Servicing Agreement will further provide that
the Depositor, the Servicer and any director, officer, employee or agent of
either of them shall be entitled to indemnification by the Trust Fund and will
be held harmless against any loss, liability or expense incurred in connection
with any legal action relating to the Pooling and Servicing Agreement or the
Certificates other than any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of his or
its duties thereunder or by reason of reckless disregard of his or its
obligations and duties thereunder. In addition, the Pooling and Servicing
Agreement will provide that the Depositor and the Servicer will not be under any
obligation to appear in, prosecute or defend any legal action that is not
incidental to its duties under the Pooling and Servicing Agreement and that in
its opinion may involve it in any expense or liability. The Depositor and the
Servicer may, however, in its discretion, undertake any such action deemed by it
necessary or desirable with respect to the Pooling and Servicing Agreement and
the rights and duties of the parties thereto and the interests of the
Certificateholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust Fund, and the Servicer will be entitled to be
reimbursed therefor out of the Certificate Account, and any loss to the Trust
Fund arising from such right of reimbursement will be allocated pro rata among
the various Classes of Certificates unless otherwise specified in the applicable
Pooling and Servicing Agreement.
Any person into which the Servicer may be merged or consolidated, or any
person resulting from any merger, conversion or consolidation to which the
Servicer is a party, or any person succeeding to the business through the
transfer of substantially all of its assets, or otherwise, of the Servicer will
be the successor of the Servicer under the Pooling and Servicing Agreement for
each Series provided that such successor or resulting entity is qualified to
service mortgage loans for FNMA or FHLMC and that the applicable Rating Agency's
rating of any Certificates for such Series in effect immediately prior to such
event is not adversely affected thereby.
The Servicer also has the right to assign its rights and delegate its
duties and obligations under the Pooling and Servicing Agreement for each Series
(A) in connection with a sale or transfer of a substantial portion of its
mortgage or manufactured housing servicing portfolio; provided that (i) in the
case of a transfer by a Servicer of Mortgage Loans, the purchaser or transferee
accepting such assignment or delegation is qualified to service mortgage loans
for FNMA or FHLMC, (ii) the purchaser or transferee is reasonably satisfactory
to the Depositor and the Trustee for such Series and executes and delivers to
the Depositor and the Trustee an agreement, in form and substance reasonably
satisfactory to the Depositor and the Trustee, which contains an assumption by
such purchaser or transferee of the due and punctual performance and observance
of each covenant and condition to be performed or observed by the Servicer under
the Pooling and Servicing Agreement from and after the date of such agreement;
and (iii) the applicable Rating Agency's rating of any Certificates for such
Series in effect immediately prior to such assignment, sale or transfer is not
qualified, downgraded or withdrawn as a result of such assignment, sale or
transfer or (B) to any affiliate of the Servicer, provided that the conditions
contained in clauses (i) through (iii) above are met. In the case of any such
assignment or delegation, the Servicer will be released from its obligations
under the Pooling and Servicing Agreement except for liabilities and obligations
incurred prior to such assignment and delegation.
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THE POOLING AND SERVICING AGREEMENT
Events of Default
Mortgage Loans or Contracts
Events of Default under the Pooling and Servicing Agreement for each Series
of Certificates relating to Mortgage Loans or Contracts include (i) any failure
by the Servicer to remit to the Trustee or to any Paying Agent for distribution
to Certificateholders any required payment which continues unremedied for 5
days; (ii) any failure by the Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the Pooling and
Servicing Agreement which continues unremedied for 30 days (or 10 days in the
case of a failure to maintain any pool insurance policy required to be
maintained pursuant to the Pooling and Servicing Agreement) after the giving of
written notice of such failure to the Servicer by the Trustee, or to the
Servicer and Trustee by the holders of Certificates of such Series having voting
rights allocated to such Certificates ("Voting Interests") aggregating not less
than 25% of the Voting Interests represented by all Certificates for such
Series; (iii) any breach of representation or warranty of the Servicer relating
to such Servicer's authority to enter into, and its ability to perform its
obligations under, such Pooling and Servicing Agreement; (iv) certain events of
insolvency, readjustments of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by the Servicer indicating its
insolvency, reorganization or inability to any its obligations and (v) if
specified in the applicable Pooling and Servicing Agreement, any failure by the
Servicer to remit to the Trustee the amount of any Advance by the business day
preceding the applicable Distribution Date.
Rights Upon Event of Default
Mortgage Loans or Contracts
So long as Event of Default remains unremedied under the Pooling and
Servicing Agreement for a Series of Certificates relating to Mortgage Loans or
Contracts, the Trustee for such Series or holders of Certificates of such Series
evidencing not less than 25% of the Voting Interests in the Trust Fund for such
Series may terminate all of the rights and obligations of the Servicer under the
Pooling and Servicing Agreement and in and to the Mortgage Loans or Contracts
(other than the Servicer's right to recovery of any Initial Deposit for such
Series and other expenses and amounts advanced pursuant to the terms of the
Pooling and Servicing Agreement, which rights the Servicer will retain under all
circumstances), whereupon the Trustee will succeed to all the responsibilities,
duties and liabilities of the Servicer under the Pooling and Servicing Agreement
and will be entitled to monthly servicing compensation not to exceed the
aggregate Servicing Fees, together with the other servicing compensation in the
form of assumption fees, late payment charges or otherwise as provided in the
Pooling and Servicing Agreement. In the event that the Trustee is unwilling or
unable so to act, it may select, pursuant to the private or public bid procedure
described in the applicable Pooling and Servicing Agreement, or petition a court
of competent jurisdiction to appoint, (i) in the case of a Servicer of Mortgage
Loans, a housing and home finance institution, bank or mortgage servicing
institution with a net worth of at least $15,000,000 and which is a FNMA-and
FHLMC-approved seller/servicer or (ii) in the case of a Servicer of Contracts,
an institution with a net worth of at least $15,000,000 which has serviced for
at least one year immediately prior thereto a portfolio of manufactured housing
loans of not less than $100,000,000, to act as successor to the Servicer under
the provisions of the Pooling and Servicing Agreement relating to the servicing
of the Mortgage Loans or Contracts. In the event such public bid procedure is
utilized, the successor Servicer would be entitled to servicing compensation in
an amount equal to the aggregate Servicing Fees, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in the Pooling and Servicing Agreement, and the Servicer
would be entitled to receive the net profits, if any, received from the sale of
its servicing rights and obligations under the Pooling and Servicing Agreement.
During the continuance of any Event of Default under the Pooling and
Servicing Agreement for a Series of Certificates relating to Mortgage Loans or
Contracts, the Trustee for such Series will have the right to take action to
enforce its rights and remedies and to protect and enforce the rights and
remedies of the Certificateholders of such Series, and holders of Certificates
evidencing not less than 25% of the Voting Interests for such Series may direct
the time, method and place of conducting any proceeding for any remedy available
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to the Trustee or exercising any trust or power conferred upon the Trustee.
However, the Trustee will not be under any obligation to pursue any such remedy
or to exercise any of such trusts or powers unless such Certificateholders have
offered the Trustee reasonable security or indemnity against the costs, expenses
and liabilities which may be incurred by the Trustee thereby. Also, the Trustee
may decline to follow any such direction if the Trustee determines that the
action or proceeding so directed may not lawfully be taken or would be unjustly
prejudicial to the nonassenting Certificateholders or if, under certain
circumstances, the Trustee receives conflicting directions from different groups
of Certificateholders.
No Certificateholders of a Series, solely by virtue of such holder's status
as a Certificateholder, will have any right under the Pooling and Servicing
Agreement for such Series to institute any proceeding with respect to the
Pooling and Servicing Agreement, unless such holder previously has given to the
Trustee for such Series written notice of default and unless the holders of
Certificates evidencing not less than 25% of the Voting Interests for such
Series have made written request upon the Trustee to institute such proceeding
in its own name as Trustee thereunder and have offered to the Trustee reasonable
indemnity and the Trustee for 60 days has neglected or refused to institute any
such proceeding.
Amendment
Each Pooling and Servicing Agreement may be amended by the Depositor, the
Servicer (with respect to a Series of Certificates relating, to the Mortgage
Loans or Contracts) and the Trustee without the consent of the
Certificateholders, (i) to cure any ambiguity, (ii) to correct or supplement any
provision therein that may be inconsistent with any over provision therein,
(iii) to modify, eliminate or add to any of its provisions to such extent as
shall be necessary to maintain the qualification of the Trust Fund (or one or
more segregated pools of assets therein) as a REMIC at all times that any
Certificates are outstanding or to avoid or modify the risk of the imposition of
any tax on the Trust Fund pursuant to the Code that would be a claim against the
Trust Fund, provided that the Trustee has received an opinion of counsel to the
effect that such action is necessary or desirable to maintain such qualification
or to avoid or minimize the risk of the imposition of any such tax and such
action will not, as evidenced by such opinion of counsel, adversely affect in
any material respect the interests of any Certificateholder, (iv) to change the
timing and/or nature of deposits into the Certificate Account, provided that
such change will not, as evidenced by an opinion of counsel, adversely affect in
any material respect the interests of any Certificateholder and that such change
will not adversely affect the then current rating assigned to any Certificates,
as evidenced by a letter from each Rating Agency to such effect, (v) to add to,
modify or eliminate any provisions therein restricting transfers of certain
Certificates, which are inserted in response to the Code provisions described
below under "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates -- Taxation of Residual Certificates --
Tax-Related Restrictions on Transfer of Residual Certificates," or (vi) to make
any other provisions with respect to matters or questions arising under such
Pooling and Servicing Agreement that are not inconsistent with the provisions
thereof, provided that such action will not, as evidenced by an opinion of
counsel, adversely affect in any material respect the interests of the
Certificateholders of the related Series. The Pooling and Servicing Agreement
may also be amended by the Depositor, the Servicer, where applicable, and the
Trustee with the consent of the holders of Certificates evidencing interests
aggregating not less than 66 2/3% of the Voting Interests evidenced by the
Certificates affected thereby, for the purpose of adding any provisions to or
changing in any manner or eliminating, any of the provisions of such Pooling and
Servicing Agreement or of modifying in any manner the rights of the
Certificateholders; provided, however, that no such amendment may (i) reduce in
any manner the amount of, or delay the timing of, any payments received on or
with respect to Mortgage Loans or Contracts that are required to be distributed
on any Certificates, without the consent of the holder of such Certificate, (ii)
adversely affect in any material respect the interests of the holders of a Class
or Subclass of Certificates of a Series in a manner other than that set forth in
clause (i) above without the consent of the holders of Certificates aggregating
not less than 66-2/3% of the Voting Interests evidenced by such Class or
Subclass, or (iii) reduce the aforesaid percentage of the Certificates, the
holders of which are required to consent to such amendment, without the consent
of the holders of all Certificates of the Class or Subclass affected then
outstanding. Notwithstanding the foregoing, the Pooling and Servicing Agreement
may be amended by the Depositor, the Servicer, where applicable, and the Trustee
provided that such action is approved by holders of Certificates evidencing 100%
of the Percentage Interest of each Class that, as evidenced by an opinion of
counsel, is adversely affected in any material respect by such action. For
purposes of giving any such consent (other than a consent to an action which
would adversely affect in any material respect the interests of the
Certificateholders of any Class, while the Servicer or any affiliate thereof is
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the holder of Certificates aggregating not less than 66- 2/3% of the Percentage
Interest of such Class), any Certificates registered in the name of the Servicer
or any affiliate thereof shall be deemed not to be outstanding. Notwithstanding
the foregoing, the Trustee will not consent to any such amendment if such
amendment would subject the Trust Fund to tax or cause the Trust Fund (or one or
more segregated pools of assets therein) to fail to qualify as a REMIC.
Termination; Purchase or Other Disposition of Mortgage Loans and Contracts
The obligations created by the Pooling and Servicing Agreement for a Series
of Certificates will terminate upon the earlier of (i) the later of the final
payment or other liquidation of the last Mortgage Loan or Contract subject
thereto and the disposition of all property acquired upon foreclosure of any
such Mortgage Loan or Contract and (ii) any purchase or disposition described in
the following paragraph. In no event, however, will the trust created by the
Pooling and Servicing Agreement continue beyond the expiration of 21 years from
the death of the late survivor of certain persons named in such Pooling and
Servicing Agreement. For each Series of Certificates, the Trustee will give
written notice of termination of the Pooling and Servicing Agreement to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at an office or agency appointed by the
Depositor and specified in the notice of termination.
If so provided in the related Prospectus Supplement, the Pooling and
Servicing Agreement for each Series of Certificates will permit, but not
require, the person or persons specified in such Prospectus Supplement to
purchase from the Trust Fund for such Series, or will require the Trust Fund to
sell, all remaining Mortgage Loans or Contracts at the time subject to the
Pooling and Servicing Agreement at a price specified in such Prospectus
Supplement. In the event that an election has been made to treat the related
Trust Fund (or one or more segregated pools of assets therein) as a REMIC, any
such purchase or disposition will be effected only upon receipt by the Trustee
of an opinion of counsel that such purchase (i) will be part of a "qualified
liquidation" or other evidence as defined in Code Section 860F(a)(4)(A), (ii)
will not otherwise subject the Trust Fund (or segregated asset pool) to tax, or
(iii) will not cause the Trust Fund (or segregated asset pool) to fail to
qualify as a REMIC. The exercise of such right or such disposition will effect
early retirement of the Certificates of that Series, but the right so to
purchase may be exercised, or the obligation to sell will arise, only after the
aggregate principal balance of the Mortgage Loans or Contracts for such Series
at the time of purchase is less than a specified percentage of the aggregate
principal balance at the Cut-Off Date for the Series, or after the date set
forth in the related Prospectus Supplement. See "Prepayment and Yield
Considerations."
The Trustee
The Trustee under each Pooling and Servicing Agreement will be named in the
applicable Prospectus Supplement. The commercial bank or trust company serving
as Trustee may have normal banking relationships with the Depositor, the
Servicer or any of their respective affiliates.
With respect to a Series of Certificates relating to Mortgage Loans or
Contracts, the Trustee may resign at any time, in which event the Servicer will
be obligated to appoint a successor trustee. The Servicer (with respect to a
Series of Certificates relating to Mortgage Loans or Contracts) may also remove
the Trustee if the Trustee ceases to be eligible to act as Trustee under the
Pooling and Servicing Agreement, if the Trustee becomes insolvent or in order to
change the situs of the Trust Fund for state-tax reasons. Upon becoming aware of
such circumstances, the Servicer or Depositor, as the case may be, will become
obligated to appoint a successor trustee. The Trustee may also be removed at any
time by the holders of Certificates evidencing not less than 51% of the Voting
Interest in the Trust Fund, except that, any Certificate registered in the name
of the Depositor, the Servicer or any affiliate thereof will not be taken into
account in determining whether the requisite Voting Interest in the Trust Fund
necessary to effect any such removal has been obtained. Any resignation and
removal of the Trustee, and the appointment of a successor trustee, will not
become effective until acceptance of such appointment by the successor trustee.
The Trustee, and any successor trustee, will have a combined capital and
surplus, or shall be a member of a bank holding system with an aggregate
combined capital and surplus, of at least $50,000,000 and will be subject to
supervision or examination by federal or state authorities.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts which are general in nature.
Because such legal aspects are governed by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete nor to
reflect the laws of any particular state, nor to encompass the laws of all
states in which the security for the Mortgage Loans or Contracts is situated.
The summaries are qualified in their entirety by reference to the applicable
federal and state laws governing the Mortgage Loans or Contracts.
The Mortgage Loans
General
The Mortgage Loans will, in general, be secured by either first, second or
more junior mortgages, deeds of trust, or other similar security agreements
depending upon the prevailing practice in the state in which the underlying
property is located. A mortgage creates a lien upon the real property described
in the mortgage. There are two parties to a mortgage: the mortgagor, who is the
borrower; and the mortgagee, who is the lender. In a mortgage state instrument,
the mortgagor delivers to the mortgagee a note or bond evidencing the loan and
the mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
has three parties: a borrower called the trustor (similar to a mortgagor), a
lender called the beneficiary (similar to a mortgagee), and a third-party
grantee called the trustee. Under a deed of trust, the borrower grant the
property, irrevocably until the debt is paid,, in trust, generally with a power
of sale, to the trustee to secure payment of the loan. The trustee's authority
under a deed of trust and the mortgage's authority under a mortgage are governed
by the express provisions of the deed of trust or mortgage, applicable law, and,
in some cases, with respect to the deed of trust, the directions of the
beneficiary.
The real property covered by a mortgage is most often the fee estate in
land and improvements. However, a mortgage may encumber other interests in real
property such as a tenant's interest in a lease of land or improvements, or
both, and the leasehold estate created by such lease. A mortgage covering an
interest in real property other than the fee estate requires special provisions
in the instrument creating such interest or in the mortgage to protect the
mortgagee against termination of such interest before the mortgage is paid.
Foreclosure
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right of foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming. After the completion of a judicial foreclosure proceeding, the
court may issue a judgment of foreclosure and appoint a receiver or other
officer to conduct the sale of the property. In some states, mortgages may also
be foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage. Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property to a third party upon any default by the
borrower under the terms of the note or deed of trust. In certain states, such
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other individual
having an interest of record in the real property, including any junior
lienholders. If the deed of trust is not reinstated within any applicable cure
period, a notice of sale must be posted in a public place and, in most states,
published for a specified period of time in one or more newspapers. In addition,
some state be laws require that a copy of the notice of sale be posted on the
property and sent to all parties having an interest of record in the property.
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In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having, a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
receiver for an amount equal to the unpaid principal amount of the note, accrued
and unpaid interest and the expenses of foreclosure. Thereafter, subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender commonly will
obtain the services of a real estate broker and pay the broker a commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of mortgage
insurance proceeds.
Foreclosure on Shares of Cooperatives
The cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the cooperative's certificate of incorporation and by-laws, as well as
the proprietary lease of occupancy agreement, and may be cancelled by the
cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
Foreclosure on the cooperative shares is accomplished by a sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code (the
"UCC") and the security agreement relating to those shares. Article 9 of the UCC
requires that a sale be conducted in a "commercially reasonable" manner. Whether
a foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
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place and terms of the foreclosure. Generally, a sale conducted according to the
usual practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
Rights of Redemption
In some states, after sale pursuant to a deed of trust and/or foreclosure
of a mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
most states where the right of redemption is available, statutory redemption may
occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a right of redemption is to diminish the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser at a foreclosure sale, or of any purchaser from the
lender subsequent to judicial foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has run.
Junior Mortgages; Rights of Senior Mortgages
The Mortgage Loans are secured by mortgages or deeds of trust some of which
are junior to other mortgages or deeds of trust held by other lenders or
institutional investors. The rights of the Trust (and therefore the
Certificateholders), as mortgagee under a junior mortgage or beneficiary under a
junior deed of trust, are subordinate to those of the mortgagee under the senior
mortgage or beneficiary under the senior deed of trust, including the prior
rights of the senior mortgagee to receive hazard insurance and condemnation
proceeds and to cause the property securing the Mortgage Loan to be sold upon
default of the mortgagor or trustor, thereby extinguishing the junior
mortgagee's or junior beneficiary's lien unless the junior mortgagee or junior
beneficiary asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage or deed of
trust. As discussed more fully below, a junior mortgagee or junior beneficiary
may satisfy a defaulted senior loan in full and, in some states, may cure such
default and loan. In most states, no notice of default is required to be given
to a junior mortgagee or junior beneficiary and junior mortgagees or junior
beneficiaries are seldom given notice of defaults or senior mortgages. In order
for a foreclosure action in some states to be effective against a junior
mortgagee or junior beneficiary, the junior mortgagee or junior beneficiary must
be named in any foreclosure action, thus giving notice to junior lienors. It is
standard practice of the Sellers to protect their interest by attending any sale
of which they have notice or appearing and bidding for, or redeeming, the
property if it is in their best interest to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, (including the sellers) confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event the
property is taken by condemnation, the mortgagee or beneficiary under any
underlying senior mortgages will have the prior right to collect and apply any
insurance proceeds payable under a hazard insurance policy to restore or repair
the property if feasible, and to collect any remaining insurance proceeds or any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages or deeds of trust. Proceeds in
excess of the amount of senior mortgage indebtedness, in most cases, may be
applied to the indebtedness of a junior mortgage or trust deed.
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The form of mortgage or deed of trust used by most institutional lenders
typically contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage or deed of trust. The
priority of any advance made under the clause depends, in some states, on
whether the advance was an "obligatory" or "optional" advance. If the mortgagee
or beneficiary is obligated to advance the additional amounts, the advance is
entitled to receive the same priority as amounts initially advanced under the
mortgage or deed of trust, notwithstanding the fact that there may be junior
mortgages or deeds of trust and other liens which intervene between the date of
recording of the mortgage or deed of trust and the date of the future advance,
and, in some states, notwithstanding that the mortgagee or beneficiary had
actual knowledge of such intervening junior mortgages or deeds of trust and
other liens at the time of the advance. Where the mortgagee or beneficiary is
not obligated to advance additional amounts or, in some states, has actual
knowledge of the intervening junior mortgages or deeds of trust and other liens,
the advance will be subordinate to such intervening junior mortgages or deeds of
trust and other liens. Priority of advances under a "future advance" cause
rests, in some states, on state statutes giving priority to all advances made
under the loan agreement to a "credit limit" amount stated in the recorded
mortgage.
Another provision sometimes included in the form of the mortgage or deed of
trust used by institutional lenders (and included in some of the forms used by
the Sellers) obligates the mortgagor or trustor to pay, before delinquency, all
taxes and assessments on the property and, when due, all encumbrances, charges
and liens on the property which appear prior to the mortgage or deed of trust,
to provide and maintain fire insurance on the property, to maintain and repair
the property and not to commit or permit any waste thereof, and to appear in and
defend any action or proceeding purporting to affect the property or the rights
of the mortgagee or beneficiary under the mortgage or deed of trust. Upon a
failure of the mortgagor or trustor to perform any of these obligations, the
mortgagee or beneficiary is given the right under certain mortgages or deeds of
trust to perform the obligations itself, at its election, with the mortgagor or
trustor agreeing to reimburse the mortgagee or beneficiary for any sums expended
by the mortgagee or beneficiary on behalf of the mortgagor or trustor. All sums
so expended by the mortgagee or beneficiary become part of the indebtedness
secured by the mortgage or deed of trust.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgage under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the foreclosure sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
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Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement and foreclosure on the
beneficial interest in a land trust. Some courts have interpreted section 9-504
of the UCC to prohibit a deficiency award unless the creditor establishes that
the sale of the collateral (which, in the case of a Mortgage Loan secured by
shares of a cooperative, would be such shares and the related proprietary lease
or occupancy agreement) was conducted in a commercially reasonable manner.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security. For example, in a Chapter
13 proceeding under the Federal Bankruptcy Code, when a court determines that
the value of a home is less than the principal balance of the loan, the court
may prevent a lender from foreclosing on the home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the value
of the home as it exists at the time of the proceeding, leaving the lender as a
general unsecured creditor for the difference between that value and the amount
of outstanding indebtedness. A bankruptcy court may grant the debtor a
reasonable time to cure a payment default, and in the case of a mortgage loan
not secured by the debtor's principal residence, also may reduce the monthly
payments due under such mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule. Certain court decisions have applied such
relief to claims secured by the debtor's principal residence.
The Internal Revenue Code of 1986, as amended, provides priority to certain
tax liens over the lien of the mortgage or deed of trust. The laws of some
states provide priority to certain tax liens over the lien of the mortgage of
deed of trust. Certain environmental protection laws may also impose liability
for cleanup expenses on owners by foreclosure on real property, which liability
may exceed the value of the property involved. Numerous federal and some state
consumer protection laws impose substantive requirements upon mortgage lenders
in connection with the origination, servicing and the enforcement of mortgage
loans. These laws include the federal Truth in Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act, and related statutes and regulations. These
federal laws and state laws impose specific statutory liabilities upon lenders
who originate or service mortgage loans and who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
mortgage loans.
"Due-on-Sale" Clauses
The forms of note, mortgage and deed of trust relating to conventional
Mortgage Loans may contain a "due-on-sale" clause permitting acceleration of the
maturity of a loan if the borrower transfers its interest in the property. In
recent years, court decisions and legislative actions placed substantial
restrictions on the right of lenders to enforce such clauses in many states.
However, effective October 15, 1982, Congress enacted the Garn-St Germain
Depository Institutions Act of 1982 (the "Act") which purports to preempt state
laws which prohibit the enforcement of "due-on-sale" clauses by providing among
other matters, that "due-on-sale" clauses in certain loans (which loans may
include the Mortgage Loans) made after the effective date of the Act are
enforceable, within certain limitations as set forth in the Act and the
regulations promulgated thereunder. "Due-on-sale" clauses contained in mortgage
loans originated by federal savings and loan associations or federal savings
banks are fully enforceable pursuant to regulations of the Office of Thrift
Supervision ("OTS"), as successor to the Federal Home Loan Bank Board ("FHLBB"),
which preempt state law restrictions on the enforcement of such clauses.
Similarly, "due-on-sale" clauses in mortgage loans made by national banks and
federal credit unions are now fully enforceable pursuant to preemptive
regulations of the Office of the Comptroller of the Currency and the National
Credit Union Administration, respectively.
The Act created a limited exemption from its general rule of enforceability
for "due-on-sale" clauses in certain mortgage loans ("Window Period Loans")
which were originated by non-federal lenders and made or assumed in certain
states ("Window Period States") during the period, prior to October 15, 1982, in
which that state prohibited the enforcement of "due-on-sale" clauses by
constitutional provision, statute or statewide court decision (the "Window
Period"). Though neither the Act nor the FHLBB regulations promulgated
thereunder actually names the Window Period States, FHLMC has taken the
position, in prescribing mortgage loan servicing standards with respect to
mortgage loans which it has purchased, that the Window Period States were:
Arizona, Arkansas, California, Colorado, Georgia, Iowa, Michigan, Minnesota, New
Mexico, Utah and Washington. Under the Act, unless a Window Period State took
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action by October 15, 1985, the end of the Window Period, to further regulate
enforcement of "due-on-sale" clauses in Window Period Loans, "due-on-sale"
clauses would become enforceable even in Window Period Loans. Five of the Window
Period States (Arizona, Minnesota, Michigan, New Mexico and Utah) have taken
actions which restrict the enforceability of "due-on-sale" clauses in Window
Period Loans beyond October 15, 1985. The actions taken vary among such states.
By virtue of the Act, the Servicer may generally be permitted to accelerate
any conventional Mortgage Loan which contains a "due-on-sale" clause upon
transfer of an interest in the property subject to the mortgage or deed of
trust. With respect to any Mortgage Loan secured by a residence occupied or to
be occupied by the borrower, this ability to accelerate will not apply to
certain types of transfers, including (i) the granting of a leasehold interest
which has a term of three years or less and which does not contain an option to
purchase, (ii) a transfer to a relative resulting from the death of a borrower,
or a transfer where the spouse or children becomes an owner of the property in
each case where the transferee(s) will occupy the property, (iii) a number
resulting from a decree of dissolution of marriage, legal separation agreement
or from an incidental property settlement agreement by which the spouse becomes
an owner of the property, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the property (provided that such lien or
encumbrance is not created pursuant to a contract for deed), (v) a transfer by
devise, descent or operation of law on the death of a joint tenant or tenant by
the entirety, and (vi) other transfers as set forth in the Act and the
regulations thereunder. The extent of the effect of the Act on the average lives
and delinquency rates of the Mortgage Loans cannot be predicted. See "Prepayment
and Yield Considerations."
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that state usury limitations shall
not apply to certain types of residential first mortgage loans originated by
certain lenders after March 31, 1980. The OTS (as successor to the FHLBB) is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. The statute authorized any state to
reimpose Stated Rate limits by adopting before April 1, 1983, a law or
constitutional provision which expressly rejects application of the federal law.
Fifteen states have adopted laws reimposing or reserving the right to impose
interest rate limits. In addition, even where Title V is not so rejected, any
state is authorized to adopt a provision limiting certain other loan charges.
Unless otherwise specified in the applicable Prospectus Supplement, each
Unaffiliated Seller will represent and warrant in the related Loan Sale
Agreement that all Mortgage Loans sold by such Unaffiliated Seller to the
Depositor were originated in full compliance with applicable state laws,
including usury laws. See "The Trust Funds -- Representations and Warranties."
Adjustable Rate Loans
The laws of certain states may provide that mortgage notes relating to
adjustable rate loans are not negotiable instruments under the Uniform
Commercial Code. In such event, the Trustee will not be deemed to be a "holder
in due course" within the meaning of the Uniform Commercial Code and may take
such a mortgage note subject to certain restrictions on its ability to foreclose
and to certain contractual defenses available to a mortgagor.
Enforceability of Certain Provisions
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under the Pooling and Servicing Agreement, late charges and prepayment
fees (to the extent permitted by law and not waived by the Servicer) will be
retained by the Servicer as additional servicing compensation.
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Courts have Unposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial remedies
that may be fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have sustained their judgment for the lender's judgment
and have required lenders to reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from temporary financial disability. In
some cases, courts have limited the right of lenders to foreclose if the default
under the mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second mortgage or
deed of trust affecting the property. In other cases, some courts have been
faced with the issue whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
deeds of trust receive notices in addition to the statutorily-prescribed minimum
requirements. For the most part, these cases have upheld the notice provisions
as being reasonable or have found that the sale by a trustee under a deed of
trust or under a mortgage having a power of sale does not involve sufficient
state action to afford constitutional protections to the borrower.
The Contracts
General
As a result of the assignment of the Contracts to the Trustee, the Trust
Fund will succeed collectively to all of the rights (including the right to
receive payment on the Contracts) and will assume the obligations of the obligee
under the Contracts. Each Contract evidences both (a) the obligation of the
obligor to repay the loan evidenced thereby, and (b) the grant of a security
interest in the Manufactured Home to secure repayment of such loan. Certain
aspects of both features of the Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code (the "UCC") in effect in the states in which the Manufactured
Homes initially were registered. Pursuant to the UCC, the sale of chattel paper
is treated in a manner similar to perfection of a security interest in chattel
paper. Under the Pooling and Servicing Agreement, the Servicer will transfer
physical possession of the Contracts to the Trustee or a designated custodian or
may retain possession of the Contracts as custodian for the Trustee. In
addition, the Servicer will make an appropriate filing of a UCC-1 financing
statement in the appropriate states to give notice of the Trustee's ownership of
the Contracts. Unless otherwise specified in the related Prospectus Supplement,
the Contracts will not be stamped or marked otherwise to reflect their
assignment from the Depositor to the Trustee. Therefore, if through negligence,
fraud or otherwise, a subsequent purchaser were able to take physical possession
of the Contracts without notice of such assignment, the Trustee's interest in
Contracts could be defeated.
Security Interests in the Manufactured Homes
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some non-title states, perfection pursuant
to the provisions of the UCC is required. The Servicer may effect such notation
or delivery of the required documents and fees, and obtain possession of the
certificate of title, as appropriate under the laws of the state in which any
manufactured home securing a manufactured housing conditional sales contract is
registered. In the event the Servicer fails, due to clerical errors, to effect
such notation or delivery, or files the security interest under the wrong law
(for example, under a motor vehicle title statute rather than under the UCC, in
a few states), the Certificateholders may not have a first priority security
interest in the Manufactured Home securing a Contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the secured party must file either a "fixture filing" under the provisions
of the UCC or a real estate mortgage under the real estate laws of the state
where the home is located. These filings must be made in the real estate records
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office of the county where the home is located. Substantially all of the
Contracts contain provisions prohibiting the borrower from permanently attaching
the Manufactured Home to its site. So long as the borrower does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to its site,
other parties could obtain an interest in the Manufactured Home which is prior
to the security interest originally retained by the Unaffiliated Seller and
transferred to the Depositor. With respect to a Series of Certificates and if so
described in the related Prospectus Supplement, the Servicer may be required to
perfect a security interest in the Manufactured Home under applicable real
estate laws. The Servicer will represent that at the date of the initial
issuance of the related Certificates it has obtained a perfected first priority
security interest by proper notation or delivery of the required documents and
fees with respect to substantially all of the Manufactured Homes securing the
Contracts.
The Depositor will cause the security interests in the Manufactured Homes
to be assigned to the Trustee on behalf of the Certificateholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Depositor
nor the Trustee will amend the certificates of title to identify the Trustee or
the Trust Fund as the new secured party, and neither the Depositor nor the
Servicer will deliver the certificates of title to the Trustee or note thereon
the interest of the Trustee. Accordingly, the Servicer (or the Unaffiliated
Seller) which continue to be named as the secured party on the certificates of
title relating to the Manufactured Homes. In many states, such assignment is an
effective conveyance of such security interest without amendment of any lien
noted on the related certificate of title and the new secured party succeeds to
the Depositor's rights as the secured party. However, in some states there
exists a risk that, in the absence of an amendment to the certificate of title,
such assignment of the security interest in the Manufactured Home might not be
effective or perfected or that, in the absence of such notation or delivery to
the Trustee, the assignment of the security interest in the Manufactured Home
might not be effective against creditors of the Servicer (or the Unaffiliated
Seller) or a trustee in bankruptcy of the Servicer (or the Unaffiliated Seller).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Servicer (or
the Unaffiliated Seller) on the certificate of title or delivery of the required
documents and fees will be sufficient to protect the Certificateholders against
the rights of subsequent purchasers of a Manufactured Home or subsequent lenders
who take a security interest in the Manufactured Home. If there are any
Manufactured Homes as to which the security interest assigned to the Trustee is
not perfected, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the Trustee as
the new secured party on the certificate of title that, through fraud or
negligence, the security interest of the Certificateholders could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and not
re-register the Manufactured Home in such state, and if steps are not taken to
re-perfect the Trustee's security interest in such state, the security interest
in the Manufactured Home would cease to be perfected. A majority of states
generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien, the
Servicer would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the Trustee
would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing conditional sales contracts, the Servicer takes steps to effect such
re-perfection upon receipt of notice of registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a manufactured home, the Trustee (or
its custodian) must surrender possession of the certificate of title or the
Servicer will receive notice as a result of its lien noted thereon and
accordingly will have an opportunity to require satisfaction of the related
manufactured housing conditional sales contract before release of the lien.
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Under the Pooling and Servicing Agreement, the Servicer is obligated to take
steps, at the Servicer's expense, as are necessary to maintain perfection of
security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufacturer Home and liens for personal property taxes take priority over a
perfected security interest. The Unaffiliated Seller will represent in the
Pooling and Servicing Agreement that it has no knowledge of any such liens with
respect to any Manufactured Home securing payment on any Contract. However, such
liens could arise at any time during the term of a Contract. No notice will be
given to the Trustee or Certificateholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes
The Servicer on behalf of the Trustee, to the extent required by the
related Pooling and Servicing Agreement, may take action to enforce the
Trustee's security interest with respect to Contracts in default by repossession
and resale of the Manufactured Homes securing such defaulted Contracts. So long
as the Manufactured Home has not become subject to the real estate law, a
creditor can repossess a Manufactured Home securing a Contract by voluntary
surrender, by "self-help" repossession that is "peaceful" (i.e., without breach
of the peace) or, in the absence of voluntary surrender and the ability to
repossess without breach of the peace, by judicial process. The holder of a
Contract must give the debtor a number of days' notice, which varies from 10 to
30 days depending on the state, prior to commencement of any repossession. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states also
requires that the debtor be given notice of any sale prior to resale of the unit
so that the debtor may redeem at or before such resale. In the event of such
repossession and resale of a Manufactured Home, the Trustee would be entitled to
be paid out of the sale proceeds before such proceeds could be applied to the
payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debted thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the obligor also may be able to asset
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
Contract.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer that is not consented to.
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In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St Germain Depository Institutions Act of 1982
preempts, subject to certain exceptions and conditions, state laws prohibiting
enforcement of "due-on-sale" clauses applicable to the Manufactured Homes.
Consequently, in some states the Servicer may be prohibited from enforcing a
"due-on-sale" clause in respect of certain Manufactured Homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations shall not apply to any loan which is secured
by a first lien on certain kinds of manufactured housing. The Contracts would be
covered if they satisfy certain conditions, among other things, governing the
terms of any prepayments, late charges and deferral fees and requiring a 30-day
notice period prior to instituting any action leading to repossession of the
related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, and state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The Unaffiliated Seller will represent that all of the Contracts comply with
applicable usury law.
Formaldehyde Litigation with Respect to Contracts
A number of lawsuits have been brought in the United States alleging
personal injury from exposure to the chemical formaldehyde, which is preset in
many building materials, including such components of manufactured housing as
plywood flooring and wall paneling. Some of these lawsuits were brought against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. Depositor is aware of a limited number of
cases in which plaintiffs have won judgments in these lawsuits.
The holder of any Contract secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Contract and may be
unable to collect amounts still due under the Contract. The successful assertion
of such claim constitutes a breach of a representation or warranty of the person
specified in the related Prospectus Supplement, and the Certificateholders would
suffer a loss only to the extent that (i) such person breached its obligation to
repurchase the Contract in the event an obligor is successful in asserting such
a claim, and (ii) such person, the Servicer or the Trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of the
Certificateholders against the manufacturer or other persons who were directly
liable to the plaintiff for the damages. Typical products liability insurance
policies held by manufacturers and component suppliers of manufactured homes may
not cover liabilities arising from formaldehyde in manufactured housing, with
the result that recoveries from such manufacturers, suppliers or other persons
may be limited to their corporate assets without the benefit of insurance.
Installment Contracts
Mortgage Loans and Contracts
The Mortgage Loan and Contracts may also consist of Installment Contracts.
Under an Installment Contract the seller (hereinafter referred to in this
Section as the "lender") retains legal title to the property and enters into an
agreement with the purchaser (hereinafter referred to in this Section as the
"borrower" for the payment of the purchase price, plus interest, over the term
of such contract. Only after full performance by the borrower of the contract is
the lender obligated to convey title to the real estate to the purchaser. As
with mortgage or deed of trust financing, during the effective period of the
Installment Contract, the borrower is generally responsible for maintaining the
property in good condition and for paying real estate taxes, assessments and
hazard insurance premiums associated with the property.
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The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated, and
the buyer's equitable interest in the property is forfeited. The lender in such
a situation does not have to foreclosure in order to obtain title to the
property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of forfeiture.
Under such statute, a judicial or nonjudicial foreclosure may be required, the
lender may be required to give notice of default and the borrower may be granted
some grace period during which the contract may be reinstated upon full payment
of the default amount and the borrower may have a post-foreclosure statutory
redemption right. In other states, courts in equity may permit a borrower with
significant investment in the property under an Installment Contract for the
sale of real estate to share in the proceeds of sale of the property after the
indebtedness is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an Installment Contract for the sale of real
estate in a given state are simpler and less time-consuming and costly than are
the procedures for foreclosing and obtaining clear title to a mortgaged
property.
Environmental Risks
Real property pledged for a Mortgaged Loan or Contract as security to a
lender may be subject to unforeseen environmental risks. Of particular concern
may be those mortgaged properties which have been the site of manufacturing,
industrial or disposal activity. Such environmental risks may give rise to (a) a
diminution in value of property securing any Mortgage Loan or the inability to
foreclose against such property or (b) in certain circumstances as more fully
described below, liability for clean-up costs or other remedial actions, which
liability could exceed the value of such property or the principal balance of
the related Mortgage Loan.
Under the laws of certain states, failure to perform the remediation
required or demanded by the state of any condition or circumstance that (i) may
pose an imminent or substantial endangerment to the public health or welfare or
the environment, (ii) may result in a release or threatened release of any
Hazardous Material, or (iii) may give rise to any environmental claim or demand
(each such condition or circumstance, or "Environmental Condition") may give
rise to a lien on the property to ensure the reimbursement of remedial costs
incurred by the state. In several states such lien has priority over the lien of
an existing mortgage against such property. The value of a Mortgaged Property as
collateral for a Mortgage Loan could therefore be adversely affected by the
existence of any such Environmental Condition.
The state of the law is currently unclear as to whether and under what
circumstances clean-up costs, or the obligation to take remedial actions, could
be Unposed on a secured lender such as the Trust Fund. Under the laws of some
states and under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), a lender may be liable as an
"owner or operator" for costs of addressing releases or threatened releases of
hazardous substances on a mortgaged property if such lender or its agents or
employees have participated in the management of the operations of the borrower,
even though CERCLA's definition of "owner or operator," however, is a person
"who without participating in the management of the facility, holds indicia of
ownership primarily to protect his security interest" (the "secured-creditor
exemption"). This exemption for holders of a security interest such as a secured
lender applies only when the lender seeks to protect its security interest in
the contaminated facility or property. Thus, if a lender's activities begin to
encroach on the actual management of such facility or property, the lender faces
potential liability as an "owner or operator" under CERCLA. Similarly, when a
lender forecloses and takes title to a contaminated facility or property
(whether it holds the facility or property as an investment or leases it to a
third party), the lender may incur potential CERCLA liability.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly contained
CERCLA's secured-creditor exemption. The court held that a lender need not have
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involved itself in the day-to-day operations of the facility or participated in
decisions relating to hazardous waste to be liable under CERCLA; rather,
liability could attach to a lender if its involvement with the management of the
facility is broad enough to support the inference that the lender had the
capacity to influence the borrower's treatment of hazardous waste. The court
added that a lender's capacity to influence such decisions could be inferred
from the extent of its involvement in the facility's financial management. A
subsequent decision by the United States Court of Appeals for the Ninth Circuit
in In re Bergsoe Metal Corp., disagreeing with the Fleet Factors court, held
that a secured lender had no liability absent "some actual management of the
facility" on the part of the lender. On April 29, 1992, the United States
Environmental Protection Agency (the "EPA") issued a final rule interpreting and
delineating CERCLA's secured-creditor exemption. The final rule defines a
specific the range of permissible actions that may be undertaken by a holder of
a contaminated facility without exceeding the bounds of the secured-creditor
exemption. Issuance of this rule by the EPA under CERCLA would not necessarily
affect the potential for liability in actions by either a state or a private
party under CERCLA or in actions under other federal or state laws which may
impose liability on "owners or operators" but do not incorporate the
second-creditor exemption.
If a lender is or becomes liable for clean-up costs, it may bring an action
for contribution against the current owners or operators, the owners or
operators at the time of on-site disposal activity or any other party who
contributed to the environmental hazard, but such persons or entities may be
bankrupt or otherwise judgment proof. Furthermore, such action against the
borrower may be adversely affected by the limitations on recourse in the
documents in the Mortgage Document File. Similarly, in some states
anti-deficiency legislation and other statues requiring the lender to exhaust
its security before bringing a personal action against the borrower-trustor (see
"Anti- Deficiency Legislation and Other Limitations on Lenders" below) may
curtail the lender's ability to recover from its borrower the environmental
clean-up and other related costs and liabilities by the lender.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan or Contract (including a
borrower who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan or Contract and is later called to
active duty) may not be charged interest above an annual rate of 6% during the
period of such borrower's active duty status, unless a court orders otherwise
upon application of the lender. It is possible that such action could have an
effect, for an indeterminate period of time, on the ability of the Servicer to
collect full amounts of interest on certain of the Mortgage Loans or Contracts
in a Trust Fund. Any shortfall in interest collections resulting from the
application of the Relief Act could result in losses to the holders of the
Certificates of the related Series. In addition, the Relief Act imposes
limitations which would impair the ability of the Servicer to foreclose on an
affected Mortgage Loan or Contract during the borrower's period of active duty
status. Thus, in the event that such a Mortgage Loan or Contract goes into
default, there may be delays and losses occasioned by the inability to realize
upon the Mortgaged Property or Manufactured Home in a timely fashion.
Type of Mortgaged Property
The lender may be subject to additional risk depending upon the type and
use of the Mortgaged Property in question. For instance, Mortgaged Properties
which are hospitals, nursing homes or convalescent homes may present special
risks to lenders in large part due to significant governmental regulation of the
operation, maintenance, control and financing of health care institutions.
Mortgages on Mortgaged Properties which are owned by the Borrower under a
condominium form of ownership are subject to the declaration, by-laws and other
rules and regulations of the condominium association. Mortgaged Properties which
are hotels or motels may present additional risk to the lender in that: (i)
hotels and motels are typically operated pursuant to franchise, management and
operating agreements which may be terminable by the operator; and (ii) the
transferability of the hotel's operating, liquor and other licenses to the
entity acquiring the hotel either through purchase or foreclosure is subject to
the vagaries of local law requirements. In addition, Mortgaged Properties which
are multifamily residential properties may be subject to rent control laws,
which could impact the future cash flows of such properties. Finally, Mortgaged
Properties which are financed in the installment sales contract method may leave
the holder of the note exposed to tort and other claims as the true owner of the
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property which could impact the availability of cash to pass through to
investors.
Certain Matters Relating to Insolvency
The Unaffiliated Seller of the Mortgage Loans or Contracts and the
Depositor intend that the transfer of such Mortgage Loans or Contracts to the
Trust Fund constitute a sale rather for a pledge of the Mortgage Loans or
Contracts to secure indebtedness of the seller of the Mortgage Loans or
Contracts. However, if the Unaffiliated Seller were to become a debtor under the
federal bankruptcy code or be placed in a conservatorship or receivership under
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), as the case may be, it is possible that a creditor, receiver,
conservator or trustee-in-bankruptcy of such seller may argue that the sale of
the Mortgage Loans or Contracts by the Unaffiliated Seller is a pledge of the
Mortgage Loans or Contracts rather than a sale. This position, if argued or
accepted by a court, could result in a delay in or reduction of distributions to
the related Certificateholders.
Under FIRREA the FDIC as receiver or conservator of a Servicer subject to
its jurisdiction may enforce a contract notwithstanding any provision of the
contract providing for termination thereof by reason of the insolvency of, or
appointment of a receiver or conservator for, the Servicer. Consequently,
provisions in a Pooling and Servicing Agreement providing for an Event of
Default upon certain events of insolvency, receivership or conservatorship of
the Servicer may not be enforceable against the FDIC as receiver or conservator
to the extent that the exercise of such rights is based solely upon the
insolvency of or appointment of a receiver or conservator for the Servicer. In
addition, the FDIC may transfer the assets and liabilities of an institution in
receivership or conservatorship to another institution.
Bankruptcy Laws
Numerous statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the ability
of the secured mortgage lender to obtain payment of the loan, to realize upon
collateral and/or enforce a deficiency judgment. For example, under federal
bankruptcy law, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of the
bankruptcy petition, and, often, no interest or principal payments are made
during the course of the bankruptcy proceeding. The delay and the consequences
thereof caused by or on behalf of a junior lienor may stay the senior lender
from taking action to foreclose out such junior lien. In a case under the
Bankruptcy Code, the lender is precluded from foreclosing without authorization
from the bankruptcy court. In addition, a court with federal bankruptcy
jurisdiction may permit a debtor through his or her Chapter 11 or Chapter 13
rehabilitative plan to cure a monetary default in respect of a mortgage loan on
the debtor's residence by paying arrearage within a reasonable time period and
reinstating the original mortgage loan payment schedule even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been entered
in state court (provided no sale of the residence had yet occurred) prior to the
filing of the debtor's petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a mortgage loan default by
paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule, and reducing the lender's security interest to the value of
the residence, thus leaving the lender in the position of a general unsecured
creditor for the difference between the value of the residence and the
outstanding balance of the loan.
Federal bankruptcy law may also interfere with or affect the ability of the
secured mortgage lender to enforce an assignment by a mortgagor of rent and
leases related to the Mortgaged Property if the related mortgagor is in a
bankruptcy proceeding. Under Section 362 of the Bankruptcy Code, the mortgagee
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue can be time-consuming and may result in
significant delays in the receipt of the rents. Rents may also escape an
assignment thereof (i) if the assignment is not fully perfected under state law
prior to commencement of the bankruptcy proceeding, (ii) to the extent such
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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.
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer to the Trust Fund of any payments made by
the mortgagor under the related Mortgage Loan. Moreover, some recent court
decisions suggest that even a non-collusive, regularly conducted foreclosure
sale may be challenged in a bankruptcy proceeding as a "fraudulent conveyance,"
regardless of the parties' intent, if a bankruptcy court determines that the
mortgaged property has been sold for less than fair consideration while the
mortgagor was insolvent and within one year (or within any longer state statutes
of limitations if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law) of the filing of bankruptcy.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of the anticipated material federal
income consequences of the purchase, ownership, and disposition of the
Certificates. The discussion below does not purport to address all federal
income consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules. The discussion is
based upon laws, regulations, rulings and decisions now in effect all of which
are subject to change. This discussion reflects the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as regulations
(the "REMIC Regulations") promulgated by the U.S. Department of the Treasury.
Investors should consult their own tax advisors in determining the federal,
state, local, and any other tax consequences to them of the purchase, ownership,
and disposition of the Certificates.
For purposes of this discussion, where the applicable Prospectus Supplement
provides for a Fixed Retained Yield with respect to the Mortgage Loans or
Contracts of a Series of Certificates, references to the Mortgage Loans or
Contracts will be deemed to refer to that portion of the Mortgage Loans or
Contracts held by the Trust Fund, which does not include the Fixed Retained
Yield. For purposes of this discussion, references to the "principal amount" or
"principal balance" of a Certificate will be deemed to refer to the Stated
Amount in the case of Multi-Class Certificates. For purposes of this discussion,
unless otherwise specified, the term "Mortgage Loans" will be used to refer to
Mortgage Loans and Contracts. References to a "holder" or "Certificateholder" in
this discussion generally mean the beneficial owner of a Certificate.
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The following discussion addresses securities of three general types: (i)
securities ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, which the Depositor will covenant to elect to have treated as a
real estate mortgage investment conduit ("REMIC") under sections 860A through
860G of the Code and the regulations promulgated thereunder; (ii) securities
("Non-REMIC Certificates") representing interests in a Trust Fund (a "Grantor
Trust Estate") which the Depositor will covenant not to elect to have treated as
a REMIC; and (iii) securities ("Notes") that are intended to be treated for
federal income tax purposes as indebtedness secured by the underlying Mortgage
Loans. This Prospectus does not address the tax treatment of partnership
interests. Such a discussion will be set forth in the applicable Prospectus
Supplement for any trust issuing securities characterized as partnership
interests. The Prospectus Supplement for each series of securities will indicate
whether a REMIC election (or elections) will be made for the related Trust
Estate and, if a REMIC election is to be made, will identify all "regular
interests" and "residual interests" in the REMIC.
REMIC CERTIFICATES
General
With respect to a particular Series of Certificates, an election may be
made to treat the Trust Fund (or one or more segregated pools of assets therein)
as one or more REMICs within the meaning of Code Section 860D. A Trust Fund or a
portion or portions thereof as to which one or more REMIC elections will be made
will be referred to as a "REMIC Pool." For purposes of this discussion,
Certificates of a Series as to which one or more REMIC elections are made, which
will include all Multi-Class Certificates and may include Standard Certificates
or Stripped Certificates or both, are referred to as "REMIC Certificates" and
will consist of one or more Classes of "Regular Certificates" and one Class of
"Residual Certificates" in the case of each REMIC Pool. Qualification as a REMIC
requires ongoing compliance with certain conditions. With respect to each Series
of REMIC Certificates, the Depositor's Counsel has advised the Depositor that in
the firm's opinion, assuming (i) the making of such an election, (ii) compliance
with the Pooling and Servicing Agreement, and (iii) compliance with any changes
in the law, including any amendments to the Code or applicable Treasury
regulations thereunder, each REMIC Pool will qualify as a REMIC. In such case,
the Regular Certificates will be considered to be "regular interests" in the
REMIC Pool and generally will be treated for federal income tax purposes as if
they were newly originated debt instruments, and the Residual Certificates will
be considered to be "residual interests" in the REMIC Pool. The Prospectus
Supplement for each Series of Certificates will indicate whether one or more
REMIC elections with respect to the related Trust Fund will be made, in which
event references to REMIC or "REMIC Pool" herein shall be deemed to refer to
each such REMIC Pool.
Status of REMIC Certificates
REMIC Certificates held by a domestic building and loan association will
constitute either a "regular or residual interest in a REMIC" within the meaning
of Code Section 7701(a)(19)(C)(xi), but only in the same proportion that the
assets of the REMIC Pool would be treated as "loans . . . secured by an interest
in real property which is . . . residential real property" (such as single
family or multifamily properties, but not commercial properties) within the
meaning of Code Section 7701(a)(19)(C)(v) or as other assets described in Code
Section 7701(a)(19)(C), and otherwise will not qualify for such treatment. REMIC
Certificates held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code Section 856(C)(5)(A), and interest on the
Regular Certificates and income with respect to Residual Certificates will be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section 856(C)(3)(B) in
the same proportion that, for both purposes, the assets and income of the REMIC
Pool would be so treated. If at all times 95% or more of the assets of the REMIC
Pool qualify for the foregoing respective treatments, the REMIC Certificates
will qualify for the corresponding status in their entirety. For purposes of
Code Sections 593(d)(1) and 856(c)(5)(A), payments of principal and interest on
the Mortgage Loans that are reinvested pending distribution to holders of
Certificates qualify for such treatment. Where two REMIC Pools are part of a
tiered structure they will be treated as one REMIC for purposes of the tests
described above respecting asset ownership of more or less than 95%. In
addition, if the assets of a REMIC include Buy-Down Loans, it is possible that
the percentage of such assets constituting "loans . . . secured by an interest
in real property" for purposes of Code Section 7701(a)(19)(c)(v) may be required
to be reduced by the amount of the related Buy-Down Fund. REMIC Certificates
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held by certain financial institutions will constitute an "evidence of
indebtedness" within the meaning of Code Section 582(c)(1).
Qualification as a REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Certificates) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a "safe harbor" pursuant
to which the de minimis requirement is met if at all times the aggregate
adjusted basis of the nonqualified assets in less than 1 percent of the
aggregate adjusted basis of all the REMIC Pool's assets. An entity that fails to
meet the safe harbor may nevertheless demonstrate that it holds no more than a
de minimis amount of nonqualified assets. A REMIC also must provide "reasonable
arrangements" to prevent its residual interest from being held by "disqualified
organizations" and applicable tax information to transferors or agents that
violate this requirement. See "Taxation of Residual Certificates -- Tax-Related
Restrictions on Transfers of Residual Certificates -- Disqualified
Organizations."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed-price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
certificates of beneficial interest in a grantor trust that holds mortgage
loans, regular interests in another REMIC, loans secured by timeshare interests
and loans secured by shares held by a tenant stockholder in a cooperative
housing corporation, provided, in general, (i) the fair market value of the real
property security (including buildings and structural components thereof) is at
least 80% of the principal balance of the related Mortgage Loan either at
origination or as of the Startup Day (an original loan-to-value ratio of not
more than 125% with respect to the real property security) or (ii) substantially
all the proceeds of the Mortgage Loan or the underlying mortgage loan were used
to acquire, improve or protect an interest in real property that, at the
origination date, was the only security for the Mortgage Loan or underlying
mortgage loan. A qualified mortgage includes a qualified replacement mortgage,
which is any property that would have been treated as a qualified mortgage if it
were transferred to the REMIC Pool on the Startup Day and that is received
either (i) in exchange for any qualified mortgage within a three-month period
thereafter or (ii) in exchange for a "defective obligation" within a two-year
period thereafter. A "defective obligation" includes (i) a mortgage in default
or as to which default is reasonably foreseeable, (ii) a mortgage as to which a
representation or warranty made at the time of transfer to the REMIC Pool has
been breached, (iii) a mortgage that was fraudulently procured by the mortgagor,
and (iv) a mortgage that was not in fact principally secured by real property
(but only if such mortgage is disposed of within 90 days of discovery). A
mortgage loan that is "defective" as described in clause (iv) that is not sold
or, if within two years of the Startup Day, exchanged, within 90 days of
discovery, ceases to be a qualified mortgage after such 90-day period. Effective
September 1, 1997, a qualified mortgage will include any regular interest in a
financial asset securitization investment trust ("FASIT") transferred to the
REMIC on the Startup Day or purchased by the REMIC within a three month period
thereafter pursuant to a fixed-price contract in effect on the Startup Day, but
only if 95% or more of the value of the FASIT's assets is at all times
attributable to obligations that are principally secured by an interest in real
property as described above.
The REMIC Regulations provide that obligations secured by interests in
manufactured housing which qualify as "single family residences" within the
meaning of Code Section 25(e)(10) may be treated as "qualified mortgages" of a
REMIC. Under Code Section 25(e)(10), the term "single family residence" includes
any manufactured home which has a minimum of 400 square feet of living space and
a minimum width in excess of 102 inches and which is of a kind customarily used
at a fixed location. The Depositor will represent and warrant that each of the
Manufactured Homes securing the Contracts meets this definition of "single
family residence."
Permitted investments include cash flow investments, qualified reserve
assets and foreclosure property. A cash flow investment is any instrument,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
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A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or to provide additional security for
payments due on the regular or residual interests that otherwise may be delayed
or defaulted upon because of default (including delinquencies) on the qualified
mortgages, lower than expected reinvestment returns, prepayment interest
shortfalls and certain other contingencies. The reserve fund will be
disqualified if more than 30 percent of the gross income from the assets in such
fund for the year is derived from the sale of property held for less than three
months, unless required to prevent a default on the regular interests caused by
a default on one or more qualified mortgages. A reserve fund must be reduced
"promptly and appropriately" as payments on the Mortgage Loans are received.
Foreclosure property is real property acquired by the REMIC Pool in connection
with default or imminent default of a qualified mortgage and generally held for
not more than two years, with extensions granted by the Internal Revenue
Service.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of regular interests or
(ii) a class of residual interests on which distributions, if any, are made pro
rata. A regular interest is an interest in a REMIC Pool that is issued on the
Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or at a qualified variable rate or consist of a specified, nonvarying portion of
the interest payments on qualified mortgages. The specified principal amount of
a regular interest that provides for interest payments consisting of a
specified, nonvarying portion of interest payments on qualified mortgages may be
zero. A residual interest is an interest in a REMIC Pool other than a regular
interest that is issued on the Startup Day and is designated as a residual
interest. An interest in a REMIC Pool may be treated as a regular interest even
if payments of principal with respect to such interest are subordinated to
payments on other regular interests or the residual interest in the REMIC Pool,
and are dependent on the absence of defaults or delinquencies on qualified
mortgages or permitted investments, lower than reasonably expected returns on
permitted investments, unanticipated expenses incurred by the REMIC Pool or
prepayment interest shortfalls. Accordingly, the Regular Certificates of a
Series will constitute one or more classes of regular interests, and the
Residual Certificates with respect to each REMIC Pool in that Series will
constitute a single class of residual interests on which distributions are made
pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable year,
the Code provides that the entity will not be treated as a REMIC for such year
and thereafter. In this event, an entity with multiple classes of ownership
interests may be treated as a separate association taxable as a corporation
under Treasury regulations, and the Regular Certificates may be treated as
equity interests therein. The Code, however, provides that in certain situations
where failure to meet one or more of the requirements for REMIC status occurs
inadvertently and in good faith, and disqualification of the REMIC Pool would
occur absent regulatory relief, the Secretary of the Treasury may determine that
the REMIC shall continue to be treated as a REMIC or that the period of
cessation of REMIC status shall be disregarded. Investors should be aware,
however, 1986 Act that the relief may be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the REMIC Pool's income for
the period of time in which the requirements for REMIC status are not satisfied.
Taxation of Regular Certificates
General
In general, interest paid or accrued, original issue discount, and market
discount on a Regular Certificate will be treated as ordinary income to a holder
of the Regular Certificate (the "Regular Certificateholder"), and principal
payments on a Regular Certificate will be treated as a return of capital to the
extent of the Regular Certificateholder's basis in the Regular Certificate
allocable thereto. Regular Certificateholders must use the accrual method of
accounting with regard to Regular Certificates, regardless of the method of
accounting otherwise used by such Regular Certificateholders.
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Original Issue Discount
Compound Interest Certificates will be, and certain of the Regular
Certificates of other Classes of a Series may be, issued with "original issue
discount" within the meaning of Code Section 1273(a). Holders of any Class or
Subclass of Regular Certificates having original issue discount generally must
include original issue discount in ordinary income for federal income purposes
as it accrues, in accordance with the constant yield method that takes into
account the compounding of interest. Such accrual may be in advance of receipt
of the cash attributable to such income. The following discussion is based in
part on Treasury regulations issued under Code Sections 1271 through 1273 and
1275 (the "OID Regulations") and in part on the provisions of the 1986 Act.
Regular Certificateholders should be aware, however, that the OID Regulations do
not adequately address certain issues relevant to prepayable securities, such as
the Regular Certificates. To the extent such issues are not addressed in the OID
Regulations, the Depositor intends to apply the methodology described in the
Conference Committee Report to the 1986 Act. No assurance can be provided that
the Internal Revenue Service will not take a different position as to those
matters not currently addressed by the OID Regulations. Moreover, the OID
Regulations include an anti-abuse rule allowing the Internal Revenue Service to
apply or depart from the OID Regulations where necessary or appropriate to
ensure a reasonable result in light of the applicable statutory provisions. A
tax result will not be considered unreasonable under the anti-abuse rule in the
absence of a substantial effect on the present value of a taxpayer's tax
liability. Investors are advised to consult their own tax advisors as to the
discussion herein and the appropriate method for reporting interest and original
issue discount with respect to the Regular Certificates.
Each Regular Certificate (except to the extent described below with respect
to a Regular Certificate on which principal is distributed in a single
installment or by lots of specified principal amounts upon the request of a
Certificateholder or by random lot (a "Retail Class Certificate")) will be
treated as a single installment obligation for purposes of determining the
original issue discount includible in a Regular Certificateholder's income. The
total amount of original issue discount on a Regular Certificate is the excess
of the "stated redemption price at maturity" of the Regular Certificate over its
"issue price." The issue price of a Regular Certificate offered pursuant to this
Prospectus generally is the first price at which a substantial amount of Regular
Certificates of that Class is sold to the public (excluding bond houses, brokers
and underwriters). Although unclear under the OID Regulations, the Depositor
intends to treat the issue price of a Class as to which there is no substantial
sale as of the issue date or that is retained by the Depositor as the fair
market value of that Class as of the issue date. The issue price of a Regular
Certificate also includes any amount paid by an initial Regular
Certificateholder for accrued interest that relates to a period prior to the
issue date of the Regular Certificate, unless the Regular Certificateholder
elects on its federal income tax return to exclude such amount from the issue
price and to recover it on the first Distribution Date. The stated redemption
price at maturity of a Regular Certificate always includes the principal amount
of the Regular Certificate, but generally will not include distributions of
interest if such interest distributions constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means interest
payable at a single fixed rate or a qualified variable rate as described below,
provided that such interest payments are unconditionally payable at intervals of
one year or less during the entire term of the Regular Certificate. No
distributions on a Compound Interest Certificate, or on other Regular
Certificates with respect to which interest distributions may be deferred and
added to principal, will constitute qualified stated interest, and, accordingly,
the stated redemption price at maturity of such Regular Certificates includes
not only their principal balances but also all other distributions (whether
denominated as accrued interest or current interest) to be received thereon.
Likewise, the Depositor intends to treat an "interest only" Class, or a Class on
which interest is substantially disproportionate to its principal amount (a
so-called "super-premium") Class as having no qualified stated interest. Where
the interval between the issue date and the first Distribution Date on a Regular
Certificate is shorter than the interval between subsequent Distribution Dates,
the interest attributable to the additional days will be included in the stated
redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Certificate multiplied
by the weighted average maturity of the Regular Certificate. For this purpose,
the weighted average maturity of the Regular Certificate is computed as the sum
of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution is
scheduled to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Regular
Certificate and the denominator of which is the stated redemption price at
maturity of the Regular Certificate. The Conference Committee Report to the 1986
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Act provides that the schedule of such distributions should be determined in
accordance with the assumed rate of prepayment of the Mortgage Loans (the
"Prepayment Assumption") and the anticipated reinvestment rate, if any, relating
to the Regular Certificates. The Prepayment Assumption with respect of a Series
of Regular Certificates will be set forth in the related Prospectus Supplement.
Holders generally must report de minimis original issue discount pro rata as
principal payments are received, and such income will be capital gain if the
Regular Certificate is held as a capital asset. However, under the OID
Regulations, Regular Certificateholders may elect to accrue all de minimis
original issue discount (other than de minimis issue discount attributable to a
"teaser" interest rate or an initial interest holiday) as well as market
discount and market premium, under the constant yield method. See "Election to
Treat All Interest Under the Constant Yield Method."
A Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Certificate accrued during an accrual period for
each day on which it holds the Regular Certificate, including the date of
purchase but excluding the date of disposition. The Depositor will treat the
monthly period ending on the day before each Distribution Date as the accrual
period. With respect to each Regular Certificate, a calculation will be made of
the original issue discount that accrues during each successive full accrual
period (or shorter period from the date of original issue) that ends on the day
before the related Distribution Date on the Regular Certificate. The Conference
Committee Report to the 1986 Act states that the rate of accrual of original
issue discount is intended to be based on the Prepayment Assumption. Other than
as discussed below with respect to a Retail Class Certificate, the original
issue discount accruing in a full accruing period would be the excess, if any,
of (i) the sum of (a) the present value of all of the remaining distributions to
be made on the Regular Certificate as of the end of that accrual period that are
included in the Regular Certificate's stated redemption price at maturity, and
(b) the distributions made on the Regular Certificate during the accrual period
that are included in the Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of the Regular Certificate at the
beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence is calculated based on (i)
the yield to maturity of the Regular Certificate at the issue date, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, and (iii) the Prepayment Assumption. For these purposes, the
adjusted issued price of a Regular Certificate at the beginning of any accrual
period equals the issue price of the Regular Certificate, increased by the
aggregate amount of original issue discount with respect to the Regular
Certificate that accrued in all such prior periods, and reduced by the amount of
distributions included in the Regular Certificate's stated redemption price at
maturity that were made on the Regular Certificate in such prior periods. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Mortgage Loans
that exceed the Prepayment Assumption, and generally will decrease (but not
below zero for any period) if the prepayments are slower than the Prepayment
Assumption.
In the case of a Retail Class Certificate, the Depositor intends to
determine the yield to maturity of such Certificate based upon the anticipated
payment characteristics of the Class as a whole under the Prepayment Assumption.
In general, the original issue discount accruing on each Retail Class
Certificate in a full accrual period would be its allocable share of the
original issue discount with respect to the entire Class, as determined in
accordance with the preceding paragraph. However, in the case of a distribution
in retirement of the entire unpaid principal balance of any Retail Class
Certificate (or portion of such unpaid principal balance), (a) the remaining
unaccrued original issue discount allocable to such Certificate (or to such
portion) will accrue at the time of such distribution, and (b) the accrual of
original issue discount allocable to each remaining Certificate of such Class
(or the remaining unpaid principal balance of a partially redeemed Retail Class
Certificate after a distribution of principal has been received) will be
adjusted by reducing the present value of the remaining payments on such Class
and the adjusted issue price of such Class to the extent attributable to the
portion of the unpaid principal balance thereof that was distributed. The
Depositor believes that the foregoing treatment is consistent with the "pro-rata
prepayment" rules of the OID Regulations, but with the rate of accrual of
original issue discount determined based on the Prepayment Assumption for a
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Class as a whole. Investors are advised to consult their tax advisors as to this
treatment.
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted issue
price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively, such
a subsequent purchaser may elect to treat all such acquisition premium under the
constant yield method, as described below under the heading "Election to Treat
All Interest Under the Constant Yield Method."
Variable Rate Regular Certificates
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate if,
generally, (i) the issue price does not exceed the total contingent principal
payments by more than a specified amount, (ii) the interest compounds or is
payable at least annually at current values of (a) one or more "qualified
floating rates," (b) a single fixed rate followed by one or more qualified
floating rates, (c) a single "objective rate" or (d) a single fixed rate and a
single objective rate that is a "qualified inverse floating rate," and (iii) the
instrument does not provide for any principal payments that are contingent, as
defined in the OID Regulations, except as provided in (i) above. Because the OID
Regulations relating to contingent payment debt instruments do not apply to
REMIC regular interests, principal payments on the Regular Certificates should
not be considered contingent for this purpose. A floating rate is a qualified
floating rate if variations in the rate can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds, and such rate is
subject to a multiple of not less than zero that is greater than 0.65, but not
more than 1.35. Such rate may also be increased or decreased by a fixed spread
or subject to a fixed cap or floor, or a cap or floor that is not reasonably
expected as of the issue date to affect the yield of the instrument
significantly. An objective rate includes a rate determined using a single fixed
formula and that is based on objective financial or economic information.
However, a rate will not constitute an objective rate if it is reasonably
expected that the average value of the rate during the first half of the
instrument's term will be significantly less than or greater than the average
value of the rate during the final half of the instrument's term. Further, an
objective rate does not include a rate that is based on information within the
control of or unique to the circumstances of the issuer or a related party. A
qualified inverse floating rate is a rate equal to a fixed rate minus a
qualified floating rate that inversely reflects the contemporaneous variations
in the cost of newly borrowed funds; an inverse floating rate that is not a
qualified inverse floating rate may nevertheless be an objective rate. Under
REMIC Regulations, a Regular Certificate (i) bearing a rate that qualifies as a
variable rate under the OID Regulations that is tied to current values of a
variable rate (or the highest, lowest or average of two or more variable rates)
including a rate based on the average cost of funds of one or more financial
institutions, or a positive or negative multiple of such a rate (plus or minus a
specified number of basis points), or that represents a weighted average of
rates on some or all of the qualified mortgages that bear either a fixed rate or
a variable rate, including such a rate that is subject to one or more caps or
floors, or (ii) bearing one or more such variable rates for one or more periods,
or one or more fixed rates for one or more periods, and a different variable or
fixed rate for other periods, qualifies as a regular interest in a REMIC.
Accordingly, unless otherwise indicated in the applicable Prospectus Supplement,
the Depositor intends to treat Regular Certificates that qualify as regular
interests under this rule in the same manner as obligations bearing a variable
rate for original issue discount reporting purposes, with regular interests that
do not meet the definition of a variable rate in the OID Regulations being
treated as having all non-qualified stated interest.
The amount of original issue discount with respect to a Regular Certificate
bearing a variable rate of interest will accrue in the manner described above
under "Original Issue Discount," with the yield to maturity and future payments
on such Regular Certificate generally to be determined by assuming that interest
will be payable for the life of the Regular Certificate based on a rate
determined by substituting a fixed rate for each qualified floating rate,
objective rate, or initial fixed interest rate, in a manner determined under
Treasury regulations. Unless otherwise specified in the applicable Prospectus
Supplement, the Depositor intends to treat such variable interest as qualified
stated interest, other than variable interest on an interest-only Class, which
will be treated as non-qualified stated interest includible in the stated
redemption price at maturity. Ordinary income reportable for any period will be
adjusted based on subsequent changes in the applicable interest rate index.
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Deferred Interest
Any Deferred Interest that accrues with respect to a Class of Regular
Certificates will constitute income to the holders of such Regular Certificates
prior to the time distributions of cash with respect to such Deferred Interest
are made. The Depositor will treat all interest on a Regular Certificate as to
which there may be Deferred Interest as includible in the stated redemption
price at maturity thereof.
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these Code sections and
the principles applied by the OID Regulations in the context of original issue
discount, "market discount" is the amount by which the purchaser's original
basis in the Regular Certificate (i) is exceeded by the then-current principal
amount of the Regular Certificate, or (ii) in the case of a Regular Certificate
having original issue discount, is exceeded by the adjusted issue price of such
Regular Certificate at the time of purchase. Such purchaser generally will be
required to recognize ordinary income to the extent of accrued market discount
on such Regular Certificate as distributions includible in the stated redemption
price at maturity thereof are received, in an amount not exceeding any such
distribution. Such market discount would accrue in a manner to be provided in
Treasury regulations and should take into account the Prepayment Assumption. The
Conference Committee Report to the 1986 Act provides that until such regulations
are issued, such market discount would accrue either (i) on the basis of a
constant interest rate, or (ii) in the ratio of stated interest allocable to the
relevant period to the sum of the interest for such period plus the remaining
interest as of the end of such period, or in the case of a Regular Certificate
issued with original issue discount, in the ratio of original issue discount
accrued for the relevant period to the sum of the original issue discount
accrued for such period plus the remaining original issue discount as of the end
of such period. Such purchaser also generally will be required to treat a
portion of any gain on a sale or exchange of the Regular Certificate as ordinary
income to the extent of the market discount accrued to the date of disposition
under one of the foregoing methods, less any accrued market discount previously
reported as ordinary income as partial distributions in reduction of the stated
redemption price at maturity were received. Such purchaser will be required to
defer deduction of all or a portion of the excess of the interest paid or
accrued on indebtedness incurred or continued to purchase or carry the Regular
Certificate over the interest distributable thereon. The deferred portion of
such interest expense in any taxable year generally will not exceed the accrued
market discount on the Regular Certificate for such year. Any such deferred
interest expense is, in general, allowed as a deduction not later than the year
in which the related market discount income is recognized or the Regular
Certificate is disposed of. As an alternative to the inclusion of market
discount in income on the foregoing basis, the Regular Certificateholder may
elect to include market discount in income currently as it accrues on all market
discount instruments acquired by such Regular Certificateholder in that taxable
year or thereafter, in which case the interest deferral rule will not apply. See
"Election to Treat All Interest Under the Constant Yield Method" below regarding
an alternative manner in which such election may be deemed to be made.
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above in the fourth paragraph under
"Original Issue Discount") remaining after the date of purchase. It appears that
de minimis market discount would generally be reported pro rata as principal
payments are received. Treasury regulations implementing the market discount
rules have not yet been issued, and therefore investors should consult their own
tax advisors regarding the application of these rules as well as the
advisability of making any of the elections with respect thereto.
Premium
A Regular Certificate purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Certificateholder holds such Regular Certificate as a
"capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize such premium
under the constant yield method. The Conference Committee Report to the 1986 Act
indicates a Congressional intent that the same rules that will apply to the
accrual of market discount on installment obligations will also apply to
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amortizing bond premium under Code Section 171 on installment obligations such
as the Regular Certificates, although it is unclear whether the alternatives to
the constant yield method described above under "Market Discount" are available.
Amortizable bond premium will be treated as an offset to interest income on the
Regular Certificates, rather than a separate deduction item. See "Election to
Treat All Interest Under the Constant Yield Method" below regarding an
alternative manner in which the Code Section 171 election may be deemed to be
made.
Treatment of Losses
Regular Certificateholders will be required to report income with respect
to Regular Certificates on the accrual method of accounting, without giving
effect to delays or reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans, except to the extent it can be established
that such losses are uncollectible. Accordingly, the holder of a Regular
Certificate, particularly a Subordinate Certificate, may have income, or may
incur a diminution in cash flow as a result of a default or delinquency, but may
not be able to take a deduction (subject to the discussion below) for the
corresponding loss until a subsequent taxable year. Although not entirely clear,
it appears that Regular Certificateholders that are corporations should in
general be allowed to deduct as an ordinary loss such loss with respect to
principal sustained during the taxable year on account of any Regular
Certificates becoming wholly or partially worthless, and that, in general,
Regular Certificateholders that are not corporations will be allowed to deduct
as a short-term capital loss any loss sustained during the taxable year on
account of a portion of any such Regular Certificates becoming wholly worthless.
Although the matter is not free from doubt, non-corporate Regular
Certificateholders should be allowed a bad debt deduction at such time as the
principal balance of such Regular Certificates is reduced to reflect losses
resulting from any liquidated Mortgage Loans. The Internal Revenue Service,
however, could take the position that non-corporate holders will be allowed a
bad debt deduction to reflect such losses only after all the Mortgage Loans
remaining in the Trust Fund have been liquidated or the applicable Class of
Regular Certificates has been otherwise retired. The Internal Revenue Service
could also assert that losses on the Regular Certificates are deductible on some
other method that may defer such deductions for all holders, such as reducing
future cash flow for purposes of computing original issue discount. This may
have the effect of creating "negative" original issue discount which would be
deductible only against future positive original issue discount or otherwise
upon termination of the Class. Regular Certificateholders are urged to consult
their own tax advisors regarding the appropriate timing, amount and character of
any loss sustained with respect to such Regular Certificates. Losses
attributable to interest previously reported as income should be deductible as
ordinary losses by both corporate and non-corporate holders. Special loss rules
are applicable to banks and thrift institutions, including rules regarding
reserves for bad debts. Such taxpayers are advised to consult their tax advisors
regarding the treatment of losses on Regular Certificates.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to such an election, (i) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. A holder generally may make such an election on
an instrument by instrument basis or for a class or group of debt instruments.
However, if the holder makes such an election with respect to a debt instrument
with amortizable bond premium or with market discount, the holder is deemed to
have made elections to amortize bond premium or to report market discount income
currently as it accrues under the constant yield method, respectively, for all
premium bonds held or market discount bonds acquired by the holder in the same
taxable year or thereafter. The election is made on the holder's federal income
tax return for the year in which the debt instrument is acquired and is
irrevocable except with the approval of the Internal Revenue Service. Investors
should consult their own tax advisors regarding the advisability of making such
an election.
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Sale or Exchange of Regular Certificates
If a Regular Certificateholder sells or exchanges a Regular Certificate,
the Regular Certificateholder will recognize gain or loss equal to the
difference, if any, between the amount received and its adjusted basis in the
Regular Certificate. The adjusted basis of a Regular Certificate generally will
equal the cost of the Regular Certificate to the seller, increased by any
original issue discount or market discount previously included in the seller's
gross income with respect to the Regular Certificate and reduced by amounts
included in the state redemption price at maturity of the Regular Certificate
that were previously received by the seller and by any amortized premium.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate as
a capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Certificate has been held for the long-term
capital gain holding period (currently more than one year). Such gain will be
treated as ordinary income (i) if a Regular Certificate is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Certificateholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate under Code Section 1274(d) in effect at the time the taxpayer
entered into the transaction minus any amount previously treated as ordinary
income with respect to any prior disposition of property that was held as a part
of such transaction, (ii) in the case of a non-corporate taxpayer, to the extent
such taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates, or (iii) to
the extent that such gain does not exceed the excess, if any, of (a) the amount
that would have been includible in the gross income of the holder if his yield
on such Regular Certificate were 110 percent of the applicable Federal rate as
of the date of purchase, over (b) the amount of income actually includible in
the gross income of such holder with respect to the Regular Certificate. In
addition, gain or loss recognized from the sale of a Regular Certificate by
certain banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c). Pursuant to the Revenue Reconciliation Act of
1993, capital gains of certain non-corporate taxpayers are subject to a lower
maximum tax rate than ordinary income of such taxpayers. The maximum tax rate
for corporations is the same with respect to both ordinary income and capital
gains.
Taxation of Residual Certificates
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Certificates ("Residual Holders"), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in such quarter
and by allocating such daily portion among the Residual Holders in proportion to
their respective holdings of Residual Certificates in the REMIC Pool on such
day. REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting except
that (i) the limitation on deductibility of investment interest expense and
expenses for the production of income do not apply, (ii) all bad loans will be
deductible as business bad debts, and (iii) the limitation on the deductibility
of interest and expenses related to tax-exempt income will apply. The REMIC
Pool's gross income includes interest, original issue discount income, and
market discount income, if any, on the Mortgage Loans, reduced by amortization
of any premium on the Mortgage Loans, plus income on reinvestment of cash flows
and reserve assets plus any cancellation of indebtedness income upon allocation
of realized losses to the Regular Certificates. The REMIC Pool's deductions
include interest and original issue discount expense on the Regular
Certificates, servicing fees on the Mortgage Loans, other administrative
expenses of the REMIC Pool and realized losses on the Mortgage Loans. The
requirement that Residual Holders report their pro rata share of taxable income
or net loss of the REMIC Pool will continue until there are no Certificates of
any class of the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest and original issue discount or market discount income or
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amortization of premium with respect to the Mortgage Loans, on the one hand, and
the timing of deductions for interest (including original issue discount) on the
Regular Certificates, on the other hand. In the event that an interest in the
Mortgage Loans is acquired by the REMIC Pool at a discount, and one or more of
such Mortgage Loans is prepaid, the Residual Holder may recognize taxable income
without being entitled to receive a corresponding amount of cash because (i) the
prepayment may be used in whole or in part to make distributions in reduction of
principal on the Regular Certificates, and (ii) the discount on the Mortgage
Loans which is includible in income may exceed the deduction allowed upon such
distributions on those Regular Certificates on account of any unaccrued original
issue discount relating to those Regular Certificates. When there is more than
one Class of Regular Certificates that distribute payments in reduction of
principal balance sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Certificates when distributions in reduction of principal are being made
in respect of earlier Classes of Regular Certificates to the extent that such
Classes are not issued with substantial discount. If taxable income attributable
to such a mismatching is realized, in general, losses would be allowed in later
years as payments on the later Classes of Regular Certificates are made. Taxable
income may also be greater in earlier years than in later years as a result of
the fact that interest expense deductions, expressed as a percentage of the
outstanding principal amount of such a Series of Regular Certificates, may
increase over time as distributions of principal are made on the lower yielding
Classes of Regular Certificates, whereas, to the extent the REMIC Pool contains
fixed rate Mortgage Loans, interest income with respect to any given Mortgage
Loan will remain constant over time as a percentage of the outstanding principal
amount of that loan. Consequently, Residual Holders must have sufficient other
sources of cash to pay any federal, state, or local income taxes due as a result
of such mismatching or unrelated deductions against which to offset such income,
subject to the discussion of "excess inclusions" below under "Limitations on
Offset or Exemption of REMIC Income." The timing of such mismatching of income
and deductions described in this paragraph, if present with respect to a Series
of Certificates, may have a significant adverse effect upon a Residual Holder's
after-tax rate of return. In addition, a Residual Holder's taxable income during
certain periods may exceed the income reflected by such Residual Holder for such
periods in accordance with generally accepted accounting principles. Investors
should consult their own accountants concerning the accounting treatment of
their investment in Residual Certificates.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Holder is limited to the adjusted basis of the Residual
Certificate as of the close of the quarter (or time of disposition of the
Residual Certificate if earlier), determined without taking into account the net
loss for the quarter. The initial adjusted basis of a purchaser of a Residual
Certificate is the amount paid for such Residual Certificate. Such adjusted
basis will be increased by the amount of taxable income of the REMIC Pool
reportable by the Residual Holder and will be decreased (but not below zero),
first, by a cash distribution from the REMIC Pool and, second, by the amount of
loss of the REMIC Pool reportable by the Residual Holder. Any loss that is
disallowed on account of this limitation may be carried over indefinitely by the
Residual Holder for whom such loss was disallowed and may be used by such
Residual Holder only to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Certificate as an offset to its share of the taxable income of the
related REMIC Pool. However, that taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Certificates over their life.
However, in view of the possible acceleration of the income of Residual Holders
described above under "Taxation of REMIC Income," the period of time over which
such issue price is effectively amortized may be longer than the economic life
of the Residual Certificates.
A Residual Certificate may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of such residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the Internal Revenue Service may provide future guidance on the
proper tax treatment of payments made by a transferor of such a residual
interest to induce the transferee to acquire the interest, and Residual Holders
should consult their own tax advisors in this regard.
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Further, to the extent the initial adjusted basis of the Residual Holder
(other than the original holder) in the Residual Certificate is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See "Treatment of Certain
Items of REMIC Income and Expense -- Market Discount" below regarding the basis
of Mortgage Loans to the REMIC Pool and "Sale or Exchange of a Residual
Certificate" below regarding possible treatment of a loss upon termination of
the REMIC Pool as a capital loss.
Treatment of Certain Items of REMIC Income and Expense
Although the Depositor intends to compute REMIC income and expense in
accordance with the Code and applicable regulations, the authorities regarding
the determination of specific items of income and expense are subject to
uncertainty and differing interpretations. The Depositor makes no representation
as to the specific method that it will use for reporting income with respect to
the Mortgage Loans and expenses with respect to the Regular Certificates and
different methods could result in different timing of reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Certificates as described above under "Taxation of
Regular Certificates -- Original Issue Discount" and "--Variable Rate Regular
Certificates," without regard to the de minimis rule described therein.
Deferred Interest. Any Deferred Interest that accrues with respect to any
adjustable rate Mortgage Loans held by the REMIC Pool will constitute income to
the REMIC Pool and will be treated in a manner similar to the Deferred Interest
that accrues with respect to Regular Certificates as described above under
"Taxation of Regular Certificates - Deferred Interest."
Market Discount. The REMIC Pool will have market discount income in respect
of Mortgage Loans if, in general, the basis of the REMIC Pool allocable to such
Mortgage Loans (presumably, allocated based on the relative fair market values
of the Mortgage Loans) is exceeded by their unpaid principal balances. The REMIC
Pool's basis in such Mortgage Loans is generally their fair market value
immediately after the transfer thereof to the REMIC Pool. The REMIC Regulations
provide that such basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool (or the fair market value
thereof at the Closing Date in the case of a retained Class). The accrued
portion of such market discount would be recognized currently as an item of
ordinary income in a manner similar to original issue discount. Market discount
income generally should accrue in the manner described above under "Taxation of
Regular Certificates--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Loans at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the fair
market value of the Mortgage Loans immediately after the transfer thereof to the
REMIC Pool based on the aggregate of the issue prices (or the fair market value
of retained Classes) of the regular and residual interests in the REMIC Pool. In
a manner analogous to the discussion above under "Taxation of Regular
Certificates -- Premium," a REMIC Pool that holds a Mortgage Loan as a capital
asset under Code Section 1221 may elect under Code Section 171 to amortize
premium on the Mortgage Loans originated after September 27, 1985 under the
constant yield method. Amortizable bond premium will be treated as an offset to
interest income on the Mortgage Loans, rather than as a separate deduction item.
To the extent that mortgagors on the Mortgage Loans are individuals, Code
Section 171 will not be available for premium on Mortgage Loans originated on or
prior to September 27, 1985. Premium with respect to such Mortgage Loans may be
deductible in accordance with a reasonable method regularly employed by the
holder thereof. The allocation of such premium pro rata among principal payments
should be considered a reasonable method; however, the Internal Revenue Service
may argue that such premium should be allocated in a different manner, such as
allocating such premium entirely to the final payment of principal.
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Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in determining
the federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Certificate over the daily accruals for such quarterly period of (i) 120% of the
long-term applicable Federal rate that would have applied to the Residual
Certificate (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (ii) the adjusted issue price of such Residual
Certificate at the beginning of such quarterly period. For this purpose, the
adjusted issue price of a Residual Certificate at the beginning of a quarter is
the issue price of the Residual Certificate, plus the amount of the daily
accruals of REMIC income described in this paragraph for all prior quarters,
decreased by any distributions made with respect to such Residual Certificate
prior to the beginning of such quarterly period. Accordingly, the portion of the
REMIC's taxable income that will be treated as excess inclusions will be a
larger portion of such income as the adjusted issue price of the Residual
Certificates diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
"excess inclusion" generally may not be offset by other deductions, including
net operating loss carryforwards, on such Residual Holder's return. Further, if
the Residual Holder is an organization subject to the tax on unrelated business
income imposed by Code Section 511, the Residual Holder's excess inclusion will
be treated as unrelated business taxable income of such Residual Holder for
purposes of Code Section 511. In addition, REMIC taxable income is subject to
30% withholding tax with respect to certain persons who are not U.S. Persons (as
defined below under "Tax-Related Restrictions on Transfer of REMIC Residual
Certificates -- Foreign Investors"), and the portion thereof attributable to
excess inclusions is not eligible for any reduction in the rate of withholding
tax (by treaty or otherwise). See "Taxation of Certain Foreign Investors --
Residual Certificates" below. Finally, if a real estate investment trust or a
regulated investment company owns a Residual Certificate, a portion (allocated
under Treasury regulations yet to be issued) of dividends paid by the real
estate investment trust or regulated investment company could not be offset by
net operating losses of its shareholders, would constitute unrelated business
taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons.
Provisions governing the relationship between excess inclusions and the
alternative minimum tax provide that (i) the alternative minimum taxable income
of a taxpayer is based on the taxpayer's regular taxable income computed without
regard to the rule that taxable income cannot be less than the amount of excess
inclusions, (ii) the alternative minimum taxable income of a taxpayer for a
taxable year cannot be less than the amount of excess inclusions for that year,
and (iii) the amount of any alternative minimum tax net operating loss is
computed without regard to any excess inclusions. While these provisions are
generally effective for tax years beginning after December 31, 1986, a taxpayer
may elect to have provisions apply only with respect to tax years beginning
after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal income tax rate applicable to corporations. The REMIC
Regulations provide that the anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and that projected payments
are based on the Prepayment Assumption. The present value rate equals the
applicable Federal rate under Code Section 1274(d) as of the date of the
transfer for a term ending with the last calendar quarter in which excess
inclusions are expected to accrue. Such a tax generally would be imposed on the
transferor of the Residual Certificate, except that where such transfer is
through an agent (including a broker, nominee or other middleman) for a
Disqualified Organization, the tax would instead be imposed on such agent.
However, a transferor of a Residual Certificate would in no event be liable for
such tax with respect to a transfer if the transferee furnishes to the
transferor an affidavit that the transferee is not a Disqualified Organization
and, as of the time of the transfer, the transferor does not have actual
knowledge that such affidavit is false. The tax also may be waived by the
Treasury Department if the Disqualified Organization promptly disposes of the
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residual interest and the transferor pays income tax at the highest corporate
rate on the excess inclusion for the period the residual interest is actually
held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that is allocable to
the interest in the Pass-Through Entity during the period such interest is held
by such Disqualified Organization, and (ii) the highest marginal federal
corporate income tax rate. Such tax would be deductible from the ordinary gross
income of the Pass-Through Entity for the taxable year. The Pass-Through Entity
would not be liable for such tax if it has received an affidavit from such
record holder that it is not a Disqualified Organization or stating such
holder's taxpayer identification number, and during the period such person is
the record holder of the Residual Certificate, the Pass-Through Entity does not
have actual knowledge that such affidavit is false.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax or
unrelated business income imposed by Code Section 511, and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust, or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through Entity as a
nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity.
The Pooling and Servicing Agreement with respect to a Series will provide
that no legal or beneficial interest in a Residual Certificate may be
transferred unless (i) the proposed transferee provides to the transferor, the
Depositor and the Trustee an affidavit providing its taxpayer identification
number and stating such transferee is the beneficial owner of the Residual
Certificate, is not a Disqualified Organization and is not purchasing such
Residual Certificate on behalf of a Disqualified Organization (i.e., as a
broker, nominee or middleman thereof), and (ii) the transferor provides a
statement in writing to the Depositor and the Trustee that it has no actual
knowledge that such affidavit is false. Moreover, the Pooling and Servicing
Agreement will provide that any attempted or purported transfer in violation of
these transfer restrictions will be null and void and will vest no rights in any
purported Transferee. Each Residual Certificate with respect to a Series will
bear a legend referring to such restrictions on transfer, and each holder of a
Residual Certificate will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Pooling and Servicing Agreement
required under the Code or applicable Treasury regulations to effectuate the
foregoing restrictions. Information necessary to compute an applicable excise
tax must be furnished to the Internal Revenue Service and to the requesting
party within 60 days of the request, and the Depositor or the Trustee may charge
a fee for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person, as defined below under "Foreign Investors") is
disregarded for all federal income tax purposes if a significant purpose of the
transferor is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes. The anticipated excess inclusions and the present
value rate are determined in the same manner as set forth above under
"Disqualified Organizations." The REMIC Regulations explain that a significant
purpose of a transfer will be deemed to impede the assessment or collection of
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tax if the transferor, at the time of the transfer, either knew or should have
known that the transferee would be unwilling or unable to pay taxes due on its
share of the taxable income of the REMIC. A safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of the noneconomic residual
interest, the transferee may incur tax liabilities in excess of cash flows
generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The Pooling
and Servicing Agreement with respect to a Series will require the transferee of
a REMIC Residual Certificate to certify to the matters in the preceding sentence
as part of the affidavit described above under the heading "Disqualified
Organizations." The transferor must have no actual knowledge or reason to know
that such statements are false.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Certificate is deemed to have tax
avoidance potential unless, at the time of the transfer, (i) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (ii) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and prior to the end of the
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Certificate back to the U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to the Certificates of a Series may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, or an estate or trust that
is subject to U.S. federal income tax regardless of the source of its income or
any trust that is not a "foreign trust" as defined in Section 7701(a)(31) of the
Code.
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount realized
over the adjusted basis (as described above under "Taxation of Residual
Certificates -- Basis and Losses") of such Residual Holder in such Residual
Certificate at the time of the sale or exchange. In addition to reporting the
taxable income of the REMIC Pool, a Residual Holder will have taxable income to
the extent that any cash distribution to it from the REMIC Pool exceeds such
adjusted basis on that Distribution Date. Such income will be treated as gain
from the sale or exchange of the Residual Certificate. It is possible that the
termination of the REMIC Pool may be treated as a sale or exchange of a Residual
Holder's Residual Certificate, in which case, if the Residual Holder has an
adjusted basis in such Residual Holder's Residual Certificate remaining when its
interest in the REMIC Pool terminates, and if such Residual Holder holds such
Residual Certificate as a capital asset under Code Section 1221, then such
Residual Holder will recognize a capital loss at that time in the amount of such
remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. In addition, gain or loss recognized from the sale of a
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Residual Certificate by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c).
The Code provides that, except as provided in Treasury regulations yet to
be issued, the wash sale rules of Code Section 1091 will apply to dispositions
of Residual Certificates where the seller of the Residual Certificate, during
the period beginning six months before the sale or disposition of the Residual
Certificate and ending six months after such sale or disposition, acquires (or
enters into any other transaction that results in the application of Section
1091) any residual interest in any REMIC or any interest in a "taxable mortgage
pool" (such as a non-REMIC owner trust) that is economically comparable to a
Residual Certificate.
Taxes That May be Imposed on the REMIC Pool
Prohibited Transactions
Income from certain transactions entered into by the REMIC Pool, called
prohibited transactions, will not be part of the calculation of income or loss
includible in the federal income tax returns of Residual Holders, but rather
will be taxed directly to the REMIC Pool at a 100% rate. Prohibited transactions
generally include (i) the disposition of a qualified mortgage other than for (a)
substitution within two years of the Startup Day for a defective, including a
defaulted, obligation (or the repurchase in lieu of substitution of a defective,
including a defaulted, obligation at any time), or for any qualified mortgage
within three months of the Startup Day, (b) foreclosure, default, or reasonably
foreseeable default of a qualified mortgage, (c) bankruptcy or insolvency of the
REMIC Pool, or (d) a qualified (complete) liquidation, (ii) the receipt of
income from assets that are not the type of mortgages or investments that the
REMIC Pool is permitted to hold, (iii) the receipt of compensation for services,
or (iv) the receipt of gain from disposition of cash flow investments other than
pursuant to a qualified liquidation. Notwithstanding (i) and (iv), it is not a
prohibited transaction to sell REMIC Pool property to prevent a default on
Regular Certificates as a result of a default on qualified mortgages or to
facilitate a clean-up call (generally, an optional termination to save
administrative costs when no more than a small percentage of the Certificates is
outstanding). The REMIC Regulations indicate that the modification of a Mortgage
Loan generally will not be treated as a disposition if it is occasioned by a
default or reasonably foreseeable default, an assumption of the Mortgage Loan,
the waiver of a due-on-sale or due-on-encumbrance clause or the conversion of an
interest rate by a mortgagor pursuant to the terms of a convertible adjustable
rate Mortgage Loan.
Contributions to the REMIC Pool after the Startup Day
In general, a REMIC Pool will be subject to tax at a 100% rate on the value
of any property contributed to the REMIC Pool after the Startup Day. Exceptions
are provided for cash contributions to a REMIC Pool (i) during the three months
following the Startup Day, (ii) made to a qualified reserve fund by a Residual
Holder, (iii) in the nature of a guarantee, (iv) made to facilitate a qualified
liquidation or clean-up call, and (v) as otherwise permitted in Treasury
regulations yet to be issued.
Net Income from Foreclosure Property
The REMIC Pool will be subject to federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period of two years, with possible extensions. Net
income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust.
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Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on the date of the adoption of the plan of liquidation, then the REMIC
Pool will not be subject to the prohibited transaction rules on the sale of its
assets, provided that the REMIC Pool credits or distributes in liquidation all
of the sale proceeds plus its cash (other than the amounts retained to meet
claims) to holders of Regular Certificates and Residual Holders within the
90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file tax returns for federal income tax purposes in a manner
similar to a partnership. The form for such income tax return is Form 1066, U.S.
Real Estate Mortgage Investment Conduit Income Tax Return. Treasury regulations
provide that, except where there is a single Residual Holder for an entire
taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The Residual Holder owning the largest percentage
interest in the Residual Certificates may be obligated to act as the REMIC
Pool's "tax matters person," as defined in applicable Treasury regulations, with
respect to the REMIC Pool, and will be required to irrevocably designate the
Trustee as its agent to perform all of the functions of the tax matters person.
Limitations on Deduction of Certain Expense
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
two percent of the investor's adjusted gross income. In addition, Code Section
68 provides that itemized deductions otherwise allowable for a taxable year of
an individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000 ($50,000 in the case of a married
individual filing a separate return) (in each case, subject to adjustment for
inflation), or (ii) 80% of the amount of itemized deductions otherwise allowable
for such year. In the case of a REMIC Pool, such deductions may include
deductions under Code Section 212 for the Servicing Fee and all administrative
and other expenses relating to the REMIC Pool, or any similar expenses allocated
to the REMIC Pool with respect to a regular interest it holds in another REMIC.
Such investors who hold REMIC Certificates either directly or indirectly through
certain pass-through entities may have their pro rata share of such expenses
allocated to them as additional gross income, but may be subject to such
limitation on deductions. In addition, such expenses are not deductible at all
for purposes of computing the alternative minimum tax and may cause such
investors to be subject to significant additional tax liability. Temporary
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to the holders of
Residual Certificates in the case of a REMIC Pool that would not qualify as a
fixed investment trust in the absence of a REMIC election. However, such
additional income and limitation on deductions will apply to the allocable
portion of such expenses to holders of Regular Certificates, as well as to
holders of Residual Certificates, where such Regular Certificates are similar to
pass-through certificates in a fixed investment trust. Unless indicated
otherwise in the applicable Prospectus Supplement, all such expenses will be
allocable to the Residual Certificates. In general, such allocable portion will
be determined based on the ratio that a Regular Certificateholder's income,
determined on a daily basis, bears to the income of all holders of Regular
Certificates and Residual Certificates with respect to the REMIC Pool. As a
result, individuals, estates, or trusts holding REMIC Certificates (either
directly or indirectly through a grantor trust, partnership, S corporation,
REMIC, or certain other pass-through entities described in the foregoing
temporary Treasury regulations), may have taxable income in excess of the
interest income at the pass-through rate on Regular Certificates that are issued
in a single Class or otherwise consistently with fixed investment trust status
or in excess of distributions of cash for the related period on Residual
Certificates.
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Taxation of Certain Foreign Investors
Regular Certificates
Interest, including original issue discount, distributable to Regular
Certificateholders who are nonresident aliens, foreign corporations, or other
Non-U.S. Persons (i.e., any persons who are not U.S. Persons, as defined above),
will be considered "portfolio interest" and, therefore, generally, will not be
subject to 30% United States withholding provided that such Non-U.S. Person (i)
is not a "10-percent shareholder" within the meaning of Code Section
871(h)(3)(B) with respect to the Depositor, or a controlled foreign corporation
described in Code Section 881(c)(3)(C) and (ii) provides the Trustee, or the
person who would otherwise be required to withhold tax from such distributions
under Code Section 1441 or 1442, with an appropriate statement, signed under
penalties of perjury, identifying the beneficial owner and stating, among other
things, that the beneficial owner of the Regular Certificate is a Non-U.S.
Person. If such statement, or any other required statement, is not provided, 30%
withholding will apply unless reduced or eliminated pursuant to an applicable
tax treaty or unless the interest on the Regular Certificate is effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Person. In the latter case, such Non-U.S. Person will be subject
to United States federal income tax at regular rates. Proposed Treasury
regulations, which would be effective for payments made after December 31, 1997
if adopted in their current form, would provide alternative certification
requirements and means for claiming the exemption from federal income and
withholding tax. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Certificate.
Residual Certificates
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are Non-U.S. Persons are treated as interest for
purposes of the 30% (or lower treaty rate) United States withholding tax.
Treasury regulations provide that amounts distributed to Residual Holders may
qualify as "portfolio interest," subject to the conditions described in "Regular
Certificates" above, but only to the extent that (i) the Mortgage Loans were
issued after July 18, 1984 and (ii) the Trust Fund or segregated pool of assets
therein (as to which a separate REMIC election will be made), to which the
Residual Certificate relates, consists of obligations issued in "registered
form" within the meaning of Code Section 163(f)(1). Generally, Mortgage Loans
will not be, but regular interests in another REMIC Pool will be, considered
obligations issued in registered form. Furthermore, a Residual Holder will not
be entitled to any exemption from the 30% withholding tax (or lower treaty rate)
to the extent of that portion of REMIC taxable income that constitutes an
"excess inclusion." See "Taxation of Residual Certificates--Limitations on
Offset or Exemption of REMIC Income." If the amounts paid to Residual Holders
who are Non-U.S. Persons are effectively connected with the conduct of a trade
or business within the United States by such Non-U.S. Persons, 30% (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to such
Non-U.S. Persons will be subject to United States federal income tax at regular
rates. If 30% (or lower treaty rate) withholding is applicable, such amounts
will be taken into account for purposes of withholding only when paid or
otherwise distributed (or when the Residual Certificate is disposed of) under
rules similar to withholding upon disposition of debt instruments that have
original issue discount. See "Taxation of Residual Certificates -- Tax-Related
Restrictions on Transfer of Residual Certificates -- Foreign Investor Investors"
above concerning the disregard of certain transfers having "tax avoidance
potential." Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Residual
Certificate.
Backup Withholding
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under certain
circumstances, principal distributions) unless the Regular Certificateholder
complies with certain reporting and/or certification procedures, including the
provision of its taxpayer identification number to the Trustee, its agent, or
the broker who effected the sale of the Regular Certificates, or such Regular
Certificateholder is otherwise an exempt recipient under applicable provisions
of the Code. Any amounts to be withheld from distribution on the Regular
Certificates would be refunded by the Internal Revenue Service or allowed as a
credit against the Regular Certificateholder's federal income tax liability.
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Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to the
Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of records of
Regular Certificates or beneficial owners who own Regular Certificates through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Certificates (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar year by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 with respect to a particular Series of Regular
Certificates. Holders through nominees must request such information from the
nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual Holders,
furnished annually, if applicable, to holders of Regular Certificates, and filed
annually with the Internal Revenue Service concerning Code Section 67 expenses
(see "Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Certificates, and filed annually with the Internal Revenue Service concerning
the percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "Status of REMIC Certificates."
NON-REMIC CERTIFICATES
Standard Certificates
General
In the event that a Trust Fund (or a segregated pool of assets therein)
with respect to a Series of Standard Certificates does not elect to be treated
as a REMIC, the Trust Fund will be classified as a grantor trust under subpart
E, Part 1 of subchapter J of the Code and not as an association taxable as a
corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Where there is no Fixed Retained Yield with respect to the Mortgage
Loans underlying such Series of Standard Certificates and where such
Certificates are not designated as Stripped Certificates, as described below
under "Stripped Certificates," the holder of each such Certificate will be
treated as the owner of a pro rata undivided interest in the ordinary income and
corpus portions of the Trust Fund represented by the Standard Certificate and
will be considered the beneficial owner of a pro rata undivided interest in each
of the Mortgage Loans, subject to the discussion below under "Recharacterization
of Servicing Fees." Accordingly, the holder of a Standard Certificate of a
particular Series (a "Standard Certificateholder") will be required to report on
its federal income tax return its pro rata share of the entire income from the
Mortgage Loans represented by its Standard Certificate, including interest at
the coupon rate, original issue discount (if any,) prepayment fees, assumption
fees, and late payment charges received by the Servicer, in accordance with such
Standard Certificateholder's method of accounting. A Standard Certificateholder
generally will be able to deduct its share of the Servicing Fee and all
administrative and other expenses of the Trust Fund in accordance with its
method of accounting, provided that such amounts are reasonable compensation for
services rendered to that Trust Fund. However, investors who are individuals,
estates, or trusts who own Standard Certificates, either directly or indirectly
through certain pass-through entities, will be subject to limitations with
respect to certain itemized deductions described in Code Section 67, including
deductions under Code Section 212, for the Servicing Fee and all such
administrative and other expenses of the Trust Fund, to the extent that such
deductions, in the aggregate, do not exceed two percent of an investor's
adjusted gross income. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer will
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be reduced by the lesser of (i) 3% of the excess, if any, of adjusted gross
income over $100,000 ($50,000 in the case of a married individual filing a
separate return) (in each case, subject to adjustment for inflation), or (ii)
80% of the amount of itemized deductions otherwise allowable for such year. As a
result, such investors holding Standard Certificates, directly or indirectly
through a pass-through entity, might have aggregate taxable income in excess of
the aggregate amount of cash received as interest or discount on such Standard
Certificates. In addition, such expenses are not deductible at all for purposes
of computing the alternative minimum tax and may cause such investors to be
subject to significant additional tax liability. Moreover, where there is Fixed
Retained Yield with respect to the Mortgage Loans underlying a Series of
Standard Certificates or where the servicing fees are in excess of reasonable
servicing compensation, the transaction may be subject to the application of the
"stripped bond" and "stripped coupon" rules of the Code, as described below
under "Stripped Certificates" and "Recharacterization of Servicing Fees,"
respectively.
Tax Status
The Depositor's Counsel has advised the Depositor that, except as discussed
below with respect to Buy-Down Loans:
1. A Standard Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans ... secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v), provided that the
property securing the Mortgage Loans represented by that Standard
Certificate is of the type described in such section of the Code.
2. A Standard Certificate owned by a real estate investment trust will
be considered to represent "real estate assets" within the meaning of Code
Section 856(c)(5)(A) to the extent that the assets of the related Trust
Fund consist of qualified assets, and interest income of such assets will
be considered "interest on obligations secured by mortgages on real
property" to such extent within the meaning of Code Section 856(c)(3)(B).
3. A Standard Certificate owned by a REMIC will be considered to
represent an "obligation (including any participation or certificate of
beneficial ownership therein) which is principally secured by an interest
in real property" within the meaning of Code Section 860G(a)(3)(A) to the
extent that the assets of the related trust fund consist of "qualified
mortgages" within the meaning of Code Section 860G(a)(3).
An issue arises as to whether Buy-Down Loans may be characterized in their
entirety under the Code provisions cited in clauses 1 and 2 of the immediately
preceding paragraph. There is indirect authority supporting treatment of an
investment in a Buy-Down Loan as entirely secured by real property if the fair
market value of the real property securing the loan exceeds the principal amount
of the loan at the time of issuance or acquisition, as the case may be. There is
no assurance that the treatment described above is proper. Accordingly, Standard
Certificateholders are urged to consult their own tax advisors concerning the
effects of such arrangements on the characterization of such Standard
Certificateholder's investment for federal income tax purposes.
Premium and Discount
Standard Certificateholders are advised to consult with their tax advisors
as to the federal income tax treatment of premium and discount arising either
upon initial acquisition of Standard Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Certificate will be determined generally as described above under "Federal
Income Tax Consequences for REMIC Certificates --Taxation of Residual
Certificates -- Premium," as if the purchaser has purchased the Mortgage Loans
directly.
Original Issue Discount. Original issue discount generally must be reported
as gross income as it accrues under a constant interest method, in advance of
the cash attributable to such income. Unless indicated otherwise in the
applicable Prospectus Supplement, no prepayment assumption will be assumed for
purposes of such accrual. However, Code Section 1272 provides for a reduction in
the amount of original issue discount includible in the income of an obligation
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holder that acquires the obligation after its initial issuance at a price
greater than the sum of the original issue price and the previously accrued
original issue discount, less prior payments of principal. Accordingly, if such
Mortgage Loans acquired by a Standard Certificateholder are purchased at a price
equal to the then unpaid principal amount of such Mortgage Loans, no original
issue discount attributable to the difference between the issue price and the
original principal amount of such Mortgage Loans (i.e., points) will be
includible by such holder.
Market Discount. Market discount on the Mortgage Loans will be determined
and will be reported as ordinary income generally in the manner described above
under "Federal Income Tax Consequences for REMIC Certificates--Taxation of
Regular Certificates--Market Discount." Unless indicated otherwise in the
applicable Prospectus Supplement, no prepayment assumption will be assumed for
purposes of such accrual.
Deferred Interest. Any Deferred Interest that accrues with respect to a
Standard Certificate will constitute income to the holder of such Standard
Certificate prior to the time distributions of cash with respect to such
Deferred Interest are made under the OID Regulations. The Depositor will treat
all interest on a Standard Certificate as to which there may be Deferred
Interest as includible in the stated redemption price at maturity of the
Mortgage Loans.
Recharacterization of Servicing Fees
If the Servicing Fee paid to the Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither income
nor a deduction to Certificateholders. In this regard, there are no
authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of the
Mortgage Loans, the reasonableness of servicing compensation should be
determined on a weighted average or loan-by-loan basis. If a loan-by-loan basis
is appropriate, the likelihood that such amount would exceed reasonable
servicing compensation as to some of the Mortgage Loans would be increased.
Internal Revenue Service guidance indicates that a servicing fee in excess
of reasonable compensation ("excess servicing") will cause the Mortgage Loans to
be treated under the "stripped bond" rules. Such guidance provides safe harbors
for servicing deemed to be reasonable and requires taxpayers to demonstrate that
the value of servicing fees in excess of such amounts is not greater than the
value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
Servicer who receives a servicing fee in excess of such amounts would be viewed
as retaining an ownership interest in a portion of the interest payments on the
Mortgage Loans. Under the rules of Code Section 1286, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of such Mortgage Loans as "stripped
coupons" and "stripped bonds." Subject to the de minimis rule discussed below
under "--Stripped Certificates," each stripped bond or stripped coupon could be
considered for this purpose as a non-interest bearing obligation issued on the
date of issue of the Standard Certificates, and the original issue discount
rules of the Code would apply to the holder thereof. While Standard
Certificateholders would still be treated as owners of beneficial interests in a
grantor trust for federal income tax purposes, the corpus of such trust could be
viewed as excluding the portion of the Mortgage Loans the ownership of which is
attributed to the Servicer, or as including such portion as a second class of
equitable interest. Applicable Treasury regulations treat such an arrangement as
a fixed investment trust, since the multiple classes of trust interests should
be treated as merely facilitating direct investments in the trust assets and the
existence of multiple classes of ownership interests is incidental to that
purpose. See "Stripped Certificates" below for a further description of the
federal income tax treatment of stripped bonds and stripped coupons.
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Sale or Exchange of Standard Certificates
Upon sale or exchange of a Standard Certificate, a Standard
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its aggregate adjusted basis in the Mortgage
Loans and other assets represented by the Standard Certificate. In general, the
aggregate adjusted basis will equal the Standard Certificateholder's cost of the
Standard Certificate, increased by the amount of any income previously reported
with respect to the Standard Certificate and decreased by the amount of any
losses previously reported with respect to the Standard Certificate and the
amount of any distributions received thereon. Except as provided above with
respect to market discount on any Mortgage Loans, and except for certain
financial institutions subject to the provisions of Code Section 582(c), any
such gain or loss would be capital gain or loss if the Standard Certificate was
held as a capital asset. However, gain on the sale of a Standard Certificate
will be treated as ordinary income (i) if a Standard Certificate is held as part
of a "conversion transaction" as defined in Code Section 1258(c), up to the
amount of interest that would have accrued on the Standard Certificateholder's
net investment in the conversion transaction at 120% of the appropriate
applicable Federal rate in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with respect
to any prior disposition of property that was held as a part of such transaction
or (ii) is in the case of a non-corporate taxpayer, to the extent such taxpayer
has made an election under Code Section 163(d)(4) to have net capital gains tax
as investment income at ordinary income rates. Pursuant to the Revenue
Reconciliation Act of 1993, capital gains of certain non-corporate taxpayers are
subject to a lower maximum tax rate than ordinary income of such taxpayers. The
maximum tax rate for corporations is the same with respect to both ordinary
income and capital gains.
Stripped Certificates
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership of
the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Certificates that are subject to those rules will be referred to as "Stripped
Certificates." The Certificates will be subject to those rules if (i) the
Depositor or any of its affiliates retains (for its own account or for purposes
of resale), in the form of Fixed Retained Yield or otherwise, an ownership
interest in a portion of the payments on the Mortgage Loans, (ii) the Depositor
or any of its affiliates is treated as having an ownership interest in the
Mortgage Loans to the extent it is paid (or retains) servicing compensation in
an amount greater than arm's length consideration for servicing the Mortgage
Loans (see "Standard Certificates--Recharacterization of Servicing Fees" above),
and (iii) Certificates are issued in two or more Classes or Subclasses
representing the right to non-pro rata percentages of the interest and principal
payments on the Mortgage Loans.
In general, a holder of a Stripped Certificate (a "Stripped
Certificateholder") will be considered to own "stripped bonds" with respect to
its pro rata share of all or a portion of the interest payments on each Mortgage
Loan, including the Stripped Certificate's allocable share of the servicing fees
paid to the Servicer, to the extent that such fees represent reasonable
compensation for services rendered. See the discussion above under "Standard
Certificates--Recharacterization of Servicing Fees." Although not free from
doubt, for purposes of reporting to Stripped Certificateholders, the servicing
fees will be allocated to the Stripped Certificates in proportion to the
respective entitlements to distributions of each Class (or Subclass) of Stripped
Certificates for the related period or periods. The holder of a Stripped
Certificate generally will be entitled to a deduction each year in respect of
the servicing fees, as described above under "Standard Certificates--General,"
subject to the limitation described therein.
Code Section 1286 generally treats a stripped bond or a stripped coupon as
an obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped Certificates
for federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Certificates are issued with respect to a
Mortgage Pool containing variable-rate Mortgage Loans, the Depositor has been
advised by counsel that (i) the Trust Fund will be treated as a grantor trust
under subpart E, Part I of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of Code
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Section 7701(i), and (ii) each Stripped Certificate should be treated as a
single installment obligation for purposes of calculating original issue
discount and gain or loss on disposition. This treatment is based on the
interrelationship of Code Section 1286, Code Sections 1272 through 1275, and the
OID Regulations. Although it is possible that computations with respect to
Stripped Certificates could be made in one of the ways described below under
"Taxation of Stripped Certificates -- Possible Alternative Characterizations,"
the OID Regulations state, in general, that two or more debt instruments issued
by a single issuer to a single investor in a single transaction should be
treated as a single debt instrument for original issue discount purposes.
Accordingly, all payments on any Stripped Certificates should be aggregated and
treated as though they were made on a single debt instrument. The Pooling and
Servicing Agreement requires that the Trustee make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, Treasury regulations issued December 28, 1992 provide for
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount. In
addition, under these regulations, a stripped Certificate that represents a
right to payments of both interest and principal may be viewed either as issued
with original issue discount or market discount (as described below), at a de
minimis original issue discount, or, presumably, at a premium. This treatment
suggests that the interest component of such a Stripped Certificate would be
treated as qualified stated interest under the OID Regulations. Further, these
final regulations provide that the purchaser of such a Stripped Certificate will
be required to account for any discount as market discount rather than original
issue discount if either (i) the initial discount with respect to the Stripped
Certificates was treated as zero under the de minimis rule, or (ii) no more than
100 basis points is stripped off the related Mortgage Loans. Any such market
discount generally would be reportable as described above under "Federal Income
Tax Consequences for REMIC Certificates--Taxation of Regular Certificates --
Market." It is unclear whether discount attributable to a stripped Mortgage Loan
the principal amount of which exceeds the value of real property securing the
Mortgage Loan will be eligible for treatment as market discount.
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "General," each
Stripped Certificate will be considered to have been issued at an original issue
discount for federal income tax purposes. Original issue discount with respect
to a Stripped Certificate must be included in ordinary income as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the OID Regulations and the
amendments to the original issue discount sections of the Code made by the 1986
Act, the amount of original issue discount required to be included in the income
of a holder of a Stripped Certificate in any taxable year likely will be
computed generally as described above under "Federal Income Tax Consequences for
"REMIC Certificates--Original Issue Discount" and "--Variable Rate Regular
Certificates." However, with the apparent exception of a Stripped Certificate
issued with de minimis original issue discount, as described above under
"General," the issue price of a Stripped Certificate will be the purchase price
paid by each holder thereof, and the stated redemption price at maturity will
include the aggregate amount of the payments to be made on the Stripped
Certificate to such Stripped Certificateholder, presumably under the Prepayment
Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the amount
of such original issue discount will be either increased or decreased depending
on the relative interests in principal and interest on each Mortgage Loan
represented by such Stripped Certificateholder's Stripped Certificate. While the
matter is not free from doubt, the holder of a Stripped Certificate should be
entitled in the year that it becomes Certain (assuming no further prepayments)
that the holder will not recover a portion of its adjusted basis in such
Stripped Certificate to recognize a loss (which may be a capital loss) equal to
such portion of unrecovered basis.
Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Non-REMIC Certificates Standard Certificates--Sale or Exchange of
Standard Certificates." To the extent that a subsequent purchaser's purchase
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price is exceeded by the remaining payments on the Stripped Certificates, such
subsequent purchaser will be required for federal income tax purposes to accrue
and report such excess as if it were original issue discount in the manner
described above. It is not clear for this purpose whether the assumed prepayment
rate that is to be used in the case of a Stripped Certificateholder other than
an original Stripped Certificateholder should be the Prepayment Assumption or a
new rate based on the circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. When an investor
purchases more than one Class of Stripped Certificates, it is currently unclear
whether for federal income tax purposes such Classes of Stripped Certificates
should be treated separately or aggregated for purposes of the rules described
above.
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates discussed above are not the only possible interpretations
of the applicable Code provisions. For example, the Stripped Certificateholder
may be treated as the owner of a separate installment obligation for each
Mortgage Loan, representing the Stripped Certificate's pro rata share of
payments of principal and/or interest to be made with respect thereto.
Alternatively, the holder of one or more Classes of Stripped Certificates may be
treated as the owner of a pro rata fractional undivided interest in each
Mortgage Loan to the extent that such Stripped Certificate, or Classes of
Stripped Certificates in the aggregate, represent the same pro rata portion of
principal and interest on each such Mortgage Loan, and a stripped bond or
stripped coupon (as the case may be), treated as an installment obligation or
contingent payment obligation, as to the remainder. Final regulations issued on
December 28, 1992 regarding original issue discount on stripped obligations make
the foregoing interpretations less likely to be applicable. The preamble to
those regulations states that they are premised on the assumption that an
aggregation approach is appropriate for determining whether original issue
discount on a stripped bond or stripped coupon is de minimis, and solicits
comments on appropriate rules for aggregating stripped bonds and stripped
coupons under Code Section 1286.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Standard Certificateholder or Stripped Certificateholder
at any time during such year, such information (prepared on the basis described
above) as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such information
will include the amount of original issue discount accrued on Certificates held
by persons other than Certificateholders exempted from the reporting
requirements. The amount required to be reported by the Trustee may not be equal
to the proper amount of original issue discount required to be reported as
taxable income by a Certificateholder, other than an original Certificateholder
that purchased at the issue price. In particular, in the case of Stripped
Certificates, unless provided otherwise in the applicable Prospectus Supplement,
such reporting will be based upon a representative initial offering price of
each Class of Stripped Certificates. The Trustee will also file such original
issue discount information with the Internal Revenue Service. If a
Certificateholder fails to supply an accurate taxpayer identification number or
if the Secretary of the Treasury determines that a Certificateholder has not
reported all interest and dividend income required to be shown on his federal
income tax return, 31% backup withholding may be required in respect of any
payments, as described above under "Federal Income Tax Consequences for REMIC
Certificates -- Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Standard Certificate or Stripped Certificate evidences
ownership in Mortgage Loans that are issued on or before July 18, 1984, interest
or original issue discount paid by the person required to withhold tax under
Code Section 1441 or 1442 to nonresident aliens, foreign corporations, or other
non-U.S. persons ("foreign persons") generally will be subject to 30% United
States withholding tax, or such lower rate as may be provided for interest by an
applicable tax treaty. Accrued original issue discount or market discount
recognized by the Standard Certificateholder or Stripped Certificateholder on
the sale or exchange of such a Certificate also will be subject to federal
income tax at the same rate.
Treasury Regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a foreign person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements, described above under "Federal
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Income Tax Consequences for REMIC Certificates--Taxation of Certain Foreign
Investors--Regular Certificates."
NOTES
General
With respect to each Series of Notes, the Depositor's Counsel will deliver
its opinion to the Depositor that (unless otherwise limited in the applicable
Prospectus Supplement) such securities will be classified as debt secured by the
related Mortgage Loans. Consequently, Notes will not be treated as ownership
interests in the Mortgage Loans or the Trust Fund. Holders will be required to
report income received with respect to Notes in accordance with their normal
method of accounting. For additional tax consequences relating to Notes
purchased at a discount or with premium, see "Non-REMIC Certificates -- Premium
and Discount."
Special Tax Attributes
As described above, Non-REMIC Certificates will possess certain special tax
attributes by virtue of their being ownership interests in the underlying
Mortgage Loans. Similarly, REMIC Certificates will possess similar attributes by
virtue of the REMIC provisions of the Code. In general, Notes will not possess
such special tax attributes. Investors to whom such attributes are important
should consult their own tax advisors regarding investment in Notes.
Sale or Exchange
If a holder of a Note sells or exchanges such security, the holder will
recognize gain or loss equal to the difference, in any, between the amount
received and the holder's adjusted basis in the security. The adjusted basis in
the security generally will equal its initial cost, increased by any original
issue discount or market discount previously included in the seller's gross
income with respect to the security and reduced by the payments previously
received on the security, other than payments of qualified stated interest, and
by any amortized premium.
In general (except as described in "Non-REMIC Certificates -- Premium and
Discount -- Market Discount") except for certain financial institutions subject
to section 582(c) of the Code, any gain or loss on the sale or exchange of a
Note recognized by an investor who holds the security as a capital asset (within
the meaning of section 1221 of the Code), will be capital gain or loss and will
be long-term or short-term depending on whether the security has been held for
more than one year.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose certain requirements on those employee
benefit plans to which they apply ("Plans") and on those persons who are
fiduciaries with respect to such Plans. The following is a general discussion of
such requirements, and certain applicable exceptions to and administrative
exemptions from such requirements.
Before purchasing any Certificates, a Plan fiduciary should determine
whether there exists any prohibition to such purchase under the requirements of
ERISA, whether prohibited transaction exemptions such as PTE 83-1 or any
individual administrative exemption (as described below) applies, including
whether the appropriate conditions set forth therein would be met, or whether
any statutory prohibited transaction exemption is applicable, and further should
consult the applicable Prospectus Supplement relating to such Series of
Certificates.
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Certain Requirements Under ERISA
General
In accordance with ERISA's general fiduciary standards, before investing in
a Certificate a Plan fiduciary should determine whether to do so is permitted
under the governing Plan instruments and is appropriate for the Plan in view of
its overall investment policy and the composition and diversification of its
portfolio. A Plan fiduciary should especially consider the ERISA requirement of
investment prudence and the sensitivity of the return on the Certificates to the
rate of principal repayments (including prepayments) on the Mortgage Loans or
Contracts, as discussed in the related Prospectus Supplement and in "Prepayment
and Yield Considerations" herein.
Parties in Interest/Disqualified Persons. Other provisions of ERISA (and
corresponding provisions of the Code) prohibit certain transactions involving
the assets of a Plan and persons who have certain specified relationships to the
Plan (so-called "parties in interest" within the meaning of ERISA or
"disqualified persons" within the meaning of the Code). The Depositor, the
Servicer (if any) or the Trustee or certain affiliates thereof might be
considered or might become "parties in interest" or "disqualified persons" with
respect to a Plan. If so, the acquisition or holding of Certificates by or on
behalf of such Plan could be considered to give rise to a "prohibited
transaction" within the meaning of ERISA and the Code unless an administrative
exemption described below or some other exemption is available.
Special caution should be exercised before the assets of a Plan are used to
purchase a Certificate if, with respect to such assets, the Depositor, the
Servicer (if any) or the Trustee or an affiliate thereof either: (a) has
investment discretion with respect to the investment of such assets of such
Plan; or (b) has authority or responsibility to give, or regularly gives
investment advice with respect to such assets for a fee and pursuant to an
agreement or understanding that such advice will serve as a primary basis for
investment decisions with respect to such assets and that such advice will be
based on the particular investment needs of the Plan.
Delegation of Fiduciary Duty
Further, if the assets included in a Trust Fund were deemed to constitute
Plan assets, it is possible that a Plan's investment in the Certificates might
be deemed to constitute a delegation, under ERISA, of the duty to manage Plan
assets by the fiduciary deciding to invest in the Certificates, and certain
transactions involved in the operation of the Trust Fund might be deemed to
constitute prohibited transactions under ERISA and the Code.
The U.S. Department of Labor (the "Department") has published final
regulations (the "Regulations") concerning whether or not a Plan's assets would
be deemed to include an interest in the underlying assets of an entity (such as
a Trust Fund) for purposes of the reporting and 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.
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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");
(3) The Trustee is not an affiliate of any of the Depositor, the
underwriter specified in the applicable Prospectus Supplement, the Servicer
(if any), any obligor with respect to Mortgage Loans included in the Trust
Fund constituting more than five percent of the aggregate unamortized
principal balance of the assets in the Trust Fund, or any affiliate of such
parties (the "Restricted Group"); and
(4) The Plan investing in the Certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
(5) The sum of all payments made to and retained by such underwriters
must represent not more than reasonable compensation for underwriting the
Certificates; the sum of all payments made to and retained by the Seller
pursuant to the assignment of the obligations or receivables to the related
Trust Fund must represent not more than the fair market value of such
obligations; and the sum of all payments made to and retained by the
Servicer and any Sub-servicer must represent not more than reasonable
compensation for such person's services under the Pooling and Servicing
Agreement and reimbursement of such person's reasonable expenses in
connection 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
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exceed twenty-five percent of all of the Certificates of that Class outstanding
at the time of the acquisition and (ii) immediately after the acquisition no
more than twenty-five percent of the assets of the Plan with respect to which
such person is a fiduciary are invested in Certificates representing an interest
in one or more trusts containing assets sold or served by the same person.
PTE 83-1. Prohibited Transaction Class Exemption 83-1 for Certain
Transactions Involving Mortgage Pool Investment Trusts ("PTE 83-1") permits
certain transactions involving the creation, maintenance and termination of
certain residential mortgage pools and the acquisition and holding of certain
residential mortgage pool pass-through certificates by Plans, whether or not the
Plan's assets would be deemed to include an ownership interest in the mortgages
in the mortgage pool, and whether or not such transactions would otherwise be
prohibited under ERISA.
The term "mortgage pool pass-through certificate" is defined in PTE 83-1 as
"a certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such a certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor." It appears that, for purposes of PTE 83-1, the
term "mortgage pool pass-through certificate" would include Certificates issued
in a single Class or in multiple classes that evidence a beneficial undivided
fractional interest in a mortgage pool of one- to four-family residential
mortgage loans and entitle the holder thereof to both a specified percentage of
future interest payments (after permitted deductions) and a specified percentage
of future principal payments.
However, it appears that PTE 83-1 does or might not apply to the purchase
and holding of (a) Certificates that evidence the beneficial ownership only of a
specified percentage of future interest payments (after permitted deductions) on
a Trust Fund or only of a specified percentage of future principal payments on a
Trust Fund, (b) Residual Certificates, (c) Certificates evidencing ownership
interests in a Trust Fund which includes Mortgage Loans secured by multifamily
residential properties or shares issued by cooperative housing corporations, or
(d) Certificates which are subordinated to other classes of Certificates of such
Series. Accordingly, unless exemptive relief other than PTE 83-1 applies, Plans
should not purchase any such Certificates.
PTE 83-1 sets forth certain "general conditions" and "specific conditions"
to its applicability. Section 11 of PTE 83-1 sets forth the following general
conditions to the application of the exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans or the property
securing such loans, and for indemnifying certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments;
(ii) the existence of a pool trustee who is not an affiliate of the pool
sponsor; and (iii) a requirement that the sum of all payments made to and
retained by the pool sponsor, and all funds inuring to the benefit of the pool
sponsor as a result of the administration of the mortgage pool, must represent
not more than adequate consideration for selling the mortgage loans plus
reasonable compensation for services provided by the pool sponsor to the pool.
The system of insurance or protection referred to in clause (i) above must
provide such protection and indemnification up to an amount not less than the
greater of 1% of the aggregate unpaid principal balance of the pooled mortgages
or the unpaid principal balance of the largest mortgage in the pool. It should
be noted that in promulgating PTE 83-1 (and a predecessor exemption), the
Department did not have under its consideration interests in pools of the exact
nature as some of the Certificates described herein.
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.
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Unrelated Business Taxable Income -- Residual Certificates
The purchase of a Residual Certificate by such plans, or by most varieties
of ERISA Plans, may give rise to "unrelated business taxable income" as
described in Code Sections 511-515 and 860E. Further, prior to the purchase of
Residual Certificates, a prospective transferee may be required to provide an
affidavit to a transferor that it is not a "Disqualified Organization" which
term includes certain tax-exempt entities not subject to Code Section 511,
including certain governmental plans, as discussed herein under the caption
"Certain Federal Income Tax Consequences--Federal Income Tax Consequences for
REMIC Certificates--Income Tax Consequences for REMIC Certificates--Taxation of
Residual Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates."
Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is particularly important that potential
investors who are Plan fiduciaries carefully consider the consequences under
ERISA of their acquisition and ownership of Certificates.
The sale of Certificates to a Plan is in no respect a representation by the
Depositor or the applicable underwriter that this investment meets all relevant
legal requirements with respect to investments by Plan generally or any
particular Plan, or that this investment is appropriate for Plans generally or
any particular Plan.
LEGAL INVESTMENT
If specified in the related Prospectus Supplement, the Certificates of one
or more classes offered pursuant to this Prospectus will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended ("SMMEA"), so long as they are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization. As "mortgage related securities," such Certificates will
constitute legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including, but not limited
to, state-chartered savings banks, commercial banks, savings and loan
associations and insurance companies, as well as trustees and state government
employee retirement systems) created pursuant to or existing under the laws of
the United States or of any state (including the District of Columbia and Puerto
Rico) whose authorized investments are subject to state regulation to the same
extent that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Pursuant to SMMEA, a
number of states enacted legislation, on or before the October 3, 1991 cutoff
for such enactments, limiting to varying 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
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of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Comptroller of the Currency and the Office of Thrift
Supervision, effective February 10, 1992, and by the NCUA (with certain
modifications), effective June 26, 1992, prohibits depository institutions from
investing in certain "high-risk" mortgage securities (including securities such
as certain series, Classes or Subclasses of Certificates), except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any
Certificates, as certain series, Classes or Subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying" and, with regard to any Certificates
issued in book-entry form, provisions which may restrict or prohibit investment
in securities which are issued in book-entry form.
Other classes of Certificates offered pursuant to this Prospectus will not
constitute "mortgage related securities" under SMMEA because they will not
represent beneficial ownership interests in qualifying mortgage loans under
SMMEA. The appropriate characterization of those Certificates under various
legal investment restrictions, and thus the ability of investors subject to
these restrictions to purchase the Certificates, may be subject to significant
interpretive uncertainties. All investors whose investment authority is subject
to legal restrictions should consult their own legal advisors to determine
whether, and to what extent, the Certificates will constitute legal investments
for them.
No representation is made as to the proper characterization of the
Certificates for legal investment or financial institution regulatory purposes,
or as to the ability of particular investors to purchase Certificates under
applicable legal investment restrictions. The uncertainties described above may
(and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the Certificates adversely
affect the liquidity of the non-SMMEA Certificates.
Investors should consult with their own legal advisors in determining
whether and to what extent the Certificates constitute legal investments for
such investors.
PLAN OF DISTRIBUTION
The Depositor may sell the Certificates offered hereby in Series either
directly or through underwriters. The related Prospectus Supplement or
Prospectus Supplements for each Series will describe the terms of the offering
for that Series and will state the public offering or purchase price of each
Class of Certificates of such Series, or the method by which such price is to be
determined, and the net proceeds to the Depositor from such sale.
If the sale of any Certificates is made pursuant to an underwriting
agreement pursuant to which one or more underwriters agree to act in such
capacity, such Certificates will be acquired by such underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices to be determined at the time of sale or at the time of commitment
therefor. Firm commitment underwriting and public reoffering by underwriters may
be done through underwriting syndicates or through one or more firms acting
alone. The specific managing underwriter or underwriters, if any, with respect
to the offer and sale of a particular Series of Certificates will be set forth
on the cover of the Prospectus Supplement related to such Series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement. The Prospectus Supplement will describe any discounts and
commissions to be allowed or paid by the Depositor to the underwriters, any
other items constituting underwriting compensation and any discounts and
commissions to be allowed or paid to the dealers. The obligations of the
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underwriters will be subject to certain conditions precedent. Unless otherwise
provided in the related Prospectus Supplement, the underwriters with respect to
a sale of any Class of Certificates will be obligated to purchase all such
Certificates if any are purchased. Pursuant to each such underwriting agreement,
the Depositor will indemnity the related underwriters against certain civil
liabilities, including liabilities under the Securities Act.
If any Certificates are offered other than through underwriters pursuant to
such underwriting agreements, the related Prospectus Supplement or Prospectus
Supplements will contain information regarding the terms of such offering and
any agreements to be entered into in connection with such offering.
Purchasers of Certificates, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the Securities Act of 1933 in connection with reoffers and sales by
them of Certificates. Certificateholders should consult with their legal
advisors in this regard prior to any such reoffer and sale.
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Depositor, any affiliate thereof or any other person or
persons specified therein may purchase some or all of one or more Classes of
Certificates of such Series from the underwriter or underwriters or such other
person or persons specified in such Prospectus Supplement. Such purchaser may
thereafter from time to time offer and sell, pursuant to this Prospectus and the
related Prospectus Supplement, some or all of such Certificates so purchased,
directly, through one or more underwriters to be designated at the time of the
offering of such Certificates, through dealers acting as agent and/or principal
as in such other manner as may be specified in the related Prospectus
Supplement. Such offering may be restricted in the manner specified in such
Prospectus Supplement. Such transactions may be effected at market prices
prevailing at the time of sale, at negotiated prices or at fixed prices. Any
underwriters and dealers participating in such purchaser's offering of such
Certificates may receive compensation in the form of underwriting discounts or
commissions from such purchaser and such dealers may receive commissions from
the investors purchasing such Certificates for whom they may act as agent (which
discounts or commissions will not exceed those customary in those types of
transactions involved). Any dealer that participates in the distribution of such
Certificates may be deemed to be an "underwriter" within the meaning of the
Securities Act of 1933, and any commissions and discounts received by such
dealer and any profit on the resale of such Certificates by such dealer might be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
LEGAL MATTERS
Certain legal matters and certain tax matters will be passed upon for the
Depositor by Dewey Ballantine, New York, New York and/or such other counsel as
will be named on the related Prospectus Supplement.
RATING
At the date of issuance of each Series of Certificates, the Certificates
offered hereby will be rated in one of the four highest categories by at least
one Rating Agency. See "Ratings" in the related Prospectus Supplement. A
securities rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
agency. Each securities rating should be evaluated independently of any other
rating.
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."
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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
- ---- ----
Act ...................................................................72
Advance ...............................................................58
Advance Reserve .......................................................44
Advances ..............................................................10
APR ...................................................................21
ARM Buy-Outs ..........................................................21
Balloon Loan ..........................................................19
Balloon Loans. ........................................................13
Balloon Period ........................................................19
Basic Senior Class Distribution........................................35
Buy-Down Account ......................................................19
Buy-Down Loans ........................................................19
Call protection .......................................................40
CERCLA ................................................................78
Certificate Account....................................................55
Certificate Account Depository.........................................55
Certificateholder ......................................................1
Certificates ...........................................................1
Class ..................................................................1
Code ..............................................................11, 81
Commission .............................................................3
Compound Interest Certificates.........................................31
Contract Pool .........................................................17
Contract Rate ......................................................7, 21
Contracts ..........................................................1, 21
Convertible Mortgage Loans.............................................17
Cooperative Loans .....................................................17
Cooperative Notes .....................................................17
Cooperatives ..........................................................17
Credit Enhancer .......................................................16
Cut-Off Date Aggregate Principal Balance...........................18, 22
D&P ..................................................................107
Debt Securities .......................................................82
Deferred Interest .................................................13, 19
Definitive Certificate.................................................30
Deleted Loan ..........................................................27
Depositor .......................................................1, 4, 52
Determination Date.....................................................32
Direct or Indirect Participants........................................15
Disqualified Organization..............................................94
Distribution Dates......................................................7
DTC ...................................................................30
Due Date ..........................................................18, 22
Due Period ............................................................41
Eligible Investments...................................................44
Environmental Condition................................................78
EPA ...................................................................79
ERISA ............................................................11, 105
Excess servicing .....................................................101
Extension protection...................................................40
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FASIT .................................................................83
FDIC ..................................................................55
FHLBB .................................................................72
FIRREA ................................................................80
Fitch ................................................................107
Foreign persons ......................................................104
Funding Period ........................................................32
Gain From Acquired Property............................................34
GEM Loans .............................................................20
GPM Fund ..............................................................21
GPM Mortgage Loans.....................................................20
Grantor Trust Estate...................................................82
Indemnification Payments...............................................34
Initial Deposit .......................................................43
Insurance Proceeds.....................................................56
Interest Accrual Period................................................49
Interest Rate ..........................................................1
Liquidated Contract....................................................34
Liquidated Mortgage Loan...........................................14, 34
Liquidation Proceeds...............................................14, 56
Loan Sale Agreement....................................................24
Loan-to-Value Ratio................................................18, 21
Moody's ..............................................................107
Mortgage Certificate Pool..............................................17
Mortgage Loans .........................................................1
Mortgage Notes ........................................................17
Mortgage Pool .........................................................17
Mortgage Rate ..........................................................7
Mortgaged Properties...................................................19
Mortgages .............................................................17
Mortgagor .............................................................13
Multi-Class Certificates................................................1
Net Contract Rate ......................................................7
Net Insurance Proceeds.................................................56
Net Liquidation Proceeds...............................................56
Net Mortgage Rate ......................................................7
Non-REMIC Certificates.................................................82
Notional Amount ........................................................1
OTS ...................................................................72
Pass-Through Entity....................................................94
Pass-Through Rate ......................................................7
Paying Agent ..........................................................57
Payment Deficiencies...................................................43
Percentage Certificates................................................30
Plans ................................................................105
Pool ...................................................................1
Pool Distribution Amount...............................................32
Pool Value Group ......................................................39
Pooling and Servicing Agreement.........................................4
Prepayment Interest Shortfall..........................................58
PTE 83-1 .............................................................108
Purchase Obligation....................................................12
Purchase Price ........................................................26
Rating Agency .........................................................11
Record Date ............................................................7
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Registration Statement..................................................3
Regular Certificates...................................................29
Relief Act ........................................................16, 79
REMIC .................................................................82
REMIC Certificates.....................................................82
REMIC Regulations .....................................................81
Repurchase Proceeds....................................................32
Residual Certificates..................................................29
Residual Holders ......................................................90
Scheduled Principal....................................................33
Secured-creditor exemption.............................................78
Securities Act .........................................................3
Senior Certificates.................................................2, 29
Senior Class Credit Enhancement........................................35
Senior Class Distributable Amount......................................33
Senior Class Principal Portion.........................................33
Senior Class Shortfall.................................................35
Senior Class Shortfall Accruals........................................35
Series .................................................................1
Servicer ...............................................................1
Servicing Account .....................................................61
Servicing Fee ..........................................................7
Shifting Interest Certificates..........................................2
SMMEA ............................................................10, 109
Special Distributions..................................................41
Special Hazard Contract................................................46
Special Hazard Mortgage Loan...........................................46
Standard Certificateholder.............................................99
Standard Certificates...................................................1
Standard Hazard Insurance Policy.......................................23
Stated Amount ..........................................................1
Stripped Certificates...................................................1
Sub-Servicer .......................................................4, 54
Sub-Servicing Account..................................................55
Subclass ...............................................................1
Subordinated Amount.....................................................9
Subordinated Certificates...........................................2, 29
Subordinated Class Distributable Amount................................33
Subordinated Class Principal Portion...................................34
Subordination Reserve Fund..............................................9
Substitute Loan .......................................................27
Title V ...........................................................73, 77
Trust Fund .............................................................1
U.S. Person ...........................................................95
UCC ...............................................................69, 74
Unaffiliated Sellers....................................................4
Unpaid Interest Shortfall..............................................36
Voting Interests ......................................................65
Window Period .........................................................72
Window Period Loans....................................................72
Window Period States...................................................72
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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
PROSPECTUS SUPPLEMENT Page
----
Summary of Prospectus Supplement ...................................... S-3
Risk Factors .......................................................... S-18
The Insurer ........................................................... S-23
The Servicer and the Originator ....................................... S-26
Emergent Group, Inc. .................................................. S-27
The Mortgage Pool ..................................................... S-28
Yield on the Certificates ............................................. S-47
Description of the Certificates ....................................... S-53
Pooling and Servicing Agreement ....................................... S-68
Certain Federal Income Tax Consequences ............................... S-71
Use of Proceeds ....................................................... S-72
Plan of Distribution .................................................. S-72
Legal Matters ......................................................... S-73
Experts ............................................................... S-73
Ratings ............................................................... S-73
Legal Investment ...................................................... S-74
ERISA Considerations .................................................. S-74
Index of Defined Terms ................................................ S-77
PROSPECTUS
Reports ............................................................... 3
Available Information ................................................. 3
Incorporation of Certain Information by Reference ..................... 3
Summary of Prospectus ................................................. 4
Risk Factors .......................................................... 12
The Trust Funds ....................................................... 17
Description of the Certificates ....................................... 28
Credit Support ........................................................ 43
Prepayment and Yield Considerations ................................... 48
Use of Proceeds ....................................................... 52
The Depositor ......................................................... 52
Underwriting Guidelines ............................................... 52
Servicing of the Mortgage Loans and Contracts ......................... 54
The Pooling and Servicing Agreement ................................... 65
Certain Legal Aspects of Mortgage Loans
and Contracts ....................................................... 68
Certain Federal Income Tax Consequences ............................... 81
ERISA Considerations .................................................. 105
Legal Investment ...................................................... 109
Plan of Distribution .................................................. 110
Legal Matters ......................................................... 111
Rating ................................................................ 111
Additional Information ................................................ 111
Index of Significant Definitions ...................................... 113
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Emergent Home Equity Loan Trust
1997-1
Emergent Mortgage Corp.
(Servicer & Originator)
Prudential Securities
Secured Financing Corporation
(Depositor)
$75,000,000 (Approximate)
$ _______ Class A-1 Certificates, __% Pass-Through Rate
$ _______ Class A-2 Certificates, __% Pass-Through Rate
$ _______ Class A-3 Certificates, __% Pass-Through Rate
Emergent Home Equity Loan Pass-Through
Certificates
Series 1997-1
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PROSPECTUS SUPPLEMENT
----------
Prudential Securities Incorporated
March __, 1997
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