As filed with the Securities and Exchange Commission on September 2, 1998
Registration No. 333-61939
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
PRE-EFFECTIVE AMENDMENT NO.1 TO FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
(Exact name of registrant as specified in governing instruments)
A Delaware Corporation 13-3526694
(State of Incorporation) (I.R.S. Identification Number)
One New York Plaza, 15th Floor
New York, New York 10292
(212) 778-1000
(Address of principal executive offices)
JOSEPH DONOVAN
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
ONE NEW YORK PLAZA, 15TH FLOOR
NEW YORK, NEW YORK 10292
(212) 778-1000
(Name and address of agent for service)
---------------------
Copies to:
Chris DiAngelo, Esq.
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective.
If the only Securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.|_|
If any of the Securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box.|X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.|_|
If this From is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.|_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.|_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Proposed Maximum Proposed Maximum
Title of Securities Amount being Offering Price Per Aggregate Offering Amount of Registration
being Registered Registered Unit(1) Price(1) Fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates $750,000,000(2) 100% $750,000,000 $221,250.00(3)
====================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) In accordance with Rule 429 of the Securities and Exchange Commission's
Rules and Regulations under the Securities Act of 1933, as amended, the
Prospectus included herein is a combined prospectus which also relates to
the Registrant's Registration Statement on Form S-3 (Registration No.
333-27355) (the "Prior Registration Statement"). The amount of securities
eligible to be sold under the Prior Registration Statement ($46,616,000.00
as of August 1, 1998) shall be carried forward to this Registration
Statement.
(3) $207,203.28 is paid pursuant to this Pre-Effective Amendment No. 1. $295
was paid previously in connection with the prior filing of this
Registration Statement. The remaining $13,751.72 of such amount is
attributable to the amount carried forward from the Prior Registration
Statement for which a filing fee in the amount of $454,545.45 was paid at
the time of registration.
-------------------------
Pursuant to Rule 429 of the Securities and Exchange Commission's Rules and
Regulations under the Securities Act of 1933, as amended, the Prospectus
contained in this Registration Statement also relates to the Registrant's
Registration Statement on Form S-3 (333-27355).
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
FORM OF PROSPECTUS SUPPLEMENT
(To Prospectus Dated August __, 1998)
- --------------------------------------------------------------------------------
[$-------]
[________] Mortgage Loan Trust [series]
[$_______] [_____%] Class A-1 Certificates
[$_______] [_____%] Class A-2 Certificates
[$_______] [_____%] Class A-3 Certificates
[$_______] [_____%] Class A-4 Certificates
[$_______] [_____%] Class A-5 Certificates
[$_______] [_____%] Class A-6 Certificates
[$_______] [_____%] Class A-7 Certificates
[$_______] [_____%] Class M-1 Certificates
[$_______] [_____%] Class M-2 Certificates
[$_______] [_____%] Class M-3 Certificates
Mortgage Pass-Through Certificates, Series [series]
[__________________]
Servicer
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
Depositor
================================================================================
The [________] Mortgage Loan Trust [series], Mortgage Pass-Through
Certificates, Series [series] (the "Certificates") will consist of (i) the Class
A-1 Certificates, the Class A-2 Certificates, the Class A-3 Certificates, the
Class A-4 Certificates the Class A-5 Certificates, the Class A-6 Certificates
and the Class A-7 Certificates (collectively, the "Class A Certificates" or the
"Senior Certificates"), (ii) the Class M-1 Certificates, the Class M-2
Certificates and the Class M-3 Certificates (collectively, the "Mezzanine
Certificates"), (iii) the Class B Certificates (the "Class B Certificates"),
(iv) the Class C Certificates (the "Class C Certificates" and together with the
Mezzanine Certificates and the Class B Certificates, the "Subordinate
Certificates") and (v) the Class R Certificates (the "Class R Certificates").
Only the Class A Certificates and the Mezzanine Certificates (collectively, the
"Offered Certificates") are offered hereby.
For a discussion of significant matters affecting investment in the
Offered Certificates, see "Risk Factors" beginning on page [___] herein and
beginning on page [__] in the Prospectus.
The Certificates will represent undivided beneficial ownership interests
in a trust fund (the "Trust Fund") consisting of two pools, (each, a "Loan
Group") of fixed- and adjustable-rate, closed-end, monthly pay, generally fully
amortizing mortgage loans (the "Mortgage Loans") secured by first or second lien
mortgages or deeds of trust (the "Mortgages") on one-to-four family residential
properties (the "Mortgaged Properties") held by [________] Mortgage Loan Trust
[series] (the "Trust"). The Trust will be created pursuant to a Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement") among
[________________], in its capacity as servicer of the Mortgage Loans (the
"Servicer"), [________________], in its capacity as unaffiliated seller of the
Mortgage Loans (the "Unaffiliated Seller"), Prudential Securities Secured
Financing Corporation, in its capacity as depositor of the Mortgage Loans (the
"Depositor"), and [________________], in its capacity as trustee (the "Trustee")
and in its capacity as backup servicer (the "Backup Servicer"). The obligations
of the Depositor, the Unaffiliated Seller, the Trustee, the Backup Servicer and
the Servicer with respect to the Certificates will be limited to their
respective contractual obligations under the Pooling and Servicing Agreement.
(Cover continued on next page)
================================================================================
THE OFFERED CERTIFICATES WILL REPRESENT BENEFICIAL INTERESTS IN THE TRUST FUND
ONLY AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE
UNAFFILIATED SELLER, THE SERVICER, THE BACKUP SERVICER, THE TRUSTEE OR ANY OF
THEIR AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
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 Offered Certificates will be purchased by Prudential Securities
Incorporated (the "Underwriter") from the Depositor and will be offered by the
Underwriter from time to time in negotiated transactions or otherwise, at
varying prices to be determined at the time of sale. Proceeds to the Depositor,
including accrued interest, are expected to be approximately [____]% of the
aggregate principal balance of the Offered Certificates before deducting
expenses payable by the Depositor estimated to be $[_____]. See "Underwriting"
herein.
The Offered Certificates are offered subject to prior sale, when, as, and
if accepted by the Underwriter and subject to the approval of certain legal
matters. It is expected that delivery of the Offered Certificates in book-entry
form will be made on or about [date] only through the facilities of DTC, CEDEL
and Euroclear (each as defined herein).
Prudential Securities Incorporated
The date of this Prospectus Supplement is [date]
<PAGE>
Distributions on the Mezzanine Certificates, the Class B Certificates and
the Class C Certificates are subordinate to distributions on the Class A
Certificates to the extent described herein. Distributions on the Class B
Certificates, the Class C Certificates and the Class R Certificates are
subordinate to distributions on the Class A Certificates and the Mezzanine
Certificates to the extent described herein. Distributions of principal and
interest payable to each Class of the Offered Certificates will be made on the
[___] day of each month or, if the [___] day is not a business day, the first
business day thereafter (each, a "Distribution Date"), beginning [date].
One or more elections will be made to treat certain assets of the Trust as
a real estate mortgage investment conduit (each a "REMIC") for federal income
tax purposes. As described more fully herein, each Class of Offered Certificates
will constitute "regular interests" in a REMIC. See "Certain Federal Income Tax
Consequences" herein and "Certain Federal Income Tax Consequences --"REMIC
Certificates" in the Prospectus.
Prior to their issuance there has been no market for the Offered
Certificates nor can there be any assurance that one will develop, or if it does
develop, that it will provide the Owners of the Offered Certificates with
liquidity or will continue. The Underwriter intends, but is not obligated, to
make a market in the Offered Certificates.
The Certificates offered by this Prospectus Supplement will be part of a
separate series of Certificates being offered by the Depositor pursuant to its
Prospectus dated August __, 1998 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.
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE OFFERED
CERTIFICATES, INCLUDING PURCHASES OF OFFERED CERTIFICATES TO STABILIZE THE
MARKET PRICE AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES SEE "UNDERWRITING" IN THIS PROSPECTUS SUPPLEMENT.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS 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.
----------------------
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 Offered Certificates. This Prospectus Supplement and Prospectus 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 7
World Trade Center, Ste. 1300, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 400, Chicago, Illinois 60661-2511 or
electronically through the Commission's Electronic Data Gathering, Analysis and
Retrieval system at the Commission's web site at http://www.sec.gov.
REPORTS TO OWNERS
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 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 in the related Trust Fund. See
"Servicing of the Mortgage Loans and Contracts -- Reports to the Trustee" and
"Evidence as to Compliance" in the Prospectus. 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, New York, New York
10292, Attention:__________________________.
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the "Index of Significant
Prospectus Supplement Definitions" herein and the "Index of Significant
Definitions" in the Prospectus for the definitions of certain capitalized terms.
Trust: [________] Mortgage Loan Trust [series] (the
"Trust").
The Certificates: The Mortgage Pass-Through Certificates, Series
[series] (the "Certificates") will consist of the
Offered Certificates, the Class B Certificates
(the "Class B Certificates"), the Class C
Certificates (the "Class C Certificates") and the
Class R Certificates (the "Class R Certificates"),
each a "Class". The Certificates will be issued
pursuant to a Pooling and Servicing Agreement (the
"Pooling and Servicing Agreement") to be dated as
of [date], among the Servicer, the Unaffiliated
Seller, the Depositor, the Backup Servicer and the
Trustee. Only the Offered Certificates are offered
hereby.
The Certificates will represent beneficial
undivided ownership interests in a trust fund (the
"Trust Fund") consisting of two pools (each such
pool, a "Loan Group") of fixed- and
adjustable-rate, closed-end, monthly pay,
generally fully amortizing mortgage loans (the
"Mortgage Loans") secured by first or second lien
mortgages or deeds of trust (the "Mortgages") on
one-to-four family residential properties (the
"Mortgaged Properties") to be conveyed to the
Trust on the Closing Date.
Certificates Offered: The "Class A Certificates" which consist of the
Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates, the
Class A-4 Certificates, the Class A-5
Certificates, the Class A-6 Certificates and the
Class A-7 Certificates and the "Mezzanine
Certificates" which consist of the Class M-1
Certificates, the Class M-2 Certificates and the
Class M-3 Certificates are offered hereby.
Certain Designations: The Class A Certificates and the Mezzanine
Certificates are herein referred to as the
"Offered Certificates." The Mezzanine
Certificates, the Class B Certificates and the
Class C Certificates are referred to herein as the
"Subordinate Certificates." The Class A
Certificates (other than the Class A-6
Certificates), the Mezzanine Certificates and the
Class B Certificates are collectively referred to
as the
- --------------------------------------------------------------------------------
S-1
<PAGE>
- --------------------------------------------------------------------------------
"Fixed Rate Loan Group Certificates" and the Class
A-6 Certificates are referred to as the
"Adjustable Rate Loan Group Certificates." The
Class A-1 Certificates and the Class A-6
Certificates are collectively referred to herein
as the "Variable Rate Certificates."
Pass-Through Rates
and Balances: Each Class of Offered Certificates will have an
original Certificate Principal Balance and will
accrue interest at a rate (the "Pass-Through
Rate") as follows:
Pass- Original
Through Certificate
Class Rate Balance
---------------------- --------- ----------
Class A-1 Certificates (1)(2) [$_______]
Class A-2 Certificates [___%](2) [$_______]
Class A-3 Certificates [___%](2) [$_______]
Class A-4 Certificates [___%](2) [$_______]
Class A-5 Certificates [___%](2) [$_______]
Class A-6 Certificates (3) [$_______]
Class A-7 Certificates [___%](2) [$_______]
Class M-1 Certificates [___%](2) [$_______]
Class M-2 Certificates [___%](2) [$_______]
Class M-3 Certificates [___%](2) [$_______]
(1) On any Distribution Date, the "Class A-1
Pass-Through Rate" will be equal to a rate equal
to the sum of one-month LIBOR plus [__%] per
annum.
(2) The Pass-Through Rate with respect to all of
the Offered Certificates, other than the Class A-6
Certificates, will on any Distribution Date be
equal to the lesser of (x) the Pass-Through Rate
for such Class set forth above and (y) the Fixed
Rate Group Available Funds Cap Rate applicable to
such Distribution Date.
(3) On each Distribution Date, the "Class A-6
Pass-Through Rate" will be equal to the least of
(x) one-month LIBOR plus [__%] per annum (the
"Class A-6 Formula Pass-Through Rate"), (y) the
Adjustable Rate Group Available Funds Cap Rate
applicable to such Distribution Date and (z) [__%]
per annum.
The excess, if any, of (x) the interest due on the
Class A-6 Certificates on any Distribution Date
calculated at the Class A-6 Formula Pass-Through
Rate over (y) the interest due on the Class A-6
Certificates calculated at the
- --------------------------------------------------------------------------------
S-2
<PAGE>
- --------------------------------------------------------------------------------
Adjustable Rate Group Available Funds Cap Rate
applicable to such Distribution Date is the "LIBOR
Shortfall Amount" applicable to the Class A-6
Certificates for such Distribution Date.
If, on any Distribution Date, there is a LIBOR
Shortfall Amount, certain amounts otherwise
distributable with respect to the Class C
Certificates and Class R Certificates will instead
be allocated to payment of the LIBOR Shortfall
Amount. If the full amount of the LIBOR Shortfall
Amount is not paid on a Distribution Date, then
the unpaid amount will be paid out of the Excess
Cashflow Amount (as defined herein). If the
Servicer exercises its right to an Optional
Termination (as defined herein), the LIBOR
Shortfall Amount may not be paid in full. The
ratings of the Class A-6 Certificates do not
address the likelihood of the payment of any LIBOR
Shortfall Amount.
The "Fixed Rate Group Available Funds Cap Rate,"
as of any Distribution Date, is an amount,
expressed as a per annum rate on the principal
amount of the Fixed Rate Group Certificates, equal
to (i) the sum of (x) the aggregate amount of
interest due and collected (or advanced) on all of
the Mortgage Loans in the Fixed Rate Loan Group
for the related Remittance Period and (y) the
excess of (A) the aggregate amount of interest due
and collected (or advanced) on all of the Mortgage
Loans in the Adjustable Rate Loan Group for the
related Remittance Period over (B) the aggregate
of the Servicing Fee and the Trustee Fee, in each
case relating to the Adjustable Rate Loan Group
and such Distribution Date and the Current
Interest with respect to the Class A-6
Certificates for such Distribution Date minus (ii)
the aggregate of the Servicing Fee and the Trustee
Fee, in each case relating to the Fixed Rate Loan
Group, on such Distribution Date.
The "Adjustable Rate Group Available Funds Cap
Rate," as of any Distribution Date, is an amount,
expressed as a per annum rate, equal to (i) the
sum of (x) the aggregate amount of interest due
and collected (or advanced) on all of the Mortgage
Loans in the Adjustable Rate Loan Group for the
related Remittance Period and (y) the excess of
(A) the aggregate amount of interest due and
collected (or advanced) on all of the Mortgage
Loans in the Fixed Rate Loan Group for the related
Remittance Period over (B) the aggregate of the
Servicing Fee and the Trustee Fee, in each case
relating to the Fixed Rate Loan Group and such
- --------------------------------------------------------------------------------
S-3
<PAGE>
- --------------------------------------------------------------------------------
Distribution Date and the Current Interest with
respect to the Offered Certificates (other than
the Class A-6 Certificates) for such Distribution
Date minus (ii) the aggregate of the Servicing Fee
and the Trustee Fee, in each case relating to the
Adjustable Rate Loan Group, on such Distribution
Date.
Depositor: Prudential Securities Secured Financing
Corporation (the "Depositor"). See "The Depositor"
in the Prospectus.
Unaffiliated Seller: [________________], a [__________] (the
"Unaffiliated Seller").
Servicer: [________________], a [__________] (the
"Servicer"). The Servicer's principal executive
offices are located at [address], and its phone
number is [number]. The Mortgage Loans will be
serviced by the Sub-Servicer (as defined herein)
pursuant to a Sub-Servicing Agreement (the
"Sub-Servicing Agreement") between the Servicer
and the Sub-Servicer.
Sub-Servicer: [_______________], a [_______________] (the
"Sub-Servicer"). THE SUB-SERVICER's principal
executive offices are located at [address], and
its phone number is [number].
Trustee and Backup Servicer: [________________], a national banking association
(the "Trustee"). The Trustee's principal executive
offices are located at [address].
Originators: Any entity from which the Unaffiliated Seller, on
or prior to the Closing Date, acquires Mortgage
Loans is an "Originator" of the related Mortgage
Loans for purposes of this Prospectus Supplement.
A substantial portion of the Mortgage Loans were
purchased by the Unaffiliated Seller as a pool
(the "Purchased Pool") from a well-known mortgage
originator (the "Independent Originator") and the
remainder were originated by, and purchased from,
the Unaffiliated Seller's correspondents under its
[underwriting program]. On the Closing Date, the
Unaffiliated Seller will sell the Mortgage Loans
to the Depositor and the Depositor will deposit
the Mortgage Loans into the Trust.
Cut-Off Date: The close of business on [date] (the "Cut-Off
Date").
Closing Date: On or about [date] (such date, the "Closing
Date").
- --------------------------------------------------------------------------------
S-4
<PAGE>
- --------------------------------------------------------------------------------
Final Scheduled Distribution
Dates: The Final Scheduled Distribution Date for the
Offered Certificates is as follows:
Final Scheduled
Class Distribution Date
----------------------- -----------------------
Class A-1 Certificates:
Class A-2 Certificates:
Class A-3 Certificates:
Class A-4 Certificates:
Class A-5 Certificates:
Class A-6 Certificates:
Class A-7 Certificates:
Class M-1 Certificates:
Class M-2 Certificates:
Class M-3 Certificates:
Each such date has been calculated as described
under "Prepayment and Yield Considerations." It is
expected that the actual last Distribution Date
for each Class of Certificates will occur
significantly earlier than such Final Scheduled
Distribution Dates. See "Prepayment and Yield
Considerations" herein.
Denominations: The Offered Certificates are issuable in book
entry form in minimum denominations of original
principal amounts of $1,000 and integral multiples
thereof.
The Mortgage Loans: Unless otherwise noted, all statistical
percentages in this Prospectus Supplement are
approximate and are measured by the aggregate
scheduled unpaid principal balance of the Mortgage
Loans as of the Cut-Off Date (the "Original
Aggregate Principal Balance"). See "Additional
Information" herein.
General. The Original Aggregate Principal Balance
of the Mortgage Loans to be conveyed to the Trust
on the Closing Date is $_______________. The
Mortgage Loans consist of closed-end, monthly pay,
generally fully amortizing mortgage loans (the
"Mortgage Loans") secured by first or second lien
mortgages or deeds of trust (the "Mortgages") on
one-to-four family residential properties (the
"Mortgaged Properties").
The Mortgage Loans will be divided into two pools
(each, a "Loan Group") of loans. One pool will
consist of only fixed-rate Mortgage Loans (the
"Fixed Rate Loan Group") and the other pool will
- --------------------------------------------------------------------------------
S-5
<PAGE>
- --------------------------------------------------------------------------------
consist of only adjustable-rate Mortgage Loans
(the "Adjustable Rate Loan Group").
The Mortgage Loans are not insured by either
primary or pool mortgage insurance policies. The
Mortgage Loans are not guaranteed by the Servicer,
the Unaffiliated Seller, the Trustee, the
Depositor, any Originator or any of their
respective affiliates or any other person. The
Mortgage Loans are required to be serviced by the
Servicer in accordance with the terms of the
Pooling and Servicing Agreement and with
reasonable care, using that degree of skill and
attention that the Servicer exercises with respect
to comparable mortgage loans that it services for
itself and others. See "The Pooling and Servicing
Agreement" herein.
Fixed Rate Loan Group. The Mortgage Loans to be
included in the Fixed Rate Loan Group consist of
_____ fixed-rate Mortgage Loans secured by
Mortgages on single-family homes (which may be
condominiums, manufactured homes or one-to-four
family residences), including investment
properties, _____%, _____%, _____% and _____% by
principal balance of Mortgage Loans in the Fixed
Rate Loan Group as of the Cut-Off Date of which
are located in the states of ________,
______________, ______________ and _____________,
respectively. The fixed-rate Mortgage Loans to be
included in the Fixed Rate Loan Group are secured
by Mortgages of which ______% by principal balance
of Mortgage Loans in the Fixed Rate Loan Group as
of the Cut-Off Date are first lien mortgages or
deeds of trust and ____% by principal balance of
Mortgage Loans in the Fixed Rate Loan Group as of
the Cut-Off Date are secured by second lien
mortgages or deeds of trust. As of the Cut-Off
Date, the Mortgage Loans in the Fixed Rate Loan
Group had an aggregate principal balance of
$_______________.
________% by principal balance of Mortgage Loans
in the Fixed Rate Loan Group as of the Cut-Off
Date were purchased by the Unaffiliated Seller
from the Independent Originator. ______% by
principal balance of Mortgage Loans in the Fixed
Rate Loan Group as of the Cut-Off Date were
mortgage loans newly originated by correspondents
under the Unaffiliated Seller's [underwriting
program] and purchased by the Unaffiliated Seller
through an affiliate.
- --------------------------------------------------------------------------------
S-6
<PAGE>
- --------------------------------------------------------------------------------
The Combined Loan-to-Value Ratio ("CLTV") of a
Mortgage Loan is equal to the ratio (expressed as
a percentage) of (x) the sum of the (i) principal
balance of the Mortgage Loan as of the Cut-Off
Date and (ii) the outstanding principal balances
of any senior mortgage loans (computed at the date
of origination of the Mortgage Loan or, if
available, the current principal balance) to (y)
the appraised value of the Mortgaged Property at
the time of origination of the Mortgage Loan or,
with respect to Mortgage Loans in the Purchased
Pool, a more recent broker price opinion, if
available.
The weighted average CLTV of the Mortgage Loans in
the Fixed Rate Loan Group was ________%.
_________% by principal balance of Mortgage Loans
in the Fixed Rate Loan Group as of the Cut-Off
Date require monthly payments of principal that
will fully amortize the Mortgage Loans by their
respective maturity date, and _______% by
principal balance of Mortgage Loans in the Fixed
Rate Loan Group as of the Cut-Off Date are Balloon
Loans (as defined herein). The weighted average
remaining term to stated maturity was ____ months,
with a range from ____ months to ____ months. The
average principal balance of the Mortgage Loans in
the Fixed Rate Loan Group was $____________, with
a range from $_____________ to $____________.
All of the Mortgage Loans in the Fixed Rate Loan
Group have interest rates (each a "Mortgage Rate")
that are fixed (the "Fixed Rate Mortgage Loans").
The Mortgage Rates of the Fixed Rate Mortgage
Loans ranged from _____% to _____% per annum, with
a weighted average Mortgage Rate of ________% per
annum. As of the Cut-Off Date, ______% by
principal balance of Mortgage Loans in the Fixed
Rate Loan Group as of the Cut-Off Date have
Mortgage Rates which "step up" after an initial
period following origination. These Mortgage Loans
have fixed Mortgage Rates which are increased by a
weighted average margin of _________% (one such
Mortgage Loan "steps-up" by ____%).
Adjustable Rate Loan Group. The Mortgage Loans to
be included in the Adjustable Rate Loan Group
consist of _______ adjustable-rate Mortgage Loans,
secured by Mortgages on single-family homes (which
may be condominiums, manufactured homes or
one-to-four family residences), including
investment properties, ________%, ______%, ______%
and ______% by principal balance of Mortgage Loans
- --------------------------------------------------------------------------------
S-7
<PAGE>
- --------------------------------------------------------------------------------
in the Adjustable Rate Loan Group as of the
Cut-Off Date of which are located in the states of
______________, _____________, ______________ and
_______________, respectively. All of the Mortgage
Loans to be included in the Adjustable Rate Loan
Group are secured by Mortgages which are first
lien mortgages or deeds of trust. As of the
Cut-Off Date, the Mortgage Loans in the Adjustable
Rate Loan Group had an aggregate principal balance
of $-----------------.
______% by principal balance of Mortgage Loans in
the Adjustable Rate Loan Group as of the Cut-Off
Date were purchased by the Unaffiliated Seller
from the Independent Originator. _______% by
principal balance of Mortgage Loans in the
Adjustable Rate Loan Group as of the Cut-Off Date
were mortgage loans newly originated by
correspondents under the Unaffiliated Seller's
[underwriting program] and purchased by the
Unaffiliated Seller through an affiliate.
The weighted average CLTV of the Mortgage Loans in
the Adjustable Rate Loan Group was ______%. All of
the Mortgage Loans require monthly payments of
principal that will fully amortize the Mortgage
Loans by their respective maturity date. The
weighted average remaining term to stated maturity
was ____ months, with a range from ___ months to
____ months. The average principal balance of the
Mortgage Loans in the Adjustable Rate Loan Group
was $____________, with a range from $____________
to $_________________.
All of the Mortgage Loans in the Adjustable Rate
Loan Group have Mortgage Rates that are adjustable
(the "Adjustable Rate Mortgage Loans"). The
Mortgage Rates on the Adjustable Rate Mortgage
Loans ranged from _____% to _____% per annum, with
a weighted average Mortgage Rate of _____% per
annum. The Adjustable Rate Mortgage Loans had
gross margins ranging from _____% to _____%, with
a weighted average gross margin of _____%;
lifetime rate caps, ranging from _____% to _____%,
with a weighted average lifetime rate cap of
_____% (for the Adjustable Rate Mortgage Loans
which have caps); and lifetime rate floors ranging
from _____% to _____%, with a weighted average
lifetime rate floor of _____% (where the gross
margin was used for Adjustable Rate Mortgage Loans
without floors).
- --------------------------------------------------------------------------------
S-8
<PAGE>
- --------------------------------------------------------------------------------
Distributions, Generally: Distributions on the Certificates will be made on
the twenty-fifth day of each calendar month, or if
such day is not a business day, the next
succeeding business day (each, a "Distribution
Date") commencing [date], to the Owners of record.
See "Description of the Offered Certificates --
General" herein. The Owners of record shall be
such Owners as of the last day of the calendar
month immediately preceding the calendar month in
which such Distribution Date occurs, (except in
the case of the [________] Distribution Date which
shall be such Owners as of the close of business
on the Closing Date) whether or not such day is a
business day (each a "Record Date"). Distributions
to an Owner will be made in an amount equal to the
product of such Owner's Percentage Interest (as
defined herein) and the amount distributed in
respect of such Owner's Class of Certificates on
such Distribution Date.
The "Percentage Interest" represented by any
Certificate will be equal to the percentage
obtained by dividing the original Certificate
Principal Balance of such Certificate by the
original Certificate Principal Balance of all
Certificates of the same Class. The "Certificate
Principal Balance" of any Certificate is equal to
the principal balance of such Certificate on the
date of issuance less any amounts actually
distributed to the Owner of such Certificate on
account of principal or allocated to such
Certificate on account of Realized Losses (as
defined herein).
Distributions of Interest: For each Distribution Date, the interest due with
respect to the Offered Certificates (other than
the Variable Rate Certificates) will be the
interest which has accrued thereon at the related
Pass-Through Rate during the calendar month
immediately preceding the month in which the
Distribution Date occurs and the interest due with
respect to the Variable Rate Certificates will be
the interest which has accrued thereon at the
related Pass-Through Rate during the period from
the [___] day of the month immediately preceding
the month in which such Distribution Date occurs
(or the Closing Date with respect to the
[________] Distribution Date) to the [__] day of
the month in which such Distribution Date occurs.
Each period referred to in the prior sentence
relating to the accrual of interest is the
"Accrual Period" for the Offered Certificates.
On each Distribution Date, to the extent of funds
available for interest distributions as described
herein under "Description of the Offered
- --------------------------------------------------------------------------------
S-9
<PAGE>
- --------------------------------------------------------------------------------
Certificates -- Interest Distributions," interest
will be distributed with respect to each Class of
Offered Certificates in an amount equal to the
interest accrued on the related Class Certificate
Principal Balance for the related Accrual Period
at the related Pass-Through Rate (such amount, the
"Current Interest").
All calculations of interest on the Offered
Certificates (other than the Variable Rate
Certificates) will be made on the basis of a
360-day year assumed to consist of twelve 30-day
months. All calculations of interest on the
Variable Rate Certificates will be made on the
basis of the actual number of days elapsed in the
related Accrual Period and a year of 360 days.
Distributions of Principal: On each Distribution Date, to the extent of funds
available for principal distributions as described
herein under "Description of the Offered
Certificates -- Principal Distributions,"
principal will be distributed with respect to each
Class of Offered Certificates then entitled to
receive distributions of principal in an aggregate
amount for all such Classes equal to the Principal
Distribution Amount for such Distribution Date.
The "Principal Distribution Amount" for any
Distribution Date will equal the sum of (i) the
Aggregate Collected Principal Amount (and with
respect to any Distribution Date on which a
Trigger Event is not in effect, less the
Overcollateralization Reduction Amount, if any)
and (ii) the Extra Principal Distribution Amount,
if any, for such Distribution Date. As to any
Distribution Date, the "Aggregate Collected
Principal Amount" will equal the aggregate of the
Collected Principal Amounts with respect to each
of the Loan Groups for the related Remittance
Period.
The "Collected Principal Amount" for any
Distribution Date and Loan Group will equal the
sum of the following amounts (without
duplication):
(a) the principal portion of all scheduled
and unscheduled (other than the principal
portion of any prepaid installments) monthly
payments on the Mortgage Loans in such Loan
Group due during the related Remittance
Period, to the extent actually received by
the Trustee on or prior to the related
Remittance Date or to the extent actually
advanced by the Servicer on or prior to the
- --------------------------------------------------------------------------------
S-10
<PAGE>
- --------------------------------------------------------------------------------
related Remittance Date including the
principal portion of all full and partial
principal prepayments made by the respective
Mortgagors during the related Remittance
Period;
(b) the scheduled principal balance of each
Mortgage Loan in such Loan Group that either
was repurchased by the Unaffiliated Seller or
purchased by the Servicer on the related
Remittance Date, to the extent such scheduled
principal balance is actually received by the
Trustee on or prior to the related Remittance
Date;
(c) any Substitution Amounts delivered by the
Unaffiliated Seller on the related Remittance
Date in connection with a substitution of a
Mortgage Loan in such Loan Group (to the
extent such Substitution Amounts relate to
principal), to the extent such Substitution
Amounts are actually received by the Trustee
on or prior to the related Remittance Date;
(d) Net Liquidation Proceeds (as defined
herein) to the extent received by the Trustee
on or prior to the related Remittance Date
for each Mortgage Loan in such Loan Group
which became a Liquidated Mortgage Loan
during the related Remittance Period; and
(e) the proceeds received by the Trustee of
any termination of the Trust (to the extent
such proceeds relate to principal).
A "Liquidated Mortgage Loan" is, in general, a
defaulted Mortgage Loan as to which the Servicer
has determined in its reasonable judgment that all
amounts that it expects to recover on such
Mortgage Loan have been recovered (exclusive of
any possibility of a deficiency judgment).
As to any Distribution Date, the
"Overcollateralization Reduction Amount" is an
amount equal to the lesser of (x) the excess, if
any, of (i) the Overcollateralization Amount for
such Distribution Date (assuming that 100% of the
Aggregate Collected Principal Amount is
distributed as principal on the Offered
Certificates on such Distribution Date) over (ii)
- --------------------------------------------------------------------------------
S-11
<PAGE>
- --------------------------------------------------------------------------------
the Required Overcollateralization Amount for such
Distribution Date and (y) the Aggregate Collected
Principal Amount for such Distribution Date.
The "Extra Principal Distribution Amount" with
respect to any Distribution Date is an amount
equal to the lesser of (i) the Overcollaterization
Deficiency Amount for such Distribution Date and
(ii) the Excess Interest Amount for such
Distribution Date.
Credit Enhancement: The credit enhancement provided for the benefit of
the Owners of the Offered Certificates consists of
(x) subordination of the Subordinate Certificates,
(y) the application of the Excess Interest Amount
to fund Realized Losses and (z) the
overcollateralization mechanics which utilize the
internal cash flows of the Trust.
Subordination of the Subordinate Certificates. The
rights of the Owners of the Subordinate
Certificates and the Class R Certificates to
receive distributions with respect to the Mortgage
Loans will be subordinated, to the extent
described herein, to the rights of the Owners of
the Class A Certificates. This subordination is
intended to enhance the likelihood of regular
receipt by the Owners of the Class A Certificates
of the full amount of their monthly payments of
interest and principal and to afford such Owners
protection against Realized Losses on Liquidated
Mortgage Loans.
In addition, the rights of the Owners of the Class
M-2 Certificates, the Class M-3 Certificates, the
Class B Certificates, the Class C Certificates and
the Class R Certificates are subordinated, to the
extent described herein, to the rights of the
Owners of the Class A Certificates and the Class
M-1 Certificates. The rights of the Owners of the
Class M-3 Certificates, the Class B Certificates,
the Class C Certificates and the Class R
Certificates are subordinated, to the extent
described herein, to the rights of the Owners of
the Class A Certificates and the Class M-1
Certificates and the Class M-2 Certificates. The
rights of the Owners of the Class B Certificates,
the Class C Certificates and the Class R
Certificates are subordinated, to the extent
described herein, to the rights of the Owners of
the Class A Certificates and the Mezzanine
Certificates. Pursuant to the terms of the Pooling
and Servicing Agreement, distributions to the
Owners of the Class C Certificates will be made
only in periods in which (x) all Realized Losses
- --------------------------------------------------------------------------------
S-12
<PAGE>
- --------------------------------------------------------------------------------
have been fully funded and (y) the
Overcollateralization Amount is equal to or
greater than the Required Overcollateralization
Amount applicable to such period.
Application of Realized Losses. To the extent that
the Net Liquidation Proceeds with respect to any
Liquidated Mortgage Loan are less than 100% of the
principal balance thereof, such shortfall is a
"Realized Loss". "Net Liquidation Proceeds" are
any amounts (including the proceeds of any
Insurance Policy) recovered by the Servicer in
connection with a Liquidated Loan, net of expenses
which are incurred by the Servicer in connection
with the liquidation and net of unreimbursed
Servicing Advances, unreimbursed Delinquency
Advances and accrued and unpaid Servicing Fees.
The Collected Principal Amount includes the Net
Liquidation Proceeds in respect of principal
received upon liquidation of a Liquidated Mortgage
Loan. If such Net Liquidation Proceeds are less
than the unpaid principal balance of such Mortgage
Loan, the Pool Balance will decline more than the
aggregate Class Certificate Principal Balance of
the Offered Certificates. If such difference is
not covered by the application of the Excess
Interest Amount or the Overcollateralization
Amount, the Class of Class M Certificates or Class
B Certificates then outstanding with the lowest
priority Class designation will bear such loss.
If, following the distributions on a Distribution
Date, the aggregate Certificate Principal Balance
of the Offered Certificates exceeds the Pool
Balance, i.e., the Certificates are
undercollateralized, the Class Certificate
Principal Balance of the Class of Subordinate
Certificates then outstanding with the lowest
priority Class designation will be reduced by the
amount of such excess. Any such reduction will
constitute an "Applied Realized Loss" for the
applicable Class. The amount that any Class is
reduced as a result of an Applied Realized Loss
will not accrue interest. Such amount, however,
may be paid on a future Distribution Date to the
extent funds are available therefor as provided
herein under "Description of the Offered
Certificates--Interest Distributions" and
"--Credit Enhancement."
Overcollateralization. In addition to the credit
enhancement provided by the Subordinate
Certificates and the Excess Interest Amount, the
provisions of the Pooling and Servicing Agreement
afford additional credit enhancement by
- --------------------------------------------------------------------------------
S-13
<PAGE>
- --------------------------------------------------------------------------------
accelerating the amortization of the Offered
Certificates relative to the amortization of the
Mortgage Loans until an overcollateralization
target is met. The accelerated amortization is
achieved by the application of certain excess
interest to the payment of principal on the
Offered Certificates then entitled to receive
principal distributions. This acceleration feature
creates overcollateralization which results from
the excess of the aggregate scheduled principal
balances of the Mortgage Loans over the aggregate
Certificate Principal Balances of the Offered
Certificates, the Class B Certificates and the
Class C Certificates. Once the required level of
overcollateralization is reached, and subject to
the provisions described in the next paragraph,
the acceleration feature will cease, unless
necessary to maintain the required level of
overcollateralization.
The Pooling and Servicing Agreement provides that,
subject to certain floors, caps and triggers, the
required level of overcollateralization may
increase or decrease over time. An increase would
result from a temporary period of accelerated
amortization of the Offered Certificates to
increase the actual level of overcollateralization
to its required level; a decrease would result
from a temporary period of decelerated
amortization to reduce the actual level of
overcollateralization to its required level.
See "Description of the Offered Certificates --
Overcollateralization Provisions" herein.
Delinquency Advances
and Compensating Interest: The Servicer will be obligated to make advances
(each a "Delinquency Advance") with respect to
delinquent payments of interest (calculated at the
related Mortgage Rate less the sum of the rate at
which the Servicing Fee (as defined herein) and
the Trustee Fee (the sum of such rates, the
"Administrative Rate") on each Mortgage Loan, but
only to the extent (i) necessary to pay any
shortfall in Current Interest for the Offered
Certificates (such amount, the "Total Current
Interest") arising because of the insufficiency of
Available Funds and (ii) that such Delinquency
Advances, in good faith and in the Servicer's
reasonable judgment, are recoverable from the
related Mortgage Loan. Delinquency Advances are
reimbursable from (i) future collections on the
Mortgage Loan which gave rise to the Delinquency
Advance, (ii) Liquidation Proceeds (as defined
herein) for such Mortgage Loan, (iii) from certain
- --------------------------------------------------------------------------------
S-14
<PAGE>
- --------------------------------------------------------------------------------
excess moneys which would otherwise be paid to the
Owners of the Class C Certificates and (iv) from
amounts on deposit in the Principal and Interest
Account once such Delinquency Advance is deemed
"nonrecoverable".
In addition, the Servicer also will be required to
deposit into the account holding collections on
the Mortgage Loans (the "Principal and Interest
Account"), with respect to any full Prepayment
received on a Mortgage Loan during the related
Remittance Period, out of its own funds without
any right of reimbursement therefor, Compensating
Interest. "Compensating Interest" is equal to the
difference between (x) 30 days' interest at such
Mortgage Loan's Mortgage Rate (less the
Administrative Rate) on the principal balance of
such Mortgage Loan as of the first day of the
related Remittance Period and (y) to the extent
not previously advanced, the interest (less an
amount calculated at the Administrative Rate) paid
by the Mortgagor with respect to such Mortgage
Loan during such Remittance Period; provided,
however, that the Servicer: (i) will only pay
Compensating Interest to the extent that there is
a shortfall in the amount of Available Funds
necessary to pay the Total Current Interest, (ii)
will not be required to pay Compensating Interest
with respect to any Remittance Period in an amount
in excess of the aggregate Servicing Fee received
by the Servicer for such Remittance Period and
(iii) will not be required to cover shortfalls in
collections of interest due to curtailments or
partial prepayments. Any excess of the full amount
of the Compensating Interest due over the related
Servicing Fee may result in a shortfall of
interest payable to the Offered Certificates or
the Subordinate Certificates.
Any failure by the Servicer to remit to the
Trustee a Delinquency Advance or Compensating
Interest to the extent required under the Pooling
and Servicing Agreement will constitute an event
of default under the Pooling and Servicing
Agreement (each, a "Servicer Event of Default"),
in which case, upon the removal of the Servicer,
the Trustee or the successor servicer will be
obligated to make such advances in accordance with
the terms of the Pooling and Servicing Agreement.
See "Servicing of the Mortgage Loans and Contracts
--Advances and Limitations Thereon" in the
Prospectus.
- --------------------------------------------------------------------------------
S-15
<PAGE>
- --------------------------------------------------------------------------------
Book-Entry Registration of
the Offered Certificates: The Offered Certificates initially will be issued
in book-entry form. Persons acquiring beneficial
ownership interests in such Offered Certificates
("Beneficial Owners") may elect to hold their
interests through The Depository Trust Company
("DTC"), in the United States, or Cedel Bank,
societe anonyme ("CEDEL") or The Euroclear System
("Euroclear"), in Europe. Transfers within DTC,
CEDEL or Euroclear, as the case may be, will be in
accordance with the usual rules and operating
procedures of the relevant system. So long as the
Offered Certificates are Book-Entry Certificates
(as defined herein), such Certificates will be
evidenced by one or more Certificates registered
in the name of Cede & Co. ("Cede"), as the nominee
of DTC, or one of the European Depositaries (as
defined below). Cross-market transfers between
persons holding directly or indirectly through
DTC, on the one hand, and counterparties holding
directly or indirectly through CEDEL or Euroclear,
on the other, will be effected in DTC through
Citibank N.A. ("Citibank") or The Chase Manhattan
Bank ("Chase," and together with Citibank, the
"European Depositaries"), the relevant
depositaries of CEDEL and Euroclear, respectively,
and each a participating member of DTC. The
Offered Certificates initially will be registered
in the name of Cede. The interests of the Owners
of such Certificates will be represented by
book-entries on the records of DTC and
participating members thereof. No Beneficial Owner
will be entitled to receive a Definitive
Certificate (as defined herein) representing such
person's interest, except in the event that
Definitive Certificates are issued under the
limited circumstances described herein. All
references in this Prospectus Supplement to any
Offered Certificates reflect the rights of
Beneficial Owners only as such rights may be
exercised through DTC and its participating
organizations for so long as such Offered
Certificates are held by DTC. See "Description of
the Offered Certificates--Book-Entry Registration
of the Offered Certificates" herein and in Annex I
hereto.
Monthly Servicing Fee
and Trustee's Fee: [________________], as Servicer, will retain a
fee, payable on each Servicer Remittance Date (as
defined herein), and equal to _____% per annum
(the "Servicing Fee"), payable monthly at
one-twelfth the annual rate, of the aggregate
outstanding principal balance of all Mortgage
Loans as of the first day of the related
Remittance Period.
- --------------------------------------------------------------------------------
S-16
<PAGE>
- --------------------------------------------------------------------------------
On each Servicer Remittance Date, the Trustee will
be entitled to receive a "Trustee Fee" equal to
the product of (x) one-twelfth of _____% and (y)
the aggregate outstanding principal balance of all
Mortgage Loans as of the first day of the related
Remittance Period.
Optional Termination: The Pooling and Servicing Agreement provides that
a party to be named therein, at its option, acting
directly or through a permitted designee, will
have the right, in certain circumstances, to
purchase from the Trust all the Mortgage Loans
then held by the Trust, at a price at least
sufficient to cause the payment in full of the
amounts then outstanding on the Class A
Certificates, the Mezzanine Certificates, the
Class B Certificates and the Class C Certificates,
on any Remittance Date on or after the Remittance
Date on which the then-outstanding aggregate
principal balance of the Mortgage Loans in the
Trust has declined to _____% or less of the
Original Aggregate Principal Balance (the
"Optional Termination Date").
The Pooling and Servicing Agreement requires that,
within 90 days following the Optional Termination
Date, if the Servicer, or an affiliate of the
Servicer, has not exercised its optional
termination right by such date, the Trustee shall
solicit bids for the purchase (the "Auction Sale")
of all Mortgage Loans remaining in the Trust. In
the event that satisfactory bids are received as
described in the Pooling and Servicing Agreement,
the net sale proceeds will be distributed to the
Owners of the Certificates, in the same order of
priority as collections received in respect of the
Mortgage Loans. If satisfactory bids are not
received, the Trustee shall decline to sell the
Mortgage Loans and shall not be under any
obligation to solicit any further bids or
otherwise negotiate any further sale of the
Mortgage Loans. Such sale and consequent
termination of the Trust must constitute a
"qualified liquidation" of the REMIC established
by the Trust under Section 860F of the Internal
Revenue Code of 1986, as amended, including,
without limitation, the requirement that the
qualified liquidation takes place over a period
not to exceed 90 days. See "The Pooling and
Servicing Agreement --Optional Termination"
herein.
Optional Repurchase of
Defaulted Mortgage Loans: The Servicer or its designee has the option, but
is not obligated, to purchase from the Trust Fund
any Mortgage Loan which is more than 60 days
delinquent, up to _____% by aggregate original
- --------------------------------------------------------------------------------
S-17
<PAGE>
- --------------------------------------------------------------------------------
Principal Balance of the Original Aggregate
Principal Balance of all Mortgage Loans, at a
purchase price equal to the outstanding Principal
Balance thereof as of the date of purchase, plus
all accrued and unpaid interest on such Principal
Balance, computed at the related Mortgage Interest
Rate (net of the related Servicing Fee) plus the
amount of any unreimbursed Servicing Advances
(without duplication) made by the Servicer with
respect to such Mortgage Loan in accordance with
the provisions specified in the Pooling and
Servicing Agreement.
Federal Income Tax Aspects: For federal income tax purposes, one or more
elections will be made to treat the Trust as a
"real estate mortgage investment conduit" (the
"REMIC"). Each Class of Offered Certificates, the
Class B Certificates and the Class C Certificates
will be designated as "regular interests" in the
REMIC and will be treated as debt instruments of
the Trust for federal income tax purposes. The
REMIC will issue the Class R Certificates, which
will be designated as the sole class of "residual
interests" in the REMIC. See "Certain Federal
Income Tax Consequences" herein and in the
Prospectus.
ERISA Considerations: As discussed under "ERISA Considerations" herein,
the acquisition by Benefit Plan Investors (as
defined herein) of the Certificates could result
in prohibited transactions under ERISA and Section
4975 of the Code. Accordingly, the Certificates
may not be purchased by Benefit Plan Investors.
Legal Investment
Considerations: [The Offered Certificates will not constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984
("SMMEA"). Accordingly, many institutions with
legal authority to invest in comparably rated
securities based on first lien mortgage loans may
not be legally authorized to invest in the Offered
Certificates.]
Certain Legal Matters: Certain legal matters relating to the validity of
the issuance of the Certificates will be passed
upon for the Unaffiliated Seller and the Servicer
by [__________], and for the Depositor and the
Underwriter by Dewey Ballantine LLP, New York, New
York.
- --------------------------------------------------------------------------------
S-18
<PAGE>
- --------------------------------------------------------------------------------
Ratings: It is a condition of the original issuance of the
Offered Certificates that the Class A Certificates
receive ratings of [__] by [____________]
("[____]") and [__] by [____________] ("[____]"
and together with [____], the "Rating Agencies")
and that the Class M-1 Certificates receive
ratings of [__] from [____] and [__] from [____],
the Class M-2 Certificates receive ratings of [__]
from [____] and [__] from [____] and the Class M-3
Certificates receive ratings of [__] from [____]
and [__] from [____]. 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 entity. See "Ratings"
herein.
- --------------------------------------------------------------------------------
S-19
<PAGE>
RISK FACTORS
Prospective investors in the Offered Certificates should consider the
following factors (as well as the factors set forth under "Risk Factors" in the
Prospectus) in connection with the purchase of the Offered Certificates.
Prepayment and Maturity Considerations
Borrowers may prepay their loans at any time and generally are not
required to pay a prepayment fee. The rate of prepayments of the Mortgage Loans
cannot be predicted and may be affected by a wide variety of economic, social
and other factors, including state and federal income tax policies, interest
rates and the availability of alternative financing. Therefore, no assurance can
be given as to the level of prepayments that the Trust will experience.
A number of factors, in addition to prepayment fees, may impact on the
prepayment behavior of a pool of loans such as the Mortgage Loans. One such
factor is the principal balance of the Mortgage Loans. A small principal balance
may be easier for a borrower to prepay than a large balance and therefore may
have a higher prepayment rate. In addition, in order to refinance a first
priority mortgage loan, the borrower generally must repay any subordinate
mortgage loans. However, a small principal balance may make refinancing a
Mortgage Loan at a lower interest rate less attractive to the borrower as the
perceived impact to the borrower of lower interest rates on the size of the
monthly payment may not be significant. Other factors that might be expected to
affect the prepayment rate include general economic conditions and the general
interest rate environment, possible future changes affecting the deductibility
for federal income tax purposes of interest payments on mortgage loans, the
amounts of, and interest rates on, the underlying senior mortgage loans, and the
tendency of borrowers to use first priority mortgage loans as long-term
financing for home purchase and second mortgage loans as shorter-term financing
for a variety of purposes, including home improvement, education expenses and
purchases of consumer durables such as automobiles.
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancings of the related senior
mortgage loan or loans), sales of Mortgaged Properties subject to "due-on-sale"
clauses and liquidations due to default, as well as the receipt of proceeds from
physical damage. In addition, repurchases from the Trust of Mortgage Loans
required to be made by the Unaffiliated Seller under the Pooling and Servicing
Agreement will have the same effect on the Owners of the Offered Certificates as
a prepayment of the related Mortgage Loans. Prepayments and such repurchases
also will accelerate the Final Scheduled Distribution Date of the Offered
Certificates. All of the Mortgage Loans contain "due-on-sale" provisions, and
the Servicer generally will enforce such provisions to the extent permitted by
applicable law. In addition, if the Unaffiliated Seller is unable to cure
documentation defects or provide a replacement Mortgage Loan for the affected
Mortgage Loans, affected Mortgage Loans will be repurchased, and the Owners of
the Offered Certificates then entitled to receive principal distributions will
experience a principal prepayment. See "Certain Legal Aspects of the Mortgage
Loans" herein.
In general, if prevailing interest rates fall significantly below the
interest rates for similar loans at the time of origination, fixed rate mortgage
loans may be subject to higher prepayment rates than if prevailing rates remain
S-20
<PAGE>
at or above those at the time such Mortgage Loans were originated. Should
prepayments on the Mortgage Loans increase because of such interest rate
reductions, the average life and final maturity of the Offered Certificates
(other than the Class A-6 Certificates) may be shortened. See "Prepayment and
Yield Considerations."
The weighted average life of a pool of loans is the average amount of time
that will elapse from the date such pool is formed until each dollar of
principal is scheduled to be repaid to the investors in such pool. Because it is
expected that there will be prepayments and defaults on the Mortgage Loans, the
actual weighted average life of the Offered Certificates is expected to vary
substantially from the weighted average remaining term to stated maturity of the
Mortgage Loans as set forth herein under "The Mortgage Pool -- General." Certain
information, based on specified prepayment assumptions, as to the possible
weighted average life of the Offered Certificates is set forth herein under
"Prepayment and Yield Considerations."
The Unaffiliated Seller has only limited records of the historical
prepayment experience of its portfolio of loans which the Unaffiliated Seller
believes does not provide meaningful information with respect to the Mortgage
Loans. In any event, no assurance can be given that prepayments on the Mortgage
Loans will conform to any historical experience and no prediction can be made as
to the actual prepayment experience on the Mortgage Loans.
Limited Protection Afforded by Subordination
The rights of the Owners of the Subordinate Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the Owners of the Class A Certificates, and the rights of the Owners
of each Class of Subordinate Certificates to receive such distributions will be
further subordinated to such rights of the Owners of the Class or Classes of
Subordinate Certificates with higher priority Class designations, in each case,
to the extent described herein. The subordination described above is intended to
increase the likelihood of regular receipt by the Owners of Certificates with a
higher payment priority, of the full amount of monthly distributions allocable
to them and to afford such Owners protection against losses. As a result, the
yield on each Class of Offered Certificates, in order of payment priority, will
be progressively more sensitive to the rate, timing and severity of Realized
Losses on the Mortgage Loans and other shortfalls in Available Funds. Investors
in the Offered Certificates, and particularly the Subordinate Certificates,
should carefully consider the related risks, including the risk that such
investors may suffer a loss on their investments.
The Subordinate Certificates will not be entitled to any principal
distributions until the Stepdown Date, at the earliest. In addition, the
Subordinate Certificates also are subject to limitations on distributions of
principal upon the occurrence of certain delinquency and loss trigger events.
Consequently, the weighted average lives of the Subordinate Certificates will be
longer than would be the case if distributions of principal were to be allocated
on a pro rata basis among the Class A Certificates and the Subordinate
Certificates. As a result of the longer weighted average lives of the
Subordinate Certificates, the Owners of such Certificates have a greater risk of
suffering a loss on their investments.
S-21
<PAGE>
The Purchased Pool, Limited Information
_____% by current aggregate Principal Balance of the Mortgage Loans were
purchased by the Unaffiliated Seller from the Independent Originator. Only
limited information was available concerning the origination and servicing of
the Mortgage Loans prior to such purchase, and none of the Servicer, the
Unaffiliated Seller or the Depositor were able independently to verify such
information as has been obtained and included herein. The Purchased Pool
consists of mortgage loans originated by the Independent Originator which were
not included in one of the Independent Originator's regular securitizations
because the mortgage loans did not meet the specified criteria for such
securitizations at that time or due to other unrelated factors. A majority of
the Mortgaged Properties securing the Mortgage Loans in the Purchased Pool are
located in the states of New Jersey, New York, California and Massachusetts. As
described below under "Geographic Concentration", the losses on the Purchased
Pool may be higher than if such Mortgage Loans were more geographically
diversified. In addition, a majority of the Mortgage Loans in the Purchased Pool
were originated in 1988 through 1990 and thus are well seasoned. Since the time
of origination of the Purchased Pool, property values in the states of New
Jersey, New York, California and Massachusetts generally have declined. Thus,
the loan-to-value ratios of the Mortgage Loans in the Purchased Pool may have
risen since the time of origination.
None of the Servicer, the Unaffiliated Seller or the Depositor have been
able to obtain historical loss and delinquency statistics with respect to loans
originated and serviced by the Independent Originator which they consider
reliable and, accordingly, no such statistics are included herein. The
Unaffiliated Seller is making certain representations and warranties regarding
the Mortgage Loans and is obligated to repurchase such Mortgage Loans as to
which there is a breach of such representations or warranties which materially
adversely affects the value of, or interest of the Trust in, such Mortgage Loan.
However, there is no assurance that such remedies will cure all problems that
may arise by reason of the limited information or documentation available with
respect to the Mortgage Loans and their origination and prior servicing. Such
problems could include failure of the Mortgage Loans to have been originated in
compliance with applicable law, industry standards, or the Independent
Originator's own underwriting standards, or failure of the Mortgage Loans to
have been serviced by the Independent Originator in accordance with such laws
and standards, as well as problems which, because of the limited information
available, currently cannot be determined.
Underwriting Guidelines, Limited Operating History and Potential Delinquencies
_____% by current aggregate Principal Balance of the Mortgage Loans were
purchased by the Unaffiliated Seller through an affiliate from third party
correspondents under the Unaffiliated Seller's [underwriting program].
Substantially all of these Mortgage Loans were purchased by the Unaffiliated
Seller pursuant to the Mortgage Loan underwriting guidelines of its
[underwriting program]. Due to the limited operating history of the Unaffiliated
Seller as a purchaser of newly originated Mortgage Loans, no assurance can be
given concerning the performance of the Mortgage Loans purchased by the
Unaffiliated Seller under the [underwriting program]. The Unaffiliated Seller
markets loans, in part, to borrowers who, for one reason or another, are not
able, or do not wish, to obtain financing from traditional sources such as
commercial banks. To the extent that such loans may be considered to be of a
riskier nature than loans made by traditional sources of financing, the Owners
S-22
<PAGE>
of the Certificates may be deemed to be at greater risk than if the Mortgage
Loans were made to other types of borrowers.
As described herein, the Unaffiliated Seller's underwriting standards
generally reflect the guidelines of the Federal Home Loan Mortgage Corporation
("FHLMC") except with regard to certain features, like CLTV's and borrower
down-payments and in certain other respects. As a result of these differences,
the Mortgage Loans in the Mortgage Loan Pool may experience higher rates of
delinquencies, defaults and foreclosures than mortgage loans underwritten in a
manner which is more similar to the FNMA and FHLMC guidelines.
Geographic Concentration
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency on loans
generally. Any concentration of the Mortgage Loans in such a region may present
risks in addition to those generally present for similar mortgage backed
securities without such concentration. In particular, approximately ______%,
______%, ______% and ______% of the Mortgage Loans by current aggregate
Principal Balance are secured by Mortgaged Properties located in the states of
___________________, ___________________, ___________________ and
___________________, respectively. Because of the relative geographic
concentration of the Mortgage Loans within New Jersey, New York, California and
Massachusetts, losses on the Mortgage Loans may be higher than would be the case
if the Mortgage Loans were more geographically diversified. For example, certain
of the Mortgaged Properties may be more susceptible to certain types of special
hazards, such as natural disasters and major civil disturbances, than
residential properties located in other parts of the country. In addition, the
economies of ___________________, ___________________, ___________________ and
___________________ may be adversely affected to a greater degree than the
economies of other areas of the country by certain regional developments.
Property values of residential real estate in ___________________,
___________________, ___________________ and ___________________ have
experienced declines in the past. If the ___________________,
___________________, ___________________ and ___________________ residential
real estate markets experience an overall decline, then the rates of
delinquencies, foreclosures and losses on the Mortgage Loans may be expected to
increase and such increase may be substantial.
Nature of Collateral; Second Lien Mortgage Loans
As of the Cut-Off Date, approximately ______% by current aggregate
Principal Balance of the Mortgage Loans are secured by second liens which are
subordinate to the rights of the mortgagee under related senior mortgages. See
"The Mortgage Pool." As a result, the proceeds from any liquidation, insurance
or condemnation proceedings will be available to satisfy the principal balance
of such a second Mortgage Loan only to the extent that the claims, if any, of
the first mortgagee are satisfied in full, including any related foreclosure
costs. In addition, a mortgagee of a second mortgage may not foreclose on the
Mortgaged Property securing such mortgage unless it forecloses subject to the
related first mortgage, in which case it must either pay the entire amount of
the first mortgage to the applicable mortgagee at or prior to the foreclosure
sale or undertake the obligation to make payments on the first mortgage in the
S-23
<PAGE>
event of default thereunder. In servicing second lien loans in its portfolio, it
is the Servicer's practice to satisfy or reinstate each such senior mortgage at
or prior to the foreclosure sale only to the extent that it determines any
amount so paid will be recoverable from future payments and collections on the
related loans or otherwise. The Trust will have no source of funds to satisfy
any senior mortgage or make payments due to any senior mortgagee.
General economic conditions have an impact on the ability of borrowers to
repay loans. Loss of earnings, illness and other similar factors may lead to an
increase in delinquencies and bankruptcy filings by borrowers. In the event of
bankruptcy of a mortgagor, it is possible that the Trust could experience a loss
with respect to such mortgagor's Mortgage Loan. In conjunction with a
mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan, thus either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to the Trust, any remaining balance
on such Mortgage Loan may not be recoverable.
An overall decline in the residential real estate market could adversely
affect the values of the Mortgaged Properties such that the outstanding
principal balances, together with the primary senior financing thereon, equals
or exceeds the value of the Mortgaged Properties. Such a decline would adversely
affect the position of a second mortgagee before having such an effect on that
of the related first mortgagee. A rise in interest rates over a period of time
and the general condition of the Mortgaged Property as well as other factors may
have the effect of reducing the value of the Mortgaged Property from the
appraised value at the time the Mortgage Loan was originated. If there is a
reduction in value of the Mortgaged Property, the ratio of the amount of the
Mortgage Loan to the value of the Mortgaged Property may increase over what it
was at the time the Mortgage Loan was originated. Such an increase may reduce
the likelihood of liquidation or other proceeds being sufficient to satisfy the
Mortgage Loan after satisfaction of any senior liens.
Even assuming that the Mortgaged Properties 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 Owners of the Offered Certificates. An action
to foreclose on the Mortgaged Property securing a Mortgage Loan is regulated by
state statutes and rules and is subject to many of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
several years to complete. Furthermore, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a Mortgaged
Property. In the event of a default by a Mortgagor, these restrictions, among
other things, may impede the ability of the Servicer to foreclose on or sell the
Mortgaged Property or to obtain proceeds on such a sale ("Liquidation Proceeds")
sufficient to repay all amounts due on the related Mortgage Loan. In addition,
the Servicer will be entitled to deduct from collections received during the
preceding Remittance Period all expenses reasonably incurred in attempting to
recover amounts due on Liquidated Mortgage Loans and not yet repaid, including
payments to senior lienholders, legal fees and costs of legal action, real
estate taxes and maintenance and preservation expenses, thereby reducing
collections available to the Owners of the Offered Certificates. See
"Description of the Offered Certificates" herein.
S-24
<PAGE>
Liquidation expenses with respect to defaulted loans do not vary directly
with the outstanding principal balance of the loan at the time of default.
Therefore, assuming that a servicer took the same steps in realizing upon a
defaulted loan having a small remaining principal balance as it would in the
case of a defaulted loan having a large remaining principal balance, the amount
realized after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the small loan than would be the case with the
defaulted loan having a large remaining principal balance. If the average
outstanding principal balance of the Mortgage Loans is relatively small, Net
Liquidation Proceeds (as defined herein) on Liquidated Mortgage Loans may be
small as a percentage of the principal balance of a Mortgage Loan.
Payments on the Mortgage Loans
The scheduled monthly payment dates with respect to the Mortgage Loans
occur throughout a month. When a Prepayment in full is made on a Mortgage Loan,
the Mortgagor is charged interest only up to the date of such Prepayment,
instead of for a full month. However, such principal receipts will only be
passed through to the Owners of the Offered Certificates once a month, on the
Distribution Date which follows the calendar month in which such Prepayment was
received by the Servicer. The Servicer is obligated to pay, without any right of
reimbursement, those shortfalls in interest collections payable on the Offered
Certificates that are attributable to the difference between the interest paid
by a Mortgagor in connection with a prepayment in full and 30 days' interest
(such payment being "Compensating Interest"); provided, however, that the
Servicer will only pay Compensating Interest to the extent that there is a
shortfall in the amount of Available Funds necessary to pay the Total Current
Interest and will not be required to pay Compensating Interest with respect to
any Remittance Period in an amount in excess of the aggregate Servicing Fee
received by the Servicer for such Remittance Period or to cover shortfalls in
collections of interest due to curtailments or partial prepayments. Any excess
of the full amount of the Compensating Interest due over the related Servicing
Fee may result in a reduction of the amount of interest payable to the
Subordinate Certificates and to the extent of any excess remaining to the Class
A Certificates.
Legal Considerations
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and may require licensing of the Originators. In
addition, many states have other laws, such as consumer protection laws, unfair
and deceptive practices acts and debt collection practices acts which may apply
to the origination or collection of the Mortgage Loans. Depending on the
provisions of the applicable law, violations of these laws may limit the ability
of the Servicer to collect all or part of the principal of or interest on the
Mortgage Loans, may entitle the borrower to a refund of amounts previously paid
and, in addition, could subject the Trust to damages and administrative
enforcement. See "Certain Legal Aspects of the Mortgage Loans and Contracts" in
the Prospectus.
The Mortgage Loans are also subject to federal laws, including: (i) the
Federal Truth in Lending Act and Regulation Z promulgated thereunder as to the
Mortgage Loans, which require certain disclosures to the borrowers regarding the
terms of such Mortgage Loans; (ii) the Equal Credit Opportunity Act and
Regulation B promulgated thereunder as to the Mortgage Loans, which prohibit
discrimination on the basis of age, race, color, sex, religion, marital status,
S-25
<PAGE>
national origin, receipt of public assistance or the exercise of any right under
the Consumer Credit Protection Act, in the extension of credit; and (iii) the
Fair Credit Reporting Act as to the Mortgage Loans, which regulates the use and
reporting of information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Mortgage Loans and in addition could subject the Trust to damages and
administrative enforcement. In addition, under the terms of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the "Civil Relief Act"), or
similar state legislation, the interest charged and the ability of the Servicer
to foreclose on loans to certain Mortgagors may be limited. Generally, under the
Civil Relief Act, a mortgagor who enters military service after the origination
of such mortgagor's mortgage loan (including a mortgagor who was in reserve
status and is called to active duty after origination of the mortgage loan),
shall not be charged interest (including fees and charges) above an annual rate
of 6% during the period of such mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. The Civil Relief Act applies to
mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Civil Relief Act applies to
mortgagors who enter military service (including reservists who are called to
active duty) after origination of the related mortgage loan, no information can
be provided as to the number of loans that may be affected by the Civil Relief
Act. Application of the Civil Relief Act would adversely affect, for an
indeterminate period of time until cessation of active duty status, the ability
of the Servicer to collect full amounts of interest on certain of the Mortgage
Loans to which it applies, if any. Any shortfall (such shortfall, a "Civil
Relief Act Interest Shortfall") in interest collections on any Mortgage Loan
resulting from the application of the Civil Relief Act will result in a
reduction of the amounts distributable to the Owners of the Subordinate
Certificates and potentially to the Owners of the Mezzanine Certificates and the
Class A Certificates. The Servicer is not obligated to offset any of the
Servicing Fee against, or to provide any other funds to cover, any Civil Relief
Act Interest Shortfall. In addition, the Civil Relief Act imposes limitations
which would impair the ability of the Servicer to foreclose on an affected
Mortgage Loan during the Mortgagor's period of active duty status and, under
certain circumstances, during an additional period thereafter. See "Certain
Legal Aspects of the Mortgage Loans" herein.
It is possible that some of the Mortgage Loans will be subject to the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of 1994.
The Riegle Act adds certain additional provisions to the Truth in Lending Act
which additions are reflected in Regulation Z, the implementing regulation of
the Truth in Lending Act. These provisions impose additional disclosure and
other requirements on creditors with respect to certain non-purchase money
mortgage loans with high interest rates or high upfront fees and charges. In
general, mortgage loans within the purview of the Riegle Act have annual
percentage rates 10 percentage points over the yield on Treasury Securities of
comparable maturity and/or fees and points which exceed the greater of 8% of the
total loan amount or $400. These provisions of the Riegle Act apply on a
mandatory basis to all mortgage loans originated on or after October 1, 1995.
These provisions can impose specific statutory liabilities upon creditors who
fail to comply with their provisions and may affect the enforceability of the
related loans. In addition, any assignee of the creditor would generally be
S-26
<PAGE>
subject to all claims and defenses that the consumer could assert against the
creditor, including, without limitation, the right to rescind the mortgage loan.
Risk of Unaffiliated Seller or Depositor Insolvency
The Unaffiliated Seller believes that the transfer of the Mortgage Loans
by the Unaffiliated Seller to the Depositor and by the Depositor to the Trust
constitutes a sale by the Unaffiliated Seller to the Depositor and by the
Depositor to the Trust and, accordingly, that such Mortgage Loans will not be
part of the assets of the Unaffiliated Seller or the Depositor in the event of
the insolvency of the Unaffiliated Seller or the Depositor, as the case may be,
and will not be available to the creditors of the Unaffiliated Seller or the
Depositor, as the case may be. However, in the event of an insolvency of the
Unaffiliated Seller or the Depositor, it is possible that a bankruptcy trustee
or a creditor of the Unaffiliated Seller or the Depositor may argue that the
transaction between the Unaffiliated Seller and the Depositor or between the
Depositor and the Trust was a pledge of such Mortgage Loans in connection with a
borrowing by the Depositor or the Trust, as the case may be, rather than a true
sale. Such an attempt, even if unsuccessful, could result in delays in
distributions on the Certificates.
On the Closing Date, the Trustee, the Unaffiliated Seller, the Depositor
and the Rating Agencies will have received an opinion of Dewey Ballantine LLP,
special counsel to the Depositor, with respect to the true sale of the Mortgage
Loans by the Unaffiliated Seller to the Depositor and by the Depositor to the
Trust, in form and substance satisfactory to the Rating Agencies.
Purchased Mortgage Loans
Most of the Mortgage Loans were purchased by the Unaffiliated Seller from
a single third-party originator. As described herein, the Unaffiliated Seller
will make certain representations and warranties regarding all of the Mortgage
Loans and, in the event of a breach of any such representation or warranty that
materially and adversely affects the value of such Mortgage Loans, the
Unaffiliated Seller will be required either to cure such breach or substitute or
repurchase the related Mortgage Loan or Mortgage Loans. Upon the purchase of
mortgage loans from third-party originators, the servicing must be transferred
from the third-party originator or current servicer to the Servicer. During the
time of such transfer, it is possible that delays in the receipt of collections
on such mortgage loans could occur resulting in a higher level of delinquencies
during such period.
THE MORTGAGE LOAN POOL
General
Unless otherwise noted, all references to statistical percentages in this
Prospectus Supplement appearing "as of the Cut-Off Date," together with all
dollar amount references herein to aggregate unpaid principal balances appearing
"as of the Cut-Off Date" have been calculated using the aggregate scheduled
unpaid principal balances of the Mortgage Loans as of the close of business on
the Cut-Off Date (the "Original Aggregate Principal Balance").
S-27
<PAGE>
Fixed Rate Loan Group
This subsection describes generally certain characteristics of the pool of
Mortgage Loans in the Fixed Rate Loan Group. The Fixed Rate Loan Group consists
of ______ of fixed-rate Mortgage Loans evidenced by promissory notes (the
"Notes") secured by deeds of trust, security deeds or mortgages on the Mortgaged
Properties, ______%, ______%, ______% and ______% by current principal balance
of Mortgage Loans in the Fixed Rate Loan Group of which are located in the
states of ___________________, ___________________, ___________________ and
___________________, respectively. The Mortgaged Properties securing the
Mortgage Loans in the Fixed Rate Loan Group consist of single-family residences
(which may be condominiums, manufactured homes or one-to-four family residences)
and multifamily properties, including investment properties. The Mortgaged
Properties may be owner-occupied (which includes vacation homes), second homes
or non-owner occupied investment properties. The Fixed Rate Loan Group consists
of _____% by principal balance of Mortgage Loans in the Fixed Rate Loan Group as
of the Cut-Off Date are secured by first lien mortgages on the related Mortgaged
Properties and _______% by principal balance of Mortgage Loans in the Fixed Rate
Loan Group as of the Cut-Off Date are secured by second liens on the related
Mortgaged Properties.
None of the Mortgage Loans in the Fixed Rate Loan Group were more than 60
days delinquent as of the Cut-Off Date.
_______% by principal balance of Mortgage Loans in the Fixed Rate Loan
Group as of the Cut-Off Date require monthly payments of principal that will
fully amortize the Mortgage Loans by their respective stated maturity dates, and
_______% by principal balance of Mortgage Loans in the Fixed Rate Loan Group as
of the Cut-Off Date are Balloon Loans. As of the Cut-Off Date, _______% by
principal balance of Mortgage Loans in the Fixed Rate Loan Group as of the
Cut-Off Date have "step-up" Mortgage Rates. These Mortgage Loans have fixed
Mortgage Rates which are increased by a weighted average margin of _______% (one
such Mortgage Loan "steps-up" by -------%).
As of the Cut-Off Date, the Fixed Rate Mortgage Loans had Mortgage Rates
ranging from _______% to _______% per annum, with a weighted average Mortgage
Rate of _______% per annum.
As of the Cut-Off Date, the Mortgage Loans in the Fixed Rate Loan Group
had original terms to stated maturity ranging from _______ months to _______
months; had remaining terms to stated maturity of _______ months to _______
months; had a weighted average original term to stated maturity of _______
months; and had a weighted average remaining term to stated maturity of _______
months.
The Mortgage Loans in the Fixed Rate Loan Group had CLTV's ranging from
_______% to _______%; the weighted average CLTV of the Mortgage Loans was
_______%.
S-28
<PAGE>
The following tables describe the Mortgage Loans in the Fixed Rate Loan
Group and the related Mortgaged Properties as of the Cut-Off Date. Some of the
aggregate percentages in the following tables may not total 100% due to
rounding.
S-29
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
Fixed Rate Loan Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
State Mortgage Loans Principal Balance Principal Balance
- ----- -------------- ----------------- -----------------
S-30
<PAGE>
DISTRIBUTION OF ORIGINAL TERMS
Fixed Rate Loan Group
Range of Months Aggregate % of Aggregate
From Origination Number of Unpaid Unpaid
to Stated Maturity Mortgage Loans Principal Balance Principal Balance
- ------------------ -------------- ----------------- -----------------
DISTRIBUTION OF REMAINING TERMS TO STATED MATURITY
Fixed Rate Loan Group
Range of Months Aggregate % of Aggregate
Remaining to Number of Unpaid Unpaid
Stated Maturity Mortgage Loans Principal Balance Principal Balance
- --------------- -------------- ----------------- -----------------
S-31
<PAGE>
SEASONING
Fixed Rate Loan Group
Aggregate % of Aggregate
Range of Months Number of Unpaid Unpaid
Elapsed Since Origination Mortgage Loans Principal Balance Principal Balance
- ------------------------- -------------- ----------------- -----------------
$
Total...........................
S-32
<PAGE>
DISTRIBUTION OF ORIGINAL PRINCIPAL BALANCES
Fixed Rate Loan Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Original Principal Balances ($) Mortgage Loans Principal Balance Principal Balance
- ------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Total.............................
</TABLE>
S-33
<PAGE>
DISTRIBUTION OF CURRENT PRINCIPAL BALANCES
Fixed Rate Loan Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Current Principal Balances ($) Mortgage Loans Principal Balance Principal Balance
- ------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
</TABLE>
S-34
<PAGE>
DISTRIBUTION OF GROSS MORTGAGE RATES
Fixed Rate Loan Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Gross Mortgage Rates (%) Mortgage Loans Principal Balance Principal Balance
------------------------ -------------- ----------------- -----------------
S-35
<PAGE>
DISTRIBUTION OF CLTV'S
Fixed Rate Loan Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Range of CLTV's (%) Mortgage Loans Principal Balance Principal Balance
- ------------------- -------------- ----------------- -----------------
The CLTV's shown above were calculated based upon the appraised values of
the Mortgaged Properties at the time of origination or, with respect to Mortgage
Loans in the Purchased Pool, a more recent broker price opinion, if available
(the "Appraised Values"), the principal balance of the Mortgage Loan as of the
Cut-Off Date and the senior liens, if any, at the time of origination or, if
available, the current senior lien. No assurance can be given that such
Appraised Values of the Mortgaged Properties have remained or will remain at
their levels on the dates of origination of the related Mortgage Loans. If
S-36
<PAGE>
property values decline such that the outstanding balances of the Mortgage
Loans, together with the outstanding balances of any senior Mortgage Loans,
become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those heretofore experienced by the Servicer and by the mortgage lending
industry in general.
DISTRIBUTION OF PROPERTY TYPES
Fixed Rate Loan Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Property Type Mortgage Loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
DISTRIBUTION OF OCCUPANCY STATUS
Fixed Rate Loan Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Property Type Mortgage Loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
S-37
<PAGE>
Adjustable Rate Loan Group
This subsection describes generally certain characteristics of the pool of
Mortgage Loans in the Adjustable Rate Loan Group. The Adjustable Rate Loan Group
consists of _____ of adjustable-rate loans evidenced by Notes secured by
Mortgages on the Mortgaged Properties, _____%, _____%, _____% and _____% by
principal balance of Mortgage Loans in the Adjustable Rate Loan Group as of the
Cut-Off Date of which are located in the states of ____________, ____________,
____________ and ____________, respectively. The Mortgaged Properties securing
the Mortgage Loans in the Adjustable Rate Loan Group consist of single-family
residences (which may be condominiums, manufactured homes or one-to-four family
residences) and multifamily properties, including investment properties. The
Mortgaged Properties may be owner-occupied (which includes vacation homes),
second homes or non-owner occupied investment properties. All of the Mortgage
Loans in the Adjustable Rate Loan Group are secured by first lien mortgages on
the related Mortgaged Properties.
None of the Mortgage Loans in the Adjustable Rate Loan Group were more
than 60 days delinquent as of the Cut-Off Date.
As of the Cut-Off Date, the Adjustable Rate Mortgage Loans had Mortgage
Rates ranging from ______% to ______% per annum, with a weighted average
Mortgage Rate of ______% per annum. The Adjustable Rate Mortgage Loans had gross
margins ranging from ______% to ______%, with a weighted average gross margin of
______%; lifetime rate caps, ranging from ______% to ______%, with a weighted
average lifetime rate cap of ______% (for the Adjustable Rate Mortgage Loans
which have caps); and lifetime rate floors ranging from ______% to ______%, with
a weighted average lifetime rate floor of ______% (where the gross margin was
used for Adjustable Rate Mortgage Loans without floors).
As of the Cut-Off Date, the Mortgage Loans in the Adjustable Rate Loan
Group had original terms to stated maturity of ______ months; had remaining
terms to stated maturity ranging from ______ months to ______ months; had a
weighted average original term to stated maturity of ______ months; and had a
weighted average remaining term to stated maturity of ______ months.
The Mortgage Loans in the Adjustable Rate Loan Group had CLTV's ranging
from ______% to ______% and the weighted average CLTV of the Mortgage Loans was
______%.
The following tables describe the Mortgage Loans in the Adjustable Rate
Loan Group and the related Mortgaged Properties as of the Cut-Off Date. Some of
the aggregate percentages in the following tables may not total 100% due to
rounding.
S-38
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
Adjustable Rate Loan Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
State Mortgage Loans Principal Balance Principal Balance
- ----- -------------- ----------------- -----------------
DISTRIBUTION OF ORIGINAL TERMS
Adjustable Rate Loan Group
Range of Months Aggregate % of Aggregate
From Origination Number of Unpaid Unpaid
To Stated Maturity Mortgage Loans Principal Balance Principal Balance
- ------------------ -------------- ----------------- -----------------
S-39
<PAGE>
DISTRIBUTION OF REMAINING TERMS TO STATED MATURITY
Adjustable Rate Loan Group
Range of Months Aggregate % of Aggregate
Remaining To Number of Unpaid Unpaid
Stated Maturity Mortgage Loans Principal Balance Principal Balance
- --------------- -------------- ----------------- -----------------
S-40
<PAGE>
SEASONING
Adjustable Rate Loan Group
Aggregate % of Aggregate
Range of Months Number of Unpaid Unpaid
Elapsed Since Origination Mortgage Loans Principal Balance Principal Balance
- ------------------------- -------------- ----------------- -----------------
S-41
<PAGE>
DISTRIBUTION OF ORIGINAL PRINCIPAL BALANCES
Adjustable Rate Loan Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Original Principal Balances ($) Mortgage Loans Principal Balance Principal Balance
- ------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
</TABLE>
S-42
<PAGE>
DISTRIBUTION OF CURRENT PRINCIPAL BALANCES
Adjustable Rate Loan Group
<TABLE>
<CAPTION>
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Current Principal Balances ($) Mortgage Loans Principal Balance Principal Balance
- ------------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
</TABLE>
S-43
<PAGE>
DISTRIBUTION OF GROSS MORTGAGE RATES
Adjustable Rate Loan Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Gross Mortgage Rates (%) Mortgage Loans Principal Balance Principal Balance
- ------------------------ -------------- ----------------- -----------------
DISTRIBUTION OF GROSS MARGINS
Adjustable Rate Loan Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Range of Gross Margins (%) Mortgage Loans Principal Balance Principal Balance
- -------------------------- -------------- ----------------- -----------------
S-44
<PAGE>
DISTRIBUTION OF LIFETIME RATE CAPS
Adjustable Rate Loan Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Lifetime Rate Caps (%) Mortgage Loans Principal Balance Principal Balance
- ---------------------- -------------- ----------------- -----------------
Total............................
DISTRIBUTION OF LIFETIME RATE FLOORS*
Adjustable Rate Loan Group
Aggregate % of Aggregate
Range of Number of Unpaid Unpaid
Lifetime Rate Floor (%) Mortgage Loans Principal Balance Principal Balance
- ----------------------- -------------- ----------------- -----------------
Total............................
*Mortgage Loans without floors were assumed to have floors equal to the related
gross margin.
S-45
<PAGE>
DISTRIBUTION OF CLTV'S
Adjustable Rate Loan Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Range of CLTV's (%) Mortgage Loans Principal Balance Principal Balance
- ------------------- -------------- ----------------- -----------------
Total............................
The CLTV's shown above were calculated based upon the appraised values of
the Mortgaged Properties at the time of origination or, with respect to Mortgage
Loans in the Purchased Pool, a more recent broker price opinion, if available
(the "Appraised Values"), the principal balance of the Mortgage Loan as of the
Cut-Off Date and the senior liens, if any, at the time of origination or, if
available, the current senior lien. No assurance can be given that such
Appraised Values of the Mortgaged Properties have remained or will remain at
their levels on the dates of origination of the related Mortgage Loans. If
property values decline such that the outstanding balances of the Mortgage
Loans, together with the outstanding balances of any senior Mortgage Loans,
become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those heretofore experienced by the Servicer and by the mortgage lending
industry in general.
S-46
<PAGE>
DISTRIBUTION OF PROPERTY TYPES
Adjustable Rate Loan Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Property Type Mortgage Loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
DISTRIBUTION OF OCCUPANCY STATUS
Adjustable Rate Loan Group
Aggregate % of Aggregate
Number of Unpaid Unpaid
Property Type Mortgage Loans Principal Balance Principal Balance
- ------------- -------------- ----------------- -----------------
Interest Payments on the Mortgage Loans
The Mortgage Loans in the Trust are Actuarial Loans. An "Actuarial Loan"
provides for amortization of the loan over a series of fixed level payment
monthly installments. Each monthly installment consists of an amount of interest
equal to 1/12 of the coupon of the loan multiplied by the unpaid principal
balance of the loan, and an amount of principal equal to the remainder of the
monthly payment. Scheduled monthly payments made by obligors on Actuarial Loans
either earlier or later than the scheduled due dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest.
THE UNAFFILIATED SELLER
[description of Unaffiliated Seller]
THE SERVICER
[description of Servicer]
THE SUB-SERVICER
[description of Sub-Servicer]
S-47
<PAGE>
Underwriting Guidelines
[insert]
Servicing
[insert]
USE OF PROCEEDS
The Unaffiliated Seller will sell the Mortgage Loans to the Depositor and
the Depositor will sell the Mortgage Loans to the Trust concurrently with the
delivery of the Certificates. Net proceeds from the sale of the Offered
Certificates will be applied by the Trust to the purchase of the Mortgage Loans
from the Depositor. Such net proceeds will represent the purchase price to be
paid by the Depositor to the Unaffiliated Seller for the Mortgage Loans.
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effects on a Certificate
Owner's yield resulting from the timing of the settlement date and those
considerations discussed below under "Payment Delay Feature of the
Certificates"), the yield to maturity on an Offered Certificate will be directly
related to the rate of payment of principal of the Mortgage Loans, including for
this purpose voluntary payment in full of Mortgage Loans prior to stated
maturity (a "Prepayment"), liquidations due to defaults, casualties and
condemnations, and repurchases of Mortgage Loans by the Unaffiliated Seller. The
actual rate of principal prepayments on pools of mortgage loans is influenced by
a variety of economic, tax, geographic, demographic, social, legal and other
factors and has fluctuated considerably in recent years. In addition, the rate
of principal prepayments may differ among pools of mortgage loans at any time
because of specific factors relating to the mortgage loans in the particular
pool, including, among other things, the age of the mortgage loans, the
geographic locations of the properties securing the loans, the extent of the
mortgagors' equity in such properties, and changes in the mortgagors' housing
needs, job transfers and unemployment.
The timing of changes in the rate of prepayments may significantly affect
the actual yield to investors, even if the average rate of principal prepayments
is consistent with the expectations of investors. In general, the earlier the
payment of principal of the Mortgage Loans, the greater the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal prepayments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Offered Certificates will not be offset by a subsequent like reduction
(or increase) in the rate of principal prepayments. Investors must make their
own decisions as to the appropriate prepayment assumptions to be used in
deciding whether to purchase any of the Offered Certificates. Neither the
Unaffiliated Seller nor the Depositor makes any representations or warranties as
to the rate of prepayment or the factors to be considered in connection with
such determination.
Projected Prepayments and Yields for Offered Certificates
S-48
<PAGE>
If purchased at other than par, the yield to maturity on an Offered
Certificate will be affected by the rate of payment of principal of the Mortgage
Loans. If the actual rate of payments on the Mortgage Loans is slower than the
rate anticipated by an investor who purchases an Offered Certificate at a
discount, the actual yield to such investor will be lower than such investor's
anticipated yield. If the actual rate of payments on the Mortgage Loans is
faster than the rate anticipated by an investor who purchases an Offered
Certificate at a premium, the actual yield to such investor will be lower than
such investor's anticipated yield.
______% by current aggregate principal balance of the Mortgage Loans are
Fixed Rate Mortgage Loans. The rate of prepayments with respect to fixed rate
mortgage loans has fluctuated significantly in recent years. In general, if
prevailing interest rates fall significantly below the interest rates on fixed
rate mortgage loans, such mortgage loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rates
on such mortgage loans. Conversely, if prevailing interest rates rise
appreciably above the interest rates on fixed rate mortgage loans, such mortgage
loans are likely to experience a lower prepayment rate than if prevailing rates
remain at or below the interest rates on such mortgage loans.
S-49
<PAGE>
The Final Scheduled Distribution Date for each Class of the Offered
Certificates is as follows:
Final Scheduled
Class Distribution Date
---------------------- -------------------------
Class A-1 Certificates:
Class A-2 Certificates:
Class A-3 Certificates:
Class A-4 Certificates:
Class A-5 Certificates:
Class A-6 Certificates:
Class A-7 Certificates:
Class M-1 Certificates:
Class M-2 Certificates:
Class M-3 Certificates:
The Final Scheduled Distribution Date for each Class of Offered
Certificates is calculated as of the date on which the related original
Certificate Principal Balance, as set forth under the Modeling Assumptions
described below, less all amounts previously distributed as principal, would be
reduced to zero, plus 13 months, assuming that no Prepayments are received on
the Mortgage Loans, that scheduled payments of principal and interest on each
Mortgage Loan are timely received, that no Realized Losses occur on the Mortgage
Loans, that the Pass-Through Rate for each Certificate is as listed under the
Modeling Assumptions, and that there is no optional termination by the party
named in the Pooling and Servicing Agreement of the Trust. The weighted average
life of each Class of Offered Certificates is likely to be shorter, and the
actual final Distribution Date with respect to each Class of Offered
Certificates could occur significantly earlier than the Final Scheduled
Distribution Date because (i) Prepayments are likely to occur which shall be
applied to the payment of the Certificate Principal Balance of the Offered
Certificates and (ii) the Servicer may cause a termination of the Trust when the
aggregate outstanding principal balance of the Mortgage Loans in the Trust has
declined to _______ or less of the Original Aggregate Principal Balance and if
the Servicer does not exercise such right, the Trustee shall offer the Mortgage
Loans in an auction sale.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. This Prospectus Supplement uses two models for
prepayment assumptions (the "Prepayment Assumption"). The model for the Offered
Certificates (other than the Variable Rate Certificates) is the "Home Equity
Prepayment" or "HEP" model which represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of mortgage
loans for the life of such mortgage loans. 16% HEP assumes a constant prepayment
rate of 1.6% per annum of the then outstanding principal balance of the Mortgage
Loans in the first month of the life of the Mortgage Loans and an additional
1.6% per annum in each month thereafter up to and including the tenth month.
Beginning in the eleventh month and in each month thereafter during the life of
the Mortgage Loans, 16% HEP assumes a constant prepayment rate of 16% per annum.
As used in the table below, 0% Prepayment Assumption assumes prepayment rates
equal to 0% of the Prepayment Assumption, i.e., no prepayments on the mortgage
loans having the characteristics described below.
S-50
<PAGE>
The model for the Variable Rate Certificates is the "Constant Prepayment
Rate" or "CPR" which represents an assumed annualized rate of prepayment
relative to the then-outstanding principal balance on a pool of new mortgage
loans. As used in the table below, 0% Prepayment Assumption assumes prepayment
rates equal to 0% of the Prepayment Assumption, i.e., no prepayments on the
mortgage loans having the characteristics described below.
The Prepayment Assumptions do not purport to be a historical description
of prepayment experience or a prediction of the anticipated rate of prepayment
of any pool of mortgage loans, including the related Mortgage Loans.
The tables entitled "Weighted Average Lives" have been prepared on the
basis of the following assumptions (collectively, the "Modeling Assumptions"):
(i) the Mortgage Loans prepay at the indicated percentage of the related
Prepayment Assumption; (ii) distributions on the Offered Certificates are
received, in cash, on the [___] day of each month; (iii) no defaults or
delinquencies in, or modifications, waivers or amendments respecting, the
payment by the Mortgagors of principal and interest on the Mortgage Loans occur;
(iv) scheduled payments are assumed to be received on the first day of each
month commencing in [________] (or as set forth in the following table) and
prepayments represent payment in full of individual Mortgage Loans and are
assumed to be received on the last day of each month, commencing in
_______________ (or as set forth in the following table) and include 30 days'
interest thereon; (v) the Offered Certificates are purchased on
___________________; (vi) the original Certificate Principal Balance and
Pass-Through Rate of the Class A-1 Certificates are equal to [$_______] and
________%, respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class A-2 Certificates are equal to [$_______] and
[_____%], respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class A-3 Certificates are equal to [$_______] and
[_____%], respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class A-4 Certificates are equal to [$_______] and
[_____%], respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class A-5 Certificates are equal to [$_______] and
[_____%], respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class A-6 Certificates are equal to [$_______] and
6.280%, respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class A-7 Certificates are equal to [$_______] and
[_____%], respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class M-1 Certificates are equal to [$_______] and
[_____%], respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class M-2 Certificates are equal to [$_______] and
[_____%], respectively, the original Certificate Principal Balance and
Pass-Through Rate of the Class M-3 Certificates are equal to [$_______] and
[_____%], respectively, and the original Certificate Principal Balance and
Pass-Through Rate of the Class B Certificates are equal to $________________ and
________%, respectively; (vii) one-month LIBOR is equal to ___________%; (viii)
the indices for the Adjustable Rate Mortgage Loans are, for six-month LIBOR,
_______%, for one year CMT, ________%, for three year CMT, _______%, for five
year CMT, _______% and for the six-month Treasury bill, ______%, (ix) the
Trustee's Fee is equal to ______% per annum and (x) the Trust Fund consists of
Mortgage Loans having the following characteristics:
S-51
<PAGE>
<TABLE>
<CAPTION>
Weighted Weighted
Weighted Average Average
Average Remaining Remaining Weighted
Weighted Mortgage Term to Term to Average
Pool Principal Average Rate Net of Amortization Balloon Seasoning
Type Number Balance Mortgage Rate Servicing Fee (months) (months) (months)
- ---- ------ ------- ------------- ------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Weighted
Average Weighted
Weighted Net Weighted Average First Reset
Pool Average Lifetime Average Net Interest Reset Frequency
Type Number Gross Margin Cap Lifetime Floor Adjustment Cap (months) (months) Index Code
- ---- ------ ------------ --------- -------------- -------------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a Certificate until each dollar of principal
of such Certificate will be repaid to the investor. The weighted average life of
the Offered Certificates will be influenced by the rate at which principal
payments on the Mortgage Loans are paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
prepayments, liquidations due to default or early termination of the Trust). The
weighted average lives of the Offered Certificates also will be influenced by
the overcollateralization of the Offered Certificates because collections
payable to the Class B Certificates as principal are limited by the Pooling and
Servicing Agreement and are applied as principal prepayments to the Offered
Certificates then entitled to receive principal distributions until the
outstanding aggregate principal balance of the Offered Certificates is less than
the aggregate outstanding principal balance of the Mortgage Loans by the
Required Overcollateralization Amount. These prepayments have the effect of
accelerating the amortization of the Offered Certificates, thereby shortening
their respective weighted average lives.
Based on the foregoing Modeling Assumptions, the tables below indicate the
weighted average life of each Class of the Offered Certificates, assuming that
the Mortgage Loans prepay according to the indicated percentages of the related
Prepayment Assumption:
S-52
<PAGE>
Prepayment Assumptions*
<TABLE>
<CAPTION>
Base Case Assumption I Assumption II Assumption III Assumption IV Assumption V
- --------- ------------ ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
</TABLE>
- ---------------------
*As a percentage of the specified base case.
Weighted Average Lives
Class A-1
Weighted
Prepayment Average Life Earliest
Assumption (CPR) (Years)(1) Retirement Date(2)
---------------- --------------- ------------------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
Class A-2
Weighted
Prepayment Average Life Earliest
Assumption (HEP) (Years)(1) Retirement Date(2)
---------------- --------------- ------------------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
S-53
<PAGE>
Class A-3
Weighted
Prepayment Average Life Earliest
Assumption (HEP) (Years)(1) Retirement Date(2)
---------------- --------------- ------------------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
Class A-4
Weighted
Prepayment Average Life Earliest
Assumption (HEP) (Years)(1) Retirement Date(2)
---------------- --------------- ------------------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
Class A-5
Weighted
Prepayment Average Life Earliest
Assumption (HEP) (Years)(1) Retirement Date(2)
---------------- --------------- ------------------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
S-54
<PAGE>
Class A-6
Weighted
Prepayment Average Life Earliest
Assumption (CPR) (Years)(1) Retirement Date(2)
---------------- --------------- ------------------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
Class A-7
Weighted
Prepayment Average Life Earliest
Assumption (HEP) (Years)(1) Retirement Date(2)
---------------- --------------- ------------------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
Class M-1
Weighted
Prepayment Average Life Earliest
Assumption (HEP) (Years)(1) Retirement Date(2)
---------------- --------------- ------------------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
S-55
<PAGE>
Class M-2
Weighted
Prepayment Average Life Earliest
Assumption (HEP) (Years)(1) Retirement Date(2)
---------------- --------------- ------------------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
Class M-3
Weighted
Prepayment Average Life Earliest
Assumption (HEP) (Years)(1) Retirement Date(2)
---------------- --------------- ------------------
(1) Assuming no early termination of the Trust.
(2) Assuming early termination of the Trust at the date when the aggregate
principal balance of the Mortgage Loans declines to a level equal to or
less than 10% of the Original Aggregate Principal Balance.
There is no assurance that prepayments will occur, or, if they do occur,
that they will occur at any constant percentage or in accordance with any of the
aforementioned Prepayment Assumptions.
Payment Delay Feature of Offered Certificates
The effective yield to the Owners of the Offered Certificates (other than
the Variable Rate Certificates) will be lower than the yield otherwise produced
by the related Pass-Through Rate and the purchase price of such Certificates
because principal and interest distributions will not be payable to such holders
until at least the [___] day of the month following the month of accrual
(without any additional distributions of interest or earnings thereon in respect
of such delay).
S-56
<PAGE>
ADDITIONAL INFORMATION
A current report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed and incorporated by reference to the
Registration Statement, together with the Pooling and Servicing Agreement with
the Commission within fifteen days after the initial issuance of the Offered
Certificates. In the event Mortgage Loans are removed from or added to the
mortgage pool, such removal or addition will be noted in the current report on
Form 8-K. Also, the Depositor intends to file certain additional yield tables
and other computational materials with respect to the Certificates with the
Commission in a report on Form 8-K. Such tables and materials were prepared at
the request of certain prospective investors, based on assumptions provided by,
and satisfying the special requirements of, such prospective investors. Such
tables and assumptions may be based on assumptions that differ from the Modeling
Assumptions. Accordingly, such tables and other materials may not be relevant to
or appropriate for investors other than those specifically requesting them.
DESCRIPTION OF THE OFFERED CERTIFICATES
General
The Certificates will consist of the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates, the Class A-4 Certificates, the Class
A-5 Certificates, the Class A-6 Certificates, the Class A-7 Certificates, the
Class M-1 Certificates, the Class M-2 Certificates, the Class M-3 Certificates,
the Class B Certificates, the Class C Certificates and the Class R Certificates.
The Certificates will be issued by [________] Mortgage Loan Trust [series], a
trust to be organized under the laws of the State of New York. Only the Offered
Certificates are offered hereby. The Class B Certificates, the Class C
Certificates and the Class R Certificates are not being offered hereby. The
Offered Certificates together with the Class B Certificates, the Class C
Certificates and the Class R Certificates are herein referred to as the
"Certificates."
Persons in whose name a Certificate is registered in the register
maintained by the Trustee are the "Owners" of the Certificates. For so long as
the Offered Certificates are in book-entry form with DTC, the only "Owner" of
the Offered Certificates as the term "Owner" is used in the Pooling and
Servicing Agreement will be Cede. No Beneficial Owner will be entitled to
receive a definitive certificate representing such person's interest in the
Trust, except in the event that physical Certificates are issued under limited
circumstances set forth in the Pooling and Servicing Agreement. All references
herein to the Owners of Offered Certificates shall mean and include the rights
of beneficial owners of Offered Certificates held through DTC, as such rights
may be exercised through DTC and its participating organizations, except as
otherwise specified in the Pooling and Servicing Agreement.
Distribution Dates
The Pooling and Servicing Agreement will require that the Trustee create
and maintain a Certificate Account (the "Certificate Account"). All funds in the
Certificate Account shall be invested and reinvested by the Trustee for the
benefit of the Servicer, in investments permitted under the Pooling and
Servicing Agreement ("Eligible Investments").
S-57
<PAGE>
Three Business Days prior to the related Distribution Date (the
"Remittance Date") the Servicer is required to withdraw from the Principal and
Interest Account and remit to the Trustee, for deposit in the Certificate
Account, the Monthly Remittance Amount. The "Monthly Remittance Amount" is equal
to (a) the sum of (i) the balance on deposit in the Principal and Interest
Account as of the close of business on the related Determination Date, (ii) all
Delinquency Advances and Compensating Interest (collectively, the "Advances")
and (iii) certain amounts required to be deposited by the Servicer in the
Certificate Account, including Loan Purchase Prices and amounts necessary to
remedy the shortfall in principal balance of any replacement Mortgage Loan
("Substitution Amounts"), reduced by (b) the sum of (i) scheduled payments on
the Mortgage Loans collected but due after the related Due Date, (ii)
reinvestment income on amounts in the Principal and Interest Account, (iii) all
amounts reimbursable to the Servicer, and (iv) the Servicing Fee. The "Due
Dates" occur throughout the month with respect to any Distribution Date. The
"Determination Date" is the ____th day of the month in which such Distribution
Date occurs or, if such day is not a business day, the immediately succeeding
business day. "Remittance Period" means the calendar month immediately preceding
the month in which the related Remittance Date occurs. See "The Pooling and
Servicing Agreement -- Payments on Mortgage Loans and Contracts" in the
Prospectus.
The Servicer will be obligated to apply amounts otherwise payable to it as
servicing compensation in any month to cover any shortfalls in collections (such
payment, "Compensating Interest") of one full month's interest at the applicable
net Mortgage Rate resulting from principal prepayments in full; provided,
however, that the Servicer will only pay Compensating Interest to the extent
that there is a shortfall in the amount of Available Funds necessary to pay the
Total Current Interest and will not be required to pay Compensating Interest
with respect to any Remittance Period in an amount in excess of the aggregate
Servicing Fee received by the Servicer for such Remittance Period. The Servicer
is not obligated to cover any shortfalls in collections of interest for
prepayments in part. Such prepayments in part are applied to reduce the
outstanding principal balance of the related Mortgage Loan as of the Due Date in
the month of prepayment.
Distributions
Distributions on the Certificates will be made on each Distribution Date
to Owners of record of the Certificates as of the immediately preceding Record
Date in an amount equal to the product of such Owner's Percentage Interest and
the amount distributed in respect of such Owner's Class of such Certificates on
such Distribution Date. The "Percentage Interest" represented by any Offered
Certificate will be equal to the percentage obtained by dividing the Original
Certificate Principal Balance of such Offered Certificate by the Original
Certificate Principal Balance of all Certificates of the same Class.
Interest Distributions
On each Distribution Date, the Trustee will withdraw the Interest
Remittance Amount for each Loan Group from amounts on deposit in the Certificate
Account and apply such amounts in the following order of priority, in each case,
to the extent of the funds remaining therefor:
(a) The Interest Remittance Amount shall be applied as follows:
S-58
<PAGE>
(i) to the Trustee, the Trustee Fee for each Loan Group and
Distribution Date;
(ii) to the Class A Certificates, the related Class Current Interest
for such Distribution Date on a pro rata basis among such Classes;
(iii) any remaining amounts shall be applied in the following order
of priority:
(A) to the Class M-1 Certificates the related Current
Interest;
(B) to the Class M-2 Certificates the related Current
Interest;
(C) to the Class M-3 Certificates the related Current
Interest;
(D) to the Class B Certificates the related Current Interest;
(b) any remaining interest amounts shall constitute the "Excess
Interest Amount" for such Distribution Date and shall be allocated as
described herein under "--Credit Enhancement."
The foregoing discussion contained defined terms which are described
herein under "--Definitions."
Principal Distributions
On each Distribution Date, the Trustee will withdraw the Aggregate
Collected Principal Amount from amounts on deposit in the Certificate Account
and apply such amount together with any Extra Principal Distribution Amount in
the following order of priority, in each case, to the extent of the funds
remaining therefor:
(a) Amounts up to the Principal Distribution Amount as follows:
(i) from the Class A Principal Distribution Amount, concurrently,
(x) to the Class A-6 Certificates, the Class A-6 Principal Distribution
Amount, until the Class Certificate Principal Balance thereof has been
reduced to zero, and (y) to the Class A Certificates (other than the Class
A-6 Certificates), the Fixed Rate Loan Group Principal Allocation,
allocated in the following order of priority:
(1) to the Class A-7 Certificates, the Class A-7 Principal
Distribution Amount, until the Class Certificate Principal Balance
thereof has been reduced to zero; and
(2) sequentially, to the Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5 and Class A-7 Certificates, in that order,
until the respective Class Certificate Principal Balances thereof
have been reduced to zero;
(ii) from any amount remaining, to the Class M-1, Class M-2, Class
M-3 and Class B Certificates on a pro rata basis; and
S-59
<PAGE>
(b) Any remaining principal amounts shall be included in the Excess
Interest Amount and shall be allocated as described herein under "--Credit
Enhancement"; provided, however, that if a Cumulative Loss Trigger Event is in
effect, such amount shall be distributed sequentially, to the Class B, Class
M-3, Class M-2 and Class M-1 Certificates, in that order, until the respective
Class Certificate Principal Balances thereof have been reduced to zero.
Notwithstanding the priority set forth in clause (i) above, if the
aggregate Class Certificate Principal Balance of the Class M Certificates and
the Class B Certificates is reduced to zero, the Class A Principal Distribution
Amount will be distributed concurrently to each Class of Senior Certificates on
a pro rata basis in accordance with their respective Class Certificate Principal
Balances.
The foregoing discussion contained defined terms which are described
herein under "--Definitions."
Credit Enhancement
General. The credit enhancement provided for the benefit of the Owners of
the Offered Certificates consists of (x) subordination of the Subordinate
Certificates, (y) the application of the Excess Interest Amount to fund Realized
Losses and (z) the overcollateralization mechanics which utilize the internal
cash flows of the Trust as described below.
Subordination of the Subordinate Certificates. The rights of the Owners of
the Mezzanine Certificates, the Class B Certificates, the Class C Certificates
and the Class R Certificates to receive distributions with respect to the
Mortgage Loans will be subordinated, to the extent described herein, to the
rights of the Owners of the Class A Certificates. This subordination is intended
to enhance the likelihood of regular receipt by the Owners of the Class A
Certificates of the full amount of their monthly payments of interest and
principal and to afford such Owners protection against Realized Losses on
Liquidated Mortgage Loans.
In addition, the rights of the Owners of the Class M-2 Certificates, the
Class M-3 Certificates, the Class B Certificates, the Class C Certificates and
the Class R Certificates are subordinated, to the extent described herein, to
the rights of the Owners of the Class A Certificates and the Class M-1
Certificates. The rights of the Owners of the Class M-3 Certificates, the Class
B Certificates, the Class C Certificates and the Class R Certificates are
subordinated, to the extent described herein, to the rights of the Owners of the
Class A Certificates and the Class M-1 Certificates and the Class M-2
Certificates.
The rights of the Owners of the Class B Certificates, the Class C
Certificates and the Class R Certificates are subordinated, to the extent
described herein, to the rights of the Owners of the Class A Certificates and
the Mezzanine Certificates.
Allocation of Realized Losses. To the extent that the Net Liquidation
Proceeds with respect to any Liquidated Mortgage Loan are less than 100% of the
outstanding principal balance thereof, such shortfall is a "Realized Loss". "Net
Liquidation Proceeds" are any amounts (including the proceeds of any Insurance
Policy) recovered by the Servicer in connection with a Liquidated Loan, net of
expenses which are incurred by the Servicer in connection with the liquidation
and net of unreimbursed Servicing Advances, unreimbursed Delinquency Advances
S-60
<PAGE>
and accrued and unpaid Servicing Fees. The Collected Principal Amount includes
the Net Liquidation Proceeds in respect of principal received upon liquidation
of a Liquidated Mortgage Loan. If such Net Liquidation Proceeds are less than
the unpaid principal balance of such Mortgage Loan, the Pool Balance will
decline more than the aggregate Class Certificate Principal Balance of the
Offered Certificates. If such difference is not covered by the
Overcollateralization Amount or the application of the Excess Interest Amount,
the Class of Subordinate Certificates then outstanding with the lowest priority
Class designation will bear such loss.
If, following the distributions on a Distribution Date, the aggregate
Certificate Principal Balance of the Offered Certificates exceeds the Pool
Balance, i.e., the Certificates are undercollateralized, the Class Certificate
Principal Balance of the Class of Mezzanine Certificates or the Class B
Certificates then outstanding with the lowest priority Class designation will be
reduced by the amount of such excess. Any such reduction will constitute an
Applied Realized Loss Amount for the applicable Class and interest will not
accrue on such amount. Such amount, however, may be paid on a future
Distribution Date to the extent funds are available therefor as provided herein
under "Description of the Offered Certificates--Interest Distributions and
- --Credit Enhancement."
Overcollateralization Provisions. The weighted average Mortgage Rate, net
of the Servicing Fee and Trustee Fee, for the Mortgage Loans generally is
expected to be higher than the weighted average of the Pass-Through Rates on the
Offered Certificates, thus generating certain excess interest collections which,
in the absence of losses, will not be necessary to fund interest distributions
on the Offered Certificates. The Pooling and Servicing Agreement provides that
this excess interest be applied, to the extent available, to make accelerated
payments of principal (i.e. the Extra Principal Distribution Amount) to the
Class or Classes then entitled to receive distributions of principal. Such
application will cause the aggregate Class Certificate Balance to amortize more
rapidly than the Mortgage Loans, resulting in overcollateralization. This excess
interest for a Remittance Period, together with interest on the
Overcollateralization Amount itself, is the "Excess Interest Amount."
The target level of overcollateralization for any Distribution Date is the
Required Overcollateralization Amount. The Required Overcollateralization Amount
is initially (i.e., prior to the Stepdown Date) $_____________. Since the actual
level of the Overcollateralization Amount is essentially zero as of the Closing
Date, in the early months of the transaction, subject to the availability of the
Excess Interest Amounts, Extra Principal Distribution Amounts will be paid, with
the result that the Overcollateralization Amount is expected to increase to the
level of the Required Overcollateralization Amount.
If, once the Required Overcollateralization Amount has been reached,
Realized Losses not accounted for by an application of the Excess Interest
Amount occur, such Realized Losses will result in an Overcollateralization
Deficiency (since it will reduce the Pool Balance without giving rise to a
corresponding reduction of the aggregate Class Certificate Balance). The
cashflow priorities of the Trust Fund require that, in this situation, an Extra
Principal Distribution Amount be paid (subject to the availability of any Excess
Cashflow Amount in subsequent months) for the purpose of re-establishing the
Overcollateralization Amount at the then-required Required Overcollateralization
Amount.
S-61
<PAGE>
On and after the Stepdown Date and assuming that a Trigger Event is not in
effect, the Required Overcollateralization Amount may be permitted to decrease
or "step-down." If the Required Overcollateralization Amount is permitted to
"step-down" on a Distribution Date, the Pooling and Servicing Agreement permits
a portion of the Aggregate Collected Principal Amount for such Distribution Date
not to be passed through as a distribution of principal on such Distribution
Date. This has the effect of decelerating the amortization of the Offered
Certificates relative to the Pool Balance, thereby reducing the actual level of
the Overcollateralization Amount to the new, lower Required
Overcollateralization Amount. This portion of the Aggregate Collected Principal
Amount not distributed as principal on the Offered Certificates therefore
releases overcollateralization from the Trust Fund. The amounts of such releases
are the "Overcollateralization Reduction Amounts."
On any Distribution Date, the sum on the Excess Interest Amount and the
Overcollateralization Reduction Amount is the "Excess Cashflow Amount," which is
required to be applied in the following order of priority on such Distribution
Date:
(a) to the Owners of the Class A-6 Certificates, to fund any LIBOR
Shortfall Amount;
(b) to fund the Extra Principal Distribution Amount of such Distribution
Date;
(c) to fund the Class M-1 Realized Loss Amortization Amount for such
Distribution Date;
(d) to fund the Class M-2 Realized Loss Amortization Amount for such
Distribution Date;
(e) to fund the Class M-3 Realized Loss Amortization Amount for such
Distribution Date;
(f) to fund the Class B Realized Loss Amortization Amount for such
Distribution Date; and
(g) any amounts remaining shall be distributed to the Owners of the Class
C Certificates; and
(h) any amounts remaining thereafter shall be distributed to the Owners of
the Class R Certificates.
Definitions
For purposes of the foregoing, the following terms have the respective
meanings set forth below:
Accrual Period: For each Distribution Date with respect to the Offered
Certificates (other than the Variable Rate Certificates), the calendar month
immediately preceding the month in which the Distribution Date occurs. For each
Distribution Date with respect to the Variable Rate Certificates, the period
from the [___] day of the month immediately preceding the month in which such
S-62
<PAGE>
Distribution Date occurs (or the Closing Date with respect to the [________]
Distribution Date) to the [__] day of the month in which such Distribution Date
occurs.
Adjustable Rate Group Available Funds Cap Rate: As to any Distribution
Date, is an amount, expressed as a per annum rate, equal to (i) the sum of (x)
the aggregate amount of interest due and collected (or advanced) on all of the
Mortgage Loans in the Adjustable Rate Loan Group for the related Remittance
Period and (y) the excess of (A) the aggregate amount of interest due and
collected (or advanced) on all of the Mortgage Loans in the Fixed Rate Loan
Group for the related Remittance Period over (B) the aggregate of the Servicing
Fee and the Trustee Fee, in each case relating to the Fixed Rate Loan Group and
such Distribution Date and the Current Interest with respect to the Class A
Certificates (other than the Class A-6 Certificates), the Class M Certificates
and the Class B Certificates minus (ii) the aggregate of the Servicing Fee and
the Trustee Fee, in each case relating to the Adjustable Rate Loan Group, on
such Distribution Date.
Aggregate Collected Principal Amount: As to any Distribution Date, the sum
of the respective Collected Principal Amounts for each Loan Group.
Applied Realized Loss Amount: As to any Distribution Date, the excess, if
any, of the aggregate Certificate Principal Balance of each Class of
Certificates then outstanding (after application of all distributions for such
Distribution Date) over the Pool Balance for both Loan Groups.
Available Funds: As to any Distribution Date, the sum, without
duplication, of the following amounts with respect to the Mortgage Loans: (i)
the Aggregate Collected Principal Amount for the related Remittance Period, (ii)
scheduled payments of interest on the Mortgage Loans received by the Servicer
prior to the Determination Date (net of amounts representing the Servicing Fee
with respect to each Mortgage Loan and reimbursement for Delinquency Advances
and Servicing Advances); (iii) payments from the Servicer in connection with (a)
Delinquency Advances and (b) Compensating Interest and (iv) amounts received by
the Trustee in respect of interest in connection with the termination of the
Trust with respect to the Mortgage Loans as provided in the Agreement
Class A Principal Distribution Amount: As to any Distribution Date, (A)
for each Distribution Date before the Stepdown Date or after the Stepdown Date
with respect to which Distribution Date a Trigger Event has occurred and is
continuing, 100% of the Principal Distribution Amount or (ii) for each
Distribution Date after the Stepdown Date with respect to which no Trigger Event
has occurred and is continuing, the product of (x) the Principal Distribution
Amount for such Distribution Date and (y) a fraction, the numerator of which is
the Class A Certificate Principal Balance immediately prior to such Distribution
Date and the denominator of which is the aggregate Certificate Principal Balance
of all Certificates.
Class A-6 Principal Distribution Amount: As to any Distribution Date, the
lesser of: (A) the greater of (i) the product of (x) the Class A Principal
Distribution Amount for such Distribution Date and (y) a fraction, the numerator
of which is the Class Certificate Principal Balance of the Class A-6
Certificates immediately prior to such Distribution Date, and the denominator of
which is the aggregate Class Certificate Principal Balance of all of the Class A
S-63
<PAGE>
Certificates immediately prior to such Distribution Date, and (ii) the excess,
if any, of (x) the Class Certificate Principal Balance of the Class A-6
Certificates immediately prior to such Distribution Date over (y) the Principal
Balance of the Adjustable Rate Loan Group as of the last day of the related Due
Period; or (B) the Class A Principal Distribution Amount.
Class A-7 Percentage: As to any Distribution Date, the applicable
percentage set forth below:
Distribution Dates Percentages
------------------ -----------
[___]...................................... [__%]
[___]...................................... [__%]
[___]...................................... [__%]
[___]...................................... [__%]
[___]...................................... [__%]
Class A-7 Principal Distribution: As to any Distribution Date, the lesser
of (A) the product of (i) the applicable Class A-7 Percentage and (ii) the
product of (x) the Fixed Rate Loan Group Principal Allocation and (y) a
fraction, the numerator of which is the Class Certificate Principal Balance of
the Class A-7 Certificates immediately prior to such Distribution Date, and the
denominator of which is the aggregate Class Certificate Principal Balance of the
Senior Certificates immediately prior to such Distribution Date, and (B) the
Fixed Rate Loan Group Principal Allocation.
Class B Applied Realized Loss Amount: As to the Class B Certificates and
as of any Distribution Date, the lesser of (x) the Class Certificate Balance
thereof (after taking into account the distribution of the Principal
Distribution Amount on such Distribution Date, but prior to the application of
the Class B Applied Realized Loss Amount, if any, on such Distribution Date) and
(y) the Applied Realized Loss Amount as of such Distribution Date.
Class B Realized Loss Amortization Amount: As to the Class B Certificates
and as of any Distribution Date, the lesser of (x) the Unpaid Realized Loss
Amount with respect to the Class B Certificates as of such Distribution Date and
(y) the excess of (i) the Excess Cashflow Amount over (ii) the sum of the Extra
Principal Distribution Amount, the Class M-1 Realized Loss Amortization Amount,
the Class M-2 Realized Loss Amortization Amount, the Class M-3 Realized Loss
Amortization Amount, in each case for such Distribution Date.
Class M-1 Applied Realized Loss Amount: As to the Class M-1 Certificates
and as of any Distribution Date, the lesser of (x) the Class Certificate Balance
thereof (after taking into account the distribution of the Principal
Distribution Amount on such Distribution Date, but prior to the application of
the Class M-1 Applied Realized Loss Amount, if any on such Distribution Date)
and (y) the excess of (i) the Applied Realized Loss Amount as of such
Distribution date over (ii) the sum of the Class M-2 Applied Realized Loss
Amount, the Class M-3 Applied Realized Loss Amount and the Class B Applied
Realized Loss Amount, in each case as of such Distribution Date.
Class M-1 Realized Loss Amortization Amount: As to the Class M-1
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount with respect to the Class M-1 Certificates as of such
S-64
<PAGE>
Distribution Date and (y) the excess of (i) the Excess Cashflow Amount over (ii)
the Extra Principal Distribution Amount, in each case for such Distribution
Date.
Class M-2 Applied Realized Loss Amount: As to the Class M-2 Certificates
and as of any Distribution Date, the lesser of (x) the Class Certificate Balance
thereof (after taking into account the distribution of the Principal
Distribution Amount on such Distribution Date, but prior to the application of
the Class M-2 Applied Realized Loss Amount, if any on such Distribution Date)
and (y) the excess of (i) the related Applied Realized Loss Amount as of such
Distribution Date over (ii) the Class M-3 Applied Realized Loss Amount and the
Class B Applied Realized Loss Amount, in each case as of such Distribution Date.
Class M-2 Realized Loss Amortization Amount: As to the Class M-2
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount with respect to the Class M-2 Certificates as of such
Distribution Date and (y) the excess of (i) the Excess Cashflow Amount over (ii)
the sum of the Extra Principal Distribution Amount and the Class M-1 Realized
Loss Amortization Amount, in each case for such Distribution Date.
Class M-3 Applied Realized Loss Amount: As to the Class M-3 Certificates
and as of any Distribution Date, the lesser of (x) the Class Certificate Balance
thereof (after taking into account the distribution of the Principal
Distribution Amount on such Distribution Date, but prior to the application of
the Class M-3 Applied Realized Loss Amount, if any on such Distribution Date)
and (y) the excess of (i) the related Applied Realized Loss Amount as of such
Distribution Date over (ii) the Class B Applied Realized Loss Amount, in each
case as of such Distribution Date.
Class M-3 Realized Loss Amortization Amount: As to the Class M-3
Certificates and as of any Distribution Date, the lesser of (x) the Unpaid
Realized Loss Amount with respect to the Class M-3 Certificates as of such
Distribution Date and (y) the excess of (i) the Excess Cashflow Amount over (ii)
the sum of the Extra Principal Distribution Amount, the Class M-1 Realized Loss
Amortization Amount and the Class M-2 Realized Loss Amortization, in each case
for such Distribution Date.
Collected Principal Amount: For any Distribution Date and Loan Group, the
sum of the following amounts (without duplication):
(a) the principal portion of all scheduled and unscheduled monthly
payments on the Mortgage Loans due during the related Remittance Period,
to the extent actually received by the Trustee on or prior to the related
Remittance Date or to the extent actually advanced by the Servicer on or
prior to the related Remittance Date including the principal portion of
all full and partial principal prepayments made by the respective
Mortgagors during the related Remittance Period;
(b) the scheduled principal balance of each Mortgage Loan that
either was repurchased by the Unaffiliated Seller or purchased by the
Servicer on the related Remittance Date, to the extent such scheduled
principal balance is actually received by the Trustee on or prior to the
related Remittance Date;
S-65
<PAGE>
(c) any Substitution Amounts delivered by the Unaffiliated Seller on
the related Remittance Date in connection with a substitution of a
Mortgage Loan (to the extent such Substitution Amounts relate to
principal), to the extent such Substitution Amounts are actually received
by the Trustee on or prior to the related Remittance Date;
(d) Net Liquidation Proceeds to the extent received by the Trustee
on or prior to the related Remittance Date for each Mortgage Loan which
became a Liquidated Mortgage Loan during the related Remittance Period;
and
(e) the proceeds received by the Trustee of any termination of the
Trust (to the extent such proceeds relate to principal).
Cumulative Loss Percentage: The percentage of all Realized Losses as a
percentage of the Original Aggregate Principal Balance of the Mortgage Loans.
Cumulative Loss Trigger Event: A Cumulative Loss Trigger Event has
occurred if (i) the Cumulative Loss Percentage for a specified period exceeds
the applicable percentage set forth below and (ii) the 60+ Delinquency
Percentage exceeds two times the original (prior to the Stepdown Date)
percentage used to determine the Required Overcollateralization Amount:
Distribution Dates Loss Percentages
------------------ ----------------
[___]................................. [__%]
[___]................................. [__%]
[___]................................. [__%]
[___]................................. [__%]
[___]................................. [__%]
Current Interest: As to any Distribution Date and Class of Certificates,
interest for the related Accrual Period at the related Certificate Rate on the
related Class Certificate Principal Balance.
Excess Interest Amount: As to any Distribution Date, the excess of (x) the
Interest Remittance Amount for both Loan Groups over (y) the sum of (i) the
aggregate of the Class Current Interest for the Class A Certificates, (ii) the
Current Interest for the Mezzanine Certificates and Class B Certificates and
(ii) the Trustee Fee for both Loan Groups.
Extra Principal Distribution Amount: As to any Distribution Date, the
lesser of (x) the Excess Interest Amount for such Distribution Date and (y) the
Overcollateralization Deficiency Amount for such Distribution Date.
Fixed Rate Loan Group Principal Allocation: As to any Distribution Date,
the excess of (i) the Class A Principal Distribution Amount for such
Distribution Date over (ii) the Class A-6 Principal Distribution Amount for such
Distribution Date.
Interest Remittance Amount: As to either Loan Group and any Distribution
Date, the portion of the Available Funds for such Loan Group that constitutes
amounts in respect of interest.
S-66
<PAGE>
Liquidated Mortgage Loan: As to any Distribution Date, a Mortgage Loan
with respect to which the Servicer has determined, in accordance with the
servicing procedures specified in the Agreement, as of the end of the preceding
Due Period, that all Liquidation Proceeds which it expects to recover with
respect to such Mortgage Loan (including the disposition of the related REO)
have been received (other than amounts recoverable through deficiency
judgments).
Original Credit Support Percentage: As to any Class of Senior Certificates
or Subordinate Certificates, the applicable percentage set forth below:
Senior
Class M-1
Class M-2
Class M-3
Class B
Overcollateralization Amount: As to any Distribution Date, the excess, if
any, of (i) the Pool Balance as of the end of the related Remittance Period over
(ii) the aggregate Class Certificate Principal Balance of the Certificates after
giving effect to the distribution of the Aggregate Collected Principal Amount on
such Distribution Date.
Overcollateralization Deficiency Amount: As to any Distribution Date, the
excess, if any, of (x) the Required Overcollateralization Amount for such
Distribution Date over (y) the Overcollateralization Amount for such
Distribution Date, calculated for this purpose after taking into account the
reduction on such Distribution Date of the Class Certificate Balances of all
Classes of Offered Certificates resulting from the distribution of the Aggregate
Collected Principal Amount (but not the Extra Principal Distribution Amount) on
such Distribution Date, but prior to taking in to account any Applied Realized
Loss Amounts on such Distribution Date.
Overcollateralization Reduction Amount: As to any Distribution Date, the
lesser of (i) the Aggregate Collected Principal Amount for such Distribution
Date and (ii) the excess, if any, of (x) the Overcollateralization Amount
(assuming 100% of the Aggregate Collected Principal Amount is distributed on the
Offered Certificates) over (y) the Required Overcollateralization Amount.
Pool Balance: With respect to any date, the aggregate of the Principal
Balances of all Mortgage Loans in both Loan Groups as of such date.
Principal Balance: As to any Mortgage Loan and any day, other than a
Liquidated Mortgage Loan, the Principal Balance as of the Cut-Off Date, minus
all collections credited against the Principal Balance of any such Mortgage
Loan. For purposes of this definition, a Liquidated Mortgage Loan shall be
deemed to have a Principal Balance equal to the Principal Balance of the related
Mortgage Loan immediately prior to the final recovery of related Liquidation
Proceeds and a Principal Balance of zero thereafter.
Principal Distribution Amount: As to any Distribution Date, the sum of (i)
the Aggregate Collected Principal Amount (and with respect to any Distribution
Date on which a Trigger Event is not in effect, less the Overcollateralization
Reduction Amount, if any) and (ii) the Extra Principal Distribution Amount.
S-67
<PAGE>
Remittance Period: As to any Distribution Date, the calendar month
preceding such Distribution Date.
Required OC Percentage: As of any date of determination, the percentage
then applicable in clause (b)(i) of the calculation of the Required
Overcollateralization Amount.
Required Overcollateralization Amount: As to any Distribution Date (a)
prior to the Stepdown Date, the product of ______% and the Original Aggregate
Principal Balance of the Mortgage Loans; (b) on and after the Stepdown Date, (i)
if no Trigger Event is in effect, the lesser of (A) ______% of the Pool Balance
as of the end of the related Remittance Period and (B) ______% of the Original
Aggregate Principal Balance of the Mortgage Loans or (ii) if a Trigger Event or
a Cumulative Loss Trigger Event is in effect, the Required Overcollateralization
Amount will equal the Required Overcollateralization Amount in effect as of the
Distribution Date immediately preceding the date on which the Trigger Event
first occurred.
Senior Enhancement Percentage: As to any Distribution Date, the percentage
equivalent of a fraction, the numerator of which is the sum of (i) the aggregate
Class Certificate Principal Balance of the Class A, Class M and Class B
Certificates minus the Certificate Principal Balance of the Class with the
highest priority and (ii) the Overcollateralization Amount, in each case after
giving effect to the distribution of the Principal Distribution Amount on such
Distribution Date, and the denominator of which is the Pool Balance as of the
last day of the related Due Period.
60+ Delinquency Percentage: A fraction expressed as a percentage, the
numerator of which is (i) with respect to any Distribution Date prior to the
______________ Distribution Date, ____% of the aggregate Principal Balance of
the Mortgage Loans that are more than 60 days delinquent; (ii) with respect to
the ________________ Distribution Date and the Distribution Dates prior to the
December 2003 Distribution Date, ____% of the aggregate Principal Balance of the
Mortgage Loans that are more than 60 days delinquent; and (iii) with respect to
the ______________________ Distribution Date and all the Distribution Dates
thereafter, _____% of the aggregate Principal Balance of the Mortgage Loans that
are more than 60 days delinquent and the denominator of which is the Pool
Balance, in each case as determined as of the last day of the related Remittance
Period.
Stepdown Date: The later to occur of (x) the Distribution Date in
_______________, and (y) the first Distribution Date on which the Senior
Enhancement Percentage (assuming 100% of the Aggregate Collected Principal
Amount is distributed on the Offered Certificates) is at least equal to the sum
of (i) two times the Original Credit Support Percentage for the Senior
Certificates and (ii) the Required OC Percentage.
Stepped Up Percentage: 100% minus the percentage equivalent of a fraction,
the numerator of which is two times the Delinquency Amount and the denominator
of which is the Pool Balance as of the last day of the related Due Period;
provided that the Stepped Up Percentage will not be less than 0.
Trigger Event: A Trigger Event shall have occurred and be continuing, if
at any time, (x) the percentage equivalent of a fraction, the numerator of which
is the aggregate Principal Balance of all Mortgage Loans that are more than 60
days delinquent, including REO properties and Mortgage Loans in foreclosure and
S-68
<PAGE>
the denominator of which is the Pool Balance as of the last day of the related
Due Period exceeds (y) ___% of the Senior Enhancement Percentage.
Unpaid Realized Loss Amount: For any Class of Mezzanine Certificates or
the Class B Certificates and as to any Distribution Date, the excess of (x) the
aggregate cumulative amount of related Applied Realized Loss Amounts with
respect to such Class for all prior Distribution Dates over (y) the aggregate,
cumulative amount of related Realized Loss Amortization Amounts with respect to
such Class for all prior Distribution Dates.
Calculation of LIBOR
With respect to each Distribution Date, 1-Month LIBOR will equal the
interbank offered rate for one-month United States dollar deposits in the London
market as quoted on Telerate Page 3750 as of 11:00 A.M., London time, on the
second LIBOR Business Day prior to (i) the Closing Date with respect to the
[________] Distribution Date or (ii) the first day of the related Accrual Period
with respect to all other Distribution Dates. "Telerate Page 3750" means the
display designated as page 3750 on the Telerate Service (or such other page as
may replace page 3750 on that service for the purpose of displaying London
interbank offered rates of major banks). If such rate does not appear on such
page (or such other page as may replace that page on that service, or if such
service is no longer offered, such other service for displaying LIBOR or
comparable rates as may be selected by the Trustee after consultation with the
Servicer), the rate will be the Reference Bank Rate. The "Reference Bank Rate"
will be determined on the basis of the rates at which deposits in U.S. Dollars
are offered by the reference banks (which shall be three major banks that are
engaged in transactions in the London interbank market, selected by the Trustee
after consultation with the Servicer) as of 11:00 A.M., London time, on the day
that is two LIBOR Business Days prior to the immediately preceding Distribution
Date to prime banks in the London interbank market for a period of one month in
amounts approximately equal to the Class Certificate Principal Balance of the
Variable Rate Certificates. The Trustee will request the principal London office
of each of the reference banks to provide a quotation of its rate. If at least
two such quotations are provided, the rate will be the arithmetic mean of the
quotations. If on such date fewer than two quotations are provided as requested,
the rate will be the arithmetic mean of the rates quoted by one or more major
banks in New York City, selected by the Trustee after consultation with the
Servicer, as of 11:00 A.M., New York City time, on such date for loans in U.S.
Dollars to leading European banks for a period of one month in amounts
approximately equal to the Class Certificate Principal Balance of the Variable
Rate Certificates. If no such quotations can be obtained, the rate will be LIBOR
for the prior Distribution Date. "LIBOR Business Day" means any day other than
(i) a Saturday or a Sunday or (ii) a day on which banking institutions in the
State of New York or in the city of London, England are required or authorized
by law to be closed.
Report to Owners of Certificates
Pursuant to the Pooling and Servicing Agreement, on each Distribution Date
the Trustee will deliver to the Servicer, each Owner of a Certificate and the
Depositor a written report containing information, including, without
limitation, the amount of the distribution on such Distribution Date, the amount
of such distribution allocable to principal and allocable to interest, the
S-69
<PAGE>
aggregate Certificate Principal Balance of the Offered Certificates as of such
Distribution Date and such other information as required by the Pooling and
Servicing Agreement.
Book Entry Registration of the Offered Certificates
The Offered Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Beneficial Owners may elect to hold their Book-Entry
Certificates directly through DTC in the United States, or CEDEL or Euroclear
(in Europe) if they are participants of such systems ("Participants"), or
indirectly through organizations which are Participants. The Book-Entry
Certificates will be issued in one or more certificates per class of Offered
Certificates which in the aggregate equal the principal balance of such Offered
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for CEDEL and Chase
will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Investors
may hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing principal amounts of $1,000 and in integral multiples
in excess thereof. Except as described below, no Beneficial Owner will be
entitled to receive a physical certificate representing such Certificate (a
"Definitive Certificate"). Unless and until Definitive Certificates are issued,
it is anticipated that the only "Owner" of such Book-Entry Certificates will be
Cede & Co., as nominee of DTC. Beneficial Owners will not be Owners as that term
is used in the Pooling and Servicing Agreement. Beneficial Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of CEDEL or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While such Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. Participants
and indirect participants with whom Beneficial Owners have accounts with respect
to Book-Entry Certificates are similarly required to make book-entry transfers
and receive and transmit such distributions on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interests.
S-70
<PAGE>
Beneficial Owners will not receive or be entitled to receive certificates
representing their respective interests in the Offered Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Beneficial Owners who are not Participants may transfer
ownership of Offered Certificates only through Participants and indirect
participants by instructing such Participants and indirect participants to
transfer such Offered Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Offered Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of such Offered
Certificates will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the Participants
and indirect participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlements in DTC. For information with respect to tax documentation procedures
relating to the Certificates, see "Certain Federal Income Tax Consequences --
Taxation of Certain Foreign Investors" and "--Backup Withholding" in the
Prospectus and "Global Clearance, Settlement and Tax Documentation
Procedures--Certain U.S. Federal Income Tax Documentation Requirements" in Annex
I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its Participants ("DTC Participants"), some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the Book-Entry
S-71
<PAGE>
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 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 a branch of a New York banking corporation which
is a member bank of the Federal Reserve System. As such, it is regulated and
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
S-72
<PAGE>
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC Participants
in accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the Beneficial Owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. 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 the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Certificates to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to Cede,
as nominee of DTC, may be made available to Beneficial Owners upon request, in
accordance with the rules, regulations and procedures creating and affecting the
Depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Pooling and Servicing Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. CEDEL or the Euroclear Operator, as the case may be, will take any
action permitted to be taken by an Owner under the Pooling and Servicing
Agreement on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect such actions on its behalf through DTC. DTC
may take actions, at the direction of the related Participants, with respect to
some Offered Certificates which conflict with actions taken with respect to
other Offered Certificates.
S-73
<PAGE>
None of the Depositor, the Unaffiliated Seller, the Servicer or the
Trustee will have any responsibility for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the Book-Entry
Certificates held by Cede, as nominee for DTC, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Unaffiliated Seller advises the Trustee in writing that DTC is no longer
willing, qualified or able to discharge properly its responsibilities as a
nominee and depository with respect to the Book-Entry Certificates and the
Unaffiliated Seller or the Trustee is unable to locate a qualified successor,
(b) the Unaffiliated Seller, at its sole option, elects to terminate a
book-entry system through DTC or (c) DTC, at the direction of the Beneficial
Owners representing a majority of the outstanding Percentage Interests of the
Offered Certificates, advises the Trustee in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of the Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
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.
Certain Activities
The Trust has not and will not: (i) issue securities (except for the
Certificates); (ii) borrow money; (iii) make loans; (iv) invest in securities
for the purpose of exercising control; (v) underwrite securities; (vi) except as
provided in the Pooling and Servicing Agreement, engage in the purchase and sale
(or turnover) of investments; (vii) offer securities in exchange for property
(except Certificates for the Mortgage Loans); or (viii) repurchase or otherwise
reacquire its securities. See "Servicing of the Mortgage Loans and Contracts
- --Reports To Certificateholders" in the Prospectus for information regarding
reports to the Owners.
S-74
<PAGE>
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in this Prospectus Supplement, there is set forth below a
summary of certain other provisions of the Pooling and Servicing Agreement.
Formation of the Trust
On the Closing Date, the Trust will be created and established pursuant to
the Pooling and Servicing Agreement. On such date, the Unaffiliated Seller will
sell without recourse the Mortgage Loans to the Depositor, the Depositor will
sell without recourse the Mortgage Loans to the Trust and the Trust will issue
the Certificates to the Owners thereof pursuant to the Pooling and Servicing
Agreement.
The property of the Trust shall include all money, instruments and other
property to the extent such money, instruments and other property are subject or
intended to be held in trust for the benefit of the Owners, and all proceeds
thereof, including, without limitation, (i) the Mortgage Loans, (ii) such
amounts, including Eligible Investments, as from time to time may be held by the
Trustee in the Certificate Account and by the Servicer in the Principal and
Interest Account (except as otherwise provided in the Pooling and Servicing
Agreement), to be created pursuant to the Pooling and Servicing Agreement, (iii)
any property, the ownership of which has been effected on behalf of the Trust as
a result of foreclosure or acceptance by the Servicer of a deed in lieu of
foreclosure and that has not been withdrawn from the Trust, (iv) any insurance
policies relating to the Mortgage Loans and any rights of the Unaffiliated
Seller under any insurance policies, (v) Net Liquidation Proceeds with respect
to any Liquidated Mortgage Loan, and (vi) the rights of the Unaffiliated Seller
against any Originator pursuant to the related Master Loan Transfer Agreement
(collectively, the "Trust Fund").
The Offered Certificates will not represent an interest in, or an
obligation of, nor will the Mortgage Loans be guaranteed by, any Originator, the
Unaffiliated Seller, the Depositor, the Servicer or the Trustee.
Assignment of the Loans; Representations and Warranties
On the Closing Date, the Depositor will sell, transfer, convey and assign
the Loans to the Trustee, without recourse, together with (i) all rights to any
payments received in respect of any of the Mortgage Loans after the Cut-Off Date
other than late receipts of scheduled monthly payments on the Actuarial Loans
that were due prior to the Cut-Off Date and (ii) all scheduled monthly payments
in respect of the Actuarial Loans that were due on or after the Cut-Off Date but
received prior to the Cut-Off Date. The Mortgage Loans will be described on a
schedule attached to the Pooling and Servicing Agreement (the "Schedule of
Mortgage Loans").
In connection with the sale of the Mortgage Loans on the Closing Date, the
Unaffiliated Seller will be required to deliver to the Trustee the promissory
notes evidencing the Loans, the related mortgages or deeds of trust or other
documents evidencing a lien on the Mortgaged Property and certain other
S-75
<PAGE>
documents relating to the Loans. The Trustee will agree, for the benefit of the
Owners of the related Offered Certificates, to review each such file within 60
days after the Closing Date to ascertain whether all required documents (or
certified copies of documents) have been executed and received.
In addition to the foregoing, the Servicer, is required to submit for
recording, within 180 days of the Closing Date (or, if original recording
information is unavailable, within such later period as is permitted by the
Pooling and Servicing Agreement) assignments of the Mortgages to the Trustee in
the appropriate jurisdictions.
Under an agreement (the "Loan Purchase Agreement") between the
Unaffiliated Seller and the Depositor for the sale of the Loans from the
Unaffiliated Seller to the Depositor, the Unaffiliated Seller will agree that in
the event of a breach of any representation or warranty made by it which
materially and adversely affects the value of, or the interests of the Owners of
the Offered Certificates in, any Mortgage Loan transferred by the Unaffiliated
Seller (any such Loan being a "Defective Loan"), the Unaffiliated Seller will
repurchase the Defective Loan at a price equal to the then outstanding principal
balance of such Loan and accrued and unpaid interest thereon, together with any
outstanding Advances (without duplication) (the "Repurchase Price").
Under the Pooling and Servicing Agreement, the Depositor will assign all
of its right, title and interest in such representations and warranties
(including the Unaffiliated Seller's repurchase obligations) to the Trustee.
None of the Depositor or the Trustee will make any representations or warranties
with respect to the Mortgage Loans and neither will have any obligations to
repurchase, or make substitutions for Defective Loans.
Servicing of the Mortgage Loans
Pursuant to the Pooling and Servicing Agreement, the Servicer will be
required to service and administer the Mortgage Loans assigned to the Trust as
more fully set forth below.
Unless otherwise specified herein or in the Pooling and Servicing
Agreement with respect to specific obligations of the Servicer, the Servicer
shall service and administer the Mortgage Loans in accordance with the
servicing, collection and investor reporting systems and procedures set forth in
the Servicer's current servicing guide (the "Servicing Standards").
The duties of the Servicer include, without limitation, collecting and
posting of all payments, responding to inquiries by obligors or by federal,
state or local government authorities with respect to the Mortgage Loans,
investigating delinquencies, reporting tax information to obligors in accordance
with its customary practices and all applicable law, accounting for collections
and furnishing monthly and annual statements to the Trustee with respect to
distributions and making Delinquency Advances, Servicing Advances and
Compensating Interest to the extent described herein.
The Servicer (i) may execute and deliver any and all instruments of
satisfaction or cancellation, or of partial or full release or discharge and all
other comparable instruments, with respect to the Mortgage Loans and with
respect to the related Mortgaged Property, (ii) may consent to any modification
of the terms of any Note not expressly prohibited hereby if the effect of any
such modification will not materially and adversely affect the security afforded
S-76
<PAGE>
by the related Mortgaged Property or reduce the amount of, or slow (other than
as permitted by the Pooling and Servicing Agreement) the timing of receipt of,
any payments required thereunder and (iii) may institute foreclosure proceedings
or obtain a deed-in-lieu of foreclosure so as to convert the ownership of such
Mortgaged Property, and to hold or cause to be held title to such Mortgaged
Property, in the name of the Servicer on behalf of the Trust.
The Pooling and Servicing Agreement permits the Servicer to modify and
extend the maturity of a Balloon Loan which matures and which is not otherwise
paid in full at such maturity date by the related Obligor; provided, that the
rescheduled final maturity date of such Mortgage Loan is not one year beyond the
original maturity date, the related Mortgage Rate is not decreased and the
obligor does not receive any additional proceeds. Such modified and extended
Balloon Loans will be permitted to remain in the Trust.
The Servicer may perform any of its servicing responsibilities with
respect to all or certain of the Mortgage Loans through a sub-servicer as it may
from time to time designate, but no such designation of a sub-servicer shall
serve to release the Servicer from any of its obligations under the Pooling and
Servicing Agreement. The Mortgage Loans will initially be serviced by the
Sub-Servicer pursuant to a sub-servicing agreement with the Servicer.
Upon removal or resignation of the Servicer, the Backup Servicer will be
required to serve as successor servicer. If the Backup Servicer is prevented by
law from acting as successor servicer, the Trustee may solicit bids for a
successor servicer, and pending the appointment of a successor servicer as a
result of soliciting such bids, the Trustee will be required to serve as
successor servicer. If the Trustee is unable to obtain a qualifying bid, the
Trustee will be required to appoint, or petition a court of competent
jurisdiction to appoint, an eligible successor. Any such successor servicer
shall assume all of the related responsibilities, duties or liabilities of the
Servicer on the date on which it becomes the Servicer, but shall not assume any
of the liabilities incurred prior to such date.
Collection of Certain Loan Payments. The Servicer shall, as required by
the Servicing Standards, make all reasonable efforts to collect payments called
for under the terms and provisions of the Mortgage Loans, and shall, to the
extent such procedures shall be consistent with the Pooling and Servicing
Agreement, follow such collection procedures with respect to the Mortgage Loans
as it follows with respect to comparable mortgage loans in its own servicing
portfolio; provided, that the Servicer shall always at least follow collection
procedures that are consistent with or better than the Servicing Standards.
Consistent with the foregoing, the Servicer may in its discretion, generally (i)
waive any assumption fees, late payment charges, charges for checks returned for
insufficient funds, prepayment fees, if any, or other fees which may be
collected in the ordinary course of servicing the Mortgage Loans, (ii) if an
obligor is in default or if default is reasonably foreseeable because of an
obligor's financial condition, arrange with the obligor a schedule for the
payment of delinquent payments due on the Mortgage Loan; provided, however, the
Servicer may not reschedule the payment of delinquent payments more than three
times in any twelve consecutive months with respect to any obligor or (iii)
modify payments of monthly principal and interest on any Mortgage Loan becoming
subject to the terms of the Civil Relief Act, in accordance with the Servicer's
general policies relating to comparable loans subject to the Civil Relief Act.
S-77
<PAGE>
The Servicer is required to establish and maintain an account in its name
for the benefit of the Trust (such account, the "Lockbox Account") into which
all collections (other than Delinquency Advances and amounts relating to
Compensating Interest) are to be deposited by the close of business on the next
business day following the business day on which such collections are received.
The Servicer shall instruct, or cause any sub-servicer to instruct, all
obligors to make payments only to the Lockbox Account, unless, due to special
collection circumstances such payment must be made to the Servicer, in which
event such amounts shall be deposited by the Servicer in the Lockbox Account.
The Servicer shall instruct the Lockbox Bank to remit all amounts received for
deposit in the Lockbox Account to the Principal and Interest Account on the next
business day following receipt of such amounts.
Not later than _________________ time on the ____________ calendar day of
each month (or the immediately succeeding business day if such calendar day
falls on a Saturday or a Sunday or a holiday), the Servicer shall deliver or
cause to be delivered to the Trustee a monthly servicing report (the "Servicing
Report") on computer readable magnetic tape or diskette. This report shall also
contain (i) a summary report of Mortgage Loan payment activity for such month,
(ii) exception payment reports for Mortgage Loans with respect to which
scheduled payments due in such month were not made and (iii) a trial balance in
the form of a computer tape.
Delinquency Advances and Servicing Advances. If, at or prior to the end of
each Remittance Period, the interest portion of any monthly payment due on any
Mortgage Loan during such Remittance Period has not been received and
transferred to the Principal and Interest Account, the Servicer shall, to the
extent that such Delinquency Advance is necessary to pay any shortfall in Total
Current Interest arising because of the insufficiency of Available Funds, make
an advance to the Principal and Interest Account (a "Delinquency Advance") by
the related Servicer Remittance Date in an amount equal to the amount of the
interest portion of such delinquent monthly payment not later than the related
Servicer Remittance Date; provided, however, that the Servicer will not be
required to make any such Delinquency Advance if it determines in reasonable
good faith that such Delinquency Advance would not be recoverable from
collections with respect to such Mortgage Loan. For purposes of the Pooling and
Servicing Agreement, the delinquent interest portion of such monthly payment
shall be deemed to include an amount equal to the interest portion of such
monthly payment that would have been due on a Mortgage Loan in respect of which
the related Mortgage Property has been repossessed or foreclosed upon and which
has not yet become a Liquidated Mortgage Loan.
The Servicer will advance all "out-of-pocket" costs and expenses incurred
in the performance of its servicing obligations with respect to the Mortgage
Loans, including, but not limited to, the cost of (i) preservation expenses on
the Mortgaged Property Loan Collateral, (ii) any enforcement or judicial
proceedings, including foreclosures, and any reasonable legal expenses in
connection with the assertion by an obligor of any claim or defense that the
obligor may have had against the originator in connection with the sale,
financing or construction of such obligor's home and which the obligor asserts
against the Servicer and (iii) the management and liquidation of "REO" property,
but in each case shall only pay such costs and expenses to the extent the
Servicer reasonably believes such costs and expenses will be recovered from the
S-78
<PAGE>
related Mortgage Loan and will increase Net Liquidation Proceeds on the related
Mortgage Loan. Each such expenditure, exclusive of overhead, will constitute a
"Servicing Advance."
If, with respect to any Distribution Date and as a result of Prepayments
in full received with respect to the Mortgage Loans held in the Trust during the
related Remittance Period, the amount of interest due on such Mortgage Loans is
decreased such that the Available Funds are insufficient to fund the full amount
of the Total Current Interest due on such Distribution Date, the Servicer will
be required to remit to the Principal and Interest Account the lesser of (x) the
amount of such insufficiency due to such Prepayments and (y) the aggregate
Servicing Fee due to the Servicer on such Distribution Date with respect to such
Trust. The Servicer will be required to remit such amount (each such amount,
"Compensating Interest") not later than the related Servicer Remittance Date.
Maintenance of Insurance. The Servicer shall cause to be maintained with
respect to each Mortgage a hazard insurance policy with a generally acceptable
carrier that provides for fire and extended coverage, and which provides for a
recovery by the Servicer on behalf of the Trustee and its assignees of insurance
proceeds relating to such Mortgage Loan, in an amount not less than the least of
(i) the outstanding principal balance of the Mortgage Loan, (ii) the minimum
amount required to compensate for damage or loss on a replacement cost basis and
(iii) the full insurable value of the improvements which are a part of the
related Mortgage Property, but in any case not less than the amount necessary to
avoid the application of any co-insurance clause.
If the Mortgage Loan relates to Mortgaged Property located in an area
identified in the Federal Register by the Federal Emergency Management Agency as
having special flood hazards and if such loan has been specifically identified
as being in such an area in the Schedule of Mortgage Loans or other writing
delivered to the Servicer by the Originator, the Servicer shall cause to be
maintained with respect thereto a flood insurance policy in a form meeting the
requirements of the current guidelines of the Federal Insurance Administration
with a generally acceptable carrier in an amount that provides for coverage, and
which provides for a recovery by the Servicer on behalf of the related Trust of
insurance proceeds relating to such Mortgage Loan, in an amount not less than
the least of (i) the outstanding principal balance of the Mortgage Loan, (ii)
the minimum amount required to fully compensate for damage or loss to the
improvements which are a part of the related Mortgaged Property on a replacement
cost basis and (iii) the maximum amount of insurance that is available under the
Flood Disaster Protection Act of 1973, but in each case in an amount not less
than such amount as is necessary to avoid the application of any co-insurance
clause contained in the related hazard insurance policy.
In the event that the Servicer shall obtain and maintain a blanket policy
insuring against fire, flood and hazards of extended coverage on all of the
Mortgage Loans, then, to the extent such policy names the Servicer as loss payee
and provides coverage in an amount equal to the aggregate principal balance of
the Mortgage Loans without co-insurance, the Servicer shall be deemed
conclusively to have satisfied its obligations with respect to fire, flood and
hazard insurance coverage. Such blanket policy may contain a deductible clause,
in which case the Servicer shall, in the event that there shall have been a loss
which would have been covered by such policy, deposit in the Principal and
Interest Account from the Servicer's own funds the difference, if any, between
S-79
<PAGE>
the amount that would have been payable under a policy described in the
preceding paragraph and the amount paid under such blanket policy.
Due-on-Sale Clauses; Assumption and Substitution Agreements. When any
Mortgaged Property has been or is about to be conveyed by the obligor (whether
by absolute conveyance or by contract of sale, and whether or not the obligor
remains liable), the Servicer shall, to the extent it has knowledge of such
conveyance or prospective conveyance, exercise the related Trust's rights to
accelerate the maturity of the related Loan under any "due-on-sale" clause
contained in the related Mortgage Loan or Note; provided, that the Servicer
shall not exercise any such right if the "due-on-sale" clause, in the reasonable
belief of the Servicer, is not enforceable under applicable law or if the
Servicer is prohibited by law from doing so.
The Servicer may also allow for an assumption agreement in the case of a
defaulted Mortgage Loan, or a Mortgage Loan as to which a default is imminent,
under the same standards as set forth above in the first paragraph under
"Collection of Certain Mortgage Payments", and subject to certain limitations on
the aggregate amount of Mortgage Loans subject to such assumptions, as set forth
in the Agreement.
Realization Upon Defaulted Loans. The Servicer shall, consistent with the
Servicing Standards, foreclose upon or otherwise comparably effect the ownership
in the name of the Servicer on behalf of the Trust of the Mortgaged Property
relating to defaulted a Mortgage Loan as to which no satisfactory arrangements
can be made for collection of delinquent payments. In connection with such
foreclosure or other conversion, the Servicer shall exercise such rights and
powers vested in it hereunder, and use the same degree of care and skill in
their exercise or use, as prudent mortgage lenders would exercise or use under
the circumstances in the conduct of their own affairs, including, but not
limited to, advancing funds for the payment of taxes and insurance premiums. The
foregoing is subject to the proviso that the Servicer shall not advance its own
funds unless it shall reasonably believe in good faith that it is recoverable
and doing so will increase Net Liquidation Proceeds on the Mortgage Loans.
Notwithstanding the foregoing, with respect to any Mortgage Loan as to which the
Servicer has received notice of, or has actual knowledge of, the presence of any
toxic or hazardous substance on the related Mortgaged Property (a "Potentially
Hazardous Property"), the Servicer shall not, on behalf of the Trust, either (i)
obtain title to such Mortgaged Property as a result of or in lieu of foreclosure
or otherwise, or (ii) otherwise acquire possession of, or take any other action
with respect to, such Mortgaged Property, if, as a result of any such action,
the Trust would be considered to hold title to, be a "mortgagee-in-possession"
of, or to be an "owner" or "operator" of, such Mortgaged Property within the
meaning of the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA") from time to time, or any comparable law. The
Servicer shall not be required to make Advances with respect to a Mortgage Loan
relating to a Potentially Hazardous Property. In the event the Servicer requires
any professional guidance with respect to CERCLA, the Servicer may, at its own
expense, obtain an opinion of counsel experienced in CERCLA matters, and shall
be fully protected in relying on any such opinion of counsel.
The Servicer shall determine with respect to each defaulted Mortgage Loan
when it has recovered, whether through trustee's sale, foreclosure sale or
otherwise, all amounts (other than from deficiency judgments) it expects to
S-80
<PAGE>
recover from or on account of such defaulted Mortgage Loan, whereupon such
Mortgage Loan shall become a "Liquidated Mortgage Loan".
Optional Purchase of Defaulted Mortgage Loans. The Servicer or its
designee has the option to purchase from the Trust Fund any Mortgage Loan which
is more than 60 days delinquent, up to ____% by aggregate Principal Balance of
the Original Aggregate Principal Balance of all Mortgage Loans, at a purchase
price equal to the outstanding principal balance of such Mortgage Loan as of the
date of purchase, plus all accrued and unpaid interest on such principal
balance, computed at the Mortgage Interest Rate, plus the amount of any
unreimbursed Servicing Advances (without duplication) made by the Servicer with
respect to such Mortgage Loan, in accordance with the provisions specified in
the Pooling and Servicing Agreement.
Servicing Compensation. As compensation for its activities the Servicer
shall be entitled to the Servicing Fee and certain ancillary servicing income
such as late charges, insufficient funds charges, modification and assumption
fees, penalties, etc., from amounts available therefor in the Principal and
Interest Account. The Servicer is also entitled to receive, monthly, the net
investment earnings on amounts on deposit in the Principal and Interest Account,
and is responsible for any losses on such investments without any right of
reimbursement with respect to such losses.
The right to receive the Servicing Fee may not be transferred (except to
the Sub-Servicer) in whole or in part except in connection with the transfer of
all of the Servicer's responsibilities and obligations under the Pooling and
Servicing Agreement.
Removal and Resignation of Servicer
The Trustee, at the direction of the majority of the Owners of the Offered
Certificates may, pursuant to the Pooling and Servicing Agreement, remove the
Servicer upon the occurrence and continuation beyond the applicable cure period
of any of the following events:
(i) any failure by the Servicer (a) to deposit to the Principal and
Interest Account all collections received by the Servicer directly within
two Business Days following the Business Day on which such amounts are
received and are determined by the Servicer to relate to the Mortgage
Loans (unless not required by the terms of the Pooling and Servicing
Agreement) or (b) to deposit to the Principal and Interest Account
Delinquency Advances and Compensating Interest as required by the Pooling
and Servicing Agreement by the related Servicer Remittance Date; or
(ii) failure on the part of the Servicer to observe or perform any
term, covenant or agreement in the Pooling and Servicing Agreement (other
than those covered by clause (a) above), which materially adversely
affects the rights of the Owners of the Certificates and which continues
unremedied for 30 days after the date on which written notice of such
failure, requiring the same to be remedied, shall have been given to the
Servicer by the Trustee, or the Owners of the Offered Certificates who
hold Certificates evidencing in aggregate greater than 25% of the
Certificate Principal Balance of the outstanding Offered Certificates; or
S-81
<PAGE>
(iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings regarding the
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings regarding the Servicer and certain actions by the
Servicer indicating its insolvency or inability to pay its obligations; or
(iv) the Servicer shall fail to deliver a report expressly required
by the Pooling and Servicing Agreement, and the continuance of such
failure for a period of three Business Days after the date upon which
written notice of such failure shall have been given to the Servicer by
the Trustee (except that such three Business Day period shall be deemed
not to run as to any portion of such report during such time as the
Servicer's failure to provide such information is for cause or inability
beyond its control and the Servicer provides the Trustee with an officer's
certificate of the Servicer to such effect).
The Servicer may not assign its obligations under the Pooling and
Servicing Agreement nor resign from the obligations and duties thereby imposed
on it except upon the determination that the Servicer's duties thereunder are no
longer permissible under applicable law and such incapacity cannot be cured by
the Servicer. No such resignation shall become effective until a successor has
assumed the Servicer's responsibilities and obligations in accordance with the
Pooling and Servicing Agreement.
Upon removal or resignation of the Servicer, the Trustee will be required
to serve as successor servicer. If the Trustee is prevented by law from acting
as successor servicer, the Trustee may solicit bids for a successor servicer,
and pending the appointment of a successor servicer as a result of soliciting
such bids, the Trustee will be required to serve as successor servicer. If the
Trustee is unable to obtain a qualifying bid, the Trustee will be required to
appoint, or petition a court of competent jurisdiction to appoint, an eligible
successor. Any such successor servicer shall assume all of the related
responsibilities, duties or liabilities of the Servicer on the date on which it
becomes the Servicer, but shall not assume any of the liabilities incurred prior
to such date.
Governing Law
The Pooling and Servicing Agreement and each Certificate will be construed
in accordance with and governed by the laws of the State of New York applicable
to agreements made and to be performed therein.
Termination of the Trust
The Pooling and Servicing Agreement will provide that the Trust will
terminate upon the earlier of (i) the payment to the Owners of all Certificates
of all amounts required to be paid such Owners upon the later to occur of (a)
the final payment or other liquidation (or any advance made with respect
thereto) of the last Mortgage Loan or (b) the disposition of all property
acquired in respect of any Mortgage Loan remaining in the Trust Estate or (ii)
any time when a Qualified Liquidation (as defined in the Pooling and Servicing
Agreement) of the Trust Estate is effected.
S-82
<PAGE>
Optional Termination
As Provided in the Pooling and Servicing Agreement. The Pooling and
Servicing Agreement provides that a party to be named therein, at its option,
acting directly or through one or more permitted designees, may determine to
purchase from the Trust all of the Mortgage Loans and other property then held
by the Trust, and thereby effect early retirement of the Certificates, on any
Remittance Date when the aggregate outstanding principal balances of the
Mortgage Loans has declined to ____% or less of the Original Aggregate Principal
Balance.
Auction Sale. The Pooling and Servicing Agreement requires that, within
ninety days following the Optional Termination Date, if the Servicer, or an
affiliate of the Servicer, has not exercised its optional termination right by
such date, the Trustee solicit bids for the purchase of all Mortgage Loans
remaining in the Trust. In the event that satisfactory bids are received as
described in the Pooling and Servicing Agreement, the net sale proceeds will be
distributed to the Owners of the Certificates, in the same order of priority as
collections received in respect of the Mortgage Loans. If satisfactory bids are
not received, the Trustee shall decline to sell the Mortgage Loans and shall not
be under any obligation to solicit any further bids or otherwise negotiate any
further sale of the Mortgage Loans. Such sale and consequent termination of the
Trust must constitute a "qualified liquidation" of each REMIC established by the
Trust under Section 860F of the Internal Revenue Code of 1986, as amended,
including, without limitation, the requirement that the qualified liquidation
takes place over a period not to exceed 90 days.
Upon Loss of REMIC Status. Following a final determination by the Internal
Revenue Service, or by a court of competent jurisdiction, in each case from
which no appeal is taken within the permitted time for such appeal, or if any
appeal is taken, following a final determination of such appeal from which no
further appeal can be taken to the effect that any REMIC held by the Trust does
not and will no longer qualify as a "REMIC" pursuant to Section 860D of the Code
(the "Final Determination"), at any time on or after the date which is 30
calendar days following such Final Determination, the Owners of a majority in
Percentage Interest represented by the Class of Offered Certificates then
outstanding may direct the Trustee on behalf of the Trust to adopt a plan of
complete liquidation as contemplated by Section 860F(a)(4) of the Code, and
thereby effect the early retirement of the Certificates. The purchase price for
any purchase of the property of the Trust Estate shall be equal to the sum of
(x) the greater of (i) 100% of the aggregate principal balances of the Mortgage
Loans as of the Due Date which immediately follows the last day of the related
Remittance Period immediately preceding the day of purchase minus amounts
remitted from the Principal and Interest Account representing collections of
principal on the Mortgage Loans during the related Remittance Period, and (ii)
the fair market value of such Mortgage Loans (disregarding accrued interest),
(y) one month's interest on such amount computed at the weighted average
Pass-Through Rate of the Offered Certificates and (z) the aggregate amount of
any unreimbursed Delinquency Advances and any Delinquency Advances which the
Servicer has theretofore failed to remit.
Upon receipt of such notice or direction from the majority of the Owners
of the Offered Certificates, the Trustee will be required to notify the Owners
of the Class B Certificates of such election to liquidate or such determination
to purchase, as the case may be (the "Termination Notice"). The Owners of a
majority of the Percentage Interest of the Class B Certificates then outstanding
may, within sixty (60) days from the date of receipt of the Termination Notice
(the "Purchase Option Period"), at their option, purchase from the Trust all
S-83
<PAGE>
(but not fewer than all) Mortgage Loans and all property theretofore acquired by
foreclosure, deed in lieu of foreclosure, or otherwise in respect of any
Mortgage Loan then remaining in the Trust Estate at a purchase price equal to
the aggregate principal balances of all Mortgage Loans as of the last day of the
Remittance Period immediately preceding the date of such purchase, plus one
month's interest on such amount at the weighted average Pass-Through Rate and
plus the aggregate amount of any unreimbursed Delinquency Advances and any
Delinquency Advances which the Servicer has theretofore failed to remit. If,
during the Purchase Option Period, the Owners of the Class B Certificates have
not exercised the option described in the immediately preceding sentence, then
upon the expiration of the Purchase Option Period in the event that the Owners
of the Offered Certificates have given the Trustee the direction described
above, the Trustee will be required to sell the Mortgage Loans and distribute
the proceeds of the liquidation of the Trust Estate, each in accordance with the
plan of complete liquidation, such that, if so directed, the liquidation of the
Trust Estate, the distribution of the proceeds of the liquidation and the
termination of the Pooling and Servicing Agreement occur no later than the close
of the sixtieth (60th) day, or such later day as the Owners of the Offered
Certificates permit or direct in writing, after the expiration of the Purchase
Option Period. In connection with such purchase, the Servicer will be required
to remit to the Trustee all amounts then on deposit in the Principal and
Interest Account for deposit to the Certificate Account, which deposit will be
deemed to have occurred immediately preceding such purchase.
Following a Final Determination, the Owners of a majority of the
Percentage Interest of the Class B Certificates then outstanding may, at their
option and upon delivery to the Trustee of an opinion of counsel experienced in
federal income tax matters which opinion shall be reasonably satisfactory in
form and substance to the Owners of a majority of the Percentage Interests
represented by the Offered Certificates then outstanding, to the effect that the
effect of the Final Determination is to increase substantially the probability
that the gross income of the Trust will be subject to federal taxation, purchase
from the Trust all (but not fewer than all) Mortgage Loans and all property
theretofore acquired by foreclosure, deed in lieu of foreclosure, or otherwise
in respect of any Mortgage Loan then remaining in the Trust Fund at a purchase
price equal to the aggregate principal balances of all Mortgage Loans as of the
Due Date which immediately follows the last day of the Remittance Period
immediately preceding the date of such purchase, plus one month's interest on
such amount computed at the weighted average Pass-Through Rate plus the
aggregate amount of unreimbursed Delinquency Advances and any Delinquency
Advances which the Servicer has theretofore failed to remit. In connection with
such purchase, the Servicer will be required to remit to the Trustee all amounts
then on deposit in the Principal and Interest Account for deposit to the
Certificate Account, which deposit shall be deemed to have occurred immediately
preceding such purchase. The foregoing opinion shall be deemed satisfactory
unless the Trustee, at the direction of the Owners of a majority of the
Percentage Interest of the Offered Certificates, gives the Owners of a majority
of the Percentage Interest of the Class B Certificates notice that such opinion
is not satisfactory within thirty days after receipt of such opinion.
S-84
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the
Offered Certificates is to be considered only in connection with "Certain
Federal Income Tax Consequences" 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 Offered Certificates.
REMIC Elections
The Trustee will cause an election to be made to treat the Trust as a
REMIC for federal income tax purposes. Dewey Ballantine, special tax counsel,
will advise that, in its opinion, for federal income tax purposes, assuming (i)
the REMIC election is made and (ii) compliance with the Pooling and Servicing
Agreement, the Trust will be treated as a REMIC, each Class of Offered
Certificates and the Class B Certificates will be treated as "regular interests"
in the REMIC and the Class R Certificates will be treated as the sole Class of
"residual interests" in the 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 Offered Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to such Offered Certificates under an accrual method. The Offered Certificates
may be issued with "original issue discount" for federal income tax purposes.
The prepayment assumption to be used in determining whether any Class of Offered
Certificates is issued with original issue discount and the rate of accrual of
original issue discount is 16% HEP for the Offered Certificates (other than the
Variable Rate Certificates) and 25% CPR for the Variable Rate Certificates. No
representation is made that any of the Mortgage Loans will prepay at this rate
or any other rate. See "Certain Federal Income Tax Consequences -- Taxation of
Regular Certificates" in the Prospectus.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Code prohibit "plan assets" of a
pension, profit-sharing or other employee benefit plan, as well as individual
retirement accounts and Keogh Plans (each, a "Benefit Plan"), from being
involved in certain transactions with persons that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to such
Benefit Plan. A violation of these "prohibited transaction" rules may result in
an excise tax or other penalties and liabilities under ERISA and Section 4975 of
the Code for such persons, unless a statutory or administrative exemption is
available.
S-85
<PAGE>
Certain transactions involving the Trust might be deemed to constitute
prohibited transactions under ERISA and Section 4975 of the Code with respect to
a Benefit Plan if Certificates were acquired with "plan assets" of such Benefit
Plan and assets of the Trust were deemed to be "plan assets" of such Benefit
Plan. Purchasers of Certificates 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. Accordingly, Certificates may not be acquired by a
Benefit Plan or an investor using assets of a Benefit Plan, including, without
limitation, insurance company general accounts (collectively referred to as
"Benefit Plan Investors"). Each purchaser and each transferee of a Certificate
will be deemed to have represented and warranted that it is not a Benefit Plan
Investor.
Certain employee benefit plans, such as governmental plans and church
plans (if no election has been made under Section 410(d) of the Code), are not
subject to the restrictions of ERISA, and assets of such plans may be invested
in the Certificates without regard to the ERISA considerations described above,
subject to other applicable federal, state or local law. However, any such
governmental or church plan which is qualified under Section 401(a) of the Code
and exempt from taxation under Section 501(a) of the Code is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
RATINGS
It is a condition of the original issuance of the Offered Certificates
that the Class A Certificates that they receive ratings of [__] by [____] and
[__] by [____] and that the Class M-1 Certificates receive ratings of [__] from
[____] and [__] from [____], the Class M-2 Certificates receive ratings of [__]
from [____] and [__] from [____] and the Class M-3 Certificates receive ratings
of [__] from [____] and [__] from [____].
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. The security rating assigned to the Offered Certificates should be
evaluated independently of similar security ratings assigned to other kinds of
securities.
Explanations of the significance of such ratings may be obtained from
[____________] at [address] and [____________] at [address]. Such ratings will
be the views only of such rating agencies. There is no assurance that any such
ratings will continue for any period of time or that such ratings will not be
revised or withdrawn. Any such revision or withdrawal of such ratings may have
an adverse effect on the market price of the Offered Certificates.
S-86
<PAGE>
LEGAL INVESTMENT CONSIDERATIONS
[The Offered Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Accordingly, many institutions with legal authority to invest in
comparably rated securities may not be legally authorized to invest in the
Offered Certificates.]
UNDERWRITING
Under the terms and subject to the conditions set forth in the
Underwriting Agreement for the sale of the Offered Certificates, dated [date],
the Depositor has agreed to cause the Trust to sell and Prudential Securities
Incorporated (the "Underwriter") has agreed to purchase the Offered
Certificates.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase the entire principal amount
of Offered Certificates.
The Underwriter has advised the Depositor that it proposes to offer the
Offered 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 Offered
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 Offered Certificates for whom they may act as
agent. Any dealers that participate with the Underwriter in the distribution of
the Offered 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 Offered Certificates by them or the
Underwriter may be deemed to be underwriting discounts or commissions under the
Securities Act.
Proceeds to the Depositor, including accrued interest, are expected to be
approximately [____%] of the aggregate principal balance of the Offered
Certificates, before deducting expenses payable by the Depositor in connection
with the Offered Certificates, estimated to be [$_____]. In connection with the
purchase and sale of the Offered Certificates, the Underwriter may be deemed to
have received compensation from the Depositor in the form of underwriting
discounts.
The Depositor has agreed to indemnify the Underwriter against certain
liabilities including liabilities under the Securities Act.
In connection with the offering of the Offered Certificates, the
Underwriter and its affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Offered Certificates. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M, pursuant to which such person may bid for or purchase
the Offered Certificates for the purpose of stabilizing its market price. Any of
S-87
<PAGE>
the transactions described in this paragraph may result in the maintenance of
the price of the Offered Certificates at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required, and, if they are taken, may be discontinued at any time
without notice.
The Underwriter is an affiliate of the Depositor.
[The Underwriter (i) has in the past and may in the future provide
underwriting, financial advisory or other services to __________, an affiliate
of the Unaffiliated Seller, the Servicer and the Sub-Servicer and (ii) does
provide warehouse financing to the Unaffiliated Seller.]
For further information regarding any offer or sale of the Offered
Certificates pursuant to this Prospectus Supplement and the Prospectus, see
"Plan of Distribution" in the Prospectus.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Offered Certificates will be passed upon for the Unaffiliated Seller and the
Servicer by [__________] and for the Depositor and the Underwriter by Dewey
Ballantine LLP, New York, New York.
S-88
<PAGE>
INDEX OF SIGNIFICANT PROSPECTUS SUPPLEMENT DEFINITIONS
Adjustable Rate Group Available Funds Cap Rate................................3
Adjustable Rate Group Certificates............................................2
Adjustable Rate Mortgage Loans................................................8
Administrative Rate..........................................................14
Advances.....................................................................58
Appraised Values.........................................................36, 46
Auction Sale.................................................................17
Beneficial Owners............................................................16
Benefit Plan.................................................................85
Book-Entry Certificates......................................................70
Cede.........................................................................16
CEDEL........................................................................16
CEDEL Participants...........................................................72
CERCLA.......................................................................80
Certificate Account..........................................................57
Certificates..................................................................1
Citibank.....................................................................16
Civil Relief Act.............................................................26
Civil Relief Act Interest Shortfall..........................................26
Class A-1 Available Funds Pass-Through Rate...................................3
Class A-1 Certificates........................................................1
Class A-2 Certificates........................................................1
Class A-2 Supplemental Interest Amount........................................3
Class A-3 Certificates........................................................1
Class A-4 Certificates........................................................1
Class A-6 Formula Pass-Through Rate...........................................2
Class A-6 Pass-Through Rate...................................................2
Class B Certificates..........................................................1
Class C Certificates..........................................................1
Class R Certificates..........................................................1
Closing Date..................................................................4
CLTV..........................................................................7
Compensating Interest................................................25, 58, 79
Constant Prepayment Rate.....................................................51
Cooperative..................................................................72
CPR..........................................................................51
Cut-Off Date..................................................................4
Defective Loan...............................................................76
Definitive Certificate.......................................................70
Delinquency Advance......................................................14, 78
Depositor.....................................................................4
Distribution Date.............................................................9
DTC..........................................................................16
Due Dates....................................................................58
Eligible Investments.........................................................57
ERISA........................................................................85
ERISA Considerations.........................................................18
Euroclear....................................................................16
Euroclear Operator...........................................................72
Euroclear Participants.......................................................72
European Depositaries....................................................16, 70
FHLMC........................................................................23
Final Determination..........................................................83
Financial Intermediary.......................................................70
Fixed Rate Group Certificates.................................................2
Fixed Rate Mortgage Loans..................................................7, 8
HEP..........................................................................50
Home Equity Prepayment.......................................................50
Independent Originator........................................................4
Liquidation Proceeds.........................................................24
Loan Purchase Agreement......................................................76
Lockbox Account..............................................................78
Monthly Remittance Amount....................................................58
Moody's......................................................................19
Mortgage Loans.............................................................1, 5
Mortgage Rate..............................................................7, 8
Mortgaged Properties.......................................................1, 5
Mortgages..................................................................1, 5
Notes....................................................................28, 38
Optional Termination..........................................................3
Optional Termination Date....................................................17
Original Aggregate Principal Balance......................................5, 27
Overcollateralization Reduction Amount.......................................11
Overcollateralization Reduction Amounts......................................62
Participants.................................................................70
Payment Delay Feature of the Certificates....................................48
Plan assets..................................................................86
Pooling and Servicing Agreement...............................................1
Potentially Hazardous Property...............................................80
Prepayment Assumption........................................................50
Principal and Interest Account...............................................15
Purchase Option Period.......................................................84
Purchased Pool................................................................4
Record Date...................................................................9
S-89
<PAGE>
REMIC........................................................................18
Remittance Date..............................................................58
Repurchase Price.............................................................76
Riegle Act...................................................................26
Schedule of Mortgage Loans...................................................75
Securities Act................................................................i
Servicer......................................................................4
Servicer Event of Default....................................................15
Servicing Fee................................................................16
Servicing Report.............................................................78
Servicing Standards..........................................................76
SMMEA....................................................................18, 87
Subordinate Certificates......................................................1
Sub-Servicer..................................................................4
Sub-Servicing Agreement.......................................................4
Substitution Amounts.........................................................58
Termination Notice...........................................................83
Terms and Conditions.........................................................72
Trust.........................................................................1
Trust Fund................................................................1, 75
Trustee.......................................................................4
Unaffiliated Seller...........................................................4
Underwriter..................................................................87
S-90
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES
Except in certain limited circumstances, the globally offered [________]
Mortgage Loan Trust [series] Mortgage Pass-Through Certificates, Class A (the
"Global Securities") will be available only in book-entry form. Investors in the
Global Securities may hold such Global Securities through any of DTC, CEDEL or
Euroclear. The Global Securities will be tradable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their Relevant Depositary
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
A-1
<PAGE>
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
asset-backed certificates issued in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
Relevant Depositary to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
A-2
<PAGE>
one-day period may substantially reduce or offset the amount of such overdraft
charges, although the result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for crediting Global Securities
to the respective European Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear, Seller and DTC Purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or a Euroclear Participant at
least one business day prior to settlement. In these cases CEDEL or Euroclear
will instruct the respective Depositary, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist to 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the CEDEL Participant or the
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or the Euroclear Participant's account would be back-valued
to the value date (which would be the preceding day, when settlement occurred in
New York). Should the CEDEL Participant or the Euroclear Participant have a line
of credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or the Euroclear Participant's
account would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their CEDEL or Euroclear account in order to
settle the sale side of the trade; or
A-3
<PAGE>
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through CEDEL
or Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons (as defined below), unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between such beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Owners or their agents.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not a
A-4
<PAGE>
U.S. Person. This summary does not deal with all aspects of U.S. Federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
A-5
<PAGE>
================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Unaffiliated Seller 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 to anyone in any jurisdiction in which the
person making such offer or solicitation is not qualified to do so or to anyone
to whom it its unlawful to make any such offer or solicitation. Neither the
delivery of this 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
Summary...................................................................
Risk Factors..............................................................
The Mortgage Loan Pool....................................................
The Unaffiliated Seller...................................................
The Servicer .............................................................
The Sub-Servicer .........................................................
Use of Proceeds ..........................................................
Prepayment and Yield Considerations ......................................
Additional Information ...................................................
Description of the Offered Certificates ..................................
The Pooling and Servicing Agreement.......................................
Certain Federal Income Tax Consequences...................................
ERISA Considerations......................................................
Ratings...................................................................
Legal Investment Considerations...........................................
Underwriting..............................................................
Certain Legal Matters.....................................................
Index of Significant Prospectus Supplement Definitions....................
Global Clearance, Settlement and .........................................
Tax Documentation Procedures..............................................
Prospectus
Reports.......................................................................3
Available Information.........................................................3
Incorporation of Certain Information by Reference.............................3
Summary of Prospectus.........................................................4
Risk Factors.................................................................13
The Trust Funds..............................................................18
Description of the Certificates..............................................29
Credit Support...............................................................43
Prepayment and Yield Considerations..........................................48
Use of Proceeds..............................................................52
The Depositor................................................................52
Underwriting Guidelines......................................................52
Servicing of the Mortgage Loans and Contracts................................54
The Pooling and Servicing Agreement..........................................64
Certain Legal Aspects of the Mortgage Loans and Contacts.....................67
Certain Federal Income Tax Consequences......................................81
ERISA Considerations.........................................................93
Legal Investment.............................................................96
Plan of Distribution.........................................................98
Legal Matters................................................................99
Rating.......................................................................99
Additional Information.......................................................99
Index of Significant Definitions............................................100
================================================================================
================================================================================
[$_______]
[________________]
Servicer
Prudential Securities
Secured Financing Corporation
Depositor
Mortgage Loan
Pass-Through Certificates
Series [series]
---------------------
PROSPECTUS SUPPLEMENT
---------------------
Prudential Securities Incorporated
[date]
================================================================================
<PAGE>
FORM OF PROSPECTUS SUPPLEMENT
(To Prospectus dated August __, 1998)
- --------------------------------------------------------------------------------
[_____] Mortgage Loan Trust [series]
[$__________] Adjustable Rate Class A-1 Certificates
[$__________] [___%] Class A-2 Certificates
[$__________] [___%] Class A-3 Certificates
[$__________] [___%] Class A-4 Certificates
[$__________] [___%] Class A-5 Certificates
[$__________] [___%] Class A-6 Certificates
[Logo] [Logo] [Logo]
(Originator) (Originator)
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
(Depositor)
Mortgage Pass-Through Certificates, Series [series]
- --------------------------------------------------------------------------------
The Mortgage Pass-Through Certificates, Series [series] (the "Certificates")
will consist of six classes (each, a "Class") of senior Certificates, the Class
A-1 Certificates (the "Class A-1 Certificates" or "Adjustable Rate
Certificates"), the Class A-2 Certificates (the "Class A-2 Certificates"), the
Class A-3 Certificates (the "Class A-3 Certificates"), the Class A-4
Certificates (the "Class A-4 Certificates"), the Class A-5 Certificates (the
"Class A-5 Certificates") and the Class A-6 Certificates (the "Class A-6
Certificates" or "Lockout Certificates" and collectively with the Class A-2
Certificates, the Class A-3 Certificates, the Class A-4 Certificates and the
Class A-5 Certificates, the "Fixed Rate Certificates") and one class of residual
Certificates, the Class R Certificates (the "Class R Certificates"). Only the
Adjustable Rate Certificates and the Fixed Rate Certificates (together, the
"Class A Certificates") are being offered hereby. Interest on each Class of
Class A Certificates will be payable monthly at the rate for such Class (each, a
"Pass-Through Rate") on the certificate principal balance of such Class (each, a
"Certificate Principal Balance") on each Distribution Date (as defined herein).
The original Certificate Principal Balances (each, an "Original Certificate
Principal Balance") of the Class A-1 Certificates, the Class A-2 Certificates,
the Class A-3 Certificates, the Class A-4 Certificates, the Class A-5
Certificates and the Class A-6 Certificates are [$__________], [$__________],
[$__________], [$__________], [$__________] and [$__________], respectively.
The Certificates will evidence in the aggregate all of the beneficial
ownership interests in a trust fund (the "Trust Fund") consisting primarily of a
pool of fixed-rate, closed-end, monthly pay, business and consumer purpose home
equity loans secured by first or second lien mortgages or deeds of trust on
residential real properties (the "Mortgage Loans") held by [_____] Mortgage Loan
Trust [series] (the "Trust"). The Trust will be created pursuant to a Pooling
and Servicing Agreement (the "Pooling and Servicing Agreement") among
[__________], as servicer (the "Servicer"), Prudential Securities Secured
Financing Corporation, as depositor (the "Depositor"), and [__________], as
trustee (the "Trustee"). On the Closing Date (as defined herein) Mortgage Loans
(the "Initial Mortgage Loans") having an aggregate Principal Balance (as defined
herein) of approximately $__________ (determined as of the Cut-Off Date, defined
herein) will be transferred to the Trust Fund. The Pooling and Servicing
Agreement provides that additional mortgage loans (the "Subsequent Mortgage
Loans") having an aggregate Principal Balance of approximately $__________ (the
"Original Pre-Funded Amount") may be purchased by the Trust from the Depositor
from time to time on or before [date] from funds deposited in the Pre-Funding
Account (as defined herein) on the Closing Date from proceeds of the sale of the
Class A Certificates.
The Seller will cause [__________] (the "Certificate Insurer") to issue
a financial guaranty insurance policy (the "Certificate Insurance Policy") for
the benefit of the holders of the Class A Certificates (the "Class A
Certificateholders") pursuant to which it will guarantee certain payments to the
Class A Certificateholders as described herein.
[Logo]
The Class A Certificates are entitled to priority, relative to the
Class R Certificates, in right of distributions on the Mortgage Loans as
described herein. See "Description of the Certificates -- Flow of Funds."
For a discussion of significant matters affecting investment in the
Certificates, see "Risk Factors" beginning on page [___] herein and beginning on
page [___] in the Prospectus.
(Cover continued on next page)
- --------------------------------------------------------------------------------
THESE SECURITIES DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR,
THE ORIGINATORS, THE SELLER, THE SERVICER, THE CERTIFICATE INSURER, THE
TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THESE SECURITIES
NOR THE UNDERLYING MORTGAGE LOANS WILL BE INSURED OR GUARANTEED BY
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Class A Certificates will be purchased by Prudential Securities
Incorporated (the "Underwriter") from the Depositor and will be offered by the
Underwriter from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of sale.
The Class A Certificates will be sold to the public at a price of _____%
plus, with respect to the Fixed Rate Certificates, interest from [date].
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 "Plan of Distribution" in this Prospectus Supplement.
The Class A Certificates are offered by the Underwriter when, as and if
issued, subject to delivery by the Depositor and acceptance by the Underwriter,
to prior sale and to withdrawal, cancellation or modification of the offer
without notice. It is expected that the Class A Certificates will be available
for delivery through the facilities of DTC, CEDEL and Euroclear (each, as
defined herein) on or about [date].
Prudential Securities Incorporated
[date]
<PAGE>
(Cover continued from previous page)
Distributions in respect of principal and interest will be made on the
[___] day of each month or, if the [___] day is not a Business Day (as defined
herein), on the next succeeding Business Day, commencing on [date] (each, a
"Distribution Date"), to the holders of Certificates (the "Holders" or the
"Certificateholders") to the extent described herein. On each Distribution Date,
the amount of interest distributed in respect of each Class of Class A
Certificates will equal the interest accrued at the applicable Pass-Through Rate
on the related Certificate Principal Balance during (x) with respect to the
Fixed Rate Certificates, the prior calendar month, and (y) with respect to the
Adjustable Rate Certificates, the period from and including each Distribution
Date (or, with respect to the [date] Distribution Date, the Closing Date) to and
including the day preceding the current Distribution Date, (each such period
relating to the accrual of interest, the "Accrual Period" for the related Class
of Certificates). Interest will be calculated (x) for the Fixed Rate
Certificates, on the basis of a 360-day year consisting of twelve 30-day months,
and (y) for the Adjustable Rate Certificates, on the basis of the actual number
of days in the related Accrual Period, divided by 360.
The last scheduled Distribution Date for the Class A-1 Certificates is
__________, for the Class A-2 Certificates is __________, for the Class A-3
Certificates is __________, for the Class A-4 Certificates is __________, for
the Class A-5 Certificates is __________, and for the Class A-6 Certificates is
__________ (each such date, a "Final Scheduled Maturity Date"). It is expected
that the actual last Distribution Date for each Class of Class A Certificates
will occur significantly earlier than such Final Scheduled Maturity Date. If
purchased at a price other than par, a Class A Certificate's yield to maturity
will be sensitive to the rate and timing of principal payments (including
prepayments) on the Mortgage Loans, some of which may be prepaid at any time
without penalty. Investors in the Class A Certificates should consider the
associated risks, including, in the case of Class A Certificates purchased at a
discount (or premium), the risk that a slower (or faster) than anticipated rate
of payments in respect of principal (including prepayments) on the Mortgage
Loans could result in an actual yield that is lower than anticipated. See
"Description of the Certificates -- Flow of Funds" in this Prospectus Supplement
and "Prepayment and Yield Considerations" in this Prospectus Supplement and in
the Prospectus.
There is currently no secondary market for the Class A Certificates and
there can be no assurance that a secondary market will develop or, if it does
develop, that it will provide Certificateholders with liquidity of investment at
any particular time or for the life of the Certificates.
An election will be made to treat the Trust as a real estate mortgage
investment conduit (a "REMIC") for federal income tax purposes. As described
more fully herein and in the Prospectus, the Class A Certificates will
constitute "regular interests" in the REMIC and the Class R Certificates will
constitute a "residual interest" in the REMIC. See "Summary Terms of the
Certificates -- Federal Income Tax Status" and "Certain Federal Income Tax
Considerations" in this Prospectus Supplement and "Certain Federal Income Tax
Consequences -- REMIC Securities" in the Prospectus.
The Class A Certificates described herein represent a class of a separate
series of Certificates being offered by the Depositor from time to time pursuant
to the Prospectus dated August __, 1998 accompanying this Prospectus Supplement.
The Prospectus shall not be considered complete without this Prospectus
Supplement. Any prospective investor should not purchase any of the Class A
Certificates described herein unless it shall have received the Prospectus and
this Prospectus Supplement. The Prospectus contains important information
regarding this offering which is not contained herein, and prospective investors
are urged to read the Prospectus and this Prospectus Supplement in full.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE CLASS A
CERTIFICATES, INCLUDING PURCHASES OF CLASS A CERTIFICATES TO STABILIZE THE
MARKET PRICE AND THE IMPOSITION OF BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES
SEE "PLAN OF DISTRIBUTION" IN THIS PROSPECTUS SUPPLEMENT.
---------------------------
Until ninety days from the date of this Prospectus Supplement, all dealers
effecting transactions in the Class A Certificates, whether or not participating
in this distribution, may be required to deliver this Prospectus Supplement and
the Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus Supplement and the Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
In addition to the documents described in the Prospectus under
"Incorporation of Certain Information by Reference," the financial statements of
the Certificate Insurer included in, or as exhibits to, the following documents,
which have been filed with the Securities and Exchange Commission (the
"Commission") by [__________], are hereby incorporated by reference in the
Registration Statement (as defined in the accompanying Prospectus) of which this
Prospectus Supplement and the Prospectus form a part:
[insert]
All financial statements of the Certificate Insurer included in documents
filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") subsequent to
the date of this Prospectus Supplement and prior to the termination of the
offering of the 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 of such documents. Copies of such financial statements shall be
provided without charge to any person to whom the Prospectus Supplement is
delivered upon written or oral request to the Seller at [address].
The Seller on behalf of the Trust hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended (the
"Securities Act"), each filing of the Trust's annual report pursuant to section
13(a) or section 15(d) of the Exchange Act and each filing of the financial
statements of the Certificate Insurer included in or as an exhibit to the annual
report of Holdings filed pursuant to section 13(a) or section 15(d) of the
Exchange Act that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the Certificates
offered hereby, and the offering of such Certificates at that time shall be
deemed to be the initial bona fide offering thereof.
S-2
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY TERMS OF THE CERTIFICATES
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
Prospectus. Capitalized terms used herein and not otherwise defined herein have
the meanings assigned in the Prospectus. See "Index of Significant Prospectus
Supplement Definitions" herein and "Index of Significant Definitions" in the
Prospectus.
Title of Securities...............[_____] Mortgage Loan Trust [series], Mortgage
Pass-Through Certificates, Series [series]
(the "Certificates").
Trust.............................[_____] Mortgage Loan Trust [series], a trust
to be formed under the laws of the State of
[New York] (the "Trust").
Depositor.........................Prudential Securities Secured Financing
Corporation (the "Depositor"). See "The
Depositor" in the Prospectus.
Seller............................[_________] (the "Seller").
Originators, Servicer
and Subservicer.................[__________] originated or purchased the
Mortgage Loans (in such capacity, the
"Originators"). The Originators will sell
and assign the Mortgage Loans to the Seller,
and the Seller will sell and assign the
Mortgage Loans to the Depositor. [________]
will act as servicer of the Mortgage Loans
(in such capacity, the "Servicer") and
[________] will act as subservicer with
respect to a portion of the Mortgage Loans
(in such capacity, the "Subservicer"). The
principal office of [__________] is at
[address]. The obligations of the Servicer
with respect to the Certificates will be
limited to its contractual servicing
obligations. See "The Originators, the
Seller and the Servicer" in this Prospectus
Supplement.
Trustee...........................[__________], a New York banking corporation
(the "Trustee").
Certificates Offered..............The Certificates will consist of six classes
of senior Certificates, the Class A-1
Certificates (the "Class A-1 Certificates"
or "Adjustable Rate Certificates"), the
Class A-2 Certificates (the "Class A-2
Certificates"), the Class A-3 Certificates
(the "Class A-3 Certificates"), the Class
A-4 Certificates (the "Class A-4
Certificates"), the Class A-5 Certificates
(the "Class A-5 Certificates") and the Class
A-6 Certificates (the "Class A-6
Certificates" or "Lockout Certificates", and
collectively with the Class A-2
Certificates, the Class A-3 Certificates,
the Class A-4 Certificates and the Class A-5
Certificates, the "Fixed Rate Certificates")
and one class of residual Certificates, the
Class R Certificates (the "Class R
Certificates"). Only the Fixed Rate
Certificates and the Adjustable Rate
Certificates (together, the "Class A
Certificates") are offered hereby.
Cut-Off Date......................The close of business on __________ or, with
respect to Initial Mortgage Loans originated
after __________, the date of origination of
such Initial Mortgage Loans (the "Cut-Off
Date").
Statistical
Calculation Date................__________ (the "Statistical Calculation
Date").
Closing Date......................On or about [date] (the "Closing Date").
- --------------------------------------------------------------------------------
S-3
<PAGE>
- --------------------------------------------------------------------------------
First Distribution Date...........[date]. Distributions on the Certificates will
be made on the [___] day of each month (or,
if such [___] day is not a Business Day, on
the next succeeding Business Day) (each, a
"Distribution Date").
Record Date.......................All distributions, other than the final
distribution on the Certificates, will be
made by or on behalf of the Trustee to the
persons in whose names the Certificates are
registered at the close of business on (x)
with respect to the Fixed Rate Certificates,
the last Business Day of the month preceding
the month in which the related Distribution
Date occurs and (y) with respect to the
Adjustable Rate Certificates, the Business
Day immediately preceding the related
Distribution Date (each such date, the
"Record Date" for the related Class of
Certificates).
Description of Certificates.......The Certificates will represent the entire
beneficial ownership interest in a trust
fund (the "Trust Fund"). The assets of the
Trust Fund will consist primarily of a pool
of Mortgage Loans (the "Mortgage Pool"). The
Mortgage Loans transferred to the Trust on
the Closing Date are referred to as the
"Initial Mortgage Loans" and the Mortgage
Loans transferred on a date subsequent to
the Closing Date but prior to [date] are
referred to as the "Subsequent Mortgage
Loans." See "The Mortgage Pool" in this
Prospectus Supplement. The Trust will be
formed, the Trust Fund will be transferred
to the Trust, and the Certificates will be
issued pursuant to the Pooling and Servicing
Agreement. In addition, the Seller will
cause [__________] (the "Certificate
Insurer") to issue a financial guaranty
insurance policy (the "Certificate Insurance
Policy") for the benefit of the Class A
Certificateholders, pursuant to which it
will guarantee certain payments to the Class
A Certificateholders as described herein.
Book-Entry Form. The Class A Certificates are
sometimes referred to in this Prospectus
Supplement as "Book-Entry Certificates." No
person acquiring an interest in the
Book-Entry Certificates (a "Beneficial
Owner") will be entitled to receive a
definitive certificate representing such
person's interest in the Trust Fund, except
under the limited circumstances described
herein. The Book-Entry Certificates
initially will be represented by a single
certificate registered in the name of Cede &
Co. ("Cede") as the nominee of The
Depository Trust Company ("DTC"), which will
be the "Holder" or "Certificateholder" of
such Certificates, as such terms are used
herein. The rights of Beneficial Owners may
only be exercised through DTC and its
participating organizations, except as
otherwise specified herein. See "Description
of the Certificates --Book-Entry
Registration" and " -- Definitive
Certificates" in this Prospectus Supplement.
Denominations.....................The Class A Certificates initially will be
issued in book-entry form ("Book-Entry
Certificates"), in denominations of $1,000
original certificate principal balance and
integral multiples of $1,000 in excess
thereof (except for one Certificate in each
Class which may be issued in a lesser
amount).
The Mortgage Pool................The Mortgage Loans to be included in the Trust
Fund will be primarily fixed-rate,
closed-end, monthly pay, business and
consumer purpose home equity loans secured
by first or second mortgages or deeds of
trust (the "Mortgages") on residential real
properties (the "Mortgaged Properties"). The
Mortgage Loans have original terms to stated
maturity ranging from ___ months to ___
months and have an aggregate Principal
Balance as of the Statistical Calculation
Date, after application of all payments due
on or before __________, of $__________ (the
"Statistical Calculation Date Aggregate
Principal Balance"). Unless otherwise noted,
all statistical percentages in this
Prospectus Supplement are approximate and
measured by the aggregate Principal Balances
of the applicable Mortgage
- --------------------------------------------------------------------------------
S-4
<PAGE>
- --------------------------------------------------------------------------------
Loans in relation to the Statistical
Calculation Date Aggregate Principal
Balance, in each case as of the Statistical
Calculation Date.
The due dates for monthly payments on the
Mortgage Loans occur throughout a month,
with _____% occurring on the first day of
each month (each, a "Due Date"). See "The
Mortgage Pool" herein. The majority of the
business purpose loans have a prepayment fee
clause. Such prepayment fee clauses
generally provide that the mortgagor pay one
or more of the following: (i) a fee equal to
a percentage of the outstanding principal
balance of the Mortgage Loan, such
percentage having been negotiated at the
time of origination, (ii) a fee which is
designed to allow the holder of the Mortgage
Note to earn interest on the Mortgage Loan
as if the Mortgage Loan remained outstanding
until a designated point in time, or (iii) a
fee equal to the amount of interest on the
outstanding principal balance of the
Mortgage Loan calculated pursuant to a Rule
of 78's calculation, which has the effect of
requiring the mortgagor to pay a greater
amount of interest than would be required to
be paid if the actuarial method of
calculating interest was utilized. See
"Certain Legal Aspects of the Mortgage Loans
and Contracts -- The Mortgage Loans" in the
Prospectus.
The Mortgage Loans were underwritten in
accordance with the underwriting standards
described in this Prospectus Supplement
under "The Originators, the Seller and the
Servicer." Approximately _____%, _____% and
_____% of the Mortgage Loans by Statistical
Calculation Date Aggregate Principal Balance
are secured by Mortgaged Properties located
in __________, __________ and __________,
respectively. See "Risk Factors --
Geographic Concentration" in this Prospectus
Supplement.
The Subsequent Mortgage Loans to be
purchased by the Trust, if available, will
be originated or purchased by the
Originators, sold by the Originators to the
Seller, sold by the Seller to the Depositor
and then sold by the Depositor to the Trust.
The Pooling and Servicing Agreement will
provide that the Subsequent Mortgage Loans,
as well as all of the Mortgage Loans
following the conveyance of such Subsequent
Mortgage Loans to the Trust, must conform to
certain specified characteristics. See "The
Mortgage Pool --Conveyance of Subsequent
Mortgage Loans" in this Prospectus
Supplement.
The Trust will be obligated to purchase the
Subsequent Mortgage Loans from time to time
on or before [date], subject to the
availability thereof. In connection with
each purchase of Subsequent Mortgage Loans,
the Trust will be required to pay to the
Depositor a cash purchase price of 100% of
the aggregate Principal Balance of such
Subsequent Mortgage Loans from the
Pre-Funding Account. Under the Pooling and
Servicing Agreement, the Depositor will be
obligated to sell Subsequent Mortgage Loans
to the Trust and the Trust will be
obligated, subject to the satisfaction of
certain conditions described herein, to
purchase such Subsequent Mortgage Loans. The
Depositor will designate as a cut-off date
(each, a "Subsequent Cut-Off Date") the
first day of the month in which such
Subsequent Mortgage Loans will be conveyed
by the Depositor to the Trust (each, a
"Subsequent Transfer Date") occurring during
the Pre-Funding Period (as defined herein).
The Trust may purchase the Subsequent
Mortgage Loans only from the Depositor and
not from any other person. See "The Mortgage
Pool -- Conveyance of Subsequent Mortgage
Loans" in this Prospectus Supplement.
Class A-1 Original Certificate
Principal Balance...............[$__________] (the "Class A-1 Original
Certificate Principal Balance").
- --------------------------------------------------------------------------------
S-5
<PAGE>
- --------------------------------------------------------------------------------
Class A-2 Original Certificate
Principal Balance...............[$__________] (the "Class A-2 Original
Certificate Principal Balance").
Class A-3 Original Certificate
Principal Balance...............[$__________] (the "Class A-3 Original
Certificate Principal Balance").
Class A-4 Original Certificate
Principal Balance...............[$__________] (the "Class A-4 Original
Certificate Principal Balance").
Class A-5 Original Certificate
Principal Balance...............[$__________] (the "Class A-5 Original
Certificate Principal Balance").
Class A-6 Original Certificate
Principal Balance...............[$__________] (the "Class A-6 Original
Certificate Principal Balance").
Class A-1
Pass-Through Rate...............On each Distribution Date, the lesser of (i)
the London Interbank offered rate for
one-month United States dollar deposits
("LIBOR") (calculated as described under
"Description of the
Certificates--Calculation of LIBOR") as of
the fifth to last business day prior to the
immediately preceding Distribution Date (or,
in the case of the [date] Distribution Date,
as of the second to the last business day
prior to the Closing Date) plus _____% per
annum and (ii) the weighted average net
Mortgage Interest Rate (i.e., the weighted
average Mortgage Interest Rate on the
Mortgage Loans less the sum of the per annum
rates at which the Servicing Fees, the
Trustee Fees and the Certificate Insurer
premium amounts are calculated) for such
Distribution Date (the "Available Funds
Pass-Through Rate") (such lesser amount, the
"Class A-1 Pass-Through Rate").
Class A-2
Pass-Through Rate...............[___%] per annum (the "Class A-2 Pass-Through
Rate").
Class A-3
Pass-Through Rate...............[___%] per annum (the "Class A-3 Pass-Through
Rate").
Class A-4
Pass-Through Rate...............[___%] per annum (the "Class A-4 Pass-Through
Rate").
Class A-5
Pass-Through Rate...............[___%] per annum (the "Class A-5 Pass-Through
Rate").
Class A-6
Pass-Through Rate...............[___%] per annum (the "Class A-6 Pass-Through
Rate").
Distributions, Generally..........Distributions on the Certificates will be made
on each Distribution Date to the related
Holders of record. Distributions to a Holder
will be made in an amount equal to the
product of such Holder's Percentage Interest
(as defined herein) and the amount
distributed in respect of such Holder's
Class of Certificates on such Distribution
Date.
The "Percentage Interest" represented by any
Certificate will be equal to the percentage
obtained by dividing the Original
Certificate Principal Balance of such
Certificate by the Original Certificate
Principal Balance of all Certificates of the
same Class. The "Certificate Principal
Balance" of any Certificate is equal to the
Original Certificate Principal Balance of
such Certificate less any
- --------------------------------------------------------------------------------
S-6
<PAGE>
- --------------------------------------------------------------------------------
amounts actually distributed to the Holder
of such Certificate on account of principal.
The Class A Distribution Amount (as defined
herein) for each Distribution Date (to the
extent funds are available therefor) shall
be allocated among the Class A Certificates
in the following amounts and in the
following order of priority:
(i) First, to the Holders of each Class of
Class A Certificates, the Class A Interest
Distribution Amount (as defined below under
the heading "Distributions of Interest") on
a pro rata basis without any priority among
the Classes of Class A Certificates.
(ii) Second, to the Holders of the Class A
Certificates, the Class A Principal
Distribution Amount (as defined below under
the heading "Distributions of Principal")
shall be distributed in the following order:
(A) to the Holders of the Class A-6
Certificates, to the extent of the least of
(x) the Class A Principal Distribution
Amount, (y) the Class A-6 Certificate
Principal Balance immediately prior to such
Distribution Date, and (z) the Class A-6
Lockout Distribution Amount (as defined
herein), (B) to the Holders of the Class A-1
Certificates, until the Certificate
Principal Balance of the Class A-1
Certificates is reduced to zero; (C) to the
Holders of the Class A-2 Certificates, until
the Certificate Principal Balance of the
Class A-2 Certificates is reduced to zero;
(D) to the Holders of the Class A-3
Certificates, until the Certificate
Principal Balance of the Class A-3
Certificates is reduced to zero; (E) to the
Holders of the Class A-4 Certificates, until
the Certificate Principal Balance of the
Class A-4 Certificates is reduced to zero;
(F) to the Holders of the Class A-5
Certificates, until the Certificate
Principal Balance of the Class A-5
Certificates is reduced to zero; and (G) to
the Holders of the Class A-6 Certificates,
until the Certificate Principal Balance of
the Class A-6 Certificates is reduced to
zero.
The "Class A-6 Lockout Distribution Amount"
for any Distribution Date will be the
product of (i) the applicable Class A-6
Lockout Percentage for such Distribution
Date (as set forth below) and (ii) the Class
A-6 Lockout Pro-Rata Distribution Amount (as
defined herein) for such Distribution Date.
The "Class A-6 Lockout Percentage" for each
Distribution Date shall be as follows:
Class A-6
Distribution Date Lockout Percentage
----------------- ------------------
%
%
%
%
%
The "Class A-6 Lockout Pro Rata Distribution
Amount" for any Distribution Date will be an
amount equal to the product of (x) a
fraction, the numerator of which is the
Class A-6 Certificate Principal Balance
immediately prior to such Distribution Date
and the denominator of which is the
aggregate of the Class A-1 Certificate
Principal Balance, the Class A-2 Certificate
Principal Balance, the Class A-3 Certificate
Principal Balance, the Class A-4 Certificate
Principal Balance, the Class A-5 Certificate
Principal Balance and the Class A-6
Certificate Principal Balance (collectively,
the "Class A Certificate Principal
Balance"), in each case immediately prior to
such Distribution Date, and (y) the Class A
Principal Distribution Amount for such
Distribution Date.
- --------------------------------------------------------------------------------
S-7
<PAGE>
- --------------------------------------------------------------------------------
During certain periods, no principal
payments or a disproportionately small
portion of the Class A Principal
Distribution Amount will be distributed on
the Lockout Certificates. During certain
other periods, a disproportionately large
portion of the Class A Principal
Distribution Amount will be distributed on
the Lockout Certificates. Unless the
Certificate Principal Balance of the Class A
Certificates (other than the Lockout
Certificates) have been reduced to zero or
unused Pre-Funding Account moneys are
distributed to the Holders of the Class A
Certificates as described herein, the
Lockout Certificates will not be entitled to
receive any distributions of principal
payments prior to the Distribution Date in
__________.
Distributions of Interest.........Interest will accrue on each Class of Class A
Certificates at the applicable Pass-Through
Rate on the related Certificate Principal
Balance during the related Accrual Period
(such interest, the "Current Interest"). The
amount of interest payable will generally be
equal to the sum of the Current Interest for
each Class, reduced by an amount equal to
the aggregate of the Prepayment Interest
Shortfalls (as defined herein) and the Civil
Relief Act Interest Shortfalls (as defined
herein) (together, the "Mortgage Loan
Interest Shortfalls"), if any, for such
Distribution Date, to the extent such
Mortgage Loan Interest Shortfalls are not
paid by the Servicer as Compensating
Interest (as defined herein). Mortgage Loan
Interest Shortfalls will not be covered by
or under the Certificate Insurance Policy.
The amount of interest (as described above)
payable with respect to the Class A
Certificates on any Distribution Date, plus
any related Carry-Forward Amount (as defined
herein), constitutes the "Class A Interest
Distribution Amount" and shall be
distributable, to the extent of the
Available Amount, less Trustee's Fees, on
the related Distribution Date. See
"Description of the Certificates" in this
Prospectus Supplement.
Distributions of Principal........The following discussion makes use of a number
of terms which are defined under
"Description of the Certificates --
Overcollateralization Provisions" in this
Prospectus Supplement.
The Holders of the Classes of Class A
Certificates then entitled to receive
principal, are entitled to receive certain
monthly distributions of principal on each
Distribution Date which generally reflect
collections of principal during the related
Due Period. The Certificate Insurance Policy
only guarantees the amount by which the sum
of the Insured Distribution Amount exceeds
the Available Amount, less Trustee's Fees
(after taking into account the portion of
the Class A Principal Distribution Amount to
actually be distributed on such Distribution
Date, without regard to any Insured Payment
to be made with respect to such Distribution
Date) as more fully described herein under
"The Certificate Insurance Policy" in this
Prospectus Supplement.
The subordination provisions of the Trust
result in a limited acceleration of the
principal payments to the Holders of the
Class of Class A Certificates then entitled
to receive principal, as more fully
described under "Description of the
Certificates -- Overcollateralization
Provisions" in this Prospectus Supplement.
Such subordination provisions have the
effect of shortening the weighted average
lives of the Class A Certificates by
increasing the rate at which principal is
distributed to the Class A
Certificateholders. See "Prepayment and
Yield Considerations" in this Prospectus
Supplement and in the Prospectus.
The Class A Certificates (other than the
Class A-6 Certificates) are "sequential pay"
in that the Holders of the Class A-5
Certificates will receive no payments of
principal until the Certificate Principal
Balance of the Class A-4 Certificates
- --------------------------------------------------------------------------------
S-8
<PAGE>
- --------------------------------------------------------------------------------
has been reduced to zero, the Holders of the
Class A-4 Certificates will receive no
payments of principal until the Certificate
Principal Balance of the Class A-3
Certificates is reduced to zero, the Holders
of the Class A-3 Certificates will receive
no payments of principal until the
Certificate Principal Balance of the Class
A-2 Certificates has been reduced to zero
and the Holders of the Class A-2
Certificates will receive no payments of
principal until the Certificate Principal
Balance of the Class A-1 Certificates has
been reduced to zero; provided, however,
that, to the extent funds in the Pre-Funding
Account are not used to purchase Subsequent
Mortgage Loans by [date], such funds will be
distributed to the Holders of the Class A
Certificates pro rata, as principal. The
Holders of the Class A-6 Certificates are
entitled to receive on each Distribution
Date, in respect of principal, payment of
the Class A-6 Lockout Distribution Amount
for such Distribution Date to the extent
such Class A-6 Lockout Distribution Amount
does not exceed the lesser of the Class A
Principal Distribution Amount or the
remaining Class A-6 Certificate Principal
Balance for such Distribution Date;
provided, that if on any Distribution Date
the Class A-5 Certificate Principal Balance
is zero, the Class A-6 Certificates will be
entitled to receive the entire Class A
Principal Distribution Amount for such
Distribution Date, up to the remaining Class
A-6 Certificate Principal Balance.
Class A Principal Distribution Amount
The "Class A Principal Distribution Amount"
for any Distribution Date will be the lesser
of:
(a) the excess of (i) the sum, as of such
Distribution Date, of (A) the Available
Amount and (B) any Insured Payment over
(ii) the sum of the Class A Interest
Distribution Amount, the Trustee's Fees
and the Reimbursement Amount; and
(b) the sum, without duplication, of:
(i) all principal in respect of the
Mortgage Loans actually collected
during the calendar month
preceding the Distribution Date
(the "Due Period"),
(ii) the Principal Balance of each
Mortgage Loan that either was
repurchased by the Seller or by
the Depositor or purchased by the
Servicer on the related
Distribution Date, to the extent
such Principal Balance is
actually received by the Trustee,
(iii) any Substitution Adjustments
delivered by the Depositor on the
related Distribution Date in
connection with a substitution of
a Mortgage Loan, to the extent
such Substitution Adjustments are
actually received by the Trustee,
(iv) the Net Liquidation Proceeds
actually collected by the
Servicer of all Mortgage Loans
during the prior calendar month
(to the extent such Net
Liquidation Proceeds relate to
principal),
(v) with respect to the __________
Distribution Date, moneys
released from the Pre-Funding
Account, if any, on [date] (to
the extent such funds are less
than ___% of the aggregate
Principal Balance of the Mortgage
Loans in the Trust on such date),
- --------------------------------------------------------------------------------
S-9
<PAGE>
- --------------------------------------------------------------------------------
(vi) the amount of any Subordination
Deficit for such Distribution
Date,
(vii) the proceeds received by the
Trustee on any termination of the
Trust (to the extent such
proceeds relate to principal),
and
(viii) the amount of any Subordination
Increase Amount for such
Distribution Date, to the extent
of any Net Monthly Excess
Cashflow available for such
purpose;
minus
(ix) the amount of any Subordination
Reduction Amount for such
Distribution Date.
In no event will the Class A Principal
Distribution Amount with respect to any
Distribution Date be (x) less than zero or
(y) greater than the then outstanding Class
A Certificate Principal Balance.
Class A Distribution Amount
With respect to any Distribution Date, the
sum of the Class A Interest Distribution
Amount and the Class A Principal
Distribution Amount is the "Class A
Distribution Amount" for such Distribution
Date.
Insured Distribution Amount
With respect to any Distribution Date, the
sum of (i) the Class A Interest Distribution
Amount, (ii) the amount of the Subordination
Deficit, if any, with respect to such
Distribution Date, and (iii) with respect to
the Distribution Date which is a Final
Scheduled Maturity Date, the outstanding
Certificate Principal Balance for the
related Class of Class A Certificates, is
the "Insured Distribution Amount" for such
Distribution Date. The "Insured Payment" for
a Distribution Date will equal the amount by
which the Insured Distribution Amount with
respect to such Distribution Date exceeds
the Available Amount, less the Trustee's
Fees, for such Distribution Date.
The "Carry-Forward Amount" as of any
Distribution Date equals the sum of (a) the
amount, if any, by which (i) the Class A
Interest Distribution Amount as of the
immediately preceding Distribution Date
exceeded (ii) the amount actually
distributed to the Class A
Certificateholders on such Distribution Date
on account of interest and (b) 30-days'
interest on such amount at the weighted
average Pass-Through Rate (weighted by the
related aggregate Certificate Principal
Balance of each Class) of the Class A
Certificates (the "Weighted Average Class A
Pass-Through Rate"). See "Description of
Certificates --Distributions" in this
Prospectus Supplement.
A "Liquidated Mortgage Loan" is, in general,
a defaulted Mortgage Loan as to which the
Servicer has determined that all amounts
that it expects to recover on such Mortgage
Loan have been recovered (exclusive of any
possibility of a deficiency judgment). Any
loss on a Liquidated Mortgage Loan (a
"Liquidated Loan Loss") may or may not be
recovered by the Holders of the Class A
Certificates on the Distribution Date which
immediately follows the event of loss.
However, the Holders of the Class A
Certificates are entitled to receive
ultimate recovery with respect to any
Liquidated Loan Losses which occur, receipt
of which will be no later than the
Distribution Date occurring after such
- --------------------------------------------------------------------------------
S-10
<PAGE>
- --------------------------------------------------------------------------------
Liquidated Loan Loss creates a Subordination
Deficit (as described below). Such payment
will be in the form of an Insured Payment if
not covered through Net Monthly Excess
Cashflow.
Insured Payments do not include Liquidated
Loan Losses until such time as such
aggregate, cumulative Liquidated Loan Losses
have created a Subordination Deficit;
provided, however, that the Certificate
Insurer is permitted, at its sole option,
but not required, to pay any Liquidated Loan
Losses in accordance with the Certificate
Insurance Policy. A "Subordination Deficit"
as of any Distribution Date, is the amount,
if any, by which (a) the Class A Certificate
Principal Balance, after taking into account
the payment of the Class A Principal
Distribution Amount on such date (except for
any payment to be made as to principal from
the proceeds of the Certificate Insurance
Policy) exceeds (b) the aggregate Principal
Balance of the Mortgage Loans determined as
of the end of the immediately preceding Due
Period.
The "Principal Balance" of any Mortgage Loan
as of any date of determination is the
outstanding principal balance of such
Mortgage Loan as of such date of
determination after giving effect to
prepayments received prior to the end of the
related Due Period and Deficient Valuations
incurred prior to the related Due Date. The
Principal Balance of a Mortgage Loan which
becomes a Liquidated Mortgage Loan on or
prior to the related Due Date shall be zero.
Pre-Funding Account...............On the Closing Date, the Trustee will deposit
the Original Pre-Funded Amount in an account
held in the name of the Trustee on behalf of
the Trust (the "Pre-Funding Account"). Such
Original Pre-Funded Amount will be funded
from the sale of the Class A Certificates,
and may be used to acquire Subsequent
Mortgage Loans during the period (the
"Pre-Funding Period") from the Closing Date
until the earliest of (i) the date on which
the amount on deposit in the Pre-Funding
Account is less than $__________, (ii) the
date on which an Event of Default occurs
under the terms of the Pooling and Servicing
Agreement, or (iii) [date]. The amount on
deposit in the Pre-Funding Account will be
reduced during the Pre-Funding Period by the
amount thereof used to purchase Subsequent
Mortgage Loans in accordance with the terms
of the Pooling and Servicing Agreement. The
Depositor expects that the Original
Pre-Funded Amount will be reduced to less
than $__________ by [date]. To the extent
funds in the Pre-Funding Account are not
expected to be used to purchase Subsequent
Mortgage Loans by [date], such funds will be
used to prepay the principal of the Class A
Certificates, pro rata, on the __________
Distribution Date. In the event that the
funds remaining in the Pre-Funding Account
on [date] (i) exceed ___% of the aggregate
Principal Balance of the Mortgage Loans in
the Trust on such date, such funds will be
used to prepay the principal of the Class A
Certificates, pro rata, in a special
distribution on such date, or (ii) are less
than ___% of the aggregate Principal Balance
of the Mortgage Loans in the Trust on such
date, such funds will be distributed in
accordance with the provisions of the
Pooling and Servicing Agreement. The
Pre-Funding Account will not be an asset of
the REMIC.
Capitalized Interest
Account.........................On the Closing Date, the Trustee will be
required to deposit a portion of the
proceeds of the sale of the Class A
Certificates in an account (the "Capitalized
Interest Account") held in the name of the
Trustee on behalf of the Trust. The amount
deposited therein will be used, as
necessary, by the Trustee during the
Pre-Funding Period to fund the aggregate
amount of interest accruing during the
related Accrual Period at the Weighted
Average Class A Pass-Through Rate on the
amount by which the Class A Certificate
Principal Balance exceeds the
- --------------------------------------------------------------------------------
S-11
<PAGE>
- --------------------------------------------------------------------------------
aggregate Principal Balance of the Mortgage
Loans in the Trust. Any amounts remaining in
the Capitalized Interest Account on the
Distribution Date which follows the end of
the Pre-Funding Period and not used for such
purposes are required to be paid directly to
the Seller on such Distribution Date. The
Capitalized Interest Account will not be an
asset of the REMIC.
Credit Enhancement................The credit enhancement provided for the
benefit of the Class A Certificateholders
consists solely of (a) overcollateralization
and (b) the Certificate Insurance Policy.
Overcollateralization.
On the Closing Date, the Trust will issue
Class A Certificates with an aggregate
Original Certificate Principal Balance which
is approximately ___% less than the sum of
the aggregate Principal Balance of the
Initial Mortgage Loans and the Original
Pre-Funded Amount, resulting in initial
overcollateralization. Overcollateralization
is increased in the early months of the
transaction pursuant to the subordination
provisions of the Trust which, starting with
the __________ Distribution Date, may cause
a limited acceleration of the Class A
Certificates relative to the amortization of
the Mortgage Loans. The accelerated
amortization results from the application of
certain excess interest to the payment of
principal on the Classes of Class A
Certificates then entitled to receive
principal. Once the required level of
overcollateralization is reached, and
subject to the provisions described in the
next paragraph, the acceleration feature
will cease, unless necessary to maintain the
required level of overcollateralization.
The Pooling and Servicing Agreement provides
that, subject to certain trigger tests, the
required level of overcollateralization may
increase or decrease over time. An increase
would result in a temporary period of
accelerated amortization of the Class A
Certificates to increase the actual level of
overcollateralization to its required level;
a decrease would result in a temporary
period of decelerated amortization to reduce
the actual level of overcollateralization to
its required level. See "Description of the
Certificates --Overcollateralization
Provisions" in this Prospectus Supplement.
The Certificate Insurance Policy.
The Class A Certificateholders will have the
benefit of the Certificate Insurance Policy,
discussed more fully below. The Certificate
Insurance Policy does not insure the payment
of Mortgage Loan Interest Shortfalls. See
"The Certificate Insurance Policy" and "The
Certificate Insurer" in this Prospectus
Supplement and "Credit Support -- Other
Credit Enhancement" in the Prospectus.
The Certificate Insurer...........[__________] (the "Certificate Insurer") is a
New York monoline insurance company engaged
in the business of writing financial
guaranty insurance, principally in respect
of securities offered in domestic and
foreign markets. The Certificate Insurer's
claims-paying ability is rated "[___]" by
[__________] ("[___]") and "[___]" by
[__________] ("[___]"), [___] Investors
Service, L.P. ("[___]"), __________ and
[__________]. See "The Certificate Insurance
Policy" and "The Certificate Insurer" in
this Prospectus Supplement.
The Certificate Insurance
Policy..........................The Certificate Insurer will issue the
Certificate Insurance Policy with respect to
the Class A Certificates, pursuant to which
it will irrevocably and unconditionally
guaranty payment on each Distribution Date
of Insured
- --------------------------------------------------------------------------------
S-12
<PAGE>
- --------------------------------------------------------------------------------
Payments to the Trustee for the benefit of
the Holders of the Class A Certificates. On
any Distribution Date, the Certificate
Insurer will generally be required to make
available to the Trustee the amount, if any,
by which the Insured Distribution Amount
exceeds the Available Amount, less the
Trustee's Fees (in each case as of the
related Distribution Date). See "Description
of the Certificates -- Overcollateralization
Provisions" in this Prospectus Supplement.
The Certificate Insurance Policy does not
guarantee the Class A Certificates any
specified rate of prepayments. Mortgage Loan
Interest Shortfalls will not be covered
under the Certificate Insurance Policy. A
payment by the Certificate Insurer under the
Certificate Insurance Policy is referred to
herein as an "Insured Payment."
So long as there does not exist a failure by
the Certificate Insurer to make a required
payment under the Certificate Insurance
Policy (such event, a "Certificate Insurer
Default"), the Certificate Insurer shall
have the right to exercise all rights of the
Holders of the Class A Certificates under
the Pooling and Servicing Agreement without
any consent of such Holders, and such
Holders may exercise such rights only with
the prior written consent of the Certificate
Insurer, except as provided in the Pooling
and Servicing Agreement. In addition, the
Certificate Insurer will be entitled to
reimbursement for all Insured Payments.
Servicing of the Mortgage
Loans...........................The Servicer will be obligated to service and
administer the Mortgage Loans in accordance
with the Pooling and Servicing Agreement and
to cause the Mortgage Loans to be serviced
with the same care as it customarily employs
in servicing and administering mortgage
loans for its own account, in accordance
with accepted mortgage servicing practices
of prudent lending institutions, and giving
due consideration to the Certificate
Insurer's and the Certificateholders'
reliance on the Servicer.
Periodic Advances.................Subject to the Servicer's determination that
such action would not constitute a
Nonrecoverable Advance (as defined herein),
the Servicer is required to make advances
("Periodic Advances") with respect to
delinquent payments of interest (at a rate
equal to the interest rate on the related
Mortgage Note (the "Mortgage Interest
Rate"), less the Servicing Fee (as defined
herein)). Such Periodic Advances by the
Servicer are reimbursable to the Servicer
subject to certain conditions and
restrictions, and are intended to provide
both sufficient funds for the payment of
interest to the Holders of the Class A
Certificates, plus an additional amount
intended to maintain a specified level of
overcollateralization and to pay the
Trustee's Fees and the premium due the
Certificate Insurer. Notwithstanding the
Servicer's good faith determination that a
Periodic Advance was recoverable when made,
if such Periodic Advance becomes a
Nonrecoverable Advance, the Servicer will be
entitled to reimbursement therefor from the
Trust Fund. See "Description of the
Certificates -- Payments on the Mortgage
Loans" in this Prospectus Supplement.
Prepayment Interest
Shortfalls......................Not later than the close of business on the
___th day of each month (each, a "Servicer
Distribution Date"), the Servicer is
required to remit to the Trustee an amount
equal to the lesser of (a) the aggregate of
the Prepayment Interest Shortfalls for the
related Distribution Date resulting from
principal prepayments in full during the
related Due Period and (b) its aggregate
Servicing Fees received in the related Due
Period (such lesser amount, the
"Compensating Interest"), and shall not have
the right to reimbursement therefor. With
respect to any Distribution Date, the
"Prepayment Interest
- --------------------------------------------------------------------------------
S-13
<PAGE>
- --------------------------------------------------------------------------------
Shortfall" will be an amount equal to the
excess, if any, of (a) 30-days' interest on
the outstanding principal balance of such
Mortgage Loans at a per annum rate equal to
the related Mortgage Interest Rate (or at
such lower rate as may be in effect for such
Mortgage Loan because of application of the
Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Civil Relief Act"),
any reduction as a result of a bankruptcy
proceeding (a "Deficient Valuation") and/or
any reduction by a court of the monthly
payment due on such Mortgage Loan (a "Debt
Service Reduction")), minus the rate at
which the Servicing Fee is calculated, over
(b) the amount of interest actually remitted
by the related mortgagor (each, a
"Mortgagor") in connection with such
principal prepayment in full, less the
Servicing Fee for such Mortgage Loan in such
month. Insured Payments do not cover
Prepayment Interest Shortfalls.
Civil Relief Act Interest
Shortfalls......................The reduction, if any, in interest payable on
the Mortgage Loans attributable to Civil
Relief Act Interest Shortfalls will be borne
by the Class A Certificateholders and will
not be covered by payments from the
Servicer, the Certificate Insurance Policy
or otherwise. See "Risk Factors --
Limitations on Interest Payments and
Foreclosures" in this Prospectus Supplement.
Servicing Advances................Subject to the Servicer's determination that
such action would not constitute a
Nonrecoverable Advance and that a prudent
mortgage lender would make a like advance if
it or an affiliate owned the related
Mortgage Loan, the Servicer is required to
advance amounts with respect to the Mortgage
Loans ("Servicing Advances") constituting
"out-of-pocket" costs and expenses relating
to (a) the preservation and restoration of
the Mortgaged Property, (b) enforcement
proceedings, including foreclosures, (c)
expenditures relating to the purchase or
maintenance of a first lien not included in
the Trust Fund on the Mortgaged Property,
and (d) certain other customary amounts
described in the Pooling and Servicing
Agreement. Such Servicing Advances by the
Servicer are reimbursable to the Servicer
subject to certain conditions and
restrictions. In the event that,
notwithstanding the Servicer's good faith
determination at the time such Servicing
Advance was made, that it would not be a
Nonrecoverable Advance, in the event such
Servicing Advance becomes a Nonrecoverable
Advance, the Servicer will be entitled to
reimbursement therefor from the Trust Fund.
Servicing Fee.....................The Servicer is entitled to a servicing fee of
_____% per annum of the Principal Balance of
each Mortgage Loan (the "Servicing Fee"),
calculated and payable monthly from the
interest portion of scheduled monthly
payments, liquidation proceeds and certain
other proceeds.
Optional Termination by the
Servicer........................The Servicer may, at its option, terminate the
Trust on the Distribution Date (the first
date on which such event occurs, the
"Clean-up Call Date") on which the aggregate
Principal Balance of the Mortgage Loans is
less than _____% of the sum of (a) the
aggregate Principal Balance of the Initial
Mortgage Loans as of the Cut-Off Date (the
"Cut-Off Date Aggregate Principal Balance")
and (b) the Original Pre-Funded Amount, by
purchasing from the Trust all of the
Mortgage Loans and REO Properties (as
defined herein) at a price equal to the sum
of (a) 100% of the aggregate Principal
Balance of each outstanding Mortgage Loan
and each REO Property and (b) the greater of
(i) the aggregate amount of accrued and
unpaid interest on the Mortgage Loans
through the related Due Period and (ii)
30-days' accrued interest thereon computed
at a rate equal to the related Mortgage
Interest Rate, less the Servicing Fee, and
(c) any unreimbursed amounts due to the
Certificate Insurer under the Pooling and
- --------------------------------------------------------------------------------
S-14
<PAGE>
- --------------------------------------------------------------------------------
Servicing Agreement or the Insurance
Agreement and any accrued and unpaid Insured
Payments. No such termination is permitted
without the prior written consent of the
Certificate Insurer if it would result in a
draw on the Certificate Insurance Policy.
See "Servicing of the Mortgage Loans --
Termination; Purchase of Mortgage Loans" in
this Prospectus Supplement.
Optional Purchase of Defaulted
Mortgage Loans..................The Seller, or any affiliate of the Seller,
has the option, but is not obligated, to
purchase from the Trust Fund any Mortgage
Loan 90 days or more delinquent at a
purchase price equal to the outstanding
Principal Balance thereof as of the date of
purchase, plus all accrued and unpaid
interest on such Principal Balance, computed
at the related Mortgage Interest Rate (net
of the related Servicing Fee if [__________]
is the Servicer) plus the amount of any
unreimbursed Servicing Advances made by the
Servicer with respect to such Mortgage Loan
in accordance with the provisions specified
in the Pooling and Servicing Agreement.
Book Entry Form of
Certificates....................The Class A Certificates are sometimes
referred to in this Prospectus Supplement as
"Book-Entry Certificates." No person
acquiring an interest in the Book-Entry
Certificates will be entitled to receive a
definitive certificate representing such
person's interest in the Trust Fund, except
under the limited circumstances described
herein. Beneficial Owners may elect to hold
their interests through The Depository Trust
Company ("DTC" or the "Depository"), in the
United States, or Centrale de Livraison de
Valeurs Mobiliers, S.A. ("CEDEL") or the
Euroclear System ("Euroclear"), in Europe.
Transfers within DTC, CEDEL or Euroclear, as
the case may be, will be in accordance with
the usual rules and operating procedures of
the relevant system. So long as the Class A
Certificates are Book-Entry Certificates,
such Class A Certificates will be evidenced
by one or more Class A Certificates
registered in the name of Cede & Co.
("Cede"), which will be the "Holder" or
"Certificateholder" of such Certificates, as
the nominee of DTC or one of the relevant
depositaries (the "European Depositaries").
Cross-market transfers between persons
holding directly or indirectly through DTC,
on the one hand, and counterparties holding
directly or indirectly through CEDEL or
Euroclear, on the other, will be effected in
DTC through [__________] ("__________"), the
relevant depositories of CEDEL or Euroclear,
respectively, and each a participating
member of DTC. The Class A Certificates will
initially be registered in the name of Cede.
The interests of the Holders of such Class A
Certificates will be represented by
book-entries on the records of DTC and
participating members thereof. No Beneficial
Owner will be entitled to receive a
definitive certificate representing such
person's interest, except in the event that
Definitive Certificates (as defined herein)
are issued under the limited circumstances
described herein. All references herein to
any Class A Certificates reflect the rights
of Beneficial Owners only as such rights may
be exercised through DTC and its
participating organizations for so long as
such Class A Certificates are held by DTC.
See "Description of the Certificates --
Book-Entry Registration" and " -- Definitive
Certificates" in this Prospectus Supplement.
ERISA Considerations..............A fiduciary of any employee benefit plan or
other retirement arrangement subject to the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Internal
Revenue Code of 1986, as amended (the
"Code"), should carefully review with its
legal advisors whether the purchase or
holding of Class A Certificates could give
rise to a transaction prohibited or not
otherwise permissible under ERISA or the
Code. The U.S. Department of Labor has
issued an individual exemption, Prohibited
Transaction Exemption
- --------------------------------------------------------------------------------
S-15
<PAGE>
- --------------------------------------------------------------------------------
90-32, to the Underwriter (the "Exemption").
The Exemption generally exempts from the
application of certain of the prohibited
transaction provisions of ERISA, and the
excise taxes imposed on such prohibited
transactions by Section 4975(a) and (b) of
the Code and Section 502(i) of ERISA,
transactions relating to the purchase, sale
and holding of pass-through certificates
such as the Class A Certificates and the
servicing and operation of asset pools such
as the Trust Fund, provided that certain
conditions are satisfied. The Class A
Certificates may not be purchased by Plans
(as defined herein) until the end of the
Pre-Funding Period. On or after such date, a
fiduciary of any Plan should carefully
review with its legal advisors whether the
purchase or holding of Class A Certificates
could give rise to a transaction prohibited
or not otherwise permissible under ERISA or
the Code. See "ERISA Considerations" in this
Prospectus Supplement.
Legal Investment..................The Class A Certificates will not constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement
Act of 1984.
Federal Income Tax
Status..........................An election will be made to treat the Trust
Fund as a real estate mortgage investment
conduit (a "REMIC") for federal income tax
purposes. The Class A Certificates will be
designated as the "regular interests" in the
REMIC, and the Class R Certificates will be
designated as the sole "residual interest"
in the REMIC.
The Class A Certificates generally will be
treated as newly originated debt instruments
for federal income tax purposes. Beneficial
Owners of the Class A Certificates will be
required to report income thereon in
accordance with the accrual method of
accounting. See "Certain Federal Income Tax
Considerations" in this Prospectus
Supplement and "Certain Federal Income Tax
Consequences--REMIC Securities" in the
Prospectus.
Certificate Ratings...............It is a condition to the issuance of the Class
A Certificates that the Class A Certificates
shall have been rated not lower than [___]
by [___] and [___] by [___] (each, a "Rating
Agency," and together, the "Rating
Agencies") taking into account the
Certificate Insurance Policy issued with
respect to such Certificates. A security
rating is not a recommendation to buy, sell
or hold securities and may be subject to
revision or withdrawal at any time by the
assigning rating organization. The ratings
do not address the possibility that Class A
Certificateholders may suffer a lower than
anticipated yield. See "Ratings" in this
Prospectus Supplement and "Prepayment and
Yield Considerations" in the Prospectus.
- --------------------------------------------------------------------------------
S-16
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Class A Certificates.
Prepayment and Maturity Considerations
Borrowers may prepay their loans at any time and may be required to pay a
prepayment fee if permitted by applicable law and if so provided in the
applicable mortgage note. The majority of the business purpose Mortgage Loans
contain substantial prepayment fees. The consumer purpose Mortgage Loans
generally do not contain prepayment fees. The rate of prepayments of the
Mortgage Loans cannot be predicted and may be affected by a wide variety of
economic, social and other factors, including state and federal income tax
policies, interest rates and the availability of alternative financing.
Therefore, no assurance can be given as to the level of prepayments that the
Trust will experience. The Seller is not aware of any publicly available studies
on the effects of changes in interest rates on prepayment rates for loans such
as the business purpose Mortgage Loans.
A number of factors, in addition to the prepayment fees, may impact on the
prepayment behavior of a pool of loans such as the Mortgage Loans. One such
factor is that the principal balance of the Mortgage Loans is relatively small.
A small principal balance may be easier for a borrower to prepay than a large
balance and therefore a higher prepayment rate may result for a loan pool such
as the Mortgage Pool. In addition, in order to refinance a first priority
mortgage loan, the borrower must generally repay any subordinate mortgage loans.
However, a small principal balance may make refinancing a Mortgage Loan at a
lower interest rate less attractive to the borrower as the perceived impact to
the borrower of lower interest rates on the size of the monthly payment may not
be significant. Other factors that might be expected to affect the prepayment
rate include general economic conditions and the general interest rate
environment, possible future changes affecting the deductibility for federal
income tax purposes of interest payments on home equity loans, the amounts of,
and interest rates on, the underlying senior mortgage loans, and the tendency of
borrowers to use first priority mortgage loans as long-term financing for home
purchase and junior mortgage loans as shorter-term financing for a variety of
purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles. Accordingly, the Mortgage Loans may
experience a higher rate of prepayment than traditional fixed rate mortgage
loans.
Prepayments may result from voluntary early payments by borrowers
(including payments in connection with refinancings of the related senior
mortgage loan or loans), sales of Mortgaged Properties subject to "due-on-sale"
clauses and liquidations due to default, as well as the receipt of proceeds from
physical damage. In addition, repurchases from the Trust of Mortgage Loans
required to be made by the Seller under the Pooling and Servicing Agreement will
have the same effect on the Class A Certificateholders as a prepayment of the
related Mortgage Loans. Prepayments and such repurchases will also accelerate
the actual final maturity of the Class A Certificates. All of the Mortgage Loans
contain "due-on-sale" provisions, and the Servicer will enforce such provisions
to the extent permitted by applicable law. In addition, if the Seller is unable
to cure documentation defects or provide Qualified Substitute Mortgage Loans (as
defined herein) for the affected Mortgage Loans, affected Mortgage Loans will be
repurchased, and the Class A Certificateholders will experience a principal
prepayment.
Except as otherwise described herein, distributions of principal will be
made to the Classes of Class A Certificates according to the priorities
described herein, rather than on a pro rata basis among such Classes. The timing
of commencement of principal distributions to each Class of the Class A
Certificates and the weighted average life of each such Class will be affected
by the rates of prepayment on the Mortgage Loans experienced both before and
after the commencement of principal distributions on each such class. Moreover,
because the Lockout Certificates do not receive (unless the Certificate
Principal Balance of the Class A Certificates, other than the Lockout
Certificates, have been reduced to zero or unused Pre-Funding Account moneys are
distributed to the Holders of the Class A Certificates as described herein) any
portion of principal payments prior to the Distribution Date occurring in
__________ and thereafter will receive (unless the Certificate Principal Balance
of the Class A Certificates, other than the Lockout Certificates, have been
reduced to zero) a disproportionately small or large portion of principal
payments, the weighted average life of the Lockout Certificates will be longer
or shorter than would otherwise be the case, and the effect on the market value
of the Lockout Certificates of changes in market interest rates or market yields
for similar securities may be greater or lesser than for the other Classes of
Class A
S-17
<PAGE>
Certificates entitled to principal distributions. To the extent funds in the
Pre-Funding Account are not to expected to be used to purchase Subsequent
Mortgage Loans by [date], such funds will be used on the __________ Distribution
Date to make a mandatory prepayment of principal to the Holders of the Class A
Certificates, pro rata. In the event that the funds remaining in the Pre-Funding
Account on [date] (i) exceed 1% of the aggregate Principal Balance of the
Mortgage Loans in the Trust on such date, such funds will be used to prepay the
principal of the Class A Certificates, pro rata, in a special distribution on
such date, or (ii) are less than 1% of the aggregate Principal Balance of the
Mortgage Loans in the Trust on such date, such funds will be distributed in
accordance with the provisions of the Pooling and Servicing Agreement. See
"Certain Legal Aspects of the Mortgage Loans and Contracts -- The Mortgage
Loans."
In general, if prevailing interest rates fall significantly below the
interest rates for similar loans at the time of origination, fixed rate mortgage
loans may be subject to higher prepayment rates than if prevailing rates remain
at or above those at the time such Mortgage Loans were originated. Should
prepayments on the Mortgage Loans increase because of such interest rate
reductions, the average life and final maturity of the Class A Certificates may
be shortened. See "Prepayment and Yield Considerations."
The weighted average life of a pool of loans is the average amount of time
that will elapse from the date such pool is formed until each dollar of
principal is scheduled to be repaid to the investors in such pool. Because it is
expected that there will be prepayments and defaults on the Mortgage Loans, the
actual weighted average life of the Class A Certificates is expected to vary
substantially from the weighted average remaining term to stated maturity of the
Mortgage Loans as set forth herein under "The Mortgage Pool -- General." Certain
information, based on specified prepayment assumptions, as to the possible
weighted average life of the Class A Certificates is set forth herein under
"Prepayment and Yield Considerations."
The Originators maintain only limited records of the historical prepayment
experience of its portfolio of loans which the Originators believe do not
provide meaningful information with respect to the Mortgage Loans. The
Originators are not aware of any publicly available reliable information
regarding prepayment experience of mortgage loans such as the business purpose
Mortgage Loans. In any event, no assurance can be given that prepayments on the
Mortgage Loans will conform to any historical experience and no prediction can
be made as to the actual prepayment experience on the Mortgage Loans.
The Subsequent Mortgage Loans and the Pre-Funding Account
If the principal amount of eligible Mortgage Loans available during the
Pre-Funding Period and sold to the Trust is less than 100% of the Original
Pre-Funded Amount, the Depositor will have insufficient Mortgage Loans to sell
to the Trust, thereby resulting in a prepayment of principal to Holders of the
Class A Certificates as described herein. In addition, any conveyance of
Subsequent Mortgage Loans is subject to the following conditions, among others:
(i) each such Subsequent Mortgage Loan must satisfy the representations and
warranties specified in the Unaffiliated Seller's Agreement (as defined herein)
and the Pooling and Servicing Agreement; (ii) the Seller will not select such
Subsequent Mortgage Loans in a manner that it believes is adverse to the
interests of the Holders of the Class A Certificates and the Certificate
Insurer; (iii) the Depositor will deliver certain opinions of counsel with
respect to the validity of the conveyance of such Subsequent Mortgage Loans; and
(iv) as of the Subsequent Cut-Off Date, the Mortgage Loans at that time,
including the Subsequent Mortgage Loans to be conveyed by the Depositor as of
such Subsequent Cut-Off Date, will satisfy the criteria set forth in the Pooling
and Servicing Agreement, as described herein under "The Mortgage Pool --
Conveyance of Subsequent Mortgage Loans."
To the extent that amounts on deposit in the Pre-Funding Account will not
be fully applied to the purchase of Subsequent Mortgage Loans by the Trust by
the end of the Pre-Funding Period, such remaining amount will be applied as a
prepayment of principal paid to the Holders of the Class A Certificates, pro
rata, on the __________ Distribution Date or as a special distribution on [date]
as described herein. The amount of any such prepayment will be applied to the
Class A Certificates. Although no assurances can be given, it is anticipated by
the Depositor that the principal amount of Subsequent Mortgage Loans sold to the
Trust will require the application of substantially all amounts on deposit in
the Pre-Funding Account and that there will be no material principal prepayment
to the Holders of the Class A Certificates.
S-18
<PAGE>
Each Subsequent Mortgage Loan must satisfy the eligibility criteria
referred to above at the time of its addition. However, Subsequent Mortgage
Loans may have been originated by the Originators, purchased by the Seller, and
purchased by the Depositor using credit criteria different from those which were
applied to the Initial Mortgage Loans and may be of a different credit quality.
Therefore, following the transfer of Subsequent Mortgage Loans to the Trust, the
aggregate characteristics of the Mortgage Loans then held in the Trust may vary
from those of the Initial Mortgage Loans included in the Trust Fund. See "The
Mortgage Pool--Conveyance of Subsequent Mortgage Loans".
Underwriting Standards, Limited Operating History and Potential Delinquencies
The Originators market loans, in part, to borrowers who, for one reason or
another, are not able, or do not wish, to obtain financing from traditional
sources such as commercial banks. To the extent that such loans may be
considered to be of a riskier nature than loans made by traditional sources of
financing, the Holders of the Certificates may be deemed to be at greater risk
than if the Mortgage Loans were made to other types of borrowers.
As described herein, the Originators' underwriting standards generally are
less stringent than those of the Federal National Mortgage Association ("FNMA")
or the Federal Home Loan Mortgage Corporation ("FHLMC") with respect to a
borrower's credit history and in certain other respects. A borrower's
non-perfect credit history may not preclude the Originators from making a loan.
As a result of this approach to underwriting, the Mortgage Loans in the Mortgage
Pool may experience higher rates of delinquencies, defaults and foreclosures
than mortgage loans underwritten in a manner which is more similar to the FNMA
and FHLMC guidelines.
Geographic Concentration
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency on loans
generally. Any concentration of the Mortgage Loans in such a region may present
risk considerations in addition to those generally present for similar mortgage
backed securities without such concentration. The Originators originate or
purchase their loans primarily on the eastern seaboard of the United States.
This practice may subject the Mortgage Pool to the risk that a downturn in the
economy in this area of the country would more greatly affect the Mortgage Pool
than if the Mortgage Pool were more diversified. In particular, approximately
_____%, _____% and _____% of the Mortgage Loans by Statistical Calculation Date
Aggregate Principal Balance are secured by Mortgaged Properties located in
__________, __________ and __________, respectively. Because of the relative
geographic concentration of the Mortgage Loans within __________ and __________,
losses on the Mortgage Loans may be higher than would be the case if the
Mortgage Loans were more geographically diversified. For example, certain of the
Mortgaged Properties may be more susceptible to certain types of special
hazards, such as earthquakes and other natural disasters and major civil
disturbances, than residential properties located in other parts of the country.
In addition, the economies of Pennsylvania and New Jersey may be adversely
affected to a greater degree than the economies of other areas of the country by
certain regional developments. If the __________ and __________ residential real
estate markets experience an overall decline in property values after the dates
of origination of the respective Mortgage Loans, then the rates of
delinquencies, foreclosures and losses on the Mortgage Loans may be expected to
increase and such increase may be substantial.
Balloon Payments
As of the Statistical Calculation Date, the Mortgage Loans have been
originated at fixed interest rates for fixed terms ranging from ___ to ___
months. As of the Statistical Calculation Date, approximately _____% of the
Mortgage Loans are not fully amortized over their terms and instead require
substantial balloon payments on their maturity dates (the "Balloon Loans"). See
"The Mortgage Pool." Because the principal balance of such Mortgage Loans does
not fully amortize over the term of the Mortgage Loan, such Mortgage Loans may
involve greater risks of default than Mortgage Loans whose principal balance is
fully amortized over the term of the Mortgage Loan. The borrower's ability to
pay the balloon amount due at maturity of such a Mortgage Loan will depend on
the borrower's ability to obtain adequate refinancing or funds from other
sources to repay the Mortgage Loan.
The Originators believe that the Mortgage Loans are or will be adequately
collateralized and that, in light of the collateralization and the relatively
small average size of the Mortgage Loans, the borrowers will have the
S-19
<PAGE>
ability to obtain adequate refinancing or secure funds from other sources. See
"The Mortgage Pool." However, the Originators have had only a very limited
historical default experience with respect to its portfolio when loans with
balloon payments come due and the Originators do not believe that the experience
provides meaningful information with respect to the Mortgage Loans.
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 Class A Certificateholders could occur.
Nature of Collateral; Second Lien Mortgage Loans
General economic conditions have an impact on the ability of borrowers to
repay loans. Loss of earnings, illness and other similar factors may lead to an
increase in delinquencies and bankruptcy filings by borrowers. In the event of a
bankruptcy of a mortgagor, it is possible that the Trust could experience a loss
with respect to such mortgagor's Mortgage Loan. In conjunction with a
mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan, thus either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to the Trust, any remaining balance
on such Mortgage Loan may not be recoverable.
As of the Statistical Calculation Date, approximately _____% of the
Mortgage Loans are secured by Second Liens or Multiple Liens (each, as defined
below) which are subordinate to the rights of the mortgagee under related first
mortgages. See "The Mortgage Pool." As a result, the proceeds from any
liquidation, insurance or condemnation proceedings will be available to satisfy
the principal balance of such a Mortgage Loan only to the extent that the
claims, if any, of each related first mortgagee are satisfied in full, including
any related foreclosure costs. In addition, a mortgagee of a second mortgage may
not foreclose on the Mortgaged Property securing such mortgage unless it
forecloses subject to the related first mortgage, in which case it must either
pay the entire amount of each first 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 business
and consumer purpose home equity loans in its portfolio, it is the Servicer's
practice to satisfy or reinstate each such first mortgage at or prior to the
foreclosure sale only to the extent that it determines any amount so paid will
be recoverable from future payments and collections on the related loans or
otherwise. The Trust will have no source of funds to satisfy any first mortgage
or make payments due to any first mortgagee.
An overall decline in the residential real estate market could adversely
affect the values of the Mortgaged Properties such that the outstanding
principal balances, together with the primary senior financing thereon, equals
or exceeds the value of the Mortgaged Properties. Such a decline would adversely
affect the position of a second mortgagee before having such an effect on that
of the related first mortgagee. A rise in interest rates over a period of time
and the general condition of the Mortgaged Property as well as other factors may
have the effect of reducing the value of the Mortgaged Property from the
appraised value at the time the Mortgage Loan was originated. If there is a
reduction in value of the Mortgaged Property, the ratio of the amount of the
Mortgage Loan to the value of the Mortgaged Property may increase over what it
was at the time the Mortgage Loan was originated. Such an increase may reduce
the likelihood of liquidation or other proceeds being sufficient to satisfy the
Mortgage Loan after satisfaction of any first liens.
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 Class A Certificateholders. An action to
foreclose on the Mortgaged Property securing a Mortgage Loan is regulated by
state statutes and rules and is subject to many of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
several years to complete. Furthermore, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a Mortgaged
Property. In the event of a default by a Mortgagor, these restrictions, among
other things, may impede the ability of the Servicer to foreclose on or sell the
Mortgaged Property or to obtain Net Liquidation Proceeds sufficient to repay all
amounts due on the related Mortgage Loan. In addition, the Servicer will be
entitled to deduct from collections received during the preceding Due Period all
expenses reasonably incurred in attempting to recover amounts due on Liquidated
Mortgage Loans and not yet repaid, including
S-20
<PAGE>
payments to first lienholders, legal fees and costs of legal action, real estate
taxes and maintenance and preservation expenses, thereby reducing collections
available to Class A Certificateholders. See "The Originators, the Seller and
the Servicer -- Delinquency and Loan Loss Experience" and "Description of the
Certificates."
Liquidation expenses with respect to defaulted loans do not vary directly
with the outstanding principal balance of the loan at the time of default.
Therefore, assuming that a servicer took the same steps in realizing upon a
defaulted loan having a small remaining principal balance as it would in the
case of a defaulted loan having a large remaining principal balance, the amount
realized after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the small loan than would be the case with the
defaulted loan having a large remaining principal balance. Because the average
outstanding principal balance of the Mortgage Loans is relatively small, Net
Liquidation Proceeds on Liquidated Mortgage Loans may be small as a percentage
of the principal balance of a Mortgage Loan.
Decline in Real Estate Values
No assurance can be given that the values of the Mortgaged Properties have
remained or will remain at their levels as of the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding balances of the
Mortgage Loans (and, in the case of Second Liens and Multiple Liens (each as
defined herein) the outstanding balance of the related first mortgage) become
equal to or greater than the value of the Mortgaged Properties, the actual rates
of delinquencies, foreclosures and losses on these Mortgaged Properties could be
higher than losses now generally experienced in the mortgage lending industry.
Payments on the Mortgage Loans
The scheduled monthly payment dates with respect to the Mortgage Loans
occur throughout a month. When a principal prepayment in full is made on a
Mortgage Loan, the Mortgagor is charged interest only up to the date of such
prepayment, instead of for a full month. However, such principal receipts will
only be passed through to the Certificateholders once a month, on the
Distribution Date which follows the calendar month in which such prepayment was
received by the Servicer. The Servicer is obligated to pay, without any right of
reimbursement, those shortfalls in interest collections payable on the Class A
Certificates that are attributable to the difference between the interest paid
by a mortgagor in connection with a prepayment in full and 30-days' interest (in
such case at the related Mortgage Interest Rate, less the Servicing Fee, such
shortfalls being "Prepayment Interest Shortfalls"), but only to the extent of
the Servicing Fee for the related Due Period (any such payment, "Compensating
Interest"). Prepayment Interest Shortfalls and Civil Relief Act Interest
Shortfalls will not be covered by payments under the Certificate Insurance
Policy.
Prepayment Interest Shortfalls that are not paid by the Servicer as
Compensating Interest, together with Civil Relief Act Interest Shortfalls, will
be allocated among the Holders of Class A Certificates on a pro rata basis to
reduce the interest otherwise payable on the Class A Certificates. See
"Description of the Certificates -- Flow of Funds" in this Prospectus
Supplement.
Effect of Mortgage Loan Yield on the Class A-1 Pass-Through Rate
The Class A-1 Pass-Through Rate is based upon the value of an adjustable
index (one-month LIBOR), while the Mortgage Interest Rates on the Mortgage Loans
are fixed. Consequently, the interest which becomes due on such Mortgage Loans
(net of the Servicing Fees, the Trustee Fees and the Certificate Insurer premium
amounts) during any Due Period may be less than the amount of interest that
would accrue at one-month LIBOR plus the margin on the Class A-1 Certificates
during the related Accrual Period, and will be limited to such lower amount. The
Class A-1 Certificates do not contain any "carry-forward" or "catch-up" feature
if the amount of interest paid is so limited.
S-21
<PAGE>
Effect of Losses; Lockout Certificates
Because principal distributions are paid to certain Classes of Class A
Certificates before other such Classes, Holders of Classes of Class A
Certificates having a later priority of payments bear a greater risk of losses
(because such Certificates will represent an increasing percentage interest in
the Trust Fund during the period prior to the commencement of distributions of
principal thereon) than Holders of Classes having earlier priorities for
distribution of principal. In particular, with respect to the Lockout
Certificates, during certain periods, no principal payments or a
disproportionately small portion of the Class A Principal Distribution Amount
will be distributed on the Lockout Certificates, and during certain other
periods, a disproportionately large portion of the Class A Principal
Distribution Amount will be distributed on the Lockout Certificates. Unless the
Certificate Principal Balance of the Class A Certificates (other than the
Lockout Certificates) has been reduced to zero or unused Pre-Funding Account
moneys are distributed to the Holders of the Class A Certificates as described
herein, the Lockout Certificates will not be entitled to receive any
distributions of principal payments prior to the Distribution Date in October
2000.
Legal Considerations
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and may require licensing of the Originators. In
addition, many states have other laws, such as consumer protection laws, unfair
and deceptive practices acts and debt collection practices acts which may apply
to the origination or collection of the Mortgage Loans. Depending on the
provisions of the applicable law, violations of these laws may limit the ability
of the Servicer to collect all or part of the principal of or interest on the
Mortgage Loans, may entitle the borrower to a refund of amounts previously paid
and, in addition, could subject the Trust to damages and administrative
enforcement. See "Certain Legal Aspects of the Mortgage Loans and Contracts" in
the Prospectus.
The Mortgage Loans are also subject to federal laws, including: (i) the
Federal Truth in Lending Act and Regulation Z promulgated thereunder as to
consumer purpose Mortgage Loans, which require certain disclosures to the
borrowers regarding the terms of such Mortgage Loans; (ii) the Equal Credit
Opportunity Act and Regulation B promulgated thereunder as to the business and
consumer purpose Mortgage Loans, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; and (iii) the Fair Credit Reporting
Act as to the business and consumer purpose Mortgage Loans, which regulates the
use and reporting of information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Mortgage Loans and in addition could subject the Trust to damages and
administrative enforcement. In addition, under the terms of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the "Civil Relief Act") or
similar state legislation, the interest charged and the ability of the Servicer
to foreclose on loans to certain Mortgagors may be limited. Generally, under the
Civil Relief Act, a mortgagor who enters military service after the origination
of such mortgagor's mortgage loan (including a mortgagor who was in reserve
status and is called to active duty after origination of the mortgage loan),
shall not be charged interest (including fees and charges) above an annual rate
of 6% during the period of such mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. The Civil Relief Act applies to
mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Civil Relief Act applies to
mortgagors who enter military service (including reservists who are called to
active duty) after origination of the related mortgage loan, no information can
be provided as to the number of loans that may be affected by the Civil Relief
Act. Application of the Civil Relief Act would adversely affect, for an
indeterminate period of time until cessation of active duty status, the ability
of the Servicer to collect full amounts of interest on certain of the Mortgage
Loans to which it applies, if any. Any shortfall in interest collections on any
Mortgage Loan resulting from the application of the Civil Relief Act (such
shortfall, a "Civil Relief Act Interest Shortfall") will result in a reduction
of the amounts distributable to the Class A Certificateholders, and would not be
covered by Periodic Advances or the Certificate Insurance Policy. The Servicer
is not obligated to offset any of the Servicing Fee against, or to provide any
other funds to cover, any Civil Relief Act Interest Shortfall. In addition, the
Civil Relief Act imposes limitations which would impair the ability of the
Servicer to foreclose on an affected Mortgage Loan during the Mortgagor's period
of active duty status and, under certain circumstances, during an additional
period thereafter. See "Certain Legal Aspects of the Mortgage Loans and
Contracts" in the Prospectus.
S-22
<PAGE>
It is possible that some of the consumer purpose Mortgage Loans will be
subject to the Riegle Community Development and Regulatory Improvement Act of
1994 (the "Riegle Act") which incorporates the Home Ownership and Equity
Protection Act of 1994. The Riegle Act adds certain additional provisions to the
Truth in Lending Act which additions are reflected in Regulation Z, the
implementing regulation of the Truth in Lending Act. These provisions impose
additional disclosure and other requirements on creditors with respect to
certain non-purchase money mortgage loans with high interest rates or high
upfront fees and charges. In general, mortgage loans within the purview of the
Riegle Act have annual percentage rates 10 percentage points over the yield on
Treasury Securities of comparable maturity and/or fees and points which exceed
the greater of 8% of the total loan amount or $400. These provisions of the
Riegle Act apply on a mandatory basis to all mortgage loans originated on or
after October 1, 1995. These provisions can impose specific statutory
liabilities upon creditors who fail to comply with their provisions and may
affect the enforceability of the related loans. In addition, any assignee of the
creditor would generally be subject to all claims and defenses that the consumer
could assert against the creditor, including, without limitation, the right to
rescind the mortgage loan.
THE MORTGAGE POOL
Difference between Statistical Calculation Date and Closing Date Pools
The statistical information presented in this Prospectus Supplement
concerning the Mortgage Loans is based on the pool as of __________ (such date,
the "Statistical Calculation Date"). The pool aggregated $__________ as of the
Statistical Calculation Date. The Depositor expects that the actual pool as of
the Closing Date will represent approximately $__________ in Mortgage Loans. The
additional Mortgage Loans will represent Mortgage Loans acquired or to be
acquired by the Depositor on or prior to the Closing Date. In addition, with
respect to the pool as of the Statistical Calculation Date as to which
statistical information is presented herein, some amortization of the pool will
occur prior to the Closing Date. Moreover, certain Mortgage Loans included in
the pool as of the Statistical Calculation Date may prepay in full, or may be
determined not to meet the eligibility requirements for the final pool, and may
not be included in the final pool. As a result of the foregoing, the statistical
distribution of characteristics as of the Closing Date for the final Mortgage
Loan pool will vary somewhat from the statistical distribution of such
characteristics as of the Statistical Calculation Date as presented in this
Prospectus Supplement, although such variance will not be material. In the event
that the Depositor does not, as of the Closing Date, have the full amount of
Mortgage Loans which the Depositor expects to sell to the Trust on such date,
the Seller will increase the size of the Pre-Funding Account and the Capitalized
Interest Account. Unless otherwise noted, all statistical percentages in this
Prospectus Supplement are measured by Statistical Calculation Date Aggregate
Principal Balance.
General
Additional Mortgage Loans (the "Subsequent Mortgage Loans") are intended
to be purchased by the Trust from the Depositor from time to time on or before
[date] from funds on deposit in the Pre-Funding Account. The Initial Mortgage
Loans and the Subsequent Mortgage Loans are referred to herein collectively as
the "Mortgage Loans." The Subsequent Mortgage Loans to be purchased by the
Trust, if available, will be originated or purchased by the Originators, sold by
the Originators to the Seller, sold by the Seller to the Depositor and then sold
by the Depositor to the Trust. The Pooling and Servicing Agreement will provide
that the Mortgage Loans, following the conveyance of the Subsequent Mortgage
Loans, must in the aggregate conform to certain specified characteristics
described below under " -- Conveyance of Subsequent Mortgage Loans."
Unless otherwise noted, all statistical percentages in this Prospectus
Supplement are approximate and are measured by the aggregate Principal Balance
of the related Mortgage Loans in relation to the Statistical Calculation Date
Aggregate Principal Balance, in each case, as of the Statistical Calculation
Date.
The Mortgage Loans will be predominantly business or consumer purpose
residential home equity loans used (x) to refinance an existing mortgage loan,
(y) to consolidate debt, or (z) to obtain cash proceeds by borrowing against the
Mortgagor's equity in the related Mortgaged Property in order to provide funds
for (i) working capital for business, (ii) business expansion, (iii) equipment
acquisition, or (iv) personal acquisitions. The Mortgaged Properties securing
the Mortgage Loans consist primarily of single-family residences (which may be
detached, part of a two-to four-family dwelling, a condominium unit or a unit in
a planned unit development). The Mortgaged
S-23
<PAGE>
Properties may be owner-occupied (which includes second and vacation homes) and
non-owner occupied investment properties. As of the Statistical Calculation
Date, the pool of Mortgage Loans consists of approximately _____% of Mortgage
Loans secured by first lien mortgages ("First Liens") on the related Mortgaged
Properties, approximately _____% of Mortgage Loans secured by second lien
mortgages ("Second Liens") on the related Mortgaged Properties and approximately
_____% of Mortgage Loans secured by liens on more than one Mortgaged Property,
one of which is a second lien mortgage ("Multiple Liens").
As of the Statistical Calculation Date, each of the Mortgage Loans had
remaining terms to maturity of no greater than ___ months and had a Mortgage
Interest Rate of at least _____% per annum.
The Combined Loan-to-Value Ratios ("CLTVs") described herein were
calculated based upon the appraised values of the related Mortgaged Properties
at the time of origination (the "Appraised Values"). No assurance can be given
that such appraised values of the Mortgaged Properties have remained or will
remain at their levels on the dates of origination of the related Mortgage
Loans. If property values decline such that the outstanding balances of the
Mortgage Loans, together with the outstanding balances of any first liens,
become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those heretofore experienced by the Servicer, as set forth below under "The
Originators, the Seller and the Servicer -- Delinquency and Loan Loss
Experience," and in the mortgage lending industry.
As of the Statistical Calculation Date, the Mortgage Loans consist of ___
Mortgage Loans under which the related Mortgaged Properties are located in ___
states, as set forth herein. As of the Statistical Calculation Date, the
Mortgage Loans had an aggregate Principal Balance of $__________, the minimum
Principal Balance of any of the Mortgage Loans was $__________, the maximum
principal balance thereof was $__________, and the average principal balance of
the Mortgage Loans was $__________. As of the Statistical Calculation Date,
Mortgage Interest Rates on the Mortgage Loans ranged from _____% to _____% per
annum, and the weighted average Mortgage Interest Rate of the Mortgage Loans was
approximately _____% per annum. As of the Statistical Calculation Date, the
original term to stated maturity of the Mortgage Loans ranged from ___ months to
___ months, the remaining term to stated maturity ranged from ___ months to ___
months, the weighted average original term to stated maturity was approximately
___ months and the weighted average remaining term to stated maturity was
approximately ___ months. As of the Statistical Calculation Date, no Mortgage
Loan had a stated maturity later than __________. Approximately _____% of the
aggregate Principal Balance of the Mortgage Loans as of the Statistical
Calculation Date require monthly payments of principal that will fully amortize
the Mortgage Loans by their respective maturity dates, and approximately _____%
of the aggregate Principal Balance of the Mortgage Loans are Balloon Loans. The
weighted average CLTV of the Mortgage Loans as of the Statistical Calculation
Date was approximately _____%. As of the Statistical Calculation Date, Mortgage
Loans representing, in the aggregate, approximately _____% of the aggregate
Principal Balance of the Mortgage Loans were secured by First Lien mortgages and
approximately _____% of the aggregate Principal Balance of the Mortgage Loans
were secured by Second Lien and Multiple Lien mortgages.
S-24
<PAGE>
GEOGRAPHIC DISTRIBUTION
Aggregate Principal % of Statistical
Balance as of Calculation Date
Number of the Statistical Aggregate
State Mortgage Loans Calculation Date Principal Balance
----- -------------- ---------------- -----------------
TOTAL..............
DISTRIBUTION OF CLTV RATIOS
Aggregate Principal % of Statistical
Balance as of Calculation Date
Range of Number of the Statistical Aggregate
CLTV Ratios Mortgage Loans Calculation Date Principal Balance
----------- -------------- ------------------- -----------------
TOTAL
S-25
<PAGE>
DISTRIBUTION OF MORTGAGE RATES
Aggregate Principal % of Statistical
Balance as of Calculation Date
Range of Number of the Statistical Aggregate
Mortgage Rates Mortgage Loans Calculation Date Principal Balance
- -------------- -------------- ------------------- -----------------
TOTAL
S-26
<PAGE>
DISTRIBUTION OF ORIGINAL TERMS TO MATURITY
(in months)
Aggregate Principal % of Statistical
Range of Balance as of Calculation Date
Original Terms Number of the Statistical Aggregate
(in months) Mortgage Loans Calculation Date Principal Balance
- -------------- -------------- ------------------- -----------------
TOTAL.............
DISTRIBUTION OF REMAINING TERMS TO MATURITY
(in months)
Aggregate Principal % of Statistical
Range of Balance as of Calculation Date
Remaining Terms Number of the Statistical Aggregate
(in months) Mortgage Loans Calculation Date Principal Balance
- -------------- -------------- ------------------- -----------------
TOTAL.................
S-27
<PAGE>
DISTRIBUTION OF ORIGINAL PRINCIPAL BALANCES
Aggregate Principal % of Statistical
Balance as of Calculation Date
Range of Original Number of the Statistical Aggregate
Principal Balances Mortgage Loans Calculation Date Principal Balance
- ------------------ -------------- ------------------- -----------------
TOTAL...........
S-28
<PAGE>
DISTRIBUTION OF CURRENT PRINCIPAL BALANCES
Aggregate Principal % of Statistical
Balance as of Calculation Date
Range of Current Number of the Statistical Aggregate
Principal Balances Mortgage Loans Calculation Date Principal Balance
- ------------------ -------------- ------------------- -----------------
TOTAL.................
S-29
<PAGE>
DISTRIBUTION BY LIEN STATUS
Aggregate Principal % of Statistical
Balance as of Calculation Date
Number of the Statistical Aggregate
Lien Status Mortgage Loans Calculation Date Principal Balance
- ------------------ -------------- ------------------- -----------------
TOTAL..............
DISTRIBUTION BY AMORTIZATION TYPE
Aggregate Principal % of Statistical
Balance as of Calculation Date
Number of the Statistical Aggregate
Amortization Type Mortgage Loans Calculation Date Principal Balance
- ------------------ -------------- ------------------- -----------------
TOTAL..............
DISTRIBUTION OF OCCUPANCY STATUS
Aggregate Principal % of Statistical
Balance as of Calculation Date
Number of the Statistical Aggregate
Occupancy Status Mortgage Loans Calculation Date Principal Balance
- ------------------ -------------- ------------------- -----------------
TOTAL..............
DISTRIBUTION OF PROPERTY TYPES
Aggregate Principal % of Statistical
Balance as of Calculation Date
Number of the Statistical Aggregate
Property Type Mortgage Loans Calculation Date Principal Balance
------------- -------------- ------------------- -----------------
TOTAL................
S-30
<PAGE>
DISTRIBUTION BY COLLATERAL CLASS
Aggregate Principal % of Statistical
Balance as of Calculation Date
Number of the Statistical Aggregate
Collateral Class Mortgage Loans Calculation Date Principal Balance
- ---------------- -------------- ------------------- -----------------
TOTAL................
DISTRIBUTION BY PURPOSE
Aggregate Principal % of Statistical
Balance as of Calculation Date
Number of the Statistical Aggregate
Purpose Mortgage Loans Calculation Date Principal Balance
------- -------------- ------------------- -----------------
TOTAL................
Conveyance of Subsequent Mortgage Loans
The Pooling and Servicing Agreement permits the Trust to acquire
approximately $__________ aggregate Principal Balance of Subsequent Mortgage
Loans. Accordingly, the statistical characteristics of the Mortgage Pool will
vary as of any Subsequent Cut-Off Date upon the acquisition of Subsequent
Mortgage Loans.
The obligation of the Trust to purchase the Subsequent Mortgage Loans on a
Subsequent Transfer Date is subject to the following requirements: (i) such
Subsequent Mortgage Loan may not be ___ or more days contractually delinquent as
of the related Subsequent Cut-Off Date; (ii) the original term to maturity of
such Subsequent Mortgage Loan may not exceed ___ months; (iii) such Subsequent
Mortgage Loan must have a Mortgage Interest Rate of at least _____%; (iv) the
purchase of the Subsequent Mortgage Loans is consented to by the Certificate
Insurer and the Rating Agencies; (v) the Principal Balance of any such
Subsequent Mortgage Loan may not exceed $__________; (vi) no more than ___% of
such Subsequent Mortgage Loans may be second liens; (vii) no such Subsequent
Mortgage Loan shall have a CLTV of more than, (a) for consumer purpose loans,
___%, and (b) for business purpose loans, ___%; (viii) no more than ___% of such
Subsequent Mortgage Loans may be Balloon Loans; (ix) no more than ___% of such
Subsequent Mortgage Loans may be secured by mixed-use properties, commercial
properties, or four or more unit multifamily properties; (x) no more than ___%
of such Subsequent Mortgage Loans may be secured by commercial properties; and
(xi) following the purchase of such Subsequent Mortgage Loans by the Trust, the
Mortgage Loans (including the Subsequent Mortgage Loans) (a) will have a
weighted average Mortgage Interest Rate, (I) for consumer purpose loans, of at
least _____% and (II) for business purpose loans, of at least _____%; and (b)
will have a weighted average CLTV of not more than (I) for consumer purpose
loans, _____%, and (II) for business purpose loans, _____%. The Pooling and
Servicing Agreement will provide that any of such requirements may be waived or
modified in any respect upon prior written consent of the Certificate Insurer.
THE ORIGINATORS, THE SELLER AND THE SERVICER
General
[insert]
S-31
<PAGE>
The Originators
[insert]
Underwriting Guidelines
[insert]
The Servicer
[insert]
Delinquency and Loan Loss Experience
[insert]
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, a Class A Certificate will be directly related to the rate
of payment of principal of the Mortgage Loans, including for this purpose
voluntary payment in full of Mortgage Loans prior to stated maturity,
liquidations due to defaults, casualties and condemnations, and repurchases of
or substitutions for Mortgage Loans by [__________] or an affiliate of
[__________] as required or permitted under the Pooling and Servicing Agreement
or the Unaffiliated Seller's Agreement.
The actual rate of principal prepayments on pools of mortgage loans is
influenced by a variety of economic, tax, geographic, demographic, social, legal
and other factors and has fluctuated considerably in recent years. In addition,
the rate of principal prepayments may differ among pools of mortgage loans at
any time because of specific factors relating to the mortgage loans in the
particular pool, including, among other things, the age of the mortgage loans,
the geographic locations of the properties securing the loans and the extent of
the mortgagors' equity in such properties, and changes in the mortgagors'
housing needs, job transfers and unemployment.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates fall significantly below the interest rates at the time of origination,
mortgage loans may be subject to higher prepayment rates than if prevailing
rates remain at or above those at the time such mortgage loans were originated.
Conversely, if prevailing interest rates rise appreciably above the interest
rates at the time of origination, mortgage loans may experience a lower
prepayment rate than if prevailing rates remain at or below those at the time
such mortgage loans were originated. However, there can be no assurance that the
Mortgage Loans will conform to the prepayment experience of conventional
mortgage loans or to any past prepayment experience or any published prepayment
forecast. No assurance can be given as to the level of prepayments on Mortgage
Loans that the Trust Fund will experience.
As indicated above, if purchased at other than par, the yield to maturity
on a Class A Certificate will be affected by the rate of the payment of
principal on the Mortgage Loans. If the actual rate of payments on the Mortgage
Loans is slower than the rate anticipated by an investor who purchases a Class A
Certificate at a discount, the actual yield to such investor will be lower than
such investor's anticipated yield. If the actual rate of payments on the
Mortgage Loans is faster than the rate anticipated by an investor who purchases
a Class A Certificate at a premium, the actual yield to such investor will be
lower than such investor's anticipated yield. Because the Lockout Certificates
do not receive (unless the Certificate Principal Balances of the Class A
Certificates, other than the Lockout Certificates, have been reduced to zero or
unused Pre-Funding Account moneys are distributed to the Holders of the Class A
Certificates as described herein) any portion of principal payments prior to the
Distribution Date occurring in __________ and will receive (unless the
Certificate Principal Balances of the Class A Certificates, other than the
Lockout Certificates, have been reduced to zero) a disproportionately small or
large portion of the Class A Principal Distribution Amount thereafter, the
weighted average life of the Lockout Certificates will be longer or shorter than
would otherwise be the case, and the effect on the market value of the Lockout
Certificates of
S-32
<PAGE>
changes in market interest rates or market yields for similar securities may be
greater or lesser than for the other Classes of Class A Certificates entitled to
principal distributions.
The final distribution date is expected to be __________ for the Class A-1
Certificates, __________ for the Class A-2 Certificates, __________ for the
Class A-3 Certificates, __________ for the Class A-4 Certificates, __________
for the Class A-5 Certificates and __________ for the Class A-6 Certificates
(each, a "Final Scheduled Maturity Date"). Each such Final Scheduled Maturity
Date was calculated using the following methodolgy assumptions: (i) with respect
to the Class A-1 Certificates, the Class A-2 Certificates, the Class A-3
Certificates and the Class A-4 Certificates, (x) the Modeling Assumptions (as
defined below), (y) 0% of the Prepayment Assumption (as defined below) and (z)
no Net Monthly Excess Cashflow is applied as an accelerated payment of principal
on the Class A Certificates, and (ii) with respect to the Class A-5 Certificates
and the Class A-6 Certificates, such Final Scheduled Maturity Date is 13 months
after the final stated maturity date of the Mortgage Loan having the latest
maturity date, assuming a Subsequent Mortgage Loan having a final stated
maturity date of __________ is purchased by the Trust. The weighted average life
of the Class A Certificates is likely to be shorter than would be the case if
payments actually made on the Mortgage Loans conformed to the foregoing
assumptions, and the final Distribution Date with respect to any Class of the
Class A Certificates could occur significantly earlier than the Final Scheduled
Maturity Date because (i) prepayments (including, for this purpose, prepayments
attributable to foreclosure, liquidation, repurchase and the like) on Mortgage
Loans are likely to occur, (ii) with respect to the Class A-5 Certificates and
the Class A-6 Certificates, thirteen months have been added to obtain the Final
Scheduled Maturity Date above, (iii) the overcollateralization provisions of the
Trust result in the application of excess interest to the payment of principal
and (iv) the Servicer may cause a liquidation of the Trust Fund when the
aggregate outstanding principal amount of the Mortgage Loans is less than ___%
of the sum of (a) the Cut-Off Date Aggregate Principal Balance and (b) the
Original Pre-Funded Amount.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security is scheduled to be repaid to an investor. The weighted average
life of the Class A Certificates will be influenced by the rate at which
principal of the Mortgage Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
liquidations due to default).
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The model used in this Prospectus Supplement
("Home Equity Prepayment" or "HEP") is a prepayment assumption (the "Prepayment
Assumption") which represents an assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of mortgage loans for the
life of such mortgage loans. 23% HEP assumes a constant prepayment rate of 2.3%
per annum of the then outstanding principal balance of the Mortgage Loans in the
first month of the life of the Mortgage Loans and an additional 2.3% per annum
in each month thereafter up to and including the tenth month. Beginning in the
eleventh month and in each month thereafter during the life of the Mortgage
Loans, 23% HEP assumes a constant prepayment rate of 23% per annum. As used in
the table below, 0% Prepayment Assumption assumes prepayment rates equal to 0%
of the Prepayment Assumption, i.e., no prepayments on the mortgage loans having
the characteristics described below. The Prepayment Assumption does not purport
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
related Mortgage Loans.
The following table has been prepared on the basis of the following
assumptions (collectively, the "Modeling Assumptions"):
(i) The Mortgage Loans prepay at the indicated percentage of the
Prepayment Assumption, (ii) distributions on the Certificates are received in
cash on the [___] day of each month commencing in __________, (iii) no defaults
or delinquencies in, or modifications, waivers or amendments respecting the
payment by the mortgagors of principal and interest on the Mortgage Loans occur,
(iv) scheduled payments are assumed to be received on the last day of each month
commencing in __________ (or as set forth in the following table) and
prepayments represent payments in full of individual Mortgage Loans and are
assumed to be received on the last day of each month, commencing in __________
(or as set forth in the following table) and include 30-days' interest thereon,
(v) the Class A-1 Pass-Through Rate remains constant at _____% per annum, (vi)
the Certificates are purchased on [date], (vii) the Specified Subordinated
Amount is as set forth in the Pooling and Servicing Agreement, and (viii) the
Mortgage Pool consists of thirteen Mortgage Loans having the following
characteristics:
S-33
<PAGE>
Original Remaining Remaining
Principal Mortgage Amortizing Term Amortizing Term Term to Maturity
Balance ($) Interest Rate (%) (in months) (in months) (in months)
- ---------- ----------------- --------------- --------------- ---------------
(1) Assumes transfer to the Trust in __________ with the characteristics set
forth above. Scheduled payments are assumed to be received on the last day
of each month commencing in__________ . Prepayments are assumed to be
received on the last day of each month commencing in __________ and include
30-days' interest thereon.
(2) Assumes transfer to the Trust in __________ with the characteristics set
forth above. Scheduled payments are assumed to be received on the last day
of each month commencing in __________. Prepayments are assumed to be
received on the last day of each month commencing in __________ and include
30-days' interest thereon.
During the first Due Period, interest is assumed to be available for payment to
the Class A Certificates at a rate of _____% per annum.
During the first two Due Periods, interest is assumed to be available for
payment to the Class A Certificates at a rate of _____% per annum.
Based upon the foregoing Modeling Assumptions, the tables below indicate
the weighted average life and earliest retirement date of the Class A
Certificates assuming that the Mortgage Loans prepay according to the indicated
percentages of the Prepayment Assumption.
Weighted Average Lives
Class A-1 Certificates
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(2) Date (2)
--------------- ------------------- -------------------
S-34
<PAGE>
Class A-2 Certificates
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(2) Date (2)
--------------- ------------------- -------------------
Class A-3 Certificates
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(2) Date (2)
--------------- ------------------- -------------------
S-35
<PAGE>
Class A-4 Certificates
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(2) Date (2)
--------------- ------------------- -------------------
Class A-5 Certificates
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(2) Date (2)
--------------- ------------------- -------------------
S-36
<PAGE>
Class A-6 Certificates
Prepayment Weighted Average Earliest Retirement
Assumption (HEP) Life in Years (1)(2) Date (2)
--------------- ------------------- -------------------
(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
Certificate Principal Balance.
(2) Determined assuming no early termination of the Trust Fund occurs.
----------------------
There is no assurance that prepayments will occur or, if they do occur,
that they will occur at any percentage of HEP.
The Pooling and Servicing Agreement provides that none of the
Certificate Insurer, the Trust, the Trustee, the Seller, the Depositor, the
Originators or the Servicer will be liable to any Certificateholder or Holder
for any loss or damage incurred by such Certificateholder or Holder as a result
of any difference in the rate of return received by such Certificateholder or
Holder as compared to the applicable Pass-Through Rate, with respect to any
Holder of Class A Certificates upon reinvestments of the funds received in
connection with any premature repayment of principal on the Certificates,
including any such repayment resulting from any prepayment by the Mortgagor, any
liquidation of such Mortgage Loan, or any repurchase of or substitution for any
Mortgage Loan by the Seller or the Servicer.
DESCRIPTION OF THE CERTIFICATES
General
The Class A-1 Certificates, the Class A-2 Certificates, the Class A-3
Certificates, the Class A-4 Certificates, the Class A-5 Certificates and the
Class A-6 Certificates (collectively, the "Class A Certificates") will be issued
by the Trust. In addition to the Class A Certificates, the Trust will also issue
the Class R Certificates. The Class R Certificates have been designated as the
single "residual interest" for purposes of the Code. The Class R Certificates
are not being offered hereby.
Each Class A Certificate represents a certain fractional undivided
ownership interest in the Trust Fund created and held pursuant to the Pooling
and Servicing Agreement, subject to the limits and the priority of distribution
described therein. The Trust Fund consists of (a) the Mortgage Loans, together
with the mortgage files relating thereto and all collections thereon and
proceeds thereof collected after the Cut-Off Date (other than monthly payments
due on each Mortgage Loan up to and including any Due Date occurring on or prior
to __________), (b) such assets as from time to time are identified as REO
Property and collections thereon and proceeds thereof, (c)
S-37
<PAGE>
assets that are deposited in the Accounts (as defined herein), including amounts
on deposit in the Accounts and invested in accordance with the Pooling and
Servicing Agreement ("Permitted Investments"), (d) the Trustee's rights with
respect to the Mortgage Loans under all insurance policies required to be
maintained pursuant to the Pooling and Servicing Agreement and any insurance
proceeds, (e) Liquidation Proceeds and (f) released mortgaged property proceeds.
In addition, the Seller will cause the Certificate Insurer to issue the
Certificate Insurance Policy under which it will guarantee payments to the Class
A Certificateholders as described herein.
Book-Entry Registration
The Class A Certificates will be issued only in book-entry form, in
denominations of $1,000 initial principal balance and integral multiples of
$1,000 in excess thereof, except that one Class A Certificate of each Class may
be issued in a different amount.
The Beneficial Owners may elect to hold their Class A Certificates through
DTC in the United States, or CEDEL or Euroclear if they are participants in such
systems ("Participants"), or indirectly through organizations which are
Participants in such systems. The Book-Entry Certificates will be issued in one
or more certificates per Class of Class A Certificates which in the aggregate
equal the Certificate Principal Balance of such Class A Certificates and will
initially be registered in the name of Cede, the nominee of DTC. CEDEL and
Euroclear will hold omnibus positions on behalf of their Participants through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Chase will act as depositary for CEDEL and Morgan will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations representing
principal amounts of $1,000. Except as described below, no Beneficial Owner will
be entitled to receive a physical certificate representing such Certificate (a
"Definitive Certificate"). Unless and until Definitive Certificates are issued,
it is anticipated that the only "Holder" of such Class A Certificates will be
Cede, as nominee of DTC. Beneficial Owners will not be Holders as that term is
used in the Pooling and Servicing Agreement. Beneficial Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's Ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of CEDEL or Euroclear, as appropriate).
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participating organizations Participants and to facilitate
the clearance and settlement of securities transactions between Participants
through electronic book-entries, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers
(including the Underwriter), banks, trust companies and clearing corporations.
Indirect access to the DTC system also is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Certificates, such as the Class A Certificates, among Participants on
whose behalf it acts with respect to the Book-Entry Certificates and to receive
and transmit distributions of principal of and interest on the Book-Entry
Certificates. Participants and Indirect Participants with which Beneficial
Owners have accounts with respect to the Book-Entry Certificates similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Beneficial Owners.
Beneficial Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Book-Entry Certificates may do so only through Participants and Indirect
S-38
<PAGE>
Participants. In addition, Beneficial Owners will receive all distributions of
principal and interest from the Trustee, or a paying agent on behalf of the
Trustee, through DTC Participants. DTC will forward such distributions to its
Participants, which thereafter will forward them to Indirect Participants or
Beneficial Owners. Beneficial Owners will not be recognized by the Trustee, the
Servicer or any paying agent as Certificateholders, as such term is used in the
Pooling and Servicing Agreement, and Beneficial Owners will be permitted to
exercise the rights of Certificateholders only indirectly through DTC and its
Participants.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlements in DTC. For information with respect to tax documentation procedures
relating to the Certificates, see "Certain Federal Income Tax Consequences --
REMIC Securities" in the Prospectus.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 31 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear Securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional
S-39
<PAGE>
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to Cede, as nominee of DTC. DTC will be
responsible for crediting the amount of such payments to the accounts of the
applicable DTC Participants in accordance with DTC's normal procedures. Each DTC
Participant will be responsible for disbursing such payment to the Beneficial
Owners of the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the Beneficial Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede, as nominee of DTC.
Distributions with respect to Class A Certificates held through CEDEL or
Euroclear will be credited to the cash accounts of CEDEL Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a Beneficial Owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Trustee to Cede,
as nominee of DTC, may be made available to Beneficial Owners upon request, in
accordance with the rules, regulations and procedures creating and affecting the
Depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Depositor and the Servicer that it will take any
action permitted to be taken by a Certificateholder under the Pooling and
Servicing Agreement only at the direction of one or more Participants to whose
accounts with DTC the Book-Entry Certificates are credited. Additionally, DTC
has advised the Depositor that it will take such actions with respect to
specified percentages of voting rights only at the direction of and on behalf of
Participants whose holdings of Book-Entry Certificates evidence such specified
percentages of voting rights. DTC may take conflicting actions with respect to
percentages of voting rights to the extent that Participants whose holdings of
Book-Entry Certificates evidence such percentages of voting rights authorize
divergent action.
None of the Depositor, the Servicer, the Certificate Insurer or the
Trustee will have any responsibility for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the Book-Entry
Certificates held by Cede, as nominee for DTC, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
S-40
<PAGE>
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.
Calculation of LIBOR
On the fifth business day preceding each Distribution Date or, in the case
of the [date] Distribution Date, on the second business day preceding the
Closing Date (each such date, an "Interest Determination Date"), the Trustee
will determine the London interbank offered rate for one-month U.S. dollar
deposits ("LIBOR") for the next Accrual Period for the Adjustable Rate
Certificates on the basis of the offered rates of the Reference Banks for
one-month U.S. dollar deposits, as such rates appear on the Reuters Screen LIBO
Page, as of 11:00 a.m. (London time) on such Interest Determination Date. As
used in this section, "business day" means a day on which banks are open for
dealing in foreign currency and exchange in London and New York City; "Reuters
Screen LIBO Page" means the display designated as page "LIBO" on the Reuters
Monitor Money Rates Service (or such other page as may replace the LIBO page on
that service for the purpose of displaying London interbank offered rates of
major banks); and "Reference Banks" means leading banks selected by the Trustee
and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (i) with an established place of business in London, (ii)
whose quotations appear on the Reuters' Screen LIBO Page on the Interest
Determination Date in question, (iii) which have been designated as such by the
Trustee and (iv) not controlling, controlled by, or under common control with,
the Servicer or the Trustee.
On each Interest Determination Date, LIBOR for the related Accrual Period
for the Adjustable Rate Certificates will be established by the Trustee as
follows:
If on such Interest Determination Date two or more Reference Banks provide
such offered quotations, LIBOR for the related Accrual Period for the Adjustable
Rate Certificates shall be the arithmetic mean of such offered quotations
(rounded upwards if necessary to the nearest whole multiple of 1/16%).
If on such Interest Determination Date fewer than two Reference Banks
provide such offered quotations, LIBOR for the related Actual Period for the
Adjustable Rate Certificates shall be the higher of (x) LIBOR as determined on
the previous Interest Determination Date and (y) the Reserve Interest Rate. The
"Reserve Interest Rate" shall be the rate per annum that the Trustee determines
to be either (i) the arithmetic mean (rounded upwards if necessary to the
nearest whole multiple of 1/16%) of the one-month U.S. dollar lending rates
which New York City banks selected by the Trustee are quoting on the relevant
Interest Determination Date to the principal London offices of leading banks in
the London interbank market or, in the event that the Trustee can determine no
such arithmetic mean, (ii) the lowest one-month U.S. dollar lending rate which
New York City banks selected by the Trustee are quoting on such Interest
Determination Date to leading European banks.
The establishment of LIBOR on each Interest Determination Date by the
Trustee and the Trustee's calculation of the rate of interest applicable to the
Adjustable Rate Certificates for the related Accrual Period shall (in the
absence of manifest error) be final and binding.
Definitive Certificates
The Class A Certificates, which will be issued initially as Book-Entry
Certificates, will be converted to Definitive Certificates and reissued to
Beneficial Owners or their nominees, rather than to DTC or its nominee, only if
(a) the Depository or the Servicer advises the Trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities as depository
with respect to the Book-Entry Certificates and the Depository or the
S-41
<PAGE>
Servicer is unable to locate a qualified successor or (b) the Trustee, at its
option, elects to terminate the book-entry system through DTC.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify all Participants of the availability
through DTC of Definitive Certificates. Upon delivery of Definitive
Certificates, the Trustee will reissue the Book-Entry Certificates as Definitive
Certificates to Beneficial Owners. Distributions of principal of, and interest
on, the Book-Entry Certificates will thereafter be made by the Trustee, or a
paying agent on behalf of the Trustee, directly to holders of Definitive
Certificates in accordance with the procedures set forth in the Pooling and
Servicing Agreement.
Definitive Certificates will be transferable and exchangeable at the
offices of the Trustee or the certificate registrar. No service charge will be
imposed for any registration of transfer or exchange, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
Assignment of Mortgage Loans
Pursuant to an Unaffiliated Seller's Agreement among the Originators, the
Depositor and the Seller (the "Unaffiliated Seller's Agreement"), the
Originators will sell, transfer, assign, set over and otherwise convey the
Mortgage Loans without recourse to the Seller and the Seller will sell,
transfer, assign, set over and otherwise convey the Mortgage Loans, including
all principal outstanding as of, and interest due after, the Cut-Off Date
without recourse to the Depositor on the Closing Date. Pursuant to the Pooling
and Servicing Agreement, the Depositor will sell, transfer, assign, set over and
otherwise convey without recourse to the Trustee in trust for the benefit of the
Certificateholders and the Certificate Insurer all right, title and interest in
and to each Mortgage Loan, including all principal outstanding as of, and
interest accrued after, the Cut-Off Date. Each such transfer will convey all
right, title and interest in and to (a) principal outstanding as of the Cut-Off
Date, and (b) interest due on each such Mortgage Loan after the Cut-Off Date;
provided, however, that the Seller will not convey, and the Seller reserves and
retains all its right, title and interest in and to, (i) principal (including
principal prepayments in full and curtailments (i.e., partial prepayments))
received on each such Mortgage Loan on or prior to the Cut-Off Date and (ii)
interest due on each Mortgage Loan on or prior to the Cut-Off Date.
In connection with such transfer and assignment, the Depositor will cause
to be delivered to the Trustee on the Closing Date the following documents
(collectively, with respect to each Mortgage Loan, the "Trustee's Mortgage
File") with respect to each Mortgage Loan:
(a) The original Mortgage Note, endorsed without recourse in blank
by the related Originator, including all intervening endorsements showing
a complete chain of endorsement;
(b) The related original Mortgage with evidence of recording
indicated thereon or a copy thereof certified by the applicable recording
office;
(c) The recorded mortgage assignment(s), or copies thereof certified
by the applicable recording office, if any, showing a complete chain of
assignment from the originator of the related Mortgage Loan to the related
Originator (which assignment may, at such Originator's option, be combined
with the assignment referred to in clause (d) below);
(d) A mortgage assignment in recordable form (which, if acceptable
for recording in the relevant jurisdiction, may be included in a blanket
assignment or assignments) of each Mortgage from the related Originator to
the Trustee;
(e) Originals of all assumption, modification and substitution
agreements in those instances where the terms or provisions of a Mortgage
or Mortgage Note have been modified or such Mortgage or Mortgage Note has
been assumed; and
S-42
<PAGE>
(f) An original title insurance policy (or (A) a copy of the title
insurance policy, or (B) a binder thereof or copy of such binder together
with a certificate from the Originator that the original Mortgage has been
delivered to the title insurance company that issued such binder for
recordation).
Pursuant to the Pooling and Servicing Agreement, the Trustee agrees to
execute and deliver on or prior to the Closing Date an acknowledgment of receipt
of the Certificate Insurance Policy and, for each Mortgage Loan, the original
Mortgage Note, item (a) above, with respect to the Mortgage Loans (with any
exceptions noted). The Trustee agrees, for the benefit of the Certificateholders
and the Certificate Insurer, to review (or cause to be reviewed) each Trustee's
Mortgage File within 30-days after the Closing Date (or, with respect to any
Qualified Substitute Mortgage Loan, within 30-days after the receipt by the
Trustee thereof) and to deliver a certification generally to the effect that, as
to each Mortgage Loan listed in the Mortgage Loan Schedule, (a) all documents
required to be delivered to it pursuant to the Pooling and Servicing Agreement
are in its possession, (b) each such document has been reviewed by it and has
not been mutilated, damaged, torn or otherwise physically altered, appears
regular on its face and relates to such Mortgage Loan, and (c) based on its
examination and only as to the foregoing documents, certain information set
forth on the Mortgage Loan Schedule accurately reflects the information set
forth in the Trustee's Mortgage File delivered on such date.
If the Trustee, during the process of reviewing the Trustee's Mortgage
Files, finds any document constituting a part of a Trustee's Mortgage File which
is not executed, has not been received or is unrelated to the Mortgage Loans, or
that any Mortgage Loan does not conform to the requirements above or to the
description thereof as set forth in the Mortgage Loan Schedule, the Trustee
shall promptly so notify the Servicer, the Seller and the Certificate Insurer in
writing with details thereof. The Seller agrees to use reasonable efforts to
cause to be remedied a material defect in a document constituting part of a
Trustee's Mortgage File of which it is so notified by the Trustee. If, however,
within 60 days after the Trustee's notice to it respecting such defect the
Seller has not caused to be remedied the defect and the defect materially and
adversely affects the interest of the Holders in the Mortgage Loan or the
interests of the Certificate Insurer, the Seller or the related Originator will
either (a) substitute in lieu of such Mortgage Loan a Qualified Substitute
Mortgage Loan and, if the then outstanding principal balance of such Qualified
Substitute Mortgage Loan is less than the principal balance of such Mortgage
Loan as of the date of such substitution plus accrued and unpaid interest
thereon, deliver to the Servicer as part of the related monthly remittance
remitted by the Servicer the amount of any such shortfall (the "Substitution
Adjustment") or (b) purchase such Mortgage Loan at a price equal to the
outstanding principal balance of such Mortgage Loan as of the date of purchase,
plus the greater of (i) all accrued and unpaid interest thereon and (ii)
30-days' interest thereon, computed at the related Mortgage Interest Rate, net
of the Servicing Fee if the Servicer is effecting the repurchase, plus the
amount of any unreimbursed Servicing Advances made by the Servicer, which
purchase price shall be deposited in the Certificate Account on the next
succeeding Servicer Distribution Date after deducting therefrom any amounts
received in respect of such repurchased Mortgage Loan or Loans and being held in
the Certificate Account for future distribution to the extent such amounts have
not yet been applied to principal or interest on such Mortgage Loan (see " --
Flow of Funds" below); provided, however, that the Seller may not purchase any
Mortgage Loan that is not in default or as to which no default is imminent
pursuant to clause (b) preceding unless the Seller has theretofore caused to be
delivered to the Trustee an opinion of counsel knowledgeable in federal income
tax matters which states that such a purchase would not constitute a prohibited
transaction under the Code.
A "Qualified Substitute Mortgage Loan" is defined in the Pooling and
Servicing Agreement as any mortgage loan or mortgage loans substituted for a
deleted Mortgage Loan and which, among other things, (i) relates or relate to a
detached one-family residence or to the same type of residential dwelling as the
deleted Mortgage Loan and in each case has or have the same or a better lien
priority as the deleted Mortgage Loan and has the same occupancy status or is an
owner-occupied Mortgaged Property, (ii) matures or mature no later than (and not
more than one year earlier than) the deleted Mortgage Loan, (iii) has or have a
Loan-to-Value Ratio ("LTV") or LTVs at the time of such substitution no higher
than the LTV of the deleted Mortgage Loan, (iv) has or have a CLTV or CLTVs at
the time of such substitution no higher than the CLTV of the deleted Mortgage
Loan, (v) has or have a principal balance or principal balances (after
application of all payments received on or prior to the date of substitution)
not substantially less and not more than the principal balance of the deleted
Mortgage Loan as of such date, (vi) satisfies or satisfy the criteria set forth
from time to time in the definition of "qualified replacement mortgage" at
Section 860G(a)(4) of the Code (or any successor statute thereto), (vii) has or
have a mortgage interest rate of at least the same interest rate as the deleted
Mortgage Loan and (viii) complies or comply as of the date of substitution with
each representation and warranty set forth in the Pooling and Servicing
Agreement.
S-43
<PAGE>
Representations and Warranties of the Seller
The Seller will represent, among other things, with respect to each
Mortgage Loan, as of the Closing Date, the following:
1. The information set forth in the Mortgage Loan Schedule with
respect to each Mortgage Loan is true and correct;
2. All of the original or certified documentation constituting the
Trustee's Mortgage Files (including all material documents related
thereto) has been or will be delivered to the Trustee on the Closing Date
or as otherwise provided in the Unaffiliated Seller's Agreement;
3. The Mortgaged Property consists of a single parcel of real
property separately assessed for tax purposes, upon which is erected a
detached or an attached one-family residence or a detached two-to- six
family dwelling, or an individual condominium unit in a low-rise
condominium, or an individual unit in a planned unit development, or a
commercial property, or a mixed use or multiple purpose property. Such
residence, dwelling or unit is not (i) a unit in a cooperative apartment,
(ii) a property constituting part of a syndication, (iii) a time share
unit, (iv) a property held in trust, (v) a mobile home, (vi) a
manufactured dwelling, (vii) a log-constructed home, or (viii) a
recreational vehicle;
4. Each Mortgage is a valid first or second lien on a fee simple (or
its equivalent under applicable state law) estate in the real property
securing the amount owed by the Mortgagor under the Mortgage Note subject
only to (i) the lien of current real property taxes and assessments which
are not delinquent, (ii) any related first mortgage loan, (iii) covenants,
conditions and restrictions, rights of way, easements and other matters of
public record as of the date of recording of such Mortgage, such
exceptions appearing of record being acceptable to mortgage lending
institutions generally in the area wherein the property subject to the
Mortgage is located or specifically reflected in the appraisal obtained in
connection with the origination of the related Mortgage Loan obtained by
the Seller and (iv) other matters to which like properties are commonly
subject which do not materially interfere with the benefits of the
security intended to be provided by such Mortgage;
5. Immediately prior to the transfer and assignment by the Seller to
the Depositor, the Seller had good title to, and was the sole owner of
each Mortgage Loan, free of any interest of any other person, and the
Seller has transferred all right, title and interest in each Mortgage Loan
to the Depositor;
6. Each Mortgage Loan conforms, and all such Mortgage Loans in the
aggregate conform, to the description thereof set forth in this Prospectus
Supplement; and
7. All of the Mortgage Loans were originated in accordance with the
underwriting criteria set forth in this Prospectus Supplement.
Pursuant to the Pooling and Servicing Agreement, upon the discovery by any
of the Certificateholders, the Seller, the Servicer, any Subservicer, the
Certificate Insurer, or the Trustee that any of the representations and
warranties contained in the Pooling and Servicing Agreement have been breached
in any material respect as of the Closing Date, with the result that the
interests of the Certificateholders in the related Mortgage Loan or the
interests of the Certificate Insurer were materially and adversely affected
(notwithstanding that such representation and warranty was made to the Seller's
best knowledge and the Seller lacked knowledge of such breach), the party
discovering such breach is required to give prompt written notice to the other
parties. Subject to certain provisions of the Pooling and Servicing Agreement,
within 60 days of the earlier to occur of the Seller's or the applicable
Originator's discovery or its receipt of notice of any such breach, the Seller
or the related Originator will (a) promptly cure such breach in all material
respects, (b) remove each Mortgage Loan which has given rise to the requirement
for action by the Seller or the related Originator, substitute one or more
Qualified Substitute Mortgage Loans and, if the outstanding principal balance of
such Qualified Substitute Mortgage Loans as of the date of such substitution is
less than the outstanding principal balance, plus accrued and unpaid interest
thereon, of the replaced Mortgage Loans as of the date of substitution, deliver
to the Trust Fund as part of the amounts remitted by the
S-44
<PAGE>
Servicer on such Distribution Date the amount of such shortfall, or (c) purchase
such Mortgage Loan at a price equal to the principal balance of such Mortgage
Loan as of the date of purchase plus the greater of (i) all accrued and unpaid
interest thereon and (ii) 30-days' interest thereon computed at the Mortgage
Interest Rate, net of the Servicing Fee if [__________] is the Servicer, plus
the amount of any unreimbursed Servicing Advances made by the Servicer, and
deposit such purchase price into the Certificate Account on the next succeeding
Servicer Distribution Date after deducting therefrom any amounts received in
respect of such repurchased Mortgage Loan or Mortgage Loans and being held in
the Certificate Account for future distribution to the extent such amounts have
not yet been applied to principal or interest on such Mortgage Loan; provided,
however, that any substitution of one or more Qualified Substitute Mortgage
Loans pursuant to clause (b) preceding must be effected not later than two years
after the Closing Date unless the Trustee and the Certificate Insurer receive an
opinion of counsel that such substitution would not constitute a prohibited
transaction for purposes of the REMIC provisions of the Code. In addition, the
Seller and the related Originator shall be obligated to indemnify the Trustee,
the Certificateholders and the Certificate Insurer for any third-party claims
arising out of a breach by the Seller of representations or warranties regarding
the Mortgage Loans. The obligation of the Seller and the related Originator to
cure such breach or to substitute or purchase any Mortgage Loan and to indemnify
constitute the sole remedies respecting a material breach of any such
representation or warranty to the Certificateholders, the Trustee and the
Certificate Insurer.
Payments on the Mortgage Loans
The Pooling and Servicing Agreement provides that the Servicer for the
benefit of the Certificateholders shall establish and maintain a Collection
Account (the "Collection Account"), which will generally be (i) an account
maintained with a depository institution or trust company whose long term
unsecured debt obligations are rated by each Rating Agency in one of its two
highest rating categories at the time of any deposit therein or (ii) trust
accounts maintained with a depository institution acceptable to each Rating
Agency (any such account, an "Eligible Account"). The Pooling and Servicing
Agreement permits the Servicer to direct any depository institution maintaining
the Collection Account to invest the funds in the Collection Account in one or
more Permitted Investments (as defined herein) that mature, unless payable on
demand, no later than the Business Day preceding the date on which the Servicer
is required to transfer the Servicer Remittance Amount from the Collection
Account to the Certificate Account, as described below.
The Servicer is obligated to deposit or cause to be deposited in the
Collection Account on a daily basis, amounts representing the following payments
received and collections made by it after the Cut-Off Date (other than in
respect of Monthly Payments on the Mortgage Loans due on each Mortgage Loan up
to and including any Due Date occurring on or prior to __________): (i) all
payments on account of principal, including prepayments of principal ("Principal
Prepayments"); (ii) all payments on account of interest on the Mortgage Loans,
(iii) all Liquidation Proceeds and all Insurance Proceeds to the extent such
proceeds are not to be applied to the restoration of the related Mortgaged
Property or released to the related borrower in accordance with the express
requirements of law or in accordance with prudent and customary servicing
practices; (iv) all Net REO Proceeds; (v) all other amounts required to be
deposited in the Collection Account pursuant to the Pooling and Servicing
Agreement; and (vi) any amounts required to be deposited in connection with net
losses realized on investments of funds in the Collection Account.
The Trustee will be obligated to set up an account (the "Certificate
Account", and together with the Collection Account, the "Accounts"), which is
required to be an Eligible Account, into which the Servicer will deposit or
cause to be deposited the Servicer Remittance Amount on the 10th day of each
month (the "Servicer Distribution Date").
The "Servicer Remittance Amount" for a Servicer Distribution Date is equal
to the sum, without duplication, of (i) all collections of principal and
interest on the Mortgage Loans (including Principal Prepayments, Net REO
Proceeds and Liquidation Proceeds, if any) collected by the Servicer during the
prior calendar month, (ii) all Periodic Advances made by the Servicer with
respect to payments due to be received on the Mortgage Loans on the related Due
Date and (iii) any other amounts required to be placed in the Collection Account
by the Servicer pursuant to the Pooling and Servicing Agreement but excluding
the following:
S-45
<PAGE>
(a) amounts received on particular Mortgage Loans, with respect to
which the Servicer has previously made an unreimbursed Periodic Advance,
as late payments of interest, or as Net Liquidation Proceeds, to the
extent of such unreimbursed Periodic Advance;
(b) amounts received on a particular Mortgage Loan with respect to
which the Servicer has previously made an unreimbursed Servicing Advance,
to the extent of such unreimbursed Servicing Advance;
(c) for such Servicer Distribution Date, the aggregate Servicing
Fee;
(d) all net income from Permitted Investments that is held in the
Collection Account for the account of the Servicer;
(e) all amounts in respect of late fees, assumption fees, prepayment
fees and similar fees;
(f) Net Foreclosure Profits; and
(g) certain other amounts which are reimbursable to the Servicer, as
provided in the Pooling and Servicing Agreement.
The amounts described in clauses (a) through (g) above may be withdrawn by
the Servicer from the Collection Account on or prior to each Servicer
Distribution Date.
"Foreclosure Profits" as to any Servicer Distribution Date, are the
excess, if any, of (i) Net Liquidation Proceeds in respect of each Mortgage Loan
that became a Liquidated Mortgage Loan during the month immediately preceding
the month of such Servicer Distribution Date over (ii) the sum of such unpaid
Principal Balance of each such Liquidated Mortgage Loan plus accrued and unpaid
interest on the unpaid Principal Balance from the Due Date to which interest was
last paid by the Mortgagor.
"Insurance Proceeds" are proceeds paid by any insurer pursuant to any
insurance policy covering a Mortgage Loan to the extent such proceeds are not
applied to the restoration of the related Mortgaged Property or released to the
related Mortgagor. "Insurance Proceeds" do not include "Insured Payments."
"Liquidation Expenses" as to any Liquidated Mortgage Loan are all expenses
incurred by the Servicer in connection with the liquidation of such Mortgage
Loan, including, without duplication, unreimbursed expenses for real property
taxes and unreimbursed Servicing Advances. In no event may Liquidation Expenses
with respect to a Liquidated Mortgage Loan exceed the related Liquidation
Proceeds.
"Liquidated Loan Loss" as to any Liquidated Mortgage Loan is the excess,
if any, of (i) the unpaid Principal Balance of such Liquidated Mortgage Loan
plus accrued and unpaid interest on such unpaid Principal Balance from the Due
Date to which interest was last paid by the Mortgagor over (ii) the sum of the
Net Liquidation Proceeds and the amount of any previously unreimbursed Periodic
Advances in respect of such Mortgage Loan.
"Liquidation Proceeds" are amounts (other than Insurance Proceeds)
received by the Servicer in connection with (i) the taking of all or a part of a
Mortgaged Property by exercise of the power of eminent domain or condemnation or
(ii) the liquidation of a defaulted Mortgage Loan through a trustee's sale,
foreclosure sale, REO Disposition or otherwise.
"Net Foreclosure Profits" as to any Servicer Distribution Date, are the
excess, if any, of (i) the aggregate Foreclosure Profits with respect to such
Servicer Distribution Date over (ii) Liquidated Loan Losses with respect to such
Servicer Distribution Date.
"Net Liquidation Proceeds" as to any Liquidated Mortgage Loan, are
Liquidation Proceeds net of Liquidation Expenses and net of any unreimbursed
Periodic Advances made by the Servicer.
S-46
<PAGE>
"Net REO Proceeds" as to any REO Property, are REO Proceeds net of any
related expenses of the Servicer.
"REO Proceeds" are monies received in respect of any REO Property
(including, without limitation, proceeds from the rental of the related
Mortgaged Property).
Servicing Fees and Other Compensation and Payment of Expenses
As compensation for its activities as Servicer under the Pooling and
Servicing Agreement, the Servicer shall be entitled with respect to each
Mortgage Loan to the Servicing Fee, which shall be payable monthly from amounts
on deposit in the Collection Account. The "Servicing Fee" shall be an amount
equal to interest at one-twelfth of the Servicing Fee Rate for such Mortgage
Loan on the outstanding Principal Balance of such Mortgage Loan. The "Servicing
Fee Rate" with respect to each Mortgage Loan will be _____% per annum. In
addition, the Servicer shall be entitled to receive, as additional servicing
compensation, to the extent permitted by applicable law and the related Mortgage
Notes, any late payment charges, assumption fees, prepayment fees or similar
items. The Servicer shall also be entitled to withdraw from the Collection
Account any net interest or other income earned on deposits therein. The
Servicer shall pay all expenses incurred by it in connection with its servicing
activities under the Pooling and Servicing Agreement and shall not be entitled
to reimbursement therefor except as specifically provided in the Pooling and
Servicing Agreement.
The Servicer may recover Periodic Advances and Servicing Advances to the
extent permitted by the Mortgage Loans or, if not recovered from the Mortgagor
on whose behalf such Servicing Advance or Periodic Advance was made, from late
collections on the related Mortgage Loan, including Liquidation Proceeds,
Insurance Proceeds and such other amounts as may be collected by the Servicer
from the Mortgagor or otherwise relating to the Mortgage Loan. In the event a
Periodic Advance or a Servicing Advance becomes a Nonrecoverable Advance, the
Servicer may be reimbursed for such advance from the Certificate Account.
The Servicer shall not be required to make any Periodic Advance or
Servicing Advance which it determines would be a nonrecoverable Periodic Advance
or nonrecoverable Servicing Advance (a "Nonrecoverable Advance"). A Periodic
Advance or Servicing Advance is "nonrecoverable" if in the good faith judgment
of the Servicer, such Periodic Advance or Servicing Advance is not ultimately
recoverable.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Pooling and
Servicing Agreement requires that, starting with the __________ Distribution
Date, the Net Monthly Excess Cashflow, if any, be applied on each Distribution
Date as an accelerated payment of principal on the Class of Class A Certificates
then entitled to distributions of principal, but only to the limited extent
hereafter described. The "Net Monthly Excess Cashflow" for a Distribution Date
is equal to the excess of (x) the amount on deposit in the Certificate Account
(exclusive of the amount of any Insured Payment and the Servicing Fee) on such
Distribution Date (such amount being the "Available Amount" for such
Distribution Date) over (y) the sum of (i) the Class A Distribution Amount
(calculated for this purpose without regard to any Subordination Increase Amount
or portion thereof included therein), (ii) any Reimbursement Amount (as defined
herein) or other amount owed to the Certificate Insurer and (iii) the Trustee's
Fees.
This application has the effect of accelerating the amortization of the
Class A Certificates relative to the amortization of the Mortgage Loans. To the
extent that any Net Monthly Excess Cashflow is not so used, the Pooling and
Servicing Agreement provides that it will be paid to the Holders of the Class R
Certificates.
With respect to any Distribution Date, the excess, if any, of (x) the sum
of the aggregate Principal Balances of the Mortgage Loans as of the close of
business on the last day of the preceding calendar month over (y) the Class A
Certificate Principal Balance as of such Distribution Date (and following the
making of all distributions on such Distribution Date (other than with respect
to any Subordination Increase Amount for such Distribution Date)) is the
"Subordinated Amount" as of such Distribution Date. The Pooling and Servicing
Agreement requires that, starting with the __________ Distribution Date, the Net
Monthly Excess Cashflow will be applied as an accelerated payment of principal
on the Class A Certificates until the Subordinated Amount has increased to the
level required by the Pooling and Servicing Agreement. Any amount of Net Monthly
Excess Cashflow actually applied as an accelerated
S-47
<PAGE>
payment of principal is a "Subordination Increase Amount." The required level of
the Subordinated Amount with respect to a Distribution Date is the "Specified
Subordinated Amount" with respect to such Distribution Date. Initially, the
Subordinated Amount will be an amount equal to approximately _____% of the sum
of the Cut-Off Date Aggregate Principal Balance and the Original Pre-Funded
Amount.
In the event that the required level of the Specified Subordinated Amount
is permitted to decrease or "step down" on a Distribution Date in the future,
the Pooling and Servicing 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 shall be distributed to the Holders of the Class R
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 difference, if any, between (a) the Subordinated Amount
that would apply on such Distribution Date after taking into account all
distributions to be made on such Distribution Date (except for any distributions
of related Subordination Reduction Amounts as described in this sentence) and
(b) the Specified Subordinated Amount is the "Excess Subordinated Amount" with
respect to such Distribution Date. 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 than the related Specified
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 shall instead be distributed to the Holders of the Class R
Certificates, in an amount equal to the lesser of (x) the Excess Subordinated
Amount and (y) the amount available for distribution on account of principal
with respect to the Class A Certificates on such Distribution Date; such amount
being the "Subordination Reduction Amount" for such Distribution Date.
The Pooling and Servicing Agreement provides that, on any Distribution
Date, all amounts collected on account of principal (other than any such amount
applied to the payment of a Subordination Reduction Amount) during the prior Due
Period will be distributed to the Holders of the Class A Certificates on such
Distribution Date. If any Mortgage Loan became a Liquidated Mortgage Loan during
such prior Due Period, the Net Liquidation Proceeds related thereto and
allocated to principal may be less than the Principal Balance of the related
Mortgage Loan; the amount of any such insufficiency is a "Liquidated Loan Loss."
In addition, the Pooling and Servicing Agreement provides that the principal
balance of any Mortgage Loan which becomes a Liquidated Mortgage Loan shall then
equal zero. The Pooling and Servicing Agreement does not contain any rule which
requires that the amount of any Liquidated Loan Loss be distributed to the
Holders of the Class A Certificates on the Distribution Date which immediately
follows the event of loss; i.e., the Pooling and Servicing Agreement does not
require the current recovery of losses. However, the occurrence of a Liquidated
Loan Loss will reduce the Subordinated Amount, which, to the extent that such
reduction causes the Subordinated Amount to be less than the Specified
Subordinated Amount applicable to the related Distribution Date, will require
the payment of a Subordination Increase Amount on such Distribution Date (or, if
insufficient funds are available on such Distribution Date, on subsequent
Distribution Dates, until the Subordinated Amount equals the related Specified
Subordinated Amount). The effect of the foregoing is to allocate losses to the
Holders of the Class R Certificates by reducing, or eliminating entirely,
payments of Monthly Excess Cashflow and of Subordination Reduction Amounts which
such Holders would otherwise receive.
Overcollateralization and the Certificate Insurance Policy. The Pooling
and Servicing Agreement defines a "Subordination Deficit" with respect to a
Distribution Date to be the amount, if any, by which (x) the aggregate
Certificate Principal Balance of the Class A Certificates as of such
Distribution Date, and following the making of all distributions to be made on
such Distribution Date (except for any payment to be made as to principal from
proceeds of the Certificate Insurance Policy), exceeds (y) the aggregate
Principal Balances of the Mortgage Loans as of the close of business on the last
day of the related Due Period. The Pooling and Servicing Agreement requires the
Trustee to make a claim for an Insured Payment under the Certificate Insurance
Policy not later than the third Business Day prior to any Distribution Date as
to which the Trustee has determined that a Subordination Deficit will occur for
the purpose of applying the proceeds of such Insured Payment as a payment of
principal to the Holders of the Class A Certificates on such Distribution Date.
Additionally, under the terms of the Pooling and Servicing Agreement, the
Certificate Insurer will have the option to cause Net Monthly Excess Cashflow to
be applied without regard to any limitation upon the occurrence of certain
trigger events, or in the event of an event of default under the
S-48
<PAGE>
Insurance Agreement (as defined herein). However, investors in the Class A
Certificates should realize that, under extreme loss or delinquency scenarios,
they may temporarily receive no distributions of principal.
Flow of Funds
On each Distribution Date, the Trustee shall distribute, to the extent of
funds, including any Insured Payments, on deposit in the Certificate Account, as
follows:
(a) to the Trustee, an amount equal to the fees then due to it
(the "Trustee's Fees");
(b) from amounts then on deposit in the Certificate Account
(excluding any Insured Payments) to the Certificate Insurer
the lesser of (x) the excess of (i) the amount then on deposit
in the Certificate Account over (ii) the Insured Distribution
Amount for such Distribution Date and (y) the amount of all
Insured Payments and other amounts due to the Certificate
Insurer pursuant to the Insurance Agreement (including the
premium amount) which have not been previously paid (the
"Reimbursement Amount") as of such Distribution Date;
(c) from amounts then on deposit in the Certificate Account, to
the Class A Certificateholders an amount equal to the Class A
Interest Distribution Amount;
(d) from amounts then on deposit in the Certificate Account, to
the Class A Certificateholders an amount equal to the Class A
Principal Distribution Amount; and
(e) following the making by the Trustee of all allocations,
transfers and disbursements described above, from amounts then
on deposit in the Certificate Account, the Trustee shall
distribute to the Holders of the Class R Certificates, the
amount remaining on such Distribution Date, if any.
Report to Certificateholders
Pursuant to the Pooling and Servicing Agreement, on each Distribution Date
the Trustee will deliver to the Servicer, the Certificate Insurer, each
Certificateholder and the Depositor a written report containing information
including, without limitation, the amount of the distribution on such
Distribution Date, the amount of such distribution allocable to principal and
allocable to interest, the aggregate outstanding principal balance of the Class
A Certificates as of such Distribution Date, the amount of any Insured Payment
included in such distributions on such Distribution Date and such other
information as required by the Pooling and Servicing Agreement.
Amendment
The Pooling and Servicing Agreement may be amended from time to time by
the Depositor, the Servicer and the Trustee by written agreement, upon the prior
written consent of the Certificate Insurer, without notice to, or consent of,
the Certificateholders, to cure any ambiguity, to correct or supplement any
provisions herein, to comply with any changes in the Code, or to make any other
provisions with respect to matters or questions arising under the Pooling and
Servicing Agreement which shall not be inconsistent with the provisions of the
Pooling and Servicing Agreement; provided, that such action shall not, as
evidenced by an opinion of counsel delivered to, but not obtained at the expense
of, the Trustee, adversely affect in any material respect the interests of any
Certificateholder; and provided, further, that no such amendment shall reduce in
any manner the amount of, or delay the timing of, payments received on Mortgage
Loans which are required to be distributed on any Certificate without the
consent of the Holder of such Certificate, or change the rights or obligations
of any other party to the Pooling and Servicing Agreement without the consent of
such party.
The Pooling and Servicing Agreement may be amended from time to time by
the Depositor, the Servicer and the Trustee with the consent of the Certificate
Insurer, and the Holders of the majority of the Percentage Interest in the Class
A Certificates and Class R Certificates for the purpose of adding any provisions
to or changing in any
S-49
<PAGE>
manner or eliminating any of the provisions of the Pooling and Servicing
Agreement or of modifying in any manner the rights of the Holders; provided,
however, that no such amendment shall be made unless the Trustee receives an
opinion of counsel, at the expense of the party requesting the change, that such
change will not adversely affect the status of the Trust as a REMIC or cause a
tax to be imposed on the REMIC; and provided further, that no such amendment
shall reduce in any manner the amount of, or delay the timing of, payments
received on Mortgage Loans which are required to be distributed on any
Certificate without the consent of the Holder of such Certificate or reduce the
percentage for each Class whose Holders are required to consent to any such
amendment without the consent of the Holders of 100% of each Class of
Certificates affected thereby.
The Unaffiliated Seller's Agreement contains substantially similar
restrictions regarding amendment.
SERVICING OF THE MORTGAGE LOANS
The Servicer
[__________] will act as the Servicer of the Mortgage Pool. [__________]
will act as subservicer with respect to a portion of the Mortgage Loans. See
"The Originators, the Seller, the Servicer and the Subservicer."
Servicer Reports
The Servicer is required to deliver to the Certificate Insurer, the
Trustee, [___] and [___], not later than __________ of each year an officer's
certificate stating that (i) the Servicer has fully complied with the servicing
provisions of the Pooling and Servicing Agreement, (ii) a review of the
activities of the Servicer during the preceding calendar year and of performance
under the Pooling and Servicing Agreement has been made under such officer's
supervision, and (iii) to the best of such officer's knowledge, based on such
review, the Servicer has fulfilled all its obligations under the Pooling and
Servicing Agreement for such year, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officer and the nature and status thereof including the steps being taken by the
Servicer to remedy such default. The first such officer's certificate shall be
delivered by the Servicer in _____.
Not later than __________ of each year, the Servicer, at its expense, is
required to cause to be delivered to the Certificate Insurer, the Trustee, [___]
and [___] from a firm of independent certified public accountants (who may also
render other services to the Servicer) a statement to the effect that such firm
has examined certain documents and records relating to the servicing of the
Mortgage Loans during the preceding calendar year (or such longer period from
the Closing Date to the end of the following calendar year) and that, on the
basis of such examination conducted substantially in compliance with generally
accepted auditing standards and the requirements of the Uniform Single
Attestation Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for FHLMC, such servicing has been conducted in compliance with the
Pooling and Servicing Agreement except for such significant exceptions or errors
in records that, in the opinion of such firm, generally accepted auditing
standards and the Uniform Single Attestation Program for Mortgage Bankers or the
Audit Program for Mortgages serviced for FHLMC require it to report, in which
case such exceptions and errors shall be so reported.
Collection and Other Servicing Procedures
The Servicer will be responsible for making reasonable efforts to collect
all payments called for under the Mortgage Loans and will, consistent with the
Pooling and Servicing Agreement, follow such collection procedures as it follows
with respect to loans which are comparable to the Mortgage Loans. Consistent
with the above, the Servicer may, in its discretion, (i) waive any late payment
charge and (ii) arrange with a Mortgagor a schedule for the liquidation of
delinquencies, subject to the provisions of the Pooling and Servicing Agreement.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated to accelerate the maturity of the
Mortgage Loan, unless it reasonably believes it is unable to enforce that
Mortgage Loan's "due-on-sale" clause under applicable law. If it reasonably
believes it may be restricted for any reason from enforcing such a "due-on-sale"
clause, the Servicer may enter into an assumption and modification
S-50
<PAGE>
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Mortgage Note.
Any fee collected by the Servicer for entering into an assumption
agreement will be retained by the Servicer as additional servicing compensation.
For a description of circumstances in which the Servicer may be unable to
enforce "due-on-sale" clauses, see "Certain Legal Aspects of the Mortgage Loans
and Contracts -- The Mortgage Loans -- 'Due-on-Sale' Clauses" in the Prospectus.
In connection with any such assumption, the Mortgage Interest Rate borne by the
mortgage note relating to each Mortgage Loan ("Mortgage Note") may not be
decreased.
Hazard Insurance
The Servicer is required to cause to be maintained for each Mortgaged
Property a hazard insurance policy with coverage which contains a standard
mortgagee's clause in an amount equal to the lesser of (a) the maximum insurable
value of such Mortgaged Property or (b) the principal balance of such Mortgage
Loan plus the outstanding balance of any mortgage loan senior to such Mortgage
Loan, but in no event may such amount be less than is necessary to prevent the
borrower from becoming a coinsurer thereunder. As set forth above, all amounts
collected by the Servicer under any hazard policy (except for amounts to be
applied to the restoration or repair of the Mortgaged Property or released to
the borrower in accordance with the Servicer's normal servicing procedures), to
the extent they constitute Net Liquidation Proceeds or Insurance Proceeds, will
ultimately be deposited in the Certificate Account. The ability of the Servicer
to assure that hazard insurance proceeds are appropriately applied may be
dependent on its being named as an additional insured under any hazard insurance
policy, or upon the extent to which information in this regard is furnished to
the Servicer by a borrower. The Pooling and Servicing Agreement provides that
the Servicer may satisfy its obligation to cause hazard policies to be
maintained by maintaining a blanket policy issued by an insurer acceptable to
the Rating Agencies insuring against losses on the Mortgage Loans. If such
blanket policy contains a deductible clause, the Servicer is obligated to
deposit in the Certificate Account the sums which would have been deposited
therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms and therefore will not contain identical terms and
conditions, the terms thereof are dictated by respective state laws, and most
such policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other
weather-related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, 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 hazard insurance policies covering the Mortgaged Properties typically
contain a co-insurance clause which in effect requires the insured at all times
to carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause generally provides that the insurer's
liability in the event of partial loss does not exceed the greater of (i) the
replacement cost of the improvements less physical depreciation or (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
Since residential properties, generally, have historically appreciated in
value over time, if the amount of hazard insurance maintained on the
improvements securing the Mortgage Loans were to decline as the principal
balances owing thereon decreased, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss.
Realization Upon Defaulted Mortgage Loans
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when, in the opinion of the Servicer, no satisfactory
S-51
<PAGE>
arrangements can be made for the collection of delinquent payments. In
connection with such foreclosure or other conversion, the Servicer will follow
such practices as it deems necessary or advisable and as are in keeping with the
Servicer's general loan servicing activities and the Pooling and Servicing
Agreement, provided the Servicer will not expend its own funds in connection
with foreclosure or other conversion, correction of a default on a senior
mortgage or restoration of any property unless such foreclosure, correction or
restoration is determined to increase Net Liquidation Proceeds. Any Mortgaged
Property so acquired by the Trust is required to be disposed of in accordance
with applicable federal income tax regulations and consistent with the status of
the Trust as a REMIC.
Removal and Resignation of the Servicer
The Certificate Insurer may, pursuant to the Pooling and Servicing
Agreement, remove the Servicer upon the occurrence and continuation beyond the
applicable cure period of an event described in clause (g) or (h) below and the
Trustee, only at the direction of the Certificate Insurer or the majority
certificateholders, with the consent of the Certificate Insurer (in the case of
any direction of the majority Certificateholders), may remove the Servicer upon
the occurrence and continuation beyond the applicable cure period of an event
described in clause (a), (b), (c), (d), (e) or (f) below:
(a) any failure by the Servicer to remit to the Trustee any payment
required to be made by the Servicer under the terms of the Pooling and
Servicing Agreement which continues unremedied for one (1) Business Day
after the date upon which written notice of such failure, requiring the
same to be remedied, shall have been given to the Servicer and the
Certificate Insurer by the Trustee or to the Servicer and the Trustee by
the Certificate Insurer or the Class A Certificateholders evidencing
Percentage Interests of at least 25%;
(b) the failure by the Servicer to make any required Servicing
Advance which failure continues unremedied for a period of one (1)
Business Day after the date on which written notice of such failure,
requiring the same to be remedied, shall have been given to the Servicer
by the Trustee or to the Servicer and the Trustee by any Certificateholder
or the Certificate Insurer;
(c) any failure on the part of the Servicer duly to observe or
perform in any material respect any other of the covenants or agreements
on the part of the Servicer contained in this Agreement, or the failure of
any representation and warranty set forth in the Pooling and Servicing
Agreement, which continues unremedied for a period of 30-days after the
date on which written notice of such failure, requiring the same to be
remedied, shall have been given to the Servicer by the Depositor or the
Trustee, or to the Servicer and the Trustee by any Certificateholder or
the Certificate Insurer;
(d) a decree or order of a court or agency or supervisory authority
having jurisdiction in an involuntary case under any present or future
federal or state bankruptcy, insolvency or similar law or for the
appointment of a conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings, or for the winding-up or liquidation of its affairs, shall
have been entered against the Servicer and such decree or order shall have
remained in force, undischarged or unstayed for a period of 60 days;
(e) the Servicer shall consent to the appointment of a conservator
or receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings of or
relating to the Servicer or of or relating to all or substantially all of
the Servicer's property;
(f) the Servicer shall admit in writing its inability to pay its
debts as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for
the benefit of its creditors, or voluntarily suspend payment of its
obligations;
(g) the delinquency or loss experience of the Mortgage Loan pool
exceeds certain levels specified in the Pooling and Servicing Agreement;
or
S-52
<PAGE>
(h) The Certificate Insurer shall notify the Trustee of any event of
default under the Insurance Agreement.
The Servicer may not assign its obligations under the Pooling and
Servicing Agreement nor resign from the obligations and duties thereby imposed
on it except by mutual consent of the Servicer, [__________] (if [__________] is
not the Servicer), the Certificate Insurer and the Trustee, or upon the
determination that the Servicer's duties thereunder are no longer permissible
under applicable law and such incapacity cannot be cured by the Servicer without
the incurrence, in the reasonable judgment of the Certificate Insurer, of
unreasonable expense. No such resignation shall become effective until a
successor has assumed the Servicer's responsibilities and obligations in
accordance with the Pooling and Servicing Agreement.
Upon removal or resignation of the Servicer, the Trustee will be the
successor servicer (the "Successor Servicer"). The Trustee, as Successor
Servicer, will be obligated to make Periodic Advances and Servicing Advances and
certain other advances unless it determines reasonably and in good faith that
such advances would not be recoverable. If, however, the Trustee is unwilling or
unable to act as Successor Servicer, or if the majority Certificateholders (with
the consent of the Certificate Insurer) or the Certificate Insurer so requests,
the Trustee shall appoint, or petition a court of competent jurisdiction to
appoint, in accordance with the provisions of the Pooling and Servicing
Agreement and subject to the approval of the Certificate Insurer, any
established mortgage loan servicing institution acceptable to the Certificate
Insurer having a net worth of not less than $__________ as the Successor
Servicer in the assumption of all or any part of the responsibilities, duties or
liabilities of the Servicer.
Pursuant to the Pooling and Servicing Agreement, the Servicer covenants
and agrees to act as the Servicer for an initial term from the Closing Date to
__________, which term will be extendable by the Certificate Insurer by notice
to the Trustee for successive terms of three (3) calendar months each, until the
termination of the Trust Fund. The Servicer will, upon its receipt of each such
notice of extension (a "Servicer Extension Notice") become bound for the
duration of the term covered by such Servicer Extension Notice to continue as
the Servicer subject to and in accordance with the other provisions of the
Pooling and Servicing Agreement. If as of the fifteenth ([___]) day prior to the
last day of any term of the Servicer the Trustee shall not have received any
Servicer Extension Notice from the Certificate Insurer, the Trustee will, within
five (5) days thereafter, give written notice of such non-receipt to the
Certificate Insurer and the Servicer. The Certificate Insurer has agreed to
extend each three month term of the Servicer, in the absence of an Event of
Default under the Pooling and Servicing Agreement.
The Trustee and any other Successor Servicer in such capacity is entitled
to the same reimbursement for advances and no more than the same servicing
compensation as the Servicer. See " -- Servicing and Other Compensation and
Payment of Expenses" above.
Termination; Purchase of Mortgage Loans
The Pooling and Servicing Agreement will terminate upon notice to the
Trustee of either: (a) the later of the distribution to Certificateholders of
the final payment or collection with respect to the last Mortgage Loan (or
Periodic Advances of same by the Servicer), or the disposition of all funds with
respect to the last Mortgage Loan and the remittance of all funds due under the
Pooling and Servicing Agreement and the payment of all amounts due and payable
to the Certificate Insurer and the Trustee or (b) mutual consent of the
Servicer, the Certificate Insurer and all Certificateholders in writing;
provided, however, that in no event will the Trust established by the Pooling
and Servicing Agreement terminate later than twenty-one years after the death of
the last surviving lineal descendant of the person named in the Pooling and
Servicing Agreement.
Subject to provisions in the Pooling and Servicing Agreement concerning
adopting a plan of complete liquidation, the Servicer may, at its option and at
its sole cost and expense, terminate the Pooling and Servicing Agreement on any
date on which the aggregate Principal Balance of the Mortgage Loans is less than
10% of the sum of (a) the Cut-Off Date Aggregate Principal Balance and (b) the
Original Pre-Funded Amount, by purchasing, on the next succeeding Distribution
Date, all of the outstanding Mortgage Loans and REO Properties at a price equal
to the sum of (a) 100% of the Principal Balance of each outstanding Mortgage
Loan and each REO Property, (b) the greater of (i) the aggregate amount of
accrued and unpaid interest on the Mortgage Loans through the related Due Period
and (ii) 30-days' accrued interest thereon computed at a rate equal to the
Mortgage Interest Rate, in each case net of the Servicing Fee, and (c) any
unreimbursed amounts due to the Certificate Insurer under the Pooling and
S-53
<PAGE>
Servicing Agreement, the Insurance Agreement and, without duplication, accrued
and unpaid Insured Payments. Any such purchase shall be accomplished by deposit
into the Certificate Account of the purchase price specified above. No such
termination is permitted without the prior written consent of the Certificate
Insurer if it would result in a draw on the Certificate Insurance Policy.
Optional Purchase of Defaulted Mortgage Loans
[__________] or any affiliate of [__________] has the option to purchase
from the Trust Fund any Mortgage Loan which is 90 days or more delinquent at a
purchase price equal to the outstanding principal balance of such Mortgage Loan
as of the date of purchase, plus all accrued and unpaid interest on such
principal balance, computed at the Mortgage Interest Rate, plus the amount of
any unreimbursed Servicing Advances made by the Servicer with respect to such
Mortgage Loan, in accordance with the provisions specified in the Pooling and
Servicing Agreement.
THE CERTIFICATE INSURANCE POLICY
The following summary of the terms of the Certificate Insurance Policy
does not purport to be complete and is qualified in its entirety by reference to
the Certificate Insurance Policy. A form of the Certificate Insurance Policy may
be obtained, upon request, from the Depositor.
Simultaneously with the issuance of the Certificates, the Certificate
Insurer will deliver the Certificate Insurance Policy to the Trustee for the
benefit of the Class A Certificateholders. Under the Certificate Insurance
Policy, the Certificate Insurer will irrevocably and unconditionally guarantee
payment on each Distribution Date to the Trustee for the benefit of the Holders
of the Class A Certificates, as applicable, of the Insured Distribution Amounts
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 Pooling and
Servicing Agreement except amendments or modifications to which the Certificate
Insurer has given its prior written consent. The Insured Distribution Amounts
for each Distribution Date will be the sum of (i) the Class A Interest
Distribution Amount with respect to such Distribution Date, (ii) the
Subordination Deficit, if any, for such Distribution Date, and (iii) with
respect to the Distribution Date which is a Final Scheduled Maturity Date, the
outstanding Certificate Principal Balance of the related Class A Certificates
(without duplication to the amount specified in clause (ii)). In addition, with
respect to any Distribution Date occurring on a date when an event of default
under the Insurance Agreement (described below) has occurred and is continuing
or a date on or after the first date on which a claim is made under the
Certificate Insurance Policy, the Certificate Insurer at its sole option, may
pay any or all of the outstanding Certificate Principal Balance of the Class A
Certificates. Mortgage Loan Interest Shortfalls will not be covered by payments
under the Certificate Insurance Policy.
Payment of claims under the Certificate Insurance Policy will be made by
the Certificate Insurer following Receipt by the Certificate Insurer of the
appropriate notice for payment on the later to occur of (a) 12:00 noon, New York
City time, on the second Business Day following Receipt of such notice for
payment, and (b) 12:00 noon, New York City time, on the relevant Distribution
Date.
If any payment of an amount guaranteed by the Certificate Insurer pursuant
to the Certificate Insurance Policy is avoided as a preference payment under
applicable bankruptcy, insolvency, receivership or similar law the Certificate
Insurer will pay such amount out of the funds of the Certificate Insurer on the
later of (a) the date when due to be paid pursuant to the Order referred to
below or (b) the first to occur of (i) the fourth Business Day following Receipt
by the Certificate Insurer from the Trustee of (A) a certified copy of the order
of the court or other governmental body which exercised jurisdiction to the
effect that a Class A Certificateholder is required to return principal or
interest distributed with respect to a Class A Certificate during the term of
the Certificate Insurance Policy because such distributions were avoidable
preferences under applicable bankruptcy law (the "Order"), (B) a certificate of
the Class A Certificateholder(s) that the Order has been entered and is not
subject to any stay, and (C) an assignment duly executed and delivered by the
Class A Certificateholder(s), in such form as is reasonably required by the
Certificate Insurer and provided to the Class A Certificateholder(s) by the
Certificate Insurer, irrevocably assigning to the Certificate Insurer all rights
and claims of the Class A Certificateholder(s) relating to or arising under the
Class A Certificates against the debtor which made such preference payment or
otherwise with respect to such preference payment, or (ii) the date of Receipt
by the Certificate Insurer from the Trustee of the
S-54
<PAGE>
items referred to in clauses (A), (B) and (C) above if, at least four Business
Days prior to such date of Receipt, the Certificate Insurer shall have Received
written notice from the Trustee that such items were to be delivered on such
date and such date was specified in such notice. Such payment shall be disbursed
to the receiver, conservator, debtor-in-possession or trustee in bankruptcy
named in the Order and not to the Trustee or any Class A Certificateholder
directly (unless a Class A Certificateholder has previously paid such amount to
the receiver, conservator, debtor-in-possession or trustee in bankruptcy named
in the Order, in which case such payment shall be disbursed to the Trustee for
distribution to such Class A Certificateholder upon proof of such payment
reasonably satisfactory to the Certificate Insurer).
The terms "Receipt" and "Received," with respect to the Certificate
Insurance Policy, means actual delivery to the Certificate Insurer and to its
fiscal agent appointed by the Certificate Insurer at its option, if any, prior
to 12:00 p.m., New York City time, on a Business Day; delivery either on a day
that is not a Business Day or after 12:00 p.m., New York City time, shall be
deemed to be Receipt on the next succeeding Business Day. If any notice or
certificate given under the Certificate Insurance Policy by the Trustee is not
in proper form or is not properly completed, executed or delivered, it shall be
deemed not to have been Received, and the Certificate Insurer or the fiscal
agent shall promptly so advise the Trustee and the Trustee may submit an amended
notice.
Under the Certificate Insurance Policy, "Business Day" means any day other
than (i) a Saturday or Sunday or (ii) a day on which banking institutions in the
City of New York, New York or the State of New York, are authorized or obligated
by law or executive order to be closed. The Certificate Insurer's obligations
under the Certificate Insurance Policy to make Insured Payments shall be
discharged to the extent funds are transferred to the Trustee as provided in the
Certificate Insurance Policy, whether or not such funds are properly applied by
the Trustee.
The Certificate Insurer shall be subrogated to the rights of each Class A
Certificateholder to receive payments of principal and interest, as applicable,
with respect to distributions on the Class A Certificates to the extent of any
payment by the Certificate Insurer under the Certificate Insurance Policy. To
the extent the Certificate Insurer makes Insured Payments, either directly or
indirectly (as by paying through the Trustee), to the Class A
Certificateholders, the Certificate Insurer will be subrogated to the rights of
the Class A Certificateholders, as applicable, with respect to such Insured
Payment and shall be deemed to the extent of the payments so made to be a
registered Class A Certificateholder for purposes of payment.
Claims under the Certificate Insurance Policy will rank equally with any
other unsecured debt and unsubordinated obligations of the Certificate Insurer
except for certain obligations in respect of tax and other payments to which
preference is or may become afforded by statute. Claims against the Certificate
Insurer under the Certificate Insurance Policy constitute pari passu claims
against the general assets of the Certificate Insurer. The terms of the
Certificate Insurance Policy cannot be modified or altered by any other
agreement or instrument, or by the merger, consolidation or dissolution of the
Depositor. The Certificate Insurance Policy may not be cancelled or revoked
prior to payment in full of the Class A Certificates. The Certificate Insurance
Policy is governed by the laws of the State of New York. The Certificate
Insurance Policy is not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law.
To the fullest extent permitted by applicable law, the Certificate Insurer
agrees under the Certificate Insurance Policy not to assert, and waives, for the
benefit of each Class A Certificateholder, all its rights (whether by
counterclaim, setoff or otherwise) and defense (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 Certificate
Insurer to avoid payment of its obligations under the Certificate Insurance
Policy in accordance with the express provisions of the Certificate Insurance
Policy.
Pursuant to the terms of the Pooling and Servicing Agreement, unless a
Certificate Insurer Default exists, the Certificate Insurer shall be deemed to
be the Certificateholders for all purposes (other than with respect to payment
on the Certificates), will be entitled to exercise all rights of the Class A
Certificateholders thereunder, without the consent of such Certificateholders,
and the Class A Certificateholders may exercise such rights only with the prior
written consent of the Certificate Insurer. In addition, the Certificate Insurer
will, as a third party beneficiary to the Pooling and Servicing Agreement and
the Unaffiliated Seller's Agreement, have, among others, the following rights:
(i) the right to give notices of breach or to terminate the rights and
obligations of the Servicer
S-55
<PAGE>
under the Pooling and Servicing Agreement in the event of an Event of Default by
the Servicer and to institute proceedings against the Servicer; (ii) the right
to consent to or direct any waivers of defaults by the Servicer; (iii) the right
to remove the Trustee pursuant to the Pooling and Servicing Agreement; (iv) the
right to direct the actions of the Trustee during the continuation of a Servicer
default; (v) the right to require the Seller to repurchase Mortgage Loans for
breach of representation and warranty or defect in documentation; (vi) the right
to direct foreclosures upon the failure of the Servicer to do so in accordance
with the Pooling and Servicing Agreement; (vii) the right to direct all matters
relating to a bankruptcy or other insolvency proceeding involving the Seller;
and (viii) the right to direct the Trustee to investigate certain matters. The
Certificate Insurer's consent will be required prior to, among other things, (i)
the removal of the Trustee, (ii) the appointment of any successor Trustee or
Servicer or (iii) any amendment to the Pooling and Servicing Agreement.
The Depositor, the Seller, the Servicer and the Certificate Insurer will
enter into an Insurance and Indemnity Agreement (the "Insurance Agreement")
pursuant to which the Servicer will agree to reimburse, with interest, the
Certificate Insurer for amounts paid pursuant to claims under the Certificate
Insurance Policy. The Servicer will further agree to pay the Certificate Insurer
all reasonable charges and expenses which the Certificate Insurer may pay or
incur relative to any amounts paid under the Certificate Insurance Policy or
otherwise in connection with the transaction and to indemnify the Certificate
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" under the Insurance Agreement will constitute
an Event of Default under the Pooling and Servicing Agreement and allow the
Certificate Insurer, among other things, to direct the Trustee to terminate the
Servicer. See "Servicing of the Mortgage Loans -- Removal and Resignation of the
Servicer" herein. An "event of default" under the Insurance Agreement includes
(i) the Originators', the Seller's, the Depositor's or the Servicer's failure to
pay when due any amount owed under the Insurance Agreement or certain other
documents, (ii) the inaccuracy or incompleteness in any material respect of any
representation or warranty of the Originators, the Seller, the Depositor or the
Servicer in the Insurance Agreement, the Pooling and Servicing Agreement or
certain other documents, (iii) the Originators', the Seller's, the Depositor's
or the Servicer's failure to perform or to comply with any covenant or agreement
in the Insurance Agreement, the Pooling and Servicing Agreement and certain
other documents, (iv) a finding or ruling by a governmental authority or agency
that the Insurance Agreement, the Pooling and Servicing Agreement or certain
other documents are not binding on the Originators, the Seller, the Depositor or
the Servicer, (v) the Originators', the Seller's, the Depositor's or the
Servicer's failure to pay its debts in general or the occurrence of certain
events of insolvency or bankruptcy with respect to the Seller or the Servicer,
and (vi) the occurrence of certain "performance test violations" designed to
measure the performance of the Mortgage Loans.
THE CERTIFICATE INSURER
The following information has been obtained from [__________] and has not
been verified by the Seller, [__________], [__________], the Depositor or the
Underwriter. No representation or warranty is made by the Seller, [__________],
[__________] or the Underwriter with respect thereto.
General
[insert]
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
An election will be made to treat the Trust as a REMIC for federal income
tax purposes. Dewey Ballantine, special tax counsel to the Depositor, will
deliver its opinion that, assuming compliance with the Pooling and Servicing
Agreement, the Trust will be treated as a REMIC for federal income tax purposes.
The Class A Certificates will be designated as "regular interests" in the REMIC,
and the Class R Certificates will be designated as the sole "residual interest"
in the REMIC. The Class R Certificates are "Residual Certificates" for purposes
of the Prospectus.
The Certificates possess certain special tax attributes by virtue of the
REMIC provisions of the Code. See "Certain Federal Income Tax Consequences --
REMIC Securities" in the Prospectus. The Small Business Job Protection Act of
1996 repeals the bad debt reserve method of accounting for mutual savings banks
and domestic building and loan associations for tax years beginning after
December 31, 1995. As a result, section 593(d) of the
S-56
<PAGE>
Code is no longer applicable to treat REMIC regular interests, including the
Certificates, as "qualifying real property loans."
The Class A Certificates generally will be treated as debt instruments for
federal income tax purposes. Beneficial owners (or registered holders, in the
case of Definitive Certificates) of the Class A Certificates will be required to
report income on such Certificates in accordance with the accrual method of
accounting.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain restrictions on (a) employee benefit plans (as
defined in Section 3(3) of ERISA), (b) plans described in section 4975(e)(1) of
the Code, including individual retirement accounts or Keogh plans, (c) any
entities whose underlying assets include plan assets by reason of a plan's
investment in such entities (each a "Plan") and (d) persons who have certain
specified relationships to such Plans ("Parties-in-Interest" under ERISA and
"Disqualified Persons" under the Code). Section 406 of ERISA prohibits Plans
from engaging in certain transactions involving the assets of such Plans with
Parties in Interest with respect to such Plans, unless a statutory or
administrative exemption is applicable to the transaction. Excise taxes under
Section 4975 of the Code, penalties under Section 502 of ERISA and other
penalties may be imposed on Plan fiduciaries and Parties-in-Interest (or
Disqualified Persons) that engage in "prohibited transactions" involving assets
of a Plan. Individual retirement arrangements and other plans that are not
subject to ERISA, but are subject to Section 4975 of the Code, and Disqualified
Persons with respect to such arrangements and plans, also may be subject to
excise taxes and other penalties if they engage in prohibited transactions.
Moreover, based on the reasoning of the United States Supreme Court in John
Hancock Life Ins. Co. v. Harris Trust and Sav. Bank, 114 S. Ct. 517 (1993), an
insurance company's general account may be deemed to include assets of the Plans
investing in the general account (e.g., through the purchase of an annuity
contract). ERISA also imposes certain duties on persons who are fiduciaries of
Plans subject to ERISA.
The Department of Labor (the "DOL") has issued a regulation (the "Plan
Asset Regulation") describing what constitutes the assets of a Plan when the
Plan acquires an equity interest in another entity. The Plan Asset Regulation
states that, unless an exemption described in the regulation is applicable, the
underlying assets of an entity in which a Plan makes an equity investment will
be considered, for purposes of ERISA, to be the assets of the investing Plan.
Pursuant to the Plan Asset Regulation, if the assets of the Trust were deemed to
be plan assets by reason of a Plan's investment in any Class A Certificates,
such plan assets would include an undivided interest in any assets held in such
Trust. Therefore, in the absence of an exemption, the purchase, sale or holding
of any Class A Certificate by a Plan subject to Section 406 of ERISA or Section
4975 of the Code might result in prohibited transactions and the imposition of
excise taxes and civil penalties.
On June 6, 1990, the DOL issued to Prudential Securities Incorporated an
individual administrative exemption, Prohibited Transaction Exemption 90-32 (the
"Exemption"), from certain of the prohibited transaction rules of ERISA with
respect to the initial purchase, the holding and the subsequent resale by a Plan
of certificates in pass-through trusts that meet the conditions and requirements
of the Exemption. Among the conditions that must be satisfied for the Exemption
to apply are the following:
1. The Acquisition of the Class A Certificates by a Plan is on terms
(including the price for the Class A 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 Class A Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust Fund;
3. The Class A Certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three highest
generic rating categories from any of [___], [___], [___], or [___];
4. The sum of all payments made to the Underwriter in connection
with the distribution of the Class A Certificates represents not more than
reasonable compensation for underwriting the Class A
S-57
<PAGE>
Certificates. The sum of all payments made to and retained by the Servicer
represents not more than reasonable compensation for the Servicer's
services under the Pooling and Servicing Agreement and reimbursement of
the Servicer's reasonable expenses in connection therewith;
5. The Trustee is not an affiliate of any other member of the
Restricted Group (as defined below); and
6. The Plan investing in the Class A 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.
The Trust Fund also must meet the following requirements:
a. The corpus of the Trust Fund must consist solely of assets of the
type which have been included in other investment pools;
b. certificates in such other investment pools must have been rated
in one of the three highest rating categories of [___], [___], [___] or
[___] for at least one year prior to the Plan's acquisition of
certificates; and
c. certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of Class A Certificates.
In order for the Exemption to apply to certain self-dealing/conflict of
interest prohibited transactions that may occur when a Plan fiduciary causes the
Plan to acquire Class A Certificates, the Exemption requires, among other
matters, that: (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 Fund is acquired by persons independent of the Restricted Group (as
defined below); (ii) such fiduciary (or its affiliate) is an obligor with
respect to 5 percent or less of the fair market value of the obligations
contained in the Trust Fund; (iii) the Plan's investment in Class A Certificates
does not exceed twenty-five percent (25%) of all of the certificates outstanding
at the time of the acquisition and (iv) immediately after the acquisition, no
more than twenty-five percent (25%) of the assets of the Plan 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 certain prohibited transactions in the
case of Plans sponsored by the Underwriter, the Trustee, the Servicer, any
obligor with respect to more than 5% of the fair market value of the Mortgage
Loans included in the Trust Fund, any entity deemed to be a "sponsor" of the
Trust Fund as such term is defined in the Exemption, or any affiliate of any
such party (the "Restricted Group").
Prior to the date on which the Pre-Funding Period expires, Plans will not
be permitted to purchase the Class A Certificates. On or after such date, the
Exemption may be available for the purchase of Class A Certificates by Plans.
Before purchasing a Class A Certificate, a fiduciary of an ERISA Plan should
make its own determination as to the availability of the exemptive relief
provided in the Exemption and whether the conditions of any such exemption will
be applicable to the Class A Certificates. Any fiduciary of an ERISA Plan
considering whether to purchase a Class A Certificate should also carefully
review with its own legal advisors the applicability of the fiduciary duty and
prohibited transaction provisions of ERISA and the Code to such investment.
A governmental plan as defined in Section 3(32) of ERISA is not subject to
ERISA, or Code Section 4975. However, such a governmental plan may be subject to
a federal, state, or local law, which is, to a material extent, similar to the
provisions of ERISA or Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the need for and the
availability of any exemptive relief under Similar Law.
S-58
<PAGE>
The sale of Certificates to a Plan is in no respect a representation by
the Depositor or the Underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular ERISA Plan.
LEGAL INVESTMENT
The Class A Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the Underwriting Agreement dated as
of [date] (the "Underwriting Agreement") between the Depositor and Prudential
Securities Incorporated (the "Underwriter"), the Depositor has agreed to sell to
the Underwriter and the Underwriter has agreed to purchase from the Depositor
the Class A Certificates.
The Depositor is obligated to sell, and the Underwriter is obligated to
purchase, all of the Class A Certificates offered hereby if any are purchased.
The Underwriter has advised the Depositor that it proposes to offer the
Class A Certificates purchased by the Underwriter for sale from time to time in
one or more negotiated transactions or otherwise, at market prices prevailing at
the time of sale, at prices related to such market prices or at negotiated
prices. The Underwriter may effect such transactions by selling such
Certificates to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
Underwriter or purchasers of the Class A Certificates for whom they may act as
agent. Any dealers that participate with the Underwriter in the distribution of
the Class A Certificates purchased by the Underwriter may be deemed to be
underwriters, and any discounts or commissions received by them or the
Underwriter and any profit on the resale of Class A Certificates by them or the
Underwriter may be deemed to be underwriting discounts or commissions under the
Securities Act.
In connection with the offering of the Class A Certificates, the
Underwriter and its affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Class A Certificates. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M, pursuant to which such person may bid for or purchase
the Class A Certificates for the purpose of stabilizing its market price. Any of
the transactions described in this paragraph may result in the maintenance of
the price of the Class A Certificates at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required, and, if they are taken, may be discontinued at any time
without notice.
For further information regarding any offer or sale of the Class A
Certificates pursuant to this Prospectus Supplement and the Prospectus, see
"Plan of Distribution" in the Prospectus.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
Prudential Securities Incorporated is an affiliate of the Depositor.
EXPERTS
The consolidated balance sheets of [__________] and subsidiaries as of
[dates] 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 [date], incorporated by reference in this Prospectus Supplement, have been
incorporated herein in reliance on the report of [_________], independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
S-59
<PAGE>
RATINGS
It is a condition to the original issuance of the Class A Certificates
that they will receive ratings of "[___]" by [___] and "[___]" by [___]. The
ratings assigned to the Class A Certificates will take into account the
claims-paying ability of the Certificate Insurer. Explanations of the
significance of such ratings may be obtained from [__________], [address] and
[___] Rating Services, [address]. Such ratings will be the views only of such
rating agencies. There is no assurance that any such ratings will continue for
any period of time or that such ratings will not be revised or withdrawn. Any
such revision or withdrawal of such ratings may have an adverse effect on the
market price of the Class A Certificates.
LEGAL MATTERS
Certain legal matters in connection with the Class A Certificates will be
passed upon for the Originators, the Seller and the Servicer by [__________],
and for the Depositor and the Underwriter by Dewey Ballantine LLP, New York, New
York.
INDEX OF SIGNIFICANT PROSPECTUS
SUPPLEMENT DEFINITIONS
__________...................................................................16
Accounts.....................................................................46
Accrual Period................................................................2
Adjustable Rate Certificates...............................................1, 3
Appraised Values.............................................................25
Available Amount.............................................................48
Available Funds Pass-Through Rate.............................................6
Balloon Loans................................................................20
Beneficial Owner..............................................................4
Book-Entry Certificates...................................................4, 16
Business Day.................................................................56
Capitalized Interest Account.................................................12
Carry-Forward Amount.........................................................11
Cede......................................................................4, 16
CEDEL........................................................................16
CEDEL Participants...........................................................40
Certificate Account..........................................................46
Certificate Insurance Policy...............................................1, 4
Certificate Insurer....................................................1, 4, 13
Certificate Insurer Default..................................................13
Certificate Principal Balance..............................................1, 7
Certificateholder............................................................16
Certificateholders............................................................2
Certificates...............................................................1, 3
Civil Relief Act.........................................................14, 23
Civil Relief Act Interest Shortfall..........................................23
Class.........................................................................1
Class A Certificate Principal Balance.........................................8
Class A Certificateholders....................................................1
Class A Certificates...................................................1, 3, 38
Class A Interest Distribution Amount..........................................8
Class A Principal Distribution Amount.........................................9
Class A-1 Certificates.....................................................1, 3
Class A-1 Original Certificate Principal Balance..............................6
Class A-1 Pass-Through Rate...................................................6
Class A-2 Certificates.....................................................1, 3
Class A-2 Original Certificate Principal Balance..............................6
Class A-2 Pass-Through Rate...................................................6
Class A-3 Certificates.....................................................1, 3
Class A-3 Original Certificate Principal Balance..............................6
Class A-3 Pass-Through Rate...................................................6
Class A-4 Certificates.....................................................1, 3
Class A-4 Original Certificate Principal Balance..............................6
Class A-4 Pass-Through Rate...................................................7
Class A-5 Certificates.....................................................1, 3
Class A-5 Original Certificate Principal Balance..............................6
Class A-5 Pass-Through Rate...................................................7
Class A-6 Certificates.....................................................1, 3
Class A-6 Lockout Distribution Amount.........................................8
Class A-6 Lockout Pro Rata Distribution Amount................................8
Class A-6 Original Certificate Principal Balance..............................6
Class A-6 Pass-Through Rate...................................................7
Class R Certificates.......................................................1, 3
Clean-up Call Date...........................................................15
Closing Date..................................................................4
CLTVs........................................................................25
Code.........................................................................16
Collection Account...........................................................46
S-60
<PAGE>
Commission....................................................................2
Compensating Interest....................................................14, 22
Cooperative..................................................................41
Current Interest..............................................................8
Cut-Off Date..................................................................3
Debt Service Reduction.......................................................14
Deficient Valuation..........................................................14
Definitive Certificate.......................................................39
Depositor..................................................................1, 3
Depository...................................................................16
Disqualified Persons.........................................................58
Distribution Date..........................................................2, 4
DOL..........................................................................58
DTC.......................................................................4, 16
Due Date......................................................................5
Due Period...................................................................10
Eligible Account.............................................................46
ERISA....................................................................16, 58
Euroclear....................................................................16
Euroclear Operator...........................................................41
Euroclear Participants.......................................................40
European Depositaries....................................................16, 39
Excess Subordinated Amount...................................................49
Exchange Act..................................................................2
Exemption................................................................16, 59
FHLMC........................................................................20
Final Scheduled Maturity Date.............................................2, 34
Financial Intermediary.......................................................39
First Liens..................................................................25
Fitch........................................................................13
Fixed Rate Certificates....................................................1, 3
FNMA.........................................................................20
Foreclosure Profits..........................................................47
HEP..........................................................................34
Holder...................................................................16, 39
Holders.......................................................................2
Home Equity Prepayment.......................................................34
Indirect Participants........................................................39
Initial Mortgage Loans.....................................................1, 4
Insurance Agreement..........................................................57
Insurance Proceeds...........................................................47
Interest Determination Date..................................................42
LIBO.........................................................................42
LIBOR.....................................................................6, 42
Liquidated Loan Loss.................................................11, 47, 49
Liquidated Mortgage Loan.....................................................11
Liquidation Expenses.........................................................47
Liquidation Proceeds.........................................................47
Lockout Certificates.......................................................1, 3
LTV..........................................................................44
Modeling Assumptions.........................................................34
Moody's......................................................................13
Mortgage Interest Rate.......................................................14
Mortgage Loan Interest Shortfalls.............................................8
Mortgage Loans............................................................1, 24
Mortgage Note................................................................52
Mortgage Pool.................................................................4
Mortgaged Properties..........................................................4
Mortgages.....................................................................4
Mortgagor....................................................................14
Multiple Liens...............................................................25
Net Foreclosure Profits......................................................48
Net Liquidation Proceeds.....................................................48
Net Monthly Excess Cashflow..................................................48
Net REO Proceeds.............................................................48
Nonrecoverable Advance.......................................................48
Original Certificate Principal Balance........................................1
Original Pre-Funded Amount....................................................1
Originators...................................................................3
Participants.................................................................39
Parties-in-Interest..........................................................58
Pass-Through Rate.............................................................1
Percentage Interest...........................................................7
Periodic Advances............................................................14
Permitted Investments........................................................39
Plan.........................................................................58
Plan Asset Regulation........................................................58
Pooling and Servicing Agreement...............................................1
Pre-Funding Account..........................................................12
Pre-Funding Period...........................................................12
Prepayment Assumption........................................................34
Prepayment Interest Shortfalls...............................................22
Principal Balance............................................................11
Principal Prepayments........................................................46
Qualified Substitute Mortgage Loan...........................................44
Rating Agencies..............................................................17
Rating Agency................................................................17
Receipt......................................................................56
Received.....................................................................56
Record Date...................................................................4
Reference Banks..............................................................42
Reimbursement Amount.........................................................50
Relevant Depositary..........................................................39
REMIC.....................................................................2, 17
REO Proceeds.................................................................48
Reserve Interest Rate........................................................42
Restricted Group.............................................................60
Reuters Screen LIBO Page.....................................................42
Riegle Act...................................................................24
Rules........................................................................39
Second Liens.................................................................25
Securities Act................................................................2
Seller........................................................................3
Servicer...................................................................1, 3
Servicer Distribution Date...............................................14, 46
Servicer Extension Notice....................................................54
Servicer Remittance Amount...................................................46
S-61
<PAGE>
Servicing Advances...........................................................15
Servicing Fee............................................................15, 48
Servicing Fee Rate...........................................................48
Similar Law..................................................................60
SMMEA........................................................................60
Specified Subordinated Amount................................................49
Standard & Poor's............................................................13
Statistical Calculation Date..............................................3, 24
Statistical Calculation Date Aggregate Principal Balance......................5
Subordinated Amount..........................................................49
Subordination Deficit....................................................11, 50
Subordination Increase Amount................................................49
Subordination Reduction Amount...............................................49
Subsequent Cut-Off Date.......................................................5
Subsequent Mortgage Loans..............................................1, 4, 24
Subsequent Transfer Date......................................................6
Subservicer...................................................................3
Substitution Adjustment......................................................44
Successor Servicer...........................................................54
Terms and Conditions.........................................................41
Trust......................................................................1, 3
Trust Fund.................................................................1, 4
Trustee....................................................................1, 3
Trustee's Fees...............................................................50
Trustee's Mortgage File......................................................43
Unaffiliated Seller's Agreement..............................................43
Underwriter...............................................................2, 60
Underwriting Agreement.......................................................60
Weighted average life........................................................34
S-62
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Depositor or by the Underwriter. This Prospectus Supplement
and the Prospectus do not constitute an offer to sell, or a solicitation of an
offer to buy, the securities offered hereby by anyone in any jurisdiction in
which such an offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement
or the Prospectus.
TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
Incorporation of Certain Information by Reference .................. _____
Summary Terms of the Certificates .................................. _____
Risk Factors ....................................................... _____
The Mortgage Pool .................................................. _____
The Originators, the Seller and the Servicer ....................... _____
Prepayment and Yield Considerations ................................ _____
Description of the Certificates .................................... _____
Servicing of the Mortgage Loans .................................... _____
The Certificate Insurance Policy ................................... _____
The Certificate Insurer ............................................ _____
Certain Federal Income Tax Considerations .......................... _____
ERISA Considerations ............................................... _____
Legal Investment ................................................... _____
Plan of Distribution ............................................... _____
Experts ............................................................ _____
Ratings ............................................................ _____
Legal Matters ...................................................... _____
Index of Significant Prospectus Supplement Definitions ............. _____
PROSPECTUS
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ......................... 2
SUMMARY TERMS OF THE CERTIFICATES ......................................... 3
RISK FACTORS .............................................................. 18
THE MORTGAGE POOL ......................................................... 24
THE ORIGINATORS, THE SELLER AND THE SERVICER .............................. 32
PREPAYMENT AND YIELD CONSIDERATIONS ....................................... 33
DESCRIPTION OF THE CERTIFICATES ........................................... 38
SERVICING OF THE MORTGAGE LOANS ........................................... 51
THE CERTIFICATE INSURANCE POLICY .......................................... 55
THE CERTIFICATE INSURER ................................................... 58
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS ................................. 58
ERISA CONSIDERATIONS ...................................................... 58
LEGAL INVESTMENT .......................................................... 60
PLAN OF DISTRIBUTION ...................................................... 60
EXPERTS ................................................................... 61
RATINGS ................................................................... 61
LEGAL MATTERS ............................................................. 61
================================================================================
================================================================================
[_____] Mortgage Loan Trust [series]
[__________]
(Servicer)
&
Prudential Securities
Secured Financing Corporation
(Depositor)
[$__________]
Adjustable Rate Class A-1 Certificates
[$__________]
[___%] Class A-2 Certificates
[$__________]
[___%] Class A-3 Certificates
[$----------]
[___%] Class A-4 Certificates
[$__________]
[___%] Class A-5 Certificates
[$__________]
[___%] Class A-6 Certificates
Mortgage Pass-Through Certificates,
Series [series]
__________________
PROSPECTUS SUPPLEMENT
__________________
Prudential Securities
Incorporated
[date]
================================================================================
<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus dated August __, 1998)
$-------------
[ ] Mortgage Loan Trust [Series]
Issuer
Asset Backed Notes, [Series]
[[____________] LOGO] [_____________]
Seller and Servicer
Prudential Securities Secured Financing Corporation
Depositor
------------------
The [ ] Mortgage Loan Trust [Series] (the "Issuer") will be formed
pursuant to a deposit trust agreement to be dated as of [__________ ] (the
"Trust Agreement") between Prudential Securities Secured Financing Corporation
(the "Depositor") and [__________ ], as owner trustee (the "Owner Trustee"). The
Issuer is hereby offering $___________ original principal amount of its Class
A-1 Asset Backed Notes, [Series] (the "Class A-1 Notes") and $____________
original principal amount of its Class A-2 Asset Backed Notes, [Series] (the
"Class A-2 Notes", and together with the Class A-1 Notes, the "Notes"). The
Notes will be issued pursuant to an indenture, dated as of [__________ ] 1 ___
(the "Indenture"), between the Issuer and [__________ ] , as indenture trustee
(the "Indenture Trustee"), and will be secured by a trust estate (the "Trust
Estate") consisting primarily of (i) a pool (the "Mortgage Pool") of fixed rate
mortgage loans secured by first and second liens on one- to four-family
residential properties (the "Mortgage Loans") and (ii) the Issuer's rights under
the Sale Agreement and the Servicing Agreement (each as defined herein). The
Issuer also will issue instruments evidencing the residual interest in the Trust
Estate (the "Residual Interest"). Only the Notes are offered hereby.
Simultaneously with the issuance of the Notes, the Seller will obtain from
[__________ ] (the "Note Insurer") a financial guaranty insurance policy
relating to the Notes (the "Insurance Policy") in favor of the Indenture
Trustee. The Insurance Policy will require the Note Insurer to make certain
Insured Payments (as defined herein) on the Notes. (cover continued on next
page)
[[__________ ]LOGO]
For a discussion of significant matters affecting investment in the Notes,
see "Risk Factors" beginning on page S-15 herein, "Certain Prepayment and Yield
Considerations" beginning on page S-50 herein and "Risk Factors" beginning on
page 13 in the Prospectus.
--------------------------------
THE ASSETS PLEDGED TO SECURE THE NOTES AND PAYMENTS UNDER THE INSURANCE POLICY
ARE THE SOLE SOURCE OF PAYMENTS ON THE NOTES. THE NOTES REPRESENT NON-RECOURSE
OBLIGATIONS OF THE ISSUER ONLY AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS
OF THE COMPANY, THE DEPOSITOR, THE SELLER, THE SERVICER, THE INDENTURE TRUSTEE,
THE OWNER TRUSTEE, THE NOTE INSURER OR ANY OF THEIR AFFILIATES, EXCEPT AS
DESCRIBED HEREIN. NEITHER THE NOTES NOR THE MORTGAGE LOANS ARE OR WILL BE
INSURED OR GUARANTEED BY ANY GOVERNMENT 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. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------------------
The Notes will be purchased by Prudential Securities Incorporated the
"Underwriters") from the Issuer and will be offered by the Underwriters 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 Issuer from the
sale of the Class A-1 Notes are expected to be approximately $________ and
proceeds from the sale of the Class A-2 Notes are expected to be approximately
$__________, in each case, plus accrued interest (based upon the original
principal amount of the Notes set forth above), before the deduction of expenses
payable by the Issuer estimated to be approximately $-------------.
The Notes are offered subject to prior sale, when, as, and if accepted by
the Underwriters and subject to the Underwriters' right to reject orders in
whole or in part. It is expected that delivery of the Notes will be made through
the Same-Day Funds Settlement System of The Depository Trust Company, Cedel
Bank, S.A. and the Euroclear System on or about [__________ ] . The Notes will
be offered in Europe and the United States of America.
Prudential Securities Incorporated
The date of this Prospectus Supplement is [__________ ] ___
<PAGE>
(continued from front cover)
The Class A-1 Notes will be secured by a group ("Group I") of Mortgage
Loans (the "Group I Mortgage Loans") in the Trust and the Class A-2 Notes will
be secured by a group ("Group II") of Mortgage Loans (the "Group II Mortgage
Loans") in the Trust. Payments on the Class A-1 Notes will be made solely from
Available Funds for Group I, and payments on the Class A-2 Notes will be made
solely from Available Funds for Group II. Group I and Group II are referred to
together herein as the "Mortgage Loan Groups" or the "Groups" and each
singularly, a "Mortgage Loan Group" or a "Group". As of the Cut-off Date, the
aggregate of the principal balances of the Group I Mortgage Loans totaled
approximately $________ and the aggregate of the principal balances of the Group
II Mortgage Loans totaled approximately $___________; the aggregate of the
principal balance of the Mortgage Pool totaled approximately $____________ (the
"Initial Mortgage Pool Balance"). The Mortgage Loans have been originated using
underwriting standards that are less stringent than the underwriting standards
applied by other first mortgage loan purchase programs such as those
administered by Fannie Mae or by Freddie Mac. See "RISK FACTORS--Risk Associated
with Underwriting Standards" herein.
The Mortgage Loans will have been originated or acquired by [____________]
(the "Seller") through its network of brokers and correspondents and retail
origination offices. On or prior to the date the Notes are issued, the Seller
will convey its interest in each Mortgage Loan to the Depositor who in turn will
convey such interests to the Issuer. The Issuer will then pledge all of its
interest in the Mortgage Loans, without recourse, to the Indenture Trustee
pursuant to the Indenture as collateral for the Notes.
Principal and interest on the Notes will be payable as described on the
25th day of each month or, if such day is not a Business Day, the next
succeeding Business Day, beginning in July ___ (each, a "Payment Date").
The Notes will constitute non-recourse obligations of the Issuer. The
Seller will have limited obligations arising in respect of certain
representations and warranties it makes in connection with the conveyance of the
Mortgage Loans to the Depositor pursuant to a mortgage loan sale agreement (the
"Sale Agreement"). The Seller will also act as servicer of the Mortgage Loans
(in such capacity, the "Servicer") and, in such capacity, will have limited
obligations that arise pursuant to certain representations and warranties and to
its contractual servicing obligations under the servicing agreement (the
"Servicing Agreement") to be entered into among the Servicer, the Issuer and the
Indenture Trustee, including the obligation to advance delinquent payments of
principal and interest on the Mortgage Loans to the extent provided herein.
The Notes will be unconditionally and irrevocably guaranteed as to timely
payment of interest due to Noteholders and as to ultimate collection of the Note
Balance, in each case pursuant to the terms of the Insurance Policy issued by
the Note Insurer. See "The Note Insurance" herein.
The stated maturity for the Notes is the Payment Date occurring in
_____________ (the "Stated Maturity").
The yield to maturity on the Notes will be affected by, among other
things, the rate of payment of principal (including by reason of prepayments,
defaults and liquidations) of the related Mortgage Loans and the timing and
receipt of such payments as described herein and in the Prospectus. See
"Prepayment and Yield Considerations" in the Prospectus and "Risk Factors--Yield
Considerations Relating to Excess Cash" and "Certain Prepayment and Yield
Considerations" herein.
Following the first Payment Date on which the Aggregate Principal Balance
(as defined herein) of the Mortgage Loans is less than 20% of the Aggregate
Principal Balance of the Mortgage Loans as of the Cut-off Date (as defined
herein), the Indenture Trustee is required to solicit competitive bids for the
purchase of the Mortgage Loans for fair market value. In the event that
satisfactory bids are received as described herein, the proceeds of such sale
will be used to redeem the Notes. See "Description of the Notes - Redemption of
the Notes" herein.
The Notes may be redeemed, in whole but not in part, at the option of the
Servicer or, if not exercised, at the option of the Note Insurer, on or after
the first Payment Date on which the Aggregate Principal Balance of the Mortgage
Loans is less than 10% of the Aggregate Principal Balance of the Mortgage Loans
as of the Cut-off Date. See "Description of the Notes--Redemption of the Notes"
herein.
No election will be made to treat the Issuer, the Trust Estate or the
arrangement by which the Notes are issued as a "real estate mortgage investment
conduit" (a "REMIC") for federal income tax purposes.
ii
<PAGE>
There is currently no secondary market for the Notes. The Underwriters
intend to make a secondary market for the Notes, but have no obligation to do
so. There can be no assurance that a secondary market for the Notes will develop
or, if one does develop, that it will provide investors with a satisfactory
level of liquidity or that it will continue.
It is a condition to the issuance of the Notes that they be rated "___" by
______________, Inc. and "_______" by _________________________________________.
Reference is made to the Index of Principal Terms herein for the location
in this Prospectus Supplement of the definitions of certain capitalized terms
used herein, and reference is also made to the Index of Principal Terms in the
Prospectus for the location in the Prospectus of the definitions of certain
capitalized terms used, but not otherwise defined, herein.
--------------------------
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Notes, whether or not participating in this
distribution, may be required to deliver a Prospectus Supplement and the related
Prospectus. This is in addition to the obligation of dealers acting as
underwriters to deliver a Prospectus Supplement and Prospectus with respect to
their unsold allotments or subscriptions.
The Notes offered by this Prospectus Supplement constitute a separate
Series of Securities being offered by the Depositor pursuant to its Prospectus
dated [__________ ], of which this Prospectus Supplement is a part and that
accompanies this Prospectus Supplement. The Prospectus contains important
information regarding the offering of the Notes that is not contained herein,
and prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full. Sales of the Notes may not be consummated unless the
prospective investor has received both this Prospectus Supplement and the
Prospectus.
For United Kingdom purchasers: The Notes may not be offered or sold in the
United Kingdom other than to persons whose ordinary business is to buy or sell
securities, whether as principal or agent (except in circumstances that do not
constitute an offer to the public within the meaning of the Public Offers of
Securities Regulation 1995), and this Prospectus Supplement and the Prospectus
may only be issued or passed on to any person in the United Kingdom if that
person is of the kind described in Article 11(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1996.
To the extent statements contained herein do not relate to historical or
current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect the payments to be made on, or the yield of, the Notes, which
risks and uncertainties are discussed under "Risk Factors" and "Certain
Prepayment and Yield Considerations" herein. As a consequence, no assurance can
be given as to the actual payments on, or the yield of, the Notes.
The Depositor has filed with the Commission certain materials relating to
the Mortgage Loans and the Notes on Form 8-K. Such materials were prepared by
the Underwriters (based in part on information provided by the Seller) for
certain prospective investors, and the information included in such materials is
subject to and is superseded by the information set forth in this Prospectus
Supplement.
--------------------------
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Capitalized terms used in this Prospectus Supplement
and not defined herein shall have the meanings set forth in the Prospectus. See
"Index of Principal Terms" in this Prospectus Supplement and in the Prospectus
for the location of the definitions of certain capitalized terms.
Securities Offered .............. $__________ _______% Class A-1 Asset Backed
Notes, [Series] (the "Class A-1 Notes") and
$__________ _____% Class A-2 Asset Backed
Notes, [Series] (the "Class A-2 Notes",
together with the Class A-1 Notes, the
"Notes"). The Notes represent non-recourse
obligations of the Issuer. Proceeds of the
assets in the Trust Estate and payments under
the Insurance Policy, if any, will be the
only sources of payments on the Notes.
Issuer .......................... [ ] Mortgage Loan Trust [Series], a
[__________ ] business trust (the "Issuer"),
established by the Depositor pursuant to a
deposit trust agreement, dated as of
[__________ ] (the "Trust Agreement"),
between the Depositor and the Owner Trustee.
After the Closing Date, the Residual Interest
representing all of the beneficial ownership
interest in the Issuer will be held by the
Company, a limited purpose, wholly-owned
subsidiary of the Seller. The Issuer does not
have, nor is it expected in the future to
have, any significant assets, other than the
assets included in the Trust Estate. See "The
Issuer" herein.
Company.......................... [____________], a corporation (the
"Company").
Seller and Servicer.............. [____________], a [__________ ] corporation
(the "Seller" and in its capacity as servicer
of the Mortgage Loans, the "Servicer"). The
Mortgage Loans were originated or acquired by
the Seller through its network of brokers and
correspondents and retail origination
offices. On or prior to the date the Notes
are issued, the Seller will convey its
interest in each Mortgage Loan to the
Depositor who in turn will convey such
interests to the Issuer.
Depositor........................ Prudential Securities Secured Financing
Corporation, a [__________ ] corporation (the
"Depositor"). The Depositor will acquire the
Mortgage Loans from the Seller and sell the
Mortgage Loans to the Issuer. See "The
Depositor" in the Prospectus.
The Indenture Trustee............ [__________ ] , as indenture trustee (the
"Indenture Trustee"). The Indenture Trustee
shall receive a fee (the "Indenture Trustee
Fee"), payable monthly on each Payment Date
at one-twelfth of 0.02% of the Aggregate
Principal Balance of the Mortgage Loans as of
the first day of the related Due Period. Upon
a termination of the Servicer, the Indenture
Trustee shall be obligated to succeed to the
obligations of the Servicer or to appoint an
eligible successor servicer.
- --------------------------------------------------------------------------------
S-1
<PAGE>
- --------------------------------------------------------------------------------
Owner Trustee.................... [__________ ], a [__________ ] [__________ ]
, acting not in its individual capacity but
solely as owner trustee (the "Owner Trustee")
under the Trust Agreement. The Owner Trustee
shall receive a fee (the "Owner Trustee Fee")
as provided under the Trust Agreement.
Cut-off Date..................... With respect to the Mortgage Loans, the
"Cut-off Date" is the close of business on
[__________ ].
Closing Date..................... On or about [__________ ] .
Administrative Fee Amount........ With respect to any Payment Date, the sum of
the Servicing Fee (as defined hereafter),
Indenture Trustee Fee and Note Insurer
Premium (as defined hereafter) relating to
such Payment Date (the "Administrative Fee
Amount").
Due Period....................... With respect to each Class of Notes and any
Payment Date, the period commencing on the
second day of the calendar month immediately
preceding the calendar month in which such
Payment Date occurs (or with respect to the
first Payment Date, commencing on the day
following the Cut-off Date for each Mortgage
Loan) and ending on the first day of the
calendar month in which such Payment Date
occurs (the "Due Period").
Collection Period................ With respect to each Class of Notes and any
Payment Date, the calendar month immediately
preceding the month in which such Payment
Date occurs (or, in the case of the first
Payment Date, the period from the day
following the Cut-off Date for each Mortgage
Loan through and including the last day of
[__________ ] ___) (the "Collection Period").
Deposit Date..................... With respect to each Payment Date, the 18th
day of the month in which such Payment Date
occurs, or if such day is not a Business Day,
then the next succeeding Business Day (the
"Deposit Date").
Description of the Notes......... The Notes represent non-recourse obligations
of the Issuer and will be issued pursuant to
an indenture to be dated as of [__________ ]
(the "Indenture"), entered into between the
Issuer and the Indenture Trustee. The assets
included in the trust estate created by the
Indenture (the "Trust Estate") and pledged to
secure the Notes and payments under the
Insurance Policy, if any, will be the only
sources of payments on the Notes. The Notes
will be issued in two classes (each, a
"Class"). The Class A-1 Notes will be secured
by the Group I Mortgage Loans and the Class
A-2 Notes will be secured by the Group II
Mortgage Loans. Payments on the Class A-1
Notes are solely from Available Funds for
Group I and payments on the Class A-2 Notes
are solely from Available Funds for Group II.
The assets of the Trust Estate will consist
of (i) a pool (the "Mortgage Pool")
consisting of two Groups of Mortgage Loans,
which are fixed rate mortgage loans secured
by first and second lien mortgages or deeds
of trust, in the case of
- --------------------------------------------------------------------------------
S-2
<PAGE>
- --------------------------------------------------------------------------------
Group I, and first lien mortgages or deeds of
trust, in the case of Group 2, on one- to
four-family residential properties, including
units in condominiums and planned unit
developments (the "Mortgaged Properties"),
and including any note or other instrument of
indebtedness (each, a "Mortgage Note"); (ii)
all payments in respect of principal and
interest on the Mortgage Loans (other than
any principal or interest payments due
thereon on or prior to the Cut-off Date);
(iii) security interests in the Mortgaged
Properties; (iv) the Issuer's rights under
the Sale Agreement and the Servicing
Agreement; and (v) certain other property.
Denominations and
Registration..................... The Notes will be issued in denominations of
not less than $1,000 principal amount and in
integral multiples thereof, with the
exception of one Note which may be issued in
a lesser amount. No person acquiring a
beneficial ownership interest in any Note
(any such person, a "Beneficial Owner") will
be entitled to receive such Note in fully
registered, certificated form (a "Definitive
Note"), except under the limited
circumstances described herein. Instead,
Beneficial Owners will hold their Notes
through The Depository Trust Company ("DTC"),
in the United States, or Cedel Bank, societe
anonyme ("Cedel") or the Euroclear System
("Euroclear") in Europe, each of which will
effect payments and transfers in respect of
the Notes by means of electronic record
keeping services, acting through certain
participating organizations. 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. So long as the Notes are in book
entry form, the Notes will be represented by
one or more global certificates registered in
the name of Cede & Co., as nominee of DTC, or
Citibank N.A. or Morgan Guaranty Trust
Company of New York, the relevant
depositaries of Cedel and Euroclear,
respectively, and each a participating member
of DTC. This may result in certain delays in
receipt of payments by an investor and may
restrict an investor's ability to pledge its
Notes. See "Risk Factors-Book-Entry
Registration" and "Description of the
Notes-Book-Entry Registration and Definitive
Notes" herein, "ANNEX A: Global Clearance,
Settlement and Tax Documentation Procedures"
hereto and "Risk Factors-Book-Entry
Registration" and "Description of the
Securities-Book-Entry Registration" in the
Prospectus. Unless and until Definitive Notes
are issued, it is anticipated that the only
"Noteholder" will be Cede & Co., as nominee
of DTC. Beneficial Owners will not be
Noteholders as that term is used in the
Indenture and the Servicing Agreement.
Beneficial Owners are permitted to exercise
their rights only indirectly through DTC and
its Participants (including Cedel and
Euroclear).
Payments on the Notes
A. General................ Payments on the Notes will be made on the
25th day of each month, or if such day is not
a Business Day, on the next succeeding
Business Day (each, a "Payment Date"),
- --------------------------------------------------------------------------------
S-3
<PAGE>
- --------------------------------------------------------------------------------
commencing July 27, ___, to each Noteholder
of record as of the last Business Day
preceding such Payment Date or, with respect
to Definitive Notes, as of the last Business
Day of the month preceding the month in which
such Payment Date occurs (the "Record Date").
A "Business Day" is any day other than (i) a
Saturday or Sunday or (ii) a day on which the
Note Insurer or banking institutions in the
State of _________ State of ____________, the
State of [__________ ] , the State of
_____________- or the city in which the
corporate trust office of the Indenture
Trustee are authorized or obligated by law,
regulation, executive order or governmental
decree to be closed.
On each Payment Date, payments of principal
and interest will be made to Noteholders as
of the immediately preceding Record Date out
of Available Funds for the related Group and
such Payment Date, together with any payments
received under the Insurance Policy. The
"Available Funds" for any Payment Date and
for each Group will generally consist of the
aggregate of the following amounts:
(i) the sum of, for the Mortgage Loans in
the related Group, (a) all scheduled
payments of principal and interest
received with respect to such
Mortgage Loans and due during the
related Due Period and (b) all
unscheduled principal payments or
recoveries on such Mortgage Loans,
including Principal Prepayments,
Insurance Proceeds and Net
Liquidation Proceeds received during
the related Collection Period, minus
----- (w) amounts received with
respect to payments due on or prior
to the Cut-off Date, (x) the
Administrative Fee Amount payable
with respect to such Payment Date,
(y) Payments Ahead and (z)
reimbursements for certain Monthly
Advances and Servicing Advances made
with respect to the Mortgage Loans as
described herein (other than those
included in Liquidation expenses
already reimbursed from related
Liquidation Proceeds); and
(ii) the amount of any Monthly Advances
and Compensating Interest Payments
made by the Servicer with respect to
Mortgage Loans in the related Group
for such Payment Date, any amounts
deposited in the Note Account in
respect of the repurchase, release,
removal or substitution of Mortgage
Loans in the related Group during the
related Collection Period or amounts
deposited in the Note Account in
connection with the redemption of the
related Class of Notes, all as more
fully described under "Description of
the Notes-Payments on the Notes"
herein.
B. Note Interest Rate.......... The "Note Interest Rate" for the Class A-1
Notes and each Interest Period prior to the
Initial Redemption Date (as defined herein)
will be a per annum rate equal to ____%, and
for each Interest Period thereafter, will be
a per annum rate equal to
- --------------------------------------------------------------------------------
S-4
<PAGE>
- --------------------------------------------------------------------------------
_____%. The "Note Interest Rate" for the
Class A-2 Notes and each Interest Period
prior to the Initial Redemption Date will be
a per annum rate equal to ______%, and for
each Interest Period thereafter will be a per
annum rate equal to _____%. See "Description
of the Notes-Payments on the Notes" herein.
The "Interest Period" in respect of any
Payment Date will be the calendar month
immediately preceding the month in which the
Payment Date occurs. All calculations of
interest on the Notes will be computed on the
basis of a year of 360 days and twelve 30 day
months.
C. Payments of Interest ....... On each Payment Date, Notes will be entitled
to payments in respect of interest accrued
during the related Interest Period ("Note
Interest") at the related Note Interest Rate
on the outstanding aggregate principal
balance of the related Notes (the "Note
Balance") as of the preceding Payment Date
(after giving effect to the payment, if any,
in reduction of principal made on the Notes
on such preceding Payment Date). See
"Description of the Notes-Payments on the
Notes" herein.
If, with respect to any Payment Date, funds
are not available from Available Funds for a
Group to pay the full amount of Note Interest
due on the related Notes, the deficiency will
be covered by payments made pursuant to the
Insurance Policy for such Payment Date. See
"The Note Insurance--The Insurance Policy"
herein.
D. Payments of Principal....... On each Payment Date, Notes will be entitled
to Monthly Principal in reduction of the Note
Balance. "Monthly Principal" with respect to
any Payment Date and each Class of Notes will
be equal to the aggregate of all scheduled
payments of principal received or advanced
with respect to the Mortgage Loans in the
related Group and due during the related Due
Period and all other amounts collected,
received or otherwise recovered in respect of
principal on the Mortgage Loans in the
related Group during or in respect of the
related Collection Period, not including
Payments Ahead that are not allocable to the
related Due Period, subject to reduction for
any Overcollateralization Surplus with
respect to the related Payment Date as
described herein.
E. Payments of Excess Cash .... On each Payment Date with respect to which
the Overcollateralization Amount for a Class
of Notes is less than the related Required
Overcollateralization Amount for such Payment
Date, Excess Cash derived from Available
Funds in respect of the related Group, if
any, will be paid on the related Notes in
reduction of the related Note Balance, up to
the amount necessary for the related
Overcollateralization Amount to equal the
applicable Required Overcollateralization
Amount. "Excess Cash" for each Class on any
Payment Date will be equal to Available Funds
for the related Group on such Payment Date,
reduced by the sum of (i) any amounts payable
to the Note Insurer for Insured Payments with
respect to such Class paid on prior Payment
Dates and not yet reimbursed and
- --------------------------------------------------------------------------------
S-5
<PAGE>
- --------------------------------------------------------------------------------
for any unpaid Note Insurer Premiums for such
Group for prior Payment Dates (in each case
with interest thereon at the Late Payment
Rate set forth in the Insurance Agreement),
(ii) the Note Interest for the related Class
and Payment Date and (iii) the Monthly
Principal for the related Class and Payment
Date. Any Excess Cash remaining with respect
to a Class after making required payments on
the related Notes and to the Note Insurer on
any Payment Date as described herein will be
released to the holder(s) of the Residual
Interest on such Payment Date, free from the
lien of the Indenture, and such amounts will
not be available to make any of the payments
referred to in clauses (i)-(iii) above on any
subsequent Payment Date. Certain Mortgage
Loans will not have their first monthly
payment due until the Due Period relating to
the August ___ Payment Date. Accordingly, in
the case of the July ___ Payment Date, the
amount of Excess Cash available will be lower
than it would have been otherwise.
F. Overcollateralization Feature Credit enhancement with respect to each Class
of Notes will be provided in part by
overcollateralization resulting from the
Aggregate Principal Balances of the Mortgage
Loans in the related Group as of the end of
each Due Period exceeding the related Note
Balance for the related Payment Date (after
taking into account the Monthly Principal and
Excess Cash to be paid on such Payment Date
in reduction of the Note Balance). The
Indenture requires that this
Overcollateralization Amount for a Class be
increased to, and thereafter maintained at,
the related Required Overcollateralization
Amount. This increase and subsequent
maintenance is intended to be accomplished by
the application of monthly Excess Cash to
accelerate the pay down of the related Note
Balance until the related
Overcollateralization Amount reaches the
related Required Overcollateralization
Amount. Such applications of Excess Cash,
because they consist of interest collections
on the Mortgage Loans, but are distributed as
principal on the Notes, will increase the
related Overcollateralization Amount. Such
overcollateralization is intended to result
in amounts received on the related Mortgage
Loans in excess of the amount necessary to
pay Note Interest and the Monthly Principal
required to be paid on the related Notes on
any Payment Date being applied to reduce the
related Note Balance to zero no later than
the Stated Maturity of the Notes.
The "Overcollateralization Amount" for each
Class of Notes on any Payment Date will be
equal to the amount by which the Aggregate
Principal Balance of the Mortgage Loans in
the related Group as of the end of the
related Due Period exceeds the related Note
Balance for such Payment Date after taking
into account payments of Monthly Principal
(disregarding any permitted reduction in
Monthly Principal due to an
Overcollateralization Surplus) made on such
Class of Notes on such Payment Date. The
"Required Overcollateralization Amount" for
each Class of Notes on any
- --------------------------------------------------------------------------------
S-6
<PAGE>
- --------------------------------------------------------------------------------
Payment Date will be equal to the amount
specified as such in the Indenture. The
"Overcollateralization Surplus" for each
Class of Notes on any Payment Date will be
the amount, if any, by which the related
Overcollateralization Amount on such Payment
Date exceeds the related Required
Overcollateralization Amount. The
"Overcollateralization Deficit" for each
Class of Notes on any Payment Date will be
the amount, if any, by which the related Note
Balance on such Payment Date (after taking
into account the Monthly Principal and Excess
Cash to be paid on such Payment Date in
reduction of the related Note Balance)
exceeds the Aggregate Principal Balance of
the Mortgage Loans in the related Group at
the end of the related Due Period.
The Indenture generally provides that the
Required Overcollateralization Amount for
each Class may, over time, decrease or
increase, subject to certain floors, caps and
triggers including triggers that allow the
related Required Overcollateralization Amount
to decrease or "step down" based on the
performance of the Mortgage Loans in the
related Group with respect to certain
delinquency rate tests specified in the
Indenture. In addition, Excess Cash for a
Group will be applied to the payment in
reduction of principal of the related Class
of Notes during the period that the related
Mortgage Loans are unable to meet certain
tests specified in the Indenture based on
delinquency rates. Any increase in a Required
Overcollateralization Amount may result in an
accelerated amortization of the related Notes
until such Required Overcollateralization
Amount is reached, and any decrease in a
Required Overcollateralization Amount will
result in a decelerated amortization of the
related Notes until such Required
Overcollateralization Amount is reached. See
"Description of the
Notes-Overcollateralization Feature" herein.
G. Insurance Policy............ [__________ ], a New York stock insurance
company (the "Note Insurer"), will issue a
financial guaranty insurance policy (the
"Insurance Policy") in favor of the Indenture
Trustee for the benefit of the Noteholders.
The amount of the actual payment, if any,
required to be made by the Note Insurer to
the Indenture Trustee for the benefit of the
Noteholders under the Insurance Policy (the
"Insured Payment") is (i) for any Payment
Date and each Class of Notes, the sum of (a)
the related Note Interest for such Payment
Date minus Available Funds for the related
Group and (b) the then existing
Overcollateralization Deficit with respect to
each Class of Notes, if any, after
application of Available Funds for the
related Group to reduce the related Note
Balance on such Payment Date and (ii) any
shortfall in the amount required to pay a
Preference Amount with respect to such Class
from any source other than the Insurance
Policy. The Insurance Policy does not insure
shortfalls to the Note Interest resulting
from the application of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended
(the "Relief Act") or due to Principal
Prepayments on the Mortgage Loans. See "The
Note Insurance-The Insurance Policy" herein.
- --------------------------------------------------------------------------------
S-7
<PAGE>
- --------------------------------------------------------------------------------
Insured Payments do not cover Realized Losses
except to the extent that an
Overcollateralization Deficit exists. Insured
Payments do not cover the Servicer's failure
to make Monthly Advances pursuant to the
Servicing Agreement, except to the extent
that an Overcollateralization Deficit would
otherwise result from such failure.
Nevertheless, the effect of the Insurance
Policy is to guaranty the timely payment of
interest on, and the ultimate payment of the
principal amount of, the Notes.
The Insurance Policy is not cancelable for
any reason.
Unless a Note Insurer Default exists, the
Note Insurer shall have the right to exercise
certain rights of the Noteholders, as
specified in the Indenture, without any
consent of such Noteholders; and such
Noteholders may exercise such rights only
with the prior written consent of the Note
Insurer, except as provided in the Indenture.
In addition, to the extent of unreimbursed
payments under the Insurance Policy, the Note
Insurer will be subrogated to the rights of
the holders of the Notes on which such
Insured Payments were made. In connection
with each Insured Payment on a Note, the
Indenture Trustee, as attorney-in-fact for
the holder thereof, will be required to
assign to the Note Insurer the rights of such
holder with respect to the Note to the extent
of such Insured Payment. "Note Insurer
Default" is defined under the Indenture
generally as the existence and continuance of
(x) the failure by the Note Insurer to make a
required payment under the Insurance Policy
or (y) the bankruptcy or insolvency of the
Note Insurer.
The Note Insurer will be entitled to receive
a monthly premium (the "Note Insurer
Premium") with respect to each Group on each
Payment Date payable from amounts on deposit
in the related Note Account.
H. Stated Maturity ............... The Stated Maturity for each Class of Notes
is _________- (which has been determined by
adding 13 months to the last Payment Date
scheduled for the Mortgage Loan of the
related Group with the latest stated
maturity). It is anticipated that the actual
final Payment Date for the Notes will occur
significantly earlier than the Stated
Maturity. See "Certain Prepayment and Yield
Considerations" herein.
Monthly Advances................. The Servicer is required to make advances
("Monthly Advances") in respect of delinquent
payments of principal and interest on the
Mortgage Loans, subject to certain
limitations described herein. See "Servicing
of the Mortgage Loans-The Servicing
Agreement-Monthly Advances" herein.
Compensating Interest............ With respect to any Mortgage Loan as to which
a prepayment in whole or in part was received
during the related Collection Period, the
Servicer will be required to remit to the
Indenture Trustee, up to the amount otherwise
payable to the Servicer as the Servicing Fee
for the related Group and Payment Date, an
amount generally calculated to ensure that a
full month's
- --------------------------------------------------------------------------------
S-8
<PAGE>
- --------------------------------------------------------------------------------
interest on each such Mortgage Loan is
available for payment to the related
Noteholders on the applicable Payment Date
(each such amount, a "Compensating Interest
Payment"). Compensating Interest Payments are
not reimbursable to the Servicer. See
"Servicing of the Mortgage Loans-The
Servicing Agreement-Compensating Interest
Payments" herein.
Servicing Fee.................... The primary compensation payable to the
Servicer on each Payment Date with respect to
each Group (the "Servicing Fee") will equal
one-twelfth (1/12) of the product of (a)
_____% and (b) the Aggregate Principal
Balance of the Mortgage Loans in the related
Group as of the first day of the related Due
Period. The Servicer shall be entitled to
retain the Servicing Fee from amounts to be
deposited in the Collection Account. The
Servicer also will be entitled to retain late
fees, prepayment charges and certain other
amounts and charges as additional servicing
compensation. See "Servicing of the Mortgage
Loans-Servicing and Other Compensation;
Payments of Expenses" herein.
The Mortgage Loans............... The statistical information presented in this
Prospectus Supplement regarding the Mortgage
Pool is based on the Mortgage Loans as of the
close of business on the Cut-off Date. As of
the Cut-off Date, the Group I Mortgage Loans
consisted of _____ Mortgage Loans with an
Aggregate Principal Balance totaling
$_________ (the "Initial Group I Pool
Balance"), the Group II Mortgage Loans
consisted of ____ Mortgage Loans with an
Aggregate Principal Balance totaling
$___________ (the "Initial Group II Pool
Balance") and the Mortgage Loans in the
Mortgage Pool consisted of _____ Mortgage
Loans with an Aggregate Principal Balance
totaling $__________ (the "Initial Mortgage
Pool Balance"). As used herein, the term
"Aggregate Principal Balance" means the
aggregate of the Principal Balances of the
Mortgage Loans in the Mortgage Pool at the
related date of determination.
The Mortgage Loans to be included in the
Trust Estate will consist of two Groups of
fixed rate mortgage loans and the Mortgage
Notes relating thereto. The Mortgage Loans
are secured by first and second lien
mortgages or deeds of trust, in the case of
Group I, and first lien mortgages or deeds of
trust, in the case of Group II, primarily on
one-to four-family residential properties
(the "Mortgaged Properties") located in ____
states and the _____________. None of the
Mortgage Loans will be insured by mortgage
pool insurance policies or by primary
mortgage insurance policies. The Mortgage
Loans are not guaranteed by the Issuer, the
Company, the Seller, the Servicer, the Note
Insurer, the Owner Trustee, the Depositor,
the Indenture Trustee or any other person.
The Mortgage Loans have been originated using
underwriting standards that are less
stringent than the underwriting standards
applied by other mortgage loan purchase
programs such as those administered by Fannie
Mae or by Freddie Mac.
- --------------------------------------------------------------------------------
S-9
<PAGE>
- --------------------------------------------------------------------------------
See "Risk Factors-Risk Associated with
Underwriting Standards" herein.
As of the Cut-off Date, the average Principal
Balance of the Group I Mortgage Loans was
$_________; the minimum and maximum Principal
Balances of the Group I Mortgage Loans were
$_________ and $________ respectively;
_______% of the Group I Mortgage Loans by
Principal Balance as of the Cut-off Date are
secured by first lien mortgages on the
related Mortgage Properties and ______% of
the Group I Mortgage Loans by Principal
Balance as of the Cut-off Date are secured by
second liens on the related Mortgaged
Properties; _____% of the Group I Mortgage
Loans by Principal Balance as of the Cut-off
Date are Balloon Loans (as defined herein);
the weighted average interest rate (the
"Mortgage Rate") of the Group I Mortgage
Loans was ______%; the Mortgage Rates of the
Group I Mortgage Loans ranged from _____% to
_____%; the weighted average Combined
Loan-to-Value Ratio (as defined herein) of
the Group I Mortgage Loans was _____% and
these Combined Loan-to-Value Ratios ranged
from ______ to ______ the weighted average
remaining term to maturity of the Group I
Mortgage Loans was __________ months; the
remaining terms to maturity of the Group I
Mortgage Loans ranged from ___ months to
______ months. No Group I Mortgage Loan has a
scheduled maturity date later than
[__________ ] ______. No Group I Mortgage
Loan will provide for negative amortization.
See "Description of The Mortgage Pool"
herein.
Approximately ____%, ____%, ____% and ____%
of the Group I Mortgage Loans by Principal
Balance as of the Cut-off Date are secured by
Mortgaged Properties located in ______,
_______, __________ and _______________,
respectively. See "Risk Factors-Risks
Associated with Geographic Concentration of
Mortgaged Properties" herein.
No Mortgage Loan identified for inclusion in
Group I as of the Closing Date will have an
original Principal Balance in excess of
$___________.
As of the Cut-off Date, the average Principal
Balance of the Group II Mortgage Loans was
$____________; the minimum and maximum
Principal Balances of the Group II Mortgage
Loans were $_________ and $__________,
respectively; 100.00% of the Group II
Mortgage Loans by Principal Balance as of the
Cut-off Date are secured by first lien
mortgages on the related Mortgage Properties;
______% of the Group II Mortgage Loans by
Principal Balance as of the Cut-off Date are
Balloon Loans (as defined herein); the
weighted average interest rate (the "Mortgage
Rate") of the Group II Mortgage Loans was
______%; the Mortgage Rates of the Group II
Mortgage Loans ranged from _____% to _____%;
the weighted average Loan-to-Value Ratio (as
defined herein) of the Group II Mortgage
Loans was _____% and these Loan-to-Value
Ratios ranged from _______% to _______%; the
weighted average remaining term to maturity
- --------------------------------------------------------------------------------
S-10
<PAGE>
- --------------------------------------------------------------------------------
of the Group II Mortgage Loans was _________
months; the remaining terms to maturity of
the Group II Mortgage Loans ranged from 119
months to ____ months. No Group II Mortgage
Loan has a scheduled maturity date later than
[__________ ] _______. No Group II Mortgage
Loan will provide for negative amortization.
See "Description of The Mortgage Pool"
herein.
No Mortgage Loan identified for inclusion in
Group II as of the Closing Date will have an
original Principal Balance in excess of
$___________.
Approximately 11.75%, 10.87%, 10.28% and
10.21% of the Group II Mortgage Loans by
Principal Balance as of the Cut-off Date are
secured by Mortgaged Properties located in
Maryland, Ohio, Massachusetts and Illinois,
respectively. See "Risk Factors-Risks
Associated with Geographic Concentration of
Mortgaged Properties" herein.
Optional Redemption.............. The Notes may be redeemed, in full but not in
part, at the option of the Servicer or, if
not exercised, at the option of the Note
Insurer on or after the first Payment Date
(such date, the "Initial Redemption Date") on
which the Aggregate Principal Balance of the
Mortgage Loans in the Mortgage Pool has
declined to less than 10% of the Aggregate
Principal Balance of the Mortgage Loans as of
the Cut-off Date. See "Description of the
Notes-Redemption of Notes" herein.
Termination of Mortgage Pool.... Following the first Payment Date on which the
Aggregate Principal Balance of the Mortgage
Loans of both Groups is less than 20% of the
Aggregate Principal Balance of the Mortgage
Loans as of the Cut-off Date, the Indenture
Trustee will be required to solicit
competitive bids for the purchase of the
Mortgage Loans for fair market value. In the
event that satisfactory bids are received as
described below, the proceeds of such sale
shall be used to redeem the Notes in full and
any excess shall be paid to the Residual
Holder(s) on the immediately succeeding
Payment Date. If the Indenture Trustee
receives bids from no fewer than three
prospective purchasers considered to be
competitive participants in the mortgage loan
market and the highest bid is not less than
the fair market value of the Mortgage Loans
and would equal or exceed the amount set
forth in the immediately succeeding sentence,
the Indenture Trustee will sell and assign
such Mortgage Loans without recourse to the
highest bidder and will redeem the Notes on
the immediately succeeding Payment Date. For
the Indenture Trustee to consummate the sale,
the bid must be with respect to each Group at
least equal to an amount, which, when added
to Available Funds for the related Payment
Date with respect to each Group, would equal
the sum, without duplication, of (i) the
accrued interest then due on the Notes in the
related Group on such Payment Date, (ii) the
aggregate Note Balance in the related Group
as of such Payment Date, (iii) the aggregate
of all Insured Payments made by the Note
Insurer to the Noteholders in the related
Group remaining unreimbursed as of such
Payment Date, and
- --------------------------------------------------------------------------------
S-11
<PAGE>
- --------------------------------------------------------------------------------
any amounts owing to the Note Insurer under
the agreement governing the issuance of the
Insurance Policy, plus interest on such
amount calculated at the Late Payment Rate as
set forth in agreement governing the issuance
of the Insurance Policy, (iv) any accrued and
unpaid Servicing Fees and any Servicing
Advances or any Monthly Advances previously
made by the Servicer to the related Group and
remaining unreimbursed as of such Payment
Date and (v) any accrued and unpaid fees
owing to the Indenture Trustee or the Owner
Trustee as of such Payment Date. If such
conditions are not met, the Indenture Trustee
will not consummate such sale. In addition,
the Indenture Trustee will decline to
consummate such sale unless it receives an
opinion of counsel that such sale will not
give rise to any adverse tax consequences to
the Issuer or the Noteholders or adversely
affect the opinion of Tax Counsel that the
Notes will evidence indebtedness of the
Issuer under the Code. In the event such sale
is not consummated in accordance with the
foregoing, the Indenture Trustee will
continue to solicit further bids on a
quarterly basis for the purchase of such
assets upon the terms described above. See
"Description of the Notes-Redemption of the
Notes" herein.
Certain Federal Income Tax
Consequences..................... In the opinion of Tax Counsel (as defined
herein) for Federal income tax purposes, the
Notes will be characterized as debt and
neither the Issuer nor either Mortgage Loan
Group will be characterized as an association
(or a publicly traded partnership) taxable as
a corporation or as a taxable mortgage pool.
Each Noteholder, by the acceptance of a Note,
will agree to treat the Notes as indebtedness
for Federal income tax purposes. See "Certain
Federal Income Tax Consequences" herein and
"Certain Federal Income Tax Consequences" in
the Prospectus for additional information
concerning the application of Federal income
tax laws to the Trust and the Notes.
ERISA Considerations............. Subject to the considerations discussed under
"ERISA Considerations" herein and in the
Prospectus, the Notes may be acquired and
held by employee benefit plans and other
retirement plans and arrangements subject to
the provisions of the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code (each,
a "Plan"). The Issuer believes that the Notes
will be treated as debt obligations without
significant equity features for purposes of
regulations of the Department of Labor set
forth in 29 C.F.R.ss. 2510.3-101 (the "Plan
Asset Regulations"). Accordingly, a Plan that
acquires a Note should not be treated as
having acquired a direct interest in the
assets of the Issuer for purposes of the Plan
Asset Regulations. However, even if the Notes
are treated as debt for purposes of the Plan
Asset Regulations, the acquisition or holding
of the Notes by or on behalf of a Plan still
could be considered to give rise to a
prohibited transaction under certain
circumstances. By purchasing a Note, an
investor will be deemed to represent either
(i) that it is not a Plan and is not acting
on behalf of a
- --------------------------------------------------------------------------------
S-12
<PAGE>
- --------------------------------------------------------------------------------
Plan or investing the assets of a Plan or
(ii) that its purchase and holding of a Note
will be covered by a Department of Labor
Prohibited Transaction Class Exemption. See
"ERISA Considerations" herein.
Legal Investment
Considerations................... The Notes will not constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Institutions whose activities
are subject to review by federal or state
regulatory authorities may be or may become
subject to restrictions, which may be
retroactively imposed by such regulatory
authorities, on the investment by such
institutions in certain forms of mortgage
related securities. See "Legal Investment
Matters" herein and in the Prospectus.
Rating........................... It is a condition to the issuance of the
Notes that they be rated "______" by
________________________ and "___" by
______________________, a Division of
______________ ("S&P" and, together with
Moody's, the "Rating Agencies"). 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 Agency. See "Rating of the
Notes" herein.
Risk Factors..................... For a discussion of certain factors that
should be considered by prospective investors
in the Notes, including certain yield and
prepayment risks, see "Risk Factors" herein
and in the Prospectus.
- --------------------------------------------------------------------------------
S-13
<PAGE>
RISK FACTORS
Prospective investors in the Notes should consider the following risk
factors (as well as the factors set forth under "Risk Factors" in the
Prospectus) in connection with the purchase of the Notes. Any statistical
information presented below is based upon the characteristics of the Mortgage
Loans as of the Cut-off Date.
Risks Associated with Underwriting Standards
The Mortgage Loans have been originated using underwriting standards that
are less stringent than the underwriting standards applied by other mortgage
loan purchase programs such as those run by Fannie Mae or by Freddie Mac. For
example, the Mortgage Loans may have been made to mortgagors having imperfect
credit histories, ranging from minor delinquencies to bankruptcies, or
mortgagors with higher ratios of monthly mortgage payments to income or higher
ratios of total monthly credit payments to income. As a result of the
underwriting standards, the Mortgage Loans are likely to experience rates of
delinquency, foreclosure and bankruptcy that are higher, and that may be
substantially higher, than those experienced by mortgage loans underwritten in a
more traditional manner. Approximately 0.755% of the Group I Mortgage Loans by
Principal Balance and approximately 1.019% of the Group II Mortgage Loans by
Principal Balance as of the Cut-off Date were more than 30 days, but less than
60 days, past due as of the Cut-off Date. In addition, because approximately
20.674% of the Group I Mortgage Loans by Principal Balance and approximately
19.557% of the Group II Mortgage Loans by Principal Balance as of the Cut-off
Date have a first scheduled monthly payment due date occurring on or after
[__________ ] 2, ___, it is not possible for such Mortgage Loans to have had a
scheduled monthly payment past due as of the Cut-off Date. Substantially all of
the Mortgage Loans were originated or acquired within the last three months and
are not very seasoned. Accordingly, there can be no assurance as to the
likelihood of default by the mortgagors or as to the likelihood of delinquency.
See "Description of the Mortgage Pool-Mortgage Loan Characteristics" and
"-Underwriting Standards" herein. The Mortgage Loans with higher Loan-to-Value
Ratios or Combined Loan-to-Value Ratios may also present a greater risk of loss.
Approximately 24.300% of the Group I Mortgage Loans and approximately 25.739% of
the Group II Mortgage Loans, in each case, by Principal Balance as of the
Cut-off Date, have Combined Loan-to-Value Ratios and Loan-to-Value Ratios,
respectively, at origination in excess of 80%. None of the Mortgage Loans will
be insured by a primary mortgage insurance policy.
No assurance can be given that the values of the Mortgaged Properties will
not decline from those on the dates the related Mortgage Loans were originated
and any such decline could render the information set forth herein with respect
to the Combined Loan-to-Value Ratios of such Mortgage Loans an unreliable
measure of security for the related debt. If the residential real estate market
should experience an overall decline in property values such that the
outstanding Principal Balances of the Mortgage Loans become equal to or greater
than the values of such Mortgaged Properties, the actual rate of delinquencies,
foreclosures and losses on the related Mortgage Loans could be higher than those
now generally experienced in the mortgage lending industry. Even assuming that
the Mortgaged Properties provide adequate security for the Mortgage Loans,
substantial delays could be encountered in connection with the foreclosure and
liquidation of defaulted Mortgage Loans and corresponding delays in the receipt
of related proceeds by Noteholders could occur. In the event that any Mortgaged
Properties fail to provide adequate security for the related Mortgage Loans, any
resulting losses will be covered by funds made available through operation of
the overcollateralization feature described herein, or, if necessary, by amounts
paid under the Insurance Policy to the extent of Note Interest due to the
Noteholders on the related Payment Date and the amount of any
Overcollateralization Deficit with respect to such Payment Date. See
"Description of the Mortgage Pool" and "Servicing of the Mortgage Loans-The
Servicing Agreement-Realization upon Defaulted Mortgage Loans" herein.
Origination Risks; Seller's Reliance on Brokers and Correspondents
The Seller depends largely on independent mortgage brokers and, to a
lesser extent, on correspondent lenders, for its originations and purchases of
mortgage loans, including the Mortgage Loans. All brokers and correspondents in
the Seller's network must undergo an approval process and enter into an
agreement with the Seller pursuant to which the broker or correspondent agrees
to comply with the Seller's eligibility and origination requirements. The Seller
underwrites all loans it funds through brokers and re-underwrites all loans it
purchases through correspondents, and regularly reviews the performance of loans
originated or purchased through its brokers and correspondents. The Seller
undertakes pre-closing and post-closing quality control procedures involving
S-14
<PAGE>
random samples of loans to confirm that the loans are being originated and
underwritten in accordance with the Seller's guidelines (subject to exceptions
approved by the Seller prior to loan funding).
The Seller has no reason to believe that any of the files for the Mortgage
Loans included in the Mortgage Pool include defective appraisals or falsified
credit documents although no assurance can be given that a mortgagor, broker,
correspondent or appraiser has not submitted defective or falsified documents.
Risks due to Nature of Collateral
Because the Group I Mortgage Loans are secured in certain cases by second
liens that are subordinate to the rights of the mortgagee or beneficiary under
the related first mortgage or deed of trust, the proceeds from any liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding balance of such a second Mortgage Loan only to the extent that the
claims of such senior mortgagee or beneficiary have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may not
foreclose on the property securing a second mortgage unless it forecloses
subject to the senior mortgage, in which case it must either pay the entire
amount due on the senior mortgage to the senior mortgagee at or prior to the
foreclosure sale or undertake the obligation to make payments on the senior
mortgage in the event the mortgagor is in default thereunder. In servicing
second mortgages in its portfolio, it is generally the Servicer's practice to
satisfy the senior mortgage at or prior to the foreclosure sale. The Issuer will
have no source of funds to satisfy the senior mortgage or make payments due to
the senior mortgagee.
Even assuming that a Mortgaged Property provides adequate security for the
related Mortgage Loan, substantial delays could be encountered in connection
with the liquidation of a Mortgage Loan that is delinquent, and resulting
shortfalls in distributions to Noteholders could occur. Liquidation expenses
(such as legal fees, real estate taxes, and maintenance and preservation
expenses) will reduce the proceeds payable to Noteholders and thereby reduce the
security for the Mortgage Loans. The Combined Loan-to-Value Ratio for the Group
I Mortgage Loans ranged from 14.660% to 125.130% as of the Cut-off Date, with a
weighted average of 77.602% and the Loan-to-Value Ratio for the Group II
Mortgage Loans ranged from 39.060% to 90.000% as of the Cut-off Date, with a
weighted average of 77.805% (based on Cut-off Date Principal Balances).
Approximately 14.94% of the Group I Mortgage Loans by Principal Balance as
of the Cut-off Date and none of the Group II Mortgage Loans are secured by
second mortgages or deeds of trust. Mortgage Loans secured by second mortgages
are entitled to proceeds that remain from the sale of the related Mortgaged
Property after any related senior mortgage loan and prior statutory liens have
been satisfied. In the event that such proceeds are insufficient to satisfy such
loans and prior liens in the aggregate, the Issuer and, accordingly, the
Noteholders, will bear (i) the risk of delay in distributions while a deficiency
judgment against the borrower is sought and (ii) the risk of loss if the
deficiency judgment cannot be obtained or is not realized upon. See "Certain
Legal Aspects of the Mortgage Loans and Contracts" in the Prospectus.
Risk Associated with Higher Default Rates for Mortgage Loans with
Balloon Payments
Approximately 38.02% of the Group I Mortgage Loans by Principal Balance
and approximately 46.46% of the Group II Mortgage Loans by Principal Balance as
of the Cut-off Date are loans that provide for the payment of the outstanding
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 Seller 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. In addition, the ability
of a borrower to repay a Balloon Loan at maturity frequently will depend on such
borrower's ability to refinance the related Mortgage Loan. The ability of a
borrower to refinance such a Mortgage Loan will be affected by a variety of
factors, including the level of available mortgage rates at the time, the value
of the related Mortgaged
S-15
<PAGE>
Property, the borrower's equity in the related Mortgaged Property, the financial
condition of the borrower and general economic conditions at the time. The
inability of a borrower to refinance a Balloon Loan may result in delinquencies
or defaults. See "Risk Factors - Risk of Losses Associated with Balloon Loans"
in the Prospectus.
Risks Associated with Geographic Concentration of Mortgaged Properties
Approximately ______________________________ of the Group I Mortgage Loans
are secured by Mortgaged Properties located in
____________________________________, respectively, and approximately 11.75%,
10.87%, 10.28% and 10.21% of the Group II Mortgage Loans are secured by
Mortgaged Properties located in _________________________________________,
respectively. In general, declines in the residential real estate markets in
such states may adversely affect the values of the Mortgaged Properties securing
such Mortgage Loans such that the Aggregate Principal Balance of such Mortgage
Loans will equal or exceed the value of such Mortgaged Properties. In addition,
adverse economic conditions in such states (which may or may not affect real
property values) may affect the timely payment by borrowers of scheduled
payments of principal and interest on such Mortgage Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses on such Mortgage Loans
could be higher than those currently experienced in the mortgage lending
industry in general.
Limited Historical Servicing Experience of the Servicer
The Servicer commenced its servicing activities for mortgage loans in
________________. As a result, the Servicer has limited historical data
available regarding loan performance. Consequently, the Servicer has been unable
to develop meaningful statistics relating to the historical performance of the
mortgage loans in its servicing portfolio. As a result, it is unknown how the
Servicer's mortgage loan portfolio will perform relative to the portfolios of
other mortgage lenders and servicers. Therefore, no assurance can be given as to
the level of losses and delinquencies that the Mortgage Loans will experience
Risks Associated with Prepayment of the Mortgage Loans
The Mortgage Loans may be prepaid by the related mortgagors in whole or in
part, at any time. However, approximately 33% of the Group I Mortgage Loans by
Principal Balance and approximately 31% of the Group II Mortgage Loans by
Principal Balance as of the Cut-off Date require the payment of a fee in
connection with certain prepayments, which may discourage prepayments. The
Mortgage Loans generally are not assumable and the Mortgage Loans will be due
and payable in full upon the sale of the related Mortgaged Property, in which
case the Servicer generally will be required to enforce any due-on-sale clause
contained in any Mortgage Note or mortgage, to the extent permitted under
applicable law and governmental regulations. The rate of prepayments of the
Mortgage Loans cannot be predicted and may be affected by a wide variety of
general economic, social, competitive and other factors, including state and
federal income tax policies, interest rates, the availability of alternative
financing and homeowner mobility. Therefore, no assurance can be given as to the
level of prepayments that the Mortgage Loans will experience. See "Certain
Prepayment and Yield Considerations" herein and "Certain Legal Aspects of the
Mortgage Assets -- The Mortgage Loans -- "Due-on-Sale" Clauses" in the
Prospectus.
The average life of the Notes, and, if purchased at other than par, the
yields realized by Noteholders will be sensitive to levels of payment, including
prepayments, on the Mortgage Loans. In general, the yield on Notes purchased at
a premium from the outstanding principal amount thereof will be adversely
affected by a higher than anticipated level of prepayments and enhanced by a
lower than anticipated level. Conversely, the yield on Notes purchased at a
discount from the outstanding principal amount thereof will be enhanced by a
higher than anticipated level of prepayments and adversely affected by a lower
than anticipated level. See "Certain Prepayment and Yield Considerations"
herein.
Credit Enhancement Does Not Apply to Prepayment Risk
In general, the protection afforded by the Insurance Policy is protection
for credit risk and not for prepayment risk. A claim may not be made under the
Insurance Policy, in an attempt to guarantee or insure that any particular rate
of prepayment is experienced by the Trust Estate. See "The Note Insurance"
herein.
S-16
<PAGE>
Yield Considerations Relating to Excess Cash
In respect of a Group, Excess Cash will be paid in reduction of the
related Note Balance on each Payment Date to the extent the then applicable
Required Overcollateralization Amount exceeds the related Overcollateralization
Amount on such Payment Date. If purchased at a premium or a discount, the yield
to maturity on a Note will be affected by the rate at which Excess Cash is paid
to Noteholders in the related Group in reduction of the related Note Balance. If
the actual rate of such Excess Cash payments is slower than the rate anticipated
by an investor who purchases a Note at a discount, the actual yield to such
investor will be lower than such investor's anticipated yield. If the actual
rate of such Excess Cash payments is faster than the rate anticipated by an
investor who purchases a Note at a premium, the actual yield to such investor
will be lower than such investor's anticipated yield. The amount of Excess Cash
in respect of a Group on any Payment Date will be affected by the actual amount
of interest received, collected or recovered or advanced by the Servicer in
respect of the Mortgage Loans of the related Group during the related Collection
Period and such amount will be influenced by changes in the weighted average of
the Mortgage Rates resulting from prepayments and liquidations of Mortgage Loans
in the related Group. The amount of Excess Cash payments applied in reduction of
the related Note Balance on each Payment Date will be based on the then
applicable Required Overcollateralization Amount, which may increase or decrease
during the period the related Notes in the related Group remain outstanding. The
Indenture generally provides that the Required Overcollateralization Amount may,
over time, decrease or increase, subject to certain floors, caps and triggers
including triggers that allow the related Required Overcollateralization Amount
to decrease or "step down" based on the performance on the related Mortgage
Loans with respect to certain delinquency rate tests specified in the Indenture.
Any increase in the Required Overcollateralization Amount may result in an
accelerated rate of amortization of the related Notes until the related
Overcollateralization Amount equals such Required Overcollateralization Amount
and any decrease in a Required Overcollateralization Amount will result in a
decelerated rate of amortization of the related Notes until the related
Overcollateralization Amount equals such Required Overcollateralization Amount.
See "Certain Prepayment and Yield Considerations" herein.
Notes are Non-Recourse Obligations
The Notes will be non-recourse obligations solely of the Issuer and will
not represent an obligation of or interest in the Company, the Seller, the
Servicer, the Owner Trustee, the Depositor, the Indenture Trustee, the
Depositor, the Note Insurer or any of their respective affiliates, except as
described herein. Neither the Notes nor the Mortgage Loans are or will be
guaranteed or insured by any governmental agency or instrumentality, or by the
Company, the Seller, the Servicer, the Owner Trustee, the Depositor, the
Indenture Trustee or any of their respective affiliates. The Notes are covered
by the Insurance Policy, as and to the extent described under the caption "The
Note Insurance-The Insurance Policy" herein. The assets included in the Trust
Estate and payments under the Insurance Policy will be the sole source of
payments on the Notes, and there will be no recourse to the Issuer, the Company,
the Seller, the Servicer, the Owner Trustee, the Depositor, the Indenture
Trustee or any of their respective affiliates, or any other entity, in the event
that such assets or payments are insufficient or otherwise unavailable to make
all payments provided for under the Notes.
Book-Entry Registration
Issuance of the Notes in book-entry form may reduce the liquidity of the
Notes in the secondary trading market because investors may be unwilling to
purchase Notes for which they cannot obtain physical certificates.
Because transactions in the Notes can be effected only through DTC, Cedel,
Euroclear, participating organizations, indirect participants and certain banks,
the ability of a Beneficial Owner to pledge a Note to persons or entities that
do not participate in the DTC, Cedel or Euroclear system, or otherwise to take
actions in respect of such Note, may be limited due to lack of a physical
certificate representing such Note.
Beneficial Owners may experience some delay in their receipt of payments
of interest of and principal on the Notes because such payments will be
forwarded by the Indenture Trustee to DTC and DTC will credit such payments to
the accounts of its Participants, which will thereafter credit them to the
accounts of Beneficial Owners either directly or indirectly through indirect
participants. See "Description of the Notes- Book- Entry Registration and
Definitive Notes" herein; "ANNEX A: Global Clearance, Settlement and Tax
Documentation Procedures"
S-17
<PAGE>
hereto and "Description of the Securities--Form of Securities; Transfer and
Exchange" and "--Book Entry Registration" in the Prospectus.
DESCRIPTION OF THE NOTES
The Notes will be issued pursuant to the Indenture. The summaries of
certain provisions of the Indenture set forth below and under the caption "The
Indenture" in the Prospectus, while complete in material respects, do not
purport to be exhaustive. For more details regarding the terms of the Indenture,
prospective investors in the Notes are advised to review the Indenture, a copy
of which the Seller will provide (without exhibits) without charge upon written
request addressed to the Seller at Middlesex Corporate Center, 11th Floor, 213
Court Street, Middletown, Connecticut 06457 (telephone number: (860) 344-5700).
General
The Notes will be secured by the Trust Estate created by the Indenture.
The Notes represent non-recourse obligations of the Issuer, and proceeds of the
assets in the Trust Estate and payments under the Insurance Policy, if any, will
be the only sources of payments on the Notes. The Notes will not represent an
interest in or obligation of the Company, the Servicer, the Indenture Trustee,
the Owner Trustee, the Depositor, the Underwriters, the Note Insurer, any of
their respective affiliates or any other entity, and will not represent an
interest in or recourse obligation of the Issuer.
The assets of the Trust Estate will consist of (i) the Mortgage Pool,
which consists of two Groups of fixed rate mortgage loans secured by first and
second lien mortgages or deeds of trust, in the case of Group I, and first lien
mortgages or deeds of trust, in the case of Group II, on the Mortgaged
Properties, and including the related Mortgage Notes; (ii) all payments in
respect of principal and interest on the Mortgage Loans (other than any
principal or interest payments due thereon on or prior to the Cut-off Date);
(iii) security interests in the Mortgaged Properties; (iv) the Issuer's rights
under the Sale Agreement and the Servicing Agreement; and (v) certain other
property.
All payments on the Notes will be made by or on behalf of the Indenture
Trustee to each Noteholder of record on the Record Date for the related Payment
Date. Payments on Notes issued in book-entry form will be made by or on behalf
of the Indenture Trustee to DTC. Payments on Definitive Notes generally will be
made either (i) by check mailed to the address of each Noteholder as it appears
in the register maintained by the Indenture Trustee or (ii) by wire transfer of
immediately available funds to the account of a Noteholder, if such Noteholder
(a) is the registered holder of Definitive Notes having an initial principal
amount of at least $___________ and (b) has provided the Indenture Trustee with
wiring instructions in writing five days prior to the related Record Date or has
provided the Indenture Trustee with such instructions for any previous Payment
Date. A fee may be charged by the Indenture Trustee to a Noteholder of
Definitive Notes for any payment made by wire transfer. Notwithstanding the
above, the final payment in redemption of any Definitive Note will be made only
upon presentation and surrender of such Definitive Note at the office or agency
designated by the Indenture Trustee for that purpose.
The Notes will be issued in denominations of not less than $1,000
principal amount and in integral dollar multiples thereof, with the exception of
one Note which may be issued in a lesser amount.
Book-Entry Registration and Definitive Notes
The Notes initially will be Book-Entry Notes (the "Book-Entry Notes").
Beneficial Owners will hold such Notes through DTC, in the United States, or
Cedel or Euroclear, in Europe, if they are participants of such systems, or
indirectly through organizations that are participants in such systems. The
Book-Entry Notes initially will be registered in the name of Cede & Co., the
nominee of DTC. Cedel and Euroclear will hold omnibus positions on behalf of
Cedel Participants and Euroclear Participants, respectively, 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. ("Citibank") will act as depositary for Cedel, and Morgan Guaranty Trust
Company of New York ("Morgan") will act as depositary for Euroclear (Citibank
and Morgan, in such capacities, individually the "Relevant Depositary" and
collectively, the
S-18
<PAGE>
"European Depositaries"). Except as described below, no person acquiring a
Book-Entry Note will be entitled to receive a Definitive Note. Unless and until
Definitive Notes are issued, it is anticipated that the only "Noteholder" will
be Cede & Co., as nominee of DTC or Citibank or Morgan, as nominees of Cedel and
Euroclear, respectively. Beneficial Owners will not be Noteholders as that term
is used in the Indenture. Beneficial Owners are permitted to exercise their
rights only indirectly through DTC and its Participants (including Cedel and
Euroclear).
The beneficial ownership of a Book-Entry Note will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the Beneficial
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Note will be recorded on the records of DTC (or of
a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the Beneficial
Owner's Financial Intermediary is not a Participant and on the records of Cedel
or Euroclear, as appropriate).
Beneficial Owners will receive all payments of principal of, and interest
on, the Notes from the Indenture Trustee through DTC and its Participants
(including Cedel and Euroclear). While the Notes are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Notes and is required to receive and transmit payments of
principal of, and interest on, such Notes. Participants and indirect
participants with whom Beneficial Owners have accounts with respect to
Book-Entry Notes are similarly required to make book-entry transfers and receive
and transmit such payments on behalf of their respective Beneficial Owners.
Accordingly, although Beneficial Owners will not possess certificates, the Rules
provide a mechanism by which Beneficial Owners will receive payments and will be
able to transfer their interests.
Beneficial Owners will not receive or be entitled to receive certificates
representing their respective interests in the Notes, except under the limited
circumstances described below. Unless and until Definitive Notes are issued,
Beneficial Owners who are not Participants may transfer ownership of Notes only
through Participants and indirect participants by instructing such Participants
and indirect participants to transfer Notes, by book-entry transfer, through DTC
for the account of the purchasers of such Notes, which account is maintained
with their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Notes will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and indirect participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
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
Participants 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 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. For information
with respect to tax documentation procedures relating to the Notes, see "Certain
Federal Income Tax Consequences--Debt Securities Backup Withholding," and
"--Foreign Investors" in the Prospectus and "--Information Reporting and Backup
Withholding" in "ANNEX A: Global Clearance, Settlement and Tax Documentation
Procedures--Certain U.S. Federal Income Tax Documentation Requirements" hereto.
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC Rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect
S-19
<PAGE>
final settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same day
funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants ("Participants"), some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each Participant in the Book-Entry
Notes, whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Notes will be subject to the rules,
regulations and procedures governing DTC and its Participants as in effect from
time to time.
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 depositary, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("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 be settled through Euroclear in any of 32 currencies,
including United States Dollars. Euroclear provides 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 [__________ ]
that 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 (the
"Federal Reserve Board") and the New York State Banking Department, as well as
the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Payments on the Book-Entry Notes will be made on each Payment Date by the
Indenture Trustee to DTC. DTC will be responsible for crediting the amount of
such payments to the accounts of the applicable Participants in accordance with
DTC's normal procedures. Each Participant will be responsible for disbursing
such payments to the Beneficial Owners that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the Beneficial Owners that it represents.
S-20
<PAGE>
Under a book-entry format, Beneficial Owners may experience some delay in
their receipt of payments because such payments will be forwarded by the
Indenture Trustee to Cede & Co. Payments with respect to Notes held through
Cedel or Euroclear will be credited to the cash accounts of Cedel Participants
or Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such payments
will be subject to tax reporting in accordance with relevant United States tax
laws and regulations. See "Certain Federal Income Tax Consequences--Debt
Securities," "--Backup Withholding," and "--Foreign Investors" in the Prospectus
and "--Information Reporting and Backup Withholding" in "ANNEX A: Global
Clearance, Settlement and Tax Documentation Procedures--Certain U.S. Federal
Income Tax Documentation Requirements" hereto. Because DTC has indicated that it
will act only on behalf of Financial Intermediaries, the ability of Beneficial
Owners to pledge Book-Entry Notes to persons or entities that do not participate
in the depository system or otherwise take actions in respect of such Book-Entry
Notes may be limited due to the lack of physical certificates representing such
Book-Entry Notes. In addition, issuance of the Book-Entry Notes in book-entry
form may reduce the liquidity of such Notes in the secondary market because
certain potential investors may be unwilling to purchase Notes for which they
cannot obtain physical certificates.
The monthly and annual statements with respect to the Mortgage Loans and
the Notes as described under "--Reports to Noteholders" herein will be provided
by the Indenture Trustee to Cede & Co., as nominee of DTC and a Noteholder, and
may be made available by such entity to Beneficial Owners upon request, in
accordance with the Rules, and to the Financial Intermediaries to whose DTC
accounts the related Book-Entry Notes are credited.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by a Noteholder
under the Indenture only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Book-Entry Notes are credited, to the
extent that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Book-Entry Notes. Cedel or the Euroclear Operator, as the
case may be, will take any other action permitted to be taken by a Noteholder
under the Indenture on behalf of a Cedel Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Notes that conflict with actions taken with respect to other
Notes.
Definitive Notes will be issued in registered form to Beneficial Owners,
or their nominees, rather than to DTC, only if (i) DTC or the Issuer advises the
Indenture Trustee in writing that DTC is no longer willing or able to discharge
properly its responsibilities as nominee and depositary with respect to the
Notes and the Issuer or the Indenture Trustee is unable to locate a qualified
successor, (ii) the Issuer, at its option, advises the Indenture Trustee that it
elects to terminate the book-entry system through DTC, or (iii) after a Note
Event of Default under the Indenture, the Beneficial Owners representing not
less than 51% of the Note Balance of the Book-Entry Notes advise the Indenture
Trustee and DTC that the book-entry system is no longer in the best interests of
such Beneficial Owners. Upon issuance of Definitive Notes to Beneficial Owners,
such Notes will be transferable directly (and not exclusively on a book-entry
basis) and registered holders will deal directly with the Indenture Trustee with
respect to transfers, notices and payments. See "Description of the
Securities--General" in the Prospectus.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to use its best
efforts to notify all Beneficial Owners of the occurrence of such event and the
availability through DTC of Definitive Notes. Upon surrender by DTC of the
global certificates representing the Book-Entry Notes and instructions for
re-registration, the Indenture Trustee will issue Definitive Notes and
thereafter the Indenture Trustee will recognize the holders of such Definitive
Notes as Noteholders under the Indenture.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfer of Notes among participants of DTC, Cedel and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
S-21
<PAGE>
Assignment of Mortgage Loans
The Mortgage Loans were originated by the Seller or acquired by the
Seller, through its network of brokers and correspondents and retail origination
offices. On or prior to the date the Notes are issued, the Seller will convey
each Mortgage Loan to the Depositor who in turn will convey each such Mortgage
Loan to the Issuer.
At the time of issuance of the Notes, the Issuer will pledge all of its
right, title and interest in and to the Mortgage Loans, including all principal
and interest due on each such Mortgage Loan after the Cut-off Dates, without
recourse, to the Indenture Trustee pursuant to the Indenture as collateral for
the Notes; provided, however, that the Seller will reserve and retain all its
right, title and interest in and to principal and interest due on such Mortgage
Loan on or prior to the Cut-off Date (whether or not received on or prior to
such Cut-off Date), and to prepayments received on or prior to the Cut-off Date.
The Indenture Trustee, concurrently with such assignment, will authenticate and
deliver the Notes at the direction of the Issuer in exchange for, among other
things, the Mortgage Loans.
The Indenture will require the Issuer to deliver the Mortgage Loans to the
Indenture Trustee or to a permitted custodian designated by the Indenture
Trustee, the related Mortgage Notes endorsed without recourse to the Indenture
Trustee, the related mortgages or deeds of trust with evidence of recording
thereon, the title policies with respect to the related Mortgaged Properties,
all intervening mortgage assignments, if applicable, and certain other documents
relating to the Mortgage Loans (the "Mortgage Files"). The Seller will be
required to cause to be prepared and recorded, at the expense of the Seller and
within the time period specified in the Indenture (or, if original recording
information is unavailable, within such later period as is permitted by the
Indenture), assignments of the mortgages from the Seller to the Indenture
Trustee.
The Indenture Trustee or a custodian on behalf of the Indenture Trustee
will review the Mortgage Files delivered to it and if any document required to
be included in any Mortgage File is found to be missing or to be defective in
any material respect and such defect is not cured within 60 days following
notification thereof to the Issuer, the Depositor, the Note Insurer and the
Seller by the Indenture Trustee, the Indenture Trustee will require either that
the related Mortgage Loan be removed from the Mortgage Pool or that a Mortgage
Loan conforming to the requirements of the Indenture (a "Qualified Replacement
Mortgage") be substituted for the related Mortgage Loan in the manner described
below.
In connection with the transfer of the Mortgage Loans to the Depositor,
the Seller will make certain representations and warranties as to the accuracy
in all material respects of the information set forth on a schedule identifying
and describing each Mortgage Loan. In addition, the Seller will make certain
other representations and warranties regarding the Mortgage Loans, including,
for instance, that each Mortgage Loan, at its origination, complied in all
material respects with applicable state and federal laws, that each first
mortgage is a valid first priority lien and that each second mortgage is a valid
lien, that, as of the Cut-off Date, no Mortgage Loan will be more than two
payments past due, that each Mortgaged Property consists of a one-to four-family
residential property or unit in a condominium or planned unit development, that
the Seller had good title to each Mortgage Loan prior to such transfer and that
the originator was authorized to originate each Mortgage Loan. The rights of the
Depositor to enforce remedies for breaches of such representations and
warranties in the Sale Agreement against the Seller will be assigned to the
Indenture Trustee pursuant to the Indenture.
If with respect to any Mortgage Loan (1) a defect in any document
constituting a part of the related Mortgage File remains uncured within the
period specified above and materially and adversely affects the value of any
such Mortgage Loan or materially and adversely affects the interest of the
Indenture Trustee therein, the Noteholders or the Note Insurer or (2) a breach
of any representation or warranty made by the Seller relating to such Mortgage
Loan occurs and such breach materially and adversely affects the value of any
such Mortgage Loan or materially and adversely affects the interests of the
Indenture Trustee, the Noteholders or the Note Insurer therein, the Indenture
Trustee will enforce the remedies for such defects or breaches against the
Seller by requiring the Seller to remove the related Mortgage Loan (any such
Mortgage Loan, a "Defective Mortgage Loan") from the Trust Estate by remitting
to the Indenture Trustee an amount equal to the Principal Balance of such
Defective Mortgage Loan together with interest accruing at the Mortgage Rate
(net of the applicable Servicing Fee Rate) on such Defective Mortgage Loan from
the date interest was last paid by the related mortgagor to the end of the
Collection Period immediately preceding the related Deposit Date, less any
payments received during the related Collection
S-22
<PAGE>
Period in respect of such Defective Mortgage Loan (the "Release Price"). The
Seller will also have the option, but not the obligation, to substitute for such
Defective Mortgage Loan a Qualified Replacement Mortgage. Upon delivery of a
Qualified Replacement Mortgage and deposit of certain amounts in the related
Note Account as set forth in the Indenture, or deposit of the Release Price in
the related Note Account (as hereinafter defined) and receipt by the Indenture
Trustee and the Note Insurer of written notification of any such substitution or
removal, as the case may be, the Indenture Trustee shall execute and deliver an
instrument of transfer or assignment necessary to vest legal and beneficial
ownership of such Defective Mortgage Loan (including any property acquired in
respect thereof or proceeds of any insurance policy with respect thereto) to the
Seller and release such Defective Mortgage Loan from the Trust Estate.
The obligation of the Seller to cure, remove or substitute any Mortgage
Loan as described above will constitute the sole remedy available to
Noteholders, the Note Insurer (with certain exceptions) or the Indenture Trustee
for a Defective Mortgage Loan.
Payments on the Notes
Payments on the Notes will be made by the Indenture Trustee (in such
capacity, the "Paying Agent") on each Payment Date, commencing with the Payment
Date in ______________, to Noteholders as of the Record Date in an amount equal
to the product of such Noteholders' Percentage Interest and the amount paid in
respect of the Notes. Payments on the Class A-1 Notes will be made solely from
Available Funds for Group I, and payments on the Class A-2 Notes will be made
solely from Available Funds for Group II. The "Percentage Interest" represented
by any Note will be equal to the percentage obtained by dividing the aggregate
principal balance of such Note by the Note Balance.
On each Payment Date, the Paying Agent will be required to pay the
following amounts with respect to each Class of Notes, in the following order of
priority, out of the related Group's Available Funds:
(a) to the Note Insurer the aggregate amount necessary to reimburse
the Note Insurer for any unreimbursed payments of Insured Payments
(together with interest thereon at the Late Payment Rate specified in the
Insurance Agreement) in respect of the Notes of such Class on prior
Payment Dates and the amount of any unpaid Note Insurer Premiums for such
Class for prior Payment Dates (together with interest thereon at the Late
Payment Rate specified in the Insurance Agreement); provided, however,
that the Note Insurer shall be paid unreimbursed Insured Payments and
unpaid Note Insurer Premiums (and any interest thereon) only after the
related Noteholders have received Note Interest and any
Overcollateralization Deficit with respect to such Payment Date;
(b) to the Noteholders of a Class, the related Note Interest with
respect to such Payment Date;
(c) to the Noteholders of a Class, the amount of Monthly Principal
for the Notes of such Class with respect to such Payment Date, in
reduction of the related Note Balance until such Note Balance is reduced
to zero;
(d) to the Noteholders of a Class, in reduction of the related Note
Balance, the amount, if any, equal to the lesser of (A) Excess Cash with
respect to the related Group and such Payment Date, and (B) the lesser of
(1) the amount necessary for the related Overcollateralization Amount to
equal the related Required Overcollateralization Amount on such Payment
Date (after giving effect to application of Monthly Principal for such
Payment Date) and (2) the amount necessary to reduce the related Note
Balance to zero; and
(e) to the Note Insurer, any amounts due and owing with respect to
such Class under the Insurance Agreement that are not described in clause
(a) above.
Any Available Funds for the related Group remaining after application in the
manner specified above will be released to the holder(s) of the Residual
Interest on such Payment Date, free from the lien of the Indenture, and such
S-23
<PAGE>
amounts will not be available to make payments on the Notes or payments to the
Note Insurer on any subsequent Payment Date.
In the event that, with respect to a particular Payment Date, Available
Funds for a Group on such date are not sufficient to pay any portion of Note
Interest for the related Class of Notes, the Indenture Trustee will file a claim
on the Insurance Policy in an amount equal to such deficiency and apply the
Insured Payment in respect of such claim to the payment of the deficiency in
such Note Interest. In addition, the Indenture Trustee will file a claim on the
Insurance Policy in an amount equal to any Overcollateralization Deficit for a
Class on a Payment Date (after taking into account payments in respect of
related Monthly Principal and Excess Cash on such Payment Date) and apply the
portion of the Insured Payment related to such Overcollateralization Deficit to
reduce the related Note Balance on such Payment Date by the amount of such
Overcollateralization Deficit. Any Insured Payment paid in respect of a Class of
Notes to make up any Overcollateralization Deficit shall be paid to the related
Noteholders, in reduction of the related Note Balance, until such Note Balance
is reduced to zero.
In no event will the aggregate payments of principal to Noteholders of a
Class exceed the related Original Note Balance.
"Note Interest" for a Class of Notes and any Payment Date will be an
amount equal to interest accrued during the related Interest Period at the
related Note Interest Rate on the related Note Balance as of the preceding
Payment Date (after giving effect to the payment, if any, in reduction of
principal made on such Notes on such preceding Payment Date).
All calculations of interest on the Notes will be computed on the basis of
a year of 360 days and of twelve 30 day months.
The "Note Interest Rate" for the Class A-1 Notes and each Interest Period
prior to the Initial Redemption Date will be a per annum rate equal to 6.605%,
and for each Interest Period thereafter, a per annum rate equal to 7.105%. The
Note Interest Rate for the Class A-2 Notes and each Interest Period prior to the
Initial Redemption Date will be a per annum rate equal to 6.585%, and for each
Interest Period thereafter will be a per annum rate equal to 7.085%.
The "Note Balance" for each Class of Notes will equal, as of any Payment
Date, the related Original Note Balance less all Monthly Principal and Excess
Cash for the related Group paid to the Noteholders of such Class on previous
Payment Dates in reduction of the related Note Balance (exclusive, for the sole
purpose of effecting the Note Insurer's subrogation rights, of payments made by
the Note Insurer in respect of any Overcollateralization Deficit for the related
Group under the Insurance Policy, except to the extent reimbursed to the Note
Insurer pursuant to the Indenture).
"Monthly Principal" for each Class of Notes and any Payment Date will be
an amount equal to (A) the aggregate of (i) all scheduled payments of principal
received or advanced with respect to the Mortgage Loans in the related Group and
due during the related Due Period and all other amounts collected, received or
otherwise recovered in respect of principal on such Mortgage Loans (including
Principal Prepayments, but not including Payments Ahead that are not allocable
to principal for the related Due Period) during or in respect of the related
Collection Period, and (ii) the aggregate of the amounts allocable to principal
deposited in the related Note Account on the related Deposit Date by the Issuer,
the Seller or the Note Insurer in connection with a repurchase, release, removal
or substitution of any such Mortgage Loans pursuant to the Indenture, reduced by
(B) the amount of any Overcollateralization Surplus for each Class of Notes with
respect to such Payment Date.
The "Principal Balance" of a Mortgage Loan with respect to any
Determination Date is the actual outstanding principal balance thereof as of the
close of business on the Determination Date in the preceding month (or, in the
case of the first Payment Date, as of the Cut-off Date), less (i) all scheduled
payments of principal received or advanced with respect to the Mortgage Loans
and due during the related Due Period and all other amounts collected, received
or otherwise recovered in respect of principal on the Mortgage Loans (including
Principal Prepayments, but not including Payments Ahead that are not allocable
to principal for the related Due Period) during or in respect of the related
Collection Period, Net Liquidation Proceeds and Insurance Proceeds allocable to
principal recovered or collected in respect of such Mortgage Loan during the
related Collection Period,
S-24
<PAGE>
(ii) the portion of the Release Price allocable to principal remitted by the
Issuer, the Servicer or the Note Insurer to the Indenture Trustee on or prior to
the next succeeding Deposit Date in connection with a release and removal of
such Mortgage Loan pursuant to the Indenture, to the extent such amount is
actually remitted on or prior to such Deposit Date, and (iii) the amount to be
remitted by the Seller to the Indenture Trustee on the next succeeding Deposit
Date in connection with a substitution of a Qualified Replacement Mortgage for
such Mortgage Loan pursuant to the Indenture, to the extent such amount is
actually remitted on or prior to such Deposit Date; provided, however, that
Mortgage Loans that have become Liquidated Mortgage Loans since the preceding
Determination Date (or, in the case of the first Determination Date, since the
Cut-off Date) will be deemed to have a Principal Balance of zero on the current
Determination Date.
"Determination Date" means, as to any Payment Date, the last day of the
Due Period relating to such Payment Date.
"Payments Ahead" means any payment of one or more scheduled monthly
payments remitted by a mortgagor with respect to a Mortgage Note in excess of
the scheduled monthly payment due during the related Due Period with respect to
such Mortgage Note, which sums the related mortgagor has instructed the Servicer
to apply to scheduled monthly payments due in one or more subsequent Due
Periods. Payments Ahead will be deemed received in the Due Period in which they
would have become due had they not been paid in advance.
"Principal Prepayment" means any mortgagor payment or other recovery in
respect of principal on a Mortgage Loan (including Net Liquidation Proceeds and
Insurance Proceeds allocable to principal) which, in the case of a mortgagor
payment, is received in advance of its scheduled due date and is not accompanied
by an amount as to interest representing scheduled interest for any month
subsequent to the month of such payment, or that is accompanied by instructions
from the related mortgagor directing the Servicer to apply such payment to the
Principal Balance of such Mortgage Loan currently.
"Liquidated Mortgage Loan" means, as to any Payment Date, any Mortgage
Loan as to which the Servicer has determined during the related Collection
Period, in accordance with its customary servicing procedures, that all
Liquidation Proceeds which it expects to recover from or on account of such
Mortgage Loan have been recovered.
"Available Funds" with respect to a Mortgage Loan Group and any Payment
Date will consist of the sum of the amounts described in clauses (a) through (g)
below, less (i) the Administrative Fee Amount for such Group in respect of such
Payment Date, (ii) Monthly Advances and Servicing Advances for such Group
previously made that are reimbursable to the Servicer (other than those included
in liquidation expenses for any Liquidated Mortgage Loan in such Group and
already reimbursed from the related Liquidation Proceeds) in such Collection
Period to the extent permitted by the Servicing Agreement and (iii) the
aggregate amounts (A) deposited into the Collection Account or related Note
Account that may not be withdrawn therefrom pursuant to a final and
nonappealable order of a United States bankruptcy court of competent
jurisdiction imposing a stay pursuant to Section 362 of the United States
Bankruptcy Code and that would otherwise have been included in Available Funds
on such Payment Date and (B) received by the Indenture Trustee that are
recoverable and sought to be recovered from the Issuer as a voidable preference
by a trustee in bankruptcy pursuant to the United States Bankruptcy Code in
accordance with a final nonappealable order of a court of competent
jurisdiction:
(a) all scheduled payments of interest received with respect to the
Mortgage Loans in such Group and due during the related Due Period and all
other interest payments on or in respect of such Mortgage Loans received
by or on behalf of the Servicer during the related Collection Period, net
of amounts representing interest accrued on such Mortgage Loans in respect
of any period prior to the Cut-off Date, plus any Compensating Interest
Payments made by the Servicer in respect of the related Mortgage Loans and
any net income from related REO Properties for such Collection Period;
(b) all scheduled payments of principal received with respect to the
Mortgage Loans in such Group and due during the related Due Period and all
other principal payments (including Principal Prepayments, but excluding
amounts described elsewhere in this definition) received or deemed to be
received during the related Collection Period in respect of such Mortgage
Loans;
S-25
<PAGE>
(c) the aggregate of any proceeds from or in respect of any policy
of insurance covering a Mortgaged Property that are received during the
related Collection Period and applied by the Servicer to reduce the
Principal Balance of the related Mortgage Loan ("Insurance Proceeds")
(which proceeds will not include any amounts applied to the restoration or
repair of the related Mortgaged Property or released to the related
mortgagor in accordance with applicable law, the Servicer's customary
servicing procedures or the terms of the related Mortgage Loan);
(d) the aggregate of any other proceeds received by the Servicer
during the related Collection Period in connection with the liquidation of
any Mortgaged Property securing a Mortgage Loan in such Group, whether
through trustee's sale, foreclosure, condemnation, taking by eminent
domain or otherwise (including any Insurance Proceeds to the extent not
duplicative of amounts in clause (c) above) ("Liquidation Proceeds"), less
expenses incurred by the Servicer in connection with the liquidation of
such Mortgage Loan ("Net Liquidation Proceeds");
(e) the aggregate of the amounts received in respect of any Mortgage
Loans in such Group that are required or permitted to be repurchased,
released, removed or substituted by the Seller during the related
Collection Period as described in "--Assignment of Mortgage Loans" and
"Servicing of the Mortgage Loans" herein, to the extent such amounts are
received by the Indenture Trustee on or before the related Deposit Date;
(f) the amount of any Monthly Advances made for such Group for such
Payment Date; and
(g) the aggregate of amounts deposited in the related Note Account
by the Indenture Trustee, the Issuer or the Note Insurer, as the case may
be, during such Collection Period in connection with redemption of the
Notes as described under "--Redemption of the Notes" herein.
Note Accounts
Pursuant to the Indenture, the Indenture Trustee shall establish and
maintain an account with respect to each Class of Notes (each, a "Note Account")
from which all payments with respect to such Notes will be made. As described
below, not later than the Deposit Date, the Servicer will be required pursuant
to the Servicing Agreement to wire transfer to the Indenture Trustee for deposit
in each Note Account the sum (without duplication) of all amounts on deposit in
the Collection Account that constitute any portion of Available Funds for the
related Group and the related Payment Date. See "Description of
Securities--Payments or Distributions of Principal and Interest" in the
Prospectus.
Investment of Note Accounts. All or a portion of each Note Account may be
invested and reinvested by the Indenture Trustee in one or more Permitted
Investments bearing interest or sold at a discount. The Indenture Trustee or any
affiliate thereof may be the obligor on any investment in a Note Account which
otherwise qualifies as a Permitted Investment. No investment in a Note Account
may mature later than the Business Day preceding the Payment Date.
The Indenture Trustee will not in any way be held liable by reason of any
insufficiency in any Note Account resulting from any loss on any Permitted
Investment included therein (except to the extent the Indenture Trustee is the
obligor thereon or manages or advises such Permitted Investment).
All income or other gain from investments in each Note Account will not be
available to Noteholders or otherwise subject to any claims or rights of the
Noteholders and will be held in such Note Account for the benefit of the
Servicer, subject to withdrawal from time to time as permitted by the Indenture.
Any loss resulting from such investments will be for the account of the
Servicer. The Servicer will be required to deposit the amount of any such loss
immediately upon the realization of such loss to the extent such loss will not
be offset by other income or gain from investments in such Note Account and then
available for such application.
Permitted Investments. The Indenture will define "Permitted Investments"
generally as follows:
S-26
<PAGE>
(a) direct obligations of, and obligations fully guaranteed by, the United
States of America, the Federal Home Loan Mortgage Corporation, Fannie Mae, the
Federal Home Loan Banks or any agency or instrumentality of the United States of
America, the obligations of which are backed by the full faith and credit of the
United States of America;
(b) (i) demand and time deposits in, certificates of deposit of, banker's
acceptances issued by or federal funds sold by any depository institution or
trust company (including the Indenture Trustee or its agent acting in their
respective commercial capacities) incorporated under the laws of the United
States of America or any state thereof and subject to supervision and
examination by federal and/or state authorities, so long as, at the time of such
investment or contractual commitment providing for such investment, such
depository institution or trust company or its ultimate parent has a short-term
unsecured debt rating in one of the two highest available rating categories of
S&P and the highest available rating category of Moody's and provided that each
such investment has an original maturity of no more than 365 days, and (ii) any
other demand or time deposit or deposit which is fully insured by the Federal
Deposit Insurance Corporation;
(c) repurchase obligations with a term not to exceed 30 days with respect
to any security described in clause (a) above and entered into with a depository
institution or trust company (acting as a principal) rated "A" or higher by
"S&P" and rated "A2" or higher by Moody's; provided, however, that collateral
transferred pursuant to such repurchase obligation must be of the type described
in clause (a) above and must (i) be valued daily at current market price plus
accrued interest, (ii) pursuant to such valuation, be equal, at all times, to
105% of the cash transferred by the Indenture Trustee in exchange for such
collateral and (iii) be delivered to the Indenture Trustee or, if the Indenture
Trustee is supplying the collateral, an agent for the Indenture Trustee, in such
a manner as to accomplish perfection of a security interest in the collateral by
possession of certified securities;
(d) securities bearing interest or sold at a discount issued by any
corporation incorporated under the laws of the United States of America or any
state thereof which has a long-term unsecured debt rating in the highest
available rating category of each of the Rating Agencies at the time of such
investment;
(e) commercial paper having an original maturity of less than 365 days and
issued by an institution having a short-term unsecured debt rating in the
highest available rating category of each of the Rating Agencies at the time of
such investment;
(f) a guaranteed investment contract approved by each of the Rating
Agencies and the Note Insurer and issued by an insurance company or other
corporation having a long-term unsecured debt rating in the highest available
rating category of each of the Rating Agencies at the time of such investment;
(g) money market funds having ratings in one of the two highest available
rating categories of S&P and Moody's at the time of such investment which invest
only in other Permitted Investments (any such money market funds which provide
for demand withdrawals being conclusively deemed to satisfy any maturity
requirements for Permitted Investments set forth herein), including money market
funds of the Indenture Trustee and any such funds that are managed by the
Indenture Trustee or its affiliates or for which the Indenture Trustee or any
affiliate acts as advisor as long as such money market funds satisfy the
criteria of this subparagraph (g); and
(h) any investment approved in writing by the Note Insurer and written
evidence that any such investment will not result in a downgrading or withdrawal
of the rating by each Rating Agency on the Notes.
The Indenture Trustee may purchase from or sell to itself or an affiliate,
as principal or agent, the Permitted Investments listed above. All Permitted
Investments in a trust account under the Indenture shall be made in the name of
the Indenture Trustee for the benefit of the Noteholders and the Note Insurer.
Overcollateralization Feature
Credit enhancement with respect to each Class of Notes will be provided in
part by overcollateralization resulting from the Aggregate Principal Balances of
the Mortgage Loans in the related Group as of the end of each Due Period
exceeding the related Note Balance for the related Payment Date (after taking
into account the related
S-27
<PAGE>
Monthly Principal and Excess Cash to be paid on such Payment Date in reduction
of such Note Balance). The Indenture requires that the Overcollateralization
Amount for each Class be increased to, and thereafter maintained at, the related
Required Overcollateralization Amount. This increase and subsequent maintenance
is intended to be accomplished by the application of monthly Excess Cash in
respect of a Group to accelerate the pay down of the related Note Balance until
the related Overcollateralization Amount reaches the related Required
Overcollateralization Amount. Such applications of Excess Cash, because they
consist of interest collections on the Mortgage Loans of a Group, but are
distributed as principal on the related Notes, will increase the related
Overcollateralization Amount. Such overcollateralization is intended to result
in amounts received on the Mortgage Loans in the related Group in excess of the
amount necessary to pay the Note Interest and Monthly Principal required to be
paid on the related Class of Notes on any Payment Date being applied to reduce
the related Note Balance to zero no later than the Stated Maturity of such
Notes.
The "Excess Cash" with respect to a Group on any Payment Date will be
equal to Available Funds for such Group and Payment Date, reduced by the sum of
(i) any amounts payable to the Note Insurer for Insured Payments with respect to
such Group paid on prior Payment Dates and not yet reimbursed and for any unpaid
Note Insurer Premiums for such Group in prior Payment Dates (in each case with
interest thereon at the Late Payment Rate set forth in the Insurance Agreement),
(ii) the Note Interest for the related Class and Payment Date and (iii) the
Monthly Principal for the related Class and Payment Date. Certain Mortgage Loans
will not have their first monthly payment due until the Due Period relating to
the August ___ Payment Date. Accordingly, in the case of the July ___ Payment
Date, the amount of Excess Cash available will be lower than it would have been
otherwise.
The "Overcollateralization Amount" with respect to a Group and any Payment
Date is the amount, if any, by which (x) the Aggregate Principal Balance of the
Mortgage Loans in such Group as of the end of the related Due Period exceeds (y)
the Note Balance of the related Class of Notes as of such Payment Date after
taking into account payments of Monthly Principal (disregarding any permitted
reduction in Monthly Principal due to an Overcollateralization Surplus) for such
Class made on such Payment Date. The required level of the Overcollateralization
Amount with respect to each Class and any Payment Date (the "Required
Overcollateralization Amount") will be equal to the amount specified as such in
the Indenture. The Indenture generally provides that the related Required
Overcollateralization Amount may, over time, decrease or increase, subject to
certain floors, caps and triggers including triggers that allow the Required
Overcollateralization Amount for a Group to decrease or "step down" based on the
performance on the Mortgage Loans in the related Group with respect to certain
delinquency rate tests specified in the Indenture. In addition, Excess Cash for
a Group will be applied to the payment in reduction of principal of the related
Notes during the period that the Mortgage Loans in such Group are unable to meet
certain tests specified in the Insurance Agreement based on delinquency rates.
Any increase in the applicable Required Overcollateralization Amount for a Group
may result in an accelerated amortization of the Notes in the related Class
until such Required Overcollateralization Amount is reached. Conversely, any
decrease in the Required Overcollateralization Amount for a Group will result in
a decelerated amortization of the Notes in the related Class until such Required
Overcollateralization Amount is reached.
The application of Excess Cash for a Group to reduce the Note Balance for
the related Class of Notes on any Payment Date will have the effect of
accelerating the amortization of such Notes relative to the amortization of the
Mortgage Loans in the related Group.
In the event that the Required Overcollateralization Amount for a Group is
permitted to decrease or "step down" on any Payment Date in the future, the
Indenture will provide that all or a portion of the Excess Cash for such Group
that would otherwise be paid to the Notes in the related Class on any such
Payment Date in reduction of the related Note Balance will be released to the
holder(s) of the Residual Interest.
With respect to a Group and any Payment Date, an "Overcollateralization
Surplus" means, the amount, if any, by which (x) the Overcollateralization
Amount for such Group and Payment Date exceeds (y) the then applicable Required
Overcollateralization Amount for such Group and Payment Date. As a technical
matter, an Overcollateralization Surplus for a Group may result even prior to
the occurrence of any decrease or "step down" in the Required
Overcollateralization Amount for such Group because the Notes of the related
Class will be entitled to receive 100% of collected principal on the related
Mortgage Loans, even though the related Note Balance will, as a result of the
accelerated amortization caused by the application of the Excess Cash for such
Group, be less than the
S-28
<PAGE>
Aggregate Principal Balance of the Mortgage Loans in such Group, in the absence
of any Realized Losses on such Mortgage Loans.
The Indenture will provide that, on any Payment Date, all amounts
collected on the Mortgage Loans in a Group in respect of principal to be applied
on such Payment Date will be paid to Noteholders of the related Class in
reduction of the related Note Balance on such Payment Date, except as provided
above with respect to any Payment Date for which there exists an
Overcollateralization Surplus for such Group. If any Mortgage Loan became a
Liquidated Mortgage Loan during such prior Collection Period, the Net
Liquidation Proceeds related thereto and allocated to principal may be less than
the Principal Balance of the related Mortgage Loan; the amount of any such
deficiency is a "Realized Loss." In addition, the Indenture will provide that
the Principal Balance of any Mortgage Loan that becomes a Liquidated Mortgage
Loan shall equal zero. The Indenture will not require that the amount of any
Realized Loss be paid to Noteholders of the related Class on the Payment Date
following the event of loss. However, the occurrence of a Realized Loss will
reduce the Overcollateralization Amount for the related Class of Notes, and will
result in more Excess Cash, if any, being paid on such Notes in reduction of the
related Note Balance on subsequent Payment Dates than would be the case in the
absence of such Realized Loss.
Overcollateralization and the Insurance Policy. The Indenture will require
the Indenture Trustee to file a claim for an Insured Payment under the Insurance
Policy not later than 12:00 noon (New York City time) on the third Business Day
prior to any Payment Date as to which the Indenture Trustee has determined that
an Overcollateralization Deficit with respect to a Class of Notes will occur for
the purpose of applying the proceeds of such Insured Payment as a payment of
principal to the Noteholders of such Class on such Payment Date. With respect to
a Class and any Payment Date, an "Overcollateralization Deficit" will mean the
amount, if any, by which (x) the related Note Balance, after taking into account
all payments to be made on such Payment Date in reduction thereof, including any
Excess Cash payments, exceeds (y) the sum of Aggregate Principal Balance of the
Mortgage Loans in the related Group as of the end of the applicable Due Period.
Accordingly, the Insurance Policy is similar to the provisions described above
with respect to the overcollateralization provisions insofar as the Insurance
Policy guarantees ultimate collection of the full amount of the related Note
Balance, rather than current payments of the amounts of any Realized Losses to
the Noteholders. Investors in the Notes should realize that, under certain loss
or delinquency scenarios, they may temporarily receive no payments in reduction
of the related Note Balance.
Reports to Noteholders
Concurrently with each payment to Noteholders, the Indenture Trustee will
mail a statement to each Noteholder, the Note Insurer and the Underwriters in
the form required by the Indenture and setting forth the following information
(to the extent the Servicer makes such information (other than the information
described in clause (b) below) available to the Indenture Trustee):
(a) the amount of such payment to the Noteholders of each Class on the
related Payment Date allocable to (i) Monthly Principal (separately setting
forth Principal Prepayments) and (ii) any Excess Cash payment;
(b) the amount of such payment to the Noteholders of each Class on such
Payment Date allocable to Note Interest;
(c) the Note Balance for each Class after giving effect to the payment of
Monthly Principal and any Excess Cash applied to reduce such Note Balance on
such Payment Date;
(d) the Aggregate Principal Balance of the Mortgage Loans in each Group as
of the end of the related Due Period;
(e) the amount of Monthly Advances made with respect to each Class and
such Payment Date and the aggregate amount of unreimbursed Monthly Advances and
Servicing Advances with respect to each Class, if any;
S-29
<PAGE>
(f) the number and the aggregate of the Principal Balances of the Mortgage
Loans in each Group delinquent (i) one month, (ii) two months and (iii) three or
more months as of the end of the related Collection Period;
(g) the aggregate of the Principal Balances of the Mortgage Loans in each
Group in foreclosure or other similar proceedings or in which the borrower is in
bankruptcy and the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure during the related Collection Period;
(h) the aggregate of the Principal Balances of the Mortgage Loans in each
Group repurchased by the Seller or the Servicer, separately setting forth the
aggregate of the Principal Balances of Mortgage Loans in each Group delinquent
for three consecutive monthly installments purchased by the Servicer at its
option pursuant to the Servicing Agreement;
(i) the Insured Payment, if any, for each Class and such Payment Date;
(j) the amount of the Servicing Fee paid to or retained by the Servicer
for each Group with respect to such Payment Date;
(k) the Overcollateralization Amount, the then applicable Required
Overcollateralization Amount, the Overcollateralization Surplus, if any, and the
Overcollateralization Deficit, if any, with respect to each Class and such
Payment Date; and
(l) the aggregate outstanding principal balance of the three largest
outstanding Mortgage Loans in each Group.
In the case of information furnished pursuant to clauses (a) and (b)
above, the amounts shall be expressed as a dollar amount per Note with a $1,000
principal denomination.
Within 90 days after the end of each calendar year, the Indenture Trustee
will mail to each person who at any time during such calendar year was a
Noteholder and to the Underwriters, if requested in writing by any such person,
a statement containing the information set forth in clauses (a) and (b) above,
aggregated for such calendar year or, in the case of each person who was a
Noteholder for a portion of such calendar year, setting forth such information
for each month thereof. Such obligation of the Indenture Trustee shall be deemed
to have been satisfied to the extent that substantially comparable information
shall be prepared and furnished by the Indenture Trustee to Noteholders pursuant
to any requirements of the Code as are in force from time to time.
Redemption of the Notes
Optional Redemption. The Notes will be subject to redemption, in whole but
not in part, at the option of the Servicer or, if not exercised, at the option
of the Note Insurer, on or after the first Payment Date (such date, the "Initial
Redemption Date") on which the Aggregate Principal Balance of the Mortgage Loans
in the Mortgage Pool has declined to less than 10% of the Aggregate Principal
Balance of the Mortgage Loans as of the Cut-off Date (the date on which the
Notes are to be redeemed, the "Redemption Date").
The Notes will be redeemed at a redemption price of 100% of the then
outstanding Note Balance, plus accrued but unpaid interest thereon through the
end of the Interest Period immediately preceding the related Payment Date;
provided, however, that no redemption may take place unless, in connection with
such redemption, any amounts due and owing to the Note Insurer under the
Insurance Agreement are paid in full to the Note Insurer. There will be no
prepayment premium in connection with such a redemption. Notice of an optional
redemption of the Notes must be mailed by the Indenture Trustee to the
Noteholders and the Note Insurer at least ten days prior to the Payment Date set
for such redemption.
The payment on the final Payment Date in connection with the redemption of
the Notes shall be in lieu of the payment otherwise required to be made on such
Payment Date in respect of the Notes.
S-30
<PAGE>
Termination of the Mortgage Pool. Following the first Payment Date on
which the Aggregate Principal Balance with respect to both Groups of the
Mortgage Loans is less than 20% of the Aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date, the Indenture Trustee will be required to
solicit competitive bids for the purchase of the Mortgage Loans for fair market
value. In the event that satisfactory bids are received as described below, the
proceeds of such sale shall be used to redeem the Notes in full and any excess
shall be paid to the Residual Holder on the immediately succeeding Payment Date.
The Indenture Trustee will solicit good-faith bids from no fewer than three
prospective purchasers that are considered at the time to be competitive
participants in the fixed-rate mortgage loan market, which prospective
purchasers may include the Seller or an affiliate of either of the Underwriters.
The Indenture Trustee will consult with the Underwriters and any securities
brokerage house then making a market in the Notes to determine if the fair
market value of the Mortgage Loans has been offered.
Any purchaser of such Mortgage Loans must agree to the continuation of the
Servicer or any successor servicer then acting as servicer of the Mortgage Loans
on terms substantially similar to those contained in the Servicing Agreement.
If the highest bid received by the Indenture Trustee from a qualified
bidder is not less than the fair market value of the Mortgage Loans and would
equal or exceed the amount set forth in the immediately succeeding sentence, the
Indenture Trustee will sell and assign such Mortgage Loans without recourse to
the highest bidder and will redeem the Notes. For the Indenture Trustee to
consummate the sale, the bid must be with respect to each Group at least equal
to an amount, which, when added to Available Funds for the related Payment Date
with respect to each Group, would equal the sum, without duplication, of (i) the
accrued interest then due on the related Group on such Payment Date, (ii) the
aggregate Note Balance for the related Group as of such Payment Date, (iii) the
aggregate of all Insured Payments made by the Note Insurer to the Noteholders in
the related Group remaining unreimbursed as of such Payment Date and any amounts
owing to the Note Insurer under the agreement governing the issuance of the
Insurance Policy, plus interest on such amount calculated at the Late Payment
Rate as set forth in agreement governing the issuance of the Insurance Policy,
(iv) any accrued and unpaid Servicing Fees and any Servicing Advances or any
Monthly Advances previously made by the Servicer to the related Group and
remaining unreimbursed as of such Payment Date and (v) any accrued and unpaid
fees owing to the Indenture Trustee or the Owner Trustee as of such Payment
Date. If such conditions are not met, the Indenture Trustee will not consummate
such sale. In addition, the Indenture Trustee will decline to consummate such
sale unless it receives an opinion of counsel that such sale will not give rise
to any adverse tax consequences to the Issuer or the Noteholders or adversely
affect the opinion of Tax Counsel that the Notes will evidence indebtedness of
the Issuer under the Code. In the event such sale is not consummated in
accordance with the foregoing, the Indenture Trustee will continue to solicit
bids on a quarterly basis for the purchase of such assets upon the terms
described above.
Payments to the Holder(s) of the Residual Interest
On each Payment Date, any portion of Available Funds for each Group
remaining after making payments of interest and principal due on the related
Notes and other distributions required on such Payment Date will be released to
the holder(s) of the Residual Interest, free of the lien of the Indenture. Any
such remaining amounts with respect to one Group will not be available to make
payments then due on the Notes of the other Class. Nor will such amounts be
available to make payments on either Class of the Notes or payments to the Note
Insurer on any subsequent Payment Date.
The Indenture Trustee
[__________ ] , a national banking association, will be the Indenture
Trustee under the Indenture. The Indenture will provide that the Indenture
Trustee is entitled to the Indenture Trustee Fee and reimbursement of certain
expenses. [__________ ] , will also act as successor servicer under the
Servicing Agreement and, upon a termination of the Servicer, shall be obligated
to succeed to the obligations of the Servicer or to appoint an eligible
successor servicer.
The Indenture also will provide that the Indenture Trustee may resign at
any time, upon notice to the Issuer, the Servicer, the Note Insurer and any
Rating Agency, in which event the Issuer will be obligated to appoint a
successor Indenture Trustee acceptable to the Note Insurer. The Issuer, with the
prior consent of the Note Insurer,
S-31
<PAGE>
may remove the Indenture Trustee if the Indenture Trustee ceases to be eligible
to continue as such under the Indenture or if the Indenture Trustee becomes
insolvent. Any resignation or removal of the Indenture Trustee and appointment
of a successor Indenture Trustee will not become effective until acceptance of
the appointment by the successor Indenture Trustee. The Indenture will provide
that the Indenture Trustee is under no obligation to exercise any of the rights
or powers vested in it by the Indenture at the request or direction of any of
the Noteholders, unless such Noteholders shall have offered to the Indenture
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred by it in compliance with such request or
direction. The Indenture Trustee may execute any of the rights or powers granted
by the Indenture or perform any duties thereunder either directly or by or
through its agents or attorneys; provided, however, the Indenture Trustee shall
remain liable for the performance of all of its duties. Pursuant to the
Indenture, the Indenture Trustee is not liable for any action it takes or omits
to take in good faith which it reasonably believes to be authorized by an
authorized officer of any person or within its rights or powers under the
Indenture. The Indenture Trustee and any director, officer, employee or agent of
the Indenture Trustee may rely and will be protected in acting or refraining
from acting in good faith in reliance on any certificate, notice or other
document of any kind prima facie properly executed and submitted by the
authorized officer of any person respecting any matters arising under the
Indenture. The Indenture Trustee will be indemnified by the Servicer for certain
losses and other events to the extent described in the Servicing Agreement.
Voting
Unless otherwise specified in the Indenture, with respect to any
provisions of the Indenture providing for the action, consent or approval of the
Noteholders evidencing specified "Voting Interests," each Noteholder will have a
Voting Interest equal to the Percentage Interest represented by such
Noteholder's Note. Unless a Note Insurer Default has occurred and is continuing,
the Voting Interests of the Noteholders will be exercised solely by or with the
consent of the Note Insurer.
Note Events of Default
An Event of Default with respect to the Notes shall occur if, on any
Payment Date, after taking into account all payments made in respect of each
Class of Notes on such Payment Date, the Note Interest for such Payment Date
remains unpaid or an Overcollateralization Deficit still exists with respect to
the Notes. See "The Indenture--Events of Default" in the Prospectus for a
description of the circumstances under which a default on the Notes, other than
a payment default, may occur. For a description of the rights of Noteholders of
a Class in connection with any Event of Default with respect to the related
Notes, see "The Indenture--Rights upon Event of Default" in the Prospectus. In
the absence of a failure by the Note Insurer to pay Insured Payments, no
acceleration of the maturity of the Notes shall be permitted without the consent
of the Note Insurer.
THE ISSUER
The Issuer is a [__________ ] business trust established by the Depositor
pursuant to the Trust Agreement. After the Closing Date, the Residual Interest
representing all of the beneficial ownership interest in the Issuer will be held
by the Company, a limited purpose, wholly-owned subsidiary of the Seller. The
principal office of the Issuer is located in______________, Attention: Corporate
Trust Administration. The Issuer does not have, nor is it expected in the future
to have, any significant assets, other than the assets included in the Trust
Estate.
[_____________]
[____________], the Seller under the Sale Agreement and the Servicer under
the Servicing Agreement, is a [__________ ] corporation and a full service
mortgage banker engaged in the business of originating, purchasing, selling and
servicing mortgage loans on one- to four-family residential properties. The
Seller's mortgage loans are primarily made to borrowers whose borrowing needs
are generally not being served by traditional financial institutions because of
impaired or limited credit profiles. The Seller was formed in November 1996. The
Seller currently originates its mortgage loans primarily through independent
licensed brokers and its retail origination offices, and purchases mortgage
loans from approved correspondents. Each Mortgage Loan is underwritten by the
S-32
<PAGE>
Seller. See "Description of the Mortgage Pool--Underwriting Standards" and
"Servicing of the Mortgage Loans--Historical Servicing Experience of the
Servicer."
The Seller has its principal offices at _________________________________.
DESCRIPTION OF THE MORTGAGE POOL
General
The following is a brief description of certain terms of the Mortgage
Loans as of the Cut-off Date.
The Mortgage Pool will consist of two Groups of fixed rate mortgage loans
secured by first and second liens, in the case of Group I, and first liens, in
the case of Group II, on one- to four-family residential properties located in
40 states and the District of Columbia for Group I and ___ states and the
_______________ for Group II. No Mortgage Loan will have an original term to
stated maturity in excess of 30 years or has a scheduled maturity date later
than [__________ ] _________-. All of the Mortgage Loans will be originated or
acquired by the Seller through its network of brokers and correspondents.
The Mortgage Loans have been originated using underwriting standards that
are less stringent than the underwriting standards applied by other mortgage
loan purchase programs such as those administered by Fannie Mae or by Freddie
Mac. See "--Underwriting Standards" and "Risk Factors--Risks Associated with the
Underwriting Standards" herein.
The Mortgage Loans are generally not assumable pursuant to the terms of
the related Mortgage Note. See "Certain Prepayment and Yield Considerations"
herein.
None of the Mortgage Loans is or will be insured or guaranteed by the
Issuer, the Seller, the Company, the Depositor, the Servicer, the Indenture
Trustee, the Note Insurer, any originator or any of their respective affiliates,
or by any governmental agency or other person, except as described herein. None
of the Mortgage Loans will be insured by mortgage pool insurance policies or
primary mortgage insurance policies.
Approximately 32.5% of the Mortgage Loans by Principal Balance as of the
Cut-off Date will provide for the payment of a prepayment charge. Prepayment
charges received on the Mortgage Loans will not be included in Available Funds
for the related Collection Period but will instead by paid to the Servicer as
additional servicer compensation.
Mortgage Loan Characteristics -- Group I
Set forth below is certain summary statistical information regarding the
Group I Mortgage Loans as of the Cut-off Date. As of the Cut-off Date, the Group
I Mortgage Loans consisted of __________ Mortgage Loans with an Aggregate
Principal Balance totaling $__________ (the "Initial Group I Pool Balance").
As of the Cut-off Date, the average Principal Balance of the Group I
Mortgage Loans was $___________; the minimum and maximum Principal Balances of
the Group I Mortgage Loans were $_________ and $___________, respectively;
85.06% of the Group I Mortgage Loans by Principal Balance as of the Cut-off Date
are secured by first lien mortgages on the related Mortgaged Properties and
14.94% of the Group I Mortgage Loans by Principal Balance as of the Cut-off Date
are secured by second lien mortgages on the related Mortgaged Properties; 38.02%
of the Group I Mortgage Loans by Principal Balance as of the Cut-off Date are
Balloon Loans; the weighted average interest rate (the "Mortgage Rate") of the
Group I Mortgage Loans was 10.168%; the Mortgage Rates of the Group I Mortgage
Loans ranged from 7.050% to 18.250% the weighted average Combined Loan-to-Value
Ratio of the Group I Mortgage Loans was 77.602% and these Combined Loan-to-Value
Ratios ranged from 14.660% to 125.130%. The weighted average remaining term to
maturity of the Group I Mortgage Loans was 219.257 months and the remaining
terms to maturity of the Group I Mortgage Loans ranged from 58 months to 360
months.
S-33
<PAGE>
Approximately 0.755% of the Group I Mortgage Loans were more than 30 days,
but less than 60 days, past due as of the Cut-off Date. As of the Cut-off Date,
none of the Group I Mortgage Loans were 60 days or more delinquent in payment of
principal and interest. None of the Group I Mortgage Loans will be covered by a
primary mortgage insurance policy. Approximately 24.300% of the Group I Mortgage
Loans by Principal Balance as of the Cut-off Date are Mortgage Loans with
Combined Loan-to-Value Ratios at origination in excess of 80%. Approximately 33%
of the Group I Mortgage Loans by Principal Balance as of the Cut-off Date
require the payment of a fee in connection with certain prepayments.
The "Combined Loan-to-Value Ratio" of a Mortgage Loan shall generally mean
that ratio, expressed as a percentage, borne by (a) the sum of the principal
amount of the Mortgage Loan at origination plus the then-current principal
balance of all mortgage loans (each a "Senior Loan" ) secured by liens on the
related Mortgaged Property having priorities senior to that of the lien which
secures such Mortgage Loan over (b) the appraised value of the related Mortgaged
Property at origination.
Set forth below is a description of certain additional characteristics of
the Group I Mortgage Loans as of the Cut-off Date (except as otherwise
indicated). The information expressed below as a percentage of the Initial Group
I Pool Balance may not total 100% due to rounding.
Principal Balances of the Group I Mortgage Loans
Aggregate
Number of Unpaid Percentage of
Range of Mortgage Principal Initial Group I
Principal Balances Loans Balance Pool Balance
- ------------------ ----- ------- ------------
$ 0- 25,000 ......... $ %
25,000.01- 50,000 .........
50,000.01- 75,000 .........
75,000.01-100,000 .........
100,000.01-150,000 .........
150,000.01-200,000 .........
200,000.01-250,000 .........
250,000.01-300,000 .........
300,000.01-350,000 .........
350,000.01-400,000 .........
400,000.01-450,000 .........
---------- ------- ------
Total ................... $ 100.00%
As of the Cut-off Date, the average Principal Balance of the Group I
Mortgage Loans was approximately $__________________.
S-34
<PAGE>
Mortgage Rates of the Group I Mortgage Loans
Aggregate
Number of Unpaid Percentage of
Range of Mortgage Mortgage Principal Initial Group I
Interest Rates (%) Loans Balance Pool Balance
- ------------------ ----- ------- ------------
$ %
-------- ------- ------
Total ................... $ 100.00%
As of the Cut-off Date, the weighted average Mortgage Rate of the Group I
Mortgage Loans was approximately 10.168% per annum.
S-35
<PAGE>
Original Combined Loan-to-Value Ratios of the Group I Mortgage Loans
Aggregate
Number of Unpaid Percentage of
Range of Original Combined Mortgage Principal Initial Group I
Loan-to-Value Ratios (%) Loans Balance Pool Balance
- ------------------------ ----- ------- ------------
$ %
-------- ------- ------
Total ................... $ 100.00%
The weighted average Combined Loan-to-Value Ratio at origination of the
Group I Mortgage Loans was approximately 77.602%.
S-36
<PAGE>
Geographic Distribution of Mortgaged Properties of the Group I Mortgage Loans
Aggregate
Number of Unpaid Percentage of
Mortgage Principal Initial Group
State Loans Balance Pool Balance
- ----- ----- ------- ------------
$ %
-------- ------- ------
Total ................... $ 100.00%
No more than 0.638% of the Group I Mortgage Loans will be secured by
Mortgaged Properties located in any one zip code area.
S-37
<PAGE>
Mortgage Loan Purpose of the Group I Mortgage Loans
Aggregate
Number of Unpaid Percentage of
Mortgage Principal Initial Group I
Loan Purpose Loans Balance Pool Balance
------------ ----- ------- ------------
Purchase ..................... $ %
Refinance/No Equity
Take Out....................
Refinance/Equity Take Out ....
Refinance/Property
Improvements ...............
---------- ------- ------
Total ................... $ 100.00%
Mortgage Loan Documentation Types of the Group I Mortgage Loans
Aggregate
Number of Unpaid Percentage of
Mortgage Principal Initial Group I
Documentation Type Loans Balance Pool Balance
------------------ ----- ------- ------------
Full Documentation...... $ %
Stated Documentation....
Limited Documentation...
---------- ------- ------
Total ................... $ 100.00%
Occupancy Status of the Group I Mortgage Loans
Number of Percentage of
Mortgage Principal Initial Group I
Occupancy Loans Balance Pool Balance
----------- ----- ------- ------------
Owner Occupied................ $ %
Investor......................
Second/Vacation homes.........
---------- ------- ------
Total ................... $ 100.00%
Mortgaged Property Types of the Group I Mortgage Loans
Number of Percentage of
Mortgage Principal Initial Group I
Property Type Loans Balance Pool Balance
------------- ----- ------- ------------
Single-Family................. $ %
Manufactured Housing..........
Planned Unit Developments
(detached).................
Condominium...................
Two- to four-family units.....
---------- ------- ------
Total ................... $ 100.00%
S-38
<PAGE>
Seasoning of the Group I Mortgage Loans
Aggregate
Number of Unpaid Percentage of
Mortgage Principal Initial Group I
Months of Seasoning (months) Loans Balance Pool Balance
---------------------------- ----- ------- ------------
0......................... $ %
1-12........................
13-24.......................
---------- ------- ------
Total ................... $ 100.00%
As of the Cut-off Date, the weighted average seasoning of the Group I
Mortgage Loans was approximately one month.
Original Term to Maturity of Group I Mortgage Loans
Aggregate
Number of Unpaid Percentage of
Original Term to Mortgage Principal Initial Group I
Maturity (months) Loans Balance Pool Balance
----------------- ----- ------- ------------
48-60............... $
72-84...............
108-120.............
121-132.............
133-144.............
145-156.............
168-180.............
228-240.............
288-300.............
348-360.............
---------- ------- ------
Total ................... $ 100.00%
S-39
<PAGE>
Remaining Terms to Maturity of the Group I Mortgage Loans
Aggregate
Number of Unpaid Percentage of
Months Remaining to Mortgage Principal Initial Group I
Maturity (months) Loans Balance Pool Balance
--------------------- ----- ------- ------------
48-60............... $ %
72-84...............
108-120.............
121-132.............
133-144.............
145-156.............
157-168.............
169-180.............
229-240.............
289-300.............
349-360.............
---------- ------- ------
Total ................... $ 100.00%
As of the Cut-off Date, the weighted average remaining terms to maturity
of the Group I Mortgage Loans was approximately 219.257 months.
Mortgage Loan Characteristics -- Group II
Set forth below is certain summary statistical information regarding the
Group II Mortgage Loans as of the Cut-off Date. As of the Cut-off Date, the
Group II Mortgage Loans consisted of 512 Mortgage Loans with an Aggregate
Principal Balance totaling $_______________ (the "Initial Group II Pool
Balance").
As of the Cut-off Date, the average Principal Balance of the Group II
Mortgage Loans was $_________; the minimum and maximum Principal Balances of the
Group II Mortgage Loans were $54,900.00 and $____________, respectively; 100.00%
of the Group II Mortgage Loans by Principal Balance as of the Cut-off Date are
secured by first lien mortgages on the related Mortgaged Properties; 46.46% of
the Group II Mortgage Loans by Principal Balance as of the Cut-off Date are
Balloon Loans; the weighted average interest rate (the "Mortgage Rate") of the
Group II Mortgage Loans was 9.487%; the Mortgage Rates of the Group II Mortgage
Loans ranged from 6.750% to 13.625% the weighted average Loan-to-Value Ratio of
the Group II Mortgage Loans was 77.805% and the Loan-to-Value Ratios ranged from
39.060% to 90.000%. The weighted average remaining term to maturity of the Group
II Mortgage Loans was 244.745 months and the remaining terms to maturity of the
Group II Mortgage Loans ranged from 119.000 months to 360 months.
Approximately 1.019% of the Group II Mortgage Loans were more than 30
days, but less than 60 days, past due as of the Cut-off Date. As of the Cut-off
Date, none of the Group II Mortgage Loans were 60 days or more delinquent in
payment of principal and interest. None of the Group II Mortgage Loans will be
covered by a primary mortgage insurance policy. Approximately 25.739% of the
Group II Mortgage Loans by Principal Balance as of the Cut-off Date are Mortgage
Loans with Loan-to-Value Ratios at origination in excess of 80%. Approximately
20% of the Group II Mortgage Loans by Principal Balance as of the Cut-off Date
provide for a prepayment charge. Approximately 31% of the Group II Mortgage
Loans by Principal Balance as of the Cut-off Date require the payment of a fee
in connection with certain prepayments.
The "Loan-to-Value Ratio" of a Mortgage Loan shall generally mean that
ratio, expressed as a percentage, borne by (a) the principal amount of the
Mortgage Loan at origination over (b) (i) the lesser of the sales price or the
appraised value of the related Mortgaged Property at origination, or (ii) in the
case of a Mortgage Loan made to refinance a previous loan, the appraised value
determined at origination of the new Mortgage Loan.
S-40
<PAGE>
Set forth below is a description of certain additional characteristics of
the Group II Mortgage Loans as of the Cut-off Date (except as otherwise
indicated). The information expressed below as a percentage of the Initial Group
II Pool Balance may not total 100% due to rounding.
Principal Balances of the Group II Mortgage Loans
Aggregate
Number of Unpaid Percentage of
Range of Mortgage Principal Initial Group II
Principal Balances Loans Balance Pool Balance
- ------------------ ----- ------- ------------
................... $ %
...................
...................
...................
...................
...................
---------- ------- ------
Total ................... $ 100.00%
As of the Cut-off Date, the average Principal Balance of the Group II
Mortgage Loans was approximately $------------.
S-41
<PAGE>
Mortgage Rates of the Group II Mortgage Loans
Aggregate
Number of Unpaid Percentage of
Range of Mortgage Mortgage Principal Initial Group II
Interest Rates (%) Loans Balance Pool Balance
- ------------------ ----- ------- ------------
..................... $ %
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
.....................
---------- ------- ------
Total ................... $ 100.00%
As of the Cut-off Date, the weighted average Mortgage Rate of the Group II
Mortgage Loans was approximately 9.487% per annum.
S-42
<PAGE>
Original Loan-to-Value Ratios of the Group II Mortgage Loans
Aggregate
Range of Original Number of Unpaid Percentage of
Loan-to-Value Mortgage Principal Initial Group II
Ratios (%) Loans Balance Pool Balance
- ------------------ ----- ------- ------------
................... $ %
...................
...................
...................
...................
...................
...................
...................
...................
...................
...................
---------- ------- ------
Total ................... $ 100.00%
The weighted average Loan-to-Value Ratio at origination of the Group II
Mortgage Loans was approximately 77.805%.
S-43
<PAGE>
Geographic Distribution of Mortgaged Properties of the Group II Mortgage Loans
Aggregate
Number of Unpaid Percentage of
Mortgage Principal Initial Group II
State Loans Balance Pool Balance
- ------------------ ----- ------- ------------
.............. $ %
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
..............
---------- ------- ------
Total ................... $ 100.00%
No more than 1.347% of the Group II Mortgage Loans will be secured by
Mortgaged Properties located in any one zip code area.
S-44
<PAGE>
Mortgage Loan Purpose of the Group II Mortgage Loans
Aggregate
Number of Unpaid Percentage of
Mortgage Principal Initial Group II
Loan Purpose Loans Balance Pool Balance
- ------------------ ----- ------- ------------
Purchase...................... $ %
Refinance/No Equity Take Out..
Refinance/Equity Take Out.....
Refinance/Property
Improvements................
---------- ------- ------
Total ................... $ 100.00%
Mortgage Loan Documentation Types of the Group II Mortgage Loans
Aggregate
Number of Unpaid Percentage of
Mortgage Principal Initial Group II
Documentation Type Loans Balance Pool Balance
- ------------------ ----- ------- ------------
Full Documentation............ $ %
Stated Documentation..........
Limited (Fast) Documentation..
---------- ------- ------
Total ................... $ 100.00%
Occupancy Status of the Group II Mortgage Loans
Number of Percentage of
Mortgage Principal Initial Group II
Occupancy Loans Balance Pool Balance
-------------- ----- ------- ------------
Owner Occupied............... $ %
Investor.....................
---------- ------- ------
Total ................... $ 100.00%
Mortgaged Property Types of the Group II Mortgage Loans
Number of Percentage of
Mortgage Principal Initial Group II
Property Type Loans Balance Pool Balance
-------------- ----- ------- ------------
Single-Family................. $ %
Manufactured Housing..........
Planned Unit Developments
(detached)................
Two- to four-family units.....
Condominium...................
---------- ------- ------
Total ................... $ 100.00%
S-45
<PAGE>
Seasoning of the Group II Mortgage Loans
Aggregate
Number of Unpaid Percentage of
Mortgage Principal Initial Group II
Months of Seasoning (months) Loans Balance Pool Balance
- ---------------------------- ----- ------- ------------
0.................... $ %
1-12...................
---------- ------- ------
Total ................... $ 100.00%
As of the Cut-off Date, the weighted average seasoning of the Group II
Mortgage Loans was approximately one month.
Original Term to Maturity of the Group II Mortgage Loans
Aggregate
Number of Unpaid Percentage of
Original Term to Mortgage Principal Initial Group II
Maturity (months) Loans Balance Pool Balance
-------------------- ----- ------- ------------
109-120................ $ %
169-180................
229-240................
289-300................
349-360................
---------- ------- ------
Total ................... $ 100.00%
Remaining Terms to Maturity of the Group II Mortgage Loans
Aggregate
Number of Unpaid Percentage of
Months Remaining to Mortgage Principal Initial Group II
Maturity (months) Loans Balance Pool Balance
-------------------- ----- ------- ------------
109-120................. $ %
169-180.................
229-240.................
289-300.................
349-360.................
---------- ------- ------
Total ................... $ 100.00%
As of the Cut-off Date, the weighted average remaining terms to maturity
of the Group II Mortgage Loans was approximately 244.745 months.
Underwriting Standards
The Mortgage Loans will be sold by the Seller to the Depositor, sold by
the Depositor to the Issuer and then pledged by the Issuer to the Indenture
Trustee. All of the Mortgage Loans were or will be originated by the Seller or
acquired by the Seller from mortgage bankers or brokers generally in accordance
with the underwriting criteria described herein.
The Seller'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
S-46
<PAGE>
market. The Seller considers, among other things, a mortgagor's credit history,
repayment ability and debt service to income ratio ("debt-to-income ratio"), as
well as the value, type and use of the mortgaged property. The Mortgage Loans
generally bear higher rates of interest than mortgage loans that are originated
in accordance with FNMA and FHLMC standards, and may experience rates of
delinquency and foreclosure that are higher, and that may be substantially
higher, than those experienced by portfolios of mortgage loans underwritten in
accordance with such FNMA or FHLMC standards.
Approximately 87% of the Mortgage Loans originated by the Seller are based
on loan application packages submitted through mortgage brokerage companies with
whom the Seller has a relationship (such mortgage loans, "Indirect Retail
Mortgage Loans"). The 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, valid broker's license(s), and a
satisfactory credit report. Once approved, mortgage brokerage companies are
eligible to submit loan application packages in compliance with the terms of a
signed broker agreement. All Indirect Retail Mortgage Loans are originated in
the Seller's regional offices located in _________, ____________, ____________,
___________ and _____________. All Indirect Retail Mortgage Loans are
underwritten according to the Seller's underwriting guidelines by the Seller in
both the regional offices and the corporate office located in Middletown,
Connecticut (the "Corporate Office"). All Indirect Retail Mortgage Loans are
initially reviewed by a loan officer for pre-approval. The credit file is
processed and reviewed by an underwriter for final approval.
Approximately 13% of the Mortgage Loans were originated by the Seller
directly through its retail operation under the name "Family Credit Connection"
(such mortgage loans, "Retail Mortgage Loans"). Retail Mortgage Loans are
underwritten based on the Seller's underwriting guidelines by the Seller in the
Corporate Office. All Retail Mortgage Loans are originated at either the
_________ or __________ retail office or the referral department in Middletown,
Connecticut. Retail Mortgage Loans are initially reviewed by a loan officer to
determine whether the loan application meets the Seller's underwriting
guidelines.
On a case-by-case basis, the Seller 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 large down payment, proven ability to handle high
debt-to-income levels, low debt-to-income ratio, large cash flow, significant
verified savings, good credit history, stable employment, excellent mortgage
history, a large reduction in monthly cash 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 loans which have
been underwritten according to such practice.
On"full-documentation" loans, the Seller's underwriters generally verify
the income of each applicant from various sources in the following manner:
salaried and hourly borrowers and those borrowers on commissions, 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, or from leases; 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 eighteen months
via W-2 forms; 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 merged 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.
The Seller 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 unit in a planned unit development) and manufactured housing. The
Seller'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 and the
S-47
<PAGE>
Financial Institutions Reform and Recovery Act ("FIRREA") standards. Appraisals
may only be provided by independent appraisers who satisfy the necessary
licensing standards.
Each appraisal included 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 Seller requires title insurance on all mortgage loans. The Seller also
requires that fire and extended coverage casualty insurance be maintained on the
mortgaged property in an amount at least equal to the lesser of the principal
balance of the related residential loan or the appraised value less the value of
the land. 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 at least 10% of all closed loans.
In addition to the quality control audit, each underwriter will have 10%
of their loans audited by the chief underwriter or his designee each month. The
loan review confirms the existence and accuracy of legal documents, credit
documentation, income computation, appraisal analysis, and underwriting
decisions. The review function allows the Seller 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 Seller's 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 Seller's guidelines have the following categories and criteria for
grading the potential likelihood that the applicant will satisfy the repayment
obligations of a mortgage loan, however, on a case-by-case basis, the Seller may
determine that, based on compensating factors, a prospective mortgagor not
strictly qualifying under such underwriting risk category guidelines warrants an
underwriting exception:
"A+": Under the A+ risk category, the applicant generally must have repaid
installment and revolving debt according to its terms with a maximum of 2
payments no more than 30 days delinquent in the past 12 months. One 30-day late
payment within the last 12 months is permitted on an existing mortgage loan.
Judgments or liens must have been paid off within 2 years prior to the funding
of the loan. Any bankruptcy must have been discharged more than 5 years ago. No
foreclosures may be in the borrower's credit file. Generally, the mortgaged
property must be in at least average condition. Generally, a maximum
Loan-to-Value ratio of 90% is permitted for owner occupied one- to four-unit and
townhouse properties secured by first mortgages. The maximum Loan-to-Value ratio
generally is reduced by 5 to 10% on a mortgaged property consisting of a second
home with proof of owner occupancy for part of the year and rental properties.
Properties with rural characteristics are limited to an 80% Loan-to-Value ratio.
The debt-to-income ratio may not exceed 45%. Second lien positions warrant a 5%
reduction in the Loan-to-Value ratio. On those second lien mortgage loans for
which the Combined Loan-to-Value Ratio ("CLTV") exceeds 90%, the CLTV may be as
high as 125%. In addition to the credit criteria outlined above, the following
risk score requirements may also apply: for risk scores of 640-659 the maximum
loan amount is $45,000; for risk scores of 660-679 the maximum loan amount is
$55,000; for risk scores of 680-699, the maximum loan amount is $65,000; and for
risk scores of 700 or greater, the maximum loan amount is $75,000. The maximum
cash out allowed on these loans is 15%. The maximum Loan-to-Value Ratio of the
underlying first mortgage loan is 80%.
"A": Under the A risk category, the applicant must have generally repaid
installment and revolving debt according to its terms with minimal payments no
more than 30 days delinquent in the past 12 months and only one 60-day late
payment within the last 12 months. A maximum of two 30-day late payments within
the past 12 months is permitted on an existing mortgage loan. Generally, a
Loan-to-Value ratio for the applied-for mortgage of 90% or less is required on
all owner occupied one-to-four unit properties secured by a first mortgage. For
purposes of
S-48
<PAGE>
determining whether a prospective mortgagor has been 30 days late, the Seller
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-off 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
three years and no foreclosures may be in the applicant's file. Generally, the
mortgaged property must be in at least average condition. The maximum
Loan-to-Value ratio generally is limited to 80% on properties with rural
characteristics. Loan-to-Value ratios for nonowner-occupied properties and
second homes are limited to 80%. The debt-to-income ratio generally may not
exceed 50%.
"B+": Under the B+ risk category, the applicant must have generally repaid
installment and revolving debt according to its terms with a maximum of 60-day
delinquency for minor and major creditors. A maximum of three 30-day late
payments within the last 12 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
within the previous 5 years. Judgments or liens may have been paid off within
one year 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 $600 are
treated on a case-by-case basis. Generally, the mortgaged property must be in at
least average condition. Generally, a maximum Loan-to-Value ration of 85% is
permitted for an owner-occupied one-to-four-unit condominium or townhouse
property with a first mortgage. The maximum Loan-to-Value ratio is generally
limited to 80% on properties with rural characteristics. Loan-to-Value ratios
for non-owner-occupied properties and second homes are limited to 75%. The
debt-to-income ratio generally may not exceed 50%.
"B": Under the B risk category, the applicant must have generally repaid
installment and revolving debt according to its terms with a maximum of 90-day
late payments permitted on any account in the last 12 months for minor
creditors. A maximum of 30-day late payments within the last 12 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 within the past five years may be in the applicant's file. No
judgment or liens of more than $500 may remain open after the funding of the
loan. No collections or charge-offs of more than $500 may remain open after the
funding of the loan unless the time elapsed since the collection or charge-off
exceeds one year. Generally, the mortgaged property must be in at least average
condition. Generally, a maximum Loan-to-Value ratio of 85% is permitted for an
owner-occupied one- to four- unit or townhouse property with a first mortgage.
The maximum Loan-to-Value ratio generally is reduced by 5% on properties with
rural characteristics. Loan-to-Value ratios for nonowner-occupied properties
generally are limited to 75%. Generally, the debt-to-income ratio must be 50% or
less.
"C": Under the C risk category, the applicant may have experienced
significant credit problems in the past. A maximum of 60-day late payments
within the last 12 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 30 days
delinquent at the time of loan closing. No notice of foreclosure filing may have
occurred during the preceding 3 years. No bankruptcy filing or discharge may
have occurred during the preceding 12 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 one year. Generally, the mortgaged property
must be in at least average condition. Generally, a maximum Loan-to-Value ratio
of 80% is permitted for an owner-occupied one-to-four unit or townhouse property
secured by a first mortgage, while 65% is permitted for nonowner-occupied
properties or second homes with proof of owner occupancy for part of the year.
The maximum Loan-to-Value ratio is generally reduced by 5% on properties in
rural areas. Generally, the debt-to-income ratio must be 50% or less.
"C-": Under the C- risk category, the applicant may have experienced
significant credit problems in the past. A maximum of two 90-day late payments
within the past 12 months is permitted on an existing mortgage loan for full
documentation loans. A maximum of one 90-day delinquency within the past 12
months is permitted on an existing mortgage loan for limited and stated
documentation loans. 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. A notice of
foreclosure filing may have occurred in the past. Bankruptcy must be discharged
. Judgments or liens may 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-
S-49
<PAGE>
off exceeds one year. Generally, the mortgaged property must be in at least
average condition. Generally, a maximum Loan-to-Value ratio of 75% 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 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.
Generally, the debt-to-income ratio must be 55% or less.
"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. 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.
Generally, the mortgaged property must be in at least average condition.
Generally, a maximum Loan-to-Value ratio of 70% is permitted for an
owner-occupied one-to-four unit or townhouse property secured by a first
mortgage. The maximum Loan-to-Value ratio is generally reduced by 10% on
nonowner-occupied properties. Generally, the debt-to-income ratio may not exceed
55%.
The Seller's standards applicable to the Mortgage Loans include the
foregoing categories and characteristics as guidelines only. The foregoing risk
grade classifications are based on factors that are exclusive of the additional
protection against loss that primary mortgage insurance customarily provides on
loans which have Loan-to-Value Ratios or Combined Loan-to-Value Ratios in excess
of 80%. None of the Mortgage Loans have primary mortgage insurance coverage.
Approximately 24.300% of the Group I Mortgage Loans and approximately 25.739% of
the Group II Mortgage Loans, in each case, by Principal Balance as of the
Cut-off Date, have Combined Loan-to-Value Ratios and Loan-to-Value Ratios,
respectively, in excess of 80%.
Based on the indicated underwriting standards applicable for mortgage
loans with risk features originated thereunder, and in particular Mortgage Loans
in loan classes C and D as described herein, such Mortgage Loans are likely to
experience greater rates of delinquency, foreclosure and loss, and may
experience substantially greater rates of delinquency, foreclosure and loss,
than mortgage loans underwritten under more stringent underwriting standards.
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS
General
The effective yield of each Class of Notes will be affected by the rate
and timing of payments of principal on the Mortgage Loans in the Group securing
such Notes (including, for this purpose, prepayments and amounts received by
virtue of refinancings, liquidations of Mortgage Loans due to defaults,
casualties, condemnations, and repurchases, whether optional or required, by the
Seller or the Note Insurer), the amount and timing of mortgagor delinquencies
and defaults resulting in realized losses, and the application of related Excess
Cash on such Notes. Such yield may be adversely affected by a higher or lower
than anticipated rate of principal payments (including Principal Prepayments) on
the related Mortgage Loans. The rate of Principal Payments on such Mortgage
Loans will in turn be affected by the amortization schedules of such Mortgage
Loans, the rate and timing of principal prepayments thereon by the mortgagors,
liquidations of defaulted Mortgage Loans and optional or required repurchases of
related Mortgage Loans as described herein. The timing of changes in the rate of
prepayments, liquidations and repurchases of the Mortgage Loans may, and the
timing of Realized Losses could, significantly affect the yield to an investor,
even if the average rate of Principal Payments experienced over time is
consistent with an investor's expectation. Since the rate and timing of
Principal Payments on the Mortgage Loans will depend on future events and on a
variety of factors (as described more fully herein), no assurance can be given
as to such rate or the timing of principal prepayments on the Notes.
Because all amounts available for payment on each Class of Notes after
payments in respect of interest on such Notes, including all or a portion of the
Excess Cash for the related Group, are applied as reductions of the related Note
Balance, the weighted average life of such Notes will also be influenced by the
amount of Excess Cash so applied. Because Excess Cash for a Group attributable
to the overcollateralization feature is derived, in part, from interest
collections on the related Mortgage Loans and will be applied to reduce the Note
Balance for the related Class, the aggregate payments in reduction of the
related Note Balance on a Payment Date will usually be greater than the
aggregate amount of principal payments (including Principal Prepayments) on the
related Mortgage Loans payable on such Payment Date until the Required
Overcollateralization Amount for such Group is reached
S-50
<PAGE>
and assuming an Overcollateralization Deficit for such Group does not occur. As
a consequence, Excess Cash in a Group available for payment in reduction of the
Note Balance for the related Class of Notes will increase in proportion to the
outstanding related Note Balance over time in the absence of offsetting Realized
Losses for the Mortgage Loans in such Group.
Excess Cash for a Group will be paid on the Notes in the related Class in
reduction of the related Note Balance on each Payment Date to the extent the
then applicable Required Overcollateralization Amount for such Group exceeds the
related Overcollateralization Amount on such Payment Date. Any remaining Excess
Cash for such Group will be released to the holder(s) of the Residual Interest.
If a Note is purchased at other than par, its yield to maturity will be affected
by the rate at which the related Excess Cash is paid to the Noteholders. If the
actual rate of related Excess Cash payments on such Class of Notes applied in
reduction of the related Note Balance is slower than the rate anticipated by an
investor who purchases a Note at a discount, the actual yield to such investor
will be lower than such investor's anticipated yield. If the actual rate of
related Excess Cash payments applied in reduction of the related Note Balance is
faster than the rate anticipated by an investor who purchases a Note at a
premium, the actual yield to such investor will be lower than such investor's
anticipated yield. The amount of related Excess Cash on any Payment Date will be
affected by, among other things, the actual amount of interest received,
collected or recovered in respect of the related Mortgage Loans during the
related Collection Period and such amount will be influenced by changes in the
weighted average of the Mortgage Rates resulting from prepayment and
liquidations of the related Mortgage Loans. The amount of related Excess Cash
paid to the Noteholders of a Class of Notes applied to the related Note Balance
on each Payment Date will be based on the related Required Overcollateralization
Amount. The Indenture generally provides that the Required Overcollateralization
Amount for a Group may, over time, decrease, or increase, subject to certain
floors, caps and triggers, including triggers that allow the related Required
Overcollateralization Amount to decrease or "step down" based on the performance
on the Mortgage Loans in such Group with respect to certain tests specified in
the Indenture based on delinquency rates. Any increase in the Required
Overcollateralization Amount for a Group may result in an accelerated
amortization until such Required Overcollateralization Amount is reached.
Conversely, any decrease in the Required Overcollateralization Amount for a
Group will result in a decelerated amortization of the Notes until such Required
Overcollateralization Amount is reached.
The Mortgage Loans generally may be prepaid in full or in part at any
time, although a substantial portion of the Mortgage Loans provide for payment
of a prepayment charge. The Mortgage Loans generally are not assumable and the
related Mortgaged property will be due on sale, in which case the Servicer shall
enforce any due-on-sale clause contained in any Mortgage Note or Mortgage, to
the extent permitted under applicable law and governmental regulations;
provided, however, if the Servicer determines that it is reasonably likely that
the mortgagor will bring, or if any mortgagor does bring legal action to declare
invalid or otherwise avoid enforcement of a due-on-sale clause contained in any
Mortgage Note or Mortgage, the Servicer shall not be required to enforce the
due-on-sale clause or to contest such action.
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of Principal Payments on the Mortgage Loans. See "Risk Factors" herein
and in the Prospectus. The rate of default on Mortgage Loans that are refinance
or limited documentation mortgage loans, and on Mortgage Loans with high
Loan-to-Value Ratios, may be higher than for other types of Mortgage Loans. As a
result of the underwriting standards applicable to the Mortgage Loans, the
Mortgage Loans are likely to experience rates of delinquency, foreclosure,
bankruptcy and loss that are higher, and that may be substantially higher, than
those experienced by mortgage loans underwritten in accordance with the
standards applied by Fannie Mae and Freddie Mac mortgage loan purchase programs.
See "Description of the Mortgage Pool--Underwriting Standards." In addition,
because of such underwriting criteria and their likely effect on the
delinquency, foreclosure, bankruptcy and loss experience of the Mortgage Loans,
the Mortgage Loans will generally be serviced in a manner intended to result in
a faster exercise of remedies, which may include foreclosure, in the event
Mortgage Loan delinquencies and defaults occur, than would be the case of the
Mortgage Loans were serviced in accordance with such other programs.
Furthermore, the rate and timing of prepayments, defaults and liquidations on
the Mortgage Loans will be affected by the general economic condition of the
region of the country in which the related Mortgaged Properties are located. The
risk of delinquencies and loss is greater and prepayments are less likely in
regions where a weak or deteriorating economy exists, as may be evidenced by,
among other factors, increasing unemployment or falling property values. To the
extent that the locations of the Mortgaged Properties are concentrated in a
given region, the risk of delinquencies, loss and involuntary prepayments
resulting from adverse economic conditions in such region or from other factors,
such as
S-51
<PAGE>
fires, storms, landslides and mudflows and earthquakes, is increased. Certain
information regarding the location of the Mortgaged Properties is set forth
under "Description of the Mortgage Pool--Mortgage Loan Characteristics" herein.
See "Risk Factors--Risks Associated with Geographic Concentration of the
Mortgage Properties" herein.
Certain of the Mortgage Loans are Balloon Loans. Balloon Loans involve a
greater degree of risk than fully amortizing loans because the ability of the
borrower to make a Balloon Payment typically will depend upon its ability either
to refinance the loan or to sell the related Mortgaged Property. The ability of
a borrower to accomplish either of these goals will be affected by a number of
factors, including the level of available mortgage rates at the time of the
attempted sale or refinancing, the borrower's equity in the related Mortgaged
Property, the financial condition of the borrower and operating history of the
related Mortgaged Property, tax laws, prevailing economic conditions and the
availability of credit for commercial real estate projects generally.
Other factors affecting prepayment of Mortgage Loans include changes in
mortgagors' housing needs, job transfers, unemployment and mortgagors' net
equity in the mortgaged properties. Since the rate of payment of principal of
the Notes will depend on the rate of payment (including prepayments) of the
principal of the Mortgage Loans, the actual maturity of the Notes could occur
significantly earlier than the Stated Maturity. See "--Weighted Average Life"
herein.
In addition, the yield to maturity of each Class of Notes will depend on
the price paid by the holders of such Notes and the related Note Interest Rate.
The extent to which the yield to maturity of a Note is sensitive to prepayments
will depend upon the degree to which it is purchased at a discount or premium.
Prepayments of principal on the Mortgage Loans will generally be passed
through to the Indenture Trustee and included in the Available Funds for such
Group in the month following the month of receipt thereof by the Servicer. Any
prepayment of a Mortgage Loan or liquidation of a Mortgage Loan (by foreclosure
proceedings or by virtue of the repurchase of a Mortgage Loan) will have the
effect of resulting in payments on the Notes in the related Class of amounts
that otherwise would be paid in amortized increments over the remaining term of
such Mortgage Loan.
To the extent that principal prepayments with respect to the Mortgage
Loans result in prepayments on the related Notes during periods of generally
lower interest rates, Noteholders may be unable to reinvest such principal
prepayments in securities having a yield and rating comparable to such Notes.
The yield on the Notes may be affected by any delays in receipt of
payments thereon as described under "Description of the Notes--Book-Entry
Registration and Definitive Notes" herein and "Risk Factors--Book Entry
Registration" and "Description of the Securities--Book Entry Registration" in
the Prospectus.
The yield on the Notes may also be affected by a redemption of the Notes
as described under " Description of the Notes--Redemption of the Notes" herein.
No representation is made as to the rate of Principal Payments on the
Mortgage Loans or as to the yield to maturity of any Note. An investor is urged
to make an investment decision with respect to a Note based on the anticipated
yield to maturity of such Note resulting from its price and such investor's own
determination as to anticipated Mortgage Loan prepayment rates. Prospective
investors are urged to analyze fully the effect of Mortgage Loan principal
prepayments and market conditions on the yield and value of the Notes, before
acquiring any Notes. In particular, investors that are required to perform
periodic valuations on their investment portfolios should consider the effect of
such fluctuations in value. In addition, investors should carefully consider the
factors discussed under "Risk Factors--Risks Associated with the Prepayment of
the Mortgage Loans" herein.
Weighted Average Life
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 each
Class of Notes will be influenced by the rate at which principal on the related
Mortgage Loans is paid, which may be
S-52
<PAGE>
in the form of scheduled payments or prepayments (including prepayments of
principal by the borrower as well as amounts received by virtue of repurchases,
condemnation, insurance or foreclosure with respect to the related Mortgage
Loans), and the timing thereof.
The weighted average life of each Class of Notes also will be influenced
by the overcollateralization of such Notes because collections are applied as
principal prepayments to the Notes until the outstanding related Note Balance is
less than the Aggregate Principal Balance of the related Mortgage Loans by an
amount equal to the related Required Overcollateralization Amount. These
prepayments have the effect of accelerating the amortization of the Notes,
thereby shortening their respective weighted average life.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. A common model ("Constant Prepayment Rate" or
"CPR") represents an assumed constant rate of prepayment each month, expressed
as an annual rate, relative to the then outstanding principal balance on a pool
of mortgage loans for the life of such loans. The model used in the Prospectus
Supplement with respect to the Notes is the Mortgage Prepayment assumption
("HEP"). HEP assumes that a pool of loans prepays in the first month of the life
of such loans at a CPR that corresponds to one tenth the given HEP percentage
and increases by an additional one-tenth each month thereafter until the tenth
month, where it remains at a CPR equal to the given HEP percentage. For example,
with respect to a pool of mortgage loans, a 25% HEP assumes a CPR of 2.5% in the
first month of the life of such loans and an increase of 2.5% CPR each month
thereafter until the tenth month. Beginning in the tenth month and in each month
thereafter during the life of such mortgage loans, 25% HEP assumes a CPR of 25%
each month. Neither the prepayment model used herein nor any other prepayment
model or assumption purports to be an historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the Mortgage Loans included in the Mortgage Pool.
The tables following the next paragraph indicates the percentage of the
initial Note Balance that would be outstanding after each of the dates shown at
various percentages of HEP and the corresponding weighted average lives of the
Notes. Each 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 tables below, (ii) distributions on such Notes
are received, in cash, on the 25th day of each month, commencing in [__________
] ___, (iii) the Mortgage Loans prepay at the percentage of HEP indicated, (iv)
the Notes are redeemed on the Initial Redemption Date, (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 Seller, the Servicer or any other person
purchases from the Trust any Mortgage Loan pursuant to any obligation or option
under the Sale Agreement, the Servicing Agreement or others, (vii) scheduled
monthly payments on the Mortgage Loans are received on the first day of each
month commencing with the month indicated in the table below, and are computed
prior to giving effect to any prepayments received in the prior month, (viii)
prepayments representing payment in full of individual Mortgage Loans in the
related Group are received on the last day of each month, and include 30 days'
interest thereon, (ix) the scheduled monthly payment for each Mortgage Loan is
calculated based on its Principal Balance, Mortgage Rate and remaining
amortization term, such that the Mortgage Loan will amortize in amounts
sufficient to repay the remaining principal balance of such Mortgage Loan by its
remaining term to maturity, (x) the coupon on the Class A-1 Notes remains
constant at 6.605% and the coupon on the Class A-2 Notes remains constant at
6.585%, and (xi) the Notes are purchased on [---------- ] .
Group I Characteristics
<TABLE>
<CAPTION>
Gross Original Remaining Remaining
Pool Principal Coupon Amortization Amortization Months To Amortization Assumed Initial
Number Balance ($) Rate (%) Term (months) Term (months) Maturity Method Payment Month
------ ----------- -------- ------------- ------------- -------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 __________ __________ ______ ______ ______ Level Pay [__________ ]
2 __________ __________ ______ ______ ______ Level Pay [__________ ]
3 __________ __________ ______ ______ ______ Level Pay [__________ ]
4 __________ __________ ______ ______ ______ Level Pay [__________ ]
5 __________ __________ ______ ______ ______ Balloon [__________ ]
</TABLE>
S-53
<PAGE>
Group II Characteristics
<TABLE>
<CAPTION>
Gross Original Remaining Remaining
Pool Principal Coupon Amortization Amortization Months To Amortization Assumed Initial
Number Balance ($) Rate (%) Term (months) Term (months) Maturity Method Payment Month
------ ----------- -------- ------------- ------------- -------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
6 __________ __________ ______ ______ ______ Level Pay [__________ ]
7 __________ __________ ______ ______ ______ Level Pay [__________ ]
8 __________ __________ ______ ______ ______ Level Pay [__________ ]
9 __________ __________ ______ ______ ______ Level Pay [__________ ]
10 __________ __________ ______ ______ ______ Balloon [__________ ]
</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 Note Balance
outstanding (and the weighted average life) of the Notes set forth in the table.
In addition, since the actual Mortgage Loans will have characteristics that
differ from those assumed in preparing the table set forth below the Notes may
mature earlier or later than indicated by the table. Based on the foregoing
assumptions, the table indicates the weighted average life of the Notes and sets
forth the percentages of the initial Note Balance that would be outstanding
after each of the Payment Dates shown, at various percentages of HEP. Variations
in the prepayment experience and the balance of the related Mortgage Loans that
prepay may increase or decrease the percentages of initial Note 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 HEP.
Class A-1 Notes
Percent of Stated Principal Balance Outstanding at
the Following Percentages of HEP
<TABLE>
<CAPTION>
Payment Date 0.00% 19.00% 21.00% 25.00% 29.00% 31.00%
- ------------ ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100 100
[__________ ] 25, 1999 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2000 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2001 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2002 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2003 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2004 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2005 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2006 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2007 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2008 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2009 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2010 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2011 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2012 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2013 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2014 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2015 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2016 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2017 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2018 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2019 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2020 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2021 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2022 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2023 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2024 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2025 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2026 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2027 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2028 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2029 ______ ______ ______ ______ ______ ______
------
Weighted Average Life to ______ ______ ______ ______ ______ ______
Call(1)
Weighted Average Life to ______ ______ ______ ______ ______ ______
Maturity(1)
</TABLE>
- ----------
(1) The weighted average life is determined by (a) multiplying the amount of
each principal payment by the number of years from the Closing Date to the
related Payment Date; (b) adding the results; and (c) dividing the sum by
the original Note Balance.
S-54
<PAGE>
Class A-2 Notes
Percent of Stated Principal Balance Outstanding at
the Following Percentages of HEP
<TABLE>
<CAPTION>
Payment Date 0.00% 19.00% 21.00% 25.00% 29.00% 31.00%
- ------------ ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100 100
[__________ ] 25, 1999 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2000 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2001 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2002 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2003 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2004 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2005 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2006 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2007 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2008 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2009 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2010 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2011 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2012 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2013 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2014 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2015 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2016 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2017 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2018 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2019 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2020 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2021 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2022 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2023 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2024 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2025 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2026 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2027 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2028 ______ ______ ______ ______ ______ ______
[__________ ] 25, 2029 ______ ______ ______ ______ ______ ______
Weighted Average Life to ______ ______ ______ ______ ______ ______
Call(1)
Weighted Average Life to ______ ______ ______ ______ ______ ______
Maturity(1)
</TABLE>
- ----------
(1) The weighted average life is determined by (a) multiplying the amount of
each principal payment by the number of years from the Closing Date to the
related Payment Date; (b) adding the results; and (c) dividing the sum by
the original Note Balance.
There is no assurance that prepayments of the Mortgage Loans will conform
to any of the levels of the Prepayment Assumption indicated in the tables above,
or to any other level, or that the actual weighted average life of the Notes
will conform to any of the weighted average lives set forth in the tables above.
Furthermore, the information contained in the tables with respect to the
weighted average life of the Notes is not necessarily indicative of the weighted
average life that might be calculated or projected under different or varying
prepayment assumptions.
The characteristics of the Mortgage Loans will differ from those assumed
in preparing the table above. In addition, it is unlikely that any Mortgage Loan
will prepay at any constant percentage until maturity or that all of the
Mortgage Loans will prepay at the same rate. The timing of changes in the rate
of prepayments may significantly affect the actual yield to maturity to
investors, even if the average rate of principal prepayments is consistent with
the expectations of investors.
S-55
<PAGE>
SERVICING OF THE MORTGAGE LOANS
General
The Mortgage Loans will be serviced by [____________], as Servicer (the
"Servicer"). The information set forth in the following paragraphs has been
provided by the Servicer.
The Servicer was incorporated in _____________, commenced closing mortgage
loans in ___________, and began servicing such mortgages loans in the same
month. The principal business of the Servicer historically has been the
origination and sale of non-conforming mortgage loans on both a servicing
released and a servicing retained basis. The Servicer does not have a
significant history of servicing mortgage loans. The loans serviced by the
Servicer's mortgage servicing department were loans made to residents throughout
the United States.
The Servicer will service and administer the Mortgage Loans in accordance
with the policies, procedures and practices customarily employed by the Servicer
in servicing other comparable mortgage loans and pursuant to the provisions of
the Servicing Agreement. The Servicer will not amend or modify in any material
respect its policies, procedures and practices with respect to the Mortgage
Loans (other than as required by applicable laws and regulations) without the
prior consent of the Note Insurer.
The Servicer's mortgage servicing department maintains a centralized
portfolio management department which services the mortgage loans that are not
sold, are sold servicing retained, are sub-serviced, as well as those mortgage
loans that are securitized. 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 Servicer has increased its servicing
capabilities and staffing significantly since 1997 in light of its origination
growth.
Consistent with the servicing standard described above, the Servicer, in
its discretion, may (a) waive any late payment charges, charges for checks
returned for insufficient funds or other fees that may be collected in the
ordinary course of servicing a Mortgage Loan, (b) arrange a schedule for the
payment of delinquent payments on the related Mortgage Loan, subject to
conditions set forth in the Servicing Agreement, if a mortgagor is in default or
about to be in default because of such mortgagor's financial condition or (c)
modify monthly payments on Mortgage Loans in accordance with the Servicer's
general policy on Mortgage Loans subject to the Relief Act; provided, however,
the Servicer may not, without the prior consent of the Note Insurer, permit any
waiver, modification or variance of a Mortgage Loan which would (i) change the
Mortgage Rate, (ii) forgive the payment of any principal or interest, (iii)
lessen the lien priority or (iv) extend the final maturity date on a Mortgage
Loan past twelve months prior to the maturity date of the Notes, in any case
except to the extent required under the Relief Act. The Servicer, acting as
agent for the Indenture Trustee, will not consent to the subsequent placement of
a deed of trust or mortgage, as applicable, on any Mortgaged Property that is of
equal or higher priority to that of the lien securing the related Mortgage Loan
unless such Mortgage Loan is prepaid in full and thereby removed from the
Mortgage Pool.
Customary Servicing Procedures
The procedures of the Servicer with respect to day to day servicing of the
Mortgage Loans may vary considerably depending on the particular Mortgage Loan,
the Mortgaged Property, the mortgagor and the laws of the jurisdiction in which
the Mortgaged Property is located. Generally, it is the current practice of the
Servicer to send borrowers coupon books periodically reflecting their Monthly
Payments and the due dates therefor. Although borrowers generally make loan
payments within ten to fifteen days after the due date, if a borrower fails to
pay the monthly payment within such time period, the Servicer will commence
collection efforts by notifying the borrower of the delinquency. Under the terms
of each Mortgage Loan, the mortgagor agrees to pay a late charge (which the
Servicer is entitled to retain as additional servicing compensation under the
Servicing Agreement) if a monthly payment on a Mortgage Loan is not received
within the number of days specified in the Mortgage Note after its due date. If
the Mortgage Loan remains delinquent, the Servicer will attempt to contact the
mortgagor to determine the cause of the delinquency and to obtain a commitment
to cure the delinquency at the earliest possible time.
S-56
<PAGE>
Collection efforts generally begin when an account is over five days past
due. At the time, the Servicer's loan counseling department attempts to contact
the borrower to determine the reason for the delinquency and cause the account
to become current. After an account becomes 8 days past due, letters are sent to
the borrower. In general, at 30 days past due, a right to cure letter is sent;
at 61 days a demand letter is sent and the account is reviewed for foreclosure
action. In addition to written notices, the Servicer attempts to maintain
telephone contact with the Borrower throughout the period of delinquency. If the
status of the account continues to deteriorate, the loan counseling department
undertakes an analysis to determine the appropriate action. In limited
circumstances, when a borrower is experiencing difficulty in making timely
payments, the loan counseling department may temporarily adjust the borrower's
payment schedule without changing the loan's delinquency status. The
determination of how to work out a delinquent loan is based upon a number of
factors, including the borrower's payment history and the reason for the current
inability to make timely payments.
When a loan is 90 days past due in accordance with its original terms, it
is placed on non-accrual status, is forwarded to the Servicer's default
servicing center 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 appraised.
Regulations and practices regarding foreclosures and the rights of the mortgagor
in default vary greatly from state to state. See "Certain Legal Aspects of the
Mortgage Loans and Contracts - The Mortgage Loans" in the Prospectus.
The Servicing Agreement
The summaries of certain provisions of the Servicing Agreement set forth
below and in other places in this Prospectus Supplement, while complete in
material respects, do not purport to be exhaustive. For more details regarding
the terms of the Servicing Agreement, prospective investors in the Notes are
advised to review the Servicing Agreement, a copy of which the Seller will
provide (without exhibits) without charge upon written request addressed to the
Seller.
Generally, the Servicer will be authorized and empowered pursuant to the
Servicing Agreement (i) to execute and deliver (or procure the execution and
delivery by the Indenture Trustee of) any and all instruments of satisfaction or
cancellation or of partial or full release or discharge and all other comparable
instruments with respect to the Mortgage Loans and with respect to the Mortgaged
Properties and (ii) to institute foreclosure proceedings or obtain deeds in lieu
of foreclosure so as to convert title to of any Mortgaged Property in the name
of the Indenture Trustee on behalf of the Noteholders and the Note Insurer.
Payments on Mortgage Loans and Establishment of Collection Account. The
Servicer shall establish and maintain one or more accounts (collectively, the
"Collection Account") at one or more institutions meeting the requirements set
forth in the Servicing Agreement. The Collection Account, and all amounts
deposited therein from time to time, shall be part of the Trust Estate. The
Servicer will deposit into the Collection Account not later than two Business
Days after receipt, all payments on or in respect of the Mortgage Loans received
from or on behalf of mortgagors and all proceeds of the Mortgage Loans, net of
servicing fees, all other items of servicing compensation, and reimbursable
outstanding Servicing Advances and Monthly Advances, to the extent the
Servicer's automated system deducts such amounts prior to deposit to the
Collection Account. On or prior to each Deposit Date, funds to be remitted to
the Note Account will be remitted from the Collection Account to the Indenture
Trustee for deposit into the Note Account. Notwithstanding the foregoing,
payments and collections that do not constitute Available Funds (e.g., amounts
representing interest accrued on Mortgage Loans in respect of any period prior
to the Cut-off Date, fees, late payment charges, prepayment charges, charges for
checks returned for insufficient funds, extension or other administrative
charges or other amounts received for application towards the payment of taxes,
insurance premiums, assessments and similar items) will not be required to be
deposited into the Collection Account. The Servicer may make withdrawals from
the Collection Account only for the following purposes: (a) to make deposits
into the Note Account as described above; (b) to pay itself any monthly
Servicing Fees and other items of servicing compensation and investment income
on Permitted Investments to the extent permitted by the Servicing Agreement; (c)
to make any Servicing Advance to the extent permitted by the Servicing Agreement
or to reimburse itself for any Servicing Advance or Monthly Advance previously
made to the extent permitted by the Servicing Agreement; (d) to withdraw amounts
that have been deposited to the Collection Account in error; and (e) to clear
and terminate the Collection Account.
S-57
<PAGE>
Investment of Collection Account. All or a portion of the Collection
Account may be invested and reinvested in one or more Permitted Investments
bearing interest or sold at a discount, at the Servicer's direction. The
Indenture Trustee or any affiliate thereof may be the obligor on, or manager or
advisor of, any investment in any Collection Account which otherwise qualifies
as a Permitted Investment. No investment in the Collection Account may mature
later than the Deposit Date next succeeding the date of investment.
The Indenture Trustee will not in any way be held liable by reason of any
insufficiency in the Collection Account resulting from any loss on any Permitted
Investment included therein (except to the extent the Indenture Trustee is the
obligor thereon).
All income or other gain from investments in the Collection Account will
be held in the Collection Account for the benefit of the Servicer and will be
subject to withdrawal from time to time as permitted by the Servicing Agreement.
Any loss resulting from such investments will be for the account of the
Servicer. The Servicer will be required to deposit the amount of any such loss
immediately upon the realization of such loss to the extent such loss will not
be offset by other income or gain from investments in the Collection Account and
then available for such application.
Monthly Advances. In order to maintain a regular flow of scheduled
interest to Noteholders (rather than to guarantee or insure against losses), the
Servicing Agreement will require that, not later than the close of business on
the Deposit Date prior to each Payment Date, the Servicer will remit or cause to
be remitted a Monthly Advance, if necessary, to the Indenture Trustee for
deposit in the related Note Account to be paid on the related Payment Date. A
"Monthly Advance" will be equal to the sum of (i) the interest and principal
portions of the aggregate amount of monthly payments (net of the related
Servicing Fee) due on the Mortgage Loans during the related Due Period but
delinquent so as not to have been deposited into the Collection Account as of
the close of business on the last day before the related Deposit Date and with
respect to each Mortgaged Property that was acquired in foreclosure or similar
action (each, an "REO Property") during or prior to the related Collection
Period and as to which final sale did not occur during the related Collection
Period, an amount equal to the excess, if any, of interest on the Principal
Balance of the Mortgage Loan relating to such REO Property for the related
Collection Period at the related Mortgage Rate (net of the Servicing Fee) over
the net income from the REO Property transferred to the related Note Account for
such Payment Date.
The Servicing Agreement provides that the Servicer may pay all or a
portion of any Monthly Advance out of amounts on deposit in the Collection
Account which are being held for payment on a subsequent Payment Date; any such
amounts so used are required to be replaced by the Servicer by deposit to the
Collection Account on or before the Deposit Date relating to such subsequent
Payment Date.
The Servicer may recover Monthly Advances, if not theretofore recovered
from the mortgagor on whose behalf such Monthly Advance was made, from
subsequent collections on the related Mortgage Loan, including Liquidation
Proceeds, Insurance Proceeds (but only to the extent of such Insurance Proceeds
or Liquidation Proceeds) and such other amounts as may be collected by the
Servicer from the mortgagor or otherwise relating to the Mortgage Loan. To the
extent the Servicer, in its good faith business judgment, determines that any
Monthly Advance will not be ultimately recoverable from subsequent collections,
Insurance Proceeds, Liquidation Proceeds on the related Mortgage Loans or
otherwise ("Nonrecoverable Advances"), the Servicer may reimburse itself on the
first Deposit Date thereafter out of collections received on other Mortgage
Loans.
The Servicer will not be required to make any Monthly Advance that it
determines would be a Nonrecoverable Advance.
Compensating Interest Payments. With respect to each Mortgage Loan as to
which a prepayment in whole or in part was received, the Servicer will be
required with respect to such Payment Date to remit to the Indenture Trustee no
later than the related Deposit Date, from amounts otherwise payable to the
Servicer as the Servicing Fee for the related Payment Date, an amount equal to
the excess, if any, of (a) 30 days' interest on the Principal Balance of each
such Mortgage Loan (immediately prior to such payment) at the related Mortgage
Rate, less (b) the amount of interest actually received on such Mortgage Loan
during the related Due Period (each such amount, a "Compensating Interest
Payment") for payment on the Notes on such Payment Date. The Servicer will not
be
S-58
<PAGE>
entitled to be reimbursed from collections on the Mortgage Loans or any assets
of the Trust Estate for any Compensating Interest Payments made.
Realization upon Defaulted Mortgage Loans. The Servicing Agreement will
require the Servicer, acting as the agent of the Indenture Trustee, to foreclose
upon or otherwise comparably convert to ownership in the name of the Indenture
Trustee, on behalf of the Noteholders and the Note Insurer, Mortgaged Properties
securing such of the Mortgage Loans as come into default, as to which no
satisfactory arrangements can be made for the collection of delinquent payments
and which the Servicer has not reacquired pursuant to the option described
below; provided, however, that if the Servicer has actual knowledge or
reasonably believes that any Mortgaged Property is contaminated by hazardous or
toxic wastes or substances, the Servicer will cause an environmental inspection
of the Mortgaged Property that complies with Fannie Mae's selling and servicing
guide applicable to single family homes and its servicing procedures to be
conducted. If the environmental inspection reveals any potentially hazardous
substances, the Servicer will notify the Indenture Trustee and the Note Insurer,
and the Servicer will not foreclose or accept a deed in lieu of foreclosure on
the Mortgaged Property without the consent of the Indenture Trustee and the Note
Insurer. In connection with such foreclosure or other conversion, the Servicer
will follow such practices as it deems necessary or advisable and as are in
keeping with its general mortgage loan servicing activities; provided, however,
that the Servicer will not be required to expend its own funds in connection
with foreclosure or other conversion, correction of a default on a senior deed
of trust or restoration of any Mortgaged Property unless the Servicer determines
that such foreclosure, correction or restoration will increase Net Liquidation
Proceeds.
In servicing the Mortgage Loans, the Servicer will be required to
determine, with respect to each defaulted Mortgage Loan, when it has recovered,
whether through trustee's sale, foreclosure sale or otherwise, all amounts, if
any, it expects to recover from or on account of such defaulted Mortgage Loan,
whereupon such Mortgage Loan will be charged off and will become a Liquidated
Mortgage Loan.
The Servicer may have the right and the option under the Servicing
Agreement, but not the obligation, to reacquire for its own account any Mortgage
Loan which becomes delinquent, in whole or in part, as to three consecutive
monthly installments or any Mortgage Loan as to which enforcement proceedings
have been brought by the Servicer. Any such Mortgage Loan so reacquired will be
withdrawn from the Mortgage Pool on a Deposit Date at the Release Price
therefor.
Evidence as to Compliance. The Servicing Agreement provides that on or
before a specified date in each year, a firm of independent public accountants
will furnish a report to the Indenture Trustee, the Rating Agencies and the Note
Insurer to the effect that on the basis of certain procedures substantially in
conformance with the Uniform Single Attestation Program for Mortgage Bankers
("USAP") (to the extent the procedures are applicable to the servicing
obligations set forth in the Servicing Agreement), the servicing by or on behalf
of the Servicer of mortgage loans, and such procedures have disclosed no
exceptions or errors in records relating to the mortgage loans serviced by the
Servicer for others which, in the opinion of such firm, such firm's required to
report under USAP, except for such exceptions as will be referred to in the
report. The Servicing Agreement will provide that the Servicer will be required
to deliver to the Indenture Trustee, the Rating Agencies and the Note Insurer,
on or before a specified date in each year, an annual statement signed by an
officer of the Servicer to the effect that the Servicer has fulfilled its
material obligations under the Servicing Agreement throughout the preceding
year.
Certain Matters Regarding Servicer's Servicing Obligations. The Servicing
Agreement will provide that the Servicer may not resign from its obligations and
duties as the Servicer thereunder, except upon the delivery, at the Servicer's
expense, of an opinion of counsel addressed to the Issuer, the Indenture Trustee
and the Note Insurer and in form and substance acceptable to the Indenture
Trustee and the Note Insurer to the effect that its duties thereunder are no
longer permissible under applicable law or regulation or are in material
conflict by reason of applicable law or regulation with any other of its
activities carried on as of the date of the Servicing Agreement. No such
resignation will become effective until the Indenture Trustee or a successor
servicer approved by the Note Insurer has assumed the servicing obligations and
duties of the Servicer under the Servicing Agreement.
The Servicing Agreement will also provide that neither the Servicer, nor
any of its directors, officers, employees or agents, will be liable to the
Indenture Trustee, the Trust, or the Noteholders for any action taken or for
refraining from the taking of any action by the Servicer pursuant to the
Servicing Agreement, or for errors in judgment; provided, however, that neither
the Servicer nor any such person will be protected against any liability
S-59
<PAGE>
which would otherwise be imposed by reason of willful misfeasance, bad faith or
negligence in the performance of duties of the Servicer, or by reason of
reckless disregard of obligations and duties of the Servicer, thereunder.
In addition, the Servicing Agreement will provide that the Servicer will
not be under any obligation to appear in, prosecute or defend any legal action
which is not incidental to its duties to service the Mortgage Loans under the
Servicing Agreement and which in its opinion may involve it in any expense or
liability.
The Servicing Agreement will provide that any corporation or other entity
(a) into which the Servicer may be merged or consolidated, (b) that may result
from any merger, conversion or consolidation to which the Servicer shall be a
party or (c) that may succeed to all or substantially all of the business of the
Servicer, will, in any case where an assumption is not effected by operation of
law, execute an agreement of assumption to perform every obligation of the
Servicer under the Servicing Agreement, and will be the successor to the
Servicer thereunder without the execution or filing of any document or any
further act by any of the parties to the Servicing Agreement; provided, however,
that if the Servicer in any of the foregoing cases is not the surviving entity,
the surviving entity shall execute an agreement of assumption to perform every
obligation of the Servicer thereunder and the corporation or other entity
satisfies the eligibility requirements for a successor Servicer.
Servicer Events of Default. Events of default (each, a "Servicer Event of
Default") under the Servicing Agreement will include (a) any failure by the
Servicer to make a required Monthly Advance on the related Deposit Date as
required or any failure by the Servicer to deposit in the Collection Account or
Note Account any other amount required to be so deposited under the Servicing
Agreement; (b) any failure by the Servicer to duly observe or perform in any
material respect any other of its covenants or agreements in the Servicing
Agreement or the Sale Agreement which materially and adversely affects the
rights of Noteholders and continues unremedied for the applicable cure period,
if any, after the giving of written notice of such failure to the Servicer by
the Indenture Trustee, at the direction of the Note Insurer, or by the Note
Insurer or, with the consent of the Note Insurer, the Noteholders evidencing
Voting Interests represented by all Notes aggregating not less than 51%; (c)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings regarding the Servicer and certain actions by
the Servicer indicating its insolvency or inability to pay its obligations; (d)
any representation or warranty made by the Servicer in the Servicing Agreement
or the Sale Agreement or certificate delivered by the Servicer pursuant thereto
having been incorrect in any material respect as of the time made and the
circumstance in respect of which such representation and warranty is incorrect,
if capable of being cured, not having been cured within any applicable cure
period after notice is given to the Servicer by the Indenture Trustee, at the
direction of the Note Insurer, or the Note Insurer, or, with the consent of the
Note Insurer, the Noteholders evidencing Voting Interests represented by all
Notes aggregating not less than 51%; (e) the failure by the Servicer to satisfy
certain net worth requirements of the Note Insurer; and (f) the occurrence of
delinquencies and/or losses in respect of the Mortgage Loans in excess of a
level, and for a period of time, as specified in the Servicing Agreement.
Rights Upon Servicer Events of Default. Upon the occurrence of a Servicer
Event of Default, the Note Insurer or, with the consent of the Note Insurer,
Noteholders evidencing Voting Interests represented by all Notes aggregating not
less than 51% or the Indenture Trustee, at the direction of the Note Insurer,
may terminate all of the rights and obligations of the Servicer under the
Servicing Agreement, whereupon the Indenture Trustee will be obligated to
appoint a successor Servicer or, if it does not, succeed to all the
responsibilities, duties and liabilities of the Servicer under the Servicing
Agreement and will be entitled to such compensation as the Servicer would have
been entitled to under the Servicing Agreement. In the event that the Indenture
Trustee fails to appoint a successor Servicer and it is unwilling or legally
unable to act as Servicer, it may petition a court of competent jurisdiction for
the appointment of a successor Servicer. Any such successor Servicer must be an
established housing and home finance institution or any institution that
regularly services nonconforming residential mortgage loans, that is currently
servicing a nonconforming residential mortgage loan portfolio, that has all
licenses, permits and approvals required by applicable law and a net worth of at
least $10,000,000. The appointment of any such successor Servicer (other than
the Indenture Trustee) shall be acceptable to the Note Insurer and shall not
result in the qualification, reduction or withdrawal of the implied rating
assigned to the Notes by the Rating Agencies (without taking into account the
Insurance Policy). Pending appointment of a successor Servicer, unless the
Indenture Trustee is prohibited by law from so acting, the Indenture Trustee
shall be obligated to act as Servicer. The Indenture Trustee and such successor
Servicer may agree upon the servicing compensation to be paid, which in no event
may be greater than the compensation described above.
S-60
<PAGE>
No Noteholder, solely by virtue of its status as a Noteholder, will have
any right under the Servicing Agreement to institute any action, suit or
proceeding with respect to the Servicing Agreement unless the Note Insurer shall
have consented thereto, unless such Noteholder previously has given to the
Indenture Trustee written notice of default and unless Noteholders evidencing
Voting Interests represented by all Notes aggregating not less than 51% have
made written request upon the Indenture Trustee to institute such action, suit
or proceeding in its own name as Indenture Trustee thereunder and have offered
to the Indenture Trustee reasonable indemnity for costs, expenses and
liabilities to be incurred, and the Indenture Trustee for 60 days has neglected
or refused to institute any such action, suit or proceeding. However, the
Indenture Trustee will be under no obligation to exercise any of the rights or
powers vested in it by the Servicing Agreement or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the Noteholders, unless such Noteholders have offered to the
Indenture Trustee reasonable security or indemnity against the costs, expenses
and liabilities which may be incurred therein or thereby.
Amendments. Subject to the prior written consent of the Note Insurer, at
any time and from time to time, without the consent of the Noteholders, the
Indenture Trustee, the Issuer and the Servicer may amend the Servicing Agreement
for the purposes of (a) curing any ambiguity or correcting or supplementing any
provision of such agreement that may be inconsistent with any other provision of
such agreement or (b) complying with the requirements of the Code; provided,
however, that such action shall not materially and adversely affect the
interests of any Noteholder, as evidenced by an opinion of counsel delivered to
the Indenture Trustee to such effect (which opinion shall not be at the expense
of the Indenture Trustee) or written confirmation from each of the Rating
Agencies that such action will not result in a qualification, reduction or
withdrawal of the implied ratings on the Notes (without taking into account the
Insurance Policy).
The Servicing Agreement may also be amended by the Indenture Trustee, the
Issuer and the Servicer, at any time and from time to time, with the prior
written approval of the Rating Agencies, the Note Insurer and not less than a
majority of the Voting Interests represented by the Notes then outstanding, for
the purpose of adding any provisions or changing in any manner or eliminating
any of the provisions thereof or of modifying in any manner the rights of the
Noteholders thereunder; provided, however, that no such amendment shall (a)
reduce in any manner the amount of, or delay the timing of, payments which are
required to be paid to the Note Account without the consent of all Noteholders
or (b) reduce the aforesaid percentages of Voting Interests which are required
to consent to any such amendments, without the consent of all Noteholders.
Servicing and Other Compensation; Payment of Expenses
The Servicing Fee will be the primary compensation to be paid to or
retained by the Servicer in respect of its servicing activities under the
Servicing Agreement and will be paid to the Servicer on each Deposit Date out of
collections of interest received on or in respect of the Mortgage Loans for the
related Collection Period. The Servicing Fee for each Group will equal
one-twelfth (1/12) of the product of (a) 0.50% and (b) the Aggregate Principal
Balance of the Mortgage Loans in such Group as of the first day of the related
Due Period. The Servicer shall be entitled to retain the Servicing Fee from
amounts to be deposited in the Collection Account. In addition, the Servicer
will retain the benefit, if any, from any deposit, maintenance or investment of
funds in the Collection Account. Assumption fees, late payment charges,
prepayment charges, charges for checks returned for insufficient funds, and
extension and other administrative charges, to the extent collected from
mortgagors, will be retained by the Servicer as additional servicing
compensation.
Subject to its right to refuse to make Nonrecoverable Advances as
described below, the Servicer will be required to pay all reasonable and
customary "out-of-pocket" costs and expenses incurred in the performance of its
servicing obligations, including, but not limited to, the payment of fees for
any sub-servicer and the cost of (i) any enforcement or judicial proceedings
relating to the mortgagors, including foreclosures, and (ii) the management and
liquidation of Mortgaged Properties acquired in satisfaction of the related
Mortgage Loans. Such expenditures (each, a "Servicing Advance") may include
costs of collection efforts, reappraisals, forced placement of hazard insurance
if a borrower allows his hazard policy to lapse, legal fees in connection with
foreclosure actions, advancing delinquent property taxes and upkeep and
maintenance of the Mortgaged Property if it is acquired through foreclosure and
similar types of expenses.
S-61
<PAGE>
The Servicing Agreement provides that the Servicer may pay all or a
portion of any Servicing Advance out of amounts on deposit in the Collection
Account which are being held for payment on a subsequent Payment Date relating
to such Collection Period; any such amounts so used are required to be replaced
by the Servicer by deposit to the Collection Account on or before the Deposit
Date relating to such subsequent Payment Date.
The Servicer may recover Servicing Advances, if not theretofore recovered
from the mortgagor on whose behalf such Servicing Advance was made, from
subsequent collections on the related Mortgage Loan, including Liquidation
Proceeds, Insurance Proceeds and such other amounts as may be collected by the
Servicer from the mortgagor or otherwise relating to the Mortgage Loan. To the
extent the Servicer, in its good faith business judgment, determines that any
Servicing Advance will be or has become a Nonrecoverable Advance, the Servicer
may reimburse itself for such advance from the Collection Account.
The Servicer will not be required to make any Servicing Advance that it
determines would be a Nonrecoverable Advance if made.
Historical Servicing Experience of the Servicer
The Servicer has provided the Company with the following information
regarding the servicing of mortgage loans which it considers non-conforming
credits and none of the Company the Issuer or the Underwriters make any
representations or warranties as to the accuracy or completeness of such
information. The table below sets forth the overall delinquency experience on
residential one-to-four-family mortgage loans for nonconforming credits which
are currently serviced by the Servicer. No mortgage loan is considered
delinquent for purposes of the table until a payment is 30 days past due on a
contractual basis. It should be noted that the Servicer commenced its servicing
activities in April 1997. Accordingly, the Servicer does not have significant
historical delinquency, bankruptcy foreclosure or default experience that may be
referred to for estimating the future delinquency and loss experience of the
Mortgage Loans. The information in the table below is not intended to indicate
or predict the expected delinquency experience on past current or future pools
of mortgage loans for which the Servicer is the primary servicer. See "Risk
Factors -- Limited Historical Experience of the Servicer."
S-62
<PAGE>
[------------]
Non-Conforming Mortgage Loan Portfolio Experience
<TABLE>
<CAPTION>
As of
-----------------------------------------------------------
(000s omitted)
<S> <C> <C> <C> <C>
Total principal balance (at period end)........... $________ $________ $________ $________
Average portfolio principal balance(1)............ $________ $________ $________ $________
DELINQUENCIES (at period end).....................
30-59 Days:
Principal balance............................. $________ $________ $________ $________
Percent(3).................................... _____% _____% _____% _____%
60-89 Days:
Principal balance............................. $________ $________ $________ $________
Percent(3).................................... _____% _____% _____% _____%
90 Days or More:
Principal balance............................. $________ $________ $________ $________
Percent(3).................................... _____% _____% _____% _____%
Total Delinquencies(2):
Principal balance............................. $________ $________ $________ $________
Percent(3).................................... _____% _____% _____% _____%
FORECLOSURES
Principal balance............................. $________ $________ $________ $________
Percent(3).................................... _____% _____% _____% _____%
REO (at period end)...............................
Net gains/(losses) on liquidated loans............
Percentage of net gains/(losses) on liquidated 0.00% 0.00% 0.00% 0.00%
loans (based on average portfolio principal
balance)......................................
</TABLE>
- ----------
(1) Calculated by summing the actual outstanding principal balances at the end
of each month and dividing the total by the number of months in the
applicable period.
(2) Delinquency information does not include loans in foreclosure or REO.
(3) Percentages are expressed based upon the total outstanding principal
balance at the end of the indicated 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 portfolios set forth in the foregoing tables. The statistics shown
above represent the delinquency experience for the indicated mortgage servicing
portfolios 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 mortgage servicing
portfolios set forth above include mortgage loans that were originated using a
variety of different underwriting procedures and standards which may have been
more selective. They include mortgage loans with a variety of payment and other
characteristics (including geographic location) which are not necessarily
representative of the payment and other characteristics of the Mortgage Loans
comprising the Mortgage Pool. In addition, a substantial number of the mortgage
loans in the servicing portfolio were not originated by the Seller and were
originated on the basis of underwriting standards that are more stringent than
those applicable to the Mortgage Loans. As a result, 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 Servicer. 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-63
<PAGE>
THE NOTE INSURANCE
The Insurance Policy
The information set forth in this section has been provided by the Note
Insurer. No representation is made by the Underwriters, the Issuer, the Seller,
the Servicer, the Company or any of their affiliates as to the accuracy or
completeness of such information or any information related to the Note Insurer
incorporated by reference herein.
The Note Insurer, in consideration of the payment of the premium and
subject to the terms of the Note Guaranty Insurance Policy (the "Policy"),
thereby unconditionally and irrevocably guarantees to any Noteholder that an
amount equal to each full and complete Insured Payment will be received by the
Indenture Trustee or its successor, as trustee for the Noteholders, on behalf of
the Noteholders from the Note Insurer, for distribution by the Indenture Trustee
to each Noteholder of each Noteholder's proportionate share of the Insured
Payment. The Note Insurer's obligations under the Policy with respect to a
particular Insured Payment shall be discharged to the extent funds equal to the
applicable Insured Payment are received by the Indenture Trustee, whether or not
such funds are properly applied by the Indenture Trustee. Insured Payments shall
be made only at the time set forth in the Policy and no accelerated Insured
Payments shall be made regardless of any acceleration of the Notes, unless such
acceleration is at the sole option of the Note Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Issuer, or the
Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability). The Policy does not cover
shortfalls to Note Interest due to the Relief Act or Principal Prepayments of
the Mortgage Loans.
The Note Insurer will pay any Insured Payment that is a Preference Amount
on the Business Day following receipt on a Business Day by the Fiscal Agent (as
described below) of (i) a certified copy of the order requiring the return of
such preference payment, (ii) an opinion of counsel satisfactory to the Note
Insurer that such order is final and not subject to appeal, (iii) an assignment
in such form as is reasonably required by the Note Insurer, irrevocably
assigning to the Note Insurer all rights and claims of the Noteholder relating
to or arising under the Notes against the debtor which made such preference
payment or otherwise with respect to such preference payment and (iv)
appropriate instruments to effect the appointment of the Note Insurer as agent
for such Noteholder in any legal proceeding related to such preference payment,
such instruments being in a form satisfactory to the Note Insurer; provided,
that if such documents are received after 12:00 noon, New York City time on such
Business Day, they will be deemed to be received on the following Business Day.
Such payments shall be disbursed to the receiver or trustee in bankruptcy named
in the final order of the court exercising jurisdiction on behalf of the
Noteholder and not to any Noteholder directly unless such Noteholder has
returned principal or interest paid on the Notes to such receiver or trustee in
bankruptcy, in which case such payment shall be disbursed to such Noteholder.
The Note Insurer will pay any other amount payable under the Policy no
later than 12:00 noon New York City time, on the later of the Payment Date on
which the Deficiency Amount is due or the third Business Day following receipt
in New York, New York, on a Business Day by State Street Bank and Trust Company,
N.A., as Fiscal Agent for the Note Insurer or any successor fiscal agent
appointed by the Note Insurer (the "Fiscal Agent") of a Notice (as described
below); provided that if such Notice is received after 12:00 noon New York City
time on such Business Day, it will be deemed to be received on the following
Business Day. If any such Notice received by the Fiscal Agent is not in proper
form or is otherwise insufficient for the purpose of making a claim under the
Policy, it shall be deemed not to have been received by the Fiscal Agent for
purposes of this paragraph, and the Note Insurer or the Fiscal Agent, as the
case may be, shall promptly so advise the Indenture Trustee and the Indenture
Trustee may submit an amended Notice.
Insured Payments due under the Policy, unless otherwise stated therein,
will be disbursed by the Fiscal Agent to the Indenture Trustee on behalf of
Noteholders by wire transfer of immediately available funds in the amount of the
Insured Payment less, in respect of Insured Payments related to Preference
Amounts, any amount held by the Indenture Trustee for the payment of such
Insured Payment and legally available therefor.
S-64
<PAGE>
The Fiscal Agent is the agent of the Note Insurer only and the Fiscal
Agent shall in no event be liable to Noteholders for any acts of the Fiscal
Agent or any failure of the Note Insurer to deposit or caused to be deposited,
sufficient funds to make payment due under the Policy.
Subject to the terms of the Agreement, the Note Insurer shall be
subrogated to the rights of each Noteholder to receive payments under the Notes
to the extent of any payment by the Note Insurer under the Policy.
As used in the Policy, the following terms shall have the following
meanings:
"Agreement" means the Indenture, dated as of [__________ ], by and
between the Issuer and the Indenture Trustee, without regard to any
amendment or supplement thereto, unless the Note Insurer shall have
consented in writing thereto.
"Noteholder" means each Noteholder (as defined in the Indenture)
who, on the applicable Payment Date, is entitled under the terms of the
applicable Note to payment thereunder.
"Business Day" means any day other than a Saturday, a Sunday or a
day on which the Note Insurer or banking institutions in New York City,
Maryland, Middletown, Connecticut, the city in which the corporate trust
office of the Indenture Trustee under the Indenture is located are
authorized or obligated by law or executive order to close.
"Deficiency Amount" means, with respect to a Class of Notes and any
Payment Date the sum of (i) the related Note Interest for such Payment
Date minus Available Funds for the related Group and (ii) the then
existing Overcollateralization Deficit for such Group, if any, after
application of such Available Funds to reduce such Note Balance on such
Payment Date.
"Insured Payment" means, with respect to a Class of Notes, as of any
Payment Date, (i) the Deficiency Amount for the related Group and (ii) any
Preference Amount for such Class due and then owing under the Policy.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit A
attached to the Policy, the original of which is subsequently delivered by
registered or certified mail, from the Indenture Trustee specifying the
Insured Payment which shall be due and owing on the applicable Payment
Date.
"Preference Amount" means for a Class of Notes any amount previously
distributed to a Noteholder on such Notes that is recoverable and sought
to be recovered as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended from
time to time, in accordance with a final nonappealable order of a court
having competent jurisdiction.
Capitalized terms used in the Policy and not otherwise defined therein
will have the respective meanings set forth in the Agreement as of the date of
execution of the Policy, without giving effect to any subsequent amendment to or
modification of the Agreement unless such amendment or modification has been
approved in writing by the Note Insurer.
Any notice under the Policy or service of process on the Fiscal Agent of
the Note Insurer may be made at the address listed below for the Fiscal Agent of
the Note Insurer or such other address as the Note Insurer shall specify in
writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York, 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
The Policy is being issued under and pursuant to, and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
S-65
<PAGE>
THE INSURANCE PROVIDED BY THE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The Policy is not cancelable for any reason. The premium on the Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to the maturity of the Notes.
The Note Insurer
The Note Insurer is the principal operating subsidiary of [__________
]Inc., a _________________ is not obligated to pay the debts of or claims
against the Note Insurer. The Note Insurer is domiciled in the State of
_______________ and licensed to do business in and is subject to regulation
under the laws of ______________________. State laws also regulate the amount of
both the aggregate and individual risks that may be insured, the payment of
dividends by the Note Insurer, changes in control and transactions among
affiliates. Additionally, the Note Insurer is required to maintain contingency
reserves on its liabilities in certain amounts and for certain periods of time.
The consolidated financial statements of the Note Insurer, a wholly owned
subsidiary of [__________ ]Inc., and its subsidiaries as of __________________
and __________________ and for the three years in the period ended December 31,
1997, prepared in accordance with generally accepted accounting principles,
included in the Annual Report on Form 10-K of [__________ ]Inc. for the year
ended __________________ and the consolidated financial statements of the Note
Insurer and its subsidiaries as of __________________ and for the periods ended
__________________ , included in the Quarterly Report on Form 10-Q of
[__________ ]Inc. for the period ended March 31, ___, are hereby incorporated by
reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by reference herein
shall be modified or superseded for purposes of this Prospectus Supplement to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of the Note Insurer and its subsidiaries included
in documents filed by [__________ ] 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 Notes shall be deemed to be incorporated by reference into this Prospectus
Supplement and to be a part hereof from the respective dates of filing such
documents.
The tables below present selected financial information of the Note
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
SAP
---------------------------------------
(Audited) (Unaudited)
(In millions)
Admitted Assets $_____ $_____
Liabilities _____ _____
Capital and Surplus _____ _____
S-66
<PAGE>
GAAP
---------------------------------------
December 31, March 31,
---- ---
(Audited) (Unaudited)
(In millions)
Admitted Assets $_____ $_____
Liabilities _____ _____
Shareholder's Equity _____ _____
----------------------------------
Copies of the financial statements of the Note Insurer incorporated by
reference herein and copies of the Note Insurer's ________ year-end audited
financial statements prepared in accordance with statutory accounting practices
are available, without charge, from the Note Insurer. The address of the Note
Insurer is -----------------------------------------.
The Note Insurer does not accept any responsibility for the accuracy of
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Insurance Policy and Note Insurer set forth
under the headings "The Note Insurance--The Insurance Policy" and "--The Note
Insurer" herein. Additionally, the Note Insurer makes no representation
regarding the Notes or the advisability of investing in the Notes.
Moody's Investor Service, Inc. rates the claims paying ability of the Note
Insurer "Aaa".
Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies, Inc. rates the claims paying ability of the Note Insurer "AAA".
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.) rates
the claims paying ability of the Note Insurer "AAA".
Each rating of the Note Insurer should be evaluated independently. The
ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Note Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Notes
and such ratings may be subject to revision or withdrawal at any time by the
rating agencies. Any downward revision or withdrawal of any of the above ratings
may have an adverse effect on the market price of the Notes. The Note Insurer
does not guaranty the market price of the Notes nor does it guaranty that the
ratings on the Notes will not be revised or withdrawn.
Credit Enhancement Does Not Apply to Prepayment Risk
In general, the protection afforded by the Insurance Policy is protection
for credit risk and not for prepayment risk. A claim may not be made under the
Insurance Policy, in an attempt to guarantee or insure that any particular rate
of prepayment is experienced by the Trust Estate.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code"), prohibit a pension, profit sharing or other employee
benefit plan, as well as individual retirement accounts and annuities and
certain Keogh Plans, and entities deemed to hold assets of such plans (each, a
"Plan") from engaging in certain transactions involving "plan assets" with
persons that are "parties in interest" under ERISA or "disqualified persons"
under the Code with respect to such Plan. A violation of these "prohibited
transaction rules" may generate excise tax and other penalties and liabilities
S-67
<PAGE>
under ERISA and the Code for such persons. Title I of ERISA also requires that
fiduciaries of a Plan subject to ERISA make investments that are prudent,
diversified (except if prudent not to do so) and in accordance with governing
plan documents.
Under regulations of the Department of Labor set forth in 29 C.F.R. ss.
2510.3-101 (the "Plan Asset Regulations"), the assets of a Plan generally
include not only securities held by a Plan but also the underlying assets of the
issuer of any equity securities (the "Look-Through Rule") unless one or more
exceptions specified in the Plan Asset Regulations are satisfied. For purposes
of those Regulations, an equity security is a security other than a security
that is treated as debt under applicable local law and that has no substantial
equity features. The Issuer believes that the Notes will be treated as debt
obligations without significant equity features for purposes of the Plan Asset
Regulations. Accordingly, a Plan that acquires a Note should not be treated as
having acquired a direct interest in the assets of the Issuer. However, there
can be no complete assurance that the Notes will be treated as debt obligations
without significant equity features for purposes of the Plan Asset Regulations.
If the Notes are treated as having substantial equity features, the purchaser of
a Note could be treated as having acquired a direct interest in the Mortgage
Loans securing the Notes. In that event, the purchase, holding, or resale of the
Notes could result in a transaction that is prohibited under ERISA or the Code.
However, even if the Notes are treated as debt for such purposes, the
acquisition or holding of Notes by or on behalf of a Plan could be considered to
give rise to a prohibited transaction if the Issuer or any of its affiliates is
or becomes a "party in interest" under ERISA or a "disqualified person" under
the Code with respect to such Plan. In such case, certain exemptions from the
prohibited transaction rules could be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire Notes.
Included among these exemptions are: Prohibited Transaction Class Exemption
("PTCE") 96-23, regarding transactions effected by "in-house asset managers";
PTCE 90-1, regarding investments by insurance company pooled separate accounts;
PTCE 95-60, regarding investments by insurance company general accounts; PTCE
91-38, regarding investments by bank collective investment funds; and PTCE
84-14, regarding transactions effected by "qualified professional asset
managers". A purchaser of a Note should be aware, however, that even if the
conditions specified in one or more exemptions are met, the scope of the relief
provided by an exemption might not cover all acts that might be construed as
prohibited transactions. The purchase of a Note will be deemed a representation
by the acquirer that either (i) it is not, and is not purchasing a Note on
behalf of or with the assets of a Plan, or (ii) the acquisition and holding of a
Note by the acquirer qualifies for exemptive relief under PTCE 95-60, PTCE
96-23, PTCE 91-38, PTCE 90-1, PTCE 84-14 or another Department of Labor Class
Exemption.
A governmental plan as defined in Section 3(32) of ERISA is not subject to
Title I of ERISA or Section 4975 of the Code. However, such a governmental plan
may be subject to a federal, state, or local law which is, to a material extent,
similar to the foregoing provisions of ERISA or the Code ("Similar Law"). A
fiduciary of a governmental plan should make its own determination as to the
need for and the availability of any exemptive relief under Similar Law.
A Plan fiduciary considering the purchase of Notes should consult its tax
and/or legal advisors regarding the applicability of the fiduciary
responsibility provisions of ERISA to such investment, whether the assets of the
Issuer would be considered plan assets, the possibility of exemptive relief from
the prohibited transaction rules, and other related issues and their potential
consequences. The sale of Notes to a Plan is in no respect a representation by
the Issuer or the Underwriters that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan. See "ERISA Considerations" in the Prospectus.
USE OF PROCEEDS
The Issuer intends to use the net proceeds to be received from the sale of
the Notes to acquire the Mortgage Loans from the Depositor and the Seller and to
pay other expenses associated with the pooling of the Mortgage Loans and the
issuance of the Notes.
S-68
<PAGE>
LEGAL INVESTMENT CONSIDERATIONS
The Notes will not constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). Institutions
whose activities are subject to review by federal or state regulatory
authorities may be or may become subject to restrictions, which may be
retroactively imposed by such regulatory authorities, on the investment by such
institutions in certain forms of mortgage related securities. See "Legal
Investment Matters" in the Prospectus.
UNDERWRITING
Under the terms set forth in the Underwriting Agreement, dated the date
hereof (the "Underwriting Agreement"), the Depositor has agreed to cause the
Issuer to sell, and the Underwriters have agreed, subject to the terms and
conditions set forth therein, to purchase the entire principal amount of the
Notes.
Each of the Underwriters has informed the Depositor that it proposes to
offer the Notes for sale from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case, at
the time of the related sale. The Underwriters may effect such transactions by
selling the Notes to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Underwriter. In connection with the sale of the Notes, the Underwriters
may be deemed to have received compensation from the Depositor in the form of
underwriting compensation. The Underwriters and any dealers that participate
with the Underwriters in the distribution of the Notes may be deemed to be
underwriters and any commissions received by them and any profit on the resale
of the Notes by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended (the "Securities Act").
The Depositor and the Seller have agreed to indemnify the Underwriters
against certain liabilities including liabilities under the Securities Act.
The Depositor has been advised by the Underwriters that the Underwriters
intend to make a market in the Notes, as permitted by applicable laws and
regulations and subject to the provisions of Rule 104 of Regulation M. The
Underwriters are not obligated, however, to make a market in the Notes and such
market-making may be discontinued at any time at the sole discretion of the
Underwriters. Accordingly, no assurance can be given as to the liquidity of, or
trading markets for, the Notes.
All of the Mortgage Loans included in the Trust Estate will have been
acquired in a privately negotiated transaction with the Seller.
REPORT OF EXPERTS
The consolidated financial statements of [__________ ] and subsidiaries,
as of _______________ and _______________ and for each of the three years in the
period ended _______________ , incorporated by reference into this Prospectus
Supplement have been audited by _______________, independent accountants, as set
forth in their report thereon incorporated by reference herein in reliance upon
the authority of such firm as experts in accounting and auditing.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material anticipated federal
income tax considerations to investors of the purchase, ownership and
disposition of the securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
considerations 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 Notes.
S-69
<PAGE>
Treatment of the Notes as Indebtedness. The Seller agrees, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for all federal, state and local income tax purposes. There are no regulations,
published rulings or judicial decisions involving the characterization for
federal income tax purposes of securities with terms substantially the same as
the Notes. In general, whether instruments such as the Notes constitute
indebtedness for federal income tax purposes is a question of fact, the
resolution of which is based primarily upon the economic substance of the
instruments and the transaction pursuant to which they are issued rather than
merely upon the form of the transaction or the manner in which the instruments
are labeled. The Internal Revenue Service (the "IRS") and the courts have set
forth various factors to be taken into account in determining, for federal
income tax purposes, whether or not an instrument constitutes indebtedness and
whether a transfer of property is a sale because the transferor has relinquished
substantial incidents of ownership in the property or whether such transfer is a
borrowing secured by the property. On the basis of its analysis of such factors
as applied to the facts and its analysis of the economic substance of the
contemplated transaction, Dewey Ballantine, tax counsel to the Depositor ("Tax
Counsel") is of the opinion that, for federal income tax purposes, the Notes
will be treated as indebtedness of the Trust, and not as an ownership interest
in the Mortgage Loans, or an equity interest in the Trust or in a separate
association taxable as a corporation or other taxable entity. Further, Tax
Counsel is of the opinion that neither the Issuer nor either Mortgage Loan group
will be characterized as an association (or as a publicly traded partnership)
taxable as a corporation or as a taxable mortgage pool.
If the Notes are characterized as indebtedness, interest paid or accrued
on a Note will be treated as ordinary income to the Noteholders and principal
payments on a Note will be treated as a return of capital to the extent of the
Noteholder's basis in the Note allocable thereto. An accrual method taxpayer
will be required to include in income interest on the Notes when earned, even if
not paid, unless it is determined to be uncollectible. The Trust will report to
Noteholders of record and the IRS in respect of the interest paid and original
issue discount, if any, accrued on the Notes to the extent required by law.
Although, as described above, it is the opinion of Tax Counsel that, for
federal income tax purposes, the Notes will be characterized as debt, such
opinion is not binding on the IRS and thus no assurance can be given that such a
characterization will prevail. If the IRS successfully asserted that one or both
Classes of the Notes did not represent debt for federal income tax purposes,
holders of the Notes would likely be treated as owning an interest in a
partnership and not an interest in an association (or publicly traded
partnership) taxable as a corporation. If the Noteholders were treated as owning
an equitable interest in a partnership, the partnership itself would not be
subject to federal income tax; rather each partner would be taxed individually
on their respective distributive share of the partnership's income, gain, loss,
deductions and credits. The amount, timing and characterization of items of
income and deductions for a Noteholder would differ if the Notes were held to
constitute partnership interests, rather than indebtedness and would cause a
tax-exempt entity subject to tax on unrelated business taxable income ("UBTI")
(including an individual retirement account) to recognize UBTI under the Code.
Since the parties will treat the Notes as indebtedness for federal income tax
purposes, none of the Servicer, the Indenture Trustee or the Owner Trustee will
attempt to satisfy the tax reporting requirements that would apply under this
alternative characterization of the Notes. Investors that are foreign persons
are strongly advised to consult their own tax advisors in determining the
federal, state, local and other tax consequences to them of the purchase,
ownership and disposition of the Notes.
Original Issue Discount. It is anticipated that the Notes will not have
any original issue discount ("OID") other than possibly OID within a de minimis
exception and that accordingly the provisions of sections 1271 through 1273 and
1275 of the Internal Revenue Code of 1986, as amended (the "Code"), generally
will not apply to the Notes. OID will be considered de minimis if it is less
than 0.25% of the principal amount of a Note multiplied by its expected weighted
average life. The prepayment assumption that will be used for purpose of
computing original issue discount, if any, for federal income tax purposes is
25% HEP.
Market Discount. A subsequent purchaser who busy a Note for less than its
principal amount may be subject to the "market discount" rules of Section 1276
through 1278 of the Code. If a subsequent purchaser of a Note disposes of such
Note (including certain nontaxable dispositions such as a gift), or receives a
principal payment, any gain upon such sale or other disposition will be
recognized, or the amount of such principal payment will be treated, as ordinary
income to the extent of any "market discount" accrued for the period that such
purchaser holds the Note. Such holder may instead elect to include market
discount in income as it accrues with respect to all debt instruments acquired
in the year of acquisition of the Notes and thereafter. Market discount
generally will equal the excess, if any, of the then current unpaid principal
balance of the Note over the purchaser's basis in the
S-70
<PAGE>
Note immediately after such purchaser acquired the Note. In general, market
discount on a Note will be treated as accruing over the term of such Note in the
ratio of interest for the current period over the sum of such current interest
and the expected amount of all remaining interest payments, or at the election
of the holder, under a constant yield method (taking into account the Prepayment
Assumption). At the request of a holder of a Note, information will be made
available that will allow the holder to compute the accrual of market discount
under the first method described in the preceding sentence.
The market discount rules also provide that a holder who incurs or
continues indebtedness to acquire a Note at a market discount may be required to
defer the deduction of all or a portion of the interest on such indebtedness
until the corresponding amount of market discount is included in income.
Notwithstanding the above rules, market discount on a Note will be
considered to be zero if it is less than a de minimis amount, which is 0.25% of
the remaining principal balance of the Note multiplied by its expected weighted
average remaining life. If OID or market discount is de minimis, the actual
amount of discount must be allocated to the remaining principal distributions on
the Notes and, when each such distribution is received, capital gain equal to
the discount allocated to such distribution will be recognized.
Market Premium. A subsequent purchaser who buys a Note for more than its
principal amount generally will be considered to have purchased the Note at a
premium. Such holder may amortize such premium, suing a constant yield method,
over the remaining term of the Note and, except as future regulations may
otherwise provide, may apply such amortized amounts to reduce the amount of
interest reportable with respect to such note over the period from the purchase
date to the date of maturity of the Note. The amortization of such premium on an
obligation that provides for partial principal payments prior to maturity should
be governed by the methods for accrual of market discount on such an obligation
(described above). A holder that elects to amortize premium must reduce the tax
basis in the related obligation by the amount of the aggregate deductions (or
interest offsets) allowable for amortizable premium. If a debt instrument
purchased at a premium is redeemed in full prior to its maturity, a purchaser
who has elected to amortize premium should be entitled to a deduction for any
remaining unamortized premium in the taxable year of redemption.
Sale or Redemption of Notes. If a Note is sold or retired, the seller will
recognize gain or loss equal to the difference between the amount realized on
the sale and such holder's adjusted basis in the Note. Such adjusted basis
generally will equal the cost of the Note to the seller, increased by any
original issue discount included in the seller's gross income in respect of the
Note (and by any market discount which the taxpayer elected to include in income
or was required to include in income), and reduced by payments other than
payments of qualified stated interest in respect of the Note received by the
seller and by any amortized premium. Similarly, a holder who receives a payment
other than a payment of qualified stated interest in respect of a Note, either
on the date on which such payment is scheduled to be made or as a prepayment,
will recognize gain equal to the excess, if any, of the amount of the payment
over his adjusted basis in the Note allocable thereto. A Noteholder who receives
a final payment which is less than his adjusted basis in the Note will generally
recognize a loss in the amount of the shortfall on the last day of his taxable
year. Generally, any such gain or loss realized by an investor who holds a Note
as a "capital asset" within the meaning of Code Section 1221 should be capital
gain or loss, except as described above in respect of market discount and except
that a loss attributable to accrued but unpaid interest may be an ordinary loss.
Taxation of Certain Foreign Investors. Interest payments (including OID)
on the Notes made to a Noteholder who is a nonresident alien individual, foreign
corporation or other non-United States person (a "foreign person") generally
will be "portfolio interest" which is not subject to United States tax if such
payments are not effectively connected with the conduct of a trade or business
in the United States by such foreign person and if the Trust (or other person
who would otherwise be required to withhold tax from such payments) is provided
with an appropriate statement that the beneficial owner of the Note identified
on the statement is a foreign person.
Backup Withholding. Distributions of interest and principal as well as
distributions of proceeds from the sale of the Notes, may be subject to the
"backup withholding tax" under Section 3406 of the Code at rate of 31% if
recipients of such distributions fail to furnish to the payor certain
information, including their taxpayer identification numbers, or otherwise fail
to establish an exemption from such tax. Any amounts deducted and withheld from
a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore,
S-71
<PAGE>
certain penalties may be imposed by the IRS on a recipient of distributions that
is required to supply information but does not do so in the proper manner.
STATE TAX CONSIDERATIONS
Potential Noteholders should consider the state and local income tax
consequences of the purchase, ownership and disposition of the Notes. State and
local income tax laws may differ substantially from the corresponding federal
law, and this discussion does not purport to describe any aspect of the income
tax laws of any state or locality. Therefore, potential Noteholders should
consult their own tax advisors with respect to the various state and local tax
consequences of an investment in the Notes.
LEGAL MATTERS
Certain legal matters will be passed upon for the Seller by
_____________________________________, will act as counsel for the Underwriters
and will pass upon certain federal income tax matters for the Issuer. Certain
legal matters relating to the Note Insurer and the Insurance Policy will be
passed upon for the Note Insurer by __________________________.
RATING OF THE NOTES
It is a condition to the issuance of the Notes that each shall be rated
"_____" by ___________ and "____" by _______.
Explanations of the significance of such ratings may be obtained from
_________________________________________. Each rating will be the view only of
the assigning Rating Agency.
The ratings on the Notes are based in substantial part on the
claims-paying ability of the Note Insurer. Any changes in the ratings of the
Note Insurer by the Rating Agencies may result in a change in the ratings of the
Notes.
The ratings assigned to the Notes do not represent any assessment of the
likelihood or rate of principal prepayments and do not address the possibility
that Noteholders might suffer a lower than anticipated yield.
There is no assurance that any rating assigned to the Notes will continue
for any period of time or that such ratings will not be revised or withdrawn.
Any such revision or withdrawal of such ratings may have an adverse effect on
the market price or liquidity of the Notes.
The ratings of the Notes should be evaluated independently form similar
ratings on other types of securities. A security rating is not a recommendation
to buy, sell or hold securities.
There can be no assurances as to whether any other rating agency will rate
the Notes, or, if one does, what rating will be assigned by such other rating
agency. A rating on the Notes by another rating agency, if assigned at all, may
be lower than the ratings assigned to the Notes by __________________________.
S-72
<PAGE>
INDEX OF PRINCIPAL TERMS
Page
----
Administrative Fee Amount......................................................2
Aggregate Principal Balance....................................................9
Agreement.....................................................................65
Available Funds............................................................4, 25
Backup Servicer................................................................i
Balloon Loans.................................................................15
Beneficial Owner...............................................................3
Book-Entry Notes..............................................................18
Business Day...............................................................4, 65
Cedel..........................................................................3
Cedel Participants............................................................20
Citibank......................................................................18
Class..........................................................................2
Class A-1 Notes................................................................i
Class A-2 Notes................................................................i
CMAC..........................................................................66
Code..........................................................................68
Collection Account............................................................57
Collection Period..............................................................2
Combined Loans-to-Ratio.......................................................34
Company........................................................................1
Compensating Interest Payment..............................................9, 58
Corporate Office..............................................................47
Cut-off Date................................................................2, 9
debt-to-income ratio..........................................................47
Defective Mortgage Loan.......................................................22
Deficiency Amount.............................................................65
Definitive Note................................................................3
Depositor......................................................................1
Determination Date............................................................25
DTC............................................................................3
Due Period.....................................................................2
ERISA.....................................................................12, 68
Euroclear......................................................................3
Euroclear Operator............................................................20
Euroclear Participants........................................................20
European Depositaries.........................................................19
Excess Cash................................................................6, 28
Financial Intermediary........................................................19
Fiscal Agent..................................................................64
Group.........................................................................ii
Group I.......................................................................ii
Group I Mortgage Loans........................................................ii
Group II......................................................................ii
Group II Mortgage Loans.......................................................ii
Groups........................................................................ii
Indenture......................................................................i
Indenture Trustee..............................................................i
Indenture Trustee Fee..........................................................1
Indirect Retail Mortgage Loans................................................47
Initial Group I Pool Balance...............................................9, 33
S-73
<PAGE>
Initial Group II Pool Balance..............................................9, 40
Initial Mortgage Pool Balance..............................................ii, 9
Initial Redemption Date...................................................11, 30
Insurance Policy............................................................i, 7
Insured Payment............................................................7, 65
Issuer.........................................................................i
Liquidated Mortgage Loan......................................................25
Liquidation Proceeds..........................................................26
Loan-to-Value Ratio...........................................................40
Look-Through Rule.............................................................68
Modeling Assumptions..........................................................53
Monthly Advance...............................................................58
Monthly Principal..........................................................5, 24
Mortgage Files................................................................22
Mortgage Loan..................................................................i
Mortgage Loan Group...........................................................ii
Mortgage Loan Groups..........................................................ii
Mortgage Note..................................................................3
Mortgage Pool...............................................................i, 3
Mortgage Rate.....................................................10, 11, 33, 40
Mortgaged Properties........................................................3, 9
Net Liquidation Proceeds......................................................26
Nonrecoverable Advances.......................................................58
Note Account..................................................................26
Note Balance...............................................................5, 24
Note Insurer................................................................i, 7
Note Insurer Default...........................................................8
Note Insurer Premium...........................................................8
Note Interest..............................................................5, 24
Note Interest Rate.........................................................5, 24
Noteholder.............................................................3, 19, 65
Notes..........................................................................i
Notice........................................................................65
Overcollateralization Amount...............................................6, 28
Overcollateralization Deficit..............................................7, 29
Overcollateralization Surplus..............................................7, 28
Owner Trustee..................................................................i
Owner Trustee Fee..............................................................2
Participants..................................................................20
Paying Agent..................................................................23
Payment Date...................................................................4
Payments Ahead................................................................25
Percentage Interest...........................................................23
Permitted Investments.........................................................26
Plan..........................................................................12
Plan Asset Regulations....................................................12, 68
Preference Amount.............................................................65
Principal Balance.............................................................24
Principal Prepayment..........................................................25
PTCE..........................................................................68
Qualified Replacement Mortgage................................................22
Rating Agencies...............................................................13
Record Date....................................................................4
Redemption Date...............................................................30
Relief Act.....................................................................8
REMIC.........................................................................ii
S-74
<PAGE>
REO Property..................................................................58
Required Overcollateralization Amount......................................7, 28
Residual Interest..............................................................i
Retail Mortgage Loans.........................................................47
S&P.......................................................................13, 27
Sale Agreement................................................................ii
Securities Act................................................................69
Seller.........................................................................1
Senior Loan...................................................................34
Servicer...................................................................ii, 1
Servicer Event of Default.....................................................60
Servicing Advance.............................................................61
Servicing Agreement...........................................................ii
Servicing Fee..................................................................9
Similar Law...................................................................68
SMMEA.....................................................................13, 69
Stated Maturity...............................................................ii
Trust Agreement................................................................i
Trust Estate................................................................i, 2
Underwriting Agreement........................................................69
S-75
<PAGE>
ANNEX A
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Asset Backed
Notes, Series [Series] (the "Global Securities"), will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through DTC, Cedel or Euroclear. The Global Securities will be
traceable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between participants of Cedel or Euroclear
and Participants holding Notes will be effected on a delivery-against-payment
basis through the Relevant Depositaries of Cedel and Euroclear (in such
capacity) and as Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name
of Cede, as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their Relevant Depositaries,
which in turn will hold such positions in accounts as Participants.
Investors selecting to hold their Global Securities through DTC will
follow DTC settlement practice. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Because the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between Participants. Secondary market trading between
Participants will be settled using the procedures applicable to prior
asset-backed Note issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the Procedures applicable to conventional eurobonds in same-day funds.
S-76
<PAGE>
Trading between DTC Seller and Cedel or Euroclear Participants. When
Global Securities are to be transferred from the account of a Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one Business Day prior to settlement. Cedel or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary to the Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they clear the
overdraft when the Global Securities are credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Because the settlement is taking place during New York business hours,
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the Participants a cross-market transaction will
settle no differently than a trade between two Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a Participant. The seller will send instructions to
Cedel or Euroclear through a Cedel Participant or Euroclear Participant at least
one Business Day prior to settlement. In these cases, Cedel or Euroclear will
instruct the Relevant Depositary, as appropriate, to deliver the Global
Securities to the Participant's account against payment. Payment will include
interest accrued on the Global Securities from and including the last coupon
payment to and excluding the settlement date on the basis of the actual number
of days in such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the Cedel Participant or Euroclear
Participant the following day, and receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail
S-77
<PAGE>
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the day trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedel or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the Participant is at least one day
prior to the value date for the sale to the Cedel Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through Cedel
or Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U. S. Persons (Form W-8). Beneficial owners of
Global Securities that are Non-U.S. Persons can obtain a complete
exemption from the withholding tax by filing a signed Form W-8
(Certificate of Foreign Status). If the information shown on Form W-8
changes, a new Form W-8 must be filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income
(Form 4224). A non-U.S. Person, including a non-U.S. corporation or bank
with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain
an exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade of Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a
tax treaty with the United States can obtain an exemption or reduced tax
rate depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the
filer alternatively files Form W-8. Form 1001 may be filed by the
beneficial owners or their agents.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of
a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom
it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8 and Form 1001 are effective
for three calendar years, and Form 4224 is effective for one calendar
year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate that is
subject to United States federal income tax, regardless of the source of its
income or (iv) a trust if (a) a court in the United
S-78
<PAGE>
States is able to exercise primary supervision over the administration of the
trust, and (b) one or more United States persons have the authority to control
all substantial decisions of the trust. The term "Non-U.S. Person" means any
person who is not a U.S. Person. This summary does not deal with all aspects of
U.S. federal income tax withholding that may be relevant to foreign holders of
Global Securities or with the application of recently issued Treasury
Regulations relating to tax documentation requirements that are generally
effective with respect to payments made after December 31, 1999. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of Global Securities.
S-79
<PAGE>
================================================================================
No dealer, salesman, or any other person has been authorized to give any
information or to make any representation not contained in this Prospectus
Supplement or the accompanying Prospectus, and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Issuer, the Company or the Underwriters. Neither this Prospectus
Supplement nor the accompanying Prospectus constitutes an over to sell or a
solicitation of an offer to buy any of the Notes offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction. Neither the delivery of this Prospectus Supplement or the
accompanying Prospectus nor any sale made hereunder shall, under any
circumstances, create an implication that the information herein is correct as
of any time subsequent to the date hereof or that there has been no change in
the affairs of the Issuer or the Depositor since such date.
-----------------------
TABLE OF CONTENTS
Prospectus Supplement
Page
----
Prospectus
Reports........................................................................3
Available Information..........................................................3
Incorporation of Certain Information by Reference..............................3
Summary of Prospectus..........................................................4
Risk Factors..................................................................13
The Trusts Funds..............................................................18
Description of the Certificates...............................................29
Credit Support................................................................43
Prepayment and Yield Considerations...........................................48
Use of Proceeds...............................................................52
The Depositor.................................................................52
Underwriting Guidelines.......................................................52
Servicing of the Mortgage Loans and Contracts.................................54
The Pooling and Servicing Agreement...........................................64
Certain Legal Aspects of the Mortgage Loans and
Contracts..................................................................67
Certain Federal Income Tax Consequences.......................................81
ERISA Considerations..........................................................93
Legal Investment..............................................................96
Plan of Distribution..........................................................98
Legal Matters.................................................................98
Rating........................................................................99
Additional Information........................................................99
Index of Significant Definitions.............................................100
================================================================================
================================================================================
$153,325,000
[____________] Mortgage Loan
Trust [Series]
Asset Backed Notes,
[Series]
[[____________] LOGO]
[____________]
Seller and Servicer
Prudential Securities
Secured Financing Corporation
Depositor
Prospectus Supplement
Prudential Securities
Incorporated
[__________ ] 4,___
================================================================================
<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 September 2, 1998
<PAGE>
(Cover continued from previous page)
Each Series of Certificates will include one or more classes. The
Certificates of any particular class may represent beneficial ownership
interests in the related Mortgage Loans held by the related Trust Fund, or may
represent debt secured by such Mortgage Loans, as described herein and in the
related Prospectus Supplement. Any Series of Certificates may include one or
more Classes or Subclasses of Certificates (the "Subordinated Certificates")
that are subordinate in right of distributions to such rights of one or more of
other Classes or Subclasses of such Series (the "Senior Certificates"). If
specified in the applicable Prospectus Supplement, the relative interests of the
Senior Certificates and the Subordinated Certificates of a Series in the Trust
Fund may be subject to adjustment from time to time on the basis of
distributions received in respect thereof (the "Shifting Interest
Certificates"). If so specified in the applicable Prospectus Supplement, credit
support may also be provided for any Series of Certificates in the form of a
guarantee, letter of credit, mortgage pool insurance policy or other form of
credit enhancement as described herein.
Neither the Mortgage Loans nor the Contracts will be guaranteed or insured
by any governmental agency or instrumentality or, except as specified in the
related Prospectus Supplement, by any other person. The only obligations of the
Depositor with respect to a Series of Certificates will be pursuant to certain
limited representations and warranties made by the Depositor, to the extent
described herein and in the related Prospectus Supplement. The Servicer with
respect to a Series of Certificates relating to Mortgage Loans or Contracts will
be named in the related Prospectus Supplement. The principal obligations of a
Servicer will be limited to certain obligations pursuant to certain
representations and warranties and to its contractual servicing obligations.
An election may be made to treat each Trust Fund (or one or more segregated
pools of assets therein) underlying a Series which includes MultiClass
Certificates as a "real estate mortgage investment conduit" (a "REMIC") or, on
or after September 1, 1997, as a Financial Asset Securitization Investment Trust
("FASIT") for federal income tax purposes. Series of Certificates for which a
REMIC election has been made will include one or more Classes or Subclasses
which constitute "regular interests" in the REMIC ("Regular Certificates") and
one Class or Subclass with respect to each REMIC which constitutes the "residual
interest" therein (the "Residual Certificates"). Series of Certificates for
which a FASIT election has been made will include one or more Classes or
Subclasses which constitute "regular interests" ("FASIT Regular Securities")
and/or "high-yield interests" ("FASIT High-Yield Securities") and one Class or
Subclass with respect to each FASIT which constitutes the "ownership interest"
therein (the "FASIT Ownership Interest"). Alternatively, a Trust Fund may be
treated as a grantor trust or as a partnership for federal income tax purposes,
or may be treated for federal income tax purposes as a mere security device
which constitutes a collateral arrangement for the issuance of debt. See
"Certain Federal Income Tax Consequences."
There will have been no public market for the Certificates of any Series
prior to the offering thereof. No assurance can be given that such a market will
develop, or that if such a market does develop, it will provide
Certificateholders with liquidity of investment or will continue for the life of
the Certificates.
2
<PAGE>
REPORTS
In connection with each distribution and annually, Certificateholders will
be furnished with statements containing information with respect to principal
and interest payments and the related Trust Fund, as described herein and in the
applicable Prospectus Supplement for such Series. Any financial information
contained in such reports will not have been examined or reported upon by an
independent public accountant. See "Servicing of the Mortgage Loans and
Contracts -- Reports to Certificateholders." The Servicer for each Series
relating to Mortgage Loans or Contracts will furnish periodic statements setting
forth certain specified information to the related Trustee and, in addition,
annually will furnish such Trustee with a statement from a firm of independent
public accounts with respect to the examination of certain documents and records
relating to the servicing of the Mortgage Loans or Contracts in the related
Trust Fund. See "Servicing of the Mortgage Loans and Contracts -- Reports to the
Trustee" and "Evidence as to Compliance." Copies of the monthly and annual
statements provided by the Servicer to the Trustee will be furnished to
Certificateholders of each Series upon request addressed to Prudential
Securities Secured Financing Corporation, One New York Plaza, 15th Floor, New
York, New York 10292, Attention: Joseph Donovan (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: Joseph Donovan.
3
<PAGE>
SUMMARY OF PROSPECTUS
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus, and by reference to the
information with respect to each Series of Certificates contained in the related
Prospectus Supplement. Certain capitalized terms used and not otherwise defined
herein shall have the meanings given elsewhere in this Prospectus. An index
indicating where certain terms used herein are defined appear at the end of this
Prospectus.
Title of Securities............ Pass-Through Certificates (Issuable in
Series).
Depositor...................... Prudential Securities Secured Financing
Corporation, formerly known as P-B Secured
Financing Corporation (the "Depositor"), a
Delaware corporation, is a wholly owned
limited purpose finance subsidiary of
Prudential Securities Group Inc. The
Depositor's principal executive offices are
located at One New York Plaza, 15th Floor,
New York, New York 10292, and its telephone
number is (212) 778-1000. See "The
Depositor."
Unaffiliated Sellers........... The Depositor will acquire the Mortgage Loans
and Contracts from one or more institutions
unaffiliated with the Depositor
("Unaffiliated Sellers").
Trustee ....................... The Trustee with respect to a Series will be
specified in the related Prospectus
Supplement.
Servicer ....................... The Servicer for each Series relating to
Mortgage Loans or Contracts will be specified
in the applicable Prospectus Supplement. The
Servicer will service the Mortgage Loans or
Contracts comprising each Trust Fund and
administer each Trust Fund pursuant to a
separate Pooling and Servicing Agreement
(each, a "Pooling and Servicing Agreement").
The Servicer may subcontract all or any
portion of its obligations as Servicer under
each Pooling and Servicing Agreement to
qualified subservicers (each, a
"Sub-Servicer") but the Servicer will not be
relieved thereby of its liability with
respect thereto. See "Servicing of the
Mortgage Loans and Contracts."
The Trust Funds................. The Trust Fund for each Series of
Certificates may consist of any combination
of Mortgage Pool and/or Contract Pools (each
as defined herein) and certain other related
property, as specified herein and in the
applicable Prospectus Supplement. Unless
otherwise specified in the applicable
Prospectus Supplement, each Mortgage Pool
will be comprised of Mortgage Loans or
Contracts or participations therein.
Unless otherwise specified in the applicable
Prospectus Supplement, each Contract Pool
will consist of fixed or adjustable rate
manufactured housing installment sale,
contracts and installment loan agreements.
Each Contract may be secured by a new or used
Manufactured Home (as defined herein).
4
<PAGE>
Neither the Certificates, the interest
thereon, nor the underlying Mortgage Loans
are guaranteed by the United States nor do
they constitute debts or obligations of the
United States or any agency or
instrumentality of the United States.
The particular characteristics of each Trust
Fund will be set forth in the applicable
Prospectus Supplement.
Description of the
Certificates.................... The Certificates issued by any Trust Fund may
represent beneficial ownership interests in
the related Mortgage Loans held by the
related Trust Fund, or may represent debt
secured by such Mortgage Loans, as described
herein and in the related Prospectus
Supplement. Certificates which represent
beneficial ownership interests in the related
Trust Fund will be referred to as
"Certificates" in the related Prospectus
Supplement; Certificates which represent debt
issued by the related Trust Fund will be
referred to as "Notes" in the related
Prospectus Supplement.
With respect to Notes issued by the related
Trust Fund, the related Trust Fund will enter
into an indenture by and between such Trust
Fund and the trustee named on such indenture,
as set forth in the related Prospectus
Supplement.
Each Series of Certificates will be recourse
to the assets of the related Trust Fund only.
The sole source of payment for any Series of
Certificates will be the assets of the
related Trust Fund. The Certificates will not
be obligations, either recourse or
non-recourse (except for certain non-recourse
debt described under "Certain Federal Income
Tax Consequences"), of the Depositor, the
Servicer or any Person other than the related
Trust Fund. In the case of Certificates that
represent beneficial ownership interest in
the related Trust Fund, such Certificates
will represent the ownership of such Trust
Fund; with respect to Certificates which are
Notes, such Notes will be secured by the
related Trust Fund. Notwithstanding the
foregoing, and as to be described in the
related Prospectus Supplement, certain types
of credit enhancement, such as a financial
guaranty insurance policy or a letter of
credit, may constitute a full recourse
obligation of the issue of such credit
enhancement.
Each Series will consist of one or more
Classes of Certificates which may be (i)
Standard Certificates, (ii) Multi-Class
Certificates or (iii) Stripped Certificates.
Any Class of Certificates may be divided into
two or more Subclasses and any Class of
Standard Certificates may be divided into
Subclasses which consist of Multi-Class
Certificates. The Depositor will cause each
Trust Fund (or one or more segregated pools
of assets therein) with respect to a Series
which includes Standard Certificates
redeemable on a random lot basis, Multi-Class
Certificates or Shifting Interest
Certificates to elect to be treated as a
5
<PAGE>
REMIC. In addition, any Series with respect
to which an election has been made to treat
the Trust Fund (or one or more segregated
pools of assets therein) as a REMIC will
include one Class or one Subclass of Residual
Certificates as to each REMIC. The Residual
Certificates of a Series, if offered hereby,
will represent the right to receive
distributions with respect to the related
Trust Fund as specified in the related
Prospectus Supplement. Unless otherwise
specified in the applicable Prospectus
Supplement, the Certificates will be offered
only in fully registered form.
A. Standard
Certificates........... Unless otherwise provided in the applicable
Prospectus Supplement, Standard Certificates
of a Series will each evidence a fractional
undivided beneficial ownership interest in
the related Trust Fund and will entitle the
holder thereof to its proportionate share of
a percentage of all of the payments and other
receipts with respect to the principal of and
interest (to the extent of the applicable Net
Mortgage Rate or Net Contract Rate) on the
related Mortgage Loans or Contracts. If
specified in the applicable Prospectus
Supplement, with respect to any Class of
Standard Certificates of a Series for which a
REMIC election has been made, distributions
of principal may be allocated among the
Certificateholders of such Class on a pro
rata, random lot or such other basis as is
specified in such Prospectus Supplement.
B. Multi-Class
Certificates........... Multi-Class Certificates of a Series will
consist of Certificates each of which
evidences a beneficial ownership interest in
the related Trust Fund and will be assigned a
Stated Amount, which may be based on an
amount of principal of the underlying
Mortgage Loans or Contracts or on the value
of future cash flows from the related Trust
Fund without distinction as to principal or
interest and an Interest Rate which may be a
fixed rate (which may be zero) or a variable
rate or which will otherwise accrue interest
as specified in the applicable Prospectus
Supplement. The holder of a Multi-Class
Certificate will be entitled to receive, to
the extent funds are available therefor,
interest payments on the outstanding Stated
Amount thereof at the applicable Interest
Rate or as otherwise specified in the
applicable Prospectus Supplement and
distributions in reduction of such Stated
Amount determined in the manner and applied
in the priority set forth in the applicable
Prospectus Supplement.
C. Stripped
Certificates........... Stripped Certificates will each evidence an
undivided beneficial ownership interest in
the related Trust Fund and will entitle the
holder thereof to its proportionate share of
a specified portion (which may be zero) of
principal payments and/or a specified portion
(which may be zero) of interest payments (to
the extent of the applicable Net Mortgage
Interest Rate) on the related Mortgage Loans.
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
8
<PAGE>
remaining moneys will be applied as a
mandatory prepayment of the related class or
classes of Certificates as specified in the
related Prospectus Supplement.
Credit Enhancement
A. By Subordination.... A Series of Certificates may include one or
more Classes or Subclasses of Senior
Certificates and one or more Classes or
Subclasses of Subordinated Certificates. The
rights of the holders of Subordinated
Certificates of a Series to receive
distributions with respect to the related
Mortgage Loans or Contracts will be
subordinated to such rights of the holders of
the Senior Certificates of the same Series to
the extent (the "Subordinated Amount")
specified herein and in the applicable
Prospectus Supplement. This subordination is
intended to enhance the likelihood of the
timely receipt by the Senior
Certificateholders of their proportionate
share of scheduled monthly principal and
interest payments on the related Mortgage
Loans or Contracts and to reduce the
likelihood that the Senior Certificateholders
will experience losses. The Prospectus
Supplement for Series of Certificates
including a subordination feature may also
specify the allocation of distributions and
priority of payments of principal, or Stated
Amount, and interest among one or more
Classes or Subclasses of Senior Certificates
of such Series. The protection afforded to
Senior Certificateholders of a Series will be
effected by a preferential right, as
specified in the applicable Prospectus
Supplement, of such Senior Certificateholders
to receive, on any Distribution Date, current
distributions on the related Mortgage Loans
or Contracts and (if so specified in the
applicable Prospectus Supplement) by the
establishment of a reserve fund (the
"Subordination Reserve Fund") for such
Series. Any Subordination Reserve Fund may be
funded initially with a deposit of cash,
instruments or securities in an amount
specified in the applicable Prospectus
Supplement and, if so specified in the
related Prospectus Supplement, may be
augmented by the retention of distributions
which otherwise would have been available for
distribution to the Subordinated
Certificateholders in the manner and to the
extent specified in the applicable Prospectus
Supplement. The Subordination Reserve Fund
for a Series may be funded and maintained in
such other manner as is specified in the
related Prospectus Supplement. The
maintenance of any Subordination Reserve Fund
would be intended to preserve the
availability of the subordination provided by
the Subordinated Certificates and to provide
liquidity, but in certain circumstances the
Subordination Reserve Fund could be depleted
and, if other amounts available for
distribution are insufficient, shortfalls in
distributions to the Senior
Certificateholders could result. Unless
otherwise specified in the related Prospectus
Supplement, until the Subordinated Amount is
reduced to zero, Senior Certificateholders
will be entitled to receive the amount of any
such shortfall, together with interest at the
applicable Pass-Through Rate, Interest Rate,
9
<PAGE>
or at such other rate specified in the
applicable Prospectus Supplement, as the case
may be, on the next Distribution Date. Senior
Certificateholders will bear their pro rata
share of any losses realized on the related
Mortgage Loans or Contracts in excess of the
applicable Subordinated Amount. If so
specified in the applicable Prospectus
Supplement, the protection afforded to
holders of Senior Certificates of a Series by
the subordination of certain rights of
holders of Subordinated Certificates of such
Series to distributions on the related
Mortgage Loans or Contracts may be effected
by a method other than that described above,
such as, in the event that the applicable
Trust Fund (or one or more segregated pools
of assets therein) elects to be treated as a
REMIC, the reallocation from time to time, on
the basis of distributions previously
received, of the respective percentage
interests of the Senior Certificates and the
Subordinated Certificates in the related
Trust Fund. See "Description of the
Certificates -- Distributions to Percentage
Certificateholders -- Shifting Interest
Certificates."
B. By Other Methods....... The Certificates of any Series, or any one or
more Classes thereof, may be entitled to the
benefits of a guarantee, letter of credit,
mortgage pool insurance policy, surety bond,
reserve fund, spread account, application of
excess interest to principal or other form of
credit enhancement as specified in the
applicable Prospectus Supplement. See
"Description of the Certificates" and "Credit
Support."
Advances........................ Under the Pooling and Servicing Agreement for
each Series relating to Mortgage Loans or
Contracts, unless otherwise provided in the
applicable Prospectus Supplement, the related
Servicer will be obligated to make advances
of cash ("Advances") to the Certificate
Account (as defined herein) in the event of
delinquencies in payments on the Mortgage
Loans or Contracts to the extent described
herein and in the applicable Prospectus
Supplement and only to the extent that the
Servicer determines such Advances would be
recoverable from future payments and
collections on the Mortgage Loans or
Contracts. Any Advances made by the Servicer
will ultimately be reimbursable to the
Servicer from the Certificate Account. See
"Servicing of the Mortgage Loans and
Contracts -- Advances and Limitations
Thereon."
Early Termination............... If so specified in the related Prospectus
Supplement, a Series of Certificates may be
subject to early termination through the
repurchase of the assets in the related Trust
Fund by the person or persons, under the
circumstances and in the manner specified in
such Prospectus Supplement. See "Prepayment
and Yield Considerations."
Legal Investment................ If so specified in the Prospectus Supplement,
one or more classes of Certificates offered
pursuant to this Prospectus will constitute
"mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"), so long as they are rated in
10
<PAGE>
one of the two highest rating categories by
at least one "nationally recognized
statistical rating organization. As "mortgage
related securities," such Certificates
offered pursuant to this Prospectus will
constitute legal investments for certain
types of institutional investors to the
extent provided in SMMEA subject, in any
case, to any other regulations which may
govern investments by such institutional
investors. Since certain other classes of
Certificates offered pursuant to this
Prospectus will not either represent
interests in, or be secured by, qualifying
mortgage loans, such Certificates will not
constitute "mortgage related securities"
under SMMEA. No representation is made as to
the appropriate characterization of any
Certificates under any laws relating to
investment restrictions, as to which
investors should consult their legal
advisors. See "Legal Investment".
ERISA Limitations............... A fiduciary of any employee benefit plan
subject to the fiduciary responsibility
provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
including the prohibited transaction rules
thereunder, and to the corresponding
provisions of the Internal Revenue Code of
1986, as amended (the "Code"), should
carefully review with its own legal advisors
whether the purchase or holding of
Certificates could give rise to a transaction
prohibited or otherwise impermissible under
ERISA or the Code. See "ERISA
Considerations."
Certain Federal Income
Tax Consequences ............... Securities of each series offered hereby
will, for federal income tax purposes,
constitute either (i) interests ("Grantor
Trust Securities") in a Trust treated as a
grantor trust under applicable provisions of
the Code, (ii) "regular interests" ("REMIC
Regular Securities") or "residual interests"
("REMIC Residual Securities") in a Trust
treated as a REMIC (or, in certain
instances, containing one or more REMIC's)
under Sections 860A through 860G of the
Code, (iii) debt issued by a Trust ("Debt
Securities"), (iv) interests in a Trust which
is treated as a partnership ("Partnership
Interests"), or, on or after September 1,
1997, (v) "regular interests" ("FASIT
Regular Securities"), "high-yield interests"
("FASIT High-Yield Securities") or an
ownership interest in a Trust treated as a
FASIT (or, in certain circumstances
containing one or more FASITs under Sections
860H through 860L of the Code.
Investors are advised to consult their tax
advisors and to review "Certain Federal
Income Tax Consequences" herein and in the
related Prospectus Supplement.
Rating ....................... At the date of issuance of each Series of
Certificates, the Certificates offered
pursuant to the related Prospectus Supplement
will be rated in one of the four highest
rating categories by at least one statistical
rating organization that has been requested
by the Depositor to rate such Certificates (a
"Rating Agency"). Such ratings will address,
in the opinion of such Rating Agency, the
likelihood that the related Trust Fund will
be able to make timely payment of all amounts
due on the related Series of Certificates in
accordance with the terms thereof. Such
ratings will neither address any prepayment
or yield considerations applicable to any
Certificates nor constitute a recommendation
to buy, sell or hold any Certificates.
The ratings expected to be received with
respect to any Certificates will be set forth
in the related Prospectus Supplement.
11
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Certificates.
Limited Liquidity. There can be no assurance that a secondary market
for the Certificates of any series or class will develop or, if it does develop,
that it will provide Certificateholders with liquidity of investment or that it
will continue for the life of the Certificates of any series. The Prospectus
Supplement for any series of Certificates may indicate that an underwriter
specified therein intends to establish a secondary market in such Certificates;
however, no underwriter will be obligated to do so. Unless otherwise specified
in the related Prospectus Supplement, the Certificates will not be listed on any
securities exchange.
Limited Obligations. The Certificates will not represent an interest in
or obligation, either recourse or non-recourse (except for certain non-recourse
debt described under "Certain Federal Income Tax Consequences"), of the
Depositor, the Servicer or any person other than the related Trust. The only
obligations of the foregoing entities with respect to the Certificates or the
Mortgage Loans will be the obligations (if any) of the Depositor and the
Servicer pursuant to certain limited representations and warranties made with
respect to the Mortgage Loans, the Servicer's servicing obligations under the
related Pooling and Servicing Agreement (including its limited obligation, if
any, to make certain advances in the event of delinquencies on the Mortgage
Loans, but only to the extent deemed recoverable) and, if and to the extent
expressly described in the related Prospectus Supplement, certain limited
obligations of the Depositor, Servicer, applicable Sub-Servicer, or another
party in connection with a purchase obligation ("Purchase Obligation") or an
agreement to purchase or act as remarketing agent with respect to a Convertible
Mortgage Loan upon conversion to a fixed rate. Notwithstanding the foregoing,
and as to be described in the related Prospectus Supplement, certain types of
Credit Enhancement, such as a financial guaranty insurance policy or a letter of
credit, may constitute a full recourse obligation of the issuer of such Credit
Enhancement. Except as described in the related Prospectus Supplement, neither
the Certificates nor the underlying Mortgage Loans will be guaranteed or insured
by any governmental agency or instrumentality, or by the Depositor, the
Servicer, any Sub-Servicer or any of their affiliates. Proceeds of the assets
included in the related Trust Fund for each series of Certificates (including
the Mortgage Loans and any form of Credit Enhancement) will be the sole source
of payments on the Certificates, and there will be no recourse to the Depositor
or any other entity in the event that such proceeds are insufficient or
otherwise unavailable to make all payments provided for under the Certificates.
Limitations, Reduction and Substitution of Credit Enhancement. With
respect to each series of Certificates, Credit Enhancement will be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit Enhancement will be provided in one or more of the forms referred
to herein, including, but not limited to: a letter of credit; a Purchase
Obligation; a mortgage pool insurance policy; a special hazard insurance policy;
a bankruptcy bond; a reserve fund; a financial guaranty insurance policy or
other type of Credit Enhancement to provide partial coverage for certain
defaults and losses relating to the Mortgage Loans. Credit Enhancement also may
be provided in the form of the related class of Certificates, subordination of
one or more classes of Certificates in a series under which losses in excess of
those absorbed by any related class of Certificates are first allocated to any
Subordinate Certificates up to a specified limit, cross-support among Trust Fund
Assets and/or overcollateralization. See "Credit Support -- Subordination" and
"Other Credit Enhancement." Regardless of the form of Credit Enhancement
provided, the coverage will be limited in amount and in most cases will be
subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such Credit Enhancements may provide only very limited coverage as
to certain types of losses, and may provide no coverage as to certain other
types of losses. Generally, Credit Enhancements do not directly or indirectly
guarantee to the investors any specified rate of prepayments. The Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the Credit Enhancement for any series of Certificates, if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. To the extent not set forth herein, the amount and types of coverage,
the identification of any entity providing the coverage, the terms of any
subordination and related information will be set forth in the Prospectus
Supplement relating to a series of Certificates. See "Credit Support - -
Subordination" and "Other Credit Enhancement."
12
<PAGE>
Risks of the Mortgage Loans
Risk of the Losses Associated with Junior Liens. Certain of the
Mortgage Loans will be secured by junior Liens subordinate to the rights of the
mortgagee or beneficiary under each related senior mortgage or deed of trust. As
a result, the proceeds from any liquidation, insurance or condemnation
proceedings will be available to satisfy the principal balance of a mortgage
loan only to the extent that the claims, if any, of each such senior mortgagee
or beneficiary are satisfied in full, including any related foreclosure costs.
In addition, a mortgagee secured by a junior Lien may not foreclose on the
related mortgaged property unless it forecloses subject to the related senior
mortgage or mortgages, in which case it must either pay the entire amount of
each senior mortgage to the applicable mortgagee at or prior to the foreclosure
sale or undertake the obligation to make payments on each senior mortgage in the
event of default thereunder. In servicing junior lien loans in its portfolio, it
has been the practice of the Servicer to satisfy each such senior mortgage at or
prior to the foreclosure sale only to the extent that it determines any amounts
so paid will be recoverable from future payments and collections on such junior
Lien loans or otherwise. The Trusts will not have any source of funds to satisfy
any such senior mortgage or make payments due to any senior mortgagee. See
"Certain Legal Aspects of Mortgage Loans and Contracts -- Foreclosure."
Risk of Losses Associated with Declining Real Estate Values. An
investment in securities such as the Certificates that generally represent
beneficial ownership interests in the Mortgage Loans or debt secured by such
Mortgage Loans may be affected by, among other things, a decline in real estate
values and changes in the borrowers' financial condition. No assurance can be
given that values of the Mortgaged Properties have remained or will remain at
their levels on the dates of origination of the related Mortgage Loans. If the
residential real estate market should experience an overall decline in property
values such that the outstanding balances of any senior Liens, the Mortgage
Loans and any secondary financing on the Mortgaged Properties in a particular
Mortgage Pool become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the nonconforming credit mortgage
lending industry. Such a decline could extinguish the interest of the related
Trust in the Mortgaged Properties before having any effect on the interest of
the related senior mortgagee. In addition, in the case of Mortgage Loans that
are subject to negative amortization, due to the addition to principal balance
of deferred interest ("Deferred Interest"), the principal balances of such
Mortgage Loans could be increased to an amount equal to or in excess of the
value of the underlying Mortgaged Properties, thereby increasing the likelihood
of default. To the extent that such losses are not covered by the applicable
Credit Enhancement, holders of Certificates of the series evidencing interests
in the related Mortgage Pool will bear all risk of loss resulting from default
by Mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans.
Risk of Losses Associated with Certain Non-Conforming and
Non-Traditional Loans. The Depositor's underwriting standards consider, among
other things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the value of the property; however, the
Depositor's Mortgage Loan program generally provides for the origination of
Mortgage Loans relating to non-conforming credits. Certain of the types of loans
that may be included in the Pools may involve additional uncertainties not
present in traditional types of loans. For example, certain of the Mortgage
Loans may provide for escalating or variable payments by the borrower under the
Mortgage Loan (the "Mortgagor"), as to which the Mortgagor is generally
qualified on the basis of the initial payment amount. In some instances the
Mortgagors' income may not be sufficient to enable them to continue to make
their loan payments as such payments increase and thus the likelihood of default
will increase. For a more detailed discussion, see "Underwriting Guidelines."
Risk of Losses Associated with Balloon Loans. Certain of the Mortgage
Loans may constitute "Balloon Loans." Balloon Loans are originated with a stated
maturity of less than the period of time of the corresponding amortization
schedule. Consequently, upon the maturity of a Balloon Loan, the Mortgagor will
be required to make a "balloon" payment that will be significantly larger than
such Mortgagor's previous monthly payments. The ability of such a Mortgagor to
repay a Balloon Loan at maturity frequently will depend on such borrower's
ability to refinance the Mortgage Loan. The ability of a Mortgagor to refinance
such a Mortgage Loan will be affected by a number of factors, including the
level of available mortgage rates at the time, the value of the related
Mortgaged Property, the Mortgagor's equity in the related Mortgaged Property,
the financial condition of the Mortgagor, the tax laws and general economic
conditions at the time.
13
<PAGE>
Although a low interest rate environment may facilitate the refinancing
of a balloon payment, the receipt and reinvestment by Certificateholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the Depositor,
the Servicer, any Sub-Servicer or the Trustee will be obligated to provide funds
to refinance any Mortgage Loan, including Balloon Loans.
Risk of Losses Associated with ARM Loans. ARM Loans may be underwritten
on the basis of an assessment that Mortgagors will have the ability to make
payments in higher amounts after relatively short periods of time. In some
instances, Mortgagors' income may not be sufficient to enable them to continue
to make their loan payments as such payments increase and thus the likelihood of
default will increase.
Risk of Losses Associated with Bankruptcy of Mortgagors. General
economic conditions have an impact on the ability of borrowers to repay Mortgage
Loans. Loss of earnings, illness and other similar factors also may lead to an
increase in delinquencies and bankruptcy filings by borrowers. In the event of
personal bankruptcy of a Mortgagor, it is possible that a Trust could experience
a loss with respect to such Mortgagor's Mortgage Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan thereby either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
Risk of Losses Associated with Foreclosure of Mortgaged Properties.
Even assuming that the Mortgaged Properties provide adequate security for the
Mortgage Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Mortgage Loans and corresponding delays in the receipt
of related proceeds by the Certificateholders could occur. An action to
foreclose on a Mortgaged Property securing a Mortgage Loan is regulated by state
statutes, rules and judicial decisions and is subject to many of the delays and
expenses of other lawsuits if defenses or counterclaims are interposed,
sometimes requiring several years to complete. Furthermore, in some states an
action to obtain a deficiency judgment is not permitted following a nonjudicial
sale of a Mortgaged Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the Servicer to
foreclose on or sell the Mortgaged Property or to obtain liquidation proceeds
(net of expenses) ("Liquidation Proceeds") sufficient to repay all amounts due
on the related Mortgage Loan. The Servicer will be entitled to deduct from
Liquidation Proceeds all expenses reasonably incurred in attempting to recover
amounts due on the related liquidated Mortgage Loan ("Liquidated Mortgage Loan")
and not yet repaid, including payments to prior lienholders, accrued Servicing
Fees, legal fees and costs of legal action, real estate taxes, and maintenance
and preservation expenses. In the event that any Mortgaged Properties fail to
provide adequate security for the related Mortgage Loans and insufficient funds
are available from any applicable Credit Enhancement, Certific- ateholders could
experience a loss on their investment.
Liquidation expenses with respect to defaulted mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
Under environmental legislation and judicial decisions applicable in
various states, a secured party that takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a mortgaged property that, prior to foreclosure,
has been involved in decisions or actions which may lead to contamination of a
property, may be liable for the costs of cleaning up the purportedly
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a holder of a mortgage note (such as a Trust)
which, under the terms of the Pooling and Servicing Agreement, is not required
to take an active role in operating the Mortgaged Properties. See "Certain Legal
Aspects of Mortgage Loans and Contracts -- Environmental Risks."
14
<PAGE>
Certain of the Mortgaged Properties relating to Mortgage Loans may not
be owner occupied. It is possible that the rate of delinquencies, foreclosures
and losses on Mortgage Loans secured by nonowner occupied properties could be
higher than for loans secured by the primary residence of the borrower.
Litigation. Any material litigation relating to the Depositor or the
Servicer will be specified in the related Prospectus Supplement.
Geographic Concentration of Mortgaged Properties. Certain geographic
regions from time to time will experience weaker regional economic conditions
and housing markets than will other regions, and, consequently, will experience
higher rates of loss and delinquency on mortgage loans generally. The Mortgage
Loans underlying certain series of Certificates may be concentrated in such
regions, and such concentrations may present risk considerations in addition to
those generally present for similar mortgage loan asset-backed securities
without such concentrations. Information with respect to geographic
concentration of Mortgaged Properties will be specified in the related
Prospectus Supplement or related current report on Form 8-K.
Legal Considerations. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures, and require licensing of
the Depositor and the Servicer and Sub-Servicers. In addition, most states have
other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices that may
apply to the origination, servicing and collection of the Mortgage Loans.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Servicer to collect all or part of the principal of or
interest on the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Servicer to damages and
administrative sanctions. See "Certain Legal Aspects of Mortgage Loans and
Contracts."
The Mortgage Loans may also be subject to federal laws, including: (i)
the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X promulgated thereunder,
which require certain disclosures to the borrowers regarding the terms of the
Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and general
principles of equity may limit the ability of the Servicer to collect all or
part of the principal of or interest on the Mortgage Loans, may entitle the
borrower to rescind the loan or to a refund of amounts previously paid and, in
addition, could subject the Servicer to damages and administrative sanctions. If
the Servicer is unable to collect all or part of the principal or interest on
the Mortgage Loans because of a violation of the aforementioned laws, public
policies or general principles of equity then the Trust may be delayed or unable
to repay all amounts owed to Investors. Furthermore, depending upon whether
damages and sanctions are assessed against the Servicer or the Depositor, such
violations may materially impact the financial ability of the Depositor to
continue to act as Servicer or the ability of the Depositor to repurchase or
replace Mortgage Loans if such violation breaches a representation or warranty
contained in a Pooling and Servicing Agreement.
Collections on the Mortgage Loans may vary due to the level of
incidence of delinquent payments and of prepayments. Collections on the Mortgage
Loans may also vary due to seasonal purchasing and payment habits of borrowers.
Book-Entry Registration. Issuance of the Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary trading
market since investors may be unwilling to purchase Certificates for which they
cannot obtain definitive physical securities representing such
Certificateholders' interests, except in certain circumstances described in the
related Prospectus Supplement.
Since transactions in Certificates will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
15
<PAGE>
system ("Direct or Indirect Participants") and certain banks, the ability of a
Certificateholder to pledge a Certificate to persons or entities that do not
participate in the DTC system, or otherwise to take actions in respect of such
Certificates, may be limited due to lack of a physical certificate representing
the Certificates.
Certificateholders may experience some delay in their receipt of
distributions of interest on and principal of the Certificates since
distributions may be required to be forwarded by the Trustee to DTC and, in such
a case, DTC will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable class of Certificateholders either directly or indirectly through
Indirect Participants. See "Description of the Certificates."
The Status of the Mortgage Loans in the Event of Bankruptcy of the
Depositor. In the event of the bankruptcy of the Depositor at a time when it or
any affiliate thereof holds a Certificate, a trustee in bankruptcy of the
Depositor, or its creditors could attempt to recharacterize the sale of the
Mortgage Loans to the related Trust as a borrowing by the Depositor or such
affiliate with the result, if such recharacterization is upheld, that the
Certificateholders would be deemed creditors of the Depositor or such affiliate,
secured by a pledge of the Mortgage Loans. If such an attempt were successful,
it could prevent timely payments of amounts due to the Trust.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such action
could have an effect, for an indeterminate period of time, on the ability of the
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
In addition, the Relief Act imposes limitations that would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan during the Mortgagor's
period of active duty status. Thus, in the event that such a Mortgage Loan goes
into default, there may be delays and losses occasioned by the inability to
realize upon the Mortgaged Property in a timely fashion.
Certificate Rating. The rating of Certificates credit enhanced through
external Credit Enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external Credit Enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to the
Certificates would likely result in a reduction in the rating of the
Certificates. See "Ratings" in the Prospectus Supplement.
16
<PAGE>
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.
17
<PAGE>
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
18
<PAGE>
exceed the scheduled monthly payment on the Mortgage Loan. In any such month, no
principal would be payable on the Mortgage Loan, and if the accrued interest
exceeded the scheduled monthly payment, such excess interest due would become
"Deferred Interest" that is added to the principal balance of the Mortgage Loan.
Deferred Interest will bear interest at the Mortgage Rate until paid. If such
limitations prevent the payments from being sufficient to amortize fully the
Mortgage Loan by its stated maturity dare, a lump sum payment equal to the
remaining unpaid principal balance will be due on such stated maturity date. See
"Prepayment and Yield Considerations."
Unless otherwise specified in the applicable Prospectus Supplement, the
Mortgage Loans in each Mortgage Pool will be permanent loans (as opposed to
construction and land development loans) secured by Mortgages on Mortgaged
Properties. The Mortgaged Properties will consist of residential properties
only, including detached homes, townhouses, units in planned unit developments,
condominium units, mixed-use properties, vacation homes and small scale
multifamily properties, all of which constitute a "dwelling or mixed residential
and commercial structure" within the meaning of Section 3(a)(41)(A)(i) of the
Securities Exchange Act of 1934, as amended (the "Mortgaged Properties"). The
Mortgage Loans will be secured by liens on fee simple or leasehold interests (in
those states in which long-term ground leases are used as an alternative to fee
interests) in such Mortgaged Properties, or liens on shares issued by
cooperatives and the related proprietary leases or occupancy agreements occupy
specified units in such cooperatives' buildings. The geographic distribution of
Mortgaged Properties will be set forth in the Prospectus Supplement. Each
Prospectus Supplement will also set forth the percentage of the Cut-Off Date
Aggregate Principal Balance of the Mortgage Loans in the related Mortgage Pool
representing the refinancing of existing mortgage indebtedness and the types of
Mortgaged Properties.
If so specified in the applicable Prospectus Supplement, a Trust Fund may
contain Mortgage Loans subject to temporary buy-down plans (the "Buy-Down
Loans") pursuant to which the monthly payments made by the mortgagor during the
early years of the Mortgage Loan will be less than the scheduled monthly
payments on the Mortgage Loan. The resulting difference in payment will be
compensated for from an amount contributed by the seller of the related
Mortgaged Property or another source and, if so specified in the related
Prospectus Supplement, placed in a custodial account (the "Buy-Down Account") by
the Servicer. If the mortgagor on a Buy-Down Loan prepays such Mortgage Loan in
its entirety, or defaults on such Mortgage Loan and the Mortgaged Property is
sold in liquidation thereof, during the period when the mortgagor is not
obligated, on account of the buy-down plan, to pay the full monthly payment
otherwise due on such loan, the unpaid principal balance of such Buy-Down Loan
will be reduced by the amounts remaining in the Buy-Down Account with respect to
such Buy-Down Loan, and such amounts shall be deposited in the Certificate
Account (as defined herein), net of any amounts paid with respect to such
Buy-Down Loan by any insurer, guarantor or other person pursuant to a credit
enhancement arrangement described in the applicable Prospectus Supplement.
If so specified in the applicable Prospectus Supplement, a Trust Fund may
include Mortgage Loans which are amortized over 30 years or some other term, or
which do not provide for amortization prior to maturity, but which have a
shorter term (each such Mortgage Loan, a "Balloon Loan") that causes the
outstanding principal balance of such Mortgage Loan to be due and payable at the
end of a certain specified period (the "Balloon Period"). If specified in the
applicable Prospectus Supplement, the originator of such Balloon Loan will be
obligated to refinance each such Balloon Loan at the end of its Balloon Period
at a new interest rate determined prior to the end of such Balloon Period by
reference to an index plus a margin specified in the related Mortgage Note. The
mortgagor is not, however, obligated to refinance the Balloon Loan through such
originator. In the event a mortgagor refinances a Balloon Loan, the new loan
will not be included in the Trust Fund. See "Prepayment and Yield
Considerations."
If specified in the Prospectus Supplement for any Series, the Mortgage
Loans included in the Trust Fund for such Series may be what are commonly
referred to as "home equity revolving lines of credit" ("Home Equity Lines").
Home Equity Lines are generally evidenced by a loan agreement ("Loan Agreement")
rather than a note. Home Equity Lines generally may be drawn down from time to
time by the borrower writing a check against the account, or acknowledging the
advance in a supplement to the Loan Agreement (the amount of such drawn down, an
"Additional Balance"). A Home Equity Line will establish a maximum credit limit
with respect to the related borrower, and will permit the borrower to draw down
Additional Balances, and repay the aggregate balance outstanding in each case
from time to time in such a manner so that the aggregate balance outstanding
19
<PAGE>
does not exceed the maximum credit limit. A Home Equity Line will be secured by
either a senior or a junior lien Mortgage, and will bear interest at either a
fixed or an adjustable rate.
In certain states the borrower must, on the opening of an account, draw an
initial advance of not less than a specified amount. Home Equity Lines generally
amortize according to an amortization basis established at the time of the
initial advance. The "amortization basis" is the length of time in which the
initial advance plus interest will be repaid in full. The amortization bases of
the Home Equity Lines generally range from 60 months (5 years) to 180 months (15
years) depending on the credit limit assigned. Generally, the amortization basis
will be longer the higher the credit limit. The minimum monthly payment on a
Home Equity Line will generally be equal to the sum of the following: (i) an
amount necessary to completely repay the then-outstanding balance and the
applicable finance charge in equal installments over the assigned amortization
basis ("Basic Monthly Amount"); (ii) any monthly escrow charges; (iii) any
delinquency or other similar charges; and (iv) any past due amounts, including
past due finance charges. The Basic Monthly Amount typically is recomputed each
time the related Mortgage Rate adjusts and whenever an Additional Balance is
advanced; such recomputation in the case of an Additional Advance may also reset
the amortization schedule. The effect of each such advance on the related Home
Equity Line is to reset the commencement date of the original maturity term to
the date of the later advance. For example, a Home Equity Line made originally
with a 15-year maturity from date of origination changes at the time of the next
adjustment or advance to a Home Equity Line with a maturity of 15 years from the
date of such advance. For certain Home Equity Lines, the same type of
recomputation exists for adjustments of the related Mortgage Rate.
Prior to the expiration of a specified period, the reduction of the account
to a zero balance and the closing of a Home Equity Line account may result in a
prepayment penalty. A prepayment penalty also may be assessed against the
borrower if a Home Equity Line account is closed by the Servicer due to a
default by the borrower under the Loan Agreement.
Each Loan Agreement will provide that the Servicer has the right to require
the borrower to pay the entire balance plus all other accrued but unpaid charges
immediately, and to cancel the borrower's credit privileges under the Loan
Agreement if, among other things, the borrower fails to make any minimum payment
when due under the Loan Agreement, if there is a material change in the
borrower's ability to repay the Home Equity Line, or if the borrower sells any
interest in the property securing the Loan Agreement, thereby causing the
"due-on-sale" clause in the trust deed or mortgage to become effective.
Mortgage Loans which are secured by junior mortgages are subordinate to the
rights of the mortgagees under the related senior mortgage or mortgages.
Accordingly, liquidation, insurance and condemnation proceeds received with
respect to the related mortgaged property will be available to satisfy the
outstanding balance of such a Mortgage Loan only to the extent that the claims
of the senior mortgages have been satisfied in full, including any related
liquidation and foreclosure costs. In addition, a junior mortgagee foreclosing
on its mort,age may be required to purchase the related mortgaged property for a
price sufficient to satisfy the claims of the holders of any senior mortgages
which are also being foreclosed. In the alternative, a junior mortgagee which
acquires title to a related mortgaged property, through foreclosure,
deed-in-lieu of foreclosure or otherwise may take the property subject to any
senior mortgages and continue to perform with respect to any senior mortgages,
in which case the junior mortgagee must comply with the terms of any senior
mortgages or risk foreclosure by the senior mortgagee.
If so specified in the applicable Prospectus Supplement, a loan pool may
include graduated equity mortgage loans ("GEM Loans"). GEM Loans are fixed rate,
fully amortizing mortgage loans which provide for monthly payments based on a
10-to 30-year amortization schedule, and which provide for scheduled annual
payment increases for a number of years and level payments thereafter. The full
amount of the scheduled payment increases during the early years is applied to
reduce the outstanding principal balance of such loans.
If so specified in the applicable Prospectus Supplement, a Mortgage Pool
may include graduated payment mortgage loans ("GPM Mortgage Loans"). GPM
Mortgage Loans provide for payments of monthly installments which increase
annually in each of a specified number of initial years and level monthly
payments thereafter. Payments during the early years are required in amounts
lower than the amounts which would be payable on a level debt service basis
due to the deferral of a portion of the interest accrued on the mortgage loan.
20
<PAGE>
Such deferred interest is added to the principal balance of the mortgage loan
and is paid, together with interest thereon, in the later years of the
obligation. Because the monthly payments during the early years of such a GPM
Mortgage Loan are not sufficient to pay the full interest accruing on the GPM
Mortgage Loan, the interest payments on such GPM Mortgage Loan may not be
sufficient in its early years to meet its proportionate share of the
distributions expected to be made on the related Certificates. Thus, if the
Mortgage Loans include GPM Mortgage Loans, the Servicer will, unless otherwise
specified in the Prospectus Supplement, establish a reserve fund (the "GPM
Fund") which (together with, if specified in the related Prospectus Supplement,
reinvestment income thereon) will be sufficient to cover the amount by which
payments of interest on such GPM Mortgage Loan assumed in calculating,
distributions expected to be made on the Certificates of such Series exceed
scheduled interest payments according to the relevant graduated payment mortgage
plan for the period during which excess occurs.
If so specified in the applicable Prospectus Supplement, a Trust Fund may
contain ARM buy-out loans ("ARM Buy-Outs") which are automatically repurchased
by the Depositor upon the occurrence of either(i) a switch from a fixed-rate
mortgage to an adjustable rate mortgage pursuant to the terms of the underlying
note or (ii) a switch from an adjustable rate to a fixed rate mortgage pursuant
to the terms of the underlying note.
If specific information respecting the Mortgage Loans to be included in a
Trust Fund is not known to the Depositor at the time the Certificates of a
Series are initially offered, more general information of the nature described
above will be provided in the Prospectus Supplement and final specific
information will be set forth in a Current Report on Form 8-K to be available to
investors on the date of issuance thereof and to be filed with the Commission
promptly after the initial issuance of such Certificates.
The Contracts
Unless otherwise specified in the applicable Prospectus Supplement, each
Contract Pool will consist of conventional manufactured housing installment
sales contracts and installment loan agreements (collectively, the "Contracts")
originated by a manufactured housing dealer in the ordinary course of business
and purchased by the Unaffiliated Seller. Unless otherwise specified in the
applicable Prospectus Supplement, each Contract will be secured by Manufactured
Homes (as defined below), each of which will be located in any of the fifty
states or the District of Columbia. Unless otherwise specified in the applicable
Prospectus Supplement, the Contracts will be fully amortizing and will bear
interest at a fixed or adjustable annual percentage rate (the "APR" or "Contract
Rate"). The Contract Pool may include Contracts with respect to which a Fixed
Retained Yield has been retained, in which event references herein to Contracts
and payments thereon shall mean the Contracts exclusive of such Fixed Retained
Yield. The Prospectus Supplement for a Series will specify whether there will be
any Fixed Retained Yield in any Contract, and if so, the owner thereof. See
"Fixed Retained Yield" below.
The Unaffiliated Seller of the Contracts will represent that the
Manufactured Homes securing the Contracts consist of manufactured homes within
the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis designed to be used
as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air-conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
Unless otherwise specified in the Prospectus Supplement for a Series, each
Contract must have an original term to maturity of not less than 1 year and not
more than 40 years. Unless otherwise specified in the Prospectus Supplement for
a Series, no Contract will have had, at origination, a principal balance in
excess of $5,000,000 or a Loan-to-Value Ratio in excess of 95%. The
"Loan-to-Value Ratio" is the ratio, expressed as a percentage, of the principal
amount of the Contract outstanding at the origination of such loan divided by
the fair market value of the Manufactured Home. The fair market value of the
Manufactured Home securing any Contract is, unless otherwise specified in the
applicable Prospectus Supplement, either (x) the appraised value of the related
Manufactured Home determined in an appraisal obtained by the originator at
21
<PAGE>
origination and (y) the sale price for such property, plus, in either case,
sales and other taxes and, to the extent financed, filing and recording fees
imposed by law, premiums for related insurance and prepaid finance charges.
Manufactured Homes, unlike site-built homes, generally depreciate in value.
Consequently, at any time after origination it is possible, especially in the
case of Contracts with high Loan-to-Value Ratios at origination, that the market
value of a Manufactured Home may be lower than the principal amount outstanding
under the related Contract.
The Prospectus Supplement for each Series will set forth certain
characteristics of the related Contracts, which may include the aggregate
principal balance of the Contracts in the Contract Pool underlying such Series
as of the Cut-Off Date for such Series (the "Cut-Off Date Aggregate Principal
Balance"), the range of original terms to maturity of the Contracts in the
Contract Pool, the weighted average remaining term to stated maturity at the
Cut-Off Date of such Contracts, the earliest and latest origination dates of
such Contracts, the range of Contract Rates and Net Contract Rates borne by such
Contracts, the weighted average Net Contract Rate at the Cut-Off Date of such
Contracts, the percentage of such Contracts which had Loan-to-Value Ratios at
the time of origination of 80% or less, the percentage of such Contracts that
had Loan-to-Value Ratios at origination in excess of 80% and the highest
outstanding principal balance at origination of any such Contract.
Unless otherwise specified in the applicable Prospectus Supplement, all of
the Contracts in a Trust Fund will have monthly payments due on the first of
each month (each, a "Due Date") and will be fully-amortizing Contracts. If so
specified in the applicable Prospectus Supplement, Contracts may have Due Dates
which occur on a date other than the first of each month. If so specified in the
applicable Prospectus Supplement, the Contract Pools may include adjustable rate
Contracts that provide for payment adjustments to be made less frequently than
adjustments in the Contract Rates. Each adjustment in the Contract Rate which is
not made at the time of a corresponding adjustment in payments (and which
adjusted amount of interest is not paid currently on a voluntary basis by the
obligor) will result in a decrease (if the Contract Rate rises) or an increase
(if the Contract Rate declines) in the rate of amortization of the Contract.
Moreover, such payment adjustments on the Contracts may be subject to certain
limitations, as specified in the Prospectus Supplement, which may also affect
the rate of amortization on the Contract. As a result of such provisions, the
amount of interest accrued in any month may equal or exceed the scheduled
monthly payment on the Contract. In any such month, no principal would be
payable on the Contract, and if the accrued interest exceeded the scheduled
monthly payment, such excess interest due would become "Deferred Interest" that
is added to the principal balance of the Contract. Deferred Interest will bear
interest at the Contract Rate until paid. If such limitations prevent the
payments from being sufficient to amortize fully the Contract by its stated
maturity date, a lump sum payment equal to the remaining unpaid principal
balance will be due on such stated maturity date. See "Prepayment and Yield
Considerations."
The geographic distribution of Manufactured Homes will be set forth in the
Prospectus Supplement. Each Prospectus Supplement will set forth the percentage
of the Cut-Off Date Aggregate Principal Balance of any Contracts in the Contract
Pool which are secured by Manufactured Homes which have become permanently
affixed to real estate. Each Prospectus Supplement will also set forth the
percentage of the Cut-Off Date Aggregate Principal Balance of the Contracts in
the related Contract Pool representing the refinancing of existing mortgage
indebtedness. Unless otherwise specified in a Prospectus Supplement, no Contract
in the Contract Pool will be more than 30 days past due as of the Cut-Off Date.
If specific information respecting the Contracts to be included in a Trust
Fund is not known to the Depositor at the time the Certificates of a Series are
initially offered, more general information of the nature described above will
be provided in the Prospectus Supplement and final specific information will be
set forth in a Current Report on Form 8-K to be available to investors on the
date of issuance thereof and to be filed with the Commission promptly after the
initial issuance of such Certificates.
Fixed Retained Yield
Fixed Retained Yield with respect to any Mortgage Loan or Contract is that
portion, if any, of interest at the Mortgage Rate or Contract Rate that is
retained by the Depositor or other owner thereof and not included in the related
Trust Fund. The Prospectus Supplement for a Series will specify whether a Fixed
22
<PAGE>
Retained Yield has been retained with respect to the Mortgage Loans or Contracts
of such Series, and, if so, the owner thereof. If so, the Fixed Retained Yield
will be established on a loan-by-loan basis with respect to the Mortgage Loans
or Contracts and will be specified in the schedule of Mortgage Loans or
Contracts attached as an exhibit to the applicable Pooling and Servicing
Agreement. The Servicer, with respect to Mortgage Loans or Contracts, may deduct
the Fixed Retained Yield from payments as received and prior to deposit of such
payments in the Certificate Account for such Series or may (unless an election
has been made to treat the Trust Fund (or one or more segregated pools of assets
therein) as a REMIC) withdraw the Fixed Retained Yield from the Certificate
Account after the entire payment has been deposited in the Certificate Account.
Notwithstanding the foregoing, any partial payment or recovery of interest
received by the Servicer relating to a Mortgage Loan or Contract (whether paid
by the mortgagor or obligor or received as Liquidation Proceeds, Insurance
Proceeds or otherwise), after deduction of all applicable servicing fees, will
be allocated between Fixed Retained Yield (if any) and interest at the Net
Mortgage Rate or Net Contract Rate on a pari passu basis.
Insurance Policies
Unless otherwise specified in the applicable Prospectus Supplement, the
Pooling and Servicing Agreement will require the Servicer to cause to be
maintained for each Mortgage Loan or Contract an insurance policy issued by a
generally acceptable insurer insuring the Mortgaged Property underlying such
Mortgage Loan or the Manufactured Home underlying such Contract against loss by
fire, with extended coverage (a "Standard Hazard Insurance Policy"). Unless
otherwise specified in the applicable Prospectus Supplement, the Pooling and
Servicing Agreement will require that such Standard Hazard Insurance Policy be
in an amount at least equal to the lesser of 100% of the insurable value of the
improvements which are a part of such Mortgaged Property or Manufactured Home or
the principal balance of such Mortgage Loan or Contract; provided, however, that
such insurance may not be less than the minimum amount required to fully
compensate for any damage or loss on a replacement cost basis. The Servicer will
also maintain on property acquired upon foreclosure, or deed in lieu of
foreclosure, of any Mortgage Loan, and on any Manufactured Home acquired by
repossession a Standard Hazard Insurance Policy in an amount that is at least
equal to the lesser of 100% of the insurable value of the improvements which are
a part of such property or the insurable value of such Manufactured Home or the
principal balance of the related Mortgage Loan or Contract plus, if required by
the applicable Pooling and Servicing Agreement, accrued interest and liquidation
expenses; provided, however, that such insurance may not be less than the
minimum amount required to fully compensate for any damage or loss on a
replacement cost basis. Any amounts collected under any such policies (other
than amounts to be applied to the restoration or repair of the Mortgaged
Property or Manufactured Home or released to the borrower in accordance with
normal servicing procedures) will be deposited in the Certificate Account.
The Standard Hazard Insurance Policies covering the Mortgaged Properties
generally will cover physical damage to, or destruction of, the improvements on
the Mortgaged Property caused by fire, lightning, explosion, smoke, windstorm,
hail, riot, strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Because the Standard Hazard Insurance Policies
relating to such Mortgage Loans will be underwritten by different insurers and
will cover Mortgaged Properties located in various states, such policies will
not contain identical terms and conditions. The most significant terms thereof,
however, generally will be determined by state law and generally will be
similar. Most such policies typically will not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, hazardous wastes or hazardous substances, theft and, in
certain cases, vandalism. The foregoing list is merely indicative of certain
kinds of uninsured risks and is not intended to be all-inclusive.
The Standard Hazard Insurance Policies covering the Contracts will provide,
at a minimum, the same coverage as a standard form fire and extended coverage
insurance policy that is customary for manufactured housing in the state in
which the Manufactured Home is located.
The Servicer may maintain a blanket policy insuring against hazard losses
on all of the Mortgaged Properties or Manufactured Homes in lieu of maintaining
the required Standard Hazard Insurance Policies. The Servicer will be liable for
the amount of any deductible under a blanket policy if such amount would have
been covered by a required Standard Hazard Insurance Policy, had it been
maintained.
23
<PAGE>
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,
24
<PAGE>
and the Unaffiliated Seller shall thereupon be liable to the Trustee for
defective Mortgage Loan or Contract documents or an uncured breach of such
Unaffiliated Seller's representations or warranties, to the extent described
below under "Assignment of the Mortgage Loans and Contracts" and
"Representations and Warranties."
Assignment of the Mortgage Loans and Contracts
At the time of the issuance of the Certificates of a Series, the Depositor
will cause the Mortgage Loans comprising the Mortgage Pool (including any
related rights to, or security interests in, leases, rents and personal
property) or the Contracts comprising the Contract Pool included in the related
Trust Fund to be assigned to the Trustee, together with all principal and
interest received by or on behalf of the Depositor on or with respect to such
Mortgage Loans or Contracts after the Cut-Off Date, other than principal and
interest due on or before the Cut-Off Date and other than any Fixed Retained
Yield. The Trustee or its accent will, concurrently with such assignment,
authenticate and deliver the Certificates evidencing such Series to the
Depositor in exchange for the Mortgage Loans or Contracts. Each Mortgage Loan or
Contract will be identified in a schedule appearing as an exhibit to the
applicable Pooling and Servicing, Agreement. Each such schedule will include,
among other things, the unpaid principal balance as of the close of business on
the applicable Cut-Off Date, the scheduled monthly payment of principal, if any,
and interest, the maturity date and the Mortgage Rate or Contract Rate for each
Mortgage Loan or Contract in the related Trust Fund.
With respect to each Mortgage Loan in a Trust Fund, the mortgage or other
promissory note, any assumption, modification or conversion to fixed interest
rate agreement, a copy of any recorded UCC-1 financing statements and related
continuation statements, together with original executed UCC-2 or UCC-3
financing statements disclosing an assignment of a security interest in any
personal property constituting security for repayment of the Mortgage Loan to
the Trustee, an executed re-assignment of assignment of leases, rents and
profits to the Trustee if the assignment of leases, rents and profits is
separate from the Mortgage, a mortgage assignment in recordable form and the
recorded Mortgage (or other documents as are required under applicable law to
create a perfected security interest in the Mortgaged Property in favor of the
Trustee) will be delivered to the Trustee (or to a designated custodian);
provided that, in instances where recorded documents cannot be delivered due to
delays in connection with recording, copies thereof, certified by the Depositor
to be true and complete copies of such documents, sent for recording, may be
delivered and the original recorded documents will be delivered promptly upon
receipt. As to each Mortgage Loan for which there is primary mortgage insurance,
the certificate of primary mortgage insurance will be delivered to the Trustee.
The assignment of each Mortgage will be recorded promptly after the initial
issuance of Certificates for the related Trust Fund, except in states where, in
the opinion of counsel acceptable to the Trustee, such recording is not required
to protect the Trustee's interest in the Mortgage Loan against the claim of any
subsequent transferee or any successor to or creditor of the Depositor, any
affiliate of the Depositor or the originator of such Mortgage Loan.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee (or to a designated
custodian) the related original Cooperative Note, the security agreement, the
proprietary lease or occupancy agreement, the recognition agreement, an executed
financing agreement and the relevant stock certificate and related blank stock
powers. The Depositor will cause to be filed in the appropriate office an
assignment and a refinancing statement evidencing the Trustee's security
interest in each Cooperative Loan.
With respect to each Contract, there will be delivered to the Trustee (or
to a designated Custodian) the original Contract and copies of documents and
instruments related to each Contract and the security interest in the property
securing each Contract. In order to give notice of the right, title and interest
of Certificateholders to the Contracts, the Depositor will cause a UCC-1
financing statement to be executed by the Depositor or the Unaffiliated Seller
identifying the Trustee as the secured party and identifying all Contracts as
collateral. Unless otherwise specified in the related Prospectus Supplement, the
Contracts will not be stamped or otherwise marked to reflect their assignment to
the Trust. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Contracts without notice
of such assignment, the interest of Certificateholders in the Contracts could be
defeated. See "Certain Legal Aspects of the Mortgage Loans and Contracts."
25
<PAGE>
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
26
<PAGE>
date of such transfer, no Mortgage Loan is 30 days or more delinquent in payment
and there are no delinquent tax or assessment liens against the related
Mortgaged Property that would permit taxing authority to initiate foreclosure
proceedings, and (vii) with respect to each Mortgage Loan, if the Mortgaged
Property is located in an area identified by the Federal Emergency Management
Agency as having special flood hazards and subject in certain circumstances to
the availability of flood insurance under the federal flood insurance program,
such Mortgaged Property is covered by flood insurance meeting the requirements
of the applicable Pooling and Servicing Agreement.
Each Unaffiliated Seller, pursuant to the related Loan Sale Agreement, will
have made representations and warranties in respect of the Contracts sold by
such Unaffiliated Seller. Unless otherwise specified in the related Prospectus
Supplement, each Unaffiliated Seller of Contracts will have represented, among
other digs, substantially to the effect that (i) immediately prior to the sale
and transfer of such Contracts, the Unaffiliated Seller had good title to, and
was the sole owner of, each such Contract and there had been no other assignment
or pledge thereof, (ii) as of the date of such transfer, such Contracts are
subject to no offsets, defenses or counterclaims, (iii) each Contract at the
time it was made complied in all material respects with applicable state and
federal laws, including usury, equal credit opportunity and disclosure laws,
(iv) as of the date of such transfer, each related Contract is a valid first
lien on the related Manufactured Home and such Manufactured Home is free of
material damage and is in good repair, (v) as of the date of such transfer, no
Contract is 30 days or more delinquent in payment and there are no delinquent
tax or assessment liens against the related Manufactured Home, and (vi) with
respect to each Contract, the Manufactured Home securing the Contract is covered
by a Standard Hazard Insurance Policy in the amount required by the Pooling and
Servicing Agreement and all premiums then due on such insurance have been paid
in full.
All of the representations and warranties of an Unaffiliated Seller in
respect of a Mortgage Loan or Contract will have been made as of the date on
which such Unaffiliated Seller sold the Mortgage Loan or Contract to the
Depositor. A substantial period of time may have elapsed between the date as of
which the representations and warranties were made and the later date of initial
issuance of the related Series of Certificates. Since the representations and
warranties referred to in the preceding paragraphs are the only representations
and warranties that will be made by an Unaffiliated Seller, the Unaffiliated
Seller's repurchase obligation described below will not arise if, during the
period commencing on the date of sale of a Mortgage Loan or Contract by the
Unaffiliated Seller to the Depositor, the relevant event occurs that would have
given rise to such an obligation had the event occurred prior to sale of the
affected Mortgage Loan or Contract. However, the Depositor will not include any
Mortgage Loan or Contract in the Trust Fund for any series of Certificates if
anything has come to the Depositor's attention that would cause it to believe
that the representations and warranties of an Unaffiliated Seller will not be
accurate and complete in all material respects in respect of such Mortgage Loan
or Contract as of the date of initial issuance of the related Series of
Certificates.
The Depositor will, unless otherwise provided in the applicable Prospectus
Supplement, assign all of its rights (except certain rights to indemnification)
with respect to such representations and warranties pursuant to any related Loan
Sale Agreement to the Trustee for the benefit of the Certificateholders of the
related Series. The Servicer, or the Trustee if the Servicer is the Unaffiliated
Seller, will promptly notify the relevant Unaffiliated Seller of any breach of
any representation or warranty made by it in respect of a Mortgage Loan or
Contract which materially and adversely affects the interests of the
Certificateholders in such Mortgage Loan or Contract. Unless otherwise specified
in the related Prospectus Supplement, if such Unaffiliated Seller cannot cure
such breach within 60 days after notice from the Servicer or the Trustee, as the
case may be, then such Unaffiliated Seller will be obligated either (i) to
repurchase such Mortgage Loan or Contract from the Trust Fund at the applicable
Purchase Price or (ii) subject to the Trustee's approval and to the extent
permitted by the Pooling and Servicing Agreement, to substitute for such
Mortgage Loan or Contract (a "Deleted Loan") one or more Mortgage Loans or
Contracts, as the case may be (each, a "Substitute Loan"), but only if (i) with
respect to a Trust Fund (or one or more segregated pools of assets therein) for
which a REMIC election is to be made, such substitution is effected within two
years of the date of initial issuance of the Certificates or (ii) with respect
to a Trust Fund for which no REMIC election is to be made, such substitution is
effected within 120 days of the date of initial issuance of the Certificates.
Except as otherwise provided in the related Prospectus Supplement, any
Substitute Loan will, on the date of substitution, (i) have a Loan-to-Value
Ratio no greater than that of the Deleted Loan, (ii) have a Mortgage Rate or
Contract Rate not less than (and not more than 1% greater than) the Mortgage
Rate or Contract Rate of the Deleted Loan, (iii) have a Net Mortgage Rate or Net
27
<PAGE>
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
28
<PAGE>
Agreement for each Series of Certificates and the applicable Prospectus
Supplement. Each Pooling and Servicing Agreement executed and delivered with
respect to each Series will be filed with the Commission as an exhibit to a
Current Report on Form 8-K promptly after issuance of the Certificates of such
Series. The Depositor will provide a copy of the Pooling and Servicing Agreement
(without exhibits) relating to any Series without charge upon written request of
a holder of a Certificate of such Series addressed to Prudential Securities
Secured Financing Corporation, One New York Plaza, 15th Floor, New York, New
York 10292, Attention: Joseph Donovan.
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.
29
<PAGE>
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.
30
<PAGE>
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
31
<PAGE>
of one or more classes of Certificates of the related Series; the additional
Mortgage Loans will be transferred to the related Trust Fund in exchange for
money released to the Depositor from the related Pre-Funding Account. Each
Forward Purchase Agreement will set a specified period (the "Funding Period")
during which any such transfers must occur; for a Trust Fund which elects
federal income treatment as REMIC or as a grantor trust, the related Funding
Period will be limited to three months from the date such Trust Fund is
established; for a Trust Fund which is treated as a mere security device for
federal income tax purposes, the related Funding Period will be limited to nine
months from the date such Trust Fund is established. The Forward Purchase
Agreement or the related Pooling and Servicing Agreement will require that, if
all moneys originally deposited to such Pre-Funding Account are not so used by
the end of the related Funding Period, then any remaining moneys will be applied
as a mandatory prepayment of the related class or classes of Certificates as
specified in the related Prospectus Supplement.
During the Funding Period the moneys deposited to the Pre-Funding Account
will either (i) be held uninvested or (ii) will be invested in cash-equivalent
investments rated in one of the four highest rating categories by at least one
nationally recognized statistical rating organization and which will either
mature prior to the end of the Funding Period, or will be drawable on demand and
in any event, will not constitute the type of investment which would require
registration of the related Trust Funds as an "investment company" under the
Investment Company Act of 1940, as amended.
Distributions to Percentage Certificateholders
Except as otherwise specified in the applicable Prospectus Supplement, on
or about the 15th day of each month in which a Distribution Date occurs (the
"Determination Date"), the Servicer will determine the amount of the payments or
other receipts on account of principal and interest on the Mortgage Loans or
Contracts which have been received and which will be distributable to holders of
Certificates on the next Distribution Date (as further described below, the
"Pool Distribution Amount"). The Pool Distribution Amount will be allocated
among the Classes or Subclasses of Percentage Certificates of such Series in the
manner described herein under "Description of the Certificates -- Standard
Certificates"; however, if such Certificates are also composed of Senior
Certificates and Subordinated Certificates, then the Pool Distribution Amount
will be allocated in accordance with the terms of the applicable subordination
arrangement. Two types of subordination arrangements are described below for a
Series which consists of two Classes of Standard Certificates. Any other type of
subordination arrangement employed for Certificates of a Series will be
described in the related Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, the
"Pool Distribution Amount" for a Distribution Date with respect to a Series of
Certificates as to which the relevant Trust Fund consists of Mortgage Loans or
Contracts will be the sum of all previously undistributed payments or other
receipts on account of principal (including principal prepayments, Net
Liquidation Proceeds (as defined herein), and Net Insurance Proceeds (as defined
herein), if any) and interest on the related Mortgage Loans or Contracts
received by the Servicer after the related Cut-Off Date (except for amounts due
on or prior to such Cut-Off Date), or received by the Servicer on or prior to
the Cut-Off Date but due after the Cut-Off Date, in either case received on or
prior to the Determination Date in the month in which such Distribution Date
occurs, plus (i) all Advances made by the Servicer, (ii) all withdrawals from
any Buy-Down Fund or other fund described in the related Prospectus Supplement,
if applicable, and (iii) all proceeds of Mortgage Loans or Contracts or property
acquired in respect thereof purchased or repurchased from the Trust Fund as
provided in the Pooling and Servicing Agreement ("Repurchase Proceeds"), but
excluding the following:
(a) amounts received as late payments of principal or interest
respecting which the Servicer previously has made one or more unreimbursed
Advances;
(b) any unreimbursed Advances with respect to Liquidated Mortgage
Loans (as defined herein) or Liquidated Contracts (as defined herein);
(c) those portions of each payment of interest on a particular
Mortgage Loan or Contract which represents (i) the Fixed Retained Yield, if
any, and (ii) the applicable Servicing Fee, as adjusted in respect of
Prepayment Interest Shortfalls as described in "Servicing of the Mortgage
32
<PAGE>
Loans and Contracts -- Adjustment to Servicing Compensation in Connection
with Prepaid and Liquidated Mortgage Loans and Contracts";
(d) all amounts representing scheduled payments of principal and
interest due after the Due Date occurring in the month in which such
Distribution Date occurs;
(e) all principal prepayments and all proceeds (including Liquidation
Proceeds, Insurance Proceeds and Repurchase Proceeds) of any Mortgage Loans
or Contracts, or property acquired in respect thereof, liquidated,
foreclosed, purchased or repurchased pursuant to the applicable Pooling and
Servicing Agreement, received on or after the Due Date occurring in the
month in which such Distribution Date occurs, and all related payments of
interest on such amounts;
(f) where permitted by the related Pooling and Servicing Agreement,
that portion of Liquidation Proceeds or Insurance Proceeds which represents
Fixed Retained Yield, if any, or any unpaid Servicing Fee to which the
Servicer is entitled;
(g) all amounts representing certain expenses reimbursable to the
Servicer and other amounts pertained to be withdrawn by the Servicer from
the Certificate Account, in each case pursuant to the applicable Pooling
and Servicing Agreement;
(h) all amounts in the nature of late fees, assumption fees,
prepayment fees and similar fees which the Servicer is entitled to retain
pursuant to the applicable Pooling and Servicing Agreement; and
(i) where permitted by the applicable Pooling and Servicing Agreement,
reinvestment earnings on payments received in respect of the Mortgage Loans
or Contracts.
Certificates other than Shifting Interest Certificates
With respect to a Series of Certificates which is comprised of one Class of
Standard Certificates which are Senior Certificates and one Class of Standard
Certificates which are Subordinated Certificates, the Servicer shall determine
the aggregate amount which would have been distributable to such Class of Senior
Certificates (the "Senior Class Distributable Amount") and the aggregate amount
which would have been distributable to such Class of Subordinated Certificates
(the "Subordinated Class Distributable Amount") assuming, among other things, no
delinquencies or losses on the Mortgage Loans or Contracts preceding such
Distribution Date and, based on the Pool Distribution Amount and such
Distributable Amounts, will determine the amount actually to be distributed to
each Class and Subclass.
Calculation of Distributable Amounts. If a Series of Certificates includes
one Class of Standard Certificates which are Senior Certificates and one Class
of Standard Certificates which are Subordinated Certificates, unless otherwise
specified in the applicable Prospectus Supplement, the Senior Class
Distributable Amount with respect to such Senior Certificates on a Distribution
Date will be an amount equal to the sum of:
(i) the aggregate undivided interest, expressed as a percentage and
specified in the applicable Prospectus Supplement, evidenced by such Class
of Senior Certificates (the "Senior Class Principal Portion") of:
(a) all scheduled payments of principal on each outstanding
Mortgage Loan or Contract that became due on the Due Date immediately
preceding such Distribution Date in accordance with the amortization
schedules of the related Mortgage Loans or Contracts (as adjusted to
give effect to any previous prepayments), whether or not such payments
were actually received by the Servicer (the aggregate of such
scheduled payments due on any such Due Date being referred to herein
as "Scheduled Principal");
(b) all principal prepayments received by the Servicer in the
month preceding the month in which such Distribution Date occurs;
33
<PAGE>
(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
34
<PAGE>
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
35
<PAGE>
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,
36
<PAGE>
during the month preceding the month in which such Distribution Date
occurs, (i) was the subject of a principal prepayment in full, (ii) became
a Liquidated Mortgage Loan or Liquidated Contract or (iii) was purchased
from the Trust Fund as provided in the Pooling and Servicing Agreement (as
described in "The Trust Funds" and "The Pooling and Servicing Agreement");
and
(iv) if the Special Hazard Termination Date (as defined below) has
occurred as a result of cumulative net losses on Special Hazard Mortgage
Loans or Special Hazard Contracts exceeding the applicable Special Hazard
Loss Amount (as defined below), such Class's specified percentage of the
Net Liquidation Proceeds and Net Insurance Proceeds from any Mortgage Loan
or Contract that became a Special Hazard Mortgage Loan or Special Hazard
Contract during the month preceding the month in which such Distribution
Date occurs, less the total amount of delinquent installments of principal
in respect of such Special Hazard Mortgage Loan or Special Hazard Contract
that were previously the subject of distributions to the holders of such
Class of Certificates out of amounts otherwise distributable to the holders
of the related Subordinated Certificates and less the portion of such Net
Liquidation Proceeds and Net Insurance Proceeds allocable to interest on
the Senior Certificates;
provided that, if such Distribution Date falls on or after the Cross-Over Date
(i.e., the date on which the amount of principal payments on the Mortgage Loans
or Contracts to which the holders of the related Subordinated Certificates are
entitled has been reduced to zero as a result of the allocation of losses to the
Subordinated Certificates), then the Senior Class Distribution Amount will
instead equal the lesser of (x) the Pool Distribution Amount and (y) the sum of
the items referred to above plus the amount by which such Senior Certificates'
outstanding principal balance as of such Distribution Date exceeds the Pool
Scheduled Principal Balance as of such Distribution Date. The "Scheduled
Principal Balance" of a Mortgage Loan or Contract for any Distribution Date is
the unpaid principal balance of such Mortgage Loan or Contract as specified in
the amortization schedule at the time relating thereto (before any adjustment to
such schedule by reason of bankruptcy, moratorium or similar waiver or grace
period) as of the first day of the month preceding the month in which such
Distribution Date occurs after giving effect to the payment of principal due on
such first day of the month, any partial prepayments applied on or prior to such
first day of the month, the addition to the principal of such Mortgage Loan or
Contract on or prior to such first day of the month of any Deferred Interest,
and irrespective of any delinquency in payment by the mortgagor or obligor. The
"Pool Scheduled Principal Balance" as of any Distribution Date is the aggregate
of the Scheduled Principal Balances of all Mortgage Loans or Contracts in a
Trust Fund for such Distribution Date.
If so provided in the applicable Prospectus Supplement, the Class of Senior
Certificates will also be entitled to receive its specified percentage, referred
to in clauses (y)(iii)(b) and (y)(iii)(c)(i) above, of all partial principal
prepayments and all principal prepayments in full on the Mortgage Loans or
Contracts in the related Trust Fund under the circumstances or for the period of
time specified therein, which will have the effect of accelerating the
amortization of the Class of Senior Certificates while increasing the respective
interest evidenced by the Class of Subordinated Certificates in the related
Trust Fund. Increasing the respective interest of the Subordinated Certificates
relative to that of the Senior Certificates is intended to preserve the
availability of the subordination provided by the Subordinated Certificates.
If the Special Hazard Termination Date would occur on any Distribution Date
under the circumstances referred to in "Credit Support -- Subordination," the
Senior Class Distribution Amount for each Class and Subclass of Senior
Certificates of such Series calculated as set forth in the two preceding
paragraphs will be modified to the extent described in such section.
Amounts distributed to the Class of Senior Certificates on a Distribution
Date will be deemed to be applied first to the payment of current interest, if
any, due on such Certificates (i.e., the amount calculated pursuant to clause
(y)(i) of the third preceding paragraph), second to the payment of any Unpaid
Interest Shortfall (i.e., the amount calculated pursuant to clause (y)(ii) of
such paragraph) and third to the payment of principal, if any, due on such
Certificates (i.e., the aggregate of the amounts calculated pursuant to clauses
(y)(iii) and (y)(iv) of such paragraph).
As indicated above, in the event that the Pool Distribution Amount on any
Distribution Date is not sufficient to make the full distribution of current
37
<PAGE>
interest to the holders of Senior Certificates entitled to payments of interest,
the difference between the amount of current interest which the holders of such
Certificates would have received on such Distribution Date if there had been
sufficient funds available and the amount actually distributed will be added to
the amount of interest which the holders of such Certificates are entitled to
receive on the next Distribution Date. Unless otherwise specified in the related
Prospectus Supplement, the amount of any such interest shortfall so carried
forward will bear interest (to the extent permitted by applicable law) at the
Pass-Through Rate applicable to such Certificates or at such other rate as
specified in the applicable Prospectus Supplement.
If the Pool Distribution Amount is insufficient on any Distribution Date to
make the full distribution of principal due to the holders of Senior
Certificates, the percentage of principal payments to which the holders of the
Senior Certificates would be entitled on the immediately succeeding Distribution
Date will be increased, as more fully described below under "Credit Support --
Subordination -- Shifting Interest Certificates." This increase will have the
effect of reducing, as a relative matter, the respective interest of the holders
of the related Subordinated Certificates in future payments of principal on the
related Mortgage Loans or Contracts. If the Pool Distribution Amount is not
sufficient to make full distribution described above to the holders of the Class
of Senior Certificates on any Distribution Date, unless otherwise provided in
the applicable Prospectus Supplement, the holders of such Class will share in
the funds actually available in proportion to the respective amounts that such
Class would have received had the Pool Distribution Amount been sufficient to
make the full distribution of interest and principal due to such Class.
Unless otherwise provided in the related Prospectus Supplement, on each
Distribution Date the holders of the related Class of Subordinated Certificates
of a Series will be entitled to receive, out of the Pool Distribution Amount,
all amounts remaining and available for distribution to them after deduction of
the amounts required to be distributed to the holders of all Senior Certificates
of such Series.
Example of Distribution to Standard Certificateholders
The following chart sets forth an example of the application of the
foregoing provisions to the first two months of the related Trust Fund's
existence, assuming the Certificates are issued in the month of January, with a
Distribution Date on the 25th of each month and a Determination Date on the 15th
of each month:
January 1(A)............................ Cut-Off Date.
January 2 -- January 31(B).............. The Servicer receives any
principal prepayments, Net Liquidation
Proceeds, Net Insurance Proceeds and
Repurchase Proceeds.
January 31(C)........................... Record Date.
February 1 -- February 15(D)............ The Servicer receives
scheduled payments of principal and
interest due on February 1.
February 15(E).......................... Determination Date.
February 25(F).......................... Distribution Date.
Succeeding monthly periods follow the pattern of (B) through (F), except that
the period in (B) begins on the first of the month.
(A) The initial unpaid principal balance of the Mortgage Loans or Contracts in
a Trust Fund would be the aggregate unpaid principal balance of the
Mortgage Loans or Contracts at the close of business on January 1, after
deducting principal payments due on or before such date. Those principal
payments due on or before January 1 and the related interest payments would
not be part of the Trust Fund and would be remitted by the Servicer to the
Depositor when received.
(B) Principal prepayments, Net Liquidation Proceeds, Net Insurance Proceeds and
Repurchase Proceeds received during this period would be credited to the
Certificate Account for distribution to Certificateholders on the February
25 Distribution Date. To the extent funds are available from the aggregate
Servicing Fees relating to mortgagor payments or other recoveries
38
<PAGE>
distributed on the related Distribution Date, the Servicer would make an
additional payment to Certificateholders with respect to any Prepayment
Interest Shortfall realized during this period.
(C) Distributions in the month of February will be made to Certificateholders
of record at the close of business on this date.
(D) Scheduled monthly payments on the Mortgage Loans or Contracts due on
February 1 will be deposited in the Certificate Account as received by the
Servicer. Principal prepayments, Net Liquidation Proceeds, Net Insurance
Proceeds and Repurchase Proceeds received during this period, will be
deposited in the Certificate Account but will not be distributed to
Certificateholders on the February 25 Distribution Date. Instead, such
amounts will be credited to the Certificate Account for distribution to
Certificateholders on the March 25 Distribution Date.
(E) As of the close of business on February 15, a determination will be made of
the amounts of Advances and the amounts of principal and interest which
will be distributed to the Certificateholders. Those scheduled payments due
on or before February 1 which have been received on or before February 15
and those principal prepayments, Net Liquidation Proceeds, Net Insurance
Proceeds and Repurchase Proceeds received during the period commencing
January 2 and ending on January 31 will be distributed to
Certificateholders on the February 25 Distribution Date. In addition, the
amounts payable in respect of any form of credit enhancement will be
calculated in accordance with the related Pooling and Servicing Agreement.
(F) Unless otherwise so specified in the related Prospectus Supplement, the
Servicer or the Paying Agent, will make distributions to Certificateholders
on the 25th day of each month, or if such 25th day is not a business day,
on the next business day.
Distributions to Multi-Class Certificateholders
Valuation of Mortgage Loans and Contracts
If specified in the Prospectus Supplement relating to a Series of
Certificates having one or more Classes or Subclasses of Multi-Class
Certificates, for purposes of establishing the principal amount of Mortgage
Loans or Contracts that will be included in a Trust Fund for such Series, each
Mortgage Loan or Contract to be included in such Trust Fund will be assigned an
initial "Pool Value." Unless otherwise specified in the applicable Prospectus
Supplement, the Pool Value of each Mortgage Loan or Contract in the Trust Fund
for such Series will be the Stated Amount of Certificates of such Series which,
based upon certain assumptions and regardless of any prepayments on such
Mortgage Loans or Contracts, can be supported by the scheduled payments of
principal and interest on such Mortgage Loans or Contracts (net of the Fixed
Retained Yield on such Mortgage Loans or Contracts, if any, and the applicable
Servicing Fee), together with reinvestment earnings thereon, if any, at the
Assumed Reinvestment Rate for the period specified in the related Prospectus
Supplement and amounts available to be withdrawn (if applicable) from any
reserve fund for such Series, all as specified in the applicable Prospectus
Supplement. In calculating the Pool Value of a Mortgage Loan or Contract
included in the Trust Fund, future distributions on such Mortgage Loan or
Contract will be determined based on scheduled payments on such Mortgage Loan or
Contract. Any similar Mortgage Loans or Contracts may be aggregated into one or
more groups (each, a "Pool Value Group") each of which will be assigned an
aggregate Pool Value calculated as if all such Mortgage Loans or Contracts in
the Pool Value Group constituted a single loan having the highest interest rate
and the longest maturity of any such loan for such Pool Value Group. There are a
number of alternative means of determining the Pool Value of a Mortgage Loan,
Contract or Pool Value Group, including determinations based on the discounted
present value of the remaining scheduled payments of principal and interest
thereon and determinations based on the relationship between the Mortgage Rates
or Contract Rates borne thereby and the Interest Rates of the MultiClass
Certificates of the related Series. The Prospectus Supplement for each Series
will describe the method or methods (and related assumptions) used to determine
the Pool Values of the Mortgage Loans or Contracts or the Pool Value Groups for
such Series.
39
<PAGE>
The "Assumed Reinvestment Rate" for a Series of Multi-Class Certificates
will be the highest rate permitted by the nationally recognized statistical
rating agency or agencies rating such Series of Multi-Class Certificates or a
rate insured by means of a surety bond, guaranteed investment contract or
similar arrangement satisfactory to such rating agency or agencies. If the
Assumed Reinvestment Rate is so insured, the related Prospectus Supplement will
set forth the terms of such arrangement.
Distributions of Interest
The Trustee will make distributions of interest on each Class of the
Multi-Class Certificates from the date and at the rates per annum (calculated on
the Stated Amount or Notional Amount of such Class) specified in, or as
otherwise determined in the manner set forth in, the related Prospectus
Supplement (and unless otherwise specified in such Prospectus Supplement,
calculated on the basis of a 360-day year of twelve 30-day months) and in
accordance with the priorities set forth in the related Prospectus Supplement.
Interest on all Classes of MultiClass Certificates of a Series, other than
Compound Interest Certificates, will be distributed on the Distribution Dates
for such Series specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, distributions of interest on
each Class of Compound Interest Certificates will be made on each Distribution
Date after the Stated Amount of all Multi-Class Certificates of such Series
having a Last Scheduled Distribution Date prior to the Last Scheduled
Distribution Date of such Class of Compound Interest Certificates has been
reduced to zero. Prior to that time, interest on such Class of Compound Interest
Certificates will be added to the Stated Amount thereof on each Distribution
Date. Such Class of Compound Interest Certificates will thereafter receive
distributions of interest on the Stated Amount thereof as so adjusted.
Distributions in Reduction of Stated Amount for a Series of Multi-Class
Certificates not including a Subordination Feature
The Stated Amount of a Multi-Class Certificate of a Series at any time will
represent the maximum specified dollar amount (excluding interest distributions,
but including, in the case of Compound Interest Certificates, interest which has
not been distributed and which has been added to the Stated Amount thereof) to
which the holder thereof is entitled from the cash flow on the assets included
in the Trust Fund for such Series and will decline to the extent distributions
in reduction of Stated Amount are received by such holder. The initial Stated
Amount of each Class of Multi-Class Certificates will be specified in the
applicable Prospectus Supplement. On each Distribution Date, distributions in
reduction of Stated Amount of the Classes of Multi-Class Certificates will be
made, to the extent funds are available, to the holders of the Multi-Class
Certificates of such Series then entitled to receive such distributions, in the
order and in the amounts specified in the related Prospectus Supplement.
Distributions in reduction of Stated Amount may be allocated among Classes of
Multi-Class Certificates in order to provide limited protection to certain
Classes against an increase in the weighted average life of such Classes as a
result of a slower than expected or scheduled rate of principal prepayments on
the Mortgage Loans ("extension protection"). In addition, distributions in
reduction of Stated Amount may be allocated among Classes of MultiClass
Certificates in order to provide limited protection to certain Classes against a
reduction in the weighted average life of such Classes as a result of a faster
than expected or scheduled rate or principal prepayments on the Mortgage Loans
("call protection"). By virtue of such allocations of distributions in reduction
of Stated Amount to provide extension protection and call protection to some
Classes, the weighted average lives of certain other Classes may be more greatly
affected by a faster or slower than expected or scheduled rate of principal
prepayments on the Mortgage Loans. See "Prepayment and Yield Considerations --
Weighted Average Life of Certificates." Distributions in reduction of Stated
Amount with respect to any Class or Subclass of Multi-Class Certificates will be
made on a pro rata or random lot or such other basis as is specified in the
applicable Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Certificates, the aggregate amount that will be distributed in
reduction of Stated Amount to holders of Multi-Class Certificates of a Series
then entitled thereto on any Distribution Date for such Series will equal, to
the extent funds are available, the sum of (i) the Multi-Class Certificate
Distribution Amount (as defined herein) and (ii) if and to the extent specified
in the related Prospectus Supplement, the applicable percentage of the Spread
specified in such Prospectus Supplement.
40
<PAGE>
Unless otherwise specified in the applicable Prospectus Supplement, the
"Multi-Class Certificate Distribution Amount" with respect to a Distribution
Date for a Series of Multi-Class Certificates will equal the amount, if any, by
which the Stated Amount of the Multi-Class Certificates of such Series (after
taking into account the amount of interest to be added to the Stated Amount of
any Class of Compound Interest Certificates on such Distribution Date and before
giving effect to any distributions in reduction of Stated Amount on such
Distribution Date) exceeds the Pool Value (as defined herein) of the Mortgage
Loans or Contracts included in the Trust Fund for such Series as of the end of
the period (a "Due Period") specified in the related Prospectus Supplement. For
purposes of determining the Multi-Class Certificate Distribution Amount with
respect to a Distribution Date for a Series of Certificates having one or more
Classes of Multi-Class Certificates, the Pool Value of the Mortgage Loans or
Contracts included in the Trust Fund for such Certificates will be reduced to
take into account all distributions thereon received by the Trustee during the
applicable Due Period.
Unless otherwise specified in the applicable Prospectus Supplement,
"Spread" with respect to a Distribution Date for a Series of Multi-Class
Certificates will be the excess of (a) the sum of (i) all payments of principal
and interest received on the related Mortgage Loans or Contracts (net of the
Fixed Retained Yield, if any, and the applicable Servicing Fee, if any, with
respect to such Mortgage Loans or Contracts) in the Due Period applicable to
such Distribution Date and, in the case of the first Due Period, any amount
deposited by the Depositor in the Certificate Account on the Closing Date, (ii)
income from reinvestment thereof, if any, and (iii) to the extent specified in
the applicable Prospectus Supplement, the amount of cash withdrawn from any
reserve fund or available under any other form of credit enhancement for such
Series since the prior Distribution Date (or since the Closing Date, in the case
of the first Distribution Date) and required to be deposited in the Certificate
Account for such Series, over (b) the sum of (i) all required to be deposited on
the Multi-Class Certificates of such Series on such Distribution Date, (ii) the
Multi-Class Certificate Distribution Amount for such Distribution Date, (iii) if
applicable, any Special Distributions (as described below) in reduction of the
Stated Amount of the Multi-Class Certificates of such Series made since the
preceding Distribution Date (or since the Closing Date in the case of the first
Distribution Date), including any accrued interest distributed with such Special
Distributions, (iv) all administrative and other expenses relating to the Trust
Fund payable during the Due Period preceding such Distribution Date, other than
such expenses which are payable by the Servicer, if any, and (v) any amount
required to be deposited into any reserve fund. Reinvestment income on any
reserve fund will not be included in Spread except to the extent that
reinvestment income is taken into account in calculating the initial amount
required to be deposited in such reserve fund, if any.
Subordination
The Prospectus Supplement relating to a Series which includes one or more
Classes or Subclasses of Multi-Class Certificates may specify that the rights of
one or more of such Classes or Subclasses (or the related Residual Certificates
of such Series) will be Senior to, or subordinated to, the rights of one or more
other Classes of Certificates of such Series.
If a Series which includes one or more Classes or Subclasses of Multi-Class
Certificates includes a subordination feature, on each Distribution Date,
distributions of interest, if any, will be made in accordance with the
preferential priorities specified in the related Prospectus Supplement and from
the date and at the Interest Rates specified therein or as otherwise specified
therein and distributions in reduction of Stated Amount, if any, will be made to
the holders of the Multi-Class Certificates in the amount and in the manner
specified in and in accordance with the preferential distribution provisions
described in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement the Subordinated Amount will be reduced as the pool
experiences losses, as well as through seasoning and prepayment of the Mortgage
Loans or Contracts included in the Trust Fund.
Special Distributions
To the extent specified in the Prospectus Supplement relating to a Series
which includes MultiClass Certificates which have less frequent than monthly
Distribution Dates, any such Class or Subclass having Stated Amounts may receive
special distributions in reduction of Stated Amount, together with accrued
interest on the amount of such reduction ("Special Distributions") in any month,
other than a month in which a Distribution Date occurs, if, as a result of
principal prepayments on the Mortgage Loans or Contracts, the Trustee
41
<PAGE>
determines, based on assumptions specified in the applicable Pooling and
Servicing Agreement, that the amount of cash anticipated to be available on the
next Distribution Date for such Series to be distributed to the holders of such
Multi-Class Certificates may be less than the sum of (i) the interest scheduled
to be distributed to such holders and (ii) the amount to be distributed in
reduction of Stated Amount of such Multi-Class Certificates on such Distribution
Date. Any such Special Distributions will be made in the same priority and
manner as distributions in reduction of Stated Amount would be made on the next
Distribution Date.
To the extent specified in the related Prospectus Supplement, one or more
Classes of Certificates of a Series may be subject to special distributions in
reduction of the Stated Amount thereof at the option of the holders of such
Certificates, or to mandatory distributions by the Servicer. Any such
distributions with respect to a Series will be described in the applicable
Prospectus Supplement and will be on such terms and conditions as described
therein and specified in the Pooling and Servicing Agreement for such Series.
Last Scheduled Distribution Date
The "Last Scheduled Distribution Date" for each Class of Multi-Class
Certificates of a Series having a Stated Amount, to the extent Last Scheduled
Distribution Dates are specified in the applicable Prospectus Supplement, is the
latest date on which (based upon the assumptions set forth in the applicable
Prospectus Supplement) the Stated Amount of such Class is expected to be reduced
to zero. Since the rate of distributions in reduction of Stated Amount of each
such Class of Multi-Class Certificates will depend upon, among other things, the
rate of payment (including prepayments) of the principal of the Mortgage Loans
or Contracts, the actual last Distribution Date for any such Class may occur
significantly earlier than its Last Scheduled Distribution Date. To the extent
of any delays in receipt of any payments, insurance proceeds or liquidation
proceeds with respect to the Mortgage Loans or Contracts included in any Trust
Fund, the last Distribution Date for any such Class may occur later than its
Last Scheduled Distribution Date. The rate of payments on the Mortgage Loans or
Contracts in the Trust Fund for any Series of Certificates will depend upon
their particular characteristics, as well as on the prevailing level of Interest
Rates from time to time and other economic factors, and no assurance can be
given as to the actual prepayment experience of the Mortgage Loans or Contracts.
See "Prepayment and Yield Considerations."
42
<PAGE>
CREDIT SUPPORT
Subordination
Certificates other than Shifting Interest Certificates
If so specified in the Prospectus Supplement relating to a Series of
Certificates as to which the related Trust Fund consists of Mortgage Loans or
Contracts, other than a Series of Shifting Interest Certificates, the rights of
the holders of a Class of Subordinated Certificates to receive distributions
will be subordinated to the rights of the holders of a Class of Senior
Certificates, to the extent of the Subordinated Amount specified in such
Prospectus Supplement. The Subordinated Amount will be reduced by an amount
equal to Aggregate Losses and will be further reduced in accordance with a
schedule described in the applicable Prospectus Supplement. Aggregate Losses as
defined in the applicable Pooling and Servicing Agreement for any given period
will equal the aggregate amount of delinquencies, losses and other deficiencies
in the amounts due to the Senior Certificateholders paid or borne by the
Subordinated Certificateholders (but excluding any payments of Senior Class
Shortfall Accruals or interest thereon) ("Payment Deficiencies") during such
period, whether such aggregate amount results by way of withdrawals from the
Subordination Reserve Fund (including, prior to the time that the Subordinated
Amount is reduced to zero, any such withdrawal of amounts attributable to the
Initial Deposit, if any), reductions in amounts that would otherwise have been
distributable to the Subordinated Certificateholders on any Distribution Date,
or otherwise; less the aggregate amount of previous Payment Deficiencies
recovered by the related Trust Fund during such period in respect of the
Mortgage Loans or Contracts giving rise to such Previous Payment Deficiencies,
including, without limitation, such recoveries resulting from the receipt of
delinquent principal or interest payments, Liquidation Proceeds and insurance
proceeds (net, in each case, of any applicable Fixed Retained Yield and any
unpaid Servicing Fee to which the Servicer is entitled, foreclosure costs and
other servicing costs, expenses and advances relating to such Mortgage Loans or
Contracts).
The protection afforded to the Senior Certificateholders by the
subordination feature described above will be effected both by the preferential
right, to the extent specified in the applicable Prospectus Supplement, of such
Senior Certificateholders to receive current distributions 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.
43
<PAGE>
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
44
<PAGE>
REMIC, no more than 30% of the income or gain of the Subordination Reserve Fund
in any taxable year may be derived from the sale or other disposition of
investments held for less than three months in the Subordination Reserve Fund.
The earnings on such investments will be withdrawn and paid to the Subordinated
Certificateholders of such Series or to the holders of the Residual
Certificates, in the event that an election has been made to treat the Trust
Fund (or a pool of segregated assets therein) with respect to such Series as a
REMIC, in accordance with their respective interests. Investment income earned
on amounts held in the Subordination Reserve Fund will not be available for
distribution to the Senior Certificateholders or otherwise subject to any claims
or rights of the Senior Certificateholders.
Eligible Investments for monies deposited in the Subordination Reserve Fund
will be specified in the applicable Pooling and Servicing Agreement and, unless
otherwise provided in the applicable Prospectus Supplement, will mature no later
than the next Distribution Date.
Holders of Subordinated Certificates of a Series will not be required to
refund any amounts which have been properly distributed to them, regardless of
whether there are sufficient funds to distribute to Senior Certificateholders
the amounts to which they are entitled.
If specified in the related Prospectus Supplement, the Subordination
Reserve Fund may be funded in any other manner acceptable to each Rating Agency
and consistent with an election, if any, to treat the Trust Fund (or one or more
pools of segregated assets therein) for such Series as a REMIC, as will be more
fully described in such Prospectus Supplement.
Shifting Interest Certificates
If specified in the applicable Prospectus Supplement, the rights of the
holders of the Subordinated Certificates of a Series of Shifting Interest
Certificates to receive distributions with respect to the Mortgage Loans or
Contracts in the related Trust Fund will be subordinated to such rights of the
holders of the Senior Certificates of such Series to the extent described below,
except as otherwise set forth in such Prospectus Supplement. This subordination
is intended to enhance the likelihood of regular receipt by holders of Senior
Certificates of the full amount of scheduled monthly payments of principal and
interest due them and to provide limited protection to the holders of the Senior
Certificates against losses due to mortgagor or obligor defaults.
The protection afforded to the holders of Senior Certificates of such a
Series by the subordination feature described above will be effected by the
preferential right of such holders to receive, prior to any distribution being
made in respect of the related Subordinated Certificates, current distributions
on the related Mortgage Loans or Contracts of principal and interest due them on
each Distribution Date out of the funds available for distribution on such date
in the related Certificate Account and, to the extent described below, by the
right of such holders to receive future distributions on the Mortgage Loans or
Contracts that would otherwise have been payable to the holders of Subordinated
Certificates.
Losses realized on Liquidated Mortgage Loans or Liquidated Contracts (other
than certain Liquidated Mortgage Loans that are Special Hazard Mortgage Loans or
Liquidated Contracts that are Special Hazard Contracts as described below) will
be allocated to the holders of Subordinated Certificates through a reduction of
the amount of principal payments on the Mortgage Loans or Contracts to which
such holders are entitled. Prior to the Cross-Over Date, holders of Senior
Certificates of each Class entitled to a percentage of principal payments on the
related Mortgage Loans or Contracts will be entitled to receive, as part of
their respective Senior Class Distribution Amounts payable on each Distribution
Date in respect of each Mortgage Loan or Contract that became a Liquidated
Mortgage Loan or Liquidated Contract in the preceding month (subject to the
additional limitation described below applicable to Liquidated Mortgage Loans
that are Special Hazard Mortgage Loans or Liquidated Contracts that are Special
Hazard Contracts), their respective shares of the Scheduled Principal Balance of
each such Liquidated Mortgage Loan or Liquidated Contract, together with
interest accrued at the Pass-Through Rate for such Class, irrespective of
whether Net Liquidation Proceeds and Net Insurance Proceeds realized thereon are
sufficient to cover such amount. For a description of the full Senior Class
Distribution Amount payable to holders of Senior Certificates of each Series,
see "Description of the Certificates--Distributions to Standard
Certificateholders -Shifting Interest Certificates."
45
<PAGE>
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
46
<PAGE>
amount of delinquent installments in respect of such Special Hazard Mortgage
Loans or Special Hazard Contracts that were previously the subject of
distributions to such Class paid out of amounts otherwise distributable to the
holders of the related Subordinated Certificates.
Although the subordination feature described above is intended to enhance
the likelihood of timely payment of principal and interest to the holders of
Senior Certificates, shortfalls could result in certain circumstances. For
example, a shortfall in the payment of principal otherwise due the holders of
Senior Certificates could occur if losses realized on the Mortgage Loans or
Contracts in a Trust Fund were exceptionally high and were concentrated in a
particular month. See "Description of the Certificates--Distributions to
Standard Certificateholders--Shifting Interest Certificates" for a description
of the consequences of any shortfall of principal or interest.
The holders of Subordinated Certificates will not be required to refund any
amounts previously properly distributed to them, regardless of whether there are
sufficient funds on a subsequent Distribution Date to make a full distribution
to holders of each Class of Senior Certificates of the same Series.
Other Credit Enhancement
In addition to subordination as discussed above, credit enhancement may be
provided with respect to any Series of Certificates in any other manner which
may be described in the applicable Prospectus Supplement, including, but not
limited to, credit enhancement through an alterative form of subordination
and/or one or more of the methods described below.
Limited Guarantee
If so specified in the Prospectus Supplement with respect to a Series of
Certificates, credit enhancement may be provided in the form of a limited
guarantee issued by a guarantor named therein.
Letter of Credit
Alternative credit support with respect to a Series of Certificates may be
provided by the issuance of a letter of credit by the bank or financial
institution specified in the applicable Prospectus Supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of credit
issued with respect to a Series of Certificates will be set forth in the
Prospectus Supplement relating to such Series.
Pool Insurance Policies
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Depositor will obtain a pool insurance policy for the Mortgage
Loans or Contracts in the related Trust Fund. The pool insurance policy will
cover any loss (subject to the limitations described in a related Prospectus
Supplement) by reason of default to the extent a related Mortgage Loan or
Contract is not covered by any primary mortgage insurance policy. The amount and
terms of any such coverage will be set forth in the Prospectus Supplement.
Special Hazard Insurance Policies or Other Forms of Support for Special
Hazard Losses
If so specified in the applicable Prospectus Supplement, for each Series of
Certificates as to which a pool insurance policy is provided, the Depositor will
also obtain a special hazard insurance policy for the related Trust Fund in the
amount set forth in such Prospectus Supplement. The special hazard insurance
policy will, subject to the limitations described in the applicable Prospectus
Supplement, protect against loss by reason of damage to Mortgaged Properties or
Manufactured Homes caused by certain hazards not insured against under the
standard form of hazard insurance policy for the respective states in which the
Mortgaged Properties or Manufactured Homes are located. The amount and terms of
any such coverage will be set forth in the Prospectus Supplement.
47
<PAGE>
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
48
<PAGE>
Rate or Contract Rate at the time of such calculation and the then unpaid
principal balance on such Mortgage Loan or Contract. The Net Mortgage Rate or
Net Contract Rate with respect to each Mortgage Loan or Contract will be
similarly calculated on a loan-by-loan basis, by subtracting from the applicable
Mortgage Rate or Contract Rate, the Fixed Retained Yield, if any, payable to the
Depositor or other person or entity specified in the Prospectus Supplement and
any Servicing Fee applicable to each Mortgage Loan or Contract. If the Trust
Fund includes adjustable-rate Mortgage Loans or Contracts or includes Mortgage
Loans or Contracts with different Net Mortgage Rates or Net Contract Rates, the
weighted average Net Mortgage Rate or Net Contract Rate may vary from time to
time as set forth below. See "The Trust Funds." The Prospectus Supplement for a
Series will also specify the initial Pass-Through Rate or Interest Rate for each
Class of Certificates of such Series having a Pass-Through Rate or Interest Rate
and will specify whether each such Pass-Through Rate or Interest Rate is fixed
or is variable.
The Net Mortgage Rate or Net Contract Rate for any adjustable rate Mortgage
Loan or Contract will change with any changes in the index specified in the
related Prospectus Supplement on which such Mortgage Rate or Contract Rate
adjustments are based, subject to any applicable periodic or aggregate caps or
floors on the related Mortgage Rate or Contract Rate or other limitations
described in the related Prospectus Supplement. The weighted average Net
Mortgage Rate or Net Contract Rate with respect to any Series may vary due to
changes in the Net Mortgage Rates or Net Contract Rates of adjustable rate
Mortgage Loans or Contracts, to the timing of the Mortgage Rate or Contract Rate
readjustments of such Mortgage Loans or Contracts and to different rates of
payment of principal of fixed or adjustable rate Mortgage Loans or Contracts
bearing different Mortgage Rates or Contract Rates.
If the Trust Fund for a Series includes adjustable rate Mortgage Loans or
Contracts, any limitations on the periodic changes in a mortgagor's or obligor's
monthly payment, any limitations on the adjustments to the Net Mortgage Rates or
Mortgage Rates or to the Net Contract Rates or Contract Rates, any provision
that could result in Deferred Interest and the effects, if any, thereof on the
yield on Certificates of the related Series will be discussed in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, no
distribution of principal and only a partial distribution of interest will be
made to Certificateholders with respect to a negatively amortizing Mortgage Loan
or Contract. Distribution of the portion of scheduled interest at the applicable
Net Mortgage Rate or Net Contract Rate representing Deferred Interest with
respect to such Mortgage Loan or Contract will be passed through to the
Certificateholders on the Distribution Date following the Due Date on which it
is received. Such Deferred Interest will bear interest at the Net Mortgage Rate
or Net Contract Rate for such Mortgage Loan or Contract. For federal income tax
purposes, Deferred Interest may constitute interest income to the Trust Fund and
to Certificateholders at the time that it accrues, rather than at the time that
it is paid. See "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for Certificates as to Which No REMIC Election Is Made--Deferred
Interest," "--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates--Deferred Interest" and "--Taxation of Residual
Certificates--Deferred Interest."
Scheduled Delays in Distributions
At the date of initial issuance of the Certificates of each Series offered
hereby, the initial purchasers of a Class of Certificates (other than certain
Classes of Residual Certificates) will be required to pay accrued interest at
the applicable Pass-Through Rate or Interest Rate for such Class from the
Cut-Off Date for such Series to, but not including the date of issuance. With
respect to Standard Certificates, the effective yield to Certificateholders will
be below the yield otherwise produced by the applicable Pass-Through Rate
because while interest will accrue at such Pass-Through Rate from the first day
of each month through the last day of such month (unless otherwise specified in
the related Prospectus Supplement), principal and interest distributions with
respect to such month will not be made until the 25th day (or if such 25th day
is not a business day, the business day immediately following such 25th day) of
the month following the month of accrual (or until such other Distribution Date
specified in the applicable Prospectus Supplement). If so specified in the
related Prospectus Supplement, a Class of Multi-Class Certificates may be
entitled to distributions on each Distribution Date of interest accrued during a
period (an "Interest Accrual Period" specified in such Prospectus Supplement
ending on such Distribution Date or ending on a date preceding such Distribution
Date. In the latter case the effective yield to such Certificateholders will be
below the yield otherwise produced by the applicable initial public offering
49
<PAGE>
prices and Interest Rates because (i) on the first Distribution Date the time
period upon which interest payable is calculated will be less than the time
elapsed since the commencement of accrual of interest, (ii) the interest that
accrues during the Interest Accrual Period will not be paid until a date
following such Interest Accrual Period specified in the related Prospectus
Supplement, and (iii) during each Interest Accrual Period following the first
Interest Accrual Period, in the case of a Class of Multi-Class Certificates
currently receiving distributions in reduction of Stated Amount, interest is
based upon a Stated Amount which is less than the Stated Amount of such
Certificates actually outstanding, since the distribution in reduction of Stated
Amount made on the following Distribution Date is deemed to have been made, for
interest accrual purposes only, at the end of the preceding Interest Accrual
Period. The Prospectus Supplement for each Series of Certificates will set forth
the nature of any scheduled delays in distribution and the impact on the yield
of such Certificates.
Interest Shortfalls Due to Principal Prepayments
When a Mortgage Loan or Contract is prepaid in full, the mortgagor or
obligor pays interest on the amount prepaid only to the date of prepayment and
not thereafter. Similarly, Liquidation Proceeds and Insurance Proceeds are also
likely to include interest only to the time of payment. When a Mortgage Loan or
Contract is prepaid in part, and such prepayment is applied as of a date other
than the Due Date occurring in the month of receipt or the Due Date occurring in
the month following the month of receipt, the mortgagor or obligor pays interest
on the amount prepaid only to the date of prepayment and not thereafter. The
effect of the foregoing is to reduce the aggregate amount of interest which
would otherwise be passed through to Certificateholders if such Mortgage Loan or
Contract were outstanding, or if such partial prepayment were applied, on the
succeeding Due Date. To mitigate this reduction in yield, the Pooling and
Servicing Agreement relating to a Series will provide, unless otherwise
specified in the applicable Prospectus Supplement, that with respect to any
principal prepayment or liquidation of any Mortgage Loan or Contract underlying
the Certificates of such Series, the Servicer will pay into the Certificate
Account for such Series to the extent funds are available for such purpose from
the related aggregate Servicing Fees (or portion thereof as specified in the
related Prospectus Supplement) which the Servicer is entitled to receive
relating to mortgagor or obligor payments or other recoveries distributed on the
related Distribution Date, such amount, if any, as may be necessary to assure
that the amount paid into the Certificate Account with respect to such Mortgage
Loan or Contract includes an amount equal to interest at the Net Mortgage Rate
or Net Contract Rate for such Mortgage Loan or Contract for the period from the
date of such prepayment or liquidation to but not including the next Due Date.
See "Servicing of the Mortgage Loans and Contracts -- Adjustment to Servicing
Compensation in Connection with Prepaid and Liquidated Mortgage Loans and
Contracts."
Weighted Average Life of Certificates
Weighted average life of a Certificate refers to the average amount of time
that will elapse from the date of issuance of the Certificate until each dollar
in reduction of the principal amount or Stated Amount of such Certificate is
distributed to the investor. The weighted average life and the yield to maturity
of any Class of the Certificates of a Series will be influenced by, among other
things, the rate at which principal on the Mortgage Loans or Contracts included
in the Mortgage Pool or Contract Pool for such Certificate is paid, which is
determined by scheduled amortization and prepayments (for this purpose, the term
"prepayments" includes prepayments and liquidations due to default, casualty,
condemnation and the like).
The Mortgage Loans or Contracts may be prepaid in full or in part at any
time. Unless otherwise specified in the applicable Prospectus Supplement or as
described in the following paragraph, no Mortgage Loan or Contract will provide
for a prepayment penalty and all fixed rate Mortgage Loans or Contracts will
contain due-on-sale clauses permitting the holder to accelerate the maturity of
the Mortgage Loan or Contract upon conveyance of the Mortgaged Property or
Manufactured Home.
Some of the Mortgage Loans may call for Balloon Payments. Balloon Payments
involve a greater degree of risk than fully amortizing loans because the ability
of the borrower to make a Balloon Payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property. The
ability of a borrower to accomplish either of these goals will be affected by a
number of factors, including the level of available mortgage rates at the time
of the attempted sale or refinancing, the borrower's equity in the related
Mortgaged Property, the financial condition of the borrower and operating
50
<PAGE>
history of the related Mortgaged Property, tax laws, prevailing economic
conditions and the availability of credit for commercial real estate projects
generally.
Some of the Mortgage Loans included in the Trust Fund may, in the event one
or more are required to be repurchased or otherwise removed from the Trust Fund,
require the payment of a release premium.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The Prospectus Supplement for each Series which
includes more than one Class or Subclass of Multi-Class Certificates will
describe one or more such prepayment standards or models and will contain tables
setting forth the weighted average life of each such Class or Subclass and the
percentage of the original aggregate Stated Amount of each such Class or
Subclass that would be outstanding on specified Distribution Dates for such
Series based on the assumptions stated in such Prospectus Supplement, including
assumptions that prepayments on the Mortgage Loans or Contracts are made at
rates corresponding to various percentages of the prepayment standard or model
specified in the related Prospectus Supplement.
There is, however, no assurance that prepayment of the Mortgage Loans or
Contracts underlying a Series of Certificates will conform to any level of the
prepayment standard or model specified in the related Prospectus Supplement. A
number of economic, geographic, social and other factors may affect prepayment
experience. These factors may include homeowner mobility, economic conditions,
changes in mortgagor's or obligor's housing needs, job transfers, unemployment,
mortgagor's or obligor's net equity in the properties securing the mortgages or
contracts, servicing decisions, enforceability of due-on-sale clauses , market
interest rates, the magnitude of related taxes, and the availability of funds
for refinancing. In general, however, if prevailing interest rates fall
significantly below the Mortgage Rates or Contract Rates on the Mortgage Loans
or Contracts underlying a Series of Certificates, the prepayment rates of such
Mortgage Loans or Contracts are likely to be higher than if prevailing rates
remain at or above the rates borne by such Mortgage Loans or Contracts. It
should be noted that Certificates of a Series may evidence an interest in a
Trust Fund with different Mortgage Rates or Contract Rates. Accordingly, the
prepayment experience of such Certificates will to some extent be a function of
the mix of Mortgage Rates or Contract Rates of the Mortgage Loans or Contracts.
In addition, the terms of the Pooling and Servicing Agreement will require the
Servicer to enforce any due-on-sale clause to the extent specified therein. See
"Servicing of the Mortgage Loans and Contracts -- Enforcement of Due-on-Sale
Clauses; Realization Upon Defaulted Mortgage Loans and Contracts" and "Certain
Legal Aspects of the Mortgage Loans and Contracts -- Due-On-Sale Clauses" for a
description of certain provisions of each Pooling and Servicing Agreement and
certain legal developments that may affect the prepayment experience on the
Mortgage Loans or Contracts.
A lower rate of principal prepayments than anticipated would negatively
affect the total return to investors in any Certificates of a Series that are
offered at a discount to their principal amount or, if applicable, their parity
price, and a higher rate of principal prepayments than anticipated would
negatively affect the total return to investors in the Certificates of a Series
that are offered at a premium to their principal amount or, if applicable, their
parity price. Parity price is the price at which a Certificate will yield its
coupon, after giving effect to any payment delay. In addition, the yield to
investors in a Class of Certificates which bears interest at a variable Interest
Rate or at a variable Pass-Through Rate, will also be affected by changes in the
index on which any such variable Interest Rate, or variable Pass-Through Rate is
based. Changes in the index may not correlate with changes in prevailing
mortgage interest rates or financing rates for manufactured housing, and the
effect, if any, thereof on the yield of the Certificates will be discussed in
the related Prospectus Supplement. The yield on certain types of Certificates
may be particularly sensitive to prepayment rates, and further information with
respect to yield on such Certificates will be included in the applicable
Prospectus Supplement.
At the request of the mortgagor or obligor, the Servicer may refinance the
Mortgage Loans or Contracts in any Trust Fund by accepting prepayments thereon
and making new loans secured by a Mortgage on the same property or a security
interest in the same Manufactured Home. Upon such refinancing, the new loans
will not be included in the Trust Fund. A mortgagor or obligor may be legally
entitled to require the Servicer to allow such a refinancing. Any such
refinancing will have the same effect as a prepayment in full of the related
Mortgage Loan or Contract.
51
<PAGE>
The Depositor may be obligated and the applicable Unaffiliated Seller will
be obligated, under certain circumstances, to repurchase certain of the Mortgage
Loans or Contracts. In addition, the terms of certain insurance policies
relating to the Mortgage Loans or Contracts may permit the applicable insurer to
purchase delinquent Mortgage Loans or Contracts. The proceeds of any such
repurchase will be deposited in the related Certificate Account and such
repurchase will have the same effect as a prepayment in full of the related
Mortgage Loan or Contract. See "The Trust Funds -- Assignment of the Mortgage
Loans and Contracts." In addition, if so specified in the applicable Prospectus
Supplement, the Servicer will have the option to purchase all, but not less than
all, of the Mortgage Loans or Contracts in any Trust Fund under the limited
conditions specified in such Prospectus Supplement. For any Series of
Certificates for which an election has been made to treat the Trust Fund (or one
or more segregated pools of assets therein) as a REMIC, any such purchase may be
effected only pursuant to a "qualified liquidation," as defined in Code Section
86OF(a)(4)(A). See "The Pooling and Servicing Agreement -- Termination; Purchase
or other Disposition of Mortgage Loans and Contracts."
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement,
substantially all of the net proceeds from the sale of each Series of
Certificates will be used by the Depositor for the purchase of the Mortgage
Loans or Contracts represented by the Certificates of such Series or to
reimburse amounts previously used to effect such a purchase, the costs of
carrying the related Mortgage Loans or Contracts until the sale of the
Certificates and other expenses connected with pooling the related Mortgage
Loans or Contracts and issuing the Certificates.
THE DEPOSITOR
Prudential Securities Secured Financing Corporation, formerly known as P-B
Secured Financing Corporation (the "Depositor"), was incorporated in the State
of Delaware on August 26, 1988 as a wholly-owned, limited purpose finance
subsidiary of Prudential Securities Group Inc. (a wholly-owned indirect
subsidiary of The Prudential Insurance Company of America). The Depositor's
principal executive offices are located at 199 Water Street, New York, New York
10292. Its telephone number is (212) 214-7835.
As described herein under "The Trust Funds -- Assignment of the Mortgage
Loans and Contracts" and "-- Representations and Warranties", the only
obligations, if any, of the Depositor with respect to a Series of Certificates
may be pursuant to certain limited representations and warranties and limited
undertakings to repurchase or substitute Mortgage Loans or Contracts under
certain circumstances. Unless otherwise specified in the applicable Prospectus
Supplement, the Depositor will have no servicing obligations or responsibilities
with respect to any Mortgage Pool, Contract Pool or Trust Fund. The Depositor
does not have, nor is it expected in the future to have, any significant assets.
As specified in the related Prospectus Supplement the Servicer with respect
to any Series of Certificates relating to Mortgage Loans or Contracts may be an
affiliate of the Depositor. As described under "The Trust Funds," the Depositor
anticipates that it may acquire Mortgage Loans and Contracts through or from an
affiliate.
Neither the Depositor nor Prudential Securities Group Inc. nor any of its
affiliates, including The Prudential Insurance Company of America, will insure
or guarantee the Certificates of any Series.
UNDERWRITING GUIDELINES
Mortgage Loans Secured by Residential Properties
The Depositor expects that all Mortgage Loans included in a Mortgage Pool
will have been originated in accordance with the underwriting procedures
described herein, subject to such variations as are specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
52
<PAGE>
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
53
<PAGE>
Unaffiliated Sellers represent and warrant that underwriting standards applied
to each Mortgage Loan purchased by the Depositor from such Unaffiliated Seller
(including Mortgage Loans secured by Mortgaged Properties located in
anti-deficiency states) require that the value of the property being financed,
as indicated by the appraisal, currently supports and is anticipated to support
in the future the outstanding principal balance of such Mortgage Loan.
Certain of the types of loans which may be included in the Mortgage Pools
are recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such Mortgage Loans may
provide for escalating or variable payments by the mortgagor. These types of
Mortgage Loans are underwritten on the basis of a judgment that mortgagors will
have the ability to make larger monthly payments in subsequent years. In some
instances, however, a mortgagor's income may not be sufficient to make loan
payments as such payments increase.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the real estate market should experience an overall
decline in property values such that the outstanding principal balances of the
Mortgage Loans, and any secondary financing on the Mortgaged Properties, in a
particular Mortgage Pool become equal to or greater than the value of the
Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In addition, adverse economic conditions (which may or may not affect
real property values) may affect the timely payment by mortgagors of scheduled
payments of principal and interest on the Mortgage Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to any
Mortgage Pool. To the extent that such losses are not covered by subordination
provisions, insurance policies or other credit support, such losses will be
borne, at least in part, by the holders of the Certificates of the related
series.
Contracts
The underwriting guidelines utilized in connection with the origination of
the Contracts underlying a Series of Certificates will be described in the
related Prospectus Supplement.
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS
The following summaries describe certain provisions of the Pooling and
Servicing Agreements which relate to Trust Funds comprised of Mortgage Loans or
Contracts. The summaries do not purport to be complete and are subject to and
are qualified in their entirety by reference to, all the provisions of the
Pooling and Servicing Agreement for each Series and the related Prospectus
Supplement, which may further modify the provisions summarized below. The
provisions of each Pooling and Servicing Agreement will vary depending upon the
nature of the Certificates to be issued thereunder and the nature of the related
Trust Fund. Each Pooling and Servicing Agreement executed and delivered with
respect to each Series will be filed with the Commission as an exhibit to a
Current Report on Form 8-K promptly after issuance of the Certificates of such
Series.
The Servicer
The Servicer under each Pooling and Servicing Agreement will be named in
the related Prospectus Supplement. The entity serving as Servicer may be an
affiliate of the Depositor and may have other normal business relationships with
the Depositor or the Depositor's affiliates. The Servicer with respect to each
Series will service the Mortgage Loans or Contracts contained in the Trust Fund
for such Series. For Trust Funds comprised of Mortgage Loans, the Servicer will
be a seller/servicer approved by FNMA or FHLMC. Any Servicer may delegate its
servicing responsibilities to one or more sub-servicers (each a "Sub-Servicer"),
but will not be relieved of its liabilities with respect thereto.
The Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
related Pooling and Servicing Agreement. An uncured breach of such a
representation or warranty that in any respect materially and adversely affects
the interests of the Certificateholders will constitute an Event of Default by
54
<PAGE>
the Servicer under the related Pooling and Servicing Agreement. See "The Pooling
and Servicing Agreement -- Events of Default -- Mortgage Loans or Contracts" and
" -- Rights Upon Event of Default -- Mortgage Loans or Contracts."
Payments on Mortgage Loans and Contracts
The Servicer or the Trustee will, as to each Series of Certificates,
establish and maintain, or cause to be established and maintained, a separate
trust account or accounts in the name of the Trustee (collectively, the
"Certificate Account"), which must be maintained with a depository institution
(the "Certificate Account Depository") acceptable to the Rating Agency rating
the Certificates of such Series. Such account or accounts will be maintained
with a Certificate Account Depository (i) whose long-term debt obligations at
the time of any deposit therein are rated not lower than the rating on the
related Series of Certificates at the time of the initial issuance thereof, (ii)
the deposits in which are insured by the Federal Deposit Insurance Corporation
(the "FDIC") through either the Bank Insurance Fund or the Savings Association
Insurance Fund (to the limit established by the FDIC) and the uninsured deposits
in which accounts are otherwise secured such that, as evidenced by an opinion of
counsel, the Trustee for the benefit of the Certificateholders of the related
Series has a claim with respect to funds in the Certificate Account for such
Series, or a perfected security interest in any collateral (which shall be
limited to Eligible Investments) securing such funds, that is superior to the
claims of any other depositor or general creditor of the Certificate Account
Depository with which the Certificate Account is maintained or (iii) which is
otherwise acceptable to the Rating Agency or Agencies.
A Certificate Account may be maintained as an interest bearing or a
non-interest bearing account, or the funds held therein may be invested pending
each succeeding Distribution Date in certain Eligible Investments. Any such
Eligible Investments shall mature not later than the business day preceding the
next Distribution Date and no such investment shall be sold or disposed of prior
to the maturity date of such Eligible Investment; however, in the event that an
election has been made to treat the Trust Fund (or a segregated pool of assets
therein) with respect to a Series as a REMIC, no such Eligible Investments will
be sold or disposed of at a gain prior to maturity unless the Servicer has
received an opinion of counsel or other evidence satisfactory to it that such
sale or disposition will not cause the Trust Fund (or segregated pool of assets)
to be subject to the tax on "prohibited transactions" imposed by Code Section
860F(a)(1), otherwise subject the Trust Fund (or segregated pool of assets) to
tax, or cause the Trust Fund (or segregated pool of assets) to fail to qualify
as a REMIC. Unless otherwise provided in the related Prospectus Supplement, any
interest or other income earned on funds in the Certificate Account will be paid
to the Servicer or its designee as additional servicing compensation. All losses
from any such investment will be deposited by the Servicer into the Certificate
Account immediately as realized. If permitted by the Rating Agency or Agencies
and so specified in the related Prospectus Supplement, a Certificate Account may
contain funds relating to more than one Series of Certificates.
Each Sub-Servicer servicing a Mortgage Loan or Contract will be required by
the Servicer to establish and maintain one or more separate accounts which may
be interest bearing and which comply with the standards with respect to
Certificate Accounts set forth above (collectively, the "Sub-Servicing
Account"). Each Sub-Servicer will be required to credit to the related
Sub-Servicing Account on a daily basis the amount of all proceeds of Mortgage
Loans or Contracts received by the Sub-Servicer, less its servicing
compensation. The Sub-Servicer shall remit to the Servicer by wire transfer of
immediately available funds all funds held in the Sub-Servicing Account with
respect to each Mortgage Loan or Contract on a monthly remittance date which
shall occur on or before two business days preceding the Determination Date
occurring in such month.
The Servicer will deposit in the Certificate Account for each Series of
Certificates any amounts representing scheduled payments of principal and
interest on the Mortgage Loans or Contracts due after the applicable Cut-Off
Date but received prior thereto, and, on a dally basis, the following payments
and collections received or made by it with respect to the Mortgage Loans or
Contracts subsequent to the applicable Cut-Off Date (other than payments due on
or before the Cut-Off Date):
(i) all payments on account of principal, including prepayments, and
interest, net of any portion thereof retained by a Sub-Servicer as its
servicing compensation and net of any Fixed Retained Yield;
55
<PAGE>
(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:
56
<PAGE>
(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.
57
<PAGE>
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).
58
<PAGE>
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
59
<PAGE>
(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.
60
<PAGE>
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.
61
<PAGE>
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
62
<PAGE>
restoration of any Mortgaged Property or Manufactured Home, such right of
reimbursement being prior to the rights of the Certificateholders to receive
Liquidation Proceeds and Insurance Proceeds. The Servicer is also entitled to
reimbursement from the Certificate Account of Advances, of advances made by it
to pay taxes or insurance premiums with respect to any Mortgaged Property or
Manufactured Home and of certain losses against which it is indemnified by the
Trust Fund.
Evidence as to Compliance
The Mortgage Loans
Each Pooling and Servicing Agreement will provide that on or before a
specified date in each year, beginning with the first such date occurring at
least six months after the related Cut-Off Date, a firm of independent public
accountants will furnish a statement to the Trustee to the effect that, on the
basis of the examination by such firm conducted substantially in compliance with
either the Uniform Single Audit Program for Mortgage Bankers or the Audit
Program for Mortgages serviced for FHLMC, the servicing by or on behalf of the
Servicer of mortgage loans under pooling and servicing agreements substantially
similar to each other (including the related Pooling and Servicing Agreement)
was conducted in compliance with the terms of such agreements other than
exceptions that are immaterial and any significant exceptions of errors in
records that, in the opinion of the firm, either the Audit Program for Mortgages
serviced for FHLMC, or paragraph 4 of the Uniform Single Audit Program for
Mortgage Bankers, requires it to report. In rendering its statement such firm
may rely, as to matters relating to the direct servicing of mortgage loans by
Sub-Servicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Audit Program for Mortgage
Bankers or the Audit Program for Mortgages serviced for FHLMC (rendered within
one year of such statement) of firms of independent public accountants with
respect to the related Sub-Servicer.
The Contracts
Each Pooling and Servicing Agreement relating to a Series of Certificates
representing interests in a Contract Pool will provide that on or before a
specified date in each year, beginning with the first such date after the
related Cut-Off Date, a firm of independent public accountants will furnish a
statement to the Trustee to the effect that such firm is of the opinion that the
system of internal accounting controls in effect on the date of such statement
relating to the servicing procedures performed by the Servicer under the Pooling
and Servicing Agreement, taken as a whole, was sufficient for the prevention and
detection of errors and irregularities which would be material to the assets of
the Trust Fund and that nothing has come to their attention that would cause
them to believe that such servicing has not been conducted in compliance with
the provisions of the Pooling and Servicing Agreement, other than such
exceptions as shall be set forth in such report.
Each Pooling and Servicing Agreement will also provide for delivery to the
Trustee annually on or before the specified date therein, a statement signed by
two officers of the Servicer to the effect that the Servicer has fulfilled its
obligations under the Pooling and Servicing Agreement throughout the preceding
year or, if there has been a default in the fulfillment of any such obligation,
describing each such default.
Copies of the annual accountants' statement and the statement of officers
of the Servicer may be obtained by Certificateholders without charge upon
written request to the Servicer at the address of the Servicer set forth in the
related Prospectus Supplement.
Certain Matters Regarding the Servicer and the Depositor
The Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement for each Series (other than its duties as
Certificate Registrar for such Series, if it is acting as such), except upon its
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities of a type and nature presently carried on by it. No such
resignation will become effective until the Trustee for such Series or a
successor Servicer has assumed the Servicer's obligations and duties under the
Pooling and Servicing Agreement. If the Servicer resigns for any of the
foregoing reasons and the Trustee is unable or unwilling to assume
63
<PAGE>
responsibility for servicing the Mortgage Loans or Contracts, it may appoint
another institution as Servicer, as described under "The Pooling and Servicing
Agreement -- Rights Upon Event of Default -- Mortgage Loans or Contracts" below.
The Pooling and Servicing Agreement will provide that neither the
Depositor, the Servicer (if the Series of Certificates relates to Mortgage Loans
or Mortgage Contracts) nor any director, officer, employee or agent of either of
them will be under any liability to the Trust Fund or the Certificateholders,
for the taking of any action or for refraining from the taking of any action in
good faith pursuant to the Pooling and Servicing Agreement, or for errors in
judgment; provided, however, that none of the Depositor, the Servicer or any
director, officer, employee or agent of the Depositor or Servicer will be
protected against any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of his or
its duties or by reason of reckless disregard of his or its obligations and
duties thereunder. The Pooling and Servicing Agreement will further provide that
the Depositor, the Servicer and any director, officer, employee or agent of
either of them shall be entitled to indemnification by the Trust Fund and will
be held harmless against any loss, liability or expense incurred in connection
with any legal action relating to the Pooling and Servicing Agreement or the
Certificates other than any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of his or
its duties thereunder or by reason of reckless disregard of his or its
obligations and duties thereunder. In addition, the Pooling and Servicing
Agreement will provide that the Depositor and the Servicer will not be under any
obligation to appear in, prosecute or defend any legal action that is not
incidental to its duties under the Pooling and Servicing Agreement and that in
its opinion may involve it in any expense or liability. The Depositor and the
Servicer may, however, in its discretion, undertake any such action deemed by it
necessary or desirable with respect to the Pooling and Servicing Agreement and
the rights and duties of the parties thereto and the interests of the
Certificateholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust Fund, and the Servicer will be entitled to be
reimbursed therefor out of the Certificate Account, and any loss to the Trust
Fund arising from such right of reimbursement will be allocated pro rata among
the various Classes of Certificates unless otherwise specified in the applicable
Pooling and Servicing Agreement.
Any person into which the Servicer may be merged or consolidated, or any
person resulting from any merger, conversion or consolidation to which the
Servicer is a party, or any person succeeding to the business through the
transfer of substantially all of its assets, or otherwise, of the Servicer will
be the successor of the Servicer under the Pooling and Servicing Agreement for
each Series provided that such successor or resulting entity is qualified to
service mortgage loans for FNMA or FHLMC and that the applicable Rating Agency's
rating of any Certificates for such Series in effect immediately prior to such
event is not adversely affected thereby.
The Servicer also has the right to assign its rights and delegate its
duties and obligations under the Pooling and Servicing Agreement for each Series
(A) in connection with a sale or transfer of a substantial portion of its
mortgage or manufactured housing servicing portfolio; provided that (i) in the
case of a transfer by a Servicer of Mortgage Loans, the purchaser or transferee
accepting such assignment or delegation is qualified to service mortgage loans
for FNMA or FHLMC, (ii) the purchaser or transferee is reasonably satisfactory
to the Depositor and the Trustee for such Series and executes and delivers to
the Depositor and the Trustee an agreement, in form and substance reasonably
satisfactory to the Depositor and the Trustee, which contains an assumption by
such purchaser or transferee of the due and punctual performance and observance
of each covenant and condition to be performed or observed by the Servicer under
the Pooling and Servicing Agreement from and after the date of such agreement;
and (iii) the applicable Rating Agency's rating of any Certificates for such
Series in effect immediately prior to such assignment, sale or transfer is not
qualified, downgraded or withdrawn as a result of such assignment, sale or
transfer or (B) to any affiliate of the Servicer, provided that the conditions
contained in clauses (i) through (iii) above are met. In the case of any such
assignment or delegation, the Servicer will be released from its obligations
under the Pooling and Servicing Agreement except for liabilities and obligations
incurred prior to such assignment and delegation.
64
<PAGE>
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
65
<PAGE>
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
66
<PAGE>
Certificateholders of any Class, while the Servicer or any affiliate thereof is
the holder of Certificates aggregating not less than 66- 2/3% of the Percentage
Interest of such Class), any Certificates registered in the name of the Servicer
or any affiliate thereof shall be deemed not to be outstanding. Notwithstanding
the foregoing, the Trustee will not consent to any such amendment if such
amendment would subject the Trust Fund to tax or cause the Trust Fund (or one or
more segregated pools of assets therein) to fail to qualify as a REMIC.
Termination; Purchase or Other Disposition of Mortgage Loans and Contracts
The obligations created by the Pooling and Servicing Agreement for a Series
of Certificates will terminate upon the earlier of (i) the later of the final
payment or other liquidation of the last Mortgage Loan or Contract subject
thereto and the disposition of all property acquired upon foreclosure of any
such Mortgage Loan or Contract and (ii) any purchase or disposition described in
the following paragraph. In no event, however, will the trust created by the
Pooling and Servicing Agreement continue beyond the expiration of 21 years from
the death of the late survivor of certain persons named in such Pooling and
Servicing Agreement. For each Series of Certificates, the Trustee will give
written notice of termination of the Pooling and Servicing Agreement to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at an office or agency appointed by the
Depositor and specified in the notice of termination.
If so provided in the related Prospectus Supplement, the Pooling and
Servicing Agreement for each Series of Certificates will permit, but not
require, the person or persons specified in such Prospectus Supplement to
purchase from the Trust Fund for such Series, or will require the Trust Fund to
sell, all remaining Mortgage Loans or Contracts at the time subject to the
Pooling and Servicing Agreement at a price specified in such Prospectus
Supplement. In the event that an election has been made to treat the related
Trust Fund (or one or more segregated pools of assets therein) as a REMIC, any
such purchase or disposition will be effected only upon receipt by the Trustee
of an opinion of counsel that such purchase (i) will be part of a "qualified
liquidation" or other evidence as defined in Code Section 860F(a)(4)(A), (ii)
will not otherwise subject the Trust Fund (or segregated asset pool) to tax, or
(iii) will not cause the Trust Fund (or segregated asset pool) to fail to
qualify as a REMIC. The exercise of such right or such disposition will effect
early retirement of the Certificates of that Series, but the right so to
purchase may be exercised, or the obligation to sell will arise, only after the
aggregate principal balance of the Mortgage Loans or Contracts for such Series
at the time of purchase is less than a specified percentage of the aggregate
principal balance at the Cut-Off Date for the Series, or after the date set
forth in the related Prospectus Supplement. See "Prepayment and Yield
Considerations."
The Trustee
The Trustee under each Pooling and Servicing Agreement will be named in the
applicable Prospectus Supplement. The commercial bank or trust company serving
as Trustee may have normal banking relationships with the Depositor, the
Servicer or any of their respective affiliates.
With respect to a Series of Certificates relating to Mortgage Loans or
Contracts, the Trustee may resign at any time, in which event the Servicer will
be obligated to appoint a successor trustee. The Servicer (with respect to a
Series of Certificates relating to Mortgage Loans or Contracts) may also remove
the Trustee if the Trustee ceases to be eligible to act as Trustee under the
Pooling and Servicing Agreement, if the Trustee becomes insolvent or in order to
change the situs of the Trust Fund for state-tax reasons. Upon becoming aware of
such circumstances, the Servicer or Depositor, as the case may be, will become
obligated to appoint a successor trustee. The Trustee may also be removed at any
time by the holders of Certificates evidencing not less than 51% of the Voting
Interest in the Trust Fund, except that, any Certificate registered in the name
of the Depositor, the Servicer or any affiliate thereof will not be taken into
account in determining whether the requisite Voting Interest in the Trust Fund
necessary to effect any such removal has been obtained. Any resignation and
removal of the Trustee, and the appointment of a successor trustee, will not
become effective until acceptance of such appointment by the successor trustee.
The Trustee, and any successor trustee, will have a combined capital and
surplus, or shall be a member of a bank holding system with an aggregate
combined capital and surplus, of at least $50,000,000 and will be subject to
supervision or examination by federal or state authorities.
67
<PAGE>
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.
68
<PAGE>
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
69
<PAGE>
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to the
usual practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti- Deficiency Legislation and
Other Limitations on Lenders" below.
Rights of Redemption
In some states, after sale pursuant to a deed of trust and/or foreclosure
of a mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
most states where the right of redemption is available, statutory redemption may
occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a right of redemption is to diminish the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser at a foreclosure sale, or of any purchaser from the
lender subsequent to judicial foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has run.
Junior Mortgages; Rights of Senior Mortgages
The Mortgage Loans are secured by mortgages or deeds of trust some of which
are junior to other mortgages or deeds of trust held by other lenders or
institutional investors. The rights of the Trust (and therefore the
Certificateholders), as mortgagee under a junior mortgage or beneficiary under a
junior deed of trust, are subordinate to those of the mortgagee under the senior
mortgage or beneficiary under the senior deed of trust, including the prior
rights of the senior mortgagee to receive hazard insurance and condemnation
proceeds and to cause the property securing the Mortgage Loan to be sold upon
default of the mortgagor or trustor, thereby extinguishing the junior
mortgagee's or junior beneficiary's lien unless the junior mortgagee or junior
beneficiary asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage or deed of
trust. As discussed more fully below, a junior mortgagee or junior beneficiary
may satisfy a defaulted senior loan in full and, in some states, may cure such
default and loan. In most states, no notice of default is required to be given
to a junior mortgagee or junior beneficiary and junior mortgagees or junior
beneficiaries are seldom given notice of defaults or senior mortgages. In order
for a foreclosure action in some states to be effective against a junior
mortgagee or junior beneficiary, the junior mortgagee or junior beneficiary must
be named in any foreclosure action, thus giving notice to junior lienors. It is
standard practice of the Sellers to protect their interest by attending any sale
of which they have notice or appearing and bidding for, or redeeming, the
property if it is in their best interest to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, (including the sellers) confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event the
property is taken by condemnation, the mortgagee or beneficiary under any
underlying senior mortgages will have the prior right to collect and apply any
insurance proceeds payable under a hazard insurance policy to restore or repair
the property if feasible, and to collect any remaining insurance proceeds or any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages or deeds of trust. Proceeds in
excess of the amount of senior mortgage indebtedness, in most cases, may be
applied to the indebtedness of a junior mortgage or trust deed.
70
<PAGE>
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.
71
<PAGE>
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
72
<PAGE>
Mexico, Utah and Washington. Under the Act, unless a Window Period State took
action by October 15, 1985, the end of the Window Period, to further regulate
enforcement of "due-on-sale" clauses in Window Period Loans, "due-on-sale"
clauses would become enforceable even in Window Period Loans. Five of the Window
Period States (Arizona, Minnesota, Michigan, New Mexico and Utah) have taken
actions which restrict the enforceability of "due-on-sale" clauses in Window
Period Loans beyond October 15, 1985. The actions taken vary among such states.
By virtue of the Act, the Servicer may generally be permitted to accelerate
any conventional Mortgage Loan which contains a "due-on-sale" clause upon
transfer of an interest in the property subject to the mortgage or deed of
trust. With respect to any Mortgage Loan secured by a residence occupied or to
be occupied by the borrower, this ability to accelerate will not apply to
certain types of transfers, including (i) the granting of a leasehold interest
which has a term of three years or less and which does not contain an option to
purchase, (ii) a transfer to a relative resulting from the death of a borrower,
or a transfer where the spouse or children becomes an owner of the property in
each case where the transferee(s) will occupy the property, (iii) a number
resulting from a decree of dissolution of marriage, legal separation agreement
or from an incidental property settlement agreement by which the spouse becomes
an owner of the property, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the property (provided that such lien or
encumbrance is not created pursuant to a contract for deed), (v) a transfer by
devise, descent or operation of law on the death of a joint tenant or tenant by
the entirety, and (vi) other transfers as set forth in the Act and the
regulations thereunder. The extent of the effect of the Act on the average lives
and delinquency rates of the Mortgage Loans cannot be predicted. See "Prepayment
and Yield Considerations."
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that state usury limitations shall
not apply to certain types of residential first mortgage loans originated by
certain lenders after March 31, 1980. The OTS (as successor to the FHLBB) is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. The statute authorized any state to
reimpose Stated Rate limits by adopting before April 1, 1983, a law or
constitutional provision which expressly rejects application of the federal law.
Fifteen states have adopted laws reimposing or reserving the right to impose
interest rate limits. In addition, even where Title V is not so rejected, any
state is authorized to adopt a provision limiting certain other loan charges.
Unless otherwise specified in the applicable Prospectus Supplement, each
Unaffiliated Seller will represent and warrant in the related Loan Sale
Agreement that all Mortgage Loans sold by such Unaffiliated Seller to the
Depositor were originated in full compliance with applicable state laws,
including usury laws. See "The Trust Funds -- Representations and Warranties."
Adjustable Rate Loans
The laws of certain states may provide that mortgage notes relating to
adjustable rate loans are not negotiable instruments under the Uniform
Commercial Code. In such event, the Trustee will not be deemed to be a "holder
in due course" within the meaning of the Uniform Commercial Code and may take
such a mortgage note subject to certain restrictions on its ability to foreclose
and to certain contractual defenses available to a mortgagor.
Enforceability of Certain Provisions
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under the Pooling and Servicing Agreement, late charges and prepayment
fees (to the extent permitted by law and not waived by the Servicer) will be
retained by the Servicer as additional servicing compensation.
73
<PAGE>
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
74
<PAGE>
where the home is located. These filings must be made in the real estate records
office of the county where the home is located. Substantially all of the
Contracts contain provisions prohibiting the borrower from permanently attaching
the Manufactured Home to its site. So long as the borrower does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to its site,
other parties could obtain an interest in the Manufactured Home which is prior
to the security interest originally retained by the Unaffiliated Seller and
transferred to the Depositor. With respect to a Series of Certificates and if so
described in the related Prospectus Supplement, the Servicer may be required to
perfect a security interest in the Manufactured Home under applicable real
estate laws. The Servicer will represent that at the date of the initial
issuance of the related Certificates it has obtained a perfected first priority
security interest by proper notation or delivery of the required documents and
fees with respect to substantially all of the Manufactured Homes securing the
Contracts.
The Depositor will cause the security interests in the Manufactured Homes
to be assigned to the Trustee on behalf of the Certificateholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Depositor
nor the Trustee will amend the certificates of title to identify the Trustee or
the Trust Fund as the new secured party, and neither the Depositor nor the
Servicer will deliver the certificates of title to the Trustee or note thereon
the interest of the Trustee. Accordingly, the Servicer (or the Unaffiliated
Seller) which continue to be named as the secured party on the certificates of
title relating to the Manufactured Homes. In many states, such assignment is an
effective conveyance of such security interest without amendment of any lien
noted on the related certificate of title and the new secured party succeeds to
the Depositor's rights as the secured party. However, in some states there
exists a risk that, in the absence of an amendment to the certificate of title,
such assignment of the security interest in the Manufactured Home might not be
effective or perfected or that, in the absence of such notation or delivery to
the Trustee, the assignment of the security interest in the Manufactured Home
might not be effective against creditors of the Servicer (or the Unaffiliated
Seller) or a trustee in bankruptcy of the Servicer (or the Unaffiliated Seller).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Servicer (or
the Unaffiliated Seller) on the certificate of title or delivery of the required
documents and fees will be sufficient to protect the Certificateholders against
the rights of subsequent purchasers of a Manufactured Home or subsequent lenders
who take a security interest in the Manufactured Home. If there are any
Manufactured Homes as to which the security interest assigned to the Trustee is
not perfected, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the Trustee as
the new secured party on the certificate of title that, through fraud or
negligence, the security interest of the Certificateholders could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and not
re-register the Manufactured Home in such state, and if steps are not taken to
re-perfect the Trustee's security interest in such state, the security interest
in the Manufactured Home would cease to be perfected. A majority of states
generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien, the
Servicer would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the Trustee
would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing conditional sales contracts, the Servicer takes steps to effect such
re-perfection upon receipt of notice of registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a manufactured home, the Trustee (or
its custodian) must surrender possession of the certificate of title or the
Servicer will receive notice as a result of its lien noted thereon and
accordingly will have an opportunity to require satisfaction of the related
75
<PAGE>
manufactured housing conditional sales contract before release of the lien.
Under the Pooling and Servicing Agreement, the Servicer is obligated to take
steps, at the Servicer's expense, as are necessary to maintain perfection of
security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufacturer Home and liens for personal property taxes take priority over a
perfected security interest. The Unaffiliated Seller will represent in the
Pooling and Servicing Agreement that it has no knowledge of any such liens with
respect to any Manufactured Home securing payment on any Contract. However, such
liens could arise at any time during the term of a Contract. No notice will be
given to the Trustee or Certificateholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes
The Servicer on behalf of the Trustee, to the extent required by the
related Pooling and Servicing Agreement, may take action to enforce the
Trustee's security interest with respect to Contracts in default by repossession
and resale of the Manufactured Homes securing such defaulted Contracts. So long
as the Manufactured Home has not become subject to the real estate law, a
creditor can repossess a Manufactured Home securing a Contract by voluntary
surrender, by "self-help" repossession that is "peaceful" (i.e., without breach
of the peace) or, in the absence of voluntary surrender and the ability to
repossess without breach of the peace, by judicial process. The holder of a
Contract must give the debtor a number of days' notice, which varies from 10 to
30 days depending on the state, prior to commencement of any repossession. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states also
requires that the debtor be given notice of any sale prior to resale of the unit
so that the debtor may redeem at or before such resale. In the event of such
repossession and resale of a Manufactured Home, the Trustee would be entitled to
be paid out of the sale proceeds before such proceeds could be applied to the
payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debted thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the obligor also may be able to asset
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
Contract.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer that is not consented to.
76
<PAGE>
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.
77
<PAGE>
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
78
<PAGE>
CERCLA's secured-creditor exemption. The court held that a lender need not have
involved itself in the day-to-day operations of the facility or participated in
decisions relating to hazardous waste to be liable under CERCLA; rather,
liability could attach to a lender if its involvement with the management of the
facility is broad enough to support the inference that the lender had the
capacity to influence the borrower's treatment of hazardous waste. The court
added that a lender's capacity to influence such decisions could be inferred
from the extent of its involvement in the facility's financial management. A
subsequent decision by the United States Court of Appeals for the Ninth Circuit
in In re Bergsoe Metal Corp., disagreeing with the Fleet Factors court, held
that a secured lender had no liability absent "some actual management of the
facility" on the part of the lender. On April 29, 1992, the United States
Environmental Protection Agency (the "EPA") issued a final rule interpreting and
delineating CERCLA's secured-creditor exemption. The final rule defines a
specific the range of permissible actions that may be undertaken by a holder of
a contaminated facility without exceeding the bounds of the secured-creditor
exemption. Issuance of this rule by the EPA under CERCLA would not necessarily
affect the potential for liability in actions by either a state or a private
party under CERCLA or in actions under other federal or state laws which may
impose liability on "owners or operators" but do not incorporate the
second-creditor exemption.
If a lender is or becomes liable for clean-up costs, it may bring an action
for contribution against the current owners or operators, the owners or
operators at the time of on-site disposal activity or any other party who
contributed to the environmental hazard, but such persons or entities may be
bankrupt or otherwise judgment proof. Furthermore, such action against the
borrower may be adversely affected by the limitations on recourse in the
documents in the Mortgage Document File. Similarly, in some states
anti-deficiency legislation and other statues requiring the lender to exhaust
its security before bringing a personal action against the borrower-trustor (see
"Anti- Deficiency Legislation and Other Limitations on Lenders" below) may
curtail the lender's ability to recover from its borrower the environmental
clean-up and other related costs and liabilities by the lender.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan or Contract (including a
borrower who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan or Contract and is later called to
active duty) may not be charged interest above an annual rate of 6% during the
period of such borrower's active duty status, unless a court orders otherwise
upon application of the lender. It is possible that such action could have an
effect, for an indeterminate period of time, on the ability of the Servicer to
collect full amounts of interest on certain of the Mortgage Loans or Contracts
in a Trust Fund. Any shortfall in interest collections resulting from the
application of the Relief Act could result in losses to the holders of the
Certificates of the related Series. In addition, the Relief Act imposes
limitations which would impair the ability of the Servicer to foreclose on an
affected Mortgage Loan or Contract during the borrower's period of active duty
status. Thus, in the event that such a Mortgage Loan or Contract goes into
default, there may be delays and losses occasioned by the inability to realize
upon the Mortgaged Property or Manufactured Home in a timely fashion.
Type of Mortgaged Property
The lender may be subject to additional risk depending upon the type and
use of the Mortgaged Property in question. For instance, Mortgaged Properties
which are hospitals, nursing homes or convalescent homes may present special
risks to lenders in large part due to significant governmental regulation of the
operation, maintenance, control and financing of health care institutions.
Mortgages on Mortgaged Properties which are owned by the Borrower under a
condominium form of ownership are subject to the declaration, by-laws and other
rules and regulations of the condominium association. Mortgaged Properties which
are hotels or motels may present additional risk to the lender in that: (i)
hotels and motels are typically operated pursuant to franchise, management and
operating agreements which may be terminable by the operator; and (ii) the
transferability of the hotel's operating, liquor and other licenses to the
entity acquiring the hotel either through purchase or foreclosure is subject to
the vagaries of local law requirements. In addition, Mortgaged Properties which
are multifamily residential properties may be subject to rent control laws,
which could impact the future cash flows of such properties. Finally, Mortgaged
Properties which are financed in the installment sales contract method may leave
79
<PAGE>
the holder of the note exposed to tort and other claims as the true owner of the
property which could impact the availability of cash to pass through to
investors.
Certain Matters Relating to Insolvency
The Unaffiliated Seller of the Mortgage Loans or Contracts and the
Depositor intend that the transfer of such Mortgage Loans or Contracts to the
Trust Fund constitute a sale rather for a pledge of the Mortgage Loans or
Contracts to secure indebtedness of the seller of the Mortgage Loans or
Contracts. However, if the Unaffiliated Seller were to become a debtor under the
federal bankruptcy code or be placed in a conservatorship or receivership under
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), as the case may be, it is possible that a creditor, receiver,
conservator or trustee-in-bankruptcy of such seller may argue that the sale of
the Mortgage Loans or Contracts by the Unaffiliated Seller is a pledge of the
Mortgage Loans or Contracts rather than a sale. This position, if argued or
accepted by a court, could result in a delay in or reduction of distributions to
the related Certificateholders.
Under FIRREA the FDIC as receiver or conservator of a Servicer subject to
its jurisdiction may enforce a contract notwithstanding any provision of the
contract providing for termination thereof by reason of the insolvency of, or
appointment of a receiver or conservator for, the Servicer. Consequently,
provisions in a Pooling and Servicing Agreement providing for an Event of
Default upon certain events of insolvency, receivership or conservatorship of
the Servicer may not be enforceable against the FDIC as receiver or conservator
to the extent that the exercise of such rights is based solely upon the
insolvency of or appointment of a receiver or conservator for the Servicer. In
addition, the FDIC may transfer the assets and liabilities of an institution in
receivership or conservatorship to another institution.
Bankruptcy Laws
Numerous statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the ability
of the secured mortgage lender to obtain payment of the loan, to realize upon
collateral and/or enforce a deficiency judgment. For example, under federal
bankruptcy law, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of the
bankruptcy petition, and, often, no interest or principal payments are made
during the course of the bankruptcy proceeding. The delay and the consequences
thereof caused by or on behalf of a junior lienor may stay the senior lender
from taking action to foreclose out such junior lien. In a case under the
Bankruptcy Code, the lender is precluded from foreclosing without authorization
from the bankruptcy court. In addition, a court with federal bankruptcy
jurisdiction may permit a debtor through his or her Chapter 11 or Chapter 13
rehabilitative plan to cure a monetary default in respect of a mortgage loan on
the debtor's residence by paying arrearage within a reasonable time period and
reinstating the original mortgage loan payment schedule even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been entered
in state court (provided no sale of the residence had yet occurred) prior to the
filing of the debtor's petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a mortgage loan default by
paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule, and reducing the lender's security interest to the value of
the residence, thus leaving the lender in the position of a general unsecured
creditor for the difference between the value of the residence and the
outstanding balance of the loan.
Federal bankruptcy law may also interfere with or affect the ability of the
secured mortgage lender to enforce an assignment by a mortgagor of rent and
leases related to the Mortgaged Property if the related mortgagor is in a
bankruptcy proceeding. Under Section 362 of the Bankruptcy Code, the mortgagee
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue can be time-consuming and may result in
significant delays in the receipt of the rents. Rents may also escape an
assignment thereof (i) if the assignment is not fully perfected under state law
80
<PAGE>
prior to commencement of the bankruptcy proceeding, (ii) to the extent such
rents are used by the borrower to maintain the mortgaged property, or for other
court authorized expenses, or (iii) to the extent other collateral may be
substituted for the rents.
To the extent a mortgagor's ability to make payment on a mortgage loan is
dependent on payments under a lease of the related property, such ability may be
impaired by the commencement of a bankruptcy proceeding relating to a lessee
under such lease. Under the federal bankruptcy laws, the filing of a petition in
bankruptcy by or on behalf of a lessee results in a stay in bankruptcy against
the commencement or continuation of any state court proceeding for past due
rent, for accelerated rent, for damages or for a summary eviction order with
respect to a default under the lease that occurred prior to the filing of the
lessee's petition.
In addition, federal bankruptcy law generally provides that a trustee or
debtor in possession in a bankruptcy or reorganization case under the Bankruptcy
Code may, subject to approval of the court (a) assume the lease and retain it or
assign it to a third party or (b) reject the lease. If the lease is assumed, the
trustee or debtor in possession (or assignee, if applicable) must cure any
defaults under the lease, compensate the lessor for its losses and provide the
lessor with "adequate assurance" of future performance. Such remedies may be
insufficient, however, as the lessor may be forced to continue under the lease
with a lessee that is a poor credit risk or an unfamiliar tenant if the lease
was assigned, and any assurances provided to the lessor may, in fact, be
inadequate. Furthermore, there is likely to be a period of time between the date
upon which a lessee files a bankruptcy petition and the date upon which the
lease is assumed or rejected. Although the lessee is obligated to make all lease
payments currently with respect to the post-petition period, there is a risk
that such payments will not be made due to the lessee's poor financial
condition. If the lease is rejected, the lessor will be treated as an unsecured
creditor with respect to its claim for damages for termination of the lease and
the mortgagor must relet the mortgage property before the flow of lease payments
will recommence. In addition, pursuant to Section 502(b)(6) of the Bankruptcy
Code, a lessor's damages for lease rejection are limited by a formula.
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer to the Trust Fund of any payments made by
the mortgagor under the related Mortgage Loan. Moreover, some recent court
decisions suggest that even a non-collusive, regularly conducted foreclosure
sale may be challenged in a bankruptcy proceeding as a "fraudulent conveyance,"
regardless of the parties' intent, if a bankruptcy court determines that the
mortgaged property has been sold for less than fair consideration while the
mortgagor was insolvent and within one year (or within any longer state statutes
of limitations if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law) of the filing of bankruptcy.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of the material anticipated federal
income tax consequences to investors of the purchase, ownership and disposition
of the Securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Securities. For purposes of this
discussion, references to a "Securityholder" or a "Holder" are to the beneficial
owner of a Security.
The following discussion addresses securities of three general types: (i)
securities ("Grantor Trust Securities") representing interests in a Trust Estate
(a "Grantor Trust Estate") which the Sponsor will covenant not to elect to have
treated as a real estate mortgage investment conduit (REMIC); (ii) securities
("REMIC Securities") representing interests in a Trust Estate, or a portion
thereof, which the Sponsor will covenant to elect to have treated as a REMIC
under sections 860A through 860G of the Internal Revenue Code of 1986, as
amended (the "Code"); and (iii) securities ("Debt Securities") that are intended
to be treated for federal income tax purposes as indebtedness secured by the
underlying Mortgage Loans. This Prospectus does not address the tax treatment of
81
<PAGE>
partnership interests or interests in a FASIT. Such a discussion will be set
forth in the related Prospectus Supplement for any Trust issuing Securities
characterized as partnership interests or interests in a FASIT. The Prospectus
Supplement for each series of Securities will indicate whether a REMIC or FASIT
election (or elections) will be made for the related Trust Estate and, if a
REMIC or FASIT election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC or all "regular interests," "high-yield
interests" or "ownership interest" in the FASIT. Pursuant to the Small Business
Job Protection Act of 1996, enacted on August 20, 1996 (the "1996 Act"), a FASIT
election can be made on or after September 1, 1997.
Grantor Trust Securities
With respect to each series of Grantor Trust Securities, special tax
counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless
otherwise limited in the related Prospectus Supplement) the related Grantor
Trust Estate will be classified as a grantor trust and not as a partnership or
an association taxable as a corporation. Accordingly, each Holder of a Grantor
Trust Security will generally be treated as the owner of an interest in the
Mortgage Loans included in the Grant or Trust Estate.
For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Estate, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Security." A Grantor Trust Security representing ownership
of all or a portion of the difference between interest paid on the Mortgage
Loans constituting the related Grantor Trust Estate and interest paid to the
Holders of Grantor Trust Fractional Interest Securities issued with respect to
such Grantor Trust Estate will be referred to as a "Grantor Trust Strip
Security."
Special Tax Attributes
Unless otherwise disclosed in a related Prospectus Supplement, special tax
counsel to the Sponsor, will deliver its opinion to the Sponsor that (a) Grantor
Trust Fractional Interest Securities will represent interests in (i) "loans . .
. secured by an interest in real property" within the meaning of section
7701(a)(19)(C)(v) of the Code; and (ii) "obligations (including any
participation or certificate of beneficial ownership therein) which . . . are
principally secured by an interest in real property" within the meaning of
section 860G(a)(3)(A) of the Code; and (b) interest on Grantor Trust Fractional
Interest Securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of section 856(c)(3)(B) of the Code. In addition, the Grantor Trust Strip
Securities will be "obligations (including any participation or certificate of
beneficial ownership therein) . . . principally secured by an interest in real
property" within the meaning of section 860G(a)(3)(A) of the Code.
The 1996 Act repeals the bad debt reserve method of accounting for mutual
savings banks and domestic building and loan associations for tax years
beginning after December 31, 1995. As a result, section 593(d) of the Code is no
longer applicable to treat the Certificates as "qualifying real property loans."
Taxation of Holders of Grantor Trust Securities
Holders of Grantor Trust Fractional Interest Securities generally will be
required to report on their federal income tax returns their respective shares
of the income from the Mortgage Loans (including amounts used to pay reasonable
82
<PAGE>
servicing fees and other expenses but excluding amounts payable to Holders of
any corresponding Gran or Trust Strip Securities) and, subject to the
limitations described below, will be entitled to deduct their shares of any such
reasonable servicing fees and other expenses. If a Holder acquires a Grantor
Trust Fractional Interest Security for an amount that differs from its
outstanding principal amount, the amount includible in income on a Grantor Trust
Fractional Interest Security may differ from the amount of interest
distributable thereon. See "Discount and Premium," below. Individuals holding a
Grantor Trust Fractional Interest Security directly or through certain
pass-through entities will be allowed a deduction for such reasonable servicing
fees and expenses only to the extent that the aggregate of such Holder's
miscellaneous itemized deductions exceeds 2% of such Holder's adjusted gross
income. Further, Holders (other than corporations) subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining
alternative minimum taxable income.
Holders of Grantor Trust Strip Securities generally will be required to
treat such Securities as "stripped coupons" under section 1286 of the Code.
Accordingly, such a Holder will be required to treat the excess of the total
amount of payments on such a Security over the amount paid for such Security as
original issue discount and to include such discount in income as it accrues
over the life of such Security. See "--Discount and Premium," below.
Grantor Trust Fractional Interest Securities may also be subject to the
coupon stripping rules if a class of Grantor Trust Strip Securities is issued as
part of the same series of Securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of such a Security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the Holder's income as
it accrues (regardless of the Holder's method of accounting), as described below
under "--Discount and Premium." The coupon stripping rules will not apply,
however, if (i) the pass-through rate is no more than 100 basis points lower
than the gross rate of interest payable on the underlying Mortgage Loans and
(ii) the difference between the outstanding principal balance on the Security
and the amount paid for such Security is less than 0.25% of such principal
balance times the weighted average remaining maturity of the Security.
Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a Grantor Trust Security (equal
to the difference between the amount realized on the sale and the adjusted basis
of such Grantor Trust Security) will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and in the case of banks and other financial institutions
except as provided under section 582(c) of the Code. The adjusted basis of a
Grantor Trust Security will generally equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions of principal.
Grantor Trust Reporting
The Trustee will furnish to each Holder of a Grantor Trust Fractional
Interest Security with each distribution a statement setting forth the amount of
such distribu ion allocable to principal on the underlying Mortgage Loans and to
interest thereon at the related Pass-Through Rate. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the Master Servicer, the Trustee will furnish to each Holder during
such year such customary factual information as the Master Servicer deems
necessary or desirable to enable Holders of Grantor Trust Securities to prepare
their tax returns and will furnish comparable information to the Internal
Revenue Service (the "IRS") as and when required to do so by law.
83
<PAGE>
REMIC Securities
If provided in a related Prospectus Supplement, an election will be made to
treat a Trust Estate as a REMIC under the Code. Qualification as a REMIC
requires ongoing compliance with certain conditions. With respect to each series
of Securities for which such an election is made, special tax counsel to the
Sponsor, will deliver its opinion to the Sponsor that (unless otherwise limited
in the related Prospectus Supplement), assuming compliance with the Pooling and
Servicing Agreement, the Trust Estate will be treated as a REMIC for federal
income tax purposes. A Trust Estate for which a REMIC election is made will be
referred to herein as a "REMIC Trust." The Securities of each class will be
designated as "regular interests" in the REMIC Trust except that a separate
class will be designated as the "residual interest" in the REMIC Trust. The
Prospectus Supplement for each series of Securities will state whether
Securities of each class will constitute a regular interest (a REMIC Regular
Security) or a residual interest (a REMIC Residual Security).
A REMIC Trust will not be subject to federal income tax except with respect
to income from prohibited transactions and in certain other instances described
below. See "- Taxes on a REMIC Trust." Generally, the total income from the
Mortgage Loans in a REMIC Trust will be taxable to the Holders of the Securities
of that series, as described below.
Regulations issued by the Treasury Department (the "REMIC Regulations")
provide some guidance regarding the federal income tax consequences associated
with the purchase, ownership and disposition of REMIC Securities. While certain
material provisions of the REMIC Regulations are discussed below, investors
should consult their own tax advisors regarding the possible application of the
REMIC Regulations in their specific circumstances.
Special Tax Attributes
REMIC Regular Securities and REMIC Residual Securities will be "regular or
residual interests in a REMIC" within the meaning of section 7701(a)(19)(C)(xi)
of the Code and "real estate assets" within the meaning of section 856(c)(5)(A)
of the Code. If at any time during a calendar year less than 95% of the assets
of a REMIC Trust consist of "qualified mortgages" (within the meaning of section
860G(a)(3) of the Code) then the portion of the REMIC Regular Securities and
REMIC Residual Securities that are qualifying assets under those sections during
such calendar year may be limited to the portion of the assets of such REMIC
Trust that are qualified mortgages. Similarly, income on the REMIC Regular
Securities and REMIC Residual Securities will be treated as "interest on
obligations secured by mortgages on real property" within the meaning of section
856(c)(3)(B) of the Code, subject to the same limitation as set forth in the
preceding sentence. For purposes of applying this limitation, a REMIC Trust
should be treated as owning the assets represented by the qualified mortgages.
The assets of the Trust Estate will include, in addition to the Mortgage Loans,
payments on the Mortgage Loans held pending distribution on the REMIC Regular
Securities and REMIC Residual Securities and any reinvestment income thereon.
REMIC Regular Securities and REMIC Residual Securities held by a financial
institution to which section 585, 586 or 593 of the Code applies will be treated
as evidences of indebtedness for purposes of section 582(c)(1) of the Code.
REMIC Regular Securities will also be qualified mortgages with respect to other
REMICs.
84
<PAGE>
The 1996 Act repeals the bad debt reserve method of accounting for mutual
savings banks and domestic building and loan associations for tax years
beginning after December 31, 1995. As a result, section 593(d) of the Code is no
longer applicable to treat the Certificates as "qualifying real property loans."
Taxation of Holders of REMIC Regular Securities
Except as indicated below in this federal income tax discussion, the REMIC
Regular Securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC Trust on the date such Securities are first sold
to the public (the "Settlement Date") and not as ownership inter sts in the
REMIC Trust or its assets. Holders of REMIC Regular Securities that otherwise
report income under a cash method of accounting will be required to report
income with respect to such Securities under an accrual method. For additional
tax consequences relating to REMIC Regular Securities purchased at a discount or
with premium, see "--Discount and Premium," below.
Taxation of Holders of REMIC Residual Securities
Daily Portions. xcept as indicated below, a Holder of a REMIC Residual
Security for a REMIC Trust generally will be required to report its daily
portion of the taxable income or net loss of the REMIC Trust for each day during
a calendar quarter that the Holder owned such REMIC Residual Security. For this
purpose, the daily portion shall be determined by allocating to each day in the
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC Trust for such quarter and by allocating the amount so allocated among the
Residual Holders (on such day) in accordance with their percentage interests on
such day. Any amount included in the gross income or allowed as a loss of any
Residual Holder by virtue of this paragraph will be treated as ordinary income
or loss.
The requirement that each Holder of a REMIC Residual Security report its
daily portion of the taxable income or net loss of the REMIC Trust will continue
until there are no Securities of any class outstanding, even though the Holder
of the REMIC Residual Security may have received full payment of the stated
interest and principal on its REMIC Residual Security.
The Trustee will provide to Holders of REMIC Residual Securities of each
series of Securities (i) such information as is necessary to enable them to
prepare their federal income tax returns and (ii) any reports regarding the
Securities of such series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net loss
of a REMIC Trust will be the income from the qualified mortgages it holds and
any reinvestment earnings less deductions allowed to the REMIC Trust. Such
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
85
<PAGE>
year and using the accrual method of accounting, with certain modifications. The
first modification is that a deduction will be allowed for accruals of interest
(including any original issue discount, but without regard to the investment
interest limitation in section 163(d) of the Code) on the REMIC Regular
Securities (but not the REMIC Residual Securities), even though REMIC Regular
Securities are for non-tax purposes evidences of beneficial ownership rather
than indebtedness of a REMIC Trust. Second, market discount or premium equal to
the difference between the total stated principal balances of the qualified
mortgages and the basis to the REMIC Trust therein generally will be included in
income (in the case of discount) or deductible (in the case of premium) by the
REMIC Trust as it accrues under a constant yield method, taking into account the
"Prepayment Assumption" (as defined in the Related Prospectus Supplement, see
"--Discount and Premium--Original Issue Discount," below). The basis to a REMIC
Trust in the qualified mortgages is the aggregate of the issue prices of all the
REMIC Regular Securities and REMIC Residual Securities in the REMIC Trust on the
Settlement Date. If, however, a substantial amount of a class of REMIC Regular
Securities or REMIC Residual Securities has not been sold to the public, then
the fair market value of all the REMIC Regular Securities or REMIC Residual
Securities in that class as of the date of the Prospectus Supplement should be
substituted for the issue price.
Third, no item of income, gain, loss or deduction allocable to a prohibited
transaction (see "--Taxes on a REMIC Trust--Prohibited Transactions" below) will
be taken into account. Fourth, a REMIC Trust generally may not deduct any item
that would not be allowed in calculating the taxable income of a partnership by
virtue of section 703(a)(2) of the Code. Finally, the limitation on
miscellaneous itemized deductions imposed on individuals by section 67 of the
Code will not be applied at the REMIC Trust level to any servicing and guaranty
fees. (See, however, "--Pass-Through of Servicing and Guaranty Fees to
Individuals" below.) In addition, under the REMIC Regulations, any expenses that
are incurred in connection with the formation of a REMIC Trust and the issuance
of the REMIC Regular Securities and REMIC Residual Securities are not treated as
expenses of the REMIC Trust for which a deduction is allowed. If the deductions
allowed to a REMIC Trust exceed its gross income for a calendar quarter, such
excess will be a net loss for the REMIC Trust for that calendar quarter. The
REMIC Regulations also provide that any gain or loss to a REMIC Trust from the
disposition of any asset, including a qualified mortgage or "permitted
investment" (as defined in section 860G(a)(5) of the Code) will be treated as
ordinary gain or loss.
A Holder of a REMIC Residual Security may be required to recognize taxable
income without being entitled to receive a corresponding amount of cash. This
could occur, for example, if the qualified mortgages are considered to be
purchased by the REMIC Trust at a discount, some or all of the REMIC Regular
Securities are issued at a discount, and the discount included as a result of a
prepayment on a Mortgage Loan that is used to pay principal on the REMIC Regular
Securities exceeds the REMIC Trust's deduction for unaccrued original issue
discount relating to such REMIC Regular Securities. Taxable income may also be
greater in earlier years because interest expense deductions, expressed as a
percentage of the outstanding principal amount of the REMIC Regular Securities,
may increase over time as the earlier classes of REMIC Regular Securities are
paid, whereas interest income with respect to any given Mortgage Loan expressed
as a percentage of the outstanding principal amount of that Mortgage Loan, will
remain constant over time.
Basis Rules and Distributions. A Holder of a REMIC Residual Security has an
initial basis in its Security equal to the amount paid for such REMIC Residual
Security. Such basis is increased by amounts included in the income of the
Holder and decreased by distributions and by any net loss taken into account
with respect to such REMIC Residual Security. A distribution on a REMIC Residual
Security to a Holder is not included in gross income to the extent it does not
exceed such Holder's basis in the REMIC Residual Security (adjusted as described
above) and, to the extent it exceeds the adjusted basis of the REMIC Residual
Security, shall be treated as gain from the sale of the REMIC Residual Security.
A Holder of a REMIC Residual Security is not allowed to take into account
any net loss for any calendar quarter to the extent such net loss exceeds such
Holder's adjusted basis in its REMIC Residual Security as of the close of such
calendar quarter (determined without regard to such net loss). Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used only
to offset income from the REMIC Residual Security.
86
<PAGE>
Excess Inclusions. Any excess inclusions with respect to a REMIC Residual
Security are subject to certain special tax rules. With respect to a Holder of a
REMIC Residual Security, the excess inclusion for any calendar quarter is
defined as the excess (if any) of the daily portions of taxable income over the
sum of the "daily accruals" for each day during such quarter that such REMIC
Residual Security was held by such Holder. The daily accruals are determined by
allocating to each day during a calendar quarter its ratable portion of the
product of the "adjusted issue price" of the REMIC Residual Security at the
beginning of the calendar quarter and 120% of the "federal long-term rate" in
effect on the Settlement Date, based on quarterly compounding, and properly
adjusted for the length of such quarter. For this purpose, the adjusted issue
price of a REMIC Residual Security as of the beginning of any calendar quarter
is equal to the issue price of the REMIC Residual Security, increased by the
amount of daily accruals for all prior quarters and decreased by any
distributions made with respect to such REMIC Residual Security before the
beginning of such quarter. The issue price of a REMIC Residual Security is the
initial offering price to the public (excluding bond houses and brokers) at
which a substantial number of the REMIC Residual Securities was sold. The
federal long-term rate is a blend of current yields on Treasury securities
having a maturity of more than nine years, computed and published monthly by the
IRS.
In general, Holders of REMIC Residual Securities with excess inclusion
income cannot offset such income by losses from other activities. For Holders
that are subject to tax only on unrelated business taxable income (as defined in
section 511 of the Code), an excess inclusion of such Holder is treated as
unrelated business taxable income. With respect to variable contracts (within
the meaning of section 817 of the Code), a life insurance company cannot adjust
its reserve to the extent of any excess inclusion, except as provided in
regulations. The REMIC Regulations indicate that if a Holder of a REMIC Residual
Security is a member of an affiliated group filing a consolidated income tax
return, the taxable income of the affiliated group cannot be less than the sum
of the excess inclusions attributable to all residual interests in REMICS held
by members of the affiliated group. For a discussion of the effect of excess
inclusions on certain foreign investors that own REMIC Residual Securities, see
"--Foreign Investors" below.
The Treasury Department also has the authority to issue regulations that
would treat all taxable income of a REMIC Trust as excess inclusions if the
REMIC Residual Security does not have "significant value." Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
how significant value would be determined for these purposes. If no such rule is
applicable, excess inclusions should be calculated as discussed above.
In the case of any REMIC Residual Securities that are held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Securities reduced (but not below zero) by the real estate investment
trust taxable income (within the meaning of section 857(b)(2) of the Code,
excluding any net capital gain) will be allocated among the shareholders of such
trust in proportion to the dividends received by such shareholders from such
trust, and any amount so allocated will be treated as an excess inclusion with
respect to a REMIC Residual Security as if held directly by such shareholder.
Similar rules will apply in the case of regulated investment companies, common
trust funds and certain cooperatives that hold a REMIC Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A Holder of a
REMIC Residual Security who is an individual will be required to include in
income a share of any servicing and guaranty fees. A deduction for such fees
will be allowed to such Holder only to the extent that such fees, along with
certain of such Holder's other miscellaneous itemized deductions exceed 2% of
such Holder's adjusted gross income. In addition, a Holder of a REMIC Residual
Security may not be able to deduct any portion of such fees in computing such
Holder's alternative minimum tax liability. A Holder's share of such fees will
generally be determined by (i) allocating the amount of such expenses for each
calendar quarter on a pro rata basis to each day in the calendar quarter, and
(ii) allocating the daily amount among the Holders in proportion to their
respective holdings on such day.
87
<PAGE>
Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a RE IC equal to 100% of
the net income derived from "prohibited transactions." In general, a prohibited
transaction means the disposition of a qualified mortgage other than pursuant to
certain specified exceptions, the receipt of investment income from a source
other than a Mortgage Loan or certain other permitted investments, the receipt
of compensation for services, or the disposition of an asset purchased with the
payments on the qualified mortgages for temporary investment pending
distribution on the regular and residual interests.
Contributions to a REMIC after the Startup Day. The Code imposes a tax on a
REMIC equal to 100% of the value of any property contributed to the REMIC after
the "startup day" (generally the same as the Settlement Date). Exceptions are
provided for cash contributions to a REMIC (i) during the three month period
beginning on the startup day, (ii) made to a qualified reserve fund by a Holder
of a residual interest, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call, and (v) as otherwise
permitted by Treasury regulations.
Net Income from Foreclosure Property. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property" (which includes property acquired by deed in
lieu of foreclosure) and "net income from foreclosure property" are defined by
reference to the rules applicable to real estate investment trusts. Generally,
foreclosure property would be treated as such for a period of two years, with
possible extensions. Net income from foreclosure property generally means gain
from the sale of foreclosure property that is inventory property and gross
income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
Sales of REMIC Securities
General. Except as provided below, if a Regular or REMIC Residual Security
is sold, the seller will recognize gain or loss equal to the difference between
the amount realized in the sale and its adjusted basis in the Security. The
adjusted basis of a REMIC Regular Security generally will equal the cost of such
Security to the seller, increased by any original issue discount or market
discount included in the seller's gross income with respect to such Security and
reduced by distributions on such Security previously received by the seller of
amounts included in the stated redemption price at maturity and by any premium
that has reduced the seller's interest income with respect to such Security. See
"--Discount and Premium." The adjusted basis of a REMIC Residual Security is
determined as described above under "--Taxation of Holders of REMIC Residual
Securities--Basis Rules and Distributions." Except as provided in the following
paragraph or under section 582(c) of the Code, any such gain or loss will be
capital gain or loss, provided such Security is held as a "capital asset"
(generally, property held for investment) within the meaning of section 1221 of
the Code.
Gain from the sale of a REMIC Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the income of the Holder of a REMIC Regular Security had income
accrued at a rate equal to 110% of the "applicable federal rate" (generally, an
average of current yields on Treasury securities) as of the date of purchase
over (ii) the amount actually includible in such Holder's income. In addition,
gain recognized on such a sale by a Holder of a REMIC Regular Security who
purchased such a Security at a market discount would also be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period such Security was held by such Holder, reduced by any market
discount includible in income under the rules described below under "--Discount
and Premium."
88
<PAGE>
If a Holder of a REMIC Residual Security sells its REMIC Residual Security
at a loss, the loss will not be recognized if, within six months before or after
the sale of the REMIC Residual Security, such Holder purchases another residual
interest in any REMIC or any interest in a taxable mortgage pool (as defined in
section 7701(i) of the Code) comparable to a residual interest in a REMIC. Such
disallowed loss would be allowed upon the sale of the other residual interest
(or comparable interest) if the rule referred to in the preceding sentence does
not apply to that sale. While this rule may be modified by Treasury regulations,
no such regulations have yet been published.
Transfers of REMIC Residual Securities. Section 860E(e) of the Code imposes
a substantial tax, payable by the transferor (or, if a transfer is through a
broker, nominee, or other middleman as the transferee's agent, payable by that
agent) upon any transfer of a REMIC Residual Security to a disqualified
organization and upon a pass-through entity (including regulated investment
companies, real estate investment trusts, common trust funds, partnerships,
trusts, estates, certain cooperatives, and nominees) that owns a REMIC Residual
Security if such pass-through entity has a disqualified organization as a
recordholder. For purposes of the preceding sentence, a transfer includes any
transfer of record or beneficial ownership, whether pursuant to a purchase, a
default under a secured lending agreement or otherwise.
The term "disqualified organization" includes the United States, any state
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of the foregoing (other than
certain taxable instrumentalities), any cooperative organization furnishing
electric energy or providing telephone service to persons in rural areas, or any
organization (other than a farmers' cooperative) that is exempt from federal
income tax, unless such organization is subject to the tax on unrelated business
income. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in such
entity are not held by disqualified organizations and (ii) information necessary
for the application of the tax described herein will be made available.
Restrictions on the transfer of a REMIC Residual Security and certain other
provisions that are intended to meet this requirement are described in the
Pooling and Servicing Agreement, and will be discussed more fully in the related
Prospectus Supplement relating to the offering of any REMIC Residual Security.
In addition, a pass-through entity (including a nominee) that holds a REMIC
Residual Security may be subject to additional taxes if a disqualified
organization is a record-holder therein. A transferor of a REMIC Residual
Security (or an agent of a transferee of a REMIC Residual Security, as the case
may be) will be relieved of such tax liability if (i) the transferee furnishes
to the transferor (or the transferee's agent) an affidavit that the transferee
is not a disqualified organization, and (ii) the transferor (or the transferee's
agent) does not have actual knowledge that the affidavit is false at the time of
the transfer. Similarly, no such tax will be imposed on a pass-through entity
for a period with respect to an interest therein owned by a disqualified
organization if (i) the record-holder of such interest furnishes to the
pass-through entity an affidavit that it is not a disqualified organization, and
(ii) during such period, the pass-through entity has no actual knowledge that
the affidavit is false.
89
<PAGE>
Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" to a U.S. Person (as defined below in "--Foreign Investors--Grantor
Trust Securities and REMIC Regular Securities") will be disregarded for all
federal tax purposes unless no significant purpose of the transfer is to impede
the assessment or collection of tax. A REMIC Residual Security would be treated
as constituting a noneconomic residual interest unless, at the time of the
transfer, (i) the present value of the expected future distributions on the
REMIC Residual Security is no less than the product of the present value of the
"anticipated excess inclusions" with respect to such Security and the highest
corporate rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the applicable REMIC Trust in an amount sufficient to satisfy the liability
for income tax on any "excess inclusions" at or after the time when such
liability accrues. Anticipated excess inclusions are the excess inclusions that
are anticipated to be allocated to each calendar quarter (or portion thereof)
following the transfer of a REMIC Residual Security, determined as of the date
such Security is transferred and based on events that have occurred as of that
date and on the Prepayment Assumption. See "--Discount and Premium" and
"--Taxation of Holders of REMIC Residual Securities-- Excess Inclusions."
The REMIC Regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC Residual Security has "improper knowledge" (i.e., either
knew, or should have known, that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC Trust). A
transferor is presumed not to have improper knowledge if (i) the transferor
conducts, at the time of a transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
come due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future; and (ii) the
transferee makes certain representations to the transferor in the affidavit
relating to disqualified organizations discussed above. Transferors of a REMIC
Residual Security should consult with their own tax advisors for further
information regarding such transfers.
Reporting and Other Administrative Matters. For purposes of the
administrative provisions of the Code, each REMIC Trust will be treated as a
partnership and the Holders of REMIC Residual Securities will be treated as
partners. The Trustee will prepare, sign and file federal income tax returns for
each REMIC Trust, which returns are subject to audit by the IRS. Moreover,
within a reasonable time after the end of each calendar year, the Trustee will
furnish to each Holder that received a distribution during such year a statement
setting forth the portions of any such distributions that constitute interest
distributions, original issue discount, and such other information as is
required by Treasury regulations and, with respect to Holders of REMIC Residual
Securities in a REMIC Trust, information necessary to compute the daily portions
of the taxable income (or net loss) of such REMIC Trust for each day during such
year. The Trustee will also act as the tax matters partner for each REMIC Trust,
either in its capacity as a Holder of a REMIC Residual Security or in a
fiduciary capacity. Each Holder of a REMIC Residual Security, by the acceptance
of its REMIC Residual Security, agrees that the Trustee will act as its
fiduciary in the performance of any duties required of it in the event that it
is the tax matters partner.
Each Holder of a REMIC Residual Security is required to treat items on its
return consistently with the treatment on the return of the REMIC Trust, unless
the Holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Trust. The IRS may assert a deficiency resulting from a failure to comply
with the consistency requirement without instituting an administrative
proceeding at the REMIC Trust level. Unless otherwise specified in the related
Prospectus Supplement, the Trustee does not intend to register any REMIC Trust
as a tax shelter pursuant to section 6111 of the Code.
Termination
In general, no spec al tax consequences will apply to a Holder of a REMIC
Regular Security upon the termination of a REMIC Trust by virtue of the final
payment or liquidation of the last Mortgage Loan remaining in the Trust Estate.
If a Holder of a REMIC Residual Security's adjusted basis in its REMIC Residual
Security at the time such termination occurs exceeds the amount of cash
distributed to such Holder in liquidation of its interest, although the matter
is not entirely free from doubt, it would appear that the Holder of the REMIC
Residual Security is entitled to a loss equal to the amount of such excess.
90
<PAGE>
Debt Securities
General
With respect to each series of Debt Securities, special tax counsel to the
Sponsor, will deliver its opinion to the Sponsor that (unless otherwise limited
in the related Prospectus Supplement) the Securities will be classified as debt
of the Sponsor secured by the related Mortgage Loans. Consequently, the Debt S
curities will not be treated as ownership interests in the Mortgage Loans or the
Trust. Holders will be required to report income received with respect to the
Debt Securities in accordance with their normal method of accounting. For
additional tax consequences relating to Debt Securities purchased at a discount
or with premium, see "--Discount and Premium," below.
Special Tax Attributes
As described above, Grantor Trust Securities will possess certain specia
tax attributes by virtue of their being ownership interests in the underlying
Mortgage Loans. Similarly, REMIC Securities will possess similar attributes by
virtue of the REMIC provisions of the Code. In general, Debt Securities will not
possess such special tax attributes. Investors to whom such attributes are
important should consult their own tax advisors regarding investment in Debt
Securities.
Sale or Exchange
If a Holder of a Debt Security sells or ex hanges such Security, the Holder
will recognize gain or loss equal to the difference, if any, between the amount
received and the Holder's adjusted basis in the Security. The adjusted basis in
the Security generally will equal its initial cost, increased by any original
issue discount or market discount previously included in the seller's gross
income with respect to the Security and reduced by the payments previously
received on the Security, other than payments of qualified stated interest, and
by any amortized premium.
In general (except as described in "--Discount and Premium--Market
Discount," below), except for certain financial institutions subject to section
582(c) of the Code, any gain or loss on the sale or exchange of a Debt Security
recognized by an investor who holds the Security as a capital asset (within the
meaning of section 1221 of the Code), will be capital gain or loss and will be
long-term or short-term depending on whether the Security has been held for more
than one year.
Discount and Premium
A Security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and certain
Grantor Trust Fractional Interest Securities will be treated as having original
issue discount by virtue of the coupon stripping rules in section 1286 of the
Code. In very general terms, (i) original issue discount is treated as a form of
interest and must be included in a Holder's income as it accrues (regardless of
the Holder's regular method of accounting) using a constant yield method; (ii)
market discount is treated as ordinary income and must be included in a Holder's
income as principal payments are made on the Security (or upon a sale of a
Security); and (iii) if a Holder so elects, premium may be amortized over the
life of the Security and offset against inclusions of interest income. These tax
consequences are discussed in greater detail below.
Original Issue Discount
In general, a Security will be considered to be issued with original issue
discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The issue price of a Security is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial number of the Securities was sold. The issue pri e also includes any
accrued interest attributable to the period between the beginning of the first
Remittance Period and the Settlement Date. The stated redemption price at
maturity of a Security that has a notional principal amount or receives
principal only or that is or may be an Accrual Security is equal to the sum of
all distributions to be made under such Security. The stated redemption price at
maturity of any other Security is its stated principal amount, plus an amount
equal to the excess (if any) of the interest payable on the first Payment Date
over the interest that accrues for the period from the Settlement Date to the
first Payment Date.
91
<PAGE>
Notwithstanding the general definition, original issue discount will be
treated as zero if such discount is less than 0.25% of the stated redemption
price at maturity multiplied by its weighted average life. The weighted average
life of a Security is apparently computed for this purpose as the sum, for all
distributions included in the stated redemption price at maturity of the amounts
determined by multiplying (i) the number of complete years (rounding down for
partial years) from the Settlement Date until the date on which each such
distribution is expected to be made under the assumption that the Mortgage Loans
prepay at the rate specified in the related Prospectus Supplement (the
"Prepayment Assumption") by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the Security's
stated redemption price at maturity. If original issue discount is treated as
zero under this rule, the actual amount of original issue discount must be
allocated to the principal distributions on the Security and, when each such
distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules directly applicable to REMIC Securities and Debt Securities and applicable
by analogy to Grantor Trust Securities. Investors in Grantor Trust Securities
should be aware that there can be no assurance that the rules described below
will be applied to such Securities. Under these rules (described in greater
detail below), (i) the amount and rate of accrual of original issue discount on
each series of Securities will be based on (x) the Prepayment Assumption, and
(y) in the case of a Security calling for a variable rate of interest, an
assumption that the value of the index upon which such variable rate is based
remains equal to the value of that rate on the Settlement Date, and (ii)
adjustments will be made in the amount of discount accruing in each taxable year
in which the actual prepayment rate differs from the Prepayment Assumption.
Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The legislative history of this Code provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The Sponsor anticipates that the Prepayment Assumption
for each series of Securities will be consistent with this standard. The Sponsor
makes no representation, however, that the Mortgage Loans for a given series
will prepay at the rate reflected in the Prepayment Assumption for that series
or at any other rate. Each investor must make its own decision as to the
appropriate prepayment assumption to be used in deciding whether or not to
purchase any of the Securities.
Each Securityholder must include in gross income the sum of the "daily
portions" of original issue discount on its Security for each day during its
taxable year on which it held such Security. For this purpose, in the case of an
original Holder, the daily portions of original issue discount will be
determined as follows. A calculation will first be made of the portion of the
original issue discount that accrued during each "accrual period." The Trustee
will supply, at the time and in the manner required by the IRS, to
Securityholders, brokers and middlemen information with respect to the original
issue discount accruing on the Securities. Unless otherwise disclosed in the
related Prospectus Supplement, the Trustee will report original issue discount
based on accrual periods of one month, each beginning on a payment date (or, in
the case of the first such period, the Settlement Date) and ending on the day
before the next payment date.
Under section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (i) the sum of (A) the present values of all the distributions remaining
to be made on the Security, if any, as of the end of the accrual period and (B)
the distribution made on such Security during the accrual period of amounts
included in the stated redemption price at maturity, over (ii) the adjusted
issue price of such Security at the beginning of the accrual period. The present
value of the remaining distributions referred to in the preceding sentence will
be calculated based on (i) the yield to maturity of the Security, calculated as
of the Settlement Date, giving effect to the Prepayment Assumption, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, (iii) the Prepayment Assumption, and (iv) in the case of a
Security calling for a variable rate of interest, an assumption that the value
of the index upon which such variable rate is based remains the same as its
value on the Settlement Date over the entire life of such Security. The adjusted
issue price of a Security at any time will equal the issue price of such
Security, increased by the aggregate amount of previously accrued original issue
discount with respect to such Security, and reduced by the amount of any
distributions made on such Security as of that time of amounts included in the
stated redemption price at maturity. The original issue discount accruing during
any accrual period will then be allocated ratably to each day during the period
to determine the daily portion of original issue discount.
92
<PAGE>
In the case of Grantor Trust Strip Securities and certain REMIC Securities,
the calculation described in the preceding paragraph may produce a negative
amount of original issue discount for one or more accrual periods. No definitive
guidance has been issued regarding the treatment of such negative amounts. The
legislative history to section 1272(a)(6) indicates that such negative amounts
may be used to offset subsequent positive accruals but may not offset prior
accruals and may not be allowed as a deduction item in a taxable year in which
negative accruals exceed positive accruals. Holders of such Securities should
consult their own tax advisors concerning the treatment of such negative
accruals.
A subsequent purchaser of a Security that purchases such Security at a cost
less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
portion and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such Security for all days on or after the day of purchase).
Market Discount
A Holder that purchases a Security at a market discount, that is, at a
purchase price less than the remaining stated redemption price at maturity of
such Security (or, in the case of a Security with original issue discount, its
adjusted issue price), will be required to allo ate each principal distribution
first to accrued market discount on the Security, and recognize ordinary income
to the extent such distribution does not exceed the aggregate amount of accrued
market discount on such Security not previously included in income. With respect
to Securities that have unaccrued original issue discount, such market discount
must be included in income in addition to any original issue discount. A Holder
that incurs or continues indebtedness to acquire a Security at a market discount
may also be required to defer the deduction of all or a portion of the interest
on such indebtedness until the corresponding amount of market discount is
included in income. In general terms, market discount on a Security may be
treated as accruing either (i) under a constant yield method or (ii) in
proportion to remaining accruals of original issue discount, if any, or if none,
in proportion to remaining distributions of interest on the Security, in any
case taking into account the Prepayment Assumption. The Trustee will make
available, as required by the IRS, to Holders of Securities information
necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a Security will be
considered to be zero if such discount is less than 0.25% of the remaining
stated redemption price at maturity of such Security multiplied by its weighted
average remaining life. Weighted average remaining life presumably would be
calculated in a manner similar to weighted average life, taking into account
payments (including prepayments) prior to the date of acquisition of the
Security by the subsequent purchaser. If market discount on a Security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the Security and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a Security that purchases such Security at a cost greater
than its remaining stated redemption price at maturity will be considered to
have purchased such Security (a "Premium Security") at a premium. Such a
purchaser need not include in income any remaining original issue discount and
may elect, under section 171(c)(2) of the Code, to treat such premium as
"amortizable bond premium." If a Holder makes such an election, the amount of
any interest payment that must be included in such Holder's income for each
period ending on a Payment Date will be reduced by the portion of the premium
allocable to such period based on the Premium Security's yield to maturity. The
legislative history of the Tax Reform Act of 1986 states that such premium
amortization should be made under principles analogous to those governing the
accrual of market discount (as discussed above under "--Market Discount"). If
such election is made by the Holder, the election will also apply to all bonds
the interest on which is not excludible from gross income ("fully taxable
bonds") held by the Holder at the beginning of the first taxable year to which
the election applies and to all such fully taxable bonds thereafter acquired by
it, and is irrevocable without the consent of the IRS. If such an election is
not made, (i) such a Holder must include the full amount of each interest
payment in income as it accrues, and (ii) the premium must be allocated to the
principal distributions on the Premium Security and, when each such distribution
is received, a loss equal to the premium allocated to such distribution will be
recognized. Any tax benefit from the premium not previously recognized will be
taken into account in computing gain or loss upon the sale or disposition of the
Premium Security.
93
<PAGE>
Some Securities may provide for only nominal distributions of principal in
comparison to the distributions of interest thereon. It is possible that the IRS
or the Treasury Department may issue guidance excluding such Securities from the
rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that such a Security will be treated as having
original issue discount equal to the excess of the total payments to be received
thereon over its issue price. In such event, section 1272(a)(6) of the Code
would govern the accrual of such original issue discount, but a Holder would
recognize substantially the same income in any given period as would be
recognized if an election were made under section 171(c)(2) of the Code. Unless
and until the Treasury Department or the IRS publishes specific guidance
relating to the tax treatment of such Securities, the Trustee intends to furnish
tax information to Holders of such Securities in accordance with the rules
described in the preceding paragraph.
Special Election
A Holder may elect to include in gross income al "interest" that accrues on
the Security by using a constant yield method. For purposes of the election, the
term "interest" includes stated interest, acquisition discount, original issue
discount, de minimis original issue discount, market discount, de minimis market
discount and unstated interest as adjusted by any amortizable bond premium or
acquisition premium. A Holder should consult its own tax advisor regarding the
time and manner of making and the scope of the election and the implementation
of the constant yield method.
Backup Withholding
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Securities, may be subject to the "backup withholding
tax" under section 3406 of the Code at a rate of 31% if recipients of such
distributions fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from such tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against such recipient's federal income
tax. Furthermore, certain penalties may be imposed by the IRS on a recipient of
distributions that is required to supply information but that does not do so in
the proper manner.
Foreign Investors
Grantor Trust, REMIC Regular and Debt Securities
Interest, including origin l issue discount, distributable on Grantor
Trust, REMIC Regular or Debt Securities received by a Holder who or which is not
a United States person, as defined below (other than a foreign bank and certain
other persons), generally will not be subject to the normal 30 percent United
States withholding tax (or lower treaty rate) imposed with respect to such
payments, provided that such Holder fulfills certain certification requirements.
Under such requirements, the Holder must certify, under penalties of perjury,
that it is not a "United States person" and provide its name and address. If
income or gain with respect to a security is effectively connected with a United
States trade or business carried on by a Holder who or which is not a United
States person, the 30 percent withholding tax will not apply but such Holder
will be subject to United States federal income tax at graduated rates
applicable to United States persons.
For this purpose, "United States person" means a person who or which is for
United States federal income tax purposes a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof, or an
estate or trust that is subject to United States federal income tax, regardless
of the source of its income. Proposed Treasury regulations, which would be
effective for payments made after December 31, 1997, if adopted in their current
form, would provide alternative certification requirements and means for
claiming the exemption from federal income and withholding tax. Investors who
are Non-U.S. Persons should consult their own tax advisors regarding the
specific tax consequences to them of owning a Grantor Trust, REMIC Regular or
Debt Security.
REMIC Residual Securities
Amounts distributed to a Holder of a REMIC Residual Security that is a not
a U.S. Person generally will be treated as interest f r purposes of applying the
30% (or lower treaty rate) withholding tax on income that is not effectively
connected with a U.S. trade or business. Temporary Treasury Regulations clarify
that amounts not constituting excess inclusions that are distributed on a REMIC
Residual Security to a Holder that is not a U.S. Person generally will be exempt
from U.S. federal income and withholding tax, subject to the same conditions as
described above, but only to the extent that the obligations directly underlying
the REMIC Trust that issued the REMIC Residual Security (e.g., Mortgage Loans or
regular interests in another REMIC) were issued after July 18, 1984. In no case
will any portion of REMIC income that constitutes an excess inclusion be
entitled to any exemption from the withholding tax or a reduced treaty rate for
withholding. See "--REMIC Securities--Taxation of Holders of REMIC Residual
Securities--Excess Inclusions."
THE FEDERAL INCOME TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON AN INVESTOR'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
94
<PAGE>
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose certain requirements on those employee
benefit plans to which they apply ("Plans") and on those persons who are
fiduciaries with respect to such Plans. The following is a general discussion of
such requirements, and certain applicable exceptions to and administrative
exemptions from such requirements.
Before purchasing any Certificates, a Plan fiduciary should determine
whether there exists any prohibition to such purchase under the requirements of
ERISA, whether prohibited transaction exemptions such as PTE 83-1 or any
individual administrative exemption (as described below) applies, including
whether the appropriate conditions set forth therein would be met, or whether
any statutory prohibited transaction exemption is applicable, and further should
consult the applicable Prospectus Supplement relating to such Series of
Certificates.
Certain Requirements Under ERISA
General
In accordance with ERISA's general fiduciary standards, before investing in
a Certificate a Plan fiduciary should determine whether to do so is permitted
under the governing Plan instruments and is appropriate for the Plan in view of
its overall investment policy and the composition and diversification of its
portfolio. A Plan fiduciary should especially consider the ERISA requirement of
investment prudence and the sensitivity of the return on the Certificates to the
rate of principal repayments (including prepayments) on the Mortgage Loans or
Contracts, as discussed in the related Prospectus Supplement and in "Prepayment
and Yield Considerations" herein.
Parties in Interest/Disqualified Persons. Other provisions of ERISA (and
corresponding provisions of the Code) prohibit certain transactions involving
the assets of a Plan and persons who have certain specified relationships to the
Plan (so-called "parties in interest" within the meaning of ERISA or
"disqualified persons" within the meaning of the Code). The Depositor, the
Servicer (if any) or the Trustee or certain affiliates thereof might be
considered or might become "parties in interest" or "disqualified persons" with
respect to a Plan. If so, the acquisition or holding of Certificates by or on
behalf of such Plan could be considered to give rise to a "prohibited
transaction" within the meaning of ERISA and the Code unless an administrative
exemption described below or some other exemption is available.
Special caution should be exercised before the assets of a Plan are used to
purchase a Certificate if, with respect to such assets, the Depositor, the
Servicer (if any) or the Trustee or an affiliate thereof either: (a) has
investment discretion with respect to the investment of such assets of such
Plan; or (b) has authority or responsibility to give, or regularly gives
investment advice with respect to such assets for a fee and pursuant to an
agreement or understanding that such advice will serve as a primary basis for
investment decisions with respect to such assets and that such advice will be
based on the particular investment needs of the Plan.
95
<PAGE>
Delegation of Fiduciary Duty
Further, if the assets included in a Trust Fund were deemed to constitute
Plan assets, it is possible that a Plan's investment in the Certificates might
be deemed to constitute a delegation, under ERISA, of the duty to manage Plan
assets by the fiduciary deciding to invest in the Certificates, and certain
transactions involved in the operation of the Trust Fund might be deemed to
constitute prohibited transactions under ERISA and the Code.
The U.S. Department of Labor (the "Department") has published final
regulations (the "Regulations") concerning whether or not a Plan's assets would
be deemed to include an interest in the underlying assets of an entity (such as
a Trust Fund) for purposes of the reporting and disclosure and general fiduciary
responsibility provisions of ERISA, as well as for the prohibited transaction
provisions of ERISA and the Code, if the Plan acquires an "equity interest"
(such as a Certificate) in such entity.
Certain exceptions are provided in the Regulations whereby an investing
Plan's assets would be deemed merely to include its interest in the Certificates
instead of being deemed to include an interest in the assets of a Trust Fund.
However, it cannot be predicted in advance nor can there be any continuing
assurance whether such exceptions may be met. For example, one of the exceptions
in the Regulations states that the underlying assets of an entity will not be
considered "plan assets" if, immediately after the most recent acquisition of
any equity interest in the entity, whether or not from the issuer or an
underwriter, less than 25% of the value of each class of equity interest is held
by "benefit plan investors," which are defined as Plans, individual retirement
accounts, and employee benefit plans not subject to ERISA (for example,
governmental plans), but this exception is tested immediately after each
acquisition of an equity interest in the entity whether upon initial issuance or
in the secondary market.
Administrative Exemptions
Individual Administrative Exemptions. Several underwriters of
mortgage-backed securities have applied for and obtained ERISA prohibited
transaction exemptions (each, an "Individual Exemption") which are in some
respects broader than Prohibited Transaction Class Exemption 83-1 (described
below). Such exemptions can only apply to mortgage-backed securities which among
other conditions, are sold in an offering with respect to which such underwriter
serves as the sole or a managing underwriter, or as a selling or placement
agent. If such an Individual Exemption might be applicable to a Series of
Certificates, the related Prospectus Supplement will refer to such possibility.
An Individual Exemption does not apply to Plans sponsored by the Restricted
Group (as defined below) or the Trustee.
Some of the conditions that must be satisfied for an Individual Exemption
to apply are the following:
(1) The rights and interests evidenced by Certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by other
Certificates of the Trust Fund;
(2) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from any of Standard & Poor's Ratings Services ("S&P"),
Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Rating
Co. ("D&P") or Fitch Investors Service, L.P. ("Fitch");
(3) The Trustee is not an affiliate of any of the Depositor, the
underwriter specified in the applicable Prospectus Supplement, the Servicer
(if any), any obligor with respect to Mortgage Loans included in the Trust
Fund constituting more than five percent of the aggregate unamortized
principal balance of the assets in the Trust Fund, or any affiliate of such
parties (the "Restricted Group"); and
(4) The Plan investing in the Certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
96
<PAGE>
If the conditions to an Individual Exemption are met, whether or not a
Plan's assets would be deemed to include an ownership interest in the Mortgage
Loans in a Mortgage Pool, the acquisition, holding and resale of the
Certificates by Plans would be exempt from the prohibited transaction provisions
of ERISA and the Code.
Moreover, an Individual Exemption can provide relief from certain
self-dealing/conflict of interest prohibited transactions, only if, among other
requirements, (i) a Plan's investment in Certificates of any class does not
exceed twenty-five percent of all of the Certificates of that Class outstanding
at the time of the acquisition and (ii) immediately after the acquisition no
more than twenty-five percent of the assets of the Plan with respect to which
such person is a fiduciary are invested in Certificates representing an interest
in one or more trusts containing assets sold or served by the same person.
PTE 83-1. Prohibited Transaction Class Exemption 83-1 for Certain
Transactions Involving Mortgage Pool Investment Trusts ("PTE 83-1") permits
certain transactions involving the creation, maintenance and termination of
certain residential mortgage pools and the acquisition and holding of certain
residential mortgage pool pass-through certificates by Plans, whether or not the
Plan's assets would be deemed to include an ownership interest in the mortgages
in the mortgage pool, and whether or not such transactions would otherwise be
prohibited under ERISA.
The term "mortgage pool pass-through certificate" is defined in PTE 83-1 as
"a certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such a certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any fees
retained by the pool sponsor." It appears that, for purposes of PTE 83-1, the
term "mortgage pool pass-through certificate" would include Certificates issued
in a single Class or in multiple classes that evidence a beneficial undivided
fractional interest in a mortgage pool of one- to four-family residential
mortgage loans and entitle the holder thereof to both a specified percentage of
future interest payments (after permitted deductions) and a specified percentage
of future principal payments.
However, it appears that PTE 83-1 does or might not apply to the purchase
and holding of (a) Certificates that evidence the beneficial ownership only of a
specified percentage of future interest payments (after permitted deductions) on
a Trust Fund or only of a specified percentage of future principal payments on a
Trust Fund, (b) Residual Certificates, (c) Certificates evidencing ownership
interests in a Trust Fund which includes Mortgage Loans secured by multifamily
residential properties or shares issued by cooperative housing corporations, or
(d) Certificates which are subordinated to other classes of Certificates of such
Series. Accordingly, unless exemptive relief other than PTE 83-1 applies, Plans
should not purchase any such Certificates.
PTE 83-1 sets forth certain "general conditions" and "specific conditions"
to its applicability. Section 11 of PTE 83-1 sets forth the following general
conditions to the application of the exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans or the property
securing such loans, and for indemnifying certificateholders against reductions
in pass-through payments due to property damage or defaults in loan payments;
(ii) the existence of a pool trustee who is not an affiliate of the pool
sponsor; and (iii) a requirement that the sum of all payments made to and
retained by the pool sponsor, and all funds inuring to the benefit of the pool
sponsor as a result of the administration of the mortgage pool, must represent
not more than adequate consideration for selling the mortgage loans plus
reasonable compensation for services provided by the pool sponsor to the pool.
The system of insurance or protection referred to in clause (i) above must
provide such protection and indemnification up to an amount not less than the
greater of 1% of the aggregate unpaid principal balance of the pooled mortgages
or the unpaid principal balance of the largest mortgage in the pool. It should
be noted that in promulgating PTE 83-1 (and a predecessor exemption), the
Department did not have under its consideration interests in pools of the exact
nature as some of the Certificates described herein.
97
<PAGE>
Exempt Plans
Employee benefit plans which are governmental plans (as defined in Section
3(32) of ERISA), and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements and assets of such plans may be invested
in Senior Certificates without regard to the ERISA considerations described
above, subject to the provisions of other applicable federal and state law.
Unrelated Business Taxable Income -- Residual Certificates
The purchase of a Residual Certificate by such plans, or by most varieties
of ERISA Plans, may give rise to "unrelated business taxable income" as
described in Code Sections 511-515 and 860E. Further, prior to the purchase of
Residual Certificates, a prospective transferee may be required to provide an
affidavit to a transferor that it is not a "Disqualified Organization" which
term includes certain tax-exempt entities not subject to Code Section 511,
including certain governmental plans, as discussed herein under the caption
"Certain Federal Income Tax Consequences--Federal Income Tax Consequences for
REMIC Certificates--Income Tax Consequences for REMIC Certificates--Taxation of
Residual Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates."
Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is particularly important that potential
investors who are Plan fiduciaries carefully consider the consequences under
ERISA of their acquisition and ownership of Certificates.
The sale of Certificates to a Plan is in no respect a representation by the
Depositor or the applicable underwriter that this investment meets all relevant
legal requirements with respect to investments by Plan generally or any
particular Plan, or that this investment is appropriate for Plans generally or
any particular Plan.
LEGAL INVESTMENT
If specified in the related Prospectus Supplement, the Certificates of one
or more classes offered pursuant to this Prospectus will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended ("SMMEA"), so long as they are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization. As "mortgage related securities," such Certificates will
constitute legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including, but not limited
to, state-chartered savings banks, commercial banks, savings and loan
associations and insurance companies, as well as trustees and state government
employee retirement systems) created pursuant to or existing under the laws of
the United States or of any state (including the District of Columbia and Puerto
Rico) whose authorized investments are subject to state regulation to the same
extent that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Pursuant to SMMEA, a
number of states enacted legislation, on or before the October 3, 1991 cutoff
for such enactments, limiting to varying extents the ability of certain entities
(in particular, insurance companies) to invest in "mortgage related securities,"
in most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Accordingly, the investors affected by such
legislation will be authorized to invest in the Certificates only to the extent
provided in such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with mortgage
related securities without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in mortgage related
securities, and national banks may purchase mortgage related securities for
their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. ss. 24 (Seventh), subject in each
case to such regulations as the applicable federal regulatory authority may
prescribe. In this connection, federal credit unions should review National
Credit Union Administration (the "NCUA") Letter to Credit Unions No. 96, as
modified by Letter No. 108, which includes guidelines to assist federal credit
unions in making investment decisions for mortgage related securities. The NCUA
98
<PAGE>
has adopted rules, effective December 2, 1991, which prohibit federal credit
unions from investing in certain mortgage related securities (including
securities such as certain series, Classes or Subclasses of Certificates),
except under limited circumstances.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Securities Activities" dated
January 28, 1992 (the "Policy Statement") of the Federal Financial Institutions
Examination Council. The Policy Statement, which has been adopted by the Board
of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Comptroller of the Currency and the Office of Thrift
Supervision, effective February 10, 1992, and by the NCUA (with certain
modifications), effective June 26, 1992, prohibits depository institutions from
investing in certain "high-risk" mortgage securities (including securities such
as certain series, Classes or Subclasses of Certificates), except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any
Certificates, as certain series, Classes or Subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying" and, with regard to any Certificates
issued in book-entry form, provisions which may restrict or prohibit investment
in securities which are issued in book-entry form.
Other classes of Certificates offered pursuant to this Prospectus will not
constitute "mortgage related securities" under SMMEA because they will not
represent beneficial ownership interests in qualifying mortgage loans under
SMMEA. The appropriate characterization of those Certificates under various
legal investment restrictions, and thus the ability of investors subject to
these restrictions to purchase the Certificates, may be subject to significant
interpretive uncertainties. All investors whose investment authority is subject
to legal restrictions should consult their own legal advisors to determine
whether, and to what extent, the Certificates will constitute legal investments
for them.
No representation is made as to the proper characterization of the
Certificates for legal investment or financial institution regulatory purposes,
or as to the ability of particular investors to purchase Certificates under
applicable legal investment restrictions. The uncertainties described above may
(and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the Certificates adversely
affect the liquidity of the non-SMMEA Certificates.
Investors should consult with their own legal advisors in determining
whether and to what extent the Certificates constitute legal investments for
such investors.
PLAN OF DISTRIBUTION
The Depositor may sell the Certificates offered hereby in Series either
directly or through underwriters. The related Prospectus Supplement or
Prospectus Supplements for each Series will describe the terms of the offering
for that Series and will state the public offering or purchase price of each
Class of Certificates of such Series, or the method by which such price is to be
determined, and the net proceeds to the Depositor from such sale.
If the sale of any Certificates is made pursuant to an underwriting
agreement pursuant to which one or more underwriters agree to act in such
capacity, such Certificates will be acquired by such underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
99
<PAGE>
varying prices to be determined at the time of sale or at the time of commitment
therefor. Firm commitment underwriting and public reoffering by underwriters may
be done through underwriting syndicates or through one or more firms acting
alone. The specific managing underwriter or underwriters, if any, with respect
to the offer and sale of a particular Series of Certificates will be set forth
on the cover of the Prospectus Supplement related to such Series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement. The Prospectus Supplement will describe any discounts and
commissions to be allowed or paid by the Depositor to the underwriters, any
other items constituting underwriting compensation and any discounts and
commissions to be allowed or paid to the dealers. The obligations of the
underwriters will be subject to certain conditions precedent. Unless otherwise
provided in the related Prospectus Supplement, the underwriters with respect to
a sale of any Class of Certificates will be obligated to purchase all such
Certificates if any are purchased. Pursuant to each such underwriting agreement,
the Depositor will indemnity the related underwriters against certain civil
liabilities, including liabilities under the Securities Act.
If any Certificates are offered other than through underwriters pursuant to
such underwriting agreements, the related Prospectus Supplement or Prospectus
Supplements will contain information regarding the terms of such offering and
any agreements to be entered into in connection with such offering.
Purchasers of Certificates, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the Securities Act of 1933 in connection with reoffers and sales by
them of Certificates. Certificateholders should consult with their legal
advisors in this regard prior to any such reoffer and sale.
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Depositor, any affiliate thereof or any other person or
persons specified therein may purchase some or all of one or more Classes of
Certificates of such Series from the underwriter or underwriters or such other
person or persons specified in such Prospectus Supplement. Such purchaser may
thereafter from time to time offer and sell, pursuant to this Prospectus and the
related Prospectus Supplement, some or all of such Certificates so purchased,
directly, through one or more underwriters to be designated at the time of the
offering of such Certificates, through dealers acting as agent and/or principal
as in such other manner as may be specified in the related Prospectus
Supplement. Such offering may be restricted in the manner specified in such
Prospectus Supplement. Such transactions may be effected at market prices
prevailing at the time of sale, at negotiated prices or at fixed prices. Any
underwriters and dealers participating in such purchaser's offering of such
Certificates may receive compensation in the form of underwriting discounts or
commissions from such purchaser and such dealers may receive commissions from
the investors purchasing such Certificates for whom they may act as agent (which
discounts or commissions will not exceed those customary in those types of
transactions involved). Any dealer that participates in the distribution of such
Certificates may be deemed to be an "underwriter" within the meaning of the
Securities Act of 1933, and any commissions and discounts received by such
dealer and any profit on the resale of such Certificates by such dealer might be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
LEGAL MATTERS
Certain legal matters and certain tax matters will be passed upon for the
Depositor by Dewey Ballantine, New York, New York and/or such other counsel as
will be named on the related Prospectus Supplement.
RATING
At the date of issuance of each Series of Certificates, the Certificates
offered hereby will be rated in one of the four highest categories by at least
one Rating Agency. See "Ratings" in the related Prospectus Supplement. A
securities rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
agency. Each securities rating should be evaluated independently of any other
rating.
100
<PAGE>
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Commission in
Washington, D.C. Copies may be obtained at rates prescribed by the Commission
upon request to the Commission, and may be inspected, without charge, at the
offices of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. See
"Available Information."
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMCs Information Statement and the most recent Supplement to such Information
Statement and any quarterly report made available by FHLMC can be obtained by
writing or calling the Investor Inquiry Department at FHLMC at 8200 Jones Branch
Drive, McLean Virginia 22102 (outside Washington, D.C. metropolitan area,
telephone 800-336-FMPC; within Washington, D.C. metropolitan area, telephone
703-759-8160). The Depositor has not and will not participate in the preparation
of FHLMC's Offering Circulars, Information Statements or Supplements.
Copies of FNMA's most recent Prospectus for FNMA Certificates and FNMA's
annual report and quarterly financial statements as well as other financial
information are available from the Senior Vice President for Investor Relations
of FNMA, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7115). The
Depositor has not and will not participate in the preparation of FNMA's
Prospectuses.
101
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
Term Page
- ---- ----
Act...........................................................................72
Advance.......................................................................58
Advance Reserve...............................................................44
Advances......................................................................10
APR...........................................................................21
ARM Buy-Outs..................................................................21
Balloon Loan..................................................................19
Balloon Loans.................................................................13
Balloon Period ...............................................................19
Basic Senior Class Distribution...............................................35
Buy-Down Account..............................................................19
Buy-Down Loans................................................................19
Call protection...............................................................40
CERCLA........................................................................78
Certificate Account...........................................................55
Certificate Account Depository................................................55
Certificateholder .............................................................1
Certificates...................................................................1
Class..........................................................................1
Code .....................................................................11, 81
Commission.....................................................................3
Compound Interest Certificates................................................31
Contract Pool ................................................................17
Contract Rate..............................................................7, 21
Contracts..................................................................1, 21
Convertible Mortgage Loans....................................................17
Cooperative Loans ............................................................17
Cooperative Notes ............................................................17
Cooperatives .................................................................17
Credit Enhancer ..............................................................16
Cut-Off Date Aggregate Principal Balance..................................18, 22
D&P..........................................................................107
Debt Securities...............................................................82
Deferred Interest.........................................................13, 19
Definitive Certificate........................................................30
Deleted Loan..................................................................27
Depositor...............................................................1, 4, 52
Determination Date............................................................32
Direct or Indirect Participants...............................................15
Disqualified Organization.....................................................94
Distribution Dates.............................................................7
DTC...........................................................................30
Due Date..................................................................18, 22
Due Period....................................................................41
Eligible Investments..........................................................44
Environmental Condition.......................................................78
EPA...........................................................................79
ERISA....................................................................11, 106
Excess servicing ...........................................................102
Extension protection..........................................................40
FASIT .........................................................................2
FASIT High-Yield Securities ................................................2,11
FASIT Ownership Interest ......................................................2
FASIT Regular Securities ...................................................2,11
102
<PAGE>
FDIC..........................................................................55
FHLBB.........................................................................72
FIRREA........................................................................80
Fitch........................................................................107
Foreign persons..............................................................105
Funding Period................................................................32
Gain From Acquired Property...................................................34
GEM Loans.....................................................................20
GPM Fund......................................................................21
GPM Mortgage Loans............................................................20
Grantor Trust Estate..........................................................82
Indemnification Payments......................................................34
Initial Deposit...............................................................43
Insurance Proceeds............................................................56
Interest Accrual Period.......................................................49
Interest Rate..................................................................1
Liquidated Contract...........................................................34
Liquidated Mortgage Loan..................................................14, 34
Liquidation Proceeds......................................................14, 56
Loan Sale Agreement...........................................................24
Loan-to-Value Ratio.......................................................18, 21
Moody's......................................................................107
Mortgage Certificate Pool.....................................................17
Mortgage Loans.................................................................1
Mortgage Notes................................................................17
Mortgage Pool.................................................................17
Mortgage Rate..................................................................7
Mortgaged Properties..........................................................19
Mortgages.....................................................................17
Mortgagor.....................................................................13
Multi-Class Certificates.......................................................1
Net Contract Rate .............................................................7
Net Insurance Proceeds........................................................56
Net Liquidation Proceeds......................................................56
Net Mortgage Rate .............................................................7
Non-REMIC Certificates........................................................82
Notional Amount................................................................1
OTS...........................................................................72
Pass-Through Entity...........................................................94
Pass-Through Rate .............................................................7
Paying Agent .................................................................57
Payment Deficiencies..........................................................43
Percentage Certificates.......................................................30
Plans........................................................................106
Pool...........................................................................1
Pool Distribution Amount......................................................32
Pool Value Group ............................................................39
Pooling and Servicing Agreement................................................4
Prepayment Interest Shortfall.................................................58
PTE 83-1.....................................................................108
Purchase Obligation...........................................................12
Purchase Price................................................................26
Rating Agency.................................................................11
Record Date....................................................................7
Registration Statement.........................................................3
103
<PAGE>
Regular Certificates..........................................................29
Relief Act................................................................16, 79
REMIC.........................................................................82
REMIC Certificates............................................................82
REMIC Regulations ............................................................81
Repurchase Proceeds...........................................................32
Residual Certificates.........................................................29
Residual Holders..............................................................90
Scheduled Principal...........................................................33
Secured-creditor exemption....................................................78
Securities Act.................................................................3
Senior Certificates........................................................2, 29
Senior Class Credit Enhancement...............................................35
Senior Class Distributable Amount.............................................33
Senior Class Principal Portion................................................33
Senior Class Shortfall........................................................35
Senior Class Shortfall Accruals...............................................35
Series.........................................................................1
Servicer.......................................................................1
Servicing Account ............................................................61
Servicing Fee..................................................................7
Shifting Interest Certificates.................................................2
SMMEA ...................................................................10, 109
Special Distributions.........................................................41
Special Hazard Contract.......................................................46
Special Hazard Mortgage Loan..................................................46
Standard Certificateholder...................................................100
Standard Certificates..........................................................1
Standard Hazard Insurance Policy..............................................23
Stated Amount..................................................................1
Stripped Certificates..........................................................1
Sub-Servicer...............................................................4, 54
Sub-Servicing Account.........................................................55
Subclass.......................................................................1
Subordinated Amount............................................................9
Subordinated Certificates..................................................2, 29
Subordinated Class Distributable Amount.......................................33
Subordinated Class Principal Portion..........................................34
Subordination Reserve Fund.....................................................9
Substitute Loan...............................................................27
Thrift institutions...........................................................93
Title V...................................................................73, 77
Trust Fund.....................................................................1
U.S. Person...................................................................95
UCC.......................................................................69, 74
Unaffiliated Sellers...........................................................4
Unpaid Interest Shortfall.....................................................36
Voting Interests..............................................................65
Window Period.................................................................72
Window Period Loans...........................................................72
Window Period States..........................................................72
104
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The expenses expected to be incurred in connection with the issuance
and distribution of the securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
SEC Registration Fee........................................ $221,250
NASD Filing Fee............................................. $ N/A
Blue Sky Fees and Expenses.................................. $ 15,000
Legal Fees and Expenses..................................... $250,000
Accounting Fees and Expenses................................ $ 75,000
Trustee's Fees and Expenses................................. $ 50,000
Printing and Engraving Fees................................. $120,000
Rating Agency Fees.......................................... $ 20,000
Miscellaneous............................................... $ 10,000
--------
Total..................................................... $761,250
========
Item 15. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law provides that a
Delaware corporation may indemnify any persons, including officers and
directors, who are, or are threatened to be made, parties to any threatened,
pending or completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such officer or
director acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, for criminal proceedings,
had no reasonable cause to believe that his conduct was illegal. A Delaware
corporation may indemnify officers and directors in an action by or in the right
of the corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer of
director actually and reasonably incurred.
The Pooling and Servicing Agreements for each series of Certificates
will provide that Prudential and any director, officer, employee or agent of
Prudential will be entitled to indemnification by the Trust Fund and will be
held harmless against any loss, liability or expense incurred in connection with
any legal action relating to the Pooling and Servicing Agreement or the
Certificates, other than any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or negligence in the performance of his or its
duties thereunder or by reason of reckless disregard of his or its obligations
and duties thereunder.
II-1
<PAGE>
Item 16. Exhibits.
(a) Financial statements filed as part of the Registration Statement: Not
applicable.
(b) Exhibits -
1.1(a)* Form of Underwriting Agreement (Version A).
1.1(b)* Form of Underwriting Agreement (Version B).
4.1(a)* Form of Pooling and Servicing Agreement (Straight
Pass-Through), including form of Certificates.
4.1(b)* Form of Pooling and Servicing Agreement (Senior/Subordinated),
including form of Certificates.
4.1(c)* Form of Pooling and Servicing Agreement (Multiclass),
including form of Certificates.
4.1(d)* Form of Pooling and Servicing Agreement (Senior/Subordinated),
including form of Certificates.
4.1(e)** Form of Forward Purchase Agreement.
5.1*** Opinion of Dewey Ballantine LLP regarding legality of
Certificates.
8.1*** Opinion of Dewey Ballantine LLP regarding tax matters.
10.1* Excerpts from Purchase Agreement.
23.1*** Consent of Dewey Ballantine LLP(included as part of Exhibit 5.1
and 8.1).
24.1*** Power of Attorney.
- -------------------
* Previously filed in connection with Registration Statement on Form S-11
(Registration No. 33- 24717) and incorporated herein by reference.
** Previously filed in connection with Registration Statement on Form S-3
(Registration No. 33- 91148) and incorporated herein by reference.
*** Previously filed with this Registration Statement.
Item 17. Undertakings.
(a) Undertaking pursuant to Rule 415
The undersigned Registrant hereby undertakes:
II-2
<PAGE>
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
(iii)to include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change of such information in the
Registration Statement.
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment any
of the Securities being registered which remain unsold at the
termination of the offering.
(b) Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) Undertaking in respect of incorporation by reference.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934, as amended, that is incorporated by reference
in the Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-3 and has duly caused this Pre-Effective
Amendment No. 1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on the 1st day of
September, 1998.
PRUDENTIAL SECURITIES SECURED FINANCING
CORPORATION
By: /s/ Norman Chaleff
-------------------------------
Norman Chaleff
Director
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 has been signed below by the following persons in
the capacities indicated on September 2, 1998.
Signature Title
- --------- -----
* Director and President
- ---------------------------- (Principal Executive Officer)
Vincent T. Pica
Director
- ----------------------------
Norman Chaleff
* Director
- ----------------------------
Leland B. Paton
* Director
- ----------------------------
Alan D. Hogan
* Chief Financial Officer
- ---------------------------- (Principal Financial
William Horan Officer and Principal
Accounting Officer)
* by Norman Chaleff as his true and lawful attorney-in-fact and agent.
II-4
<PAGE>
EXHIBIT INDEX
Exhibit Description
Number of Document
- ------ -----------
1.1(a)* Form of Underwriting Agreement (Version A).
1.1(b)* Form of Underwriting Agreement (Version B).
4.1(a)* Form of Pooling and Servicing Agreement
(Straight Pass-Through), including form of Certificates.
4.1(b)* Form of Pooling and Servicing Agreement
(Senior/Subordinated), including form of Certificates.
4.1(c)* Form of Pooling and Servicing Agreement (Multiclass),
including form of Certificates.
4.1(d)* Form of Pooling and Servicing Agreement
(Senior/Subordinated), including form of Certificates.
4.1(e)** Form of Forward Purchase Agreement.
5.1*** Opinion of Dewey Ballantine LLP regarding legality
of Certificates.
8.1*** Opinion of Dewey Ballantine LLP regarding tax matters.
10.1* Excerpts from Purchase Agreement.
23.1*** Consent of Dewey Ballantine LLP (included as
part of Exhibit 5.1 and 8.1).
24.1*** Power of Attorney.
- -------------------
* Previously filed in connection with Registration Statement on Form S-11
(Registration No. 33-24717) and incorporated herein by reference.
** Previously filed in connection with Registration Statement on Form S-3
(Registration No. 33- 91148) and incorporated herein by reference.
*** Previously filed with this Registration Statement.
