PROSPECTUS SUPPLEMENT
(To Prospectus dated June 10, 1997)
================================================================================
$120,000,000
(approximate)
Mortgage Lenders Network Home Equity Loan Trust 1998-1
Issuer
Asset Backed Notes, Series 1998-1
[LOGO]
Mortgage Lenders Network USA, Inc.
Seller and Servicer
Prudential Securities Secured Financing Corporation
Depositor
The Mortgage Lenders Network Home Equity Loan Trust 1998-1 (the "Issuer")
will be formed pursuant to a deposit trust agreement to be dated as of March 1,
1998 (the "Trust Agreement") between Prudential Securities Secured Financing
Corporation (the "Depositor") and Wilmington Trust Company, as owner trustee
(the "Owner Trustee"). The Issuer is hereby offering $120,000,000 (approximate)
original principal amount of its Asset Backed Notes, Series 1998-1 (the
"Notes"). The Notes will be issued pursuant to an indenture, dated as of March
1, 1998 (the "Indenture"), between the Issuer and Norwest Bank Minnesota,
National Association, 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 Sales 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 MBIA Insurance Corporation (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] MBIA
For a discussion of significant matters affecting investment in the Notes,
see "Risk Factors" beginning on page S-14 herein, "Certain Prepayment and Yield
Considerations" beginning on page S-44 herein and "Risk Factors" beginning on
page 13 in the Prospectus.
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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
(together with First Union Capital Markets, a division of Wheat First Securities
Corp., 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 Notes are expected to be approximately
$119,652,000, 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 $350,000.
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 March 13, 1998. The Notes will
be offered in Europe and the United States of America.
Prudential Securities Incorporated First Union Capital Markets
The date of this Prospectus Supplement is March 5, 1998
<PAGE>
(continued from front cover)
The Mortgage Loans identified for inclusion in the Mortgage Pool as of the
close of business on February 17, 1998 (the "Statistical Calculation Date") will
be collectively referred to herein as the "Initial Mortgage Loans." The
aggregate of the principal balances of the Initial Mortgage Loans, determined as
of the Statistical Calculation Date, totaled approximately $91,963,685.88 (the
"Initial Mortgage Pool Balance"). Other Mortgage Loans satisfying the criteria
described herein (the "Additional Mortgage Loans") may be included in the
Mortgage Pool on or before the Closing Date. 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 Mortgage
Lenders Network USA, Inc. (the "Seller") through its network of brokers and
correspondents. 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 April 1998 (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
"Sales 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 August
2029 (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 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 applicable 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 applicable 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.
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.
ii
<PAGE>
It is a condition to the issuance of the Notes that they be rated "Aaa" by
Moody's Investors Service, Inc. and "AAA" by Standard and Poor's Ratings
Services, a Division of The McGraw-Hill Companies, Inc.
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 June 10, 1997, 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.
--------------------------
iii
<PAGE>
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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 ........... $120,000,000 (approximate) 6.755% Asset
Backed Notes, Series 1998-1 (the "Notes").
The Notes represent non-recourse obligations
of the Issuer. Proceeds of the assets in the
Trust Estate, payments under the Insurance
Policy, if any, and payments under the Demand
Note (as defined herein), if any, will be the
only sources of payments on the Notes. The
original principal amount of the Notes may be
increased or decreased by up to 5% on the
Closing Date, depending upon the Mortgage
Loans actually acquired by the Issuer and
pledged to the Indenture Trustee.
Issuer ....................... Mortgage Lenders Network Home Equity Loan
Trust 1998-1, a Delaware business trust (the
"Issuer"), established by the Depositor
pursuant to a deposit trust agreement, dated
as of March 1, 1998 (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....................... MLN Capital Corporation I, a Delaware
corporation (the "Company").
Seller and Servicer........... Mortgage Lenders Network USA, Inc., a
Delaware 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. 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 Delaware 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......... Norwest Bank Minnesota, National Association,
a national banking association, 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
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S-1
<PAGE>
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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.
Owner Trustee................. Wilmington Trust Company, a Delaware banking
corporation, 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 Dates................. With respect to the Initial Mortgage Loans,
the "Cut-off Date" is March 1, 1998. With
respect to the Additional Mortgage Loans, the
Cut-off Date is the later of (i) March 1,
1998 and (ii) their respective origination
dates, which have occurred prior to the
Closing Date.
Closing Date.................. On or about March 13, 1998.
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 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
applicable 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 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 applicable
Cut-off Date for each Mortgage Loan through
and including the last day of March 1998)
(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 March 1, 1998
(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, payments under the
Insurance Policy, if any, and payments under
the Demand Note, if any, will be the only
sources of payments on the Notes. The Notes
will be issued in a single class.
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S-2
<PAGE>
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The assets of the Trust Estate will consist
of (i) a pool (the "Mortgage Pool") of
Mortgage Loans, which are fixed rate mortgage
loans secured by first and second lien
mortgages or deeds of trust 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 applicable Cut-off
Date); (iii) security interests in the
Mortgaged Properties; (iv) the Issuer's
rights under the Sales 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).
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S-3
<PAGE>
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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"),
commencing April 27, 1998, 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 Connecticut, the State of Maryland,
the State of Delaware, the State of New York
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 such Payment Date,
together with any payments received under the
Insurance Policy. The "Available Funds" for
any Payment Date will generally consist of
the aggregate of the following amounts:
(i) the sum of (a) all scheduled
payments of principal and interest
received with respect to the
Mortgage Loans and due during the
related Due Period and (b) all
unscheduled principal payments or
recoveries on the 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
applicable 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 for such
Payment Date, any amounts deposited
in the Note Account in respect of
the repurchase, release, removal or
substitution of Mortgage Loans
during the related Collection Period
or amounts deposited in the Note
Account in connection with the
redemption of the 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 each Interest
Period prior to the Initial Redemption Date
(as defined herein) will be a per annum rate
equal to 6.755%, and for each Interest Period
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S-4
<PAGE>
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thereafter, a per annum rate equal to 7.255%.
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 Note Interest Rate on the
outstanding aggregate principal balance of
the 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 to pay
the full amount of Note Interest due on the
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 will be equal to the
aggregate of 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
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 the
Notes is less than the Required
Overcollateralization Amount for such Payment
Date, Excess Cash derived from Available
Funds, if any, will be paid on the Notes in
reduction of the Note Balance, up to the
amount necessary for the related
Overcollateralization Amount to equal the
applicable Required Overcollateralization
Amount. "Excess Cash" on any Payment Date
will be equal to Available Funds on such
Payment Date, reduced by the sum of (i) any
amounts payable to the Note Insurer for
Insured Payments paid on prior Payment Dates
and not yet reimbursed and for any unpaid
Note Insurer Premiums 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 Payment Date and (iii) the Monthly
Principal for the related Payment Date. Any
Excess Cash remaining after making required
payments on the 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
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S-5
<PAGE>
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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 May 1998 Payment Date. Accordingly, in
the case of the April 1998 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 the Notes
will be provided in part by
overcollateralization resulting from the
Aggregate Principal Balances of the Mortgage
Loans as of the end of each Due Period
exceeding the 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 be increased to,
and thereafter maintained at, the 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
Note Balance until the Overcollateralization
Amount reaches the 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 Mortgage Loans in
excess of the amount necessary to pay Note
Interest and the Monthly Principal required
to be paid on the Notes on any Payment Date
being applied to reduce the Note Balance to
zero no later than the Stated Maturity of the
Notes.
The "Overcollateralization Amount" for the
Notes on any Payment Date will be equal to
the amount by which the Aggregate Principal
Balance of the Mortgage Loans in the Mortgage
Pool as of the end of the related Due Period
exceeds the 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 the
Notes on such Payment Date. The "Required
Overcollateralization Amount" for the Notes
on any Payment Date will be equal to the
amount specified as such in the Indenture.
The "Overcollateralization Surplus" for the
Notes on any Payment Date will be the amount,
if any, by which the Overcollateralization
Amount on such Payment Date exceeds the then
applicable Required Overcollateralization
Amount. The "Overcollateralization Deficit"
for the Notes on any Payment Date will be the
amount, if any, by which the 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
Note Balance) exceeds the Aggregate Principal
Balance of the Mortgage Loans at the end of
the related Due Period.
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S-6
<PAGE>
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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 of the
Mortgage Loans with respect to certain
delinquency rate tests specified in the
Indenture. In addition, Excess Cash will be
applied to the payment in reduction of
principal of the Notes during the period that
the Mortgage Loans are unable to meet certain
tests specified in the Indenture based on
delinquency rates. Any increase in the
Required Overcollateralization Amount may
result in an accelerated amortization of the
Notes until such Required
Overcollateralization Amount is reached, and
any decrease in the Required
Overcollateralization Amount will result in a
decelerated amortization of the Notes until
such Required Overcollateralization Amount is
reached. See "Description of the
Notes-Overcollateralization Feature" herein.
G. Insurance Policy...... MBIA Insurance Corporation, 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, the sum of (a) the
Note Interest for such Payment Date minus
Available Funds and (b) the then existing
Overcollateralization Deficit, if any, after
application of Available Funds to reduce the
Note Balance on such Payment Date and (ii)
any shortfall in the amount required to pay a
Preference Amount 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.
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
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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") on each Payment Date payable from
amounts on deposit in the Note Account.
H. Demand Note........... Mortgage Lenders Network USA, Inc. will issue
a note (the "Demand Note") in favor of the
Company which can be drawn against by the
Indenture Trustee for the benefit of the
Noteholders. The actual amount, if any, to be
drawn against the Demand Note is, for any
Payment Date as to which a Note Insurer
Default shall have occurred or be continuing,
the sum of (i) the Note Interest for such
Payment Date minus Available Funds, (ii)
certain payments of principal, to the extent
provided in the Demand Note, minus Available
Funds and (iii) the then existing
Overcollateralization Deficit, if any, after
application of Available Funds to reduce the
Note Balance on such Payment Date.
The aggregate of amounts drawn from time to
time on the Demand Note shall not exceed the
Demand Note Limit (as defined below). As of
any Payment Date prior to the first Payment
Date on which the Overcollateralization
Amount equals or exceeds 3.0% of the
Aggregate Principal Balance of the Mortgage
Loans (the "Target Date"), the "Demand Note
Limit" shall be equal to 3.0% of the
Aggregate Principal Balance of the Mortgage
Loans as of the Cut-Off Date, minus (i) the
aggregate dollar amount of
overcollateralization created on each prior
Payment Date and minus (ii) the aggregate
amount of all draws made against the Demand
Note on all prior Payment Dates. On each
Payment Date on and after the Target Date,
the Demand Note Limit will equal zero. On the
Target Date, the Demand Note will be
cancelled and will no longer be available to
make payments on the Notes. Once cancelled,
the Demand Note will not be reinstated, even
upon the occurrence of a Note Insurer
Default.
I. Stated Maturity ...... The Stated Maturity for the Notes is August
25, 2029 (which has been determined by adding
18 months to the last Payment Date scheduled
for the Initial Mortgage Loan 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.
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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 Payment Date, an amount
generally calculated to ensure that a full
month's interest on each such Mortgage Loan
is available for payment to the 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 (the "Servicing
Fee") will equal one-twelfth (1/12) of the
product of (a) 0.50% and (b) the Aggregate
Principal Balance of the Mortgage Loans 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 only on the Initial Mortgage
Loans as of the close of business on February
17, 1998 (the "Statistical Calculation
Date"). As of the Statistical Calculation
Date, the Initial Mortgage Loans consisted of
1,481 Mortgage Loans with an Aggregate
Principal Balance totaling $91,963,685.88
(the "Initial Mortgage Pool Balance"). Other
Mortgage Loans satisfying the criteria
described herein (the "Additional Mortgage
Loans") will be included in the Mortgage Pool
on or before the Closing Date. 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 statistical information presented in this
Prospectus Supplement does not take into
account any Additional Mortgage Loans that
are added to the Mortgage Pool on or prior to
the Closing Date. In addition, certain
Mortgage Loans may prepay in full or be
removed, prior to the Closing Date, from the
Mortgage Pool and other Mortgage Loans may be
substituted therefor. As a result of the
foregoing, the statistical information
presented herein regarding the Initial
Mortgage Loans as of the Statistical
Calculation Date may vary in certain limited
respects from comparable information
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based on the actual composition of the
Mortgage Pool on the Closing Date, although
any such variance will not be material.
A Current Report on Form 8-K relating to the
Notes and containing a detailed description
of the Mortgage Loans actually delivered to
the Indenture Trustee at the time the Notes
are issued will be filed with the Securities
and Exchange Commission within fifteen days
after the Closing Date. This Current Report
on Form 8-K will specify the Original Note
Balance.
The Mortgage Loans to be included in the
Trust Estate will consist 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 primarily on one- to
four-family residential properties (the
"Mortgaged Properties") located in 33 states
and the District of Columbia. 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. See "Risk Factors-Risk
Associated with Underwriting Standards"
herein.
As of the Statistical Calculation Date, the
average Principal Balance of the Initial
Mortgage Loans was $62,095.67; the minimum
and maximum Principal Balances of the Initial
Mortgage Loans were $9,981.36 and
$344,845.74, respectively; 92.856% of the
Initial Mortgage Loans by Principal Balance
as of the Statistical Calculation Date are
secured by first lien mortgages on the
related Mortgage Properties and 7.144% of the
Initial Mortgage Loans by Principal Balance
as of the Statistical Calculation Date are
secured by second liens on the related
Mortgaged Properties; 39.917% of the Initial
Mortgage Loans by Principal Balance as of the
Statistical Calculation Date are Balloon
Loans (as defined herein); the weighted
average interest rate (the "Mortgage Rate")
of the Initial Mortgage Loans was 10.287%;
the Mortgage Rates of the Initial Mortgage
Loans ranged from 7.20% to 15.75%; the
weighted average Combined Loan-to-Value Ratio
(as defined herein) of the Initial Mortgage
Loans was 75.92% and these Combined
Loan-to-Value Ratios ranged from 10.84% to
100.00%; the weighted average remaining term
to maturity of the Initial Mortgage Loans was
226.728 months; the remaining terms to
maturity of the Initial Mortgage Loans ranged
from 58 months to 360 months. No Mortgage
Loan has a scheduled maturity date later than
March 1, 2028. No Mortgage Loan will provide
for negative amortization. See "Description
of The Mortgage Pool" herein.
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No Mortgage Loan identified for inclusion in
the Mortgage Pool as of the Closing Date will
have an original Principal Balance in excess
of $227,000.
Approximately 12.03% and 10.54% of the
Initial Mortgage Loans by Principal Balance
as of the Statistical Calculation Date are
secured by Mortgaged Properties located in
Ohio 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 applicable Cut-off Dates. 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 is less than 20% of the Aggregate
Principal Balance of the Mortgage Loans as of
the applicable Cut-off Dates, 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 at least equal to an amount,
which, when added to Available Funds for the
related Payment Date, would equal the sum,
without duplication, of (i) the accrued
interest then due on the Notes on such
Payment Date, (ii) the Note Balance as of
such Payment Date, (iii) the aggregate of all
Insured Payments made by the Note Insurer to
the Noteholders 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 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
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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 Dewey Ballantine LLP,
special tax counsel to the Issuer ("Tax
Counsel"), the Issuer will not be
characterized as an association (or a
publicly traded partnership) taxable as a
corporation, the Issuer will not be a taxable
mortgage pool, the Notes will evidence debt
obligations under the Internal Revenue Code
of 1986, as amended (the "Code"), and
interest paid or accrued thereon, including
original issue discount, if any, will be
taxable to nonexempt Noteholders. Payments on
Notes held by foreign persons not engaged in
a U.S. trade or business generally will be
exempt from United States withholding tax,
subject to compliance with applicable
certification procedures. No election will be
made to treat the Issuer, the Mortgage Loans,
or the arrangement by which the Notes are
issued as a real estate mortgage investment
conduit ("REMIC") for federal income tax
purposes. By acceptance of its Note, each
Noteholder will be deemed to have agreed to
treat its Note as a debt instrument for
purposes of federal and state income tax,
franchise tax and any other tax measured in
whole or in part by income.
It is not anticipated that the Notes will be
issued with original issue discount as
described in "Certain Federal Income Tax
Consequences-Discount and Premium" in the
Prospectus. The prepayment assumption that
should be used in determining the rate of
accrual of original issue discount, if any,
on the Notes is 25% HEP (as defined herein).
However, no representation is made herein as
to the rate at which prepayments actually
will occur. See "Certain Prepayment and Yield
Considerations" herein.
The Notes will not represent "real estate
assets" for purposes of Section 856(c)(5)(A)
of the Internal Revenue Code of 1986, as
amended, or "[l]oans. . . principally secured
by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the
Code.
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
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<PAGE>
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"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 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 "Aaa" by Moody's
Investors Service, Inc. ("Moody's") and "AAA"
by Standard and Poor's Rating Services, a
Division of The McGraw-Hill Companies, Inc.
("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.
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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 Initial
Mortgage Loans as of the Statistical Calculation Date. Such information does not
take into account the Additional Mortgage Loans and may vary as a result of the
possibility that certain Mortgage Loans may prepay in full or be removed from
the Mortgage Pool prior to the Closing 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 1.385% of the Initial Mortgage Loans by
Principal Balance as of the Statistical Calculation Date were more than 30 days,
but less than 60 days, past due as of the Statistical Calculation Date. In
addition, because approximately 17.527% of the Initial Mortgage Loans by
Principal Balance as of the Statistical Calculation Date and substantially all
of the Additional Mortgage Loans have a first scheduled monthly payment due date
occurring on or after March 1, 1998, it is not possible for such Mortgage Loans
to have had a scheduled monthly payment past due as of the Statistical
Calculation 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 Combined Loan-to-Value Ratios may also present a
greater risk of loss. Approximately 27.35% of the Initial Mortgage Loans by
Principal Balance as of the Statistical Calculation Date are Mortgage Loans with
Combined Loan-to-Value Ratios 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
S-14
<PAGE>
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
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 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
Initial Mortgage Loans ranged from 10.84% to 100.00% as of the Statistical
Calculation Date, with a weighted average of 75.92% (based on Statistical
Calculation Date Principal Balances).
Approximately 7.144% of the Initial Mortgage Loans by Principal Balance as
of the Statistical Calculation Date 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 39.917% of the Initial Mortgage Loans by Principal Balance
as of the Statistical Calculation 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 Property, the borrower's
equity in
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<PAGE>
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 12.03% and 10.54% of the Initial Mortgage Loans are secured
by Mortgaged Properties located in Ohio and Illinois, respectively. In general,
declines in the Ohio or Illinois residential real estate markets 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 Ohio or Illinois (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.
Difference Between Initial Mortgage Loans as of the Statistical Calculation Date
and the Mortgage Loans as of the Applicable Cut-off Dates
The statistical information presented in this Prospectus Supplement is
based solely on the characteristics of the Initial Mortgage Loans as of the
Statistical Calculation Date and does not take into account any Additional
Mortgage Loans identified after the date of this Prospectus Supplement.
Moreover, certain Initial Mortgage Loans included as of the Statistical
Calculation Date may prepay in full or may be determined not to meet the
eligibility requirements for the Mortgage Loans, and thus not be included as
Initial Mortgage Loans. As a result of the foregoing, the statistical
distribution of characteristics of the Mortgage Loans as of the applicable
Cut-off Dates will vary somewhat from the statistical distribution of such
characteristics as of the Statistical Calculation Date with regard to the
Initial Mortgage Loans as presented in this Prospectus Supplement, although such
variance will not be material.
Limited Historical Servicing Experience of the Servicer
The Servicer commenced its servicing activities for mortgage loans in
April 1997. 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 20% of the Mortgage Loans by Principal
Balance as of the Statistical Calculation 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
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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.
Yield Considerations Relating to Excess Cash
Excess Cash will be paid in reduction of the Note Balance on each Payment
Date to the extent the then applicable Required Overcollateralization Amount
exceeds the 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 reduction of the 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
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 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. The amount of Excess Cash payments applied
in reduction of the 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 Notes 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 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 Notes until the 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 Notes until the 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, payments under the Insurance Policy and payments under the Demand Note,
if any, 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.
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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" 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.
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, payments under the Insurance Policy, if any, and
payments under the Demand Note, 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 is comprised of fixed rate mortgage loans secured by first and second lien
mortgages or deeds of trust 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 applicable Cut-off Date); (iii) security interests in the
Mortgaged Properties; (iv) the Issuer's rights under the Sales 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 $1,000,000 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.
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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 "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.
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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 ("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 banking
corporation 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
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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.
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
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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.
Assignment of Mortgage Loans
The Mortgage Loans were originated by the Seller or acquired by the
Seller, through its network of brokers and correspondents. 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 applicable 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 applicable Cut-off Date (whether or not
received on or prior to such Cut-off Date), and to prepayments received on or
prior to the applicable 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 applicable 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 Sales 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
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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 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 Note Account as set forth in the
Indenture, or deposit of the Release Price in the 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 April 1998, 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. 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, in the following order of priority, out of 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 on prior Payment Dates and
the amount of any unpaid Note Insurer Premiums 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 Noteholders have received Note Interest
and any Overcollateralization Deficit with respect to such Payment Date;
(b) to the Noteholders, Note Interest with respect to such Payment
Date;
(c) to the Noteholders, the amount of Monthly Principal for the
Notes with respect to such Payment Date, in reduction of the Note Balance
until such Note Balance is reduced to zero;
(d) to the Noteholders, in reduction of the Note Balance, the
amount, if any, equal to the lesser of (A) Excess Cash with respect to
such Payment Date, and (B) the lesser of (1) the amount necessary for the
Overcollateralization Amount to equal the 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 Note Balance to zero; and
(e) to the Note Insurer, any amounts due and owing under the
Insurance Agreement that are not described in clause (a) above.
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Any Available Funds 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 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 on such date are not sufficient to pay any portion of Note Interest, 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 on a Payment Date (after taking into account
payments in respect of 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 Note Balance on such Payment Date by
the amount of such Overcollateralization Deficit. Any Insured Payment paid in
respect of the Notes to make up any Overcollateralization Deficit shall be paid
to the Noteholders, in reduction of the Note Balance, until such Note Balance is
reduced to zero. In the event that, with respect to a particular Payment Date
prior to the Target Date and as to which an Insurer Default has occurred and is
continuing, Available Funds on such date are not sufficient to pay any portion
of Note Interest, certain payments of principal, to the extent set forth in the
Demand Note, or any Overcollateralization Deficit on such Payment Date, the
Indenture Trustee will file a claim for the payment of the deficiency against
the Demand Note, to the extent that the Demand Note remains outstanding, up to
the Demand Note Limit. On each Payment Date on and after the Target Date, the
Demand Note Limit will equal zero. On the Target Date, the Demand Note will be
cancelled and will no longer be available to make payments on the Notes. Once
cancelled, the Demand Note will not be reinstated, even upon the occurrence of a
Note Insurer Default.
In no event will the aggregate payments of principal to Noteholders exceed
the Original Note Balance.
"Note Interest" for any Payment Date will be an amount equal to interest
accrued during the related Interest Period at the Note Interest Rate on 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).
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 each Interest Period prior to the Initial
Redemption Date will be a per annum rate equal to 6.755%, and for each Interest
Period thereafter, a per annum rate equal to 7.255%.
The "Note Balance" will equal, as of any Payment Date, the Original Note
Balance less all Monthly Principal and Excess Cash paid to the Noteholders on
previous Payment Dates in reduction of the 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 under the
Insurance Policy, except to the extent reimbursed to the Note Insurer pursuant
to the Indenture).
"Monthly Principal" for 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 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, and (ii) the aggregate of
the amounts allocable to principal deposited in the Note Account on the related
Deposit Date by the Issuer, the Company, the Servicer or the Note Insurer in
connection with a repurchase, release, removal or substitution of any Mortgage
Loans pursuant to the Indenture, reduced by (B) the amount of any
Overcollateralization Surplus 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 applicable 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
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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, (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
applicable Cut-off Dates) 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 any Payment Date will consist of the sum
of the amounts described in clauses (a) through (g) below, less (i) the
Administrative Fee Amount in respect of such Payment Date, (ii) Monthly Advances
and Servicing Advances previously made that are reimbursable to the Servicer
(other than those included in liquidation expenses for any Liquidated Mortgage
Loan 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 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 and due during the related Due Period and all other
interest payments on or in respect of the 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 applicable Cut-off Dates, 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 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 the Mortgage Loans;
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(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, 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 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 Payment Date;
and
(g) the aggregate of amounts deposited in the 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 Account
Pursuant to the Indenture, the Indenture Trustee shall establish and
maintain an account (the "Note Account") from which all payments with respect to
the 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 the 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 Payment Date. See "Description of
Securities--Payments or Distributions of Principal and Interest" in the
Prospectus.
Investment of Note Account. All or a portion of the 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 the Note Account which
otherwise qualifies as a Permitted Investment. No investment in the 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 the Note Account will not be
available to Noteholders or otherwise subject to any claims or rights of the
Noteholders and will be held in the 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 the Note Account and then
available for such application.
Permitted Investments. The Indenture will define "Permitted Investments"
generally as follows:
(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
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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 the Notes will be provided in part by
overcollateralization resulting from the Aggregate Principal Balances of the
Mortgage Loans as of the end of each Due Period exceeding the 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 be increased to,
and thereafter maintained at, the Required Overcollateralization Amount. This
increase
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and subsequent maintenance is intended to be accomplished by the application of
monthly Excess Cash to accelerate the pay down of the Note Balance until the
Overcollateralization Amount reaches the 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 Mortgage Loans in excess of the
amount necessary to pay Note Interest and the Monthly Principal required to be
paid on the Notes on any Payment Date being applied to reduce the Note Balance
to zero no later than the Stated Maturity of the Notes.
The "Excess Cash" on any Payment Date will be equal to Available Funds for
such Payment Date, reduced by the sum of (i) any amounts payable to the Note
Insurer for Insured Payments paid on prior Payment Dates and not yet reimbursed
and for any unpaid Note Insurer Premiums 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 Payment Date and (iii) the
Monthly Principal for the related Payment Date. Certain Mortgage Loans will not
have their first monthly payment due until the Due Period relating to the May
1998 Payment Date. Accordingly, in the case of the April 1998 Payment Date, the
amount of Excess Cash available will be lower than it would have been otherwise.
The "Overcollateralization Amount" with respect to any Payment Date is the
amount, if any, by which (x) the Aggregate Principal Balance of the Mortgage
Loans as of the end of the related Due Period exceeds (y) the Note Balance 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) made on such Payment Date. The required level of
the Overcollateralization Amount with respect to 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 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 Mortgage Loans with respect to certain delinquency rate tests
specified in the Indenture. In addition, Excess Cash will be applied to the
payment in reduction of principal of the Notes during the period that the
Mortgage Loans are unable to meet certain tests specified in the Insurance
Agreement based on delinquency rates. Any increase in the applicable Required
Overcollateralization Amount may result in an accelerated amortization of the
Notes until such Required Overcollateralization Amount is reached. Conversely,
any decrease in the Required Overcollateralization Amount will result in a
decelerated amortization of the Notes until such Required Overcollateralization
Amount is reached.
The application of Excess Cash to reduce the Note Balance on any Payment
Date will have the effect of accelerating the amortization of the Notes relative
to the amortization of the Mortgage Loans in the Trust Estate.
In the event that the Required Overcollateralization Amount 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 that would otherwise be paid to
the Notes on any such Payment Date in reduction of the Note Balance will be
released to the holder(s) of the Residual Interest.
With respect to any Payment Date, an "Overcollateralization Surplus"
means, the amount, if any, by which (x) the Overcollateralization Amount for
such Payment Date exceeds (y) the then applicable Required Overcollateralization
Amount for such Payment Date. As a technical matter, an Overcollateralization
Surplus may result even prior to the occurrence of any decrease or "step down"
in the Required Overcollateralization Amount because the Notes will be entitled
to receive 100% of collected principal on the Mortgage Loans, even though the
Note Balance will, as a result of the accelerated amortization caused by the
application of the Excess Cash, be less than the Aggregate Principal Balance of
the Mortgage Loans, in the absence of any Realized Losses on the Mortgage Loans.
The Indenture will provide that, on any Payment Date, all amounts
collected on the Mortgage Loans in respect of principal to be applied on such
Payment Date will be paid to Noteholders in reduction of the Note Balance on
such Payment Date, except as provided above with respect to any Payment Date for
which there exists an Overcollateralization Surplus. 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
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Loan shall equal zero. The Indenture will not require that the amount of any
Realized Loss be paid to Noteholders on the Payment Date following the event of
loss. However, the occurrence of a Realized Loss will reduce the
Overcollateralization Amount for the Notes, and will result in more Excess Cash,
if any, being paid on the Notes in reduction of the 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 the Notes will occur for the
purpose of applying the proceeds of such Insured Payment as a payment of
principal to the Noteholders on such Payment Date. With respect to any Payment
Date, an "Overcollateralization Deficit" will mean the amount, if any, by which
(x) the 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 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 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 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 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 on such Payment Date
allocable to Note Interest;
(c) the Note Balance after giving effect to the payment of Monthly
Principal and any Excess Cash applied to reduce the Note Balance on such Payment
Date;
(d) the Aggregate Principal Balance of the Mortgage Loans as of the end of
the related Due Period;
(e) the amount of Monthly Advances made with respect to such Payment Date
and the aggregate amount of unreimbursed Monthly Advances and Servicing
Advances, if any;
(f) the number and the aggregate of the Principal Balances of the Mortgage
Loans 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
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
repurchased by the Seller or the Servicer, separately setting forth the
aggregate of the Principal Balances of Mortgage Loans 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 such Payment Date;
(j) the amount of the Servicing Fee paid to or retained by the Servicer
with respect to such Payment Date;
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(k) the Overcollateralization Amount, the then applicable Required
Overcollateralization Amount, the Overcollateralization Surplus, if any, and the
Overcollateralization Deficit, if any, with respect to such Payment Date; and
(1) the aggregate outstanding principal balance of the three largest
outstanding Mortgage Loans in the Mortgage Pool.
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 applicable Cut-off Dates (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.
Termination of the Mortgage Pool. Following the first Payment Date on
which the Aggregate Principal Balance of the Mortgage Loans is less than 20% of
the Aggregate Principal Balance of the Mortgage Loans as of the applicable
Cut-off Dates, 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 at least equal to an
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amount, which, when added to Available Funds for the related Payment Date, would
equal the sum, without duplication, of (i) the accrued interest then due on the
Notes on such Payment Date, (ii) the Note Balance as of such Payment Date, (iii)
the aggregate of all Insured Payments made by the Note Insurer to the
Noteholders 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 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 remaining after
making payments of interest and principal due on the 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. Such amounts will not
be available to make payments on the Notes or payments to the Note Insurer on
any subsequent Payment Date.
The Indenture Trustee
Norwest Bank Minnesota, National Association, 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. Norwest Bank Minnesota, National
Association, 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, 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
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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 the
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 in
connection with any Event of Default with respect to the 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 Delaware 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 Wilmington, Delaware, c/o the Owner
Trustee, Rodney Square North, 1100 North Market Street, Wilmington, Delaware
19890-0001, 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.
MORTGAGE LENDERS NETWORK USA, INC.
Mortgage Lenders Network USA, Inc., the Seller under the Sales Agreement
and the Servicer under the Servicing Agreement, is a Delaware 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 purchases mortgage loans from
approved correspondents. Each Mortgage Loan is underwritten by the 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 Middlesex Corporate Center, 11th
Floor, 213 Court Street, Middletown, Connecticut 06457 (telephone number: (860)
344-5700).
DESCRIPTION OF THE MORTGAGE POOL
General
The following is a brief description of certain terms of the Initial
Mortgage Loans based on the Initial Mortgage Loans as of the Statistical
Calculation Date. The statistical information presented herein does not take
into account any Additional Mortgage Loans that may be added to the Mortgage
Pool on or prior to the Closing Date. In addition, certain Mortgage Loans may
prepay in full or be removed, prior to the Closing Date, from the Mortgage Pool
and other Mortgage Loans may be substituted therefor. As a result of the
foregoing, the statistical information regarding the Initial Mortgage Loans set
forth herein may vary from comparable information based on the actual
composition of the Mortgage Pool at the Closing Date, although such variance
will not be material.
The Mortgage Pool will consist of fixed rate mortgage loans secured by
first and second liens on one- to four-family residential properties located in
33 states and the District of Columbia. No Mortgage Loan will have an original
term to stated maturity in excess of 30 years or has a scheduled maturity date
later than March 1, 2028. All
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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 20% of the Initial Mortgage Loans by Principal Balance as of
the Statistical Calculation 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
Set forth below is certain summary statistical information regarding the
Initial Mortgage Loans as of the Statistical Calculation Date. As of the
Statistical Calculation Date, the Initial Mortgage Loans consisted of 1,481
Mortgage Loans with an Aggregate Principal Balance totaling $91,963,685.88 (the
"Initial Mortgage Pool Balance"). Other Mortgage Loans satisfying the criteria
described herein (the "Additional Mortgage Loans") will be included in the
Mortgage Pool on or before the Closing Date. The Mortgage Loans, following the
conveyance of the Additional Mortgage Loans, must in the aggregate conform to
certain specified characteristics described below under "--Conveyance of
Additional Mortgage Loans. "
A Current Report on Form 8-K relating to the Notes and containing a
detailed description of the Mortgage Loans actually delivered to the Indenture
Trustee at the time the Notes are issued will be filed with the Securities and
Exchange Commission within fifteen days after the Closing Date. This Current
Report on Form 8-K will specify the Original Note Balance.
As of the Statistical Calculation Date, the average Principal Balance of
the Initial Mortgage Loans was $62,095.67; the minimum and maximum Principal
Balances of the Initial Mortgage Loans were $9,981.36 and $344,845.74,
respectively; 92.856% of the Initial Mortgage Loans by Principal Balance as of
the Statistical Calculation Date are secured by first lien mortgages on the
related Mortgaged Properties and 7.144% of the Initial Mortgage Loans by
Principal Balance as of the Statistical Calculation Date are secured by second
lien mortgages on the related Mortgaged Properties; 39.917% of the Initial
Mortgage Loans by Principal Balance as of the Statistical Calculation Date are
Balloon Loans; the weighted average interest rate (the "Mortgage Rate") of the
Initial Mortgage Loans was 10.287%; the Mortgage Rates of the Mortgage Loans
ranged from 7.20% to 15.75% the weighted average Combined Loan-to-Value Ratio of
the Initial Mortgage Loans was 75.92% and these Combined Loan-to-Value Ratios
ranged from 10.84% to 100.00% the weighted average remaining term to maturity of
the Initial Mortgage Loans was 226.728 months and the remaining terms to
maturity of the Initial Mortgage Loans ranged from 58 months to 360 months. No
Mortgage Loan identified for inclusion in the Mortgage Pool as of the Closing
Date will have an original Principal Balance in excess of $227,000.
Approximately 1.385% of the Initial Mortgage Loans were more than 30 days,
but less than 60 days, past due as of the Statistical Calculation Date. As of
the Statistical Calculation Date, none of the Initial Mortgage Loans were 60
days or more delinquent in payment of principal and interest. None of the
Mortgage Loans will be covered by a primary mortgage insurance policy.
Approximately 27.35% of the Initial Mortgage Loans by Principal Balance as of
the Statistical Calculation Date are Mortgage Loans with Combined Loan-to-Value
Ratios at origination in
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excess of 80%. Approximately 20% of the Initial Mortgage Loans by Principal
Balance as of the Statistical Calculation Date provide for a prepayment charge.
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. 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 Initial Mortgage Loans as of the Statistical Calculation Date (except as
otherwise indicated). The information expressed below as a percentage of the
Initial Mortgage Pool Balance may not total 100% due to rounding.
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Principal Balances of the Initial Mortgage Loans
Percentage of
Range of Principal Number of Aggregate Unpaid Initial Mortgage
Balances Mortgage Loans Principal Balance Pool Balances
-------- -------------- ----------------- ----------------
$ 5,000-10,000..... 3 $ 29,962.72 0.03%
10,000.01-15,000..... 33 448,892.39 0.49
15,000.01-20,000..... 58 1,027,484.50 1.12
20,000.01-25,000..... 71 1,633,308.13 1.78
25,000.01-30,000..... 87 2,421,569.46 2.63
30,000.01-35,000..... 95 3,136,844.63 3.41
35,000.01-40,000..... 111 4,198,122.67 4.56
40,000.01-45,000..... 109 4,662,636.21 5.07
45,000.01-50,000..... 116 5,552,771.72 6.04
50,000.01-55,000..... 91 4,787,704.46 5.21
55,000.01-60,000..... 109 6,298,908.34 6.85
60,000.01-65,000..... 72 4,523,184.39 4.92
65,000.01-70,000..... 73 4,943,741.45 5.38
70,000.01-75,000..... 79 5,715,160.57 6.21
75,000.01-80,000..... 51 3,956,238.31 4.30
80,000.01-85,000..... 29 2,411,180.20 2.62
85,000.01-90,000..... 33 2,912,883.88 3.17
90,000.01-95,000..... 33 3,066,252.03 3.33
95,000.01-100,000..... 27 2,643,112.40 2.87
100,000.01-105,000..... 25 2,573,353.93 2.80
105,000.01-110,000..... 25 2,679,606.56 2.91
110,000.01-115,000..... 18 2,022,599.94 2.20
115,000.01-120,000..... 20 2,350,976.15 2.56
120,000.01-125,000..... 12 1,473,651.74 1.60
125,000.01-130,000..... 19 2,421,466.04 2.63
130,000.01-135,000..... 12 1,591,258.55 1.73
135,000.01-140,000..... 11 1,517,677.78 1.65
140,000.01-145,000..... 6 861,189.77 0.94
145,000.01-150,000..... 10 1,487,444.99 1.62
150,000.01-200,000..... 27 4,602,805.08 5.01
200,000.01-250,000..... 7 1,483,684.84 1.61
250,000.01-300,000..... 8 2,183,166.31 2.37
300,000.01-350,000..... 1 344,845.74 0.37
----- -------------- ------
Total............... 1,481 $91,963,685.88 100.00%
As of the Statistical Calculation Date, the average Principal Balance of
the Initial Mortgage Loans was approximately $62,095.67.
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<PAGE>
Mortgage Rates of the Initial Mortgage Loans
Percentage of
Range of Mortgage Number of Aggregate Unpaid Initial Mortgage
Interest Rates (%) Mortgage Loans Principal Balance Pool Balances
------------------ -------------- ----------------- -------------
7.00-7.50................ 5 $ 384,417.05 0.42%
7.51-7.75................ 12 855,874.03 0.93
7.76-8.00................ 15 1,058,253.09 1.15
8.01-8.25................ 9 774,062.57 0.84
8.26-8.50................ 44 3,568,339.55 3.88
8.51-8.75................ 43 3,214,616.73 3.50
8.76-9.00................ 71 4,734,549.68 5.15
9.01-9.25................ 64 4,076,540.90 4.43
9.26-9.50................ 79 4,991,596.63 5.43
9.51-9.75................ 111 7,225,091.41 7.86
9.76-10.00................ 165 11,652,073.11 12.67
10.01-10.25................ 93 5,682,673.41 6.18
10.26-10.50................ 119 6,701,391.41 7.29
10.51-10.75................ 99 6,586,406.66 7.16
10.76-11.00................ 133 8,978,317.72 9.76
11.01-11.25................ 72 4,510,709.04 4.90
11.26-11.50................ 64 3,411,543.65 3.71
11.51-11.75................ 67 4,023,566.66 4.38
11.76-12.00................ 46 2,284,548.06 2.48
12.01-12.25................ 30 1,592,448.24 1.73
12.26-12.50................ 24 1,020,671.28 1.11
12.51-12.75................ 50 1,546,150.21 1.68
12.76-13.00................ 10 689,374.64 0.75
13.01-13.25................ 8 427,024.76 0.46
13.26-13.50................ 12 733,275.94 0.80
13.51-13.75................ 24 685,771.62 0.75
13.76-14.00................ 4 205,783.28 0.22
14.01-14.25................ 3 73,663.84 0.08
14.26-14.50................ 1 75,384.04 0.08
14.51-14.75................ 1 41,343.34 0.04
14.76-15.00................ 2 133,255.41 0.14
15.51-15.75................ 1 24,967.92 0.03
----- -------------- ------
Total.................... 1,481 $91,963,685.88 100.00%
As of the Statistical Calculation Date, the weighted average Mortgage Rate
of the Initial Mortgage Loans was approximately 10.287% per annum.
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<PAGE>
Original Combined Loan-to-Value Ratios of the Initial Mortgage Loans
Range of Initial
Original Combined Original Number of Aggregate Unpaid Mortgage
Loan-to-Value Ratios(%) Mortgage Loans Principal Balance Pool Balance
----------------------- -------------- ----------------- ------------
10.000-15.000.......... 4 $ 76,716.37 0.08%
15.001-20.000.......... 1 40,970.46 0.04
20.001-25.000.......... 9 205,775.71 0.22
25.001-30.000.......... 13 626,933.86 0.68
30.001-35.000.......... 16 509,627.60 0.55
35.001-40.000.......... 19 711,182.30 0.77
40.001-45.000.......... 23 1,266,897.33 1.38
45.001-50.000.......... 25 875,582.66 0.95
50.001-55.000.......... 28 1,172,380.80 1.27
55.001-60.000.......... 48 2,123,284.25 2.31
60.001-65.000.......... 105 6,030,755.58 6.56
65.001-70.000.......... 146 9,122,695.56 9.92
70.001-75.000.......... 249 15,863,837.86 17.25
75.001-80.000.......... 409 28,187,236.28 30.65
80.001-85.000.......... 212 14,816,743.67 16.11
85.001-90.000.......... 109 8,881,883.06 9.66
90.001-95.000.......... 5 148,403.90 0.16
95.001-100.000.......... 60 1,302,778.63 1.42
----- -------------- ------
Total........................ 1,481 $91,963,685.88 100.00%
The weighted average Combined Loan-to-Value Ratio at origination of the
Initial Mortgage Loans was approximately 75.92%.
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<PAGE>
Geographic Distribution of Mortgaged Properties of the Initial Mortgage Loans
Percentage of
Number of Aggregate Unpaid Initial Mortgage
State Mortgage Loans Principal Balance Pool Balance
- --------------- -------------- ----------------- ------------
Arizona...................... 21 $ 1,273,235.64 1.38%
Colorado..................... 9 335,131.02 0.36
Connecticut.................. 13 1,134,993.64 1.23
District of Columbia......... 7 497,229.39 0.54
Delaware..................... 14 893,122.31 0.97
Florida...................... 20 1,343,357.97 1.46
Georgia...................... 62 2,799,179.04 3.04
Iowa......................... 3 204,737.04 0.22
Illinois..................... 143 9,692,178.15 10.54
Indiana...................... 31 1,634,458.80 1.78
Kansas....................... 2 104,331.85 0.11
Kentucky..................... 100 5,755,421.03 6.26
Massachusetts................ 60 5,169,149.93 5.62
Maine........................ 1 89,917.44 0.10
Michigan..................... 10 520,329.28 0.57
Minnesota.................... 4 154,749.24 0.17
Missouri..................... 48 2,930,903.28 3.19
Mississippi.................. 5 190,737.17 0.21
North Carolina............... 81 4,653,453.06 5.06
Nebraska..................... 1 16,225.00 0.02
New Hampshire................ 5 416,878.00 0.45
New Jersey................... 18 1,603,007.93 1.74
New Mexico................... 60 3,528,797.07 3.84
New York..................... 29 2,307,609.86 2.51
Ohio......................... 187 11,066,532.66 12.03
Pennsylvania................. 69 4,555,450.25 4.95
Rhode Island................. 9 704,321.47 0.77
South Carolina............... 153 7,245,789.26 7.88
Tennessee.................... 92 5,486,772.20 5.97
Utah......................... 4 182,939.44 0.20
Virginia..................... 72 5,625,907.55 6.12
Wisconsin.................... 12 660,501.36 0.72
West Virginia................ 5 211,884.86 0.23
----- -------------- ------
Total................... 1,481 $91,963,685.88 100.00%
No more than 0.821% of the Initial Mortgage Loans will be secured by
Mortgaged Properties located in any one zip code area.
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<PAGE>
Mortgage Loan Purpose of the Initial Mortgage Loans
Percentage of
Number of Aggregate Unpaid Initial Mortgage
Loan Purpose Mortgage Loans Principal Balance Pool Balance
------------ -------------- ----------------- ------------
Purchase.................... 49 $ 3,010,640.05 3.27%
Cashout Refinance........... 1,375 85,855,230.40 93.36
Rate/Term Refinance......... 8 718,821.33 0.78
Refinance/Property
Improvements............. 49 2,378,994.10 2.59
----- -------------- ------
Total.................. 1,481 $91,963,685.88 100.00%
Mortgage Loan Documentation Types of the Initial Mortgage Loans
Percentage of
Number of Aggregate Unpaid Initial Mortgage
Documentation Type Mortgage Loans Principal Balance Pool Balance
------------------ -------------- ----------------- ------------
Full Documentation............ 1,307 $79,795,640.74 86.77%
Limited (Fast) Documentation.. 69 5,409,654.15 5.88
Stated Documentation.......... 105 6,758,390.99 7.35
----- -------------- ------
Total.................... 1,481 $91,963,685.88 100.00%
Occupancy Status of the Initial Mortgage Loans
Percentage of
Number of Principal Initial Mortgage
Occupancy Mortgage Loans Balance Pool Balances
--------- -------------- ------- -------------
Owner Occupied................ 1,369 $86,265,802.18 93.80%
Investor...................... 107 5,368,998.12 5.84
Second/Vacation homes......... 5 328,885.58 0.36
----- -------------- ------
Total.................... 1,481 $91,963,685.88 100.00%
Mortgaged Property Types of the Initial Mortgage Loans
Percentage of
Number of Principal Initial Mortgage
Property Type Mortgage Loans Balance Pool Balances
------------- -------------- ------- -------------
Single-Family............... 1,369 $83,865,764.08 91.19%
Planned Unit
Developments (detached)..... 5 416,040.30 0.45
Two- to four-family units... 73 5,535,405.09 6.02
Manufactured Housing........ 11 757,773.61 0.82
Condominium................. 19 1,044,243.95 1.14
Mixed use................... 4 344,458.85 0.37
----- -------------- ------
Total.................. 1,481 $91,963,685.88 100.00%
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Seasoning of the Initial Mortgage Loans
Percentage of
Months of Number of Aggregate Unpaid Initial Mortgage
Seasoning (months) Mortgage Loans Principal Balance Pool Balance
------------------ -------------- ----------------- ------------
0................. 533 $34,309,784.23 37.31%
1-12................ 948 57,653,901.65 62.69
----- -------------- ------
Total................. 1,481 $91,963,685.88 100.00%
As of the Statistical Calculation Date, the weighted average seasoning of
the Initial Mortgage Loans was approximately one month.
Original Term to Maturity of Initial Mortgage Loans
Percentage of
Original Term to Number of Aggregate Unpaid Initial Mortgage
Maturity (months) Mortgage Loans Principal Balance Pool Balance
----------------- -------------- ----------------- ------------
48-60.............. 4 $ 82,634.86 0.09%
72-84.............. 1 28,986.28 0.03
85-96.............. 2 51,580.73 0.06
108-120............ 35 1,220,177.63 1.33
132-144............ 2 111,073.88 0.12
168-180............ 853 51,949,036.01 56.49
228-240............ 308 17,002,028.23 18.49
288-300............ 83 6,816,701.06 7.41
312-324............ 1 126,692.66 0.14
348-360............ 192 14,574,774.54 15.85
----- -------------- ------
Total................... 1,481 $91,963,685.88 100.00%
Remaining Terms to Maturity of the Initial Mortgage Loans
Percentage of
Months Remaining to Number of Aggregate Unpaid Initial Mortgage
Maturity (months) Mortgage Loans Principal Balance Pool Balance
----------------- -------------- ----------------- ------------
48-60.............. 4 $ 82,634.86 0.09%
72-84.............. 1 28,986.28 0.03
85-96.............. 2 51,580.73 0.06
108-120............ 35 1,220,177.63 1.33
132-144............ 2 111,073.88 0.12
168-180............ 853 51,949,036.01 56.49
228-240............ 308 17,002,028.23 18.49
288-300............ 83 6,816,701.06 7.41
312-324............ 1 126,692.66 0.14
348-360............ 192 14,574,774.54 15.85
----- -------------- ------
Total................... 1,481 $91,963,685.88 100.00%
As of the Statistical Calculation Date, the weighted average remaining
terms to maturity of the Initial Mortgage Loans was approximately 227 months.
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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 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.
Substantially all of the Initial 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 Horsham, Pennsylvania,
Oak Brook, Illinois, Atlanta, Georgia, and Phoenix, Arizona. 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.
The remainder of the Initial 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
Illinois 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
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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 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.
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"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 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 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 may be in the applicant's file. No judgment or liens of more than
$500 may remain open after the funding of the loan. No collections or
charge-offs of more than $500 may remain open after the funding of the loan
unless the time elapsed since the collection or charge-off exceeds four years.
Generally, the mortgaged property must be in at least average condition.
Generally, a maximum Loan-to-Value ratio of 85% is permitted for an
owner-occupied one- to four- unit or townhouse property with a first 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 three years. Generally, the mortgaged property
must be in at least average condition. Generally, a maximum Loan-to-Value ratio
of 80% is permitted for an owner-occupied one-to-four unit or townhouse property
secured by a first 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 one 90-day delinquency
within the past 12 months is permitted on an existing mortgage loan. An existing
mortgage loan is not required to be current at the time the application is
submitted. However, an existing mortgage loan can be no more than 60 days
delinquent at the time of loan closing. 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-off exceeds two years. 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
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<PAGE>
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 27.35% of the Initial Mortgage Loans by Principal Balance as of
the Statistical Calculation Date have Combined Loan-to-Value Ratios 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.
Conveyance of Additional Mortgage Loans
The pledge of Additional Mortgage Loans by the Issuer on or prior to the
Closing Date is subject to the following requirements: (i) no Additional
Mortgage Loans may be contractually delinquent as of the applicable Cutoff Dates
beyond any applicable grace periods, (ii) the original term to stated maturity
of such Additional Mortgage Loans may not exceed 30 years, (iii) each Additional
Mortgage Loan will have a fixed rate of interest, (iv) each Additional Mortgage
Loan will have an interest rate of not less than 7.50%, (v) such Additional
Mortgage Loans will have been underwritten or re-underwritten, as applicable,
substantially in accordance with the criteria set forth under "--Underwriting
Standards" herein, (vi) each Additional Mortgage Loan will have a principal
balance not in excess of $227,000 and (vii) following the acquisition of such
Additional Mortgage Loans, the Mortgage Loans (a) will have a weighted average
Mortgage Rate of approximately 10.23%; (b) will have Seller assigned risk
categories substantially similar to the Initial Mortgage Loans; and (c) will
have no final payment date after April 15, 2028. The transfer of Additional
Mortgage Loans to the Mortgage Pool is subject to the approval of the Note
Insurer and, in instances deemed appropriate by the Note Insurer, the
requirements for Additional Mortgage Loans specified above may be waived or
modified.
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS
General
The effective yield of the Notes will be affected by the rate and timing
of payments of principal on the Mortgage Loans securing the 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 Excess Cash on the Notes. Such yield may
be adversely affected by a higher or lower than anticipated rate of principal
payments (including Principal Prepayments) on the Mortgage Loans. The rate of
Principal Payments on such Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans, the rate and timing of principal
prepayments thereon by the mortgagors, liquidations of defaulted Mortgage Loans
and optional or required repurchases of 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 the Notes after payments in
respect of interest on the Notes, including all or a portion of the Excess Cash,
are applied as reductions of the Note Balance, the weighted average
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<PAGE>
life of such Notes will also be influenced by the amount of Excess Cash so
applied. Because Excess Cash attributable to the overcollateralization feature
is derived, in part, from interest collections on the Mortgage Loans and will be
applied to reduce the Note Balance, the aggregate payments in reduction of the
Note Balance on a Payment Date will usually be greater than the aggregate amount
of principal payments (including Principal Prepayments) on the Mortgage Loans
payable on such Payment Date until the Required Overcollateralization Amount is
reached and assuming an Overcollateralization Deficit does not occur. As a
consequence, Excess Cash available for payment in reduction of the Note Balance
will increase in proportion to the outstanding Note Balance over time in the
absence of offsetting Realized Losses on the Mortgage Loans.
Excess Cash will be paid on the Notes in reduction of the Note Balance on
each Payment Date to the extent the then applicable Required
Overcollateralization Amount exceeds the Overcollateralization Amount on such
Payment Date. Any remaining Excess Cash 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 Excess Cash is paid to the
Noteholders. If the actual rate of Excess Cash payments on the Notes applied in
reduction of the 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 Excess Cash
payments applied in reduction of the 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 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 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 Mortgage Loans. The amount
of Excess Cash paid to the Noteholders applied to the Note Balance on each
Payment Date will be based on the Required Overcollateralization Amount. 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 Mortgage Loans with
respect to certain tests specified in the Indenture based on delinquency rates.
Any increase in the Required Overcollateralization Amount may result in an
accelerated amortization until such Required Overcollateralization Amount is
reached. Conversely, any decrease in the Required Overcollateralization Amount
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
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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 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 the Notes will depend on the price
paid by the holders of the Notes and the 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 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 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 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 the 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 the Notes
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<PAGE>
will be influenced by the rate at which principal on the Mortgage Loans is paid,
which may be in the form of scheduled payments or prepayments (including
prepayments of principal by the borrower as well as amounts received by virtue
of repurchases, condemnation, insurance or foreclosure with respect to the
Mortgage Loans), and the timing thereof.
The weighted average life of the Notes also will be influenced by the
overcollateralization of the Notes because collections are applied as principal
prepayments to the Notes until the outstanding Note Balance is less than the
Aggregate Principal Balance of the Mortgage Loans by an amount equal to the
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 standard or model. The model used in this Prospectus Supplement
("Home Equity Prepayment" or "HEP") assumes that the pool of loans prepays in
the first month at a constant annual prepayment rate of 2.50% and increases by
an additional 2.50% each month thereafter until the tenth month, where it
remains at a constant annual prepayment rate equal to 25.0% (the "Prepayment
Assumption"). HEP represents an assumed annualized rate of prepayment relative
to the then outstanding principal balance on a pool of new mortgage loans.
Neither the prepayment model used herein nor any other prepayment model or
assumption purports to be an historical description of prepayment experience or
a prediction of the anticipated rate of prepayment of any pool of mortgage
loans, including the Mortgage Loans included in the Mortgage Pool.
The table following the next paragraph indicates the percentage of the
initial Note Balance that would be outstanding after each of the dates shown at
various percentage HEPs and the corresponding weighted average lives of the
Notes. The table is based on the following assumptions (the "Modeling
Assumptions"): (i) the Mortgage Pool consists of Mortgage Loans with the
characteristics set forth in the table below, (ii) distributions on such Notes
are received, in cash, on the 25th day of each month, commencing in April 1998,
(iii) the Mortgage Loans prepay at the percentage 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 Sales
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 are received on the
last day of each month, and include 30 days' interest thereon, (ix) the
scheduled monthly payment for each Mortgage Loan is calculated based on its
Principal Balance, Mortgage Rate, original term to maturity and remaining term
to maturity such that the Mortgage Loan will amortize in amounts sufficient to
repay the remaining principal balance of such Mortgage Loan by its remaining
term to maturity, (x) the coupon on the Notes remains constant at 6.755%, and
(xi) the Notes are purchased on March 13, 1998.
Characteristics
<TABLE>
<CAPTION>
Remaining
Amortization
Pool Principal Net Coupon Original Remaining 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 1,950,056.74 9.523 117 116 116 Level Pay March 1998
2 19,886,176.94 9.813 180 179 179 Level Pay March 1998
3 22,185,315.52 9.415 240 239 239 Level Pay March 1998
4 8,894,860.18 9.864 300 299 299 Level Pay March 1998
5 19,183,398.83 9.712 360 359 359 Level Pay March 1998
6 47,900,191.79 9.975 360 359 179 Balloon March 1998
</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
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<PAGE>
be outstanding after each of the Payment Dates shown, at various percentage
HEPs. Variations in the prepayment experience and the balance of the related
Mortgage Loans that prepay may increase or decrease the percentages of initial
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 percentage HEPs.
Percent of Stated Principal Balance Outstanding at the Following Percentage HEPs
Payment Date 0.00% 19.00% 21.00% 25.00% 29.00% 31.00%
- ------------ ----- ------ ------ ------ ------ ------
Initial Balance 100 100 100 100 100 100
March 25, 1999 96 83 81 78 76 74
March 25, 2000 93 64 61 56 50 48
March 25, 2001 91 50 46 40 35 32
March 25, 2002 90 39 36 30 24 22
March 25, 2003 88 31 28 22 17 15
March 25, 2004 86 25 21 16 12 10
March 25, 2005 83 20 17 12 0 0
March 25, 2006 81 15 13 0 0 0
March 25, 2007 78 12 10 0 0 0
March 25, 2008 75 9 0 0 0 0
March 25, 2009 71 0 0 0 0 0
March 25, 2010 68 0 0 0 0 0
March 25, 2011 64 0 0 0 0 0
March 25, 2012 60 0 0 0 0 0
March 25, 2013 24 0 0 0 0 0
March 25, 2014 22 0 0 0 0 0
March 25, 2015 20 0 0 0 0 0
March 25, 2016 18 0 0 0 0 0
March 25, 2017 15 0 0 0 0 0
March 25, 2018 13 0 0 0 0 0
March 25, 2019 12 0 0 0 0 0
March 25, 2020 10 0 0 0 0 0
March 25, 2021 0 0 0 0 0 0
March 25, 2022 0 0 0 0 0 0
March 25, 2023 0 0 0 0 0 0
March 25, 2024 0 0 0 0 0 0
March 25, 2025 0 0 0 0 0 0
March 25, 2026 0 0 0 0 0 0
March 25, 2027 0 0 0 0 0 0
March 25, 2028 0 0 0 0 0 0
March 25, 2029 0 0 0 0 0 0
Weighted Average 13.3 4.0 3.7 3.1 2.7 2.6
Life to Call(1)
Weighted Average 13.6 4.3 3.9 3.4 2.9 2.8
Life to Maturity(1)
(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 table 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 table above.
Furthermore, the information contained in the table 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.
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SERVICING OF THE MORTGAGE LOANS
General
The Mortgage Loans will be serviced by Mortgage Lenders Network USA, Inc.,
as Servicer (the "Servicer"). The information set forth in the following
paragraphs has been provided by the Servicer.
The Servicer was incorporated in November 1996, commenced closing mortgage
loans in April 1997, 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.
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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 applicable Cut-off Dates, 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.
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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 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 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
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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
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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 Sales 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 Sales 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.
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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 will equal one-twelfth (1/12) of
the product of (a) 0.50% and (b) the Aggregate Principal Balance of the Mortgage
Loans 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.
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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-55
<PAGE>
Mortgage Lenders Network USA, Inc.
Non-Conforming Mortgage Loan Portfolio Experience
<TABLE>
<CAPTION>
As of
--------------------------------------------------------------
June 30, 1997 September 30, 1997 December 31, 1997
--------------------------------------------------------------
(000s omitted)
<S> <C> <C> <C>
Total principal balance (at period end)........... $602,640 $690,256 $790,410
Average portfolio principal balance(1)............ $208,663 $670,399 $754,273
DELINQUENCIES (at period end).....................
30-59 Days:
Principal balance............................. $11,504 $10,349 $8,608
Percent(3).................................... 1.91% 1.50% 1.09%
60-89 Days:
Principal balance............................. $3,089 $1,942 $2,105
Percent(3).................................... 0.51% 0.28% 0.27%
90 Days or More:
Principal balance............................. $332 $1,077 $1,314
Percent(3).................................... 0.05% 0.16% 0.17%
Total Delinquencies(2):
Principal balance............................. $14,925 $14,879 $15,133
Percent(3).................................... 2.48% 2.16% 1.92%
FORECLOSURES
Principal balance............................. 0 $1,511 $3,085
Percent(3).................................... 0.00% 0.22% 0.39%
REO (at period end)...............................
Net gains/(losses) on liquidated loans............ 0 0 0
Percentage of net gains/(losses) on liquidated
loans (based on average portfolio principal
balance)...................................... 0.00% 0.00% 0.00%
</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-56
<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-57
<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 March 1, 1998, 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 any Payment Date the sum
of (i) the Note Interest for such Payment Date minus Available Funds and
(ii) the then existing Overcollateralization Deficit, if any, after
application of Available Funds to reduce the Note Balance on such Payment
Date.
"Insured Payment" means, (i) as of any Payment Date, the Deficiency
Amount and (ii) any Preference Amount 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 any amount previously distributed to a
Noteholder on the 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-58
<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 MBIA Inc., a New
York Stock Exchange listed company. MBIA Inc. is not obligated to pay the debts
of or claims against the Note Insurer. The Note Insurer is domiciled in the
State of New York and licensed to do business in and is subject to regulation
under the laws of all 50 states, the District of Columbia, the Commonwealth of
Puerto Rico, the Commonwealth of the Northern Mariana Islands, the Virgin
Islands of the United States and the Territory of Guam. The Note Insurer has two
European branches, one in the Republic of France and the other in the Kingdom of
Spain. New York has laws prescribing minimum capital requirements, limiting
classes and concentration of investments and requiring the approval of policy
rates and forms. 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.
Effective February 17, 1998, MBIA Inc. acquired all of the outstanding
stock of Capital Markets Assurance Corporation ("CMAC"), a New York domiciled
financial guarantee insurance company, through a merger with its parent CapMAC
Holdings Inc. MBIA Inc. then contributed the common stock of CMAC to the Note
Insurer. Pursuant to a reinsurance agreement, CMAC has ceded all of its net
insured risks, as well as its unearned premiums and contingency reserves, to the
Note Insurer and the Note Insurer has reinsured CMAC's net outstanding exposure.
MBIA Inc. is not obligated to pay the debts of or claims against CMAC.
The consolidated financial statements of the Note Insurer, a wholly owned
subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1996 and
December 31, 1995 and for the three years in the period ended December 31, 1996,
prepared in accordance with generally accepted accounting principles, included
in the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31,
1996 and the consolidated financial statements of the Note Insurer and its
subsidiaries as of September 30, 1997 and for the periods ended September 30,
1997 and September 30, 1996, included in the Quarterly Report on Form 10-Q of
MBIA Inc. for the period ended September 30, 1997, 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 MBIA Inc. 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"):
S-59
<PAGE>
SAP
---------------------------------------
December 31, September 30,
1996 1997
---- ----
(Audited) (Unaudited)
(In millions)
Admitted Assets $4,476 $5,165
Liabilities 3,009 3,457
Capital and Surplus 1,467 1,708
GAAP
---------------------------------------
December 31, September 30,
1996 1997
---- ----
(Audited) (Unaudited)
(In millions)
Admitted Assets $5,066 $5,819
Liabilities 2,262 2,594
Shareholder's Equity 2,804 3,225
----------------------------------
Copies of the financial statements of the Note Insurer incorporated by
reference herein and copies of the Note Insurer's 1996 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 113 King Street, Armonk, New York 10504. The telephone number of the
Note Insurer is (914) 273-4545.
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 and CMAC "Aaa".
Standard & Poor's Rating Services, a Division of The McGraw-Hill
Companies, Inc. rates the claims paying ability of the Note Insurer and CMAC
"AAA".
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.) rates
the claims paying ability of the Note Insurer "AAA" (CMAC has not requested a
rating from Fitch IBCA, Inc.).
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.
S-60
<PAGE>
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
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
S-61
<PAGE>
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.
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.
First Union Capital Markets, a division of Wheat First Securities Corp.
("First Union"), or affiliates of First Union (collectively referred to as First
Union for the purposes of this paragraph) provide warehouse financing facilities
to the Seller. In connection with such financing facilities, the Seller has
agreed to provide First Union with the opportunity to underwrite securities, as
herein.
All of the Mortgage Loans included in the Trust Estate will have been
acquired in a privately negotiated transaction with the Seller.
S-62
<PAGE>
REPORT OF EXPERTS
The consolidated financial statements of MBIA Insurance Corporation and
subsidiaries, as of December 31, 1996 and 1995 and for each of the three years
in the period ended December 31, 1996, incorporated by reference into this
Prospectus Supplement have been audited by Coopers & Lybrand L. L. P.,
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 general discussion, when read in conjunction with the
discussion of "Certain Federal Income Tax Consequences-Debt Securities" in the
Prospectus, describes certain federal income tax consequences to the original
purchasers of the Notes of the purchase, ownership and disposition of the Notes.
It does not purport to discuss all federal income tax consequences that may be
applicable to investment in the Notes or to particular categories of investors,
some of which may be subject to special rules.
The discussion that follows, and the opinions set forth below of Dewey
Ballantine LLP, special tax counsel to the Issuer ("Tax Counsel"), are based on
the provisions of the Internal Revenue Code of 1986, as amended (the "Code") and
Treasury regulations promulgated thereunder as in effect on the date hereof and
on existing judicial and administrative interpretations thereof. These
authorities are subject to change and to differing interpretations, which could
apply retroactively. The opinions of Tax Counsel are not binding on the courts
or the Internal Revenue Service (the "IRS"). Potential investors should consult
their own tax advisors in determining the federal, state, local, foreign and any
other tax consequences to them of the purchase, ownership and disposition of the
Notes.
Characterization of the Notes as Indebtedness
In the opinion of Tax Counsel, although no transaction closely comparable
to that contemplated herein has been the subject of any Treasury regulation,
revenue ruling or judicial decision, based on the application of existing law to
the facts as set forth in the applicable agreements, the proper treatment of the
Notes is as indebtedness for federal income tax purposes.
Except as described below, 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. It is not anticipated that the Notes will be
issued with original issue discount. See "Certain Federal Income Tax
Consequences -- Debt Securities" in the Prospectus.
Alternative Characterizations of the Notes
Although it is the opinion of Tax Counsel that the Notes are properly
characterized as indebtedness for federal income tax purposes, no assurance can
be given that such characterization of the Notes will prevail. If the Notes were
treated as an ownership interest in the Mortgage Loans, all income on such
Mortgage Loans would be income to the holders of the Notes, and related fees and
expenses would generally be deductible (subject to certain limitations on the
deductibility of miscellaneous itemized deductions by individuals) and certain
market discount and premium provisions of the Code might apply to a purchase of
the Notes.
If, alternatively, the Notes were treated as an equity interest in the
Trust, the Trust would be treated as a partnership for federal income tax
purposes. As a partnership, the Trust will not be subject to federal income tax
unless treated as a publicly traded partnership taxable as a corporation. Any
such corporate income tax could materially reduce cash available to make
payments on the Notes. Tax Counsel is of the opinion that, although no
transaction closely comparable to that contemplated herein has been the subject
of any Treasury regulation, revenue ruling or judicial decision and, therefore,
is subject to interpretation, the Trust, if treated as a partnership, will not
be treated as a publicly traded partnership taxable as a corporation. This
opinion is based on Tax Counsel's conclusion
S-63
<PAGE>
that the nature of the income of the Trust exempts it from the rules that
certain publicly traded partnerships are taxable as corporations.
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 Brown & Wood
LLP, Washington, D.C.. Dewey Ballantine LLP, New York, New York or Dewey
Ballantine LLP, Washington, D.C., 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 Kutak Rock, Omaha, Nebraska.
RATING OF THE NOTES
It is a condition to the issuance of the Notes that each shall be rated
"Aaa" by Moody's and "AAA" by S&P.
Explanations of the significance of such ratings may be obtained from
Moody's, 99 Church Street, New York, New York 10007, and S&P, 25 Broadway, New
York, New York 10004. 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 Moody's or S&P.
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<PAGE>
INDEX OF PRINCIPAL TERMS
Page
----
Additional Mortgage Loans..................................................9, 33
Administrative Fee Amount......................................................2
Aggregate Principal Balance....................................................9
Agreement.....................................................................58
Available Funds............................................................4, 25
Backup Servicer................................................................i
Balloon Loans.................................................................15
Beneficial Owner...............................................................3
Book-Entry Notes..............................................................19
Business Day...............................................................4, 58
Cedel..........................................................................3
Cedel Participants............................................................20
Citibank......................................................................19
CMAC..........................................................................59
Code..................................................................12, 61, 63
Collection Account............................................................50
Collection Period..............................................................2
Combined Loans-to-Ratio.......................................................34
Company........................................................................1
Compensating Interest Payment..............................................9, 51
Corporate Office..............................................................41
Cut-off Date...................................................................2
debt-to-income ratio..........................................................41
Defective Mortgage Loan.......................................................23
Deficiency Amount.............................................................58
Definitive Note................................................................3
Demand Note....................................................................8
Demand Note Limit..............................................................8
Depositor......................................................................1
Determination Date............................................................25
DTC............................................................................3
Due Period.....................................................................2
ERISA.....................................................................12, 61
Euroclear......................................................................3
Euroclear Operator............................................................20
Euroclear Participants........................................................20
European Depositaries.........................................................19
Excess Cash................................................................5, 28
Financial Intermediary........................................................19
Fiscal Agent..................................................................57
HEP...........................................................................47
Home Equity Prepayment........................................................47
Indenture......................................................................i
Indenture Trustee..............................................................i
Indenture Trustee Fee..........................................................1
Indirect Retail Mortgage Loans................................................41
Initial Mortgage Pool Balance..............................................9, 33
Initial Redemption Date...................................................11, 30
Insurance Policy............................................................i, 7
Insured Payment............................................................7, 58
Issuer.........................................................................i
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<PAGE>
Liquidated Mortgage Loan......................................................25
Liquidation Proceeds..........................................................26
Loan-to-Value Ratio...........................................................34
Look-Through Rule.............................................................61
Modeling Assumptions..........................................................47
Monthly Advance...............................................................51
Monthly Principal..........................................................5, 24
Mortgage Files................................................................22
Mortgage Loan..................................................................i
Mortgage Note..................................................................3
Mortgage Pool..................................................................i
Mortgage Rate.............................................................10, 33
Mortgaged Properties..........................................................10
Net Liquidation Proceeds......................................................26
Nonrecoverable Advances.......................................................51
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.........................................................4, 24
Noteholder.............................................................3, 19, 58
Notes..........................................................................i
Notice........................................................................58
Overcollateralization Amount...............................................6, 28
Overcollateralization Deficit..............................................6, 29
Overcollateralization Surplus..............................................6, 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..........................................................................13
Plan Asset Regulations....................................................13, 61
Preference Amount.............................................................58
Prepayment Assumption.........................................................47
Principal Balance.............................................................24
Principal Prepayment..........................................................25
PTCE..........................................................................61
Qualified Replacement Mortgage................................................22
Rating Agencies...............................................................13
Record Date....................................................................4
Redemption Date...............................................................30
Relief Act.....................................................................7
REMIC.........................................................................12
REO Property..................................................................51
Required Overcollateralization Amount......................................6, 28
Residual Interest..............................................................i
Retail Mortgage Loans.........................................................41
S&P.......................................................................13, 27
Securities Act................................................................62
Seller.........................................................................1
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<PAGE>
Senior Loan...................................................................34
Servicer.......................................................................1
Servicer Event of Default.....................................................53
Servicing Advance.............................................................54
Servicing Fee..................................................................9
Similar Law...................................................................61
SMMEA.....................................................................13, 62
Statistical Calculation Date...................................................9
Target Date....................................................................8
Tax Counsel...................................................................63
Trust Agreement................................................................i
Trust Estate...................................................................i
Underwriting Agreement........................................................62
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<PAGE>
ANNEX A
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Asset Backed
Notes, Series 1998-1 (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 euroNote 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 euroNotes, 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 euroNotes in same-day funds.
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<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 on
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<PAGE>
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
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<PAGE>
States is able to exercise primary supervision over the administration of the
trust, and (b) one or more United States fiduciaries 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. Investors are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of Global
Securities.
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<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
Prudential Securities Secured Financing Corporation
(Depositor)
Pass-Through Certificates
(Issuable in Series)
- --------------------------------------------------------------------------------
Prudential Securities Secured Financing Corporation (the "Depositor") may
sell from time to time under this Prospectus and related Prospectus Supplements
Pass-Through Certificates or Notes (such Pass-Through Certificates or such
Notes, together the "Certificates"), issuable in series (each, a "Series")
consisting of one or more classes (each, a "Class") of Certificates on terms to
be determined at the time of sale.
The Certificates of a Series will evidence the beneficial ownership
interests in a separate trust formed by the Depositor for the benefit of the
holders of the related Series of Certificates (the "Certificateholders"). Unless
otherwise specified in the applicable Prospectus Supplement, the property of
each such trust (for each Series, the "Trust Fund") will consist of a segregated
pool (the "Pool") of (i) promissory notes or other evidences of indebtedness
secured by first, second or more junior liens on fee simple or leasehold
interests in the Mortgaged Properties (as defined herein), including installment
sale contracts with respect to any such properties, or participation in any of
the foregoing (the "Mortgage Loans") or (ii) manufactured housing conditional
sales contracts and installment agreements (the "Contracts"). The Mortgage Loans
or Contracts included in a Trust Fund will have been acquired from one or more
affiliates of the Depositor or from one or more Unaffiliated Sellers (as defined
herein) by the Depositor and conveyed by the Depositor to such Trust Fund. The
Mortgage Loans included in a Mortgage Pool or the Contracts included in a
Contract Pool of a Series will be serviced by a servicer (the "Servicer")
described in the applicable Prospectus Supplement.
The Certificates of a Series will consist of (i) one or more Classes of
Certificates representing fractional undivided interests in all the principal
payments and the interest payments, to the extent of the related Net Mortgage
Rates (as defined herein) or Net Contract Rates (as defined herein), on the
related Mortgage Loans or Contracts ("Standard Certificates"), (ii) one or more
Classes of Certificates ("Multi-Class Certificates") each of which will be
assigned a principal balance (a "Stated Amount") based on the value of future
cash flows from the related Trust Fund without distinction as to principal or
interest or may have no principal amount but may instead be assigned a notional
amount (a "Notional Amount") on which interest accrues, and each of which will
bear interest on the Stated Amount or Notional Amount thereof at a fixed rate
(which may be zero) specified in, or a variable rate determined as specified in,
the applicable Prospectus Supplement (the "Interest Rate") or (iii) one or more
Classes of Certificates representing fractional undivided interests in all or
specified portions of the principal payments and/or interest payments, to the
extent of the related Net Mortgage Interest Rate, on the related Mortgage Loans
("Stripped Certificates"). Any Class of Certificates may be divided into two or
more subclasses (each, a "Subclass") and any Class of Standard Certificates may
be divided into two or more Subclasses that consist of Multi-Class Certificates.
In addition, a Series of Certificates for which a REMIC (as defined herein)
election has been made will also include one Class or one Subclass of Residual
Certificates (as defined herein).
(Cover continued on next page)
-----------------------------------
THE ASSETS OF THE RELATED TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE
RELATED SECURITIES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE DEPOSITOR, THE SERVICER OR ANY OF THEIR AFFILIATES, EXCEPT AS
SET FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE
CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SELLER, THE SERVICER OR ANY
OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT.
SEE "RISK FACTORS" PAGE 13.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------------------------
The Certificates may be sold from time to time by the Depositor through
dealers or agents designated from time to time, through underwriting syndicates
led by one or more managing underwriters or through one or more underwriters
acting alone. See "Plan of Distribution." Affiliates of the Depositor may from
time to time act as agents or underwriters in connection with the sale of
Certificates. The terms of a particular offering will be set forth in the
Prospectus Supplement related to such offering.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Certificates unless accompanied by the Prospectus
Supplement relating to the offering of such Certificates.
- --------------------------------------------------------------------------------
The date of this Prospectus is June 10, 1997
<PAGE>
(Cover continued from previous page)
Each Series of Certificates will include one or more classes. The
Certificates of any particular class may represent beneficial ownership
interests in the related Mortgage Loans held by the related Trust Fund, or may
represent debt secured by such Mortgage Loans, as described herein and in the
related Prospectus Supplement. Any Series of Certificates may include one or
more Classes or Subclasses of Certificates (the "Subordinated Certificates")
that are subordinate in right of distributions to such rights of one or more of
other Classes or Subclasses of such Series (the "Senior Certificates"). If
specified in the applicable Prospectus Supplement, the relative interests of the
Senior Certificates and the Subordinated Certificates of a Series in the Trust
Fund may be subject to adjustment from time to time on the basis of
distributions received in respect thereof (the "Shifting Interest
Certificates"). If so specified in the applicable Prospectus Supplement, credit
support may also be provided for any Series of Certificates in the form of a
guarantee, letter of credit, mortgage pool insurance policy or other form of
credit enhancement as described herein.
Neither the Mortgage Loans nor the Contracts will be guaranteed or insured
by any governmental agency or instrumentality or, except as specified in the
related Prospectus Supplement, by any other person. The only obligations of the
Depositor with respect to a Series of Certificates will be pursuant to certain
limited representations and warranties made by the Depositor, to the extent
described herein and in the related Prospectus Supplement. The Servicer with
respect to a Series of Certificates relating to Mortgage Loans or Contracts will
be named in the related Prospectus Supplement. The principal obligations of a
Servicer will be limited to certain obligations pursuant to certain
representations and warranties and to its contractual servicing obligations.
An election may be made to treat each Trust Fund (or one or more
segregated pools of assets therein) underlying a Series which includes
MultiClass Certificates as a "real estate mortgage investment conduit" (a
"REMIC") or, on or after September 1, 1997, as a Financial Asset Securitization
Investment Trust ("FASIT") for federal income tax purposes. Series of
Certificates for which a REMIC election has been made will include one or more
Classes or Subclasses which constitute "regular interests" in the REMIC
("Regular Certificates") and one Class or Subclass with respect to each REMIC
which constitutes the "residual interest" therein (the "Residual Certificates").
Series of Certificates for which a FASIT election has been made will include one
or more Classes or Subclasses which constitute "regular interests" ("FASIT
Regular Securities") and/or "high-yield interests" ("FASIT High-Yield
Securities") and one Class or Subclass with respect to each FASIT which
constitutes the "ownership interest" therein (the "FASIT Ownership Interest").
Alternatively, a Trust Fund may be treated as a grantor trust or as a
partnership for federal income tax purposes, or may be treated for federal
income tax purposes as a mere security device which constitutes a collateral
arrangement for the issuance of debt. See "Certain Federal Income Tax
Consequences."
There will have been no public market for the Certificates of any Series
prior to the offering thereof. No assurance can be given that such a market will
develop, or that if such a market does develop, it will provide
Certificateholders with liquidity of investment or will continue for the life of
the Certificates.
2
<PAGE>
REPORTS
In connection with each distribution and annually, Certificateholders will
be furnished with statements containing information with respect to principal
and interest payments and the related Trust Fund, as described herein and in the
applicable Prospectus Supplement for such Series. Any financial information
contained in such reports will not have been examined or reported upon by an
independent public accountant. See "Servicing of the Mortgage Loans and
Contracts -- Reports to Certificateholders." The Servicer for each Series
relating to Mortgage Loans or Contracts will furnish periodic statements setting
forth certain specified information to the related Trustee and, in addition,
annually will furnish such Trustee with a statement from a firm of independent
public accounts with respect to the examination of certain documents and records
relating to the servicing of the Mortgage Loans or Contracts in the related
Trust Fund. See "Servicing of the Mortgage Loans and Contracts -- Reports to the
Trustee" and "Evidence as to Compliance." Copies of the monthly and annual
statements provided by the Servicer to the Trustee will be furnished to
Certificateholders of each Series upon request addressed to Prudential
Securities Secured Financing Corporation, One New York Plaza, 15th Floor, New
York, New York 10292, Attention: Len Blum (212) 778-1000.
AVAILABLE INFORMATION
The Depositor has filed a Registration Statement (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with the Securities and Exchange Commission (the "Commission") with respect to
the Certificates offered pursuant to this Prospectus. This Prospectus contains,
and the Prospectus Supplement for each Series of Certificates will contain, a
summary of the material terms of the documents referred to herein and therein,
but neither contains nor will contain all of the information set forth in the
Registration Statement of which this Prospectus is a part. For further
information, reference is made to such Registration Statement and any amendments
thereof and to the exhibits thereto. Copies of the Registration Statement may be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 upon payment of the prescribed charges, or may be
examined free of charge at the Commission's offices, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at the regional offices of the Commission located at
Room 1400, 75 Park Place, New York, New York 10007 and Northwestern Atrium
Center, 500 West Madison Street, Suite 400, Chicago, Illinois 60661-2511.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of any offering of Certificates evidencing interests therein. The Depositor will
provide or cause to be provided without charge to each person to whom this
Prospectus is delivered in connection with the offering of one or more Classes
of Certificates, a list identifying, all filings with respect to a Trust Fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, since the
Depositor's latest fiscal year covered by its annual report on Form 10-K and a
copy of any or all documents or reports incorporated herein by reference, in
each case to the extent such documents or reports relate to one or more of such
Classes of such Certificates, other than the exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests to the Depositor should be directed to: Prudential Securities Secured
Financing Corporation, One New York Plaza, 15th Floor, New York, New York 10292,
telephone number (212) 778-1000, Attention: Len Blum.
3
<PAGE>
SUMMARY OF PROSPECTUS
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus, and by reference to the
information with respect to each Series of Certificates contained in the related
Prospectus Supplement. Certain capitalized terms used and not otherwise defined
herein shall have the meanings given elsewhere in this Prospectus. An index
indicating where certain terms used herein are defined appear at the end of this
Prospectus.
Title of Securities........... Pass-Through Certificates (Issuable in
Series).
Depositor..................... Prudential Securities Secured Financing
Corporation, formerly known as P-B Secured
Financing Corporation (the "Depositor"), a
Delaware corporation, is a wholly-owned
limited purpose finance subsidiary of
Prudential Securities Group Inc. The
Depositor's principal executive offices are
located at One New York Plaza, 15th Floor,
New York, New York 10292, and its telephone
number is (212) 778-1000. See "The
Depositor."
Unaffiliated Sellers ......... The Depositor will acquire the Mortgage Loans
and Contracts from one or more institutions
unaffiliated with the Depositor
("Unaffiliated Sellers").
Trustee....................... The Trustee with respect to a Series will be
specified in the related Prospectus
Supplement.
Servicer...................... The Servicer for each Series relating to
Mortgage Loans or Contracts will be specified
in the applicable Prospectus Supplement. The
Servicer will service the Mortgage Loans or
Contracts comprising each Trust Fund and
administer each Trust Fund pursuant to a
separate Pooling and Servicing Agreement
(each, a "Pooling and Servicing Agreement").
The Servicer may subcontract all or any
portion of its obligations as Servicer under
each Pooling and Servicing Agreement to
qualified subservicers (each, a
"Sub-Servicer") but the Servicer will not be
relieved thereby of its liability with
respect thereto. See "Servicing of the
Mortgage Loans and Contracts."
The Trust Funds............... The Trust Fund for each Series of
Certificates may consist of any combination
of Mortgage Pool and/or Contract Pools (each
as defined herein) and certain other related
property, as specified herein and in the
applicable Prospectus Supplement. Unless
otherwise specified in the applicable
Prospectus Supplement, each Mortgage Pool
will be comprised of Mortgage Loans or
Contracts or participations therein.
Unless otherwise specified in the applicable
Prospectus Supplement, each Contract Pool
will consist of fixed or adjustable rate
manufactured housing installment sale,
contracts and installment loan agreements.
Each Contract may be secured by a new or used
Manufactured Home (as defined herein).
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Neither the Certificates, the interest
thereon, nor the underlying Mortgage Loans
are guaranteed by the United States nor do
they constitute debts or obligations of the
United States or any agency or
instrumentality of the United States.
The particular characteristics of each Trust
Fund will be set forth in the applicable
Prospectus Supplement.
Description of the
Certificates ................. The Certificates issued by any Trust Fund may
represent beneficial ownership interests in
the related Mortgage Loans held by the
related Trust Fund, or may represent debt
secured by such Mortgage Loans, as described
herein and in the related Prospectus
Supplement. Certificates which represent
beneficial ownership interests in the related
Trust Fund will be referred to as
"Certificates" in the related Prospectus
Supplement; Certificates which represent debt
issued by the related Trust Fund will be
referred to as "Notes" in the related
Prospectus Supplement.
With respect to Notes issued by the related
Trust Fund, the related Trust Fund will enter
into an indenture by and between such Trust
Fund and the trustee named on such indenture,
as set forth in the related Prospectus
Supplement.
Each Series of Certificates will be recourse
to the assets of the related Trust Fund only.
The sole source of payment for any Series of
Certificates will be the assets of the
related Trust Fund. The Certificates will not
be obligations, either recourse or
non-recourse (except for certain non-recourse
debt described under "Certain Federal Income
Tax Consequences"), of the Depositor, the
Servicer or any Person other than the related
Trust Fund. In the case of Certificates that
represent beneficial ownership interest in
the related Trust Fund, such Certificates
will represent the ownership of such Trust
Fund; with respect to Certificates which are
Notes, such Notes will be secured by the
related Trust Fund. Notwithstanding the
foregoing, and as to be described in the
related Prospectus Supplement, certain types
of credit enhancement, such as a financial
guaranty insurance policy or a letter of
credit, may constitute a full recourse
obligation of the issue of such credit
enhancement.
Each Series will consist of one or more
Classes of Certificates which may be (i)
Standard Certificates, (ii) Multi-Class
Certificates or (iii) Stripped Certificates.
Any Class of Certificates may be divided into
two or more Subclasses and any Class of
Standard Certificates may be divided into
Subclasses which consist of Multi-Class
Certificates. The Depositor will cause each
Trust Fund (or one or more segregated pools
of assets therein) with respect to a Series
which includes Standard Certificates
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redeemable on a random lot basis, Multi-Class
Certificates or Shifting Interest
Certificates to elect to be treated as a
REMIC. In addition, any Series with respect
to which an election has been made to treat
the Trust Fund (or one or more segregated
pools of assets therein) as a REMIC will
include one Class or one Subclass of Residual
Certificates as to each REMIC. The Residual
Certificates of a Series, if offered hereby,
will represent the right to receive
distributions with respect to the related
Trust Fund as specified in the related
Prospectus Supplement. Unless otherwise
specified in the applicable Prospectus
Supplement, the Certificates will be offered
only in fully registered form.
A. Standard
Certificates.............. Unless otherwise provided in the applicable
Prospectus Supplement, Standard Certificates
of a Series will each evidence a fractional
undivided beneficial ownership interest in
the related Trust Fund and will entitle the
holder thereof to its proportionate share of
a percentage of all of the payments and other
receipts with respect to the principal of and
interest (to the extent of the applicable Net
Mortgage Rate or Net Contract Rate) on the
related Mortgage Loans or Contracts. If
specified in the applicable Prospectus
Supplement, with respect to any Class of
Standard Certificates of a Series for which a
REMIC election has been made, distributions
of principal may be allocated among the
Certificateholders of such Class on a pro
rata, random lot or such other basis as is
specified in such Prospectus Supplement.
B. Multi-Class
Certificates............... Multi-Class Certificates of a Series will
consist of Certificates each of which
evidences a beneficial ownership interest in
the related Trust Fund and will be assigned a
Stated Amount, which may be based on an
amount of principal of the underlying
Mortgage Loans or Contracts or on the value
of future cash flows from the related Trust
Fund without distinction as to principal or
interest and an Interest Rate which may be a
fixed rate (which may be zero) or a variable
rate or which will otherwise accrue interest
as specified in the applicable Prospectus
Supplement. The holder of a Multi-Class
Certificate will be entitled to receive, to
the extent funds are available therefor,
interest payments on the outstanding Stated
Amount thereof at the applicable Interest
Rate or as otherwise specified in the
applicable Prospectus Supplement and
distributions in reduction of such Stated
Amount determined in the manner and applied
in the priority set forth in the applicable
Prospectus Supplement.
C. Stripped
Certificates............... Stripped Certificates will each evidence an
undivided beneficial ownership interest in
the related Trust Fund and will entitle the
holder thereof to its proportionate share of
a specified portion (which may be zero) of
principal payments and/or a specified portion
(which may be zero) of interest payments (to
the extent of the applicable Net Mortgage
Interest Rate) on the related Mortgage Loans.
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Pooling and Servicing
Agreement..................... The Certificates of each Series will be
issued pursuant to a Pooling and Servicing
Agreement among the Depositor, the Servicer,
if any, and the Trustee.
Cut-Off Date.................. The date specified in the applicable
Prospectus Supplement.
Distribution Dates............ Unless otherwise specified in the applicable
Prospectus Supplement, distributions on
Standard Certificates or Stripped
Certificates will be made on the 25th day
(or, if such day is not a business day, the
business day following the 25th day) of each
month, commencing with the month following
the month in which the applicable Cut-Off
Date occurs. Distributions on Multi-Class
Certificates will be made monthly, quarterly,
or semiannually, on the dates specified in
the applicable Prospectus Supplement. The
dates upon which such distributions are made
are referred to herein as the "Distribution
Dates."
Record Dates.................. Distributions will be made on each
Distribution Date set forth in the Prospectus
Supplement to Certificateholders of record at
the close of business on the last business
day of the month preceding the month in which
such Distribution Date occurs or such other
date as may be set forth in the Prospectus
Supplement (the "Record Date").
Interest...................... With respect to a Series of Certificates
consisting of Standard Certificates or
Stripped Certificates, unless otherwise
specified in the applicable Prospectus
Supplement, interest on the related Mortgage
Loans, Mortgage Certificates or Contracts at
the applicable pass-through rate (the
"Pass-Through Rate"), as set forth in the
applicable Prospectus Supplement, will be
passed through monthly on each Distribution
Date to holders thereof, in accordance with
the particular terms of each such
Certificate. Holders of Multi-Class
Certificates will receive distributions of
interest at the applicable Interest Rate, if
any, on the Stated Amount or Notional Amount
of such Certificates, or as otherwise
specified in the applicable Prospectus
Supplement, without regard to the Net
Mortgage Rates or Net Contract Rates on the
underlying Mortgage Loans or Contracts.
Unless otherwise specified in the applicable
Prospectus Supplement, the "Net Mortgage
Rate" for each Mortgage Loan in a given
period will equal the Mortgage Rate for such
Mortgage Loan in such period (the "Mortgage
Rate") less any Fixed Retained Yield, and
less the Servicing Fee (as defined herein).
Unless otherwise specified in the applicable
Prospectus Supplement, the "Net Contract
Rate" for each Contract in a given period
will equal the Contract Rate for such
Contract in such period (the "Contract Rate")
less any Fixed Retained Yield, and less the
Servicing Fee. The "Servicing Fee" with
respect to each Mortgage Loan or Contract is
an amount reserved for servicing such
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<PAGE>
Mortgage Loan or Contract and administration
of the related Trust Fund.
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
8
<PAGE>
Purchase Agreement or the related Pooling and
Servicing Agreement will require that, if all
moneys originally deposited to such
Pre-Funding Account are not so used by the
end of such specified period, then any
remaining moneys will be applied as a
mandatory prepayment of the related 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,
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<PAGE>
until the Subordinated Amount is reduced to
zero, Senior Certificateholders will be
entitled to receive the amount of any such
shortfall, together with interest at the
applicable Pass-Through Rate, Interest Rate,
or at such other rate specified in the
applicable Prospectus Supplement, as the case
may be, on the next 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."
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<PAGE>
Legal Investment.............. If so specified in the Prospectus Supplement,
one or more classes of Certificates offered
pursuant to this Prospectus will constitute
"mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"), so long as they are rated in
one of the two highest rating categories by
at least one "nationally recognized
statistical rating organization. As "mortgage
related securities," such Certificates
offered pursuant to this Prospectus will
constitute legal investments for certain
types of institutional investors to the
extent provided in SMMEA subject, in any
case, to any other regulations which may
govern investments by such institutional
investors. Since certain other classes of
Certificates offered pursuant to this
Prospectus will not either represent
interests in, or be secured by, qualifying
mortgage loans, such Certificates will not
constitute "mortgage related securities"
under SMMEA. No representation is made as to
the appropriate characterization of any
Certificates under any laws relating to
investment restrictions, as to which
investors should consult their legal
advisors. See "Legal Investment".
ERISA Limitations............. A fiduciary of any employee benefit plan
subject to the fiduciary responsibility
provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
including the prohibited transaction rules
thereunder, and to the corresponding
provisions of the Internal Revenue Code of
1986, as amended (the "Code"), should
carefully review with its own legal advisors
whether the purchase or holding of
Certificates could give rise to a transaction
prohibited or otherwise impermissible under
ERISA or the Code. See "ERISA
Considerations."
Certain Federal Income
Tax Consequences ........... Securities of each series offered hereby
will, for federal income tax purposes,
constitute either (i) interests ("Grantor
Trust Securities") in a Trust treated as a
grantor trust under applicable provisions of
the Code, (ii) "regular interests" ("REMIC
Regular Securities") or "residual interests"
("REMIC Residual Securities") in a Trust
treated as a REMIC (or, in certain instances,
containing one or more REMIC's) under
Sections 860A through 860G of the Code, (iii)
debt issued by a Trust ("Debt Securities")
(iv) interests in a Trust which is treated as
a partnership ("Partnership Interests"), or,
(v) on or after September 1, 1997, "regular
interests" ("FASIT Regular Securities"),
"high-yield interests" ("FASIT High-Yield
Securities") or an ownership interest in a
Trust treated as a FASIT (or, in certain
circumstances containing one or more FASITs
under Sections 860H through 860L of the
Code).
Investors are advised to consult their tax
advisors and to review "Certain Federal
Income Tax Consequences" herein and in the
related Prospectus Supplement.
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<PAGE>
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.
12
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Certificates.
Limited Liquidity. There can be no assurance that a secondary market for
the Certificates of any series or class will develop or, if it does develop,
that it will provide Certificateholders with liquidity of investment or that it
will continue for the life of the Certificates of any series. The Prospectus
Supplement for any series of Certificates may indicate that an underwriter
specified therein intends to establish a secondary market in such Certificates;
however, no underwriter will be obligated to do so. Unless otherwise specified
in the related Prospectus Supplement, the Certificates will not be listed on any
securities exchange.
Limited Obligations. The Certificates will not represent an interest in or
obligation, either recourse or non-recourse (except for certain non-recourse
debt described under "Certain Federal Income Tax Consequences"), of the
Depositor, the Servicer or any person other than the related Trust. The only
obligations of the foregoing entities with respect to the Certificates or the
Mortgage Loans will be the obligations (if any) of the Depositor and the
Servicer pursuant to certain limited representations and warranties made with
respect to the Mortgage Loans, the Servicer's servicing obligations under the
related Pooling and Servicing Agreement (including its limited obligation, if
any, to make certain advances in the event of delinquencies on the Mortgage
Loans, but only to the extent deemed recoverable) and, if and to the extent
expressly described in the related Prospectus Supplement, certain limited
obligations of the Depositor, Servicer, applicable Sub-Servicer, or another
party in connection with a purchase obligation ("Purchase Obligation") or an
agreement to purchase or act as remarketing agent with respect to a Convertible
Mortgage Loan upon conversion to a fixed rate. Notwithstanding the foregoing,
and as to be described in the related Prospectus Supplement, certain types of
Credit Enhancement, such as a financial guaranty insurance policy or a letter of
credit, may constitute a full recourse obligation of the issuer of such Credit
Enhancement. Except as described in the related Prospectus Supplement, neither
the Certificates nor the underlying Mortgage Loans will be guaranteed or insured
by any governmental agency or instrumentality, or by the Depositor, the
Servicer, any Sub-Servicer or any of their affiliates. Proceeds of the assets
included in the related Trust Fund for each series of Certificates (including
the Mortgage Loans and any form of Credit Enhancement) will be the sole source
of payments on the Certificates, and there will be no recourse to the Depositor
or any other entity in the event that such proceeds are insufficient or
otherwise unavailable to make all payments provided for under the Certificates.
Limitations, Reduction and Substitution of Credit Enhancement. With
respect to each series of Certificates, Credit Enhancement will be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit Enhancement will be provided in one or more of the forms referred
to herein, including, but not limited to: a letter of credit; a Purchase
Obligation; a mortgage pool insurance policy; a special hazard insurance policy;
a bankruptcy bond; a reserve fund; a financial guaranty insurance policy or
other type of Credit Enhancement to provide partial coverage for certain
defaults and losses relating to the Mortgage Loans. Credit Enhancement also may
be provided in the form of the related class of Certificates, subordination of
one or more classes of Certificates in a series under which losses in excess of
those absorbed by any related class of Certificates are first allocated to any
Subordinate Certificates up to a specified limit, cross-support among Trust Fund
Assets and/or overcollateralization. See "Credit Support -- Subordination" and
"Other Credit Enhancement." Regardless of the form of Credit Enhancement
provided, the coverage will be limited in amount and in most cases will be
subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such Credit Enhancements may provide only very limited coverage as
to certain types of losses, and may provide no coverage as to certain other
types of losses. Generally, Credit Enhancements do not directly or indirectly
guarantee to the investors any specified rate of prepayments. The Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the Credit Enhancement for any series of Certificates, if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. To the extent not set forth herein, the amount and types of coverage,
the identification of any entity providing the coverage, the terms of any
subordination and related information will be set forth in the Prospectus
Supplement relating to a series of Certificates. See "Credit Support --
Subordination" and "Other Credit Enhancement."
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<PAGE>
Risks of the Mortgage Loans
Risk of the Losses Associated with Junior Liens. Certain of the Mortgage
Loans will be secured by junior Liens subordinate to the rights of the mortgagee
or beneficiary under each related senior mortgage or deed of trust. As a result,
the proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the principal balance of a mortgage loan only to the extent
that the claims, if any, of each such senior mortgagee or beneficiary are
satisfied in full, including any related foreclosure costs. In addition, a
mortgagee secured by a junior Lien may not foreclose on the related mortgaged
property unless it forecloses subject to the related senior mortgage or
mortgages, in which case it must either pay the entire amount of each senior
mortgage to the applicable mortgagee at or prior to the foreclosure sale or
undertake the obligation to make payments on each senior mortgage in the event
of default thereunder. In servicing junior lien loans in its portfolio, it has
been the practice of the Servicer to satisfy each such senior mortgage at or
prior to the foreclosure sale only to the extent that it determines any amounts
so paid will be recoverable from future payments and collections on such junior
Lien loans or otherwise. The Trusts will not have any source of funds to satisfy
any such senior mortgage or make payments due to any senior mortgagee. See
"Certain Legal Aspects of Mortgage Loans and Contracts -- Foreclosure."
Risk of Losses Associated with Declining Real Estate Values. An investment
in securities such as the Certificates that generally represent beneficial
ownership interests in the Mortgage Loans or debt secured by such Mortgage Loans
may be affected by, among other things, a decline in real estate values and
changes in the borrowers' financial condition. No assurance can be given that
values of the Mortgaged Properties have remained or will remain at their levels
on the dates of origination of the related Mortgage Loans. If the residential
real estate market should experience an overall decline in property values such
that the outstanding balances of any senior Liens, the Mortgage Loans and any
secondary financing on the Mortgaged Properties in a particular Mortgage Pool
become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the nonconforming credit mortgage lending
industry. Such a decline could extinguish the interest of the related Trust in
the Mortgaged Properties before having any effect on the interest of the related
senior mortgagee. In addition, in the case of Mortgage Loans that are subject to
negative amortization, due to the addition to principal balance of deferred
interest ("Deferred Interest"), the principal balances of such Mortgage Loans
could be increased to an amount equal to or in excess of the value of the
underlying Mortgaged Properties, thereby increasing the likelihood of default.
To the extent that such losses are not covered by the applicable Credit
Enhancement, holders of Certificates of the series evidencing interests in the
related Mortgage Pool will bear all risk of loss resulting from default by
Mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans.
Risk of Losses Associated with Certain Non-Conforming and Non-Traditional
Loans. The Depositor's underwriting standards consider, among other things, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the value of the property; however, the Depositor's Mortgage Loan
program generally provides for the origination of Mortgage Loans relating to
non-conforming credits. Certain of the types of loans that may be included in
the Pools may involve additional uncertainties not present in traditional types
of loans. For example, certain of the Mortgage Loans may provide for escalating
or variable payments by the borrower under the Mortgage Loan (the "Mortgagor"),
as to which the Mortgagor is generally qualified on the basis of the initial
payment amount. In some instances the Mortgagors' income may not be sufficient
to enable them to continue to make their loan payments as such payments increase
and thus the likelihood of default will increase. For a more detailed
discussion, see "Underwriting Guidelines."
Risk of Losses Associated with Balloon Loans. Certain of the Mortgage
Loans may constitute "Balloon Loans." Balloon Loans are originated with a stated
maturity of less than the period of time of the corresponding amortization
schedule. Consequently, upon the maturity of a Balloon Loan, the Mortgagor will
be required to make a "balloon" payment that will be significantly larger than
such Mortgagor's previous monthly payments. The ability of such a Mortgagor to
repay a Balloon Loan at maturity frequently will depend on such borrower's
ability to refinance the Mortgage Loan. The ability of a Mortgagor to refinance
such a Mortgage Loan will be affected by a number of factors, including the
level of available mortgage rates at the time, the value of the related
Mortgaged Property, the Mortgagor's equity in the related Mortgaged Property,
the financial condition of the Mortgagor, the tax laws and general economic
conditions at the time.
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<PAGE>
Although a low interest rate environment may facilitate the refinancing of
a balloon payment, the receipt and reinvestment by Certificateholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the Depositor,
the Servicer, any Sub-Servicer or the Trustee will be obligated to provide funds
to refinance any Mortgage Loan, including Balloon Loans.
Risk of Losses Associated with ARM Loans. ARM Loans may be underwritten on
the basis of an assessment that Mortgagors will have the ability to make
payments in higher amounts after relatively short periods of time. In some
instances, Mortgagors' income may not be sufficient to enable them to continue
to make their loan payments as such payments increase and thus the likelihood of
default will increase.
Risk of Losses Associated with Bankruptcy of Mortgagors. General economic
conditions have an impact on the ability of borrowers to repay Mortgage Loans.
Loss of earnings, illness and other similar factors also may lead to an increase
in delinquencies and bankruptcy filings by borrowers. In the event of personal
bankruptcy of a Mortgagor, it is possible that a Trust could experience a loss
with respect to such Mortgagor's Mortgage Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan thereby either
delaying or permanently limiting the amount received by the Trust with respect
to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the
transfer of the related Mortgaged Property to a Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
Risk of Losses Associated with Foreclosure of Mortgaged Properties. Even
assuming that the Mortgaged Properties provide adequate security for the
Mortgage Loans, substantial delays could be encountered in connection with the
liquidation of defaulted Mortgage Loans and corresponding delays in the receipt
of related proceeds by the Certificateholders could occur. An action to
foreclose on a Mortgaged Property securing a Mortgage Loan is regulated by state
statutes, rules and judicial decisions and is subject to many of the delays and
expenses of other lawsuits if defenses or counterclaims are interposed,
sometimes requiring several years to complete. Furthermore, in some states an
action to obtain a deficiency judgment is not permitted following a nonjudicial
sale of a Mortgaged Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the Servicer to
foreclose on or sell the Mortgaged Property or to obtain liquidation proceeds
(net of expenses) ("Liquidation Proceeds") sufficient to repay all amounts due
on the related Mortgage Loan. The Servicer will be entitled to deduct from
Liquidation Proceeds all expenses reasonably incurred in attempting to recover
amounts due on the related liquidated Mortgage Loan ("Liquidated Mortgage Loan")
and not yet repaid, including payments to prior lienholders, accrued Servicing
Fees, legal fees and costs of legal action, real estate taxes, and maintenance
and preservation expenses. In the event that any Mortgaged Properties fail to
provide adequate security for the related Mortgage Loans and insufficient funds
are available from any applicable Credit Enhancement, Certificateholders could
experience a loss on their investment.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal balance
mortgage loan than would be the case with a larger principal balance loan.
Under environmental legislation and judicial decisions applicable in
various states, a secured party that takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a mortgaged property that, prior to foreclosure,
has been involved in decisions or actions which may lead to contamination of a
property, may be liable for the costs of cleaning up the purportedly
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a holder of a mortgage note (such as a Trust)
which, under the terms of the Pooling and Servicing Agreement, is not required
to take an active role in operating the Mortgaged Properties. See "Certain Legal
Aspects of Mortgage Loans and Contracts -- Environmental Risks."
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Certain of the Mortgaged Properties relating to Mortgage Loans may not be
owner occupied. It is possible that the rate of delinquencies, foreclosures and
losses on Mortgage Loans secured by nonowner occupied properties could be higher
than for loans secured by the primary residence of the borrower.
Litigation. Any material litigation relating to the Depositor or the
Servicer will be specified in the related Prospectus Supplement.
Geographic Concentration of Mortgaged Properties. Certain geographic
regions from time to time will experience weaker regional economic conditions
and housing markets than will other regions, and, consequently, will experience
higher rates of loss and delinquency on mortgage loans generally. The Mortgage
Loans underlying certain series of Certificates may be concentrated in such
regions, and such concentrations may present risk considerations in addition to
those generally present for similar mortgage loan asset-backed securities
without such concentrations. Information with respect to geographic
concentration of Mortgaged Properties will be specified in the related
Prospectus Supplement or related current report on Form 8-K.
Legal Considerations. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures, and require licensing of
the Depositor and the Servicer and Sub-Servicers. In addition, most states have
other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices that may
apply to the origination, servicing and collection of the Mortgage Loans.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Servicer to collect all or part of the principal of or
interest on the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Servicer to damages and
administrative sanctions. See "Certain Legal Aspects of Mortgage Loans and
Contracts."
The Mortgage Loans may also be subject to federal laws, including: (i) the
Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the
Real Estate Settlement Procedures Act and Regulation X promulgated thereunder,
which require certain disclosures to the borrowers regarding the terms of the
Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and general
principles of equity may limit the ability of the Servicer to collect all or
part of the principal of or interest on the Mortgage Loans, may entitle the
borrower to rescind the loan or to a refund of amounts previously paid and, in
addition, could subject the Servicer to damages and administrative sanctions. If
the Servicer is unable to collect all or part of the principal or interest on
the Mortgage Loans because of a violation of the aforementioned laws, public
policies or general principles of equity then the Trust may be delayed or unable
to repay all amounts owed to Investors. Furthermore, depending upon whether
damages and sanctions are assessed against the Servicer or the Depositor, such
violations may materially impact the financial ability of the Depositor to
continue to act as Servicer or the ability of the Depositor to repurchase or
replace Mortgage Loans if such violation breaches a representation or warranty
contained in a Pooling and Servicing Agreement.
Collections on the Mortgage Loans may vary due to the level of incidence
of delinquent payments and of prepayments. Collections on the Mortgage Loans may
also vary due to seasonal purchasing and payment habits of borrowers.
Book-Entry Registration. Issuance of the Certificates in book-entry form
may reduce the liquidity of such Certificates in the secondary trading market
since investors may be unwilling to purchase Certificates for which they cannot
obtain definitive physical securities representing such Certificateholders'
interests, except in certain circumstances described in the related Prospectus
Supplement.
Since transactions in Certificates will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
system ("Direct or Indirect Participants") and certain banks, the ability of a
Certificateholder to pledge a Certificate to persons or entities that do not
participate in the DTC system,
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or otherwise to take actions in respect of such Certificates, may be limited due
to lack of a physical certificate representing the Certificates.
Certificateholders may experience some delay in their receipt of
distributions of interest on and principal of the Certificates since
distributions may be required to be forwarded by the Trustee to DTC and, in such
a case, DTC will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable class of Certificateholders either directly or indirectly through
Indirect Participants. See "Description of the Certificates."
The Status of the Mortgage Loans in the Event of Bankruptcy of the
Depositor. In the event of the bankruptcy of the Depositor at a time when it or
any affiliate thereof holds a Certificate, a trustee in bankruptcy of the
Depositor, or its creditors could attempt to recharacterize the sale of the
Mortgage Loans to the related Trust as a borrowing by the Depositor or such
affiliate with the result, if such recharacterization is upheld, that the
Certificateholders would be deemed creditors of the Depositor or such affiliate,
secured by a pledge of the Mortgage Loans. If such an attempt were successful,
it could prevent timely payments of amounts due to the Trust.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such action
could have an effect, for an indeterminate period of time, on the ability of the
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
In addition, the Relief Act imposes limitations that would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan during the Mortgagor's
period of active duty status. Thus, in the event that such a Mortgage Loan goes
into default, there may be delays and losses occasioned by the inability to
realize upon the Mortgaged Property in a timely fashion.
Certificate Rating. The rating of Certificates credit enhanced through
external Credit Enhancement such as a letter of credit, financial guaranty
insurance policy or mortgage pool insurance will depend primarily on the
creditworthiness of the issuer of such external Credit Enhancement device (a
"Credit Enhancer"). Any reduction in the rating assigned to the claims-paying
ability of the related Credit Enhancer below the rating initially given to the
Certificates would likely result in a reduction in the rating of the
Certificates. See "Ratings" in the Prospectus Supplement.
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THE TRUST FUNDS
General
The Trust Fund for each Series of Certificates will consist primarily of a
Pool of Mortgage Loans (a "Mortgage Pool") and/or Contracts (a "Contract Pool").
In addition, a Trust Fund will also include (i) amounts held from time to time
in the related Certificate Account, (ii) the Depositor's interest in any primary
mortgage insurance, hazard insurance, title insurance and/or other insurance
policies relating to a Mortgage Loan or Contract, (iii) any property which
initially secured a Mortgage Loan and which has been acquired by foreclosure or
trustee's sale or deed in lieu of foreclosure or trustee's sale, (iv) any
Manufactured Home which initially secured a Contract and which is acquired by
repossession, (v) if applicable, and to the extent set forth in the applicable
Prospectus Supplement, any Subordination Reserve Fund and/or any other reserve
fund, (vi) if applicable, and to the extent set forth in the applicable
Prospectus Supplement, one or more guarantees, letters of credit, insurance
policies, or any other credit enhancement arrangement, and (vii) such other
assets as may be specified in the related Prospectus Supplement. Unless
otherwise specified in the applicable Prospectus Supplement, the Trust Fund will
not include, however, the portion of interest on the Mortgage Loans or Contracts
which constitutes the Fixed Retained Yield, if any. See "Fixed Retained Yield"
below. If specified in the related Prospectus Supplement, certain Certificates
will evidence the entire fractional undivided ownership interest in the related
Mortgage Loans held by the related Trust Fund or may represent debt secured by
the related Mortgage Loans.
The Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist of Mortgage Loans evidenced by promissory notes or
other evidences of indebtedness (the "Mortgage Notes") that provide for an
original term to maturity of not more than 40 years, for monthly payments and
for interest on the outstanding principal amounts thereof at a rate that is
either fixed or subject to adjustment as described in the related Prospectus
Supplement. If so specified in the applicable Prospectus Supplement, the
adjustable interest rate on certain of the Mortgage Loans will be convertible
into a fixed interest rate at the option of the mortgagor at the times and upon
the conditions specified therein ("Convertible Mortgage Loans"). The Mortgage
Loans may provide for fixed level payments or be GPM Loans, GEM Loans, Balloon
Loans or Buy-Down Loans (each as defined herein) or Mortgage Loans with other
payment characteristics as described in the related Prospectus Supplement. In
addition, the Mortgage Pools may include participation interests in Mortgage
Loans, in which event references herein to payments on Mortgage Loans
underlying, such participations shall mean payments thereon allocable to such
participation interests, and the meaning of other terms relating to Mortgage
Loans will be similarly adjusted. Similarly, the Mortgage Pools may include
Mortgage Loans with respect to which a Fixed Retained Yield has been retained,
in which event references herein to Mortgage Loans and payments thereon shall
mean the Mortgage Loans exclusive of such Fixed Retained Yield. A "Fixed
Retained Yield" in a Mortgage Loan or Contract represents a specified portion of
the interest payable thereon. The Prospectus Supplement for a Series will
specify whether there will be any Fixed Retained Yield in any Mortgage Loan or
Contract and, if so, the owner thereof. See "Servicing of the Mortgage Loans and
Contracts -- Fixed Retained Yield." Unless otherwise specified in the related
Prospectus Supplement, the Mortgage Loans will be secured by promissory notes or
other evidences of indebtedness (the "Mortgages") creating first, second or more
junior liens on conventional one-to four-family residential properties (which
may include mixed-use or vacation properties), all of which will be located in
any of the fifty states or the District of Columbia. The Mortgage Loans may also
consist of installment contracts for the sale of real estate. If so provided in
the applicable Prospectus Supplement, a Mortgage Pool may also contain
cooperative apartment loans (the "Cooperative Loans") evidenced by promissory
notes (the "Cooperative Notes") secured by security interests in shares issued
by private, non-profit, cooperative housing corporations (the "cooperatives")
and in the related proprietary leases or occupancy agreements granting exclusive
rights to occupy specific Cooperative Dwellings in such cooperatives' buildings.
In the case of a Cooperative Loan, the proprietary lease or occupancy agreement
securing such Cooperative Loan is generally subordinate to any blanket mortgage
on the related cooperative apartment building and/or the underlying land.
Additionally, the proprietary lease or occupancy agreement is subject to
termination and the cooperative shares are subject to cancellation by the
cooperative if the tenant-stockholder fails to pay maintenance or other
obligations or charges owed by such tenant-stockholder.
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Mortgage Loans may be entitled to the benefit of external credit
enhancement. Residential Mortgage Loans may be insured by the Federal Housing
Administration or its successors against defaults by the borrower in the payment
of principal and interest thereon, have a portion of principal and interest
payments guaranteed by the Department of Veterans Affairs or its successors or
be subject to other payment guarantees, including guarantees under the National
Housing Act.
Unless otherwise specified in the Prospectus Supplement for a Series, each
Mortgage Loan must have an original term of maturity of not less than 5 years
and not more than 40 years. Unless otherwise specified in the Prospectus
Supplement for a Series, no Mortgage Loan for residential property will have
had, at origination, a principal balance in excess of $5,000,000 or a
Loan-to-Value Ratio in excess of 95%, and Mortgage Loans having Loan-to-Value
Ratios at the time of origination exceeding 80% will be supported by external
credit enhancement or be covered by primary mortgage insurance providing,
coverage on at least the amount of each such mortgage loan in excess of 75% of
the original fair market value of the mortgaged property and remaining in force
until the principal balance of such Mortgage Loan is reduced to 80% of such
original fair market value. The "Loan-to-Value Ratio" is the ratio, expressed as
a percentage, of the principal amount of the Mortgage Loan outstanding at the
origination of such loan divided by the fair market value of the Mortgaged
Property. The fair market value of the Mortgaged Property securing any Mortgage
Loan is, unless otherwise specified in the applicable Prospectus Supplement, the
lesser of (x) the appraised value of the related Mortgaged Property determined
in an appraisal obtained by the originator at origination (or, in the case of a
refinancing, an appraisal obtained at the origination of the refinanced mortgage
loan) and (y) the sale price for such property.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at the levels which existed on the dates of origination
of the related Mortgage Loans. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans and any secondary financing on the Mortgaged
Properties in a particular Trust Fund become equal to or greater than the value
of the Mortgaged Properties, the actual rates of delinquencies, foreclosures and
losses could be higher than those now generally experienced in the mortgage
lending industry. To the extent that such losses are not covered by the methods
of credit support or the insurance policies described herein, they will be borne
by holders of the Certificates of the Series evidencing interests in such Trust
Fund. Furthermore, in a declining real estate market a new appraisal could
render the Cut-Off Date Loan-to-Value Ratios as unreliable measures of leverage.
The Prospectus Supplement for each Series will set forth certain
characteristics of the related Mortgage Loans, which may include the aggregate
principal balance of the Mortgage Loans in the Mortgage Pool underlying such
Series as of the Cut-Off Date for such Series (the "Cut-Off Date Aggregate
Principal Balance"), the range of original terms to maturity of the Mortgage
Loans in the Mortgage Pool, the weighted average remaining term to stated
maturity at the Cut-Off Date of such Mortgage Loans, the earliest and latest
origination dates of such Mortgage Loans, the range of Mortgage Rates and Net
Mortgage Rates borne by such Mortgage Loans, the weighted average Net Mortgage
Rate at the Cut-Off Date of such Mortgage Loans, the percentage of such Mortgage
Loans which had Loan-to-Value Ratios at the time of origination of 80% or less,
the percentage of such Mortgage Loans that had Loan-to-Value Ratios at
origination in excess of 80% and the highest outstanding, principal balance at
origination of any such Mortgage Loan.
Unless otherwise specified in the applicable Prospectus Supplement, all of
the Mortgage Loans in a Trust Fund will have monthly payments due on a specified
day of each month (each, a "Due Date") and will, with respect to Mortgage Loans
secured by residential properties, require at least monthly payments of interest
on any outstanding balance. If so specified in the applicable Prospectus
Supplement, the Mortgage Pools may include adjustable rate Mortgage Loans that
provide for payment adjustments to be made less frequently than adjustments in
the Mortgage Rates. Each adjustment in the Mortgage Rate which is not made at
the time of a corresponding adjustment in payments (and which adjusted amount of
interest is not paid currently on a voluntary basis by the mortgagor) will
result in a decrease (if the Mortgage Rate rises) or an increase (if the
Mortgage Rate declines) in the rate of amortization of the Mortgage Loan.
Moreover, such payment adjustments on the Mortgage Loans may be subject to
certain limitations, as specified in the Prospectus Supplement, which may also
affect the rate of amortization on the Mortgage Loan. As a result of such
provisions, or in accordance with the payment schedules of certain GPM Loans and
other Mortgage Loans, the amount of interest accrued in any month may equal or
exceed the scheduled monthly payment on the Mortgage Loan. In any such month, no
principal would be payable on the
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Mortgage Loan, and if the accrued interest exceeded the scheduled monthly
payment, such excess interest due would become "Deferred Interest" that is added
to the principal balance of the Mortgage Loan. Deferred Interest will bear
interest at the Mortgage Rate until paid. If such limitations prevent the
payments from being sufficient to amortize fully the Mortgage Loan by its stated
maturity dare, a lump sum payment equal to the remaining unpaid principal
balance will be due on such stated maturity date. See "Prepayment and Yield
Considerations."
Unless otherwise specified in the applicable Prospectus Supplement, the
Mortgage Loans in each Mortgage Pool will be permanent loans (as opposed to
construction and land development loans) secured by Mortgages on Mortgaged
Properties. The Mortgaged Properties will consist of residential properties
only, including detached homes, townhouses, units in planned unit developments,
condominium units, mixed-use properties, vacation homes and small scale
multifamily properties, all of which constitute a "dwelling or mixed residential
and commercial structure" within the meaning of Section 3(a)(41)(A)(i) of the
Securities Exchange Act of 1934, as amended (the "Mortgaged Properties"). The
Mortgage Loans will be secured by liens on fee simple or leasehold interests (in
those states in which long-term ground leases are used as an alternative to fee
interests) in such Mortgaged Properties, or liens on shares issued by
cooperatives and the related proprietary leases or occupancy agreements occupy
specified units in such cooperatives' buildings. The geographic distribution of
Mortgaged Properties will be set forth in the Prospectus Supplement. Each
Prospectus Supplement will also set forth the percentage of the Cut-Off Date
Aggregate Principal Balance of the Mortgage Loans in the related Mortgage Pool
representing the refinancing of existing mortgage indebtedness and the types of
Mortgaged Properties.
If so specified in the applicable Prospectus Supplement, a Trust Fund may
contain Mortgage Loans subject to temporary buy-down plans (the "Buy-Down
Loans") pursuant to which the monthly payments made by the mortgagor during the
early years of the Mortgage Loan will be less than the scheduled monthly
payments on the Mortgage Loan. The resulting difference in payment will be
compensated for from an amount contributed by the seller of the related
Mortgaged Property or another source and, if so specified in the related
Prospectus Supplement, placed in a custodial account (the "Buy-Down Account") by
the Servicer. If the mortgagor on a Buy-Down Loan prepays such Mortgage Loan in
its entirety, or defaults on such Mortgage Loan and the Mortgaged Property is
sold in liquidation thereof, during the period when the mortgagor is not
obligated, on account of the buy-down plan, to pay the full monthly payment
otherwise due on such loan, the unpaid principal balance of such Buy-Down Loan
will be reduced by the amounts remaining in the Buy-Down Account with respect to
such Buy-Down Loan, and such amounts shall be deposited in the Certificate
Account (as defined herein), net of any amounts paid with respect to such
Buy-Down Loan by any insurer, guarantor or other person pursuant to a credit
enhancement arrangement described in the applicable Prospectus Supplement.
If so specified in the applicable Prospectus Supplement, a Trust Fund may
include Mortgage Loans which are amortized over 30 years or some other term, or
which do not provide for amortization prior to maturity, but which have a
shorter term (each such Mortgage Loan, a "Balloon Loan") that causes the
outstanding principal balance of such Mortgage Loan to be due and payable at the
end of a certain specified period (the "Balloon Period"). If specified in the
applicable Prospectus Supplement, the originator of such Balloon Loan will be
obligated to refinance each such Balloon Loan at the end of its Balloon Period
at a new interest rate determined prior to the end of such Balloon Period by
reference to an index plus a margin specified in the related Mortgage Note. The
mortgagor is not, however, obligated to refinance the Balloon Loan through such
originator. In the event a mortgagor refinances a Balloon Loan, the new loan
will not be included in the Trust Fund. See "Prepayment and Yield
Considerations."
If specified in the Prospectus Supplement for any Series, the Mortgage
Loans included in the Trust Fund for such Series may be what are commonly
referred to as "home equity revolving lines of credit" ("Home Equity Lines").
Home Equity Lines are generally evidenced by a loan agreement ("Loan Agreement")
rather than a note. Home Equity Lines generally may be drawn down from time to
time by the borrower writing a check against the account, or acknowledging the
advance in a supplement to the Loan Agreement (the amount of such drawn down, an
"Additional Balance"). A Home Equity Line will establish a maximum credit limit
with respect to the related borrower, and will permit the borrower to draw down
Additional Balances, and repay the aggregate balance outstanding in each case
from time to time in such a manner so that the aggregate balance outstanding
does not exceed the maximum credit limit. A Home Equity Line will be secured by
either a senior or a junior lien Mortgage, and will bear interest at either a
fixed or an adjustable rate.
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In certain states the borrower must, on the opening of an account, draw an
initial advance of not less than a specified amount. Home Equity Lines generally
amortize according to an amortization basis established at the time of the
initial advance. The "amortization basis" is the length of time in which the
initial advance plus interest will be repaid in full. The amortization bases of
the Home Equity Lines generally range from 60 months (5 years) to 180 months (15
years) depending on the credit limit assigned. Generally, the amortization basis
will be longer the higher the credit limit. The minimum monthly payment on a
Home Equity Line will generally be equal to the sum of the following: (i) an
amount necessary to completely repay the then-outstanding balance and the
applicable finance charge in equal installments over the assigned amortization
basis ("Basic Monthly Amount"); (ii) any monthly escrow charges; (iii) any
delinquency or other similar charges; and (iv) any past due amounts, including
past due finance charges. The Basic Monthly Amount typically is recomputed each
time the related Mortgage Rate adjusts and whenever an Additional Balance is
advanced; such recomputation in the case of an Additional Advance may also reset
the amortization schedule. The effect of each such advance on the related Home
Equity Line is to reset the commencement date of the original maturity term to
the date of the later advance. For example, a Home Equity Line made originally
with a 15-year maturity from date of origination changes at the time of the next
adjustment or advance to a Home Equity Line with a maturity of 15 years from the
date of such advance. For certain Home Equity Lines, the same type of
recomputation exists for adjustments of the related Mortgage Rate.
Prior to the expiration of a specified period, the reduction of the
account to a zero balance and the closing of a Home Equity Line account may
result in a prepayment penalty. A prepayment penalty also may be assessed
against the borrower if a Home Equity Line account is closed by the Servicer due
to a default by the borrower under the Loan Agreement.
Each Loan Agreement will provide that the Servicer has the right to
require the borrower to pay the entire balance plus all other accrued but unpaid
charges immediately, and to cancel the borrower's credit privileges under the
Loan Agreement if, among other things, the borrower fails to make any minimum
payment when due under the Loan Agreement, if there is a material change in the
borrower's ability to repay the Home Equity Line, or if the borrower sells any
interest in the property securing the Loan Agreement, thereby causing the
"due-on-sale" clause in the trust deed or mortgage to become effective.
Mortgage Loans which are secured by junior mortgages are subordinate to
the rights of the mortgagees under the related senior mortgage or mortgages.
Accordingly, liquidation, insurance and condemnation proceeds received with
respect to the related mortgaged property will be available to satisfy the
outstanding balance of such a Mortgage Loan only to the extent that the claims
of the senior mortgages have been satisfied in full, including any related
liquidation and foreclosure costs. In addition, a junior mortgagee foreclosing
on its mort,age may be required to purchase the related mortgaged property for a
price sufficient to satisfy the claims of the holders of any senior mortgages
which are also being foreclosed. In the alternative, a junior mortgagee which
acquires title to a related mortgaged property, through foreclosure,
deed-in-lieu of foreclosure or otherwise may take the property subject to any
senior mortgages and continue to perform with respect to any senior mortgages,
in which case the junior mortgagee must comply with the terms of any senior
mortgages or risk foreclosure by the senior mortgagee.
If so specified in the applicable Prospectus Supplement, a loan pool may
include graduated equity mortgage loans ("GEM Loans"). GEM Loans are fixed rate,
fully amortizing mortgage loans which provide for monthly payments based on a
10- to 30-year amortization schedule, and which provide for scheduled annual
payment increases for a number of years and level payments thereafter. The full
amount of the scheduled payment increases during the early years is applied to
reduce the outstanding principal balance of such loans.
If so specified in the applicable Prospectus Supplement, a Mortgage Pool
may include graduated payment mortgage loans ("GPM Mortgage Loans"). GPM
Mortgage Loans provide for payments of monthly installments which increase
annually in each of a specified number of initial years and level monthly
payments thereafter. Payments during the early years are required in amounts
lower than the amounts which would be payable on a level debt service basis due
to the deferral of a portion of the interest accrued on the mortgage loan. Such
deferred interest is added to the principal balance of the mortgage loan and is
paid, together with interest thereon, in the later years of the obligation.
Because the monthly payments during the early years of such a GPM Mortgage Loan
are not sufficient to pay the full interest accruing on the GPM Mortgage Loan,
the interest payments on such GPM Mortgage Loan may not be sufficient in its
early years to meet its proportionate share of the distributions expected to be
made on the related Certificates. Thus, if the Mortgage Loans include GPM
Mortgage Loans, the
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Servicer will, unless otherwise specified in the Prospectus Supplement,
establish a reserve fund (the "GPM Fund") which (together with, if specified in
the related Prospectus Supplement, reinvestment income thereon) will be
sufficient to cover the amount by which payments of interest on such GPM
Mortgage Loan assumed in calculating, distributions expected to be made on the
Certificates of such Series exceed scheduled interest payments according to the
relevant graduated payment mortgage plan for the period during which excess
occurs.
If so specified in the applicable Prospectus Supplement, a Trust Fund may
contain ARM buy-out loans ("ARM Buy-Outs") which are automatically repurchased
by the Depositor upon the occurrence of either(i) a switch from a fixed-rate
mortgage to an adjustable rate mortgage pursuant to the terms of the underlying
note or (ii) a switch from an adjustable rate to a fixed rate mortgage pursuant
to the terms of the underlying note.
If specific information respecting the Mortgage Loans to be included in a
Trust Fund is not known to the Depositor at the time the Certificates of a
Series are initially offered, more general information of the nature described
above will be provided in the Prospectus Supplement and final specific
information will be set forth in a Current Report on Form 8-K to be available to
investors on the date of issuance thereof and to be filed with the Commission
promptly after the initial issuance of such Certificates.
The Contracts
Unless otherwise specified in the applicable Prospectus Supplement, each
Contract Pool will consist of conventional manufactured housing installment
sales contracts and installment loan agreements (collectively, the "Contracts")
originated by a manufactured housing dealer in the ordinary course of business
and purchased by the Unaffiliated Seller. Unless otherwise specified in the
applicable Prospectus Supplement, each Contract will be secured by Manufactured
Homes (as defined below), each of which will be located in any of the fifty
states or the District of Columbia. Unless otherwise specified in the applicable
Prospectus Supplement, the Contracts will be fully amortizing and will bear
interest at a fixed or adjustable annual percentage rate (the "APR" or "Contract
Rate"). The Contract Pool may include Contracts with respect to which a Fixed
Retained Yield has been retained, in which event references herein to Contracts
and payments thereon shall mean the Contracts exclusive of such Fixed Retained
Yield. The Prospectus Supplement for a Series will specify whether there will be
any Fixed Retained Yield in any Contract, and if so, the owner thereof. See
"Fixed Retained Yield" below.
The Unaffiliated Seller of the Contracts will represent that the
Manufactured Homes securing the Contracts consist of manufactured homes within
the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis designed to be used
as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air-conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
Unless otherwise specified in the Prospectus Supplement for a Series, each
Contract must have an original term to maturity of not less than 1 year and not
more than 40 years. Unless otherwise specified in the Prospectus Supplement for
a Series, no Contract will have had, at origination, a principal balance in
excess of $5,000,000 or a Loan-to-Value Ratio in excess of 95%. The
"Loan-to-Value Ratio" is the ratio, expressed as a percentage, of the principal
amount of the Contract outstanding at the origination of such loan divided by
the fair market value of the Manufactured Home. The fair market value of the
Manufactured Home securing any Contract is, unless otherwise specified in the
applicable Prospectus Supplement, either (x) the appraised value of the related
Manufactured Home determined in an appraisal obtained by the originator at
origination and (y) the sale price for such property, plus, in either case,
sales and other taxes and, to the extent financed, filing and recording fees
imposed by law, premiums for related insurance and prepaid finance charges.
Manufactured Homes, unlike site-built homes, generally depreciate in
value. Consequently, at any time after origination it is possible, especially in
the case of Contracts with high Loan-to-Value Ratios at origination,
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that the market value of a Manufactured Home may be lower than the principal
amount outstanding under the related Contract.
The Prospectus Supplement for each Series will set forth certain
characteristics of the related Contracts, which may include the aggregate
principal balance of the Contracts in the Contract Pool underlying such Series
as of the Cut-Off Date for such Series (the "Cut-Off Date Aggregate Principal
Balance"), the range of original terms to maturity of the Contracts in the
Contract Pool, the weighted average remaining term to stated maturity at the
Cut-Off Date of such Contracts, the earliest and latest origination dates of
such Contracts, the range of Contract Rates and Net Contract Rates borne by such
Contracts, the weighted average Net Contract Rate at the Cut-Off Date of such
Contracts, the percentage of such Contracts which had Loan-to-Value Ratios at
the time of origination of 80% or less, the percentage of such Contracts that
had Loan-to-Value Ratios at origination in excess of 80% and the highest
outstanding principal balance at origination of any such Contract.
Unless otherwise specified in the applicable Prospectus Supplement, all of
the Contracts in a Trust Fund will have monthly payments due on the first of
each month (each, a "Due Date") and will be fully-amortizing Contracts. If so
specified in the applicable Prospectus Supplement, Contracts may have Due Dates
which occur on a date other than the first of each month. If so specified in the
applicable Prospectus Supplement, the Contract Pools may include adjustable rate
Contracts that provide for payment adjustments to be made less frequently than
adjustments in the Contract Rates. Each adjustment in the Contract Rate which is
not made at the time of a corresponding adjustment in payments (and which
adjusted amount of interest is not paid currently on a voluntary basis by the
obligor) will result in a decrease (if the Contract Rate rises) or an increase
(if the Contract Rate declines) in the rate of amortization of the Contract.
Moreover, such payment adjustments on the Contracts may be subject to certain
limitations, as specified in the Prospectus Supplement, which may also affect
the rate of amortization on the Contract. As a result of such provisions, the
amount of interest accrued in any month may equal or exceed the scheduled
monthly payment on the Contract. In any such month, no principal would be
payable on the Contract, and if the accrued interest exceeded the scheduled
monthly payment, such excess interest due would become "Deferred Interest" that
is added to the principal balance of the Contract. Deferred Interest will bear
interest at the Contract Rate until paid. If such limitations prevent the
payments from being sufficient to amortize fully the Contract by its stated
maturity date, a lump sum payment equal to the remaining unpaid principal
balance will be due on such stated maturity date. See "Prepayment and Yield
Considerations."
The geographic distribution of Manufactured Homes will be set forth in the
Prospectus Supplement. Each Prospectus Supplement will set forth the percentage
of the Cut-Off Date Aggregate Principal Balance of any Contracts in the Contract
Pool which are secured by Manufactured Homes which have become permanently
affixed to real estate. Each Prospectus Supplement will also set forth the
percentage of the Cut-Off Date Aggregate Principal Balance of the Contracts in
the related Contract Pool representing the refinancing of existing mortgage
indebtedness. Unless otherwise specified in a Prospectus Supplement, no Contract
in the Contract Pool will be more than 30 days past due as of the Cut-Off Date.
If specific information respecting the Contracts to be included in a Trust
Fund is not known to the Depositor at the time the Certificates of a Series are
initially offered, more general information of the nature described above will
be provided in the Prospectus Supplement and final specific information will be
set forth in a Current Report on Form 8-K to be available to investors on the
date of issuance thereof and to be filed with the Commission promptly after the
initial issuance of such Certificates.
Fixed Retained Yield
Fixed Retained Yield with respect to any Mortgage Loan or Contract is that
portion, if any, of interest at the Mortgage Rate or Contract Rate that is
retained by the Depositor or other owner thereof and not included in the related
Trust Fund. The Prospectus Supplement for a Series will specify whether a Fixed
Retained Yield has been retained with respect to the Mortgage Loans or Contracts
of such Series, and, if so, the owner thereof. If so, the Fixed Retained Yield
will be established on a loan-by-loan basis with respect to the Mortgage Loans
or Contracts and will be specified in the schedule of Mortgage Loans or
Contracts attached as an exhibit to the applicable Pooling and Servicing
Agreement. The Servicer, with respect to Mortgage Loans or Contracts, may deduct
the Fixed Retained Yield from payments as received and prior to deposit of such
payments in the Certificate Account for such Series or may (unless an election
has been made to treat the Trust Fund (or one or more segregated
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pools of assets therein) as a REMIC) withdraw the Fixed Retained Yield from the
Certificate Account after the entire payment has been deposited in the
Certificate Account. Notwithstanding the foregoing, any partial payment or
recovery of interest received by the Servicer relating to a Mortgage Loan or
Contract (whether paid by the mortgagor or obligor or received as Liquidation
Proceeds, Insurance Proceeds or otherwise), after deduction of all applicable
servicing fees, will be allocated between Fixed Retained Yield (if any) and
interest at the Net Mortgage Rate or Net Contract Rate on a pari passu basis.
Insurance Policies
Unless otherwise specified in the applicable Prospectus Supplement, the
Pooling and Servicing Agreement will require the Servicer to cause to be
maintained for each Mortgage Loan or Contract an insurance policy issued by a
generally acceptable insurer insuring the Mortgaged Property underlying such
Mortgage Loan or the Manufactured Home underlying such Contract against loss by
fire, with extended coverage (a "Standard Hazard Insurance Policy"). Unless
otherwise specified in the applicable Prospectus Supplement, the Pooling and
Servicing Agreement will require that such Standard Hazard Insurance Policy be
in an amount at least equal to the lesser of 100% of the insurable value of the
improvements which are a part of such Mortgaged Property or Manufactured Home or
the principal balance of such Mortgage Loan or Contract; provided, however, that
such insurance may not be less than the minimum amount required to fully
compensate for any damage or loss on a replacement cost basis. The Servicer will
also maintain on property acquired upon foreclosure, or deed in lieu of
foreclosure, of any Mortgage Loan, and on any Manufactured Home acquired by
repossession a Standard Hazard Insurance Policy in an amount that is at least
equal to the lesser of 100% of the insurable value of the improvements which are
a part of such property or the insurable value of such Manufactured Home or the
principal balance of the related Mortgage Loan or Contract plus, if required by
the applicable Pooling and Servicing Agreement, accrued interest and liquidation
expenses; provided, however, that such insurance may not be less than the
minimum amount required to fully compensate for any damage or loss on a
replacement cost basis. Any amounts collected under any such policies (other
than amounts to be applied to the restoration or repair of the Mortgaged
Property or Manufactured Home or released to the borrower in accordance with
normal servicing procedures) will be deposited in the Certificate Account.
The Standard Hazard Insurance Policies covering the Mortgaged Properties
generally will cover physical damage to, or destruction of, the improvements on
the Mortgaged Property caused by fire, lightning, explosion, smoke, windstorm,
hail, riot, strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Because the Standard Hazard Insurance Policies
relating to such Mortgage Loans will be underwritten by different insurers and
will cover Mortgaged Properties located in various states, such policies will
not contain identical terms and conditions. The most significant terms thereof,
however, generally will be determined by state law and generally will be
similar. Most such policies typically will not cover any physical damage
resulting from the following: war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, hazardous wastes or hazardous substances, theft and, in
certain cases, vandalism. The foregoing list is merely indicative of certain
kinds of uninsured risks and is not intended to be all-inclusive.
The Standard Hazard Insurance Policies covering the Contracts will
provide, at a minimum, the same coverage as a standard form fire and extended
coverage insurance policy that is customary for manufactured housing in the
state in which the Manufactured Home is located.
The Servicer may maintain a blanket policy insuring against hazard losses
on all of the Mortgaged Properties or Manufactured Homes in lieu of maintaining
the required Standard Hazard Insurance Policies. The Servicer will be liable for
the amount of any deductible under a blanket policy if such amount would have
been covered by a required Standard Hazard Insurance Policy, had it been
maintained.
In general, if a Mortgaged Property or Manufactured Home is located in an
area identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards (and such flood insurance has been made
available) the Pooling and Servicing Agreement will require the Servicer to
cause to be maintained a flood insurance policy meeting the requirements of the
current guidelines of the Federal Insurance Administration with a generally
acceptable insurance carrier. Generally, the Pooling and Servicing Agreement
will require that such flood insurance be in an amount not less than the lesser
of (i) the amount required to compensate
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for any loss or damage to the Mortgaged Property on a replacement cost basis and
(ii) the maximum amount of insurance which is available under the federal flood
insurance program.
Any losses incurred with respect to Mortgage Loans or Contracts due to
uninsured risks (including earthquakes, mudflows, floods, hazardous wastes and
hazardous substances) or insufficient hazard insurance proceeds could affect
distributions to the Certificateholders.
The Servicer will maintain or cause to be maintained with respect to each
Mortgage Loan a primary mortgage insurance policy in accordance with the
standards described in the "Mortgage Loans" above.
The Servicer shall obtain and maintain at its own expense and keep in full
force and effect a blanket fidelity bond and an error and omissions insurance
policy covering the Servicer's officers and employees as well as office persons
acting on behalf of the Servicer in connection with the servicing of the
Mortgage Loans.
Although the terms and conditions of primary mortgage insurance policies
differ, each primary mortgage insurance policy will generally cover losses up to
an amount equal to the excess of the unpaid principal amount of a defaulted
Mortgage Loan (plus accrued and unpaid interest thereon and certain approved
expenses) over a specified percentage of the value of the related Mortgage
Property.
As conditions precedent to the filing or payment of a claim under a
primary mortgage insurance policy, the insured will typically be required, in
the event of default by the mortgagor, among other things, to: (i) advance or
discharge (a) hazard insurance premiums and (b) as necessary and approved in
advance by the insurer, real estate taxes, protection and preservation expenses
and foreclosure and related costs; (ii) in the event of any physical loss or
damage to the Mortgaged Property, have the Mortgaged Property restored to at
least its condition at the effective date of the primary mortgage insurance
policy (ordinary wear and tear excepted); and (iii) if the insurer pays the
entire amount of the loss or damage, tender to the insurer good and merchantable
title to, and possession of, the Mortgaged Property.
Any mortgage insurance relating to the Contracts underlying a Series of
Certificates will be described in the related Prospectus Supplement.
Acquisition of the Mortgage Loans and Contracts From Unaffiliated Sellers
The Mortgage Loans or Contracts underlying a Series of Certificates will
be purchased by the Depositor, either directly or through affiliates, from
Unaffiliated Sellers pursuant to a separate agreement (a "Loan Sale Agreement")
between the Depositor or such affiliate and each such Unaffiliated Seller. The
Depositor expects that, unless otherwise specified in the applicable Prospectus
Supplement, each Mortgage Loan or Contract so acquired will have been originated
by the originator thereof in accordance with the underwriting criteria specified
under "Underwriting Guidelines." Unless otherwise specified in the applicable
Prospectus Supplement, each Unaffiliated Seller must be an institution
experienced in originating and servicing conventional mortgage loans or
manufactured housing contracts in accordance with accepted practices and prudent
guidelines, and must maintain facilities to originate and service those loans
satisfactory to the Depositor. In addition, each Unaffiliated Seller must
satisfy certain criteria as to financial stability evaluated on a case by case
basis by the Depositor. Unless otherwise provided in the applicable Prospectus
Supplement, each Unaffiliated Seller pursuant to the related Loan Sale Agreement
will make certain representations and warranties to the Depositor in respect of
the Mortgage Loans or Contracts sold by such Unaffiliated Seller to the
Depositor as described herein under "Representations and Warranties" below.
Unless otherwise provided in the applicable Prospectus Supplement with respect
to each Series, the Depositor will assign all of its rights (except certain
rights of indemnification) and interest in the related Loan Sale Agreement to
the related Trustee for the benefit of the Certificateholders of such Series,
and the Unaffiliated Seller shall thereupon be liable to the Trustee for
defective Mortgage Loan or Contract documents or an uncured breach of such
Unaffiliated Seller's representations or warranties, to the extent described
below under "Assignment of the Mortgage Loans and Contracts" and
"Representations and Warranties."
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Assignment of the Mortgage Loans and Contracts
At the time of the issuance of the Certificates of a Series, the Depositor
will cause the Mortgage Loans comprising the Mortgage Pool (including any
related rights to, or security interests in, leases, rents and personal
property) or the Contracts comprising the Contract Pool included in the related
Trust Fund to be assigned to the Trustee, together with all principal and
interest received by or on behalf of the Depositor on or with respect to such
Mortgage Loans or Contracts after the Cut-Off Date, other than principal and
interest due on or before the Cut-Off Date and other than any Fixed Retained
Yield. The Trustee or its accent will, concurrently with such assignment,
authenticate and deliver the Certificates evidencing such Series to the
Depositor in exchange for the Mortgage Loans or Contracts. Each Mortgage Loan or
Contract will be identified in a schedule appearing as an exhibit to the
applicable Pooling and Servicing, Agreement. Each such schedule will include,
among other things, the unpaid principal balance as of the close of business on
the applicable Cut-Off Date, the scheduled monthly payment of principal, if any,
and interest, the maturity date and the Mortgage Rate or Contract Rate for each
Mortgage Loan or Contract in the related Trust Fund.
With respect to each Mortgage Loan in a Trust Fund, the mortgage or other
promissory note, any assumption, modification or conversion to fixed interest
rate agreement, a copy of any recorded UCC-1 financing statements and related
continuation statements, together with original executed UCC-2 or UCC-3
financing statements disclosing an assignment of a security interest in any
personal property constituting security for repayment of the Mortgage Loan to
the Trustee, an executed re-assignment of assignment of leases, rents and
profits to the Trustee if the assignment of leases, rents and profits is
separate from the Mortgage, a mortgage assignment in recordable form and the
recorded Mortgage (or other documents as are required under applicable law to
create a perfected security interest in the Mortgaged Property in favor of the
Trustee) will be delivered to the Trustee (or to a designated custodian);
provided that, in instances where recorded documents cannot be delivered due to
delays in connection with recording, copies thereof, certified by the Depositor
to be true and complete copies of such documents, sent for recording, may be
delivered and the original recorded documents will be delivered promptly upon
receipt. As to each Mortgage Loan for which there is primary mortgage insurance,
the certificate of primary mortgage insurance will be delivered to the Trustee.
The assignment of each Mortgage will be recorded promptly after the initial
issuance of Certificates for the related Trust Fund, except in states where, in
the opinion of counsel acceptable to the Trustee, such recording is not required
to protect the Trustee's interest in the Mortgage Loan against the claim of any
subsequent transferee or any successor to or creditor of the Depositor, any
affiliate of the Depositor or the originator of such Mortgage Loan.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee (or to a designated
custodian) the related original Cooperative Note, the security agreement, the
proprietary lease or occupancy agreement, the recognition agreement, an executed
financing agreement and the relevant stock certificate and related blank stock
powers. The Depositor will cause to be filed in the appropriate office an
assignment and a refinancing statement evidencing the Trustee's security
interest in each Cooperative Loan.
With respect to each Contract, there will be delivered to the Trustee (or
to a designated Custodian) the original Contract and copies of documents and
instruments related to each Contract and the security interest in the property
securing each Contract. In order to give notice of the right, title and interest
of Certificateholders to the Contracts, the Depositor will cause a UCC-1
financing statement to be executed by the Depositor or the Unaffiliated Seller
identifying the Trustee as the secured party and identifying all Contracts as
collateral. Unless otherwise specified in the related Prospectus Supplement, the
Contracts will not be stamped or otherwise marked to reflect their assignment to
the Trust. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Contracts without notice
of such assignment, the interest of Certificateholders in the Contracts could be
defeated. See "Certain Legal Aspects of the Mortgage Loans and Contracts."
The Trustee (or the custodian hereinafter referred to) will hold such
documents relating to Mortgage Loans or Contracts in trust for the benefit of
Certificateholders of the related Series and will review such documents within
45 days of the date of the applicable Pooling and Servicing Agreement. Unless
otherwise provided in the applicable Prospectus Supplement, if any document is
not delivered or is found to be defective in any material respect or has not
been recorded as required by the applicable Loan Sale Agreement, the Trustee (or
such custodian) shall immediately notify the Servicer and the Depositor, and the
Servicer shall immediately notify
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the related Unaffiliated Seller. If the Unaffiliated Seller cannot cure such
omission or defect within 60 days after receipt of such notice, the Unaffiliated
Seller will be obligated, pursuant to the related Loan Sale Agreement, either to
repurchase the related Mortgage Loan or Contract from the Trustee within 60 days
after receipt of such notice, at a price (the "Purchase Price") equal to the
then unpaid principal balance thereof, plus accrued and unpaid interest at the
applicable Mortgage Rate or Contract Rate (less any Fixed Retained Yield with
respect to such Mortgage Loan or Contract and less the rate, if any, of
servicing compensation payable to the Unaffiliated Seller with respect to such
Mortgage Loan or Contract) through the last day of the month in which such
repurchase takes place or to substitute one or more new Mortgage Loans or
Contracts for such Mortgage Loan or Contract. In the case of a Mortgage Loan or
Contract so repurchased by an Unaffiliated Seller, the Purchase Price will be
deposited in the related Certificate Account. In the case of a substitution,
such substitution will be made in accordance with the standards described in
"Representations and Warranties" below.
There can be no assurance that an Unaffiliated Seller will fulfill this
repurchase or substitution obligation. The Servicer will be obligated to enforce
such obligation to the same extent as it must enforce the obligation of an
Unaffiliated Seller for a breach of representation or warranty as described
below under "Representations and Warranties." However, as in the case of an
uncured breach of such a representation or warranty, neither the Servicer
(unless the Servicer is the Unaffiliated Seller) nor the Depositor will be
obligated to purchase or substitute for such Mortgage Loan or Contract if the
Unaffiliated Seller defaults on its repurchase or substitution obligation,
unless such breach also constitutes a breach of the representations or
warranties of the Servicer or the Depositor, as the case may be. Unless
otherwise specified in the related Prospectus Supplement, this repurchase or
substitution obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for omission of, or a material defect in, a
constituent document.
The Trustee will be authorized to appoint a custodian to maintain
possession of the documents relating to the Mortgage Loans or Contracts. The
custodian will keep such documents as the Trustee's agent under a custodial
agreement.
Representations and Warranties
Each Unaffiliated Seller, pursuant to the related Loan Sale Agreement,
will have made representations and warranties in respect of the Mortgage Loans
sold by such Unaffiliated Seller. Unless otherwise specified in the related
Prospectus Supplement, each Unaffiliated Seller of Mortgage Loans will have
represented, among other things, substantially to the effect that (i)
immediately prior to the sale and transfer of such Mortgage Loans, the
Unaffiliated Seller had good title to, and was the sole owner of, each such
Mortgage Loan and there had been no other assignment or pledge thereof, (ii) as
of the date of such transfer, such Mortgage Loans are subject to no offsets,
defenses or counterclaims, (iii) each Mortgage Loan at the tune it was made
complied in all material respects with applicable state and federal laws,
including, usury, equal credit opportunity and disclosure laws, (iv) a lender's
policy of title insurance was issued on the date of the origination of each
Mortgage Loan and each such policy is valid and remains in full force and
effect, (v) as of the date of such transfer, each related Mortgage is a valid
lien on the related Mortgaged Property (subject only to (a) the lien of current
real property taxes and assessments, (b) covenants, conditions and restrictions,
rights of way, easements and other matters of public record as of the date of
the recording of such Mortgage, such exceptions appearing of record and either
being acceptable to mortgage lending institutions generally or specifically
reflected in the lender's policy of title insurance issued on the date of
origination and either (A) specifically referred to in the appraisal made in
connection with the origination of the related Mortgage Loan or (B) which do not
adversely affect the appraised value of the Mortgaged Property as set forth in
such appraisal, (c) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security intended to
be provided by the Mortgage and (d) in the case of second or more junior loans
any senior loans of record as of the date of recording of the Equity Loan) and
such property is free of material damage and is in good repair, (vi) as of the
date of such transfer, no Mortgage Loan is 30 days or more delinquent in payment
and there are no delinquent tax or assessment liens against the related
Mortgaged Property that would permit taxing authority to initiate foreclosure
proceedings, and (vii) with respect to each Mortgage Loan, if the Mortgaged
Property is located in an area identified by the Federal Emergency Management
Agency as having special flood hazards and subject in certain circumstances to
the availability of flood insurance under the federal flood insurance program,
such Mortgaged Property is covered by flood insurance meeting the requirements
of the applicable Pooling and Servicing Agreement.
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Each Unaffiliated Seller, pursuant to the related Loan Sale Agreement,
will have made representations and warranties in respect of the Contracts sold
by such Unaffiliated Seller. Unless otherwise specified in the related
Prospectus Supplement, each Unaffiliated Seller of Contracts will have
represented, among other things, substantially to the effect that (i)
immediately prior to the sale and transfer of such Contracts, the Unaffiliated
Seller had good title to, and was the sole owner of, each such Contract and
there had been no other assignment or pledge thereof, (ii) as of the date of
such transfer, such Contracts are subject to no offsets, defenses or
counterclaims, (iii) each Contract at the time it was made complied in all
material respects with applicable state and federal laws, including usury, equal
credit opportunity and disclosure laws, (iv) as of the date of such transfer,
each related Contract is a valid first lien on the related Manufactured Home and
such Manufactured Home is free of material damage and is in good repair, (v) as
of the date of such transfer, no Contract is 30 days or more delinquent in
payment and there are no delinquent tax or assessment liens against the related
Manufactured Home, and (vi) with respect to each Contract, the Manufactured Home
securing the Contract is covered by a Standard Hazard Insurance Policy in the
amount required by the Pooling and Servicing Agreement and all premiums then due
on such insurance have been paid in full.
All of the representations and warranties of an Unaffiliated Seller in
respect of a Mortgage Loan or Contract will have been made as of the date on
which such Unaffiliated Seller sold the Mortgage Loan or Contract to the
Depositor. A substantial period of time may have elapsed between the date as of
which the representations and warranties were made and the later date of initial
issuance of the related Series of Certificates. Since the representations and
warranties referred to in the preceding paragraphs are the only representations
and warranties that will be made by an Unaffiliated Seller, the Unaffiliated
Seller's repurchase obligation described below will not arise if, during the
period commencing on the date of sale of a Mortgage Loan or Contract by the
Unaffiliated Seller to the Depositor, the relevant event occurs that would have
given rise to such an obligation had the event occurred prior to sale of the
affected Mortgage Loan or Contract. However, the Depositor will not include any
Mortgage Loan or Contract in the Trust Fund for any series of Certificates if
anything has come to the Depositor's attention that would cause it to believe
that the representations and warranties of an Unaffiliated Seller will not be
accurate and complete in all material respects in respect of such Mortgage Loan
or Contract as of the date of initial issuance of the related Series of
Certificates.
The Depositor will, unless otherwise provided in the applicable Prospectus
Supplement, assign all of its rights (except certain rights to indemnification)
with respect to such representations and warranties pursuant to any related Loan
Sale Agreement to the Trustee for the benefit of the Certificateholders of the
related Series. The Servicer, or the Trustee if the Servicer is the Unaffiliated
Seller, will promptly notify the relevant Unaffiliated Seller of any breach of
any representation or warranty made by it in respect of a Mortgage Loan or
Contract which materially and adversely affects the interests of the
Certificateholders in such Mortgage Loan or Contract. Unless otherwise specified
in the related Prospectus Supplement, if such Unaffiliated Seller cannot cure
such breach within 60 days after notice from the Servicer or the Trustee, as the
case may be, then such Unaffiliated Seller will be obligated either (i) to
repurchase such Mortgage Loan or Contract from the Trust Fund at the applicable
Purchase Price or (ii) subject to the Trustee's approval and to the extent
permitted by the Pooling and Servicing Agreement, to substitute for such
Mortgage Loan or Contract (a "Deleted Loan") one or more Mortgage Loans or
Contracts, as the case may be (each, a "Substitute Loan"), but only if (i) with
respect to a Trust Fund (or one or more segregated pools of assets therein) for
which a REMIC election is to be made, such substitution is effected within two
years of the date of initial issuance of the Certificates or (ii) with respect
to a Trust Fund for which no REMIC election is to be made, such substitution is
effected within 120 days of the date of initial issuance of the Certificates.
Except as otherwise provided in the related Prospectus Supplement, any
Substitute Loan will, on the date of substitution, (i) have a Loan-to-Value
Ratio no greater than that of the Deleted Loan, (ii) have a Mortgage Rate or
Contract Rate not less than (and not more than 1% greater than) the Mortgage
Rate or Contract Rate of the Deleted Loan, (iii) have a Net Mortgage Rate or Net
Contract Rate not less than (and not more than 1% greater than) the Net Mortgage
Rate or Net Contract Rate of the Deleted Loan, (iv) have a remaining term to
maturity not greater than (and not more than one year less than) that of the
Deleted Loan and (v) comply with all of the representations and warranties set
forth in the related Loan Sale Agreement as of the date of substitution. If
substitution is to be made for a Deleted Loan with an adjustable Mortgage Rate
or Contract Rate, the Substitute Loan will also bear interest based on the same
index, margin, frequency and month of adjustment as the Deleted Loan. In the
event that one Substitute Loan is substituted for more than one Deleted Loan, or
more than one Substitute Loan is substituted for one or more Deleted Loans, then
the amount described in clause (i) will be determined on the basis of aggregate
principal balances (provided that in all events the tests for a "qualified
mortgage" as described in the second paragraph under the heading "Certain
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Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC
Certificates -- Qualification as a REMIC" are met as to each Substituted Loan),
the rates described in clauses (ii) and (iii) with respect to Deleted Loans will
be determined on the basis of weighted average Mortgage Rates and Net Mortgage
Rates or Contract Rates and Net Contract Rates, as the case may be, and the
terms described in clause (iv) will be determined on the basis of weighted
average remaining terms to maturity. In the case of a Substitute Loan, the
mortgage file relating, thereto will be delivered to the Trustee (or the
custodian) and the Unaffiliated Seller will pay an amount equal to the excess of
(i) the unpaid principal balance of the Deleted Loan, over (ii) the unpaid
principal balance of the Substitute Loan or Loans, together with interest on
such excess at the Mortgage Rate or Contract Rate to the next scheduled Due Date
of the Deleted Loan. Such amount will be deposited in the Certificate Account
for distribution to Certificateholders. Except in those cases in which the
Servicer is the Unaffiliated Seller, the Servicer will be required under the
applicable Pooling and Servicing Agreement to enforce this repurchase or
substitution obligation for the benefit of the Trustee and the holders of the
Certificates, following the practices it would employ in its good faith business
judgment were it the owner of such Mortgage Loan or Contract. This repurchase or
substitution obligation will constitute the sole remedy available to holders of
Certificates or the Trustee for a breach of representation by an Unaffiliated
Seller.
Neither the Depositor nor the Servicer (unless the Servicer is the
Unaffiliated Seller) will be obligated to purchase or substitute for a Mortgage
Loan or Contract if an Unaffiliated Seller defaults on its obligation to do so,
and no assurance can be given that Unaffiliated Sellers will carry out their
respective repurchase obligations with respect to Mortgage Loans or Contracts.
If so specified in the applicable Prospectus Supplement, the Depositor,
the Servicer or another entity specified in the applicable Prospectus
Supplement, will make such representations and warranties as to the types and
geographical concentration of the Mortgage Loans or Contracts in the related
Mortgage Pool or Contract Pool and as to such other matters concerning such
Mortgage Loans or Contracts as may be described therein. Upon a breach of any
such representation or warranty which materially and adversely affects the
interests of the Certificateholders in a Mortgage Loan or Contract, the entity
making such representation or warranty will be obligated either to cure the
breach in all material respects, repurchase the Mortgage Loan or Contract at the
Purchase Price or substitute for such Mortgage Loan or Contract in the manner,
and subject to the conditions, described above regarding the obligations of
Unaffiliated Sellers with respect to missing or defective loan documents or the
breach of such Unaffiliated Sellers' representations and warranties. This
repurchase or substitution obligation constitutes the sole remedy available to
the Certificateholders or the Trustee for a breach of a representation or
warranty by the Depositor, the Servicer or such other party, respectively.
DESCRIPTION OF THE CERTIFICATES
General
Each Series of Certificates will be issued pursuant to a Pooling and
Servicing Agreement among the Depositor, the Servicer, if the Series relates to
Mortgage Loans or Contracts, and the Trustee named in the related Prospectus
Supplement. The provisions of each Pooling and Servicing Agreement will vary
depending upon the nature of the Certificates to be issued thereunder and the
nature of the related Trust Fund. Forms of the Pooling and Servicing Agreements
have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. The following summaries describe certain provisions of the
Certificates and the Pooling and Servicing Agreements; however, the summaries do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Pooling and Servicing
Agreement for each Series of Certificates and the applicable Prospectus
Supplement. Each Pooling and Servicing Agreement executed and delivered with
respect to each Series will be filed with the Commission as an exhibit to a
Current Report on Form 8-K promptly after issuance of the Certificates of such
Series. The Depositor will provide a copy of the Pooling and Servicing Agreement
(without exhibits) relating to any Series without charge upon written request of
a holder of a Certificate of such Series addressed to Prudential Securities
Secured Financing Corporation, One New York Plaza, 15th Floor, New York, New
York 10292, Attention: Len Blum.
Each Series of Certificates will evidence the beneficial ownership
interest in the related Trust Fund created by the Depositor pursuant to the
related Pooling and Servicing Agreement. Each Series of Certificates
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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.
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
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receipt by the transferor of any affidavit signed by the transferee stating that
the transferee is not a "Disqualified Organization" within the meaning of Code
Section 860E(e)(5) or an agent (including a broker, nominee, or other middleman)
thereof. The Prospectus Supplement with respect to a Series may specify
additional transfer restrictions with respect to the Residual Certificates. See
"Certain Federal Income Tax Consequences -- Federal Income Tax Consequences for
REMIC Certificates -- Taxation of Residual Certificates -- Tax-Related
Restrictions on Transfer of Residual Certificates." If so specified in the
related Prospectus Supplement, the Certificates of specified Classes or
Subclasses of a Series may be issued in the form of book entries on the records
of The Depository Trust Company ("DTC") and participating members thereof.
Distributions will be made on each of the Distribution Dates specified in
the applicable Prospectus Supplement for a Series to persons in whose name the
Certificates of such Series are registered at the close of business on the
related Record Date. Unless otherwise specified in the applicable Prospectus
Supplement, distributions to Certificateholders of all Series (other than the
final distribution in retirement of the Certificates) will be made by check
mailed to the address of the person entitled thereto as it appears on the
certificate register, except that, with respect to any holder of a Certificate
evidencing not less than the specified fractional undivided interest, notional
amount or Stated Amount set forth in such Prospectus Supplement, distributions
will be made by wire transfer in immediately available funds, provided that the
Trustee shall have been furnished with appropriate wiring instructions not less
than three business days (or such longer period as may be specified in the
related Prospectus Supplement) prior to the related Distribution Date. The final
distribution in retirement of Certificates will be made only upon presentation
and surrender of the Certificates at the office or agency maintained by the
Trustee or such other entity for such purpose, as specified in the final
distribution notice to Certificateholders.
A Series of Certificates will consist of one or more Classes of Standard
Certificates or Stripped Certificates (referred to hereinafter sometimes
collectively as "Percentage Certificates") or two or more Classes of Multi-Class
Certificates (each as described below).
Percentage Certificates
Each Series of Percentage Certificates may include one or more Classes of
Standard Certificates or Stripped Certificates, any Class of which may be
divided into two or more Subclasses. The Standard Certificates of each Class
will evidence fractional undivided interests in all of the principal and
interest (to the extent of the Net Mortgage Interest Rate) payments on the
Mortgage Loans comprising the Trust Fund related to such Series. Each holder of
a Standard Certificate of a Class will be entitled to receive its Certificate's
percentage interest of the portion of the Pool Distribution Amount (as defined
below) allocated to such Class. The percentage interest of each Standard
Certificate will be equal to the percentage obtained by dividing the aggregate
unpaid principal balance of the Mortgage Loans represented by such Standard
Certificate as of the Cut-Off Date by the aggregate unpaid principal balance of
the Mortgage Loans represented by all the Standard Certificates of the same
Class as of the Cut-Off Date.
The Stripped Certificates of each Class will evidence fractional undivided
interests in specified portions of the principal and/or interest payments on the
Mortgage Loans comprising the Trust Fund related to such Series. The holders of
the Stripped Certificates of each Class will be entitled to receive a portion
(which may be zero) as specified in the applicable Prospectus Supplement of the
principal distributions comprising the Pool Distribution Amount, and a portion
(which may be zero) as specified in the applicable Prospectus Supplement of the
interest distributions comprising the Pool Distribution Amount on each
Distribution Date.
In the case of Classes of Stripped Certificates representing interests in
interest distributions on the Mortgage Loans and not in principal distributions
on the Mortgage Loans, such Certificates will be denominated in notional
amounts. The aggregate original notional amount for a Class of such Certificates
will be equal to the aggregate unpaid principal balance (or a specified portion
thereof) of the Mortgage Loans as of the Cut-Off Date specified in the
applicable Prospectus Supplement. The notional amount of each such Stripped
Certificate will be used to calculate the holder's pro rata share of the
interest distributions on the Mortgage Loans allocated to that Class and for the
determination of certain other rights of holders of such Class of Stripped
Certificates and will not represent an interest in, or entitle any such holder
to any distribution with respect to, any principal distributions on the Mortgage
Loans. Each such Certificate's pro rata share of the interest distribution on
the Mortgage Loans on each Distribution Date will be calculated by multiplying
the interest distributions on the Mortgage Loans allocated
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to its Class by a fraction, the numerator of which is the original notional
amount of such Stripped Certificates and the denominator of which is the
aggregate original notional amount of all the Stripped Certificates of its
Class.
The interest of a Class of Percentage Certificates representing an
interest in a Trust Fund (or a segregated pool of assets therein) with respect
to which an election to be treated as a REMIC has been made may be fixed as
described above or may vary over time as a result of prepayments received and
losses realized on the underlying Mortgage Loans. A Series of Percentage
Certificates comprised of Classes whose percentage interests in the Trust Fund
may vary is referred to herein as a Series of "Shifting Interest Certificates."
Distributions on, and subordination arrangements with respect to, Shifting
Interest Certificates are discussed below under the headings "Description of the
Certificates -- Distributions to Percentage Certificateholders -- Shifting
Interest Certificates" and "Credit Support -- Subordination -- Shifting Interest
Certificates."
Multi-Class Certificates
Each Series may include one or more Classes or Subclasses of Multi-Class
Certificates. Each Multi-Class Certificate will be assigned a Stated Amount or
Notional Amount. The Stated Amount may be based on an amount of principal of the
underlying Mortgage Loans or Contracts or on the value of future cash flows from
the related Trust Fund, without distinction as to principal and interest
received on the Mortgage Loans or Contracts. Interest on the Classes or
Subclasses of Multi-Class Certificates will be paid at rates specified in or
determined as specified in the applicable Prospectus Supplement, and will accrue
in the manner specified therein. Any Class or Subclass of Multi-Class
Certificates may consist of Certificates on which interest accrues but is not
payable until such time as specified in the applicable Prospectus Supplement
("Compound Interest Certificates"), and interest accrued on any such Certificate
will be added to the Stated Amount thereof in the manner described therein.
The Stated Amount of a Multi-Class Certificate of a Series at any time
will represent the maximum specified dollar amount (exclusive of interest at the
related Interest Rate, if any) to which the holder thereof is entitled from the
cash flow on the Mortgage Loans or Contracts and other assets in the Trust Fund
for such Series and will decline to the extent distributions in reduction of
Stated Amount are received by such holder. The initial Stated Amount of each
Class within a Series of Multi-Class Certificates will be specified in the
applicable Prospectus Supplement.
Forward Commitments; Pre-Funding
A Trust Fund may enter into an agreement (each, a "Forward Purchase
Agreement") with the Depositor whereby the Depositor will agree to transfer
additional Mortgage Loans to such Trust Fund following the date on which such
Trust Fund is established and the related Certificates are issued. The Trust
Fund may enter into Forward Purchase Agreements to permit the acquisition of
additional Mortgage Loans that could not be delivered by the Depositor or have
not formally completed the origination process, in each case prior to the date
on which the Certificates are delivered to the Certificateholders (the "Closing
Date"). Any Forward Purchase Agreement will require that any Mortgage Loans so
transferred to the Trust Fund conform to the requirements specified in such
Forward Purchase Agreement.
If a Forward Purchase Agreement is to be utilized, and unless otherwise
specified in the related Prospectus Supplement, the related Trustee will be
required to deposit in a segregated account (each, a "Pre-Funding Account") up
to 100% of the net proceeds received by the Trustee in connection with the sale
of one or more classes of Certificates of the related Series; the additional
Mortgage Loans will be transferred to the related Trust Fund in exchange for
money released to the Depositor from the related Pre-Funding Account. Each
Forward Purchase Agreement will set a specified period (the "Funding Period")
during which any such transfers must occur; for a Trust Fund which elects
federal income treatment as REMIC or as a grantor trust, the related Funding
Period will be limited to three months from the date such Trust Fund is
established; for a Trust Fund which is treated as a mere security device for
federal income tax purposes, the related Funding Period will be limited to nine
months from the date such Trust Fund is established. The Forward Purchase
Agreement or the related Pooling and Servicing Agreement will require that, if
all moneys originally deposited to such Pre-Funding Account are not so used by
the end of the related Funding Period, then any remaining moneys will be applied
as a mandatory prepayment of the related class or classes of Certificates as
specified in the related Prospectus Supplement.
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During the Funding Period the moneys deposited to the Pre-Funding Account
will either (i) be held uninvested or (ii) will be invested in cash-equivalent
investments rated in one of the four highest rating categories by at least one
nationally recognized statistical rating organization and which will either
mature prior to the end of the Funding Period, or will be drawable on demand and
in any event, will not constitute the type of investment which would require
registration of the related Trust Funds as an "investment company" under the
Investment Company Act of 1940, as amended.
Distributions to Percentage Certificateholders
Except as otherwise specified in the applicable Prospectus Supplement, on
or about the 15th day of each month in which a Distribution Date occurs (the
"Determination Date"), the Servicer will determine the amount of the payments or
other receipts on account of principal and interest on the Mortgage Loans or
Contracts which have been received and which will be distributable to holders of
Certificates on the next Distribution Date (as further described below, the
"Pool Distribution Amount"). The Pool Distribution Amount will be allocated
among the Classes or Subclasses of Percentage Certificates of such Series in the
manner described herein under "Description of the Certificates -- Standard
Certificates"; however, if such Certificates are also composed of Senior
Certificates and Subordinated Certificates, then the Pool Distribution Amount
will be allocated in accordance with the terms of the applicable subordination
arrangement. Two types of subordination arrangements are described below for a
Series which consists of two Classes of Standard Certificates. Any other type of
subordination arrangement employed for Certificates of a Series will be
described in the related Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, the
"Pool Distribution Amount" for a Distribution Date with respect to a Series of
Certificates as to which the relevant Trust Fund consists of Mortgage Loans or
Contracts will be the sum of all previously undistributed payments or other
receipts on account of principal (including principal prepayments, Net
Liquidation Proceeds (as defined herein), and Net Insurance Proceeds (as defined
herein), if any) and interest on the related Mortgage Loans or Contracts
received by the Servicer after the related Cut-Off Date (except for amounts due
on or prior to such Cut-Off Date), or received by the Servicer on or prior to
the Cut-Off Date but due after the Cut-Off Date, in either case received on or
prior to the Determination Date in the month in which such Distribution Date
occurs, plus (i) all Advances made by the Servicer, (ii) all withdrawals from
any Buy-Down Fund or other fund described in the related Prospectus Supplement,
if applicable, and (iii) all proceeds of Mortgage Loans or Contracts or property
acquired in respect thereof purchased or repurchased from the Trust Fund as
provided in the Pooling and Servicing Agreement ("Repurchase Proceeds"), but
excluding the following:
(a) amounts received as late payments of principal or interest
respecting which the Servicer previously has made one or more unreimbursed
Advances;
(b) any unreimbursed Advances with respect to Liquidated Mortgage
Loans (as defined herein) or Liquidated Contracts (as defined herein);
(c) those portions of each payment of interest on a particular
Mortgage Loan or Contract which represents (i) the Fixed Retained Yield,
if any, and (ii) the applicable Servicing Fee, as adjusted in respect of
Prepayment Interest Shortfalls as described in "Servicing of the Mortgage
Loans and Contracts -- Adjustment to Servicing Compensation in Connection
with Prepaid and Liquidated Mortgage Loans and Contracts";
(d) all amounts representing scheduled payments of principal and
interest due after the Due Date occurring in the month in which such
Distribution Date occurs;
(e) all principal prepayments and all proceeds (including
Liquidation Proceeds, Insurance Proceeds and Repurchase Proceeds) of any
Mortgage Loans or Contracts, or property acquired in respect thereof,
liquidated, foreclosed, purchased or repurchased pursuant to the
applicable Pooling and Servicing Agreement, received on or after the Due
Date occurring in the month in which such Distribution Date occurs, and
all related payments of interest on such amounts;
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(f) where permitted by the related Pooling and Servicing Agreement,
that portion of Liquidation Proceeds or Insurance Proceeds which
represents Fixed Retained Yield, if any, or any unpaid Servicing Fee to
which the Servicer is entitled;
(g) all amounts representing certain expenses reimbursable to the
Servicer and other amounts pertained to be withdrawn by the Servicer from
the Certificate Account, in each case pursuant to the applicable Pooling
and Servicing Agreement;
(h) all amounts in the nature of late fees, assumption fees,
prepayment fees and similar fees which the Servicer is entitled to retain
pursuant to the applicable Pooling and Servicing Agreement; and
(i) where permitted by the applicable Pooling and Servicing
Agreement, reinvestment earnings on payments received in respect of the
Mortgage Loans or Contracts.
Certificates other than Shifting Interest Certificates
With respect to a Series of Certificates which is comprised of one Class
of Standard Certificates which are Senior Certificates and one Class of Standard
Certificates which are Subordinated Certificates, the Servicer shall determine
the aggregate amount which would have been distributable to such Class of Senior
Certificates (the "Senior Class Distributable Amount") and the aggregate amount
which would have been distributable to such Class of Subordinated Certificates
(the "Subordinated Class Distributable Amount") assuming, among other things, no
delinquencies or losses on the Mortgage Loans or Contracts preceding such
Distribution Date and, based on the Pool Distribution Amount and such
Distributable Amounts, will determine the amount actually to be distributed to
each Class and Subclass.
Calculation of Distributable Amounts. If a Series of Certificates includes
one Class of Standard Certificates which are Senior Certificates and one Class
of Standard Certificates which are Subordinated Certificates, unless otherwise
specified in the applicable Prospectus Supplement, the Senior Class
Distributable Amount with respect to such Senior Certificates on a Distribution
Date will be an amount equal to the sum of:
(i) the aggregate undivided interest, expressed as a percentage and
specified in the applicable Prospectus Supplement, evidenced by such Class
of Senior Certificates (the "Senior Class Principal Portion") of:
(a) all scheduled payments of principal on each outstanding
Mortgage Loan or Contract that became due on the Due Date
immediately preceding such Distribution Date in accordance with the
amortization schedules of the related Mortgage Loans or Contracts
(as adjusted to give effect to any previous prepayments), whether or
not such payments were actually received by the Servicer (the
aggregate of such scheduled payments due on any such Due Date being
referred to herein as "Scheduled Principal");
(b) all principal prepayments received by the Servicer in the
month preceding the month in which such Distribution Date occurs;
(c) the Scheduled Principal Balance (as defined herein) of
each Mortgage Loan or Contract which was purchased from the Trust
Fund as provided in the Pooling and Servicing Agreement (as
described in "The Trust Funds" and "The Pooling and Servicing
Agreement"), and of each Mortgage Loan or Contract as to which the
Servicer has determined that all recoveries of Liquidation Proceeds
and Insurance Proceeds have been received (a "Liquidated Mortgage
Loan" or "Liquidated Contract"), in each case during the month
preceding the month in which such Distribution Date occurs,
calculated as of the date each such Mortgage Loan or Contract was
purchased or calculated as of the date each such Mortgage Loan or
Contract became a Liquidated Mortgage Loan or Liquidated Contract,
as the case may be; and
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(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 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
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received with respect to the Mortgage Loans or Contracts; provided that
Prepayment Interest Shortfall is included only to the extent that funds
for such purposes are available out of Servicing Compensation; less
(iii) the Subordinated Class Principal Portion of any
Indemnification Payments.
The foregoing is subject to the proviso that if one or more REMIC
elections are made with respect to a Series of Certificates, any Gain From
Acquired Property will not be included in the Distributable Amount of the Class
of such Series which consist of Regular Interests, but shall instead be paid in
full to the holders of the Residual Certificates of such Series.
Calculation of Amounts To Be Distributed. The Servicer will calculate, on
the related Determination Date, the portion of the Distributable Amount for each
Class of the Series that is actually available to be paid out of the Pool
Distribution Amount on the Distribution Date prior to any adjustments with
respect to subordination. The portion so available on a Distribution Date to the
Senior Certificateholders and to the Subordinated Certificateholders
(respectively, the "Senior Class Pro Rata Share" and the "Subordinated Class Pro
Rata Share") will, unless otherwise specified in the applicable Prospectus
Supplement, be the amount equal to the product of the Pool Distribution Amount
for such Distribution Date and a fraction, the numerator of which is the
Distributable Amount for such Class on such Distribution Date and the
denominator of which is the sum of the Distributable Amounts for such Series on
such Distribution Date.
So long as the Subordinated Amount is greater than zero, the holders of
Senior Certificates will be entitled to receive on any Distribution Date the
lesser of (a) the sum of the Senior Class Distributable Amount and the Senior
Class Carryover Shortfall (as defined below) and (b) the Senior Class Pro Rata
Share on such Distribution Date (the "Basic Senior Class Distribution"). In
addition, to the extent Senior Class Credit Enhancement is available, the
holders of Senior Certificates will be entitled to receive the amount, if any,
by which the Senior Class Distributable Amount plus any Senior Class Carryover
Shortfall (as defined below) on such Distribution Date exceeds the Basic Senior
Class Distribution on such Distribution Date (such excess being referred to
herein as the "Senior Class Shortfall"). "Senior Class Credit Enhancement"
includes: (a) amounts otherwise distributable to the holders of Subordinated
Certificates on such Distribution Date and amounts available for such purpose in
any Subordination Reserve Fund pursuant to any subordination of the rights of
any holders of Subordinated Certificates as described below; and (b) any other
credit enhancement arrangement which shall be specified in the related
Prospectus Supplement. See "Credit Support". The "Senior Class Carryover
Shortfall" on any Distribution Date means the amount the holders of Senior
Certificates were entitled to receive on the prior Distribution Date over the
amount the holders of Senior Certificates actually received on such prior
Distribution Date, together with interest on the difference at Pass-Through Rate
for the Senior Certificates from such prior Distribution Date through the
current Distribution Date.
At the time the Subordinated Amount, if any, is reduced to zero, Senior
Certificateholders will be entitled to the Senior Class Pro Rata Share on each
Distribution Date. In such event any remaining Senior Class Shortfall will cease
to be payable from available sources of credit enhancement, except that the
portion of such Senior Class Shortfall which is attributable to the account of
interest on any previous Senior Class Carryover Shortfall (the "Senior Class
Shortfall Accruals") shall continue to bear interest at the Pass-Through Rate
for the Senior Certificates, and the holders of Senior Certificates shall
continue to have a preferential right to be paid such amount from distributions
otherwise available for distribution to any holders of Subordinated
Certificates, until such 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
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decreased to give effect to the preferential right of the holders of Senior
Certificates to receive Senior Class Shortfall Accruals as provided herein.
The foregoing is subject to the proviso that if a REMIC election has been
made with respect to a Trust Fund (or a segregated pool of assets therein), the
Subordinated Certificateholders of the related Series will be entitled to the
sum of (a) the Subordinated Class Pro Rata Share, (b) all amounts in the
Subordination Reserve Fund (net of any amount required to be maintained as
liquidity for Advances) and (c) such other amounts, if any, as may be specified
in the related Prospectus Supplement (including, if such Certificates are
Residual Certificates, any Gain From Acquired Property).
Shifting Interest Certificates
On each Distribution Date for a Series which is comprised of two Classes
of Standard Certificates which are Shifting Interest Certificates, the holders
of record on the Record Date of the Senior Certificates thereof will be entitled
to receive, to the extent of the Pool Distribution Amount with respect to such
Distribution Date and prior to any distribution being made on the related
Subordinated Certificates, an amount equal to the Senior Class Distribution
Amount. The Senior Class Distribution Amount will (except as otherwise set forth
in the applicable Prospectus Supplement) be calculated for any Distribution Date
as the lesser of (x) the Pool Distribution Amount for such Distribution Date and
(y) the sum of:
(i) one month's interest at the applicable Pass-Through Rate on such
Class's outstanding principal balance (less, if specified in the
applicable Prospectus Supplement, (a) the amount of such interest
constituting Deferred Interest, if any, not then payable on the Mortgage
Loans or Contracts and (b) the amount by which the Prepayment Interest
Shortfall with respect to the preceding month exceeds the aggregate
Servicing Fees relating to mortgagor or obligor payments or other
recoveries distributed on such Distribution Date, in each case allocated
to such Class on the basis set forth in the related Prospectus
Supplement);
(ii) if distribution of the amount of interest calculated pursuant
to clause (i) above on prior Distribution Dates was not made in full on
such prior Distribution Dates, an amount equal to (a) the difference
between (x) the amount of interest which the holders of such Certificates
would have received on such prior Distribution Dates if there had been
sufficient funds available in the Certificate Account and (y) the amount
of interest actually distributed to such holders on such prior
Distribution Dates, together with interest on such difference (to the
extent permitted by applicable law) at the applicable Pass-Through Rate of
such Class (the "Unpaid Interest Shortfall") less (b) the aggregate amount
distributed on Distribution Dates subsequent to such prior Distribution
Dates with respect to the Unpaid Interest Shortfall;
(iii) such Class's percentage, calculated as provided in the related
Prospectus Supplement, of (a) all scheduled payments of principal due on
each outstanding Mortgage Loan or Contract that became due on the Due Date
occurring in the month in which such Distribution Date occurs, (b) all
partial principal prepayments received in the month preceding the month in
which such Distribution Date occurs and (c) except for Special Hazard
Mortgage Loans or Special Hazard Contracts covered by clause (iv) below,
the Scheduled Principal Balance of each Mortgage Loan or Contract which,
during the month preceding the month in which such Distribution Date
occurs, (i) was the subject of a principal prepayment in full, (ii) became
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
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holders of the related Subordinated Certificates and less the portion of
such Net Liquidation Proceeds and Net Insurance Proceeds allocable to
interest on the Senior Certificates;
provided that, if such Distribution Date falls on or after the Cross-Over Date
(i.e., the date on which the amount of principal payments on the Mortgage Loans
or Contracts to which the holders of the related Subordinated Certificates are
entitled has been reduced to zero as a result of the allocation of losses to the
Subordinated Certificates), then the Senior Class Distribution Amount will
instead equal the lesser of (x) the Pool Distribution Amount and (y) the sum of
the items referred to above plus the amount by which such Senior Certificates'
outstanding principal balance as of such Distribution Date exceeds the Pool
Scheduled Principal Balance as of such Distribution Date. The "Scheduled
Principal Balance" of a Mortgage Loan or Contract for any Distribution Date is
the unpaid principal balance of such Mortgage Loan or Contract as specified in
the amortization schedule at the time relating thereto (before any adjustment to
such schedule by reason of bankruptcy, moratorium or similar waiver or grace
period) as of the first day of the month preceding the month in which such
Distribution Date occurs after giving effect to the payment of principal due on
such first day of the month, any partial prepayments applied on or prior to such
first day of the month, the addition to the principal of such Mortgage Loan or
Contract on or prior to such first day of the month of any Deferred Interest,
and irrespective of any delinquency in payment by the mortgagor or obligor. The
"Pool Scheduled Principal Balance" as of any Distribution Date is the aggregate
of the Scheduled Principal Balances of all Mortgage Loans or Contracts in a
Trust Fund for such Distribution Date.
If so provided in the applicable Prospectus Supplement, the Class of
Senior Certificates will also be entitled to receive its specified percentage,
referred to in clauses (y)(iii)(b) and (y)(iii)(c)(i) above, of all partial
principal prepayments and all principal prepayments in full on the Mortgage
Loans or Contracts in the related Trust Fund under the circumstances or for the
period of time specified therein, which will have the effect of accelerating the
amortization of the Class of Senior Certificates while increasing the respective
interest evidenced by the Class of Subordinated Certificates in the related
Trust Fund. Increasing the respective interest of the Subordinated Certificates
relative to that of the Senior Certificates is intended to preserve the
availability of the subordination provided by the Subordinated Certificates.
If the Special Hazard Termination Date would occur on any Distribution
Date under the circumstances referred to in "Credit Support -- Subordination,"
the Senior Class Distribution Amount for each Class and Subclass of Senior
Certificates of such Series calculated as set forth in the two preceding
paragraphs will be modified to the extent described in such section.
Amounts distributed to the Class of Senior Certificates on a Distribution
Date will be deemed to be applied first to the payment of current interest, if
any, due on such Certificates (i.e., the amount calculated pursuant to clause
(y)(i) of the third preceding paragraph), second to the payment of any Unpaid
Interest Shortfall (i.e., the amount calculated pursuant to clause (y)(ii) of
such paragraph) and third to the payment of principal, if any, due on such
Certificates (i.e., the aggregate of the amounts calculated pursuant to clauses
(y)(iii) and (y)(iv) of such paragraph).
As indicated above, in the event that the Pool Distribution Amount on any
Distribution Date is not sufficient to make the full distribution of current
interest to the holders of Senior Certificates entitled to payments of interest,
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
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Certificates on any Distribution Date, unless otherwise provided in the
applicable Prospectus Supplement, the holders of such Class will share in the
funds actually available in proportion to the respective amounts that such Class
would have received had the Pool Distribution Amount been sufficient to make the
full distribution of interest and principal due to such Class.
Unless otherwise provided in the related Prospectus Supplement, on each
Distribution Date the holders of the related Class of Subordinated Certificates
of a Series will be entitled to receive, out of the Pool Distribution Amount,
all amounts remaining and available for distribution to them after deduction of
the amounts required to be distributed to the holders of all Senior Certificates
of such Series.
Example of Distribution to Standard Certificateholders
The following chart sets forth an example of the application of the
foregoing provisions to the first two months of the related Trust Fund's
existence, assuming the Certificates are issued in the month of January, with a
Distribution Date on the 25th of each month and a Determination Date on the 15th
of each month:
January 1(A) .................. Cut-Off Date.
January 2 -- January 31(B)..... The Servicer receives any principal
prepayments, Net Liquidation Proceeds, Net
Insurance Proceeds and Repurchase Proceeds.
January 31(C).................. Record Date.
February 1 -- February 15(D) .. The Servicer receives scheduled payments of
principal and interest due on February 1.
February 15(E)................. Determination Date.
February 25(F)................. Distribution Date.
Succeeding monthly periods follow the pattern of (B) through (F), except that
the period in (B) begins on the first of the month.
(A) The initial unpaid principal balance of the Mortgage Loans or Contracts in
a Trust Fund would be the aggregate unpaid principal balance of the
Mortgage Loans or Contracts at the close of business on January 1, after
deducting principal payments due on or before such date. Those principal
payments due on or before January 1 and the related interest payments
would not be part of the Trust Fund and would be remitted by the Servicer
to the Depositor when received.
(B) Principal prepayments, Net Liquidation Proceeds, Net Insurance Proceeds
and Repurchase Proceeds received during this period would be credited to
the Certificate Account for distribution to Certificateholders on the
February 25 Distribution Date. To the extent funds are available from the
aggregate Servicing Fees relating to mortgagor payments or other
recoveries distributed on the related Distribution Date, the Servicer
would make an 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
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principal prepayments, Net Liquidation Proceeds, Net Insurance Proceeds
and Repurchase Proceeds received during the period commencing January 2
and ending on January 31 will be distributed to Certificateholders on the
February 25 Distribution Date. In addition, the amounts payable in respect
of any form of credit enhancement will be calculated in accordance with
the related Pooling and Servicing Agreement.
(F) Unless otherwise so specified in the related Prospectus Supplement, the
Servicer or the Paying Agent, will make distributions to
Certificateholders on the 25th day of each month, or if such 25th day is
not a business day, on the next business day.
Distributions to Multi-Class Certificateholders
Valuation of Mortgage Loans and Contracts
If specified in the Prospectus Supplement relating to a Series of
Certificates having one or more Classes or Subclasses of Multi-Class
Certificates, for purposes of establishing the principal amount of Mortgage
Loans or Contracts that will be included in a Trust Fund for such Series, each
Mortgage Loan or Contract to be included in such Trust Fund will be assigned an
initial "Pool Value." Unless otherwise specified in the applicable Prospectus
Supplement, the Pool Value of each Mortgage Loan or Contract in the Trust Fund
for such Series will be the Stated Amount of Certificates of such Series which,
based upon certain assumptions and regardless of any prepayments on such
Mortgage Loans or Contracts, can be supported by the scheduled payments of
principal and interest on such Mortgage Loans or Contracts (net of the Fixed
Retained Yield on such Mortgage Loans or Contracts, if any, and the applicable
Servicing Fee), together with reinvestment earnings thereon, if any, at the
Assumed Reinvestment Rate for the period specified in the related Prospectus
Supplement and amounts available to be withdrawn (if applicable) from any
reserve fund for such Series, all as specified in the applicable Prospectus
Supplement. In calculating the Pool Value of a Mortgage Loan or Contract
included in the Trust Fund, future distributions on such Mortgage Loan or
Contract will be determined based on scheduled payments on such Mortgage Loan or
Contract. Any similar Mortgage Loans or Contracts may be aggregated into one or
more groups (each, a "Pool Value Group") each of which will be assigned an
aggregate Pool Value calculated as if all such Mortgage Loans or Contracts in
the Pool Value Group constituted a single loan having the highest interest rate
and the longest maturity of any such loan for such Pool Value Group. There are a
number of alternative means of determining the Pool Value of a Mortgage Loan,
Contract or Pool Value Group, including determinations based on the discounted
present value of the remaining scheduled payments of principal and interest
thereon and determinations based on the relationship between the Mortgage Rates
or Contract Rates borne thereby and the Interest Rates of the Multi-Class
Certificates of the related Series. The Prospectus Supplement for each Series
will describe the method or methods (and related assumptions) used to determine
the Pool Values of the Mortgage Loans or Contracts or the Pool Value Groups for
such Series.
The "Assumed Reinvestment Rate" for a Series of Multi-Class Certificates
will be the highest rate permitted by the nationally recognized statistical
rating agency or agencies rating such Series of Multi-Class Certificates or a
rate insured by means of a surety bond, guaranteed investment contract or
similar arrangement satisfactory to such rating agency or agencies. If the
Assumed Reinvestment Rate is so insured, the related Prospectus Supplement will
set forth the terms of such arrangement.
Distributions of Interest
The Trustee will make distributions of interest on each Class of the
Multi-Class Certificates from the date and at the rates per annum (calculated on
the Stated Amount or Notional Amount of such Class) specified in, or as
otherwise determined in the manner set forth in, the related Prospectus
Supplement (and unless otherwise specified in such Prospectus Supplement,
calculated on the basis of a 360-day year of twelve 30-day months) and in
accordance with the priorities set forth in the related Prospectus Supplement.
Interest on all Classes of Multi-Class Certificates of a Series, other than
Compound Interest Certificates, will be distributed on the Distribution Dates
for such Series specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, distributions of interest on
each Class of Compound Interest Certificates will be made on each Distribution
Date after the Stated Amount of all Multi-Class Certificates of such Series
having a Last Scheduled Distribution Date prior to the Last Scheduled
Distribution Date of such Class of Compound Interest Certificates has
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been reduced to zero. Prior to that time, interest on such Class of Compound
Interest Certificates will be added to the Stated Amount thereof on each
Distribution Date. Such Class of Compound Interest Certificates will thereafter
receive distributions of interest on the Stated Amount thereof as so adjusted.
Distributions in Reduction of Stated Amount for a Series of
Multi-Class Certificates not including a Subordination Feature
The Stated Amount of a Multi-Class Certificate of a Series at any time
will represent the maximum specified dollar amount (excluding interest
distributions, but including, in the case of Compound Interest Certificates,
interest which has not been distributed and which has been added to the Stated
Amount thereof) to which the holder thereof is entitled from the cash flow on
the assets included in the Trust Fund for such Series and will decline to the
extent distributions in reduction of Stated Amount are received by such holder.
The initial Stated Amount of each Class of Multi-Class Certificates will be
specified in the applicable Prospectus Supplement. On each Distribution Date,
distributions in reduction of Stated Amount of the Classes of Multi-Class
Certificates will be made, to the extent funds are available, to the holders of
the Multi-Class Certificates of such Series then entitled to receive such
distributions, in the order and in the amounts specified in the related
Prospectus Supplement. Distributions in reduction of Stated Amount may be
allocated among Classes of Multi-Class Certificates in order to provide limited
protection to certain Classes against an increase in the weighted average life
of such Classes as a result of a slower than expected or scheduled rate of
principal prepayments on the Mortgage Loans ("extension protection"). In
addition, distributions in reduction of Stated Amount may be allocated among
Classes of Multi-Class Certificates in order to provide limited protection to
certain Classes against a reduction in the weighted average life of such Classes
as a result of a faster than expected or scheduled rate or principal prepayments
on the Mortgage Loans ("call protection"). By virtue of such allocations of
distributions in reduction of Stated Amount to provide extension protection and
call protection to some Classes, the weighted average lives of certain other
Classes may be more greatly affected by a faster or slower than expected or
scheduled rate of principal prepayments on the Mortgage Loans. See "Prepayment
and Yield Considerations -- Weighted Average Life of Certificates."
Distributions in reduction of Stated Amount with respect to any Class or
Subclass of Multi-Class Certificates will be made on a pro rata or random lot or
such other basis as is specified in the applicable Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Certificates, the aggregate amount that will be distributed in
reduction of Stated Amount to holders of Multi-Class Certificates of a Series
then entitled thereto on any Distribution Date for such Series will equal, to
the extent funds are available, the sum of (i) the Multi-Class Certificate
Distribution Amount (as defined herein) and (ii) if and to the extent specified
in the related Prospectus Supplement, the applicable percentage of the Spread
specified in such Prospectus Supplement.
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
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Date, in the case of the first Distribution Date) and required to be deposited
in the Certificate Account for such Series, over (b) the sum of (i) all required
to be deposited on the Multi-Class Certificates of such Series on such
Distribution Date, (ii) the Multi-Class Certificate Distribution Amount for such
Distribution Date, (iii) if applicable, any Special Distributions (as described
below) in reduction of the Stated Amount of the Multi-Class Certificates of such
Series made since the preceding Distribution Date (or since the Closing Date in
the case of the first Distribution Date), including any accrued interest
distributed with such Special Distributions, (iv) all administrative and other
expenses relating to the Trust Fund payable during the Due Period preceding such
Distribution Date, other than such expenses which are payable by the Servicer,
if any, and (v) any amount required to be deposited into any reserve fund.
Reinvestment income on any reserve fund will not be included in Spread except to
the extent that reinvestment income is taken into account in calculating the
initial amount required to be deposited in such reserve fund, if any.
Subordination
The Prospectus Supplement relating to a Series which includes one or more
Classes or Subclasses of Multi-Class Certificates may specify that the rights of
one or more of such Classes or Subclasses (or the related Residual Certificates
of such Series) will be Senior to, or subordinated to, the rights of one or more
other Classes of Certificates of such Series.
If a Series which includes one or more Classes or Subclasses of
Multi-Class Certificates includes a subordination feature, on each Distribution
Date, distributions of interest, if any, will be made in accordance with the
preferential priorities specified in the related Prospectus Supplement and from
the date and at the Interest Rates specified therein or as otherwise specified
therein and distributions in reduction of Stated Amount, if any, will be made to
the holders of the Multi-Class Certificates in the amount and in the manner
specified in and in accordance with the preferential distribution provisions
described in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement the Subordinated Amount will be reduced as the pool
experiences losses, as well as through seasoning and prepayment of the Mortgage
Loans or Contracts included in the Trust Fund.
Special Distributions
To the extent specified in the Prospectus Supplement relating to a Series
which includes Multi-Class Certificates which have less frequent than monthly
Distribution Dates, any such Class or Subclass having Stated Amounts may receive
special distributions in reduction of Stated Amount, together with accrued
interest on the amount of such reduction ("Special Distributions") in any month,
other than a month in which a Distribution Date occurs, if, as a result of
principal prepayments on the Mortgage Loans or Contracts, the Trustee
determines, based on assumptions specified in the applicable Pooling and
Servicing Agreement, that the amount of cash anticipated to be available on the
next Distribution Date for such Series to be distributed to the holders of such
Multi-Class Certificates may be less than the sum of (i) the interest scheduled
to be distributed to such holders and (ii) the amount to be distributed in
reduction of Stated Amount of such Multi-Class Certificates on such Distribution
Date. Any such Special Distributions will be made in the same priority and
manner as distributions in reduction of Stated Amount would be made on the next
Distribution Date.
To the extent specified in the related Prospectus Supplement, one or more
Classes of Certificates of a Series may be subject to special distributions in
reduction of the Stated Amount thereof at the option of the holders of such
Certificates, or to mandatory distributions by the Servicer. Any such
distributions with respect to a Series will be described in the applicable
Prospectus Supplement and will be on such terms and conditions as described
therein and specified in the Pooling and Servicing Agreement for such Series.
Last Scheduled Distribution Date
The "Last Scheduled Distribution Date" for each Class of Multi-Class
Certificates of a Series having a Stated Amount, to the extent Last Scheduled
Distribution Dates are specified in the applicable Prospectus Supplement, is the
latest date on which (based upon the assumptions set forth in the applicable
Prospectus Supplement) the Stated Amount of such Class is expected to be reduced
to zero. Since the rate of distributions in reduction of Stated Amount of each
such Class of Multi-Class Certificates will depend upon, among other things, the
rate of payment (including prepayments) of the principal of the Mortgage Loans
or Contracts, the actual last
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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."
CREDIT SUPPORT
Subordination
Certificates other than Shifting Interest Certificates
If so specified in the Prospectus Supplement relating to a Series of
Certificates as to which the related Trust Fund consists of Mortgage Loans or
Contracts, other than a Series of Shifting Interest Certificates, the rights of
the holders of a Class of Subordinated Certificates to receive distributions
will be subordinated to the rights of the holders of a Class of Senior
Certificates, to the extent of the Subordinated Amount specified in such
Prospectus Supplement. The Subordinated Amount will be reduced by an amount
equal to Aggregate Losses and will be further reduced in accordance with a
schedule described in the applicable Prospectus Supplement. Aggregate Losses as
defined in the applicable Pooling and Servicing Agreement for any given period
will equal the aggregate amount of delinquencies, losses and other deficiencies
in the amounts due to the Senior Certificateholders paid or borne by the
Subordinated Certificateholders (but excluding any payments of Senior Class
Shortfall Accruals or interest thereon) ("Payment Deficiencies") during such
period, whether such aggregate amount results by way of withdrawals from the
Subordination Reserve Fund (including, prior to the time that the Subordinated
Amount is reduced to zero, any such withdrawal of amounts attributable to the
Initial Deposit, if any), reductions in amounts that would otherwise have been
distributable to the Subordinated Certificateholders on any Distribution Date,
or otherwise; less the aggregate amount of previous Payment Deficiencies
recovered by the related Trust Fund during such period in respect of the
Mortgage Loans or Contracts giving rise to such Previous Payment Deficiencies,
including, without limitation, such recoveries resulting from the receipt of
delinquent principal or interest payments, Liquidation Proceeds and insurance
proceeds (net, in each case, of any applicable Fixed Retained Yield and any
unpaid Servicing Fee to which the Servicer is entitled, foreclosure costs and
other servicing costs, expenses and advances relating to such Mortgage Loans or
Contracts).
The protection afforded to the Senior Certificateholders by the
subordination feature described above will be effected both by the preferential
right, to the extent specified in the applicable Prospectus Supplement, of such
Senior Certificateholders to receive current distributions on the related
Mortgage Loans or Contracts that, but for such subordination, would otherwise
have been distributable to the Subordinated Certificateholders from the related
Trust Fund (to the extent of the Subordinated Amount for such Series) and
(unless otherwise specified in the applicable Prospectus Supplement) by the
establishment and maintenance of a Subordination Reserve Fund for such Series.
Unless otherwise specified in the applicable Prospectus Supplement, the
Subordination Reserve Fund will not be a part of the Trust Fund. The
Subordination Reserve Fund may be funded initially with an initial deposit by
the Depositor (the "Initial Deposit") in an amount set forth in the applicable
Prospectus Supplement. Following the initial issuance of the Certificates of a
Series and until the balance of the Subordination Reserve Fund (without taking
into account the amount of any Initial Deposit) first equals or exceeds the
Specified Subordination Reserve Fund Balance set forth in the applicable
Prospectus Supplement, the Servicer will withhold all amounts that would
otherwise have been distributable to the Subordinated Certificateholders and
deposit such amounts (less any portions thereof required to be distributed to
Senior Certificateholders as described below) in the Subordination Reserve Fund.
The time necessary for the Subordination Reserve Fund of a Series to reach the
applicable Specified Subordination Reserve Fund Balance for such Series after
the initial issuance of the Certificates, and the period for which such balance
is maintained, will be affected by the prepayment, delinquency and foreclosure
or repossession experience of the Mortgage Loans or Contracts in the related
Trust Fund and cannot be accurately predicted. Unless otherwise specified in the
applicable Prospectus Supplement, after the amount in the Subordination Reserve
Fund (without taking into account the amount of any Initial Deposit) for a
Series first equals or exceeds the applicable Specified Subordination Reserve
Fund Balance, the Servicer will withhold from the Subordinated
Certificateholders
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and will deposit in the Subordination Reserve Fund such portion of the principal
payments on the Mortgage Loans or Contracts otherwise distributable to the
Subordinated Certificateholders as may be necessary to maintain the
Subordination Reserve Fund (without taking into account the amount of any
Initial Deposit) at the Specified Subordination Reserve Fund Balance. The
Prospectus Supplement for each Series will set forth the amount of the Specified
Subordination Reserve Fund Balance applicable from time to time and the extent,
if any, to which the Specified Subordination Reserve Fund Balance may be
reduced. Unless otherwise specified in the applicable Prospectus Supplement, the
Specified Subordination Reserve Fund Balance for a Series will not be required
to exceed the Subordinated Amount.
If on any Distribution Date while the Subordinated Amount exceeds zero,
there is a Senior Class Shortfall, the Senior Class Certificateholders will be
entitled to receive from current payments on the Mortgage Loans or Contracts
that would otherwise have been distributable to Subordinated Certificateholders
the amount of such Senior Class Shortfall. If such current payments are
insufficient, an amount equal to the lesser of: (i) the entire amount on deposit
in the Subordination Reserve Fund available for such purpose; or (ii) the amount
necessary to cover the Senior Class Shortfall will be withdrawn from the
Subordination Reserve Fund. Amounts representing investment earnings on amounts
held in the Subordination Reserve Fund will not be available to make payments to
the Senior Certificateholders. If current payments on the Mortgage Loans or
Contracts and amounts available in the Subordination Reserve Fund are
insufficient to pay the entire Senior Class Shortfall, then amounts held in the
Certificate Account for future distributions will be distributed as necessary to
the Senior Certificateholders.
In the event the Subordination Reserve Fund is depleted before the
Subordinated Amount is reduced to zero, the Senior Certificateholders will
continue to have a preferential right, to the extent specified in the applicable
Prospectus Supplement, to receive current distributions of amounts that would
otherwise have been distributable to the Subordinated Certificateholders to the
extent of the then Subordinated Amount.
After the Subordinated Amount is reduced to zero, the Senior
Certificateholders of a Series will, unless otherwise specified in the
applicable Prospectus Supplement, nonetheless have a preferential right to
receive payment of Senior Class Shortfall Accruals and interest which has
accrued thereon from amounts that would otherwise have been distributable to the
Subordinated Certificateholders. The Senior Certificateholders will otherwise
bear their proportionate share of any losses realized on the Trust Fund in
excess of the Subordinated Amount.
Unless otherwise specified in the related Prospectus Supplement, amounts
held from time to time in the Subordination Reserve Fund for a Series will be
held for the benefit of the Senior Certificateholders and Subordinated
Certificateholders of such Series until withdrawn from the Subordination Reserve
Fund as described below; provided, however, that the portion of the Initial
Deposit, if any, which has not been recovered by the Servicer and any
undistributed investment earnings attributable thereto will continue to be the
property of the Servicer and will ultimately be recoverable by the Servicer.
Amounts withdrawn from the Subordination Reserve Fund for a Series and
deposited in the Certificate Account for such Series will be charged first
against amounts in the Subordination Reserve Fund other than the Initial
Deposit, if any, for such Series, and thereafter against such Initial Deposit.
If so specified in the related Prospectus Supplement, if the Subordinated
Amount for a Series is reduced to zero and funds remain in the Subordination
Reserve Fund, an amount (the "Advance Reserve") equal to the lesser of (i) the
amount of the Initial Deposit and (ii) such funds remaining in the Subordination
Reserve Fund at the time the Subordinated Amount is reduced to zero, will remain
in the Subordination Reserve Fund and be available in certain circumstances for
withdrawal to make Advances.
Any amounts in the Subordination Reserve Fund for a Series on a
Distribution Date in excess of the Specified Subordination Reserve Fund Balance
on such date prior to the time the Subordinated Amount for such Series is
reduced to zero, and any amounts remaining in the Subordination Reserve Fund for
such Series upon termination of the trust created by the applicable Pooling and
Servicing Agreement, will be paid, unless otherwise specified in the applicable
Prospectus Supplement, to the Subordinated Certificateholders of such Series in
accordance with their pro rata ownership thereof, or, in the case of a Series
with respect to which an election has been made to treat the Trust Fund as a
REMIC, first to the Residual Certificateholders (to the extent of any portion
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of the Initial Deposit, if any, and undistributed reinvestment earnings
attributable thereto), and second to the Subordinated Certificateholders of such
Series, in each case in accordance with their pro rata ownership thereof.
Amounts permitted to be distributed from the Subordination Reserve Fund for a
Series will no longer be subject to any claims or rights of the Senior
Certificateholders of such Series.
Funds in the Subordination Reserve Fund for a Series will be invested as
provided in the applicable Pooling and Servicing Agreement in certain types of
eligible investments ("Eligible Investments"). If an election has been made to
treat the Trust Fund (or one or more pools of segregated assets therein) as a
REMIC, no more than 30% of the income or gain of the Subordination Reserve Fund
in any taxable year may be derived from the sale or other disposition of
investments held for less than three months in the Subordination Reserve Fund.
The earnings on such investments will be withdrawn and paid to the Subordinated
Certificateholders of such Series or to the holders of the Residual
Certificates, in the event that an election has been made to treat the Trust
Fund (or a pool of segregated assets therein) with respect to such Series as a
REMIC, in accordance with their respective interests. Investment income earned
on amounts held in the Subordination Reserve Fund will not be available for
distribution to the Senior Certificateholders or otherwise subject to any claims
or rights of the Senior Certificateholders.
Eligible Investments for monies deposited in the Subordination Reserve
Fund will be specified in the applicable Pooling and Servicing Agreement and,
unless otherwise provided in the applicable Prospectus Supplement, will mature
no later than the next Distribution Date.
Holders of Subordinated Certificates of a Series will not be required to
refund any amounts which have been properly distributed to them, regardless of
whether there are sufficient funds to distribute to Senior Certificateholders
the amounts to which they are entitled.
If specified in the related Prospectus Supplement, the Subordination
Reserve Fund may be funded in any other manner acceptable to each Rating Agency
and consistent with an election, if any, to treat the Trust Fund (or one or more
pools of segregated assets therein) for such Series as a REMIC, as will be more
fully described in such Prospectus Supplement.
Shifting Interest Certificates
If specified in the applicable Prospectus Supplement, the rights of the
holders of the Subordinated Certificates of a Series of Shifting Interest
Certificates to receive distributions with respect to the Mortgage Loans or
Contracts in the related Trust Fund will be subordinated to such rights of the
holders of the Senior Certificates of such Series to the extent described below,
except as otherwise set forth in such Prospectus Supplement. This subordination
is intended to enhance the likelihood of regular receipt by holders of Senior
Certificates of the full amount of scheduled monthly payments of principal and
interest due them and to provide limited protection to the holders of the Senior
Certificates against losses due to mortgagor or obligor defaults.
The protection afforded to the holders of Senior Certificates of such a
Series by the subordination feature described above will be effected by the
preferential right of such holders to receive, prior to any distribution being
made in respect of the related Subordinated Certificates, current distributions
on the related Mortgage Loans or Contracts of principal and interest due them on
each Distribution Date out of the funds available for distribution on such date
in the related Certificate Account and, to the extent described below, by the
right of such holders to receive future distributions on the Mortgage Loans or
Contracts that would otherwise have been payable to the holders of Subordinated
Certificates.
Losses realized on Liquidated Mortgage Loans or Liquidated Contracts
(other than certain Liquidated Mortgage Loans that are Special Hazard Mortgage
Loans or Liquidated Contracts that are Special Hazard Contracts as described
below) will be allocated to the holders of Subordinated Certificates through a
reduction of the amount of principal payments on the Mortgage Loans or Contracts
to which such holders are entitled. Prior to the Cross-Over Date, holders of
Senior Certificates of each Class entitled to a percentage of principal payments
on the related Mortgage Loans or Contracts will be entitled to receive, as part
of their respective Senior Class Distribution Amounts payable on each
Distribution Date in respect of each Mortgage Loan or Contract that became a
Liquidated Mortgage Loan or Liquidated Contract in the preceding month (subject
to the additional limitation described below applicable to Liquidated Mortgage
Loans that are Special Hazard Mortgage Loans or
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Liquidated Contracts that are Special Hazard Contracts), their respective shares
of the Scheduled Principal Balance of each such Liquidated Mortgage Loan or
Liquidated Contract, together with interest accrued at the Pass-Through Rate for
such Class, irrespective of whether Net Liquidation Proceeds and Net Insurance
Proceeds realized thereon are sufficient to cover such amount. For a description
of the full Senior Class Distribution Amount payable to holders of Senior
Certificates of each Series, see "Description of the Certificates --
Distributions to Standard Certificateholders -- Shifting Interest Certificates."
On each Distribution Date occurring on or after the Cross-Over Date,
holders of Senior Certificates of each Class entitled to a percentage of
principal payments will generally receive, as part of their respective Senior
Class Distribution Amounts, only their respective shares of the Net Liquidation
Proceeds and Net Insurance Proceeds actually realized in respect of the
applicable Liquidated Mortgage Loans or Liquidated Contracts after reimbursement
to the Servicer of any previously reimbursed Advances made in respect of such
Liquidated Mortgage Loans or Liquidated Contracts. See "Description of the
Certificates -- Distributions to Standard Certificateholders -- Shifting
Interest Certificates."
In the event that a Mortgage Loan becomes a Liquidated Mortgage Loan or a
Contract becomes a Liquidated Contract as a result of a hazard not insured
against under a Standard Hazard Insurance Policy (a "Special Hazard Mortgage
Loan" or "Special Hazard Contract"), the holders of Senior Certificates of each
Class entitled to a percentage of principal payments on the related Mortgage
Loans or Contracts will be entitled to receive in respect of each Mortgage Loan
or Contract which became a Special Hazard Mortgage Loan or Special Hazard
Contract in the preceding month, as part of their respective Senior Class
Distribution Amounts payable on each Distribution Date prior to the Special
Hazard Termination Date, their respective shares of the Scheduled Principal
Balance of such Mortgage Loan or Contract, together with interest accrued at the
applicable Pass-Through Rate, rather than their respective shares of Net
Liquidation Proceeds and Net Insurance Proceeds actually realized. The Special
Hazard Termination Date for a Series of Certificates will be the earlier to
occur of (i) the date on which cumulative net losses in respect of Special
Hazard Mortgage Loans or Special Hazard Contracts exceed the Special Hazard Loss
Amount specified in the applicable Prospectus Supplement or (ii) the Cross-Over
Date. Since the amount of the Special Hazard Loss Amount for a Series of
Certificates is expected to be significantly less than the amount of principal
payments on the Mortgage Loans or Contracts to which the holders of the
Subordinated Certificates of such Series are initially entitled (such amount
being subject to reduction, as described above, as a result of allocation of
losses on other Liquidated Mortgage Loans or Liquidated Contracts as well as
Special Hazard Mortgage Loans or Special Hazard Contracts), the holders of
Subordinated Certificates of such Series will bear the risk of losses in the
case of Special Hazard Mortgage Loans or Special Hazard Contracts to a lesser
extent than they will bear losses on other Liquidated Mortgage Loans or
Liquidated Contracts. Once the Special Hazard Termination Date has occurred,
holders of Senior Certificates of each Class entitled to payments of principal
will be entitled to receive, as part of their respective Senior Class
Distribution Amounts, only their respective shares of Net Liquidation Proceeds
and Net Insurance Proceeds realized on Special Hazard Mortgage Loans or Special
Hazard Contracts (less the total amount of delinquent installments in respect of
each Special Hazard Mortgage Loan or Special Hazard Contract that were
previously the subject of distributions to the holders of the Senior
Certificates and less the portion of such Net Liquidation Proceeds and Net
Insurance Proceeds allocable to interest). The outstanding principal balance or
notional amount of each such Class will, however, be reduced by such Class's
specified percentage of the Scheduled Principal Balance of each such Special
Hazard Mortgage Loan or Special Hazard Contract. See "Description of the
Certificates -- Distributions to Standard Certificateholders -- Shifting
Interest Certificates."
If the cumulative net losses on all Mortgage Loans or Contracts in a Trust
Fund that have become Special Hazard Mortgage Loans or Special Hazard Contracts
in the months prior to the month in which a Distribution Date occurs would
exceed the Special Hazard Loss Amount for a Series of Certificates, that portion
of the Senior Class Distribution Amount as of such Distribution Date for each
Class of Senior Certificates of such Series entitled to a percentage of
principal payments on the Mortgage Loans or Contracts in the related Trust Fund
attributable to Mortgage Loans or Contracts which became Special Hazard Mortgage
Loans or Special Hazard Contracts in the month preceding the month of such
Distribution Date will be calculated not on the basis of the Scheduled Principal
Balances of such Special Hazard Mortgage Loans or Special Hazard Contracts but
rather will be computed as an amount equal to the lesser of (a) such Class's
percentage, calculated as provided in the related Prospectus Supplement, of the
Scheduled Principal Balance of such Special Hazard Mortgage Loans or Special
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
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in months prior to the month of such Distribution Date and (ii) the excess of
(a) the product of the percentage of principal payments to which such Class is
entitled multiplied by the aggregate Net Liquidation Proceeds and Net Insurance
Proceeds (net of the portion of each thereof allocable to interest) of the
Mortgage Loans or Contracts which became Special Hazard Mortgage Loans or
Special Hazard Contracts in the month preceding the month of such Distribution
Date over (b) the total amount of delinquent installments in respect of such
Special Hazard Mortgage Loans or Special Hazard Contracts that were previously
the subject of distributions to such Class paid out of amounts otherwise
distributable to the holders of the related Subordinated Certificates.
Although the subordination feature described above is intended to enhance
the likelihood of timely payment of principal and interest to the holders of
Senior Certificates, shortfalls could result in certain circumstances. For
example, a shortfall in the payment of principal otherwise due the holders of
Senior Certificates could occur if losses realized on the Mortgage Loans or
Contracts in a Trust Fund were exceptionally high and were concentrated in a
particular month. See "Description of the Certificates -- Distributions to
Standard Certificateholders -- Shifting Interest Certificates" for a description
of the consequences of any shortfall of principal or interest.
The holders of Subordinated Certificates will not be required to refund
any amounts previously properly distributed to them, regardless of whether there
are sufficient funds on a subsequent Distribution Date to make a full
distribution to holders of each Class of Senior Certificates of the same Series.
Other Credit Enhancement
In addition to subordination as discussed above, credit enhancement may be
provided with respect to any Series of Certificates in any other manner which
may be described in the applicable Prospectus Supplement, including, but not
limited to, credit enhancement through an alternative 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
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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.
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
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Contracts underlying such Series as of the Cut-Off Date. Unless otherwise
specified in the related Prospectus Supplement, each monthly interest payment on
a Mortgage Loan or Contract will generally be calculated as the product of
one-twelfth of the applicable Mortgage Rate or Contract Rate at the time of such
calculation and the then unpaid 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
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Date of interest accrued during a period (an "Interest Accrual Period" specified
in such Prospectus Supplement ending on such Distribution Date or ending on a
date preceding such Distribution Date. In the latter case the effective yield to
such Certificateholders will be below the yield otherwise produced by the
applicable initial public offering prices and Interest Rates because (i) on the
first Distribution Date the time period upon which interest payable is
calculated will be less than the time elapsed since the commencement of accrual
of interest, (ii) the interest that accrues during the Interest Accrual Period
will not be paid until a date following such Interest Accrual Period specified
in the related Prospectus Supplement, and (iii) during each Interest Accrual
Period following the first Interest Accrual Period, in the case of a Class of
Multi-Class Certificates currently receiving distributions in reduction of
Stated Amount, interest is based upon a Stated Amount which is less than the
Stated Amount of such Certificates actually outstanding, since the distribution
in reduction of Stated Amount made on the following Distribution Date is deemed
to have been made, for interest accrual purposes only, at the end of the
preceding Interest Accrual Period. The Prospectus Supplement for each Series of
Certificates will set forth the nature of any scheduled delays in distribution
and the impact on the yield of such Certificates.
Interest Shortfalls Due to Principal Prepayments
When a Mortgage Loan or Contract is prepaid in full, the mortgagor or
obligor pays interest on the amount prepaid only to the date of prepayment and
not thereafter. Similarly, Liquidation Proceeds and Insurance Proceeds are also
likely to include interest only to the time of payment. When a Mortgage Loan or
Contract is prepaid in part, and such prepayment is applied as of a date other
than the Due Date occurring in the month of receipt or the Due Date occurring in
the month following the month of receipt, the mortgagor or obligor pays interest
on the amount prepaid only to the date of prepayment and not thereafter. The
effect of the foregoing is to reduce the aggregate amount of interest which
would otherwise be passed through to Certificateholders if such Mortgage Loan or
Contract were outstanding, or if such partial prepayment were applied, on the
succeeding Due Date. To mitigate this reduction in yield, the Pooling and
Servicing Agreement relating to a Series will provide, unless otherwise
specified in the applicable Prospectus Supplement, that with respect to any
principal prepayment or liquidation of any Mortgage Loan or Contract underlying
the Certificates of such Series, the Servicer will pay into the Certificate
Account for such Series to the extent funds are available for such purpose from
the related aggregate Servicing Fees (or portion thereof as specified in the
related Prospectus Supplement) which the Servicer is entitled to receive
relating to mortgagor or obligor payments or other recoveries distributed on the
related Distribution Date, such amount, if any, as may be necessary to assure
that the amount paid into the Certificate Account with respect to such Mortgage
Loan or Contract includes an amount equal to interest at the Net Mortgage Rate
or Net Contract Rate for such Mortgage Loan or Contract for the period from the
date of such prepayment or liquidation to but not including the next Due Date.
See "Servicing of the Mortgage Loans and Contracts -- Adjustment to Servicing
Compensation in Connection with Prepaid and Liquidated Mortgage Loans and
Contracts."
Weighted Average Life of Certificates
Weighted average life of a Certificate refers to the average amount of
time that will elapse from the date of issuance of the Certificate until each
dollar in reduction of the principal amount or Stated Amount of such Certificate
is distributed to the investor. The weighted average life and the yield to
maturity of any Class of the Certificates of a Series will be influenced by,
among other things, the rate at which principal on the Mortgage Loans or
Contracts included in the Mortgage Pool or Contract Pool for such Certificate is
paid, which is determined by scheduled amortization and prepayments (for this
purpose, the term "prepayments" includes prepayments and liquidations due to
default, casualty, condemnation and the like).
The Mortgage Loans or Contracts may be prepaid in full or in part at any
time. Unless otherwise specified in the applicable Prospectus Supplement or as
described in the following paragraph, no Mortgage Loan or Contract will provide
for a prepayment penalty and all fixed rate Mortgage Loans or Contracts will
contain due-on-sale clauses permitting the holder to accelerate the maturity of
the Mortgage Loan or Contract upon conveyance of the Mortgaged Property or
Manufactured Home.
Some of the Mortgage Loans may call for Balloon Payments. Balloon Payments
involve a greater degree of risk than fully amortizing loans because the ability
of the borrower to make a Balloon Payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property. The
ability of a borrower to accomplish either of these goals will be affected by a
number of factors, including the level of available mortgage rates at the time
of the attempted sale or refinancing, the borrower's equity in the related
Mortgaged Property, the financial condition of the borrower and operating
history of the related Mortgaged
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Property, tax laws, prevailing economic conditions and the availability of
credit for commercial real estate projects generally.
Some of the Mortgage Loans included in the Trust Fund may, in the event
one or more are required to be repurchased or otherwise removed from the Trust
Fund, require the payment of a release premium.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The Prospectus Supplement for each Series which
includes more than one Class or Subclass of Multi-Class Certificates will
describe one or more such prepayment standards or models and will contain tables
setting forth the weighted average life of each such Class or Subclass and the
percentage of the original aggregate Stated Amount of each such Class or
Subclass that would be outstanding on specified Distribution Dates for such
Series based on the assumptions stated in such Prospectus Supplement, including
assumptions that prepayments on the Mortgage Loans or Contracts are made at
rates corresponding to various percentages of the prepayment standard or model
specified in the related Prospectus Supplement.
There is, however, no assurance that prepayment of the Mortgage Loans or
Contracts underlying a Series of Certificates will conform to any level of the
prepayment standard or model specified in the related Prospectus Supplement. A
number of economic, geographic, social and other factors may affect prepayment
experience. These factors may include homeowner mobility, economic conditions,
changes in mortgagor's or obligor's housing needs, job transfers, unemployment,
mortgagor's or obligor's net equity in the properties securing the mortgages or
contracts, servicing decisions, enforceability of due-on-sale clauses, market
interest rates, the magnitude of related taxes, and the availability of funds
for refinancing. In general, however, if prevailing interest rates fall
significantly below the Mortgage Rates or Contract Rates on the Mortgage Loans
or Contracts underlying a Series of Certificates, the prepayment rates of such
Mortgage Loans or Contracts are likely to be higher than if prevailing rates
remain at or above the rates borne by such Mortgage Loans or Contracts. It
should be noted that Certificates of a Series may evidence an interest in a
Trust Fund with different Mortgage Rates or Contract Rates. Accordingly, the
prepayment experience of such Certificates will to some extent be a function of
the mix of Mortgage Rates or Contract Rates of the Mortgage Loans or Contracts.
In addition, the terms of the Pooling and Servicing Agreement will require the
Servicer to enforce any due-on-sale clause to the extent specified therein. See
"Servicing of the Mortgage Loans and Contracts -- Enforcement of Due-on-Sale
Clauses; Realization Upon Defaulted Mortgage Loans and Contracts" and "Certain
Legal Aspects of the Mortgage Loans and Contracts -- Due-On-Sale Clauses" for a
description of certain provisions of each Pooling and Servicing Agreement and
certain legal developments that may affect the prepayment experience on the
Mortgage Loans or Contracts.
A lower rate of principal prepayments than anticipated would negatively
affect the total return to investors in any Certificates of a Series that are
offered at a discount to their principal amount or, if applicable, their parity
price, and a higher rate of principal prepayments than anticipated would
negatively affect the total return to investors in the Certificates of a Series
that are offered at a premium to their principal amount or, if applicable, their
parity price. Parity price is the price at which a Certificate will yield its
coupon, after giving effect to any payment delay. In addition, the yield to
investors in a Class of Certificates which bears interest at a variable Interest
Rate or at a variable Pass-Through Rate, will also be affected by changes in the
index on which any such variable Interest Rate, or variable Pass-Through Rate is
based. Changes in the index may not correlate with changes in prevailing
mortgage interest rates or financing rates for manufactured housing, and the
effect, if any, thereof on the yield of the Certificates will be discussed in
the related Prospectus Supplement. The yield on certain types of Certificates
may be particularly sensitive to prepayment rates, and further information with
respect to yield on such Certificates will be included in the applicable
Prospectus Supplement.
At the request of the mortgagor or obligor, the Servicer may refinance the
Mortgage Loans or Contracts in any Trust Fund by accepting prepayments thereon
and making new loans secured by a Mortgage on the same property or a security
interest in the same Manufactured Home. Upon such refinancing, the new loans
will not be included in the Trust Fund. A mortgagor or obligor may be legally
entitled to require the Servicer to allow such a refinancing. Any such
refinancing will have the same effect as a prepayment in full of the related
Mortgage Loan or Contract.
The Depositor may be obligated and the applicable Unaffiliated Seller will
be obligated, under certain circumstances, to repurchase certain of the Mortgage
Loans or Contracts. In addition, the terms of certain
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insurance policies relating to the Mortgage Loans or Contracts may permit the
applicable insurer to purchase delinquent Mortgage Loans or Contracts. The
proceeds of any such repurchase will be deposited in the related Certificate
Account and such repurchase will have the same effect as a prepayment in full of
the related Mortgage Loan or Contract. See "The Trust Funds -- Assignment of the
Mortgage Loans and Contracts." In addition, if so specified in the applicable
Prospectus Supplement, the Servicer will have the option to purchase all, but
not less than all, of the Mortgage Loans or Contracts in any Trust Fund under
the limited conditions specified in such Prospectus Supplement. For any Series
of Certificates for which an election has been made to treat the Trust Fund (or
one or more segregated pools of assets therein) as a REMIC, any such purchase
may be effected only pursuant to a "qualified liquidation," as defined in Code
Section 86OF(a)(4)(A). See "The Pooling and Servicing Agreement -- Termination;
Purchase or other Disposition of Mortgage Loans and Contracts."
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement,
substantially all of the net proceeds from the sale of each Series of
Certificates will be used by the Depositor for the purchase of the Mortgage
Loans or Contracts represented by the Certificates of such Series or to
reimburse amounts previously used to effect such a purchase, the costs of
carrying the related Mortgage Loans or Contracts until the sale of the
Certificates and other expenses connected with pooling the related Mortgage
Loans or Contracts and issuing the Certificates.
THE DEPOSITOR
Prudential Securities Secured Financing Corporation, formerly known as P-B
Secured Financing Corporation (the "Depositor"), was incorporated in the State
of Delaware on August 26, 1988 as a wholly-owned, limited purpose finance
subsidiary of Prudential Securities Group Inc. (a wholly-owned indirect
subsidiary of The Prudential Insurance Company of America). The Depositor's
principal executive offices are located at One New York Plaza, 15th Floor, New
York, New York 10292. Its telephone number is (212) 778-1000.
As described herein under "The Trust Funds -- Assignment of the Mortgage
Loans and Contracts" and "-- Representations and Warranties", the only
obligations, if any, of the Depositor with respect to a Series of Certificates
may be pursuant to certain limited representations and warranties and limited
undertakings to repurchase or substitute Mortgage Loans or Contracts under
certain circumstances. Unless otherwise specified in the applicable Prospectus
Supplement, the Depositor will have no servicing obligations or responsibilities
with respect to any Mortgage Pool, Contract Pool or Trust Fund. The Depositor
does not have, nor is it expected in the future to have, any significant assets.
As specified in the related Prospectus Supplement the Servicer with
respect to any Series of Certificates relating to Mortgage Loans or Contracts
may be an affiliate of the Depositor. As described under "The Trust Funds," the
Depositor anticipates that it may acquire Mortgage Loans and Contracts through
or from an affiliate.
Neither the Depositor nor Prudential Securities Group Inc. nor any of its
affiliates, including The Prudential Insurance Company of America, will insure
or guarantee the Certificates of any Series.
UNDERWRITING GUIDELINES
Mortgage Loans Secured by Residential Properties
The Depositor expects that all Mortgage Loans included in a Mortgage Pool
will have been originated in accordance with the underwriting procedures
described herein, subject to such variations as are specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, all or a representative sample of the Mortgage Loans comprising the
Mortgage Pool for a Series will be reviewed by or on behalf of the Depositor to
determine compliance with such underwriting procedures and standards and
compliance with other requirements for inclusion in the related Mortgage Pool.
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Except as otherwise set forth in the related Prospectus Supplement, it is
expected that each originator of Mortgage Loans will have applied, in a standard
procedure which complies with applicable federal and state law and regulations,
underwriting procedures that are intended to evaluate the mortgagor's credit
standing and repayment ability, and the value and adequacy of the Mortgaged
Property as collateral. A prospective mortgagor will have been required to fill
out an application designed to provide to the original lender pertinent credit
information. As part of the description of the mortgagor's financial condition,
the mortgagor will have been required to provide a current balance sheet
describing assets and liabilities and a statement of income and expenses, as
well as an authorization to apply for a credit report which summarizes the
mortgagor's credit history with local merchants and lenders and any record of
bankruptcy. In addition, an employment verification will have been obtained in
the case of individual borrowers which reports the mortgagor's current salary,
length of such employment and whether it was expected that the mortgagor will
continue such employment in the future. If a prospective borrower was
self-employed, the mortgagor will have been required to submit copies of signed
tax returns. The mortgagor may also have been required to authorize verification
of deposits at financial institutions where the mortgagor has demand or savings
accounts.
In determining the adequacy of the Mortgaged Property as collateral,
except in the instance of certain small second loan applications, an appraisal
will have been made of each Mortgaged Property considered for financing. Each
appraiser will have been selected in accordance with predetermined guidelines
established by or acceptable to the Unaffiliated Seller for appraisers. The
appraiser will have been required to inspect the Mortgaged Property and verify
that it was in good condition and that construction, if new, has been completed.
The appraisal is based on the market value of the comparable properties, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the Mortgaged Property.
In determining the adequacy of the Mortgaged Property as collateral, the
originator shall, in the case of second or more junior loans, look at the
combined Loan-to-Value Ratio in determining whether the Mortgage Loan exceeds
lending guidelines. Furthermore, when considering such second or more junior
loans, confirm that payment has been timely made on the senior liens.
Once all applicable employment, credit and property information was
received, a determination would have been made as to whether the prospective
mortgagor had sufficient monthly income available (i) to meet its monthly
obligations on the Mortgage Loan (determined on the basis of the monthly
payments due in the year of origination and taking into consideration, payments
due on any senior liens) and other expenses related to the Mortgaged Property
(such as property taxes and hazard insurance) and (ii) in the case of individual
mortgagors, to meet monthly housing expenses and other financial obligations and
monthly living expenses. When two individuals cosign loan documents, the income
and expenses of both individuals may be included in the computation.
Underwriting guidelines generally similar to traditional underwriting guidelines
used by FNMA and FHLMC which were in effect at the time of origination of each
Mortgage Loan will generally have been used, except that the ratios at
origination of the amounts described in clauses (i) and (ii) above to the
applicant's stable monthly gross income may exceed in certain cases the then
applicable FNMA and FHLMC guidelines. With respect to a vacation or second home,
no income derived from the property will have been considered for underwriting
purposes.
Other credit considerations may cause departure from the traditional
guidelines. If the Loan-to-Value Ratio and/or term of the Mortgage Loan is less
than a percentage specified in the related Prospectus Supplement, certain
aspects of review relating to monthly income assets may be foregone and standard
ratios of monthly or total expenses to gross income may not be applied. The
Depositor may permit an Unaffiliated Seller's underwriting standards to
otherwise vary in certain cases to the extent specified in the related
Prospectus Supplement.
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the mortgagor but rather must look solely to the property for
repayment in the event of foreclosure. The Depositor will require that the
Unaffiliated Sellers represent and warrant that underwriting standards applied
to each Mortgage Loan purchased by the Depositor from such Unaffiliated Seller
(including Mortgage Loans secured by Mortgaged Properties located in
anti-deficiency states) require that the value of the property being financed,
as indicated by the appraisal, currently supports and is anticipated to support
in the future the outstanding principal balance of such Mortgage Loan.
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Certain of the types of loans which may be included in the Mortgage Pools
are recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such Mortgage Loans may
provide for escalating or variable payments by the mortgagor. These types of
Mortgage Loans are underwritten on the basis of a judgment that mortgagors will
have the ability to make larger monthly payments in subsequent years. In some
instances, however, a mortgagor's income may not be sufficient to make loan
payments as such payments increase.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the real estate market should experience an overall
decline in property values such that the outstanding principal balances of the
Mortgage Loans, and any secondary financing on the Mortgaged Properties, in a
particular Mortgage Pool become equal to or greater than the value of the
Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In addition, adverse economic conditions (which may or may not affect
real property values) may affect the timely payment by mortgagors of scheduled
payments of principal and interest on the Mortgage Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to any
Mortgage Pool. To the extent that such losses are not covered by subordination
provisions, insurance policies or other credit support, such losses will be
borne, at least in part, by the holders of the Certificates of the related
series.
Contracts
The underwriting guidelines utilized in connection with the origination of
the Contracts underlying a Series of Certificates will be described in the
related Prospectus Supplement.
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS
The following summaries describe certain provisions of the Pooling and
Servicing Agreements which relate to Trust Funds comprised of Mortgage Loans or
Contracts. The summaries do not purport to be complete and are subject to and
are qualified in their entirety by reference to, all the provisions of the
Pooling and Servicing Agreement for each Series and the related Prospectus
Supplement, which may further modify the provisions summarized below. The
provisions of each Pooling and Servicing Agreement will vary depending upon the
nature of the Certificates to be issued thereunder and the nature of the related
Trust Fund. Each Pooling and Servicing Agreement executed and delivered with
respect to each Series will be filed with the Commission as an exhibit to a
Current Report on Form 8-K promptly after issuance of the Certificates of such
Series.
The Servicer
The Servicer under each Pooling and Servicing Agreement will be named in
the related Prospectus Supplement. The entity serving as Servicer may be an
affiliate of the Depositor and may have other normal business relationships with
the Depositor or the Depositor's affiliates. The Servicer with respect to each
Series will service the Mortgage Loans or Contracts contained in the Trust Fund
for such Series. For Trust Funds comprised of Mortgage Loans, the Servicer will
be a seller/servicer approved by FNMA or FHLMC. Any Servicer may delegate its
servicing responsibilities to one or more sub-servicers (each a "Sub-Servicer"),
but will not be relieved of its liabilities with respect thereto.
The Servicer will make certain representations and warranties regarding
its authority to enter into, and its ability to perform its obligations under,
the related Pooling and Servicing Agreement. An uncured breach of such a
representation or warranty that in any respect materially and adversely affects
the interests of the Certificateholders will constitute an Event of Default by
the Servicer under the related Pooling and Servicing Agreement. See "The Pooling
and Servicing Agreement -- Events of Default -- Mortgage Loans or Contracts" and
" -- Rights Upon Event of Default -- Mortgage Loans or Contracts."
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Payments on Mortgage Loans and Contracts
The Servicer or the Trustee will, as to each Series of Certificates,
establish and maintain, or cause to be established and maintained, a separate
trust account or accounts in the name of the Trustee (collectively, the
"Certificate Account"), which must be maintained with a depository institution
(the "Certificate Account Depository") acceptable to the Rating Agency rating
the Certificates of such Series. Such account or accounts will be maintained
with a Certificate Account Depository (i) whose long-term debt obligations at
the time of any deposit therein are rated not lower than the rating on the
related Series of Certificates at the time of the initial issuance thereof, (ii)
the deposits in which are insured by the Federal Deposit Insurance Corporation
(the "FDIC") through either the Bank Insurance Fund or the Savings Association
Insurance Fund (to the limit established by the FDIC) and the uninsured deposits
in which accounts are otherwise secured such that, as evidenced by an opinion of
counsel, the Trustee for the benefit of the Certificateholders of the related
Series has a claim with respect to funds in the Certificate Account for such
Series, or a perfected security interest in any collateral (which shall be
limited to Eligible Investments) securing such funds, that is superior to the
claims of any other depositor or general creditor of the Certificate Account
Depository with which the Certificate Account is maintained or (iii) which is
otherwise acceptable to the Rating Agency or Agencies.
A Certificate Account may be maintained as an interest bearing or a
non-interest bearing account, or the funds held therein may be invested pending
each succeeding Distribution Date in certain Eligible Investments. Any such
Eligible Investments shall mature not later than the business day preceding the
next Distribution Date and no such investment shall be sold or disposed of prior
to the maturity date of such Eligible Investment; however, in the event that an
election has been made to treat the Trust Fund (or a segregated pool of assets
therein) with respect to a Series as a REMIC, no such Eligible Investments will
be sold or disposed of at a gain prior to maturity unless the Servicer has
received an opinion of counsel or other evidence satisfactory to it that such
sale or disposition will not cause the Trust Fund (or segregated pool of assets)
to be subject to the tax on "prohibited transactions" imposed by Code Section
860F(a)(1), otherwise subject the Trust Fund (or segregated pool of assets) to
tax, or cause the Trust Fund (or segregated pool of assets) to fail to qualify
as a REMIC. Unless otherwise provided in the related Prospectus Supplement, any
interest or other income earned on funds in the Certificate Account will be paid
to the Servicer or its designee as additional servicing compensation. All losses
from any such investment will be deposited by the Servicer into the Certificate
Account immediately as realized. If permitted by the Rating Agency or Agencies
and so specified in the related Prospectus Supplement, a Certificate Account may
contain funds relating to more than one Series of Certificates.
Each Sub-Servicer servicing a Mortgage Loan or Contract will be required
by the Servicer to establish and maintain one or more separate accounts which
may be interest bearing and which comply with the standards with respect to
Certificate Accounts set forth above (collectively, the "Sub-Servicing
Account"). Each Sub-Servicer will be required to credit to the related
Sub-Servicing Account on a daily basis the amount of all proceeds of Mortgage
Loans or Contracts received by the Sub-Servicer, less its servicing
compensation. The Sub-Servicer shall remit to the Servicer by wire transfer of
immediately available funds all funds held in the Sub-Servicing Account with
respect to each Mortgage Loan or Contract on a monthly remittance date which
shall occur on or before two business days preceding the Determination Date
occurring in such month.
The Servicer will deposit in the Certificate Account for each Series of
Certificates any amounts representing scheduled payments of principal and
interest on the Mortgage Loans or Contracts due after the applicable Cut-Off
Date but received prior thereto, and, on a dally basis, the following payments
and collections received or made by it with respect to the Mortgage Loans or
Contracts subsequent to the applicable Cut-Off Date (other than payments due on
or before the Cut-Off Date):
(i) all payments on account of principal, including prepayments, and
interest, net of any portion thereof retained by a Sub-Servicer as its
servicing compensation and net of any Fixed Retained Yield;
(ii) all amounts received by the Servicer in connection with the
liquidation of defaulted Mortgage Loans or Contracts or property acquired
in respect thereof, whether through foreclosure sale or otherwise,
including payments in connection with defaulted Mortgage Loans or
Contracts received from the mortgagor or obligor other than amounts
required to be paid to the mortgagor or obligor pursuant to the
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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:
(i) to reimburse itself for Advances;
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(ii) to reimburse itself from Liquidation Proceeds for expenses
incurred by the Servicer in connection with the liquidation of any
defaulted Mortgage Loan or Contract or property acquired in respect
thereof and for amounts expended in good faith in connection with the
restoration of damaged property, to reimburse itself from Insurance
Proceeds for expenses incurred by the Servicer in connection with the
restoration, preservation or repair of the related Mortgage Properties or
Manufactured Homes and expenses incurred in connection with collecting on
the related insurance policies and, to the extent that Liquidation
Proceeds or Insurance Proceeds after such reimbursement are in excess of
the unpaid principal balance of the related Mortgage Loans or Contracts
together with accrued and unpaid interest thereon at the applicable Net
Mortgage Rate or Net Contract Rate through the last day of the month in
which such Liquidation Proceeds or Insurance Proceeds were received, to
pay to itself out of such excess the amount of any unpaid Servicing Fees
and any assumption fees, late payment charges or other mortgagor or
obligor charges on the related Mortgage Loans or Contracts;
(iii) to pay to itself the applicable Servicing Fee and/or pay the
owner thereof any Fixed Retained Yield, in the event the Servicer is not
required, and has elected not, to withhold such amounts out of any payment
or other recovery with respect to a particular Mortgage Loan or Contract
prior to the deposit of such payment or recovery in the Certificate
Account;
(iv) to reimburse itself and the Depositor for certain expenses
(including taxes paid on behalf of the Trust Fund) incurred by and
recoverable by or reimbursable to it or the Depositor, as the case may be;
(v) to pay to the Depositor or the Unaffiliated Seller with respect
to each Mortgage Loan or Contract or property acquired in respect thereof
that has been repurchased by the Depositor or the Unaffiliated Seller, as
the case may be, all amounts received thereon and not distributed as of
the date as of which the purchase price of such Mortgage Loan or Contract
was determined;
(vi) to pay itself any interest earned on or investment income
earned with respect to funds in the Certificate Account (all such interest
or income to be withdrawn not later than the next Distribution Date);
(vii) to make withdrawals from the Certificate Account in order to
make distributions to Certificateholders; and
(viii) to clear and terminate the Certificate Account.
The Servicer will be authorized to appoint a paying agent (the "Paying
Agent") to make distributions, as agent for the Servicer, to Certificateholders
of a Series. If the Paying Agent for a Series is the Trustee of such Series,
such Paying Agent will be authorized to make withdrawals from the Certificate
Account in order to make distributions to Certificateholders. If the Paying
Agent for a Series is not the Trustee for such Series, the Servicer will, prior
to each Distribution Date, deposit in immediately available funds in an account
designated by the Paying Agent the amount required to be distributed to the
Certificateholders on such Distribution Date.
The Servicer will cause any Paying Agent which is not the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
agrees with the Trustee that such Paying Agent will:
(1) hold all amounts deposited with it by the Servicer for
distribution to Certificateholders in trust for the benefit of
Certificateholders until such amounts are distributed to
Certificateholders or otherwise disposed of as provided in the applicable
Pooling and Servicing Agreement;
(2) give the Trustee notice of any default by the Servicer in the
making of such deposit; and
(3) at any time during the continuance of any such default, upon
written request of the Trustee, forthwith pay to the Trustee all amounts
held in trust by such Paying Agent.
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Advances and Limitations Thereon
Unless otherwise provided in the applicable Prospectus Supplement, the
Servicer will advance on or before the business day preceding each Distribution
Date its own funds (an "Advance") or funds held in the Certificate Account for
future distribution or withdrawal and which are not included in the Pool
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of payments of principal and interest which were due during the
related Due Period, that were delinquent on the Determination Date and were not
advanced by any Sub-Servicer, to the extent that the Servicer determines that
such advances will be reimbursable from late collections, Insurance Proceeds,
Liquidation Proceeds or otherwise.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the Class or Classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Unless otherwise
provided in the applicable Prospectus Supplement, advances of the Servicer's
funds will be reimbursable only out of related recoveries on the Mortgage Loans
or Contracts respecting which such amounts were advanced, or from any amounts in
the Certificate Account to the extent that the Servicer shall determine that any
such advances previously made are not ultimately recoverable from late
collections, Insurance Proceeds, Liquidation Proceeds or otherwise. If advances
have been made by the Servicer from excess funds in the Certificate Account, the
Servicer will replace such funds in the Certificate Account on any future
Distribution Date to the extent that funds in the Certificate Account on such
Distribution Date are less than payments required to be made to
Certificateholders on such date.
Adjustment to Servicing Compensation in Connection with Prepaid and Liquidated
Mortgage Loans and Contracts
When a mortgagor or obligor prepays a Mortgage Loan or Contract in full,
the mortgagor or obligor pays interest on the amount prepaid only to the date on
which such principal prepayment is made. Similarly, Liquidation Proceeds from a
Mortgaged Property or Manufactured Home will not include interest for any period
after the date on which the liquidation took place, and Insurance Proceeds may
include interest only to the date of settlement of the related claims. Further,
when a Mortgage Loan or Contract is prepaid in part, and such prepayment is
applied as of a date other than a Due Date, the mortgagor or obligor pays
interest on the amount prepaid only to the date of prepayment and not
thereafter. The effect of the foregoing is to reduce the aggregate amount of
interest which would otherwise be passed through to Certificateholders if such
Mortgage Loan or Contract were outstanding, or if such partial prepayment were
applied, on the succeeding Due Date. Unless otherwise specified in the
applicable Prospectus Supplement, in order to mitigate the adverse effect to
Certificateholders of a Series resulting from the prepayment or liquidation of a
Mortgage Loan or Contract or settlement of an insurance claim with respect
thereto, the amount of the aggregate Servicing Fees will be reduced by an amount
equal to the accrual of interest on any prepaid or liquidated Mortgage Loan or
Contract at the Net Mortgage Rate for such Mortgage Loan or the Net Contract
Rate for such Contract from the date of its prepayment or liquidation or the
date of such insurance settlement to the next Due Date (the "Prepayment Interest
Shortfall"). Such reductions in the aggregate Servicing Fees will be made by the
Servicer with respect to the Mortgage Loans or Contracts under the applicable
Pooling and Servicing Agreement, but only to the extent that the aggregate
Prepayment Interest Shortfall does not exceed the aggregate Servicing Fees
relating to mortgagor or obligor payments or other recoveries distributed on the
related Distribution Date. The amount of the offset against the aggregate
Servicing Fees will be included in the scheduled distributions to
Certificateholders on the Distribution Date on which the related principal
prepayments, Liquidation Proceeds or Insurance Proceeds are passed through to
Certificateholders. See "Prepayment and Yield Considerations." Payments with
respect to any Prepayment Interest Shortfall will not be obtained by means of
any subordination of the rights of Subordinated Certificateholders or any other
credit enhancement arrangement (except to the extent such credit enhancement
pays interest with respect to a Mortgage Loan or Contract in excess of the
related Net Mortgage Rate or Net Contract Rate and such excess would otherwise
be paid to the Servicer as a Servicing Fee).
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:
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(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
(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:
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(a) the amounts so distributed under any such form of credit
enhancement or from any such reserve fund on the applicable
Distribution Date; and
(b) the amount of coverage remaining under any such form of
credit enhancement and the balance in any such fund, after giving
effect to any payments thereunder and other amounts charged thereto
on the Distribution Date;
(x) in the case of a Series of Certificates with a variable
Pass-Through Rate, such Pass-Through Rate;
(xi) the book value of any collateral acquired by the Trust Fund
through foreclosure or otherwise; and
(xii) the number and aggregate principal amount of Mortgage Loans or
Contracts one month and two or more months delinquent.
In addition, within a reasonable period of time after the end of each
calendar year, a report will be furnished to each Certificateholder of record at
any time during such calendar year (a) as to the aggregate of amounts reported
pursuant to clauses (i) through (xii) above, as applicable, for such calendar
year or, in the event such person was a Certificateholder of record during a
portion of such calendar year, for the applicable portion of such year and (b)
such other information as required to enable Certificateholders to prepare their
tax returns. In the event that an election has been made to treat the Trust Fund
(or one or more segregated pools of assets therein) as a REMIC, the Trustee with
respect to a Series will be required to sign the federal income tax returns with
respect to such REMIC. See "Certain Federal Income Tax Consequences -- Federal
Income Tax Consequences for REMIC Certificates -- Administrative Matters."
Reports to the Trustee
No later than 15 days after each Distribution Date for a Series, the
Servicer will provide the Trustee of such Series with a report setting forth the
status of the related Certificate Account and the related Subordination Reserve
Fund, if any, and any other reserve fund as of the close of business on such
Distribution Date, stating that all distributions required to be made by the
Servicer under the applicable Pooling and Servicing Agreement have been made (or
if any required distribution has not been made by the Servicer, specifying the
nature and status thereof) and showing, for the period covered by such
statement, the aggregate of deposits to and withdrawals from the Certificate
Account for each category of deposits and withdrawals specified in the Pooling
and Servicing Agreement. Such statement shall also include information as to (i)
the aggregate unpaid principal balances of all the Mortgage Loans or Contracts
as of the close of business on the last day of the month preceding the month in
which such Distribution Date occurs (or such other day as may be specified in
the applicable Pooling and Servicing Agreement); and (ii) the amount of any
Subordination Reserve Fund and any other reserve fund, as of such Distribution
Date (after giving effect to the distributions on such Distribution Date).
Copies of such reports may be obtained by Certificateholders upon request in
writing addressed to the related Trustee at its mailing address provided in the
related Prospectus Supplement.
Collection and Other Servicing Procedures
The Servicer, directly or through Sub-Servicers, will make reasonable
efforts to collect all payments called for under the Mortgage Loans or Contracts
and will, consistent with the applicable Pooling and Servicing Agreement and any
applicable agreement governing any form of credit enhancement, follow such
collection procedures as it follows with respect to mortgage loans or
manufactured housing contracts serviced by it that are comparable to the
Mortgage Loans or Contracts, as the case may be. Consistent with the above, the
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.
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Pursuant to the Pooling and Servicing Agreement, the Servicer, to the
extent permitted by law, will establish and maintain or will cause to be
established and maintained one or more escrow accounts (collectively, the
"Servicing Account") in which the Servicer will be required to deposit or cause
to be deposited payments by mortgagors or obligors, as applicable, for taxes,
assessments, mortgage and hazard insurance premiums and other comparable items.
Withdrawals from the Servicing Account may be made to effect timely payment of
taxes, assessments, mortgage and hazard insurance, to refund to mortgagors or
obligors amounts determined to be overages, to pay interest to mortgagors or
obligors on balances in the Servicing Account, if required, to repair or
otherwise protect the Mortgaged Properties or Manufactured Homes and to clear
and terminate such account. The Servicer will be responsible for the
administration of each Servicing Account. The Servicer will be obligated to
advance certain amounts which are not timely paid by mortgagors or obligors, to
the extent that the Servicer determines that such amounts will be recoverable
out of Insurance Proceeds, Liquidation Proceeds, or otherwise. Alternatively, if
specified in the applicable Pooling and Servicing Agreement, in lieu of
establishing a Servicing Account, the Servicer may procure a performance bond or
other form of insurance coverage, in an amount acceptable to the Rating Agency
rating the related Series of Certificates, covering loss occasioned by the
failure to escrow such amounts.
Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage Loans
and Contracts
Each Pooling and Servicing Agreement will provide that, when any Mortgaged
Property or Manufactured Home is conveyed by the mortgagor or obligor, the
Servicer will exercise its rights to accelerate the maturity of such Mortgage
Loan or Contract under any "due-on-sale" clause applicable thereto, if any,
unless (a) it is not exercisable under applicable law or (b) such exercise would
result in loss of insurance coverage with respect to such Mortgage Loan or
Contract. In any such case, the Servicer is authorized to take or enter into an
assumption and modification agreement from or with the person to whom such
Mortgaged Property or Manufactured Home has been or is about to be conveyed,
pursuant to which such person becomes liable under the Mortgage Note or Contract
and, unless prohibited by applicable state law, the mortgagor or obligor remains
liable thereon, provided that the Mortgage Loan or Contract will continue to be
covered by any pool insurance policy and any related primary mortgage insurance
policy, and the Mortgage Rate or Contract Rate with respect to such Mortgage
Loan or Contract and the payment terms shall remain unchanged. The Servicer will
also be authorized, with the prior approval of any pool insurer and any primary
mortgage insurer, if any, to enter into a substitution of liability agreement
with such person, pursuant to which the original mortgagor or obligor is
released from liability and such person is substituted as mortgagor or obligor
and becomes liable under the Mortgage Note or Contract.
The Servicer is obligated under the Pooling and Servicing Agreement for
each Series to realize upon defaulted Mortgage Loans or Contracts to the extent
provided therein. However, in the case of foreclosure or of damage to a
Mortgaged Property or Manufactured Home from an uninsured cause, the Servicer is
not required to expend its own funds to foreclose, repossess or restore any
damaged property, unless it reasonably determines (i) that such foreclosure,
repossession or restoration will increase the proceeds to Certificateholders of
such Series of liquidation of the Mortgage Loan or Contract after reimbursement
of the Servicer for its expenses and (ii) that such expenses will be recoverable
to it through Liquidation Proceeds or Insurance Proceeds. In the event that the
Servicer has expended its own funds for foreclosure or to restore damaged
property, it will be entitled to charge the Certificate Account for such Series
an amount equal to all costs and expenses incurred by it.
The Servicer may foreclose against property securing a defaulted Mortgage
Loan either by foreclosure, by sale or by strict foreclosure and in the event a
deficiency judgment is available against the mortgagor or other person (see
"Certain Legal Aspects of the Mortgage Loans and Contracts -- The Mortgage Loans
- -- Anti-Deficiency Legislation and Other Limitations on Lenders" for a
description of the availability of deficiency judgments), may proceed for the
deficiency. It is anticipated that in most cases the Servicer will not seek
deficiency judgments against any mortgagor or obligor, and the Servicer is not
required under the Pooling and Servicing Agreement to seek deficiency judgments.
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
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or Manufactured Home in a manner which does not cause the Mortgaged Property or
Manufactured Home to fail to qualify as "foreclosure property" within the
meaning of Code Section 860G(a)(8) or result in the receipt by the Trust Fund of
any "net income from foreclosure property" within the meaning of Code Section
860G(c). In general, this would preclude the holding of the Mortgaged Property
or Manufactured Home as a dealer in such property or the receipt of rental
income based on the profits of the lessee.
The Servicer may modify, waive or amend the terms of any Mortgage Loan or
Contract without the consent of the Trustee or any Certificateholder. Such
modification, waiver or amendment shall only be given if the Servicer determines
that it is in the best interests of Certificateholders and, generally, only if
the Mortgage Loan is in default or the Service has determined that default is
reasonably foreseeable.
Servicing Compensation and Payment of Expenses
For each Series of Certificates, the Servicer will be entitled to be paid
the Servicing Fee on the related Mortgage Loans or Contracts until termination
of the applicable Pooling and Servicing Agreement, subject, unless otherwise
specified in the applicable Prospectus Supplement, to adjustment as described
under "Adjustment to Servicing Compensation in Connection with Prepaid and
Liquidated Mortgage Loans and Contracts" above. The Servicer, at its election,
will pay itself the Servicing Fee for a Series with respect to each Mortgage
Loan or Contract by (a) withholding the Servicing Fee from any scheduled payment
of interest prior to deposit of such payment in the Certificate Account for such
Series or (b) withdrawing the Servicing Fee from the Certificate Account after
the entire interest payment has been deposited in the Certificate Account. The
Servicer may also pay itself out of the Liquidation Proceeds or Insurance
Proceeds with respect to a Mortgage Loan or Contract, or withdraw from the
Certificate Account, the Servicing Fee in respect of such Mortgage Loan or
Contract or other recoveries with respect thereto to the extent provided in the
applicable Pooling and Servicing Agreement. The Servicing Fee with respect to
the Mortgage Loans or Contracts underlying the Certificates of a Series will be
specified in the applicable Prospectus Supplement. Any additional servicing
compensation in the form of prepayment charges, assumption fees, late payment
charges or otherwise will be retained by the Servicer to the extent not required
to be deposited in the Certificate Account.
In addition to amounts payable to any Sub-Servicer, the Servicer will pay
all expenses incurred in connection with the servicing of the Mortgage Loans or
Contracts underlying a Series, including, without limitation, payment of the
hazard insurance policy premiums and fees or other amounts payable pursuant to
any applicable agreement for the provision of credit enhancement for such
Series, payment of the fees and disbursements of the Trustee and any custodian,
fees due to the independent accountants and expenses incurred in connection with
distributions and reports to Certificateholders. However, certain of these
expenses may be reimbursable to the Servicer pursuant to the terms of the
applicable Pooling and Servicing Agreement. In addition, the Servicer will be
entitled to reimbursement for certain expenses incurred by it in connection with
the liquidation of defaulted Mortgage Loans or Contracts. In the event that
claims are either not made or are not fully paid from any applicable form of
credit enhancement, the related Trust Fund will suffer a loss to the extent that
Net Liquidation Proceeds and Net Insurance Proceeds are less than the principal
balance of the related Mortgage Loan or Contract, plus accrued interest thereon
at the Net Mortgage Rate or Net Contract Rate. In addition, the Servicer will be
entitled to reimbursement of expenditures incurred by it in connection with the
restoration of any Mortgaged Property or Manufactured Home, such right of
reimbursement being prior to the rights of the Certificateholders to receive
Liquidation Proceeds and Insurance Proceeds. The Servicer is also entitled to
reimbursement from the Certificate Account of Advances, of advances made by it
to pay taxes or insurance premiums with respect to any Mortgaged Property or
Manufactured Home and of certain losses against which it is indemnified by the
Trust Fund.
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
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Servicer of mortgage loans under pooling and servicing agreements substantially
similar to each other (including the related Pooling and Servicing Agreement)
was conducted in compliance with the terms of such agreements other than
exceptions that are immaterial and any significant exceptions of errors in
records that, in the opinion of the firm, either the Audit Program for Mortgages
serviced for FHLMC, or paragraph 4 of the Uniform Single Audit Program for
Mortgage Bankers, requires it to report. In rendering its statement such firm
may rely, as to matters relating to the direct servicing of mortgage loans by
Sub-Servicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Audit Program for Mortgage
Bankers or the Audit Program for Mortgages serviced for FHLMC (rendered within
one year of such statement) of firms of independent public accountants with
respect to the related Sub-Servicer.
The Contracts
Each Pooling and Servicing Agreement relating to a Series of Certificates
representing interests in a Contract Pool will provide that on or before a
specified date in each year, beginning with the first such date after the
related Cut-Off Date, a firm of independent public accountants will furnish a
statement to the Trustee to the effect that such firm is of the opinion that the
system of internal accounting controls in effect on the date of such statement
relating to the servicing procedures performed by the Servicer under the Pooling
and Servicing Agreement, taken as a whole, was sufficient for the prevention and
detection of errors and irregularities which would be material to the assets of
the Trust Fund and that nothing has come to their attention that would cause
them to believe that such servicing has not been conducted in compliance with
the provisions of the Pooling and Servicing Agreement, other than such
exceptions as shall be set forth in such report.
Each Pooling and Servicing Agreement will also provide for delivery to the
Trustee annually on or before the specified date therein, a statement signed by
two officers of the Servicer to the effect that the Servicer has fulfilled its
obligations under the Pooling and Servicing Agreement throughout the preceding
year or, if there has been a default in the fulfillment of any such obligation,
describing each such default.
Copies of the annual accountants' statement and the statement of officers
of the Servicer may be obtained by Certificateholders without charge upon
written request to the Servicer at the address of the Servicer set forth in the
related Prospectus Supplement.
Certain Matters Regarding the Servicer and the Depositor
The Servicer may not resign from its obligations and duties under the
Pooling and Servicing Agreement for each Series (other than its duties as
Certificate Registrar for such Series, if it is acting as such), except upon its
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities of a type and nature presently carried on by it. No such
resignation will become effective until the Trustee for such Series or a
successor Servicer has assumed the Servicer's obligations and duties under the
Pooling and Servicing Agreement. If the Servicer resigns for any of the
foregoing reasons and the Trustee is unable or unwilling to assume
responsibility for servicing the Mortgage Loans or Contracts, it may appoint
another institution as Servicer, as described under "The Pooling and Servicing
Agreement -- Rights Upon Event of Default -- Mortgage Loans or Contracts" below.
The Pooling and Servicing Agreement will provide that neither the
Depositor, the Servicer (if the Series of Certificates relates to Mortgage Loans
or Mortgage Contracts) nor any director, officer, employee or agent of either of
them will be under any liability to the Trust Fund or the Certificateholders,
for the taking of any action or for refraining from the taking of any action in
good faith pursuant to the Pooling and Servicing Agreement, or 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
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addition, the Pooling and Servicing Agreement will provide that the Depositor
and the Servicer will not be under any obligation to appear in, prosecute or
defend any legal action that is not incidental to its duties under the Pooling
and Servicing Agreement and that in its opinion may involve it in any expense or
liability. The Depositor and the Servicer may, however, in its discretion,
undertake any such action deemed by it necessary or desirable with respect to
the Pooling and Servicing Agreement and the rights and duties of the parties
thereto and the interests of the Certificateholders thereunder. In such event,
the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund, and the
Servicer will be entitled to be reimbursed therefor out of the Certificate
Account, and any loss to the Trust Fund arising from such right of reimbursement
will be allocated pro rata among the various Classes of Certificates unless
otherwise specified in the applicable Pooling and Servicing Agreement.
Any person into which the Servicer may be merged or consolidated, or any
person resulting from any merger, conversion or consolidation to which the
Servicer is a party, or any person succeeding to the business through the
transfer of substantially all of its assets, or otherwise, of the Servicer will
be the successor of the Servicer under the Pooling and Servicing Agreement for
each Series provided that such successor or resulting entity is qualified to
service mortgage loans for FNMA or FHLMC and that the applicable Rating Agency's
rating of any Certificates for such Series in effect immediately prior to such
event is not adversely affected thereby.
The Servicer also has the right to assign its rights and delegate its
duties and obligations under the Pooling and Servicing Agreement for each Series
(A) in connection with a sale or transfer of a substantial portion of its
mortgage or manufactured housing servicing portfolio; provided that (i) in the
case of a transfer by a Servicer of Mortgage Loans, the purchaser or transferee
accepting such assignment or delegation is qualified to service mortgage loans
for FNMA or FHLMC, (ii) the purchaser or transferee is reasonably satisfactory
to the Depositor and the Trustee for such Series and executes and delivers to
the Depositor and the Trustee an agreement, in form and substance reasonably
satisfactory to the Depositor and the Trustee, which contains an assumption by
such purchaser or transferee of the due and punctual performance and observance
of each covenant and condition to be performed or observed by the Servicer under
the Pooling and Servicing Agreement from and after the date of such agreement;
and (iii) the applicable Rating Agency's rating of any Certificates for such
Series in effect immediately prior to such assignment, sale or transfer is not
qualified, downgraded or withdrawn as a result of such assignment, sale or
transfer or (B) to any affiliate of the Servicer, provided that the conditions
contained in clauses (i) through (iii) above are met. In the case of any such
assignment or delegation, the Servicer will be released from its obligations
under the Pooling and Servicing Agreement except for liabilities and obligations
incurred prior to such assignment and delegation.
THE POOLING AND SERVICING AGREEMENT
Events of Default
Mortgage Loans or Contracts
Events of Default under the Pooling and Servicing Agreement for each
Series of Certificates relating to Mortgage Loans or Contracts include (i) any
failure by the Servicer to remit to the Trustee or to any Paying Agent for
distribution to Certificateholders any required payment which continues
unremedied for 5 days; (ii) any failure by the Servicer duly to observe or
perform in any material respect any other of its covenants or agreements in the
Pooling and Servicing Agreement which continues unremedied for 30 days (or 10
days in the case of a failure to maintain any pool insurance policy required to
be maintained pursuant to the Pooling and Servicing 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.
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Rights Upon Event of Default
Mortgage Loans or Contracts
So long as Event of Default remains unremedied under the Pooling and
Servicing Agreement for a Series of Certificates relating to Mortgage Loans or
Contracts, the Trustee for such Series or holders of Certificates of such Series
evidencing not less than 25% of the Voting Interests in the Trust Fund for such
Series may terminate all of the rights and obligations of the Servicer under the
Pooling and Servicing Agreement and in and to the Mortgage Loans or Contracts
(other than the Servicer's right to recovery of any Initial Deposit for such
Series and other expenses and amounts advanced pursuant to the terms of the
Pooling and Servicing Agreement, which rights the Servicer will retain under all
circumstances), whereupon the Trustee will succeed to all the responsibilities,
duties and liabilities of the Servicer under the Pooling and Servicing Agreement
and will be entitled to monthly servicing compensation not to exceed the
aggregate Servicing Fees, together with the other servicing compensation in the
form of assumption fees, late payment charges or otherwise as provided in the
Pooling and Servicing Agreement. In the event that the Trustee is unwilling or
unable so to act, it may select, pursuant to the private or public bid procedure
described in the applicable Pooling and Servicing Agreement, or petition a court
of competent jurisdiction to appoint, (i) in the case of a Servicer of Mortgage
Loans, a housing and home finance institution, bank or mortgage servicing
institution with a net worth of at least $15,000,000 and which is a FNMA- and
FHLMC-approved seller/servicer or (ii) in the case of a Servicer of Contracts,
an institution with a net worth of at least $15,000,000 which has serviced for
at least one year immediately prior thereto a portfolio of manufactured housing
loans of not less than $100,000,000, to act as successor to the Servicer under
the provisions of the Pooling and Servicing Agreement relating to the servicing
of the Mortgage Loans or Contracts. In the event such public bid procedure is
utilized, the successor Servicer would be entitled to servicing compensation in
an amount equal to the aggregate Servicing Fees, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in the Pooling and Servicing Agreement, and the Servicer
would be entitled to receive the net profits, if any, received from the sale of
its servicing rights and obligations under the Pooling and Servicing Agreement.
During the continuance of any Event of Default under the Pooling and
Servicing Agreement for a Series of Certificates relating to Mortgage Loans or
Contracts, the Trustee for such Series will have the right to take action to
enforce its rights and remedies and to protect and enforce the rights and
remedies of the Certificateholders of such Series, and holders of Certificates
evidencing not less than 25% of the Voting Interests for such Series may direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred upon the Trustee.
However, the Trustee will not be under any obligation to pursue any such remedy
or to exercise any of such trusts or powers unless such Certificateholders have
offered the Trustee reasonable security or indemnity against the costs, expenses
and liabilities which may be incurred by the Trustee thereby. Also, the Trustee
may decline to follow any such direction if the Trustee determines that the
action or proceeding so directed may not lawfully be taken or would be unjustly
prejudicial to the nonassenting Certificateholders or if, under certain
circumstances, the Trustee receives conflicting directions from different groups
of Certificateholders.
No Certificateholders of a Series, solely by virtue of such holder's
status as a Certificateholder, will have any right under the Pooling and
Servicing Agreement for such Series to institute any proceeding with respect to
the Pooling and Servicing Agreement, unless such holder previously has given to
the Trustee for such Series written notice of default and unless the holders of
Certificates evidencing not less than 25% of the Voting Interests for such
Series have made written request upon the Trustee to institute such proceeding
in its own name 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
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therein) as a REMIC at all times that any Certificates are outstanding or to
avoid or modify the risk of the imposition of any tax on the Trust Fund pursuant
to the Code that would be a claim against the Trust Fund, provided that the
Trustee has received an opinion of counsel to the effect that such action is
necessary or desirable to maintain such qualification or to avoid or minimize
the risk of the imposition of any such tax and such action will not, as
evidenced by such opinion of counsel, adversely affect in any material respect
the interests of any Certificateholder, (iv) to change the timing and/or nature
of deposits into the Certificate Account, provided that such change will not, as
evidenced by an opinion of counsel, adversely affect in any material respect the
interests of any Certificateholder and that such change will not adversely
affect the then current rating assigned to any Certificates, as evidenced by a
letter from each Rating Agency to such effect, (v) to add to, modify or
eliminate any provisions therein restricting transfers of certain Certificates,
which are inserted in response to the Code provisions described below under
"Certain Federal Income Tax Consequences -- Federal Income Tax Consequences for
REMIC Certificates -- Taxation of Residual Certificates -- Tax-Related
Restrictions on Transfer of Residual Certificates," or (vi) to make any other
provisions with respect to matters or questions arising under such Pooling and
Servicing Agreement that are not inconsistent with the provisions thereof,
provided that such action will not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of the Certificateholders
of the related Series. The Pooling and Servicing Agreement may also be amended
by the Depositor, the Servicer, where applicable, and the Trustee with the
consent of the holders of Certificates evidencing interests aggregating not less
than 66-2/3% of the Voting Interests evidenced by the Certificates affected
thereby, for the purpose of adding any provisions to or changing in any manner
or eliminating, any of the provisions of such Pooling and Servicing Agreement or
of modifying in any manner the rights of the Certificateholders; provided,
however, that no such amendment may (i) reduce in any manner the amount of, or
delay the timing of, any payments received on or with respect to Mortgage Loans
or Contracts that are required to be distributed on any Certificates, without
the consent of the holder of such Certificate, (ii) adversely affect in any
material respect the interests of the holders of a Class or Subclass of
Certificates of a Series in a manner other than that set forth in clause (i)
above without the consent of the holders of Certificates aggregating not less
than 66-2/3% of the Voting Interests evidenced by such Class or Subclass, or
(iii) reduce the aforesaid percentage of the Certificates, the holders of which
are required to consent to such amendment, without the consent of the holders of
all Certificates of the Class or Subclass affected then outstanding.
Notwithstanding the foregoing, the Pooling and Servicing Agreement may be
amended by the Depositor, the Servicer, where applicable, and the Trustee
provided that such action is approved by holders of Certificates evidencing 100%
of the Percentage Interest of each Class that, as evidenced by an opinion of
counsel, is adversely affected in any material respect by such action. For
purposes of giving any such consent (other than a consent to an action which
would adversely affect in any material respect the interests of the
Certificateholders of any Class, while the Servicer or any affiliate thereof is
the holder of Certificates aggregating not less than 66-2/3% of the Percentage
Interest of such Class), any Certificates registered in the name of the Servicer
or any affiliate thereof shall be deemed not to be outstanding. Notwithstanding
the foregoing, the Trustee will not consent to any such amendment if such
amendment would subject the Trust Fund to tax or cause the Trust Fund (or one or
more segregated pools of assets therein) to fail to qualify as a REMIC.
Termination; Purchase or Other Disposition of Mortgage Loans and Contracts
The obligations created by the Pooling and Servicing Agreement for a
Series of Certificates will terminate upon the earlier of (i) the later of the
final payment or other liquidation of the last Mortgage Loan or Contract subject
thereto and the disposition of all property acquired upon foreclosure of any
such Mortgage Loan or Contract and (ii) any purchase or disposition described in
the following paragraph. In no event, however, will the trust created by the
Pooling and Servicing Agreement continue beyond the expiration of 21 years from
the death of the late survivor of certain persons named in such Pooling and
Servicing Agreement. For each Series of 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
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by the Trustee of an opinion of counsel that such purchase (i) will be part of a
"qualified liquidation" or other evidence as defined in Code Section
860F(a)(4)(A), (ii) will not otherwise subject the Trust Fund (or segregated
asset pool) to tax, or (iii) will not cause the Trust Fund (or segregated asset
pool) to fail to qualify as a REMIC. The exercise of such right or such
disposition will effect early retirement of the Certificates of that Series, but
the right so to purchase may be exercised, or the obligation to sell will arise,
only after the aggregate principal balance of the Mortgage Loans or Contracts
for such Series at the time of purchase is less than a specified percentage of
the aggregate principal balance at the Cut-Off Date for the Series, or after the
date set forth in the related Prospectus Supplement. See "Prepayment and Yield
Considerations."
The Trustee
The Trustee under each Pooling and Servicing Agreement will be named in
the applicable Prospectus Supplement. The commercial bank or trust company
serving as Trustee may have normal banking relationships with the Depositor, the
Servicer or any of their respective affiliates.
With respect to a Series of Certificates relating to Mortgage Loans or
Contracts, the Trustee may resign at any time, in which event the Servicer will
be obligated to appoint a successor trustee. The Servicer (with respect to a
Series of Certificates relating to Mortgage Loans or Contracts) may also remove
the Trustee if the Trustee ceases to be eligible to act as Trustee under the
Pooling and Servicing Agreement, if the Trustee becomes insolvent or in order to
change the situs of the Trust Fund for state-tax reasons. Upon becoming aware of
such circumstances, the Servicer or Depositor, as the case may be, will become
obligated to appoint a successor trustee. The Trustee may also be removed at any
time by the holders of Certificates evidencing not less than 51% of the Voting
Interest in the Trust Fund, except that, any Certificate registered in the name
of the Depositor, the Servicer or any affiliate thereof will not be taken into
account in determining whether the requisite Voting Interest in the Trust Fund
necessary to effect any such removal has been obtained. Any resignation and
removal of the Trustee, and the appointment of a successor trustee, will not
become effective until acceptance of such appointment by the successor trustee.
The Trustee, and any successor trustee, will have a combined capital and
surplus, or shall be a member of a bank holding system with an aggregate
combined capital and surplus, of at least $50,000,000 and will be subject to
supervision or examination by federal or state authorities.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts which are general in nature.
Because such legal aspects are governed by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete nor to
reflect the laws of any particular state, nor to encompass the laws of all
states in which the security for the Mortgage Loans or Contracts is situated.
The summaries are qualified in their entirety by reference to the applicable
federal and state laws governing the Mortgage Loans or Contracts.
The Mortgage Loans
General
The Mortgage Loans will, in general, be secured by either first, second or
more junior mortgages, deeds of trust, or other similar security agreements
depending upon the prevailing practice in the state in which the 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.
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The real property covered by a mortgage is most often the fee estate in
land and improvements. However, a mortgage may encumber other interests in real
property such as a tenant's interest in a lease of land or improvements, or
both, and the leasehold estate created by such lease. A mortgage covering an
interest in real property other than the fee estate requires special provisions
in the instrument creating such interest or in the mortgage to protect the
mortgagee against termination of such interest before the mortgage is paid.
Foreclosure
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right of foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming. After the completion of a judicial foreclosure proceeding, the
court may issue a judgment of foreclosure and appoint a receiver or other
officer to conduct the sale of the property. In some states, mortgages may also
be foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage. Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property to a third party upon any default by the
borrower under the terms of the note or deed of trust. In certain states, such
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other individual
having an interest of record in the real property, including any junior
lienholders. If the deed of trust is not reinstated within any applicable cure
period, a notice of sale must be posted in a public place and, in most states,
published for a specified period of time in one or more newspapers. In addition,
some state be laws require that a copy of the notice of sale be posted on the
property and sent to all parties having an interest of record in the property.
In some states, the borrower-trustor has the right to reinstate the loan
at any time following default until shortly before the trustee's sale. In
general, the borrower, or any other person having, a junior encumbrance on the
real estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
receiver for an amount equal to the unpaid principal amount of the note, accrued
and unpaid interest and the expenses of foreclosure. Thereafter, subject to the
right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender commonly will
obtain the services of a real estate broker and pay the broker a commission in
connection with the 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
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lease or occupancy agreement generally permits the cooperative to terminate such
lease or agreement in the event an obligor fails to make payments or defaults in
the performance of covenants required thereunder. Typically, the lender and the
cooperative enter into a recognition agreement which establishes the rights and
obligations of both parties in the event of a default by the tenant-stockholder
on its obligations under the proprietary lease or occupancy agreement. A default
by the tenant-stockholder under the proprietary lease or occupancy agreement
will usually constitute a default under the security agreement between the
lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on
a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
Foreclosure on the cooperative shares is accomplished by a sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code (the
"UCC") and the security agreement relating to those shares. Article 9 of the UCC
requires that a sale be conducted in a "commercially reasonable" manner. Whether
a foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to the
usual practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
Rights of Redemption
In some states, after sale pursuant to a deed of trust and/or foreclosure
of a mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
most states where the right of redemption is available, statutory redemption may
occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect of
a right of redemption is to diminish the ability of the lender to sell the
foreclosed 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
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rights of the senior mortgagee to receive hazard insurance and condemnation
proceeds and to cause the property securing the Mortgage Loan to be sold upon
default of the mortgagor or trustor, thereby extinguishing the junior
mortgagee's or junior beneficiary's lien unless the junior mortgagee or junior
beneficiary asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage or deed of
trust. As discussed more fully below, a junior mortgagee or junior beneficiary
may satisfy a defaulted senior loan in full and, in some states, may cure such
default and loan. In most states, no notice of default is required to be given
to a junior mortgagee or junior beneficiary and junior mortgagees or junior
beneficiaries are seldom given notice of defaults or senior mortgages. In order
for a foreclosure action in some states to be effective against a junior
mortgagee or junior beneficiary, the junior mortgagee or junior beneficiary must
be named in any foreclosure action, thus giving notice to junior lienors. It is
standard practice of the Sellers to protect their interest by attending any sale
of which they have notice or appearing and bidding for, or redeeming, the
property if it is in their best interest to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, (including the sellers) confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event the
property is taken by condemnation, the mortgagee or beneficiary under any
underlying senior mortgages will have the prior right to collect and apply any
insurance proceeds payable under a hazard insurance policy to restore or repair
the property if feasible, and to collect any remaining insurance proceeds or any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages or deeds of trust. Proceeds in
excess of the amount of senior mortgage indebtedness, in most cases, may be
applied to the indebtedness of a junior mortgage or trust deed.
The form of mortgage or deed of trust used by most institutional lenders
typically contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage or deed of trust. The
priority of any advance made under the clause depends, in some states, on
whether the advance was an "obligatory" or "optional" advance. If the mortgagee
or beneficiary is obligated to advance the additional amounts, the advance is
entitled to receive the same priority as amounts initially advanced under the
mortgage or deed of trust, notwithstanding the fact that there may be junior
mortgages or deeds of trust and other liens which intervene between the date of
recording of the mortgage or deed of trust and the date of the future advance,
and, in some states, notwithstanding that the mortgagee or beneficiary had
actual knowledge of such intervening junior mortgages or deeds of trust and
other liens at the time of the advance. Where the mortgagee or beneficiary is
not obligated to advance additional amounts or, in some states, has actual
knowledge of the intervening junior mortgages or deeds of trust and other liens,
the advance will be subordinate to such intervening junior mortgages or deeds of
trust and other liens. Priority of advances under a "future advance" cause
rests, in some states, on state statutes giving priority to all advances made
under the loan agreement to a "credit limit" amount stated in the recorded
mortgage.
Another provision sometimes included in the form of the mortgage or deed
of trust used by institutional lenders (and included in some of the forms used
by the Sellers) obligates the mortgagor or trustor to pay, before delinquency,
all taxes and assessments on the property and, when due, all encumbrances,
charges and liens on the property which appear prior to the mortgage or deed of
trust, to provide and maintain fire insurance on the property, to maintain and
repair the property and not to commit or permit any waste thereof, and to appear
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
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to obtain a deficiency judgment against the borrower following foreclosure or
sale under a deed of trust. A deficiency judgment is a personal judgment against
the former borrower equal in most cases to the difference between the amount due
to the lender and the net amount realized upon the foreclosure sale.
Some state statutes may require the beneficiary or mortgagee to exhaust
the security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided
for in certain instances where the value of the lender's security has been
impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement and foreclosure on the
beneficial interest in a land trust. Some courts have interpreted section 9-504
of the UCC to prohibit a deficiency award unless the creditor establishes that
the sale of the collateral (which, in the case of a Mortgage Loan secured by
shares of a cooperative, would be such shares and the related proprietary lease
or occupancy agreement) was conducted in a commercially reasonable manner.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security. For example, in a Chapter
13 proceeding under the Federal Bankruptcy Code, when a court determines that
the value of a home is less than the principal balance of the loan, the court
may prevent a lender from foreclosing on the home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the value
of the home as it exists at the time of the proceeding, leaving the lender as a
general unsecured creditor for the difference between that value and the amount
of outstanding indebtedness. A bankruptcy court may grant the debtor a
reasonable time to cure a payment default, and in the case of a mortgage loan
not secured by the debtor's principal residence, also may reduce the monthly
payments due under such mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule. Certain court decisions have applied such
relief to claims secured by the debtor's principal residence.
The Internal Revenue Code of 1986, as amended, provides priority to
certain tax liens over the lien of the mortgage or deed of trust. The laws of
some states provide priority to certain tax liens over the lien of the mortgage
of deed of trust. Certain environmental protection laws may also impose
liability for cleanup expenses 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
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in the property. In recent years, court decisions and legislative actions placed
substantial restrictions on the right of lenders to enforce such clauses in many
states. However, effective October 15, 1982, Congress enacted the Garn-St
Germain Depository Institutions Act of 1982 (the "Act") which purports to
preempt state laws which prohibit the enforcement of "due-on-sale" clauses by
providing among other matters, that "due-on-sale" clauses in certain loans
(which loans may include the Mortgage Loans) made after the effective date of
the Act are enforceable, within certain limitations as set forth in the Act and
the regulations promulgated thereunder. "Due-on-sale" clauses contained in
mortgage loans originated by federal savings and loan associations or federal
savings banks are fully enforceable pursuant to regulations of the Office of
Thrift Supervision ("OTS"), as successor to the Federal Home Loan Bank Board
("FHLBB"), which preempt state law restrictions on the enforcement of such
clauses. Similarly, "due-on-sale" clauses in mortgage loans made by national
banks and federal credit unions are now fully enforceable pursuant to preemptive
regulations of the Office of the Comptroller of the Currency and the National
Credit Union Administration, respectively.
The Act created a limited exemption from its general rule of
enforceability for "due-on-sale" clauses in certain mortgage loans ("Window
Period Loans") which were originated by non-federal lenders and made or assumed
in certain states ("Window Period States") during the period, prior to October
15, 1982, in which that state prohibited the enforcement of "due-on-sale"
clauses by constitutional provision, statute or statewide court decision (the
"Window Period"). Though neither the Act nor the FHLBB regulations promulgated
thereunder actually names the Window Period States, FHLMC has taken the
position, in prescribing mortgage loan servicing standards with respect to
mortgage loans which it has purchased, that the Window Period States were:
Arizona, Arkansas, California, Colorado, Georgia, Iowa, Michigan, Minnesota, New
Mexico, Utah and Washington. Under the Act, unless a Window Period State took
action by October 15, 1985, the end of the Window Period, to further regulate
enforcement of "due-on-sale" clauses in Window Period Loans, "due-on-sale"
clauses would become enforceable even in Window Period Loans. Five of the Window
Period States (Arizona, Minnesota, Michigan, New Mexico and Utah) have taken
actions which restrict the enforceability of "due-on-sale" clauses in Window
Period Loans beyond October 15, 1985. The actions taken vary among such states.
By virtue of the Act, the Servicer may generally be permitted to
accelerate any conventional Mortgage Loan which contains a "due-on-sale" clause
upon transfer of an interest in the property subject to the mortgage or deed of
trust. With respect to any Mortgage Loan secured by a residence occupied or to
be occupied by the borrower, this ability to accelerate will not apply to
certain types of transfers, including (i) the granting of a leasehold interest
which has a term of three years or less and which does not contain an option to
purchase, (ii) a transfer to a relative resulting from the death of a borrower,
or a transfer where the spouse or children becomes an owner of the property in
each case where the transferee(s) will occupy the property, (iii) a number
resulting from a decree of dissolution of marriage, legal separation agreement
or from an incidental property settlement agreement by which the spouse becomes
an owner of the property, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the property (provided that such lien or
encumbrance is not created pursuant to a contract for deed), (v) a transfer by
devise, descent or operation of law on the death of a joint tenant or tenant by
the entirety, and (vi) other transfers as set forth in the Act and the
regulations thereunder. The extent of the effect of the Act on the average lives
and delinquency rates of the Mortgage Loans cannot be predicted. See "Prepayment
and Yield Considerations."
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
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to the Depositor were originated in full compliance with applicable state laws,
including usury laws. See "The Trust Funds -- Representations and Warranties."
Adjustable Rate Loans
The laws of certain states may provide that mortgage notes relating to
adjustable rate loans are not negotiable instruments under the Uniform
Commercial Code. In such event, the Trustee will not be deemed to be a "holder
in due course" within the meaning of the Uniform Commercial Code and may take
such a mortgage note subject to certain restrictions on its ability to foreclose
and to certain contractual defenses available to a mortgagor.
Enforceability of Certain Provisions
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under the Pooling and Servicing Agreement, late charges and prepayment
fees (to the extent permitted by law and not waived by the Servicer) will be
retained by the Servicer as additional servicing compensation.
Courts have Unposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial remedies
that may be fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have sustained their judgment for the lender's judgment
and have required lenders to reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from temporary financial disability. In
some cases, courts have limited the right of lenders to foreclose if the default
under the mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second mortgage or
deed of trust affecting the property. In other cases, some courts have been
faced with the issue whether federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
deeds of trust receive notices in addition to the statutorily-prescribed minimum
requirements. For the most part, these cases have upheld the notice provisions
as being reasonable or have found that the sale by a trustee under a deed of
trust or under a mortgage having a power of sale does not involve sufficient
state action to afford constitutional protections to the borrower.
The Contracts
General
As a result of the assignment of the Contracts to the Trustee, the Trust
Fund will succeed collectively to all of the rights (including the right to
receive payment on the Contracts) and will assume the 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.
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Security Interests in the Manufactured Homes
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some non-title states, perfection pursuant
to the provisions of the UCC is required. The Servicer may effect such notation
or delivery of the required documents and fees, and obtain possession of the
certificate of title, as appropriate under the laws of the state in which any
manufactured home securing a manufactured housing conditional sales contract is
registered. In the event the Servicer fails, due to clerical errors, to effect
such notation or delivery, or files the security interest under the wrong law
(for example, under a motor vehicle title statute rather than under the UCC, in
a few states), the Certificateholders may not have a first priority security
interest in the Manufactured Home securing a Contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the secured party must file either a "fixture filing" under the provisions
of the UCC or a real estate mortgage under the real estate laws of the state
where the home is located. These filings must be made in the real estate records
office of the county where the home is located. Substantially all of the
Contracts contain provisions prohibiting the borrower from permanently attaching
the Manufactured Home to its site. So long as the borrower does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to its site,
other parties could obtain an interest in the Manufactured Home which is prior
to the security interest originally retained by the Unaffiliated Seller and
transferred to the Depositor. With respect to a Series of Certificates and if so
described in the related Prospectus Supplement, the Servicer may be required to
perfect a security interest in the Manufactured Home under applicable real
estate laws. The Servicer will represent that at the date of the initial
issuance of the related Certificates it has obtained a perfected first priority
security interest by proper notation or delivery of the required documents and
fees with respect to substantially all of the Manufactured Homes securing the
Contracts.
The Depositor will cause the security interests in the Manufactured Homes
to be assigned to the Trustee on behalf of the Certificateholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Depositor
nor the Trustee will amend the certificates of title to identify the Trustee or
the Trust Fund as the new secured party, and neither the Depositor nor the
Servicer will deliver the certificates of title to the Trustee or note thereon
the interest of the Trustee. Accordingly, the Servicer (or the Unaffiliated
Seller) which continue to be named as the secured party on the certificates of
title relating to the Manufactured Homes. In many states, such assignment is an
effective conveyance of such security interest without amendment of any lien
noted on the related certificate of title and the new secured party succeeds to
the Depositor's rights as the secured party. However, in some states there
exists a risk that, in the absence of an amendment to the certificate of title,
such assignment of the security interest in the Manufactured Home might not be
effective or perfected or that, in the absence of such 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.
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In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and not
re-register the Manufactured Home in such state, and if steps are not taken to
re-perfect the Trustee's security interest in such state, the security interest
in the Manufactured Home would cease to be perfected. A majority of states
generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien, the
Servicer would receive notice of surrender if the security interest in the
Manufactured Home is noted on the certificate of title. Accordingly, the Trustee
would have the opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing conditional sales contracts, the Servicer takes steps to effect such
re-perfection upon receipt of notice of registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a manufactured home, the Trustee (or
its custodian) must surrender possession of the certificate of title or the
Servicer will receive notice as a result of its lien noted thereon and
accordingly will have an opportunity to require satisfaction of the related
manufactured housing conditional sales contract before release of the lien.
Under the Pooling and Servicing Agreement, the Servicer is obligated to take
steps, at the Servicer's expense, as are necessary to maintain perfection of
security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufacturer Home and liens for personal property taxes take priority over a
perfected security interest. The Unaffiliated Seller will represent in the
Pooling and Servicing Agreement that it has no knowledge of any such liens with
respect to any Manufactured Home securing payment on any Contract. However, such
liens could arise at any time during the term of a Contract. No notice will be
given to the Trustee or Certificateholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes
The Servicer on behalf of the Trustee, to the extent required by the
related Pooling and Servicing Agreement, may take action to enforce the
Trustee's security interest with respect to Contracts in default by repossession
and resale of the Manufactured Homes securing such defaulted Contracts. So long
as the Manufactured Home has not become subject to the real estate law, a
creditor can repossess a Manufactured Home securing a Contract by voluntary
surrender, by "self-help" repossession that is "peaceful" (i.e., without breach
of the peace) or, in the absence of voluntary surrender and the ability to
repossess without breach of the peace, by judicial process. The holder of a
Contract must give the debtor a number of days' notice, which varies from 10 to
30 days depending on the state, prior to commencement of any repossession. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states also
requires that the debtor be given notice of any sale prior to resale of the unit
so that the debtor may redeem at or before such resale. In the event of such
repossession and resale of a Manufactured Home, the Trustee would be entitled to
be paid out of the sale proceeds 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.
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Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debted thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the obligor also may be able to asset
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
Contract.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer that is not consented to.
In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St Germain Depository Institutions Act of 1982
preempts, subject to certain exceptions and conditions, state laws prohibiting
enforcement of "due-on-sale" clauses applicable to the Manufactured Homes.
Consequently, in some states the Servicer may be prohibited from enforcing a
"due-on-sale" clause in respect of certain Manufactured Homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that, subject to the following
conditions, state usury limitations shall not apply to any loan which is secured
by a first lien on certain kinds of manufactured housing. The Contracts would be
covered if they satisfy certain conditions, among other things, governing the
terms of any prepayments, late charges and deferral fees and requiring a 30-day
notice period prior to instituting any action leading to repossession of the
related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, and state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The Unaffiliated Seller will represent that all of the Contracts comply with
applicable usury law.
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
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obligation to repurchase the Contract in the event an obligor is successful in
asserting such a claim, and (ii) such person, the Servicer or the Trustee were
unsuccessful in asserting any claim of contribution or subrogation on behalf of
the Certificateholders against the manufacturer or other persons who were
directly liable to the plaintiff for the damages. Typical products liability
insurance policies held by manufacturers and component suppliers of manufactured
homes may not cover liabilities arising from formaldehyde in manufactured
housing, with the result that recoveries from such manufacturers, suppliers or
other persons may be limited to their corporate assets without the benefit of
insurance.
Installment Contracts
Mortgage Loans and Contracts
The Mortgage Loan and Contracts may also consist of Installment Contracts.
Under an Installment Contract the seller (hereinafter referred to in this
Section as the "lender") retains legal title to the property and enters into an
agreement with the purchaser (hereinafter referred to in this Section as the
"borrower" for the payment of the purchase price, plus interest, over the term
of such contract. Only after full performance by the borrower of the contract is
the lender obligated to convey title to the real estate to the purchaser. As
with mortgage or deed of trust financing, during the effective period of the
Installment Contract, the borrower is generally responsible for maintaining the
property in good condition and for paying real estate taxes, assessments and
hazard insurance premiums associated with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated, and
the buyer's equitable interest in the property is forfeited. The lender in such
a situation does not have to foreclosure in order to obtain title to the
property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of forfeiture.
Under such statute, a judicial or nonjudicial foreclosure may be required, the
lender may be required to give notice of default and the borrower may be granted
some grace period during which the contract may be reinstated upon full payment
of the default amount and the borrower may have a post-foreclosure statutory
redemption right. In other states, courts in equity may permit a borrower with
significant investment in the property under an Installment Contract for the
sale of real estate to share in the proceeds of sale of the property after the
indebtedness is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an Installment Contract for the sale of real
estate in a given state are simpler and less time-consuming and costly than are
the procedures for foreclosing and obtaining clear title to a mortgaged
property.
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
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of a Mortgaged Property as collateral for a Mortgage Loan could therefore be
adversely affected by the existence of any such Environmental Condition.
The state of the law is currently unclear as to whether and under what
circumstances clean-up costs, or the obligation to take remedial actions, could
be Unposed on a secured lender such as the Trust Fund. Under the laws of some
states and under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), a lender may be liable as an
"owner or operator" for costs of addressing releases or threatened releases of
hazardous substances on a mortgaged property if such lender or its agents or
employees have participated in the management of the operations of the borrower,
even though CERCLA's definition of "owner or operator," however, is a person
"who without participating in the management of the facility, holds indicia of
ownership primarily to protect his security interest" (the "secured-creditor
exemption"). This exemption for holders of a security interest such as a secured
lender applies only when the lender seeks to protect its security interest in
the contaminated facility or property. Thus, if a lender's activities begin to
encroach on the actual management of such facility or property, the lender faces
potential liability as an "owner or operator" under CERCLA. Similarly, when a
lender forecloses and takes title to a contaminated facility or property
(whether it holds the facility or property as an investment or leases it to a
third party), the lender may incur potential CERCLA liability.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly contained
CERCLA's secured-creditor exemption. The court held that a lender need not have
involved itself in the day-to-day operations of the facility or participated in
decisions relating to hazardous waste to be liable under CERCLA; rather,
liability could attach to a lender if its involvement with the management of the
facility is broad enough to support the inference that the lender had the
capacity to influence the borrower's treatment of hazardous waste. The court
added that a lender's capacity to influence such decisions could be inferred
from the extent of its involvement in the facility's financial management. A
subsequent decision by the United States Court of Appeals for the Ninth Circuit
in In re Bergsoe Metal Corp., disagreeing with the Fleet Factors court, held
that a secured lender had no liability absent "some actual management of the
facility" on the part of the lender. On April 29, 1992, the United States
Environmental Protection Agency (the "EPA") issued a final rule interpreting and
delineating CERCLA's secured-creditor exemption. The final rule defines a
specific the range of permissible actions that may be undertaken by a holder of
a contaminated facility without exceeding the bounds of the secured-creditor
exemption. Issuance of this rule by the EPA under CERCLA would not necessarily
affect the potential for liability in actions by either a state or a private
party under CERCLA or in actions under other federal or state laws which may
impose liability on "owners or operators" but do not incorporate the
second-creditor exemption.
If a lender is or becomes liable for clean-up costs, it may bring an
action for contribution against the current owners or operators, the owners or
operators at the time of on-site disposal activity or any other party who
contributed to the environmental hazard, but such persons or entities may be
bankrupt or otherwise judgment proof. Furthermore, such action against the
borrower may be adversely affected by the limitations on recourse in the
documents in the Mortgage Document File. Similarly, in some states
anti-deficiency legislation and other statues requiring the lender to exhaust
its security before bringing a personal action against the borrower-trustor (see
"Anti-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
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of active duty status. Thus, in the event that such a Mortgage Loan or Contract
goes into default, there may be delays and losses occasioned by the inability to
realize upon the Mortgaged Property or Manufactured Home in a timely fashion.
Type of Mortgaged Property
The lender may be subject to additional risk depending upon the type and
use of the Mortgaged Property in question. For instance, Mortgaged Properties
which are hospitals, nursing homes or convalescent homes may present special
risks to lenders in large part due to significant governmental regulation of the
operation, maintenance, control and financing of health care institutions.
Mortgages on Mortgaged Properties which are owned by the Borrower under a
condominium form of ownership are subject to the declaration, by-laws and other
rules and regulations of the condominium association. Mortgaged Properties which
are hotels or motels may present additional risk to the lender in that: (i)
hotels and motels are typically operated pursuant to franchise, management and
operating agreements which may be terminable by the operator; and (ii) the
transferability of the hotel's operating, liquor and other licenses to the
entity acquiring the hotel either through purchase or foreclosure is subject to
the vagaries of local law requirements. In addition, Mortgaged Properties which
are multifamily residential properties may be subject to rent control laws,
which could impact the future cash flows of such properties. Finally, Mortgaged
Properties which are financed in the installment sales contract method may leave
the holder of the note exposed to tort and other claims as the true owner of the
property which could impact the availability of cash to pass through to
investors.
Certain Matters Relating to Insolvency
The Unaffiliated Seller of the Mortgage Loans or Contracts and the
Depositor intend that the transfer of such Mortgage Loans or Contracts to the
Trust Fund constitute a sale rather for a pledge of the Mortgage Loans or
Contracts to secure indebtedness of the seller of the Mortgage Loans or
Contracts. However, if the Unaffiliated Seller were to become a debtor under the
federal bankruptcy code or be placed in a conservatorship or receivership under
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), as the case may be, it is possible that a creditor, receiver,
conservator or trustee-in-bankruptcy of such seller may argue that the sale of
the Mortgage Loans or Contracts by the Unaffiliated Seller is a pledge of the
Mortgage Loans or Contracts rather than a sale. This position, if argued or
accepted by a court, could result in a delay in or reduction of distributions to
the related Certificateholders.
Under FIRREA the FDIC as receiver or conservator of a Servicer subject to
its jurisdiction may enforce a contract notwithstanding any provision of the
contract providing for termination thereof by reason of the insolvency of, or
appointment of a receiver or conservator for, the Servicer. Consequently,
provisions in a Pooling and Servicing Agreement providing for an Event of
Default upon certain events of insolvency, receivership or conservatorship of
the Servicer may not be enforceable against the FDIC as receiver or conservator
to the extent that the exercise of such rights is based solely upon the
insolvency of or appointment of a receiver or conservator for the Servicer. In
addition, the FDIC may transfer the assets and liabilities of an institution in
receivership or conservatorship to another institution.
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
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the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule, and reducing the lender's security interest to the value of
the residence, thus leaving the lender in the position of a general unsecured
creditor for the difference between the value of the residence and the
outstanding balance of the loan.
Federal bankruptcy law may also interfere with or affect the ability of
the secured mortgage lender to enforce an assignment by a mortgagor of rent and
leases related to the Mortgaged Property if the related mortgagor is in a
bankruptcy proceeding. Under Section 362 of the Bankruptcy Code, the mortgagee
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue can be time-consuming and may result in
significant delays in the receipt of the rents. Rents may also escape an
assignment thereof (i) if the assignment is not fully perfected under state law
prior to commencement of the bankruptcy proceeding, (ii) to the extent such
rents are used by the borrower to maintain the mortgaged property, or for other
court authorized expenses, or (iii) to the extent other collateral may be
substituted for the rents.
To the extent a mortgagor's ability to make payment on a mortgage loan is
dependent on payments under a lease of the related property, such ability may be
impaired by the commencement of a bankruptcy proceeding relating to a lessee
under such lease. Under the federal bankruptcy laws, the filing of a petition in
bankruptcy by or on behalf of a lessee results in a stay in bankruptcy against
the commencement or continuation of any state court proceeding for past due
rent, for accelerated rent, for damages or for a summary eviction order with
respect to a default under the lease that occurred prior to the filing of the
lessee's petition.
In addition, federal bankruptcy law generally provides that a trustee or
debtor in possession in a bankruptcy or reorganization case under the Bankruptcy
Code may, subject to approval of the court (a) assume the lease and retain it or
assign it to a third party or (b) reject the lease. If the lease is assumed, the
trustee or debtor in possession (or assignee, if applicable) must cure any
defaults under the lease, compensate the lessor for its losses and provide the
lessor with "adequate assurance" of future performance. Such remedies may be
insufficient, however, as the lessor may be forced to continue under the lease
with a lessee that is a poor credit risk or an unfamiliar tenant if the lease
was assigned, and any assurances provided to the lessor may, in fact, be
inadequate. Furthermore, there is likely to be a period of time between the date
upon which a lessee files a bankruptcy petition and the date upon which the
lease is assumed or rejected. Although the lessee is obligated to make all lease
payments currently with respect to the post-petition period, there is a risk
that such payments will not be made due to the lessee's poor financial
condition. If the lease is rejected, the lessor will be treated as an unsecured
creditor with respect to its claim for damages for termination of the lease and
the mortgagor must release the mortgage property before the flow of lease
payments will recommence. In addition, pursuant to Section 502(b)(6) of the
Bankruptcy Code, a lessor's damages for lease rejection are limited by a
formula.
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.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of the material anticipated federal
income tax consequences to investors of the purchase, ownership and disposition
of the Securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Securities. For purposes of this
discussion, references to a "Securityholder" or a "Holder" are to the beneficial
owner of a Security.
The following discussion addresses securities of three general types: (i)
securities ("Grantor Trust Securities") representing interests in a Trust Estate
(a "Grantor Trust Estate") which the Sponsor will covenant not to elect to have
treated as a real estate mortgage investment conduit ("REMIC"); (ii) securities
("REMIC Securities") representing interests in a Trust Estate, or a portion
thereof, which the Sponsor will covenant to elect to have treated as a REMIC
under sections 860A through 860G of the Internal Revenue Code of 1986, as
amended (the "Code"); and (iii) securities ("Debt Securities") that are intended
to be treated for federal income tax purposes as indebtedness secured by the
underlying Mortgage Loans. This Prospectus does not address the tax treatment of
partnership interests or interests in a FASIT. Such a discussion will be set
forth in the related Prospectus Supplement for any Trust issuing Securities
characterized as partnership interests or interests in a FASIT. The Prospectus
Supplement for each series of Securities will indicate whether a REMIC or FASIT
election (or elections) will be made for the related Trust Estate and, if a
REMIC or FASIT election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC or all "regular interests," "high-yield
interests" or "ownership interest" in the FASIT. Pursuant to the Small Business
Job Protection Act of 1996, enacted on August 20, 1996 (the "1996 Act"), a FASIT
election can be made on or after September 1, 1997.
Grantor Trust Securities
With respect to each series of Grantor Trust Securities, special tax
counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless
otherwise limited in the related Prospectus Supplement) the related Grantor
Trust Estate will be classified as a grantor trust and not as a partnership or
an association taxable as a corporation. Accordingly, each Holder of a Grantor
Trust Security will generally be treated as the owner of an interest in the
Mortgage Loans included in the Grant or Trust Estate.
For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Estate, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Security." A Grantor Trust Security representing ownership
of all or a portion of the difference between interest paid on the Mortgage
Loans constituting the related Grantor Trust Estate and interest paid to the
Holders of Grantor Trust Fractional Interest Securities issued with respect to
such Grantor Trust Estate will be referred to as a "Grantor Trust Strip
Security."
Special Tax Attributes
Unless otherwise disclosed in a related Prospectus Supplement, special tax
counsel to the Sponsor, will deliver its opinion to the Sponsor that (a) Grantor
Trust Fractional Interest Securities will represent interests in (i) "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.
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The 1996 Act repeals the bad debt reserve method of accounting for mutual
savings banks and domestic building and loan associations for tax years
beginning after December 31, 1995. As a result, section 593(d) of the Code is no
longer applicable to treat the Certificates as "qualifying real property loans."
Taxation of Holders of Grantor Trust Securities
Holders of Grantor Trust Fractional Interest Securities generally will be
required to report on their federal income tax returns their respective shares
of the income from the Mortgage Loans (including amounts used to pay reasonable
servicing fees and other expenses but excluding amounts payable to Holders of
any corresponding Grantor Trust Strip Securities) and, subject to the
limitations described below, will be entitled to deduct their shares of any such
reasonable servicing fees and other expenses. If a Holder acquires a Grantor
Trust Fractional Interest Security for an amount that differs from its
outstanding principal amount, the amount includible in income on a Grantor Trust
Fractional Interest Security may differ from the amount of interest
distributable thereon. See "--Discount and Premium," below. Individuals holding
a Grantor Trust Fractional Interest Security directly or through certain
pass-through entities will be allowed a deduction for such reasonable servicing
fees and expenses only to the extent that the aggregate of such Holder's
miscellaneous itemized deductions exceeds 2% of such Holder's adjusted gross
income. Further, Holders (other than corporations) subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining
alternative minimum taxable income.
Holders of Grantor Trust Strip Securities generally will be required to
treat such Securities as "stripped coupons" under section 1286 of the Code.
Accordingly, such a Holder will be required to treat the excess of the total
amount of payments on such a Security over the amount paid for such Security as
original issue discount and to include such discount in income as it accrues
over the life of such Security. See "--Discount and Premium," below.
Grantor Trust Fractional Interest Securities may also be subject to the
coupon stripping rules if a class of Grantor Trust Strip Securities is issued as
part of the same series of Securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of such a Security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the Holder's income as
it accrues (regardless of the Holder's method of accounting), as described below
under "--Discount and Premium." The coupon stripping rules will not apply,
however, if (i) the pass-through rate is no more than 100 basis points lower
than the gross rate of interest payable on the underlying Mortgage Loans and
(ii) the difference between the outstanding principal balance on the Security
and the amount paid for such Security is less than 0.25% of such principal
balance times the weighted average remaining maturity of the Security.
Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a Grantor Trust Security (equal
to the difference between the amount realized on the sale and the adjusted basis
of such Grantor Trust Security) will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and in the case of banks and other financial institutions
except as provided under section 582(c) of the Code. The adjusted basis of a
Grantor Trust Security will generally equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions of principal.
Grantor Trust Reporting
The Trustee will furnish to each Holder of a Grantor Trust Fractional
Interest Security with each distribution a statement setting forth the amount of
such distribution allocable to principal on the underlying Mortgage Loans and to
interest thereon at the related Pass-Through Rate. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the Master Servicer, the Trustee will furnish to each Holder during
such year such customary factual information as the Master Servicer deems
necessary or desirable to enable Holders of Grantor Trust Securities to prepare
their tax returns and will furnish comparable information to the Internal
Revenue Service (the "IRS") as and when required to do so by law.
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REMIC Securities
If provided in a related Prospectus Supplement, an election will be made
to treat a Trust Estate as a REMIC under the Code. Qualification as a REMIC
requires ongoing compliance with certain conditions. With respect to each series
of Securities for which such an election is made, special tax counsel to the
Sponsor, will deliver its opinion to the Sponsor that (unless otherwise limited
in the related Prospectus Supplement), assuming compliance with the Pooling and
Servicing Agreement, the Trust Estate will be treated as a REMIC for federal
income tax purposes. A Trust Estate for which a REMIC election is made will be
referred to herein as a "REMIC Trust." The Securities of each class will be
designated as "regular interests" in the REMIC Trust except that a separate
class will be designated as the "residual interest" in the REMIC Trust. The
Prospectus Supplement for each series of Securities will state whether
Securities of each class will constitute a regular interest (a "REMIC Regular
Security") or a residual interest (a "REMIC Residual Security").
A REMIC Trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in certain other instances
described below. See "-Taxes on a REMIC Trust." Generally, the total income from
the Mortgage Loans in a REMIC Trust will be taxable to the Holders of the
Securities of that series, as described below.
Regulations issued by the Treasury Department (the "REMIC Regulations")
provide some guidance regarding the federal income tax consequences associated
with the purchase, ownership and disposition of REMIC Securities. While certain
material provisions of the REMIC Regulations are discussed below, investors
should consult their own tax advisors regarding the possible application of the
REMIC Regulations in their specific circumstances.
Special Tax Attributes
REMIC Regular Securities and REMIC Residual Securities will be "regular or
residual interests in a REMIC" within the meaning of section 7701(a)(19)(C)(xi)
of the Code and "real estate assets" within the meaning of section 856(c)(5)(A)
of the Code. If at any time during a calendar year less than 95% of the assets
of a REMIC Trust consist of "qualified mortgages" (within the meaning of section
860G(a)(3) of the Code) then the portion of the REMIC Regular Securities and
REMIC Residual Securities that are qualifying assets under those sections during
such calendar year may be limited to the portion of the assets of such REMIC
Trust that are qualified mortgages. Similarly, income on the REMIC Regular
Securities and REMIC Residual Securities will be treated as "interest on
obligations secured by mortgages on real property" within the meaning of section
856(c)(3)(B) of the Code, subject to the same limitation as set forth in the
preceding sentence. For purposes of applying this limitation, a REMIC Trust
should be treated as owning the assets represented by the qualified mortgages.
The assets of the Trust Estate will include, in addition to the Mortgage Loans,
payments on the Mortgage Loans held pending distribution on the REMIC Regular
Securities and REMIC Residual Securities and any reinvestment income thereon.
REMIC Regular Securities and REMIC Residual Securities held by a financial
institution to which section 585, 586 or 593 of the Code applies will be treated
as evidences of indebtedness for purposes of section 582(c)(1) of the Code.
REMIC Regular Securities will also be qualified mortgages with respect to other
REMICs.
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 interests in the
REMIC Trust or its assets. Holders of REMIC Regular Securities that otherwise
report income under a cash method of accounting will be required to report
income with respect to such Securities under an accrual method. For additional
tax consequences relating to REMIC Regular Securities purchased at a discount or
with premium, see "--Discount and Premium," below.
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Taxation of Holders of REMIC Residual Securities
Daily Portions. Except as indicated below, a Holder of a REMIC Residual
Security for a REMIC Trust generally will be required to report its daily
portion of the taxable income or net loss of the REMIC Trust for each day during
a calendar quarter that the Holder owned such REMIC Residual Security. For this
purpose, the daily portion shall be determined by allocating to each day in the
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC Trust for such quarter and by allocating the amount so allocated among the
Residual Holders (on such day) in accordance with their percentage interests on
such day. Any amount included in the gross income or allowed as a loss of any
Residual Holder by virtue of this paragraph will be treated as ordinary income
or loss.
The requirement that each Holder of a REMIC Residual Security report its
daily portion of the taxable income or net loss of the REMIC Trust will continue
until there are no Securities of any class outstanding, even though the Holder
of the REMIC Residual Security may have received full payment of the stated
interest and principal on its REMIC Residual Security.
The Trustee will provide to Holders of REMIC Residual Securities of each
series of Securities (i) such information as is necessary to enable them to
prepare their federal income tax returns and (ii) any reports regarding the
Securities of such series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net
loss of a REMIC Trust will be the income from the qualified mortgages it holds
and any reinvestment earnings less deductions allowed to the REMIC Trust. Such
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with certain modifications. The
first modification is that a deduction will be allowed for accruals of interest
(including any original issue discount, but without regard to the investment
interest limitation in section 163(d) of the Code) on the REMIC Regular
Securities (but not the REMIC Residual Securities), even though REMIC Regular
Securities are for non-tax purposes evidences of beneficial ownership rather
than indebtedness of a REMIC Trust. Second, market discount or premium equal to
the difference between the total stated principal balances of the qualified
mortgages and the basis to the REMIC Trust therein generally will be included in
income (in the case of discount) or deductible (in the case of premium) by the
REMIC Trust as it accrues under a constant yield method, taking into account the
"Prepayment Assumption" (as defined in the Related Prospectus Supplement, see
"--Discount and Premium--Original Issue Discount," below). The basis to a REMIC
Trust in the qualified mortgages is the aggregate of the issue prices of all the
REMIC Regular Securities and REMIC Residual Securities in the REMIC Trust on the
Settlement Date. If, however, a substantial amount of a class of REMIC Regular
Securities or REMIC Residual Securities has not been sold to the public, then
the fair market value of all the REMIC Regular Securities or REMIC Residual
Securities in that class as of the date of the Prospectus Supplement should be
substituted for the issue price.
Third, no item of income, gain, loss or deduction allocable to a
prohibited transaction (see "--Taxes on a REMIC Trust--Prohibited Transactions"
below) will be taken into account. Fourth, a REMIC Trust generally may not
deduct any item that would not be allowed in calculating the taxable income of a
partnership by virtue of section 703(a)(2) of the Code. Finally, the limitation
on miscellaneous itemized deductions imposed on individuals by section 67 of the
Code will not be applied at the REMIC Trust level to any servicing and guaranty
fees. (See, however, "--Pass-Through of Servicing and Guaranty Fees to
Individuals" below.) In addition, under the REMIC Regulations, any expenses that
are incurred in connection with the formation of a REMIC Trust and the issuance
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
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issued at a discount, and the discount included as a result of a prepayment on a
Mortgage Loan that is used to pay principal on the REMIC Regular Securities
exceeds the REMIC Trust's deduction for unaccrued original issue discount
relating to such REMIC Regular Securities. Taxable income may also be greater in
earlier years because interest expense deductions, expressed as a percentage of
the outstanding principal amount of the REMIC Regular Securities, may increase
over time as the earlier classes of REMIC Regular Securities are paid, whereas
interest income with respect to any given Mortgage Loan expressed as a
percentage of the outstanding principal amount of that Mortgage Loan, will
remain constant over time.
Basis Rules and Distributions. A Holder of a REMIC Residual Security has
an initial basis in its Security equal to the amount paid for such REMIC
Residual Security. Such basis is increased by amounts included in the income of
the Holder and decreased by distributions and by any net loss taken into account
with respect to such REMIC Residual Security. A distribution on a REMIC Residual
Security to a Holder is not included in gross income to the extent it does not
exceed such Holder's basis in the REMIC Residual Security (adjusted as described
above) and, to the extent it exceeds the adjusted basis of the REMIC Residual
Security, shall be treated as gain from the sale of the REMIC Residual Security.
A Holder of a REMIC Residual Security is not allowed to take into account
any net loss for any calendar quarter to the extent such net loss exceeds such
Holder's adjusted basis in its REMIC Residual Security as of the close of such
calendar quarter (determined without regard to such net loss). Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used only
to offset income from the REMIC Residual Security.
Excess Inclusions. Any excess inclusions with respect to a REMIC Residual
Security are subject to certain special tax rules. With respect to a Holder of a
REMIC Residual Security, the excess inclusion for any calendar quarter is
defined as the excess (if any) of the daily portions of taxable income over the
sum of the "daily accruals" for each day during such quarter that such REMIC
Residual Security was held by such Holder. The daily accruals are determined by
allocating to each day during a calendar quarter its ratable portion of the
product of the "adjusted issue price" of the REMIC Residual Security at the
beginning of the calendar quarter and 120% of the "federal long-term rate" in
effect on the Settlement Date, based on quarterly compounding, and properly
adjusted for the length of such quarter. For this purpose, the adjusted issue
price of a REMIC Residual Security as of the beginning of any calendar quarter
is equal to the issue price of the REMIC Residual Security, increased by the
amount of daily accruals for all prior quarters and decreased by any
distributions made with respect to such REMIC Residual Security before the
beginning of such quarter. The issue price of a REMIC Residual Security is the
initial offering price to the public (excluding bond houses and brokers) at
which a substantial number of the REMIC Residual Securities was sold. The
federal long-term rate is a blend of current yields on Treasury securities
having a maturity of more than nine years, computed and published monthly by the
IRS.
In general, Holders of REMIC Residual Securities with excess inclusion
income cannot offset such income by losses from other activities. For Holders
that are subject to tax only on unrelated business taxable income (as defined in
section 511 of the Code), an excess inclusion of such Holder is treated as
unrelated business taxable income. With respect to variable contracts (within
the meaning of section 817 of the Code), a life insurance company cannot adjust
its reserve to the extent of any excess inclusion, except as provided in
regulations. The REMIC Regulations indicate that if a Holder of a REMIC Residual
Security is a member of an affiliated group filing a consolidated income tax
return, the taxable income of the affiliated group cannot be less than the sum
of the excess inclusions attributable to all residual interests in REMICS held
by members of the affiliated group. For a discussion 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
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real estate investment trust taxable income (within the meaning of section
857(b)(2) of the Code, excluding any net capital gain) will be allocated among
the shareholders of such trust in proportion to the dividends received by such
shareholders from such trust, and any amount so allocated will be treated as an
excess inclusion with respect to a REMIC Residual Security as if held directly
by such shareholder. Similar rules will apply in the case of regulated
investment companies, common trust funds and certain cooperatives that hold a
REMIC Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A Holder of a
REMIC Residual Security who is an individual will be required to include in
income a share of any servicing and guaranty fees. A deduction for such fees
will be allowed to such Holder only to the extent that such fees, along with
certain of such Holder's other miscellaneous itemized deductions exceed 2% of
such Holder's adjusted gross income. In addition, a Holder of a REMIC Residual
Security may not be able to deduct any portion of such fees in computing such
Holder's alternative minimum tax liability. A Holder's share of such fees will
generally be determined by (i) allocating the amount of such expenses for each
calendar quarter on a pro rata basis to each day in the calendar quarter, and
(ii) allocating the daily amount among the Holders in proportion to their
respective holdings on such day.
Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a REMIC equal to 100%
of the net income derived from "prohibited transactions." In general, a
prohibited transaction means the disposition of a qualified mortgage other than
pursuant to certain specified exceptions, the receipt of investment income from
a source other than a Mortgage Loan or certain other permitted investments, the
receipt of compensation for services, or the disposition of an asset purchased
with the payments on the qualified mortgages for temporary investment pending
distribution on the regular and residual interests.
Contributions to a REMIC after the Startup Day. The Code imposes a tax on
a REMIC equal to 100% of the value of any property contributed to the REMIC
after the "startup day" (generally the same as the Settlement Date). Exceptions
are provided for cash contributions to a REMIC (i) during the three month period
beginning on the startup day, (ii) made to a qualified reserve fund by a Holder
of a residual interest, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call, and (v) as otherwise
permitted by Treasury regulations.
Net Income from Foreclosure Property. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property" (which includes property acquired by deed in
lieu of foreclosure) and "net income from foreclosure property" are defined by
reference to the rules applicable to real estate investment trusts. Generally,
foreclosure property would be treated as such for a period of two years, with
possible extensions. Net income from foreclosure property generally means gain
from the sale of foreclosure property that is inventory property and gross
income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
Sales of REMIC Securities
General. Except as provided below, if a Regular or REMIC Residual Security
is sold, the seller will recognize gain or loss equal to the difference between
the amount realized in the sale and its adjusted basis in the Security. The
adjusted basis of a REMIC Regular Security generally will equal the cost of such
Security to the seller, increased by any original issue discount or market
discount included in the seller's gross income with respect 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
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would have been includible in the income of the Holder of a REMIC Regular
Security had income accrued at a rate equal to 110% of the "applicable federal
rate" (generally, an average of current yields on Treasury securities) as of the
date of purchase over (ii) the amount actually includible in such Holder's
income. In addition, gain recognized on such a sale by a Holder of a REMIC
Regular Security who purchased such a Security at a market discount would also
be taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period such Security was held by such Holder,
reduced by any market discount includible in income under the rules described
below under "--Discount and Premium."
If a Holder of a REMIC Residual Security sells its REMIC Residual Security
at a loss, the loss will not be recognized if, within six months before or after
the sale of the REMIC Residual Security, such Holder purchases another residual
interest in any REMIC or any interest in a taxable mortgage pool (as defined in
section 7701(i) of the Code) comparable to a residual interest in a REMIC. Such
disallowed loss would be allowed upon the sale of the other residual interest
(or comparable interest) if the rule referred to in the preceding sentence does
not apply to that sale. While this rule may be modified by Treasury regulations,
no such regulations have yet been published.
Transfers of REMIC Residual Securities. Section 860E(e) of the Code
imposes a substantial tax, payable by the transferor (or, if a transfer is
through a broker, nominee, or other middleman as the transferee's agent, payable
by that agent) upon any transfer of a REMIC Residual Security to a disqualified
organization and upon a pass-through entity (including regulated investment
companies, real estate investment trusts, common trust funds, partnerships,
trusts, estates, certain cooperatives, and nominees) that owns a REMIC Residual
Security if such pass-through entity has a disqualified organization as a
record-holder. For purposes of the preceding sentence, a transfer includes any
transfer of record or beneficial ownership, whether pursuant to a purchase, a
default under a secured lending agreement or otherwise.
The term "disqualified organization" includes the United States, any state
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of the foregoing (other than
certain taxable instrumentalities), any cooperative organization furnishing
electric energy or providing telephone service to persons in rural areas, or any
organization (other than a farmers' cooperative) that is exempt from federal
income tax, unless such organization is subject to the tax on unrelated business
income. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in such
entity are not held by disqualified organizations and (ii) information necessary
for the application of the tax described herein will be made available.
Restrictions on the transfer of a REMIC Residual Security and certain other
provisions that are intended to meet this requirement are described in the
Pooling and Servicing Agreement, and will be discussed more fully in the related
Prospectus Supplement relating to the offering of any REMIC Residual Security.
In addition, a pass-through entity (including a nominee) that holds a REMIC
Residual Security may be subject to additional taxes if a disqualified
organization is a record-holder therein. A transferor of a REMIC Residual
Security (or an agent of a transferee of a REMIC Residual Security, as the case
may be) will be relieved of such tax liability if (i) the transferee furnishes
to the transferor (or the transferee's agent) an affidavit that the transferee
is not a disqualified organization, and (ii) the transferor (or the transferee's
agent) does not have actual knowledge that the affidavit is false at the time of
the transfer. Similarly, no such tax will be imposed on a pass-through entity
for a period with respect to an interest therein owned by a disqualified
organization if (i) the record-holder of such interest furnishes to the
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.
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
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Security is transferred and based on events that have occurred as of that date
and on the Prepayment Assumption. See "--Discount and Premium" and "--Taxation
of Holders of REMIC Residual Securities-- Excess Inclusions."
The REMIC Regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC Residual Security has "improper knowledge" (i.e., either
knew, or should have known, that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC Trust). A
transferor is presumed not to have improper knowledge if (i) the transferor
conducts, at the time of a transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
come due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future; and (ii) the
transferee makes certain representations to the transferor in the affidavit
relating to disqualified organizations discussed above. Transferors of a REMIC
Residual Security should consult with their own tax advisors for further
information regarding such transfers.
Reporting and Other Administrative Matters. For purposes of the
administrative provisions of the Code, each REMIC Trust will be treated as a
partnership and the Holders of REMIC Residual Securities will be treated as
partners. The Trustee will prepare, sign and file federal income tax returns for
each REMIC Trust, which returns are subject to audit by the IRS. Moreover,
within a reasonable time after the end of each calendar year, the Trustee will
furnish to each Holder that received a distribution during such year a statement
setting forth the portions of any such distributions that constitute interest
distributions, original issue discount, and such other information as is
required by Treasury regulations and, with respect to Holders of REMIC Residual
Securities in a REMIC Trust, information necessary to compute the daily portions
of the taxable income (or net loss) of such REMIC Trust for each day during such
year. The Trustee will also act as the tax matters partner for each REMIC Trust,
either in its capacity as a Holder of a REMIC Residual Security or in a
fiduciary capacity. Each Holder of a REMIC Residual Security, by the acceptance
of its REMIC Residual Security, agrees that the Trustee will act as its
fiduciary in the performance of any duties required of it in the event that it
is the tax matters partner.
Each Holder of a REMIC Residual Security is required to treat items on its
return consistently with the treatment on the return of the REMIC Trust, unless
the Holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Trust. The IRS may assert a deficiency resulting from a failure to comply
with the consistency requirement without instituting an administrative
proceeding at the REMIC Trust level. Unless otherwise specified in the related
Prospectus Supplement, the Trustee does not intend to register any REMIC Trust
as a tax shelter pursuant to section 6111 of the Code.
Termination
In general, no special tax consequences will apply to a Holder of a REMIC
Regular Security upon the termination of a REMIC Trust by virtue of the final
payment or liquidation of the last Mortgage Loan remaining in the Trust Estate.
If a Holder of a REMIC Residual Security's adjusted basis in its REMIC Residual
Security at the time such termination occurs exceeds the amount of cash
distributed to such Holder in liquidation of its interest, although the matter
is not entirely free from doubt, it would appear that the Holder of the REMIC
Residual Security is entitled to a loss equal to the amount of such excess.
Debt Securities
General
With respect to each series of Debt Securities, Dewey Ballantine, special
tax counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless
otherwise limited in the related Prospectus Supplement) the Securities will be
classified as debt of the Sponsor secured by the related Mortgage Loans.
Consequently, the Debt Securities will not be treated as ownership interests in
the Mortgage Loans or the Trust. Holders will be required to report income
received with respect to the Debt Securities in accordance with their normal
method of accounting. For additional tax consequences relating to Debt
Securities purchased at a discount or with premium, see "--Discount and
Premium," below.
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Special Tax Attributes
As described above, Grantor Trust Securities will possess certain special
tax attributes by virtue of their being ownership interests in the underlying
Mortgage Loans. Similarly, REMIC Securities will possess similar attributes by
virtue of the REMIC provisions of the Code. In general, Debt Securities will not
possess such special tax attributes. Investors to whom such attributes are
important should consult their own tax advisors regarding investment in Debt
Securities.
Sale or Exchange
If a Holder of a Debt Security sells or exchanges such Security, the
Holder will recognize gain or loss equal to the difference, if any, between the
amount received and the Holder's adjusted basis in the Security. The adjusted
basis in the Security generally will equal its initial cost, increased by any
original issue discount or market discount previously included in the seller's
gross income with respect to the Security and reduced by the payments previously
received on the Security, other than payments of qualified stated interest, and
by any amortized premium.
In general (except as described in "--Discount and Premium--Market
Discount," below), except for certain financial institutions subject to section
582(c) of the Code, any gain or loss on the sale or exchange of a Debt Security
recognized by an investor who holds the Security as a capital asset (within the
meaning of section 1221 of the Code), will be capital gain or loss and will be
long-term or short-term depending on whether the Security has been held for more
than one year.
Discount and Premium
A Security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and certain
Grantor Trust Fractional Interest Securities will be treated as having original
issue discount by virtue of the coupon stripping rules in section 1286 of the
Code. In very general terms, (i) original issue discount is treated as a form of
interest and must be included in a Holder's income as it accrues (regardless of
the Holder's regular method of accounting) using a constant yield method; (ii)
market discount is treated as ordinary income and must be included in a Holder's
income as principal payments are made on the Security (or upon a sale of a
Security); and (iii) if a Holder so elects, premium may be amortized over the
life of the Security and offset against inclusions of interest income. These tax
consequences are discussed in greater detail below.
Original Issue Discount
In general, a Security will be considered to be issued with original issue
discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The issue price of a Security is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial number of the Securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
Remittance Period and the Settlement Date. The stated redemption price at
maturity of a Security that has a notional principal amount or receives
principal only or that is or may be an Accrual Security is equal to the sum of
all distributions to be made under such Security. The stated redemption price at
maturity of any other Security is its stated principal amount, plus an amount
equal to the excess (if any) of the interest payable on the first Payment Date
over the interest that accrues for the period from the Settlement Date to the
first Payment Date.
Notwithstanding the general definition, original issue discount will be
treated as zero if such discount is less than 0.25% of the stated redemption
price at maturity multiplied by its weighted average life. The weighted average
life of a Security is apparently computed for this purpose as the sum, for all
distributions included in the stated redemption price at maturity of the amounts
determined by multiplying (i) the number of complete years (rounding down for
partial years) from the Settlement Date until the date on which each such
distribution is expected to be made under the assumption that the Mortgage Loans
prepay at the rate specified in the related Prospectus Supplement (the
"Prepayment Assumption") by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the Security's
stated redemption price at maturity. If original issue
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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.
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.
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A subsequent purchaser of a Security that purchases such Security at a
cost less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
portion and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such Security for all days on or after the day of purchase).
Market Discount
A Holder that purchases a Security at a market discount, that is, at a
purchase price less than the remaining stated redemption price at maturity of
such Security (or, in the case of a Security with original issue discount, its
adjusted issue price), will be required to allocate each principal distribution
first to accrued market discount on the Security, and recognize ordinary income
to the extent such distribution does not exceed the aggregate amount of accrued
market discount on such Security not previously included in income. With respect
to Securities that have unaccrued original issue discount, such market discount
must be included in income in addition to any original issue discount. A Holder
that incurs or continues indebtedness to acquire a Security at a market discount
may also be required to defer the deduction of all or a portion of the interest
on such indebtedness until the corresponding amount of market discount is
included in income. In general terms, market discount on a Security may be
treated as accruing either (i) under a constant yield method or (ii) in
proportion to remaining accruals of original issue discount, if any, or if none,
in proportion to remaining distributions of interest on the Security, in any
case taking into account the Prepayment Assumption. The Trustee will make
available, as required by the IRS, to Holders of Securities information
necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a Security will be
considered to be zero if such discount is less than 0.25% of the remaining
stated redemption price at maturity of such Security multiplied by its weighted
average remaining life. Weighted average remaining life presumably would be
calculated in a manner similar to weighted average life, taking into account
payments (including prepayments) prior to the date of acquisition of the
Security by the subsequent purchaser. If market discount on a Security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the Security and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a Security that purchases such Security at a cost greater
than its remaining stated redemption price at maturity will be considered to
have purchased such Security (a "Premium Security") at a premium. Such a
purchaser need not include in income any remaining original issue discount and
may elect, under section 171(c)(2) of the Code, to treat such premium as
"amortizable bond premium." If a Holder makes such an election, the amount of
any interest payment that must be included in such Holder's income for each
period ending on a Payment Date will be reduced by the portion of the premium
allocable to such period based on the Premium Security's yield to maturity. The
legislative history of the Tax Reform Act of 1986 states that such premium
amortization should be made under principles analogous to those governing the
accrual of market discount (as discussed above under "--Market Discount"). If
such election is made by the Holder, the election will also apply to all bonds
the interest on which is not excludible from gross income ("fully taxable
bonds") held by the Holder at the beginning of the first taxable year to which
the election applies and to all such fully taxable bonds thereafter acquired by
it, and is irrevocable without the consent of the IRS. If such an election is
not made, (i) such a Holder must include the full amount of each interest
payment in income as it accrues, and (ii) the premium must be allocated to the
principal distributions on the Premium Security and, when each such distribution
is received, a loss equal to the premium allocated to such distribution will be
recognized. Any tax benefit from the premium not previously recognized will be
taken into account in computing gain or loss upon the sale or disposition of the
Premium Security.
Some Securities may provide for only nominal distributions of principal in
comparison to the distributions of interest thereon. It is possible that the IRS
or the Treasury Department may issue guidance excluding such Securities from the
rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that such a Security will be treated as having
original issue discount equal to the excess of the total
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payments to be received thereon over its issue price. In such event, section
1272(a)(6) of the Code would govern the accrual of such original issue discount,
but a Holder would recognize substantially the same income in any given period
as would be recognized if an election were made under section 171(c)(2) of the
Code. Unless and until the Treasury Department or the IRS publishes specific
guidance relating to the tax treatment of such Securities, the Trustee intends
to furnish tax information to Holders of such Securities in accordance with the
rules described in the preceding paragraph.
Special Election
A Holder may elect to include in gross income all "interest" that accrues
on the Security by using a constant yield method. For purposes of the election,
the term "interest" includes stated interest, acquisition discount, original
issue discount, de minimis original issue discount, market discount, de minimis
market discount and unstated interest as adjusted by any amortizable bond
premium or acquisition premium. A Holder should consult its own tax advisor
regarding the time and manner of making and the scope of the election and the
implementation of the constant yield method.
Backup Withholding
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Securities, may be subject to the "backup withholding
tax" under section 3406 of the Code at a rate of 31% if recipients of such
distributions fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from such tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against such recipient's federal income
tax. Furthermore, certain penalties may be imposed by the IRS on a recipient of
distributions that is required to supply information but that does not do so in
the proper manner.
Foreign Investors
Grantor Trust, REMIC Regular and Debt Securities
Interest, including original issue discount, distributable on Grantor
Trust, REMIC Regular or Debt Securities received by a Holder who or which is not
a United States person, as defined below (other than a foreign bank and certain
other persons), generally will not be subject to the normal 30 percent United
States withholding tax (or lower treaty rate) imposed with respect to such
payments, provided that such Holder fulfills certain certification requirements.
Under such requirements, the Holder must certify, under penalties of perjury,
that it is not a "United States person" and provide its name and address. If
income or gain with respect to a security is effectively connected with a United
States trade or business carried on by a Holder who or which is not a United
States person, the 30 percent withholding tax will not apply but such Holder
will be subject to United States federal income tax at graduated rates
applicable to United States persons.
For this purpose, "United States person" means a person who or which is
for United States federal income tax purposes a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision thereof,
or an estate or trust that is subject to United States federal income tax,
regardless of the source of its income. Proposed Treasury regulations, which
would be effective for payments made after December 31, 1997, if adopted in
their current form, would provide alternative certification requirements and
means for claiming the exemption from federal income and withholding tax.
Investors who are Non-U.S. Persons should consult their own tax advisors
regarding the specific tax consequences to them of owning a Grantor Trust, REMIC
Regular or Debt Security.
REMIC Residual Securities
Amounts distributed to a Holder of a REMIC Residual Security that is a not
a U.S. Person generally will be treated as interest for purposes of applying the
30% (or lower treaty rate) withholding tax on income that is not effectively
connected with a U.S. trade or business. Temporary Treasury Regulations clarify
that amounts not constituting excess inclusions that are distributed on a REMIC
Residual Security to a Holder that is not
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a U.S. Person generally will be exempt from U.S. federal income and withholding
tax, subject to the same conditions as described above, but only to the extent
that the obligations directly underlying the REMIC Trust that issued the REMIC
Residual Security (e.g., Mortgage Loans or regular interests in another REMIC)
were issued after July 18, 1984. In no case will any portion of REMIC income
that constitutes an excess inclusion be entitled to any exemption from the
withholding tax or a reduced treaty rate for withholding. See "--REMIC
Securities--Taxation of Holders of REMIC Residual Securities--Excess
Inclusions."
THE FEDERAL INCOME TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON AN INVESTOR'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose certain requirements on those employee
benefit plans to which they apply ("Plans") and on those persons who are
fiduciaries with respect to such Plans. The following is a general discussion of
such requirements, and certain applicable exceptions to and administrative
exemptions from such requirements.
Before purchasing any Certificates, a Plan fiduciary should determine
whether there exists any prohibition to such purchase under the requirements of
ERISA, whether prohibited transaction exemptions such as PTE 83-1 or any
individual administrative exemption (as described below) applies, including
whether the appropriate conditions set forth therein would be met, or whether
any statutory prohibited transaction exemption is applicable, and further should
consult the applicable Prospectus Supplement relating to such Series of
Certificates.
Certain Requirements Under ERISA
General
In accordance with ERISA's general fiduciary standards, before investing
in a Certificate a Plan fiduciary should determine whether to do so is permitted
under the governing Plan instruments and is appropriate for the Plan in view of
its overall investment policy and the composition and diversification of its
portfolio. A Plan fiduciary should especially consider the ERISA requirement of
investment prudence and the sensitivity of the return on the Certificates to the
rate of principal repayments (including prepayments) on the Mortgage Loans or
Contracts, as discussed in the related Prospectus Supplement and in "Prepayment
and Yield Considerations" herein.
Parties in Interest/Disqualified Persons. Other provisions of ERISA (and
corresponding provisions of the Code) prohibit certain transactions involving
the assets of a Plan and persons who have certain specified relationships to the
Plan (so-called "parties in interest" within the meaning of ERISA or
"disqualified persons" within the meaning of the Code). The Depositor, the
Servicer (if any) or the Trustee or certain affiliates thereof might be
considered or might become "parties in interest" or "disqualified persons" with
respect to a Plan. If so, the acquisition or holding of Certificates by or on
behalf of such Plan could be considered to give rise to a "prohibited
transaction" within the meaning of ERISA and the Code unless an administrative
exemption described below or some other exemption is available.
Special caution should be exercised before the assets of a Plan are used
to purchase a Certificate if, with respect to such assets, the Depositor, the
Servicer (if any) or the Trustee or an affiliate thereof either: (a) has
investment discretion with respect to the investment of such assets of such
Plan; or (b) has authority or responsibility to give, or regularly gives
investment advice with respect to such assets for a fee and pursuant to an
agreement or understanding that such advice will serve as a primary basis for
investment decisions with respect to such assets and that such advice will be
based on the particular investment needs of the Plan.
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Delegation of Fiduciary Duty
Further, if the assets included in a Trust Fund were deemed to constitute
Plan assets, it is possible that a Plan's investment in the Certificates might
be deemed to constitute a delegation, under ERISA, of the duty to manage Plan
assets by the fiduciary deciding to invest in the Certificates, and certain
transactions involved in the operation of the Trust Fund might be deemed to
constitute prohibited transactions under ERISA and the Code.
The U.S. Department of Labor (the "Department") has published final
regulations (the "Regulations") concerning whether or not a Plan's assets would
be deemed to include an interest in the underlying assets of an entity (such as
a Trust Fund) for purposes of the reporting and disclosure and general fiduciary
responsibility provisions of ERISA, as well as for the prohibited transaction
provisions of ERISA and the Code, if the Plan acquires an "equity interest"
(such as a Certificate) in such entity.
Certain exceptions are provided in the Regulations whereby an investing
Plan's assets would be deemed merely to include its interest in the Certificates
instead of being deemed to include an interest in the assets of a Trust Fund.
However, it cannot be predicted in advance nor can there be any continuing
assurance whether such exceptions may be met. For example, one of the exceptions
in the Regulations states that the underlying assets of an entity will not be
considered "plan assets" if, immediately after the most recent acquisition of
any equity interest in the entity, whether or not from the issuer or an
underwriter, less than 25% of the value of each class of equity interest is held
by "benefit plan investors," which are defined as Plans, individual retirement
accounts, and employee benefit plans not subject to ERISA (for example,
governmental plans), but this exception is tested immediately after each
acquisition of an equity interest in the entity whether upon initial issuance or
in the secondary market.
Administrative Exemptions
Individual Administrative Exemptions. Several underwriters of
mortgage-backed securities have applied for and obtained ERISA prohibited
transaction exemptions (each, an "Individual Exemption") which are in some
respects broader than Prohibited Transaction Class Exemption 83-1 (described
below). Such exemptions can only apply to mortgage-backed securities which among
other conditions, are sold in an offering with respect to which such underwriter
serves as the sole or a managing underwriter, or as a selling or placement
agent. If such an Individual Exemption might be applicable to a Series of
Certificates, the related Prospectus Supplement will refer to such possibility.
An Individual Exemption does not apply to Plans sponsored by the Restricted
Group (as defined below) or the Trustee.
Some of the conditions that must be satisfied for an Individual Exemption
to apply are the following:
(1) The rights and interests evidenced by Certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other Certificates of the Trust Fund;
(2) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from any of Standard & Poor's Structural Ratings Group,
Moody's Investors Service, Inc., Duff & Phelps Credit Rating Co., or Fitch
Investors Service, L.P. ("National Credit Rating Agencies");
(3) The Trustee is not an affiliate of any of the Depositor, the
underwriter specified in the applicable Prospectus Supplement, the
Servicer (if any), any obligor with respect to Mortgage Loans included in
the Trust Fund constituting more than five percent of the aggregate
unamortized principal balance of the assets in the Trust Fund, or any
affiliate of such parties (the "Restricted Group"); and
(4) The Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933.
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(5) The sum of all payments made to and retained by such
underwriters must represent not more than reasonable compensation for
underwriting the Certificates; the sum of all payments made to and
retained by the Seller pursuant to the assignment of the obligations or
receivables to the related Trust Fund must represent not more than the
fair market value of such obligations; and the sum of all payments made to
and retained by the Servicer and any Sub-servicer must represent not more
than reasonable compensation for such person's services under the Pooling
and Servicing Agreement and reimbursement of such person's reasonable
expenses in connection there with;
(6) (i) the investment pool consists only of assets of the type
enumerated in the exemption and which have bene included in other
investment pools; (ii) certificates evidencing interests in such other
investment pools have been rated in one of the three highest generic
rating categories by one of the National Credit Rating agencies for at
least one year prior to a Plan's acquisition of certificates; and (iii)
certificates evidencing interests in such other investment pools have been
purchased by investors other than Plans for at least one year prior to a
Plan's acquisition of certificates; and
(7) The acquisition of Certificates by certain Plans must be on
terms that are at least as favorable to the Plan as they would be in any
arm's length transaction with an unrelated party.
If the conditions to an Individual Exemption are met, whether or not a
Plan's assets would be deemed to include an ownership interest in the Mortgage
Loans in a Mortgage Pool, the acquisition, holding and resale of the
Certificates by Plans would be exempt from the prohibited transaction provisions
of ERISA and the Code.
Moreover, an Individual Exemption can provide relief from certain
self-dealing/conflict of interest prohibited transactions, only if, among other
requirements, (i) a Plan's investment in Certificates of any class does not
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
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maintenance of a system of insurance or other protection for the pooled mortgage
loans or the property securing such loans, and for indemnifying
certificateholders against reductions in pass-through payments due to property
damage or defaults in loan payments; (ii) the existence of a pool trustee who is
not an affiliate of the pool sponsor; and (iii) a requirement that the sum of
all payments made to and retained by the pool sponsor, and all funds inuring to
the benefit of the pool sponsor as a result of the administration of the
mortgage pool, must represent not more than adequate consideration for selling
the mortgage loans plus reasonable compensation for services provided by the
pool sponsor to the pool. The system of insurance or protection referred to in
clause (i) above must provide such protection and indemnification up to an
amount not less than the greater of 1% of the aggregate unpaid principal balance
of the pooled mortgages or the unpaid principal balance of the largest mortgage
in the pool. It should be noted that in promulgating PTE 83-1 (and a predecessor
exemption), the Department did not have under its consideration interests in
pools of the exact nature as some of the Certificates described herein.
Exempt Plans
Employee benefit plans which are governmental plans (as defined in Section
3(32) of ERISA), and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements and assets of such plans may be invested
in Senior Certificates without regard to the ERISA considerations described
above, subject to the provisions of other applicable federal and state law.
Unrelated Business Taxable Income -- Residual Certificates
The purchase of a Residual Certificate by such plans, or by most varieties
of ERISA Plans, may give rise to "unrelated business taxable income" as
described in Code Sections 511-515 and 860E. Further, prior to the purchase of
Residual Certificates, a prospective transferee may be required to provide an
affidavit to a transferor that it is not a "Disqualified Organization" which
term includes certain tax-exempt entities not subject to Code Section 511,
including certain governmental plans, as discussed herein under the caption
"Certain Federal Income Tax Consequences--Federal Income Tax Consequences for
REMIC Certificates--Income Tax Consequences for REMIC Certificates--Taxation of
Residual Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates."
Due to the complexity of these rules and the penalties imposed upon
persons involved in prohibited transactions, it is particularly important that
potential investors who are Plan fiduciaries carefully consider the consequences
under ERISA of their acquisition and ownership of Certificates.
The sale of Certificates to a Plan is in no respect a representation by
the Depositor or the applicable underwriter that this investment meets all
relevant legal requirements with respect to investments by Plan generally or any
particular Plan, or that this investment is appropriate for Plans generally or
any particular Plan.
LEGAL INVESTMENT
If specified in the related Prospectus Supplement, the Certificates of one
or more classes offered pursuant to this Prospectus will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended ("SMMEA"), so long as they are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization. As "mortgage related securities," such Certificates will
constitute legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including, but not limited
to, state-chartered savings banks, commercial banks, savings and loan
associations and insurance companies, as well as trustees and state government
employee retirement systems) created pursuant to or existing under the laws of
the United States or of any state (including the District of Columbia and Puerto
Rico) whose authorized investments are subject to state regulation to the same
extent that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Pursuant to SMMEA, a
number of states enacted legislation, on or before the October 3, 1991 cutoff
for such enactments, limiting to varying extends the ability of certain entities
(in particular, insurance companies) to invest in "mortgage related securities,"
in most cases by requiring the affected investors to rely solely upon existing
state law, and not
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SMMEA. Accordingly, the investors affected by such legislation will be
authorized to invest in the Certificates only to the extent provided in such
legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with mortgage
related securities without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in mortgage related
securities, and national banks may purchase mortgage related securities for
their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. ss. 24 (Seventh), subject in each
case to such regulations as the applicable federal regulatory authority may
prescribe. In this connection, federal credit unions should review National
Credit Union Administration (the "NCUA") Letter to Credit Unions No. 96, as
modified by Letter No. 108, which includes guidelines to assist federal credit
unions in making investment decisions for mortgage related securities. The NCUA
has adopted rules, effective December 2, 1991, which prohibit federal credit
unions from investing in certain mortgage related securities (including
securities such as certain series, Classes or Subclasses of Certificates),
except under limited circumstances.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Securities Activities" dated
January 28, 1992 (the "Policy Statement") of the Federal Financial Institutions
Examination Council. The Policy Statement, which has been adopted by the Board
of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Comptroller of the Currency and the Office of Thrift
Supervision, effective February 10, 1992, and by the NCUA (with certain
modifications), effective June 26, 1992, prohibits depository institutions from
investing in certain "high-risk" mortgage securities (including securities such
as certain series, Classes or Subclasses of Certificates), except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any
Certificates, as certain series, Classes or Subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying" and, with regard to any Certificates
issued in book-entry form, provisions which may restrict or prohibit investment
in securities which are issued in book-entry form.
Other classes of Certificates offered pursuant to this Prospectus will not
constitute "mortgage related securities" under SMMEA because they will not
represent beneficial ownership interests in qualifying mortgage loans under
SMMEA. The appropriate characterization of those Certificates under various
legal investment restrictions, and thus the ability of investors subject to
these restrictions to purchase the Certificates, may be subject to significant
interpretive uncertainties. All investors whose investment authority is subject
to legal restrictions should consult their own legal advisors to determine
whether, and to what extent, the Certificates will constitute legal investments
for them.
No representation is made as to the proper characterization of the
Certificates for legal investment or financial institution regulatory purposes,
or as to the ability of particular investors to purchase Certificates under
applicable legal investment restrictions. The uncertainties described above may
(and any 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.
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PLAN OF DISTRIBUTION
The Depositor may sell the Certificates offered hereby in Series either
directly or through underwriters. The related Prospectus Supplement or
Prospectus Supplements for each Series will describe the terms of the offering
for that Series and will state the public offering or purchase price of each
Class of Certificates of such Series, or the method by which such price is to be
determined, and the net proceeds to the Depositor from such sale.
If the sale of any Certificates is made pursuant to an underwriting
agreement pursuant to which one or more underwriters agree to act in such
capacity, such Certificates will be acquired by such underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices to be determined at the time of sale or at the time of commitment
therefor. Firm commitment underwriting and public reoffering by underwriters may
be done through underwriting syndicates or through one or more firms acting
alone. The specific managing underwriter or underwriters, if any, with respect
to the offer and sale of a particular Series of Certificates will be set forth
on the cover of the Prospectus Supplement related to such Series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement. The Prospectus Supplement will describe any discounts and
commissions to be allowed or paid by the Depositor to the underwriters, any
other items constituting underwriting compensation and any discounts and
commissions to be allowed or paid to the dealers. The obligations of the
underwriters will be subject to certain conditions precedent. Unless otherwise
provided in the related Prospectus Supplement, the underwriters with respect to
a sale of any Class of Certificates will be obligated to purchase all such
Certificates if any are purchased. Pursuant to each such underwriting agreement,
the Depositor will indemnity the related underwriters against certain civil
liabilities, including liabilities under the Securities Act.
If any Certificates are offered other than through underwriters pursuant
to such underwriting agreements, the related Prospectus Supplement or Prospectus
Supplements will contain information regarding the terms of such offering and
any agreements to be entered into in connection with such offering.
Purchasers of Certificates, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the Securities Act of 1933 in connection with reoffers and sales by
them of Certificates. Certificateholders should consult with their legal
advisors in this regard prior to any such reoffer and sale.
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Depositor, any affiliate thereof or any other person or
persons specified therein may purchase some or all of one or more Classes of
Certificates of such Series from the underwriter or underwriters or such other
person or persons specified in such Prospectus Supplement. Such purchaser may
thereafter from time to time offer and sell, pursuant to this Prospectus and the
related Prospectus Supplement, some or all of such Certificates so purchased,
directly, through one or more underwriters to be designated at the time of the
offering of such Certificates, through dealers acting as agent and/or principal
as in such other manner as may be specified in the related Prospectus
Supplement. Such offering may be restricted in the manner specified in such
Prospectus Supplement. Such transactions may be effected at market prices
prevailing at the time of sale, at negotiated prices or at fixed prices. Any
underwriters and dealers participating in such purchaser's offering of such
Certificates may receive compensation in the form of underwriting discounts or
commissions from such purchaser and such dealers may receive commissions from
the investors purchasing such Certificates for whom they may act as agent (which
discounts or commissions will not exceed those customary in those types of
transactions involved). Any dealer that participates in the distribution of such
Certificates may be deemed to be an "underwriter" within the meaning of the
Securities Act of 1933, and any commissions and discounts received by such
dealer and any profit on the resale of such Certificates by such dealer might be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
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.
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RATING
At the date of issuance of each Series of Certificates, the Certificates
offered hereby will be rated in one of the four highest categories by at least
one Rating Agency. See "Ratings" in the related Prospectus Supplement. A
securities rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
agency. Each securities rating should be evaluated independently of any other
rating.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Commission in
Washington, D.C. Copies may be obtained at rates prescribed by the Commission
upon request to the Commission, and may be inspected, without charge, at the
offices of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. See
"Available Information."
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMCs Information Statement and the most recent Supplement to such Information
Statement and any quarterly report made available by FHLMC can be obtained by
writing or calling the Investor Inquiry Department at FHLMC at 8200 Jones Branch
Drive, McLean Virginia 22102 (outside Washington, D.C. metropolitan area,
telephone 800-336-FMPC; within Washington, D.C. metropolitan area, telephone
703-759-8160). The Depositor has not and will not participate in the preparation
of FHLMC's Offering Circulars, Information Statements or Supplements.
Copies of FNMA's most recent Prospectus for FNMA Certificates and FNMA's
annual report and quarterly financial statements as well as other financial
information are available from the Senior Vice President for Investor Relations
of FNMA, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7115). The
Depositor has not and will not participate in the preparation of FNMA's
Prospectuses.
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INDEX OF SIGNIFICANT DEFINITIONS
Page
----
1996 Act......................................................................81
Act...........................................................................72
Additional Balance............................................................20
Advance.......................................................................58
Advance Reserve...............................................................44
Advances......................................................................10
Amortization Basis............................................................21
APR...........................................................................22
ARM Buy-Outs..................................................................22
Balloon Loan..................................................................20
Balloon Loans.................................................................14
Balloon Period................................................................20
Basic Monthly Amount..........................................................21
Basic Senior Class Distribution...............................................36
Buy-Down Account..............................................................20
Buy-Down Loans................................................................20
Call Protection...............................................................41
CERCLA........................................................................78
Certificate Account...........................................................55
Certificate Account Depository................................................55
Certificateholders.............................................................1
Certificates................................................................1, 5
Class..........................................................................1
Closing Date..................................................................32
Code..........................................................................11
Commission.....................................................................3
Compound Interest Certificates................................................32
Contract Pool.................................................................18
Contract Rate..............................................................7, 22
Contracts..................................................................1, 22
Convertible Mortgage Loans....................................................18
Cooperative Loans.............................................................18
Cooperative Notes.............................................................18
Cooperatives..................................................................18
Credit Enhancer...............................................................17
Cut-Off Date Aggregate Principal Balance..................................19, 23
Debt Securities...............................................................11
Deferred Interest.....................................................14, 20, 23
Definitive Certificate........................................................30
Deleted Loan..................................................................28
Depositor...................................................................1, 4
Determination Date............................................................33
Direct or Indirect Participants...............................................16
Distribution Dates.............................................................7
DTC...........................................................................31
Due Date..................................................................19, 23
Due Period....................................................................41
Eligible Investments..........................................................45
Environmental Condition.......................................................77
EPA...........................................................................78
ERISA.........................................................................11
Extension Protection..........................................................41
FASIT..........................................................................2
FASIT High-Yield Securities................................................2, 11
FASIT Ownership Interest.......................................................2
100
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FASIT Regular Securities...................................................2, 11
FDIC..........................................................................55
FHLBB.........................................................................72
FIRREA........................................................................79
Fixed Retained Yield..........................................................18
Forward Purchase Agreement.................................................8, 32
Funding Period................................................................32
Gain From Acquired Property...................................................35
GEM Loans.....................................................................21
GPM Fund......................................................................22
GPM Mortgage Loans............................................................21
Grantor Trust Estate..........................................................81
Grantor Trust Fractional Interest Security....................................81
Grantor Trust Securities......................................................11
Grantor Trust Strip Security..................................................81
Holder........................................................................81
Home Equity Lines.............................................................20
Indemnification Payments......................................................35
Initial Deposit...............................................................43
Insurance Proceeds............................................................56
Interest Accrual Period.......................................................49
Interest Rate..................................................................1
IRS...........................................................................82
Liquidated Contract...........................................................34
Liquidated Mortgage Loan......................................................15
Liquidation Proceeds..........................................................15
Loan Agreement................................................................20
Loan Sale Agreement...........................................................25
Loan-to-Value Ratio...........................................................22
Mortgage Loans.................................................................1
Mortgage Notes................................................................18
Mortgage Pool.................................................................18
Mortgage Rate..................................................................7
Mortgaged Properties..........................................................20
Mortgages.....................................................................18
Mortgagor.....................................................................14
Multi-Class Certificates.......................................................1
Net Contract Rate..............................................................7
Net Insurance Proceeds........................................................56
Net Liquidation Proceeds......................................................56
Net Mortgage Rate..............................................................7
Notional Amount................................................................1
OTS...........................................................................72
Partnership Interests.........................................................11
Pass-Through Rate..............................................................7
Paying Agent..................................................................57
Payment Deficiencies..........................................................43
Percentage Certificates.......................................................31
Plans.........................................................................93
Pool...........................................................................1
Pool Distribution Amount......................................................33
Pool Value Group..............................................................40
Pooling and Servicing Agreement................................................4
Pre-Funding Account............................................................8
Premium Security..............................................................91
Prepayment Assumption.....................................................84, 89
Prepayment Interest Shortfall.................................................58
PTE 83-1......................................................................95
Purchase Obligation...........................................................13
101
<PAGE>
Purchase Price................................................................27
Rating Agency.................................................................12
Record Date....................................................................7
Registration Statement.........................................................3
Regular Certificates.......................................................2, 30
Relief Act....................................................................17
REMIC..........................................................................2
REMIC Regular Securities......................................................11
REMIC Regular Security........................................................83
REMIC Regulations.............................................................83
REMIC Residual Securities.....................................................11
REMIC Residual Security.......................................................83
REMIC Securities..............................................................81
REMIC Trust...................................................................83
Repurchase Proceeds...........................................................33
Residual Certificates......................................................2, 30
Scheduled Principal...........................................................34
secured-creditor exemption....................................................78
Securities Act.................................................................3
Senior Certificates........................................................2, 30
Senior Class Carryover Shortfall..............................................36
Senior Class Credit Enhancement...............................................36
Senior Class Distributable Amount.............................................34
Senior Class Principal Portion................................................34
Senior Class Pro Rata Share...................................................36
Senior Class Shortfall........................................................36
Senior Class Shortfall Accruals...............................................36
Series.........................................................................1
Servicer.......................................................................1
Servicing Account.............................................................61
Servicing Fee..................................................................7
Settlement Date...............................................................83
Shifting Interest Certificates.............................................2, 32
SMMEA.........................................................................11
Special Distributions.........................................................42
Special Hazard Contract.......................................................46
Special Hazard Mortgage Loan..................................................46
Standard Certificates..........................................................1
Standard Hazard Insurance Policy..............................................24
Stated Amount..................................................................1
Stripped Certificates..........................................................1
Subclass.......................................................................1
Subordinated Amount............................................................9
Subordinated Certificates..................................................2, 30
Subordinated Class Distributable Amount.......................................34
Subordinated Class Principal Portion..........................................35
Subordinated Class Pro Rata Share.............................................36
Subordination Reserve Fund.....................................................9
Sub-Servicer...............................................................4, 54
Sub-Servicing Account.........................................................55
Substitute Loan...............................................................28
Title V...................................................................72, 76
Trust Fund.....................................................................1
UCC.......................................................................69, 73
Unaffiliated Sellers...........................................................4
United States person..........................................................92
Unpaid Interest Shortfall.....................................................37
Voting Interests..............................................................64
Window Period.................................................................72
102
<PAGE>
Window Period Loans...........................................................72
Window Period States..........................................................72
103
<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
----
Summary of Terms ............................................................S-1
Risk Factors................................................................S-14
Description of the Notes....................................................S-18
The Issuer..................................................................S-32
Mortgage Lenders Network USA, Inc...........................................S-32
Description of the Mortgage Pool............................................S-32
Certain Prepayment and Yield Considerations.................................S-44
Servicing of the Mortgage Loans.............................................S-49
The Note Insurance..........................................................S-57
ERISA Considerations........................................................S-61
Use of Proceeds.............................................................S-62
Legal Investment Considerations.............................................S-62
Underwriting................................................................S-62
Report of Experts...........................................................S-63
Certain Federal Income Tax Consequences.....................................S-63
State Tax Considerations....................................................S-64
Legal Matters...............................................................S-64
Rating of the Notes.........................................................S-64
Index of Principal Terms....................................................S-65
Global Clearance, Settlement and Tax
Documentation Procedures..................................................S-68
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
================================================================================
================================================================================
$120,000,000
(approximate)
Mortgage Lenders Network Home Equity Loan
Trust 1998-1
Asset Backed Notes,
Series 1998-1
[LOGO]
Mortgage Lenders Network USA, Inc.
Seller and Servicer
Prudential Securities
Secured Financing Corporation
Depositor
---------------------
Prospectus Supplement
---------------------
Prudential Securities
Incorporated
First Union
Capital Markets
March 5, 1998
================================================================================
