As filed with the Securities and Exchange Commission on April 1, 1999
Registration Statement No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
(Exact name of registrant as specified in Its Charter)
Delaware One New York Plaza 13-3526694
(Jurisdiction) New York, New York 10292 (I.R.S. Employer
(212) 778-1000 Identification No.)
(Address of registrant's principal
executive offices)
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Joe Donovan
Prudential Securities Secured
Financing Corporation
One New York Plaza
New York, New York 10292
(Name and address of agent for service)
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Copies to:
Christopher J. DiAngelo, Esq.
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 426(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Proposed
Proposed Maximum
Maximum Aggregate Amount of
Title of Securities Amount Being Offering Price Offering Registration
Being Registered Registered Per Unit(1) Price(1) Fee
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<S> <C> <C> <C> <C>
Mortgage Backed
Securities............... $1,000,000 100% $1,000,000 $278
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(1) Estimated solely for purposes of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS
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Prudential Securities Secured Financing Corporation Asset-Backed Securities
Sponsor Issuable in Series
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Prudential Securities Secured Financing Corporation may sponsor, from time to
time, the sale of separate series of asset-backed securities consisting of
either asset-backed certificates or asset-backed notes, each such series backed
solely by the assets of a trust or other special purpose entity. The assets of
each such issuer will consist primarily of a pool of mortgage loans and/or
manufactured housing contracts (or participations therein).
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You should read the section entitled "Risk Factors" starting on page 10 of this
prospectus and consider these factors before making a decision to invest in the
securities.
The securities will represent interests in, or debt of, the related issuer only
and are not interests in, or obligations of, any other person.
Except as otherwise described in the related prospectus supplement, neither the
securities nor the underlying assets will be insured or guaranteed by any
governmental agency or instrumentality or any other person.
Retain this prospectus for future reference. This prospectus may not be used to
consummate sales of securities unless accompanied by the prospectus supplement
relating to the offering of such securities.
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The Securities
The securities will be issued in separate series consisting of one or more
classes, on terms to be determined at the time of sale. Any series of securities
may include one or more classes that are subordinate in right of distributions
to such rights of one or more of other classes of such series. The relative
interests of the senior securities and the subordinated securities may be
subject to adjustment from time to time on the basis of the amounts received in
respect of the related mortgage loans or manufactured housing contracts.
The Assets
The assets held by an issuer will primarily consist of a pool of mortgage loans
and/or manufactured housing contracts (or participations therein), funds on
deposit in one or more accounts and such forms of credit enhancement as are
described in this prospectus and in the related prospectus supplement.
Underwriting
The securities offered by this prospectus and by the related prospectus
supplement will be offered by Prudential Securities Incorporated, subject to
prior sale, to withdrawal, cancellation or modification of the offer without
notice, to delivery to and acceptance by the underwriter and to certain other
conditions. Affiliates of the sponsor may from time to time act as agents or
underwriters in connection with the sale of the securities. In connection with
any such offering, the underwriter may over-allot or effect transactions which
stabilize or maintain the market prices of the securities at levels above those
which might otherwise prevail in the open market. Such stabilizing, if commenced
by the underwriter, may be discontinued at any time.
Neither the Securities and Exchange Commission nor any state securities
commission has approved of disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
PRUDENTIAL SECURITIES
The date of this prospectus is _______, 1999
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IMPORTANT INFORMATION ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the securities in two separate
documents that progressively provide more detail: (1) this prospectus, which
provides general information, some of which may not apply to a particular series
of securities, and (2) the prospectus supplement relating to your series of
securities, which describes the specific terms of your series of securities.
This prospectus does not contain complete information about the offering
of your series of securities. Additional information is contained in the related
prospectus supplement. You are urged to read both this prospectus and the
related prospectus supplement in full. We can not sell the securities of a
series to you unless you have received both this prospectus and the related
prospectus supplement.
The prospectus supplement relating to a series of securities to be offered
under this prospectus will state:
o the aggregate principal amount, interest rate, and authorized
denominations of each class of such series;
o certain information concerning the mortgage loans and/or the
manufactured housing contracts, the originator(s) and any
servicer;
o the terms of any insurance relating to the mortgage loans
and/or the manufactured housing contracts;
o the terms of any credit enhancement for each class of such
series;
o information concerning any other assets of the related issuer,
including any reserve funds;
o the distribution dates for such series;
o the final scheduled distribution date of each class of such
series;
o the method to be used to calculate the amount of principal
required to be paid in respect of each class of such series on
each distribution date;
o additional information with respect to the plan of
distribution of such series; and
o the federal income tax characterization of each class of such
series.
If the terms for your series of securities vary between this prospectus
and the accompanying prospectus supplement, you should rely on the information
in the accompanying prospectus supplement.
REPORTS
Each issuer will be required to file certain reports with the Securities
and Exchange Commission pursuant to the requirements of the Securities Exchange
Act of 1934, as amended. Each issuer will suspend filing such reports if and
when such reports are no longer required under the Securities Exchange Act.
In connection with each distribution, and annually, the sponsor will cause
the related servicer to furnish securityholders with statements containing
information with respect to the assets of the related issuer, as described in
this prospectus and in the prospectus supplement for such series. See "Servicing
of the Loans--Reports to Securityholders." The servicer for each series will
furnish periodic statements
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setting forth certain specified information to the trustee for such series 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 and/or manufactured
housing contracts held by the related issuer. See "Servicing of the
Loans--Evidence as to Compliance" herein. Copies of the monthly and annual
statements provided by the related servicer to the related trustee will be
furnished to securityholders of the related series upon request addressed to
Prudential Securities Secured Financing Corporation, One New York Plaza, 14th
Floor, New York, New York 10292, Attention: Managing Director-Asset-Backed
Finance Group, (212) 778-1000.
AVAILABLE INFORMATION
The sponsor has filed a registration statement under the Securities Act of
1933, as amended, with the Securities and Exchange Commission with respect to
the securities offered pursuant to this prospectus. This prospectus contains,
and the prospectus supplement for each series of securities 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, you should read the registration statement and any amendments
thereof and exhibits thereto. You may obtain a copy of the registration
statement from the Public Reference Section of the Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of the
prescribed charges, or you may examine the registration statement free of charge
at the Securities and Exchange Commission's offices, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at the regional offices of the Securities and Exchange
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. In addition, the Securities and Exchange Commission
maintains a site on the World Wide Web containing reports, proxy and information
statements and other items. The address of the site is http://www.sec.gov.
You should rely only on the information contained in this prospectus and
in the accompanying prospectus supplement. We have not authorized anyone to
provide any information that is different. This prospectus and any accompanying
prospectus supplement do not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the securities offered hereby and thereby
nor an offer of the securities to any person in any state or other jurisdiction
in which such offer would be unlawful. The information set forth in this
prospectus speaks as of the date hereof. You should not assume that it will
remain correct after such date.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the sponsor pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, after the date of this
prospectus and prior to the termination of any offering of securities evidencing
interests therein. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for all purposes of this prospectus to the extent that a statement
contained herein (or in the accompanying prospectus supplement) or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference modifies or replaces such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
The sponsor 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 a series, a list identifying all filings with respect to
the related issuer pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act, since the latest fiscal year covered by its annual
report on Form 10-K, and a copy of any or
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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
series, other than the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests to the
sponsor should be directed to: Prudential Securities Secured Financing
Corporation, One New York Plaza, 14th Floor, New York, New York 10292,
Attention: Managing Director-Asset-Backed Finance Group, (212) 778-1000.
TABLE OF CONTENTS
Important Information About the Information Presented in this
Prospectus and the Accompanying Prospectus Supplement.....................2
Reports......................................................................2
Available Information........................................................3
Incorporation of Certain Information by Reference............................3
Table of Contents............................................................4
Summary of Prospectus........................................................5
Risk Factors................................................................10
The Trust Funds.............................................................18
Description of the Securities...............................................33
Credit Enhancement..........................................................37
Prepayment and Yield Considerations.........................................40
Use of Proceeds.............................................................43
The Sponsor.................................................................43
Servicing of the Loans......................................................43
Certain Legal Aspects of the Loans..........................................55
Certain Federal Income Tax Consequences.....................................70
State Tax Considerations....................................................88
ERISA Considerations........................................................89
Legal Investment............................................................92
Plan of Distribution........................................................93
Legal Matters...............................................................94
Ratings.....................................................................94
Additional Information......................................................95
Index of Significant Definitions............................................96
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SUMMARY OF PROSPECTUS
o This summary highlights selected information from this prospectus and does
not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the offering
of your series of securities, read carefully this entire prospectus and
the accompanying prospectus supplement.
o This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in
this prospectus and in the accompanying prospectus supplement.
o You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Significant
Definitions" beginning on page 96 of this prospectus.
Securities Offered
General
From time to time, the sponsor will cause the related issuer to issue one
or more series of securities which will consist of either asset-backed
certificates or asset-backed notes.
Each series of securities will be recourse to the assets of the related
issuer only and the sole source of payment for any series of securities will be
such assets. The securities will not be obligations, either recourse or
non-recourse, of the sponsor, the related servicer or any person other than the
related issuer.
The securities will consist of one or more classes of ownership securities
or debt securities.
Ownership Securities
Ownership securities represent beneficial ownership interests in the
assets held by the related issuer. Ownership securities of a series may be
issued in the following forms:
o grantor trust securities, representing interests in a grantor trust,
o partnership interest securities, representing interests in a trust
or other special purpose entity that is intended to be treated as a
partnership under the Internal Revenue Code,
o "real estate mortgage investment conduit" or REMIC securities,
representing interests in a REMIC trust, or a portion thereof, or
o "financial asset securitization investment trust" or FASIT
securities, representing interest in a FASIT trust, or a portion
thereof.
Debt Securities
Debt securities represent indebtedness secured by the assets of the
related issuer, which may be a business trust or other special purpose entity.
Debt securities will be issued in the form of notes.
Characteristics
Each series of securities will be issued in one or more classes, one or
more of which may be classes of:
o fixed-rate securities,
o adjustable-rate securities,
o compound-interest or accrual securities,
o planned-amortization-class securities,
o principal-only securities,
o interest-only securities,
o participating securities,
o senior securities, or
o subordinated securities.
The interest rate, principal balance, notional balance, minimum
denomination and form of each class of securities will be set forth in the
related prospectus supplement. The securities may be available in either fully
registered or
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book-entry form, as set forth in the related prospectus supplement.
Distributions
Distribution Dates
Distributions on the securities will be made monthly, quarterly, or
semiannually, on the dates specified in the related prospectus supplement.
Record Dates
Distributions will be made on each distribution date to holders of record
on the last business day of the month preceding the month in which such
distribution date occurs or on a another business day preceding such
distribution date, as set forth in the related prospectus supplement.
Interest
Holders of each class of securities are entitled to distributions of
interest on each distribution date equal to the interest accrued on the
principal balance or notional balance of such class at the applicable interest
rate during the related accrual period. Holders of subordinate classes of
securities may be subject to a lower payment priority than holders of the more
senior classes of such series.
Principal
With respect to each class of securities, distributions in reduction of
the principal balance will be made on each distribution date to the holders of
the securities of such class then entitled to receive such distributions until
the aggregate amount of such distributions have reduced the principal balance of
each such class of securities to zero. Distributions in reduction of the
principal balance will be allocated among the classes of such securities in the
manner specified in the applicable prospectus supplement. Distributions in
reduction of stated amount with respect to any class of securities 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.
Credit Enhancement
The issuer may provide for credit enhancement for one or more classes of a
series in the form of:
o subordination,
o overcollateralization,
o cross-collateralization,
o letters of credit, surety bonds or insurance policies, or
o reserve funds.
The credit enhancement will support the payments on the securities and may
be used for other purposes, to the extent and under the conditions specified in
the related prospectus supplement.
Subordination
A series of securities may include one or more classes of senior
securities and one or more classes of subordinated securities. The protection
afforded to senior securityholders of a series will be effected by a
preferential right of such senior securityholders to receive current
distributions on the related loans.
Subordination is intended to enhance the likelihood of the timely receipt
by the senior securityholders of their proportionate share of scheduled monthly
principal and interest payments on the related loans. Subordination is also
intended to reduce the likelihood that the senior securityholders will
experience losses.
Overcollateralization
Subordination provisions may be used to accelerate the amortization of one
or more classes of securities relative to the amortization of the related loans.
The accelerated amortization is achieved by the application of certain excess
cash flow to the payment of principal of such classes.
This acceleration feature creates overcollateralization equal to
o the excess of the aggregate principal balance of the related loans,
over
o the principal balance of the related class of securities.
Such acceleration may continue for the life of the related class, or may
be limited. In the case of limited acceleration, once the required level of
overcollateralization is reached, and subject to certain performance provisions,
such limited
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acceleration feature may cease, unless necessary to maintain the required level
of overcollateralization.
Cross-collateraliation
An issuer may issue classes of securities relating to separate pools of
loans. In such an event, excess cash from one pool may be used to make payments
in respect of shortfalls of principal of, or interest on, the classes relating
to the other pools of loans. Such cross-collateralization reduces the likelihood
of losses on all such cross-collateralized securities.
Letters of Credit, Surety Bonds and Insurance Policies
Credit enhancement for a series may consist of letters of credit, surety
bonds, special hazard insurance policies, and other types of guaranteed payments
or insurance supporting payments on the securities or funding certain accounts.
Any such credit enhancement will be provided by an institution acceptable
to the rating agency or agencies rating such series of securities.
Reserve Funds
The issuer may deposit cash, a letter or letters of credit, short-term
investments, or other instruments acceptable to the rating agencies in one or
more reserve funds. A reserve fund may also be funded through the application of
excess cash flow or through the application of distributions otherwise due to
subordinate classes of securities. A reserve fund will be used by the related
trustee to make required payments of principal of, or interest on, the
securities, to make adequate provision for future payments on such securities or
for any other purpose specified in the related prospectus supplement.
The Trust Funds
General
The assets of the issuer, or trust fund, for each series of securities may
consist of a pool of loans made up of any combination of mortgage loans and/or
manufactured housing contracts (or participations therein) and certain other
related property, as specified herein and in the related prospectus supplement.
The statistical characteristics of each such trust fund will be set forth in the
related prospectus supplement as further described herein under "The Trust
Funds."
Mortgage loans are fixed or adjustable rate promissory notes or other
evidences of indebtedness secured by residential properties, including detached
homes, townhouses, units in planned unit developments, condominium units,
mixed-use properties, vacation homes and small scale multifamily properties.
Manufactured housing contracts are fixed- or adjustable-rate manufactured
housing installment sale contracts or installment loan agreements. Each
manufactured housing contract may be secured by a new or used manufactured home.
Neither the securities nor the underlying 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.
Pre-Funding and Capitalized Interest Accounts
A trust fund may include one or more pre-funding accounts, the funds of
which will be used by the related issuer to purchase additional loans after the
closing date. Each such pre-funding account will be funded on the related
closing date with a portion of the proceeds of the sale of the related
securities.
The issuer may purchase additional loans during a period of time that will
not extend beyond the end of the third full month from the related closing date.
If the principal balance of additional loans purchased by the related issuer
during such period is less than the original amount on deposit in the
pre-funding account, the holders of the related securities will receive a
prepayment of principal equal to the amount of such difference. Any such
principal prepayment may adversely affect the yield to maturity of such
securities.
If a pre-funding account is established, one or more capitalized interest
accounts may be established and maintained with the trustee for the related
series. On the closing date for such series, a portion of the proceeds of the
sale of the securities of such series will be deposited in the
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capitalized interest account. Such amount will be used to fund any shortfall
during the pre-funding period between (x) the amount of interest which will
accrue on the securities and certain fees and expenses to be incurred by the
issuer during such period and (y) the amount of interest available from the
loans available for the payment therefor.
Redemption or Repurchase of Securities
One or more classes of securities of any series may be redeemed or
repurchased in whole or in part, at such time, by the related issuer, the
related servicer, the provider of credit enhancement, or an affiliate thereof at
the price (which would not be less than an amount necessary to pay all principal
and accrued interest on the outstanding securities) set forth in the related
prospectus supplement. Each such redemption or repurchase may occur on or after
such time as the aggregate principal balance of the securities of the series or
the loans relating to such series is less than a specified percentage (which
percentage shall not exceed 20%) of their respective original level.
If the holder of such right of optional termination fails to exercise such
right, the trustee, the related servicer or the related issuer may be required
to effect early retirement of a series of securities by soliciting competitive
bids for the purchase of the related loans at an auction sale or otherwise.
Legal Investment
The prospectus supplement will state whether or not the securities will
constitute "mortgage related securities" under the Secondary Mortgage Market
Enhancement Act of 1984.
Investors are urged to consult their legal advisors concerning the
appropriate characterization of the securities and to review "Legal Investment"
herein and in the related prospectus supplement.
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, including the prohibited transaction rules thereunder, and to
the corresponding provisions of the Internal Revenue Code of 1986, as amended,
should carefully review with its own legal advisors whether the purchase or
holding of securities could give rise to a transaction prohibited or otherwise
impermissible under ERISA or the Internal Revenue Code
Investors are urged to consult their own legal advisors concerning the
implications under ERISA of holding the securitie, and to review "ERISA
Considerations" herein and in the related prospectus supplement.
Certain Federal Income Tax Consequences
Each class of securities of each series offered by this prospectus and the
related prospectus supplement will, for federal income tax purposes, constitute
one of the following:
o interests in a trust treated as a grantor trust under applicable
provisions of the Internal Revenue Code,
o "regular interests" or "residual interests" in a trust treated as
one or more "real estate mortgage investment conduits" under
applicable provisions of the Internal Revenue Code,
o debt issued by the issuer,
o interests in an issuer which is treated as a partnership under
applicable provisions of the Internal Revenue Code, or
o "regular interests", "high-yield interests" or "ownership interests"
in a trust treated as one or more "financial asset securitization
investment conduits" under applicable provisions of the Internal
Revenue Code.
Investors are urged to consult their tax advisors and to review "Certain
Federal Income Tax Consequences" herein and in the related prospectus
supplement.
Ratings
At the date of issuance of each series of securities, the securities
offered by this prospectus and the related prospectus supplement will be rated
in one of the four highest rating categories by at least one statistical rating
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organization that has been requested by the issuer or the sponsor to rate such
securities. Such ratings will address, in the opinion of such rating agency, the
likelihood that the related issuer will be able to make timely payment from the
related trust fund of all amounts due on the related series of securities in
accordance with their terms. Such ratings will neither address any prepayment or
yield considerations applicable to any securities nor constitute a
recommendation to buy, sell or hold any securities.
The ratings expected to be received with respect to any securities will be
set forth in the related prospectus supplement.
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RISK FACTORS
For a discussion of all material risk factors that could make the offering
of the securities speculative or one of high risk, potential investors should
consider the following factors and the factors set forth under "Risk Factors" in
the related prospectus supplement.
Your investment in any security may be an illiquid investment, which may cause
you to hold this security to maturity.
A secondary market for the securities may not develop. If it does develop,
it may not provide holders with liquidity of investment or continue for
the life of the securities. The underwriter(s) may establish a secondary
market in such securities, although no underwriter will be obligated to do
so. Unless otherwise specified in the related prospectus supplement, the
securities will not be listed on any securities exchange or quoted in the
automated quotation system of a registered securities association.
Book-entry registration may reduce the liquidity of securities.
Issuance of the securities in book-entry form may reduce the liquidity of
such securities in the secondary trading market since some investors may
be unwilling to purchase securities for which they cannot obtain
definitive physical securities.
Transactions in securities may, in most cases, be effected only through
The Depository Trust Company or DTC, direct or indirect participants in
DTC's book-entry system and certain banks. Therefore, the ability of a
securityholder to pledge a security to persons or entities that do not
participate in the DTC system, or otherwise to take actions in respect of
such securities, may be limited due to lack of a physical certificate
representing the securities.
Securityholders may experience some delay in their receipt of
distributions of interest on and principal of the securities since
distributions may be required to be forwarded by the trustee to DTC. In
such a case, DTC will credit such distributions to the accounts of its
participants, which thereafter will credit them to the accounts of the
securityholders either directly or indirectly through indirect
participants in the DTC system. See "Description of the Securities"
herein.
ERISA laws may place restrictions on the acquisition, ownership and disposition
of securities.
Generally, the Employee Retirement Income Security Act of 1974, as
amended, or ERISA applies to investments made by benefit plans and
transactions involving the assets of such plans. Due to the complexity of
regulations which govern such plans, prospective investors that are
subject to ERISA are urged to consult their own counsel regarding
consequences under ERISA of acquisition, ownership and disposition of
Securities. See "ERISA Considerations" herein.
Prepayments on the loans may adversely affect the yield to maturity of your
securities.
The yield to maturity of the securities of each series may be adversely
affected by a higher or lower than anticipated rate of prepayments on the
related loans. The yield to maturity on interest-only securities purchased
at premiums or discounted to par will be extremely sensitive to the rate
of prepayments on the related loans. In addition, the yield to maturity on
certain other types of classes of securities, including certain classes in
a series including more than one class of securities, may be relatively
more sensitive to the rate of prepayment on the related loans than other
classes of securities.
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The loans may be prepaid in full or in part at any time, although
prepayment may require the obligor to pay of a prepayment penalty or
premium. Such penalties will generally not be property of the related
issuer. We cannot predict the rate of prepayments of the loans, which is
influenced by a wide variety of economic, social and other factors. Such
factors include prevailing mortgage market interest rates, the
availability of alternative financing, local and regional economic
conditions and homeowner mobility. Therefore, we can give no assurance as
to the level of prepayments that a trust fund will experience.
Prepayments may result from mandatory prepayments relating to unused
monies held in pre-funding accounts, voluntary early payments by borrowers
(including payments in connection with refinancings of the related senior
loans), sales of mortgaged properties subject to "due-on-sale" provisions
and liquidations due to default, as well as the receipt of proceeds from
physical damage, credit life and disability insurance policies. In
addition, repurchases or purchases from an issuer of loans or the payment
of substitution adjustments will have the same effect on the
securityholders as a prepayment of such loans. The related prospectus
supplement will specify whether any or all of the loans contain
"due-on-sale" provisions.
Collections on the loans may vary due to the level of incidence of
delinquent payments and of prepayments. Collections on the loans may also
vary due to seasonal purchasing and payment habits of borrowers.
As a result of optional or mandatory termination, you could be fully paid
significantly earlier than would otherwise be the case, which may adversely
affect the yield to maturity on your securities.
One or more classes of securities of any series may be subject to optional
redemption or repurchase, in whole or in part, on or after a specified
date, or on or after such time as the aggregate outstanding principal
amount of the loans or the securities is less than a specified amount or
percentage. Such amount or percentage will not exceed 20% of the original
aggregate principal balance of the loans or the securities. Neither the
issuer nor the securityholders will have any continuing liability under
such optional redemption or repurchase. If the optional termination is not
exercised, then one or more classes of securities may be subject to
mandatory termination by auction sale or other means. The risk of
reinvesting unscheduled distributions resulting from redemption or
repurchase of the securities will be borne by the holders. The optional
and mandatory termination described herein are the only circumstances in
which the securities could be retired earlier than would be the case if
the loans were allowed to mature to term.
Unused pre-funding amounts may adversely affect the yield on your investment.
If the trust fund includes a pre-funding account and the principal balance
of additional loans purchased by the issuer during the pre-funding period
is less than the original amount on deposit in the pre-funding account,
the holders of the securities of the related series will receive a
prepayment of principal to the extent of such difference. Any such
principal prepayment may adversely affect the yield to maturity of such
securities. Since prevailing interest rates are subject to fluctuation,
there can be no assurance that investors will be able to reinvest such a
prepayment at yields equaling or exceeding the yields on the related
securities. It is possible that the yield on any such reinvestment will be
lower, and may be significantly lower, than the yield on the related
securities.
Each such additional loan must satisfy the eligibility criteria specified
in the related prospectus supplement. Such eligibility criteria will be
determined in consultation with each rating agency and/or provider of
credit enhancement prior to the issuance of the related series and are
designed to ensure that if such additional loan were included as part
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of the initial trust fund, the credit quality of such assets would be
consistent with the initial rating of each class of securities of such
series. Following the purchase of additional loans by the issuer, the
aggregate characteristics of the loans then held in the trust fund may
vary from those of the initial loans held in such trust fund. As a result,
the additional loans may adversely affect the performance of the related
securities.
The ability of an issuer to purchase additional loans during the related
pre-funding period will be dependent on the availability of loans that
satisfy the requirements for purchase by the issuer. The availability of
such loans will be affected by a variety of social and economic factors,
including the prevailing level of market interest rates, unemployment
levels and consumer perceptions of general economic conditions.
The assets of the related issuer, as well as any applicable credit enhancement,
will be limited and, if such assets and/or credit enhancement become
insufficient to service the related securities, you may experience losses on
your securities.
The securities will not represent an interest in, or obligation of, either
recourse or non-recourse, of the sponsor, the servicer or any person other
than the related issuer. The only obligations of the foregoing entities
with respect to the securities or the loans will be the obligations, if
any, of the servicer pursuant to certain limited representations and
warranties made with respect to the loans, the servicer's servicing
obligations under the related servicing agreement and, if and to the
extent expressly described in the related prospectus supplement, certain
limited obligations of the servicer or another party in connection with a
purchase obligation or an agreement to purchase or act as remarketing
agent with respect to a convertible mortgage loan upon its conversion to a
fixed rate.
Notwithstanding the foregoing, certain types of credit enhancement for a
series, such as a financial guaranty insurance policy or a letter of
credit, may constitute a full recourse obligation of the provider of such
credit enhancement. Except as described in the related prospectus
supplement, neither the securities nor the underlying loans will be
guaranteed or insured by any governmental agency or instrumentality, or by
the sponsor, the servicer or any of their respective affiliates.
Proceeds of the related trust fund (including the loans and any form of
credit enhancement) will be the sole source of payments on the securities,
and there will be no recourse to the sponsor or any other entity in the
event that such proceeds are insufficient or otherwise unavailable to make
all payments provided for under the securities.
Credit enhancement will be limited in amount and scope of coverage and may not
be sufficient to cover losses on the loans, which may cause losses on your
security.
With respect to each series of securities, credit enhancement may be
provided in limited amounts to cover certain types of losses on the
underlying loans. Credit enhancement may be provided in one or more of the
forms referred to in this prospectus, including, but not limited to,
letters of credit, surety bonds, insurance policies, or reserve funds.
Credit enhancement also may be provided in the form of,
o subordination of one or more classes of securities in a series
under which losses in excess of those absorbed by any senior
of securities are first allocated to any subordinate
securities up to a specified limit,
o cross-collateralization among separate portions of the assets
of the trust fund, and/or
o overcollateralization resulting from the use of excess cash
flow to amortize certain classes of securities faster than the
amortization of the related pool of loans.
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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 enhancement 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 enhancement does 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 securities, if the
applicable rating agencies indicate that the then-current rating of such
series 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 securities. See "Credit Enhancement" herein.
Property values may decline, leading to higher losses on the loans, which may
cause losses on your securities.
An investment in securities such as these securities, which generally
represent beneficial ownership interests in the underlying loans or debt
secured by such loans, may be affected by, among other things, a decline
in real estate values and changes in the borrowers' financial condition.
We can not assure that values of the mortgaged properties have remained or
will remain at their levels on the dates of origination of the related
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 loans and any secondary financing become equal to or
greater than the value of the related 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
issuer in the mortgaged properties before having any effect on the
interest of the related senior mortgagee. In addition, in the case of
loans that are subject to negative amortization, due to the addition to
principal balance of deferred interest, the principal balances of such
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 securities 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.
Adjustable-rate loans may have a risk of default if loan payments increase.
Adjustable-rate 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.
Loans with balloon and non-traditional payment methods may create greater
default risk.
A portion of the aggregate principal balance of the loans at any time may
be balloon loans that provide for the payment of the unamortized principal
balance of such loan in a single payment at maturity. 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 loan generally 5, 7, 10, or 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
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substantially larger than the regular scheduled payments. Because
borrowers of balloon loans are required to make substantial single
payments upon maturity, it is possible that the default risk associated
with balloon loans is greater than that associated with fully-amortizing
loans.
Other types of loans that may be included in the assets of an issuer may
involve additional uncertainties not present in traditional types of
loans. For example, certain of the loans may provide for escalating or
variable payments by the borrower, as to which the borrower is generally
qualified on the basis of the initial payment amount. In some instances
the borrower's 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.
Loans with high loan-to-value ratios may create a risk of losses, which may
cause losses on your securities.
Certain of the loans may have combined loan-to-value or LTV ratios at the
time of origination in excess of 100%, generally up to a maximum of 125%.
As a result, the related mortgaged properties may not provide adequate
security for these high LTV loans. Underwriting analysis with respect to
high LTV loans relies more heavily on the mortgagor's creditworthiness
than on the protection afforded by the security interest alone. Such high
LTV loans are generally targeted as debt consolidation loans for repeat or
frequent borrowers with generally strong credit ratings.
Additionally, there is also the risk that if the related mortgagors
relocate, such mortgagors will be unable to discharge the loans in full
from the sale proceeds of the related mortgaged properties and any other
funds available to these borrowers. As a result, the costs incurred in the
collection and liquidation of high LTV loans may be higher than with
respect to loans with combined loan-to-value ratios of 100% or less
because the servicer may be required to pursue collection solely against
the mortgagor. The servicer may, in accordance with accepted servicing
procedures, pursue alternative methods to maximize proceeds therefrom,
including, without limitation, the modification of defaulted loans, which
may include the abatement of accrued interest or the reduction of a
portion of the outstanding principal balance of such defaulted loan.
Consequently, the losses on such defaulted loans may be more severe as
there is no assurance that any proceeds will be recovered.
Loans secured by junior liens may experience higher rates of delinquencies and
losses, which may cause losses on your securities.
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. The issuers 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 Loans--Foreclosure"
herein.
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Bankruptcy of mortgagors could cause losses on the loans, which may cause losses
on your security.
General economic conditions have an impact on the ability of borrowers to
repay 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 an
issuer could experience a loss with respect to such mortgagor's 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 loan or permanently reduce the principal balance of such loan
thereby either delaying or permanently limiting the amount received by the
issuer with respect to such loan. Moreover, in the event a bankruptcy
court prevents the transfer of the related mortgaged property to an
issuer, any remaining balance on such loan may not be recoverable.
Foreclosure of mortgaged properties involve delays and expense and could cause
losses on the loans, which may cause losses on your securities.
Even assuming that the mortgaged properties provide adequate security for
the loans, substantial delays could be encountered in connection with the
liquidation of defaulted loans and corresponding delays in the receipt of
related proceeds by the securityholders could occur. An action to
foreclose on a mortgaged property securing a 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 related servicer to foreclose on or sell the mortgaged
property or to obtain proceeds (net of expenses) from the liquidation of
the loan sufficient to repay all amounts due on the such 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 loan and not yet repaid, including payments to prior
lienholders, accrued fees of the servicer, 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 loans and insufficient funds are available from any
applicable credit enhancement, securityholders could experience a loss on
their investment.
Liquidation expenses with respect to defaulted loans do not vary directly
with the outstanding principal balance of the loan at the time of default.
Therefore, assuming that a servicer takes the same steps in realizing upon
a defaulted loan having a small remaining principal balance as it would in
the case of a defaulted loan having a 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 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 an issuer) which is not required to take an active
role in operating the mortgaged properties. See "Certain Legal Aspects of
Loans--Environmental Risks" herein.
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Certain of the mortgaged properties relating to loans may not be owner
occupied. It is possible that the rate of delinquencies, foreclosures and
losses on loans secured by non-owner occupied properties could be higher
than for loans secured by the primary residence of the borrower.
Geographic concentration of mortgaged properties may result in higher losses, if
particular regions experience downturns.
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
loans generally. The loans underlying certain series of securities may be
concentrated in such regions, and such concentrations may present risk
considerations in addition to those generally present for similar
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 filed with the Securities and Exchange Commission.
Environmental conditions on the mortgaged property may give rise to liability
for the issuer.
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
mortgaged property may give rise to a lien on the mortgaged property to
assure the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage or owner's interest against such
mortgaged property. In addition, under the laws of some states and under
the federal Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, or CERCLA, a lender may be liable, as an "owner" or
"operator," for costs of addressing releases or threatened releases of
hazardous substances that require remedy at a property, if agents or
employees of the lender have become sufficiently involved in the
operations of the borrower, regardless of whether or not the environmental
damage or threat was caused by a prior owner. A lender also risks such
liability on foreclosure of the mortgaged property.
Security interests in the manufactured homes may not be perfected and the issuer
may not realize upon the full amount due under the related contract.
Each manufactured housing contract is secured by a security interest in a
manufactured home. Each "land secured" contract will also be secured by
the real estate on which the related manufactured home is located.
Perfection of security interests in the manufactured homes and enforcement
of rights to realize upon the value of the manufactured homes as
collateral for the contracts are subject to a number of federal and state
laws, including the Uniform Commercial Code or UCC, as adopted in the
states in which the manufactured homes are located, and such states'
certificate of title statutes, but generally not their real estate laws.
Under such federal and state laws, a number of factors may limit the
ability of a holder of a perfected security interest in manufactured homes
to realize upon such manufactured homes or may limit the amount realized
to less than the amount due under the related contract. See "Certain Legal
Aspects of the Loans" herein.
In addition, because of the expense and administrative inconvenience
involved, the issuer and its affiliates may not amend any certificates of
the title related to any manufactured home to change the lienholder
specified therein to the trustee, and may not execute any transfer
instrument (including, among other instruments, UCC-3 assignments)
relating to any manufactured home in favor of the trustee or note thereon
the trustee's interest. Such
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amendment would require, consistent with the law of the related state,
filings at the state or county level for each contract. As a result, the
originator of the contract will remain the lienholder on the certificate
of title relating to the manufactured home. In some states, in the absence
of such an amendment, execution or notation, the assignment to the trustee
of the security interest in the manufactured homes located therein may not
be effective or such security interest may not be perfected. If any
otherwise effectively assigned security interest in favor of the trustee
is not perfected, such assignment of the security interest to the trustee
may not be effective against creditors of the originator to the extent it
continues to be specified as lienholder on any certificate of title or as
secured party on any UCC filing, or against a trustee in bankruptcy of the
such originator.
Each contract, other than a land secured contract, will be "chattel paper"
(as defined in the UCC in effect in the jurisdiction in which the related
manufactured home was located at origination). Under the UCC as in effect
in each such jurisdiction, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. The
trustee will have possession of the contracts. In addition, the originator
will make appropriate filings of UCC-1 financing statements in the office
of the secretary of state of the state where its principal place of
business is located to give notice of the trustee's ownership of the
contracts. The trustee's interest in the contracts could, through the
fraud or negligence of the trustee, be defeated if a subsequent purchaser
were able to take physical possession of the contracts without notice of
such assignment.
Further, because of the expense and administrative inconvenience involved,
the assignment of mortgages or deeds of trust to the trustee may not be
recorded with respect to the mortgages or deeds of trust securing each
land secured contract. Recordation of such assignments would require the
originator to retain counsel in the respective state, and make the
appropriate filing at the local level. The failure to record the
assignments to the trustee of the mortgage or deed of trust securing land
secured contracts may result in the sale of such contracts or the
trustee's rights in the land secured by the mortgage or deed of trust
being ineffective against creditors of the originator or against a trustee
in bankruptcy of the originator or against a subsequent purchaser of such
contracts from the originator, without notice of the sale to the trustee.
State and federal credit protection laws may limit collection of principal and
interest on the loans.
Applicable state laws generally regulate interest rates and other charges
and require certain disclosures. In addition, other state laws, public
policy and general principles of equity relating to the protection of
consumers, unfair and deceptive practices and debt collection practices
may apply to the origination, servicing and collection of the loans.
The loans may also be subject to federal laws, including:
o the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers
regarding the terms of the Loans,
o 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
o 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
principles may limit the
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ability of the related servicer to collect all or part of the principal
of, or interest on, the loans, may entitle the borrower to a refund of
amounts previously paid and, in addition, could subject the owner of the
loan to damages and administrative enforcement. See "Certain Legal Aspects
of Loans" herein.
The Civil Relief Act may limit the ability to collect on the loans.
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended, or similar state legislation, a mortgagor who enters
military service after the origination of the related 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 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 loans. In addition, the Civil Relief Act
imposes limitations that would impair the ability of the servicer to
foreclose on an affected loan during the mortgagor's period of active duty
status. Thus, in the event that such a loan goes into default, there may
be delays and losses occasioned by the inability to realize upon the
mortgaged property in a timely fashion.
Ratings are not recommendations to buy securities. A reduction in the rating of
any provider of credit enhancement would likely adversely impact the rating of
your securities.
Any securities offered hereunder will be rated in one of the four highest
rating categories by the rating agencies identified in the related
prospectus supplement. Any such rating would be based on, among other
things, the adequacy of the value of the trust fund and any credit
enhancement with respect to such series. Such rating should not be deemed
a recommendation to purchase, hold or sell securities, inasmuch as it does
not address market price or suitability for a particular investor.
There is also no assurance that any such rating will remain in effect for
any given period of time or may not be lowered or withdrawn entirely by
the rating agencies if in its judgment circumstances in the future so
warrant. In addition to being lowered or withdrawn to any erosion in the
adequacy of the value of the trust fund, such rating might also be lowered
or withdrawn, among other reasons, because of an adverse change in the
financial or other condition of a provider of credit enhancement or a
change in the rating of such credit enhancement provider's long term debt.
THE TRUST FUNDS
General
The asset-backed certificates (the "Certificates") or asset-backed notes
(the "Notes" and, together with the Certificates, the "Securities") offered
hereby will represent either a beneficial ownership interests in, or debt
secured by, the assets of a trust or other special-purpose entity (each, an
"Issuer"). The assets of the issuer (the "Trust Fund") for each series of
Securities will consist primarily of a segregated pool (each, a "Pool") of
Mortgage Loans (a "Mortgage Pool") and/or Contracts (a "Contract Pool"). The
Mortgage Loans and the Contracts are collectively referred to herein as the
"Loans." In addition, a Trust Fund may also include one or more of the
following: (i) amounts held from time to time in the related Collection Account;
(ii) the Issuer's interest in any primary mortgage insurance, hazard insurance,
title insurance and/or other insurance policies relating to a Loan; (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
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or trustee's sale; (iv) any Manufactured Home which initially secured a Contract
and which is acquired by repossession; (v) a Reserve Fund or Funds; (vi) 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. Some of the Loans may be delinquent to the extent
and as specified in the related prospectus supplement. The percentage of those
Loans which are delinquent shall not exceed 10% of the aggregate principal
balance of the Loans in the related Pool as of the Cut-Off Date for that series.
Unless otherwise specified in the applicable prospectus supplement, the Trust
Fund will not include, however, the portion of interest on the Loans which
constitutes the Fixed Retained Yield, if any. See "--Fixed Retained Yield"
below.
The Mortgage Pool and/or Contract Pool for a series will be originated or
acquired by an originator of Mortgage Loans and/or Contracts (the "Originator")
and transferred to the related Issuer either directly by the Originator or
through a special-purpose affiliate thereof. The Mortgage Pool or Contract Pool
relating to a series will be serviced by a servicer (the "Servicer"), which may
be the Originator, specified in the related prospectus supplement, pursuant to a
servicing agreement (each, a "Servicing Agreement") between the Issuer and
Servicer, with respect to a series of Securities.
The Mortgage Loans
Each Mortgage Pool will consist of mortgage loans (the "Mortgage Loans")
evidenced by promissory notes or other evidences of indebtedness (collectively,
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 adjustable, as
described in the related prospectus supplement. The Mortgage Loans may provide
for fixed level payments or be Graduated Payment Mortgage Loans, Graduated
Equity Mortgage Loans, Balloon Loans or Buy-Down Loans 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. The prospectus supplement for a
series will specify whether there will be any Fixed Retained Yield in any
Mortgage Loan and, if so, the owner thereof. See "Servicing of the Loans--Fixed
Retained Yield" herein. The Mortgage Loans will be secured by mortgages, deeds
of trust or other similar security instruments (collectively, 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 and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific 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.
Each Mortgage Loan must have an original term of maturity of not less than
5 years and not more than 40 years. Mortgage Loans having Loan-to-Value Ratios
at the time of origination exceeding 80% will generally 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
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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" or "LTV" of a Mortgage Loan is the
ratio, expressed as a percentage, of the principal amount of the Mortgage Loan
outstanding at the origination of such Mortgage 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 acquisition (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 Mortgaged 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 Enhancement or the insurance policies described herein, they will be
borne by holders of the Securities of the series relating to 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 related Mortgage Pool as of the
date (the "Cut-Off Date") such Mortgage Loans were pledged to the trustee (the
"Trustee") of the Securities, 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 Loan Rates and Net
Loan Rates borne by such Mortgage Loans, the weighted average Loan Rate at the
Cut-Off Date of such Mortgage Loans, the range of Net Loan-to-Value Ratios at
the time of origination and the highest outstanding principal balance at
origination of any such Mortgage Loan. A maximum of 5% (by aggregate principal
balance as of the Cut-Off Date) of the Mortgage Loans that are included in a
Trust Fund may deviate from the characteristics that are described in the
related 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 Mortgaged Properties, require at least
monthly payments of interest on any outstanding balance. The Mortgage Pools may
include adjustable-rate Mortgage Loans that provide for payment adjustments to
be made less frequently than adjustments in the payments. Each adjustment in the
Loan 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 Loan Rate
rises) or an increase (if the Loan 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
Graduated Payment Mortgage 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
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 Loan Rate until paid. If such limitations prevent the payments
from being sufficient to amortize fully the Mortgage Loan by its stated maturity
date, a lump sum payment equal to the remaining unpaid principal balance of such
Mortgage Loan will be due on such stated maturity date. See "Prepayment and
Yield Considerations."
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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 related prospectus supplement.
Each prospectus supplement will also set forth the percentage of the aggregate
principal balance as of the Cut-Off Date of the Mortgage Loans in the related
Mortgage Pool representing the refinancing of existing mortgage indebtedness and
the types of Mortgaged Properties.
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 Originator 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
Buy-Down 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 Collection Account,
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.
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 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" herein.
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 outstanding
balance in each case from time to time in such a manner so that the aggregate
outstanding balance does not exceed the maximum credit limit. A Home Equity Line
will be secured by either a senior or a junior lien Mortgage, and will bear
interest at either a fixed or an adjustable rate.
In certain states the borrower must, on the opening of an account, draw an
initial advance of not less than a specified amount. Home Equity Lines generally
amortize according to an Amortization Basis established at the time of the
initial advance. The "Amortization Basis" is the length of time in which the
initial advance plus interest will be repaid in full. The Amortization Basis of
the Home Equity Lines
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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 (the "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
Loan 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 Additional Advance on the related
Home Equity Line is to reset the commencement date of the original maturity term
to the date of such Additional 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 Additional Advance to a Home Equity Line with a
maturity of 15 years from the date of such Additional Advance. For certain Home
Equity Lines, the same type of recomputation exists for adjustments of the
related Loan 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 Mortgage 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.
A Mortgage Pool may include Mortgage Loans with combined Loan-to-Value
Ratios in excess of 100%, generally up to a maximum of 125% (the "High LTV
Loans"). For High LTV Loans, relatively more emphasis in the underwriting
analysis is placed on the borrower's payment history and ability to repay debt,
rather than on the collateral value of the related Mortgaged Property. High LTV
Loans are generally targeted as debt consolidation loans for repeat or frequent
borrowers with generally strong credit ratings. Lending decisions for these
loans are based on an analysis of the prospective Mortgagor's documented cash
flow and credit history supplemented by a collateral evaluation deemed
appropriate by the Originator.
A Mortgage Pool may include Graduated Equity Mortgage Loans. "Graduated
Equity Mortgage Loans" are fixed-rate, fully-amortizing Mortgage Loans which
provide for monthly payments based on a
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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 Mortgage Loans.
A Mortgage Pool may include Graduated Payment Mortgage Loans. "Graduated
Payment 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
Mortgage loan are not sufficient to pay the full interest accruing on the
mortgage loan, the interest payments on such 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 Securities. Thus, if the Mortgage Loans include
Graduated Payment Mortgage Loans, the Servicer will, establish a Reserve Fund,
which (together with reinvestment income thereon) will be sufficient to cover
the amount by which payments of interest on such Graduated Payment Mortgage
Loans assumed in calculating, distributions expected to be made on the
Securities of such series exceed scheduled interest payments according to the
relevant graduated payment mortgage plan for the period during which excess
occurs.
A Trust Fund may contain loans ("Convertible Mortgage Loans") which are
automatically repurchased by the Originator or the Servicer 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 Mortgage Note or (ii) switch from an
adjustable-rate Mortgage to a fixed-rate Mortgage pursuant to the terms of the
underlying Mortgage Note.
Payment Terms.
The payment terms of the Mortgage Loans to be included in a Trust Fund for
a series will be described in the related prospectus supplement and may include
any of the following features of combinations thereof or other features
described in the related prospectus supplement:
(a) Interest may be payable at a rate (each, a "Loan Rate") that
may be a fixed rate, a rate adjustable from time to time in relation to an
index (which will be specified in the related prospectus supplement), a
rate that is fixed for a period of time or under certain circumstances and
is followed by an adjustable rate, a rate that otherwise varies from time
to time, or a rate that is convertible from an adjustable rate to a fixed
rate or a fixed rate to an adjustable rate. Changes to a Loan Rate may be
subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and
added to the principal of a Mortgage Loan for such periods and under such
circumstances as may be specified in the related prospectus supplement.
Mortgage Loans may provide for the payment of interest at a rate lower
than the specified Loan Rate for a period of time of for the life of the
Mortgage Loan, and the amount of any difference may be contributed from
funds supplied by the seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to
fully amortize the Mortgage Loan over its term, may be calculated on the
basis of an assumed amortization schedule that is significantly longer
than the original term to maturity or on an interest rate that is
different from the Loan Rate or may not be amortized during all or a
portion of the original term. Payment of all or a substantial portion of
the principal may be due on maturity. Principal may include interest that
has been deferred and added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for
the life of the Mortgage Loan, may increase over a specified period of
time or may change from period to
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period. Mortgage Loans may include limits on periodic increases or
decreases in the amount of monthly payments and may include maximum or
minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the Mortgage Loan or may decline over
time, and may be prohibited for the life of the Mortgage Loan or for
certain periods. Certain Mortgage Loans may permit prepayments after
expiration of the applicable lockout period and may require the payment of
a prepayment fee in connection with any such subsequent prepayment. Other
Mortgage Loans may permit prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The Mortgage Loans may
include "due on sale" clauses which permit the mortgagee to demand payment
of the entire Mortgage Loan in connection with the sale or certain
transfers of the related Mortgaged Property. Other Mortgage Loans may be
assumable by persons meeting the then applicable underwriting standards of
the Originator.
Amortization of the Mortgage Loans.
The Mortgage Loans will provide for payments that are allocated to
principal and interest according to either the actuarial method, the simple
interest method or the "Rule of 78s" method, as set forth in the related
prospectus supplement. The related prospectus supplement will set forth whether
any of the Mortgage Loans will provide for deferred interest or negative
amortization.
An actuarial Mortgage Loan provides for payments in level monthly
installments (except, in the case of a Balloon Loan, the final payment)
consisting of interest equal to one-twelfth of the applicable Loan Rate times
the unpaid principal balance, with the remainder of such payment applied to
principal.
A simple interest Mortgage Loan provides for the amortization of the
amount financed under such Mortgage Loan over a series of equal monthly payments
(except, in the case of a Balloon Loan, the final payment). Each monthly payment
consists of an installment of interest which is calculated on the basis of the
outstanding principal balance of the Mortgage Loan being multiplied by the
stated Loan Rate and further multiplied by a fraction, the numerator of which is
the number of days in the period elapsed since the preceding payment of interest
was made and the denominator of which is the number of days in the annual period
for which interest accrues on such Mortgage Loan. As payments are received under
a simple interest Mortgage Loan, the amount received is applied first to
interest accrued to the date of payment and the balance is applied to reduce the
unpaid principal balance. Accordingly, if a borrower pays a fixed monthly
installment on a simple interest Mortgage Loan before its scheduled due date,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. However, the next
succeeding payment will result in an allocation of a greater amount to interest
if such payment is made on its scheduled due date.
Conversely, if a borrower pays a fixed monthly installment after its
scheduled Due Date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment under a simple interest Mortgage
Loan is made on or prior to its scheduled due date, the principal balance of the
Mortgage Loan will amortize in the manner described in the preceding paragraph.
However, if the borrower consistently makes scheduled payments after the
scheduled Due Date, the Mortgage Loan will amortize more slowly than scheduled.
If a simple interest Mortgage Loan is prepaid, the borrower is required to pay
interest only to the date of prepayment.
Certain of the Mortgage Loans contained in a Trust may be loans insured
under the FHA Title I credit insurance program created pursuant to Sections 1
and 2(a) of the National Housing Act of 1934 (the "Title I Program"). Under the
Title I Program, the FHA is authorized and empowered to insure qualified
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lending institutions against losses on eligible loans. The Title I Program
operates as a coinsurance program in which the FHA insures up to 90% of certain
losses incurred on an individual insured loan, including the unpaid principal
balance of the loan, but only to the extent of the insurance coverage available
in the lender's FHA insurance coverage reserve account. The owner of the loan
bears the uninsured loss on each loan. The types of loans which are eligible for
insurance by the FHA under the Title I Program include property improvement
loans ("Title I Loans") made to finance actions or items that substantially
protect or improve the basic livability or utility of a property and includes:
(1) single family, multifamily and nonresidential property improvement loans;
(2) manufactured home improvement loans, where the home is classified as
personality; (3) historic preservation loans; and (4) fire safety equipment
loans for existing health care facilities.
If specific information respecting the Mortgage Loans to be included in a
Trust Fund is not known to the Issuer at the time the Securities 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 Securities and Exchange
Commission promptly after the initial issuance of such Securities. A copy of the
related Agreement with respect to each series of Securities will be attached to
the Form 8-K and will be available for inspection at the corporate trust office
of the Trustee specified in the related prospectus supplement. A schedule of the
Mortgage Loans relating to such series will be attached to the related Agreement
delivered to the Trustee upon delivery of the Securities.
The Contracts
Each Contract Pool will consist of conventional manufactured housing
installment sales contracts and installment loan agreements (collectively, the
"Contracts") originated by the Originator or by a manufactured housing dealer in
the ordinary course of business and purchased by the Originator. Each Contract
will be secured by Manufactured Homes, each of which will be located in any of
the fifty states or the District of Columbia. The Contracts will be fully
amortizing and will bear interest at a fixed or adjustable annual percentage
rate ("APR"). 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" herein.
The Originator will represent that the homes securing the Contracts (the
"Manufactured Homes") 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."
Manufactured Homes, unlike site-built homes, generally depreciate in
value. Consequently, at any time after origination it is possible, especially in
the case of Contracts with high Loan-to-Value Ratios at origination, that the
market value of a Manufactured Home may be lower than the principal amount
outstanding under the related Contract.
The prospectus supplement for each series will set forth certain
characteristics of the related Contracts, which may include the aggregate
principal balance of the Contracts in the Contract
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Pool as of the Cut-Off Date for such series, 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 Loan Rates and Net Loan
Rates borne by such Contracts, the weighted average Net Loan Rate at the Cut-Off
Date of such Contracts, the range of such Contracts which had Loan-to-Value
Ratios at the time of origination of the Contracts and the highest outstanding
principal balance at origination of any such Contract. A maximum of 5% (by
aggregate principal balance as of the Cut-Off Date) of the aggregate Contracts
that are included in a Trust Fund will deviate from the characteristics that are
described in the related prospectus supplement.
The "Loan-to-Value Ratio" or "LTV" of a Contract 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 or acquisition 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.
The Contracts in a Trust Fund will generally have Due Dates on the first
of each month and will be fully-amortizing Contracts. Contracts may have Due
Dates which occur on a date other than the first of each month. The Contract
Pools may include adjustable rate Contracts that provide for payment adjustments
to be made less frequently than adjustments in the payments. Each adjustment in
the Loan 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 Loan Rate
rises) or an increase (if the Loan 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 Loan 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"
herein.
The geographic distribution of Manufactured Homes will be set forth in the
prospectus supplement. Each prospectus supplement will set forth the percentage
of the aggregate principal balance of any Contracts as of the Cut-Off Date 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 aggregate principal balance of the Contracts as of
the Cut-Off Date in the related Contract Pool representing the refinancing of
existing mortgage indebtedness.
If specific information respecting the Contracts to be included in a Trust
Fund is not known to the Issuer at the time the Securities 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 Securities and Exchange
Commission promptly after the initial issuance of such Securities.
Fixed Retained Yield
"Fixed Retained Yield" with respect to any Loan is that portion, if any,
of interest at the Loan Rate that is retained by the Issuer 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
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respect to the Loans of such series, and, if so, the owner thereof. If so, the
Fixed Retained Yield will be established on a loan-by-loan basis and will be
specified in the schedule of Loans attached as an exhibit to the applicable
Agreement. The Servicer, with respect to Loans, may deduct the Fixed Retained
Yield from payments as received and prior to deposit of such payments in the
Collection Account for such series or may (unless an election has been made to
treat the Trust Fund (or one or more segregated pools of assets therein) as a
REMIC) withdraw the Fixed Retained Yield from the Collection Account after the
entire payment has been deposited in the Collection Account. Notwithstanding the
foregoing, any partial payment or recovery of interest received by the Servicer
relating to a Loan (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 on a pari passu basis.
Insurance Policies
The related Agreement may require the Servicer to cause to be maintained
for each Loan 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"). Such Standard Hazard Insurance
Policy will generally 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 Loan; 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 may 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 Loan plus, if required by the applicable
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 Collection 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
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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 related 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 related Agreement will require that such flood
insurance be in an amount not less than the lesser of (i) the amount required to
compensate for any loss or damage to the Mortgaged Property on a replacement
cost basis and (ii) the maximum amount of insurance which is available under the
federal flood insurance program.
Any losses incurred with respect to Loans due to uninsured risks
(including earthquakes, mudflows, floods, hazardous wastes and hazardous
substances) or insufficient hazard insurance proceeds could affect distributions
to the Securityholders.
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 Trust
Fund.
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 or Contract (plus accrued and unpaid interest thereon and certain
approved expenses) over a specified percentage of the value of the related
Mortgaged Property or Manufactured Home.
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 (x) hazard insurance premiums and (y) 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.
Acquisition of the Loans from the Originator
The Loans underlying a series of Securities will be acquired by the Issuer
from the Originator, either directly or through a special-purpose affiliate
thereof, pursuant to a separate agreement or agreements (collectively, a "Loan
Sale Agreement"). Each Loan so acquired will have been originated or acquired by
the Originator thereof in accordance with the underwriting criteria specified
herein under "Underwriting Guidelines". Pursuant to the related Loan Sale
Agreement, the Originator will make certain representations and warranties in
respect of the Loans being acquired from such Originator as described herein
under "--Representations and Warranties".
Assignment of the Loans
At the time of the issuance of the Securities of a series, the Issuer 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 related Trustee, together with all principal and interest
received by or on behalf of the Issuer on or with respect to such Loans 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, and the Originator shall thereupon
be
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liable to the Trustee for defective loan documents or an uncured breach of the
representations or warranties regarding the Loans, to the extent described
below. The Trustee or its agent will, concurrently with such assignment,
authenticate and deliver the Securities evidencing such series to the Issuer in
exchange for the Loans. Each Loan will be identified in a schedule appearing as
an exhibit to the applicable 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 Loan Rate for each Loan in the related Trust
Fund.
With respect to each Mortgage Loan in a Trust Fund, the Mortgage Note 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 Originator
or the Seller 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 Securities for the related Trust Fund,
except in states where, 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 Originator or any affiliate of the
Originator.
With respect to any Mortgage Loans which are Cooperative Loans, the Issuer
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
Originator 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 Securityholders to the Contracts, the Sponsor will cause a UCC-1 financing
statement to be executed identifying the Trustee as the secured party and
identifying all Contracts as collateral. The Contracts will not be stamped or
otherwise marked to reflect their assignment to the Issuer. 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 Securityholders in the Contracts could be defeated. See "Certain
Legal Aspects of the Loans."
The Trustee (or the designated custodian) will hold such documents
relating to Mortgage Loans generally or Contracts in trust for the benefit of
Securityholders of the related series and will review such documents within 45
days of the date of the applicable Agreement. 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 Issuer, and the Servicer shall
immediately notify the Originator. If the Originator cannot cure such omission
or defect within 60 days after receipt of such notice, the Originator will be
obligated, pursuant to the related Loan Sale Agreement, either to repurchase the
related Loan 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
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accrued and unpaid interest at the applicable Loan Rate (less any Fixed Retained
Yield and less the rate, if any, of Servicing Fee payable with respect to such
Loan) through the last day of the month in which such repurchase takes place or
to substitute one or more new Loans for such Loan. In the case of a Loan so
repurchased, the purchase price will be deposited in the related Collection
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 the Originator 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 the
Originator for a breach of representation or warranty. However, as in the case
of an uncured breach of such a representation or warranty, neither the Servicer
(unless the Servicer is the Originator) nor the Issuer will be obligated to
purchase or substitute for such Loan if the Originator defaults on its
repurchase or substitution obligation, unless such breach also constitutes a
breach of the representations or warranties of the Servicer or the Issuer, as
the case may be. This repurchase or substitution obligation constitutes the sole
remedy available to the Securityholders 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 Loans. The custodian will keep such
documents as the Trustee's agent under a custodial agreement.
Representations and Warranties
The Originator, pursuant to the related Loan Sale Agreement, will have
made representations and warranties in respect of the Mortgage Loans. The
Originator will have represented, among other things, substantially to the
effect that (i) immediately prior to the sale and transfer of such Mortgage
Loans, the Originator 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 time 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 (i) specifically referred to in the appraisal made in
connection with the origination of the related Mortgage Loan or (ii) 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
Mortgage Loan) and such property is free of material damage and is in adequate
repair, (vi) as of the date of such transfer, 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 Agreement.
The Originator, pursuant to the related Loan Sale Agreement, will have
made representations and warranties in respect of the Contracts. The Originator
will have represented, among other things, substantially to the effect that (i)
immediately prior to the sale and transfer of such Contracts, the
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Originator 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 adequate repair, (v)
as of the date of such transfer, 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 Agreement and all premiums then
due on such insurance have been paid in full.
All of the representations and warranties of the Originator in respect of
a Loan will have been made as of the date on which the Originator sold the Loan
to the Issuer. 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 Securities. Since the representations
and warranties referred to in the preceding paragraphs are the only
representations and warranties that will be made by the Originator, the
repurchase obligation described below will not arise if, during the period
commencing on the date of sale of a Loan by the Originator, the relevant event
occurs that would have given rise to such an obligation had the event occurred
prior to sale of the affected Loan. However, the Issuer will not include any
Loan in the Trust Fund for any series of Securities if anything has come to the
Issuer's attention that would cause it to believe that the representations and
warranties of the Originator will not be accurate and complete in all material
respects in respect of such Loan as of the date of initial issuance of the
related series of Securities.
The Servicer, or the Trustee if the Servicer is the Originator, will
promptly notify the Originator of any breach of any representation or warranty
made by it in respect of a Loan which materially and adversely affects the
interests of the Securityholders in such Loan. If the Originator cannot cure
such breach within 60 days after notice from the Servicer or the Trustee, as the
case may be, then the Originator will be obligated either (i) to repurchase such
Loan from the Trust Fund at the applicable purchase price or (ii) subject to the
Trustee's approval and to the extent permitted by the related Agreement, to
substitute for such Loan (a "Deleted Loan") one or more Loans, 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 (2) years of the date of
initial issuance of the Securities 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 Securities. 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 Loan Rate not less than the Loan Rate
of the Deleted Loan, (iii) have a Net Loan Rate not less than the Net Loan Rate
of the Deleted Loan, (iv) have a remaining term to maturity not greater 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 Loan 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 Section 860G of the Internal Revenue Code
of 1986, as amended (the "Code") 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 Loan Rates and Net Loan Rates, as
the case may be, 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 Originator 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
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Substitute Loan or Loans, together with interest on such excess at the Loan Rate
to the next scheduled Due Date of the Deleted Loan. Such amount will be
deposited in the Collection Account for distribution to Securityholders. Except
in those cases in which the Servicer is the Originator, the Servicer will be
required under the applicable Agreement to enforce this repurchase or
substitution obligation for the benefit of the Trustee and the holders of the
Securities, following the practices it would employ in its good faith business
judgment were it the owner of such Loan. This repurchase or substitution
obligation will constitute the sole remedy available to holders of Securities or
the Trustee for a breach of representation by the Originator.
None of the Sponsor, the Issuer or the Servicer (unless the Servicer is
the Originator) will be obligated to purchase or substitute for a Loan if the
Originator defaults on its obligation to do so, and no assurance can be given
that the Originator will carry out their respective repurchase obligations with
respect to Loans.
The Originator, 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 related Mortgage Pool or Contract
Pool and as to such other matters concerning such Pools as may be described
therein. Upon a breach of any such representation or warranty which materially
and adversely affects the interests of the Securityholders in a Loan, the entity
making such representation or warranty will be obligated either to cure the
breach in all material respects, repurchase the Loan at the purchase price or
substitute for such Loan in the manner, and subject to the conditions, described
above regarding the obligations of the Originator with respect to missing or
defective loan documents or the breach of such the Originator's representations
and warranties. This repurchase or substitution obligation constitutes the sole
remedy available to the Securityholders or the Trustee for a breach of a
representation or warranty by the Originator, the Servicer or such other party,
respectively.
Pre-Funding Accounts
A Trust Fund may include one or more segregated trust accounts (each, a
"Pre-Funding Account") established and maintained with the Trustee for the
related series. On the closing date for such series, a portion of the proceeds
of the sale of the Securities of such series (such amount, the "Pre-Funded
Amount") will be deposited in the Pre-Funding Account and may be used to acquire
additional Loans (the "Additional Loans") during the period of time specified in
the related prospectus supplement (the "Pre-Funding Period"). If any Pre-Funded
Amount remains on deposit in the Pre-Funding Account at the end of the
Pre-Funding Period, such amount will be applied in the manner specified in the
related prospectus supplement to prepay the Securities of the applicable series.
If a Pre-Funding Account is established, (a) the Pre-Funding Period will
not extend beyond the last day of the third full month after the related closing
date, (b) the Additional Loans to be acquired during the Pre-Funding Period will
be subject to the same representations and warranties and satisfy the same
eligibility requirements as the Loans included in the related Trust Fund on the
closing date, subject to such exceptions as are expressly stated in such
prospectus supplement and (c) prior to the investment of the Pre-Funded Amount
in additional Loans, such Pre-Funded Amount will be invested in one or more
eligible investments ("Eligible Investments") allowed by the rating agencies or
the Credit Enhancer. Any eligible investment must mature no later than the
business day prior to the next Distribution Date.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related series. On the closing date for such
series, a portion of the proceeds of the sale of the Securities of such series
will be deposited in the Capitalized Interest Account and used to fund the
excess, if any, of (i) the sum of the amount of interest accrued on the
Securities of such series and certain fees or expenses during the Pre-Funding
Period, over (ii) the amount of interest available therefor from the Loans in
the Trust Fund. Any amounts on deposit in the Capitalized Interest Account at
the end of the Pre-Funding Period that are not
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necessary for such purposes will be distributed to the person specified in the
related prospectus supplement.
If a Trust Fund includes a Pre-Funding Account and the principal balance
of additional Loans delivered to the Trust Fund during the Pre-Funding Period is
less than the original Pre-Funded Amount, the Holders of the Securities of the
related series will receive a prepayment of principal as and to the extent
described in the related prospectus supplement. Any such principal prepayment
may adversely affect the yield to maturity of the applicable Securities. Since
prevailing interest rates are subject to fluctuation, there can be no assurance
that investors will be able to reinvest such a prepayment at yields equaling or
exceeding the yields on the related Securities. It is possible that the yield on
any such reinvestment will be lower, and may be significantly lower, than the
yield on the related Securities.
DESCRIPTION OF THE SECURITIES
General
The Securities will be issued in series. Each series of Securities (or, in
certain instances, two or more series of Securities) will be issued pursuant to
a pooling and servicing agreement, a trust agreement (or other similar
agreement) or an indenture (collectively, the Agreements"). Each series of
Grantor Trust Securities, REMIC Securities and FASIT Securities will be issued
pursuant to a pooling and servicing agreement. Each series of Debt Securities
will be issued pursuant to an indenture. Each series of Partnership Interests
will be issued pursuant to a trust agreement or other similar agreement. The
following summaries describe certain provision of the Agreements. The summaries
are not complete and are subject to all of the provisions of the Agreement for
the related Issuer and the related prospectus supplement. We will file each
Agreement executed and delivered with respect to each series with the Securities
and Exchange Commission as an exhibit to a Current Report on Form 8-K promptly
after issuance of the Securities of such series. We will provide a copy of the
Agreement (without exhibits) relating to any series without charge upon written
request of a holder of a Security of such series addressed to Prudential
Securities Secured Financing Corporation, One New York Plaza, 14th Floor, New
York, New York 10292, Attention: Managing Director-Asset Backed Finance Group.
Neither the Securities nor the underlying Loans will be guaranteed or
insured by any governmental agency or instrumentality or the Sponsor, the
Issuer, the Servicer, the Trustee, the Originator or any of their respective
affiliates.
The Securities will consist of two basic types: (i) Certificates
representing beneficial ownership interests in the assets held by the related
Issuer and (ii) Notes representing debt secured by the assets held by the
related Issuer. Each series or class of Securities may have a different rate of
interest (the "Interest Rate"), which may be fixed or adjustable. The related
prospectus supplement will specify the Interest Rate for each series or class of
Securities, or the initial Interest Rate and the method for determining
subsequent changes to the Interest Rate.
A series may include one or more classes of Securities ("Strip
Securities") entitled to (i) principal distributions, with disproportionate,
nominal or no interest distributions, or (ii) interest distributions, with
disproportionate, nominal or no principal distributions. In addition, a series
may include two or more classes that differ as to timing, sequential order,
priority of payment, Interest Rate or amount of distributions of principal or
interest or both. Distributions of principal or interest or both on any class
may be made upon the occurrence of specified events, in accordance with a
schedule or formula, or on the basis of collections from designated portions of
the related Pool. A series may include one or more classes of Securities
("Accrual Securities"), as to which certain accrued interest will not be
distributed but rather will be added to the principal balance of the related
Security (or nominal principal balance in the case of Accrual Securities which
are also Strip Securities) on each Distribution Date.
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A series of Securities may include one or more classes of Securities
(collectively, the "Senior Securities") that are senior to one or more classes
of Securities (collectively, the "Subordinate Securities") in respect of certain
distributions of principal and interest and allocations of losses on the Loans.
In addition, certain classes of Senior (or Subordinate) Securities may be senior
to other classes of Senior (or Subordinate) Securities in respect of such
distributions or losses.
Each Trust may also issue classes of subordinated equity participation
securities which will represent the right to receive the proceeds of the related
Trust Fund after all required payments have been made to the holders of the
related Securities (both Senior Securities and Subordinate Securities), and
following any required deposits to any Reserve Fund that may be established for
the benefit of the related Securities. Such classes of Securities may constitute
what are commonly referred to as the "residual interest," "seller's interest" or
the "general partnership interest," depending upon the treatment of the related
Issuer for federal income tax purposes and generally will not be styled as
having principal and interest components. Any losses suffered by the related
Trust Fund first will generally be absorbed by the related class of Equity
Participation Securities.
Distributions.
Securityholders will be entitled to receive payments on their Securities
on specified dates ("Distribution Dates"). Distribution Dates will occur
monthly, quarterly or semi-annually, as specified in the related prospectus
supplement. The Distribution Date will be the specified day of each month (or,
in the case of quarterly-pay Securities, the specified day of every third month;
and, in the case of semi-annually-pay Securities, the specified day of every
sixth month) or if such day is not a business day, the next succeeding business
day.
The related prospectus supplement will describe a date (the "Record Date")
preceding such Distribution Date, as of which the Trustee or its paying agent
will fix the identity of the Securityholders for the purpose of receiving
payments on the next succeeding Distribution Date. The Record Date will be
either the close of business as of the last day of the calendar month which
precedes the related Distribution Date or the day immediately prior to such
Distribution Date.
The related prospectus supplement and the related Agreement will describe
a period (a "Remittance Period") prior to each Distribution Date (for example,
in the case of monthly-pay Securities, the calendar month preceding the month in
which a Distribution Date occurs or such other specified period). Interest
accrued and principal collected on or with respect to the related Pool during a
Remittance Period will be required to be remitted by the Servicer to the related
Trustee prior to the related Distribution Date and will be used to distribute
payments to Securityholders on such Distribution Date. The related Agreement may
provide that all or a portion of the principal collected on or with respect to
the related Pool may be applied by the related Trustee to the acquisition of
subsequent Loans during a specified period (rather than used to distribute
payments of principal to Securityholders during such period) with the result
that the related Securities possess an interest-only period, also commonly
referred to as a revolving period, which will be followed by an amortization
period. Any such interest-only or revolving period may, upon the occurrence of
certain events, terminate prior to the end of the specified period and result in
the earlier than expected amortization of the related Securities.
Beginning on the Distribution Date in the month following the month (or,
in the case of quarterly-pay Securities, the third month following such month
and each third month thereafter or, in the case of semi-annually-pay Securities,
the sixth month following such month and each sixth month thereafter) in which
the Cut-Off Date occurs for a series of Securities, distributions of principal
and accrued interest (or, where applicable, of principal only or interest only)
on each class of Securities entitled thereto will be made either by the Trustee
or a paying agent appointed by the Trustee (the "Paying Agent"), to the persons
who are registered as Securityholders at the close of business on the Record
Date. Interest that accrues and is not payable on a class of Securities will
generally be added to the principal balance of each Security of such class.
Distributions will be made in immediately available funds (by wire transfer or
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otherwise) to the account of a Securityholder at a bank or other entity having
appropriate facilities therefor, if such Securityholder has so notified the
Trustee or the Paying Agent, as the case may be, and the applicable Agreement
provides for such form of payment, or by check mailed to the address of the
person entitled thereto as it appears on the Security register; provided,
however, that the final distribution in retirement of the Securities (other than
any Book-Entry Securities) will be made only upon presentation and surrender of
the Securities at the office or agency of the Trustee specified in the notice to
Securityholders of such final distribution.
Principal and Interest on the Securities
The method of determining, and the amount of, distributions of principal
and interest (or, where applicable, of principal only or interest only) on a
particular series of Securities will be described in the related prospectus
supplement. Each class of Securities (other than certain classes of Strip
Securities) may bear interest at a different Interest Rate. The related
prospectus supplement will specify the Interest Rate for each class, or in the
case of an adjustable Interest Rate, the initial Interest Rate and the method
for determining the Interest Rate. Interest on the Securities will be calculated
either on the basis of a 360-day year consisting of twelve 30-day months, on the
basis of the actual number of days in the related accrual period over 360 or on
the basis of the actual number of days in the related accrual period over 365.
On each Distribution Date for a series of Securities, the Trustee will
distribute or cause the Paying Agent to distribute, as the case may be, to each
holder of record on the Record Date of a class of Securities, an amount equal to
the percentage interest represented by the Security held by such holder
multiplied by the Distribution Amount for such class. The "Distribution Amount"
for a class of Securities for any Distribution Date will be the portion, if any,
of the principal distribution amount allocable to such class for such
Distribution Date, plus, if such class is entitled to payments of interest on
such Distribution Date, the interest accrued at the applicable Interest Rate on
the principal balance or notional amount of such class, less the amount of any
Deferred Interest added to the principal balance of the Mortgage Loans and/or
the outstanding balance of one or more classes of Securities on the related Due
Date and any other interest shortfalls allocable to Securityholders which are
not covered by advances or the applicable Credit Enhancement.
In the case of a series of Securities that includes two or more classes of
Securities, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple classes of Senior Securities or Subordinate Securities) of each
such class shall be as provided in the related prospectus supplement. Generally,
distributions in respect of principal of any class of Securities will be made on
a pro rata basis among all of the Securities of such class.
On or prior to the second business day next preceding the Distribution
Date (or such earlier day as shall be agreed by the related provider of credit
enhancement (the "Credit Enhancer"), if any, and the related Trustee) (the
"Determination Date"), the related Trustee will determine the amounts of
principal and interest which will be passed through to Securityholders on the
immediately succeeding Distribution Date. If the amount in the Collection
Account is insufficient to cover the amount to be passed through to
Securityholders, the related Trustee will be required to notify the related
Credit Enhancer, if any, pursuant to the related Agreement for the purpose of
funding such deficiency.
Form of Securities
The Securities of each series will be issued as physical certificates
("Physical Certificates") in fully registered form only in the denominations
specified in the related prospectus supplement, and will be transferable and
exchangeable at the corporate trust office of the registrar of the Securities
(the "Security Registrar") named in the related prospectus supplement. No
service charge will be made for
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any registration of exchange or transfer of Securities, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
If so specified in the related prospectus supplement, specified classes of
a series of Securities will be issued in uncertificated book-entry form
("Book-Entry Securities"), and will be registered in the name of Cede, the
nominee of The Depository Trust Company ("DTC"). DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the UCC
and a "clearing agency" registered pursuant to the provisions of Section 17A of
the Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for its participating organizations ("Participants") and facilitate
the clearance and settlement of securities transactions between Participants
through electronic book-entry changes in their accounts, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system also is
available to others such as brokers, dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
Under a book-entry format, Securityholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Securities registered in the name of Cede, as nominee of DTC, may
do so only through Participants and Indirect Participants. In addition, such
Securityholders will receive all distributions of principal of and interest on
the Securities from the Trustee through DTC and its Participants. Under a
book-entry format, Securityholders will receive payments after the related
Distribution Date because, while payments are required to be forwarded to Cede,
as nominee for DTC, on each such date, DTC will forward such payments to its
Participants, which thereafter will be required to forward such payments to
Indirect Participants or Securityholders. Unless and until Physical Securities
are issued, it is anticipated that the only Securityholder will be Cede, as
nominee of DTC, and that the beneficial holders of Book-Entry Securities will
not be recognized by the Trustee as Securityholders under the Agreement. The
beneficial holders of such Securities will only be permitted to exercise the
rights of Securityholders under the Agreement indirectly through DTC and its
Participants who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Securities and is required to
receive and transmit payments of principal of and interest on the Securities.
Participants and Indirect Participants with which Securityholders have accounts
with respect to their Book-Entry Securities similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Securityholders. Accordingly, although Securityholders will not
possess Securities, the rules provide a mechanism by which Securityholders will
receive distributions and will be able to transfer their interests.
Unless and until Physical Certificates are issued, Securityholders who are
not Participants may transfer ownership of Securities only through Participants
by instructing such Participants to transfer Securities, by book-entry transfer,
through DTC for the account of the purchasers of such Securities, which account
is maintained with their respective Participants. Under the rules and in
accordance with DTC's normal procedures, transfers of ownership of Securities
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the respective Participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Securityholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a Physical Certificate for such
Securities.
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DTC in general advises that it will take any action permitted to be taken
by a Securityholder under an Agreement only at the direction of one or more
Participants to whose account with DTC the related Securities are credited.
Additionally, DTC in general advises that it will take such actions with respect
to specified percentages of the Securityholders only at the direction of and on
behalf of Participants whose holdings include current principal amounts of
outstanding Securities that satisfy such specified percentages. DTC may take
conflicting actions with respect to other current principal amounts of
outstanding Securities to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Securities.
Any Securities initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to Securityholders or
their nominees, rather than to DTC or its nominee only under the events
specified in the related Agreement and described in the related prospectus
supplement. Upon the occurrence of any of the events specified in the related
Agreement and the prospectus supplement, DTC will be required to notify all
Participants of the availability through DTC of Physical Certificates. Upon
surrender by DTC of the securities representing the Securities and instruction
for reregistration, the Trustee will issue the Securities in the form of
Physical Certificates, and thereafter the Trustee will recognize the holders of
such Physical Certificates as Securityholders. Thereafter, payments of principal
of and interest on the Securities will be made by the Trustee directly to
Securityholders in accordance with the procedures set forth herein and in the
Agreement. The final distribution of any Security (whether Physical Certificates
or Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Distribution Date at
such office or agency as is specified in the notice of final payment to
Securityholders.
None of the Sponsor, the Issuer, the Originator, the Servicer or the
Trustee will have any liability for any actions taken by DTC or its nominee or
Cedelbank or Euroclear, including, without limitation, actions for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the Securities held by Cede, as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
CREDIT ENHANCEMENT
General.
Various forms of Credit Enhancement may be provided with respect to one or
more classes of a series of Securities or with respect to the Mortgage Loans in
the related Trust Fund. "Credit Enhancement" may be in the form of (i) the
subordination of one or more classes of Subordinate Securities to provide credit
support to one or more classes of Senior Securities, (ii) overcollateralization,
(iii) the cross-collateralization, (iv) the use of a surety bond, special hazard
insurance policy, letter of credit or other third party guarantees, (v) the use
of a Reserve Fund, or (vi) any combination of the foregoing. Any Credit
Enhancement will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance of the Securities and
interest thereon. If losses occur that exceed the amount covered by Credit
Enhancement or are not covered by the Credit Enhancement, holders of one or more
classes of Securities will bear their allocable share of deficiencies.
The descriptions of any insurance policies or bonds described in this
prospectus or any prospectus supplement and the coverage thereunder are not
complete and are qualified in their entirety by reference to the actual forms of
such policies, copies of which are available upon request.
Subordination
The subordination of one or more classes of Subordinate Securities
provides Credit Enhancement to the related Senior Securities. With respect to
any Senior/Subordinate series of Securities, the total amount available for
distribution on each Distribution Date, as well as the method for allocating
such
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amount among the various classes of Securities included in such series, will be
as set forth in the related prospectus supplement. Generally, the amount
available for contribution will be allocated first to interest on the Senior
Securities of such series, and then to principal of the Senior Securities up to
the amounts determined as specified in the related prospectus supplement and the
related Agreement, prior to allocation to the Subordinate Securities of such
series. In the event of any realized losses on the Loans, the rights of the
Subordinate Securityholders to receive distributions with respect to the Loans
will be subordinate to the rights of the Senior Securityholders.
Overcollateralization
Subordination provisions of a Series may be used to accelerate the
amortization of one or more classes of Securities relative to the amortization
of the related Loans. The accelerated amortization is achieved by the
application of excess interest to the payment of principal of one or more
classes of Securities. This acceleration feature creates, with respect to the
Loans or groups thereof, overcollateralization which results from the excess of
the aggregate principal balance of the related Loans, or a group thereof, over
the principal balance of the related class of Securities. Such acceleration may
continue for the life of the related Security, or may be limited. In the case of
limited acceleration, once the required level of overcollateralization is
reached, such limited acceleration feature may cease, unless necessary to
maintain the required level of overcollateralization.
Cross-Collateralization
The beneficial ownership of separate groups of assets included in a Trust
Fund or the obligations to make payments secured by a pledge of a separate group
of assets included in a Trust Fund may be evidenced by separate classes of the
related series of Securities. In such case, Credit Enhancement may be provided
by a cross-collateralization feature which requires that distributions be made
with respect to one class of Securities may be made from excess amounts
available from other asset groups within the same Trust Fund which support other
classes of Securities. The prospectus supplement for a series that includes a
cross-collaterlization feature will describe the manner and conditions for
applying such cross-collateralization feature.
The coverage provided by one or more forms of Credit Enhancement may apply
concurrently to two or more separate Trust Funds. If applicable, the prospectus
supplement will identify the Trust Funds to which such credit-collaterlization
relates and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified Trust Funds.
Surety Bonds
A surety bond or financial guaranty insurance policy (each, a "Surety
Bond") may be obtained and maintained for each class or series of Securities.
The issuer of any Surety Bond (a "Bond Insurer") will be described in the
related prospectus supplement. Such description will include financial
information with respect to the related Bond Insurer
A Surety Bond will unconditionally and irrevocably guarantee to
Securityholders that an amount equal to each full and complete insured payment
will be received by the Trustee on behalf of Securityholders, for distribution
by the Trustee to each Securityholder. The "insured payment" will be defined in
the related prospectus supplement, and will generally equal the full amount of
the distributions of principal and interest to which Securityholders are
entitled under the related Agreement plus any other amounts specified therein or
in the related prospectus supplement (the "Insured Payment").
Surety Bonds may apply only to certain specified classes, or may apply at
the Loan level and only to specified Loans.
The specific terms of any Surety Bond will be set forth in the related
prospectus supplement. Surety Bonds may have limitations including limitations
on the Bond Insurer's obligation to guarantee the obligations of the Originator
to repurchase or substitute for any Loans. Surety Bonds will not guarantee
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any specified rate of prepayments. In addition, Insured Payments will generally
not be available to cover interest shortfalls arising from the application of
the Civil Relief Act.
Subject to the terms of the related Agreement, the Bond Insurer may be
subrogated to the rights of each Securityholder to receive payments under the
Securities to the extent of any payment by such Bond Insurer under the related
Surety Bond.
Letters of Credit
A letter of credit (the "Letter of Credit") may be obtained from a bank
(the "Letter of Credit Bank") and delivered to the Trustee. The Letter of Credit
may provide direct coverage with respect to the related Securities or support
the Issuer's or any other person's obligation pursuant to a purchase obligation
to make certain payments to the Trustee with respect to one or more components
of Credit Enhancement. The Letter of Credit Bank, as well as the amount
available under the Letter of Credit with respect to each component of Credit
Enhancement, will be specified in the applicable prospectus supplement and the
related Agreement.
Special Hazard Insurance Policies
Any insurance policy covering special hazard losses (a "Special Hazard
Insurance Policy") which may be obtained by the Issuer for a Trust Fund will be
issued by the insurer named in the related prospectus supplement. Each Special
Hazard Insurance Policy will protect holders of the related series of Securities
from (i) losses due to direct physical damage to a Mortgaged Property other than
any loss of a type covered by a hazard insurance policy or a flood insurance
policy, if applicable, and (ii) losses from partial damage caused by reason of
the application of the co-insurance clauses contained in hazard insurance
policies. Aggregate claims under a Special Hazard Insurance Policy will be
limited to a maximum amount of coverage, as set forth in the related prospectus
supplement and the related Agreement.
Reserve Funds
If so provided in the related prospectus supplement, the Issuer will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash, one or more irrevocable Letters of Credit or one or more
Eligible Investments in specified amounts, amounts otherwise distributable to
Subordinate Securityholders, or any other instrument satisfactory to the Rating
Agency or Agencies, which will be applied and maintained in the manner and under
the conditions specified in such prospectus supplement. In the alternate or in
addition to such deposit, a Reserve Fund may be funded through application of
all or a portion of amounts otherwise payable on any related Subordinate
Securities, on any subordinated equity participation security or otherwise.
Amounts in a Reserve Fund may be distributed to Securityholders, or applied to
reimburse the Servicer for outstanding advances or may be used for other
purposes.
Other Insurance, Guarantees and Similar Instruments or Agreements
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 all or any
specified portion of 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 Securities has a
floating Interest Rate, or if any of the Loans has a floating coupon 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.
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Reduction or Substitution of Credit Enhancement
The amount of Credit support provided pursuant to any of the forms of
Credit Enhancement (including, without limitation, a Surety Bond, Special Hazard
Insurance Policy, Letter of Credit, or any alternative form of Credit
Enhancement) may be reduced under certain specified circumstances. In most
cases, the amount available pursuant to any Credit Enhancement will be subject
to periodic reduction in accordance with a schedule or formula on a
nondiscretionary basis pursuant to the terms of the related Agreement as the
aggregate outstanding principal balance of the Loans declines. Additionally, in
certain cases, such Credit Enhancement (and any replacements therefor) may be
replaced, reduced or terminated upon the written assurance from each applicable
Rating Agency that the then current rating of the related series of Securities
will not be adversely affected. Furthermore, in the event that the credit rating
of any obligor under any applicable Credit Enhancement is downgraded, the credit
rating of the related Securities may be downgraded to a corresponding level, and
neither the Sponsor nor the Issuer thereafter will be obligated to obtain
replacement Credit Enhancement in order to restore the rating of the Securities,
and also will be permitted to replace such Credit Enhancement with other Credit
Enhancement instruments issued by obligors whose credit ratings are equivalent
to such downgraded level and in lower amounts which would satisfy such
downgraded level; provided, that the then current, albeit downgraded, rating of
the related series of Securities is maintained. Where the Credit Enhancement is
in the form of a Reserve Fund, a permitted reduction in the amount of Credit
Enhancement will result in a release of all or a portion of the assets in the
Reserve Fund to any of the holders of the Equity Participation Securities, the
Sponsor, the Servicer, the Originator or such other person that is entitled
thereto. Any assets so released will not be available to fund distribution
obligations in future periods.
PREPAYMENT AND YIELD CONSIDERATIONS
Interest Rates
Any class of Securities of a series may have a fixed Interest Rate, or an
Interest Rate which varies based on changes in an index or based on changes with
respect to the underlying Loans (such as, for example, varying on the basis of
changes in the weighted average Net Loan Rate of the underlying Loans) or may
receive interest payments with respect to the underlying Loans 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 Loan Rates and Net Loan Rates for the Loans underlying
such series as of the Cut-Off Date. Each monthly interest payment on a Loan will
generally be calculated as the product of one-twelfth of the applicable Loan
Rate at the time of such calculation and the then unpaid principal balance on
such Loan. The "Net Loan Rate" with respect to each Loan will be similarly
calculated on a loan-by-loan basis, by subtracting from the applicable Loan
Rate, the Fixed Retained Yield, if any, payable to the Issuer or other person or
entity specified in the prospectus supplement and any Servicing Fee applicable
to each Loan. If the Trust Fund includes adjustable-rate Loans or includes Loans
with different Net Loan Rates, the weighted average Net Loan 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 Interest Rate for each
class of Securities of such series having an Interest Rate and will specify
whether each such Interest Rate is fixed or is variable.
The Net Loan Rate for any adjustable rate Loan will change with any
changes in the index specified in the related prospectus supplement on which
such Loan Rate adjustments are based, subject to any applicable periodic or
aggregate caps or floors on the related Loan Rate or other limitations described
in the related prospectus supplement. The weighted average Net Loan Rate with
respect to any series may vary due to changes in the Net Loan Rates of
adjustable rate Loans, to the timing of the Loan Rate
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readjustments of such Loans and to different rates of payment of principal of
fixed or adjustable rate Loans bearing different Loan Rates.
If the Trust Fund for a series includes adjustable rate Loans, any
limitations on the periodic changes in a mortgagor's or obligor's monthly
payment, any limitations on the adjustments to the Net Loan Rates or Loan Rates,
any provision that could result in Deferred Interest and the effects, if any,
thereof on the yield on Securities of the related series will be discussed in
the related prospectus supplement.
No distribution of principal and only a partial distribution of interest
will be made to Securityholders with respect to a negatively amortizing Loan.
Distribution of the portion of scheduled interest at the applicable Net Loan
Rate representing Deferred Interest with respect to such Loan will be passed
through to the Securityholders on the Distribution Date following the Due Date
on which it is received. Such Deferred Interest will bear interest at the Net
Loan Rate for such Loan. For federal income tax purposes, Deferred Interest may
constitute interest income to the Trust Fund and to Securityholders at the time
that it accrues, rather than at the time that it is paid. See "Certain Federal
Income Tax Consequences."
Interest Shortfalls Due to Principal Prepayments
When a Loan 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 Loan 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
Securityholders if such Loan were outstanding, or if such partial prepayment
were applied, on the succeeding Due Date. To mitigate this reduction in yield,
the Agreement will provide whether with respect to any principal prepayment or
liquidation of any Loan underlying the Securities of such series, the Servicer
will pay into the Collection 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 Collection Account with
respect to such Loan includes an amount equal to interest at the Net Loan Rate
for such Loan for the period from the date of such prepayment or liquidation to
but not including the next Due Date. See "Servicing of the Loans--Adjustment to
Servicing Compensation in Connection with Prepaid and Liquidated Loans."
Weighted Average Life of Securities
Weighted average life of a Security refers to the average amount of time
that will elapse from the date of issuance of the Security until each dollar in
reduction of the principal amount of such Security is distributed to the
investor. The weighted average life and the yield to maturity of any class of
the Securities of a series will be influenced by, among other things, the rate
at which principal on the Loans included in the Mortgage Pool or Contract Pool
for such Security 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 Loans may generally be prepaid in full or in part at any time. and
fixed rate Loans will generally contain due-on-sale clauses permitting the
holder to accelerate the maturity of the Loan upon conveyance of the Mortgaged
Property or Manufactured Home.
Prepayments on Loans are commonly measured relative to a prepayment
standard or model. The prospectus supplement for each series will describe one
or more such prepayment standards or models
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and will contain tables setting forth the weighted average life of each such
class and the percentage of the original aggregate principal amount of each such
class 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 Loans 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 Loans underlying a
series of Securities 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 Loans, 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 Loan
Rates on the Loans underlying a series of Securities, the prepayment rates of
such Loans are likely to be higher than if prevailing rates remain at or above
the rates borne by such Loans. It should be noted that Securities of a series
may evidence an interest in a Trust Fund with different Loan Rates. Accordingly,
the prepayment experience of such Securities will to some extent be a function
of the mix of Loan Rates of the Loans. In addition, the terms of the Servicing
Agreement will require the Servicer to enforce any due-on-sale clause to the
extent specified therein. See "Servicing of the Loans--Enforcement of
Due-on-Sale Clauses; Realization Upon Defaulted Loans" and "Certain Legal
Aspects of the Loans--Due-On-Sale Clauses" for a description of certain
provisions of each Servicing Agreement and certain legal developments that may
affect the prepayment experience on the Loans.
A lower rate of principal prepayments than anticipated would negatively
affect the total return to investors in any Securities 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 Securities 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 Security will yield its
coupon, after giving effect to any payment delay. In addition, the yield to
investors in a class of Securities which bears interest at an adjustable
Interest Rate, will also be affected by changes in the index on which any such
adjustable Interest 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
Securities will be discussed in the related prospectus supplement. The yield on
certain types of Securities may be particularly sensitive to prepayment rates,
and further information with respect to yield on such Securities will be
included in the applicable prospectus supplement.
At the request of the mortgagor or obligor, the Servicer may refinance the
Loans 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 Loan.
The Unaffiliated Seller may be obligated, under certain circumstances, to
repurchase certain of the Loans. In addition, the terms of certain insurance
policies relating to the Loans may permit the applicable insurer to purchase
delinquent Loans. The proceeds of any such repurchase will be deposited in the
related Collection Account and such repurchase will have the same effect as a
prepayment in full of the related Loan. See "The Trust Funds--Assignment of the
Loans." In addition, the Servicer may have the option to purchase all, but not
less than all, of the Loans in any Trust Fund under certain limited conditions.
For any series of Securities 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
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pursuant to a "qualified liquidation," as defined in Code Section 86OF(a)(4)(A).
See "Servicing of the Loans--Termination; Purchase or other Disposition of
Loans."
USE OF PROCEEDS
Unless otherwise specified in the applicable prospectus supplement,
substantially all of the net proceeds from the sale of each series of Securities
will be used for the purchase of the Loans represented by the Securities of such
series or to reimburse amounts previously used to effect such a purchase, the
costs of carrying the related Loans until the sale of the Securities and other
expenses connected with pooling the related Loans and issuing the Securities.
THE SPONSOR
Prudential Securities Secured Financing Corporation, (the "Sponsor"), 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 Sponsor's principal executive offices are located at One New York
Plaza, 14th Floor, New York, New York 10292. Its telephone number is (212)
778-1000.
Unless otherwise specified in the applicable prospectus supplement, the
Sponsor will have no servicing obligations or responsibilities with respect to
any Mortgage Pool, Contract Pool or Trust Fund. The Sponsor does not have, nor
is it expected in the future to have, any significant assets.
Neither the Sponsor nor Prudential Securities Group Inc. nor any of
their affiliates, including The Prudential Insurance Company of America, will
insure or guarantee the Securities of any series.
SERVICING OF THE LOANS
The following summaries describe certain provisions of the Servicing
Agreements which relate to Trust Funds comprised of Loans. 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 Servicing Agreement for each series
which may further modify the provisions summarized below. The provisions of each
Servicing Agreement will vary depending upon the nature of the Securities to be
issued thereunder and the nature of the related Trust Fund. We will file each
Servicing Agreement executed and delivered with respect to each series with the
Securities and Exchange Commission as an exhibit to a Current Report on Form 8-K
promptly after issuance of the Securities of such series.
The Servicer
The Servicer under each Servicing Agreement will be named in the related
prospectus supplement. The Servicer with respect to each series will service the
Loans 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, 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 Servicing Agreement. An uncured breach of such a representation or
warranty that in any respect materially and adversely affects the interests of
the Securityholders will constitute an Event of Default by the Servicer under
the related Servicing Agreement. See "The Agreements--Events of Default--Loans"
and "--Rights Upon Event of Default--Loans."
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Payments on Loans
The Servicer or the Trustee will, as to each series of Securities,
establish and maintain, or cause to be established and maintained, a separate
trust account or accounts in the name of the Trustee (collectively, the
"Collection Account"), which must be maintained with a depository institution
(the "Collection Account Depository") acceptable to the Rating Agency rating the
Securities of such series. Such account or accounts will be maintained with a
Collection 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 Securities 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 Securityholders of the related series has a
claim with respect to funds in the Collection 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 Sponsor or general creditor of the Collection Account Depository with
which the Collection Account is maintained or (iii) which is otherwise
acceptable to the Rating Agency or Agencies.
A Collection 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 investments satisfactory to the
Rating Agencies or any Credit Enhancer ("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. Any interest or other income earned on funds in the Collection
Account is generally paid to the Servicer or its designee as additional
servicing compensation.
The Servicer will deposit in the Collection Account for each series of
Securities any amounts representing scheduled payments of principal and interest
on the Loans due after the applicable Cut-Off Date but received prior thereto,
and, the following payments and collections received or made by it with respect
to the Loans subsequent to the applicable Cut-Off Date (other than payments due
on or before the Cut-Off Date):
(a) 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;
(b) all amounts received by the Servicer in connection with the
liquidation of defaulted Loans or property acquired in respect thereof,
whether through foreclosure sale or otherwise, including payments in
connection with defaulted Loans received from the mortgagor or obligor
other than amounts required to be paid to the mortgagor or obligor
pursuant to the terms of the applicable Loan 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 Loan
and, in the discretion of the Servicer, but only to the extent of the
amount permitted to be withdrawn from the Collection Account, any unpaid
Servicing Fees, in respect of
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the related Loans or the related Mortgaged Properties or Manufactured
Homes ("Net Liquidation Proceeds");
(c) all proceeds received by the Servicer under any title, hazard
or other insurance policy covering any such Loan ("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 Servicing
Agreement, and further reduced by expenses incurred in connection with
collecting on related insurance policies, any unreimbursed Advances with
respect to such Loan and in the discretion of the Servicer, but only to
the extent of the amount permitted to be withdrawn from the Collection
Account, any unpaid Servicing Fees, in respect of such Loan ("Net
Insurance Proceeds");
(d) 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;
(e) all Advances made by the Servicer;
(f) all amounts withdrawn from buy-down funds or other funds
described in the related prospectus supplement, if any, with respect to
the Loans, in accordance with the terms of the respective agreements
applicable thereto;
(g) all proceeds from the repurchase of Loans by the Originator;
and
(h) all other amounts required to be deposited therein pursuant
to the applicable 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 Collection Account or (b) to withdraw the applicable Servicing
Fee and/or any Fixed Retained Yield from the Collection 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 Collection Account.
Advances, amounts withdrawn from any Reserve Fund, and amounts available
under any other form of Credit Enhancement will be deposited in the Collection
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 Collection Account not later than the business day next following the day
of receipt and posting by the Servicer.
If the Servicer deposits in the Collection Account for a series any amount
not required to be deposited therein, it may at any time withdraw such amount
from such Collection Account.
The Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for the following purposes, to the extent permitted in the
applicable Servicing Agreement:
(a) to reimburse itself for Advances;
(b) to reimburse itself from Liquidation Proceeds for expenses
incurred by the Servicer in connection with the liquidation of any
defaulted Loan 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 Loans together with
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accrued and unpaid interest thereon at the applicable Net Loan 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 Loans;
(c) 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 Loan prior to the deposit
of such payment or recovery in the Collection Account;
(d) to reimburse itself and the Issuer for certain expenses
(including taxes paid on behalf of the Trust Fund) incurred by and
recoverable by or reimbursable to it or the Issuer, as the case may be;
(e) to pay to the Originator or the Seller with respect to each
Loan or property acquired in respect thereof that has been repurchased by
the Originator, as the case may be, all amounts received thereon and not
distributed as of the date as of which the purchase price of such Loan was
determined;
(f) to pay itself any interest earned on or investment income
earned with respect to funds in the Collection Account (all such interest
or income to be withdrawn not later than the next Distribution Date);
(g) to make withdrawals from the Collection Account in order to
make distributions to Securityholders; and
(h) to clear and terminate the Collection Account.
Advances and Limitations Thereon
The related prospectus supplement will describe the circumstances, if any,
under which the Servicer will make advances with respect to delinquent payments
on Loans ("Advances"). The Servicer will be obligated to make Advances, and such
obligation may be limited in amount, or may not be activated until a certain
portion of a specified Reserve Fund is depleted. Advances are intended to
provide liquidity and not to guarantee or insure against losses. Accordingly,
any funds advanced are recoverable by the Servicer out of amounts received on
particular Loans which represent late recoveries of principal or interest,
proceeds of insurance policies or Liquidation Proceeds respecting which any such
Advance was made. If an Advance is made and subsequently determined to be
nonrecoverable from late collections, proceeds of insurance policies, or
Liquidation Proceeds from the related Loan, the Servicer may be entitled to
reimbursement from other funds in the Collection Account, or from a specified
Reserve Fund as applicable, to the extent specified in the related prospectus
supplement.
Adjustment to Servicing Compensation in Connection with Prepaid and Liquidated
Loans
When a mortgagor or obligor prepays a Loan 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
Loan 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 Securityholders if such Loan were outstanding, or if such partial prepayment
were applied, on the succeeding Due Date. In order to mitigate the adverse
effect to Securityholders of a series resulting from the prepayment or
liquidation of a Loan or settlement of an insurance claim with respect thereto,
the amount of the aggregate Servicing Fees may be reduced by an amount equal to
the accrual of interest on any prepaid or liquidated Loan at the Net Loan
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Rate 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 Loans under the applicable 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 Securityholders on the Distribution Date on which the related
principal prepayments, Liquidation Proceeds or Insurance Proceeds are passed
through to Securityholders. See "Prepayment and Yield Considerations."
Reports to Securityholders
Unless otherwise specified or modified in the related Servicing Agreement
for each series, a statement setting forth the following information, if
applicable, will be included with each distribution to Securityholders of record
of such series:
(a) the amount of principal distributed to holders of the related
Securities and the outstanding principal balance of such Securities
following such distribution;
(b) the amount of interest distributed to holders of the related
Securities and the current interest on such Securities;
(c) the amounts of (i) any overdue accrued interest included in
such distribution, (ii) any remaining overdue accrued interest with
respect to such Securities or (c) any current shortfall in amounts to be
distributed as accrued interest to holders of such Securities;
(d) the amounts of (i) any overdue payments of scheduled
principal included in such distribution, (ii) any remaining overdue
principal amounts with respect to such Securities, (iii) any current
shortfall in receipt of scheduled principal payments on the related Loans
or (iv) any realized losses or Liquidation Proceeds to be allocated as
reductions in the outstanding principal balances of such Securities;
(e) the amount received under any related Credit Enhancement, and
the remaining amount available under such Credit Enhancement;
(f) the amount of any delinquencies with respect to payments on
the related Loans;
(g) the book value of any REO Property acquired by the related
Trust Fund; and
(h) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will furnish to each holder of record at any time
during such calendar year (a) the aggregate of amounts reported pursuant to
clauses (a), (b), and (d)(iv) above for such calendar year and (b) such
information specified in the related Agreement to enable Holders to prepare
their tax returns including, without limitation, the amount of original issue
discount accrued on the Securities, if applicable. Information in the
Distribution Date and annual statements provided to the holders will not have
been examined and reported upon by an independent public accountant. However,
the Servicer will provide to the Trustee a report by independent public
accountants with respect to the Servicer's servicing of the Loans.
See "--Evidence as to Compliance" herein.
A series of Securities or one or more classes of such series may be issued
in book-entry form. In such event, owners of beneficial interests in such
Securities will not be considered holders and will not receive such reports
directly from the Trustee. The Trustee will forward such reports only to the
entity or its nominee which is the registered holder of the global certificate
which evidences such book-entry securities. Beneficial owners will receive such
reports from the participants and indirect participants of the applicable
book-entry system in accordance with the practices and procedures of such
entities.
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Collection and Other Servicing Procedures
The Servicer, directly or through sub-servicers, will make reasonable
efforts to collect all payments called for under the Loans and will, consistent
with the Servicing Agreement, follow such collection procedures as it follows
with respect to mortgage loans or manufactured housing contracts serviced by it
that are comparable to the Loans, 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 Loan and (ii) arrange with a mortgagor or obligor a schedule for the
liquidation of deficiencies running for not more than six (6) months after the
applicable Due Date.
Pursuant to the 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
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 Securities,
covering loss occasioned by the failure to escrow such amounts.
Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Loans
Each 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 Loan 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 Loan. 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 Loan will
continue to be covered by any pool insurance policy and any related primary
mortgage insurance policy, and the Loan Rate with respect to such Loan 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 Servicing Agreement to realize upon
defaulted Loans 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 Securityholders of such series of liquidation of the Loan 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
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Servicer has expended its own funds for foreclosure or to restore damaged
property, it will be entitled to charge the Collection Account for such series
an amount equal to all costs and expenses incurred by it.
The Servicer may foreclose against property securing a defaulted 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 Loans--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
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 Loan secured by such Mortgaged Property or
Manufactured Home, the Trustee generally will be required to dispose of such
property with two (2) years following its acquisition by the Trust Fund. The
Servicer also will be required to administer the Mortgaged Property or
Manufactured Home in a manner which does not cause the Mortgaged Property or
Manufactured Home to fail to qualify as "foreclosure property" within the
meaning of Code Section 860G(a)(8) or result in the receipt by the Trust Fund of
any "net income from foreclosure property" within the meaning of Code Section
860G(c). In general, this would preclude the holding of the Mortgaged Property
or Manufactured Home as a dealer in such property or the receipt of rental
income based on the profits of the lessee.
The Servicer may modify, waive or amend the terms of any Loan without the
consent of the Trustee or any Securityholder. Such modification, waiver or
amendment shall only be given if the Servicer determines that it is in the best
interests of Securityholders and, generally, only if the Loan is in default or
the Servicer has determined that default is reasonably foreseeable.
Servicing Compensation and Payment of Expenses
For each series of Securities, the Servicer will be entitled to be paid a
fee (the "Servicing Fee") on the related Loans until termination of the
Servicing Agreement. The Servicer, at its election, will pay itself the
Servicing Fee for a series with respect to each Loan by (a) withholding the
Servicing Fee from any scheduled payment of interest prior to deposit of such
payment in the Collection Account for such series or (b) withdrawing the
Servicing Fee from the Collection Account after the entire interest payment has
been deposited in the Collection Account. The Servicer may also pay itself out
of the Liquidation Proceeds or Insurance Proceeds with respect to a Loan, or
withdraw from the Collection Account, the Servicing Fee in respect of such Loan
or other recoveries with respect thereto to the extent provided in the Servicing
Agreement. The Servicing Fee with respect to the Loans underlying the Securities
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 Collection Account.
In addition to amounts payable to any sub-servicer, the Servicer will pay
all expenses incurred in connection with the servicing of the Loans 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 Securityholders. However, certain of these expenses may be reimbursable to
the Servicer pursuant to the terms of the Agreement. In addition, the Servicer
will be entitled to reimbursement for certain expenses incurred by it in
connection with the liquidation of defaulted Loans. 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 Loan,
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plus accrued interest thereon at the Net Loan 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 Securityholders to receive
Liquidation Proceeds and Insurance Proceeds. The Servicer is also entitled to
reimbursement from the Collection 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 applicable Servicing Agreement for each series will provide that each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that such firm has examined certain documents and records
relating to the servicing of the Loans by the Servicer and that, on the basis of
such examination, such firm is of the opinion that the servicing has been
conducted in compliance with such Servicing Agreement, except for (i) such
exceptions as such firm believes to be immaterial and (ii) such other exceptions
as are set forth in such statement.
The applicable Servicing Agreement for each series will also provide for
delivery to the Trustee for such series of an annual statement signed by an
officer of the Servicer to the effect that the Servicer has fulfilled its
obligations under such Servicing Agreement throughout the preceding calendar
year.
Certain Matters Regarding the Servicer
The Servicer may not resign from its obligations and duties under the
Servicing Agreement for each series, 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 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 Loans, it may appoint
another institution as Servicer, as described under "The Agreements--Rights Upon
Event of Default--Loans" below.
The Servicing Agreement will provide that neither the Servicer nor any
director, officer, employee or agent of either of them will be under any
liability to the Trust Fund or the Securityholders, for the taking of any action
or for refraining from the taking of any action in good faith pursuant to the
Servicing Agreement or for errors in judgment; provided, however, that none of
the Servicer or any director, officer, employee or agent of the Servicer will be
protected against any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence in the performance of his or its
duties or by reason of reckless disregard of his or its obligations and duties
thereunder. The Servicing Agreement will further provide that the Servicer and
any director, officer, employee or agent of the Servicer 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 Servicing Agreement or the Securities other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or negligence in
the performance of his or its duties thereunder or by reason of reckless
disregard of his or its obligations and duties thereunder. 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 that is not
incidental to its duties under the Servicing Agreement and that in its opinion
may involve it in any expense or liability. The Servicer may, however, in its
discretion, undertake any such action deemed by it necessary or desirable with
respect to the Servicing Agreement and the rights and duties of the parties
thereto and the interests of the Securityholders 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 Collection Account, and any
loss to the Trust Fund arising from such right of reimbursement will be
allocated pro rata among the various classes of Securities unless otherwise
specified in the applicable Servicing Agreement.
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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 Servicing Agreement; 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 Securities
for such series in effect immediately prior to such event is not adversely
affected thereby.
The Servicer also may have the right to assign its rights and delegate its
duties and obligations under the Servicing Agreement 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 Issuer and the Trustee
for such series and executes and delivers to the Issuer and the Trustee an
agreement, in form and substance reasonably satisfactory to the Issuer 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 Servicing Agreement from and
after the date of such agreement; and (iii) the applicable Rating Agency's
rating of any Securities 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 Servicing Agreement except for
liabilities and obligations incurred prior to such assignment and delegation.
Events of Default; Rights Upon Event of Default
Servicing Agreement. "Events of Default" under the Servicing Agreement
generally include (i) any failure by the Servicer to deposit amounts in the
Collection Account, which failure continues unremedied for the number of days
specified in the related prospectus supplement after the giving of written
notice of such failure to the Servicer by the Trustee for such series, or to the
Servicer and the Trustee by the holders of such series evidencing not less than
a specified percentage of the aggregate voting rights of the Securities for such
series, (ii) any failure by the Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the applicable
Agreement which continues unremedied for the number of days specified in the
related prospectus supplement after the giving of written notice of such failure
to the Servicer by the Trustee, or to the Servicer and the Trustee by the
holders of such series evidencing not less than a specified percentage of the
aggregate voting rights of the Securities for such series, and (iii) certain
events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
The related Servicing Agreement will specify the circumstances under which
the Trustee of the holders of Securities may remove the Servicer upon the
occurrence and continuance of an Event of Default thereunder, whereupon the
Trustee will succeed to all the responsibilities, duties and liabilities of the
Servicer under such Servicing Agreement and will be entitled to reasonable
servicing compensation not to exceed the applicable Servicing Fee, together with
other servicing compensation in the form of assumption fees, late payment
charges or otherwise as provided in such Servicing Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the related prospectus supplement to act as successor Servicer under the
provisions of the applicable Servicing Agreement. The successor Servicer would
be entitled to reasonable servicing compensation in an amount not to exceed the
Servicing Fee as set forth in the related prospectus
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supplement, together with the other servicing compensation in the form of
assumption fees, late payment charges or otherwise, as provided in such
Servicing Agreement.
During the continuance of any Event of Default of a Servicer under a
Servicing Agreement, the Trustee will have the right to take action to enforce
its rights and remedies and to protect and enforce the rights and remedies of
the holders of such series, and holders of Securities evidencing not less than a
specified percentage of the aggregate voting rights of the Securities 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 that 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
Holders have offered the Trustee reasonable security or indemnity against the
cost, expenses and liabilities which may be incurred by the Trustee therein or
thereby. 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 involve it in personal liability or be unjustly prejudicial to the
nonassenting holders.
Indenture. "Events of Default" under the Indenture for each series of
Notes generally include: (i) a default in the payment of any principal of or
interest on any Note of such series, which continues for the period of time
specified in the related prospectus supplement; (ii) failure to perform any
other covenant of the Issuer in the Indenture which continues for the period of
time specified in the related prospectus supplement after notice thereof is
given in accordance with the procedures described in the related prospectus
supplement; (iii) any representation or warranty made by the Issuer in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such series having been
incorrect in a material respect as of the time made, and such breach is not
cured within the period of time specified in the related prospectus supplement
after notice thereof is given in accordance with the procedures described in the
related prospectus supplement; (iv) certain events of bankruptcy, insolvency,
receivership or liquidation of the Issuer; or (v) any other event of default
provided with respect to Notes of that series.
If an Event of Default with respect to the Notes of any series at the time
outstanding occurs and is continuing, either the Trustee or the holders of a
majority of the then aggregate outstanding amount of the Notes of such series
may declare the principal amount of all the Notes of such series to be due and
payable immediately. Such declaration may, under certain circumstances, be
rescinded and annulled by the holders of a majority in aggregate outstanding
amount of the Notes of such series.
If, following an Event of Default with respect to any series of Notes, the
Notes of such series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such series for thirty (30) days or
more, unless (a) the holders of 100% of the then aggregate outstanding amount of
the Notes of such series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding Notes of such series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the holders of a specified percentage of the then
aggregate outstanding amount of the Notes of such series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
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liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders may be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
In the event the principal of the Notes of a series is declared due and
payable, as described above, the Holders of any such Notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a series of Notes, the Trustee will be under no obligation to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the holders of Notes of such series, unless such holders offered to the Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority of the then
aggregate outstanding amount of the Notes of such series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such series, and the holders of a majority
of the then aggregate outstanding amount of the Notes of such series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of such series affected thereby.
Amendment
Each Agreement may be amended by the parties thereto without the consent
of the Securityholders, (i) to cure any ambiguity, (ii) to correct or supplement
any provision therein that may be inconsistent with any over provision therein,
(iii) to comply with the requirements of the Code, or (iv) to make any other
provisions with respect to matters or questions arising under such 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 Securityholders of the related series. The
Agreement may also be amended by the with the consent of the holders of
Securities evidencing interests aggregating not less than a specified percentage
of the voting interests evidenced by the Securities affected thereby, for the
purpose of adding any provisions to or changing in any manner or eliminating,
any of the provisions of such Agreement or of modifying in any manner the rights
of the Securityholders; 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 Loans that are required to be distributed on any Securities,
without the consent of the holder of such Security, (ii) adversely affect in any
material respect the interests of the holders of a class of Securities of a
series in a manner other than that set forth in clause (i) above without the
consent of the holders of Securities aggregating not less than a specified
percentage of the Voting Interests evidenced by such class, or (iii) reduce the
aforesaid percentage of the Securities, the holders of which are required to
consent to such amendment, without the consent of the holders of all Securities
of the class affected then outstanding.
Termination; Purchase or Other Disposition of Loans
The obligations created by the Agreement for a series of Securities will
terminate upon the earlier of (i) the later of the final payment or other
liquidation of the last Loan subject thereto and the disposition of all property
acquired upon foreclosure of any such Loan and (ii) any purchase or disposition
described in the following paragraph. In no event, however, will the trust
created by the Agreement continue beyond the expiration of 21 years from the
death of the late survivor of certain persons named in such
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Agreement. For each series of Securities, the Trustee will give written notice
of termination of the Agreement to each Securityholder, and the final
distribution will be made only upon surrender and cancellation of the Securities
at an office or agency appointed by the Sponsor and specified in the notice of
termination.
Repurchase of the Remaining Loans. The Agreement for each series may
permit, but not require, the Servicer or other entity specified in the related
prospectus supplement to purchase from the Trust Fund for such series all
remaining Loans at a price equal to 100% of the aggregate principal balance of
such Loans plus, with respect to any property acquired in respect of a Loan, if
any, the outstanding principal balance of the related Loan at the time of
foreclosure, less, in either case, related unreimbursed Advances (in the case of
the Loans, only to the extent not already reflected in the computation of the
aggregate principal balance of such Loans) and unreimbursed expenses (that are
reimbursable pursuant to the terms of the Agreement) plus, in either case,
accrued interest thereon at the weighted average rate on the related Loans
through the last day of the Due Period in which such repurchase occurs;
provided, however, that if an election is made for treatment as a REMIC under
the Code, the repurchase price may equal the greater of (a) 100% of the
aggregate Principal Balance of such Loans, plus accrued interest thereon at the
applicable Net Loan Rates on the Loans through the last day of the month of such
repurchase and (b) the aggregate fair market value of such Loans plus the fair
market value of any property acquired in respect of a Loan and remaining in the
Trust Fund. The exercise of such right will effect early retirement of the
Securities of such series, but such entity's right to so purchase is subject to
the aggregate principal balance of the Loans at the time of repurchase being
less than a fixed percentage (which shall not exceed 20%), to be set forth in
the related Agreement, of the aggregate principal balance of the Loans as of the
Cut-Off Date.
Mandatory Termination; Auction Sale. The Trustee, the Servicer or the
related Originator may be required to effect early retirement of a series of
Securities by soliciting competitive bids for the purchase of the related Trust
Fund.
The mandatory termination may take the form of an auction sale. Within a
certain period following the failure of the holder of the optional termination
right to exercise such right, the required party shall solicit bids for the
purchase of all Loans remaining in the Trust Fund. In the event that
satisfactory bids (which would not be less than an amount necessary to pay all
principal and interest on the securities outstanding) are received as specified
in the related Agreement, the net sale proceeds will be distributed to Holders,
in the same order of priority as collections received in respect of the Loans.
If satisfactory bids are not received, such party shall decline to sell the
Loans and shall not be under any obligation to solicit any further bids or
otherwise negotiate any further sale of the Loans. Such sale and consequent
termination of the Trust Fund must constitute a "qualified liquidation" of each
REMIC established by the Trust Fund under Section 860F of the Internal Revenue
Code of 1986, as amended, including, without limitation, the requirement that
the qualified liquidation takes place over a period not to exceed 90 days.
The Trustee
The Trustee under each 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 Sponsor, the Issuer, the Servicer
or any of their respective affiliates.
With respect to a series of Securities relating to Loans, 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 Securities relating
to Loans) may also remove the Trustee if the Trustee ceases to be eligible to
act as Trustee under the 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 the Issuer, 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 Securities evidencing not less than a specified
percentage of the
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voting interest in the Trust Fund, except that, any Security registered in the
name of the Issuer, 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 LOANS
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 Loans is situated. The summaries are
qualified in their entirety by reference to the applicable federal and state
laws governing the Loans.
The Mortgage Loans
General
The Mortgage Loans will, in general, be secured by either first, second or
more junior mortgages, deeds of trust, or other similar security agreements
depending upon the prevailing practice in the state in which the underlying
property is located. A mortgage creates a lien upon the real property described
in the mortgage. There are two parties to a mortgage: the mortgagor, who is the
borrower; and the mortgagee, who is the lender. In a mortgage state instrument,
the mortgagor delivers to the mortgagee a note or bond evidencing the loan and
the mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
has three parties: a borrower called the trustor (similar to a mortgagor), a
lender called the beneficiary (similar to a mortgagee), and a third-party
grantee called the trustee. Under a deed of trust, the borrower grant the
property, irrevocably until the debt is paid,, in trust, generally with a power
of sale, to the trustee to secure payment of the loan. The trustee's authority
under a deed of trust and the mortgage's authority under a mortgage are governed
by the express provisions of the deed of trust or mortgage, applicable law, and,
in some cases, with respect to the deed of trust, the directions of the
beneficiary.
The real property covered by a mortgage is most often the fee estate in
land and improvements. However, a mortgage may encumber other interests in real
property such as a tenant's interest in a lease of land or improvements, or
both, and the leasehold estate created by such lease. A mortgage covering an
interest in real property other than the fee estate requires special provisions
in the instrument creating such interest or in the mortgage to protect the
mortgagee against termination of such interest before the mortgage is paid.
Foreclosure
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right of foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming. After the completion of a judicial foreclosure proceeding, the
court may issue a judgment of foreclosure and appoint a receiver or other
officer to conduct the sale of the property. In some states, mortgages may also
be foreclosed by advertisement,
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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 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
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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
Securityholders), as mortgagee under a junior mortgage or beneficiary under a
junior deed of trust, are subordinate to those of the mortgagee under the senior
mortgage or beneficiary under the senior deed of trust, including the prior
rights of the senior mortgagee to receive hazard insurance and condemnation
proceeds and to cause the property securing the Mortgage Loan to be sold upon
default of the mortgagor or trustor, thereby extinguishing the junior
mortgagee's or junior beneficiary's lien unless the junior mortgagee or junior
beneficiary asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage or deed of
trust. As discussed more fully
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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.
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Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgage under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the foreclosure sale.
Some state statutes may require the beneficiary or mortgagee to exhaust
the security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided
for in certain instances where the value of the lender's security has been
impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement and foreclosure on the
beneficial interest in a land trust. Some courts have interpreted Section 9-504
of the UCC to prohibit a deficiency award unless the creditor establishes that
the sale of the collateral (which, in the case of a Mortgage Loan secured by
shares of a cooperative, would be such shares and the related proprietary lease
or occupancy agreement) was conducted in a commercially reasonable manner.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Civil Relief Act 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 Code, 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
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in connection with the origination, servicing and the enforcement of mortgage
loans. These laws include the federal Truth in Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act, and related statutes and regulations. These
federal laws and state laws impose specific statutory liabilities upon lenders
who originate or service mortgage loans and who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
mortgage loans.
"Due-on-Sale" Clauses
The forms of note, mortgage and deed of trust relating to conventional
Mortgage Loans may contain a "due-on-sale" clause permitting acceleration of the
maturity of a loan if the borrower transfers its interest in the property. In
recent years, court decisions and legislative actions placed substantial
restrictions on the right of lenders to enforce such clauses in many states.
However, effective October 15, 1982, Congress enacted the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn 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 Garn Act
are enforceable, within certain limitations as set forth in the Garn 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 Garn 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 Garn 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 Garn 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 (3) 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
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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 Garn Act and the
regulations thereunder. The extent of the effect of the Garn Act on the average
lives and delinquency rates of the Mortgage Loans cannot be predicted. See
"Prepayment and Yield Considerations."
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that state usury limitations shall
not apply to certain types of residential first mortgage loans originated by
certain lenders after March 31, 1980. The OTS (as successor to the FHLBB) is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. The statute authorized any state to
reimpose Stated Rate limits by adopting before April 1, 1983, a law or
constitutional provision which expressly rejects application of the federal law.
Fifteen states have adopted laws reimposing or reserving the right to impose
interest rate limits. In addition, even where Title V is not so rejected, any
state is authorized to adopt a provision limiting certain other loan charges.
Unless otherwise specified in the applicable prospectus supplement, each
Unaffiliated Seller will represent and warrant in the related Loan Sale
Agreement that all Mortgage Loans sold by such Unaffiliated Seller to the
Sponsor 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 UCC. In such
event, the Trustee will not be deemed to be a "holder in due course" within the
meaning of the UCC 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 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 applied 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.
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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 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 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 Issuer to the Trustee. Therefore,
if through negligence, fraud or otherwise, a subsequent purchaser were able to
take physical possession of the Contracts without notice of such assignment, the
Trustee's interest in Contracts could be defeated.
Security Interests in the Manufactured Homes
The Manufactured Homes securing the Contracts may be located in all 50
states and the District of Columbia. 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 Securityholders 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 Sponsor. With respect to a series of Securities
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
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that at the date of the initial issuance of the related Securities 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 Sponsor will cause the security interests in the Manufactured Homes to
be assigned to the Trustee on behalf of the Securityholders. Unless otherwise
specified in the related prospectus supplement, neither the Sponsor nor the
Trustee will amend the Securities of title to identify the Trustee or the Trust
Fund as the new secured party, and neither the Sponsor nor the Servicer will
deliver the Securities of title to the Trustee or note thereon the interest of
the Trustee. Accordingly, the Servicer (or the Originator) which continue to be
named as the secured party on the Securities 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 Issuer'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 Originator) or a trustee in
bankruptcy of the Servicer (or the Originator).
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 Originator) on the certificate of title or delivery of the required
documents and fees will be sufficient to protect the Securityholders 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 Securityholders could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four (4) 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 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.
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Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority over a
perfected security interest. The Unaffiliated Seller will represent in the
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 Securityholders 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 Servicing Agreement, may take action to enforce the Trustee's security
interest with respect to Contracts in default by repossession and resale of the
Manufactured Homes securing such defaulted Contracts. So long as the
Manufactured Home has not become subject to the real estate law, a creditor can
repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale of
a Manufactured Home, the Trustee would be entitled to be paid out of the sale
proceeds before such proceeds could be applied to the payment of the claims of
unsecured creditors or the holders of subsequently perfected security interests
or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debted thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the obligor also may be able to asset
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
Contract.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer that is not consented to.
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In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn Act 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 Originator 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. The Sponsor 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 Securityholders would
suffer a loss only to the extent that (i) such person breached its obligation to
repurchase the Contract in the event an obligor is successful in asserting such
a claim, and (ii) such person, the Servicer or the Trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of the
Securityholders 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
Loans
The Loans may also consist of installment contracts ("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
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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 Loan 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 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 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 an "Environmental Condition") may give
rise to a lien on the property to ensure the reimbursement of remedial costs
incurred by the state. In several states such lien has priority over the lien of
an existing mortgage against such property. The value of a Mortgaged Property as
collateral for a 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 imposed 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
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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 Loan 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 "Civil Relief Act"), a borrower who enters military
service after the origination of such borrower's Loan (including a borrower who
is a member of the National Guard or is in reserve status at the time of the
origination of the Loan 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 Loans in a Trust Fund. Any shortfall in interest collections
resulting from the application of the Civil Relief Act could result in losses to
the holders of the Securities of the related series. In addition, the Civil
Relief Act imposes limitations which would impair the ability of the Servicer to
foreclose on an affected Loan during the borrower's period of active duty
status. Thus, in the event that such a Loan 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.
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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 Originator, the Issuer and the Sponsor intend that the transfer of
such Loans to the Issuer constitute a sale rather for a pledge of the Loans to
secure indebtedness of the Originator. However, if the Originator 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 the Originator may argue that
the sale of the Loans by the Originator is a pledge of the Loans 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 Securityholders.
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 Servicing Agreement providing for an Event of Default upon
certain events of insolvency, receivership or conservatorship of the Servicer
may not be enforceable against the FDIC as receiver or conservator to the extent
that the exercise of such rights is based solely upon the insolvency of or
appointment of a receiver or conservator for the Servicer. In addition, the FDIC
may transfer the assets and liabilities of an institution in receivership or
conservatorship to another institution.
Bankruptcy Laws
Numerous statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the ability
of the secured mortgage lender to obtain payment of the loan, to realize upon
collateral and/or enforce a deficiency judgment. For example, under federal
bankruptcy law, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of the
bankruptcy petition, and, often, no interest or principal payments are made
during the course of the bankruptcy proceeding. The delay and the consequences
thereof caused by or on behalf of a junior lienor may stay the senior lender
from taking action to foreclose out such junior lien. In a case under the
Bankruptcy Code, the lender is precluded from foreclosing without authorization
from the bankruptcy court. In addition, a court with federal bankruptcy
jurisdiction may permit a debtor through his or her Chapter 11 or Chapter 13
rehabilitative plan to cure a monetary default in respect of a mortgage loan on
the debtor's residence by paying arrearage within a reasonable time period and
reinstating the original mortgage loan payment schedule even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been entered
in state court (provided, no sale of the residence had yet occurred) prior to
the filing of the debtor's petition. Some courts with
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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 (1) 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 discussion of the material 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 are urged to consult their own tax advisors in
determining the particular federal, state and local consequences to them of the
purchase, ownership and disposition of the Securities.
The following discussion addresses securities of five general types: (i)
securities ("Grantor Trust Securities") representing interests in a trust (a
"Grantor Trust") which the Issuer will covenant not to elect to have treated as
a real estate mortgage investment conduit ("REMIC") or a financial asset
securitization investment trust ("FASIT"); (ii) securities ("REMIC Securities")
representing interests in a trust, or a portion thereof, which the Issuer 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"); (iii) securities
("Debt Securities") that are intended to be treated for federal income tax
purposes as indebtedness secured by the underlying loans; (iv) securities
("Partnership Interests") representing interests in a trust (a "Partnership")
that is intended to be treated as a partnership under the Code; and (v)
securities ("FASIT Securities") representing interests in a trust, or portion
thereof, which the Issuer will covenant to elect to have treated as a FASIT
under Sections 860H through 860L of the Code. 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 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" and the "ownership
interest" in the FASIT.
The Taxpayer Relief Act of 1997 adds provisions to the Code that require
the recognition of gain upon the "constructive sale of an appreciated financial
position." A constructive sale of an appreciated financial position occurs if a
taxpayer enters into certain transactions or series of such transactions with
respect to a financial instrument that have the effect of substantially
eliminating the taxpayer's risk of loss and opportunity for gain with respect to
the financial instrument. These provisions apply only to classes of Securities
that do not have a principal balance.
Grantor Trust Securities
With respect to each series of Grantor Trust Securities, Dewey Ballantine
LLP, special tax counsel to the Sponsor, will deliver its opinion to the Sponsor
that the related Grantor Trust will be classified as a grantor trust and not as
an association taxable as a corporation. Such opinion shall be attached on Form
8-K to be filed with the Securities and Exchange Commission within fifteen (15)
days after the initial issuance of such Securities or filed with the Commission
as a post-effective amendment to the prospectus. Accordingly, each beneficial
owner of a Grantor Trust Security will generally be treated as the owner of an
interest in the Loans included in the Grantor Trust.
For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Loans constituting the related Grantor Trust, 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 Loans constituting the related
Grantor Trust and interest paid to the beneficial owners of Grantor Trust
Fractional Interest Securities issued with respect to such Grantor Trust will be
referred to as a "Grantor Trust Strip Security."
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Special Tax Attributes
Unless otherwise disclosed in a related prospectus supplement, Dewey
Ballantine LLP, 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. We will file such opinion with the Securities and Exchange Commission on
Form 8-K within fifteen (15) days after the initial issuance of such Securities
or as a post-effective amendment to the prospectus.
Taxation of Beneficial Owners of Grantor Trust Securities
Beneficial owners 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 Loans (including amounts used to pay
reasonable servicing fees and other expenses but excluding amounts payable to
beneficial owners 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 beneficial
owner 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 beneficial
owner's miscellaneous itemized deductions exceeds 2% of such beneficial owner's
adjusted gross income. Further, beneficial owners (other than corporations)
subject to the alternative minimum tax may not deduct miscellaneous itemized
deductions in determining alternative minimum taxable income.
Beneficial owners 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 beneficial owner 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 beneficial owner's
income as it accrues (regardless of the beneficial owner'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 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
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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 Originator (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 beneficial owner 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 Loans
and to interest thereon at the related interest rate. In addition, within a
reasonable time after the end of each calendar year, based on information
provided by the Servicer, the Trustee will furnish to each beneficial owner
during such year such customary factual information as the Servicer deems
necessary or desirable to enable beneficial owners of Grantor Trust Securities
to prepare their tax returns and will furnish comparable information to the
Internal Revenue Service (the "IRS") as and when required to do so by law.
REMIC Securities
If provided in a related prospectus supplement, an election will be made
to treat an Issuer 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, Dewey Ballantine LLP, special tax
counsel to the Sponsor, will deliver its opinion to the Sponsor that, assuming
compliance with the Pooling and Servicing Agreement, the Issuer will be treated
as a REMIC for federal income tax purposes. We will file such opinion with the
Commission on Form 8-K within fifteen (15) days after the initial issuance of
such Securities or as a post-effective amendment to the prospectus. An Issuer
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 Loans in a REMIC Trust will be taxable to the beneficial owners of the
Securities of that series, as described below.
Regulations issued by the Treasury Department on December 23, 1992 (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
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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 Fund will include, in addition
to the Loans, payments on the 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 and FASITs.
Taxation of Beneficial Owners 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. Beneficial owners of REMIC Regular Securities that
otherwise report income under a cash method of accounting will be required to
report income with respect to such Securities under an accrual method. For
additional tax consequences relating to REMIC Regular Securities purchased at a
discount or with premium, see "Discount and Premium," below.
Taxation of Beneficial Owners of REMIC Residual Securities
Daily Portions. Except as indicated below, a beneficial owner 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 beneficial owner 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 beneficial owners of REMIC Residual Securities (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 beneficial owner of such REMIC
Residual Security by virtue of this paragraph will be treated as ordinary income
or loss.
The requirement that each beneficial owner 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 beneficial owner 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 beneficial owners 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
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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.
The third modification is that 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 beneficial owner of a REMIC Residual Security may be required to
recognize taxable income without being entitled to receive a corresponding
amount of cash. This could occur, for example, if the qualified mortgages are
considered to be purchased by the REMIC Trust at a discount, some or all of the
REMIC Regular Securities are issued at a discount, and the discount included as
a result of a prepayment on a 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 Loan
expressed as a percentage of the outstanding principal amount of that Loan, will
remain constant over time.
Basis Rules and Distributions. A beneficial owner 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 beneficial owner 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 beneficial owner is not included
in gross income to the extent it does not exceed such beneficial owner'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 beneficial owner 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 beneficial owner'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 beneficial
owner 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
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was held by such beneficial owner. 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 (9) years, computed and published monthly by
the IRS.
In general, beneficial owners of REMIC Residual Securities with excess
inclusion income cannot offset such income by losses from other activities. For
beneficial owners that are subject to tax only on unrelated business taxable
income (as defined in Section 511 of the Code), an excess inclusion of such
beneficial owner 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 beneficial owner of a REMIC Residual Security is a member of an
affiliated group filing a consolidated income tax return, the taxable income of
the affiliated group cannot be less than the sum of the excess inclusions
attributable to all residual interests in REMICs held by members of the
affiliated group. For a discussion of the effect of excess inclusions on certain
foreign investors that own REMIC Residual Securities, see "--Foreign Investors"
below.
The Treasury Department also has the authority to issue regulations that
would treat all taxable income of a REMIC Trust as excess inclusions if the
REMIC Residual Security does not have "significant value." Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
how significant value would be determined for these purposes. If no such rule is
applicable, excess inclusions should be calculated as discussed above.
In the case of any REMIC Residual Securities that are held by a real
estate investment trust, the aggregate excess inclusions with respect to such
REMIC Residual Securities reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain) will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Security as if held directly by such
shareholder. Similar rules will apply in the case of regulated investment
companies, common trust funds and certain cooperatives that hold a REMIC
Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A beneficial
owner 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 beneficial owner only to the extent that such
fees, along with certain of such beneficial owner's other miscellaneous itemized
deductions exceed 2% of such beneficial owner's adjusted gross income. In
addition, a beneficial owner of a REMIC Residual Security may not be able to
deduct any portion of such fees in computing such beneficial owner's alternative
minimum tax liability. A beneficial owner'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 beneficial owners in proportion to their
respective holdings on such day.
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Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a 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 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 (3) month
period beginning on the startup day, (ii) made to a qualified reserve fund by a
beneficial owner 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 three (3) years,
with a possible extension. 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 Beneficial Owners of REMIC
Residual Securities--Basis Rules and Distributions." Except as provided in the
following paragraph or under Section 582(c) of the Code, any such gain or loss
will be capital gain or loss, provided such Security is held as a "capital
asset" (generally, property held for investment) within the meaning of Section
1221 of the Code.
Gain from the sale of a REMIC Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the income of the beneficial owner 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 beneficial owner's
income. In addition, gain recognized on such a sale by a beneficial owner 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
beneficial owner, reduced by any market discount includible in income under the
rules described below under "Discount and Premium."
If a beneficial owner of a REMIC Residual Security sells its REMIC
Residual Security at a loss, the loss will not be recognized if, within six (6)
months before or after the sale of the REMIC Residual Security, such beneficial
owner purchases another residual interest in any REMIC or any interest in a
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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.
The Taxpayer Relief Act of 1997 adds provisions to the Code that will
apply to an "electing large partnership." If an electing large partnership holds
a Residual Certificate, all interests in the electing large partnership are
treated as held by disqualified organizations for purposes of the tax imposed
upon a pass-through entity by Section 860E(e) of the Code. An exception to this
tax, otherwise available to a pass-through entity that is furnished certain
affidavits by record holders of interests in the entity and that does not know
such affidavits are false, is not available to an electing large partnership.
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
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tax on any "excess inclusions" at or after the time when such liability accrues.
Anticipated excess inclusions are the excess inclusions that are anticipated to
be allocated to each calendar quarter (or portion thereof) following the
transfer of a REMIC Residual Security, determined as of the date such Security
is transferred and based on events that have occurred as of that date and on the
Prepayment Assumption. See "Discount and Premium" and "--Taxation of Beneficial
Owners 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 beneficial owners 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 beneficial owner 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 beneficial owners 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 beneficial owner of a REMIC Residual Security or in a fiduciary capacity.
Each beneficial owner 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 beneficial owner 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 beneficial owner 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.
Termination
In general, no special tax consequences will apply to a beneficial owner
of a REMIC Regular Security upon the termination of a REMIC Trust by virtue of
the final payment or liquidation of the last Loan remaining in the Trust Fund.
If a beneficial owner 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 beneficial owner in liquidation of its interest, although
the matter is not entirely free from doubt, it would appear that the beneficial
owner of the REMIC Residual Security is entitled to a loss equal to the amount
of such excess.
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Debt Securities
With respect to each series of Debt Securities, Dewey Ballantine LLP,
special tax counsel to the Sponsor, will deliver its opinion to the Sponsor that
the Securities will be classified as debt secured by the related Loans.
Consequently, the Debt Securities will not be treated as ownership interests in
the Loans or the Trust. Beneficial owners will be required to report income
received with respect to the Debt Securities in accordance with their normal
method of accounting. For additional tax consequences relating to Debt
Securities purchased at a discount or with premium, see "Discount and Premium,"
below.
Special Tax Attributes
As described above, Grantor Trust Securities will possess certain special
tax attributes by virtue of their being ownership interests in the underlying
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 of Debt Securities
If a beneficial owner of a Debt Security sells or exchanges such Security,
the beneficial owner will recognize gain or loss equal to the difference, if
any, between the amount received and the beneficial owner'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 (1) year.
Debt Securities Reporting
The Trustee will furnish to each beneficial owner of a Debt Security with
each distribution a statement setting forth the amount of such distribution
allocable to principal on the underlying Loans and to interest thereon at the
related interest rate. In addition, within a reasonable time after the end of
each calendar year, based on information provided by the Servicer, the Trustee
will furnish to each beneficial owner during such year such customary factual
information as the Servicer deems necessary or desirable to enable beneficial
owners of Debt Securities to prepare their tax returns and will furnish
comparable information to the IRS as and when required to do so by law.
Partnership Interests
With respect to each series of Partnership Interests, Dewey Ballantine
LLP, special tax counsel to the Sponsor, will deliver its opinion to the Sponsor
that the Issuer will be treated as a partnership and not an association taxable
as a corporation for federal income tax purposes. We will file such opinion with
the Securities and Exchange Commission on Form 8-K within fifteen (15) days
after the initial issuance of such Securities or as a post-effective amendment
to the prospectus. Accordingly, each beneficial owner of a Partnership Interest
will generally be treated as the owner of an interest in the Loans.
Special Tax Attributes
As described above, REMIC Securities will possess certain special tax
attributes by virtue of the REMIC provisions of the Code. In general,
Partnership Interests will not possess such special tax attributes. Investors to
whom such attributes are important should consult their own tax advisors
regarding investment in Partnership Interests.
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Taxation of Beneficial Owners of Partnership Interests
If the Issuer is treated as a partnership for federal income tax purposes,
the Issuer will not be subject to federal income tax. Instead, each beneficial
owner of a Partnership Interest will be required to separately take into account
its allocable share of income, gains, losses, deductions, credits and other tax
items of the Issuer. These partnership allocations are made in accordance with
the Code, Treasury regulations and the partnership agreement (here, the trust
agreement or other similar agreement).
The Issuer's assets will be the assets of the partnership. The Issuer's
income will consist primarily of interest and finance charges earned on the
underlying Loans. The Issuer's deductions will consist primarily of interest
accruing with respect to any indebtedness issued by the Issuer, servicing and
other fees, and losses or deductions upon collection or disposition of the
Issuer's assets.
In certain instances, the Issuer could have an obligation to make payments
of withholding tax on behalf of a beneficial owner of a Partnership Interest.
See "Backup Withholding" and "Foreign Investors".
Substantially all of the taxable income allocated to a beneficial owner of
a Partnership Interest that is a pension, profit sharing or employee benefit
plan or other tax-exempt entity (including an individual retirement account)
will constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
Under Section 708 of the Code, the Issuer will be deemed to terminate for
federal income tax purposes if 50% or more of the capital and profits interests
in the Issuer are sold or exchanged within a 12-month period. Under Treasury
regulations issued on May 9, 1997 if such a termination occurs, the Issuer is
deemed to contribute all of its assets and liabilities to a newly formed
partnership in exchange for a partnership interest. Immediately thereafter, the
terminated partnership distributes interests in the new partnership to the
purchasing partner and remaining partners in proportion to their interests in
liquidation of the terminated partnership.
Sale or Exchange of Partnership Interests
Generally, capital gain or loss will be recognized on a sale or exchange
of Partnership Interests in an amount equal to the difference between the amount
realized and the seller's tax basis in the Partnership Interests sold. A
beneficial owner's tax basis in a Partnership Interest will generally equal the
beneficial owner's cost increased by the beneficial owner's share of Issuer
income and decreased by any distributions received with respect to such
Partnership Interest. In addition, both the tax basis in the Partnership
Interest and the amount realized on a sale of a Partnership Interest would take
into account the beneficial owner's share of any indebtedness of the Issuer. A
beneficial owner acquiring Partnership Interests at different prices may be
required to maintain a single aggregate adjusted tax basis in such Partnership
Interest, and upon sale or other disposition of some of the Partnership
Interests, allocate a portion of such aggregate tax basis to the Partnership
Interests sold (rather than maintaining a separate tax basis in each Partnership
Interest for purposes of computing gain or loss on a sale of that Partnership
Interest).
Any gain on the sale of a Partnership Interest attributable to the
beneficial owner's share of unrecognized accrued market discount on the assets
of the Issuer would generally be treated as ordinary income to the holder and
would give rise to special tax reporting requirements. If a beneficial owner of
a Partnership Interest is required to recognize an aggregate amount of income
over the life of the Partnership Interest that exceeds the aggregate cash
distributions with respect thereto, such excess will generally give rise to a
capital loss upon the retirement of the Partnership Interest. If a beneficial
owner sells its Partnership Interest at a profit or loss, the transferee will
have a higher or lower basis in the Partnership Interests than the transferor
had. The tax basis of the Issuer's assets will not be adjusted to reflect that
higher or lower basis unless the Issuer files an election under Section 754 of
the Code.
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Partnership Reporting
The Trustee is required to (i) keep complete and accurate books of the
Issuer, (ii) file a partnership information return (IRS Form 1065) with the IRS
for each taxable year of the Issuer and (iii) report each beneficial owner's
allocable share of items of Issuer income and expense to beneficial owners and
the IRS on Schedule K-1. The Issuer will provide the Schedule K-1 information to
nominees that fail to provide the Issuer with the information statement
described below and such nominees will be required to forward such information
to the beneficial owners of the Partnership Interests. Generally, beneficial
owners of a Partnership Interest must file tax returns that are consistent with
the information return filed by the Issuer or be subject to penalties unless the
beneficial owner of a Partnership Interest notifies the IRS of all such
inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Interests as a nominee at any time during a calendar year is required to furnish
the Issuer with a statement containing certain information on the nominee, the
beneficial owners and the Partnership Interests so held. Such information
includes (i) the name, address and taxpayer identification number of the nominee
and (ii) as to each beneficial owner (x) the name, address and identification
number of such person, (y) whether such person is a United States person, a
tax-exempt entity or a foreign government, an international organization, or any
wholly owned agency or instrumentality of either of the foregoing, and (z)
certain information on Partnership Interests that were held, bought or sold on
behalf of such person throughout the year. In addition, brokers and financial
institutions that hold Partnership Interests through a nominee are required to
furnish directly to the Issuer information as to themselves and their ownership
of Partnership Interests. A clearing agency registered under Section 17A of the
Securities Exchange Act of 1934, as amended, is not required to furnish any such
information statement to the Issuer. Nominees, brokers and financial
institutions that fail to provide the Issuer with the information described
above may be subject to penalties.
The Code provides for administrative examination of a partnership as if
the partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before three (3) years after
the date on which the partnership information return is filed. Any adverse
determination following an audit of the return of the Issuer by the appropriate
taxing authorities could result in an adjustment of the returns of the
beneficial owner of a Partnership Interests, and, under certain circumstances, a
beneficial owner of a Partnership Interest may be precluded from separately
litigating a proposed adjustment to the items of the Issuer. An adjustment could
also result in an audit of the beneficial owner of a Partnership Interest's
returns and adjustments of items note related to the income and losses of the
Issuer.
FASIT Securities
If provided in a related prospectus supplement, an election will be made
to treat the Issuer as a FASIT within the meaning of Code Section 860L(a).
Qualification as a FASIT requires ongoing compliance with certain conditions.
With respect to each series of Securities for which an election is made, Dewey
Ballantine LLP, special tax counsel to the Sponsor, will deliver its opinion to
the Sponsor that, assuming compliance with the Pooling and Servicing Agreement,
the Issuer will be treated as a FASIT for federal income tax purposes. An Issuer
for which a FASIT election is made will be referred to herein as a "FASIT
Trust." The Securities of each class will be designated as "regular interests"
or "high-yield regular interests" in the FASIT Trust except that one separate
class will be designated as the "ownership interest" in the FASIT Trust. The
prospectus supplement for each series of Securities will state whether
Securities of each class will constitute either a regular interest or a
high-yield regular interest (a FASIT Regular Security) or an ownership interest
(a "FASIT Ownership Security"). We will file such opinion with the Securities
and Exchange Commission on Form 8-K within fifteen (15) days after the initial
issuance of such Securities or as a post-effective amendment to the prospectus.
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Special Tax Attributes
FASIT Securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of Code Sections 856(c)(5)(A) and
856(c)(6) and interest on the FASIT Regular Securities will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B) in the same
proportion that, for both purposes, the assets of the FASIT Trust and the income
thereon would be so treated. FASIT Regular Securities held by a domestic
building and loan association will be treated as "regular interest[s] in a
FASIT" under Code Section 7701(a)(19)(C)(xi), but only in the proportion that
the FASIT Trust holds "loans . . . secured by an interest in real property which
is . . . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v). If at all times 95% or more of the assets of the FASIT Trust
or the income thereon qualify for the foregoing treatments, the FASIT Regular
Securities will qualify for the corresponding status in their entirety. For
purposes of Code Section 856(c)(5)(A), payments of principal and interest on a
Loan that are reinvested pending distribution to holders of FASIT Regular
Securities should qualify for such treatment. FASIT Regular Securities held by a
regulated investment company will not constitute "government securities" within
the meaning of Code Section 851(b)(4)(A)(i). FASIT Regular Securities held by
certain financial institutions will constitute an "evidence of indebtedness"
within the meaning of Code Section 582(c)(1).
Taxation of Beneficial Owners of FASIT Regular Securities
A FASIT Trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in certain other instances as
described below. The FASIT Regular Securities generally will be treated for
federal income tax purposes as newly-originated debt instruments. In general,
interest, original issue discount ("OID") and market discount on a FASIT Regular
Security will be treated as ordinary income to the beneficial owner, and
principal payments (other than principal payments that do not exceed accrued
market discount) on an FASIT Regular Security will be treated as a return of
capital to the extent of the beneficial owner's basis allocable thereto.
Beneficial owners must use the accrual method of accounting with respect to
FASIT Regular Securities, regardless of the method of accounting otherwise used
by such beneficial owners. See "Discount and Premium" below.
In order for the FASIT Trust to qualify as a FASIT, there must be ongoing
compliance with the requirements set forth in the Code. The FASIT must fulfill
an asset test, which requires that substantially all the assets of the FASIT, as
of the close of the third calendar month beginning after the "Startup Day"
(which for purposes of this discussion is the date of the initial issuance of
the FASIT Securities) and at all times thereafter, must consist of cash or cash
equivalents, certain debt instruments (other than debt instruments issued by the
owner of the FASIT or a related party) and hedges (and contracts to acquire the
same), foreclosure property and regular interests in another FASIT or in a
REMIC. Based on identical statutory language applicable to REMICs, it appears
that the "substantially all" requirement should be met if at all times the
aggregate adjusted basis of the nonqualified assets is less than one percent of
the aggregate adjusted basis of all the FASIT's assets. The FASIT provisions of
the Code (Sections 860H through 860L) also require the FASIT ownership interest
and certain "high-yield regular interests" (described below) to be held only by
certain fully taxable domestic corporations.
Permitted debt instruments must bear interest, if any, at a fixed or
qualified variable rate. Permitted hedges include interest rate or foreign
currency notional principal contracts, letters of credit, insurance, guarantees
of payment default and similar instruments to be provided in regulations, and
which are reasonably required to guarantee or hedge against the FASIT's risks
associated with being the obligor on interests issued by the FASIT. Foreclosure
property is real property acquired by the FASIT in connection with the default
or imminent default of a qualified mortgage, provided the Issuer had no
knowledge or reason to know as of the date such asset was acquired by the FASIT
that such a default had occurred or would occur.
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In addition to the foregoing requirements, the various interests in a
FASIT also must meet certain requirements. All of the interests in a FASIT must
be either of the following: (a) one or more classes of regular interests or (b)
a single class of ownership interest. A regular interest is an interest in a
FASIT that is issued on or after the Startup Day with fixed terms, is designated
as a regular interest, and (i) unconditionally entitles the holder to receive a
specified principal amount (or other similar amount), (ii) provides that
interest payments (or other similar amounts), if any, at or before maturity
either are payable based on a fixed rate or a qualified variable rate, (iii) has
a stated maturity of not longer than 30 years, (iv) has an issue price not
greater than 125% of its stated principal amount, and (v) has a yield to
maturity not greater than five (5%) percentage points higher than the related
applicable Federal rate (as defined in Code Section 1274(d)). A regular interest
that is described in the preceding sentence except that if fails to meet one or
more of requirements (i), (ii) (iv) or (v) is a "high-yield regular interest." A
high-yield regular interest that fails requirement (ii) must consist of a
specified, nonvarying portion of the interest payments on the permitted assets,
by reference to the REMIC rules. An ownership interest is an interest in a FASIT
other than a regular interest that is issued on the Startup Day, is designated
an ownership interest and is held by a single, fully-taxable, domestic
corporation. An interest in a FASIT may be treated as a regular interest even if
payments of principal with respect to such interest are subordinated to payments
on other regular interests or the ownership interest in the FASIT, and are
dependent on the absence of defaults or delinquencies on permitted assets lower
than reasonably expected returns on permitted assets, unanticipated expenses
incurred by the FASIT or prepayment interest shortfalls.
If an entity fails to comply with one or more of the ongoing requirements
of the Code for status as a FASIT during any taxable year, the Code provides
that the entity or applicable potion thereof will not be treated as a FASIT
thereafter. In this event, any entity that holds mortgage loans and is the
obligor with respect to debt obligations with two or more maturities, such as
the Trust Fund, may be treated as a separate association taxable as a
corporation, and the FASIT Regular Securities may be treated as equity interests
therein. The legislative history to the FASIT Provisions indicates, however,
that an entity can continue to be a FASIT if loss of its status was inadvertent,
it takes prompt steps to requalify and other requirements that may be provided
in Treasury regulations are met. Loss of FASIT status results in retirement of
all regular interests and their reissuance. If the resulting instruments would
be treated as equity under general tax principles, cancellation of debt income
may result.
Taxes on a FASIT Trust
Income from certain transactions by a FASIT, called prohibited
transactions, are taxable to the holder of the ownership interest in a FASIT at
a 100% rate. Prohibited transactions generally include (i) the disposition of a
permitted asset other than for (a) foreclosure, default, or imminent default,
(b) bankruptcy or insolvency of the FASIT, (c) a qualified (complete)
liquidation, (d) substitution for another permitted debt instrument or
distribution of the debt instrument to the holder of the ownership interest to
reduce overcollateralization, but only if a principal purpose of acquiring the
debt instrument which is disposed of was not the recognition of gain (or the
reduction of a loss) on the withdrawn asset as a result of an increase in the
market value of the asset after its acquisition by the FASIT or (e) the
retirement of a class of FASIT regular interests; (ii) the receipt of income
from nonpermitted assets; (iii) the receipt of compensation for services; or
(iv) the receipt of any income derived from a loan originated by the FASIT. It
is unclear the extent to which tax on such transactions could be collected from
the FASIT Trust directly under the applicable statutes rather than from the
holder of the FASIT Residual Security.
DUE TO THE COMPLEXITY OF THESE RULES, THE ABSENCE OF TREASURY REGULATIONS
AND THE CURRENT UNCERTAINTY AS TO THE MANNER TO THEIR APPLICATION TO THE TRUST
AND TO HOLDERS OF FASIT SECURITIES, IT IS PARTICULARLY IMPORTANT THAT POTENTIAL
INVESTORS CONSULT THEIR OWN
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TAX ADVISORS REGARDING THE TAX TREATMENT OF THEIR ACQUISITION, OWNERSHIP AND
DISPOSITION OF THE FASIT REGULAR SECURITIES.
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 beneficial owner's income as it accrues
(regardless of the beneficial owner's regular method of accounting) using a
constant yield method; (ii) market discount is treated as ordinary income and
must be included in a beneficial owner's income as principal payments are made
on the Security (or upon a sale of a Security); and (iii) if a beneficial owner
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 were sold. The issue price also includes
any accrued interest attributable to the period between the beginning of the
first Accrual 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 Distribution
Date over the interest that accrues for the period from the Settlement Date to
the first Distribution Date. The Trustee will supply, at the time and in the
manner required by the IRS, to beneficial owners, brokers and middlemen
information with respect to the original issue discount accruing on the
Securities.
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 of the Security 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 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. Even if original issue discount is treated
as zero under this rule, the actual amount of original issue discount must be
allocated to the principal distributions on the Security and, when each such
distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules directly applicable to REMIC Securities and Debt Securities. The Taxpayer
Relief Act of 1997 extends application of Section 1272(a)(6) to the Grantor
Trust Securities for tax years beginning after August 5, 1997. 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.
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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 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 beneficial owner 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 beneficial owner, 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." Original
issue discount calculations must be based on accrual periods of no longer than
one (1) year either (i) beginning on a distribution date (or, in the case of the
first such period, the Settlement Date) and ending on the day before the next
distribution date or (ii) beginning on the next day following a distribution
date and ending on the next distribution 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. Beneficial owners of
such Securities should consult their own tax advisors concerning the treatment
of such negative accruals.
A subsequent purchaser of a Security that purchases such Security at a
cost less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
portion and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such Security for all days on or after the day of purchase).
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Market Discount
A beneficial owner 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 beneficial owner 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
beneficial owners 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.
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 beneficial owner makes such an election, the
amount of any interest payment that must be included in such beneficial owner's
income for each period ending on a Distribution Date will be reduced by the
portion of the premium allocable to such period based on the Premium Security's
yield to maturity. Such premium amortization should be made using constant yield
principles. If such election is made by the beneficial owner, the election will
also apply to all bonds the interest on which is not excludible from gross
income ("fully taxable bonds") held by the beneficial owner 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 beneficial owner must
include the full amount of each interest payment in income as it accrues, and
(ii) the premium must be allocated to the principal distributions on the Premium
Security and when each such distribution is received a loss equal to the premium
allocated to such distribution will be recognized. Any tax benefit from the
premium not previously recognized will be taken into account in computing gain
or loss upon the sale or disposition of the Premium Security.
Some Securities may provide for only nominal distributions of principal in
comparison to the distributions of interest thereon. It is possible that the IRS
or the Treasury Department may issue guidance excluding such Securities from the
rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that such a Security will be treated as having
original issue discount equal to the excess of the total payments to be received
thereon over its issue price. In such event, Section 1272(a)(6) of the Code
would govern the accrual of such original issue discount, but a beneficial owner
would
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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 beneficial owners of such Securities in accordance with the
rules described in the preceding paragraph.
Special Election
For any Security acquired on or after April 4, 1994, a beneficial owner
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 beneficial owner 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.
The Internal Revenue Service recently issued final regulations (the
"Withholding Regulations"), which change certain of the rules relating to
certain presumptions currently available relating to information reporting and
backup withholding. The Withholding Regulations would provide alternative
methods of satisfying the beneficial ownership certification requirement. The
Withholding Regulations are effective January 1, 2000, although valid
withholding certificates that are held on December 31, 1999 remain valid until
the earlier of December 31, 2000 or the due date of expiration of the
certificate under the rules as currently in effect.
Foreign Investors
The Withholding Regulations would require, in the case of Securities held
by a foreign partnership, that (x) the certification described above be provided
by the partners rather than by the foreign partnership and (y) the partnership
provide certain information, including a United States taxpayer identification
number. See "--Backup Withholding" above. A look-through rule would apply in the
case of tiered partnerships. Non-U.S. Persons should consult their own tax
advisors regarding the application to them of the Withholding Regulations.
Grantor Trust Securities and REMIC Regular Securities
Distributions made on a Grantor Trust Security, Debt Security or a REMIC
Regular Security to, or on behalf of, a beneficial owner that is not a U.S.
Person generally will be exempt from U.S. federal income and withholding taxes.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate that
is subject to U.S. federal income tax regardless of the source of its income, or
a trust if a court within the United States can exercise primary supervision
over its administration and at least one United States person has the authority
to control all substantial decisions of the trust. This exemption is applicable
provided (a) the beneficial owner is not subject to U.S. tax as a result of a
connection to the United States other than ownership of the Security, (b) the
beneficial owner signs a statement under penalties of perjury that certifies
that such beneficial owner is not a U.S. Person,
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and provides the name and address of such beneficial owner, and (c) the last
U.S. Person in the chain of payment to the beneficial owner receives such
statement from such beneficial owner or a financial institution holding on its
behalf and does not have actual knowledge that such statement is false.
Beneficial owners should be aware that the IRS might take the position that this
exemption does not apply to a beneficial owner that also owns 10% or more of the
REMIC Residual Securities of any REMIC trust, or to a beneficial owner that is a
"controlled foreign corporation" described in Section 881(c)(3)(C) of the Code.
REMIC Residual Securities
Amounts distributed to a beneficial owner 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 beneficial owner that is not a
U.S. Person generally will be exempt from U.S. federal income and withholding
tax, subject to the same conditions applicable to distributions on Grantor Trust
Securities, Debt Securities and REMIC Regular Securities, as described above,
but only to the extent that the obligations directly underlying the REMIC Trust
that issued the REMIC Residual Security (e.g., Loans or regular interests in
another REMIC or FASIT) 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 Beneficial Owners of REMIC Residual
Securities--Excess Inclusions" herein.
Partnership Interests
Depending upon the particular terms of the related Agreement and Loan Sale
Agreement, a Issuer may be considered to be engaged in a trade or business in
the United States for purposes of federal withholding taxes with respect to
non-U.S. persons. If the Issuer is considered to be engaged in a trade or
business in the United States for such purposes and the Issuer is treated as a
partnership, the income of the Issuer distributable to a non-U.S. person would
be subject to federal withholding tax. Also, in such cases, a non-U.S.
beneficial owner of a Partnership Interest that is a corporation may be subject
to the branch profits tax. If the Trust is notified that a beneficial owner of a
Partnership Interest is a foreign person, the Issuer may withhold as if it were
engaged in a trade or business in the United States in order to protect the
Issuer from possible adverse consequences of a failure to withhold. A foreign
holder generally would be entitled to file with the IRS a claim for refund with
respect to withheld taxes, taking the position that no taxes were due because
the Issuer was not in a U.S. trade or business.
FASIT Regular Securities
Certain "high-yield" FASIT Regular Securities may not be sold to or
beneficially owned by Non-U.S. Persons. Any such purported transfer will be null
and void and, upon the Trustee's discovery of any purported transfer in
violation of this requirement, the last preceding owner of such high-yield FASIT
Regular Securities will be restored to ownership thereof as completely as
possible. Such last preceding owner will, in any event, be taxable on all income
with respect to such high-yield FASIT Regular Securities for federal income tax
purposes. The related Agreement will provide that, as a condition to transfer of
a high-yield FASIT Regular Security, the proposed transferee must furnish an
affidavit as to its status as a U.S. Person and otherwise as a permitted
transferee.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the state
and local income tax consequences of the acquisition, ownership, and disposition
of the Securities. State and local income tax law may differ
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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 investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
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.
General
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing or other employee benefit plan (a "Plan") and certain individual
retirement arrangements 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 the Plan, unless a statutory or
administrative exemption applies to the transaction. ERISA and the Code also
prohibit generally certain actions involving conflicts of interest by persons
who are fiduciaries of such Plans or arrangements. A violation of these
"prohibited transaction" rules may generate excise tax and other liabilities
under ERISA and the Code for such persons. In addition, investments by Plans are
subject to ERISA's general fiduciary requirements, including the requirement of
investment prudence and diversification and the requirement that a Plan's
investments be made in accordance with the documents governing the Plan.
Employee benefit plans that 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. Accordingly, assets of such plans may be
invested in Securities without regard to the ERISA considerations discussed
below, subject to the provisions of other applicable federal, state and local
law. Any such plan which is qualified and exempt from taxation under Sections
401(a) and 501(a) of the Code, however, is subject to the prohibited transaction
rules set forth in Section 503 of the Code.
Certain transactions involving the Issuer might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan
(including an individual retirement arrangement) that purchased Securities, if
the assets of the Issuer were deemed to be assets of the Plan. Under a
regulation (the "Plan Assets Regulation") issued by the United States Department
of Labor (the "DOL"), the assets of the Issuer would be treated as plan assets
of a Plan for the purposes of ERISA and the Code only if the Plan acquired an
equity interest in the Issuer and none of the exceptions contained in the Plan
Assets Regulation were applicable. An "equity interest" is defined under the
Plan Assets Regulation as an interest other than an instrument which is treated
as indebtedness under applicable local law and which has no substantial equity
features. In addition, in John Hancock Mutual Life Insurance Co. v. Harris Trust
and Savings Bank, 510 U.S. 86 (1993), the United States Supreme Court ruled that
assets held in an insurance company's general account may be deemed to be "plan
assets" for ERISA purposes under certain circumstances. Therefore, in the
absence of an exemption, the purchase, sale or holding of a
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Security by a Plan (including certain individual retirement arrangements)
subject to Section 406 of ERISA or Section 4975 of the Code might result in
prohibited transactions and the imposition of excise taxes and civil penalties.
Certificates
The DOL has issued to various underwriters individual prohibited
transaction exemptions (the "Underwriter Exemptions"), which generally exempt
from the application of the prohibited transaction provisions of Sections
406(a), 406(b)(1), 406(b)(2) and 407(a) of ERISA and the excise taxes imposed
pursuant to Sections 4975(a) and (b) of the Code, certain transactions with
respect to the initial purchase, the holding and the subsequent resale by Plans
of certificates in pass-through trusts that consist of secured receivables,
secured loans and other secured obligations that meet the conditions and
requirements of the Underwriter Exemptions. The Underwriter Exemptions will only
be available for Securities that are Certificates.
Among the conditions that must be satisfied in order for the Underwriter
Exemptions to apply to offered certificates are the following:
(a) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an
unrelated party;
(b) the rights and interests evidenced by the certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust;
(c) 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 Standard & Poor's Rating Services, a division of
The McGraw-Hill Companies ("Standard & Poor's"), Moody's Investors
Service, Inc. ("Moody's"), Duff & Phelps Credit Rating Co. ("D&P"), or
Fitch IBCA, Inc. ("Fitch");
(d) the Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(e) the sum of all payments made to and retained by the
underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
originators and the sponsor pursuant to the assignment of the loans to the
Trust Fund represents not more than the fair market value of such loans;
the sum of all payments made to and retained by any servicer represents
not more than reasonable compensation for such person's services under the
pooling and servicing agreement and reimbursement of such person's
reasonable expenses in connection therewith;
(f) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D under the
Securities Act of 1933, as amended; and
(g) in the event that all of the obligations used to fund the
trust have not been transferred to the trust on the closing date,
additional obligations of the types specified in the prospectus supplement
and/or pooling and servicing agreement having an aggregate value equal to
no more than 25% of the total principal amount of the certificates being
offered by the trust may be transferred to the trust, in exchange for
amounts credited to the account funding the additional obligations, within
a funding period of no longer than 90 days or 3 months following the
closing date.
The Trust Fund must also meet the following requirements:
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(a) the corpus of the Trust Fund must consist solely of assets of
the type that have been included in other investment pools;
(b) certificates in such other investment pools must have been
rated in one of the three highest rating categories of Standard & Poor's,
Moody's, Fitch or D&P for at least one (1) year prior to the Plan's
acquisition of certificates; and
(c) certificates evidencing interests in such other investment
pools must have been purchased by investors other than Plans for at least
one (1) year prior to the Plan's acquisition of certificates.
Moreover, the Underwriter Exemptions provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables held in the trust;
provided, that, among other requirements, (i) in the case of an acquisition in
connection with the initial issuance of certificates, at least fifty percent of
each class of certificates in which Plans have invested is acquired by persons
independent of the Restricted Group and at least fifty percent of the aggregate
interest in the trust is acquired by persons independent of the Restricted
Group; (ii) such fiduciary (or its affiliate) is an obligor with respect to five
percent or less of the fair market value of the obligations contained in the
trust; (iii) the Plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class outstanding at the
time of the acquisition; and (iv) immediately after the acquisition, no more
than twenty-five percent of the assets of the Plan with respect to which such
person is a fiduciary are invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same entity. The
Underwriter Exemptions do not apply to Plans sponsored by the Sponsor, the
Issuer, the underwriter(s), the Trustee, the Servicer, any other servicer, any
obligor with respect to 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").
In addition to the Underwriter Exemptions, the DOL has issued Prohibited
Transaction class Exemption ("PTCE") 83-1 which provides an exemption for
certain transactions involving the sale or exchange of certain residential
mortgage pool pass-through certificates by Plans and for transactions in
connection with the servicing and operation of the mortgage pool.
Notes
The Underwriter Exemptions will not be available for Securities which are
Notes. If the Notes are treated as having substantial equity features, the
purchase, holding and resale of the Notes could result in a transaction that is
prohibited under ERISA or the Code. However, if the Notes are treated as
indebtedness without substantial equity features, the Trust's assets would not
be deemed assets of a Plan. The acquisition or holding of the Notes by or on
behalf of a Plan could nevertheless give rise to a prohibited transaction, if
such acquisition and holding of Notes by or on behalf of a Plan were deemed to
be a prohibited loan to a party in interest with respect to such Plan. Certain
exemptions from such prohibited transaction rules could be applicable to the
purchase and holding of Notes by a Plan, depending on the type and circumstances
of the plan fiduciary making the decision to acquire such Notes. Included among
these exemptions are: PTCE 84-14, regarding certain transactions effected by
"qualified professional asset managers"; PTCE 90-1, regarding certain
transactions entered into by insurance company pooled separate accounts; PTCE
91-38, regarding certain transactions entered into by bank collective investment
funds; PTCE 95-60, regarding certain transactions entered into by insurance
company general accounts; and PTCE 96-23, regarding certain transactions
effected by "in-house asset managers". Each purchaser and each transferee of a
Note that is treated as debt for purposes of the Plan Assets Regulation may be
required to represent and warrant that its purchase and holding of such Note
will be covered by one of the exemptions listed above or by another DOL class
exemption.
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Consultation with Counsel
The prospectus supplement for each series of Securities will provide
further information which Plans should consider before purchasing the offered
Securities. A Plan fiduciary considering the purchase of Securities should
consult its tax and/or legal advisors regarding whether the assets of the Trust
would be considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other ERISA issues and their potential
consequences. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio. The sale of Securities to a Plan is in no respect a
representation by the Sponsor, the Issuer or the underwriter(s) that this
investment meets all relevant 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.
LEGAL INVESTMENT
If specified in the related prospectus supplement, the Securities 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 Securities will
constitute legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including, but not limited
to, state-chartered savings banks, commercial banks, savings and loan
associations and insurance companies, as well as trustees and state government
employee retirement systems) created pursuant to or existing under the laws of
the United States or of any state (including the District of Columbia and Puerto
Rico) whose authorized investments are subject to state regulation to the same
extent that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Pursuant to SMMEA, a
number of states enacted legislation, on or before the October 3, 1991 cutoff
for such enactments, limiting to varying extends the ability of certain entities
(in particular, insurance companies) to invest in "mortgage related securities,"
in most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Accordingly, the investors affected by such
legislation will be authorized to invest in the Securities 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 of Securities), except under limited
circumstances.
All depository institutions considering an investment in the Securities
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
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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 institutions from investing in certain "high-risk" mortgage
securities (including securities such as certain series, classes of Securities),
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 Securities,
as certain series, classes 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 Securities issued
in book-entry form, provisions which may restrict or prohibit investment in
securities which are issued in book-entry form.
Other classes of Securities 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 Securities under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase the Securities, 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 Securities will constitute legal investments
for them.
No representation is made as to the proper characterization of the
Securities for legal investment or financial institution regulatory purposes, or
as to the ability of particular investors to purchase Securities 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 Securities adversely
affect the liquidity of the non-SMMEA Securities.
Investors should consult with their own legal advisors in determining
whether and to what extent the Securities constitute legal investments for such
investors.
PLAN OF DISTRIBUTION
The Issuer may sell the Securities 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 Securities of such series, or the method by which such price is to be
determined, and the net proceeds to the Issuer from such sale.
If the sale of any Securities is made pursuant to an underwriting
agreement pursuant to which one or more underwriters agree to act in such
capacity, such Securities 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
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particular series of Securities 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 Issuer
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 Securities will be obligated to purchase
all such Securities if any are purchased. Pursuant to each such underwriting
agreement, the Sponsor will indemnity the related underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended.
If any Securities 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 Securities, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the Securities Act, in connection with reoffers and sales by them of
Securities. Securityholders 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
Securities, the Sponsor, any affiliate thereof or any other person or persons
specified therein may purchase some or all of one or more classes of Securities
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 Securities so purchased, directly,
through one or more underwriters to be designated at the time of the offering of
such Securities, 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 Securities 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 Securities 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 Securities
may be deemed to be an "underwriter" within the meaning of the Securities Act,
and any commissions and discounts received by such dealer and any profit on the
resale of such Securities by such dealer might be deemed to be underwriting
discounts and commissions under the Securities Act.
LEGAL MATTERS
Certain legal matters and certain tax matters will be passed upon for the
Sponsor by Dewey Ballantine LLP, New York, New York and/or such other counsel as
will be named on the related prospectus supplement.
RATINGS
At the date of issuance of each series of Securities, the Securities
offered hereby will be rated in one of the four highest categories by at least
one nationally recognized statistical rating agency (a "Rating Agency"). See
"Ratings" in the related prospectus supplement. A securities rating is not a
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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 Securities
and Exchange Commission in Washington, D.C. You may obtain copies of the
registration statement for a fee upon request to the Commission, and you may
inspect the registration statement, 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 Securities,
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 Sponsor 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 Securities 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
Sponsor has not and will not participate in the preparation of FNMA's
prospectuses.
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INDEX OF SIGNIFICANT DEFINITIONS
Term Page
- ---- ----
Accrual Securities............................................................34
Additional Balance............................................................21
Additional Loans..............................................................32
Advances......................................................................47
Agreements....................................................................33
Amortization Basis............................................................22
APR...........................................................................25
Balloon Loan..................................................................21
Balloon Period................................................................21
Bond Insurer..................................................................39
Book-Entry Securities.........................................................36
Buy-Down Account..............................................................21
Buy-Down Loans................................................................21
Capitalized Interest Account..................................................33
CERCLA........................................................................67
Certificates..................................................................18
Civil Relief Act..............................................................68
Code......................................................................32, 71
Collection Account............................................................44
Collection Account Depository.................................................44
Contract Pool.................................................................18
Contracts.....................................................................25
Convertible Mortgage Loans....................................................23
Cooperative Loans.............................................................19
Cooperative Notes.............................................................19
Credit Enhancement............................................................38
Credit Enhancer...............................................................36
Cut-Off Date..................................................................20
D&P...........................................................................91
Debt Securities...............................................................71
Deferred Interest.............................................................21
Deleted Loan..................................................................31
Determination Date............................................................36
Distribution Amount...........................................................35
Distribution Dates............................................................34
DOL...........................................................................90
DTC...........................................................................36
Due Date......................................................................20
Eligible Investments......................................................33, 44
Environmental Condition.......................................................67
EPA...........................................................................68
ERISA.........................................................................90
Events of Default.............................................................52
FASIT.........................................................................71
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FASIT Ownership Security......................................................82
FASIT Securities..............................................................71
FASIT Trust...................................................................82
FDIC..........................................................................44
FHLBB.........................................................................60
FIRREA........................................................................69
Fitch.........................................................................91
Fixed Retained Yield..........................................................27
Garn Act......................................................................60
Graduated Equity Mortgage Loans...............................................23
Graduated Payment Mortgage Loans..............................................23
Grantor Trust.................................................................70
Grantor Trust Fractional Interest Security....................................71
Grantor Trust Securities......................................................70
Grantor Trust Strip Security..................................................71
High LTV Loans................................................................23
Home Equity Lines.............................................................21
Indirect Participants.........................................................36
Installment Contracts.........................................................66
Insurance Proceeds............................................................45
Insured Payment...............................................................39
Interest Rate.................................................................34
IRS...........................................................................73
Issuer........................................................................18
Letter of Credit..............................................................39
Letter of Credit Bank.........................................................39
Liquidation Proceeds..........................................................45
Loan Agreement................................................................21
Loan Rate.....................................................................23
Loan Sale Agreement...........................................................28
Loans.........................................................................18
Loan-to-Value Ratio...........................................................20
LTV.......................................................................20, 26
Manufactured Homes............................................................25
Moody's.......................................................................91
Mortgage Loans................................................................19
Mortgage Notes................................................................19
Mortgage Pool.................................................................18
Mortgaged Properties..........................................................21
Mortgages.....................................................................19
Net Insurance Proceeds........................................................45
Net Liquidation Proceeds......................................................45
Net Loan Rate.................................................................41
Notes.........................................................................18
OID...........................................................................83
Originator....................................................................19
OTS...........................................................................60
Participants..................................................................36
Partnership...................................................................71
Partnership Interests.........................................................71
Paying Agent..................................................................35
Physical Certificates.........................................................36
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Plan..........................................................................90
Plan Assets Regulation........................................................90
Plans.........................................................................90
Policy Statement..............................................................93
Pool..........................................................................18
Pre-Funded Amount.............................................................32
Pre-Funding Account...........................................................32
Pre-Funding Period............................................................32
Premium Security..............................................................87
Prepayment Interest Shortfall.................................................47
PTCE..........................................................................92
Purchase Price................................................................30
Rating Agency.................................................................95
Record Date...................................................................34
REMIC.........................................................................71
REMIC Regular Security........................................................73
REMIC Regulations.............................................................73
REMIC Residual Security.......................................................73
REMIC Securities..............................................................71
REMIC Trust...................................................................73
Remittance Period.............................................................34
Reserve Fund..................................................................40
Restricted Group..............................................................92
Securities....................................................................18
Security Registrar............................................................36
Senior Securities.............................................................34
Servicer......................................................................19
Servicing Account.............................................................48
Servicing Agreement...........................................................19
Settlement Date...............................................................74
SMMEA.........................................................................93
Special Hazard Insurance Policy...............................................39
Sponsor.......................................................................43
Standard & Poor's.............................................................91
Standard Hazard Insurance Policy..............................................27
Strip Securities..............................................................34
Subordinate Securities........................................................34
Substitute Loan...............................................................31
Surety Bond...................................................................39
Title I Loans.................................................................25
Title I Program...............................................................25
Title V...................................................................61, 65
Trust Fund....................................................................18
Trustee.......................................................................20
U.S. Person...................................................................88
UCC...........................................................................57
Underwriter Exemptions........................................................90
Window Period.................................................................61
Window Period Loans...........................................................61
Window Period States..........................................................61
Withholding Regulations.......................................................88
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses in connection with the
issuance and distribution of the Securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimates,
except the SEC registration fee.
SEC registration fee................... $ 278
Legal fees and expenses................ *
Accounting fees and expenses........... *
Blue Sky fees and expenses............. *
Rating agency fees..................... *
Owner Trustee fees and expenses........ *
Indenture Trustee fees and expenses.... *
Credit Enhancer ....................... *
Printing and engraving................. *
Miscellaneous.......................... *
--------
Total............................ $ 278
--------
- ----------
* To be completed by Amendment.
Item 15. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law provides that a
Delaware corporation may indemnify any persons, including officers and
directors, who are, or are threatened to be made, parties to any threatened,
pending or completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person was an officer or director
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such officer or
director acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, for criminal proceedings,
had no reasonable cause to believe that his conduct was illegal. A Delaware
corporation may indemnify officers and directors in an action by or in the right
of the corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer of
director actually and reasonably incurred.
The agreements which the Registrant will enter into for each series of
Securities will provide that the Registrant and any director, officer, employee
or agent of the Registrant will be entitled to indemnification by the Trust Fund
and will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to such agreements or the Securities,
other than any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence in the performance of his or its duties
thereunder or by reason of reckless disregard of his or its obligations and
duties thereunder.
Section 8 of the form of underwriting agreements filed as a part of
Exhibit 1 to this Registration Statement provides for indemnification of
directors and officers who sign the Registration Statement and controlling
persons of the Registrant by the underwriters, and for indemnification of each
underwriter and its controlling person by the Registrant, against certain
liabilities.
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Item 16. Exhibits.
Exhibit
- -------
1.1* Form of Underwriting Agreement for Notes .
1.2* Form of Underwriting Agreement for Certificates.
4.1* Form of Pooling and Servicing Agreement (Grantor Trust), including
form of Certificates.
4.2* Form of Pooling and Servicing Agreement (REMIC/FASIT), including form
of Certificates.
4.3* Form of Indenture between the Issuer and the Indenture Trustee,
including form of Notes and certain other related agreements as
Exhibits thereto.
4.4* Form of Trust Agreement between the Issuer and the Trustee.
5.1* Opinion of Dewey Ballantine LLP regarding legality.
8.1* Opinion of Dewey Ballantine LLP regarding tax matters.
10.1* Form of Loan Sale Agreement.
23.1* Consent of Dewey Ballantine LLP (included as part of Exhibits 5.1 and
8.1).
24.1 Power of Attorney (included as part of the signature page to Form
S-3).
25.1* Statement of Eligibility and Qualification of the Indenture Trustee
(Form T-1).
99.1* Form of Prospectus Supplement -- Notes.
99.2* Form of Prospectus Supplement -- Certificates.
99.3* Form of Prospectus Supplement -- Notes and Certificates.
- ----------
* To be filed by Amendment.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which is registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
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<PAGE>
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply
if the Registration Statement is on Form S-3, Form S-8 or Form F-3, and
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the Securities being registered which remain unsold at the
termination of the offering.
(b) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in this Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referred to in Item 15 of
this Registration Statement, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the Securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
(d) That,
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(e) To file an application for the purpose of determining the eligibility
of the trustee to act under subsection (a) of Section 310 of the Trust Indenture
Act in accordance with the rules and regulations prescribed by the Commission
under Section 305(b)(2) of the Trust Indenture Act.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York on the 30th day of March,
1999.
PRUDENTIAL SECURITIES SECURED FINANCING
CORPORATION
By /s/ Vincent T. Pica, II
--------------------------------------
Vincent T. Pica, II
President and Director
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Vincent T. Pica, II his true and lawful
attorney-in-fact and agent, acting alone, with full power of substitution and
resubstitution, for him and his name, place and stead, in any and all
capacities, to sign any or all amendments to this Registration Statement,
including post-effective amendments, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, and hereby ratifies and confirms all
his said attorney-in-fact and agent, acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Vincent T. Pica, II President (Principal March 30, 1998
- ------------------------ Executive Officer) and
Vincent T. Pica, II Director
/s/ P. Carter Rise Director March 30, 1998
- ------------------------
P. Carter Rise
/s/ Martin Pfinsgraff Director March 30, 1998
- ------------------------
Martin Pfinsgraff
/s/ Leland B. Paton Director March 30, 1998
- ------------------------
Leland B. Paton
/s/ William J. Horan Chief Financial Officer March 30, 1998
- ------------------------ (Principal Financial
William J. Horan Officer and Principal
Accounting Officer)
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EXHIBIT INDEX
Exhibit Description of Document
- ------- -----------------------
1.1* Form of Underwriting Agreement for Notes .
1.2* Form of Underwriting Agreement for Certificates.
4.1* Form of Pooling and Servicing Agreement (Grantor Trust), including
form of Certificates.
4.2* Form of Pooling and Servicing Agreement (REMIC/FASIT), including form
of Certificates.
4.3* Form of Indenture between the Issuer and the Indenture Trustee,
including form of Notes and certain other related agreements as
Exhibits thereto.
4.4* Form of Trust Agreement between the Issuer and the Trustee.
5.1* Opinion of Dewey Ballantine LLP regarding legality.
8.1* Opinion of Dewey Ballantine LLP regarding tax matters.
10.1* Form of Loan Sale Agreement.
23.1* Consent of Dewey Ballantine LLP (included as part of Exhibits 5.1 and
8.1).
24.1 Power of Attorney (included as part of the signature page to Form
S-3).
25.1* Statement of Eligibility and Qualification of the Indenture Trustee
(Form T-1).
99.1* Form of Prospectus Supplement -- Notes.
99.2* Form of Prospectus Supplement -- Certificates.
99.3* Form of Prospectus Supplement -- Notes and Certificates.
- ----------
* To be filed by Amendment.
