<PAGE>
Pursuant to Fule 424(b)(5)
File No. 333-74859
Prospectus supplement to prospectus dated March 23, 1999
- --------------------------------------------------------------------------------
$184,075,000
ABFS Mortgage Loan Trust 1999-1
$100,000,000 6.545%(1) Class A-1 Notes
$84,075,000 6.580%(1) Class A-2 Notes
(1) Subject to increase as set forth herein
[ABFS Logo]
Prudential Securities Secured Financing Corporation
Depositor
Mortgage-Backed Notes, Series 1999-1
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
You should read the section entitled "Risk Factors" starting on page S-7 of
this prospectus supplement and page 12 of the accompanying prospectus and
consider these factors before making a decision to invest in the notes.
The notes represent non-recourse obligations of the trust only and are not
interests in or obligations of any other person.
Neither the notes nor the underlying mortgage loans will be insured or
guaranteed by any governmental agency or instrumentality.
- -------------------------------------------------------------------------------
The ABFS Mortgage Loan Trust 1999-1 will issue two classes of notes, each of
which will be backed solely by a pledge of assets of the trust. The assets of
the trust consist primarily of two pools of fixed-rate, closed-end, monthly-
pay, business and consumer purpose home equity loans secured by first- or
second-lien mortgages or deeds of trust on residential or commercial real
properties. Each class of notes will be secured primarily by one of these two
pools of mortgage loans.
The notes
o Interest and principal on the notes is scheduled to be paid monthly, on the
25th day of the month, or the immediately following business day if such
25th day is not a business day. The first scheduled distribution date is
April 26, 1999.
Credit enhancement
o The notes will be unconditionally and irrevocably guaranteed as to the
payment of scheduled interest and ultimate principal pursuant to the terms
of a financial guaranty insurance policy to be issued by
[FSA Logo]
o On each distribution date, excess interest from one of the pools of
mortgage loans may be utilized to cover certain credit losses and certain
interest shortfalls on the class of notes relating to the other pool of
mortgage loans. The availability of such cross-collateralization provides
credit enhancement for each class of notes.
o The sum of initial aggregate principal balance of the mortgage loans and
the original amount on deposit in the pre-funding accounts exceeds the
initial aggregate principal balance of the notes, thereby creating
over-collateralization. Excess interest will be used in the early years of
the transaction to increase such over-collateralization. Such
over-collateralization provides credit enhancement for each class of notes.
o The trust is also issuing two classes of trust certificates, which are not
offered by this prospectus supplement, each representing the entire
beneficial ownership interest in the portion of the trust consisting of one
of the pools of mortgage loans. Payments on the trust certificates are
subordinated to the payments due on the notes. Subordination of the trust
certificates provides credit enhancement for each class of notes.
<TABLE>
<CAPTION>
Class Original Note Price to the Underwriting Proceeds to the Ratings Final Stated
Principal Balance Public(1) Discount Depositor(2) Moody's/S&P Maturity Date
----- ----------------- ------------ ------------ --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
A-1 $100,000,000.00 100.00% 0.35% $ 99,650,000.00 Aaa/AAA May 25, 2030
A-2 $ 84,075,000.00 100.00% 0.35% $ 83,780,737.50 Aaa/AAA May 25, 2030
----- ----------------- --------------- ----------- --------------- ----------- -------------
Total $184,075,000.00 $184,075,000.00 $644,262.50 $183,430,737.50
</TABLE>
- -----------------
(1) Plus accrued interest from March 1, 1999.
(2) Before deducting expenses estimated to be $435,000.00.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus supplement. Any representation to the
contrary is a criminal offense.
Prudential Securities
The date of this prospectus supplement is March 24, 1999
<PAGE>
Important notice about the information presented in this
prospectus supplement and the accompanying prospectus
We provide information to you about the notes in two separate
documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
your series of notes, and (2) this prospectus supplement, which describes the
specific terms of your series of notes.
This prospectus supplement does not contain complete information about
the offering of the notes. Additional information is contained in the
accompanying prospectus. You are urged to read both this prospectus supplement
and the accompanying prospectus in full. We cannot sell the notes to you unless
you have received both this prospectus supplement and the accompanying
prospectus.
If the terms of your series of notes vary between this prospectus
supplement and the accompanying prospectus, you should rely on the information
in this prospectus supplement.
Prudential Securities Secured Financing Corporation has filed with the
Securities and Exchange Commission a registration statement (Registration No.
333-74859) under the Securities Act of 1933, as amended, with respect to the
notes offered pursuant to this prospectus supplement. This prospectus
supplement and the accompanying prospectus, which form a part of the
registration statement, omit certain information contained in such registration
statement pursuant to the rules and regulations of the Securities and Exchange
Commission. You may read and copy the registration statement at the Public
Reference Room at the Securities and Exchange Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. and at the Securities and Exchange
Commission's regional offices at Seven World Trade Center, 13th Floor, New
York, New York, 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the Public Reference
Rooms. In addition, the Securities and Exchange Commission maintains a site on
the World Wide Web containing reports, proxy materials, information statements
and other items. The address is http://www.sec.gov.
The Securities and Exchange Commission allows us to "incorporate by
reference" certain information already on file with it. This means that we can
disclose important information to you by referring you to those documents. Such
information is considered part of this prospectus supplement, and later
information that is filed will automatically update and supersede this
information. We incorporate by reference all of the documents listed in the
accompanying prospectus under the heading "Incorporation of Certain Information
by Reference" and the financial statements of Financial Security Assurance Inc.
included in, or as exhibits to, the following documents, which have been filed
by Financial Security Assurance Holdings Ltd.:
o the Annual Report on Form 10-K for the year ended December 31,
1997; and
o the Quarterly Report on Form 10-Q for the quarter ended September
30, 1998.
You should rely only on the information incorporated by reference or
provided in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone else to provide you with different information. You
should not assume that the information in this prospectus supplement or the
accompanying prospectus is accurate as of any date other than the date on the
cover page of this prospectus supplement or the accompanying prospectus.
<PAGE>
You can find a listing of the pages where capitalized terms used in
this prospectus supplement and the accompanying prospectus are defined under
the caption "Index of Principal Defined Terms" beginning on page S-76 in this
prospectus supplement and under the caption "Index of Significant Definitions"
beginning on page 104 in the accompanying prospectus.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents provides the pages
on which these captions are located.
<PAGE>
TABLE OF CONTENTS
SUMMARY.............................................S-1
The Notes and the Trust Certificates...........S-1
Description of the Notes...................S-1
Description of the Trust Certificates......S-1
Distributions..................................S-2
General....................................S-2
Distributions of Interest..................S-2
Distributions of Principal.................S-2
Flow of Funds..............................S-2
Credit Enhancement.............................S-3
Over-collateralization Provisions..........S-3
Cross-collateralization Provisions.........S-3
The Note Insurance Policy..................S-4
The Mortgage Loans.............................S-4
General....................................S-4
The Initial Mortgage Loans.................S-5
The Subsequent Mortgage Loans..............S-5
Servicing of the Mortgage Loans................S-5
Servicing Fee..............................S-5
Option of the Servicer to Call Either
Class of Notes.........................S-5
Option of the Servicer to Terminate the
Trust..................................S-5
ERISA Considerations...........................S-6
Federal Income Tax Status......................S-6
Ratings........................................S-6
RISK FACTORS........................................S-7
Prepayment and Maturity Considerations.........S-7
The Subsequent Mortgage Loans and the
Pre-Funding Accounts.......................S-8
Underwriting Standards and Potential
Delinquencies..............................S-9
Geographic Concentration.......................S-9
Balloon Payments..............................S-10
Nature of Collateral; Second Lien Mortgage
Loans.....................................S-10
Decline in Real Estate Values.................S-12
Payments on the Mortgage Loans................S-12
Legal Considerations..........................S-12
Year 2000 Issues..............................S-14
DTC and the Year 2000 Issue...................S-14
TRANSACTION OVERVIEW...............................S-15
Parties.......................................S-15
The Transaction...............................S-16
THE MORTGAGE LOAN POOLS............................S-16
General.......................................S-16
The Pool I Mortgage Loans.....................S-17
The Pool II Mortgage Loans....................S-25
Conveyance of Subsequent Mortgage Loans.......S-32
THE ORIGINATORS, THE SELLER AND THE SERVICER.......S-32
General.......................................S-32
The Originators...............................S-33
Underwriting Guidelines.......................S-35
The Servicer..................................S-37
Delinquency and Loan Loss Experience..........S-38
THE OWNER TRUSTEE..................................S-39
THE INDENTURE TRUSTEE..............................S-39
THE COLLATERAL AGENT...............................S-39
DESCRIPTION OF THE NOTES AND THE TRUST CERTIFICATESS-40
General.......................................S-40
Book-Entry Registration.......................S-40
Definitive Notes..............................S-44
Assignment and Pledge of Initial Mortgage
Loans.....................................S-44
Assignment and Pledge of Subsequent Mortgage
Loans.....................................S-44
Delivery of Mortgage Loan Documents...........S-45
Representations and Warranties of the Seller..S-46
Payments on the Mortgage Loans................S-48
Over-collateralization Provisions.............S-49
Cross-collateralization Provisions............S-51
Flow of Funds.................................S-51
Definitions...................................S-52
Events of Default.............................S-56
Reports to Noteholders........................S-57
Amendment.....................................S-57
SERVICING OF THE MORTGAGE LOANS....................S-57
The Servicer..................................S-57
<PAGE>
Servicing Fees and Other Compensation and
Payment of Expenses.......................S-57
Periodic Advances and Servicer Advances.......S-58
Prepayment Interest Shortfalls................S-58
Civil Relief Act Interest Shortfalls..........S-59
Optional Purchase of Defaulted Mortgage Loans.S-59
Servicer Reports..............................S-59
Collection and Other Servicing Procedures.....S-60
Hazard Insurance..............................S-60
Realization Upon Defaulted Mortgage Loans.....S-61
Removal and Resignation of the Servicer.......S-61
Optional Clean-up Call on the Notes...........S-63
Termination; Purchase of Mortgage Loans.......S-63
THE NOTE INSURANCE POLICY..........................S-64
THE NOTE INSURER...................................S-66
The Note Insurer..............................S-66
Reinsurance...................................S-67
Ratings.......................................S-67
Capitalization................................S-67
Insurance Regulation..........................S-68
PREPAYMENT AND YIELD CONSIDERATIONS................S-68
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS..........S-71
Treatment of the Notes........................S-71
Treatment of the Trust........................S-73
ERISA CONSIDERATIONS...............................S-73
LEGAL INVESTMENT...................................S-74
UNDERWRITING.......................................S-74
EXPERTS............................................S-75
RATINGS............................................S-75
LEGAL MATTERS......................................S-75
INDEX OF PRINCIPAL DEFINED TERMS...................S-76
<PAGE>
SUMMARY
o This summary highlights selected information from this prospectus
supplement 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 the notes, carefully read this entire prospectus
supplement and the accompanying prospectus.
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 supplement and the accompanying prospectus.
-------------------------------
THE NOTES AND THE TRUST CERTIFICATES
The ABFS Mortgage Loan Trust 1999-1 (the "Trust") will issue two classes of its
Mortgage Backed Notes, Series 1999-1 (the "Notes"), the "Class A-1 Notes" and
the "Class A-2 Notes". The Notes are being offered to you by this prospectus
supplement.
The Trust will also issue two classes of trust certificates (the "Trust
Certificates"), together representing the entire beneficial ownership interest
in the Trust. The Trust Certificates are not offered by this prospectus
supplement.
Description of the Notes
Each class of Notes will be secured by a pledge of a separate portion of the
assets of the Trust. The assets of the Trust (the "Trust Estate") will consist
primarily of two pools of fixed-rate, closed-end, monthly-pay, business and
consumer purpose home equity loans secured by first- or second-lien mortgages
or deeds of trust on residential or commercial real properties (the "Mortgage
Loans"). The Class A-1 Notes will be secured by the Mortgage Loans in the first
pool ("Pool I") and the Class A-2 Notes will be secured by the Mortgage Loans
in the second pool ("Pool II"). Each pool will constitute a separate sub-trust
of the Trust.
Each class of Notes will accrue interest at an interest rate (each, a "Note
Rate"), have an original principal balance and final stated maturity date, as
follows:
Note Original Note Final Stated
Class Rate(1) Principal Balance Maturity Date(2)
- ----- ------- ----------------- ----------------
A-1 6.545% $100,000,000 May 25, 2030
A-2 6.580% $ 84,075,000 May 25, 2030
(1) If the Servicer does not exercise its option to call a class of Notes as
described in this Summary under "Servicing of the Mortgage Loans -- Option
of the Servicer to Call Either Class of Notes," the Note Rate on the
related class of Notes will be equal to the rate set forth above plus 0.50%
per annum.
(2) It is expected that the actual last Distribution Date for each class of
Notes will occur significantly earlier than such final stated maturity
date.
The Trust will issue the Notes in book-entry form in minimum denominations of
$1,000 in original principal balance and integral multiples of $1,000 in excess
thereof (except for one Note of each class which may be issued in a different
amount).
Description of the Trust Certificates
One class of Trust Certificates will represent the ownership interest in the
sub-trust of the Trust consisting of the Mortgage Loans in Pool I. The other
class of Trust Certificates will represent the ownership interest in the
sub-trust of the Trust consisting of the Mortgage Loans in Pool II. The holders
of the Trust Certificates are entitled to receive certain payments consisting
of Excess Interest from the related pool of Mortgage Loans, but only to the
extent all payments have been made on each Distribution Date in respect of the
Notes.
o Excess Interest. Generally, because more interest is anticipated to be
paid by the Mortgage Loan borrowers than is necessary to pay the interest
which accrues on the Notes, there is expected to be "Excess Interest" each
month. Excess Interest may be used to cover shortfalls of interest, to
create over-collateralization, for cross-collateralization or to pay
amounts due the Note Insurer. After all such distributions are made on
each Distribution Date, any remaining Excess Interest will be distributed
to the holders of the Trust Certificates. For a description of the
over-collateralization and cross-
<PAGE>
collateralization provisions of this transaction, see "Credit
Enhancement" in this Summary.
DISTRIBUTIONS
General
Distributions on the Notes will be made on each Distribution Date to the
holders of record on the Record Date. Distributions to a holder will be made in
an amount equal to such holder's percentage interest of the total amount
distributed in respect of such holder's class of Notes on such Distribution
Date.
o Distribution Date. Distributions on the Notes will be made on the 25th
day of each month (or, if such 25th day is not a business day, on the
next succeeding business day), beginning on April 26, 1999.
o Record Date. The Record Date for the Notes will be the last business day
of the month preceding the related Distribution Date (or, in the case of
the April 26, 1999 Distribution Date, the closing date).
Distributions of Interest
On each Distribution Date, each class of Notes is entitled to receive its
Current Interest.
o Current Interest. The Current Interest for a Distribution Date is the
interest which accrues on a class of Notes at the applicable Note Rate
on the outstanding principal balance of such class during the related
Accrual Period.
o Accrual Period. The Accrual Period for the Notes is the calendar month
preceding the applicable Distribution Date. All computations of interest
accrued on the Notes shall be made on the basis of a 360-day year
consisting of twelve 30-day months.
In the event the full amount of Current Interest with respect to a class of
Notes is not available on any Distribution Date due to Net Mortgage Loan
Interest Shortfalls in the related Pool, the amount of the shortfall in Current
Interest will not be covered by the Note Insurance Policy. Such shortfall in
Current Interest will be paid from the Excess Interest, if any, before such
Excess Interest is used for over-collateralization, cross-collateralization or
paid to the holder of the related Trust Certificate.
For a description of the Civil Relief Act, see "Risk Factors -- Legal
Considerations" herein. For a description of the Servicer's limited obligation
to advance in respect of interest shortfalls, see "Servicing of the Mortgage
Loans -- Advancing" herein.
Distributions of Principal
The holders of each class of Notes are entitled to receive distributions of
principal on each Distribution Date which generally reflect collections of
principal during the preceding calendar month on the Mortgage Loans in the
related pool.
In addition, in accordance with the over-collateralization features of the
transaction, Excess Interest otherwise distributable to the holders of the
Trust Certificates during the early months of the transaction will be
distributed to the holders of the related class of Notes as an additional
distribution of principal, until the level of over-collateralization for such
class has reached its target level. For a description of the
over-collateralization features of the transaction, see "Credit Enhancement --
Over-collateralization" in this Summary.
Flow of Funds
On each Distribution Date, the Indenture Trustee will make the following
payments in respect of each pool of Mortgage Loans to the holders of the
related class of Notes, to the extent of the funds available therefor, in the
following order of priority:
first payment of the expenses of the Trust relating to such pool of Mortgage
Loans, including the fees, premiums and amounts owed to the Servicer,
the Indenture Trustee and the Note Insurer;
second to the holders of the related class of Notes, payment of interest on
the related class of Notes, excluding the amount of any Net Mortgage
Loan Interest Shortfalls in the related pool;
third to the holders of the related class of Notes, payment of principal of
the related class of Notes, but not including payments of principal
constituting over-collateralization payments;
fourth to the holders of the related class of Notes, payments in respect of
any Net Mortgage Loan Interest Shortfalls in the related pool;
<PAGE>
fifth to the holders of the other class of Notes, cross-collateralization
payments equal to the amount of certain credit losses or certain
interest shortfalls;
sixth to the holders of the related class of Notes, payments of principal
constituting over-collateralization payments;
seventh to the Cross-collateralization Reserve Account relating to the other
class of Notes, payment of the amount required for the balance of such
account to equal its required level; and
eighth to the holders of the Trust Certificates relating to such pool of
Mortgage Loans, payment of any remaining amount.
In each case, payments to the holders of a class of Notes, other than
cross-collateralization payments, will be made solely from amounts collected in
respect of the related pool of Mortgage Loans.
For a detailed description of the distribution of funds, see "Description of
the Notes -- Flow of Funds" herein.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Notes
consists solely of: (a) over-collateralization, (b) cross-collateralization and
(c) the Note Insurance Policy.
Over-collateralization Provisions
On the closing date, each class of Notes will be issued with an aggregate
original principal balance which is approximately 0.50% less than the sum of
the aggregate outstanding principal balance of the related pool of Mortgage
Loans purchased on the closing date and the original amount on deposit in the
related Pre-Funding Account, resulting in initial over-collateralization.
Over-collateralization is increased in the early months of the transaction,
starting with the second Distribution Date, through a limited acceleration of
the Notes relative to the amortization of the related pool of Mortgage Loans
and other collateral. The accelerated amortization results from the application
of Excess Interest to the payment of principal on the Notes. Starting with the
second Distribution Date until the required level of over-collateralization of
each pool of Mortgage Loans is reached, available Excess Interest from each
pool of Mortgage Loans will be used as a payment of principal to accelerate the
amortization of the related class of Notes. Once the required level of
over-collateralization is reached, and subject to the provisions described in
the next paragraph, the acceleration feature will cease, unless necessary to
maintain the required level of over-collateralization.
The over-collateralization provisions of the transaction provide that, subject
to certain trigger tests, the required level of over-collateralization may
increase or decrease over time. An increase would result in a temporary period
of accelerated amortization of the Notes to increase the actual level of
over-collateralization to its required level; a decrease would result in a
temporary period of decelerated amortization to reduce the actual level of
over-collateralization to its required level.
For a detailed description of the over-collateralization provisions of the
transaction, including the required levels of over-collateralization and
relevant triggers, see "Description of the Notes -- Over-collateralization
Provisions" herein.
Cross-collateralization Provisions
In certain circumstances, Excess Interest from one pool of Mortgage Loans may
be used to make payments with respect to the class of Notes relating to the
other pool of Mortgage Loans.
Pursuant to the cross-collateralization provisions of the transaction, Excess
Interest from a pool of Mortgage Loans which would otherwise be payable to the
holder of the Trust Certificate relating to such pool will instead be paid to
the holders of the class of Notes relating to the other pool of Mortgage Loans,
to the extent of certain credit losses or certain interest shortfalls on such
other pool.
The cross-collateralization provisions of the transaction are limited to the
payment of certain credit losses, certain interest shortfalls and amounts owed
to the Note Insurer. Thus, Excess Interest from one pool of Mortgage Loans may
not be used to build over-collateralization with respect to the other pool of
Mortgage Loans.
Cross-collateralization Reserve Account. Each class of Notes will have the
benefit of a Cross-collateralization Reserve Account. In the event that the
required level of over-collateralization for a pool of Mortgage Loans has not
been reached, Excess Interest from the other pool of Mortgage
<PAGE>
Loans may be used to fund the Cross-collateralization Reserve Account with
respect to such pool of Mortgage Loans, up to an amount equal to the shortfall
in the required level of over-collateralization. Funds on deposit in this
account will be used to pay over-collateralization deficits, certain interest
shortfalls and amounts owed to the Note Insurer with respect to either pool of
Mortgage Loans.
For a detailed description of the cross-collateralization provisions of the
transaction, including the Cross-collateralization Reserve Account, see
"Description of the Notes -- Cross-collateralization Provisions" herein.
The Note Insurance Policy
On the closing date, Financial Security Assurance Inc. (the "Note Insurer")
will issue a financial guaranty insurance policy (the "Note Insurance Policy")
for the benefit of the holders of the Notes, pursuant to which it will
irrevocably and unconditionally guaranty payment on each Distribution Date of
scheduled interest on the Notes and payment on the final stated maturity date
of the outstanding principal balance of the related class of Notes.
On any Distribution Date, the Note Insurer will generally be required to make
available the amount, if any, by which the amount required to be distributed on
such Distribution Date, including
o scheduled interest on the Notes,
o the amount, if any, by which the aggregate outstanding principal
balance of the Notes exceeds the sum of the aggregate principal balance
of the Mortgage Loans and amounts on deposit in the Pre-Funding
Accounts and Cross-collateralization Reserve Accounts, and
o on the final stated maturity date for a class of Notes, the outstanding
principal balance of such class of Notes,
exceeds the amount available for distribution on such Distribution Date. The
Note Insurer will be entitled to reimbursement from the Trust Estate for all
payments made in respect of the Note Insurance Policy.
The Note Insurance Policy does not guarantee the Notes any specified rate of
principal repayment. In addition, shortfalls in interest due to prepayments and
the imposition of the Civil Relief Act will not be covered under the Note
Insurance Policy.
So long as the Note Insurer is not in default of its obligations under the Note
Insurance Policy, the Note Insurer shall have the right to exercise all rights
of the holders of the Notes without any consent of such holders. Such holders
may exercise their rights only with the prior written consent of the Note
Insurer, except as provided in the Indenture.
For a detailed description of the of the Note Insurer and the Note Insurance
Policy, including selected financial information of the Note Insurer, see "The
Note Insurer" and "The Note Insurance Policy" herein.
THE MORTGAGE LOANS
General
The Mortgage Loans to be included in the Trust Estate will be primarily
fixed-rate, closed-end, monthly pay, business and consumer purpose home equity
loans secured by first, second or multiple mortgages or deeds of trust on
residential or commercial real properties. Each of the Mortgage Loans were
underwritten in accordance with the underwriting standards described herein
under "The Originators, the Seller and the Servicer."
For statistical information regarding the Mortgage Loans, see "The Mortgage
Loan Pools" herein.
The majority of the Mortgage Loans have a prepayment fee clause. Such
prepayment fee clauses generally provide that the mortgagor pay, upon
prepayment, one or more of the following: (i) a fee equal to a percentage
(negotiated at origination) of the outstanding principal balance of the
Mortgage Loan, (ii) a fee which is designed to allow the holder of the mortgage
note to earn interest on the Mortgage Loan as if the Mortgage Loan remained
outstanding until a designated point in time, or (iii) a fee equal to the
amount of interest on the outstanding principal balance of the Mortgage Loan
calculated pursuant to a Rule of 78's calculation, which has the effect of
requiring the mortgagor to pay a greater amount of interest than would be
required to be paid if the actuarial method of calculating interest was
utilized.
For a discussion of the operation of certain prepayment fees, see "Certain
Legal Aspects of the
<PAGE>
Mortgage Loans and Contracts -- The Mortgage Loans" in the accompanying
prospectus.
The Initial Mortgage Loans
On the closing date, the Trust will purchase the Mortgage Loans. The aggregate
principal balance of the Pool I Mortgage Loans will be approximately
$89,436,393.09 and the aggregate principal balance of the Pool II Mortgage
Loans will be approximately $78,196,637.16.
The aggregate principal balance of the Mortgage Loans purchased by the Trust on
the closing date will be less than the amount required to be held by the Trust.
The amount of such difference will be taken from the proceeds of the sale of
the Class A-1 Notes and Class A-2 Notes, as applicable, and placed in the
respective Pre-Funding Account and used for the purchase of Mortgage Loans by
the Trust after the closing date.
The Pre-Funding Accounts. On the closing date, the difference between the
amount of Mortgage Loans in Pool I and Pool II required to be held by the Trust
and the amount of Mortgage Loans in each pool actually purchased by the Trust
on such date, will be taken from the proceeds of the sale of the Class A-1
Notes and Class A-2 Notes, as applicable, and deposited in the respective
Pre-Funding Account. Amounts on deposit in the Pre-Funding Accounts may be used
to acquire Mortgage Loans after the closing date to be added to the respective
pool. However, if any amount remains on deposit in the Pre-Funding Accounts at
the close of business on April 30, 1999, such amount will be used to prepay the
principal of the related class of Notes on the following Distribution Date.
The Capitalized Interest Accounts. On the closing date, the Indenture Trustee
will be required to deposit a portion of the proceeds of the sale of the Class
A-1 Notes and Class A-2 Notes in the respective Capitalized Interest Account.
The amount deposited therein will be used, as necessary, to fund the aggregate
amount of interest accruing on the amount on deposit in the related Pre-Funding
Account during the related Accrual Period, at the respective Note Rate plus the
rate at which the premium of the Note Insurer is calculated.
The Subsequent Mortgage Loans
The Mortgage Loans to be purchased by the Trust after the closing date, as well
as characteristics of all of the Mortgage Loans in each pool following the
purchase of such Mortgage Loans, must conform to certain specified
characteristics, as described herein under "The Mortgage Pools -- Conveyance of
Subsequent Mortgage Loans."
SERVICING OF THE MORTGAGE LOANS
American Business Credit, Inc. (the "Servicer") will be obligated to service
and administer the Mortgage Loans on behalf of the Trust, for the benefit of
the Note Insurer and the holders of the Notes. The Servicer will be required to
use the same care as it customarily employs in servicing and administering
mortgage loans for its own account, in accordance with accepted mortgage
servicing practices of prudent lending institutions, and giving due
consideration to the reliance of the Note Insurer and the holder of the Notes
on the Servicer.
Servicing Fee
The Servicer is entitled to a servicing fee of 0.50% per annum of the
outstanding principal balance of each Mortgage Loan, calculated and payable
monthly from the interest portion of scheduled monthly payments, liquidation
proceeds and certain other proceeds.
Option of the Servicer to Call Either Class of Notes
The Servicer may, at its option, call the Class A-1 Notes or the Class A-2
Notes on any Distribution Date on which the aggregate outstanding principal
balance of such class is equal to or less than 10% of the aggregate original
principal balance of such class. In order to exercise its call, the Servicer
must pay off the aggregate outstanding principal balance of such class, on such
Distribution Date, plus accrued and unpaid interest thereon, and any unpaid
amounts due the Note Insurer in respect of such class. The mortgage loans
relating to such redeemed class will remain pledged to the Indenture Trustee,
for the benefit of the noteholders, to secure the cross-collateralization
obligations of the Trust with regard to the other class. See "Servicing of the
Mortgage Loans--Optional Clean-up Call on the Notes" herein.
Option of the Servicer to Terminate the Trust
The Servicer may, at its option, terminate the Trust on the Distribution Date
on which the aggregate outstanding principal balance of all Mortgage
<PAGE>
Loans is less than 10% of the sum of the aggregate original principal balance
of the Mortgage Loans purchased on the closing date and the amount on deposit
in the Pre-Funding Accounts on the closing date. In order to exercise its
option, the Servicer must purchase from the Trust all of the Mortgage Loans at
a price equal to the sum of the principal and interest due on the Mortgage
Loans and any unpaid amounts due the Note Insurer. No such termination is
permitted without the prior written consent of the Note Insurer if it would
result in a draw on the Note Insurance Policy. See "Servicing of the Mortgage
Loans -- Termination; Purchase of Mortgage Loans" herein.
ERISA CONSIDERATIONS
Subject to the conditions described under "ERISA Considerations" herein, the
Notes may be purchased by any employee benefit plan or other retirement
arrangement subject to ERISA or the Internal Revenue Code of 1986, as amended
(the "Code"). See "ERISA Considerations" herein.
FEDERAL INCOME TAX STATUS
It is the opinion of Dewey Ballantine LLP, special federal tax counsel to the
Trust, that for federal income tax purposes (i) the Notes will be characterized
as indebtedness and (ii) the Trust will not be characterized as an association
(or a publicly traded partnership) taxable as a corporation or a taxable
mortgage pool. Each Noteholder, by the acceptance of a Note, will agree to
treat the Notes as indebtedness.
See "Certain Federal Income Tax Considerations" herein and "Certain Federal
Income Tax Consequences" in the accompanying prospectus.
RATINGS
In order to be issued, the Notes must be rated "AAA" by Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc. and "Aaa" by
Moody's Investors Service, Inc., taking into account the Note Insurance Policy
issued with respect to the Notes.
For a discussion of the ratings, see "Ratings" herein.
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors
(as well as the factors set forth under "Risk Factors" in the accompanying
prospectus) before deciding to invest in the Notes.
Prepayment and Borrowers may prepay their loans at any time and may be
Maturity required to pay a prepayment fee if permitted by
Considerations applicable law and the applicable mortgage note. The
majority of the Mortgage Loans contain prepayment fees.
The rate of prepayments of the Mortgage Loans cannot be
predicted and may be affected by a wide variety of
economic, social and other factors, including state and
federal income tax policies, interest rates and the
availability of alternative financing. No assurance can
be given as to the level of prepayments that the
Mortgage Loans in the Trust will experience.
A number of factors, in addition to the prepayment fees,
may impact the prepayment rate of loans such as the
Mortgage Loans. One such factor is whether the principal
balance of the Mortgage Loans is relatively small. A
small principal balance may be easier for a borrower to
prepay than a large balance and therefore a higher
prepayment rate may result for loans such as the
Mortgage Loans. In addition, in order to refinance a
first priority mortgage loan, the borrower must
generally repay any subordinate mortgage loans. However,
a small principal balance may make refinancing a
Mortgage Loan at a lower interest rate less attractive
to the borrower as the perceived impact to the borrower
of lower interest rates on the size of the monthly
payment may not be significant.
Other factors that might affect the prepayment rate
include:
o general economic conditions and the general
interest rate environment,
o possible future changes affecting the
deductibility for federal income tax purposes of
interest payments on home equity loans,
o the amounts of, and interest rates on, any
underlying senior mortgage loans, and
o the tendency of borrowers to use first priority
mortgage loans as long-term financing for home
purchases and junior mortgage loans as shorter-term
financing for a variety of purposes, including home
improvement, education expenses and purchases of
consumer durables such as automobiles.
Accordingly, the Mortgage Loans may experience a higher
rate of prepayment than traditional fixed-rate mortgage
loans.
Prepayments may result from voluntary early payments by
borrowers (including payments in connection awith
refinancings of any related senior mortgage loan or
loans), sales of mortgaged properties subject to
"due-on-sale" clauses and liquidations due to default,
as well as the receipt of proceeds from physical damage.
In addition, repurchases of Mortgage Loans from the
Trust are required in certain circumstances and will
have the same effect on the holders of the Notes as a
prepayment of the related Mortgage Loans. Prepayments
and such repurchases may also accelerate the actual
final maturity date of the Notes. All of the Mortgage
Loans contain "due-on-sale" provisions, and the Servicer
will enforce such provisions to the extent permitted by
applicable law.
<PAGE>
The timing of principal distributions to each class of
Notes and the weighted average life of each class of
Notes may be affected by the rates of prepayment on the
Mortgage Loans in the related pool. In addition, to the
extent funds in the Pre-Funding Accounts are not used to
purchase Mortgage Loans by April 30, 1999, such funds
will be used on the following Distribution Date to make
a mandatory prepayment of principal to the holders of
the related class of Notes.
In general, if prevailing interest rates fall
significantly below the interest rates for similar loans
at the time of origination, fixed-rate Mortgage Loans may
be subject to higher prepayment rates than if prevailing
rates remain at or above those at the time such Mortgage
Loans were originated. Should prepayments on the Mortgage
Loans increase because of such interest rate reductions,
the weighted average life and final maturity date of the
Notes may be shortened. See "Prepayment and Yield
Considerations" herein.
The weighted average life of a pool of loans is the
average amount of time that will elapse from the date such
Pool is formed until each dollar of principal is scheduled
to be repaid. Because it is expected that there will be
prepayments and defaults on the Mortgage Loans, the actual
weighted average life of each class of Notes is expected
to vary substantially from the weighted average remaining
term to stated maturity of the related pool of Mortgage
Loans. Certain information, based on specified prepayment
assumptions, as to the possible weighted average life of
the Notes is set forth herein under "Prepayment and Yield
Considerations."
The Originators maintain only limited records of the
historical prepayment experience for their portfolio of
loans which they believe do not provide meaningful
information with respect to the Mortgage Loans. The
Originators are not aware of any publicly available
reliable information regarding prepayment experience of
mortgage loans. No assurance can be given that prepayments
on the Mortgage Loans will conform to any historical
experience and no prediction can be made as to the actual
prepayment experience on the Mortgage Loans.
Investors in the Notes should consider the associated
risks, including, in the case of Notes purchased at a
discount (or premium), the risk that a slower (or faster)
than anticipated rate of payments in respect of principal
(including prepayments) on the Mortgage Loans could result
in an actual yield that is lower than anticipated. See
"Description of the Notes -- Flow of Funds" herein and
"Prepayment and Yield Considerations" herein and in the
accompanying Prospectus.
The Subsequent If the principal balance of the eligible Mortgage Loans
Mortgage Loans available for purchase by the Trust on and April 30,
and the Pre-Funding 1999 is less than the amount on deposit in either
Accounts Pre-Funding Account on such date, such remaining amount
will be applied as a prepayment of principal paid to the
holders of the related class of Notes on the following
Distribution Date. Although no assurances can be given, it
is anticipated that the aggregate principal balance of the
Mortgage Loans sold to the Trust after the closing date
will require the application of substantially all amounts
on deposit in the Pre-Funding Accounts and that there will
be no material principal prepayment to the holders of the
related Notes. In addition, any purchase of Mortgage Loans
by the Trust using funds on deposit in the Pre-Funding
Accounts is subject to the following conditions, among
others:
o each such Mortgage Loan must satisfy certain
statistical criteria and representations and
warranties specified herein;
o such Mortgage Loans will not be selected in a
manner that is believed to be adverse to the
interests of the holders of the Notes and the Note
Insurer; and
<PAGE>
o certain opinions of counsel will be delivered with
respect to the validity of the conveyance of such
Mortgage Loans.
Each Mortgage Loan purchased after the closing date must
satisfy the eligibility criteria referred to above at the
time of its addition. However, such Mortgage Loans may
have been originated using credit criteria different from
those which were applied to the Mortgage Loans purchased
on the closing date, and may be of a different credit
quality. Therefore, following the transfer of such
Mortgage Loans to the Trust, the aggregate characteristics
of the Mortgage Loans then held in the Trust may vary from
those of the Mortgage Loans included in the Trust on the
closing date. For a description of the requirements for
Mortgage Loans purchased after the closing date, see "The
Mortgage Pool -- Conveyance of Subsequent Mortgage Loans"
herein.
Underwriting The Mortgage Loans were made, in part, to borrowers who,
Standards and for one reason or another, are not able, or do not
Potential wish, to obtain financing from traditional sources such
Delinquencies as commercial banks. Such loans may be considered to be
of a riskier nature than loans made by traditional
sources of financing, so that the holders of the Notes may
be deemed to be at greater risk than if the Mortgage Loans
were made to other types of borrowers.
As described herein, the underwriting standards used in
the origination of the Mortgage Loans are generally less
stringent than those of Fannie Mae or Freddie Mac with
respect to a borrower's credit history and in certain
other respects. Borrowers on the loans may have an
impaired or unsubstantiated credit history. As a result
of this less stringent approach to underwriting, the
Mortgage Loans purchased by the Trust may experience
higher rates of delinquencies, defaults and foreclosures
than mortgage loans underwritten in a manner which is
more similar to the Fannie Mae and Freddie Mac
guidelines.
Geographic Certain geographic regions of the United States from
Delinquencies time to time will experience weaker regional economic
conditions and housing markets, and, consequently, will
experience higher rates of loss and delinquency on loans
generally. Any concentration of the Mortgage Loans in such
a region may present risk considerations in addition to
those generally present for similar mortgage-backed
securities without such concentration. The mortgaged
properties underlying the Mortgage Loans are located
primarily on the eastern seaboard of the United States.
This may subject a pool of Mortgage Loans to the risk that
a downturn in the economy in this area of the country
would more greatly affect the pool than if the pool were
more diversified.
In particular, the percentages of Mortgage Loans in Pool I
and Pool II (measured by the aggregate principal balance
of the Mortgage Loans in the related pool that existed on
February 8, 1999 (the "Statistical Calculation Date
Aggregate Principal Balance")) which are secured by
mortgaged properties located in certain states are set
forth below:
<TABLE>
<CAPTION>
New Jersey New York Pennsylvania Georgia Florida
---------- -------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Pool I 32.61% 21.12% 14.30% 7.39% 8.76%
Pool II 20.04% 16.75% 21.08% 11.28% 9.55%
</TABLE>
Because of the relative geographic concentration of the
Mortgage Loans within the States of New Jersey, New York,
Pennsylvania, Georgia and Florida, losses on the Mortgage
Loans may be higher than would be the case if the Mortgage
Loans were more geographically diversified. For example,
certain of the mortgaged properties may be more
susceptible to certain types of special hazards, such as
earthquakes and other natural disasters and major civil
disturbances, than residential or commercial properties
located in other parts of the
<PAGE>
country. In addition, the economies of New Jersey, New
York, Pennsylvania, Georgia and Florida may be adversely
affected to a greater degree than the economies of other
areas of the country by certain regional developments. If
the New Jersey, New York, Pennsylvania, Georgia and
Florida residential or commercial real estate markets
experience an overall decline in property values after
the dates of origination of the respective Mortgage
Loans, then the rates of delinquencies, foreclosures and
losses on the Mortgage Loans may be expected to increase
and such increase may be substantial.
Balloon Payments Approximately 47.35% of the Mortgage Loans in Pool I
(measured by Pool I Statistical Calculation Date Aggregate
Principal Balance) and 40.25% of the Mortgage Loans in
Pool II (measured by Pool II Statistical Calculation Date
Aggregate Principal Balance) are not fully amortized over
their terms and instead require substantial balloon
payments on their maturity dates (such Mortgage Loans
being referred to herein as the "Balloon Loans"). Because
the principal balances of such Mortgage Loans do not fully
amortize over the term of the Mortgage Loan, such Mortgage
Loans may involve greater risks of default than Mortgage
Loans whose principal balance is fully amortized over the
term of the Mortgage Loan. The borrower's ability to pay
the balloon amount due at maturity of such a Mortgage Loan
will depend on the borrower's ability to obtain adequate
refinancing or funds from other sources to repay the
Mortgage Loan.
The Originators believe that the Mortgage Loans are or
will be adequately collateralized. In light of the
collateralization and the relatively small average size of
the Mortgage Loans, they believe the borrowers are likely
to have the ability to obtain adequate refinancing or
secure funds from other sources. However, the Originators
have only limited historical default data with respect to
their balloon loans and they do not believe that their
data is sufficient to predict the default experience of
such balloon loans.
Even assuming that the mortgaged properties provide
adequate security for the Mortgage Loans, substantial
delays could be encountered in connection with the
liquidation of defaulted Mortgage Loans and corresponding
delays in the receipt of related proceeds by the holders
of the Notes could occur.
Nature of General economic conditions have an impact on the
Collateral; ability of borrowers to repay loans. Loss of earnings,
Second Lien illness and other similar factors may lead to an
Mortgage Loans increase in delinquencies and bankruptcy filings by
borrowers. In the event of a bankruptcy of a mortgagor, it
is possible that the Trust could experience a loss with
respect to such mortgagor's Mortgage Loan. In conjunction
with a mortgagor's bankruptcy, a bankruptcy court may
suspend or reduce the payments of principal and interest
to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage
Loan, thus either delaying or permanently limiting the
amount received by the Trust with respect to such Mortgage
Loan. Moreover, in the event a bankruptcy court rejects
the transfer of the related mortgaged property to the
Trust, any remaining balance on such Mortgage Loan may not
be recoverable.
Approximately 4.07% of the Mortgage Loans in Pool I
(measured by Pool I Statistical Calculation Date Aggregate
Principal Balance) and 22.21% of the Mortgage Loans in
Pool II (measured by Pool II Statistical Calculation Date
Aggregate Principal Balance) are secured by subordinate or
junior mortgages which are subordinate to the rights of
the holder of the related senior mortgages. As a result,
the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the
principal balance of such a Mortgage Loan only to the
extent that the claims, if any, of each related senior
mortgagee are satisfied in full, including any related
foreclosure costs. In addition, a holder of a junior
mortgage may not foreclose on the mortgaged property
securing such mortgage unless it forecloses subject to the
related senior mortgages, in which case it must either pay
the entire
<PAGE>
amount of the senior mortgages to the mortgagees at or
prior to the foreclosure sale or undertake the obligation
to make payments on each senior mortgage in the event of
default thereunder. In servicing business and consumer
purpose home equity loans in its portfolio, it is the
Servicer's practice to satisfy or reinstate each such
first mortgage at or prior to the foreclosure sale only
to the extent that it determines any amount so paid will
be recoverable from future payments and collections on
the related loans or otherwise. The Trust will have no
source of funds to satisfy any senior mortgage or make
payments due to any senior mortgagee.
An overall decline in the residential or commercial real
estate markets could adversely affect the values of the
mortgaged properties such that the outstanding principal
balances of the Mortgage Loans, together with the primary
senior financing thereon, equals or exceeds the value of
the mortgaged properties. Such a decline would adversely
affect the position of a second mortgagee before having
such an effect on that of the related first mortgagee. A
rise in interest rates over a period of time and the
general condition of the mortgaged property as well as
other factors may have the effect of reducing the value of
the mortgaged property from the appraised value at the
time the Mortgage Loan was originated. If there is a
reduction in value of the mortgaged property, the ratio of
the amount of the Mortgage Loan to the value of the
mortgaged property may increase over what it was at the
time the Mortgage Loan was originated. Such an increase
may reduce the likelihood of liquidation or other proceeds
being sufficient to satisfy the Mortgage Loan after
satisfaction of any first liens.
Even assuming that the mortgaged properties provide
adequate security for the Mortgage Loans, substantial
delays could be encountered in connection with the
liquidation of defaulted Mortgage Loans and corresponding
delays in the receipt of related proceeds by holders of
the Notes. An action to foreclose on the mortgaged
property securing a Mortgage Loan is regulated by state
statutes and rules and is subject to many of the delays
and expenses of other lawsuits if defenses or
counterclaims are presented, sometimes requiring several
years to complete. Furthermore, in some states, an action
to obtain a deficiency judgment is not permitted
following a nonjudicial sale of a mortgaged property. In
the event of a default by a mortgagor, these
restrictions, among other things, may impede the ability
of the Servicer to foreclose on or sell the mortgaged
property or to obtain proceeds from a foreclosure
sufficient to repay all amounts due on the related
Mortgage Loan. In addition, the Servicer will be entitled
to deduct from collections received during the preceding
calendar month all expenses reasonably incurred in
attempting to recover amounts due on such Mortgage Loans
and not yet repaid, including payments to senior
lienholders, legal fees and costs of legal action, real
estate taxes and maintenance and preservation expenses,
thereby reducing collections available to the holder of
the Notes. See "The Originators, the Seller and the
Servicer -- Delinquency and Loan Loss Experience" and
"Description of the Notes" herein.
Liquidation expenses with respect to defaulted loans do
not vary directly with the outstanding principal balance
of the loan at the time of default. Therefore, assuming
that a servicer took the same steps in realizing upon a
defaulted loan having a small remaining principal balance
as it would in the case of a defaulted loan having a large
remaining principal balance, the amount realized after
expenses of liquidation would be smaller as a percentage
of the outstanding principal balance of the small loan
than would be the case with the defaulted loan having a
large remaining principal balance. Because the average
outstanding principal balance of the Mortgage Loans is
relatively small, proceeds from foreclosure actions on
such Mortgage Loans may be smaller as a percentage of the
outstanding principal balance of a Mortgage Loan than
foreclosure proceeds on loans from a pool of mortgage
loans that have a larger average outstanding principal
balance.
<PAGE>
Decline in Real No assurance can be given that the values of the
Estate Values mortgaged properties have remained or will remain at
their levels as of the dates of origination of the related
Mortgage Loans. If the residential or commercial real
estate markets should experience an overall decline in
property values such that the outstanding balances of the
Mortgage Loans (and, in the case of second mortgages, the
outstanding balance of the related first mortgage) become
equal to or greater than the value of the mortgaged
properties, the actual rates of delinquencies,
foreclosures and losses on these mortgaged properties
could be higher than losses now generally experienced in
the mortgage lending industry.
Payments on the The scheduled monthly payment dates with respect to the
Mortgage Loans occur throughout a month. When a principal prepayment in
full is made on a Mortgage Loan, the mortgagor is charged
interest only up to the date of such prepayment, instead
of for a full month. However, such principal receipts
will only be passed through to the holders of the Notes
once a month, on the Distribution Date which follows the
calendar month in which such prepayment was received by
the Servicer. The Servicer is obligated to pay, without
any right of reimbursement, those shortfalls in interest
collections payable on the Notes that are attributable to
the difference between the interest paid by a mortgagor
in connection with a prepayment in full and thirty (30)
days' interest on such Mortgage Loan, but only to the
extent of the servicing fee for the such calendar month.
If the Servicer fails to make such payments or the
shortfall exceeds the related servicing fee, there will
be less funds available for the payment of interest on
the related class of Notes. Such shortfalls of interest,
if they result in the inability of the Trust to pay the
full amount of the Current Interest on the related class
of Notes, are not covered by the Note Insurance Policy.
See "Description of the Notes -- Flow of Funds" herein.
Legal Considerations Applicable state laws generally regulate interest rates
and other charges, require certain disclosures, and may
require licensing of originators. In addition, many
states have other laws, such as consumer protection laws,
unfair and deceptive practices acts and debt collection
practices acts which may apply to the origination or
collection of the Mortgage Loans. Depending on the
provisions of the applicable law, violations of these laws
may limit the ability of the Servicer to collect all or
part of the principal of or interest on the Mortgage
Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Trust
to damages and administrative enforcement. See "Certain
Legal Aspects of the Mortgage Loans and Contracts" in the
accompanying prospectus.
The Mortgage Loans are also subject to federal laws,
including:
o the Federal Truth in Lending Act and Regulation Z
issued under that Act, as to consumer purpose
Mortgage Loans, which require certain disclosures
to the borrowers regarding the terms of such
Mortgage Loans;
o the Equal Credit Opportunity Act and Regulation B
issued under that Act, as to the business and
consumer purpose Mortgage Loans, which prohibit
discrimination on the basis of age, race, color,
sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any
right under the Consumer Credit Protection Act, in
the extension of credit; and
o the Fair Credit Reporting Act, as to the business
and consumer purpose Mortgage Loans, which
regulates the use and reporting of information
related to the borrower's credit experience.
Violations of certain provisions of these federal laws may
limit the ability of the Servicer to collect all or part
of the principal of or interest on the Mortgage Loans and
in addition could
<PAGE>
subject the Trust to damages and administrative
enforcement.
In addition, under the terms of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the
"Civil Relief Act") or similar state legislation, the
interest charged and the ability of the Servicer to
foreclose on loans to certain mortgagors may be limited.
Generally, under the Civil Relief Act, a mortgagor who
enters military service after the origination of such
mortgagor's mortgage loan (including a mortgagor who was
in reserve status and is called to active duty after
origination of the mortgage loan), shall not be charged
interest (including fees and charges) above an annual
rate of 6% during the period of such mortgagor's active
duty status, unless a court orders otherwise upon
application of the lender. The Civil Relief Act applies
to mortgagors who are members of the Army, Navy, Air
Force, Marines, National Guard, Reserves, Coast Guard
and officers of the U.S. Public Health Service assigned
to duty with the military. Because the Civil Relief Act
applies to mortgagors who enter military service
(including reservists who are called to active duty)
after origination of the related mortgage loan, no
information can be provided as to the number of loans
that may be affected by the Civil Relief Act.
Application of the Civil Relief Act would adversely
affect, for an indeterminate period of time until
cessation of active duty status, the ability of the
Servicer to collect full amounts of interest on certain
of the Mortgage Loans to which it applies, if any. Any
shortfall in interest collections on any Mortgage Loan
resulting from the application of the Civil Relief Act
will result in a reduction of the amounts available for
distribution in respect of interest on the related class
of Notes. Such shortfalls, if they result in the
inability of the Trust to pay the full amount of Current
Interest on the related class of Notes, are not covered
by Servicer advances or the Note Insurance Policy. The
Servicer is not obligated to offset any of its fees
against, or to provide any other funds to cover, any
such shortfalls. In addition, the Civil Relief Act
imposes limitations which would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan
during the mortgagor's period of active duty status and,
under certain circumstances, during an additional period
thereafter. See "Certain Legal Aspects of the Mortgage
Loans and Contracts" in the accompanying prospectus.
It is possible that some of the consumer purpose Mortgage
Loans will be subject to the Riegle Community Development
and Regulatory Improvement Act of 1994 (the "Riegle Act")
which incorporates the Home Ownership and Equity
Protection Act of 1994. The Riegle Act adds certain
additional provisions to the Truth in Lending Act which
additions are reflected in Regulation Z, the implementing
regulation of the Truth in Lending Act. These provisions
impose additional disclosure and other requirements on
creditors with respect to certain non-purchase money
mortgage loans with high interest rates or high upfront
fees and charges. In general, mortgage loans within the
purview of the Riegle Act have annual percentage rates
ten percentage points over the yield on U.S. Treasury
securities of comparable maturity and/or fees and points
which exceed the greater of 8% of the total loan amount
or $400. These provisions of the Riegle Act apply on a
mandatory basis to all mortgage loans originated on or
after October 1, 1995. These provisions can impose
specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the
enforceability of the related loans. In addition, any
assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert
against the creditor, including, without limitation, the
right to rescind the mortgage loan.
<PAGE>
Year 2000 Issues There is a significant uncertainty regarding the effect of
the Year 2000 problem because computer systems that do not
properly recognize date sensitive information when the
year changes to 2000 could generate erroneous data or
altogether fail. The Servicer and its affiliates have
assessed their internal systems, programs and data
processing applications as well as those provided to them
by third-party vendors with respect to Year 2000 data
processing issues. The Servicer and its affiliates believe
that the computer equipment and software used by them will
function properly with respect to dates in the Year 2000
and thereafter. The Servicer and its affiliates have not
incurred significant expense to date, and do not
anticipate incurring significant future expense, to
address Year 2000 issues although there can be no
assurance that the Servicer and its affiliates will not
incur significant future expenses. However, third parties
that have relationships with them, including vendors and
borrowers, may experience significant Year 2000 issues.
These issues may have a serious adverse effect on the
operations of such third parties, including a shut-down of
operations for a period of time, which may, in turn, have
a material adverse effect on their business, financial
condition and results of operations.
DTC and the Year The management of The Depository Trust Company ("DTC") is
2000 Issue aware that some computer applications, systems and the
like for processing data that are dependant upon calendar
dates, including dates before, on and after January 1,
2000, may encounter Year 2000 Issues. DTC has informed its
participants and members of the financial community that
it has developed and is implementing a program so that its
systems, as the same relate to the timely payment of
distributions (including principal and interest payments)
to securityholders, book-entry deliveries, and settlement
of trades within DTC continue to function appropriately on
and after January 1, 2000. This program includes a
technical assessment and a remediation plan, each of which
is complete. Additionally, DTC's plan includes a testing
phase, which is expected to be completed within
appropriate time frames.
However, DTC's ability to properly perform its services is
also dependent upon other parties, including, but not
limited to, issuers, their agents and its participating
organizations as well as third party vendors on whom DTC
relies for information or the provision of services,
including telecommunication and electrical utility service
providers among others. DTC has informed the financial
community that it is contacting (and will continue to
contact) third party vendors from whom DTC acquires
services to: (i) impress upon them the importance of such
services being Year 2000 compliant and (ii) determine the
extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC
has stated that it is in the process of developing such
contingency plans as it deems appropriate.
If problems associated with the Year 2000 Issue were to
occur with respect to DTC and the services described
above, distributions to the beneficial owners of Notes
could be delayed or otherwise adversely affected.
According to DTC, the foregoing information with respect
to DTC has been provided to the financial community for
information purposes only and is not intended to serve
as a representation, warranty or contract modification
of any kind.
<PAGE>
TRANSACTION OVERVIEW
Parties
The Trust. ABFS Mortgage Loan Trust 1999-1, a Delaware business trust.
The principal executive office of the Trust is in Wilmington, Delaware, in care
of the Owner Trustee, at the address of the Owner Trustee specified below.
The Depositor. Prudential Securities Secured Financing Corporation,
a Delaware corporation. The principal executive office of the Depositor is
located at One New York Plaza, 14th Floor, New York, New York 10292, and its
telephone number is (212) 778-1000.
The Seller. ABFS 1999-1, Inc., a Delaware corporation, which is owned
by the Originators. The principal executive office of the Seller is at
Balapointe Centre, 111 Presidential Boulevard, Suite 127, Bala Cynwyd,
Pennsylvania 19004, and its telephone number is (610) 668-2440.
The Originators. American Business Credit, Inc. ("ABC"), a
Pennsylvania corporation, Home American Credit, Inc. d/b/a Upland Mortgage
("Upland"), a Pennsylvania corporation, and New Jersey Mortgage and Investment
Corp. ("NJMIC"), a New Jersey corporation, originated or purchased the
Mortgage Loans. For a description of the business of the Originators, see "The
Originators, the Seller and the Servicer" herein.
The Servicer and the Subservicers. ABC will act as servicer of the
Mortgage Loans, and Upland and NJMIC will act as subservicers with respect to
different portions of the Mortgage Loans. For a description of the business of
the Servicer, see "The Originators, the Seller and the Servicer" herein.
The Indenture Trustee. The Bank of New York, a New York banking
corporation. The corporate trust office of the Indenture Trustee is located at
101 Barclay Street, New York, New York 10286, and its telephone number is (212)
815-5766. For a description of the Indenture Trustee and its responsibilities
with respect to the Notes, see "The Indenture Trustee" herein.
The Owner Trustee. First Union Trust Company, National Association, a
national banking association. The corporate trust office of the Owner Trustee
is located at One Rodney Square, 920 King Street, Suite 102, Wilmington,
Delaware 19801, and its telephone number is (302) 888-7539. For a description
of the Owner Trustee and its responsibilities with respect to the Notes and the
Mortgage Loans, see "The Owner Trustee" herein.
The Collateral Agent. Chase Bank of Texas, N.A., a national banking
association. The corporate trust office of the Collateral Agent is located at
801 West Greens Road, Houston, Texas 77067, and its telephone number is (281)
775-5400.
The Note Insurer. Financial Security Assurance Inc., a New York
financial guaranty insurance company. The Note Insurer will issue a financial
guaranty insurance policy (the "Note Insurance Policy") for the benefit of the
holders of the Notes. For a description of the business and selected financial
information of the Note Insurer, see "The Note Insurance Policy" and "The Note
Insurer" herein.
The Rating Agencies. Standard & Poor's Ratings Services, a division
of the McGraw-Hill Companies, Inc. ("S&P") and Moody's Investors Service, Inc.
("Moody's") will issue ratings with respect to each class of Notes.
<PAGE>
The Transaction
Formation of the Trust and Issuance of the Trust Certificates. The
Trust will be formed pursuant to the terms of a Trust Agreement, dated as of
March 1, 1999 (the "Trust Agreement"), between the Owner Trustee, the Depositor
and the Seller. Pursuant to the terms of the Trust Agreement, the Trust will
also issue the Trust Certificates to the Seller, each evidencing the entire
beneficial ownership interest in the sub-trust of the Trust consisting of the
related pool of Mortgage Loans of the Trust.
Sale and Servicing of the Mortgage Loans. The Mortgage Loans have been
originated or purchased by the Originators pursuant to their respective
underwriting guidelines, as set forth herein under "The Originators, the Seller
and the Servicer." The Originators will sell the Mortgage Loans to the Seller,
and the Seller will sell the Mortgage Loans to the Depositor, pursuant to an
Unaffiliated Seller's Agreement, dated as of March 1, 1999 (the "Unaffiliated
Seller's Agreement"), among the Originators, the Seller and the Depositor. The
Depositor will sell the Mortgage Loans to the Trust pursuant to a Sale and
Servicing Agreement, dated as of March 1, 1999 (the "Sale and Servicing
Agreement"), among the Depositor, the Trust, the Servicer, the Collateral Agent
and the Indenture Trustee. The Servicer will service the Mortgage Loans
pursuant to the terms of the Sale and Servicing Agreement.
Issuance of the Notes. Pursuant to the terms of an Indenture, dated as
of March 1, 1999 (the "Indenture"), between the Trust and the Indenture
Trustee, the Trust will pledge the Trust Estate to the Indenture Trustee, for
the benefit of the holders of the Notes and the Note Insurer, and issue the
Notes.
Issuance of the Note Insurance Policy. The Note Insurer will issue the
Note Insurance Policy pursuant to the terms of an Insurance and Indemnity
Agreement, dated as of March 1, 1999 (the "Insurance Agreement") among the Note
Insurer, the Trust, the Depositor, the Seller, the Originators and the
Servicer.
THE MORTGAGE LOAN POOLS
General
Difference between Statistical Calculation Date and Closing Date
Pools. The statistical information presented in this prospectus supplement
concerning the Mortgage Loans is based on the pools of Mortgage Loans that
existed on February 8, 1999 (such date, the "Statistical Calculation Date").
Pool I aggregated $52,821,606.16 as of the Statistical Calculation Date and
Pool II aggregated $44,426,648.30 as of the Statistical Calculation Date. The
Seller expects that the actual pools on the closing date will represent
approximately $89,436,393.09 in aggregate principal balance of Mortgage Loans
in Pool I, as of the close of business on February 28, 1999 (the "Cut-Off
Date") and approximately $78,196,637.16 in aggregate principal balance of
Mortgage Loans in Pool II, as of the Cut-Off Date. The additional Mortgage
Loans will represent Mortgage Loans acquired or to be acquired by the Trust on
or prior to the closing date. In addition, with respect to the pools as of the
Statistical Calculation Date as to which statistical information is presented
herein, some amortization will occur prior to the closing date. Moreover,
certain Mortgage Loans included in the pools as of the Statistical Calculation
Date may prepay in full, or may be determined not to meet the eligibility
requirements for the final pools, and may not be included in the final pools.
As a result of the foregoing, the statistical distribution of characteristics
as of the closing date for the final Mortgage Loan pools will vary somewhat
from the statistical distribution of such characteristics as of the Statistical
Calculation Date as presented in this prospectus supplement, although such
variance should not be material. In the event that the Depositor does not, as
of the closing date, have the full amount of Mortgage Loans which the Depositor
expects to sell to the Trust on such date, the Seller will increase the size of
the Pre-Funding Accounts and the Capitalized Interest Accounts, as applicable.
Unless otherwise noted, all statistical percentages in this prospectus
supplement are measured by Statistical Calculation Date Aggregate Principal
Balance for each pool.
<PAGE>
Additional Mortgage Loans (the "Subsequent Mortgage Loans") are
intended to be purchased by the Trust from time to time on or before April 30,
1999 from funds on deposit in the Pre-Funding Accounts. The Initial Mortgage
Loans and the Subsequent Mortgage Loans are referred to herein collectively as
the "Mortgage Loans." The Subsequent Mortgage Loans to be purchased by the
Trust, if available, will be originated or purchased by the Originators, sold
by the Originators to the Seller, sold by the Seller to the Depositor and then
sold by the Depositor to the Trust. The Indenture will provide that the
Mortgage Loans, following the conveyance of the Subsequent Mortgage Loans, must
in the aggregate conform to certain specified characteristics described below
under " -- Conveyance of Subsequent Mortgage Loans."
Unless otherwise noted, all statistical percentages in this prospectus
supplement are approximate and are measured by the aggregate principal balance
of the related Mortgage Loans in relation to the Statistical Calculation Date
Aggregate Principal Balance for each pool, in each case, as of the Statistical
Calculation Date.
The Mortgage Loans will be predominantly business or consumer purpose
residential home equity loans used (x) to refinance an existing mortgage loan,
(y) to consolidate debt, or (z) to obtain cash proceeds by borrowing against
the mortgagor's equity in the related mortgaged property in order to provide
funds for (i) working capital for business, (ii) business expansion, (iii)
equipment acquisition, or (iv) personal acquisitions. The mortgaged properties
securing the Mortgage Loans consist primarily of single-family residences
(which may be detached, part of a multi-family dwelling, a condominium unit, a
townhouse, a mobile home or a unit in a planned unit development) and
commercial or mixed use property. The mortgaged properties may be
owner-occupied properties (which includes second and vacation homes), non-owner
occupied investment properties or business purpose properties.
The Pool I Mortgage Loans
As of the Statistical Calculation Date, each of the Mortgage Loans in
Pool I had a remaining term to maturity of no greater than 360 months and had a
mortgage interest rate of at least 8.24% per annum.
The combined loan-to-value ratios ("CLTV") described herein were
calculated based upon the appraised values of the related mortgaged properties
at the time of origination. No assurance can be given that such appraised
values of the mortgaged properties have remained or will remain at the levels
that existed on the dates of origination of the related Mortgage Loans. If
property values decline such that the outstanding principal balances of the
Mortgage Loans, together with the outstanding principal balances of any first
liens, become equal to or greater than the value of the mortgaged properties,
the actual rates of delinquencies, foreclosures and losses could be higher than
those historically experienced by the Servicer, as set forth below under "The
Originators, the Seller and the Servicer -- Delinquency and Loan Loss
Experience," and in the mortgage lending industry generally.
As of the Statistical Calculation Date, the Mortgage Loans in Pool I
consisted of 534 Mortgage Loans under which the related mortgaged properties
are located in 19 states, as set forth herein. As of the Statistical
Calculation Date, the Mortgage Loans in Pool I had an aggregate principal
balance, after application of all payments due on or before February 8, 1999,
of $52,821,606.16, the minimum principal balance of any of the Mortgage Loans
was $9,792.27, the maximum principal balance thereof was $240,000.00, and the
average principal balance of the Mortgage Loans was $98,916.87. As of the
Statistical Calculation Date, mortgage interest rates on the Mortgage Loans in
Pool I ranged from 8.24% to 17.99% per annum, and the weighted average mortgage
interest rate of the Mortgage Loans was approximately 11.13% per annum. As of
the Statistical Calculation Date, the original term to stated maturity of the
Mortgage Loans in Pool I ranged from 36 months to 360 months, the remaining
term to stated maturity ranged from 35 months to 360 months, the weighted
average original term to stated maturity was approximately 268 months and the
weighted average remaining term to stated maturity was approximately 267
months. As of the Statistical Calculation Date, no Mortgage Loan in Pool I had
a maturity later than February 6, 2029. Approximately 52.65% of the aggregate
principal balance of the Mortgage Loans in Pool I as of the Statistical
Calculation Date require monthly payments of principal that will fully amortize
the Mortgage Loans by their respective maturity dates, and
<PAGE>
approximately 47.35% of the aggregate principal balance of the Mortgage Loans
are Balloon Loans. The weighted average CLTV of the Mortgage Loans in Pool I
as of the Statistical Calculation Date was approximately 79.03%. As of the
Statistical Calculation Date, the Mortgage Loans in Pool I consisted of
approximately 95.93% of Mortgage Loans secured by first lien mortgages ("First
Liens") on the related Mortgaged Properties, and approximately 4.07% of
Mortgage Loans secured by second lien mortgages ("Second Liens") on the
related mortgaged properties.
Approximately 32.61%, 21.12%, 14.30%, 8.76% and 7.39%, of the Mortgage
Loans in Pool I are secured by mortgaged properties located in the States of
New Jersey, New York, Pennsylvania, Florida and Georgia, respectively. See
"Risk Factors -- Geographic Concentration" herein.
On or prior to April 30, 1999, the Trust is expected to purchase,
subject to availability, Subsequent Mortgage Loans to be added to Pool I. The
maximum aggregate principal balance of Subsequent Mortgage Loans that may be
purchased is expected to be approximately $11,066,119.47.
The following tables set forth certain statistical information with
respect to the Mortgage Loans in Pool I. Due to rounding, the percentages shown
may not precisely total 100.00%.
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
Pool I
Number of Aggregate Unpaid % of Statistical Calculation Date
State Mortgage Loans Principal Balance Aggregate Principal Balance
----- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Connecticut 11 $ 998,311.77 1.89%
Delaware 13 993,504.04 1.88
Florida 45 4,625,455.34 8.76
Georgia 38 3,906,007.15 7.39
Illinois 23 2,294,960.19 4.34
Indiana 2 26,668.00 0.05
Kentucky 1 118,800.00 0.22
Maryland 9 1,211,335.45 2.29
Michigan 1 16,400.00 0.03
Mississippi 5 331,324.76 0.63
New Jersey 162 17,227,199.49 32.61
New York 97 11,155,847.05 21.12
North Carolina 7 494,233.93 0.94
Ohio 6 781,399.33 1.48
Pennsylvania 99 7,554,991.67 14.30
South Carolina 1 9,934.74 0.02
Tennessee 3 217,071.91 0.41
Virginia 9 657,022.56 1.24
West Virginia 2 201,138.78 0.38
---- ---------------- ------
TOTAL 534 $ 52,821,606.16 100.00%
==== ================ =======
</TABLE>
DISTRIBUTION OF CLTV RATIOS
<TABLE>
<CAPTION>
Pool I
Original Number of Aggregate Unpaid % of Statistical Calculation Date
CLTV Range Mortgage Loans Principal Balance Aggregate Principal Balance
---------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
5.000% less than CLTV less than =10.000% 4 $ 45,930.51 0.09%
10.000 less than CLTV less than =15.000 1 9,927.84 0.02
15.000 less than CLTV less than =20.000 7 295,773.21 0.56
20.000 less than CLTV less than =25.000 4 191,820.29 0.36
25.000 less than CLTV less than =30.000 4 52,990.82 0.10
30.000 less than CLTV less than =35.000 3 51,542.92 0.10
35.000 less than CLTV less than =40.000 7 297,151.22 0.56
40.000 less than CLTV less than =45.000 4 119,628.43 0.23
45.000 less than CLTV less than =50.000 11 616,719.42 1.17
50.000 less than CLTV less than =55.000 13 1,115,777.10 2.11
55.000 less than CLTV less than =60.000 17 1,548,818.04 2.93
60.000 less than CLTV less than =65.000 19 1,780,428.00 3.37
65.000 less than CLTV less than =70.000 35 3,252,366.80 6.16
70.000 less than CLTV less than =75.000 57 5,501,081.82 10.41
75.000 less than CLTV less than =80.000 92 9,850,972.32 18.65
80.000 less than CLTV less than =85.000 107 11,337,998.12 21.46
85.000 less than CLTV less than =90.000 147 16,464,828.80 31.17
90.000 less than CLTV less than =95.000 2 287,850.50 0.54
------ --------------- -------
TOTAL 534 $ 52,821,606.16 100.00%
====== =============== =======
</TABLE>
<PAGE>
DISTRIBUTION OF GROSS MORTGAGE INTEREST RATES
Pool I
<TABLE>
<CAPTION>
Gross Mortgage Number of Aggregate Unpaid % of Statistical Calculation Date
Interest Rate Range Mortgage Loans Principal Balance Aggregate Principal Balance
------------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
8.00% less than Gross Coupon less than =8.25% 3 $ 250,000.00 0.47%
8.25 less than Gross Coupon less than =8.50 7 996,819.03 1.89
8.50 less than Gross Coupon less than =8.75 3 280,569.91 0.53
8.75 less than Gross Coupon less than =9.00 19 1,933,568.55 3.66
9.00 less than Gross Coupon less than =9.25 4 540,369.12 1.02
9.25 less than Gross Coupon less than =9.50 29 3,486,175.33 6.60
9.50 less than Gross Coupon less than =9.75 9 898,419.96 1.70
9.75 less than Gross Coupon less than =10.00 70 8,235,650.22 15.59
10.00 less than Gross Coupon less than =10.25 18 1,681,015.43 3.18
10.25 less than Gross Coupon less than =10.50 42 4,901,008.66 9.28
10.50 less than Gross Coupon less than =10.75 15 1,841,691.83 3.49
10.75 less than Gross Coupon less than =11.00 83 8,995,045.90 17.03
11.00 less than Gross Coupon less than =11.25 14 1,151,845.43 2.18
11.25 less than Gross Coupon less than =11.50 31 3,325,639.75 6.30
11.50 less than Gross Coupon less than =11.75 14 1,126,787.66 2.13
11.75 less than Gross Coupon less than =12.00 36 3,376,695.19 6.39
12.00 less than Gross Coupon less than =12.25 15 1,030,385.37 1.95
12.25 less than Gross Coupon less than =12.50 30 2,045,384.12 3.87
12.50 less than Gross Coupon less than =12.75 7 183,860.33 0.35
12.75 less than Gross Coupon less than =13.00 19 1,391,325.06 2.63
13.00 less than Gross Coupon less than =13.25 1 95,912.85 0.18
13.25 less than Gross Coupon less than =13.50 5 89,520.11 0.17
13.50 less than Gross Coupon less than =13.75 9 589,474.49 1.12
13.75 less than Gross Coupon less than =14.00 4 204,449.77 0.39
14.00 less than Gross Coupon less than =14.25 1 84,000.00 0.16
14.25 less than Gross Coupon less than =14.50 2 204,144.30 0.39
14.50 less than Gross Coupon less than =14.75 3 265,500.00 0.50
14.75 less than Gross Coupon less than =15.00 2 215,000.00 0.41
15.25 less than Gross Coupon less than =15.50 1 13,595.82 0.03
15.50 less than Gross Coupon less than =15.75 2 33,963.48 0.06
15.75 less than Gross Coupon less than =16.00 33 3,200,605.08 6.06
16.00 less than Gross Coupon less than =16.25 2 138,200.00 0.26
17.50 less than Gross Coupon less than =18.00 1 14,983.41 0.03
---- -------------- -------
TOTAL 534 $52,821,606.16 100.00%
==== ============== =======
</TABLE>
<PAGE>
DISTRIBUTION OF ORIGINAL TERMS TO MATURITY
(in months)
Pool I
<TABLE>
<CAPTION>
Range of Original Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
----------------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
24 less than Orig. Term less than = 36 1 $ 11,754.06 0.02%
48 less than Orig. Term less than = 60 16 353,887.01 0.67
60 less than Orig. Term less than = 72 1 16,446.24 0.03
72 less than Orig. Term less than = 84 2 116,450.65 0.22
84 less than Orig. Term less than = 96 2 29,759.29 0.06
96 less than Orig. Term less than = 108 2 31,857.92 0.06
108 less than Orig. Term less than = 120 42 1,233,316.20 2.33
120 less than Orig. Term less than = 132 1 18,200.00 0.03
144 less than Orig. Term less than = 156 1 18,899.01 0.04
168 less than Orig. Term less than = 180 199 20,254,641.82 38.35
180 less than Orig. Term less than = 192 1 82,100.00 0.16
204 less than Orig. Term less than = 216 3 230,095.04 0.44
228 less than Orig. Term less than = 240 51 4,544,288.51 8.60
288 less than Orig. Term less than = 300 22 2,513,790.74 4.76
324 less than Orig. Term less than = 336 1 120,000.00 0.23
336 less than Orig. Term less than = 348 18 2,093,851.28 3.96
348 less than Orig. Term less than = 360 171 21,152,268.39 40.04
---- -------------- --------
534 $52,821,606.16 100.00%
==== ============== ========
</TABLE>
<PAGE>
DISTRIBUTION OF REMAINING TERMS TO MATURITY
(in months)
Pool I
<TABLE>
<CAPTION>
Range of Remaining Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------ -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
24 less than Rem. Term less than = 36 1 $ 11,754.06 0.02%
48 less than Rem. Term less than = 60 16 353,887.01 0.67
60 less than Rem. Term less than = 72 1 16,446.24 0.03
72 less than Rem. Term less than = 84 2 116,450.65 0.22
84 less than Rem. Term less than = 96 2 29,759.29 0.06
96 less than Rem. Term less than = 108 2 31,857.92 0.06
108 less than Rem. Term less than = 120 42 1,233,316.20 2.33
120 less than Rem. Term less than = 132 1 18,200.00 0.03
144 less than Rem. Term less than = 156 1 18,899.01 0.04
168 less than Rem. Term less than = 180 199 20,254,641.82 38.35
180 less than Rem. Term less than = 192 1 82,100.00 0.16
204 less than Rem. Term less than = 216 3 230,095.04 0.44
228 less than Rem. Term less than = 240 51 4,544,288.51 8.60
288 less than Rem. Term less than = 300 22 2,513,790.74 4.76
324 less than Rem. Term less than = 336 1 120,000.00 0.23
336 less than Rem. Term less than = 348 18 2,093,851.28 3.96
348 less than Rem. Term less than = 360 171 21,152,268.39 40.04
----- ----------------- -------
TOTAL 534 $ 52,821,606.16 100.00%
===== ================= =======
</TABLE>
<PAGE>
DISTRIBUTION OF ORIGINAL PRINCIPAL BALANCES
Pool I
<TABLE>
<CAPTION>
Range of Original Mortgage Loan Number of Aggregate Unpaid % of Statistical Calculation Date
Principal Balances Mortgage Loans Principal Balance Aggregate Principal Balance
- ------------------------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
$ 5,000 less than Balance less than = 15,000 11 $ 109,519.39 0.21%
10,000 less than Balance less than = 15,000 48 644,504.54 1.22
15,000 less than Balance less than = 20,000 50 892,004.93 1.69
20,000 less than Balance less than = 25,000 5 101,180.93 0.19
75,000 less than Balance less than = 80,000 15 1,197,700.86 2.27
80,000 less than Balance less than = 85,000 32 2,670,638.33 5.06
85,000 less than Balance less than = 90,000 50 4,403,431.30 8.34
90,000 less than Balance less than = 95,000 32 2,975,894.90 5.63
95,000 less than Balance less than =100,000 35 3,435,813.76 6.50
100,000 less than Balance less than =105,000 23 2,372,593.79 4.49
105,000 less than Balance less than =110,000 26 2,795,473.75 5.29
110,000 less than Balance less than =115,000 23 2,579,295.50 4.88
115,000 less than Balance less than =120,000 30 3,554,696.14 6.73
120,000 less than Balance less than =125,000 8 974,210.97 1.84
130,000 less than Balance less than =135,000 22 2,914,812.69 5.52
135,000 less than Balance less than =140,000 13 1,789,359.85 3.39
140,000 less than Balance less than =145,000 10 1,425,496.30 2.70
145,000 less than Balance less than =150,000 12 1,775,134.44 3.36
150,000 less than Balance less than =200,000 71 12,230,916.43 23.16
200,000 less than Balance less than =250,000 18 3,978,927.36 7.53
---- ----------------- -------
TOTAL 534 $ 52,821,606.16 100.00%
==== ================= =======
</TABLE>
<PAGE>
DISTRIBUTION OF CURRENT PRINCIPAL BALANCES
Pool I
<TABLE>
<CAPTION>
Range of Current Mortgage Loan Number of Aggregate Unpaid % of Statistical Calculation Date
Principal Balances Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
$ 5,000 less than Balance less than = $10,000 12 $ 119,311.66 0.23%
10,000 less than Balance less than = 15,000 47 634,712.27 1.20
15,000 less than Balance less than = 20,000 50 892,004.93 1.69
20,000 less than Balance less than = 25,000 5 101,180.93 0.19
75,000 less than Balance less than = 80,000 15 1,197,700.86 2.27
80,000 less than Balance less than = 85,000 32 2,670,638.33 5.06
85,000 less than Balance less than = 90,000 50 4,403,431.30 8.34
90,000 less than Balance less than = 95,000 33 3,070,852.85 5.81
95,000 less than Balance less than = 100,000 34 3,340,855.81 6.32
100,000 less than Balance less than = 105,000 23 2,372,593.79 4.49
105,000 less than Balance less than = 110,000 26 2,795,473.75 5.29
110,000 less than Balance less than = 115,000 23 2,579,295.50 4.88
115,000 less than Balance less than = 120,000 30 3,554,696.14 6.73
120,000 less than Balance less than = 125,000 8 974,210.97 1.84
130,000 less than Balance less than = 135,000 22 2,914,812.69 5.52
135,000 less than Balance less than = 140,000 13 1,789,359.85 3.39
140,000 less than Balance less than = 145,000 10 1,425,496.30 2.70
145,000 less than Balance less than = 150,000 12 1,775,134.44 3.36
150,000 less than Balance less than = 200,000 71 12,230,916.43 23.16
200,000 less than Balance less than = 250,000 18 3,978,927.36 7.53
----- -------------- -------
TOTAL 534 $52,821,606.16 100.00%
===== ============== ========
</TABLE>
<PAGE>
DISTRIBUTION BY LIEN STATUS
Pool I
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Lien Status Mortgage Loans Principal Balance Aggregate Principal Balance
----------- -------------- ----------------- --------------------------------
<S> <C> <C> <C>
First Lien 447 $ 50,669,336.68 95.93%
Second Lien 87 2,152,269.48 4.07
---- --------------- -------
TOTAL 534 $ 52,821,606.16 100.00%
==== =============== ========
</TABLE>
DISTRIBUTION BY AMORTIZATION TYPE
Pool I
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Amortization Type Mortgage Loans Principal Balance Aggregate Principal Balance
----------------- -------------- ----------------- --------------------------------
<S> <C> <C> <C>
Fully Amortizing 279 $ 27,812,760.76 52.65%
Balloon Loans 255 25,008,845.40 47.35
----- --------------- -------
TOTAL 534 $ 52,821,606.16 100.00%
===== ================ =======
</TABLE>
DISTRIBUTION BY OCCUPANCY STATUS
Pool I
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Occupancy Status Mortgage Loans Principal Balance Aggregate Principal Balance
---------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Owner Occupied 492 $ 48,924,961.78 92.62%
Investor 23 1,894,366.31 3.59
Vacation/Second Home 2 32,590.66 0.06
Business 17 1,969,687.41 3.73
---- --------------- --------
TOTAL 534 $ 52,821,606.16 100.00%
==== =============== ========
</TABLE>
DISTRIBUTION BY PROPERTY TYPE
Pool I
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Property Type Mortgage Loans Principal Balance Aggregate Principal Balance
- -------------------------- ---------------- -------------------- ------------------------------------
<S> <C> <C> <C>
Mixed Use 13 $ 1,500,436.74 2.84%
PUD 1 162,900.00 0.31
Commercial 4 469,250.67 0.89
Townhouses 12 1,010,358.90 1.91
2-4 Family 60 6,521,708.35 12.35
Condominiums 10 854,943.60 1.62
Single Family 430 41,781,182.90 79.10
Mobile Home 2 178,825.00 0.34
5+ Family 2 342,000.00 0.65
--- ---------------- -------
TOTAL 534 $ 52,821,606.16 100.00%
=== ================ =======
</TABLE>
<PAGE>
The Pool II Mortgage Loans
As of the Statistical Calculation Date, each of the Mortgage Loans in
Pool II had a remaining term to maturity of no greater than 360 months and had
a mortgage interest rate of at least 7.50% per annum.
The CLTVs described herein were calculated based upon the appraised
values of the related mortgaged properties at the time of origination. No
assurance can be given that such appraised values of the mortgaged properties
have remained or will remain at the levels that existed on the dates of
origination of the related Mortgage Loans. If property values decline such that
the outstanding principal balances of the Mortgage Loans, together with the
outstanding principal balances of any first liens, become equal to or greater
than the value of the mortgaged properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those historically experienced by
the Servicer, as set forth below under "The Originators, the Seller and the
Servicer -- Delinquency and Loan Loss Experience," and in the mortgage lending
industry.
As of the Statistical Calculation Date, the Mortgage Loans in Pool II
consisted of 801 Mortgage Loans under which the related mortgaged properties
are located in 22 states, as set forth herein. As of the Statistical
Calculation Date, the Mortgage Loans in Pool II had an aggregate principal
balance, after application of all payments due on or before February 8, 1999,
of $44,426,648.30, the minimum principal balance of any of the Mortgage Loans
was $20,000.00, the maximum principal balance thereof was $350,000.00, and the
average principal balance of the Mortgage Loans was $55,463.98. As of the
Statistical Calculation Date, mortgage interest rates on the Mortgage Loans in
Pool II ranged from 7.50% to 16.25% per annum, and the weighted average
mortgage interest rate of the Mortgage Loans was approximately 11.62% per
annum. As of the Statistical Calculation Date, the original term to stated
maturity of the Mortgage Loans in Pool II ranged from 60 months to 360 months,
the remaining term to stated maturity ranged from 59 months to 360 months, the
weighted average original term to stated maturity was approximately 240 months
and the weighted average remaining term to stated maturity was approximately
240 months. As of the Statistical Calculation Date, no Mortgage Loan in Pool II
had a maturity later than February 5, 2029. Approximately 59.75% of the
aggregate principal balance of the Mortgage Loans in Pool II as of the
Statistical Calculation Date require monthly payments of principal that will
fully amortize the Mortgage Loans by their respective maturity dates, and
approximately 40.25% of the aggregate principal balance of the Mortgage Loans
are Balloon Loans. The weighted average CLTV of the Mortgage Loans in Pool II
as of the Statistical Calculation Date was approximately 72.63%. As of the
Statistical Calculation Date, the Mortgage Loans in Pool II consisted of
approximately 77.79% of Mortgage Loans secured by First Liens, and
approximately 22.21% of Mortgage Loans secured by Second Liens.
Approximately 21.08%, 20.04%, 16.75%, 11.28% and 9.55% of the Mortgage
Loans in Pool II are secured by mortgaged properties located in the States of
Pennsylvania, New Jersey, New York, Georgia and Florida, respectively. See
"Risk Factors--Geographic Concentration" herein.
On or prior to April 30, 1999, the Trust is expected to purchase,
subject to availability, Subsequent Mortgage Loans to be added to Pool II. The
maximum aggregate principal balance of Subsequent Mortgage Loans that may be
purchased is expected to be approximately $6,300,850.28.
The following tables set forth certain statistical information with
respect to the Mortgage Loans in Pool II. Due to rounding, the percentages
shown may not precisely total 100.00%.
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
Pool II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
State Mortgage Loans Principal Balance Aggregate Principal Balance
- ------------------------------ ---------------- ------------------- -----------------------------------------
<S> <C> <C> <C>
Colorado 1 $ 68,000.00 0.15%
Connecticut 18 1,359,629.96 3.06
Delaware 15 872,851.60 1.96
Florida 77 4,243,327.35 9.55
Georgia 87 5,010,171.30 11.28
Illinois 30 2,198,905.47 4.95
Indiana 4 208,860.00 0.47
Kentucky 5 204,485.01 0.46
Maryland 10 739,378.54 1.66
Michigan 1 60,000.00 0.14
Mississippi 10 427,800.83 0.96
Missouri 1 46,875.00 0.11
New Jersey 161 8,904,561.12 20.04
New York 124 7,441,696.21 16.75
North Carolina 16 791,416.89 1.78
Ohio 14 841,195.32 1.89
Pennsylvania 195 9,363,621.79 21.08
South Carolina 5 229,514.40 0.52
Tennessee 6 336,146.74 0.76
Vermont 1 55,750.00 0.13
Virginia 17 868,015.04 1.95
West Virginia 3 154,445.73 0.35
---- ---------------- --------
TOTAL 801 $ 44,426,648.30 100.00%
===== ================= ========
</TABLE>
DISTRIBUTION OF CLTV RATIOS
Pool II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Original CLTV Ratio Mortgage Loans Principal Balance Aggregate Principal Balance
- ------------------------------------------------- ----------------- --------------------------- --------------------------------
<S> <C> <C> <C> <C>
10.000% less than CLTV less than= 15.000% 7 $ 231,374.71 0.52%
15.000 less than CLTV less than= 20.000 5 175,959.80 0.40
20.000 less than CLTV less than= 25.000 6 221,634.55 0.50
25.000 less than CLTV less than= 30.000 12 431,845.06 0.97
30.000 less than CLTV less than= 35.000 12 459,360.30 1.03
35.000 less than CLTV less than= 40.000 18 664,805.22 1.50
40.000 less than CLTV less than= 45.000 19 985,699.12 2.22
45.000 less than CLTV less than= 50.000 28 1,799,692.43 4.05
50.000 less than CLTV less than= 55.000 25 1,093,599.43 2.46
55.000 less than CLTV less than= 60.000 44 2,020,568.67 4.55
60.000 less than CLTV less than= 65.000 56 3,092,332.12 6.96
65.000 less than CLTV less than= 70.000 60 3,803,392.68 8.56
70.000 less than CLTV less than= 75.000 121 6,846,336.00 15.41
75.000 less than CLTV less than= 80.000 136 7,376,042.45 16.60
80.000 less than CLTV less than= 85.000 124 7,790,169.97 17.53
85.000 less than CLTV less than= 90.000 128 7,433,835.79 16.73
----- ---------------- --------
TOTAL 801 $ 44,426,648.30 100.00%
===== ================ =========
</TABLE>
<PAGE>
DISTRIBUTION OF GROSS MORTGAGE INTEREST RATES
Pool II
<TABLE>
<CAPTION>
Gross Mortgage Number of Aggregate Unpaid % of Statistical Calculation Date
Interest Rate Range Mortgage Loans Principal Balance Aggregate Principal Balance
- ----------------------------------------------- ----------------- --------------------------- --------------------------------
<S> <C> <C> <C>
7.25% less than Gross Coupon less than= 7.50% 1 $ 25,000.00 0.06%
7.75 less than Gross Coupon less than= 8.00 4 251,223.57 0.57
8.25 less than Gross Coupon less than= 8.50 4 205,107.83 0.46
8.50 less than Gross Coupon less than= 8.75 4 250,661.12 0.56
8.75 less than Gross Coupon less than= 9.00 20 1,394,065.49 3.14
9.00 less than Gross Coupon less than= 9.25 11 1,057,283.42 2.38
9.25 less than Gross Coupon less than= 9.50 32 2,085,111.91 4.69
9.50 less than Gross Coupon less than= 9.75 21 1,591,579.10 3.58
9.75 less than Gross Coupon less than= 10.00 71 4,455,011.57 10.03
10.00 less than Gross Coupon less than= 10.25 23 1,361,126.17 3.06
10.25 less than Gross Coupon less than= 10.50 60 3,608,284.59 8.12
10.50 less than Gross Coupon less than= 10.75 27 1,365,799.45 3.07
10.75 less than Gross Coupon less than= 11.00 116 6,505,407.99 14.64
11.00 less than Gross Coupon less than= 11.25 21 876,279.50 1.97
11.25 less than Gross Coupon less than= 11.50 36 1,431,510.77 3.22
11.50 less than Gross Coupon less than= 11.75 18 1,195,965.65 2.69
11.75 less than Gross Coupon less than= 12.00 64 2,971,372.51 6.69
12.00 less than Gross Coupon less than= 12.25 17 1,105,299.05 2.49
12.25 less than Gross Coupon less than= 12.50 43 1,803,830.97 4.06
12.50 less than Gross Coupon less than= 12.75 19 808,972.89 1.82
12.75 less than Gross Coupon less than= 13.00 43 1,916,906.21 4.31
13.00 less than Gross Coupon less than= 13.25 9 351,411.34 0.79
13.25 less than Gross Coupon less than= 13.50 17 686,894.95 1.55
13.50 less than Gross Coupon less than= 13.75 10 537,595.59 1.21
13.75 less than Gross Coupon less than= 14.00 17 569,347.27 1.28
14.00 less than Gross Coupon less than= 14.25 1 32,819.65 0.07
14.25 less than Gross Coupon less than= 14.50 4 249,622.36 0.56
14.50 less than Gross Coupon less than= 14.75 5 189,603.57 0.43
14.75 less than Gross Coupon less than= 15.00 2 228,000.00 0.51
15.50 less than Gross Coupon less than= 15.75 8 224,754.54 0.51
15.75 less than Gross Coupon less than= 16.00 71 5,025,852.42 11.31
16.00 less than Gross Coupon less than= 16.25 2 64,946.85 0.15
---- --------------- --------
TOTAL 801 $ 44,426,648.30 100.00%
==== =============== =========
</TABLE>
<PAGE>
DISTRIBUTION OF ORIGINAL TERMS TO MATURITY
(in months)
Pool II
<TABLE>
<CAPTION>
Range of Original Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
- ----------------------------------------------- -------------------- --------------------------- ---------------------------------
<S> <C> <C> <C>
48 less than Orig. Term less than = 60 24 $ 748,977.26 1.69%
72 less than Orig. Term less than = 84 5 205,000.00 0.46
84 less than Orig. Term less than = 96 2 69,663.49 0.16
96 less than Orig. Term less than = 108 1 40,000.00 0.09
108 less than Orig. Term less than = 120 53 1,742,780.71 3.92
120 less than Orig. Term less than = 132 2 68,440.25 0.15
132 less than Orig. Term less than = 144 4 149,742.42 0.34
144 less than Orig. Term less than = 156 3 153,754.43 0.35
168 less than Orig. Term less than = 180 357 20,082,354.06 45.20
204 less than Orig. Term less than = 216 3 136,818.47 0.31
228 less than Orig. Term less than = 240 121 6,596,890.04 14.85
288 less than Orig. Term less than = 300 31 1,543,062.67 3.47
336 less than Orig. Term less than = 348 5 226,675.29 0.51
348 less than Orig. Term less than = 360 190 12,662,489.21 28.50
---- --------------- -------
TOTAL 801 $ 44,426,648.30 100.00%
===== ================ ========
</TABLE>
<PAGE>
DISTRIBUTION OF REMAINING TERMS TO MATURITY
(in months)
Pool II
<TABLE>
<CAPTION>
Range of Remaining Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
- -------------------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
48 less than Rem. Term less than = 60 24 $ 748,977.26 1.69%
72 less than Rem. Term less than = 84 5 205,000.00 0.46
84 less than Rem. Term less than = 96 2 69,663.49 0.16
96 less than Rem. Term less than = 108 1 40,000.00 0.09
108 less than Rem. Term less than = 120 53 1,742,780.71 3.92
120 less than Rem. Term less than = 132 2 68,440.25 0.15
132 less than Rem. Term less than = 144 4 149,742.42 0.34
144 less than Rem. Term less than = 156 3 153,754.43 0.35
168 less than Rem. Term less than = 180 357 20,082,354.06 45.20
204 less than Rem. Term less than = 216 3 136,818.47 0.31
228 less than Rem. Term less than = 240 121 6,596,890.04 14.85
288 less than Rem. Term less than = 300 31 1,543,062.67 3.47
336 less than Rem. Term less than = 348 5 226,675.29 0.51
348 less than Rem. Term less than = 360 190 12,662,489.21 28.50
--- ------------- -------
TOTAL 801 $44,426,648.30 100.00%
=== ============== =======
</TABLE>
DISTRIBUTION OF ORIGINAL PRINCIPAL BALANCES
Pool II
<TABLE>
<CAPTION>
Range of Original Mortgage Number of Aggregate Unpaid % of Statistical Calculation Date
Loan Principal Balances Mortgage Loans Principal Balance Aggregate Principal Balance
-------------------------- -------------- ----------------- ----------------------------------
<S> <C> <C> <C>
$15,000 less than Balance less than =$20,000 23 $ 460,000.00 1.04%
20,000 less than Balance less than = 25,000 75 1,754,633.28 3.95
25,000 less than Balance less than = 30,000 81 2,308,173.55 5.20
30,000 less than Balance less than = 35,000 75 2,464,779.61 5.55
35,000 less than Balance less than = 40,000 77 2,947,627.52 6.63
40,000 less than Balance less than = 45,000 72 3,107,563.57 6.99
45,000 less than Balance less than = 50,000 52 2,507,880.73 5.64
50,000 less than Balance less than = 55,000 53 2,800,135.89 6.30
55,000 less than Balance less than = 60,000 62 3,574,948.58 8.05
60,000 less than Balance less than = 65,000 58 3,653,329.33 8.22
65,000 less than Balance less than = 70,000 56 3,803,664.07 8.56
70,000 less than Balance less than = 75,000 38 2,771,908.06 6.24
75,000 less than Balance less than = 80,000 25 1,932,443.97 4.35
80,000 less than Balance less than = 85,000 1 85,000.00 0.19
85,000 less than Balance less than = 90,000 1 85,380.00 0.19
95,000 less than Balance less than = 100,000 2 196,565.81 0.44
120,000 less than Balance less than =125,000 7 870,871.49 1.96
125,000 less than Balance less than =130,000 16 2,051,108.41 4.62
150,000 less than Balance less than = 200,000 3 573,418.21 1.29
200,000 less than Balance less than = 250,000 12 2,955,932.46 6.65
250,000 less than Balance less than = 300,000 8 2,192,533.76 4.94
300,000 less than Balance less than = 350,000 4 1,328,750.00 2.99
---- ---------------- -------
TOTAL 801 $ 44,426,648.30 100.00%
==== ================ =======
</TABLE>
<PAGE>
DISTRIBUTION OF CURRENT PRINCIPAL BALANCES
Pool II
<TABLE>
<CAPTION>
Range of Current Mortgage Loan Number of Aggregate Unpaid % of Statistical Calculation
Principal Balances Mortgage Loans Principal Balance Date Aggregate Principal Balance
------------------------------- -------------- ----------------- --------------------------------
<S> <C> <C> <C>
$15,000 less than Balance less than = $20,000 23 $ 460,000.00 1.04%
20,000 less than Balance less than = 25,000 75 1,754,633.28 3.95
25,000 less than Balance less than = 30,000 81 2,308,173.55 5.20
30,000 less than Balance less than = 35,000 75 2,464,779.61 5.55
35,000 less than Balance less than = 40,000 77 2,947,627.52 6.63
40,000 less than Balance less than = 45,000 72 3,107,563.57 6.99
45,000 less than Balance less than = 50,000 53 2,557,869.60 5.76
50,000 less than Balance less than = 55,000 52 2,750,147.02 6.19
55,000 less than Balance less than = 60,000 62 3,574,948.58 8.05
60,000 less than Balance less than = 65,000 58 3,653,329.33 8.22
65,000 less than Balance less than = 70,000 56 3,803,664.07 8.56
70,000 less than Balance less than = 75,000 39 2,846,873.43 6.41
75,000 less than Balance less than = 80,000 24 1,857,478.60 4.18
80,000 less than Balance less than = 85,000 1 85,000.00 0.19
85,000 less than Balance less than = 90,000 1 85,380.00 0.19
95,000 less than Balance less than = 100,000 2 196,565.81 0.44
120,000 less than Balance less than = 125,000 7 870,871.49 1.96
125,000 less than Balance less than = 130,000 16 2,051,108.41 4.62
150,000 less than Balance less than = 200,000 3 573,418.21 1.29
200,000 less than Balance less than = 250,000 12 2,955,932.46 6.65
250,000 less than Balance less than = 300,000 8 2,192,533.76 4.94
300,000 less than Balance less than = 350,000 4 1,328,750.00 2.99
--- -------------- -------
TOTAL 801 $44,426,648.30 100.00%
=== ============== =======
</TABLE>
<PAGE>
DISTRIBUTION BY LIEN STATUS
Pool II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Lien Status Mortgage Loans Principal Balance Aggregate Principal Balance
- -------------------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
First Lien 570 $34,558,838.54 77.79%
Second Lien 231 9,867,809.76 22.21
--- -------------- ------
TOTAL 801 $44,426,648.30 100.00%
=== ============== ======
</TABLE>
DISTRIBUTION BY AMORTIZATION TYPE
Pool II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Amortization Type Mortgage Loans Principal Balance Aggregate Principal Balance
----------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Fully Amortizing 468 $26,545,804.88 59.75%
Balloon Loans 333 17,880,843.42 40.25
--- ------------- -----
TOTAL 801 $44,426,648.30 100.00%
=== ============== ======
</TABLE>
DISTRIBUTION BY OCCUPANCY STATUS
Pool II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Occupancy Status Mortgage Loans Principal Balance Aggregate Principal Balance
---------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Owner Occupied 704 $38,954,090.38 87.68%
Investor 68 2,951,785.21 6.64
Vacation/Second Home 6 238,306.99 0.54
Business 23 2,282,465.72 5.14
--- -------------- ------
TOTAL 801 $44,426,648.30 100.00%
=== ============== ======
</TABLE>
DISTRIBUTION BY PROPERTY TYPE
Pool II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation
Property Type Mortgage Loans Principal Balance Date Aggregate Principal Balance
------------- -------------- ----------------- --------------------------------
<S> <C> <C> <C>
Mixed Use 16 $1,362,573.68 3.07%
PUD 2 136,370.32 0.31
Commercial 7 919,892.04 2.07
Townhouse 37 1,551,733.52 3.49
2-4 Family 57 3,633,979.12 8.18
Condominiums 14 599,460.72 1.35
Single Family 665 36,136,403.60 81.34
Mobile Home 3 86,235.30 0.19
--- -------------- ------
TOTAL 801 $44,426,648.30 100.00%
=== ============== ======
</TABLE>
<PAGE>
Conveyance of Subsequent Mortgage Loans
The Indenture permits the Trust to acquire Subsequent Mortgage Loans
with the funds on deposit in the Pre-Funding Accounts. It is expected that the
amount on deposit in the Pre-Funding Accounts on the closing date will be
approximately $11,066,119.47 for Pool I and $6,300,850.28 for Pool II.
Accordingly, the statistical characteristics of the Mortgage Loans in Pool I
and Pool II will vary as of any Subsequent Cut-Off Date upon the acquisition of
Subsequent Mortgage Loans.
The obligation of the Trust to purchase the Subsequent Mortgage Loans
on any date (each, a "Subsequent Transfer Date") during the Pre-Funding Period
is subject to the following requirements: (i) such Subsequent Mortgage Loan may
not be 30 or more days contractually delinquent as of the close of business on
the last day of the calendar month preceding the month in which such Subsequent
Mortgage Loan was purchased by the Trust (such date, the "Subsequent Cut-Off
Date"); (ii) the original term to maturity of such Subsequent Mortgage Loan may
not exceed 360 months for Pool I and 360 months for Pool II; (iii) such
Subsequent Mortgage Loan must have a mortgage interest rate of at least 7.75%
for Pool I and 7.00% for Pool II; (iv) the purchase of the Subsequent Mortgage
Loans is consented to by the Note Insurer and the Rating Agencies,
notwithstanding the fact that the Subsequent Mortgage Loans meet the parameters
stated herein; (v) the principal balance of any such Subsequent Mortgage Loan
may not exceed $240,000.00 for Pool I and $340,000.00 for Pool II; (vi) no more
than 13.50% for Pool I and 30.00% for Pool II of the aggregate principal
balance of such Subsequent Mortgage Loans may be Second Liens; (vii) no such
Subsequent Mortgage Loan shall have a CLTV of more than (a) for consumer
purpose loans, 91.75% for Pool I and 90.25% for Pool II, and (b) for business
purpose loans, 75% for Pool I and 78% for Pool II; (viii) no more than 40% for
Pool I and 55% for Pool II of such Subsequent Mortgage Loans may be Balloon
Loans; (ix) no more than 6% for Pool I and 13% for Pool II of such Subsequent
Mortgage Loans may be secured by mixed-use properties, commercial properties,
or five or more unit multifamily properties; and (x) following the purchase of
such Subsequent Mortgage Loans by the Trust, the Mortgage Loans (including the
Subsequent Mortgage Loans), (a) will have a weighted average mortgage interest
rate, (I) for consumer purpose loans, of at least 10.25% for Pool I and 10.50%
for Pool II and (II) for business purpose loans, of at least 15.75% for Pool I
and 15.75% for Pool II; and (b) will have a weighted average CLTV of not more
than (I) for consumer purpose loans, 80% for Pool I and 75% for Pool II, and
(II) for business purpose loans, 62% for Pool I and 62% for Pool II. The
Indenture will provide that any of such requirements may be waived or modified
in any respect upon prior written consent of the Note Insurer, with the
exception of the requirements set forth in clause (v) above.
THE ORIGINATORS, THE SELLER AND THE SERVICER
General
ABC, the Servicer and an Originator, is a wholly-owned subsidiary of
American Business Financial Services, Inc., a Delaware corporation ("ABFS").
Upland, an Originator and a Subservicer, is a wholly-owned subsidiary of ABC.
NJMIC, an Originator and a Subservicer, is a wholly-owned subsidiary of ABC.
The Seller is owned by ABC, Upland and NJMIC.
ABFS is a financial services holding company operating, through its
subsidiaries, primarily in the eastern region of the United States. ABFS,
through ABC, originates, sells and services loans to businesses secured by real
estate and other business assets, and, through Upland and NJMIC, originates,
sells and services non-conforming mortgage loans, typically to credit impaired
borrowers, secured by mortgages on single-family residences. ABFS, through a
subsidiary, also originates small ticket leases (generally $5,000 to $250,000)
and, to a lesser extent, middle market leases (generally $250,001 to $1.0
million) for the acquisition of business equipment. In addition, ABFS, acting
through Upland, has business arrangements with several financial institutions
pursuant to which Upland will purchase home equity loans that do not meet the
underwriting guidelines of the selling institution but meet Upland's
underwriting criteria (the "Bank Alliance Program").
<PAGE>
ABFS's customers currently consist primarily of two groups. The first
category of customers includes credit impaired borrowers who generally are
unable to obtain financing from banks or savings and loan associations that
have historically provided loans only to individuals with favorable credit
characteristics. These borrowers generally have impaired or unsubstantiated
credit characteristics and/or unverifiable income and respond favorably to
ABFS's marketing efforts. The second category of customers includes borrowers
who would qualify for loans from traditional lending sources but elect to
utilize ABFS's products and services. ABFS's experience has indicated that
these borrowers are attracted to ABFS's loan products as a result of its
marketing efforts, the personalized service provided by ABFS's staff of lending
officers and the timely response to loan requests. Historically, both
categories of customers have been willing to pay ABFS's origination fees and
interest rates which are generally higher than those charged by traditional
lending sources. ABFS also markets mortgage loans to borrowers with favorable
credit histories. ABFS' lease customers are typically small businesses or
proprietorships with less than 100 employees with favorable credit histories.
ABFS was incorporated in Delaware in 1985. ABFS is a publicly traded
company and its common stock is listed on the Nasdaq National Market System
under the symbol "ABFI." The principal executive offices of ABFS and its
operating entities are located at Balapointe Office Centre, 111 Presidential
Boulevard, Suite 127, Bala Cynwyd, Pennsylvania 19004. Its telephone number at
such address is (610) 668-2440.
The Originators
The Mortgage Loans were or will be originated or purchased by the
Originators directly in the ordinary course of their business. The Originators'
primary source of loan product is retail marketing, directly targeting small
businesses and consumers through various advertising media.
The business purpose Mortgage Loans were or will be originated by ABC
(except for Mortgage Loans which are secured by properties located in states
where the originating or purchasing of mortgage loans requires a mortgage
banking license, in which case Upland has or will originate or purchase such
Mortgage Loans). The consumer purpose Mortgage Loans were or will be originated
or purchased by Upland and NJMIC.
None of ABC, Upland or NJMIC will insure or guarantee the Notes.
American Business Credit, Inc. ABC originates, services and sells
business purpose loans collateralized by real estate. ABC's operating
subsidiaries include: (i) Upland, a consumer purpose residential mortgage
company; (ii) Process Servicing Center, Inc., a loan processor for home equity
loans generated by the Bank Alliance Program; (iii) American Business Leasing,
Inc., a small-ticket equipment leasing company; (iv) ABC Holdings Corporation,
a holder of foreclosed real estate; and (v) NJMIC, a residential mortgage
company. ABC was incorporated in 1988 pursuant to the laws of the Commonwealth
of Pennsylvania and maintains its corporate headquarters in the metropolitan
Philadelphia area.
ABC currently markets its financial services and originates business
loans through a retail network of salespeople in Pennsylvania, Delaware,
Maryland, New Jersey, New York, Virginia, Ohio and Connecticut. ABC's
origination program is primarily a retail marketing program utilizing various
forms of advertising and a direct sales force. ABC's marketing effort is
principally undertaken by its commissioned sales staff, which consists of full
time professional sales persons who are responsible for converting advertising
leads into loan applications. ABC advertises through newspapers and radio as
well as by conducting large direct mail campaigns targeted at owners of small
businesses located in ABC's market area.
ABC makes business purpose mortgage loans to corporations,
partnerships, other business entities and sole proprietors. ABC primarily makes
loans to borrowers with imperfect, impaired and/or unsubstantiated credit
histories. As a result, ABC typically requires lower loan-to-value ratios than
are generally required of borrowers with unblemished credit histories. All such
loans are collateralized by a first or second mortgage lien on a principal
residence or some other parcel of real property, such as office and apartment
buildings and mixed use buildings owned by the borrower, a principal of the
borrower, or a guarantor of the borrower. ABC,
<PAGE>
generally, further collateralizes its loans by obtaining a lien on the
borrower's other tangible and intangible assets and by filing appropriate UCC
financing statements.
ABC makes loans for various business purposes including, but not
limited to, working capital, business expansion, equipment acquisition and
debt-consolidation. ABC does not target any particular industries or trade
pools.
Loans made by ABC generally range from $15,000 to $350,000 and average
approximately $83,000.
HomeAmerican Credit, Inc. d/b/a Upland Mortgage. Upland, ABC's home
equity lending subsidiary, is a Pennsylvania corporation and was incorporated
in May 1991. Upland primarily originates residential mortgages and consumer
home equity loans. Upland is licensed to act and currently operates as a first
and second mortgage banker/lender in Pennsylvania, New Jersey, Delaware,
Georgia, Maryland, North Carolina, South Carolina, Georgia, Florida, Virginia,
Connecticut, New York and Ohio.
Upland originates business loans on behalf of ABC in instances where
state licensing laws require a mortgage license in order to make such loans. In
such circumstances, the credit criteria and collateral requirements utilized by
Upland are identical to those utilized by ABC. As such, ABC's lending
procedures and policies govern Upland when it is originating business purpose
mortgage loans.
Upland primarily markets its residential mortgage and consumer home
equity loans through print advertisements in various newspapers, television and
radio advertisements and through telemarketing and direct mail campaigns in the
states where it originates or purchases mortgage loans. Upland takes
applications from potential borrowers over the phone and in person. The loan
request is then processed and closed. Upland attempts to provide its home
equity borrowers with a loan approval within 24 hours and to close its home
equity loans within approximately seven to ten days of obtaining a loan
approval.
Upland's growth strategy includes geographic expansion into the
markets where it has recently been granted mortgage licenses and may include
the acquisition of other mortgage bankers and brokers which compliment Upland's
market. Toward this goal, HomeAmerican Credit, Inc., in February 1996, acquired
all of the assets of Upland Mortgage Corp., a New Jersey and Pennsylvania
licensed mortgage broker and commenced doing business as "Upland Mortgage" in
August, 1996.
Prior to 1995, each of the non-business residential mortgages and home
equity consumer loans originated and funded by Upland was sold to one of
several third party lenders, at a premium. Upland presently accumulates
portfolios of such non-business loans for the purpose of retaining such loans,
selling such loans in bulk or engaging in securitizations. The business loans
made by Upland are either retained in Upland's portfolio, securitized or sold
to third parties. Upland's residential mortgages and consumer home equity loans
are currently made in accordance with loan-to-value standards set forth in the
underlying credit manual. The loan-to-value ratios and terms and conditions
utilized for its business loans are identical to those utilized by ABC.
In fiscal 1996, Upland, in conjunction with the Processing Service
Center, Inc., implemented the Bank Alliance Program, which is designed to
provide an additional source of home equity loans. The Bank Alliance Program
targets traditional financial institutions, such as banks, which because of
their strict underwriting and credit guidelines have generally provided
mortgage financing only to the most credit-worthy borrowers. The Bank Alliance
Program enables such financial institutions to originate loans to credit
impaired borrowers in order to achieve certain community reinvestment
objectives and subsequently sell such loans to Upland.
Under the Bank Alliance Program, a borrower who fails to meet a
financial institution's underwriting guidelines will be referred to the
Processing Service Center, Inc. which will process the loan application and
underwrite the loan pursuant to Upland's underwriting guidelines. If the
borrower qualifies under Upland's underwriting standards, the loan will be
originated by the financial institution and subsequently sold to Upland.
<PAGE>
Since the introduction of the Bank Alliance Program, agreements have
been entered into with eight financial institutions which provide Upland with
the opportunity to underwrite, process and purchase loans generated by the
branch networks of such institutions, which consist of approximately 1,000
branches located in Pennsylvania, Delaware, New Jersey and Maryland. During the
fiscal year ended June 30, 1998, $22.3 million of loans were purchased pursuant
to the Bank Alliance Program. Upland continues to market this program to other
regional and national banking institutions. Upland is also negotiating with
other financial institutions regarding their participation in the program.
New Jersey Mortgage and Investment Corp. ABFS acquired NJMIC, a
mortgage and leasing company based in Roseland, New Jersey, and its
subsidiaries, in October 1997. NJMIC is a full-service diversified residential
lender, which directly and through its subsidiaries offers a broad range of
loan and lease products, including home equity loans, first mortgage loans, and
equipment leases. Historically, NJMIC originated loans for sale to third
parties with servicing released. ABFS intends that NJMIC will continue to
originate first mortgage loans for sale in the secondary market and the home
equity loans originated by NJMIC will be securitized and sold pursuant to ABFS'
current securitization program. Loans originated by NJMIC are secured by
properties located in 29 states. Such loans are originated through its network
of six branch sales offices and three satellite offices located in eight
states. NJMIC's home equity loan customers primarily include credit-impaired
borrowers while borrowers on its first mortgage loans are generally borrowers
with favorable credit histories.
ABFS' acquisition of NJMIC and its subsidiaries expanded the
geographic scope of ABFS' loan origination activities to include states in the
midwestern part of the United States and leasing activities to include the
entire United States. ABFS believes that certain cross marketing opportunities
exist between the two companies with respect to the products and services
offered.
Underwriting Guidelines
General. The Originators' loan underwriting standards are applied to
evaluate prospective borrowers' credit standing and repayment ability and the
value and adequacy of the mortgaged property as collateral. Initially, the
borrower is required to fill out a detailed application providing pertinent
credit information. As part of the description of the borrower's financial
condition, the borrower is required to provide information concerning assets,
liabilities, income, credit, employment history and other demographic and
personal information. If the application demonstrates the borrower's ability to
repay the debt as well as sufficient income and equity, loan processing
personnel obtain and review an independent credit bureau report on the credit
history of the borrower and verification of the borrower's income by obtaining
and reviewing one or more of the borrower's pay stubs, income tax returns,
checking account statements, W-2 tax forms or verification of business or
employment forms. Once all applicable employment, credit and property
information is obtained, a determination is made as to whether sufficient
unencumbered equity in the property exists and whether the prospective borrower
has sufficient monthly income available to meet the borrower's monthly
obligations.
The Originators endeavor at all times to keep their interest and other
charges competitive with the lending rates of other finance companies for
similar type loans. Generally, loans are made at fixed rates for fixed terms
ranging from 5 to 30 years. Generally, the Originators compute interest due on
their outstanding loans by the simple interest method. The Originators require
that title insurance be obtained in connection with their mortgage loans.
In determining the adequacy of the mortgaged property as collateral,
an appraisal is made of each property considered for financing. The appraisal
is completed by an independent qualified appraiser and generally includes
pictures of comparable properties and pictures of the subject property's
interior. With respect to business and consumer purpose loans, the appraisal is
completed by a qualified appraiser on a Fannie Mae form.
<PAGE>
The due dates for monthly payments on the Mortgage Loans occur
throughout a month (each, a "Due Date"). The majority of the Mortgage Loans
have a prepayment fee clause. Such prepayment fee clauses generally provide
that the borrower pay one or more of the following: (i) a fee equal to a
percentage of the outstanding principal balance of the Mortgage Loan, such
percentage having been negotiated at the time of origination, (ii) a fee which
is designed to allow the holder of the Mortgage Note to earn interest on the
Mortgage Loan as if the Mortgage Loan remained outstanding until a designated
point in time, or (iii) a fee equal to the amount of interest on the
outstanding principal balance of the Mortgage Loan calculated pursuant to a
Rule of 78's calculation, which has the effect of requiring the mortgagor to
pay a greater amount of interest than would be required to be paid if the
actuarial method of calculating interest was utilized. See "Certain Legal
Aspects of the Mortgage Loans and Contracts -- The Mortgage Loans" in the
accompanying prospectus.
Lending Policies and Practices for Business Purpose Mortgage Loans.
Summarized below are the current lending policies and practices with respect to
the business purpose loans originated or purchased by ABC. It should be noted
that such policies and practices will be altered, amended and supplemented as
conditions warrant. ABC reserves the right to make changes in its day-to-day
practices and policies in its sole discretion.
Generally, business purpose loans collateralized by residential real
estate must have an overall loan-to-value ratio (based solely on the
independent appraised fair market value of the real estate collateral securing
the loan) on the properties collateralizing the loans of no greater than 70%.
Business purpose loans collateralized by commercial real estate generally must
have an overall loan-to-value ratio (based solely on the independent appraised
fair market value of the real estate collateral securing the loan) of no
greater than 55%. In addition, in substantially all instances, ABC receives
additional collateral in the form of, among other things, pledges of
securities, assignments of contract rights, life insurance and lease payments
and liens on business equipment and other business assets, as available.
Lending Policies and Practices for Consumer Purpose Mortgage Loans.
Summarized below are the current lending policies and practices with respect to
the consumer purpose loans originated or purchased by Upland and NJMIC. It
should be noted that such policies and practices will be altered, amended and
supplemented as conditions warrant. Upland and NJMIC reserve the right to make
changes in their day-to-day practices and policies in their sole discretion.
The maximum allowed loan-to-value ratio for consumer purpose loans held in
Upland's and NJMIC's portfolios is generally 90%. The consumer purpose loans
originated by Upland and NJMIC had an average loan-to-value ratio of 76.6% for
the fiscal year ended June 30, 1998. When the loan-to-value ratio is equal to
70% or greater, neither Upland nor NJMIC will make a second mortgage loan when
the second mortgage loan amount is less than 15% of the existing first lien
mortgage loan amount. When the fair market value of a property exceeds
$450,000, Upland and NJMIC will only lend 50% of the property's value exceeding
$450,000. Occasionally, exceptions to these maximum loan-to-value ratios are
made if other collateral is available or if there are compensating factors.
Title insurance generally is obtained in connection with all real estate
secured loans.
Upland and NJMIC attempt to keep their interest rates and other
charges competitive with the lending rates of other finance companies and
banks. Generally, its consumer purpose loans are made at fixed rates for fixed
terms and may extend for a term of up to 30 years. In all instances, Upland and
NJMIC permit borrowers to prepay such loans. Where permitted by applicable law,
Upland and NJMIC may impose a prepayment fee. Whether a prepayment fee is
imposed and the amount of such penalty, if any, is negotiated between Upland or
NJMIC and the individual borrower prior to closing the loan.
Terms of the Mortgage Loans. The principal amount of the Mortgage
Loans outstanding bears interest at a fixed rate as indicated on the mortgage
notes. Interest with respect to a majority of the Mortgage Loans included or to
be included in the Mortgage Loan pools accrue interest on a simple interest
method. The simple interest method provides for the amortization of the amount
of such Mortgage Loan over a series of monthly payments. Each monthly interest
payment is calculated by multiplying the outstanding principal balance of such
Mortgage Loan by the stated interest rate. Such product is then multiplied by a
fraction, the numerator of
<PAGE>
which is the number of days elapsed since the preceding payment of
interest was made and the denominator of which is 360. Payments received on a
Mortgage Loan are applied first to interest accrued to the date of payment,
then to late fees and other charges and then to reduce the unpaid principal
balance of such Mortgage Loan. The remainder of the Mortgage Loans are not
fully amortized over their terms and instead require substantial balloon
payments on their maturity dates.
The mortgage notes provide the holder with the right to require the
borrower to make immediate payment of the entire principal balance plus all
accrued but unpaid interest under the loan agreement if, among other things,
the borrower fails to make any payment under the loan agreement when due
(subject to a grace period or right to cure a default required by state law),
or if the borrower transfers any interest in the property securing the loan
agreement.
In the event of default on a mortgage that is senior to a mortgage
loan, the second mortgagee has the right in many states to satisfy the
defaulted first mortgage in full, or to cure such default and make the
defaulted senior mortgage current as to payment, in either event adding any
amounts expended in connection with such satisfaction or cure to the then
current principal balance due for such Mortgage Loan. In such an event of
default, the Servicer will either take the actions described above, take other
appropriate actions, or refrain from taking any action based upon the
Servicer's practices in connection with servicing loans for itself and others.
See "Certain Legal Aspects of the Mortgage Loans and Contracts -- The Mortgage
Loans" in the accompanying prospectus.
The Servicer
ABC will be responsible for servicing the Mortgage Loans in accordance
with its established servicing procedures and the terms of the Sale and
Servicing Agreement. ABC will contract with Upland and NJMIC to act as
Subservicers with respect to the servicing of the consumer purpose Mortgage
Loans. Upland and NJMIC follow the same servicing procedures described below
with respect to ABC.
ABC begins the collection process approximately twenty (20) days prior
to the payment date by sending an invoice to the mortgagor. ABC generally
initiates the telephone collection process one day after a borrower misses a
monthly due date. ABC's daily automated collection system identifies delinquent
mortgage loans and places them on a collector's delinquency file. A collector
then attempts to call the delinquent borrower. The collector attempts to
contact the delinquent borrower every day until either a promise to pay has
been made by such borrower or such borrower makes all delinquent payments. When
a delinquent borrower makes a promise to pay, the collector attempts to contact
the borrower by phone on the expected payment date. If telephone contact is not
made, the collector sends a computer generated reminder notice to the borrower.
During any period of delinquency, ABC generates a payment reminder letter to
the borrower three (3) days after a missed monthly due date, a late notice is
sent to the borrower seven (7) days after the due date and if no payment or
arrangement for payment has been made fifteen (15) days after the borrower's
due date, an attorney referral letter is sent. When a mortgage loan is fifteen
(15) days past due and no contact has been made with the borrower, a supervisor
reviews the account of the borrower to ensure that all procedures and contacts
have been made. At this time, new contact letters are sent to the delinquent
borrower. With respect to second mortgage loans, the servicer of the first
mortgage loan is contacted to determine if the borrower is also delinquent on
the first mortgage loan. When a mortgage loan becomes forty-five (45) to sixty
(60) days delinquent, it is transferred to ABC's loan work-out department.
When a mortgage loan is received in the work-out department, telephone
contact continues, a new default notice is sent to the borrower, an updated
property value report is ordered for the collateral, the tax status of the
mortgage loan is determined, and the first lien holder (if applicable) is
contacted to determine the status of its loan. If a first mortgage is in
default, ABC may advance funds to keep the first mortgage current or may choose
to pay off the senior mortgage.
<PAGE>
If the borrower has declared bankruptcy or the first mortgagor is
foreclosing, the matter is immediately referred to outside counsel. The
work-out department will attempt to reinstate the loan, seek a payoff, or enter
into a loan modification agreement with the borrower to avoid foreclosure.
Supporting ABC's collection and accounting functions is a network of
computer hardware and software. ABC's current computer system produces mortgage
loan invoices, payment reminders and late notices. In addition to these
collection functions, the computer provides an in-depth customer contact system
which enables ABC's collectors to manage each borrower's loan history by
individually logging all correspondence into the system's data base. The system
also generates numerous management reports detailing collection activity and
accounting information.
ABFS is taking all action reasonably necessary to assess the risk that
the computer applications it uses in its business may be unable to properly
perform date sensitive functions on or after December 31, 1999. Further it is
in the process of taking all remedial action reasonably necessary to avoid such
risk and expects to complete such action in a timely fashion. Finally, ABFS is
in the process of determining with its third party vendors, with which it has a
material contractual relationship, the likelihood that a similar computer
application risk which is not being addressed by the service provider, would
likely have a material adverse effect on its operations.
Delinquency and Loan Loss Experience
The following tables set forth information relating to the delinquency
and loan loss experience on the mortgage loans included in ABC's, Upland's and
NJMIC's servicing portfolio for the periods shown. The delinquency and loan
loss experience represents the historical experience of ABC, Upland and NJMIC,
and there can be no assurance that the future experience on the Mortgage Loans
in the Trust will be the same as, or more favorable than, that of the mortgage
loans in ABC's, Upland's and NJMIC's overall servicing portfolio.
Delinquency and Foreclosure Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
At June 30, 1996 At June 30, 1997 At June 30, 1998
---------------- ---------------- ----------------
% of % of % of
Amount Amount Amount Amount Amount Amount
Serviced Serviced Serviced Serviced Serviced Serviced
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio.............. $ 55,284 100.00% $167,190 100.00% $450,935 100.00%
Past due loans(1):
60-89 days................... $ 136 0.25% $ 803 0.48% $ 1,950 0.43%
90 days or more ............. $ 1,083 1.96% $ 833 0.50% $ 7,103 1.58%
--------- ------ -------- ------ -------- ------
Total past due loans(2).......... $ 1,219 2.20% $ 1,636 0.98% $ 9,053 2.01%
REO Properties(3)................ $ 608 1.10% $ 605 0.36% $ 922 0.20%
--------- ------- -------- ------ -------- ------
Total past due loans,
foreclosures pending and REO
Properties(3).................... $ 1,827 3.30% $ 2,241 1.34% $ 9,975 2.21%
========= ===== ======== ===== ======== =====
</TABLE>
(1) The past due period is based on the actual number of days that a
payment is contractually past due. A loan as to which a monthly
payment was due 60-89 days prior to the reporting period is considered
60-89 days past due, etc.
(2) Includes pending foreclosures.
(3) An "REO Property" is a property acquired and held as a result of
foreclosure or deed in lieu of foreclosure.
<PAGE>
Loan Charge-Off Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
At June 30, At June 30, At June 30,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Servicing portfolio at period end...... $ 55,284 $ 167,190 $ 450,935
Average outstanding(1)................. $ 35,514 $ 111,237 $ 309,063
Gross losses(2)...................... $ 129 $ 81 $ 203
Loan recoveries...................... $ 0 $ 47 $ 65
---------- --------- ---------
Net loan charge-offs................. $ 129 $ 34 $ 138
Net loan charge-offs as a percentage
of servicing portfolio at period end. 0.23% 0.02% 0.03%
Net loan charge-offs as a percentage
of average outstanding............... 0.36% 0.03% 0.04%
</TABLE>
(1) "Average outstanding" presented is the arithmetic average of the principal
balances of the loans in the Originators' servicing portfolio outstanding at
the opening and closing of business for such period.
(2) "Gross losses" means the outstanding principal balance plus accrued but
unpaid interest on liquidated mortgage loans.
While the above delinquency and foreclosure and loan charge-off
experiences are typical of the Originators' experiences at the dates for the
periods indicated, there can be no assurance that the delinquency and
foreclosure and loan charge-off experiences on the Mortgage Loans will be
similar. Accordingly, the information should not be considered to reflect the
credit quality of the Mortgage Loans included in the Trust, or as a basis of
assessing the likelihood, amount or severity of losses on the Mortgage Loans.
The statistical data in the tables is based on all of the mortgage loans in the
Originators' servicing portfolio. The Mortgage Loans, in general, may have
characteristics which distinguish them from the majority of the loans in the
Originators' servicing portfolio.
THE OWNER TRUSTEE
First Union Trust Company, National Association (the "Owner Trustee"),
a national banking association, has its corporate trust offices located at One
Rodney Square, 920 King Street, Suite 102, Wilmington, Delaware 19801 (the
"Owner Trust Office"). The Owner Trustee will perform limited administrative
functions on behalf of the Trust pursuant to the Trust Agreement. The Owner
Trustee's duties in connection with the issuance and sale of the Notes are
limited solely to its express obligations under the Trust Agreement.
THE INDENTURE TRUSTEE
The Bank of New York (the "Indenture Trustee"), a New York banking
corporation, has an office at 101 Barclay Street, New York, New York 10286 (the
"Indenture Trust Office"). The Indenture Trustee will act as initial
authenticating agent, paying agent and note registrar pursuant to the terms of
the Indenture.
THE COLLATERAL AGENT
Chase Bank of Texas, N.A. (the "Collateral Agent"), a national banking
association, has its corporate trust office at 801 West Greens Road, Houston,
Texas 77067 (the "Collateral Agent Office"). The Collateral Agent's duties are
limited solely to its express obligations under the Sale and Servicing
Agreement.
<PAGE>
DESCRIPTION OF THE NOTES AND THE TRUST CERTIFICATES
General
Certain capitalized terms used in this section are defined herein
under "Description of the Notes -- Definitions."
On the closing date, the Trust will issue the Class A-1 Notes and the
Class A-2 Notes pursuant to the Indenture. Each Class A-1 Note represents a
debt obligation of the Trust secured by a pledge of the portion of the Trust
Estate consisting of the Pool I Mortgage Loans and, to the extent provided
herein, the Pool II Mortgage Loans. Each Class A-2 Note represents a debt
obligation of the Trust secured by a pledge of the portion of the Trust Estate
consisting of the Pool II Mortgage Loans and, to the extent provided herein,
the Pool I Mortgage Loans. Pursuant to the Trust Agreement, the Trust will also
issue two classes of Trust Certificates, together representing the entire
beneficial ownership interest in the Trust. Each class of Trust Certificate
will represent the entire beneficial ownership interest in one pool of Mortgage
Loans. There will be two Trust Certificates relating to each Pool, which will
be held by the Unaffiliated Seller and ABFS. None of the Trust Certificates may
be transferred without the consent of the Note Insurer and compliance with the
transfer provisions of the Trust Agreement.
The Trust Estate consists of (a) the Mortgage Loans, together with the
mortgage files relating thereto and all collections thereon and proceeds
thereof collected after the Cut-Off Date, (b) such assets as from time to time
are identified as REO Property and collections thereon and proceeds thereof,
(c) assets that are deposited in the Accounts, including amounts on deposit in
the Accounts and invested in accordance with the Indenture and the Sale and
Servicing Agreement ("Permitted Investments"), (d) the Indenture Trustee's
rights with respect to the Mortgage Loans under all insurance policies required
to be maintained pursuant to the Sale and Servicing Agreement and any insurance
proceeds, (e) Liquidation Proceeds and (f) released mortgaged property
proceeds. In addition, the Seller will cause the Note Insurer to issue the Note
Insurance Policy under which it will guarantee payments to the holders of the
Notes as described herein.
The Notes will be issued only in book-entry form, in denominations of
$1,000 initial principal balance and integral multiples of $1,000 in excess
thereof, except that one Note of each class may be issued in a different
amount.
Book-Entry Registration
The Notes are sometimes referred to in this prospectus supplement as
"Book-Entry Notes." No person acquiring an interest in the Book-Entry Notes
will be entitled to receive a Definitive Note (as defined below) representing
an obligation of the Trust, except under the limited circumstances described
herein. Beneficial Owners may elect to hold their interests through The
Depository Trust Company ("DTC" or the "Depository"), in the United States, or
Centrale de Livraison de Valeurs Mobiliers, S.A. ("CEDEL") or the Euroclear
System ("Euroclear"), in Europe. Transfers within DTC, CEDEL or Euroclear, as
the case may be, will be in accordance with the usual rules and operating
procedures of the relevant system. So long as the Notes are Book-Entry Notes,
such Notes will be evidenced by one or more Notes registered in the name of
Cede & Co. ("Cede"), which will be the "holder" of such Notes, as the nominee
of DTC or one of the relevant depositaries. Cross-market transfers between
persons holding directly or indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly through CEDEL or Euroclear, on
the other, will be effected in DTC through The Chase Manhattan Bank ("Chase"),
the relevant depositories of CEDEL or Euroclear, respectively, and each a
participating member of DTC. The Notes will initially be registered in the name
of Cede. The interests of the holders of such Notes will be represented by
book-entries on the records of DTC and participating members thereof. All
references herein to any Notes reflect the rights of Beneficial Owners only as
such rights may be exercised through DTC and its participating organizations
for so long as such Notes are held by DTC.
<PAGE>
The Beneficial Owners may elect to hold their Notes through DTC in the
United States, or CEDEL or Euroclear if they are participants in such systems
("Participants"), or indirectly through organizations which are Participants in
such systems. The Book-Entry Notes will be issued in one or more notes per
class of Notes which in the aggregate equal the outstanding principal balance
of the related class of Notes and will initially be registered in the name of
Cede, the nominee of DTC. CEDEL and Euroclear will hold omnibus positions on
behalf of their Participants through customers' securities accounts in CEDEL's
and Euroclear's names on the books of their respective depositaries which in
turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Chase will act as depositary for CEDEL
and Morgan Guaranty Trust Company of New York will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Investors may hold such beneficial
interests in the Book-Entry Notes in minimum denominations representing
principal amounts of $1,000. Except as described below, no Beneficial Owner
will be entitled to receive a physical note representing such Note (a
"Definitive Note"). Unless and until Definitive Notes are issued, it is
anticipated that the only "holder" of such Notes will be Cede, as nominee of
DTC. Beneficial Owners will not be "holders" or "noteholders" as those terms
are used in the Indenture and the Sale and Servicing Agreement. Beneficial
Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Note will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Note will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of CEDEL or Euroclear, as appropriate).
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and settlement
of securities transactions between Participants through electronic
book-entries, thereby eliminating the need for physical movement of notes.
Participants include securities brokers and dealers (including the
Underwriter), banks, trust companies and clearing corporations. Indirect access
to the DTC system also is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly ("Indirect Participants").
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Book-Entry Notes, such as the Notes, among Participants on whose behalf it
acts with respect to the Book-Entry Notes and to receive and transmit
distributions of principal of and interest on the Book-Entry Notes.
Participants and Indirect Participants with which Beneficial Owners have
accounts with respect to the Book-Entry Notes similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Beneficial Owners.
Beneficial Owners that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Notes may do so only through Participants and Indirect
Participants. In addition, Beneficial Owners will receive all distributions of
principal and interest from the Indenture Trustee, or a paying agent on behalf
of the Indenture Trustee, through DTC Participants. DTC will forward such
distributions to its Participants, which thereafter will forward them to
Indirect Participants or Beneficial Owners. Beneficial Owners will not be
recognized by the Indenture Trustee, the Servicer or any paying agent as
holders of the Notes, and Beneficial Owners will be permitted to exercise the
rights of the holders of the Notes only indirectly through DTC and its
Participants.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the
<PAGE>
business day following the DTC settlement date. Such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Euroclear or CEDEL Participants on such business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant (as defined below) or Euroclear Participant (as defined below) to a
DTC Participant will be received with value on the DTC settlement date but will
be available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC. For information with respect to tax
documentation procedures relating to the Notes, see "Certain Federal Income Tax
Consequences -- REMIC Securities" in the accompanying prospectus.
Transfers between Participants will occur in accordance with DTC
rules. Transfers between CEDEL Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of notes. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
notes and any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 31 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of
Morgan Guaranty Trust Company of New York (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear Securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to
<PAGE>
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear Participant, either directly or
indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific notes to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Notes will be made on each
Distribution Date by the Indenture Trustee to Cede, as nominee of DTC. DTC will
be responsible for crediting the amount of such payments to the accounts of the
applicable DTC Participants in accordance with DTC's normal procedures. Each
DTC Participant will be responsible for disbursing such payment to the
Beneficial Owners of the Book-Entry Notes that it represents and to each
Financial Intermediary for which it acts as agent. Each such Financial
Intermediary will be responsible for disbursing funds to the Beneficial Owners
of the Book-Entry Notes that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes
may experience some delay in their receipt of payments, since such payments
will be forwarded by the Indenture Trustee to Cede, as nominee of DTC.
Distributions with respect to Notes held through CEDEL or Euroclear will be
credited to the cash accounts of CEDEL Participants or Euroclear Participants
in accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Because DTC can only act on behalf of Financial Intermediaries, the ability of
a Beneficial Owner to pledge Book-Entry Notes to persons or entities that do
not participate in the Depository system, or otherwise take actions in respect
of such Book-Entry Notes, may be limited due to the lack of physical notes for
such Book-Entry Notes. In addition, issuance of the Book-Entry Notes in
book-entry form may reduce the liquidity of such Notes in the secondary market
since certain potential investors may be unwilling to purchase Notes for which
they cannot obtain physical notes.
Monthly and annual reports on the Trust provided by the Indenture
Trustee to Cede, as nominee of DTC, may be made available to Beneficial Owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Notes of such Beneficial Owners are credited.
DTC has advised the Depositor and the Servicer that it will take any
action permitted to be taken by a holder of the Notes under the Indenture only
at the direction of one or more Participants to whose accounts with DTC the
Book-Entry Notes are credited. Additionally, DTC has advised the Depositor that
it will take such actions with respect to specified percentages of voting
rights only at the direction of and on behalf of Participants whose holdings of
Book-Entry Notes evidence such specified percentages of voting rights. DTC may
take conflicting actions with respect to percentages of voting rights to the
extent that Participants whose holdings of Book-Entry Notes evidence such
percentages of voting rights authorize divergent action.
None of the Trust, the Owner Trustee, the Depositor, the Servicer, the
Note Insurer or the Indenture Trustee will have any responsibility for any
aspect of the records relating to or payments made on account of
<PAGE>
beneficial ownership interests of the Book-Entry Notes held by Cede, as
nominee for DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Notes among Participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
Definitive Notes
The Notes, which will be issued initially as Book-Entry Notes, will be
converted to Definitive Notes and reissued to Beneficial Owners or their
nominees, rather than to DTC or its nominee, only if (a) the Depository or the
Servicer advises the Indenture Trustee in writing that DTC is no longer willing
or able to discharge properly its responsibilities as depository with respect
to the Book-Entry Notes and the Depository or the Servicer is unable to locate
a qualified successor or (b) the Indenture Trustee, at its option, elects to
terminate the book-entry system through DTC.
Upon the occurrence of any event described in the immediately
preceding paragraph, DTC will be required to notify all Participants of the
availability through DTC of Definitive Notes. Upon delivery of Definitive
Notes, the Indenture Trustee will reissue the Book-Entry Notes as Definitive
Notes to Beneficial Owners. Distributions of principal of, and interest on, the
Book-Entry Notes will thereafter be made by the Indenture Trustee, or a paying
agent on behalf of the Indenture Trustee, directly to holders of Definitive
Notes in accordance with the procedures set forth in the Indenture.
Definitive Notes will be transferable and exchangeable at the offices
of the Indenture Trustee or the note registrar. No service charge will be
imposed for any registration of transfer or exchange, but the Indenture Trustee
may require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
Assignment and Pledge of Initial Mortgage Loans
Pursuant to the Unaffiliated Seller's Agreement, the Originators will
sell, transfer, assign, set over and otherwise convey the Mortgage Loans,
without recourse, to the Seller and the Seller will sell, transfer, assign, set
over and otherwise convey the Mortgage Loans, including all principal
outstanding as of, and interest due after, the Cut-Off Date, without recourse,
to the Depositor on the closing date. Pursuant to the Sale and Servicing
Agreement, the Depositor will sell, transfer, assign, set over and otherwise
convey without recourse to the Trust, all right, title and interest in and to
each Mortgage Loan, including all principal outstanding as of, and interest due
after, the Cut-Off Date. Each such transfer will convey all right, title and
interest in and to (a) principal outstanding as of the Cut-Off Date, and (b)
interest due on each such Mortgage Loan after the Cut-Off Date; provided,
however, that the Originators will not convey, and the Originators reserve and
retain all their respective right, title and interest in and to, (i) principal
(including principal prepayments in full and curtailments (i.e., partial
prepayments)) received on each such Mortgage Loan on or prior to the Cut-Off
Date and (ii) interest due on each Mortgage Loan on or prior to the Cut-Off
Date.
Pursuant to the Indenture, the Trust will pledge to the Indenture
Trustee in trust for the benefit of the holders of the Notes and the Note
Insurer, all right, title and interest in and to each Mortgage Loan, including
all principal outstanding as of, and interest due after, the Cut-Off Date, as
collateral security for the Notes.
Assignment and Pledge of Subsequent Mortgage Loans
The Trust may acquire Subsequent Mortgage Loans with the funds on
deposit in either Pre-Funding Account at any time during the period (the
"Pre-Funding Period") from the closing date until the earliest of (i) the date
on which the amount on deposit in related Pre-Funding Account is less than
$100,000, (ii) the date on which an Event of Default occurs under the terms of
the Indenture, or (iii) the close of business on April 30, 1999. The amount on
deposit in the Pre-Funding Accounts will be reduced during the Pre-Funding
Period by the amount thereof used to purchase Subsequent Mortgage Loans in
accordance with the terms of the
<PAGE>
Indenture. The Seller expects that the amount on deposit in each of the
Pre-Funding Accounts will be reduced to less than $100,000 by April 30, 1999. To
the extent funds in the Pre-Funding Accounts are not used to purchase Subsequent
Mortgage Loans by April 30, 1999, such funds will be used to prepay the
principal of the related class of Notes on the following Distribution Date.
Subsequent Mortgage Loans will be transferred by the Originators to the Seller,
transferred by the Seller to the Depositor and transferred by the Depositor to
the Trust. The Trust will then pledge the Subsequent Mortgage Loans to the
Indenture Trustee, on behalf of the holders of the Notes and the Note Insurer.
Delivery of Mortgage Loan Documents
In connection with the sale, transfer, assignment or pledge of the
Mortgage Loans to the Trust, the Trust will cause to be delivered to the
Collateral Agent, on behalf of the Indenture Trustee, on the closing date, the
following documents (collectively, with respect to each Mortgage Loan, the
"Indenture Trustee's Mortgage File") with respect to each Mortgage Loan:
(a) the original mortgage note, endorsed without recourse in blank by
the related Originator, including all intervening endorsements
showing a complete chain of endorsement;
(b) the related original mortgage with evidence of recording indicated
thereon or, in certain limited circumstances, a copy thereof
certified by the applicable recording office;
(c) the recorded mortgage assignment(s), or copies thereof certified
by the applicable recording office, if any, showing a complete
chain of assignment from the originator of the related Mortgage
Loan to the related Originator (which assignment may, at such
Originator's option, be combined with the assignment referred to
in clause (d) below);
(d) a mortgage assignment in recordable form (which, if acceptable for
recording in the relevant jurisdiction, may be included in a
blanket assignment or assignments) of each mortgage from the
related Originator to the Indenture Trustee;
(e) originals of all assumption, modification and substitution
agreements in those instances where the terms or provisions of a
mortgage or mortgage note have been modified or such mortgage or
mortgage note has been assumed; and
(f) an original title insurance policy (or (A) a copy of the title
insurance policy, or (B) a binder thereof or copy of such binder
together with a certificate from the Originator that the original
mortgage has been delivered to the title insurance company that
issued such binder for recordation).
Pursuant to the Sale and Servicing Agreement, the Collateral Agent, on
behalf of the Indenture Trustee, agrees to execute and deliver on or prior to
the closing date, or, with respect to Subsequent Mortgage Loans, on or prior to
the related Subsequent Transfer Date, an acknowledgment of receipt of the
original mortgage note, item (a) above, with respect to each of the Mortgage
Loans (with any exceptions noted). The Collateral Agent, on behalf of the
Indenture Trustee, agrees, for the benefit of the holders of the Notes and the
Note Insurer, to review (or cause to be reviewed) each Indenture Trustee's
Mortgage File within thirty (30) days after the closing date or the Subsequent
Transfer Date, as applicable (or, with respect to any Qualified Substitute
Mortgage Loan, within thirty (30) days after the receipt by the Collateral Agent
thereof), and to deliver a certification generally to the effect that, as to
each Mortgage Loan listed in the schedule of Mortgage Loans, (a) all documents
required to be delivered to it pursuant to the Sale and Servicing Agreement are
in its possession, (b) each such document has been reviewed by it and has not
been mutilated, damaged, torn or otherwise physically altered, appears regular
on its face and relates to such Mortgage Loan, and (c) based on its examination
and only as to the foregoing documents, certain information set forth on the
schedule of Mortgage Loans accurately reflects the information set forth in the
Indenture Trustee's Mortgage File delivered on such date.
<PAGE>
If the Collateral Agent, during the process of reviewing the Indenture
Trustee's Mortgage Files, finds any document constituting a part of an
Indenture Trustee's Mortgage File which is not executed, has not been received
or is unrelated to the Mortgage Loans, or that any Mortgage Loan does not
conform to the requirements above or to the description thereof as set forth in
the schedule of Mortgage Loans, the Collateral Agent shall promptly so notify
the Indenture Trustee, the Servicer, the Seller and the Note Insurer in writing
with details thereof. The Seller agrees to use reasonable efforts to cause to
be remedied a material defect in a document constituting part of an Indenture
Trustee's Mortgage File of which it is so notified by the Collateral Agent. If,
however, within sixty (60) days after the Collateral Agent's notice of such
defect, the Seller has not caused the defect to be remedied and the defect
materially and adversely affects the interest of the holders of the Notes or
the interests of the Note Insurer in the Mortgage Loan, the Seller or the
related Originator will either (a) substitute in lieu of such Mortgage Loan a
Qualified Substitute Mortgage Loan and, if the then outstanding principal
balance of such Qualified Substitute Mortgage Loan is less than the principal
balance of such Mortgage Loan as of the date of such substitution plus accrued
and unpaid interest thereon, deliver to the Servicer the amount of any such
shortfall (the "Substitution Adjustment") or (b) purchase such Mortgage Loan at
a price equal to the outstanding principal balance of such Mortgage Loan as of
the date of purchase, plus the greater of (i) all accrued and unpaid interest
thereon and (ii) thirty (30) days' interest thereon, computed at the related
mortgage interest rate, net of the Servicing Fee if the Servicer is effecting
the repurchase, plus the amount of any unreimbursed Servicing Advances made by
the Servicer, which purchase price shall be deposited in the related
Distribution Account on the next succeeding Servicer Distribution Date after
deducting therefrom any amounts received in respect of such repurchased
Mortgage Loan or Loans and being held in the Distribution Account for future
distribution to the extent such amounts have not yet been applied to principal
or interest on such Mortgage Loan. In addition, the Seller and the Originators
shall be obligated to indemnify the Indenture Trustee, the Collateral Agent,
the holders of the Notes and the Note Insurer for any third-party claims
arising out of a breach by the Seller or the Originators of representations or
warranties regarding the Mortgage Loans. The obligation of the Seller and the
Originators to cure such breach or to substitute or purchase any Mortgage Loan
and to indemnify constitute the sole remedies respecting a material breach of
any such representation or warranty to the holders of the Notes, the Indenture
Trustee, the Collateral Agent and the Note Insurer.
A "Qualified Substitute Mortgage Loan" is defined in the Indenture as
any mortgage loan or mortgage loans substituted for a deleted Mortgage Loan and
which, among other things, (i) relates or relate to a detached one-family
residence or to the same type of residential dwelling or commercial property as
the deleted Mortgage Loan and, has or have the same or a better lien priority
as the deleted Mortgage Loan and has or have the same occupancy status as the
deleted Mortgage Loan or is or are owner-occupied mortgaged property or
properties, (ii) matures or mature no later than (and not more than one year
earlier than) the deleted Mortgage Loan, (iii) has or have a Loan-to-Value
Ratio ("LTV") or LTVs at the time of such substitution no higher than the LTV
of the deleted Mortgage Loan, (iv) has or have a CLTV or CLTVs at the time of
such substitution no higher than the CLTV of the deleted Mortgage Loan, (v) has
or have a principal balance or principal balances (after application of all
payments received on or prior to the date of substitution) not substantially
less and not more than the principal balance of the deleted Mortgage Loan as of
such date, (vi) has or have a mortgage interest rate of at least the same
interest rate as the deleted Mortgage Loan and (vii) complies or comply, as of
the date of substitution, with each representation and warranty set forth in
the Unaffiliated Seller's Agreement.
Representations and Warranties of the Seller
The Seller will represent, among other things, with respect to each
Mortgage Loan, as of the closing date or the Subsequent Transfer Date, as
applicable, the following:
1. the information set forth in the schedule of Mortgage Loans
with respect to each Mortgage Loan is true and correct;
2. all of the original or certified documentation constituting the
Indenture Trustee's Mortgage Files (including all material documents
related thereto) has been or will be delivered to the
<PAGE>
Collateral Agent, on behalf of the Indenture Trustee, on the closing
date or the Subsequent Transfer Date, as applicable;
3. the mortgaged property consists of a single parcel of real
property separately assessed for tax purposes, upon which is erected a
detached or an attached one-family residence or a detached two- to
six-family dwelling, or an individual condominium unit in a low-rise
condominium, or a mobile home unit, or an individual unit in a planned
unit development, or a commercial property, or a mixed use or multiple
purpose property. Such residence, dwelling or unit is not (i) a unit in
a cooperative apartment, (ii) a property constituting part of a
syndication, (iii) a time share unit, (iv) a property held in trust,
(v) a manufactured dwelling, (vi) a log-constructed home, or (vii) a
recreational vehicle;
4. each mortgage is a valid first or second lien on a fee simple
(or its equivalent under applicable state law) estate in the real
property securing the amount owed by the mortgagor under the mortgage
note subject only to (i) the lien of current real property taxes and
assessments which are not delinquent, (ii) any related first mortgage
loan, (iii) covenants, conditions and restrictions, rights of way,
easements and other matters of public record as of the date of
recording of such mortgage, such exceptions appearing of record being
acceptable to mortgage lending institutions generally in the area
wherein the property subject to the mortgage is located or specifically
reflected in the appraisal obtained in connection with the origination
of the related Mortgage Loan obtained by the Seller and (iv) other
matters to which like properties are commonly subject which do not
materially interfere with the benefits of the security intended to be
provided by such mortgage;
5. immediately prior to the transfer and assignment by the Seller
to the Depositor, the Seller had good title to, and was the sole owner
of each Mortgage Loan, free of any interest of any other person, and
the Seller has transferred all right, title and interest in each
Mortgage Loan to the Depositor;
6. each Mortgage Loan conforms, and all such Mortgage Loans in the
aggregate conform, to the description thereof set forth in this
prospectus supplement; and
7. all of the Mortgage Loans were originated in accordance with
the underwriting criteria set forth in this prospectus supplement.
Pursuant to the Sale and Servicing Agreement, upon the discovery by any
of the holder of the Notes, the Seller, the Servicer, any Subservicer, the Note
Insurer, the Collateral Agent or the Indenture Trustee that any of the
representations and warranties contained in the Sale and Servicing Agreement
have been breached in any material respect as of the closing date or the
Subsequent Transfer Date, as applicable, with the result that the interests of
the holders of the Notes in the related Mortgage Loan or the interests of the
Note Insurer were materially and adversely affected (notwithstanding that such
representation and warranty was made to the Seller's or the Originator's best
knowledge and the Seller or the Originator lacked knowledge of such breach), the
party discovering such breach is required to give prompt written notice to the
other parties. Subject to certain provisions of the Sale and Servicing
Agreement, within sixty (60) days of the earlier to occur of the Seller's or an
Originator's discovery or its receipt of notice of any such breach, the Seller
or the Originators will (a) promptly cure such breach in all material respects,
(b) remove each Mortgage Loan which has given rise to the requirement for action
by the Seller or the Originators, substitute one or more Qualified Substitute
Mortgage Loans and, if the outstanding principal balance of such Qualified
Substitute Mortgage Loans as of the date of such substitution is less than the
outstanding principal balance, plus accrued and unpaid interest thereon, of the
replaced Mortgage Loans as of the date of substitution, deliver to the Trust as
part of the amounts remitted by the Servicer on such Distribution Date the
amount of such shortfall, or (c) purchase such Mortgage Loan at a price equal to
the principal balance of such Mortgage Loan as of the date of purchase plus the
greater of (i) all accrued and unpaid interest thereon and (ii) thirty (30)
days' interest thereon computed at the mortgage interest rate, net of the
Servicing Fee if ABC is the Servicer, plus the amount of any unreimbursed
Servicing Advances made by the Servicer, and deposit such purchase price into
the Distribution
<PAGE>
Account on the next succeeding Servicer Distribution Date after deducting
therefrom any amounts received in respect of such repurchased Mortgage Loan or
Mortgage Loans and being held in the Distribution Account for future
distribution to the extent such amounts have not yet been applied to principal
or interest on such Mortgage Loan. In addition, the Seller and the Originators
shall be obligated to indemnify the Trust, the Owner Trustee, the Indenture
Trustee, the Collateral Agent, the holders of the Notes and the Note Insurer for
any third-party claims arising out of a breach by the Seller or the Originators
of representations or warranties regarding the Mortgage Loans. The obligation of
the Seller and the Originators to cure such breach or to substitute or purchase
any Mortgage Loan and to indemnify constitute the sole remedies respecting a
material breach of any such representation or warranty to the holders of the
Notes, the Indenture Trustee, the Collateral Agent and the Note Insurer.
Payments on the Mortgage Loans
The Sale and Servicing Agreement provides that the Servicer, for the
benefit of the holders of the Notes, shall establish and maintain a Collection
Account (the "Collection Account"), which will generally be (i) an account
maintained with a depository institution or trust company whose long term
unsecured debt obligations are rated by each Rating Agency in one of its two
highest rating categories at the time of any deposit therein or (ii) trust
accounts maintained with a depository institution acceptable to each Rating
Agency and the Note Insurer (any such account, an "Eligible Account"). The Sale
and Servicing Agreement permits the Servicer to direct any depository
institution maintaining the Collection Account to invest the funds in the
Collection Account in one or more Permitted Investments that mature, unless
payable on demand, no later than the business day preceding the date on which
the Servicer is required to transfer the Servicer Remittance Amount from the
Collection Account to the Distribution Account, as described below.
The Servicer is obligated to deposit or cause to be deposited in the
Collection Account on a daily basis, amounts representing the following
payments received and collections made by it after the Cut-Off Date (other than
in respect of Monthly Payments on the Mortgage Loans due on each Mortgage Loan
up to and including any Due Date occurring on or prior to the Cut-Off Date):
(i) all payments on account of principal, including prepayments of principal
("Principal Prepayments"); (ii) all payments on account of interest on the
Mortgage Loans; (iii) all Liquidation Proceeds and all Insurance Proceeds to
the extent such proceeds are not to be applied to the restoration of the
related mortgaged property or released to the related borrower in accordance
with the express requirements of law or in accordance with prudent and
customary servicing practices; (iv) all Net REO Proceeds; (v) all other amounts
required to be deposited in the Collection Account pursuant to the Sale and
Servicing Agreement; and (vi) any amounts required to be deposited in
connection with net losses realized on investments of funds in the Collection
Account.
The Indenture Trustee will be obligated to set up an account with
respect to each class of Notes (each, a "Distribution Account", and
collectively with the Collection Account, the Pre-Funding Accounts and the
Capitalized Interest Accounts, the "Accounts"), which is required to be an
Eligible Account, into which the Servicer will deposit or cause to be deposited
the Servicer Remittance Amount on the 20th day of each month (the "Servicer
Distribution Date").
The "Servicer Remittance Amount" for a Servicer Distribution Date is
equal to the sum, without duplication, of (i) all collections of principal and
interest on the Mortgage Loans (including Principal Prepayments, Net REO
Proceeds and Liquidation Proceeds, if any) collected by the Servicer during the
prior calendar month, (ii) all Periodic Advances made by the Servicer with
respect to payments due to be received on the Mortgage Loans on the related Due
Date and (iii) any other amounts required to be placed in the Collection
Account by the Servicer pursuant to the Sale and Servicing Agreement, but
excluding the following:
(a) amounts received on particular Mortgage Loans, with respect to
which the Servicer has previously made an unreimbursed Periodic
Advance, as late payments of interest, or as Net Liquidation
Proceeds, to the extent of such unreimbursed Periodic Advance;
<PAGE>
(b) amounts received on a particular Mortgage Loan with respect to
which the Servicer has previously made an unreimbursed Servicing
Advance, to the extent of such unreimbursed Servicing Advance;
(c) for such Servicer Distribution Date, the aggregate Servicing Fee;
(d) all net income from Permitted Investments that is held in the
Collection Account for the account of the Servicer;
(e) all amounts actually recovered from the Servicer in respect of
late fees, assumption fees, prepayment fees and similar fees;
(f) Net Foreclosure Profits; and
(g) certain other amounts which are reimbursable to the Servicer, as
provided in the Sale and Servicing Agreement.
The amounts described in clauses (a) through (g) above may be withdrawn
by the Servicer from the Collection Account on or prior to each Servicer
Distribution Date.
Over-collateralization Provisions
Over-collateralization Resulting from Cash Flow Structure. The
Indenture requires that, starting with the second Distribution Date, the Excess
Interest with respect to a pool of Mortgage Loans, if any, that is not used to
make cross-collateralization payments will be applied on each Distribution Date
as an accelerated payment of principal on the related class of Notes, but only
to the limited extent hereafter described. The application of Excess Interest
as a payment of principal has the effect of accelerating the amortization of a
class of Notes relative to the amortization of the related pool of Mortgage
Loans. The "Excess Interest" for a Distribution Date and a pool of Mortgage
Loans is equal to the excess of (x) the amount on deposit in the related
Distribution Account (exclusive of the amount of any Insured Payment and the
Servicing Fee) on such Distribution Date (such amount being the "Available
Amount" for such Distribution Date and such pool of Mortgage Loans) over (y)
the sum of (i) the related Interest Distribution Amount, (ii) the related
Principal Distribution Amount, (calculated for this purpose without regard to
any Over-collateralization Increase Amount or portion thereof included
therein), (iii) any Reimbursement Amount or other amounts owed to the Note
Insurer and (iv) the Indenture Trustee's Fees. The Excess Interest from a pool
of Mortgage Loans will be used (1) to reimburse the Note Insurer for any
amounts due to it, (2) as needed to pay Net Mortgage Loan Interest Shortfalls
relating to such class, (3) as needed to make cross-collateralization payments
in respect of the other pool of Mortgage Loans, (4) as a payment of principal
to the related class of Notes until the Distribution Date on which the amount
of over-collateralization has reached the required level, and (5) as needed to
fund the Cross-collateralization Reserve Account relating to the other pool of
Mortgage Loans. Notwithstanding the foregoing, in the event certain tests set
forth in the Indenture are violated, all available Excess Interest will be used
as a payment of principal to the related class of Notes to accelerate the
amortization of such Notes.
With respect to any Distribution Date and a pool of Mortgage Loans,
the excess, if any, of (x) the sum of (i) the aggregate principal balances of
the Mortgage Loans in such pool as of the close of business on the last day of
the preceding calendar month and (ii) the amounts, if any, on deposit in the
Pre-Funding Accounts, over (y) the aggregate principal balance of the related
class of Notes as of such Distribution Date (and following the making of all
distributions on such Distribution Date (other than with respect to any
Over-collateralization Increase Amount for such Distribution Date)) is the
"Over-collateralized Amount" for such pool as of such Distribution Date. The
Indenture requires that, starting with the second Distribution Date, Excess
Interest from a pool of Mortgage Loans that is not used to make
cross-collateralization payments will be applied as an accelerated payment of
principal on the related class of Notes until the Over-collateralized Amount
has increased to the level required by the Indenture. After such time, if it is
necessary to re-establish
<PAGE>
the required level of over-collateralization, Excess Interest from each pool of
Mortgage Loans that is not used to make cross-collateralization payments will
again be applied as an accelerated payment of principal on the related class of
Notes. Notwithstanding the foregoing, in the event certain tests set forth in
the Indenture are violated, all available Excess Interest from each pool of
Mortgage Loans will be used as a payment of principal to accelerate the
amortization of the related class of Notes. Any amount of Excess Interest
actually applied as an accelerated payment of principal is an
"Over-collateralization Increase Amount." The required level of the
Over-collateralized Amount with respect to a Distribution Date is the "Specified
Over-collateralized Amount" with respect to such Distribution Date. Initially,
the Over-collateralized Amount of each pool of Mortgage Loans will be an amount
equal to approximately 0.50% of the sum of (x) the aggregate principal balance
of the Mortgage Loans in each pool on the closing date and (y) the original
amount on deposit in the related Pre-Funding Account on the closing date.
In the event that the required level of the Specified
Over-collateralized Amount with respect to a pool of Mortgage Loans is
permitted to decrease or "step down" on a Distribution Date in the future, the
Indenture provides that a portion of the principal which would otherwise be
distributed to the holders of the related class of Notes on such Distribution
Date shall instead be distributed in the priority set forth herein under
"--Flow of Funds." This has the effect of decelerating the amortization of the
related class of Notes relative to the amortization of such pool of Mortgage
Loans, and of reducing the Over-collateralized Amount. With respect to each
pool of Mortgage Loans and a Distribution Date, the difference, if any, between
(a) the Over-collateralized Amount that would apply on such Distribution Date
after taking into account all distributions to be made on such Distribution
Date (except for any distributions of related Over-collateralization Reduction
Amounts as described in this sentence) and (b) the Specified
Over-collateralized Amount is the "Excess Over-collateralized Amount" with
respect to such pool of Mortgage Loans and such Distribution Date. If, on any
Distribution Date, the Excess Over-collateralized Amount is, or, after taking
into account all other distributions to be made on such Distribution Date would
be, greater than zero (i.e., the Over-collateralized Amount is or would be
greater than the related Specified Over-collateralized Amount), then any
amounts relating to principal which would otherwise be distributed to the
holders of the related class of Notes on such Distribution Date shall instead
be distributed in the priority set forth herein under "--Flow of Funds", in an
amount equal to the lesser of (x) the Excess Over-collateralized Amount and (y)
the amount available for distribution on account of principal with respect to
the related class of Notes on such Distribution Date; such amount being the
"Over-collateralization Reduction Amount" with respect to such pool of Mortgage
Loans for such Distribution Date.
The Indenture provides that, on any Distribution Date, all amounts
collected on account of principal (other than any such amount applied to the
payment of an Over-collateralization Reduction Amount) with respect to each
pool of Mortgage Loans during the prior calendar month (the related "Due
Period") will be distributed to the holders of the related class of Notes on
such Distribution Date. If any Mortgage Loan became a Liquidated Mortgage Loan
during such prior Due Period, the Net Liquidation Proceeds related thereto and
allocated to principal may be less than the principal balance of the related
Mortgage Loan; the amount of any such insufficiency is a "Liquidated Loan
Loss." In addition, the Sale and Servicing Agreement provides that the
principal balance of any Mortgage Loan which becomes a Liquidated Mortgage Loan
shall then equal zero. The Sale and Servicing Agreement does not contain any
rule which requires that the amount of any Liquidated Loan Loss be distributed
to the holders of the related class of Notes on the Distribution Date which
immediately follows the event of loss; i.e., the Sale and Servicing Agreement
does not require the current recovery of losses. However, the occurrence of a
Liquidated Loan Loss will reduce the Over-collateralized Amount with respect to
such pool of Mortgage Loans, which, to the extent that such reduction causes
the Over-collateralized Amount to be less than the Specified
Over-collateralized Amount applicable to the related Distribution Date, will
require the payment of an Over-collateralization Increase Amount on such
Distribution Date (or, if insufficient funds are available on such Distribution
Date, on subsequent Distribution Dates, until the Over-collateralized Amount
equals the related Specified Over-collateralized Amount). The effect of the
foregoing is to allocate losses to the holders of the related Trust
Certificates by reducing, or eliminating entirely, payments of Excess Interest
and Over-collateralization Reduction Amounts which such holders would otherwise
receive.
<PAGE>
Over-collateralization and the Note Insurance Policy. The Indenture
defines an "Over-collateralization Deficit" with respect to a Distribution Date
to be the amount, if any, by which (x) the aggregate principal balance of the
Notes as of such Distribution Date, and following the making of all
distributions to be made on such Distribution Date (except for any payment to
be made as to principal from proceeds of the Note Insurance Policy), exceeds
(y) the sum of (i) aggregate principal balance of the Mortgage Loans, as of the
close of business on the last day of the related Due Period, (ii) the amount on
deposit in the Pre-Funding Accounts, and (iii) funds on deposit in the
Cross-collateralization Reserve Accounts. The Indenture requires the Indenture
Trustee to make a claim for an Insured Payment under the Note Insurance Policy
not later than the third business day prior to any Distribution Date as to
which the Indenture Trustee has determined that an Over-collateralization
Deficit will occur for the purpose of applying the proceeds of such Insured
Payment as a payment of principal to the holders of the related class of Notes
on such Distribution Date. The Note Insurer has the option on any Distribution
Date to make a payment of principal, including in respect of Liquidated Loan
Losses, up to the amount that would have been payable to the holders of the
Notes if sufficient funds were available thereof. Additionally, under the terms
of the Indenture, the Note Insurer will have the option to cause Excess
Interest to be applied without regard to any limitation upon the occurrence of
certain trigger events, or in the event of an "event of default" under the
Insurance Agreement. However, investors in the Notes should realize that, under
extreme loss or delinquency scenarios, they may temporarily receive no
distributions of principal.
Cross-collateralization Provisions
Cross-collateralization Payments. On each Distribution Date, available
Excess Interest from a pool of Mortgage Loans, if any, will be paid to the
holders of the class of Notes relating to the other pool of Mortgage Loans to
the extent of the Shortfall Amount for such other pool. The "Shortfall Amount"
for a pool of Mortgage Loans and any Distribution Date equals the sum of (w)
any shortfall in the amount of the Interest Distribution Amount for such pool
actually distributed to the holders of the related class of Notes, (x) any
shortfall in the amount of the Net Mortgage Loan Interest Shortfalls for such
pool actually distributed to the holders of the related class of Notes, (y) the
amount of any Over-collateralization Deficit for such pool and such
Distribution Date and (z) any shortfall in the payment of any amounts owed the
Note Insurer.
The cross-collateralization provisions of the transaction are limited
to the payment of certain credit losses, certain interest shortfalls and any
amounts due the Note Insurer. Excess Interest from one pool of Mortgage Loans
will not be used to build over-collateralization with respect to the other pool
of Mortgage Loans.
Cross-collateralization Reserve Account. Each class of Notes will have
the benefit of a Cross-collateralization Reserve Account. On each Distribution
Date, available Excess Interest from a pool of Mortgage Loans, if any, will be
paid into the Cross-collateralization Reserve Account relating to the other
pool of Mortgage Loans, until the amount of funds on deposit therein equals the
Specified Reserve Amount for such other pool. The "Specified Reserve Amount"
for each pool of Mortgage Loans and any Distribution Date equals the difference
between (x) the Specified Over-collateralized Amount for such pool and such
Distribution Date and (y) the Over-collateralized Amount for such pool on such
Distribution Date. If the amount on deposit in the Cross-collateralization
Reserve Account for a pool of Mortgage Loans on any Distribution Date exceeds
the Specified Reserve Amount for such pool and such Distribution Date, the
amount of such excess shall be distributed in the priority set forth herein
under "--Flow of Funds."
Funds on deposit in a Cross-collateralization Reserve Account will be
used on any Distribution Date to make payments in respect of the Shortfall
Amount for either pool, to the extent that there is no Excess Interest
available therefor on such Distribution Date.
Flow of Funds
On each Distribution Date, the Indenture Trustee (based solely on the
information received from the Servicer in the Servicer Remittance Report prior
to such Distribution Date) shall make payments in respect of
<PAGE>
each pool of Mortgage Loans to the holders of the related class of Notes and
reimbursement to the Note Insurer under the Insurance Agreement, to the extent
of funds, including any Insured Payments, on deposit in the related Distribution
Account, as follows:
(a) to the Indenture Trustee, an amount equal to the fees then due to
it with respect to the related class of Notes (the "Indenture
Trustee's Fees");
(b) from amounts then on deposit in the related Distribution Account
(excluding any Insured Payments) to the Note Insurer the lesser of
(x) the excess of (i) the amount then on deposit in the
Distribution Account over (ii) the Insured Distribution Amounts
for such pool and such Distribution Date and (y) the amount of all
Insured Payments and other amounts due to the Note Insurer for
such pool pursuant to the Insurance Agreement (including the
premium amount) which have not been previously paid (the
"Reimbursement Amount") as of such Distribution Date;
(c) from amounts then on deposit in the related Distribution Account,
the Interest Distribution Amount for the related class of Notes;
(d) from amounts then on deposit in the related Distribution Account,
the Principal Distribution Amount for the related class of Notes,
until the principal balance of such class of Notes is reduced to
zero;
(e) from amounts then on deposit in the related Distribution Account
the amount of any Net Mortgage Loan Interest Shortfalls for the
related Class of Notes;
(f) from amounts then on deposit in the related Distribution Account,
to the holders of the other class of Notes, the Shortfall Amount
for such other class;
(g) from amounts then on deposit in the related Distribution Account,
to the Cross-collateralization Reserve Account relating to the
other class of Notes, the amount necessary for the balance of such
account to equal the Specified Reserve Amount; and
(h) following the making by the Indenture Trustee of all allocations,
transfers and disbursements described above, to the holders of the
related Trust Certificates, the amount remaining on such
Distribution Date in the related Distribution Account, if any.
Definitions
"Available Amount" for any pool of Mortgage Loans and any Distribution
Date is the amount on deposit in the related Distribution Account (exclusive of
the amount of any Insured Payment and the Servicing Fee) on such Distribution
Date.
"Class A-1 Interest Distribution Amount" for any Distribution Date
will be an amount equal to the sum of the Current Interest for the Class A-1
Notes on such Distribution Date, less the amount of any Class A-1 Mortgage Loan
Interest Shortfalls relating to such Distribution Date.
"Class A-1 Mortgage Loan Interest Shortfalls" for any Distribution
Date will be the aggregate of the Mortgage Loan Interest Shortfalls in Pool I,
if any, for such Distribution Date, to the extent such Mortgage Loan Interest
Shortfalls are not paid by the Servicer as Compensating Interest.
"Class A-1 Note Rate" with respect to any Distribution Date, the per
annum rate equal to 6.545%; provided, that, on any Distribution Date after the
Note Clean-Up Call Date for the Class A-1 Notes, the Class A-1 Note Rate will
be 7.045%.
<PAGE>
"Class A-2 Interest Distribution Amount" for any Distribution Date
will be an amount equal to the sum of the Current Interest for the Class A-2
Notes on such Distribution Date, less the amount of any Class A-2 Mortgage Loan
Interest Shortfalls relating to such Distribution Date.
"Class A-2 Mortgage Loan Interest Shortfalls" for any Distribution
Date will be the aggregate of the Mortgage Loan Interest Shortfalls in Pool II,
if any, for such Distribution Date, to the extent such Mortgage Loan Interest
Shortfalls are not paid by the Servicer as Compensating Interest.
"Class A-2 Note Rate" with respect to any Distribution Date, the per
annum rate equal to 6.580%; provided, that, on any Distribution Date after the
Note Clean-up Call Date for the Class A-2 Notes, the Class A-2 Note Rate will
be 7.080%.
"Current Interest" for any pool of Mortgage Loans and any Distribution
Date is the interest that will accrue on the related class of Notes at the
applicable Note Rate on the aggregate outstanding principal balance of such
class during the related Accrual Period.
"Excess Interest" for any pool of Mortgage Loans and any Distribution
Date is equal to the excess of (x) the Available Amount for such pool and such
Distribution Date over (y) the sum of (i) the Interest Distribution Amount for
such pool and such Distribution Date, (ii) Principal Distribution Amount for
such pool and such Distribution Date (calculated for this purpose without
regard to any Over-collateralization Increase Amount or portion thereof
included therein), (iii) any Reimbursement Amount or other amount owed to the
Note Insurer relating to such pool and (iv) the Indenture Trustee's Fees for
such pool and such Distribution Date .
"Foreclosure Profits" as to any Servicer Distribution Date, are the
excess, if any, of (i) Net Liquidation Proceeds in respect of each Mortgage
Loan that became a Liquidated Mortgage Loan during the month immediately
preceding the month of such Servicer Distribution Date over (ii) the sum of
such unpaid principal balance of each such Liquidated Mortgage Loan plus
accrued and unpaid interest on the unpaid principal balance from the Due Date
to which interest was last paid by the mortgagor.
"Insurance Proceeds" are proceeds paid by any insurer pursuant to any
insurance policy covering a Mortgage Loan to the extent such proceeds are not
applied to the restoration of the related mortgaged property or released to the
related mortgagor. "Insurance Proceeds" do not include "Insured Payments."
"Insured Distribution Amount" for any pool of Mortgage Loans and any
Distribution Date, is the sum of (i) the Interest Distribution Amount for such
pool and such Distribution Date, (ii) the amount of the Over-collateralization
Deficit applicable to such pool and such Distribution Date, if any, and (iii)
with respect to the Distribution Date which is a final stated maturity date,
the aggregate outstanding principal balance for the related class of Notes.
"Insured Payment" for any pool of Mortgage Loans and any Distribution
Date will equal the amount by which the Insured Distribution Amount for such
pool and such Distribution Date exceeds the Available Amount less the Indenture
Trustee's Fees for such pool and such Distribution Date.
"Interest Distribution Amount" means the Class A-1 Interest
Distribution Amount or the Class A-2 Interest Distribution Amount, as
applicable.
"Liquidation Expenses" as to any Liquidated Mortgage Loan are all
expenses incurred by the Servicer in connection with the liquidation of such
Mortgage Loan, including, without duplication, unreimbursed expenses for real
property taxes and unreimbursed Servicing Advances. In no event may Liquidation
Expenses with respect to a Liquidated Mortgage Loan exceed the related
Liquidation Proceeds.
<PAGE>
"Liquidated Loan Loss" as to any Liquidated Mortgage Loan is the
excess, if any, of (i) the unpaid principal balance of such Liquidated Mortgage
Loan plus accrued and unpaid interest on such unpaid principal balance from the
Due Date to which interest was last paid by the Mortgagor over (ii) the sum of
the Net Liquidation Proceeds and the amount of any previously unreimbursed
Periodic Advances in respect of such Mortgage Loan.
"Liquidation Proceeds" are amounts (other than Insurance Proceeds)
received by the Servicer in connection with (i) the taking of all or a part of
a Mortgaged Property by exercise of the power of eminent domain or condemnation
or (ii) the liquidation of a defaulted Mortgage Loan through a sale,
foreclosure sale, REO Disposition or otherwise.
"Mortgage Loan Interest Shortfalls" means Civil Relief Act Interest
Shortfalls and Prepayment Interest Shortfalls.
"Net Foreclosure Profits" as to any Servicer Distribution Date, are
the excess, if any, of (i) the aggregate Foreclosure Profits with respect to
such Servicer Distribution Date over (ii) Liquidated Loan Losses with respect
to such Servicer Distribution Date.
"Net Liquidation Proceeds" as to any Liquidated Mortgage Loan, are
Liquidation Proceeds net of Liquidation Expenses and net of any unreimbursed
Periodic Advances made by the Servicer.
"Net Mortgage Loan Interest Shortfalls" means the Class A-1 Mortgage
Loan Interest Shortfalls or the Class A-2 Mortgage Loan Interest Shortfalls, as
applicable.
"Net REO Proceeds" as to any REO Property, are REO Proceeds net of any
related expenses of the Servicer.
"Over-collateralization Deficit" for any Distribution Date, is the
amount by which the aggregate outstanding principal balance of the Notes
exceeds the sum of (i) the aggregate principal balance of the Mortgage Loans,
(ii) any amount on deposit in the Pre-Funding Accounts on such Distribution
Date, and (iii) any amounts on deposit in the Cross-collateralization Reserve
Accounts on such Distribution Date, after application of all amounts due on
such Distribution Date.
"Over-collateralization Increase Amount" for any pool of Mortgage
Loans and any Distribution Date is the amount of Excess Interest to be applied
as an accelerated payment of principal on the related class of Notes until the
over-collateralization for such pool reaches the Specified Over-collateralized
Amount. Such payment is limited to the extent of the Available Amount as
described in the definition of "Principal Distribution Amount."
"Over-collateralization Reduction Amount" with respect to any pool of
Mortgage Loans and any Distribution Date, is the difference, if any, between
(a) the Over-collateralized Amount for such pool that would apply on such
Distribution Date after taking into account all distributions to be made on
such Distribution Date (except for any distributions of related
Over-collateralization Reduction Amounts as described in this sentence) and (b)
the Specified Over-collateralized Amount for such pool and such Distribution
Date to the extent of principal available for distribution.
"Principal Distribution Amount" for any pool of Mortgage Loans and any
Distribution Date will be the lesser of:
(a) the excess of (i) the sum, as of such Distribution Date, of
(A) the Available Amount for such pool and (B) any Insured Payment with
respect to the related class of Notes over (ii) the sum of Interest
Distribution Amount for such pool, the Indenture Trustee's Fees, and
the Reimbursement Amount allocable to the related class of Notes; and
<PAGE>
(b) the sum, without duplication, of:
(i) all principal in respect of the Mortgage Loans in such
pool actually collected during the related Due Period;
(ii) the principal balance of each Mortgage Loan that either
was repurchased by the Seller or purchased by the Servicer on the
related Servicer Distribution Date from such pool, to the extent
such principal balance is actually received by the Indenture
Trustee;
(iii) any Substitution Adjustments delivered by the Seller on
the related Servicer Distribution Date in connection with a
substitution of a Mortgage Loan in such pool, to the extent such
Substitution Adjustments are actually received by the Indenture
Trustee;
(iv) the Net Liquidation Proceeds actually collected by the
Servicer of all Mortgage Loans in such pool during the prior
calendar month (to the extent such Net Liquidation Proceeds relate
to principal);
(v) on the April 1999 or May 1999 Distribution Dates, moneys
released from the related Pre-Funding Account, if any;
(vi) the proceeds received by the Indenture Trustee upon the
exercise by the Servicer of its option to call the related class
of Notes (to the extent such proceeds relate to principal);
(vii) the amount of any Over-collateralization Deficit with
respect to such pool for such Distribution Date;
(viii) the proceeds received by the Indenture Trustee on any
termination of the Trust (to the extent such proceeds relate to
principal) allocable to such pool;
(ix) the amount of any Over-collateralization Increase Amount
with respect to such pool for such Distribution Date, to the
extent of any Excess Interest for such pool available for such
purpose, exclusive of the amount of Excess Interest for such pool
necessary to make the payment of (A) any Net Mortgage Loan
Interest Shortfalls for such pool and such Distribution Date and
(B) the Shortfall Amount for the other pool and such Distribution
Date;
(x) if the Note Insurer shall so elect, an amount of
principal (including Liquidated Loan Losses) that would have been
payable pursuant to clauses (i) through (ix) above if sufficient
funds were available therefor;
minus
(xi) the amount of any Over-collateralization Reduction
Amount for such pool for such Distribution Date.
In no event will the Principal Distribution Amount for a pool with
respect to any Distribution Date be (x) less than zero or (y) greater than the
then outstanding aggregate principal balance for the Notes.
"REO Proceeds" are monies received in respect of any REO Property
(including, without limitation, proceeds from the rental of the related
mortgaged property).
<PAGE>
"Specified Over-collateralized Amount" with respect to a pool of
Mortgage Loans and any Distribution Date will be the amount of
Over-collateralization which the Note Insurer requires with respect to such
pool and such Distribution Date.
Events of Default
Upon the occurrence of an Event of Default, the Indenture Trustee,
upon the direction of the majority holders (which shall be the Note Insurer in
the absence of a default by the Note Insurer under the Insurance Agreement),
shall declare (or, with respect to an Event of Default described in clauses
(iv) through (vii), the occurrence shall result in the automatic declaration
of) the aggregate outstanding principal balance of all the Notes to be due and
payable together with all accrued and unpaid interest thereon without
presentment, demand, protest or other notice of any kind, all of which are
waived by the Trust. An "Event of Default", wherever used herein, means any one
of the following events:
(i) the Trust shall fail to distribute or cause to be distributed to
the Indenture Trustee, for the benefit of the holders of the
Notes, on any Distribution Date, all or part of any Interest
Distribution Amount due on the Notes on such Distribution Date and
all or a part of any Net Mortgage Loan Interest Shortfalls due on
the Notes on such Distribution Date;
(ii) the Trust shall fail to distribute or cause to be distributed to
the Indenture Trustee, for the benefit of the holders of the
Notes, (x) on any Distribution Date an amount equal to the
principal due on the outstanding Notes on such Distribution Date,
to the extent that sufficient funds are on deposit in the
Collection Account or (y) on the final stated maturity date for
any class of Notes, the aggregate outstanding principal balance of
the related class of Notes.
(iii) the Trust shall breach or default in the due observance of any
one or more of the negative covenants under the Indenture.
(iv) the Trust shall consent to the appointment of a custodian,
receiver, trustee or liquidator (or other similar official) of
itself, or of a substantial part of its property, or shall admit
in writing its inability to pay its debts generally as they come
due, or a court of competent jurisdiction shall determine that the
Trust is generally not paying its debts as they come due, or the
Trust shall make a general assignment for the benefit of
creditors;
(v) the Trust shall file a voluntary petition in bankruptcy or a
voluntary petition or an answer seeking reorganization in a
proceeding under any bankruptcy laws (as now or hereafter in
effect) or an answer admitting the material allegation of a
petition filed against the Trust in any such proceeding, or the
Trust shall, by voluntary petition, answer or consent, seek relief
under the provisions of any now existing or future bankruptcy or
other similar law providing for the reorganization or winding-up
of debtors, or providing for an agreement, composition, extension
or adjustment with its creditors;
(vi) an order, judgment or decree shall be entered in any proceeding by
any court of competent jurisdiction appointing, without the
consent (express or legally implied) of the Trust, a custodian,
receiver, trustee or liquidator (or other similar official) of the
Trust or any substantial part of its property, or sequestering any
substantial part of its respective property, and any such order,
judgment or decree or appointment or sequestration shall remain in
force undismissed, unstayed or unvacated for a period of ninety
(90) days after the date of entry thereof; or
(vii) a petition against the Trust in a proceeding under applicable
bankruptcy laws or other insolvency laws, as now or hereafter in
effect, shall be filed and shall not be stayed, withdrawn or
dismissed within ninety (90) days thereafter, or if, under the
provisions of any law providing for reorganization or winding-up
of debtors which may apply to the Trust, any court of competent
jurisdiction shall assume jurisdiction, custody or control of the
Trust or any substantial part of its
<PAGE>
property, and such jurisdiction, custody or control shall remain
in force unrelinquished, unstayed or unterminated for a period of
ninety (90) days.
Reports to Noteholders
Pursuant to the Indenture, on each Distribution Date the Indenture
Trustee will deliver to the Servicer, the Note Insurer, the Depositor and each
holder of a Note or a Trust Certificate a written report (the "Indenture
Trustee's Remittance Report") containing information including, without
limitation, the amount of the distribution on such Distribution Date, the
amount of such distribution allocable to principal and allocable to interest,
the aggregate outstanding principal balance of the Notes as of such
Distribution Date, the amount of any Insured Payment included in such
distributions on such Distribution Date and such other information as required
by the Indenture.
Amendment
The Indenture may be amended from time to time by the Trust and the
Indenture Trustee by written agreement, upon the prior written consent of the
Note Insurer, without notice to, or consent of, the holder of the Notes, to
cure any ambiguity, to correct or supplement any provisions herein, to comply
with any changes in the Code, or to make any other provisions with respect to
matters or questions arising under the Indenture which shall not be
inconsistent with the provisions of the Indenture; provided, that such action
shall not, as evidenced by an opinion of counsel delivered to, but not obtained
at the expense of, the Indenture Trustee, adversely affect in any material
respect the interests of any holder of the Notes; provided, further, that no
such amendment shall reduce in any manner the amount of, or delay the timing
of, payments received on Mortgage Loans which are required to be distributed on
any Note without the consent of the holder of such Note, or change the rights
or obligations of any other party to the Indenture without the consent of such
party.
The Indenture may be amended from time to time by the Trust and the
Indenture Trustee with the consent of the Note Insurer, and the holders of the
majority of the percentage interest of the Notes and Trust Certificates for the
purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Indenture or of modifying in any manner the rights
of the holders; provided, however, that no such amendment shall reduce in any
manner the amount of, or delay the timing of, payments received on Mortgage
Loans which are required to be distributed on any Note without the consent of
the holder of such Note or reduce the percentage for each class whose holders
are required to consent to any such amendment without the consent of the
holders of 100% of each class of Notes affected thereby.
The Unaffiliated Seller's Agreement and the Sale and Servicing
Agreement contain substantially similar restrictions regarding amendment.
SERVICING OF THE MORTGAGE LOANS
The Servicer
ABC will act as the Servicer of the Mortgage Loan pools. Upland and
NJMIC will act as Subservicers with respect to a portion of the Mortgage Loans.
See "The Originators, the Seller, the Servicer and the Subservicer" herein.
Servicing Fees and Other Compensation and Payment of Expenses
As compensation for its activities as Servicer under the Sale and
Servicing Agreement, the Servicer shall be entitled with respect to each
Mortgage Loan to the Servicing Fee, which shall be payable monthly from amounts
on deposit in the Collection Account. The "Servicing Fee" shall be an amount
equal to interest at one-twelfth of the Servicing Fee Rate for such Mortgage
Loan on the outstanding principal balance of such Mortgage Loan. The "Servicing
Fee Rate" with respect to each Mortgage Loan will be 0.50% per annum. In
addition, the Servicer shall be entitled to receive, as additional servicing
compensation, to the extent permitted
<PAGE>
by applicable law and the related mortgage notes, any late payment charges,
assumption fees, prepayment fees or similar items. The Servicer shall also be
entitled to withdraw from the Collection Account any net interest or other
income earned on deposits therein. The Servicer shall pay all expenses incurred
by it in connection with its servicing activities under the Sale and Servicing
Agreement and shall not be entitled to reimbursement therefor except as
specifically provided in the Sale and Servicing Agreement.
Periodic Advances and Servicer Advances
Periodic Advances. Subject to the Servicer's determination that such
action would not constitute a Nonrecoverable Advance, the Servicer is required
to make advances ("Periodic Advances") with respect to delinquent payments of
interest (at a rate equal to the interest rate on the related mortgage note,
less the Servicing Fee). Such Periodic Advances by the Servicer are
reimbursable to the Servicer subject to certain conditions and restrictions,
and are intended to provide both sufficient funds for the payment of interest
to the holders of the Notes, plus an additional amount intended to maintain a
specified level of over-collateralization and to pay the Indenture Trustee's
Fees, and the premium due the Note Insurer. Notwithstanding the Servicer's good
faith determination that a Periodic Advance was recoverable when made, if such
Periodic Advance becomes a Nonrecoverable Advance, the Servicer will be
entitled to reimbursement therefor from the Trust Estate. See "Description of
the Notes -- Payments on the Mortgage Loans" herein.
Servicing Advances. Subject to the Servicer's determination that such
action would not constitute a Nonrecoverable Advance and that a prudent
mortgage lender would make a like advance if it or an affiliate owned the
related Mortgage Loan, the Servicer is required to advance amounts with respect
to the Mortgage Loans ("Servicing Advances") constituting "out-of-pocket" costs
and expenses relating to (a) the preservation and restoration of the mortgaged
property, (b) enforcement proceedings, including foreclosures, (c) expenditures
relating to the purchase or maintenance of a first lien not included in the
Trust Estate on the mortgaged property, and (d) certain other customary amounts
described in the Sale and Servicing Agreement. Such Servicing Advances by the
Servicer are reimbursable to the Servicer subject to certain conditions and
restrictions. In the event that, notwithstanding the Servicer's good faith
determination at the time such Servicing Advance was made, that it would not be
a Nonrecoverable Advance, such Servicing Advance becomes a Nonrecoverable
Advance, the Servicer will be entitled to reimbursement therefor from the Trust
Estate.
Recovery of Advances. The Servicer may recover Periodic Advances and
Servicing Advances to the extent permitted by the Sale and Servicing Agreement
or, if not recovered from the mortgagor on whose behalf such Servicing Advance
or Periodic Advance was made, from late collections on the related Mortgage
Loan, including Liquidation Proceeds, Insurance Proceeds and such other amounts
as may be collected by the Servicer from the mortgagor or otherwise relating to
the Mortgage Loan. In the event a Periodic Advance or a Servicing Advance
becomes a Nonrecoverable Advance, the Servicer may be reimbursed for such
advance from the Distribution Account.
The Servicer shall not be required to make any Periodic Advance or
Servicing Advance which it determines would be a nonrecoverable Periodic
Advance or nonrecoverable Servicing Advance (a "Nonrecoverable Advance"). A
Periodic Advance or Servicing Advance is "nonrecoverable" if in the good faith
judgment of the Servicer, such Periodic Advance or Servicing Advance would not
ultimately be recoverable.
Prepayment Interest Shortfalls
Not later than the close of business on the 20th day of each month
(each, a "Servicer Distribution Date"), the Servicer is required to remit to
the Indenture Trustee an amount equal to the lesser of (a) the aggregate of the
Prepayment Interest Shortfalls for the related Distribution Date resulting from
principal prepayments in full during the related Due Period and (b) its
aggregate Servicing Fees received in the related Due Period (such lesser
amount, the "Compensating Interest"), and shall not have the right to
reimbursement therefor. With respect to any Distribution Date, the "Prepayment
Interest Shortfall" will be an amount equal to
<PAGE>
the excess, if any, of (a) thirty (30) days' interest on the outstanding
principal balance of such Mortgage Loans at a per annum rate equal to the
related mortgage interest rate (or at such lower rate as may be in effect for
such Mortgage Loan because of application of the Civil Relief Act, any reduction
as a result of a bankruptcy proceeding (a "Deficient Valuation") and/or any
reduction by a court of the monthly payment due on such Mortgage Loan (a "Debt
Service Reduction")), minus the rate at which the Servicing Fee is calculated,
over (b) the amount of interest actually remitted by the related mortgagor in
connection with such principal prepayment in full, less the Servicing Fee for
such Mortgage Loan in such month. Insured Payments do not cover Prepayment
Interest Shortfalls.
Civil Relief Act Interest Shortfalls
The reduction, if any, in interest payable on the Mortgage Loans in
the applicable Pool attributable to the application of the Civil Relief Act
("Civil Relief Act Interest Shortfalls") will not reduce the amount of Current
Interest due to the holders of the Class A-1 Notes or Class A-2 Notes,
respectively. However, in the event the full amount of Current Interest is not
available on any Distribution Date due to Civil Relief Act Interest Shortfalls
in the applicable Pool, the amount of such shortfall will not be covered by the
Note Insurance Policy. Such shortfalls in Current Interest will be paid from
the Excess Interest, if any, otherwise payable in respect of
over-collateralization, cross-collateralization or to the holder of the Trust
Certificate relating to the applicable Pool. See "Risk Factors -- Legal
Considerations" herein.
Optional Purchase of Defaulted Mortgage Loans
The Seller, or any affiliate of the Seller, has the option, but is not
obligated, to purchase from the Trust any Mortgage Loan ninety (90) days or
more delinquent at a purchase price equal to the outstanding principal balance
thereof as of the date of purchase, plus all accrued and unpaid interest on
such principal balance, computed at the related mortgage interest rate (net of
the related Servicing Fee, if ABC is the Servicer) plus the amount of any
unreimbursed Periodic Advances and Servicing Advances made by the Servicer with
respect to such Mortgage Loan in accordance with the provisions specified in
the Sale and Servicing Agreement.
Servicer Reports
On each Servicer Distribution Date, the Servicer is required to
deliver to the Note Insurer, the Indenture Trustee, and the Collateral Agent, a
report (the "Servicer Remittance Report") setting forth the information
necessary for the Indenture Trustee to make the distributions set forth under
"--Flow of Funds" herein and containing the information to be included in the
Indenture Trustee's Remittance Report for such Distribution Date.
The Servicer is required to deliver to the Note Insurer, the Indenture
Trustee, the Collateral Agent, S&P and Moody's, not later than April 30th of
each year an officer's certificate stating that (i) the Servicer has fully
complied with the servicing provisions of the Sale and Servicing Agreement,
(ii) a review of the activities of the Servicer during the preceding calendar
year and of performance under the Sale and Servicing Agreement has been made
under such officer's supervision, and (iii) to the best of such officer's
knowledge, based on such review, the Servicer has fulfilled all its obligations
under the Sale and Servicing Agreement for such year, or, if there has been a
default in the fulfillment of any such obligation, specifying each such default
known to such officer and the nature and status thereof including the steps
being taken by the Servicer to remedy such default. The first such officer's
certificate shall be delivered by the Servicer in 2000.
Not later than April 30th of each year, the Servicer, at its expense,
is required to cause to be delivered to the Note Insurer, the Indenture
Trustee, the Collateral Agent, S&P and Moody's from a firm of independent
certified public accountants (who may also render other services to the
Servicer) a statement to the effect that such firm has examined certain
documents and records relating to the servicing of the Mortgage Loans during
the preceding calendar year (or such longer period from the closing date to the
end of the following calendar year) and that, on the basis of such examination
conducted substantially in compliance with generally accepted auditing
standards and the requirements of the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for Freddie Mac,
such servicing has been conducted in compliance
<PAGE>
with the Sale and Servicing Agreement except for such significant exceptions or
errors in records that, in the opinion of such firm, generally accepted auditing
standards and the Uniform Single Attestation Program for Mortgage Bankers or the
Audit Program for Mortgages serviced for Freddie Mac require it to report, in
which case such exceptions and errors shall be so reported.
Collection and Other Servicing Procedures
The Servicer will be responsible for making reasonable efforts to
collect all payments called for under the Mortgage Loans and will, consistent
with the Sale and Servicing Agreement, follow such collection procedures as it
follows with respect to loans held for its own account which are comparable to
the Mortgage Loans. Consistent with the above, the Servicer may, in its
discretion, (i) waive any late payment charge and (ii) arrange with a mortgagor
a schedule for the liquidation of delinquencies, subject to the provisions of
the Sale and Servicing Agreement.
If a mortgaged property has been or is about to be conveyed by the
mortgagor, the Servicer will be obligated to accelerate the maturity of the
Mortgage Loan, unless it reasonably believes it is unable to enforce that
Mortgage Loan's "due-on-sale" clause under applicable law. If it reasonably
believes it may be restricted for any reason from enforcing such a
"due-on-sale" clause, the Servicer may enter into an assumption and
modification agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable under the
mortgage note.
Any fee collected by the Servicer for entering into an assumption
agreement will be retained by the Servicer as additional servicing
compensation. In connection with any such assumption, the mortgage interest
rate borne by the mortgage note relating to each Mortgage Loan may not be
decreased. For a description of circumstances in which the Servicer may be
unable to enforce "due-on-sale" clauses, see "Certain Legal Aspects of the
Mortgage Loans and Contracts -- The Mortgage Loans -- 'Due-on-Sale' Clauses" in
the accompanying prospectus.
Hazard Insurance
The Servicer is required to cause to be maintained for each mortgaged
property a hazard insurance policy with coverage which contains a standard
mortgagee's clause in an amount equal to the lesser of (a) the maximum
insurable value of such mortgaged property or (b) the principal balance of such
Mortgage Loan plus the outstanding balance of any mortgage loan senior to such
Mortgage Loan, but in no event may such amount be less than is necessary to
prevent the borrower from becoming a coinsurer thereunder. As set forth above,
all amounts collected by the Servicer under any hazard policy (except for
amounts to be applied to the restoration or repair of the mortgaged property or
released to the borrower in accordance with the Servicer's normal servicing
procedures), to the extent they constitute Net Liquidation Proceeds or
Insurance Proceeds, will ultimately be deposited in the related Distribution
Account. The ability of the Servicer to assure that hazard insurance proceeds
are appropriately applied may be dependent on its being named as an additional
insured under any hazard insurance policy, or upon the extent to which
information in this regard is furnished to the Servicer by a borrower. The Sale
and Servicing Agreement provides that the Servicer may satisfy its obligation
to cause hazard policies to be maintained by maintaining a blanket policy
issued by an insurer acceptable to the Rating Agencies insuring against losses
on the Mortgage Loans. If such blanket policy contains a deductible clause, the
Servicer is obligated to deposit in the related Distribution Account the sums
which would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers under different state laws in accordance
with different applicable state forms and therefore will not contain identical
terms and conditions, the terms thereof are dictated by respective state laws,
and most such policies typically do not cover any physical damage resulting
from the following: war, revolution, governmental actions, floods and
<PAGE>
other weather-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive.
The hazard insurance policies covering the mortgaged properties
typically contain a co-insurance clause which in effect requires the insured at
all times to carry insurance of a specified percentage (generally 80% to 90%)
of the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(i) the replacement cost of the improvements less physical depreciation or (ii)
such proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such improvements.
Since residential and commercial properties, generally, have
historically appreciated in value over time, if the amount of hazard insurance
maintained on the improvements securing the Mortgage Loans were to decline as
the principal balances owing thereon decreased, hazard insurance proceeds could
be insufficient to restore fully the damaged property in the event of a partial
loss.
Realization Upon Defaulted Mortgage Loans
The Servicer will foreclose upon, or otherwise comparably convert to
ownership, mortgaged properties securing such of the Mortgage Loans as come
into default when, in the opinion of the Servicer, no satisfactory arrangements
can be made for the collection of delinquent payments. In connection with such
foreclosure or other conversion, the Servicer will follow such practices as it
deems necessary or advisable and as are in keeping with the Servicer's general
loan servicing activities and the Sale and Servicing Agreement; provided, that
the Servicer will not expend its own funds in connection with foreclosure or
other conversion, correction of a default on a senior mortgage or restoration
of any property unless such foreclosure, correction or restoration is
determined to increase Net Liquidation Proceeds.
Removal and Resignation of the Servicer
The Note Insurer may, pursuant to the Sale and Servicing Agreement,
remove the Servicer upon the occurrence and continuation beyond the applicable
cure period of an event described in clauses (g), (h) or (i) below and the
Indenture Trustee, only at the direction of the Note Insurer or the majority
holders of Notes, with the consent of the Note Insurer (in the case of any
direction of the majority holders), may remove the Servicer upon the occurrence
and continuation beyond the applicable cure period of an event described in
clause (a), (b), (c), (d), (e) or (f) below. Each of the following constitutes
a "Servicer Event of Default":
(a) any failure by the Servicer to remit to the Indenture Trustee any
payment required to be made by the Servicer under the terms of the
Sale and Servicing Agreement (other than Servicing Advances
covered by clause (b) below) which continues unremedied for one
(1) business day after the date upon which written notice of such
failure, requiring the same to be remedied, shall have been given
to the Servicer and the Note Insurer by the Indenture Trustee or
to the Servicer and the Indenture Trustee by the Note Insurer or
the holders of Notes evidencing percentage interests of at least
25%;
(b) the failure by the Servicer to make any required Servicing Advance
which failure continues unremedied for a period of thirty (30)
days after the date on which written notice of such failure,
requiring the same to be remedied, shall have been given to the
Servicer by the Indenture Trustee or to the Servicer and the
Indenture Trustee by any holder of a Note or the Note Insurer;
<PAGE>
(c) any failure on the part of the Servicer duly to observe or perform
in any material respect any other of the covenants or agreements
on the part of the Servicer contained in the Sale and Servicing
Agreement, or the failure of any representation and warranty set
forth in the Sale and Servicing Agreement, which continues
unremedied for a period of thirty (30) days after the date on
which written notice of such failure, requiring the same to be
remedied, shall have been given to the Servicer by the Indenture
Trustee, or to the Servicer and the Indenture Trustee by any
holder of a Note or the Note Insurer;
(d) a decree or order of a court or agency or supervisory authority
having jurisdiction in an involuntary case under any present or
future federal or state bankruptcy, insolvency or similar law or
for the appointment of a conservator or receiver or liquidator in
any insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the
Servicer and such decree or order shall have remained in force,
undischarged or unstayed for a period of sixty (60) days;
(e) the Servicer shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings of or
relating to the Servicer or of or relating to all or substantially
all of the Servicer's property;
(f) the Servicer shall admit in writing its inability generally to pay
its debts as they become due, file a petition to take advantage of
any applicable insolvency or reorganization statute, make an
assignment for the benefit of its creditors, or voluntarily
suspend payment of its obligations;
(g) the delinquency or loss experience of the Mortgage Loans exceeds
certain levels specified in the Sale and Servicing Agreement;
(h) the Note Insurer shall notify the Indenture Trustee of any "event
of default" under the Insurance Agreement; or
(i) the occurrence of an Event of Default under the Indenture.
The Servicer may not assign its obligations under the Sale and
Servicing Agreement nor resign from the obligations and duties thereby imposed
on it except by mutual consent of the Servicer, ABC (if ABC is not the
Servicer), the Note Insurer, the Collateral Agent and the Indenture Trustee, or
upon the determination that the Servicer's duties thereunder are no longer
permissible under applicable law and such incapacity cannot be cured by the
Servicer without the incurrence, in the reasonable judgment of the Note
Insurer, of unreasonable expense. No such resignation shall become effective
until a successor has assumed the Servicer's responsibilities and obligations
in accordance with the Sale and Servicing Agreement.
Upon removal or resignation of the Servicer, the Indenture Trustee
will be the successor servicer (the "Successor Servicer"). The Indenture
Trustee, as Successor Servicer, will be obligated to make Periodic Advances and
Servicing Advances and certain other advances unless it determines reasonably
and in good faith that such advances would not be recoverable. If, however, the
Indenture Trustee is unwilling or unable to act as Successor Servicer, or if
the majority holders (with the consent of the Note Insurer) or the Note Insurer
so requests, the Indenture Trustee shall appoint, or petition a court of
competent jurisdiction to appoint, in accordance with the provisions of the
Sale and Servicing Agreement and subject to the approval of the Note Insurer,
any established mortgage loan servicing institution acceptable to the Note
Insurer having a net worth of not less than $15,000,000 as the Successor
Servicer in the assumption of all or any part of the responsibilities, duties
or liabilities of the Servicer.
<PAGE>
Pursuant to the Sale and Servicing Agreement, the Servicer covenants
and agrees to act as the Servicer for an initial term from the closing date to
June 30, 1999, which term will be extendable by the Note Insurer by notice to
the Indenture Trustee for successive terms of three (3) calendar months each,
until the termination of the Trust Estate. The Servicer will, upon its receipt
of each such notice of extension (a "Servicer Extension Notice"), become bound
for the duration of the term covered by such Servicer Extension Notice to
continue as the Servicer subject to and in accordance with the other provisions
of the Sale and Servicing Agreement. If as of the fifteenth (15th) day prior to
the last day of any term of the Servicer the Indenture Trustee shall not have
received any Servicer Extension Notice from the Note Insurer, the Indenture
Trustee will, within five (5) days thereafter, give written notice of such
non-receipt to the Note Insurer and the Servicer. The Note Insurer has agreed
to extend each three (3) month term of the Servicer, in the absence of an Event
of Default under the Sale and Servicing Agreement.
The Indenture Trustee and any other Successor Servicer in such capacity
is entitled to the same reimbursement for advances and no more than the same
servicing compensation as the Servicer. See "--Servicing and Other Compensation
and Payment of Expenses" herein.
Optional Clean-up Call on the Notes
The Servicer may, at its option, call the Class A-1 Notes or the Class
A-2 Notes, separately, on any Distribution Date (the first date on which such
event occurs for a class the "Note Clean-up Call Date") on which the aggregate
outstanding principal balance of the related class of Notes is equal to or less
than 10% of the aggregate original principal balance of such class of Notes by
depositing an amount equal to the aggregate outstanding principal balance of
such class of Notes on such Distribution Date, plus accrued and unpaid interest
thereon, and any unpaid amounts due the Note Insurer in respect of such class
of Notes into the related Distribution Account (each such call, the "Clean-up
Call"). The mortgage loans relating to such redeemed class will remain pledged
to the Indenture Trustee, for the benefit of the holders of the Notes, to
secure the cross-collateralization obligations of the Trust with regard to the
other class.
Termination; Purchase of Mortgage Loans
The Indenture will terminate upon notice to the Indenture Trustee of
either: (a) the later of the distribution to Noteholders of the final payment
or collection with respect to the last Mortgage Loan (or Periodic Advances of
same by the Servicer), or the disposition of all funds with respect to the last
Mortgage Loan and the remittance of all funds due under the Indenture and the
payment of all amounts due and payable to the Note Insurer, the Collateral
Agent and the Indenture Trustee or (b) mutual consent of the Servicer, the Note
Insurer and all holders in writing; provided, however, that in no event will
the Trust terminate later than twenty-one (21) years after the death of the
last surviving lineal descendant of the person named in the Trust Agreement.
Subject to provisions in the Indenture concerning adopting a plan of
complete liquidation, the Servicer may, at its option and at its sole cost and
expense, terminate the Indenture on any date on which the aggregate principal
balance of the Mortgage Loans is less than 10% of the sum of (x) the aggregate
original principal balance of the Mortgage Loans purchased on the closing date
and (y) the original amount on deposit in the Pre-Funding Accounts, by
purchasing, on the next succeeding Distribution Date, all of the outstanding
Mortgage Loans and REO Properties at a price equal to the sum of (a) 100% of
the principal balance of each outstanding Mortgage Loan and each REO Property,
(b) the greater of (i) the aggregate amount of accrued and unpaid interest on
the Mortgage Loans through the related Due Period and (ii) thirty (30) days'
accrued interest thereon computed at a rate equal to the mortgage interest
rate, in each case net of the Servicing Fee, (c) any unreimbursed amounts due
to the Note Insurer under the Indenture, the Sale and Servicing Agreement, the
Insurance Agreement and, without duplication, accrued and unpaid Insured
Payments, and (d) the Indenture Trustee's Fees. Any such purchase shall be
accomplished by depositing into each Distribution Account the portion of the
purchase price specified above which relates to such class of Notes. No such
termination is permitted without the prior written consent of the Note Insurer
if it would result in a draw on the Note Insurance Policy.
<PAGE>
THE NOTE INSURANCE POLICY
The following summary of the terms of the Note Insurance Policy does
not purport to be complete and is qualified in its entirety by reference to the
Note Insurance Policy. A form of the Note Insurance Policy may be obtained,
upon request, from the Seller.
Simultaneously with the issuance of the Notes, the Note Insurer will
deliver the Note Insurance Policy to the Indenture Trustee, for the benefit of
the holders of the Notes. Under the Note Insurance Policy, the Note Insurer
will irrevocably and unconditionally guarantee payment on each Distribution
Date to the Indenture Trustee, for the benefit of the holders of the Notes, of
the Insured Distribution Amounts with respect to the related class of Notes
calculated in accordance with the original terms of the Notes when issued and
without regard to any amendment or modification of the Notes or the Indenture
except amendments or modifications to which the Note Insurer has given its
prior written consent. The Insured Distribution Amounts for each Distribution
Date and each class of Notes will be the sum of (i) the Interest Distribution
Amount with respect to such Distribution Date and such class, (ii) the
Over-collateralization Deficit, if any, for such Distribution Date and such
class, and (iii) with respect to the Distribution Date which is a final stated
maturity date for a class of Notes, the aggregate outstanding principal balance
of such class of Notes (without duplication to the amount specified in clause
(ii)). In addition, with respect to any Distribution Date occurring on a date
when an event of default under the Insurance Agreement (as described below) has
occurred and is continuing or a date on or after the first date on which a
claim is made under the Note Insurance Policy, the Note Insurer at its sole
option, may pay any or all of the outstanding principal balance of the Notes.
Mortgage Loan Interest Shortfalls will not be covered by payments under the
Note Insurance Policy.
Payment of claims under the Note Insurance Policy will be made by the
Note Insurer following Receipt by the Note Insurer of the appropriate notice
for payment on the later to occur of (a) 12:00 noon, New York City time, on the
second business day following Receipt of such notice for payment, and (b) 12:00
noon, New York City time, on the relevant Distribution Date.
If any payment of an amount guaranteed by the Note Insurer pursuant to
the Note Insurance Policy is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law the Note Insurer will pay
such amount out of the funds of the Note Insurer on the later of (a) the date
when due to be paid pursuant to the Order referred to below or (b) the first to
occur of (i) the fourth business day following Receipt by the Note Insurer from
the Indenture Trustee of (A) a certified copy of the order of the court or
other governmental body which exercised jurisdiction to the effect that a
holder is required to return principal or interest distributed with respect to
a Note during the term of the Note Insurance Policy because such distributions
were avoidable preferences under applicable bankruptcy law (the "Order"), (B) a
certificate of the holder(s) that the Order has been entered and is not subject
to any stay, and (C) an assignment duly executed and delivered by the
holder(s), in such form as is reasonably required by the Note Insurer and
provided to the holder(s) by the Note Insurer, irrevocably assigning to the
Note Insurer all rights and claims of the holder(s) relating to or arising
under the Notes against the debtor which made such preference payment or
otherwise with respect to such preference payment, or (ii) the date of Receipt
by the Note Insurer from the Indenture Trustee of the items referred to in
clauses (A), (B) and (C) above if, at least four (4) business days prior to
such date of Receipt, the Note Insurer shall have Received written notice from
the Indenture Trustee that such items were to be delivered on such date and
such date was specified in such notice. Such payment shall be disbursed to the
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the Order and not to the Indenture Trustee or any holder directly (unless a
holder has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which case
such payment shall be disbursed to the Indenture Trustee for distribution to
such holder upon proof of such payment reasonably satisfactory to the Note
Insurer).
The terms "Receipt" and "Received," with respect to the Note Insurance
Policy, means actual delivery to the Note Insurer and to its fiscal agent
appointed by the Note Insurer at its option, if any, prior to 12:00 p.m.,
<PAGE>
New York City time, on a business day; delivery either on a day that is not a
business day or after 12:00 p.m., New York City time, shall be deemed to be
Receipt on the next succeeding business day. If any notice or certificate given
under the Note Insurance Policy by the Indenture Trustee is not in proper form
or is not properly completed, executed or delivered, it shall be deemed not to
have been Received, and the Note Insurer or the fiscal agent shall promptly so
advise the Indenture Trustee and the Indenture Trustee may submit an amended
notice.
Under the Note Insurance Policy, "Business Day" means any day other
than (i) a Saturday or Sunday or (ii) a day on which banking institutions in
the City of New York, New York or the State of New York, are authorized or
obligated by law or executive order to be closed. The Note Insurer's
obligations under the Note Insurance Policy to make Insured Payments shall be
discharged to the extent funds are transferred to the Indenture Trustee as
provided in the Note Insurance Policy, whether or not such funds are properly
applied by the Indenture Trustee.
The Note Insurer shall be subrogated to the rights of each holder to
receive payments of principal and interest, as applicable, with respect to
distributions on the Notes to the extent of any payment by the Note Insurer
under the Note Insurance Policy. To the extent the Note Insurer makes Insured
Payments, either directly or indirectly (as by paying through the Indenture
Trustee), to the holders of Notes, the Note Insurer will be subrogated to the
rights of the holders, as applicable, with respect to such Insured Payment and
shall be deemed to the extent of the payments so made to be a registered holder
for purposes of payment.
Claims under the Note Insurance Policy will rank equally with any
other unsecured debt and unsubordinated obligations of the Note Insurer except
for certain obligations in respect of tax and other payments to which
preference is or may become afforded by statute. Claims against the Note
Insurer under the Note Insurance Policy constitute pari passu claims against
the general assets of the Note Insurer. The terms of the Note Insurance Policy
cannot be modified or altered by any other agreement or instrument, or by the
merger, consolidation or dissolution of the Trust. The Note Insurance Policy is
governed by the laws of the State of New York. The Note Insurance Policy is not
covered by the Property/Casualty Insurance Security Fund specified in Article
76 of the New York Insurance Law.
To the fullest extent permitted by applicable law, the Note Insurer
agrees under the Note Insurance Policy not to assert, and waives, for the
benefit of each holder, all its rights (whether by counterclaim, setoff or
otherwise) and defenses (including, without limitation, the defense of fraud),
whether acquired by subrogation, assignment or otherwise, to the extent that
such rights and defenses may be available to the Note Insurer to avoid payment
of its obligations under the Note Insurance Policy in accordance with the
express provisions of the Note Insurance Policy.
Pursuant to the terms of the Indenture, unless a Note Insurer Default
exists, the Note Insurer shall be deemed to be the holder of the Notes for all
purposes (other than with respect to payment on the Notes), will be entitled to
exercise all rights of the holders thereunder, without the consent of such
holders, and the holders may exercise such rights only with the prior written
consent of the Note Insurer. In addition, the Note Insurer will, as a
third-party beneficiary to the Indenture, the Sale and Servicing Agreement and
the Unaffiliated Seller's Agreement, have, among others, the following rights:
(i) the right to give notices of breach or to terminate the rights and
obligations of the Servicer under the Sale and Servicing Agreement in the event
of a Servicer Event of Default and to institute proceedings against the
Servicer; (ii) the right to consent to or direct any waivers of defaults by the
Servicer; (iii) the right to remove the Indenture Trustee pursuant to the
Indenture; (iv) the right to direct the actions of the Indenture Trustee during
the continuation of a Servicer default; (v) the right to require the Seller to
repurchase Mortgage Loans for breach of representation and warranty or defect
in documentation; (vi) the right to direct foreclosures upon the failure of the
Servicer to do so in accordance with the Sale and Servicing Agreement; (vii)
the right to direct all matters relating to a bankruptcy or other insolvency
proceeding involving the Seller; and (viii) the right to direct the Indenture
Trustee to investigate certain matters. The Note Insurer's consent will be
required prior to, among other things, (x) the removal of the Indenture
Trustee, (y) the appointment of any successor Indenture Trustee or Servicer or
(z) any amendment to the Indenture or the Sale and Servicing Agreement.
<PAGE>
The Trust, the Depositor, the Seller, the Servicer, the Originators
and the Note Insurer will enter into the Insurance Agreement pursuant to which
the Trust, the Depositor, the Seller, Servicer and the Originators will agree
to reimburse, with interest, the Note Insurer for amounts paid pursuant to
claims under the Note Insurance Policy; provided, the payment obligations shall
be non-recourse obligations with respect to the Depositor, the Seller, the
Originators, the Trust and the Servicer and shall be payable only from monies
available for such payment in accordance with the provisions of the Indenture.
The Servicer will further agree to pay the Note Insurer all reasonable charges
and expenses which the Note Insurer may pay or incur relative to any amounts
paid under the Note Insurance Policy or otherwise in connection with the
transaction and to indemnify the Note Insurer against certain liabilities.
Except to the extent provided therein, amounts owing under the Insurance
Agreement will be payable solely from the Trust Estate. An "event of default"
under the Insurance Agreement will constitute an Event of Default under the
Indenture and a Servicer Event of Default under the Sale and Servicing
Agreement and allow the Note Insurer, among other things, to direct the
Indenture Trustee to terminate the Servicer. An "event of default" under the
Insurance Agreement includes (i) the Originators', the Seller's, the
Depositor's or the Servicer's failure to pay when due any amount owed under the
Insurance Agreement or certain other documents, (ii) the inaccuracy or
incompleteness in any material respect of any representation or warranty of the
Originators, the Seller, the Depositor or the Servicer in the Insurance
Agreement, the Sale and Servicing Agreement, the Indenture or certain other
documents, (iii) the Originators', the Seller's, the Depositor's or the
Servicer's failure to perform or to comply with any covenant or agreement in
the Insurance Agreement, the Sale and Servicing Agreement, the Indenture and
certain other documents, (iv) a finding or ruling by a governmental authority
or agency that the Insurance Agreement, the Sale and Servicing Agreement, the
Indenture or certain other documents are not binding on the Originators, the
Seller, the Depositor or the Servicer, (v) the Originators', the Seller's, the
Depositor's or the Servicer's failure to pay its debts in general or the
occurrence of certain events of insolvency or bankruptcy with respect to the
Seller or the Servicer, and (vi) the occurrence of certain "performance test
violations" designed to measure the performance of the Mortgage Loans.
THE NOTE INSURER
The following information has been obtained from Financial Security
Assurance Inc. (hereinafter in this section, the "Note Insurer" or "Financial
Security") and has not been verified by the Seller, the Originators, the
Servicer, the Depositor or the Underwriter. No representation or warranty is
made by the Seller, the Originators, the Servicer, the Depositor or the
Underwriter with respect thereto.
The Note Insurer
Financial Security is a monoline insurance company incorporated in
1984 under the laws of the State of New York. Financial Security is licensed to
engage in the financial guaranty insurance business in all 50 states, the
District of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities -- thereby enhancing the credit rating of those securities
- -- in consideration for the payment of a premium to the insurer. Financial
Security and its subsidiaries principally insure asset-backed, collateralized
and municipal securities. Asset-backed securities are generally supported by
residential or commercial mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of
general obligation bonds, special revenue bonds and other special obligations
of state and local governments. Financial Security insures both newly issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy Financial Security's underwriting criteria.
<PAGE>
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings,
Inc., MediaOne Capital Corporation, The Tokio Marine and Fire Insurance Co.,
Ltd. and XL Capital Ltd. No shareholder of Holdings is obligated to pay any
debt of Financial Security or any claim under any insurance policy issued by
Financial Security or to make any additional contribution to the capital of
Financial Security.
The principal executive offices of Financial Security are located at
350 Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100.
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by Financial
Security or any of its domestic or Bermuda operating insurance company
subsidiaries are generally reinsured among such companies on an agreed-upon
percentage substantially proportional to their respective capital, surplus and
reserves, subject to applicable statutory risk limitations. In addition,
Financial Security reinsures a portion of its liabilities under certain of its
financial guaranty insurance policies with other reinsurers under various
treaties and on a transaction-by-transaction basis. Such reinsurance is
utilized by Financial Security as a risk management device and to comply with
statutory and rating agency requirements; it does not alter or limit Financial
Security's obligations under any financial guaranty insurance policy.
Ratings
Financial Security's insurance financial strength is rated "Aaa" by
Moody's and Financial Security's insurer financial strength is rated "AAA" by
S&P and Standard & Poor's (Australia) Pty. Ltd. Financial Security's
claims-paying ability is rated "AAA" by Fitch IBCA, Inc. and Japan Rating and
Investment Information, Inc. Such ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies.
Capitalization
The following table sets forth the capitalization of Financial
Security and its wholly owned subsidiaries on the basis of generally accepted
accounting principles as of September 30, 1998, as well as such capitalization
as adjusted to give effect to certain transactions entered into during November
1998:
<TABLE>
<CAPTION>
September 30, 1998
------------------
Actual As Adjusted (1)
------ ---------------
(Unaudited)
(In thousands)
<S> <C> <C>
Deferred Premium Revenue (net of prepaid reinsurance premiums)..... $ 480,089 480,089
--------------- $-------------
Surplus Notes...................................................... 50,000 130,000
--------------- ---------------
Minority Interest.................................................. -- 20,000
--------------- --------------
Shareholder's Equity:
Common Stock.................................................. 15,000 15,000
--------------- --------------
Additional Paid-In Capital.................................... 614,787 684,787
--------------- --------------
Accumulated other Comprehensive Income (net of deferred
income taxes)................................................. 41,923 41,923
--------------- --------------
Accumulated Earnings.......................................... 326,145 326,145
--------------- --------------
Total Shareholder's Equity......................................... $ 997,855 $ 1,067,855
---------------- --------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
September 30, 1998
------------------
Actual As Adjusted (1)
------ ---------------
(Unaudited)
(In thousands)
<S> <C> <C>
Total Deferred Premium Revenue, Surplus Notes, Minority Interest
and Shareholder's Equity........................................... $ 1,527,944 $ 1,697,944
--------------- --------------
</TABLE>
------------------
(1) Adjusted to give effect to the November 1998 (a) purchase by Holdings of
$80 million of surplus notes from Financial Security in connection with
the formation of a new indirect Bermuda subsidiary of Financial Security,
initially capitalized with $100 million, including a $20 million minority
interest owned by XL Capital Ltd., and (b) contribution by Holdings to
the capital of Financial Security of approximately $70 million,
representing a portion of the proceeds from the sale by Holdings of $100
million of 6.950% Senior Quarterly Income Debt Securities due 2098.
For further information concerning Financial Security, see the
Consolidated Financial Statements of Financial Security and Subsidiaries, and
the notes thereto, incorporated by reference herein. Financial Security
financial statements are included as exhibits to the annual report on Form 10-K
and Quarterly Reports on Form 10-Q filed with the Commission by Holdings and
may be reviewed at the EDGAR website maintained by the Commission and at
Holdings's website, http://www.FSA.com. Copies of the statutory quarterly and
annual statements filed with the State of New York Insurance Department by
Financial Security are available upon request to the State of New York
Insurance Department.
Insurance Regulation
Financial Security is licensed and subject to regulation as a
financial guaranty insurance corporation under the laws of the State of New
York, its state of domicile. In addition, Financial Security and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial
guaranty insurance corporation licensed to do business in the State of New
York, Financial Security is subject to Article 69 of the New York Insurance Law
which, among other things, limits the business of each such insurer to
financial guaranty insurance and related lines, requires that each such insurer
maintain a minimum surplus to policyholders, establishes contingency, loss and
unearned premium reserve requirements for each such insurer, and limits the
size of individual transactions ("single risks") and the volume of transactions
("aggregate risks") that may be underwritten by each such insurer. Other
provisions of the New York Insurance Law, applicable to non-life insurance
companies such as Financial Security, regulate, among other things, permitted
investments, payment of dividends, transactions with affiliates, mergers,
consolidations, acquisitions or sales of assets and incurrence of liability for
borrowings.
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, a Note will be directly related to the rate of payment of
principal of the Mortgage Loans, including for this purpose voluntary payment
in full of Mortgage Loans prior to stated maturity, liquidations due to
defaults, casualties and condemnations, and repurchases of or substitutions for
Mortgage Loans by ABC or an affiliate of ABC as required or permitted under the
Indenture, the Sale and Servicing Agreement or the Unaffiliated Seller's
Agreement.
The actual rate of principal prepayments on pools of mortgage loans is
influenced by a variety of economic, tax, geographic, demographic, social,
legal and other factors and has fluctuated considerably in recent years. In
addition, the rate of principal prepayments may differ among pools of mortgage
loans at any time because of specific factors relating to the mortgage loans in
the particular pool, including, among other things, the age of the mortgage
loans, the geographic locations of the properties securing the loans and the
extent of the mortgagors' equity in such properties, and changes in the
mortgagors' housing needs, job transfers and unemployment.
<PAGE>
The rate of prepayments with respect to conventional mortgage loans
has fluctuated significantly in recent years. In general, if prevailing
interest rates fall significantly below the interest rates of certain mortgage
loans at the time of origination, such mortgage loans may be subject to higher
prepayment rates than if prevailing rates remain at or above those at the time
such mortgage loans were originated. Conversely, if prevailing interest rates
rise appreciably above the interest rates of certain mortgage loans at the time
of origination, such mortgage loans may experience a lower prepayment rate than
if prevailing rates remain at or below those at the time such mortgage loans
were originated. However, there can be no assurance that the Mortgage Loans
will conform to the prepayment experience of conventional mortgage loans or to
any past prepayment experience or any published prepayment forecast. No
assurance can be given as to the level of prepayments on Mortgage Loans that
the Trust Estate will experience.
As indicated above, if purchased at other than par, the yield to
maturity on a Note will be affected by the rate of the payment of principal on
the related Mortgage Loans. If the actual rate of payments on the related
Mortgage Loans is slower than the rate anticipated by an investor who purchases
a Note at a discount, the actual yield to such investor will be lower than such
investor's anticipated yield. If the actual rate of payments on the related
Mortgage Loans is faster than the rate anticipated by an investor who purchases
a Note at a premium, the actual yield to such investor will be lower than such
investor's anticipated yield.
The final stated maturity date is expected to be May 25, 2030 for the
Class A-1 Notes and the Class A-2 Notes (each, a "Final Stated Maturity Date").
Each such Final Stated Maturity Date was calculated using the assumption that
such Final Stated Maturity Date is thirteen (13) months after the final stated
maturity date of the Mortgage Loan having the latest maturity date in each pool
and assuming a Subsequent Mortgage Loan having a final stated maturity date of
April 25, 2029 is purchased by the Trust and included in each Pool. The
weighted average life of the Notes is likely to be shorter than would be the
case if payments actually made on the related Mortgage Loans conformed to the
foregoing assumptions, and the final Distribution Date with respect to any
class of the Notes could occur significantly earlier than the Final Stated
Maturity Date because (i) prepayments (including, for this purpose, prepayments
attributable to foreclosure, liquidation, repurchase and the like) on Mortgage
Loans are likely to occur, (ii) thirteen (13) months have been added to obtain
the Final Stated Maturity Date above, (iii) the over-collateralization
provisions of the transaction result in the application of Excess Interest to
the payment of principal; (iv) the Servicer may cause a liquidation of the
Trust Estate when the aggregate outstanding principal amount of the Mortgage
Loans is less than 10% of the sum of (a) the aggregate principal balance of the
Mortgage Loans purchased on the closing date and (b) the original amount on
deposit in the Pre-Funding Accounts; and (v) the Servicer may, at its option,
call the Class A-1 Notes or the Class A-2 Notes, separately, when the aggregate
outstanding principal balance of the Class A-1 Notes or the Class A-2 Notes,
respectively, is equal to or less than 10% of the aggregate original principal
balance of the Class A-1 Notes or the Class A-2 Notes, respectively.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal
of such security is scheduled to be repaid to an investor. The weighted average
life of the Notes will be influenced by the rate at which principal of the
related Mortgage Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
liquidations due to default).
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The model used in this prospectus supplement,
Home Equity Prepayment ("HEP"), is a prepayment assumption (the "Prepayment
Assumption") which represents an assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of mortgage loans for the
life of such mortgage loans. For example, 25% HEP assumes a constant prepayment
rate of 2.5% per annum of the then outstanding principal balance of the
Mortgage Loans in the first month of the life of the Mortgage Loans and an
additional 2.5% per annum in each month thereafter up to and including the
tenth month. Beginning in the eleventh month and in each month thereafter
during the life of the Mortgage Loans, 25% HEP assumes a constant prepayment
rate of 25% per annum. As used in the table below, 0% Prepayment Assumption
assumes prepayment rates equal to 0% of the Prepayment Assumption, i.e., no
prepayments on the mortgage loans
<PAGE>
having the characteristics described below. The Prepayment Assumption does not
purport to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of mortgage loans, including
the Mortgage Loans.
The following table has been prepared on the basis of the following
assumptions (collectively, the "Modeling Assumptions"): (i) The Mortgage Loans
prepay at the indicated percentage of the Prepayment Assumption, (ii)
distributions on the Notes are received in cash on the 25th day of each month
commencing in April 1999, (iii) no defaults or delinquencies in, or
modifications, waivers or amendments respecting the payment by the mortgagors
of principal and interest on the Mortgage Loans occur, (iv) scheduled payments
are assumed to be received on the last day of each month commencing in March
1999 (or as set forth in the following table) and prepayments represent
payments in full of individual Mortgage Loans and are assumed to be received on
the last day of each month, commencing in March 1999 (or as set forth in the
following table) and include thirty (30) days' interest thereon, (v) the Notes
are purchased on March 30, 1999, (vi) the Specified Over-collateralized Amount
is as set forth in the Indenture, (vii) on each Distribution Date, all Excess
Interest for each pool is applied to build up over-collateralization necessary
to satisfy the Specified Over-Collateralized Amount for each pool (except for
the first Distribution Date, on which the amount of Excess Interest applied to
build up over-collateralization is zero), (ix) the Mortgage Loans in Pool I
consist of six (6) Mortgage Loans having the following characteristics:
<TABLE>
<CAPTION>
Principal Mortgage Net Mortgage Original Amortizing Remaining Amortizing Remaining Term to
Balance ($) Interest Rate (%) Interest Rate (%) Term (in months) Term (in months) Maturity (in months)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$6,260,577.04 14.015% 13.515% 167 166 166
4,357,151.65 10.314 9.814 239 239 239
33,719,586.03 10.646 10.146 360 359 359
39,867,493.10 11.169 10.669 345 345 208
8,581,415.75(1) 11.089 10.589(2) 321 321 321
7,716,288.99(1) 11.169 10.669(2) 345 345 208
</TABLE>
(1) Assumes transfer to the Trust in April 1999 of Mortgage Loans with the
characteristics set forth above. The actual characteristics of such
Mortgage Loans may vary from such assumptions. Scheduled payments are
assumed to be received on the last day of each month commencing in
April 1999. Prepayments are assumed to be received on the last day of
each month commencing in April 1999 and include 30 days' interest
thereon.
(2) During the first Due Period, interest is assumed to be available for
payment to the Notes and the Note Insurer at an assumed net mortgage
interest rate of 6.745%.
(x) The Mortgage Loans in Pool II consists of six (6) Mortgage Loans having the
following characteristics:
<TABLE>
<CAPTION>
Principal Mortgage Net Mortgage Original Amortizing Remaining Amortizing Remaining Term to
Balance ($) Interest Rate (%) Interest Rate (%) Term (in months) Term (in months) Maturity (in months)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$14,046,447.77 12.896% 12.396% 171 171 171
8,029,742.32 11.158 10.658 249 248 248
20,225,343.56 10.775 10.275 360 360 360
28,493,658.53 11.715 11.215 321 320 185
8,187,393.61(1) 11.552 11.052(2) 276 276 276
5,514,901.65(1) 11.715 11.215(2) 321 321 186
</TABLE>
(1) Assumes transfer to the Trust in April 1999 of Mortgage Loans with the
characteristics set forth above. The actual characteristics of such
Mortgage Loans may vary from such assumptions. Scheduled payments are
assumed to be received on the last day of each month commencing in
April 1999. Prepayments are assumed to be received on the last day of
each month commencing in April 1999 and include 30 days' interest
thereon.
(2) During the first Due Period, interest is assumed to be available for
payment to the Notes and the Note Insurer at an assumed net mortgage
interest rate of 6.780%.
The foregoing Modeling Assumptions are assumptions and are not
necessarily indicative of actual performance.
Based upon the foregoing Modeling Assumptions, the tables below
indicate the weighted average life and earliest retirement date of the Notes
assuming that the related Mortgage Loans prepay according to the indicated
percentages of the Prepayment Assumption.
<PAGE>
Weighted Average Lives
<TABLE>
<CAPTION>
Class A-1 Notes
Prepayment Weighted Average Earliest
Assumption (HEP) Life in Years(1)(2) Retirement Date(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
0% 16.43 9/25/25
15% 5.08 11/25/11
20% 3.91 12/25/08
25% 3.16 12/25/06
30% 2.65 8/25/05
35% 2.28 8/25/04
</TABLE>
<TABLE>
<CAPTION>
Class A-2 Notes
Prepayment Weighted Average Earliest
Assumption (HEP) Life in Years(1)(2) Retirement Date(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
0% 14.19 10/25/23
15% 4.92 5/25/11
20% 3.83 9/25/08
25% 3.12 11/25/06
30% 2.62 7/25/05
35% 2.25 7/25/04
</TABLE>
(1) The weighted average life of each class of Notes is determined by (a)
multiplying the amount of each principal payment used to retire the
related class of Notes by the number of years from the closing date to
the final Distribution Date when the related class of Notes is fully
retired; (b) adding the results; and (c) dividing the sum by the
original principal balance of such class.
(2) Determined assuming the call of the Class A-1 Notes or the Class A-2
Notes, respectively, occurs as stated herein.
----------------------
There is no assurance that prepayments will occur or, if they do
occur, that they will occur at any percentage of HEP.
The Indenture provides that none of the Note Insurer, the Trust, the
Owner Trustee, the Indenture Trustee, the Seller, the Depositor, the
Originators or the Servicer will be liable to any holder for any loss or damage
incurred by such holder as a result of any difference in the rate of return
received by such holder as compared to the applicable Note Rate, with respect
to any holder of Notes upon reinvestment of the funds received in connection
with any premature repayment of principal on the Notes, including any such
repayment resulting from any prepayment by the mortgagor, any liquidation of
such Mortgage Loan, or any repurchase of or substitution for any Mortgage Loan
by the Seller or the Servicer.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of certain material federal income tax
consequences of the purchase, ownership and disposition of the Notes is to be
considered only in connection with "Certain Federal Income Tax Consequences" in
the accompanying prospectus. The discussion herein and in the accompanying
prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
accompanying prospectus does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Notes.
Treatment of the Notes
The Originators, the Seller, the Depositor and the Trust agree, and
the holders of the Notes will agree by their purchase of the Notes, to treat
the Notes as indebtedness for all federal, state and local income tax purposes.
There are no regulations, published rulings or judicial decisions involving the
characterization for
<PAGE>
federal income tax purpose of securities with terms substantially the same as
the Notes. In general, whether instruments such as the Notes constitute
indebtedness for federal income tax purposes is a question of fact, the
resolution of which is based primarily upon the economic substance of the
instruments and the transaction pursuant to which they are issued rather than
merely upon the form of the transaction or the manner in which the instruments
are labeled. The Internal Revenue Service (the "IRS") and the courts have set
forth various factors to be taken into account in determining, for federal
income tax purposes, whether an instrument constitutes indebtedness and whether
a transfer of property is a sale because the transferor has relinquished
substantial incidents of ownership in the property or whether such transfer is a
borrowing secured by the property. On the basis of its analysis of such factors
as applied to the facts and its analysis of the economic substance of the
contemplated transaction, Dewey Ballantine LLP, special tax counsel to the
Depositor ("Tax Counsel"), is of the opinion that, for federal income tax
purposes, the Notes will be treated as indebtedness, and not as an ownership
interest in the Mortgage Loans, or an equity interest in the sub-trust of the
Trust consisting of the Pool I Mortgage Loans or the Pool II Mortgage Loans, as
the case may be, or in a separate association taxable as a corporation or other
taxable entity. See "Certain Federal Income Tax Consequences -- Debt Securities"
in the accompanying prospectus.
If the Notes are characterized as indebtedness, interest paid or
accrued on a Note will be treated as ordinary income to holders of the Notes
and principal payments on a Note will be treated as a return of capital to the
extent of the holder's basis in the Note allocable thereto. An accrual method
taxpayer will be required to include in income interest on the Notes when
earned, even if not paid, unless it is determined to be uncollectible. The
Indenture Trustee, on behalf of the Trust, will report to the holders of the
Notes of record and the IRS the amount of interest paid and original issue
discount, if any, accrued on the Notes to the extent required by law.
Possible Alternative Characterizations of the Notes. Although, as
described above, it is the opinion of Tax Counsel that for federal income tax
purposes, the Notes will be characterized as indebtedness, such opinion is not
binding on the IRS and thus no assurance can be given that such a
characterization will prevail. If the IRS successfully asserted that the Notes
did not represent debt for federal income tax purposes, holders of the Notes
would likely be treated as owning an interest in a partnership and not an
interest in an association (or a publicly traded partnership) taxable as a
corporation or a taxable mortgage pool. If the holders of the Notes were
treated as owing an equitable interest in a partnership, the partnership itself
would not be subject to federal income tax; rather each partner would be taxed
individually on their respective distributive share of the partnership's
income, gain, loss, deductions and credits. The amount, timing and
characterization of items of income and deduction for a holder of a Note would
differ if the Notes were held to constitute partnership interests, rather than
indebtedness. Since the parties will treat the Notes as indebtedness for
federal income tax purposes, none of the Servicer, the Indenture Trustee or the
Owner Trustee will attempt to satisfy the tax reporting requirements that would
apply under this alternative characterization of the Notes. Investors that are
foreign persons are strongly advised to consult their own tax advisors in
determining the federal, state, local and other tax consequences to them of the
purchase, ownership and disposition of the Notes.
Special Tax Attributes. The Notes will not represent "real estate
assets" for purposes of Section 856(c)(4)(A) of the Code or "[l]oans ...
secured by an interest in real property" within the meaning of Section
7701(a)(19)(C) of the Code.
Discount and Premium. It is not anticipated that the Notes will be
issued with any original issue discount. See "Certain Federal Income Tax
Consequences -- Discount and Premium -- Original Issue Discount" in the
accompanying prospectus. The prepayment assumption that will be used for
purposes of computing original issue discount, if any, for federal income tax
purposes is the Prepayment Assumption using 25% HEP. See "Prepayment and Yield
Considerations" herein. In addition, a subsequent purchaser who buys a Note for
less than its principal amount may be subject to the "market discount" rules of
the Code. See "Certain Federal Income Tax Consequences -- Discount and Premium
- -- Market Discount" in the accompanying prospectus. A subsequent purchaser who
buys a Note for more than its principal amount may
<PAGE>
be subject to the "market premium" rules of the Code. See "Certain Federal
Income Tax Consequences -- Discount and Premium -- Securities Purchased at a
Premium" in the accompanying prospectus.
Sale or Redemption of the Notes. If a Note is sold or retired, the
seller will recognize gain or loss equal to the difference between the amount
realized on the sale and such holder's adjusted basis in the Note. See "Certain
Federal Income Tax Consequences -- Debt Securities -- Sale or Exchange" in the
accompanying prospectus.
Other Matters. For a discussion of backup withholding and taxation of
foreign investors in the Notes, see "Certain Federal Income Tax Consequences --
Backup Withholding" and " --Foreign Investors -- Grantor Trust, REMIC Regular
and Debt Securities" in the accompanying prospectus.
Treatment of the Trust
Tax Counsel is of the opinion that neither the sub-trust of the Trust
consisting of the Pool I Mortgage Loans nor the sub-trust of the Trust
consisting of the Pool II Mortgage Loans will be characterized as an
association (or a publicly traded partnership) taxable as a corporation or a
taxable mortgage pool.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain restrictions on (a) employee benefit
plans (as defined in Section 3(3) of ERISA), (b) plans described in section
4975(e)(1) of the Code, including individual retirement accounts or Keogh
plans, (c) any entities whose underlying assets include plan assets by reason
of a plan's investment in such entities (each a "Plan") and (d) persons who
have certain specified relationships to such Plans ("Parties-in-Interest" under
ERISA and "Disqualified Persons" under the Code). Section 406 of ERISA
prohibits Plans from engaging in certain transactions involving the assets of
such Plans with Parties in Interest with respect to such Plans, unless a
statutory or administrative exemption is applicable to the transaction. Excise
taxes under Section 4975 of the Code, penalties under Section 502 of ERISA and
other penalties may be imposed on Plan fiduciaries and Parties-in-Interest (or
Disqualified Persons) that engage in "prohibited transactions" involving assets
of a Plan. Individual retirement arrangements and other plans that are not
subject to ERISA, but are subject to Section 4975 of the Code, and Disqualified
Persons with respect to such arrangements and plans, also may be subject to
excise taxes and other penalties if they engage in prohibited transactions.
Moreover, based on the reasoning of the United States Supreme Court in John
Hancock Life Ins. Co. v. Harris Trust and Sav. Bank, 114 S. Ct. 517 (1993), an
insurance company's general account may be deemed to include assets of the
Plans investing in the general account (e.g., through the purchase of an
annuity contract). ERISA also imposes certain duties on persons who are
fiduciaries of Plans subject to ERISA.
Certain transactions involving the purchase, holding or transfer of
the Notes might be deemed to constitute prohibited transactions under ERISA and
the Code if assets of the Trust were deemed to be assets of a Plan. Under a
regulation issued by the United States Department of Labor (the "Plan Assets
Regulation"), the assets of the Trust would be treated as plan assets of a Plan
for the purposes of ERISA and the Code only if the Plan acquires an "equity
interest" in the Trust and none of the exceptions contained in the Plan Assets
Regulation is 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. Although there is little guidance on the subject, the Seller believes
that the Notes should be treated as indebtedness without substantial equity
features for purposes of the Plan Assets Regulation. This determination is
based in part on the traditional debt features of the Notes, including the
reasonable expectation of purchasers of the Notes that the Notes will be repaid
when due, as well as the absence of conversion rights, warrants and other
typical equity features. The debt treatment of the Notes could change if the
Trust incurs losses. However, even if the Notes are treated as debt for such
purposes, the acquisition or holding of Notes by or on behalf of a Plan could
be considered to give rise to a prohibited transaction if the
<PAGE>
Issuer or any of its affiliates is or becomes a Party in Interest or a
Disqualified Person with respect to such Plan. In such case, certain exemptions
from the prohibited transaction rules could be applicable depending on the type
and circumstances of the plan fiduciary making the decision to acquire a note.
Included among these exemptions are: Prohibited Transaction Class Exemption
("PTCE") 90-1, regarding investments by insurance company pooled separate
accounts; PTCE 95-60, regarding investments by insurance company general
accounts; PTCE 91-38, regarding investments by bank collective investment funds;
PTCE 96-23, regarding transactions affected by in-house asset managers; and PTCE
84-14, regarding transactions effected by "qualified professional asset
managers." Each investor using the assets of a Plan which acquires the Notes, or
to whom the Notes are transferred, will be deemed to have represented that the
acquisition and continued holding of the Notes will be covered by one of the
exemptions listed above or by another Department of Labor Class Exemption.
LEGAL INVESTMENT
The Notes will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement
dated March 11, 1999 (the "Underwriting Agreement") between the Depositor and
Prudential Securities Incorporated (the "Underwriter"), the Depositor has
agreed to sell to the Underwriter and the Underwriter has agreed to purchase
from the Depositor the Notes. The Depositor is obligated to sell, and the
Underwriter is obligated to purchase, all of the Notes offered hereby if any
are purchased.
The Underwriter has advised the Depositor that it proposes to offer
the Notes purchased by the Underwriter for sale from time to time in one or
more negotiated transactions or otherwise, at market prices prevailing at the
time of sale, at prices related to such market prices or at negotiated prices.
The Underwriter may effect such transactions by selling such Notes to or
through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter or
purchasers of the Notes for whom they may act as agent. Any dealers that
participate with the Underwriter in the distribution of the Notes purchased by
the Underwriter may be deemed to be underwriters, and any discounts or
commissions received by them or the Underwriter and any profit on the resale of
Notes by them or the Underwriter may be deemed to be underwriting discounts or
commissions under the Securities Act of 1933, as amended (the "Securities
Act").
In connection with the offering of the Notes, the Underwriter and its
affiliates may engage in transactions that stabilize, maintain or otherwise
affect the market price of the Notes. Such transactions may include
stabilization transactions effected in accordance with Rule 104 of Regulation
M, pursuant to which such person may bid for or purchase the Notes for the
purpose of stabilizing its market price. Any of the transactions described in
this paragraph may result in the maintenance of the price of the Notes at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are taken,
may be discontinued at any time without notice.
For further information regarding any offer or sale of the Notes
pursuant to this prospectus supplement and the accompanying prospectus, see
"Plan of Distribution" in the accompanying prospectus.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
Prudential Securities Incorporated is an affiliate of the Depositor.
<PAGE>
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc.
and subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1997, incorporated by
reference in this prospectus supplement, have been incorporated herein in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
RATINGS
It is a condition to the original issuance of the Notes that they will
receive ratings of "AAA" by S&P and "Aaa" by Moody's. The ratings assigned to
the Notes will take into account the claims-paying ability of the Note Insurer.
Explanations of the significance of such ratings may be obtained from Moody's
Investors Service, Inc., 99 Church Street, New York, New York 10007 and
Standard & Poor's Rating Services, 25 Broadway, New York, New York 10004. Such
ratings will be the views only of such rating agencies. There is no assurance
that any such ratings will continue for any period of time or that such ratings
will not be revised or withdrawn. Any such revision or withdrawal of such
ratings may have an adverse effect on the market price of the Notes.
LEGAL MATTERS
Certain legal matters in connection with the Notes will be passed upon
for the Originators, the Seller and the Servicer by Blank Rome Comisky &
McCauley LLP, Philadelphia, Pennsylvania, for the Trust by Stradley, Ronon,
Stevens & Young, LLP, Wilmington, Delaware, and for the Depositor and the
Underwriter by Dewey Ballantine LLP, New York, New York.
<PAGE>
INDEX OF PRINCIPAL DEFINED TERMS
ABC..............................................S-15
ABFS.............................................S-32
Accounts.........................................S-48
Accrual Period....................................S-2
Available Amount...........................S-49, S-52
Balloon Loans....................................S-10
Bank Alliance Program............................S-32
Business Day.....................................S-65
Capitalized Interest Accounts.....................S-5
Cede.............................................S-40
CEDEL............................................S-40
CEDEL Participants...............................S-42
Chase............................................S-40
Civil Relief Act.................................S-13
Civil Relief Act Interest Shortfalls.............S-59
Class A-1 Interest Distribution Amount...........S-52
Class A-1 Mortgage Loan Interest Shortfalls......S-52
Class A-1 Note Rate..............................S-52
Class A-1 Notes...................................S-1
Class A-2 Interest Distribution Amount...........S-53
Class A-2 Mortgage Loan Interest Shortfalls......S-53
Class A-2 Note Rate..............................S-53
Class A-2 Notes...................................S-1
Clean-up Call....................................S-63
CLTV.............................................S-17
Collateral Agent.................................S-15
Collection Account...............................S-48
Cooperative......................................S-42
Cross-collateralization Reserve Account...........S-3
Current Interest.................................S-53
Current Interests.................................S-2
Cut-Off Date.....................................S-16
Debt Service Reduction...........................S-59
Deficient Valuation..............................S-59
Definitive Note..................................S-41
Depositor........................................S-15
Depository.......................................S-40
Distribution Account.............................S-48
Distribution Date.................................S-2
DTC..............................................S-40
Due Period.......................................S-50
Eligible Account.................................S-48
ERISA............................................S-73
Euroclear........................................S-40
Euroclear Operator...............................S-42
Euroclear Participants...........................S-42
European Depositaries............................S-41
Event of Default.................................S-56
Excess Interest.......................S-1, S-49, S-53
Excess Over-collateralized Amount................S-50
Final Stated Maturity Date.......................S-69
Financial Intermediary...........................S-41
Financial Security...............................S-66
First Liens......................................S-18
Foreclosure Profits..............................S-53
HEP..............................................S-69
Holdings.........................................S-67
Home Equity Prepayment...........................S-69
Indenture........................................S-16
Indenture Trust Office...........................S-39
Indenture Trustee..........................S-15, S-39
Indenture Trustee's Fees.........................S-52
Indenture Trustee's Mortgage File................S-45
Indenture Trustee's Remittance Report............S-57
Indirect Participants............................S-41
Insurance Agreement..............................S-16
Insurance Proceeds...............................S-53
Insured Distribution Amount......................S-53
Insured Payment..................................S-53
Interest Distribution Amount.....................S-53
IRS..............................................S-72
Liquidated Loan Loss.......................S-50, S-54
Liquidation Expenses.............................S-53
Liquidation Proceeds.............................S-54
LTV..............................................S-46
Modeling Assumptions.............................S-70
Moody's..........................................S-15
Mortgage Loan Interest Shortfalls................S-54
Mortgage Loans....................................S-1
Net Foreclosure Profits..........................S-54
Net Liquidation Proceeds.........................S-54
Net Mortgage Loan Interest Shortfalls............S-54
Net REO Proceeds.................................S-54
NJMIC............................................S-15
Nonrecoverable Advance...........................S-58
Note Clean-up Call Date..........................S-63
Note Insurance Policy.......................S-4, S-15
Note Insurer..........................S-4, S-15, S-66
Note Rate.........................................S-1
Notes.............................................S-1
Order............................................S-64
Originators......................................S-15
Over-collateralization Deficit.............S-51, S-54
Over-collateralization Increase Amount.....S-50, S-54
Over-collateralization Reduction Amount....S-50, S-54
Over-collateralized Amount.......................S-49
Owner Trust Office...............................S-39
Owner Trustee..............................S-15, S-39
Participants.....................................S-41
Periodic Advances................................S-58
Permitted Investments............................S-40
Plan.............................................S-73
<PAGE>
Plan Assets Regulation...........................S-73
Pool I............................................S-1
Pool II...........................................S-1
Pre-Funding Accounts..............................S-5
Pre-Funding Period...............................S-44
Prepayment Assumption............................S-69
Prepayment Interest Shortfall....................S-58
Principal Distribution Amount....................S-54
Principal Prepayments............................S-48
PTCE.............................................S-74
Qualified Substitute Mortgage Loan...............S-46
Rating Agencies..................................S-15
Receipt..........................................S-64
Received.........................................S-64
Record Date.......................................S-2
Reimbursement Amount.............................S-52
REO Proceeds.....................................S-55
REO Property.....................................S-38
Rules............................................S-41
S&P..............................................S-15
Sale and Servicing Agreement.....................S-16
Second Liens.....................................S-18
Securities Act...................................S-74
Seller...........................................S-15
Servicer....................................S-5, S-15
Servicer Distribution Date.................S-48, S-58
Servicer Event of Default........................S-61
Servicer Extension Notice........................S-63
Servicer Remittance Amount.......................S-48
Servicer Remittance Report.......................S-59
Servicing Advances...............................S-58
Servicing Fee....................................S-57
Servicing Fee Rate...............................S-57
Shortfall Amount.................................S-51
SMMEA............................................S-74
Specified Over-collateralized Amount.......S-50, S-56
Specified Reserve Amount.........................S-51
Statistical Calculation Date.....................S-16
Statistical Calculation Date Aggregate
Principal Balance.............................S-9
Subsequent Mortgage Loans........................S-17
Subsequent Transfer Date.........................S-32
Subservicer......................................S-15
Substitution Adjustment..........................S-46
Successor Servicer...............................S-62
Tax Counsel......................................S-72
Terms and Conditions.............................S-43
Trust.......................................S-1, S-15
Trust Agreement..................................S-16
Trust Certificates................................S-1
Trust Estate......................................S-1
Unaffiliated Seller's Agreement..................S-16
Underwriter......................................S-74
Underwriting Agreement...........................S-74
Upland...........................................S-15
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
Prudential Securities Secured Financing Corporation
(Depositor)
Pass-Through Certificates
(Issuable in Series)
- --------------------------------------------------------------------------------
Prudential Securities Secured Financing Corporation (the
"Depositor") may sell from time to time under this Prospectus and related
Prospectus Supplements Pass-Through Certificates or Notes (such Pass-Through
Certificates or such Notes, together the "Certificates"), issuable in series
(each, a "Series") consisting of one or more classes (each, a "Class") of
Certificates on terms to be determined at the time of sale.
The Certificates of a Series will evidence the beneficial
ownership interests in a separate trust formed by the Depositor for the benefit
of the holders of the related Series of Certificates (the
"Certificateholders"). Unless otherwise specified in the applicable Prospectus
Supplement, the property of each such trust (for each Series, the "Trust Fund")
will consist of a segregated pool (the "Pool") of (i) promissory notes or other
evidences of indebtedness secured by first, second or more junior liens on fee
simple or leasehold interests in the Mortgaged Properties (as defined herein),
including installment sale contracts with respect to any such properties, or
participation in any of the foregoing (the "Mortgage Loans") or (ii)
manufactured housing conditional sales contracts and installment agreements
(the "Contracts"). The Mortgage Loans or Contracts included in a Trust Fund
will have been acquired from one or more affiliates of the Depositor or from
one or more Unaffiliated Sellers (as defined herein) by the Depositor and
conveyed by the Depositor to such Trust Fund. The Mortgage Loans included in a
Mortgage Pool or the Contracts included in a Contract Pool of a Series will be
serviced by a servicer (the "Servicer") described in the applicable Prospectus
Supplement.
The Certificates of a Series will consist of (i) one or more
Classes of Certificates representing fractional undivided interests in all the
principal payments and the interest payments, to the extent of the related Net
Mortgage Rates (as defined herein) or Net Contract Rates (as defined herein),
on the related Mortgage Loans or Contracts ("Standard Certificates"), (ii) one
or more Classes of Certificates ("Multi-Class Certificates") each of which will
be assigned a principal balance (a "Stated Amount") based on the value of
future cash flows from the related Trust Fund without distinction as to
principal or interest or may have no principal amount but may instead be
assigned a notional amount (a "Notional Amount") on which interest accrues, and
each of which will bear interest on the Stated Amount or Notional Amount
thereof at a fixed rate (which may be zero) specified in, or a variable rate
determined as specified in, the applicable Prospectus Supplement (the "Interest
Rate") or (iii) one or more Classes of Certificates representing fractional
undivided interests in all or specified portions of the principal payments
and/or interest payments, to the extent of the related Net Mortgage Interest
Rate, on the related Mortgage Loans ("Stripped Certificates"). Any Class of
Certificates may be divided into two or more subclasses (each, a "Subclass")
and any Class of Standard Certificates may be divided into two or more
Subclasses that consist of Multi-Class Certificates. In addition, a Series of
Certificates for which a REMIC (as defined herein) election has been made will
also include one Class or one Subclass of Residual Certificates (as defined
herein).
(Cover continued on next page)
-----------------------------------
THE ASSETS OF THE RELATED TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
SECURITIES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE DEPOSITOR, THE SERVICER OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH
HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE CERTIFICATES NOR
THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR BY THE SELLER, THE SERVICER OR ANY OF THEIR
AFFILIATES, EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT. SEE "RISK
FACTORS" PAGE 13.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
-----------------------------------
The Certificates may be sold from time to time by the
Depositor through dealers or agents designated from time to time, through
underwriting syndicates led by one or more managing underwriters or through one
or more underwriters acting alone. See "Plan of Distribution." Affiliates of
the Depositor may from time to time act as agents or underwriters in connection
with the sale of Certificates. The terms of a particular offering will be set
forth in the Prospectus Supplement related to such offering.
Retain this Prospectus for future reference. This Prospectus
may not be used to consummate sales of Certificates unless accompanied by the
Prospectus Supplement relating to the offering of such Certificates.
<PAGE>
(Cover continued from previous page)
Each Series of Certificates will include one or more classes.
The Certificates of any particular class may represent beneficial ownership
interests in the related Mortgage Loans held by the related Trust Fund, or may
represent debt secured by such Mortgage Loans, as described herein and in the
related Prospectus Supplement. Any Series of Certificates may include one or
more Classes or Subclasses of Certificates (the "Subordinated Certificates")
that are subordinate in right of distributions to such rights of one or more of
other Classes or Subclasses of such Series (the "Senior Certificates"). If
specified in the applicable Prospectus Supplement, the relative interests of
the Senior Certificates and the Subordinated Certificates of a Series in the
Trust Fund may be subject to adjustment from time to time on the basis of
distributions received in respect thereof (the "Shifting Interest
Certificates"). If so specified in the applicable Prospectus Supplement, credit
support may also be provided for any Series of Certificates in the form of a
guarantee, letter of credit, mortgage pool insurance policy or other form of
credit enhancement as described herein.
Neither the Mortgage Loans nor the Contracts will be
guaranteed or insured by any governmental agency or instrumentality or, except
as specified in the related Prospectus Supplement, by any other person. The
only obligations of the Depositor with respect to a Series of Certificates will
be pursuant to certain limited representations and warranties made by the
Depositor, to the extent described herein and in the related Prospectus
Supplement. The Servicer with respect to a Series of Certificates relating to
Mortgage Loans or Contracts will be named in the related Prospectus Supplement.
The principal obligations of a Servicer will be limited to certain obligations
pursuant to certain representations and warranties and to its contractual
servicing obligations.
An election may be made to treat each Trust Fund (or one or
more segregated pools of assets therein) underlying a Series which includes
MultiClass Certificates as a "real estate mortgage investment conduit" (a
"REMIC") or, on or after September 1, 1997, as a Financial Asset Securitization
Investment Trust ("FASIT") for federal income tax purposes. Series of
Certificates for which a REMIC election has been made will include one or more
Classes or Subclasses which constitute "regular interests" in the REMIC
("Regular Certificates") and one Class or Subclass with respect to each REMIC
which constitutes the "residual interest" therein (the "Residual
Certificates"). Series of Certificates for which a FASIT election has been made
will include one or more Classes or Subclasses which constitute "regular
interests" ("FASIT Regular Securities") and/or "high-yield interests" ("FASIT
High-Yield Securities") and one Class or Subclass with respect to each FASIT
which constitutes the "ownership interest" therein (the "FASIT Ownership
Interest"). Alternatively, a Trust Fund may be treated as a grantor trust or as
a partnership for federal income tax purposes, or may be treated for federal
income tax purposes as a mere security device which constitutes a collateral
arrangement for the issuance of debt. See "Certain Federal Income--Tax
Consequences."
There will have been no public market for the Certificates of
any Series prior to the offering thereof. No assurance can be given that such a
market will develop, or that if such a market does develop, it will provide
Certificateholders with liquidity of investment or will continue for the life
of the Certificates.
<PAGE>
REPORTS
In connection with each distribution and annually,
Certificateholders will be furnished with statements containing information
with respect to principal and interest payments and the related Trust Fund, as
described herein and in the applicable Prospectus Supplement for such Series.
Any financial information contained in such reports will not have been examined
or reported upon by an independent public accountant. See "Servicing of the
Mortgage Loans and Contracts--Reports to Certificateholders." The Servicer for
each Series relating to Mortgage Loans or Contracts will furnish periodic
statements setting forth certain specified information to the related Trustee
and, in addition, annually will furnish such Trustee with a statement from a
firm of independent public accounts with respect to the examination of certain
documents and records relating to the servicing of the Mortgage Loans or
Contracts in the related Trust Fund. See "Servicing of the Mortgage Loans and
Contracts--Reports to the Trustee" and "Evidence as to Compliance." Copies of
the monthly and annual statements provided by the Servicer to the Trustee will
be furnished to Certificateholders of each Series upon request addressed to
Prudential Securities Secured Financing Corporation, One New York Plaza, 15th
Floor, New York, New York 10292, Attention: Joseph Donovan (212) 778-1000.
AVAILABLE INFORMATION
The Depositor has filed a Registration Statement (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with the Securities and Exchange Commission (the
"Commission") with respect to the Certificates offered pursuant to this
Prospectus. This Prospectus contains, and the Prospectus Supplement for each
Series of Certificates will contain, a summary of the material terms of the
documents referred to herein and therein, but neither contains nor will contain
all of the information set forth in the Registration Statement of which this
Prospectus is a part. For further information, reference is made to such
Registration Statement and any amendments thereof and to the exhibits thereto.
Copies of the Registration Statement may be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 upon
payment of the prescribed charges, or may be examined free of charge at the
Commission's offices, 450 Fifth Street, N.W., Washington, D.C. 20549 or at the
regional offices of the Commission located at Room 1400, 75 Park Place, New
York, New York 10007 and Northwestern Atrium Center, 500 West Madison Street,
Suite 400, Chicago, Illinois 60661-2511.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and
reports filed or caused to be filed by the Depositor with respect to a Trust
Fund pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior
to the termination of any offering of Certificates evidencing interests
therein. The Depositor will provide or cause to be provided without charge to
each person to whom this Prospectus is delivered in connection with the
offering of one or more Classes of Certificates, a list identifying, all
filings with respect to a Trust Fund pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act, since the Depositor's latest fiscal year covered by
its annual report on Form 10-K and a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to one or more of such Classes of such Certificates, other than
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed to: Prudential Securities Secured Financing Corporation, One New
York Plaza, 15th Floor, New York, New York 10292, telephone number (212)
778-1000, Attention: Joseph Donovan.
3
<PAGE>
SUMMARY OF PROSPECTUS
The following is qualified in its entirety by reference to
the detailed information appearing elsewhere in this Prospectus, and by
reference to the information with respect to each Series of Certificates
contained in the related Prospectus Supplement. Certain capitalized terms used
and not otherwise defined herein shall have the meanings given elsewhere in
this Prospectus. An index indicating where certain terms used herein are
defined appear at the end of this Prospectus.
Title of Securities..................Pass-Through Certificates (Issuable in
Series).
Depositor ...........................Prudential Securities Secured Financing
Corporation, formerly known as P-B Secured
Financing Corporation (the "Depositor"), a
Delaware corporation, is a wholly owned
limited purpose finance subsidiary of
Prudential Securities Group Inc. The
Depositor's principal executive offices are
located at One New York Plaza, 15th Floor,
New York, New York 10292, and its telephone
number is (212) 778-1000. See "The
Depositor."
Unaffiliated Sellers.................The Depositor will acquire the Mortgage
Loans and Contracts from one or more
institutions unaffiliated with the
Depositor ("Unaffiliated Sellers").
Trustee .............................The Trustee with respect to a Series will
be specified in the related Prospectus
Supplement.
Servicer ............................The Servicer for each Series relating to
Mortgage Loans or Contracts will be
specified in the applicable Prospectus
Supplement. The Servicer will service the
Mortgage Loans or Contracts comprising each
Trust Fund and administer each Trust Fund
pursuant to a separate Pooling and
Servicing Agreement (each, a "Pooling and
Servicing Agreement"). The Servicer may
subcontract all or any portion of its
obligations as Servicer under each Pooling
and Servicing Agreement to qualified
subservicers (each, a "Sub-Servicer") but
the Servicer will not be relieved thereby
of its liability with respect thereto. See
"Servicing of the Mortgage Loans and
Contracts."
The Trust Funds .....................The Trust Fund for each Series of
Certificates may consist of any combination
of Mortgage Pool and/or Contract Pools
(each as defined herein) and certain other
related property, as specified herein and
in the applicable Prospectus Supplement.
Unless otherwise specified in the
applicable Prospectus Supplement, each
Mortgage Pool will be comprised of Mortgage
Loans or Contracts or participations
therein.
Unless otherwise specified in the
applicable Prospectus Supplement, each
Contract Pool will consist of fixed or
adjustable rate manufactured housing
installment sale, contracts and installment
loan agreements. Each Contract may be
secured by a new or used Manufactured Home
(as defined herein).
4
<PAGE>
Neither the Certificates, the interest
thereon, nor the underlying Mortgage Loans
are guaranteed by the United States nor do
they constitute debts or obligations of the
United States or any agency or
instrumentality of the United States.
The particular characteristics of each
Trust Fund will be set forth in the
applicable Prospectus Supplement.
Description of the
Certificates.........................The Certificates issued by any Trust
Fund may represent beneficial ownership
interests in the related Mortgage Loans
held by the related Trust Fund, or may
represent debt secured by such Mortgage
Loans, as described herein and in the
related Prospectus Supplement. Certificates
which represent beneficial ownership
interests in the related Trust Fund will be
referred to as "Certificates" in the
related Prospectus Supplement; Certificates
which represent debt issued by the related
Trust Fund will be referred to as "Notes"
in the related Prospectus Supplement.
With respect to Notes issued by the related
Trust Fund, the related Trust Fund will
enter into an indenture by and between such
Trust Fund and the trustee named on such
indenture, as set forth in the related
Prospectus Supplement.
Each Series of Certificates will be
recourse to the assets of the related Trust
Fund only. The sole source of payment for
any Series of Certificates will be the
assets of the related Trust Fund. The
Certificates will not be obligations,
either recourse or non-recourse (except for
certain non-recourse debt described under
"Certain Federal Income Tax Consequences"),
of the Depositor, the Servicer or any
Person other than the related Trust Fund.
In the case of Certificates that represent
beneficial ownership interest in the
related Trust Fund, such Certificates will
represent the ownership of such Trust Fund;
with respect to Certificates which are
Notes, such Notes will be secured by the
related Trust Fund. Notwithstanding the
foregoing, and as to be described in the
related Prospectus Supplement, certain
types of credit enhancement, such as a
financial guaranty insurance policy or a
letter of credit, may constitute a full
recourse obligation of the issue of such
credit enhancement.
Each Series will consist of one or more
Classes of Certificates which may be (i)
Standard Certificates, (ii) Multi-Class
Certificates or (iii) Stripped
Certificates. Any Class of Certificates may
be divided into two or more Subclasses and
any Class of Standard Certificates may be
divided into Subclasses which consist of
Multi-Class Certificates. The Depositor
will cause each Trust Fund (or one or more
segregated pools of assets therein) with
respect to a Series which includes Standard
Certificates redeemable on a random lot
basis, Multi-Class Certificates or Shifting
Interest Certificates to elect to be
treated as a REMIC. In addition, any Series
with respect to which an election has been
made to treat the Trust Fund (or one or
more segregated pools of assets
5
<PAGE>
therein) as a REMIC will include one Class
or one Subclass of Residual Certificates as
to each REMIC. The Residual Certificates of
a Series, if offered hereby, will represent
the right to receive distributions with
respect to the related Trust Fund as
specified in the related Prospectus
Supplement. Unless otherwise specified in
the applicable Prospectus Supplement, the
Certificates will be offered only in fully
registered form.
A. Standard
Certificates...................Unless otherwise provided in the applicable
Prospectus Supplement, Standard
Certificates of a Series will each evidence
a fractional undivided beneficial ownership
interest in the related Trust Fund and will
entitle the holder thereof to its
proportionate share of a percentage of all
of the payments and other receipts with
respect to the principal of and interest
(to the extent of the applicable Net
Mortgage Rate or Net Contract Rate) on the
related Mortgage Loans or Contracts. If
specified in the applicable Prospectus
Supplement, with respect to any Class of
Standard Certificates of a Series for which
a REMIC election has been made,
distributions of principal may be allocated
among the Certificateholders of such Class
on a pro rata, random lot or such other
basis as is specified in such Prospectus
Supplement.
B. Multi-Class
Certificates...................Multi-Class Certificates of a Series will
consist of Certificates each of which
evidences a beneficial ownership interest
in the related Trust Fund and will be
assigned a Stated Amount, which may be
based on an amount of principal of the
underlying Mortgage Loans or Contracts or
on the value of future cash flows from the
related Trust Fund without distinction as
to principal or interest and an Interest
Rate which may be a fixed rate (which may
be zero) or a variable rate or which will
otherwise accrue interest as specified in
the applicable Prospectus Supplement. The
holder of a Multi-Class Certificate will be
entitled to receive, to the extent funds
are available therefor, interest payments
on the outstanding Stated Amount thereof at
the applicable Interest Rate or as
otherwise specified in the applicable
Prospectus Supplement and distributions in
reduction of such Stated Amount determined
in the manner and applied in the priority
set forth in the applicable Prospectus
Supplement.
C. Stripped
Certificates...................Stripped Certificates will each evidence
an undivided beneficial ownership interest
in the related Trust Fund and will entitle
the holder thereof to its proportionate
share of a specified portion (which may be
zero) of principal payments and/or a
specified portion (which may be zero) of
interest payments (to the extent of the
applicable Net Mortgage Interest Rate) on
the related Mortgage Loans.
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Pooling and Servicing
Agreement............................The Certificates of each Series will
be issued pursuant to a Pooling and
Servicing Agreement among the Depositor,
the Servicer, if any, and the Trustee.
Cut-Off Date ........................The date specified in the applicable
Prospectus Supplement.
Distribution Dates ..................Unless otherwise specified in the
applicable Prospectus Supplement,
distributions on Standard Certificates or
Stripped Certificates will be made on the
25th day (or, if such day is not a business
day, the business day following the 25th
day) of each month, commencing with the
month following the month in which the
applicable Cut-Off Date occurs.
Distributions on Multi-Class Certificates
will be made monthly, quarterly, or
semiannually, on the dates specified in the
applicable Prospectus Supplement. The dates
upon which such distributions are made are
referred to herein as the "Distribution
Dates."
Record Dates ........................Distributions will be made on each
Distribution Date set forth in the
Prospectus Supplement to Certificateholders
of record at the close of business on the
last business day of the month preceding
the month in which such Distribution Date
occurs or such other date as may be set
forth in the Prospectus Supplement (the
"Record Date").
Interest ............................With respect to a Series of Certificates
consisting of Standard Certificates or
Stripped Certificates, unless otherwise
specified in the applicable Prospectus
Supplement, interest on the related
Mortgage Loans, Mortgage Certificates or
Contracts at the applicable pass-through
rate (the "Pass-Through Rate"), as set
forth in the applicable Prospectus
Supplement, will be passed through monthly
on each Distribution Date to holders
thereof, in accordance with the particular
terms of each such Certificate. Holders of
Multi-Class Certificates will receive
distributions of interest at the applicable
Interest Rate, if any, on the Stated Amount
or Notional Amount of such Certificates, or
as otherwise specified in the applicable
Prospectus Supplement, without regard to
the Net Mortgage Rates or Net Contract
Rates on the underlying Mortgage Loans or
Contracts. Unless otherwise specified in
the applicable Prospectus Supplement, the
"Net Mortgage Rate" for each Mortgage Loan
in a given period will equal the Mortgage
Rate for such Mortgage Loan in such period
(the "Mortgage Rate") less any Fixed
Retained Yield, and less the Servicing Fee
(as defined herein). Unless otherwise
specified in the applicable Prospectus
Supplement, the "Net Contract Rate" for
each Contract in a given period will equal
the Contract Rate for such Contract in such
period (the "Contract Rate") less any Fixed
Retained Yield, and less the Servicing Fee.
The "Servicing Fee" with respect to each
Mortgage Loan or Contract is an amount
reserved for servicing such Mortgage Loan
or Contract and administration of the
related Trust Fund.
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Principal (including
prepayments).........................With respect to a Series of Certificates
consisting of Standard Certificates or
Stripped Certificates, unless otherwise
specified in the applicable Prospectus
Supplement, principal payments (including
prepayments received on each related
Mortgage Loan or Contract during the month
preceding the month in which a Distribution
Date occurs) will be passed through to
holders on such Distribution Date, in
accordance with the particular terms of
each such Certificate.
Distributions in
Reduction of
Stated Amount........................With respect to each Class and Subclass of
Multi-Class Certificates, distributions in
reduction of Stated Amount will be made on
each Distribution Date to the holders of
the Certificates of such Class and Subclass
then entitled to receive such distributions
until the aggregate amount of such
distributions have reduced the Stated
Amount of each such Class and Subclass of
Certificates to zero. Distributions in
reduction of Stated Amount will be
allocated among the Classes or Subclasses
of such Certificates in the manner
specified in the applicable Prospectus
Supplement. Distributions in reduction of
Stated Amount with respect to any Class or
Subclass of Multi-Class Certificates of a
Series may be made on a pro rata or random
lot or such other basis as is specified in
the applicable Prospectus Supplement. See
"Description of the
Certificates--Distributions to Multi-Class
Certificateholders."
Forward Commitments;
Pre-Funding..........................A Trust Fund may enter into an agreement
(each, a "Forward Purchase Agreement") with
the Depositor whereby the Depositor will
agree to transfer additional Mortgage Loans
to such Trust Fund following the date on
which such Trust Fund is established and
the related Certificates are issued. Any
Forward Purchase Agreement will require
that any Mortgage Loans so transferred to a
Trust Fund conform to the requirements
specified in such Forward Purchase
Agreement. If a Forward Purchase Agreement
is to be utilized, and unless otherwise
specified in the related Prospectus
Supplement, the related Trustee will be
required to deposit in a segregated account
(each, a "Pre-Funding Account") all or a
portion of the proceeds received by the
Trustee in connection with the sale of one
or more classes of Certificates of the
related Series; subsequently, the
additional Mortgage Loans will be
transferred to the related Trust Fund in
exchange for money released to the
Depositor from the related Pre-Funding
Account in one or more transfers. Each
Forward Purchase Agreement will set a
specified period during which any such
transfers must occur. The Forward Purchase
Agreement or the related Pooling and
Servicing Agreement will require that, if
all moneys originally deposited to such
Pre-Funding Account are not so used by the
end of such specified period, then any
remaining moneys will be applied as a
mandatory prepayment of the related class
or classes of Certificates as specified in
the related Prospectus Supplement.
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Credit Enhancement
A. By Subordination................A Series of Certificates may include one
or more Classes or Subclasses of Senior
Certificates and one or more Classes or
Subclasses of Subordinated Certificates.
The rights of the holders of Subordinated
Certificates of a Series to receive
distributions with respect to the related
Mortgage Loans or Contracts will be
subordinated to such rights of the holders
of the Senior Certificates of the same
Series to the extent (the "Subordinated
Amount") specified herein and in the
applicable Prospectus Supplement. This
subordination is intended to enhance the
likelihood of the timely receipt by the
Senior Certificateholders of their
proportionate share of scheduled monthly
principal and interest payments on the
related Mortgage Loans or Contracts and to
reduce the likelihood that the Senior
Certificateholders will experience losses.
The Prospectus Supplement for Series of
Certificates including a subordination
feature may also specify the allocation of
distributions and priority of payments of
principal, or Stated Amount, and interest
among one or more Classes or Subclasses of
Senior Certificates of such Series. The
protection afforded to Senior
Certificateholders of a Series will be
effected by a preferential right, as
specified in the applicable Prospectus
Supplement, of such Senior
Certificateholders to receive, on any
Distribution Date, current distributions on
the related Mortgage Loans or Contracts and
(if so specified in the applicable
Prospectus Supplement) by the establishment
of a reserve fund (the "Subordination
Reserve Fund") for such Series. Any
Subordination Reserve Fund may be funded
initially with a deposit of cash,
instruments or securities in an amount
specified in the applicable Prospectus
Supplement and, if so specified in the
related Prospectus Supplement, may be
augmented by the retention of distributions
which otherwise would have been available
for distribution to the Subordinated
Certificateholders in the manner and to the
extent specified in the applicable
Prospectus Supplement. The Subordination
Reserve Fund for a Series may be funded and
maintained in such other manner as is
specified in the related Prospectus
Supplement. The maintenance of any
Subordination Reserve Fund would be
intended to preserve the availability of
the subordination provided by the
Subordinated Certificates and to provide
liquidity, but in certain circumstances the
Subordination Reserve Fund could be
depleted and, if other amounts available
for distribution are insufficient,
shortfalls in distributions to the Senior
Certificateholders could result. Unless
otherwise specified in the related
Prospectus Supplement, until the
Subordinated Amount is reduced to zero,
Senior Certificateholders will be entitled
to receive the amount of any such
shortfall, together with interest at the
applicable Pass-Through Rate, Interest
Rate, or at such other rate specified in
the applicable Prospectus Supplement, as
the case may be, on the next Distribution
Date. Senior Certificateholders will bear
their pro rata share of any losses realized
on the related Mortgage Loans or Contracts
in excess of the applicable Subordinated
Amount. If so specified in the applicable
Prospectus Supplement, the protection
afforded to
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holders of Senior Certificates of a Series
by the subordination of certain rights of
holders of Subordinated Certificates of
such Series to distributions on the related
Mortgage Loans or Contracts may be effected
by a method other than that described
above, such as, in the event that the
applicable Trust Fund (or one or more
segregated pools of assets therein) elects
to be treated as a REMIC, the reallocation
from time to time, on the basis of
distributions previously received, of the
respective percentage interests of the
Senior Certificates and the Subordinated
Certificates in the related Trust Fund. See
"Description of the
Certificates--Distributions to Percentage
Certificateholders--Shifting Interest
Certificates."
B. By Other Methods ................The Certificates of any Series, or any one
or more Classes thereof, may be entitled to
the benefits of a guarantee, letter of
credit, mortgage pool insurance policy,
surety bond, reserve fund, spread account,
application of excess interest to principal
or other form of credit enhancement as
specified in the applicable Prospectus
Supplement. See "Description of the
Certificates" and "Credit Support."
Advances ............................Under the Pooling and Servicing Agreement
for each Series relating to Mortgage Loans
or Contracts, unless otherwise provided in
the applicable Prospectus Supplement, the
related Servicer will be obligated to make
advances of cash ("Advances") to the
Certificate Account (as defined herein) in
the event of delinquencies in payments on
the Mortgage Loans or Contracts to the
extent described herein and in the
applicable Prospectus Supplement and only
to the extent that the Servicer determines
such Advances would be recoverable from
future payments and collections on the
Mortgage Loans or Contracts. Any Advances
made by the Servicer will ultimately be
reimbursable to the Servicer from the
Certificate Account. See "Servicing of the
Mortgage Loans and Contracts--Advances and
Limitations Thereon."
Early Termination ...................If so specified in the related Prospectus
Supplement, a Series of Certificates may be
subject to early termination through the
repurchase of the assets in the related
Trust Fund by the person or persons, under
the circumstances and in the manner
specified in such Prospectus Supplement.
See "Prepayment and Yield Considerations."
Legal Investment ....................If so specified in the Prospectus
Supplement, one or more classes of
Certificates offered pursuant to this
Prospectus will constitute "mortgage
related securities" under the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA"), so long as they are rated in one
of the two highest rating categories by at
least one "nationally recognized
statistical rating organization." As
"mortgage related securities," such
Certificates offered pursuant to this
Prospectus will constitute legal
investments for certain types of
institutional investors to the extent
provided in SMMEA subject, in any case, to
any other regulations which may govern
investments by such institutional
investors. Since certain other classes of
Certificates offered pursuant to this
Prospectus will not either
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<PAGE>
represent interests in, or be secured by,
qualifying mortgage loans, such
Certificates will not constitute "mortgage
related securities" under SMMEA. No
representation is made as to the
appropriate characterization of any
Certificates under any laws relating to
investment restrictions, as to which
investors should consult their legal
advisors. See "Legal Investment".
ERISA Limitations....................A fiduciary of any employee benefit plan
subject to the fiduciary responsibility
provisions of the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), including the prohibited
transaction rules thereunder, and to the
corresponding provisions of the Internal
Revenue Code of 1986, as amended (the
"Code"), should carefully review with its
own legal advisors whether the purchase or
holding of Certificates could give rise to
a transaction prohibited or otherwise
impermissible under ERISA or the Code. See
"ERISA Considerations."
Certain Federal Income
Tax Consequences.....................Securities of each series offered
hereby will, for federal income tax
purposes, constitute either (i) interests
("Grantor Trust Securities") in a Trust
treated as a grantor trust under applicable
provisions of the Code, (ii) "regular
interests" ("REMIC Regular Securities") or
"residual interests" ("REMIC Residual
Securities") in a Trust treated as a REMIC
(or, in certain instances, containing one
or more REMIC's) under Sections 860A
through 860G of the Code, (iii) debt issued
by a Trust ("Debt Securities") (iv)
interests in a Trust which is treated as a
partnership ("Partnership Interests"), or,
(v) on or after September 1, 1997, "regular
interests" ("FASIT Regular Securities"),
"high-yield interests" ("FASIT High-Yield
Securities") or an ownership interest in a
Trust treated as a FASIT (or, in certain
circumstances containing one or more FASITs
under Sections 860H through 860L of the
Code).
Investors are advised to consult their tax
advisors and to review "Certain Federal
Income Tax Consequences" herein and in the
related Prospectus Supplement.
Rating...............................At the date of issuance of each
Series of Certificates, the Certificates
offered pursuant to the related Prospectus
Supplement will be rated in one of the four
highest rating categories by at least one
statistical rating organization that has
been requested by the Depositor to rate
such Certificates (a "Rating Agency"). Such
ratings will address, in the opinion of
such Rating Agency, the likelihood that the
related Trust Fund will be able to make
timely payment of all amounts due on the
related Series of Certificates in
accordance with the terms thereof. Such
ratings will neither address any prepayment
or yield considerations applicable to any
Certificates nor constitute a
recommendation to buy, sell or hold any
Certificates.
The ratings expected to be received with
respect to any Certificates will be set
forth in the related Prospectus Supplement.
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following
factors in connection with the purchase of the Certificates.
Limited Liquidity. There can be no assurance that a secondary
market for the Certificates of any series or class will develop or, if it does
develop, that it will provide Certificateholders with liquidity of investment
or that it will continue for the life of the Certificates of any series. The
Prospectus Supplement for any series of Certificates may indicate that an
underwriter specified therein intends to establish a secondary market in such
Certificates; however, no underwriter will be obligated to do so. Unless
otherwise specified in the related Prospectus Supplement, the Certificates will
not be listed on any securities exchange.
Limited Obligations. The Certificates will not represent an
interest in or obligation, either recourse or non-recourse (except for certain
non-recourse debt described under "Certain Federal Income Tax Consequences"),
of the Depositor, the Servicer or any person other than the related Trust. The
only obligations of the foregoing entities with respect to the Certificates or
the Mortgage Loans will be the obligations (if any) of the Depositor and the
Servicer pursuant to certain limited representations and warranties made with
respect to the Mortgage Loans, the Servicer's servicing obligations under the
related Pooling and Servicing Agreement (including its limited obligation, if
any, to make certain advances in the event of delinquencies on the Mortgage
Loans, but only to the extent deemed recoverable) and, if and to the extent
expressly described in the related Prospectus Supplement, certain limited
obligations of the Depositor, Servicer, applicable Sub-Servicer, or another
party in connection with a purchase obligation ("Purchase Obligation") or an
agreement to purchase or act as remarketing agent with respect to a Convertible
Mortgage Loan upon conversion to a fixed rate. Notwithstanding the foregoing,
and as to be described in the related Prospectus Supplement, certain types of
Credit Enhancement, such as a financial guaranty insurance policy or a letter
of credit, may constitute a full recourse obligation of the issuer of such
Credit Enhancement. Except as described in the related Prospectus Supplement,
neither the Certificates nor the underlying Mortgage Loans will be guaranteed
or insured by any governmental agency or instrumentality, or by the Depositor,
the Servicer, any Sub-Servicer or any of their affiliates. Proceeds of the
assets included in the related Trust Fund for each series of Certificates
(including the Mortgage Loans and any form of Credit Enhancement) will be the
sole source of payments on the Certificates, and there will be no recourse to
the Depositor or any other entity in the event that such proceeds are
insufficient or otherwise unavailable to make all payments provided for under
the Certificates.
Limitations, Reduction and Substitution of Credit
Enhancement. With respect to each series of Certificates, Credit Enhancement
will be provided in limited amounts to cover certain types of losses on the
underlying Mortgage Loans. Credit Enhancement will be provided in one or more
of the forms referred to herein, including, but not limited to: a letter of
credit; a Purchase Obligation; a mortgage pool insurance policy; a special
hazard insurance policy; a bankruptcy bond; a reserve fund; a financial
guaranty insurance policy or other type of Credit Enhancement to provide
partial coverage for certain defaults and losses relating to the Mortgage
Loans. Credit Enhancement also may be provided in the form of the related class
of Certificates, subordination of one or more classes of Certificates in a
series under which losses in excess of those absorbed by any related class of
Certificates are first allocated to any Subordinate Certificates up to a
specified limit, cross-support among Trust Fund Assets and/or
overcollateralization. See "Credit Support--Subordination" and "Other Credit
Enhancement." Regardless of the form of Credit Enhancement provided, the
coverage will be limited in amount and in most cases will be subject to
periodic reduction in accordance with a schedule or formula. Furthermore, such
Credit Enhancements may provide only very limited coverage as to certain types
of losses, and may provide no coverage as to certain other types of losses.
Generally, Credit Enhancements do not directly or indirectly guarantee to the
investors any specified rate of prepayments. The Servicer will generally be
permitted to reduce, terminate or substitute all or a portion of the Credit
Enhancement for any series of Certificates, if the applicable Rating Agency
indicates that the then-current rating thereof will not be adversely affected.
To the extent not set forth herein, the amount and types of coverage, the
identification of any entity providing the coverage, the terms of any
subordination and related information will be set forth in the
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<PAGE>
Prospectus Supplement relating to a series of Certificates. See "Credit
Support--Subordination" and "Other Credit Enhancement."
Risks of the Mortgage Loans
Risk of the Losses Associated with Junior Liens. Certain of
the Mortgage Loans will be secured by junior Liens subordinate to the rights of
the mortgagee or beneficiary under each related senior mortgage or deed of
trust. As a result, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the principal balance of
a mortgage loan only to the extent that the claims, if any, of each such senior
mortgagee or beneficiary are satisfied in full, including any related
foreclosure costs. In addition, a mortgagee secured by a junior Lien may not
foreclose on the related mortgaged property unless it forecloses subject to the
related senior mortgage or mortgages, in which case it must either pay the
entire amount of each senior mortgage to the applicable mortgagee at or prior
to the foreclosure sale or undertake the obligation to make payments on each
senior mortgage in the event of default thereunder. In servicing junior lien
loans in its portfolio, it has been the practice of the Servicer to satisfy
each such senior mortgage at or prior to the foreclosure sale only to the
extent that it determines any amounts so paid will be recoverable from future
payments and collections on such junior Lien loans or otherwise. The Trusts
will not have any source of funds to satisfy any such senior mortgage or make
payments due to any senior mortgagee. See "Certain Legal Aspects of Mortgage
Loans and Contracts--Foreclosure."
Risk of Losses Associated with Declining Real Estate Values.
An investment in securities such as the Certificates that generally represent
beneficial ownership interests in the Mortgage Loans or debt secured by such
Mortgage Loans may be affected by, among other things, a decline in real estate
values and changes in the borrowers' financial condition. No assurance can be
given that values of the Mortgaged Properties have remained or will remain at
their levels on the dates of origination of the related Mortgage Loans. If the
residential real estate market should experience an overall decline in property
values such that the outstanding balances of any senior Liens, the Mortgage
Loans and any secondary financing on the Mortgaged Properties in a particular
Mortgage Pool become equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the nonconforming credit
mortgage lending industry. Such a decline could extinguish the interest of the
related Trust in the Mortgaged Properties before having any effect on the
interest of the related senior mortgagee. In addition, in the case of Mortgage
Loans that are subject to negative amortization, due to the addition to
principal balance of deferred interest ("Deferred Interest"), the principal
balances of such Mortgage Loans could be increased to an amount equal to or in
excess of the value of the underlying Mortgaged Properties, thereby increasing
the likelihood of default. To the extent that such losses are not covered by
the applicable Credit Enhancement, holders of Certificates of the series
evidencing interests in the related Mortgage Pool will bear all risk of loss
resulting from default by Mortgagors and will have to look primarily to the
value of the Mortgaged Properties for recovery of the outstanding principal and
unpaid interest on the defaulted Mortgage Loans.
Risk of Losses Associated with Certain Non-Conforming and
Non-Traditional Loans. The Depositor's underwriting standards consider, among
other things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the value of the property; however, the
Depositor's Mortgage Loan program generally provides for the origination of
Mortgage Loans relating to non-conforming credits. Certain of the types of loans
that may be included in the Pools may involve additional uncertainties not
present in traditional types of loans. For example, certain of the Mortgage
Loans may provide for escalating or variable payments by the borrower under the
Mortgage Loan (the "Mortgagor"), as to which the Mortgagor is generally
qualified on the basis of the initial payment amount. In some instances the
Mortgagors' income may not be sufficient to enable them to continue to make
their loan payments as such payments increase and thus the likelihood of default
will increase. For a more detailed discussion, see "Underwriting Guidelines."
Risk of Losses Associated with Balloon Loans. Certain of the
Mortgage Loans may constitute "Balloon Loans." Balloon Loans are originated
with a stated maturity of less than the period of time of the corresponding
amortization schedule. Consequently, upon the maturity of a Balloon Loan, the
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Mortgagor will be required to make a "balloon" payment that will be
significantly larger than such Mortgagor's previous monthly payments. The
ability of such a Mortgagor to repay a Balloon Loan at maturity frequently will
depend on such borrower's ability to refinance the Mortgage Loan. The ability
of a Mortgagor to refinance such a Mortgage Loan will be affected by a number
of factors, including the level of available mortgage rates at the time, the
value of the related Mortgaged Property, the Mortgagor's equity in the related
Mortgaged Property, the financial condition of the Mortgagor, the tax laws and
general economic conditions at the time.
Although a low interest rate environment may facilitate the
refinancing of a balloon payment, the receipt and reinvestment by
Certificateholders of the proceeds in such an environment may produce a lower
return than that previously received in respect of the related Mortgage Loan.
Conversely, a high interest rate environment may make it more difficult for the
Mortgagor to accomplish a refinancing and may result in delinquencies or
defaults. None of the Depositor, the Servicer, any Sub-Servicer or the Trustee
will be obligated to provide funds to refinance any Mortgage Loan, including
Balloon Loans.
Risk of Losses Associated with ARM Loans. ARM Loans may be
underwritten on the basis of an assessment that Mortgagors will have the
ability to make payments in higher amounts after relatively short periods of
time. In some instances, Mortgagors' income may not be sufficient to enable
them to continue to make their loan payments as such payments increase and thus
the likelihood of default will increase.
Risk of Losses Associated with Bankruptcy of Mortgagors.
General economic conditions have an impact on the ability of borrowers to repay
Mortgage Loans. Loss of earnings, illness and other similar factors also may
lead to an increase in delinquencies and bankruptcy filings by borrowers. In
the event of personal bankruptcy of a Mortgagor, it is possible that a Trust
could experience a loss with respect to such Mortgagor's Mortgage Loan. In
conjunction with a Mortgagor's bankruptcy, a bankruptcy court may suspend or
reduce the payments of principal and interest to be paid with respect to such
Mortgage Loan or permanently reduce the principal balance of such Mortgage Loan
thereby either delaying or permanently limiting the amount received by the
Trust with respect to such Mortgage Loan. Moreover, in the event a bankruptcy
court prevents the transfer of the related Mortgaged Property to a Trust, any
remaining balance on such Mortgage Loan may not be recoverable.
Risk of Losses Associated with Foreclosure of Mortgaged
Properties. Even assuming that the Mortgaged Properties provide adequate
security for the Mortgage Loans, substantial delays could be encountered in
connection with the liquidation of defaulted Mortgage Loans and corresponding
delays in the receipt of related proceeds by the Certificateholders could
occur. An action to foreclose on a Mortgaged Property securing a Mortgage Loan
is regulated by state statutes, rules and judicial decisions and is subject to
many of the delays and expenses of other lawsuits if defenses or counterclaims
are interposed, sometimes requiring several years to complete. Furthermore, in
some states an action to obtain a deficiency judgment is not permitted
following a nonjudicial sale of a Mortgaged Property. In the event of a default
by a Mortgagor, these restrictions, among other things, may impede the ability
of the Servicer to foreclose on or sell the Mortgaged Property or to obtain
liquidation proceeds (net of expenses) ("Liquidation Proceeds") sufficient to
repay all amounts due on the related Mortgage Loan. The Servicer will be
entitled to deduct from Liquidation Proceeds all expenses reasonably incurred
in attempting to recover amounts due on the related liquidated Mortgage Loan
("Liquidated Mortgage Loan") and not yet repaid, including payments to prior
lienholders, accrued Servicing Fees, legal fees and costs of legal action, real
estate taxes, and maintenance and preservation expenses. In the event that any
Mortgaged Properties fail to provide adequate security for the related Mortgage
Loans and insufficient funds are available from any applicable Credit
Enhancement, Certificateholders could experience a loss on their investment.
Liquidation expenses with respect to defaulted mortgage loans
do not vary directly with the outstanding principal balance of the loan at the
time of default. Therefore, assuming that a servicer takes the same steps in
realizing upon a defaulted mortgage loan having a small remaining principal
balance as it would in the case of a defaulted mortgage loan having a larger
principal balance, the amount realized after expenses of liquidation would be
less as a percentage of the outstanding principal balance of the smaller
principal balance mortgage loan than would be the case with a larger principal
balance loan.
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Under environmental legislation and judicial decisions
applicable in various states, a secured party that takes a deed in lieu of
foreclosure, or acquires at a foreclosure sale a mortgaged property that, prior
to foreclosure, has been involved in decisions or actions which may lead to
contamination of a property, may be liable for the costs of cleaning up the
purportedly contaminated site. Although such costs could be substantial, it is
unclear whether they would be imposed on a holder of a mortgage note (such as a
Trust) which, under the terms of the Pooling and Servicing Agreement, is not
required to take an active role in operating the Mortgaged Properties. See
"Certain Legal Aspects of Mortgage Loans and Contracts--Environmental Risks."
Certain of the Mortgaged Properties relating to Mortgage
Loans may not be owner occupied. It is possible that the rate of delinquencies,
foreclosures and losses on Mortgage Loans secured by nonowner occupied
properties could be higher than for loans secured by the primary residence of
the borrower.
Litigation. Any material litigation relating to the Depositor
or the Servicer will be specified in the related Prospectus Supplement.
Geographic Concentration of Mortgaged Properties. Certain
geographic regions from time to time will experience weaker regional economic
conditions and housing markets than will other regions, and, consequently, will
experience higher rates of loss and delinquency on mortgage loans generally.
The Mortgage Loans underlying certain series of Certificates may be
concentrated in such regions, and such concentrations may present risk
considerations in addition to those generally present for similar mortgage loan
asset-backed securities without such concentrations. Information with respect
to geographic concentration of Mortgaged Properties will be specified in the
related Prospectus Supplement or related current report on Form 8-K.
Legal Considerations. Applicable state laws generally
regulate interest rates and other charges, require certain disclosures, and
require licensing of the Depositor and the Servicer and Sub-Servicers. In
addition, most states have other laws, public policy and general principles of
equity relating to the protection of consumers, unfair and deceptive practices
and practices that may apply to the origination, servicing and collection of
the Mortgage Loans. Depending on the provisions of the applicable law and the
specific facts and circumstances involved, violations of these laws, policies
and principles may limit the ability of the Servicer to collect all or part of
the principal of or interest on the Mortgage Loans, may entitle the borrower to
a refund of amounts previously paid and, in addition, could subject the
Servicer to damages and administrative sanctions. See "Certain Legal Aspects of
Mortgage Loans and Contracts."
The Mortgage Loans may also be subject to federal laws,
including: (i) the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder and the Real Estate Settlement Procedures Act and Regulation X
promulgated thereunder, which require certain disclosures to the borrowers
regarding the terms of the Mortgage Loans; (ii) the Equal Credit Opportunity
Act and Regulation B promulgated thereunder, which prohibit discrimination on
the basis of age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the Consumer
Credit Protection Act, in the extension of credit; and (iii) the Fair Credit
Reporting Act, which regulates the use and reporting of information related to
the borrower's credit experience. Depending on the provisions of the applicable
law and the specific facts and circumstances involved, violations of these
laws, policies and general principles of equity may limit the ability of the
Servicer to collect all or part of the principal of or interest on the Mortgage
Loans, may entitle the borrower to rescind the loan or to a refund of amounts
previously paid and, in addition, could subject the Servicer to damages and
administrative sanctions. If the Servicer is unable to collect all or part of
the principal or interest on the Mortgage Loans because of a violation of the
aforementioned laws, public policies or general principles of equity then the
Trust may be delayed or unable to repay all amounts owed to Investors.
Furthermore, depending upon whether damages and sanctions are assessed against
the Servicer or the Depositor, such violations may materially impact the
financial ability of the Depositor to continue to act as Servicer or the
ability of the Depositor to repurchase or replace Mortgage Loans if such
violation breaches a representation or warranty contained in a Pooling and
Servicing Agreement.
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Collections on the Mortgage Loans may vary due to the level
of incidence of delinquent payments and of prepayments. Collections on the
Mortgage Loans may also vary due to seasonal purchasing and payment habits of
borrowers.
Book-Entry Registration. Issuance of the Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
trading market since investors may be unwilling to purchase Certificates for
which they cannot obtain definitive physical securities representing such
Certificateholders' interests, except in certain circumstances described in the
related Prospectus Supplement.
Since transactions in Certificates will, in most cases, be
able to be effected only through DTC, direct or indirect participants in DTC's
book-entry system ("Direct or Indirect Participants") and certain banks, the
ability of a Certificateholder to pledge a Certificate to persons or entities
that do not participate in the DTC system, or otherwise to take actions in
respect of such Certificates, may be limited due to lack of a physical
certificate representing the Certificates.
Certificateholders may experience some delay in their receipt
of distributions of interest on and principal of the Certificates since
distributions may be required to be forwarded by the Trustee to DTC and, in
such a case, DTC will be required to credit such distributions to the accounts
of its Participants which thereafter will be required to credit them to the
accounts of the applicable class of Certificateholders either directly or
indirectly through Indirect Participants. See "Description of the
Certificates."
The Status of the Mortgage Loans in the Event of Bankruptcy
of the Depositor. In the event of the bankruptcy of the Depositor at a time
when it or any affiliate thereof holds a Certificate, a trustee in bankruptcy
of the Depositor, or its creditors could attempt to recharacterize the sale of
the Mortgage Loans to the related Trust as a borrowing by the Depositor or such
affiliate with the result, if such recharacterization is upheld, that the
Certificateholders would be deemed creditors of the Depositor or such
affiliate, secured by a pledge of the Mortgage Loans. If such an attempt were
successful, it could prevent timely payments of amounts due to the Trust.
Limitations on Interest Payments and Foreclosures. Generally,
under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), or similar state legislation, a Mortgagor who
enters military service after the origination of the related Mortgage Loan
(including a Mortgagor who is a member of the National Guard or is in reserve
status at the time of the origination of the Mortgage Loan and is later called
to active duty) may not be charged interest (including fees and charges) above
an annual rate of 6% during the period of such Mortgagor's active duty status,
unless a court orders otherwise upon application of the lender. It is possible
that such action could have an effect, for an indeterminate period of time, on
the ability of the Servicer to collect full amounts of interest on certain of
the Mortgage Loans. In addition, the Relief Act imposes limitations that would
impair the ability of the Servicer to foreclose on an affected Mortgage Loan
during the Mortgagor's period of active duty status. Thus, in the event that
such a Mortgage Loan goes into default, there may be delays and losses
occasioned by the inability to realize upon the Mortgaged Property in a timely
fashion.
Certificate Rating. The rating of Certificates credit
enhanced through external Credit Enhancement such as a letter of credit,
financial guaranty insurance policy or mortgage pool insurance will depend
primarily on the creditworthiness of the issuer of such external Credit
Enhancement device (a "Credit Enhancer"). Any reduction in the rating assigned
to the claims-paying ability of the related Credit Enhancer below the rating
initially given to the Certificates would likely result in a reduction in the
rating of the Certificates. See "Ratings" in the Prospectus Supplement.
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THE TRUST FUNDS
General
The Trust Fund for each Series of Certificates will consist
primarily of a Pool of Mortgage Loans (a "Mortgage Pool") and/or Contracts (a
"Contract Pool"). In addition, a Trust Fund will also include (i) amounts held
from time to time in the related Certificate Account, (ii) the Depositor's
interest in any primary mortgage insurance, hazard insurance, title insurance
and/or other insurance policies relating to a Mortgage Loan or Contract, (iii)
any property which initially secured a Mortgage Loan and which has been
acquired by foreclosure or trustee's sale or deed in lieu of foreclosure or
trustee's sale, (iv) any Manufactured Home which initially secured a Contract
and which is acquired by repossession, (v) if applicable, and to the extent set
forth in the applicable Prospectus Supplement, any Subordination Reserve Fund
and/or any other reserve fund, (vi) if applicable, and to the extent set forth
in the applicable Prospectus Supplement, one or more guarantees, letters of
credit, insurance policies, or any other credit enhancement arrangement, and
(vii) such other assets as may be specified in the related Prospectus
Supplement. Unless otherwise specified in the applicable Prospectus Supplement,
the Trust Fund will not include, however, the portion of interest on the
Mortgage Loans or Contracts which constitutes the Fixed Retained Yield, if any.
See "Fixed Retained Yield" below. If specified in the related Prospectus
Supplement, certain Certificates will evidence the entire fractional undivided
ownership interest in the related Mortgage Loans held by the related Trust Fund
or may represent debt secured by the related Mortgage Loans.
The Mortgage Loans
Unless otherwise specified in the related Prospectus
Supplement, each Mortgage Pool will consist of Mortgage Loans evidenced by
promissory notes or other evidences of indebtedness (the "Mortgage Notes") that
provide for an original term to maturity of not more than 40 years, for monthly
payments and for interest on the outstanding principal amounts thereof at a
rate that is either fixed or subject to adjustment as described in the related
Prospectus Supplement. If so specified in the applicable Prospectus Supplement,
the adjustable interest rate on certain of the Mortgage Loans will be
convertible into a fixed interest rate at the option of the mortgagor at the
times and upon the conditions specified therein ("Convertible Mortgage Loans").
The Mortgage Loans may provide for fixed level payments or be GPM Loans, GEM
Loans, Balloon Loans or Buy-Down Loans (each as defined herein) or Mortgage
Loans with other payment characteristics as described in the related Prospectus
Supplement. In addition, the Mortgage Pools may include participation interests
in Mortgage Loans, in which event references herein to payments on Mortgage
Loans underlying, such participations shall mean payments thereon allocable to
such participation interests, and the meaning of other terms relating to
Mortgage Loans will be similarly adjusted. Similarly, the Mortgage Pools may
include Mortgage Loans with respect to which a Fixed Retained Yield has been
retained, in which event references herein to Mortgage Loans and payments
thereon shall mean the Mortgage Loans exclusive of such Fixed Retained Yield. A
"Fixed Retained Yield" in a Mortgage Loan or Contract represents a specified
portion of the interest payable thereon. The Prospectus Supplement for a Series
will specify whether there will be any Fixed Retained Yield in any Mortgage
Loan or Contract and, if so, the owner thereof. See "Servicing of the Mortgage
Loans and Contracts--Fixed Retained Yield." Unless otherwise specified in the
related Prospectus Supplement, the Mortgage Loans will be secured by promissory
notes or other evidences of indebtedness (the "Mortgages") creating first,
second or more junior liens on conventional one-to four-family residential
properties (which may include mixed-use or vacation properties), all of which
will be located in any of the fifty states or the District of Columbia. The
Mortgage Loans may also consist of installment contracts for the sale of real
estate. If so provided in the applicable Prospectus Supplement, a Mortgage Pool
may also contain cooperative apartment loans (the "Cooperative Loans")
evidenced by promissory notes (the "Cooperative Notes") secured by security
interests in shares issued by private, non-profit, cooperative housing
corporations (the "cooperatives") and in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific Cooperative
Dwellings in such cooperatives' buildings. In the case of a Cooperative Loan,
the proprietary lease or occupancy agreement securing such Cooperative Loan is
generally subordinate to any blanket mortgage on the related cooperative
apartment building and/or the underlying land. Additionally, the proprietary
lease or occupancy agreement is subject to termination and
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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.
Mortgage Loans may be entitled to the benefit of external
credit enhancement. Residential Mortgage Loans may be insured by the Federal
Housing Administration or its successors against defaults by the borrower in
the payment of principal and interest thereon, have a portion of principal and
interest payments guaranteed by the Department of Veterans Affairs or its
successors or be subject to other payment guarantees, including guarantees
under the National Housing Act.
Unless otherwise specified in the Prospectus Supplement for a
Series, each Mortgage Loan must have an original term of maturity of not less
than 5 years and not more than 40 years. Unless otherwise specified in the
Prospectus Supplement for a Series, no Mortgage Loan for residential property
will have had, at origination, a principal balance in excess of $5,000,000 or a
Loan-to-Value Ratio in excess of 95%, and Mortgage Loans having Loan-to-Value
Ratios at the time of origination exceeding 80% will be supported by external
credit enhancement or be covered by primary mortgage insurance providing,
coverage on at least the amount of each such mortgage loan in excess of 75% of
the original fair market value of the mortgaged property and remaining in force
until the principal balance of such Mortgage Loan is reduced to 80% of such
original fair market value. The "Loan-to-Value Ratio" is the ratio, expressed
as a percentage, of the principal amount of the Mortgage Loan outstanding at
the origination of such loan divided by the fair market value of the Mortgaged
Property. The fair market value of the Mortgaged Property securing any Mortgage
Loan is, unless otherwise specified in the applicable Prospectus Supplement,
the lesser of (x) the appraised value of the related Mortgaged Property
determined in an appraisal obtained by the originator at origination (or, in
the case of a refinancing, an appraisal obtained at the origination of the
refinanced mortgage loan) and (y) the sale price for such property.
No assurance can be given that values of the Mortgaged
Properties have remained or will remain at the levels which existed on the
dates of origination of the related Mortgage Loans. If the residential real
estate market should experience an overall decline in property values such that
the outstanding balances of the Mortgage Loans and any secondary financing on
the Mortgaged Properties in a particular Trust Fund become equal to or greater
than the value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. To the extent that such losses are not covered
by the methods of credit support or the insurance policies described herein,
they will be borne by holders of the Certificates of the Series evidencing
interests in such Trust Fund. Furthermore, in a declining real estate market a
new appraisal could render the Cut-Off Date Loan-to-Value Ratios as unreliable
measures of leverage.
The Prospectus Supplement for each Series will set forth
certain characteristics of the related Mortgage Loans, which may include the
aggregate principal balance of the Mortgage Loans in the Mortgage Pool
underlying such Series as of the Cut-Off Date for such Series (the "Cut-Off
Date Aggregate Principal Balance"), the range of original terms to maturity of
the Mortgage Loans in the Mortgage Pool, the weighted average remaining term to
stated maturity at the Cut-Off Date of such Mortgage Loans, the earliest and
latest origination dates of such Mortgage Loans, the range of Mortgage Rates
and Net Mortgage Rates borne by such Mortgage Loans, the weighted average Net
Mortgage Rate at the Cut-Off Date of such Mortgage Loans, the percentage of
such Mortgage Loans which had Loan-to-Value Ratios at the time of origination
of 80% or less, the percentage of such Mortgage Loans that had Loan-to-Value
Ratios at origination in excess of 80% and the highest outstanding, principal
balance at origination of any such Mortgage Loan.
Unless otherwise specified in the applicable Prospectus
Supplement, all of the Mortgage Loans in a Trust Fund will have monthly
payments due on a specified day of each month (each, a "Due Date") and will,
with respect to Mortgage Loans secured by residential properties, require at
least monthly payments of interest on any outstanding balance. If so specified
in the applicable Prospectus Supplement, the Mortgage Pools may include
adjustable rate Mortgage Loans that provide for payment adjustments to be made
less frequently than adjustments in the Mortgage Rates. Each adjustment in the
Mortgage Rate which is not made at the time of a corresponding adjustment in
payments (and which adjusted amount of interest is not paid currently on a
voluntary basis by the mortgagor) will result in a decrease (if the
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Mortgage Rate rises) or an increase (if the Mortgage Rate declines) in the rate
of amortization of the Mortgage Loan. Moreover, such payment adjustments on the
Mortgage Loans may be subject to certain limitations, as specified in the
Prospectus Supplement, which may also affect the rate of amortization on the
Mortgage Loan. As a result of such provisions, or in accordance with the payment
schedules of certain GPM Loans and other Mortgage Loans, the amount of interest
accrued in any month may equal or exceed the scheduled monthly payment on the
Mortgage Loan. In any such month, no principal would be payable on the Mortgage
Loan, and if the accrued interest exceeded the scheduled monthly payment, such
excess interest due would become "Deferred Interest" that is added to the
principal balance of the Mortgage Loan. Deferred Interest will bear interest at
the Mortgage Rate until paid. If such limitations prevent the payments from
being sufficient to amortize fully the Mortgage Loan by its stated maturity
dare, a lump sum payment equal to the remaining unpaid principal balance will be
due on such stated maturity date. See "Prepayment and Yield Considerations."
Unless otherwise specified in the applicable Prospectus
Supplement, the Mortgage Loans in each Mortgage Pool will be permanent loans
(as opposed to construction and land development loans) secured by Mortgages on
Mortgaged Properties. The Mortgaged Properties will consist of residential
properties only, including detached homes, townhouses, units in planned unit
developments, condominium units, mixed-use properties, vacation homes and small
scale multifamily properties, all of which constitute a "dwelling or mixed
residential and commercial structure" within the meaning of Section
3(a)(41)(A)(i) of the Securities Exchange Act of 1934, as amended (the
"Mortgaged Properties"). The Mortgage Loans will be secured by liens on fee
simple or leasehold interests (in those states in which long-term ground leases
are used as an alternative to fee interests) in such Mortgaged Properties, or
liens on shares issued by cooperatives and the related proprietary leases or
occupancy agreements occupy specified units in such cooperatives' buildings.
The geographic distribution of Mortgaged Properties will be set forth in the
Prospectus Supplement. Each Prospectus Supplement will also set forth the
percentage of the Cut-Off Date Aggregate Principal Balance of the Mortgage
Loans in the related Mortgage Pool representing the refinancing of existing
mortgage indebtedness and the types of Mortgaged Properties.
If so specified in the applicable Prospectus Supplement, a
Trust Fund may contain Mortgage Loans subject to temporary buy-down plans (the
"Buy-Down Loans") pursuant to which the monthly payments made by the mortgagor
during the early years of the Mortgage Loan will be less than the scheduled
monthly payments on the Mortgage Loan. The resulting difference in payment will
be compensated for from an amount contributed by the seller of the related
Mortgaged Property or another source and, if so specified in the related
Prospectus Supplement, placed in a custodial account (the "Buy-Down Account")
by the Servicer. If the mortgagor on a Buy-Down Loan prepays such Mortgage Loan
in its entirety, or defaults on such Mortgage Loan and the Mortgaged Property
is sold in liquidation thereof, during the period when the mortgagor is not
obligated, on account of the buy-down plan, to pay the full monthly payment
otherwise due on such loan, the unpaid principal balance of such Buy-Down Loan
will be reduced by the amounts remaining in the Buy-Down Account with respect
to such Buy-Down Loan, and such amounts shall be deposited in the Certificate
Account (as defined herein), net of any amounts paid with respect to such
Buy-Down Loan by any insurer, guarantor or other person pursuant to a credit
enhancement arrangement described in the applicable Prospectus Supplement.
If so specified in the applicable Prospectus Supplement, a
Trust Fund may include Mortgage Loans which are amortized over 30 years or some
other term, or which do not provide for amortization prior to maturity, but
which have a shorter term (each such Mortgage Loan, a "Balloon Loan") that
causes the outstanding principal balance of such Mortgage Loan to be due and
payable at the end of a certain specified period (the "Balloon Period"). If
specified in the applicable Prospectus Supplement, the originator of such
Balloon Loan will be obligated to refinance each such Balloon Loan at the end
of its Balloon Period at a new interest rate determined prior to the end of
such Balloon Period by reference to an index plus a margin specified in the
related Mortgage Note. The mortgagor is not, however, obligated to refinance
the Balloon Loan through such originator. In the event a mortgagor refinances a
Balloon Loan, the new loan will not be included in the Trust Fund. See
"Prepayment and Yield Considerations."
If specified in the Prospectus Supplement for any Series, the
Mortgage Loans included in the Trust Fund for such Series may be what are
commonly referred to as "home equity revolving lines of
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credit" ("Home Equity Lines"). Home Equity Lines are generally evidenced by a
loan agreement ("Loan Agreement") rather than a note. Home Equity Lines
generally may be drawn down from time to time by the borrower writing a check
against the account, or acknowledging the advance in a supplement to the Loan
Agreement (the amount of such drawn down, an "Additional Balance"). A Home
Equity Line will establish a maximum credit limit with respect to the related
borrower, and will permit the borrower to draw down Additional Balances, and
repay the aggregate balance outstanding in each case from time to time in such a
manner so that the aggregate balance outstanding does not exceed the maximum
credit limit. A Home Equity Line will be secured by either a senior or a junior
lien Mortgage, and will bear interest at either a fixed or an adjustable rate.
In certain states the borrower must, on the opening of an
account, draw an initial advance of not less than a specified amount. Home
Equity Lines generally amortize according to an amortization basis established
at the time of the initial advance. The "amortization basis" is the length of
time in which the initial advance plus interest will be repaid in full. The
amortization bases of the Home Equity Lines generally range from 60 months (5
years) to 180 months (15 years) depending on the credit limit assigned.
Generally, the amortization basis will be longer the higher the credit limit.
The minimum monthly payment on a Home Equity Line will generally be equal to
the sum of the following: (i) an amount necessary to completely repay the
then-outstanding balance and the applicable finance charge in equal
installments over the assigned amortization basis ("Basic Monthly Amount");
(ii) any monthly escrow charges; (iii) any delinquency or other similar
charges; and (iv) any past due amounts, including past due finance charges. The
Basic Monthly Amount typically is recomputed each time the related Mortgage
Rate adjusts and whenever an Additional Balance is advanced; such recomputation
in the case of an Additional Advance may also reset the amortization schedule.
The effect of each such advance on the related Home Equity Line is to reset the
commencement date of the original maturity term to the date of the later
advance. For example, a Home Equity Line made originally with a 15-year
maturity from date of origination changes at the time of the next adjustment or
advance to a Home Equity Line with a maturity of 15 years from the date of such
advance. For certain Home Equity Lines, the same type of recomputation exists
for adjustments of the related Mortgage Rate.
Prior to the expiration of a specified period, the reduction
of the account to a zero balance and the closing of a Home Equity Line account
may result in a prepayment penalty. A prepayment penalty also may be assessed
against the borrower if a Home Equity Line account is closed by the Servicer
due to a default by the borrower under the Loan Agreement.
Each Loan Agreement will provide that the Servicer has the
right to require the borrower to pay the entire balance plus all other accrued
but unpaid charges immediately, and to cancel the borrower's credit privileges
under the Loan Agreement if, among other things, the borrower fails to make any
minimum payment when due under the Loan Agreement, if there is a material
change in the borrower's ability to repay the Home Equity Line, or if the
borrower sells any interest in the property securing the Loan Agreement,
thereby causing the "due-on-sale" clause in the trust deed or mortgage to
become effective.
Mortgage Loans which are secured by junior mortgages are
subordinate to the rights of the mortgagees under the related senior mortgage
or mortgages. Accordingly, liquidation, insurance and condemnation proceeds
received with respect to the related mortgaged property will be available to
satisfy the outstanding balance of such a Mortgage Loan only to the extent that
the claims of the senior mortgages have been satisfied in full, including any
related liquidation and foreclosure costs. In addition, a junior mortgagee
foreclosing on its mort,age may be required to purchase the related mortgaged
property for a price sufficient to satisfy the claims of the holders of any
senior mortgages which are also being foreclosed. In the alternative, a junior
mortgagee which acquires title to a related mortgaged property, through
foreclosure, deed-in-lieu of foreclosure or otherwise may take the property
subject to any senior mortgages and continue to perform with respect to any
senior mortgages, in which case the junior mortgagee must comply with the terms
of any senior mortgages or risk foreclosure by the senior mortgagee.
If so specified in the applicable Prospectus Supplement, a
loan pool may include graduated equity mortgage loans ("GEM Loans"). GEM Loans
are fixed rate, fully amortizing mortgage
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loans which provide for monthly payments based on a 10-to 30-year amortization
schedule, and which provide for scheduled annual payment increases for a number
of years and level payments thereafter. The full amount of the scheduled payment
increases during the early years is applied to reduce the outstanding principal
balance of such loans.
If so specified in the applicable Prospectus Supplement, a
Mortgage Pool may include graduated payment mortgage loans ("GPM Mortgage
Loans"). GPM Mortgage Loans provide for payments of monthly installments which
increase annually in each of a specified number of initial years and level
monthly payments thereafter. Payments during the early years are required in
amounts lower than the amounts which would be payable on a level debt service
basis due to the deferral of a portion of the interest accrued on the mortgage
loan. Such deferred interest is added to the principal balance of the mortgage
loan and is paid, together with interest thereon, in the later years of the
obligation. Because the monthly payments during the early years of such a GPM
Mortgage Loan are not sufficient to pay the full interest accruing on the GPM
Mortgage Loan, the interest payments on such GPM Mortgage Loan may not be
sufficient in its early years to meet its proportionate share of the
distributions expected to be made on the related Certificates. Thus, if the
Mortgage Loans include GPM Mortgage Loans, the Servicer will, unless otherwise
specified in the Prospectus Supplement, establish a reserve fund (the "GPM
Fund") which (together with, if specified in the related Prospectus Supplement,
reinvestment income thereon) will be sufficient to cover the amount by which
payments of interest on such GPM Mortgage Loan assumed in calculating,
distributions expected to be made on the Certificates of such Series exceed
scheduled interest payments according to the relevant graduated payment
mortgage plan for the period during which excess occurs.
If so specified in the applicable Prospectus Supplement, a
Trust Fund may contain ARM buy-out loans ("ARM Buy-Outs") which are
automatically repurchased by the Depositor upon the occurrence of either(i) a
switch from a fixed-rate mortgage to an adjustable rate mortgage pursuant to
the terms of the underlying note or (ii) a switch from an adjustable rate to a
fixed rate mortgage pursuant to the terms of the underlying note.
If specific information respecting the Mortgage Loans to be
included in a Trust Fund is not known to the Depositor at the time the
Certificates of a Series are initially offered, more general information of the
nature described above will be provided in the Prospectus Supplement and final
specific information will be set forth in a Current Report on Form 8-K to be
available to investors on the date of issuance thereof and to be filed with the
Commission promptly after the initial issuance of such Certificates.
The Contracts
Unless otherwise specified in the applicable Prospectus
Supplement, each Contract Pool will consist of conventional manufactured
housing installment sales contracts and installment loan agreements
(collectively, the "Contracts") originated by a manufactured housing dealer in
the ordinary course of business and purchased by the Unaffiliated Seller.
Unless otherwise specified in the applicable Prospectus Supplement, each
Contract will be secured by Manufactured Homes (as defined below), each of
which will be located in any of the fifty states or the District of Columbia.
Unless otherwise specified in the applicable Prospectus Supplement, the
Contracts will be fully amortizing and will bear interest at a fixed or
adjustable annual percentage rate (the "APR" or "Contract Rate"). The Contract
Pool may include Contracts with respect to which a Fixed Retained Yield has
been retained, in which event references herein to Contracts and payments
thereon shall mean the Contracts exclusive of such Fixed Retained Yield. The
Prospectus Supplement for a Series will specify whether there will be any Fixed
Retained Yield in any Contract, and if so, the owner thereof. See "Fixed
Retained Yield" below.
The Unaffiliated Seller of the Contracts will represent that
the Manufactured Homes securing the Contracts consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a
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permanent chassis designed to be used as a dwelling with or without a permanent
foundation when connected to the required utilities, and includes the plumbing,
heating, air-conditioning, and electrical systems contained therein; except that
such term shall include any structure which meets all the requirements of [this]
paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary of
Housing and Urban Development and complies with the standards established under
[this] chapter."
Unless otherwise specified in the Prospectus Supplement for a
Series, each Contract must have an original term to maturity of not less than 1
year and not more than 40 years. Unless otherwise specified in the Prospectus
Supplement for a Series, no Contract will have had, at origination, a principal
balance in excess of $5,000,000 or a Loan-to-Value Ratio in excess of 95%. The
"Loan-to-Value Ratio" is the ratio, expressed as a percentage, of the principal
amount of the Contract outstanding at the origination of such loan divided by
the fair market value of the Manufactured Home. The fair market value of the
Manufactured Home securing any Contract is, unless otherwise specified in the
applicable Prospectus Supplement, either (x) the appraised value of the related
Manufactured Home determined in an appraisal obtained by the originator at
origination and (y) the sale price for such property, plus, in either case,
sales and other taxes and, to the extent financed, filing and recording fees
imposed by law, premiums for related insurance and prepaid finance charges.
Manufactured Homes, unlike site-built homes, generally
depreciate in value. Consequently, at any time after origination it is
possible, especially in the case of Contracts with high Loan-to-Value Ratios at
origination, that the market value of a Manufactured Home may be lower than the
principal amount outstanding under the related Contract.
The Prospectus Supplement for each Series will set forth
certain characteristics of the related Contracts, which may include the
aggregate principal balance of the Contracts in the Contract Pool underlying
such Series as of the Cut-Off Date for such Series (the "Cut-Off Date Aggregate
Principal Balance"), the range of original terms to maturity of the Contracts
in the Contract Pool, the weighted average remaining term to stated maturity at
the Cut-Off Date of such Contracts, the earliest and latest origination dates
of such Contracts, the range of Contract Rates and Net Contract Rates borne by
such Contracts, the weighted average Net Contract Rate at the Cut-Off Date of
such Contracts, the percentage of such Contracts which had Loan-to-Value Ratios
at the time of origination of 80% or less, the percentage of such Contracts
that had Loan-to-Value Ratios at origination in excess of 80% and the highest
outstanding principal balance at origination of any such Contract.
Unless otherwise specified in the applicable Prospectus
Supplement, all of the Contracts in a Trust Fund will have monthly payments due
on the first of each month (each, a "Due Date") and will be fully-amortizing
Contracts. If so specified in the applicable Prospectus Supplement, Contracts
may have Due Dates which occur on a date other than the first of each month. If
so specified in the applicable Prospectus Supplement, the Contract Pools may
include adjustable rate Contracts that provide for payment adjustments to be
made less frequently than adjustments in the Contract Rates. Each adjustment in
the Contract Rate which is not made at the time of a corresponding adjustment
in payments (and which adjusted amount of interest is not paid currently on a
voluntary basis by the obligor) will result in a decrease (if the Contract Rate
rises) or an increase (if the Contract Rate declines) in the rate of
amortization of the Contract. Moreover, such payment adjustments on the
Contracts may be subject to certain limitations, as specified in the Prospectus
Supplement, which may also affect the rate of amortization on the Contract. As
a result of such provisions, the amount of interest accrued in any month may
equal or exceed the scheduled monthly payment on the Contract. In any such
month, no principal would be payable on the Contract, and if the accrued
interest exceeded the scheduled monthly payment, such excess interest due would
become "Deferred Interest" that is added to the principal balance of the
Contract. Deferred Interest will bear interest at the Contract Rate until paid.
If such limitations prevent the payments from being sufficient to amortize
fully the Contract by its stated maturity date, a lump sum payment equal to the
remaining unpaid principal balance will be due on such stated maturity date.
See "Prepayment and Yield Considerations."
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The geographic distribution of Manufactured Homes will be set
forth in the Prospectus Supplement. Each Prospectus Supplement will set forth
the percentage of the Cut-Off Date Aggregate Principal Balance of any Contracts
in the Contract Pool which are secured by Manufactured Homes which have become
permanently affixed to real estate. Each Prospectus Supplement will also set
forth the percentage of the Cut-Off Date Aggregate Principal Balance of the
Contracts in the related Contract Pool representing the refinancing of existing
mortgage indebtedness. Unless otherwise specified in a Prospectus Supplement,
no Contract in the Contract Pool will be more than 30 days past due as of the
Cut-Off Date.
If specific information respecting the Contracts to be
included in a Trust Fund is not known to the Depositor at the time the
Certificates of a Series are initially offered, more general information of the
nature described above will be provided in the Prospectus Supplement and final
specific information will be set forth in a Current Report on Form 8-K to be
available to investors on the date of issuance thereof and to be filed with the
Commission promptly after the initial issuance of such Certificates.
Fixed Retained Yield
Fixed Retained Yield with respect to any Mortgage Loan or
Contract is that portion, if any, of interest at the Mortgage Rate or Contract
Rate that is retained by the Depositor or other owner thereof and not included
in the related Trust Fund. The Prospectus Supplement for a Series will specify
whether a Fixed Retained Yield has been retained with respect to the Mortgage
Loans or Contracts of such Series, and, if so, the owner thereof. If so, the
Fixed Retained Yield will be established on a loan-by-loan basis with respect
to the Mortgage Loans or Contracts and will be specified in the schedule of
Mortgage Loans or Contracts attached as an exhibit to the applicable Pooling
and Servicing Agreement. The Servicer, with respect to Mortgage Loans or
Contracts, may deduct the Fixed Retained Yield from payments as received and
prior to deposit of such payments in the Certificate Account for such Series or
may (unless an election has been made to treat the Trust Fund (or one or more
segregated pools of assets therein) as a REMIC) withdraw the Fixed Retained
Yield from the Certificate Account after the entire payment has been deposited
in the Certificate Account. Notwithstanding the foregoing, any partial payment
or recovery of interest received by the Servicer relating to a Mortgage Loan or
Contract (whether paid by the mortgagor or obligor or received as Liquidation
Proceeds, Insurance Proceeds or otherwise), after deduction of all applicable
servicing fees, will be allocated between Fixed Retained Yield (if any) and
interest at the Net Mortgage Rate or Net Contract Rate on a pari passu basis.
Insurance Policies
Unless otherwise specified in the applicable Prospectus
Supplement, the Pooling and Servicing Agreement will require the Servicer to
cause to be maintained for each Mortgage Loan or Contract an insurance policy
issued by a generally acceptable insurer insuring the Mortgaged Property
underlying such Mortgage Loan or the Manufactured Home underlying such Contract
against loss by fire, with extended coverage (a "Standard Hazard Insurance
Policy"). Unless otherwise specified in the applicable Prospectus Supplement,
the Pooling and Servicing Agreement will require that such Standard Hazard
Insurance Policy be in an amount at least equal to the lesser of 100% of the
insurable value of the improvements which are a part of such Mortgaged Property
or Manufactured Home or the principal balance of such Mortgage Loan or
Contract; provided, however, that such insurance may not be less than the
minimum amount required to fully compensate for any damage or loss on a
replacement cost basis. The Servicer will also maintain on property acquired
upon foreclosure, or deed in lieu of foreclosure, of any Mortgage Loan, and on
any Manufactured Home acquired by repossession a Standard Hazard Insurance
Policy in an amount that is at least equal to the lesser of 100% of the
insurable value of the improvements which are a part of such property or the
insurable value of such Manufactured Home or the principal balance of the
related Mortgage Loan or Contract plus, if required by the applicable Pooling
and Servicing Agreement, accrued interest and liquidation expenses; provided,
however, that such insurance may not be less than the minimum amount required
to fully compensate for any damage or loss on a replacement cost basis. Any
amounts collected under any such policies (other than amounts to be applied to
the restoration or repair of the Mortgaged Property or Manufactured Home or
released to the borrower in accordance with normal servicing procedures) will
be deposited in the Certificate Account.
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The Standard Hazard Insurance Policies covering the Mortgaged
Properties generally will cover physical damage to, or destruction of, the
improvements on the Mortgaged Property caused by fire, lightning, explosion,
smoke, windstorm, hail, riot, strike and civil commotion, subject to the
conditions and exclusions particularized in each policy. Because the Standard
Hazard Insurance Policies relating to such Mortgage Loans will be underwritten
by different insurers and will cover Mortgaged Properties located in various
states, such policies will not contain identical terms and conditions. The most
significant terms thereof, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mudflows), nuclear reaction, wet or dry rot,
vermin, rodents, insects or domestic animals, hazardous wastes or hazardous
substances, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive.
The Standard Hazard Insurance Policies covering the Contracts
will provide, at a minimum, the same coverage as a standard form fire and
extended coverage insurance policy that is customary for manufactured housing
in the state in which the Manufactured Home is located.
The Servicer may maintain a blanket policy insuring against
hazard losses on all of the Mortgaged Properties or Manufactured Homes in lieu
of maintaining the required Standard Hazard Insurance Policies. The Servicer
will be liable for the amount of any deductible under a blanket policy if such
amount would have been covered by a required Standard Hazard Insurance Policy,
had it been maintained.
In general, if a Mortgaged Property or Manufactured Home is
located in an area identified in the Federal Register by the Federal Emergency
Management Agency as having special flood hazards (and such flood insurance has
been made available) the Pooling and Servicing Agreement will require the
Servicer to cause to be maintained a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration
with a generally acceptable insurance carrier. Generally, the Pooling and
Servicing Agreement will require that such flood insurance be in an amount not
less than the lesser of (i) the amount required to compensate for any loss or
damage to the Mortgaged Property on a replacement cost basis and (ii) the
maximum amount of insurance which is available under the federal flood
insurance program.
Any losses incurred with respect to Mortgage Loans or
Contracts due to uninsured risks (including earthquakes, mudflows, floods,
hazardous wastes and hazardous substances) or insufficient hazard insurance
proceeds could affect distributions to the Certificateholders.
The Servicer will maintain or cause to be maintained with
respect to each Mortgage Loan a primary mortgage insurance policy in accordance
with the standards described in the "Mortgage Loans" above.
The Servicer shall obtain and maintain at its own expense and
keep in full force and effect a blanket fidelity bond and an error and
omissions insurance policy covering the Servicer's officers and employees as
well as office persons acting on behalf of the Servicer in connection with the
servicing of the Mortgage Loans.
Although the terms and conditions of primary mortgage
insurance policies differ, each primary mortgage insurance policy will
generally cover losses up to an amount equal to the excess of the unpaid
principal amount of a defaulted Mortgage Loan (plus accrued and unpaid interest
thereon and certain approved expenses) over a specified percentage of the value
of the related Mortgage Property.
As conditions precedent to the filing or payment of a claim
under a primary mortgage insurance policy, the insured will typically be
required, in the event of default by the mortgagor, among other things, to: (i)
advance or discharge (a) hazard insurance premiums and (b) as necessary and
approved in advance by the insurer, real estate taxes, protection and
preservation expenses and foreclosure and related costs; (ii) in the event of
any physical loss or damage to the Mortgaged Property, have the
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Mortgaged Property restored to at least its condition at the effective date of
the primary mortgage insurance policy (ordinary wear and tear excepted); and
(iii) if the insurer pays the entire amount of the loss or damage, tender to the
insurer good and merchantable title to, and possession of, the Mortgaged
Property.
Any mortgage insurance relating to the Contracts underlying a
Series of Certificates will be described in the related Prospectus Supplement.
Acquisition of the Mortgage Loans and Contracts From Unaffiliated Sellers
The Mortgage Loans or Contracts underlying a Series of
Certificates will be purchased by the Depositor, either directly or through
affiliates, from Unaffiliated Sellers pursuant to a separate agreement (a "Loan
Sale Agreement") between the Depositor or such affiliate and each such
Unaffiliated Seller. The Depositor expects that, unless otherwise specified in
the applicable Prospectus Supplement, each Mortgage Loan or Contract so
acquired will have been originated by the originator thereof in accordance with
the underwriting criteria specified under "Underwriting Guidelines." Unless
otherwise specified in the applicable Prospectus Supplement, each Unaffiliated
Seller must be an institution experienced in originating and servicing
conventional mortgage loans or manufactured housing contracts in accordance
with accepted practices and prudent guidelines, and must maintain facilities to
originate and service those loans satisfactory to the Depositor. In addition,
each Unaffiliated Seller must satisfy certain criteria as to financial
stability evaluated on a case by case basis by the Depositor. Unless otherwise
provided in the applicable Prospectus Supplement, each Unaffiliated Seller
pursuant to the related Loan Sale Agreement will make certain representations
and warranties to the Depositor in respect of the Mortgage Loans or Contracts
sold by such Unaffiliated Seller to the Depositor as described herein under
"Representations and Warranties" below. Unless otherwise provided in the
applicable Prospectus Supplement with respect to each Series, the Depositor
will assign all of its rights (except certain rights of indemnification) and
interest in the related Loan Sale Agreement to the related Trustee for the
benefit of the Certificateholders of such Series, and the Unaffiliated Seller
shall thereupon be liable to the Trustee for defective Mortgage Loan or
Contract documents or an uncured breach of such Unaffiliated Seller's
representations or warranties, to the extent described below under "Assignment
of the Mortgage Loans and Contracts" and "Representations and Warranties."
Assignment of the Mortgage Loans and Contracts
At the time of the issuance of the Certificates of a Series,
the Depositor will cause the Mortgage Loans comprising the Mortgage Pool
(including any related rights to, or security interests in, leases, rents and
personal property) or the Contracts comprising the Contract Pool included in
the related Trust Fund to be assigned to the Trustee, together with all
principal and interest received by or on behalf of the Depositor on or with
respect to such Mortgage Loans or Contracts after the Cut-Off Date, other than
principal and interest due on or before the Cut-Off Date and other than any
Fixed Retained Yield. The Trustee or its accent will, concurrently with such
assignment, authenticate and deliver the Certificates evidencing such Series to
the Depositor in exchange for the Mortgage Loans or Contracts. Each Mortgage
Loan or Contract will be identified in a schedule appearing as an exhibit to
the applicable Pooling and Servicing, Agreement. Each such schedule will
include, among other things, the unpaid principal balance as of the close of
business on the applicable Cut-Off Date, the scheduled monthly payment of
principal, if any, and interest, the maturity date and the Mortgage Rate or
Contract Rate for each Mortgage Loan or Contract in the related Trust Fund.
With respect to each Mortgage Loan in a Trust Fund, the
mortgage or other promissory note, any assumption, modification or conversion
to fixed interest rate agreement, a copy of any recorded UCC-1 financing
statements and related continuation statements, together with original executed
UCC-2 or UCC-3 financing statements disclosing an assignment of a security
interest in any personal property constituting security for repayment of the
Mortgage Loan to the Trustee, an executed re-assignment of assignment of
leases, rents and profits to the Trustee if the assignment of leases, rents and
profits is separate from the Mortgage, a mortgage assignment in recordable form
and the recorded Mortgage (or other documents as are required under applicable
law to create a perfected security interest in the Mortgaged Property in favor
of the Trustee) will be delivered to the Trustee (or to a designated
custodian);
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provided that, in instances where recorded documents cannot be delivered due to
delays in connection with recording, copies thereof, certified by the Depositor
to be true and complete copies of such documents, sent for recording, may be
delivered and the original recorded documents will be delivered promptly upon
receipt. As to each Mortgage Loan for which there is primary mortgage insurance,
the certificate of primary mortgage insurance will be delivered to the Trustee.
The assignment of each Mortgage will be recorded promptly after the initial
issuance of Certificates for the related Trust Fund, except in states where, in
the opinion of counsel acceptable to the Trustee, such recording is not required
to protect the Trustee's interest in the Mortgage Loan against the claim of any
subsequent transferee or any successor to or creditor of the Depositor, any
affiliate of the Depositor or the originator of such Mortgage Loan.
With respect to any Mortgage Loans which are Cooperative
Loans, the Depositor will cause to be delivered to the Trustee (or to a
designated custodian) the related original Cooperative Note, the security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Depositor will cause to be filed in the
appropriate office an assignment and a refinancing statement evidencing the
Trustee's security interest in each Cooperative Loan.
With respect to each Contract, there will be delivered to the
Trustee (or to a designated Custodian) the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the property securing each Contract. In order to give notice of the right,
title and interest of Certificateholders to the Contracts, the Depositor will
cause a UCC-1 financing statement to be executed by the Depositor or the
Unaffiliated Seller identifying the Trustee as the secured party and
identifying all Contracts as collateral. Unless otherwise specified in the
related Prospectus Supplement, the Contracts will not be stamped or otherwise
marked to reflect their assignment to the Trust. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Contracts without notice of such assignment, the
interest of Certificateholders in the Contracts could be defeated. See "Certain
Legal Aspects of the Mortgage Loans and Contracts."
The Trustee (or the custodian hereinafter referred to) will
hold such documents relating to Mortgage Loans or Contracts in trust for the
benefit of Certificateholders of the related Series and will review such
documents within 45 days of the date of the applicable Pooling and Servicing
Agreement. Unless otherwise provided in the applicable Prospectus Supplement,
if any document is not delivered or is found to be defective in any material
respect or has not been recorded as required by the applicable Loan Sale
Agreement, the Trustee (or such custodian) shall immediately notify the
Servicer and the Depositor, and the Servicer shall immediately notify the
related Unaffiliated Seller. If the Unaffiliated Seller cannot cure such
omission or defect within 60 days after receipt of such notice, the
Unaffiliated Seller will be obligated, pursuant to the related Loan Sale
Agreement, either to repurchase the related Mortgage Loan or Contract from the
Trustee within 60 days after receipt of such notice, at a price (the "Purchase
Price") equal to the then unpaid principal balance thereof, plus accrued and
unpaid interest at the applicable Mortgage Rate or Contract Rate (less any
Fixed Retained Yield with respect to such Mortgage Loan or Contract and less
the rate, if any, of servicing compensation payable to the Unaffiliated Seller
with respect to such Mortgage Loan or Contract) through the last day of the
month in which such repurchase takes place or to substitute one or more new
Mortgage Loans or Contracts for such Mortgage Loan or Contract. In the case of
a Mortgage Loan or Contract so repurchased by an Unaffiliated Seller, the
Purchase Price will be deposited in the related Certificate Account. In the
case of a substitution, such substitution will be made in accordance with the
standards described in "Representations and Warranties" below.
There can be no assurance that an Unaffiliated Seller will
fulfill this repurchase or substitution obligation. The Servicer will be
obligated to enforce such obligation to the same extent as it must enforce the
obligation of an Unaffiliated Seller for a breach of representation or warranty
as described below under "Representations and Warranties." However, as in the
case of an uncured breach of such a representation or warranty, neither the
Servicer (unless the Servicer is the Unaffiliated Seller) nor the Depositor
will be obligated to purchase or substitute for such Mortgage Loan or Contract
if the Unaffiliated Seller defaults on its repurchase or substitution
obligation, unless such breach also constitutes a breach of the representations
or warranties of the Servicer or the Depositor, as the case may be. Unless
otherwise specified in the related Prospectus Supplement, this repurchase or
substitution obligation constitutes the
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sole remedy available to the Certificateholders or the Trustee for omission of,
or a material defect in, a constituent document.
The Trustee will be authorized to appoint a custodian to
maintain possession of the documents relating to the Mortgage Loans or
Contracts. The custodian will keep such documents as the Trustee's agent under
a custodial agreement.
Representations and Warranties
Each Unaffiliated Seller, pursuant to the related Loan Sale
Agreement, will have made representations and warranties in respect of the
Mortgage Loans sold by such Unaffiliated Seller. Unless otherwise specified in
the related Prospectus Supplement, each Unaffiliated Seller of Mortgage Loans
will have represented, among other things, substantially to the effect that (i)
immediately prior to the sale and transfer of such Mortgage Loans, the
Unaffiliated Seller had good title to, and was the sole owner of, each such
Mortgage Loan and there had been no other assignment or pledge thereof, (ii) as
of the date of such transfer, such Mortgage Loans are subject to no offsets,
defenses or counterclaims, (iii) each Mortgage Loan at the tune it was made
complied in all material respects with applicable state and federal laws,
including, usury, equal credit opportunity and disclosure laws, (iv) a lender's
policy of title insurance was issued on the date of the origination of each
Mortgage Loan and each such policy is valid and remains in full force and
effect, (v) as of the date of such transfer, each related Mortgage is a valid
lien on the related Mortgaged Property (subject only to (a) the lien of current
real property taxes and assessments, (b) covenants, conditions and
restrictions, rights of way, easements and other matters of public record as of
the date of the recording of such Mortgage, such exceptions appearing of record
and either being acceptable to mortgage lending institutions generally or
specifically reflected in the lender's policy of title insurance issued on the
date of origination and either (A) specifically referred to in the appraisal
made in connection with the origination of the related Mortgage Loan or (B)
which do not adversely affect the appraised value of the Mortgaged Property as
set forth in such appraisal, (c) other matters to which like properties are
commonly subject which do not materially interfere with the benefits of the
security intended to be provided by the Mortgage and (d) in the case of second
or more junior loans any senior loans of record as of the date of recording of
the Equity Loan) and such property is free of material damage and is in good
repair, (vi) as of the date of such transfer, no Mortgage Loan is 30 days or
more delinquent in payment and there are no delinquent tax or assessment liens
against the related Mortgaged Property that would permit taxing authority to
initiate foreclosure proceedings, and (vii) with respect to each Mortgage Loan,
if the Mortgaged Property is located in an area identified by the Federal
Emergency Management Agency as having special flood hazards and subject in
certain circumstances to the availability of flood insurance under the federal
flood insurance program, such Mortgaged Property is covered by flood insurance
meeting the requirements of the applicable Pooling and Servicing Agreement.
Each Unaffiliated Seller, pursuant to the related Loan Sale
Agreement, will have made representations and warranties in respect of the
Contracts sold by such Unaffiliated Seller. Unless otherwise specified in the
related Prospectus Supplement, each Unaffiliated Seller of Contracts will have
represented, among other digs, substantially to the effect that (i) immediately
prior to the sale and transfer of such Contracts, the Unaffiliated Seller had
good title to, and was the sole owner of, each such Contract and there had been
no other assignment or pledge thereof, (ii) as of the date of such transfer,
such Contracts are subject to no offsets, defenses or counterclaims, (iii) each
Contract at the time it was made complied in all material respects with
applicable state and federal laws, including usury, equal credit opportunity
and disclosure laws, (iv) as of the date of such transfer, each related
Contract is a valid first lien on the related Manufactured Home and such
Manufactured Home is free of material damage and is in good repair, (v) as of
the date of such transfer, no Contract is 30 days or more delinquent in payment
and there are no delinquent tax or assessment liens against the related
Manufactured Home, and (vi) with respect to each Contract, the Manufactured
Home securing the Contract is covered by a Standard Hazard Insurance Policy in
the amount required by the Pooling and Servicing Agreement and all premiums
then due on such insurance have been paid in full.
All of the representations and warranties of an Unaffiliated
Seller in respect of a Mortgage Loan or Contract will have been made as of the
date on which such Unaffiliated Seller sold the
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Mortgage Loan or Contract to the Depositor. A substantial period of time may
have elapsed between the date as of which the representations and warranties
were made and the later date of initial issuance of the related Series of
Certificates. Since the representations and warranties referred to in the
preceding paragraphs are the only representations and warranties that will be
made by an Unaffiliated Seller, the Unaffiliated Seller's repurchase obligation
described below will not arise if, during the period commencing on the date of
sale of a Mortgage Loan or Contract by the Unaffiliated Seller to the Depositor,
the relevant event occurs that would have given rise to such an obligation had
the event occurred prior to sale of the affected Mortgage Loan or Contract.
However, the Depositor will not include any Mortgage Loan or Contract in the
Trust Fund for any series of Certificates if anything has come to the
Depositor's attention that would cause it to believe that the representations
and warranties of an Unaffiliated Seller will not be accurate and complete in
all material respects in respect of such Mortgage Loan or Contract as of the
date of initial issuance of the related Series of Certificates.
The Depositor will, unless otherwise provided in the
applicable Prospectus Supplement, assign all of its rights (except certain
rights to indemnification) with respect to such representations and warranties
pursuant to any related Loan Sale Agreement to the Trustee for the benefit of
the Certificateholders of the related Series. The Servicer, or the Trustee if
the Servicer is the Unaffiliated Seller, will promptly notify the relevant
Unaffiliated Seller of any breach of any representation or warranty made by it
in respect of a Mortgage Loan or Contract which materially and adversely
affects the interests of the Certificateholders in such Mortgage Loan or
Contract. Unless otherwise specified in the related Prospectus Supplement, if
such Unaffiliated Seller cannot cure such breach within 60 days after notice
from the Servicer or the Trustee, as the case may be, then such Unaffiliated
Seller will be obligated either (i) to repurchase such Mortgage Loan or
Contract from the Trust Fund at the applicable Purchase Price or (ii) subject
to the Trustee's approval and to the extent permitted by the Pooling and
Servicing Agreement, to substitute for such Mortgage Loan or Contract (a
"Deleted Loan") one or more Mortgage Loans or Contracts, as the case may be
(each, a "Substitute Loan"), but only if (i) with respect to a Trust Fund (or
one or more segregated pools of assets therein) for which a REMIC election is
to be made, such substitution is effected within two years of the date of
initial issuance of the Certificates or (ii) with respect to a Trust Fund for
which no REMIC election is to be made, such substitution is effected within 120
days of the date of initial issuance of the Certificates. Except as otherwise
provided in the related Prospectus Supplement, any Substitute Loan will, on the
date of substitution, (i) have a Loan-to-Value Ratio no greater than that of
the Deleted Loan, (ii) have a Mortgage Rate or Contract Rate not less than (and
not more than 1% greater than) the Mortgage Rate or Contract Rate of the
Deleted Loan, (iii) have a Net Mortgage Rate or Net Contract Rate not less than
(and not more than 1% greater than) the Net Mortgage Rate or Net Contract Rate
of the Deleted Loan, (iv) have a remaining term to maturity not greater than
(and not more than one year less than) that of the Deleted Loan and (v) comply
with all of the representations and warranties set forth in the related Loan
Sale Agreement as of the date of substitution. If substitution is to be made
for a Deleted Loan with an adjustable Mortgage Rate or Contract Rate, the
Substitute Loan will also bear interest based on the same index, margin,
frequency and month of adjustment as the Deleted Loan. In the event that one
Substitute Loan is substituted for more than one Deleted Loan, or more than one
Substitute Loan is substituted for one or more Deleted Loans, then the amount
described in clause (i) will be determined on the basis of aggregate principal
balances (provided that in all events the tests for a "qualified mortgage" as
described in the second paragraph under the heading "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC
Certificates--Qualification as a REMIC" are met as to each Substituted Loan),
the rates described in clauses (ii) and (iii) with respect to Deleted Loans
will be determined on the basis of weighted average Mortgage Rates and Net
Mortgage Rates or Contract Rates and Net Contract Rates, as the case may be,
and the terms described in clause (iv) will be determined on the basis of
weighted average remaining terms to maturity. In the case of a Substitute Loan,
the mortgage file relating, thereto will be delivered to the Trustee (or the
custodian) and the Unaffiliated Seller will pay an amount equal to the excess
of (i) the unpaid principal balance of the Deleted Loan, over (ii) the unpaid
principal balance of the Substitute Loan or Loans, together with interest on
such excess at the Mortgage Rate or Contract Rate to the next scheduled Due
Date of the Deleted Loan. Such amount will be deposited in the Certificate
Account for distribution to Certificateholders. Except in those cases in which
the Servicer is the Unaffiliated Seller, the Servicer will be required under
the applicable Pooling and Servicing Agreement to enforce this repurchase or
substitution obligation for the benefit of the Trustee and the holders of the
Certificates, following the practices it would employ in its good faith
business judgment
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were it the owner of such Mortgage Loan or Contract. This repurchase or
substitution obligation will constitute the sole remedy available to holders of
Certificates or the Trustee for a breach of representation by an Unaffiliated
Seller.
Neither the Depositor nor the Servicer (unless the Servicer
is the Unaffiliated Seller) will be obligated to purchase or substitute for a
Mortgage Loan or Contract if an Unaffiliated Seller defaults on its obligation
to do so, and no assurance can be given that Unaffiliated Sellers will carry
out their respective repurchase obligations with respect to Mortgage Loans or
Contracts.
If so specified in the applicable Prospectus Supplement, the
Depositor, the Servicer or another entity specified in the applicable
Prospectus Supplement, will make such representations and warranties as to the
types and geographical concentration of the Mortgage Loans or Contracts in the
related Mortgage Pool or Contract Pool and as to such other matters concerning
such Mortgage Loans or Contracts as may be described therein. Upon a breach of
any such representation or warranty which materially and adversely affects the
interests of the Certificateholders in a Mortgage Loan or Contract, the entity
making such representation or warranty will be obligated either to cure the
breach in all material respects, repurchase the Mortgage Loan or Contract at
the Purchase Price or substitute for such Mortgage Loan or Contract in the
manner, and subject to the conditions, described above regarding the
obligations of Unaffiliated Sellers with respect to missing or defective loan
documents or the breach of such Unaffiliated Sellers' representations and
warranties. This repurchase or substitution obligation constitutes the sole
remedy available to the Certificateholders or the Trustee for a breach of a
representation or warranty by the Depositor, the Servicer or such other party,
respectively.
DESCRIPTION OF THE CERTIFICATES
General
Each Series of Certificates will be issued pursuant to a
Pooling and Servicing Agreement among the Depositor, the Servicer, if the
Series relates to Mortgage Loans or Contracts, and the Trustee named in the
related Prospectus Supplement. The provisions of each Pooling and Servicing
Agreement will vary depending upon the nature of the Certificates to be issued
thereunder and the nature of the related Trust Fund. Forms of the Pooling and
Servicing Agreements have been filed as exhibits to the Registration Statement
of which this Prospectus is a part. The following summaries describe certain
provisions of the Certificates and the Pooling and Servicing Agreements;
however, the summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Pooling and Servicing Agreement for each Series of Certificates and the
applicable Prospectus Supplement. Each Pooling and Servicing Agreement executed
and delivered with respect to each Series will be filed with the Commission as
an exhibit to a Current Report on Form 8-K promptly after issuance of the
Certificates of such Series. The Depositor will provide a copy of the Pooling
and Servicing Agreement (without exhibits) relating to any Series without
charge upon written request of a holder of a Certificate of such Series
addressed to Prudential Securities Secured Financing Corporation, One New York
Plaza, 15th Floor, New York, New York 10292, Attention: Joseph Donovan.
Each Series of Certificates will evidence the beneficial
ownership interest in the related Trust Fund created by the Depositor pursuant
to the related Pooling and Servicing Agreement. Each Series of Certificates
will consist of one or more Classes of Standard Certificates, Stripped
Certificates or Multi-Class Certificates. Any Class of Certificates may be
divided into two or more Subclasses and any Class of Standard Certificates may
be divided into two or more Subclasses that consist of Multi-Class
Certificates. Any Class or Subclass of Multi-Class Certificates may be Compound
Interest Certificates. In addition, each Series for which the Depositor has
caused the related Trust Fund (or one or more segregated pools of assets
therein) to elect to be treated as a REMIC will include one Class or one
Subclass of Residual Certificates with respect to each such REMIC which, if
offered hereby, will represent the right to receive distributions with respect
to such Trust Fund as specified in the related Prospectus Supplement.
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Each Series of Certificates may include one or more Classes
or Subclasses of Certificates (the "Subordinated Certificates") that are
subordinate in right of distributions to one or more other Classes or
Subclasses of Certificates (the "Senior Certificates"). Two types of
subordination arrangements for a Series which consists of two Classes of
Standard Certificates are described herein. See "Distributions to Standard
Certificateholders." Any other type of subordination arrangement for Standard
Certificates, or any subordination arrangement for any Class of Multi-Class
Certificates or Stripped Certificates, will be described in the applicable
Prospectus Supplement. Certain Series or Classes of Certificates may be covered
by insurance policies or other forms of credit enhancement, in each case as
described herein and in the related Prospectus Supplement.
Except as described in the related Prospectus Supplement, the
Mortgage Loans or Contracts included in a Trust Fund will not be guaranteed or
insured by any governmental agency or instrumentality or any other insurer.
The Depositor will cause each Trust Fund (or one or more
segregated pools of assets therein) with respect to a Series which includes
Standard Certificates redeemable on a random lot basis, Multi-Class
Certificates or Shifting Interest Certificates to elect to be treated as a
REMIC. The Depositor may cause any other Trust Fund (or segregated pool of
assets therein) to elect to be treated as a REMIC. If such an election is made,
such Series will consist of one or more Classes or Subclasses of Certificates
that will represent "regular interests" within the meaning of Code Section
860G(a)(1) (such Certificates collectively referred to as the "Regular
Certificates") and one Class or one Subclass of Certificates that will be
designated as the "residual interest" with respect to each REMIC within the
meaning of Code Section 860G(a)(2) (the "Residual Certificates") representing
the right to receive distributions as specified in the Prospectus Supplement
for such Series. See "Certain Federal Income Tax Consequences" herein. The
related Prospectus Supplement will specify whether one or more REMIC elections
are to be made. Alternatively, the Pooling and Servicing Agreement for a Series
may provide that a REMIC election is to be made at the discretion of the
Depositor or the Servicer and may only be made if certain conditions are
satisfied. As to each Series with respect to which a REMIC election is to be
made, the Servicer and the Trustee will be obligated to take certain actions in
order to comply with applicable REMIC laws and regulations, and no
Certificateholder other than a holder of a Residual Certificate will be liable
for any prohibited transaction taxes under applicable REMIC laws and
regulations.
The Depositor may sell certain Classes or Subclasses of the
Certificates of a Series, including one or more Classes or Subclasses of
Subordinated Certificates or one Class or one Subclass of Residual
Certificates, in privately negotiated transactions exempt from registration
under the Securities Act. Alternatively, if so specified in the applicable
Prospectus Supplement, the Depositor may offer one or more Classes or
Subclasses of the Subordinated Certificates or the one Class or one Subclass of
Residual Certificates of a Series by means of this Prospectus and such
Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus
Supplement with respect to a Series of Certificates, each Certificate offered
hereby and by the applicable Prospectus Supplement will be issued in fully
registered form (each, a "Definitive Certificate") and will be issued in the
authorized denominations as specified in the applicable Prospectus Supplement.
The Certificates of a Series offered hereby and by means of the applicable
Prospectus Supplement will be transferable and exchangeable at the office or
agency maintained by the Trustee or such other entity for such purpose set forth
in the related Prospectus Supplement. No service charge will be made for any
transfer or exchange of Certificates, but the Trustee or such other entity may
require payment of a sum sufficient to cover any tax or other governmental
charge in connection with such transfer or exchange. In the event that an
election is made to treat the Trust Fund (or one or more segregated pools of
assets therein) as a REMIC, no legal or beneficial interest in all or any
portion of the "Residual Certificates" thereof may be transferred without the
receipt by the transferor of any affidavit signed by the transferee stating that
the transferee is not a "Disqualified Organization" within the meaning of Code
Section 860E(e)(5) or an agent (including a broker, nominee, or other middleman)
thereof. The Prospectus Supplement with respect to a Series may specify
additional transfer restrictions with respect to the Residual Certificates. See
"Certain Federal Income Tax Consequences--Federal Income Tax Consequences for
REMIC Certificates--Taxation of Residual Certificates--Tax-Related Restrictions
on Transfer of Residual Certificates." If so specified in the related
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Prospectus Supplement, the Certificates of specified Classes or Subclasses of a
Series may be issued in the form of book entries on the records of The
Depository Trust Company ("DTC") and participating members thereof.
Distributions will be made on each of the Distribution Dates
specified in the applicable Prospectus Supplement for a Series to persons in
whose name the Certificates of such Series are registered at the close of
business on the related Record Date. Unless otherwise specified in the
applicable Prospectus Supplement, distributions to Certificateholders of all
Series (other than the final distribution in retirement of the Certificates)
will be made by check mailed to the address of the person entitled thereto as
it appears on the certificate register, except that, with respect to any holder
of a Certificate evidencing not less than the specified fractional undivided
interest, notional amount or Stated Amount set forth in such Prospectus
Supplement, distributions will be made by wire transfer in immediately
available funds, provided that the Trustee shall have been furnished with
appropriate wiring instructions not less than three business days (or such
longer period as may be specified in the related Prospectus Supplement) prior
to the related Distribution Date. The final distribution in retirement of
Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency maintained by the Trustee or such other
entity for such purpose, as specified in the final distribution notice to
Certificateholders.
A Series of Certificates will consist of one or more Classes
of Standard Certificates or Stripped Certificates (referred to hereinafter
sometimes collectively as "Percentage Certificates") or two or more Classes of
Multi-Class Certificates (each as described below).
Percentage Certificates
Each Series of Percentage Certificates may include one or
more Classes of Standard Certificates or Stripped Certificates, any Class of
which may be divided into two or more Subclasses. The Standard Certificates of
each Class will evidence fractional undivided interests in all of the principal
and interest (to the extent of the Net Mortgage Interest Rate) payments on the
Mortgage Loans comprising the Trust Fund related to such Series. Each holder of
a Standard Certificate of a Class will be entitled to receive its Certificate's
percentage interest of the portion of the Pool Distribution Amount (as defined
below) allocated to such Class. The percentage interest of each Standard
Certificate will be equal to the percentage obtained by dividing the aggregate
unpaid principal balance of the Mortgage Loans represented by such Standard
Certificate as of the Cut-Off Date by the aggregate unpaid principal balance of
the Mortgage Loans represented by all the Standard Certificates of the same
Class as of the Cut-Off Date.
The Stripped Certificates of each Class will evidence
fractional undivided interests in specified portions of the principal and/or
interest payments on the Mortgage Loans comprising the Trust Fund related to
such Series. The holders of the Stripped Certificates of each Class will be
entitled to receive a portion (which may be zero) as specified in the
applicable Prospectus Supplement of the principal distributions comprising the
Pool Distribution Amount, and a portion (which may be zero) as specified in the
applicable Prospectus Supplement of the interest distributions comprising the
Pool Distribution Amount on each Distribution Date.
In the case of Classes of Stripped Certificates representing
interests in interest distributions on the Mortgage Loans and not in principal
distributions on the Mortgage Loans, such Certificates will be denominated in
notional amounts. The aggregate original notional amount for a Class of such
Certificates will be equal to the aggregate unpaid principal balance (or a
specified portion thereof) of the Mortgage Loans as of the Cut-Off Date
specified in the applicable Prospectus Supplement. The notional amount of each
such Stripped Certificate will be used to calculate the holder's pro rata share
of the interest distributions on the Mortgage Loans allocated to that Class and
for the determination of certain other rights of holders of such Class of
Stripped Certificates and will not represent an interest in, or entitle any
such holder to any distribution with respect to, any principal distributions on
the Mortgage Loans. Each such Certificate's pro rata share of the interest
distribution on the Mortgage Loans on each Distribution Date will be calculated
by multiplying the interest distributions on the Mortgage Loans allocated to
its Class by a fraction, the numerator of which is the original notional amount
of such Stripped
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Certificates and the denominator of which is the aggregate original notional
amount of all the Stripped Certificates of its Class.
The interest of a Class of Percentage Certificates
representing an interest in a Trust Fund (or a segregated pool of assets
therein) with respect to which an election to be treated as a REMIC has been
made may be fixed as described above or may vary over time as a result of
prepayments received and losses realized on the underlying Mortgage Loans. A
Series of Percentage Certificates comprised of Classes whose percentage
interests in the Trust Fund may vary is referred to herein as a Series of
"Shifting Interest Certificates." Distributions on, and subordination
arrangements with respect to, Shifting Interest Certificates are discussed
below under the headings "Description of the Certificates--Distributions to
Percentage Certificateholders--Shifting Interest Certificates" and "Credit
Support--Subordination--Shifting Interest Certificates."
Multi-Class Certificates
Each Series may include one or more Classes or Subclasses of
Multi-Class Certificates. Each Multi-Class Certificate will be assigned a
Stated Amount or Notional Amount. The Stated Amount may be based on an amount
of principal of the underlying Mortgage Loans or Contracts or on the value of
future cash flows from the related Trust Fund, without distinction as to
principal and interest received on the Mortgage Loans or Contracts. Interest on
the Classes or Subclasses of Multi-Class Certificates will be paid at rates
specified in or determined as specified in the applicable Prospectus
Supplement, and will accrue in the manner specified therein. Any Class or
Subclass of Multi-Class Certificates may consist of Certificates on which
interest accrues but is not payable until such time as specified in the
applicable Prospectus Supplement ("Compound Interest Certificates"), and
interest accrued on any such Certificate will be added to the Stated Amount
thereof in the manner described therein.
The Stated Amount of a Multi-Class Certificate of a Series at
any time will represent the maximum specified dollar amount (exclusive of
interest at the related Interest Rate, if any) to which the holder thereof is
entitled from the cash flow on the Mortgage Loans or Contracts and other assets
in the Trust Fund for such Series and will decline to the extent distributions
in reduction of Stated Amount are received by such holder. The initial Stated
Amount of each Class within a Series of Multi-Class Certificates will be
specified in the applicable Prospectus Supplement.
Forward Commitments; Pre-Funding
A Trust Fund may enter into an agreement (each, a "Forward
Purchase Agreement") with the Depositor whereby the Depositor will agree to
transfer additional Mortgage Loans to such Trust Fund following the date on
which such Trust Fund is established and the related Certificates are issued.
The Trust Fund may enter into Forward Purchase Agreements to permit the
acquisition of additional Mortgage Loans that could not be delivered by the
Depositor or have not formally completed the origination process, in each case
prior to the date on which the Certificates are delivered to the
Certificateholders (the "Closing Date"). Any Forward Purchase Agreement will
require that any Mortgage Loans so transferred to the Trust Fund conform to the
requirements specified in such Forward Purchase Agreement.
If a Forward Purchase Agreement is to be utilized, and unless
otherwise specified in the related Prospectus Supplement, the related Trustee
will be required to deposit in a segregated account (each, a "Pre-Funding
Account") up to 100% of the net proceeds received by the Trustee in connection
with the sale of one or more classes of Certificates of the related Series; the
additional Mortgage Loans will be transferred to the related Trust Fund in
exchange for money released to the Depositor from the related Pre-Funding
Account. Each Forward Purchase Agreement will set a specified period (the
"Funding Period") during which any such transfers must occur; for a Trust Fund
which elects federal income treatment as REMIC or as a grantor trust, the
related Funding Period will be limited to three months from the date such Trust
Fund is established; for a Trust Fund which is treated as a mere security
device for federal income tax purposes, the related Funding Period will be
limited to nine months from the date such Trust Fund is established. The
Forward Purchase Agreement or the related Pooling and Servicing Agreement will
require that, if all moneys originally deposited to such Pre-Funding Account
are not so used by the end of the
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related Funding Period, then any remaining moneys will be applied as a mandatory
prepayment of the related class or classes of Certificates as specified in the
related Prospectus Supplement.
During the Funding Period the moneys deposited to the
Pre-Funding Account will either (i) be held uninvested or (ii) will be invested
in cash-equivalent investments rated in one of the four highest rating
categories by at least one nationally recognized statistical rating
organization and which will either mature prior to the end of the Funding
Period, or will be drawable on demand and in any event, will not constitute the
type of investment which would require registration of the related Trust Funds
as an "investment company" under the Investment Company Act of 1940, as
amended.
Distributions to Percentage Certificateholders
Except as otherwise specified in the applicable Prospectus
Supplement, on or about the 15th day of each month in which a Distribution Date
occurs (the "Determination Date"), the Servicer will determine the amount of
the payments or other receipts on account of principal and interest on the
Mortgage Loans or Contracts which have been received and which will be
distributable to holders of Certificates on the next Distribution Date (as
further described below, the "Pool Distribution Amount"). The Pool Distribution
Amount will be allocated among the Classes or Subclasses of Percentage
Certificates of such Series in the manner described herein under "Description
of the Certificates--Standard Certificates"; however, if such Certificates are
also composed of Senior Certificates and Subordinated Certificates, then the
Pool Distribution Amount will be allocated in accordance with the terms of the
applicable subordination arrangement. Two types of subordination arrangements
are described below for a Series which consists of two Classes of Standard
Certificates. Any other type of subordination arrangement employed for
Certificates of a Series will be described in the related Prospectus
Supplement.
Unless otherwise specified in the applicable Prospectus
Supplement, the "Pool Distribution Amount" for a Distribution Date with respect
to a Series of Certificates as to which the relevant Trust Fund consists of
Mortgage Loans or Contracts will be the sum of all previously undistributed
payments or other receipts on account of principal (including principal
prepayments, Net Liquidation Proceeds (as defined herein), and Net Insurance
Proceeds (as defined herein), if any) and interest on the related Mortgage
Loans or Contracts received by the Servicer after the related Cut-Off Date
(except for amounts due on or prior to such Cut-Off Date), or received by the
Servicer on or prior to the Cut-Off Date but due after the Cut-Off Date, in
either case received on or prior to the Determination Date in the month in
which such Distribution Date occurs, plus (i) all Advances made by the
Servicer, (ii) all withdrawals from any Buy-Down Fund or other fund described
in the related Prospectus Supplement, if applicable, and (iii) all proceeds of
Mortgage Loans or Contracts or property acquired in respect thereof purchased
or repurchased from the Trust Fund as provided in the Pooling and Servicing
Agreement ("Repurchase Proceeds"), but excluding the following:
(a) amounts received as late payments of principal or
interest respecting which the Servicer previously has made one or more
unreimbursed Advances;
(b) any unreimbursed Advances with respect to Liquidated
Mortgage Loans (as defined herein) or Liquidated Contracts (as defined
herein);
(c) those portions of each payment of interest on a
particular Mortgage Loan or Contract which represents (i) the Fixed
Retained Yield, if any, and (ii) the applicable Servicing Fee, as
adjusted in respect of Prepayment Interest Shortfalls as described in
"Servicing of the Mortgage Loans and Contracts--Adjustment to
Servicing Compensation in Connection with Prepaid and Liquidated
Mortgage Loans and Contracts";
(d) all amounts representing scheduled payments of principal
and interest due after the Due Date occurring in the month in which
such Distribution Date occurs;
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(e) all principal prepayments and all proceeds (including
Liquidation Proceeds, Insurance Proceeds and Repurchase Proceeds) of
any Mortgage Loans or Contracts, or property acquired in respect
thereof, liquidated, foreclosed, purchased or repurchased pursuant to
the applicable Pooling and Servicing Agreement, received on or after
the Due Date occurring in the month in which such Distribution Date
occurs, and all related payments of interest on such amounts;
(f) where permitted by the related Pooling and Servicing
Agreement, that portion of Liquidation Proceeds or Insurance Proceeds
which represents Fixed Retained Yield, if any, or any unpaid Servicing
Fee to which the Servicer is entitled;
(g) all amounts representing certain expenses reimbursable to
the Servicer and other amounts pertained to be withdrawn by the
Servicer from the Certificate Account, in each case pursuant to the
applicable Pooling and Servicing Agreement;
(h) all amounts in the nature of late fees, assumption fees,
prepayment fees and similar fees which the Servicer is entitled to
retain pursuant to the applicable Pooling and Servicing Agreement; and
(i) where permitted by the applicable Pooling and Servicing
Agreement, reinvestment earnings on payments received in respect of
the Mortgage Loans or Contracts.
Certificates other than Shifting Interest Certificates
With respect to a Series of Certificates which is comprised
of one Class of Standard Certificates which are Senior Certificates and one
Class of Standard Certificates which are Subordinated Certificates, the
Servicer shall determine the aggregate amount which would have been
distributable to such Class of Senior Certificates (the "Senior Class
Distributable Amount") and the aggregate amount which would have been
distributable to such Class of Subordinated Certificates (the "Subordinated
Class Distributable Amount") assuming, among other things, no delinquencies or
losses on the Mortgage Loans or Contracts preceding such Distribution Date and,
based on the Pool Distribution Amount and such Distributable Amounts, will
determine the amount actually to be distributed to each Class and Subclass.
Calculation of Distributable Amounts. If a Series of
Certificates includes one Class of Standard Certificates which are Senior
Certificates and one Class of Standard Certificates which are Subordinated
Certificates, unless otherwise specified in the applicable Prospectus
Supplement, the Senior Class Distributable Amount with respect to such Senior
Certificates on a Distribution Date will be an amount equal to the sum of:
(i) the aggregate undivided interest, expressed as a
percentage and specified in the applicable Prospectus Supplement,
evidenced by such Class of Senior Certificates (the "Senior Class
Principal Portion") of:
(a) all scheduled payments of principal on each
outstanding Mortgage Loan or Contract that became due on the
Due Date immediately preceding such Distribution Date in
accordance with the amortization schedules of the related
Mortgage Loans or Contracts (as adjusted to give effect to
any previous prepayments), whether or not such payments were
actually received by the Servicer (the aggregate of such
scheduled payments due on any such Due Date being referred to
herein as "Scheduled Principal");
(b) all principal prepayments received by the
Servicer in the month preceding the month in which such
Distribution Date occurs;
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(c) the Scheduled Principal Balance (as defined
herein) of each Mortgage Loan or Contract which was purchased
from the Trust Fund as provided in the Pooling and Servicing
Agreement (as described in "The Trust Funds" and "The Pooling
and Servicing Agreement"), and of each Mortgage Loan or
Contract as to which the Servicer has determined that all
recoveries of Liquidation Proceeds and Insurance Proceeds
have been received (a "Liquidated Mortgage Loan" or
"Liquidated Contract"), in each case during the month
preceding the month in which such Distribution Date occurs,
calculated as of the date each such Mortgage Loan or Contract
was purchased or calculated as of the date each such Mortgage
Loan or Contract became a Liquidated Mortgage Loan or
Liquidated Contract, as the case may be; and
(d) with respect to (1) the disposition of the
Mortgaged Property or Manufactured Home in connection with
any Liquidated Mortgage Loan or Contract, the amount by which
Net Liquidation Proceeds and Net Insurance Proceeds exceed
the unpaid principal balance of such Mortgage Loan or
Contract and accrued but unpaid interest on such Mortgage
Loan or Contract at the Mortgage Rate or Contract Rate to the
Due Date next succeeding the last date of receipt of the
Liquidation Proceeds and Insurance Proceeds, and (2) the
repurchase of Mortgage Loans or Contracts in connection with
an early termination of the Trust Fund (see "The Pooling and
Servicing Agreement--Termination; Purchase of Mortgage Loans
and Contracts"), the amount by which the repurchase price
exceeds the aggregate unpaid principal balances of the
Mortgage Loans or Contracts in the related Trust Fund and
accrued but unpaid interest at the weighted average Mortgage
Rate or Contract Rate through the end of the month in which
such repurchase occurs (collectively, "Gain From Acquired
Property"); and
(ii) interest at the Pass-Through Rate for the Class of
Senior Certificates from the second preceding Due Date (or the Cut-Off
Date in the case of the first Distribution Date) to the Due Date
immediately preceding such Distribution Date on the Senior Class
Principal Portion of the aggregate Scheduled Principal Balance of the
Mortgage Loans or Contracts as of the second preceding Due Date (or as
of the Cut-Off Date in the case of the first Distribution Date)
whether or not such interest was actually received by the Servicer;
provided that Prepayment Interest Shortfall is included only to the
extent that funds for such purposes are available out of Servicing
Compensation; less
(iii) the Senior Class Principal Portion of any
indemnification payments made to the Servicer, the Depositor, or any
officer, director, employee or agent of either the Servicer or the
Depositor since the preceding Distribution Date as described under
"Servicing of the Mortgage Loans and Contracts--Certain Matters
Regarding the Servicer and the Depositor" below (the "Indemnification
Payments").
Unless otherwise specified in the applicable Prospectus
Supplement, the Subordinated Class Distributable Amount with respect to a
Distribution Date for Percentage Certificates which are Subordinated
Certificates will be an amount equal to the sum of:
(i) the aggregate undivided interest, expressed as a
percentage and specified in the applicable Prospectus Supplement,
evidenced by such Subordinated Certificates (the "Subordinated Class
Principal Portion") of:
(a) all Scheduled Principal;
(b) all principal prepayments received by the
Servicer during the month preceding the month in which such
Distribution Date occurs;
(c) the Scheduled Principal Balance of each Mortgage
Loan or Contract which was purchased from the Trust Fund as
provided in the Pooling and Servicing Agreement (as described
in "The Trust Funds" and "The Pooling and Servicing
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Agreement"), and of each Mortgage Loan or Contract which
became a Liquidated Mortgage Loan or Liquidated Contract, in
each case during the month preceding the month in which such
Distribution Date occurs, determined as of the date each such
Mortgage Loan or Contract was purchased, or as of the date
each such Mortgage Loan or Contract became a Liquidated
Mortgage Loan or Liquidated Contract, as the case may be; and
(d) Gain From Acquired Property; and
(ii) interest at the Pass-Through Rate for the Class of
Subordinated Certificates from the second preceding Due Date (or from
the Cut-Off Date in the case of the first Distribution Date) to the
Due Date immediately preceding such Distribution Date on the
Subordinated Class Principal Portion of the Scheduled Principal
Balance of the Mortgage Loans or Contracts as of the second preceding
Due Date (or as of the Cut-Off Date in the case of the first
Distribution Date), whether or not such interest was actually received
with respect to the Mortgage Loans or Contracts; provided that
Prepayment Interest Shortfall is included only to the extent that
funds for such purposes are available out of Servicing Compensation;
less
(iii) the Subordinated Class Principal Portion of any
Indemnification Payments.
The foregoing is subject to the proviso that if one or more
REMIC elections are made with respect to a Series of Certificates, any Gain
From Acquired Property will not be included in the Distributable Amount of the
Class of such Series which consist of Regular Interests, but shall instead be
paid in full to the holders of the Residual Certificates of such Series.
Calculation of Amounts To Be Distributed. The Servicer will
calculate, on the related Determination Date, the portion of the Distributable
Amount for each Class of the Series that is actually available to be paid out
of the Pool Distribution Amount on the Distribution Date prior to any
adjustments with respect to subordination. The portion so available on a
Distribution Date to the Senior Certificateholders and to the Subordinated
Certificateholders (respectively, the "Senior Class Pro Rata Share" and the
"Subordinated Class Pro Rata Share") will, unless otherwise specified in the
applicable Prospectus Supplement, be the amount equal to the product of the
Pool Distribution Amount for such Distribution Date and a fraction, the
numerator of which is the Distributable Amount for such Class on such
Distribution Date and the denominator of which is the sum of the Distributable
Amounts for such Series on such Distribution Date.
So long as the Subordinated Amount is greater than zero, the
holders of Senior Certificates will be entitled to receive on any Distribution
Date the lesser of (a) the sum of the Senior Class Distributable Amount and the
Senior Class Carryover Shortfall (as defined below) and (b) the Senior Class
Pro Rata Share on such Distribution Date (the "Basic Senior Class
Distribution"). In addition, to the extent Senior Class Credit Enhancement is
available, the holders of Senior Certificates will be entitled to receive the
amount, if any, by which the Senior Class Distributable Amount plus any Senior
Class Carryover Shortfall (as defined below) on such Distribution Date exceeds
the Basic Senior Class Distribution on such Distribution Date (such excess
being referred to herein as the "Senior Class Shortfall"). "Senior Class Credit
Enhancement" includes: (a) amounts otherwise distributable to the holders of
Subordinated Certificates on such Distribution Date and amounts available for
such purpose in any Subordination Reserve Fund pursuant to any subordination of
the rights of any holders of Subordinated Certificates as described below; and
(b) any other credit enhancement arrangement which shall be specified in the
related Prospectus Supplement. See "Credit Support". The "Senior Class
Carryover Shortfall" on any Distribution Date means the amount the holders of
Senior Certificates were entitled to receive on the prior Distribution Date
over the amount the holders of Senior Certificates actually received on such
prior Distribution Date, together with interest on the difference at
Pass-Through Rate for the Senior Certificates from such prior Distribution Date
through the current Distribution Date.
At the time the Subordinated Amount, if any, is reduced to
zero, Senior Certificateholders will be entitled to the Senior Class Pro Rata
Share on each Distribution Date. In such event any remaining
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Senior Class Shortfall will cease to be payable from available sources of credit
enhancement, except that the portion of such Senior Class Shortfall which is
attributable to the account of interest on any previous Senior Class Carryover
Shortfall (the "Senior Class Shortfall Accruals") shall continue to bear
interest at the Pass-Through Rate for the Senior Certificates, and the holders
of Senior Certificates shall continue to have a preferential right to be paid
such amount from distributions otherwise available for distribution to any
holders of Subordinated Certificates, until such amount (including interest
thereon at the Pass-Through Rate for the Senior Certificates) is paid in full.
See "Credit Support--Subordination."
So long as the Subordinated Amount is greater than zero, the
holders of Subordinated Certificates will be entitled to receive on any
Distribution Date an amount equal to the excess of (a) the sum of (i) the Pool
Distribution Amount and (ii) all amounts released from the Subordination
Reserve Fund for distribution to the holders of Subordinated Certificates on
such Distribution Date over (b) the sum of (i) the Basic Senior Class
Distribution, (ii) any amounts required to be distributed to the holders of
Senior Certificates pursuant to the subordination of the rights of the holders
of Subordinated Certificates and (iii) amounts required to be deposited in the
Subordination Reserve Fund. See "Credit Support." At the time the Subordinated
Amount, if any, is reduced to zero, Subordinated Certificateholders will be
entitled to the Subordinated Class Pro Rata Share on each Distribution Date;
provided, however, that such amount to be distributed to the holders of
Subordinated Certificates shall be decreased to give effect to the preferential
right of the holders of Senior Certificates to receive Senior Class Shortfall
Accruals as provided herein.
The foregoing is subject to the proviso that if a REMIC
election has been made with respect to a Trust Fund (or a segregated pool of
assets therein), the Subordinated Certificateholders of the related Series will
be entitled to the sum of (a) the Subordinated Class Pro Rata Share, (b) all
amounts in the Subordination Reserve Fund (net of any amount required to be
maintained as liquidity for Advances) and (c) such other amounts, if any, as
may be specified in the related Prospectus Supplement (including, if such
Certificates are Residual Certificates, any Gain From Acquired Property).
Shifting Interest Certificates
On each Distribution Date for a Series which is comprised of
two Classes of Standard Certificates which are Shifting Interest Certificates,
the holders of record on the Record Date of the Senior Certificates thereof
will be entitled to receive, to the extent of the Pool Distribution Amount with
respect to such Distribution Date and prior to any distribution being made on
the related Subordinated Certificates, an amount equal to the Senior Class
Distribution Amount. The Senior Class Distribution Amount will (except as
otherwise set forth in the applicable Prospectus Supplement) be calculated for
any Distribution Date as the lesser of (x) the Pool Distribution Amount for
such Distribution Date and (y) the sum of:
(i) one month's interest at the applicable Pass-Through Rate
on such Class's outstanding principal balance (less, if specified in
the applicable Prospectus Supplement, (a) the amount of such interest
constituting Deferred Interest, if any, not then payable on the
Mortgage Loans or Contracts and (b) the amount by which the Prepayment
Interest Shortfall with respect to the preceding month exceeds the
aggregate Servicing Fees relating to mortgagor or obligor payments or
other recoveries distributed on such Distribution Date, in each case
allocated to such Class on the basis set forth in the related
Prospectus Supplement);
(ii) if distribution of the amount of interest calculated
pursuant to clause (i) above on prior Distribution Dates was not made
in full on such prior Distribution Dates, an amount equal to (a) the
difference between (x) the amount of interest which the holders of
such Certificates would have received on such prior Distribution Dates
if there had been sufficient funds available in the Certificate
Account and (y) the amount of interest actually distributed to such
holders on such prior Distribution Dates, together with interest on
such difference (to the extent permitted by applicable law) at the
applicable Pass-Through Rate of such Class (the "Unpaid Interest
Shortfall") less (b) the aggregate amount distributed on Distribution
Dates subsequent to such prior Distribution Dates with respect to the
Unpaid Interest Shortfall;
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(iii) such Class's percentage, calculated as provided in the
related Prospectus Supplement, of (a) all scheduled payments of
principal due on each outstanding Mortgage Loan or Contract that
became due on the Due Date occurring in the month in which such
Distribution Date occurs, (b) all partial principal prepayments
received in the month preceding the month in which such Distribution
Date occurs and (c) except for Special Hazard Mortgage Loans or
Special Hazard Contracts covered by clause (iv) below, the Scheduled
Principal Balance of each Mortgage Loan or Contract which, during the
month preceding the month in which such Distribution Date occurs, (i)
was the subject of a principal prepayment in full, (ii) became a
Liquidated Mortgage Loan or Liquidated Contract or (iii) was purchased
from the Trust Fund as provided in the Pooling and Servicing Agreement
(as described in "The Trust Funds" and "The Pooling and Servicing
Agreement"); and
(iv) if the Special Hazard Termination Date (as defined
below) has occurred as a result of cumulative net losses on Special
Hazard Mortgage Loans or Special Hazard Contracts exceeding the
applicable Special Hazard Loss Amount (as defined below), such Class's
specified percentage of the Net Liquidation Proceeds and Net Insurance
Proceeds from any Mortgage Loan or Contract that became a Special
Hazard Mortgage Loan or Special Hazard Contract during the month
preceding the month in which such Distribution Date occurs, less the
total amount of delinquent installments of principal in respect of
such Special Hazard Mortgage Loan or Special Hazard Contract that were
previously the subject of distributions to the holders of such Class
of Certificates out of amounts otherwise distributable to the holders
of the related Subordinated Certificates and less the portion of such
Net Liquidation Proceeds and Net Insurance Proceeds allocable to
interest on the Senior Certificates;
provided that, if such Distribution Date falls on or after the Cross-Over Date
(i.e., the date on which the amount of principal payments on the Mortgage Loans
or Contracts to which the holders of the related Subordinated Certificates are
entitled has been reduced to zero as a result of the allocation of losses to
the Subordinated Certificates), then the Senior Class Distribution Amount will
instead equal the lesser of (x) the Pool Distribution Amount and (y) the sum of
the items referred to above plus the amount by which such Senior Certificates'
outstanding principal balance as of such Distribution Date exceeds the Pool
Scheduled Principal Balance as of such Distribution Date. The "Scheduled
Principal Balance" of a Mortgage Loan or Contract for any Distribution Date is
the unpaid principal balance of such Mortgage Loan or Contract as specified in
the amortization schedule at the time relating thereto (before any adjustment
to such schedule by reason of bankruptcy, moratorium or similar waiver or grace
period) as of the first day of the month preceding the month in which such
Distribution Date occurs after giving effect to the payment of principal due on
such first day of the month, any partial prepayments applied on or prior to
such first day of the month, the addition to the principal of such Mortgage
Loan or Contract on or prior to such first day of the month of any Deferred
Interest, and irrespective of any delinquency in payment by the mortgagor or
obligor. The "Pool Scheduled Principal Balance" as of any Distribution Date is
the aggregate of the Scheduled Principal Balances of all Mortgage Loans or
Contracts in a Trust Fund for such Distribution Date.
If so provided in the applicable Prospectus Supplement, the
Class of Senior Certificates will also be entitled to receive its specified
percentage, referred to in clauses (y)(iii)(b) and (y)(iii)(c)(i) above, of all
partial principal prepayments and all principal prepayments in full on the
Mortgage Loans or Contracts in the related Trust Fund under the circumstances
or for the period of time specified therein, which will have the effect of
accelerating the amortization of the Class of Senior Certificates while
increasing the respective interest evidenced by the Class of Subordinated
Certificates in the related Trust Fund. Increasing the respective interest of
the Subordinated Certificates relative to that of the Senior Certificates is
intended to preserve the availability of the subordination provided by the
Subordinated Certificates.
If the Special Hazard Termination Date would occur on any
Distribution Date under the circumstances referred to in "Credit
Support--Subordination," the Senior Class Distribution Amount for each Class
and Subclass of Senior Certificates of such Series calculated as set forth in
the two preceding paragraphs will be modified to the extent described in such
section.
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Amounts distributed to the Class of Senior Certificates on a
Distribution Date will be deemed to be applied first to the payment of current
interest, if any, due on such Certificates (i.e., the amount calculated
pursuant to clause (y)(i) of the third preceding paragraph), second to the
payment of any Unpaid Interest Shortfall (i.e., the amount calculated pursuant
to clause (y)(ii) of such paragraph) and third to the payment of principal, if
any, due on such Certificates (i.e., the aggregate of the amounts calculated
pursuant to clauses (y)(iii) and (y)(iv) of such paragraph).
As indicated above, in the event that the Pool Distribution
Amount on any Distribution Date is not sufficient to make the full distribution
of current interest to the holders of Senior Certificates entitled to payments
of interest, the difference between the amount of current interest which the
holders of such Certificates would have received on such Distribution Date if
there had been sufficient funds available and the amount actually distributed
will be added to the amount of interest which the holders of such Certificates
are entitled to receive on the next Distribution Date. Unless otherwise
specified in the related Prospectus Supplement, the amount of any such interest
shortfall so carried forward will bear interest (to the extent permitted by
applicable law) at the Pass-Through Rate applicable to such Certificates or at
such other rate as specified in the applicable Prospectus Supplement.
If the Pool Distribution Amount is insufficient on any
Distribution Date to make the full distribution of principal due to the holders
of Senior Certificates, the percentage of principal payments to which the
holders of the Senior Certificates would be entitled on the immediately
succeeding Distribution Date will be increased, as more fully described below
under "Credit Support--Subordination--Shifting Interest Certificates." This
increase will have the effect of reducing, as a relative matter, the respective
interest of the holders of the related Subordinated Certificates in future
payments of principal on the related Mortgage Loans or Contracts. If the Pool
Distribution Amount is not sufficient to make full distribution described above
to the holders of the Class of Senior Certificates on any Distribution Date,
unless otherwise provided in the applicable Prospectus Supplement, the holders
of such Class will share in the funds actually available in proportion to the
respective amounts that such Class would have received had the Pool
Distribution Amount been sufficient to make the full distribution of interest
and principal due to such Class.
Unless otherwise provided in the related Prospectus
Supplement, on each Distribution Date the holders of the related Class of
Subordinated Certificates of a Series will be entitled to receive, out of the
Pool Distribution Amount, all amounts remaining and available for distribution
to them after deduction of the amounts required to be distributed to the
holders of all Senior Certificates of such Series.
Example of Distribution to Standard Certificateholders
The following chart sets forth an example of the application
of the foregoing provisions to the first two months of the related Trust Fund's
existence, assuming the Certificates are issued in the month of January, with a
Distribution Date on the 25th of each month and a Determination Date on the
15th of each month:
January 1(A)................................ Cut-Off Date.
January 2 - January 31(B)....................The Servicer receives any
principal prepayments, Net
Liquidation Proceeds, Net
Insurance Proceeds and Repurchase
Proceeds.
January 31(C)............................... Record Date.
February 1 - February 15(D)................. The Servicer receives scheduled
payments of principal and
interest due on February 1.
February 15(E)...............................Determination Date.
February 25(F).............................. Distribution Date.
Succeeding monthly periods follow the pattern of (B) through (F), except that
the period in (B) begins on the first of the month.
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(A) The initial unpaid principal balance of the Mortgage Loans or
Contracts in a Trust Fund would be the aggregate unpaid principal
balance of the Mortgage Loans or Contracts at the close of business on
January 1, after deducting principal payments due on or before such
date. Those principal payments due on or before January 1 and the
related interest payments would not be part of the Trust Fund and
would be remitted by the Servicer to the Depositor when received.
(B) Principal prepayments, Net Liquidation Proceeds, Net Insurance
Proceeds and Repurchase Proceeds received during this period would be
credited to the Certificate Account for distribution to
Certificateholders on the February 25 Distribution Date. To the extent
funds are available from the aggregate Servicing Fees relating to
mortgagor payments or other recoveries distributed on the related
Distribution Date, the Servicer would make an additional payment to
Certificateholders with respect to any Prepayment Interest Shortfall
realized during this period.
(C) Distributions in the month of February will be made to
Certificateholders of record at the close of business on this date.
(D) Scheduled monthly payments on the Mortgage Loans or Contracts due on
February 1 will be deposited in the Certificate Account as received by
the Servicer. Principal prepayments, Net Liquidation Proceeds, Net
Insurance Proceeds and Repurchase Proceeds received during this
period, will be deposited in the Certificate Account but will not be
distributed to Certificateholders on the February 25 Distribution
Date. Instead, such amounts will be credited to the Certificate
Account for distribution to Certificateholders on the March 25
Distribution Date.
(E) As of the close of business on February 15, a determination will be
made of the amounts of Advances and the amounts of principal and
interest which will be distributed to the Certificateholders. Those
scheduled payments due on or before February 1 which have been
received on or before February 15 and those principal prepayments, Net
Liquidation Proceeds, Net Insurance Proceeds and Repurchase Proceeds
received during the period commencing January 2 and ending on January
31 will be distributed to Certificateholders on the February 25
Distribution Date. In addition, the amounts payable in respect of any
form of credit enhancement will be calculated in accordance with the
related Pooling and Servicing Agreement.
(F) Unless otherwise so specified in the related Prospectus Supplement,
the Servicer or the Paying Agent, will make distributions to
Certificateholders on the 25th day of each month, or if such 25th day
is not a business day, on the next business day.
Distributions to Multi-Class Certificateholders
Valuation of Mortgage Loans and Contracts
If specified in the Prospectus Supplement relating to a
Series of Certificates having one or more Classes or Subclasses of Multi-Class
Certificates, for purposes of establishing the principal amount of Mortgage
Loans or Contracts that will be included in a Trust Fund for such Series, each
Mortgage Loan or Contract to be included in such Trust Fund will be assigned an
initial "Pool Value." Unless otherwise specified in the applicable Prospectus
Supplement, the Pool Value of each Mortgage Loan or Contract in the Trust Fund
for such Series will be the Stated Amount of Certificates of such Series which,
based upon certain assumptions and regardless of any prepayments on such
Mortgage Loans or Contracts, can be supported by the scheduled payments of
principal and interest on such Mortgage Loans or Contracts (net of the Fixed
Retained Yield on such Mortgage Loans or Contracts, if any, and the applicable
Servicing Fee), together with reinvestment earnings thereon, if any, at the
Assumed Reinvestment Rate for the period specified in the related Prospectus
Supplement and amounts available to be withdrawn (if applicable) from any
reserve fund for such Series, all as specified in the applicable Prospectus
Supplement. In calculating the Pool Value of a Mortgage Loan or Contract
included in the Trust Fund, future distributions on such Mortgage Loan or
Contract will be determined based on scheduled payments on such Mortgage Loan
or Contract. Any similar Mortgage Loans or Contracts may be aggregated into one
or more groups (each, a "Pool Value Group") each of which will be assigned an
aggregate Pool Value calculated as if all such
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Mortgage Loans or Contracts in the Pool Value Group constituted a single loan
having the highest interest rate and the longest maturity of any such loan for
such Pool Value Group. There are a number of alternative means of determining
the Pool Value of a Mortgage Loan, Contract or Pool Value Group, including
determinations based on the discounted present value of the remaining scheduled
payments of principal and interest thereon and determinations based on the
relationship between the Mortgage Rates or Contract Rates borne thereby and the
Interest Rates of the Multi-Class Certificates of the related Series. The
Prospectus Supplement for each Series will describe the method or methods (and
related assumptions) used to determine the Pool Values of the Mortgage Loans or
Contracts or the Pool Value Groups for such Series.
The "Assumed Reinvestment Rate" for a Series of Multi-Class
Certificates will be the highest rate permitted by the nationally recognized
statistical rating agency or agencies rating such Series of Multi-Class
Certificates or a rate insured by means of a surety bond, guaranteed investment
contract or similar arrangement satisfactory to such rating agency or agencies.
If the Assumed Reinvestment Rate is so insured, the related Prospectus
Supplement will set forth the terms of such arrangement.
Distributions of Interest
The Trustee will make distributions of interest on each Class
of the Multi-Class Certificates from the date and at the rates per annum
(calculated on the Stated Amount or Notional Amount of such Class) specified
in, or as otherwise determined in the manner set forth in, the related
Prospectus Supplement (and unless otherwise specified in such Prospectus
Supplement, calculated on the basis of a 360-day year of twelve 30-day months)
and in accordance with the priorities set forth in the related Prospectus
Supplement. Interest on all Classes of Multi-Class Certificates of a Series,
other than Compound Interest Certificates, will be distributed on the
Distribution Dates for such Series specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
distributions of interest on each Class of Compound Interest Certificates will
be made on each Distribution Date after the Stated Amount of all Multi-Class
Certificates of such Series having a Last Scheduled Distribution Date prior to
the Last Scheduled Distribution Date of such Class of Compound Interest
Certificates has been reduced to zero. Prior to that time, interest on such
Class of Compound Interest Certificates will be added to the Stated Amount
thereof on each Distribution Date. Such Class of Compound Interest Certificates
will thereafter receive distributions of interest on the Stated Amount thereof
as so adjusted.
Distributions in Reduction of Stated Amount for a Series of
Multi-Class Certificates not including a Subordination Feature
The Stated Amount of a Multi-Class Certificate of a Series at
any time will represent the maximum specified dollar amount (excluding interest
distributions, but including, in the case of Compound Interest Certificates,
interest which has not been distributed and which has been added to the Stated
Amount thereof) to which the holder thereof is entitled from the cash flow on
the assets included in the Trust Fund for such Series and will decline to the
extent distributions in reduction of Stated Amount are received by such holder.
The initial Stated Amount of each Class of Multi-Class Certificates will be
specified in the applicable Prospectus Supplement. On each Distribution Date,
distributions in reduction of Stated Amount of the Classes of Multi-Class
Certificates will be made, to the extent funds are available, to the holders of
the Multi-Class Certificates of such Series then entitled to receive such
distributions, in the order and in the amounts specified in the related
Prospectus Supplement. Distributions in reduction of Stated Amount may be
allocated among Classes of Multi-Class Certificates in order to provide limited
protection to certain Classes against an increase in the weighted average life
of such Classes as a result of a slower than expected or scheduled rate of
principal prepayments on the Mortgage Loans ("extension protection"). In
addition, distributions in reduction of Stated Amount may be allocated among
Classes of Multi-Class Certificates in order to provide limited protection to
certain Classes against a reduction in the weighted average life of such
Classes as a result of a faster than expected or scheduled rate or principal
prepayments on the Mortgage Loans ("call protection"). By virtue of such
allocations of distributions in reduction of Stated Amount to provide extension
protection and call protection to some Classes, the weighted average lives of
certain other Classes may be more greatly affected by a faster or slower than
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expected or scheduled rate of principal prepayments on the Mortgage Loans. See
"Prepayment and Yield Considerations--Weighted Average Life of Certificates."
Distributions in reduction of Stated Amount with respect to any Class or
Subclass of Multi-Class Certificates will be made on a pro rata or random lot
or such other basis as is specified in the applicable Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement
relating to a Series of Certificates, the aggregate amount that will be
distributed in reduction of Stated Amount to holders of Multi-Class
Certificates of a Series then entitled thereto on any Distribution Date for
such Series will equal, to the extent funds are available, the sum of (i) the
Multi-Class Certificate Distribution Amount (as defined herein) and (ii) if and
to the extent specified in the related Prospectus Supplement, the applicable
percentage of the Spread specified in such Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus
Supplement, the "Multi-Class Certificate Distribution Amount" with respect to a
Distribution Date for a Series of Multi-Class Certificates will equal the
amount, if any, by which the Stated Amount of the Multi-Class Certificates of
such Series (after taking into account the amount of interest to be added to
the Stated Amount of any Class of Compound Interest Certificates on such
Distribution Date and before giving effect to any distributions in reduction of
Stated Amount on such Distribution Date) exceeds the Pool Value (as defined
herein) of the Mortgage Loans or Contracts included in the Trust Fund for such
Series as of the end of the period (a "Due Period") specified in the related
Prospectus Supplement. For purposes of determining the Multi-Class Certificate
Distribution Amount with respect to a Distribution Date for a Series of
Certificates having one or more Classes of Multi-Class Certificates, the Pool
Value of the Mortgage Loans or Contracts included in the Trust Fund for such
Certificates will be reduced to take into account all distributions thereon
received by the Trustee during the applicable Due Period.
Unless otherwise specified in the applicable Prospectus
Supplement, "Spread" with respect to a Distribution Date for a Series of
Multi-Class Certificates will be the excess of (a) the sum of (i) all payments
of principal and interest received on the related Mortgage Loans or Contracts
(net of the Fixed Retained Yield, if any, and the applicable Servicing Fee, if
any, with respect to such Mortgage Loans or Contracts) in the Due Period
applicable to such Distribution Date and, in the case of the first Due Period,
any amount deposited by the Depositor in the Certificate Account on the Closing
Date, (ii) income from reinvestment thereof, if any, and (iii) to the extent
specified in the applicable Prospectus Supplement, the amount of cash withdrawn
from any reserve fund or available under any other form of credit enhancement
for such Series since the prior Distribution Date (or since the Closing Date,
in the case of the first Distribution Date) and required to be deposited in the
Certificate Account for such Series, over (b) the sum of (i) all required to be
deposited on the Multi-Class Certificates of such Series on such Distribution
Date, (ii) the Multi-Class Certificate Distribution Amount for such
Distribution Date, (iii) if applicable, any Special Distributions (as described
below) in reduction of the Stated Amount of the Multi-Class Certificates of
such Series made since the preceding Distribution Date (or since the Closing
Date in the case of the first Distribution Date), including any accrued
interest distributed with such Special Distributions, (iv) all administrative
and other expenses relating to the Trust Fund payable during the Due Period
preceding such Distribution Date, other than such expenses which are payable by
the Servicer, if any, and (v) any amount required to be deposited into any
reserve fund. Reinvestment income on any reserve fund will not be included in
Spread except to the extent that reinvestment income is taken into account in
calculating the initial amount required to be deposited in such reserve fund,
if any.
Subordination
The Prospectus Supplement relating to a Series which includes
one or more Classes or Subclasses of Multi-Class Certificates may specify that
the rights of one or more of such Classes or Subclasses (or the related
Residual Certificates of such Series) will be Senior to, or subordinated to,
the rights of one or more other Classes of Certificates of such Series.
If a Series which includes one or more Classes or Subclasses
of Multi-Class Certificates includes a subordination feature, on each
Distribution Date, distributions of interest, if any, will be made in
accordance with the preferential priorities specified in the related Prospectus
Supplement and from the date
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and at the Interest Rates specified therein or as otherwise specified therein
and distributions in reduction of Stated Amount, if any, will be made to the
holders of the Multi-Class Certificates in the amount and in the manner
specified in and in accordance with the preferential distribution provisions
described in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement the Subordinated Amount will be reduced as the pool
experiences losses, as well as through seasoning and prepayment of the Mortgage
Loans or Contracts included in the Trust Fund.
Special Distributions
To the extent specified in the Prospectus Supplement relating
to a Series which includes Multi-Class Certificates which have less frequent
than monthly Distribution Dates, any such Class or Subclass having Stated
Amounts may receive special distributions in reduction of Stated Amount,
together with accrued interest on the amount of such reduction ("Special
Distributions") in any month, other than a month in which a Distribution Date
occurs, if, as a result of principal prepayments on the Mortgage Loans or
Contracts, the Trustee determines, based on assumptions specified in the
applicable Pooling and Servicing Agreement, that the amount of cash anticipated
to be available on the next Distribution Date for such Series to be distributed
to the holders of such Multi-Class Certificates may be less than the sum of (i)
the interest scheduled to be distributed to such holders and (ii) the amount to
be distributed in reduction of Stated Amount of such Multi-Class Certificates
on such Distribution Date. Any such Special Distributions will be made in the
same priority and manner as distributions in reduction of Stated Amount would
be made on the next Distribution Date.
To the extent specified in the related Prospectus Supplement,
one or more Classes of Certificates of a Series may be subject to special
distributions in reduction of the Stated Amount thereof at the option of the
holders of such Certificates, or to mandatory distributions by the Servicer.
Any such distributions with respect to a Series will be described in the
applicable Prospectus Supplement and will be on such terms and conditions as
described therein and specified in the Pooling and Servicing Agreement for such
Series.
Last Scheduled Distribution Date
The "Last Scheduled Distribution Date" for each Class of
Multi-Class Certificates of a Series having a Stated Amount, to the extent Last
Scheduled Distribution Dates are specified in the applicable Prospectus
Supplement, is the latest date on which (based upon the assumptions set forth
in the applicable Prospectus Supplement) the Stated Amount of such Class is
expected to be reduced to zero. Since the rate of distributions in reduction of
Stated Amount of each such Class of Multi-Class Certificates will depend upon,
among other things, the rate of payment (including prepayments) of the
principal of the Mortgage Loans or Contracts, the actual last Distribution Date
for any such Class may occur significantly earlier than its Last Scheduled
Distribution Date. To the extent of any delays in receipt of any payments,
insurance proceeds or liquidation proceeds with respect to the Mortgage Loans
or Contracts included in any Trust Fund, the last Distribution Date for any
such Class may occur later than its Last Scheduled Distribution Date. The rate
of payments on the Mortgage Loans or Contracts in the Trust Fund for any Series
of Certificates will depend upon their particular characteristics, as well as
on the prevailing level of Interest Rates from time to time and other economic
factors, and no assurance can be given as to the actual prepayment experience
of the Mortgage Loans or Contracts. See "Prepayment and Yield Considerations."
CREDIT SUPPORT
Subordination
Certificates other than Shifting Interest Certificates
If so specified in the Prospectus Supplement relating to a
Series of Certificates as to which the related Trust Fund consists of Mortgage
Loans or Contracts, other than a Series of Shifting
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Interest Certificates, the rights of the holders of a Class of Subordinated
Certificates to receive distributions will be subordinated to the rights of the
holders of a Class of Senior Certificates, to the extent of the Subordinated
Amount specified in such Prospectus Supplement. The Subordinated Amount will be
reduced by an amount equal to Aggregate Losses and will be further reduced in
accordance with a schedule described in the applicable Prospectus Supplement.
Aggregate Losses as defined in the applicable Pooling and Servicing Agreement
for any given period will equal the aggregate amount of delinquencies, losses
and other deficiencies in the amounts due to the Senior Certificateholders paid
or borne by the Subordinated Certificateholders (but excluding any payments of
Senior Class Shortfall Accruals or interest thereon) ("Payment Deficiencies")
during such period, whether such aggregate amount results by way of withdrawals
from the Subordination Reserve Fund (including, prior to the time that the
Subordinated Amount is reduced to zero, any such withdrawal of amounts
attributable to the Initial Deposit, if any), reductions in amounts that would
otherwise have been distributable to the Subordinated Certificateholders on any
Distribution Date, or otherwise; less the aggregate amount of previous Payment
Deficiencies recovered by the related Trust Fund during such period in respect
of the Mortgage Loans or Contracts giving rise to such Previous Payment
Deficiencies, including, without limitation, such recoveries resulting from the
receipt of delinquent principal or interest payments, Liquidation Proceeds and
insurance proceeds (net, in each case, of any applicable Fixed Retained Yield
and any unpaid Servicing Fee to which the Servicer is entitled, foreclosure
costs and other servicing costs, expenses and advances relating to such
Mortgage Loans or Contracts).
The protection afforded to the Senior Certificateholders by
the subordination feature described above will be effected both by the
preferential right, to the extent specified in the applicable Prospectus
Supplement, of such Senior Certificateholders to receive current distributions
on the related Mortgage Loans or Contracts that, but for such subordination,
would otherwise have been distributable to the Subordinated Certificateholders
from the related Trust Fund (to the extent of the Subordinated Amount for such
Series) and (unless otherwise specified in the applicable Prospectus
Supplement) by the establishment and maintenance of a Subordination Reserve
Fund for such Series. Unless otherwise specified in the applicable Prospectus
Supplement, the Subordination Reserve Fund will not be a part of the Trust
Fund. The Subordination Reserve Fund may be funded initially with an initial
deposit by the Depositor (the "Initial Deposit") in an amount set forth in the
applicable Prospectus Supplement. Following the initial issuance of the
Certificates of a Series and until the balance of the Subordination Reserve
Fund (without taking into account the amount of any Initial Deposit) first
equals or exceeds the Specified Subordination Reserve Fund Balance set forth in
the applicable Prospectus Supplement, the Servicer will withhold all amounts
that would otherwise have been distributable to the Subordinated
Certificateholders and deposit such amounts (less any portions thereof required
to be distributed to Senior Certificateholders as described below) in the
Subordination Reserve Fund. The time necessary for the Subordination Reserve
Fund of a Series to reach the applicable Specified Subordination Reserve Fund
Balance for such Series after the initial issuance of the Certificates, and the
period for which such balance is maintained, will be affected by the
prepayment, delinquency and foreclosure or repossession experience of the
Mortgage Loans or Contracts in the related Trust Fund and cannot be accurately
predicted. Unless otherwise specified in the applicable Prospectus Supplement,
after the amount in the Subordination Reserve Fund (without taking into account
the amount of any Initial Deposit) for a Series first equals or exceeds the
applicable Specified Subordination Reserve Fund Balance, the Servicer will
withhold from the Subordinated Certificateholders and will deposit in the
Subordination Reserve Fund such portion of the principal payments on the
Mortgage Loans or Contracts otherwise distributable to the Subordinated
Certificateholders as may be necessary to maintain the Subordination Reserve
Fund (without taking into account the amount of any Initial Deposit) at the
Specified Subordination Reserve Fund Balance. The Prospectus Supplement for
each Series will set forth the amount of the Specified Subordination Reserve
Fund Balance applicable from time to time and the extent, if any, to which the
Specified Subordination Reserve Fund Balance may be reduced. Unless otherwise
specified in the applicable Prospectus Supplement, the Specified Subordination
Reserve Fund Balance for a Series will not be required to exceed the
Subordinated Amount.
If on any Distribution Date while the Subordinated Amount
exceeds zero, there is a Senior Class Shortfall, the Senior Class
Certificateholders will be entitled to receive from current payments on the
Mortgage Loans or Contracts that would otherwise have been distributable to
Subordinated
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Certificateholders the amount of such Senior Class Shortfall. If such current
payments are insufficient, an amount equal to the lesser of: (i) the entire
amount on deposit in the Subordination Reserve Fund available for such purpose;
or (ii) the amount necessary to cover the Senior Class Shortfall will be
withdrawn from the Subordination Reserve Fund. Amounts representing investment
earnings on amounts held in the Subordination Reserve Fund will not be
available to make payments to the Senior Certificateholders. If current
payments on the Mortgage Loans or Contracts and amounts available in the
Subordination Reserve Fund are insufficient to pay the entire Senior Class
Shortfall, then amounts held in the Certificate Account for future
distributions will be distributed as necessary to the Senior
Certificateholders.
In the event the Subordination Reserve Fund is depleted
before the Subordinated Amount is reduced to zero, the Senior
Certificateholders will continue to have a preferential right, to the extent
specified in the applicable Prospectus Supplement, to receive current
distributions of amounts that would otherwise have been distributable to the
Subordinated Certificateholders to the extent of the then Subordinated Amount.
After the Subordinated Amount is reduced to zero, the Senior
Certificateholders of a Series will, unless otherwise specified in the
applicable Prospectus Supplement, nonetheless have a preferential right to
receive payment of Senior Class Shortfall Accruals and interest which has
accrued thereon from amounts that would otherwise have been distributable to
the Subordinated Certificateholders. The Senior Certificateholders will
otherwise bear their proportionate share of any losses realized on the Trust
Fund in excess of the Subordinated Amount.
Unless otherwise specified in the related Prospectus
Supplement, amounts held from time to time in the Subordination Reserve Fund
for a Series will be held for the benefit of the Senior Certificateholders and
Subordinated Certificateholders of such Series until withdrawn from the
Subordination Reserve Fund as described below; provided, however, that the
portion of the Initial Deposit, if any, which has not been recovered by the
Servicer and any undistributed investment earnings attributable thereto will
continue to be the property of the Servicer and will ultimately be recoverable
by the Servicer.
Amounts withdrawn from the Subordination Reserve Fund for a
Series and deposited in the Certificate Account for such Series will be charged
first against amounts in the Subordination Reserve Fund other than the Initial
Deposit, if any, for such Series, and thereafter against such Initial Deposit.
If so specified in the related Prospectus Supplement, if the
Subordinated Amount for a Series is reduced to zero and funds remain in the
Subordination Reserve Fund, an amount (the "Advance Reserve") equal to the
lesser of (i) the amount of the Initial Deposit and (ii) such funds remaining
in the Subordination Reserve Fund at the time the Subordinated Amount is
reduced to zero, will remain in the Subordination Reserve Fund and be available
in certain circumstances for withdrawal to make Advances.
Any amounts in the Subordination Reserve Fund for a Series on
a Distribution Date in excess of the Specified Subordination Reserve Fund
Balance on such date prior to the time the Subordinated Amount for such Series
is reduced to zero, and any amounts remaining in the Subordination Reserve Fund
for such Series upon termination of the trust created by the applicable Pooling
and Servicing Agreement, will be paid, unless otherwise specified in the
applicable Prospectus Supplement, to the Subordinated Certificateholders of
such Series in accordance with their pro rata ownership thereof, or, in the
case of a Series with respect to which an election has been made to treat the
Trust Fund as a REMIC, first to the Residual Certificateholders (to the extent
of any portion of the Initial Deposit, if any, and undistributed reinvestment
earnings attributable thereto), and second to the Subordinated
Certificateholders of such Series, in each case in accordance with their pro
rata ownership thereof. Amounts permitted to be distributed from the
Subordination Reserve Fund for a Series will no longer be subject to any claims
or rights of the Senior Certificateholders of such Series.
Funds in the Subordination Reserve Fund for a Series will be
invested as provided in the applicable Pooling and Servicing Agreement in
certain types of eligible investments ("Eligible Investments"). If an election
has been made to treat the Trust Fund (or one or more pools of segregated
assets therein) as a REMIC, no more than 30% of the income or gain of the
Subordination Reserve Fund in
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any taxable year may be derived from the sale or other disposition of
investments held for less than three months in the Subordination Reserve Fund.
The earnings on such investments will be withdrawn and paid to the Subordinated
Certificateholders of such Series or to the holders of the Residual
Certificates, in the event that an election has been made to treat the Trust
Fund (or a pool of segregated assets therein) with respect to such Series as a
REMIC, in accordance with their respective interests. Investment income earned
on amounts held in the Subordination Reserve Fund will not be available for
distribution to the Senior Certificateholders or otherwise subject to any
claims or rights of the Senior Certificateholders.
Eligible Investments for monies deposited in the
Subordination Reserve Fund will be specified in the applicable Pooling and
Servicing Agreement and, unless otherwise provided in the applicable Prospectus
Supplement, will mature no later than the next Distribution Date.
Holders of Subordinated Certificates of a Series will not be
required to refund any amounts which have been properly distributed to them,
regardless of whether there are sufficient funds to distribute to Senior
Certificateholders the amounts to which they are entitled.
If specified in the related Prospectus Supplement, the
Subordination Reserve Fund may be funded in any other manner acceptable to each
Rating Agency and consistent with an election, if any, to treat the Trust Fund
(or one or more pools of segregated assets therein) for such Series as a REMIC,
as will be more fully described in such Prospectus Supplement.
Shifting Interest Certificates
If specified in the applicable Prospectus Supplement, the
rights of the holders of the Subordinated Certificates of a Series of Shifting
Interest Certificates to receive distributions with respect to the Mortgage
Loans or Contracts in the related Trust Fund will be subordinated to such
rights of the holders of the Senior Certificates of such Series to the extent
described below, except as otherwise set forth in such Prospectus Supplement.
This subordination is intended to enhance the likelihood of regular receipt by
holders of Senior Certificates of the full amount of scheduled monthly payments
of principal and interest due them and to provide limited protection to the
holders of the Senior Certificates against losses due to mortgagor or obligor
defaults.
The protection afforded to the holders of Senior Certificates
of such a Series by the subordination feature described above will be effected
by the preferential right of such holders to receive, prior to any distribution
being made in respect of the related Subordinated Certificates, current
distributions on the related Mortgage Loans or Contracts of principal and
interest due them on each Distribution Date out of the funds available for
distribution on such date in the related Certificate Account and, to the extent
described below, by the right of such holders to receive future distributions
on the Mortgage Loans or Contracts that would otherwise have been payable to
the holders of Subordinated Certificates.
Losses realized on Liquidated Mortgage Loans or Liquidated
Contracts (other than certain Liquidated Mortgage Loans that are Special Hazard
Mortgage Loans or Liquidated Contracts that are Special Hazard Contracts as
described below) will be allocated to the holders of Subordinated Certificates
through a reduction of the amount of principal payments on the Mortgage Loans
or Contracts to which such holders are entitled. Prior to the Cross-Over Date,
holders of Senior Certificates of each Class entitled to a percentage of
principal payments on the related Mortgage Loans or Contracts will be entitled
to receive, as part of their respective Senior Class Distribution Amounts
payable on each Distribution Date in respect of each Mortgage Loan or Contract
that became a Liquidated Mortgage Loan or Liquidated Contract in the preceding
month (subject to the additional limitation described below applicable to
Liquidated Mortgage Loans that are Special Hazard Mortgage Loans or Liquidated
Contracts that are Special Hazard Contracts), their respective shares of the
Scheduled Principal Balance of each such Liquidated Mortgage Loan or Liquidated
Contract, together with interest accrued at the Pass-Through Rate for such
Class, irrespective of whether Net Liquidation Proceeds and Net Insurance
Proceeds realized thereon are sufficient to cover such amount. For a
description of the full Senior Class Distribution Amount payable to holders of
Senior Certificates of each Series, see "Description of the
Certificates--Distributions to Standard Certificateholders--Shifting Interest
Certificates."
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On each Distribution Date occurring on or after the
Cross-Over Date, holders of Senior Certificates of each Class entitled to a
percentage of principal payments will generally receive, as part of their
respective Senior Class Distribution Amounts, only their respective shares of
the Net Liquidation Proceeds and Net Insurance Proceeds actually realized in
respect of the applicable Liquidated Mortgage Loans or Liquidated Contracts
after reimbursement to the Servicer of any previously reimbursed Advances made
in respect of such Liquidated Mortgage Loans or Liquidated Contracts. See
"Description of the Certificates--Distributions to Standard
Certificateholders--Shifting Interest Certificates."
In the event that a Mortgage Loan becomes a Liquidated
Mortgage Loan or a Contract becomes a Liquidated Contract as a result of a
hazard not insured against under a Standard Hazard Insurance Policy (a "Special
Hazard Mortgage Loan" or "Special Hazard Contract"), the holders of Senior
Certificates of each Class entitled to a percentage of principal payments on
the related Mortgage Loans or Contracts will be entitled to receive in respect
of each Mortgage Loan or Contract which became a Special Hazard Mortgage Loan
or Special Hazard Contract in the preceding month, as part of their respective
Senior Class Distribution Amounts payable on each Distribution Date prior to
the Special Hazard Termination Date, their respective shares of the Scheduled
Principal Balance of such Mortgage Loan or Contract, together with interest
accrued at the applicable Pass-Through Rate, rather than their respective
shares of Net Liquidation Proceeds and Net Insurance Proceeds actually
realized. The Special Hazard Termination Date for a Series of Certificates will
be the earlier to occur of (i) the date on which cumulative net losses in
respect of Special Hazard Mortgage Loans or Special Hazard Contracts exceed the
Special Hazard Loss Amount specified in the applicable Prospectus Supplement or
(ii) the Cross-Over Date. Since the amount of the Special Hazard Loss Amount
for a Series of Certificates is expected to be significantly less than the
amount of principal payments on the Mortgage Loans or Contracts to which the
holders of the Subordinated Certificates of such Series are initially entitled
(such amount being subject to reduction, as described above, as a result of
allocation of losses on other Liquidated Mortgage Loans or Liquidated Contracts
as well as Special Hazard Mortgage Loans or Special Hazard Contracts), the
holders of Subordinated Certificates of such Series will bear the risk of
losses in the case of Special Hazard Mortgage Loans or Special Hazard Contracts
to a lesser extent than they will bear losses on other Liquidated Mortgage
Loans or Liquidated Contracts. Once the Special Hazard Termination Date has
occurred, holders of Senior Certificates of each Class entitled to payments of
principal will be entitled to receive, as part of their respective Senior Class
Distribution Amounts, only their respective shares of Net Liquidation Proceeds
and Net Insurance Proceeds realized on Special Hazard Mortgage Loans or Special
Hazard Contracts (less the total amount of delinquent installments in respect
of each Special Hazard Mortgage Loan or Special Hazard Contract that were
previously the subject of distributions to the holders of the Senior
Certificates and less the portion of such Net Liquidation Proceeds and Net
Insurance Proceeds allocable to interest). The outstanding principal balance or
notional amount of each such Class will, however, be reduced by such Class's
specified percentage of the Scheduled Principal Balance of each such Special
Hazard Mortgage Loan or Special Hazard Contract. See "Description of the
Certificates--Distributions to Standard Certificateholders--Shifting Interest
Certificates."
If the cumulative net losses on all Mortgage Loans or
Contracts in a Trust Fund that have become Special Hazard Mortgage Loans or
Special Hazard Contracts in the months prior to the month in which a
Distribution Date occurs would exceed the Special Hazard Loss Amount for a
Series of Certificates, that portion of the Senior Class Distribution Amount as
of such Distribution Date for each Class of Senior Certificates of such Series
entitled to a percentage of principal payments on the Mortgage Loans or
Contracts in the related Trust Fund attributable to Mortgage Loans or Contracts
which became Special Hazard Mortgage Loans or Special Hazard Contracts in the
month preceding the month of such Distribution Date will be calculated not on
the basis of the Scheduled Principal Balances of such Special Hazard Mortgage
Loans or Special Hazard Contracts but rather will be computed as an amount
equal to the lesser of (a) such Class's percentage, calculated as provided in
the related Prospectus Supplement, of the Scheduled Principal Balance of such
Special Hazard Mortgage Loans or Special Hazard Contracts and (b) the sum of
(i) the excess of the Special Hazard Loss Amount over the cumulative net losses
on all Mortgage Loans or Contracts that became Special Hazard Mortgage Loans or
Special Hazard Contracts in months prior to the month of such Distribution Date
and (ii) the excess of (a) the product of the percentage of principal payments
to which such Class is entitled multiplied by the aggregate Net Liquidation
Proceeds and Net Insurance Proceeds (net of the portion of each thereof
allocable to interest) of the Mortgage Loans
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or Contracts which became Special Hazard Mortgage Loans or Special Hazard
Contracts in the month preceding the month of such Distribution Date over (b)
the total amount of delinquent installments in respect of such Special Hazard
Mortgage Loans or Special Hazard Contracts that were previously the subject of
distributions to such Class paid out of amounts otherwise distributable to the
holders of the related Subordinated Certificates.
Although the subordination feature described above is
intended to enhance the likelihood of timely payment of principal and interest
to the holders of Senior Certificates, shortfalls could result in certain
circumstances. For example, a shortfall in the payment of principal otherwise
due the holders of Senior Certificates could occur if losses realized on the
Mortgage Loans or Contracts in a Trust Fund were exceptionally high and were
concentrated in a particular month. See "Description of the
Certificates--Distributions to Standard Certificateholders--Shifting Interest
Certificates" for a description of the consequences of any shortfall of
principal or interest.
The holders of Subordinated Certificates will not be required
to refund any amounts previously properly distributed to them, regardless of
whether there are sufficient funds on a subsequent Distribution Date to make a
full distribution to holders of each Class of Senior Certificates of the same
Series.
Other Credit Enhancement
In addition to subordination as discussed above, credit
enhancement may be provided with respect to any Series of Certificates in any
other manner which may be described in the applicable Prospectus Supplement,
including, but not limited to, credit enhancement through an alternative form
of subordination and/or one or more of the methods described below.
Limited Guarantee
If so specified in the Prospectus Supplement with respect to
a Series of Certificates, credit enhancement may be provided in the form of a
limited guarantee issued by a guarantor named therein.
Letter of Credit
Alternative credit support with respect to a Series of
Certificates may be provided by the issuance of a letter of credit by the bank
or financial institution specified in the applicable Prospectus Supplement. The
coverage, amount and frequency of any reduction in coverage provided by a
letter of credit issued with respect to a Series of Certificates will be set
forth in the Prospectus Supplement relating to such Series.
Pool Insurance Policies
If so specified in the Prospectus Supplement relating to a
Series of Certificates, the Depositor will obtain a pool insurance policy for
the Mortgage Loans or Contracts in the related Trust Fund. The pool insurance
policy will cover any loss (subject to the limitations described in a related
Prospectus Supplement) by reason of default to the extent a related Mortgage
Loan or Contract is not covered by any primary mortgage insurance policy. The
amount and terms of any such coverage will be set forth in the Prospectus
Supplement.
Special Hazard Insurance Policies or Other Forms of Support for
Special Hazard Losses
If so specified in the applicable Prospectus Supplement, for
each Series of Certificates as to which a pool insurance policy is provided,
the Depositor will also obtain a special hazard insurance policy for the
related Trust Fund in the amount set forth in such Prospectus Supplement. The
special hazard insurance policy will, subject to the limitations described in
the applicable Prospectus Supplement,
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protect against loss by reason of damage to Mortgaged Properties or
Manufactured Homes caused by certain hazards not insured against under the
standard form of hazard insurance policy for the respective states in which the
Mortgaged Properties or Manufactured Homes are located. The amount and terms of
any such coverage will be set forth in the Prospectus Supplement.
Surety Bonds
If so specified in the Prospectus Supplement relating to a
Series of Certificates, credit support with respect to one or more Classes of
Certificates of a Series may be provided by the issuance of a surety bond
issued by a financial guarantee insurance company specified in the applicable
Prospectus Supplement. The coverage, amount and frequency of any reduction in
coverage provided by a surety bond will be set forth in the Prospectus
Supplement relating to such Series.
Fraud Coverage
If so specified in the applicable Prospectus Supplement,
losses resulting fraud, dishonesty or misrepresentation in connection with the
origination or sale of the Mortgage Loans or Contracts may be covered to a
limited extent by representations and warranties to the effect that no such
fraud, dishonesty or misrepresentation had occurred, by a reserve fund, letter
of credit, or other method. The amount and terms of any such coverage will be
set forth in the Prospectus Supplement.
Mortgagor Bankruptcy Bond
If so specified in the applicable Prospectus Supplement,
losses resulting from a bankruptcy proceeding relating to a mortgagor or
obligor affecting the Mortgage Loans or Contracts in a Trust Fund with respect
to a Series of Certificates will be covered under a mortgagor bankruptcy bond
(or any other instrument that will not result in a downgrading of the rating of
the Certificates of a Series by the Rating Agency that rated such Series). Any
mortgagor bankruptcy bond or such other instrument will provide for coverage in
an amount meeting the criteria of the Rating Agency rating the Certificates of
the related Series, which amount will be set forth in the related Prospectus
Supplement. The amount and terms of any such coverage will be set forth in the
Prospectus Supplement.
Other Insurance, Guarantees and Similar Instruments or Agreements
If specified in the related Prospectus Supplement, a Trust
Fund may include in lieu of some or all of the foregoing or in addition thereto
third party guarantees, and other arrangements for maintaining timely payments
or providing additional protection against losses on the assets included in
such Trust Fund, paying administrative expenses, or accomplishing such other
purpose as may be described in the Prospectus Supplement. The Trust Fund may
include a guaranteed investment contract or reinvestment agreement pursuant to
which funds held in one or more accounts will be invested at a specified rate.
If any Class of Certificates has a floating interest rate, or if any of the
Mortgage Loans or Contracts in the related Trust Fund has a floating interest
rate, the Trust Fund may include an interest rate swap contract, an interest
rate cap agreement or similar contract providing limited protection against
interest rate risks.
PREPAYMENT AND YIELD CONSIDERATIONS
Pass-Through Rates and Interest Rates
Any Class of Certificates of a Series may have a fixed
Pass-Through Rate or Interest Rate, or a Pass-Through Rate or Interest Rate
which varies based on changes in an index or based on changes with respect to
the underlying Mortgage Loans or Contracts (such as, for example, varying on
the basis of changes in the weighted average Net Mortgage Rate or Net Contract
Rate of the underlying
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Mortgage Loans or Contracts) or may receive interest payments with respect to
the underlying Mortgage Loans or Contracts in such other manner specified in
the applicable Prospectus Supplement.
The Prospectus Supplement for each Series will specify the
range and the weighted average of the Mortgage Rates or Contract Rates and Net
Mortgage Rates or Net Contract Rates for the Mortgage Loans or Contracts
underlying such Series as of the Cut-Off Date. Unless otherwise specified in
the related Prospectus Supplement, each monthly interest payment on a Mortgage
Loan or Contract will generally be calculated as the product of one-twelfth of
the applicable Mortgage Rate or Contract Rate at the time of such calculation
and the then unpaid principal balance on such Mortgage Loan or Contract. The
Net Mortgage Rate or Net Contract Rate with respect to each Mortgage Loan or
Contract will be similarly calculated on a loan-by-loan basis, by subtracting
from the applicable Mortgage Rate or Contract Rate, the Fixed Retained Yield,
if any, payable to the Depositor or other person or entity specified in the
Prospectus Supplement and any Servicing Fee applicable to each Mortgage Loan or
Contract. If the Trust Fund includes adjustable-rate Mortgage Loans or
Contracts or includes Mortgage Loans or Contracts with different Net Mortgage
Rates or Net Contract Rates, the weighted average Net Mortgage Rate or Net
Contract Rate may vary from time to time as set forth below. See "The Trust
Funds." The Prospectus Supplement for a Series will also specify the initial
Pass-Through Rate or Interest Rate for each Class of Certificates of such
Series having a Pass-Through Rate or Interest Rate and will specify whether
each such Pass-Through Rate or Interest Rate is fixed or is variable.
The Net Mortgage Rate or Net Contract Rate for any adjustable
rate Mortgage Loan or Contract will change with any changes in the index
specified in the related Prospectus Supplement on which such Mortgage Rate or
Contract Rate adjustments are based, subject to any applicable periodic or
aggregate caps or floors on the related Mortgage Rate or Contract Rate or other
limitations described in the related Prospectus Supplement. The weighted
average Net Mortgage Rate or Net Contract Rate with respect to any Series may
vary due to changes in the Net Mortgage Rates or Net Contract Rates of
adjustable rate Mortgage Loans or Contracts, to the timing of the Mortgage Rate
or Contract Rate readjustments of such Mortgage Loans or Contracts and to
different rates of payment of principal of fixed or adjustable rate Mortgage
Loans or Contracts bearing different Mortgage Rates or Contract Rates.
If the Trust Fund for a Series includes adjustable rate
Mortgage Loans or Contracts, any limitations on the periodic changes in a
mortgagor's or obligor's monthly payment, any limitations on the adjustments to
the Net Mortgage Rates or Mortgage Rates or to the Net Contract Rates or
Contract Rates, any provision that could result in Deferred Interest and the
effects, if any, thereof on the yield on Certificates of the related Series
will be discussed in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus
Supplement, no distribution of principal and only a partial distribution of
interest will be made to Certificateholders with respect to a negatively
amortizing Mortgage Loan or Contract. Distribution of the portion of scheduled
interest at the applicable Net Mortgage Rate or Net Contract Rate representing
Deferred Interest with respect to such Mortgage Loan or Contract will be passed
through to the Certificateholders on the Distribution Date following the Due
Date on which it is received. Such Deferred Interest will bear interest at the
Net Mortgage Rate or Net Contract Rate for such Mortgage Loan or Contract. For
federal income tax purposes, Deferred Interest may constitute interest income
to the Trust Fund and to Certificateholders at the time that it accrues, rather
than at the time that it is paid. See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for Certificates as to Which No
REMIC Election Is Made--Deferred Interest," "-- Federal Income Tax Consequences
for REMIC Certificates--Taxation of Regular Certificates--Deferred Interest"
and "-- Taxation of Residual Certificates--Deferred Interest."
Scheduled Delays in Distributions
At the date of initial issuance of the Certificates of each
Series offered hereby, the initial purchasers of a Class of Certificates (other
than certain Classes of Residual Certificates) will be required to pay accrued
interest at the applicable Pass-Through Rate or Interest Rate for such Class
from the Cut-Off Date for such Series to, but not including the date of
issuance. With respect to Standard Certificates, the effective yield to
Certificateholders will be below the yield otherwise produced by the applicable
Pass-
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Through Rate because while interest will accrue at such Pass-Through Rate from
the first day of each month through the last day of such month (unless
otherwise specified in the related Prospectus Supplement), principal and
interest distributions with respect to such month will not be made until the
25th day (or if such 25th day is not a business day, the business day
immediately following such 25th day) of the month following the month of
accrual (or until such other Distribution Date specified in the applicable
Prospectus Supplement). If so specified in the related Prospectus Supplement, a
Class of Multi-Class Certificates may be entitled to distributions on each
Distribution Date of interest accrued during a period (an "Interest Accrual
Period" specified in such Prospectus Supplement ending on such Distribution
Date or ending on a date preceding such Distribution Date. In the latter case
the effective yield to such Certificateholders will be below the yield
otherwise produced by the applicable initial public offering prices and
Interest Rates because (i) on the first Distribution Date the time period upon
which interest payable is calculated will be less than the time elapsed since
the commencement of accrual of interest, (ii) the interest that accrues during
the Interest Accrual Period will not be paid until a date following such
Interest Accrual Period specified in the related Prospectus Supplement, and
(iii) during each Interest Accrual Period following the first Interest Accrual
Period, in the case of a Class of Multi-Class Certificates currently receiving
distributions in reduction of Stated Amount, interest is based upon a Stated
Amount which is less than the Stated Amount of such Certificates actually
outstanding, since the distribution in reduction of Stated Amount made on the
following Distribution Date is deemed to have been made, for interest accrual
purposes only, at the end of the preceding Interest Accrual Period. The
Prospectus Supplement for each Series of Certificates will set forth the nature
of any scheduled delays in distribution and the impact on the yield of such
Certificates.
Interest Shortfalls Due to Principal Prepayments
When a Mortgage Loan or Contract is prepaid in full, the
mortgagor or obligor pays interest on the amount prepaid only to the date of
prepayment and not thereafter. Similarly, Liquidation Proceeds and Insurance
Proceeds are also likely to include interest only to the time of payment. When
a Mortgage Loan or Contract is prepaid in part, and such prepayment is applied
as of a date other than the Due Date occurring in the month of receipt or the
Due Date occurring in the month following the month of receipt, the mortgagor
or obligor pays interest on the amount prepaid only to the date of prepayment
and not thereafter. The effect of the foregoing is to reduce the aggregate
amount of interest which would otherwise be passed through to
Certificateholders if such Mortgage Loan or Contract were outstanding, or if
such partial prepayment were applied, on the succeeding Due Date. To mitigate
this reduction in yield, the Pooling and Servicing Agreement relating to a
Series will provide, unless otherwise specified in the applicable Prospectus
Supplement, that with respect to any principal prepayment or liquidation of any
Mortgage Loan or Contract underlying the Certificates of such Series, the
Servicer will pay into the Certificate Account for such Series to the extent
funds are available for such purpose from the related aggregate Servicing Fees
(or portion thereof as specified in the related Prospectus Supplement) which
the Servicer is entitled to receive relating to mortgagor or obligor payments
or other recoveries distributed on the related Distribution Date, such amount,
if any, as may be necessary to assure that the amount paid into the Certificate
Account with respect to such Mortgage Loan or Contract includes an amount equal
to interest at the Net Mortgage Rate or Net Contract Rate for such Mortgage
Loan or Contract for the period from the date of such prepayment or liquidation
to but not including the next Due Date. See "Servicing of the Mortgage Loans
and Contracts--Adjustment to Servicing Compensation in Connection with Prepaid
and Liquidated Mortgage Loans and Contracts."
Weighted Average Life of Certificates
Weighted average life of a Certificate refers to the average
amount of time that will elapse from the date of issuance of the Certificate
until each dollar in reduction of the principal amount or Stated Amount of such
Certificate is distributed to the investor. The weighted average life and the
yield to maturity of any Class of the Certificates of a Series will be
influenced by, among other things, the rate at which principal on the Mortgage
Loans or Contracts included in the Mortgage Pool or Contract Pool for such
Certificate is paid, which is determined by scheduled amortization and
prepayments (for this purpose, the term "prepayments" includes prepayments and
liquidations due to default, casualty, condemnation and the like).
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The Mortgage Loans or Contracts may be prepaid in full or in
part at any time. Unless otherwise specified in the applicable Prospectus
Supplement or as described in the following paragraph, no Mortgage Loan or
Contract will provide for a prepayment penalty and all fixed rate Mortgage
Loans or Contracts will contain due-on-sale clauses permitting the holder to
accelerate the maturity of the Mortgage Loan or Contract upon conveyance of the
Mortgaged Property or Manufactured Home.
Some of the Mortgage Loans may call for Balloon Payments.
Balloon Payments involve a greater degree of risk than fully amortizing loans
because the ability of the borrower to make a Balloon Payment typically will
depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property. The ability of a borrower to accomplish either of these
goals will be affected by a number of factors, including the level of available
mortgage rates at the time of the attempted sale or refinancing, the borrower's
equity in the related Mortgaged Property, the financial condition of the
borrower and operating history of the related Mortgaged Property, tax laws,
prevailing economic conditions and the availability of credit for commercial
real estate projects generally.
Some of the Mortgage Loans included in the Trust Fund may, in
the event one or more are required to be repurchased or otherwise removed from
the Trust Fund, require the payment of a release premium.
Prepayments on mortgage loans are commonly measured relative
to a prepayment standard or model. The Prospectus Supplement for each Series
which includes more than one Class or Subclass of Multi-Class Certificates will
describe one or more such prepayment standards or models and will contain
tables setting forth the weighted average life of each such Class or Subclass
and the percentage of the original aggregate Stated Amount of each such Class
or Subclass that would be outstanding on specified Distribution Dates for such
Series based on the assumptions stated in such Prospectus Supplement, including
assumptions that prepayments on the Mortgage Loans or Contracts are made at
rates corresponding to various percentages of the prepayment standard or model
specified in the related Prospectus Supplement.
There is, however, no assurance that prepayment of the
Mortgage Loans or Contracts underlying a Series of Certificates will conform to
any level of the prepayment standard or model specified in the related
Prospectus Supplement. A number of economic, geographic, social and other
factors may affect prepayment experience. These factors may include homeowner
mobility, economic conditions, changes in mortgagor's or obligor's housing
needs, job transfers, unemployment, mortgagor's or obligor's net equity in the
properties securing the mortgages or contracts, servicing decisions,
enforceability of due-on-sale clauses , market interest rates, the magnitude of
related taxes, and the availability of funds for refinancing. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Rates or Contract Rates on the Mortgage Loans or Contracts underlying a Series
of Certificates, the prepayment rates of such Mortgage Loans or Contracts are
likely to be higher than if prevailing rates remain at or above the rates borne
by such Mortgage Loans or Contracts. It should be noted that Certificates of a
Series may evidence an interest in a Trust Fund with different Mortgage Rates
or Contract Rates. Accordingly, the prepayment experience of such Certificates
will to some extent be a function of the mix of Mortgage Rates or Contract
Rates of the Mortgage Loans or Contracts. In addition, the terms of the Pooling
and Servicing Agreement will require the Servicer to enforce any due-on-sale
clause to the extent specified therein. See "Servicing of the Mortgage Loans
and Contracts--Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted
Mortgage Loans and Contracts" and "Certain Legal Aspects of the Mortgage Loans
and Contracts--Due-On-Sale Clauses" for a description of certain provisions of
each Pooling and Servicing Agreement and certain legal developments that may
affect the prepayment experience on the Mortgage Loans or Contracts.
A lower rate of principal prepayments than anticipated would
negatively affect the total return to investors in any Certificates of a Series
that are offered at a discount to their principal amount or, if applicable,
their parity price, and a higher rate of principal prepayments than anticipated
would negatively affect the total return to investors in the Certificates of a
Series that are offered at a premium to their principal amount or, if
applicable, their parity price. Parity price is the price at which a
Certificate will yield its coupon, after giving effect to any payment delay. In
addition, the yield to investors in a Class
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of Certificates which bears interest at a variable Interest Rate or at a
variable Pass-Through Rate, will also be affected by changes in the index on
which any such variable Interest Rate, or variable Pass-Through Rate is based.
Changes in the index may not correlate with changes in prevailing mortgage
interest rates or financing rates for manufactured housing, and the effect, if
any, thereof on the yield of the Certificates will be discussed in the related
Prospectus Supplement. The yield on certain types of Certificates may be
particularly sensitive to prepayment rates, and further information with
respect to yield on such Certificates will be included in the applicable
Prospectus Supplement.
At the request of the mortgagor or obligor, the Servicer may
refinance the Mortgage Loans or Contracts in any Trust Fund by accepting
prepayments thereon and making new loans secured by a Mortgage on the same
property or a security interest in the same Manufactured Home. Upon such
refinancing, the new loans will not be included in the Trust Fund. A mortgagor
or obligor may be legally entitled to require the Servicer to allow such a
refinancing. Any such refinancing will have the same effect as a prepayment in
full of the related Mortgage Loan or Contract.
The Depositor may be obligated and the applicable
Unaffiliated Seller will be obligated, under certain circumstances, to
repurchase certain of the Mortgage Loans or Contracts. In addition, the terms
of certain insurance policies relating to the Mortgage Loans or Contracts may
permit the applicable insurer to purchase delinquent Mortgage Loans or
Contracts. The proceeds of any such repurchase will be deposited in the related
Certificate Account and such repurchase will have the same effect as a
prepayment in full of the related Mortgage Loan or Contract. See "The Trust
Funds--Assignment of the Mortgage Loans and Contracts." In addition, if so
specified in the applicable Prospectus Supplement, the Servicer will have the
option to purchase all, but not less than all, of the Mortgage Loans or
Contracts in any Trust Fund under the limited conditions specified in such
Prospectus Supplement. For any Series of Certificates for which an election has
been made to treat the Trust Fund (or one or more segregated pools of assets
therein) as a REMIC, any such purchase may be effected only pursuant to a
"qualified liquidation," as defined in Code Section 86OF(a)(4)(A). See "The
Pooling and Servicing Agreement--Termination; Purchase or other Disposition of
Mortgage Loans and Contracts."
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus
Supplement, substantially all of the net proceeds from the sale of each Series
of Certificates will be used by the Depositor for the purchase of the Mortgage
Loans or Contracts represented by the Certificates of such Series or to
reimburse amounts previously used to effect such a purchase, the costs of
carrying the related Mortgage Loans or Contracts until the sale of the
Certificates and other expenses connected with pooling the related Mortgage
Loans or Contracts and issuing the Certificates.
THE DEPOSITOR
Prudential Securities Secured Financing Corporation, formerly
known as P-B Secured Financing Corporation (the "Depositor"), was incorporated
in the State of Delaware on August 26, 1988 as a wholly-owned, limited purpose
finance subsidiary of Prudential Securities Group Inc. (a wholly-owned indirect
subsidiary of The Prudential Insurance Company of America). The Depositor's
principal executive offices are located at One New York Plaza, 15th Floor, New
York, New York 10292. Its telephone number is (212) 778-1000.
As described herein under "The Trust Funds--Assignment of the
Mortgage Loans and Contracts" and "-- Representations and Warranties", the only
obligations, if any, of the Depositor with respect to a Series of Certificates
may be pursuant to certain limited representations and warranties and limited
undertakings to repurchase or substitute Mortgage Loans or Contracts under
certain circumstances. Unless otherwise specified in the applicable Prospectus
Supplement, the Depositor will have no servicing obligations or
responsibilities with respect to any Mortgage Pool, Contract Pool or Trust
Fund. The Depositor does not have, nor is it expected in the future to have,
any significant assets.
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As specified in the related Prospectus Supplement the
Servicer with respect to any Series of Certificates relating to Mortgage Loans
or Contracts may be an affiliate of the Depositor. As described under "The
Trust Funds," the Depositor anticipates that it may acquire Mortgage Loans and
Contracts through or from an affiliate.
Neither the Depositor nor Prudential Securities Group Inc.
nor any of its affiliates, including The Prudential Insurance Company of
America, will insure or guarantee the Certificates of any Series.
UNDERWRITING GUIDELINES
Mortgage Loans Secured by Residential Properties
The Depositor expects that all Mortgage Loans included in a
Mortgage Pool will have been originated in accordance with the underwriting
procedures described herein, subject to such variations as are specified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, all or a representative sample of the Mortgage Loans
comprising the Mortgage Pool for a Series will be reviewed by or on behalf of
the Depositor to determine compliance with such underwriting procedures and
standards and compliance with other requirements for inclusion in the related
Mortgage Pool.
xcept as otherwise set forth in the related Prospectus
Supplement, it is expected that each originator of Mortgage Loans will have
applied, in a standard procedure which complies with applicable federal and
state law and regulations, underwriting procedures that are intended to
evaluate the mortgagor's credit standing and repayment ability, and the value
and adequacy of the Mortgaged Property as collateral. A prospective mortgagor
will have been required to fill out an application designed to provide to the
original lender pertinent credit information. As part of the description of the
mortgagor's financial condition, the mortgagor will have been required to
provide a current balance sheet describing assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report which summarizes the mortgagor's credit history with local
merchants and lenders and any record of bankruptcy. In addition, an employment
verification will have been obtained in the case of individual borrowers which
reports the mortgagor's current salary, length of such employment and whether
it was expected that the mortgagor will continue such employment in the future.
If a prospective borrower was self-employed, the mortgagor will have been
required to submit copies of signed tax returns. The mortgagor may also have
been required to authorize verification of deposits at financial institutions
where the mortgagor has demand or savings accounts.
In determining the adequacy of the Mortgaged Property as
collateral, except in the instance of certain small second loan applications,
an appraisal will have been made of each Mortgaged Property considered for
financing. Each appraiser will have been selected in accordance with
predetermined guidelines established by or acceptable to the Unaffiliated
Seller for appraisers. The appraiser will have been required to inspect the
Mortgaged Property and verify that it was in good condition and that
construction, if new, has been completed. The appraisal is based on the market
value of the comparable properties, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the Mortgaged Property.
In determining the adequacy of the Mortgaged Property as
collateral, the originator shall, in the case of second or more junior loans,
look at the combined Loan-to-Value Ratio in determining whether the Mortgage
Loan exceeds lending guidelines. Furthermore, when considering such second or
more junior loans, confirm that payment has been timely made on the senior
liens.
Once all applicable employment, credit and property
information was received, a determination would have been made as to whether
the prospective mortgagor had sufficient monthly income available (i) to meet
its monthly obligations on the Mortgage Loan (determined on the basis of the
monthly payments due in the year of origination and taking into consideration,
payments due on any senior
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liens) and other expenses related to the Mortgaged Property (such as property
taxes and hazard insurance) and (ii) in the case of individual mortgagors, to
meet monthly housing expenses and other financial obligations and monthly
living expenses. When two individuals cosign loan documents, the income and
expenses of both individuals may be included in the computation. Underwriting
guidelines generally similar to traditional underwriting guidelines used by
FNMA and FHLMC which were in effect at the time of origination of each Mortgage
Loan will generally have been used, except that the ratios at origination of
the amounts described in clauses (i) and (ii) above to the applicant's stable
monthly gross income may exceed in certain cases the then applicable FNMA and
FHLMC guidelines. With respect to a vacation or second home, no income derived
from the property will have been considered for underwriting purposes.
Other credit considerations may cause departure from the
traditional guidelines. If the Loan-to-Value Ratio and/or term of the Mortgage
Loan is less than a percentage specified in the related Prospectus Supplement,
certain aspects of review relating to monthly income assets may be foregone and
standard ratios of monthly or total expenses to gross income may not be
applied. The Depositor may permit an Unaffiliated Seller's underwriting
standards to otherwise vary in certain cases to the extent specified in the
related Prospectus Supplement.
The Mortgaged Properties may be located in states where, in
general, a lender providing credit on a single-family property may not seek a
deficiency judgment against the mortgagor but rather must look solely to the
property for repayment in the event of foreclosure. The Depositor will require
that the Unaffiliated Sellers represent and warrant that underwriting standards
applied to each Mortgage Loan purchased by the Depositor from such Unaffiliated
Seller (including Mortgage Loans secured by Mortgaged Properties located in
anti-deficiency states) require that the value of the property being financed,
as indicated by the appraisal, currently supports and is anticipated to support
in the future the outstanding principal balance of such Mortgage Loan.
Certain of the types of loans which may be included in the
Mortgage Pools are recently developed and may involve additional uncertainties
not present in traditional types of loans. For example, certain of such
Mortgage Loans may provide for escalating or variable payments by the
mortgagor. These types of Mortgage Loans are underwritten on the basis of a
judgment that mortgagors will have the ability to make larger monthly payments
in subsequent years. In some instances, however, a mortgagor's income may not
be sufficient to make loan payments as such payments increase.
No assurance can be given that values of the Mortgaged
Properties have remained or will remain at their levels on the dates of
origination of the related Mortgage Loans. If the real estate market should
experience an overall decline in property values such that the outstanding
principal balances of the Mortgage Loans, and any secondary financing on the
Mortgaged Properties, in a particular Mortgage Pool become equal to or greater
than the value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions (which
may or may not affect real property values) may affect the timely payment by
mortgagors of scheduled payments of principal and interest on the Mortgage
Loans and, accordingly, the actual rates of delinquencies, foreclosures and
losses with respect to any Mortgage Pool. To the extent that such losses are
not covered by subordination provisions, insurance policies or other credit
support, such losses will be borne, at least in part, by the holders of the
Certificates of the related series.
Contracts
The underwriting guidelines utilized in connection with the
origination of the Contracts underlying a Series of Certificates will be
described in the related Prospectus Supplement.
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS
The following summaries describe certain provisions of the
Pooling and Servicing Agreements which relate to Trust Funds comprised of
Mortgage Loans or Contracts. The summaries do
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not purport to be complete and are subject to and are qualified in their
entirety by reference to, all the provisions of the Pooling and Servicing
Agreement for each Series and the related Prospectus Supplement, which may
further modify the provisions summarized below. The provisions of each Pooling
and Servicing Agreement will vary depending upon the nature of the Certificates
to be issued thereunder and the nature of the related Trust Fund. Each Pooling
and Servicing Agreement executed and delivered with respect to each Series will
be filed with the Commission as an exhibit to a Current Report on Form 8-K
promptly after issuance of the Certificates of such Series.
The Servicer
The Servicer under each Pooling and Servicing Agreement will
be named in the related Prospectus Supplement. The entity serving as Servicer
may be an affiliate of the Depositor and may have other normal business
relationships with the Depositor or the Depositor's affiliates. The Servicer
with respect to each Series will service the Mortgage Loans or Contracts
contained in the Trust Fund for such Series. For Trust Funds comprised of
Mortgage Loans, the Servicer will be a seller/servicer approved by FNMA or
FHLMC. Any Servicer may delegate its servicing responsibilities to one or more
sub-servicers (each a "Sub-Servicer"), but will not be relieved of its
liabilities with respect thereto.
The Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Pooling and Servicing Agreement. An uncured
breach of such a representation or warranty that in any respect materially and
adversely affects the interests of the Certificateholders will constitute an
Event of Default by the Servicer under the related Pooling and Servicing
Agreement. See "The Pooling and Servicing Agreement--Events of
Default--Mortgage Loans or Contracts" and "--Rights Upon Event of
Default--Mortgage Loans or Contracts."
Payments on Mortgage Loans and Contracts
The Servicer or the Trustee will, as to each Series of
Certificates, establish and maintain, or cause to be established and
maintained, a separate trust account or accounts in the name of the Trustee
(collectively, the "Certificate Account"), which must be maintained with a
depository institution (the "Certificate Account Depository") acceptable to the
Rating Agency rating the Certificates of such Series. Such account or accounts
will be maintained with a Certificate Account Depository (i) whose long-term
debt obligations at the time of any deposit therein are rated not lower than
the rating on the related Series of Certificates at the time of the initial
issuance thereof, (ii) the deposits in which are insured by the Federal Deposit
Insurance Corporation (the "FDIC") through either the Bank Insurance Fund or
the Savings Association Insurance Fund (to the limit established by the FDIC)
and the uninsured deposits in which accounts are otherwise secured such that,
as evidenced by an opinion of counsel, the Trustee for the benefit of the
Certificateholders of the related Series has a claim with respect to funds in
the Certificate Account for such Series, or a perfected security interest in
any collateral (which shall be limited to Eligible Investments) securing such
funds, that is superior to the claims of any other depositor or general
creditor of the Certificate Account Depository with which the Certificate
Account is maintained or (iii) which is otherwise acceptable to the Rating
Agency or Agencies.
A Certificate Account may be maintained as an interest
bearing or a non-interest bearing account, or the funds held therein may be
invested pending each succeeding Distribution Date in certain Eligible
Investments. Any such Eligible Investments shall mature not later than the
business day preceding the next Distribution Date and no such investment shall
be sold or disposed of prior to the maturity date of such Eligible Investment;
however, in the event that an election has been made to treat the Trust Fund
(or a segregated pool of assets therein) with respect to a Series as a REMIC,
no such Eligible Investments will be sold or disposed of at a gain prior to
maturity unless the Servicer has received an opinion of counsel or other
evidence satisfactory to it that such sale or disposition will not cause the
Trust Fund (or segregated pool of assets) to be subject to the tax on
"prohibited transactions" imposed by Code Section 860F(a)(1), otherwise subject
the Trust Fund (or segregated pool of assets) to tax, or cause the Trust Fund
(or segregated pool of assets) to fail to qualify as a REMIC. Unless otherwise
provided in the related Prospectus Supplement, any interest or other income
earned on funds in the Certificate Account will be paid to the Servicer or its
designee as additional servicing compensation. All losses from any such
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investment will be deposited by the Servicer into the Certificate Account
immediately as realized. If permitted by the Rating Agency or Agencies and so
specified in the related Prospectus Supplement, a Certificate Account may
contain funds relating to more than one Series of Certificates.
Each Sub-Servicer servicing a Mortgage Loan or Contract will
be required by the Servicer to establish and maintain one or more separate
accounts which may be interest bearing and which comply with the standards with
respect to Certificate Accounts set forth above (collectively, the
"Sub-Servicing Account"). Each Sub-Servicer will be required to credit to the
related Sub-Servicing Account on a daily basis the amount of all proceeds of
Mortgage Loans or Contracts received by the Sub-Servicer, less its servicing
compensation. The Sub-Servicer shall remit to the Servicer by wire transfer of
immediately available funds all funds held in the Sub-Servicing Account with
respect to each Mortgage Loan or Contract on a monthly remittance date which
shall occur on or before two business days preceding the Determination Date
occurring in such month.
The Servicer will deposit in the Certificate Account for each
Series of Certificates any amounts representing scheduled payments of principal
and interest on the Mortgage Loans or Contracts due after the applicable
Cut-Off Date but received prior thereto, and, on a dally basis, the following
payments and collections received or made by it with respect to the Mortgage
Loans or Contracts subsequent to the applicable Cut-Off Date (other than
payments due on or before the Cut-Off Date):
(i) all payments on account of principal, including
prepayments, and interest, net of any portion thereof retained by a
Sub-Servicer as its servicing compensation and net of any Fixed
Retained Yield;
(ii) all amounts received by the Servicer in connection with
the liquidation of defaulted Mortgage Loans or Contracts or property
acquired in respect thereof, whether through foreclosure sale or
otherwise, including payments in connection with defaulted Mortgage
Loans or Contracts received from the mortgagor or obligor other than
amounts required to be paid to the mortgagor or obligor pursuant to
the terms of the applicable Mortgage Loan or Contract or otherwise
pursuant to law ("Liquidation Proceeds"), and further reduced by
expenses incurred in connection with such liquidation, other
reimbursed servicing costs associated with such liquidation, certain
amounts applied to the restoration, preservation or repair of the
Mortgaged Property or Manufactured Home, any unreimbursed Advances
with respect to such Mortgage Loan or Contract and, in the discretion
of the Servicer, but only to the extent of the amount permitted to be
withdrawn from the Certificate Account, any unpaid Servicing Fees, in
respect of the related Mortgage Loans or Contracts or the related
Mortgaged Properties or Manufactured Homes ("Net Liquidation
Proceeds");
(iii) all proceeds received by the Servicer under any title,
hazard or other insurance policy covering any such Mortgage Loan or
Contract ("Insurance Proceeds"), other than proceeds to be applied to
the restoration or repair of the related Mortgaged Property or
Manufactured Home or released to the mortgagor or obligor in
accordance with the applicable Pooling and Servicing Agreement, and
further reduced by expenses incurred in connection with collecting on
related insurance policies, any unreimbursed Advances with respect to
such Mortgage Loan or Contract and in the discretion of the Servicer,
but only to the extent of the amount permitted to be withdrawn from
the Certificate Account, any unpaid Servicing Fees, in respect of such
Mortgage Loan or Contract ("Net Insurance Proceeds");
(iv) all amounts required to be deposited therein from any
related reserve fund, and amounts available under any other form of
credit enhancement applicable to such Series;
(v) all Advances made by the Servicer;
(vi) all amounts withdrawn from Buy-Down Funds or other funds
described in the related Prospectus Supplement, if any, with respect
to the Mortgage Loans or Contracts, in accordance with the terms of
the respective agreements applicable thereto;
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(vii) all Repurchase Proceeds; and
(viii) all other amounts required to be deposited therein
pursuant to the applicable Pooling and Servicing Agreement.
Notwithstanding the foregoing, the Servicer will be entitled,
at its election, either (a) to withhold and pay itself the applicable Servicing
Fee and/or to withhold and pay to the owner thereof any Fixed Retained Yield
from any payment or other recovery on account of interest as received and prior
to deposit in the Certificate Account or (b) to withdraw the applicable
Servicing Fee and/or any Fixed Retained Yield from the Certificate Account
after the entire payment or recovery has been deposited therein; however, with
respect to each Trust Fund (or a segregated pool of assets therein) as to which
a REMIC election has been made, the Servicer will, in each instance, withhold
and pay to the owner thereof the Fixed Retained Yield prior to deposit of the
related payment or recovery in the Certificate Account.
Advances, amounts withdrawn from any reserve fund, and
amounts available under any other form of credit enhancement will be deposited
in the Certificate Account not later than the business day preceding the
Distribution Date on which such amounts are required to be distributed. All
other amounts will be deposited in the Certificate Account not later than the
business day next following the day of receipt and posting by the Servicer.
If the Servicer deposits in the Certificate Account for a
Series any amount not required to be deposited therein, it may at any time
withdraw such amount from such Certificate Account.
The Servicer is permitted, from time to time, to make
withdrawals from the Certificate Account for the following purposes, to the
extent permitted in the applicable Pooling and Servicing Agreement:
(i) to reimburse itself for Advances;
(ii) to reimburse itself from Liquidation Proceeds for
expenses incurred by the Servicer in connection with the liquidation
of any defaulted Mortgage Loan or Contract or property acquired in
respect thereof and for amounts expended in good faith in connection
with the restoration of damaged property, to reimburse itself from
Insurance Proceeds for expenses incurred by the Servicer in connection
with the restoration, preservation or repair of the related Mortgage
Properties or Manufactured Homes and expenses incurred in connection
with collecting on the related insurance policies and, to the extent
that Liquidation Proceeds or Insurance Proceeds after such
reimbursement are in excess of the unpaid principal balance of the
related Mortgage Loans or Contracts together with accrued and unpaid
interest thereon at the applicable Net Mortgage Rate or Net Contract
Rate through the last day of the month in which such Liquidation
Proceeds or Insurance Proceeds were received, to pay to itself out of
such excess the amount of any unpaid Servicing Fees and any assumption
fees, late payment charges or other mortgagor or obligor charges on
the related Mortgage Loans or Contracts;
(iii) to pay to itself the applicable Servicing Fee and/or
pay the owner thereof any Fixed Retained Yield, in the event the
Servicer is not required, and has elected not, to withhold such
amounts out of any payment or other recovery with respect to a
particular Mortgage Loan or Contract prior to the deposit of such
payment or recovery in the Certificate Account;
(iv) to reimburse itself and the Depositor for certain
expenses (including taxes paid on behalf of the Trust Fund) incurred
by and recoverable by or reimbursable to it or the Depositor, as the
case may be;
(v) to pay to the Depositor or the Unaffiliated Seller with
respect to each Mortgage Loan or Contract or property acquired in
respect thereof that has been repurchased by the Depositor or
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the Unaffiliated Seller, as the case may be, all amounts received
thereon and not distributed as of the date as of which the purchase
price of such Mortgage Loan or Contract was determined;
(vi) to pay itself any interest earned on or investment
income earned with respect to funds in the Certificate Account (all
such interest or income to be withdrawn not later than the next
Distribution Date);
(vii) to make withdrawals from the Certificate Account in
order to make distributions to Certificateholders; and
(viii) to clear and terminate the Certificate Account.
The Servicer will be authorized to appoint a paying agent
(the "Paying Agent") to make distributions, as agent for the Servicer, to
Certificateholders of a Series. If the Paying Agent for a Series is the Trustee
of such Series, such Paying Agent will be authorized to make withdrawals from
the Certificate Account in order to make distributions to Certificateholders.
If the Paying Agent for a Series is not the Trustee for such Series, the
Servicer will, prior to each Distribution Date, deposit in immediately
available funds in an account designated by the Paying Agent the amount
required to be distributed to the Certificateholders on such Distribution Date.
The Servicer will cause any Paying Agent which is not the
Trustee to execute and deliver to the Trustee an instrument in which such
Paying Agent agrees with the Trustee that such Paying Agent will:
(1) hold all amounts deposited with it by the Servicer for
distribution to Certificateholders in trust for the benefit of
Certificateholders until such amounts are distributed to
Certificateholders or otherwise disposed of as provided in the
applicable Pooling and Servicing Agreement;
(2) give the Trustee notice of any default by the Servicer in
the making of such deposit; and
(3) at any time during the continuance of any such default,
upon written request of the Trustee, forthwith pay to the Trustee all
amounts held in trust by such Paying Agent.
Advances and Limitations Thereon
Unless otherwise provided in the applicable Prospectus
Supplement, the Servicer will advance on or before the business day preceding
each Distribution Date its own funds (an "Advance") or funds held in the
Certificate Account for future distribution or withdrawal and which are not
included in the Pool Distribution Amount for such Distribution Date, in an
amount equal to the aggregate of payments of principal and interest which were
due during the related Due Period, that were delinquent on the Determination
Date and were not advanced by any Sub-Servicer, to the extent that the Servicer
determines that such advances will be reimbursable from late collections,
Insurance Proceeds, Liquidation Proceeds or otherwise.
Advances are intended to maintain a regular flow of scheduled
interest and principal payments to holders of the Class or Classes of
Certificates entitled thereto, rather than to guarantee or insure against
losses. Unless otherwise provided in the applicable Prospectus Supplement,
advances of the Servicer's funds will be reimbursable only out of related
recoveries on the Mortgage Loans or Contracts respecting which such amounts
were advanced, or from any amounts in the Certificate Account to the extent
that the Servicer shall determine that any such advances previously made are
not ultimately recoverable from late collections, Insurance Proceeds,
Liquidation Proceeds or otherwise. If advances have been made by the Servicer
from excess funds in the Certificate Account, the Servicer will replace such
funds in the Certificate Account on any future Distribution Date to the extent
that funds in the Certificate
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Account on such Distribution Date are less than payments required to be made to
Certificateholders on such date.
Adjustment to Servicing Compensation in Connection with Prepaid and Liquidated
Mortgage Loans and Contracts
When a mortgagor or obligor prepays a Mortgage Loan or
Contract in full, the mortgagor or obligor pays interest on the amount prepaid
only to the date on which such principal prepayment is made. Similarly,
Liquidation Proceeds from a Mortgaged Property or Manufactured Home will not
include interest for any period after the date on which the liquidation took
place, and Insurance Proceeds may include interest only to the date of
settlement of the related claims. Further, when a Mortgage Loan or Contract is
prepaid in part, and such prepayment is applied as of a date other than a Due
Date, the mortgagor or obligor pays interest on the amount prepaid only to the
date of prepayment and not thereafter. The effect of the foregoing is to reduce
the aggregate amount of interest which would otherwise be passed through to
Certificateholders if such Mortgage Loan or Contract were outstanding, or if
such partial prepayment were applied, on the succeeding Due Date. Unless
otherwise specified in the applicable Prospectus Supplement, in order to
mitigate the adverse effect to Certificateholders of a Series resulting from
the prepayment or liquidation of a Mortgage Loan or Contract or settlement of
an insurance claim with respect thereto, the amount of the aggregate Servicing
Fees will be reduced by an amount equal to the accrual of interest on any
prepaid or liquidated Mortgage Loan or Contract at the Net Mortgage Rate for
such Mortgage Loan or the Net Contract Rate for such Contract from the date of
its prepayment or liquidation or the date of such insurance settlement to the
next Due Date (the "Prepayment Interest Shortfall"). Such reductions in the
aggregate Servicing Fees will be made by the Servicer with respect to the
Mortgage Loans or Contracts under the applicable Pooling and Servicing
Agreement, but only to the extent that the aggregate Prepayment Interest
Shortfall does not exceed the aggregate Servicing Fees relating to mortgagor or
obligor payments or other recoveries distributed on the related Distribution
Date. The amount of the offset against the aggregate Servicing Fees will be
included in the scheduled distributions to Certificateholders on the
Distribution Date on which the related principal prepayments, Liquidation
Proceeds or Insurance Proceeds are passed through to Certificateholders. See
"Prepayment and Yield Considerations." Payments with respect to any Prepayment
Interest Shortfall will not be obtained by means of any subordination of the
rights of Subordinated Certificateholders or any other credit enhancement
arrangement (except to the extent such credit enhancement pays interest with
respect to a Mortgage Loan or Contract in excess of the related Net Mortgage
Rate or Net Contract Rate and such excess would otherwise be paid to the
Servicer as a Servicing Fee).
Reports to Certificateholders
Unless otherwise specified or modified in the related Pooling
and Servicing Agreement for each Series, a statement setting forth the
following information, if applicable, will be included with each distribution
to Certificateholders of record of such Series:
(i) to each holder of a Certificate other than a Multi-Class
Certificate, the amount of such distribution allocable to principal of
the related Mortgage Loans or Contracts, separately identifying the
aggregate amount of any principal prepayments included therein, the
amount of such distribution allocable to interest on the related
Mortgage Loans or Contracts, and the aggregate unpaid principal
balance of the Mortgage Loans or Contracts after giving effect to the
principal distributions on such Distribution Date;
(ii) to each holder of a Multi-Class Certificate on which an
interest distribution and a distribution in reduction of Stated Amount
are then being made, the amount of such interest distribution and
distribution in reduction of Stated Amount, and the Stated Amount of
each Class after giving effect to the distribution in reduction of
Stated Amount made on such Distribution Date;
(iii) to each holder of a Multi-Class Certificate on which a
distribution of interest only is then being made, the aggregate Stated
Amount of Certificates outstanding of each Class after
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giving effect to the distribution in reduction of Stated Amount made
on such Distribution Date and on any Special Distribution Date
occurring subsequent to the last such report and after including in
the aggregate Stated Amount the Stated Amount of the Compound
Interest Certificates, if any, outstanding and the amount of any
accrued interest added to the Stated Amount of such Compound Interest
Certificates on such Distribution Date;
(iv) to each holder of a Multi-Class Certificate which is a
Compound Interest Certificate (but only if such holder shall not have
received a distribution of interest equal to the entire amount of
interest accrued on such Certificate with respect to such Distribution
Date),
(a) the information contained in the report
delivered pursuant to clause (ii) above;
(b) the interest accrued on such Class of Compound
Interest Certificates with respect to such Distribution Date
and added to the Stated Amount of such Compound Interest
Certificate; and
(c) the Stated Amount of such Class of Compound
Interest Certificates after giving effect to the addition
thereto of all interest accrued thereon;
(v) to each holder of a Certificate, the aggregate amount of
the Servicing Fees paid with respect to such Distribution Date;
(vi) to each holder of a Certificate, the amount by which the
Servicing Fee has been reduced by the aggregate Prepayment Interest
Shortfall for the related Distribution Date;
(vii) the aggregate amount of any Advances by the Servicer
included in the amounts actually distributed to the Certificateholders;
(viii) to each holder of each Senior Certificate (other than
a Shifting Interest Certificate):
(a) the amount of funds, if any, otherwise
distributable to Subordinated Certificateholders and the
amount of any withdrawal from the Subordination Reserve Fund,
if any, included in amounts actually distributed to Senior
Certificateholders;
(b) the Subordinated Amount remaining and the
balance in the Subordination Reserve Fund, if any, following
such distribution; and
(c) the amount of any Senior Class Shortfall with
respect to, and the amount of any Senior Class Carryover
Shortfall outstanding prior to, such Distribution Date;
(ix) to each holder of a Certificate entitled to the benefits
of payments under any form of credit enhancement or from any reserve
fund other than the Subordination Reserve Fund:
(a) the amounts so distributed under any such form
of credit enhancement or from any such reserve fund on the
applicable Distribution Date; and
(b) the amount of coverage remaining under any such
form of credit enhancement and the balance in any such fund,
after giving effect to any payments thereunder and other
amounts charged thereto on the Distribution Date;
(x) in the case of a Series of Certificates with a variable
Pass-Through Rate, such Pass-Through Rate;
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(xi) the book value of any collateral acquired by the Trust
Fund through foreclosure or otherwise; and
(xii) the number and aggregate principal amount of Mortgage
Loans or Contracts one month and two or more months delinquent.
In addition, within a reasonable period of time after the end
of each calendar year, a report will be furnished to each Certificateholder of
record at any time during such calendar year (a) as to the aggregate of amounts
reported pursuant to clauses (i) through (xii) above, as applicable, for such
calendar year or, in the event such person was a Certificateholder of record
during a portion of such calendar year, for the applicable portion of such year
and (b) such other information as required to enable Certificateholders to
prepare their tax returns. In the event that an election has been made to treat
the Trust Fund (or one or more segregated pools of assets therein) as a REMIC,
the Trustee with respect to a Series will be required to sign the federal
income tax returns with respect to such REMIC. See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC
Certificates--Administrative Matters."
Reports to the Trustee
No later than 15 days after each Distribution Date for a
Series, the Servicer will provide the Trustee of such Series with a report
setting forth the status of the related Certificate Account and the related
Subordination Reserve Fund, if any, and any other reserve fund as of the close
of business on such Distribution Date, stating that all distributions required
to be made by the Servicer under the applicable Pooling and Servicing Agreement
have been made (or if any required distribution has not been made by the
Servicer, specifying the nature and status thereof) and showing, for the period
covered by such statement, the aggregate of deposits to and withdrawals from
the Certificate Account for each category of deposits and withdrawals specified
in the Pooling and Servicing Agreement. Such statement shall also include
information as to (i) the aggregate unpaid principal balances of all the
Mortgage Loans or Contracts as of the close of business on the last day of the
month preceding the month in which such Distribution Date occurs (or such other
day as may be specified in the applicable Pooling and Servicing Agreement); and
(ii) the amount of any Subordination Reserve Fund and any other reserve fund,
as of such Distribution Date (after giving effect to the distributions on such
Distribution Date). Copies of such reports may be obtained by
Certificateholders upon request in writing addressed to the related Trustee at
its mailing address provided in the related Prospectus Supplement.
Collection and Other Servicing Procedures
The Servicer, directly or through Sub-Servicers, will make
reasonable efforts to collect all payments called for under the Mortgage Loans
or Contracts and will, consistent with the applicable Pooling and Servicing
Agreement and any applicable agreement governing any form of credit
enhancement, follow such collection procedures as it follows with respect to
mortgage loans or manufactured housing contracts serviced by it that are
comparable to the Mortgage Loans or Contracts, as the case may be. Consistent
with the above, the Servicer may, in its discretion, (i) waive any prepayment
charge, assumption fee, late payment charge or any other charge in connection
with the prepayment of a Mortgage Loan or Contract and (ii) arrange with a
mortgagor or obligor a schedule for the liquidation of deficiencies running for
not more than six months after the applicable Due Date.
Pursuant to the Pooling and Servicing Agreement, the
Servicer, to the extent permitted by law, will establish and maintain or will
cause to be established and maintained one or more escrow accounts
(collectively, the "Servicing Account") in which the Servicer will be required
to deposit or cause to be deposited payments by mortgagors or obligors, as
applicable, for taxes, assessments, mortgage and hazard insurance premiums and
other comparable items. Withdrawals from the Servicing Account may be made to
effect timely payment of taxes, assessments, mortgage and hazard insurance, to
refund to mortgagors or obligors amounts determined to be overages, to pay
interest to mortgagors or obligors on balances in the Servicing Account, if
required, to repair or otherwise protect the Mortgaged Properties or
Manufactured Homes and to clear and terminate such account. The Servicer will
be responsible for the
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administration of each Servicing Account. The Servicer will be obligated to
advance certain amounts which are not timely paid by mortgagors or obligors, to
the extent that the Servicer determines that such amounts will be recoverable
out of Insurance Proceeds, Liquidation Proceeds, or otherwise. Alternatively,
if specified in the applicable Pooling and Servicing Agreement, in lieu of
establishing a Servicing Account, the Servicer may procure a performance bond
or other form of insurance coverage, in an amount acceptable to the Rating
Agency rating the related Series of Certificates, covering loss occasioned by
the failure to escrow such amounts.
Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage Loans
and Contracts
Each Pooling and Servicing Agreement will provide that, when
any Mortgaged Property or Manufactured Home is conveyed by the mortgagor or
obligor, the Servicer will exercise its rights to accelerate the maturity of
such Mortgage Loan or Contract under any "due-on-sale" clause applicable
thereto, if any, unless (a) it is not exercisable under applicable law or (b)
such exercise would result in loss of insurance coverage with respect to such
Mortgage Loan or Contract. In any such case, the Servicer is authorized to take
or enter into an assumption and modification agreement from or with the person
to whom such Mortgaged Property or Manufactured Home has been or is about to be
conveyed, pursuant to which such person becomes liable under the Mortgage Note
or Contract and, unless prohibited by applicable state law, the mortgagor or
obligor remains liable thereon, provided that the Mortgage Loan or Contract
will continue to be covered by any pool insurance policy and any related
primary mortgage insurance policy, and the Mortgage Rate or Contract Rate with
respect to such Mortgage Loan or Contract and the payment terms shall remain
unchanged. The Servicer will also be authorized, with the prior approval of any
pool insurer and any primary mortgage insurer, if any, to enter into a
substitution of liability agreement with such person, pursuant to which the
original mortgagor or obligor is released from liability and such person is
substituted as mortgagor or obligor and becomes liable under the Mortgage Note
or Contract.
The Servicer is obligated under the Pooling and Servicing
Agreement for each Series to realize upon defaulted Mortgage Loans or Contracts
to the extent provided therein. However, in the case of foreclosure or of
damage to a Mortgaged Property or Manufactured Home from an uninsured cause,
the Servicer is not required to expend its own funds to foreclose, repossess or
restore any damaged property, unless it reasonably determines (i) that such
foreclosure, repossession or restoration will increase the proceeds to
Certificateholders of such Series of liquidation of the Mortgage Loan or
Contract after reimbursement of the Servicer for its expenses and (ii) that
such expenses will be recoverable to it through Liquidation Proceeds or
Insurance Proceeds. In the event that the Servicer has expended its own funds
for foreclosure or to restore damaged property, it will be entitled to charge
the Certificate Account for such Series an amount equal to all costs and
expenses incurred by it.
The Servicer may foreclose against property securing a
defaulted Mortgage Loan either by foreclosure, by sale or by strict foreclosure
and in the event a deficiency judgment is available against the mortgagor or
other person (see "Certain Legal Aspects of the Mortgage Loans and
Contracts--The Mortgage Loans--Anti-Deficiency Legislation and Other
Limitations on Lenders" for a description of the availability of deficiency
judgments), may proceed for the deficiency. It is anticipated that in most
cases the Servicer will not seek deficiency judgments against any mortgagor or
obligor, and the Servicer is not required under the Pooling and Servicing
Agreement to seek deficiency judgments.
With respect to a Trust Fund (or one or more segregated pools
of assets therein) as to which a REMIC election has been made, if the Trustee
acquires ownership of any Mortgaged Property or Manufactured Home as a result
of a default or imminent default of any Mortgage Loan or Contract secured by
such Mortgaged Property or Manufactured Home, the Trustee generally will be
required to dispose of such property with two years following its acquisition
by the Trust Fund. The Servicer also will be required to administer the
Mortgaged Property 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
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holding of the Mortgaged Property or Manufactured Home as a dealer in such
property or the receipt of rental income based on the profits of the lessee.
The Servicer may modify, waive or amend the terms of any
Mortgage Loan or Contract without the consent of the Trustee or any
Certificateholder. Such modification, waiver or amendment shall only be given
if the Servicer determines that it is in the best interests of
Certificateholders and, generally, only if the Mortgage Loan is in default or
the Service has determined that default is reasonably foreseeable.
Servicing Compensation and Payment of Expenses
For each Series of Certificates, the Servicer will be
entitled to be paid the Servicing Fee on the related Mortgage Loans or
Contracts until termination of the applicable Pooling and Servicing Agreement,
subject, unless otherwise specified in the applicable Prospectus Supplement, to
adjustment as described under "Adjustment to Servicing Compensation in
Connection with Prepaid and Liquidated Mortgage Loans and Contracts" above. The
Servicer, at its election, will pay itself the Servicing Fee for a Series with
respect to each Mortgage Loan or Contract by (a) withholding the Servicing Fee
from any scheduled payment of interest prior to deposit of such payment in the
Certificate Account for such Series or (b) withdrawing the Servicing Fee from
the Certificate Account after the entire interest payment has been deposited in
the Certificate Account. The Servicer may also pay itself out of the
Liquidation Proceeds or Insurance Proceeds with respect to a Mortgage Loan or
Contract, or withdraw from the Certificate Account, the Servicing Fee in
respect of such Mortgage Loan or Contract or other recoveries with respect
thereto to the extent provided in the applicable Pooling and Servicing
Agreement. The Servicing Fee with respect to the Mortgage Loans or Contracts
underlying the Certificates of a Series will be specified in the applicable
Prospectus Supplement. Any additional servicing compensation in the form of
prepayment charges, assumption fees, late payment charges or otherwise will be
retained by the Servicer to the extent not required to be deposited in the
Certificate Account.
In addition to amounts payable to any Sub-Servicer, the
Servicer will pay all expenses incurred in connection with the servicing of the
Mortgage Loans or Contracts underlying a Series, including, without limitation,
payment of the hazard insurance policy premiums and fees or other amounts
payable pursuant to any applicable agreement for the provision of credit
enhancement for such Series, payment of the fees and disbursements of the
Trustee and any custodian, fees due to the independent accountants and expenses
incurred in connection with distributions and reports to Certificateholders.
However, certain of these expenses may be reimbursable to the Servicer pursuant
to the terms of the applicable Pooling and Servicing Agreement. In addition,
the Servicer will be entitled to reimbursement for certain expenses incurred by
it in connection with the liquidation of defaulted Mortgage Loans or Contracts.
In the event that claims are either not made or are not fully paid from any
applicable form of credit enhancement, the related Trust Fund will suffer a
loss to the extent that Net Liquidation Proceeds and Net Insurance Proceeds are
less than the principal balance of the related Mortgage Loan or Contract, plus
accrued interest thereon at the Net Mortgage Rate or Net Contract Rate. In
addition, the Servicer will be entitled to reimbursement of expenditures
incurred by it in connection with the restoration of any Mortgaged Property or
Manufactured Home, such right of reimbursement being prior to the rights of the
Certificateholders to receive Liquidation Proceeds and Insurance Proceeds. The
Servicer is also entitled to reimbursement from the Certificate Account of
Advances, of advances made by it to pay taxes or insurance premiums with
respect to any Mortgaged Property or Manufactured Home and of certain losses
against which it is indemnified by the Trust Fund.
Evidence as to Compliance
The Mortgage Loans
Each Pooling and Servicing Agreement will provide that on or
before a specified date in each year, beginning with the first such date
occurring at least six months after the related Cut-Off Date, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that, on the basis of the examination by such firm conducted
substantially in compliance with either the Uniform Single Audit Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
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servicing by or on behalf of the Servicer of mortgage loans under pooling and
servicing agreements substantially similar to each other (including the related
Pooling and Servicing Agreement) was conducted in compliance with the terms of
such agreements other than exceptions that are immaterial and any significant
exceptions of errors in records that, in the opinion of the firm, either the
Audit Program for Mortgages serviced for FHLMC, or paragraph 4 of the Uniform
Single Audit Program for Mortgage Bankers, requires it to report. In rendering
its statement such firm may rely, as to matters relating to the direct
servicing of mortgage loans by Sub-Servicers, upon comparable statements for
examinations conducted substantially in compliance with the Uniform Single
Audit Program for Mortgage Bankers or the Audit Program for Mortgages serviced
for FHLMC (rendered within one year of such statement) of firms of independent
public accountants with respect to the related Sub-Servicer.
The Contracts
Each Pooling and Servicing Agreement relating to a Series of
Certificates representing interests in a Contract Pool will provide that on or
before a specified date in each year, beginning with the first such date after
the related Cut-Off Date, a firm of independent public accountants will furnish
a statement to the Trustee to the effect that such firm is of the opinion that
the system of internal accounting controls in effect on the date of such
statement relating to the servicing procedures performed by the Servicer under
the Pooling and Servicing Agreement, taken as a whole, was sufficient for the
prevention and detection of errors and irregularities which would be material
to the assets of the Trust Fund and that nothing has come to their attention
that would cause them to believe that such servicing has not been conducted in
compliance with the provisions of the Pooling and Servicing Agreement, other
than such exceptions as shall be set forth in such report.
Each Pooling and Servicing Agreement will also provide for
delivery to the Trustee annually on or before the specified date therein, a
statement signed by two officers of the Servicer to the effect that the
Servicer has fulfilled its obligations under the Pooling and Servicing
Agreement throughout the preceding year or, if there has been a default in the
fulfillment of any such obligation, describing each such default.
Copies of the annual accountants' statement and the statement
of officers of the Servicer may be obtained by Certificateholders without
charge upon written request to the Servicer at the address of the Servicer set
forth in the related Prospectus Supplement.
Certain Matters Regarding the Servicer and the Depositor
The Servicer may not resign from its obligations and duties
under the Pooling and Servicing Agreement for each Series (other than its
duties as Certificate Registrar for such Series, if it is acting as such),
except upon its determination that its duties thereunder are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it. No such resignation will become effective until the Trustee for such
Series or a successor Servicer has assumed the Servicer's obligations and
duties under the Pooling and Servicing Agreement. If the Servicer resigns for
any of the foregoing reasons and the Trustee is unable or unwilling to assume
responsibility for servicing the Mortgage Loans or Contracts, it may appoint
another institution as Servicer, as described under "The Pooling and Servicing
Agreement--Rights Upon Event of Default--Mortgage Loans or Contracts" below.
The Pooling and Servicing Agreement will provide that neither
the Depositor, the Servicer (if the Series of Certificates relates to Mortgage
Loans or Mortgage Contracts) nor any director, officer, employee or agent of
either of them will be under any liability to the Trust Fund or the
Certificateholders, for the taking of any action or for refraining from the
taking of any action in good faith pursuant to the Pooling and Servicing
Agreement, or for errors in judgment; provided, however, that none of the
Depositor, the Servicer or any director, officer, employee or agent of the
Depositor or Servicer will be protected against any liability that would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of his or its duties or by reason of reckless
disregard of his or its obligations and duties thereunder. The Pooling and
Servicing Agreement will further provide that the
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Depositor, the Servicer and any director, officer, employee or agent of either
of them shall be entitled to indemnification by the Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Pooling and Servicing Agreement or the
Certificates other than any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of his or
its duties thereunder or by reason of reckless disregard of his or its
obligations and duties thereunder. In addition, the Pooling and Servicing
Agreement will provide that the Depositor and the Servicer will not be under
any obligation to appear in, prosecute or defend any legal action that is not
incidental to its duties under the Pooling and Servicing Agreement and that in
its opinion may involve it in any expense or liability. The Depositor and the
Servicer may, however, in its discretion, undertake any such action deemed by
it necessary or desirable with respect to the Pooling and Servicing Agreement
and the rights and duties of the parties thereto and the interests of the
Certificateholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the Trust Fund, and the Servicer will be entitled to be
reimbursed therefor out of the Certificate Account, and any loss to the Trust
Fund arising from such right of reimbursement will be allocated pro rata among
the various Classes of Certificates unless otherwise specified in the
applicable Pooling and Servicing Agreement.
Any person into which the Servicer may be merged or
consolidated, or any person resulting from any merger, conversion or
consolidation to which the Servicer is a party, or any person succeeding to the
business through the transfer of substantially all of its assets, or otherwise,
of the Servicer will be the successor of the Servicer under the Pooling and
Servicing Agreement for each Series provided that such successor or resulting
entity is qualified to service mortgage loans for FNMA or FHLMC and that the
applicable Rating Agency's rating of any Certificates for such Series in effect
immediately prior to such event is not adversely affected thereby.
The Servicer also has the right to assign its rights and
delegate its duties and obligations under the Pooling and Servicing Agreement
for each Series (A) in connection with a sale or transfer of a substantial
portion of its mortgage or manufactured housing servicing portfolio; provided
that (i) in the case of a transfer by a Servicer of Mortgage Loans, the
purchaser or transferee accepting such assignment or delegation is qualified to
service mortgage loans for FNMA or FHLMC, (ii) the purchaser or transferee is
reasonably satisfactory to the Depositor and the Trustee for such Series and
executes and delivers to the Depositor and the Trustee an agreement, in form
and substance reasonably satisfactory to the Depositor and the Trustee, which
contains an assumption by such purchaser or transferee of the due and punctual
performance and observance of each covenant and condition to be performed or
observed by the Servicer under the Pooling and Servicing Agreement from and
after the date of such agreement; and (iii) the applicable Rating Agency's
rating of any Certificates for such Series in effect immediately prior to such
assignment, sale or transfer is not qualified, downgraded or withdrawn as a
result of such assignment, sale or transfer or (B) to any affiliate of the
Servicer, provided that the conditions contained in clauses (i) through (iii)
above are met. In the case of any such assignment or delegation, the Servicer
will be released from its obligations under the Pooling and Servicing Agreement
except for liabilities and obligations incurred prior to such assignment and
delegation.
THE POOLING AND SERVICING AGREEMENT
Events of Default
Mortgage Loans or Contracts
Events of Default under the Pooling and Servicing Agreement
for each Series of Certificates relating to Mortgage Loans or Contracts include
(i) any failure by the Servicer to remit to the Trustee or to any Paying Agent
for distribution to Certificateholders any required payment which continues
unremedied for 5 days; (ii) any failure by the Servicer duly to observe or
perform in any material respect any other of its covenants or agreements in the
Pooling and Servicing Agreement which continues unremedied for 30 days (or 10
days in the case of a failure to maintain any pool insurance policy required to
be maintained pursuant to the Pooling and Servicing Agreement) after the giving
of written notice of
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such failure to the Servicer by the Trustee, or to the Servicer and Trustee by
the holders of Certificates of such Series having voting rights allocated to
such Certificates ("Voting Interests") aggregating not less than 25% of the
Voting Interests represented by all Certificates for such Series; (iii) any
breach of representation or warranty of the Servicer relating to such
Servicer's authority to enter into, and its ability to perform its obligations
under, such Pooling and Servicing Agreement; (iv) certain events of insolvency,
readjustments of debt, marshalling of assets and liabilities or similar
proceedings and certain actions by the Servicer indicating its insolvency,
reorganization or inability to any its obligations and (v) if specified in the
applicable Pooling and Servicing Agreement, any failure by the Servicer to
remit to the Trustee the amount of any Advance by the business day preceding
the applicable Distribution Date.
Rights Upon Event of Default
Mortgage Loans or Contracts
So long as Event of Default remains unremedied under the
Pooling and Servicing Agreement for a Series of Certificates relating to
Mortgage Loans or Contracts, the Trustee for such Series or holders of
Certificates of such Series evidencing not less than 25% of the Voting
Interests in the Trust Fund for such Series may terminate all of the rights and
obligations of the Servicer under the Pooling and Servicing Agreement and in
and to the Mortgage Loans or Contracts (other than the Servicer's right to
recovery of any Initial Deposit for such Series and other expenses and amounts
advanced pursuant to the terms of the Pooling and Servicing Agreement, which
rights the Servicer will retain under all circumstances), whereupon the Trustee
will succeed to all the responsibilities, duties and liabilities of the
Servicer under the Pooling and Servicing Agreement and will be entitled to
monthly servicing compensation not to exceed the aggregate Servicing Fees,
together with the other servicing compensation in the form of assumption fees,
late payment charges or otherwise as provided in the Pooling and Servicing
Agreement. In the event that the Trustee is unwilling or unable so to act, it
may select, pursuant to the private or public bid procedure described in the
applicable Pooling and Servicing Agreement, or petition a court of competent
jurisdiction to appoint, (i) in the case of a Servicer of Mortgage Loans, a
housing and home finance institution, bank or mortgage servicing institution
with a net worth of at least $15,000,000 and which is a FNMA- and
FHLMC-approved seller/servicer or (ii) in the case of a Servicer of Contracts,
an institution with a net worth of at least $15,000,000 which has serviced for
at least one year immediately prior thereto a portfolio of manufactured housing
loans of not less than $100,000,000, to act as successor to the Servicer under
the provisions of the Pooling and Servicing Agreement relating to the servicing
of the Mortgage Loans or Contracts. In the event such public bid procedure is
utilized, the successor Servicer would be entitled to servicing compensation in
an amount equal to the aggregate Servicing Fees, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in the Pooling and Servicing Agreement, and the Servicer
would be entitled to receive the net profits, if any, received from the sale of
its servicing rights and obligations under the Pooling and Servicing Agreement.
During the continuance of any Event of Default under the
Pooling and Servicing Agreement for a Series of Certificates relating to
Mortgage Loans or Contracts, the Trustee for such Series will have the right to
take action to enforce its rights and remedies and to protect and enforce the
rights and remedies of the Certificateholders of such Series, and holders of
Certificates evidencing not less than 25% of the Voting Interests for such
Series may direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or power conferred
upon the Trustee. However, the Trustee will not be under any obligation to
pursue any such remedy or to exercise any of such trusts or powers unless such
Certificateholders have offered the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred by the
Trustee thereby. Also, the Trustee may decline to follow any such direction if
the Trustee determines that the action or proceeding so directed may not
lawfully be taken or would be unjustly prejudicial to the nonassenting
Certificateholders or if, under certain circumstances, the Trustee receives
conflicting directions from different groups of Certificateholders.
No Certificateholders of a Series, solely by virtue of such
holder's status as a Certificateholder, will have any right under the Pooling
and Servicing Agreement for such Series to
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institute any proceeding with respect to the Pooling and Servicing Agreement,
unless such holder previously has given to the Trustee for such Series written
notice of default and unless the holders of Certificates evidencing not less
than 25% of the Voting Interests for such Series have made written request upon
the Trustee to institute such proceeding in its own name as Trustee thereunder
and have offered to the Trustee reasonable indemnity and the Trustee for 60
days has neglected or refused to institute any such proceeding.
Amendment
Each Pooling and Servicing Agreement may be amended by the
Depositor, the Servicer (with respect to a Series of Certificates relating, to
the Mortgage Loans or Contracts) and the Trustee without the consent of the
Certificateholders, (i) to cure any ambiguity, (ii) to correct or supplement
any provision therein that may be inconsistent with any over provision therein,
(iii) to modify, eliminate or add to any of its provisions to such extent as
shall be necessary to maintain the qualification of the Trust Fund (or one or
more segregated pools of assets therein) as a REMIC at all times that any
Certificates are outstanding or to avoid or modify the risk of the imposition
of any tax on the Trust Fund pursuant to the Code that would be a claim against
the Trust Fund, provided that the Trustee has received an opinion of counsel to
the effect that such action is necessary or desirable to maintain such
qualification or to avoid or minimize the risk of the imposition of any such
tax and such action will not, as evidenced by such opinion of counsel,
adversely affect in any material respect the interests of any
Certificateholder, (iv) to change the timing and/or nature of deposits into the
Certificate Account, provided that such change will not, as evidenced by an
opinion of counsel, adversely affect in any material respect the interests of
any Certificateholder and that such change will not adversely affect the then
current rating assigned to any Certificates, as evidenced by a letter from each
Rating Agency to such effect, (v) to add to, modify or eliminate any provisions
therein restricting transfers of certain Certificates, which are inserted in
response to the Code provisions described below under "Certain Federal Income
Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates--Tax-Related Restrictions on
Transfer of Residual Certificates," or (vi) to make any other provisions with
respect to matters or questions arising under such Pooling and Servicing
Agreement that are not inconsistent with the provisions thereof, provided that
such action will not, as evidenced by an opinion of counsel, adversely affect
in any material respect the interests of the Certificateholders of the related
Series. The Pooling and Servicing Agreement may also be amended by the
Depositor, the Servicer, where applicable, and the Trustee with the consent of
the holders of Certificates evidencing interests aggregating not less than 66
2/3% of the Voting Interests evidenced by the Certificates affected thereby,
for the purpose of adding any provisions to or changing in any manner or
eliminating, any of the provisions of such Pooling and Servicing Agreement or
of modifying in any manner the rights of the Certificateholders; provided,
however, that no such amendment may (i) reduce in any manner the amount of, or
delay the timing of, any payments received on or with respect to Mortgage Loans
or Contracts that are required to be distributed on any Certificates, without
the consent of the holder of such Certificate, (ii) adversely affect in any
material respect the interests of the holders of a Class or Subclass of
Certificates of a Series in a manner other than that set forth in clause (i)
above without the consent of the holders of Certificates aggregating not less
than 66-2/3% of the Voting Interests evidenced by such Class or Subclass, or
(iii) reduce the aforesaid percentage of the Certificates, the holders of which
are required to consent to such amendment, without the consent of the holders
of all Certificates of the Class or Subclass affected then outstanding.
Notwithstanding the foregoing, the Pooling and Servicing Agreement may be
amended by the Depositor, the Servicer, where applicable, and the Trustee
provided that such action is approved by holders of Certificates evidencing
100% of the Percentage Interest of each Class that, as evidenced by an opinion
of counsel, is adversely affected in any material respect by such action. For
purposes of giving any such consent (other than a consent to an action which
would adversely affect in any material respect the interests of the
Certificateholders of any Class, while the Servicer or any affiliate thereof is
the holder of Certificates aggregating not less than 66-2/3% of the Percentage
Interest of such Class), any Certificates registered in the name of the
Servicer or any affiliate thereof shall be deemed not to be outstanding.
Notwithstanding the foregoing, the Trustee will not consent to any such
amendment if such amendment would subject the Trust Fund to tax or cause the
Trust Fund (or one or more segregated pools of assets therein) to fail to
qualify as a REMIC.
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Termination; Purchase or Other Disposition of Mortgage Loans and Contracts
The obligations created by the Pooling and Servicing
Agreement for a Series of Certificates will terminate upon the earlier of (i)
the later of the final payment or other liquidation of the last Mortgage Loan
or Contract subject thereto and the disposition of all property acquired upon
foreclosure of any such Mortgage Loan or Contract and (ii) any purchase or
disposition described in the following paragraph. In no event, however, will
the trust created by the Pooling and Servicing Agreement continue beyond the
expiration of 21 years from the death of the late survivor of certain persons
named in such Pooling and Servicing Agreement. For each Series of Certificates,
the Trustee will give written notice of termination of the Pooling and
Servicing Agreement to each Certificateholder, and the final distribution will
be made only upon surrender and cancellation of the Certificates at an office
or agency appointed by the Depositor and specified in the notice of
termination.
If so provided in the related Prospectus Supplement, the
Pooling and Servicing Agreement for each Series of Certificates will permit,
but not require, the person or persons specified in such Prospectus Supplement
to purchase from the Trust Fund for such Series, or will require the Trust Fund
to sell, all remaining Mortgage Loans or Contracts at the time subject to the
Pooling and Servicing Agreement at a price specified in such Prospectus
Supplement. In the event that an election has been made to treat the related
Trust Fund (or one or more segregated pools of assets therein) as a REMIC, any
such purchase or disposition will be effected only upon receipt by the Trustee
of an opinion of counsel that such purchase (i) will be part of a "qualified
liquidation" or other evidence as defined in Code Section 860F(a)(4)(A), (ii)
will not otherwise subject the Trust Fund (or segregated asset pool) to tax, or
(iii) will not cause the Trust Fund (or segregated asset pool) to fail to
qualify as a REMIC. The exercise of such right or such disposition will effect
early retirement of the Certificates of that Series, but the right so to
purchase may be exercised, or the obligation to sell will arise, only after the
aggregate principal balance of the Mortgage Loans or Contracts for such Series
at the time of purchase is less than a specified percentage of the aggregate
principal balance at the Cut-Off Date for the Series, or after the date set
forth in the related Prospectus Supplement. See "Prepayment and Yield
Considerations."
The Trustee
The Trustee under each Pooling and Servicing Agreement will
be named in the applicable Prospectus Supplement. The commercial bank or trust
company serving as Trustee may have normal banking relationships with the
Depositor, the Servicer or any of their respective affiliates.
With respect to a Series of Certificates relating to Mortgage
Loans or Contracts, the Trustee may resign at any time, in which event the
Servicer will be obligated to appoint a successor trustee. The Servicer (with
respect to a Series of Certificates relating to Mortgage Loans or Contracts)
may also remove the Trustee if the Trustee ceases to be eligible to act as
Trustee under the Pooling and Servicing Agreement, if the Trustee becomes
insolvent or in order to change the situs of the Trust Fund for state-tax
reasons. Upon becoming aware of such circumstances, the Servicer or Depositor,
as the case may be, will become obligated to appoint a successor trustee. The
Trustee may also be removed at any time by the holders of Certificates
evidencing not less than 51% of the Voting Interest in the Trust Fund, except
that, any Certificate registered in the name of the Depositor, the Servicer or
any affiliate thereof will not be taken into account in determining whether the
requisite Voting Interest in the Trust Fund necessary to effect any such
removal has been obtained. Any resignation and removal of the Trustee, and the
appointment of a successor trustee, will not become effective until acceptance
of such appointment by the successor trustee. The Trustee, and any successor
trustee, will have a combined capital and surplus, or shall be a member of a
bank holding system with an aggregate combined capital and surplus, of at least
$50,000,000 and will be subject to supervision or examination by federal or
state authorities.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS
The following discussion contains summaries of certain legal
aspects of mortgage loans and manufactured housing contracts which are general
in nature. Because such legal aspects are governed
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by applicable state law (which laws may differ substantially), the summaries do
not purport to be complete nor to reflect the laws of any particular state, nor
to encompass the laws of all states in which the security for the Mortgage
Loans or Contracts is situated. The summaries are qualified in their entirety
by reference to the applicable federal and state laws governing the Mortgage
Loans or Contracts.
The Mortgage Loans
General
The Mortgage Loans will, in general, be secured by either
first, second or more junior mortgages, deeds of trust, or other similar
security agreements depending upon the prevailing practice in the state in
which the underlying property is located. A mortgage creates a lien upon the
real property described in the mortgage. There are two parties to a mortgage:
the mortgagor, who is the borrower; and the mortgagee, who is the lender. In a
mortgage state instrument, the mortgagor delivers to the mortgagee a note or
bond evidencing the loan and the mortgage. Although a deed of trust is similar
to a mortgage, a deed of trust has three parties: a borrower called the trustor
(similar to a mortgagor), a lender called the beneficiary (similar to a
mortgagee), and a third-party grantee called the trustee. Under a deed of
trust, the borrower grant the property, irrevocably until the debt is paid,, in
trust, generally with a power of sale, to the trustee to secure payment of the
loan. The trustee's authority under a deed of trust and the mortgage's
authority under a mortgage are governed by the express provisions of the deed
of trust or mortgage, applicable law, and, in some cases, with respect to the
deed of trust, the directions of the beneficiary.
The real property covered by a mortgage is most often the fee
estate in land and improvements. However, a mortgage may encumber other
interests in real property such as a tenant's interest in a lease of land or
improvements, or both, and the leasehold estate created by such lease. A
mortgage covering an interest in real property other than the fee estate
requires special provisions in the instrument creating such interest or in the
mortgage to protect the mortgagee against termination of such interest before
the mortgage is paid.
Foreclosure
Foreclosure of a mortgage is generally accomplished by
judicial action. Generally, the action is initiated by the service of legal
pleadings upon all parties having an interest of record in the real property.
Delays in completion of the foreclosure occasionally may result from
difficulties in locating necessary parties defendant. When the mortgagee's
right of foreclosure is contested, the legal proceedings necessary to resolve
the issue can be time-consuming. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a
receiver or other officer to conduct the sale of the property. In some states,
mortgages may also be foreclosed by advertisement, pursuant to a power of sale
provided in the mortgage. Foreclosure of a mortgage by advertisement is
essentially similar to foreclosure of a deed of trust by nonjudicial power of
sale.
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust
that authorizes the trustee to sell the property to a third party upon any
default by the borrower under the terms of the note or deed of trust. In
certain states, such foreclosure also may be accomplished by judicial action in
the manner provided for foreclosure of mortgages. In some states, the trustee
must record a notice of default and send a copy to the borrower-trustor and to
any person who has recorded a request for a copy of a notice of default and
notice of sale. In addition, the trustee must provide notice in some states to
any other individual having an interest of record in the real property,
including any junior lienholders. If the deed of trust is not reinstated within
any applicable cure period, a notice of sale must be posted in a public place
and, in most states, published for a specified period of time in one or more
newspapers. In addition, some state be laws require that a copy of the notice
of sale be posted on the property and sent to all parties having an interest of
record in the property.
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
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having, a junior encumbrance on the real estate, may, during a reinstatement
period, cure the default by paying the entire amount in arrears plus the costs
and expenses incurred in enforcing the obligation. Certain state laws control
the amount of foreclosure expenses and costs, including attorneys' fees, which
may be recovered by a lender.
In case of foreclosure under either a mortgage or a deed of
trust, the sale by the receiver or other designated officer, or by the trustee,
is a public sale. However, because of the difficulty a potential buyer at the
sale would have in determining the exact status of title and because the
physical condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at the
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or receiver for an amount equal to the unpaid principal amount
of the note, accrued and unpaid interest and the expenses of foreclosure.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume the burdens of
ownership, including obtaining hazard insurance and making such repairs at its
own expense as are necessary to render the property suitable for sale. The
lender commonly will obtain the services of a real estate broker and pay the
broker a commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of mortgage insurance proceeds.
Foreclosure on Shares of Cooperatives
The cooperative shares owned by the tenant-stockholder and
pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's certificate of incorporation and
by-laws, as well as the proprietary lease of occupancy agreement, and may be
cancelled by the cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender
and the tenant-stockholder.
The recognition agreement generally provides that, in the
event that the tenant-stockholder has defaulted under the proprietary lease or
occupancy agreement, the cooperative will take no action to terminate such
lease or agreement until the lender has been provided with an opportunity to
cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the cooperative will
recognize the lender's lien against proceeds from a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement. The total amount owed to the
cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and
unpaid interest thereon.
Recognition agreements also provide that in the event of a
foreclosure on a cooperative loan, the lender must obtain the approval or
consent of the cooperative as required by the proprietary lease before
transferring the cooperative shares or assigning the proprietary lease.
Generally, the lender is not limited in any rights it may have to dispossess
the tenant-stockholders.
Foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the foreclosure. Generally, a sale
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conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale
will be applied first to pay the costs and expenses of the sale and then to
satisfy the indebtedness secured by the lender's security interest. The
recognition agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative corporation to receive
sums due under the proprietary lease or occupancy agreement. If there are
proceeds remaining, the lender must account to the tenant-stockholder for the
surplus. Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See
"Anti-Deficiency Legislation and Other Limitations on Lenders" below.
Rights of Redemption
In some states, after sale pursuant to a deed of trust and/or
foreclosure of a mortgage, the borrower and certain foreclosed junior lienors
are given a statutory period in which to redeem the property from the
foreclosure sale. In most states where the right of redemption is available,
statutory redemption may occur upon payment of the foreclosure purchase price,
accrued interest and taxes. In some states, the right to redeem is an equitable
right. The effect of a right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser at a foreclosure sale, or of any
purchaser from the lender subsequent to judicial foreclosure or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has run.
Junior Mortgages; Rights of Senior Mortgages
The Mortgage Loans are secured by mortgages or deeds of trust
some of which are junior to other mortgages or deeds of trust held by other
lenders or institutional investors. The rights of the Trust (and therefore the
Certificateholders), as mortgagee under a junior mortgage or beneficiary under
a junior deed of trust, are subordinate to those of the mortgagee under the
senior mortgage or beneficiary under the senior deed of trust, including the
prior rights of the senior mortgagee to receive hazard insurance and
condemnation proceeds and to cause the property securing the Mortgage Loan to
be sold upon default of the mortgagor or trustor, thereby extinguishing the
junior mortgagee's or junior beneficiary's lien unless the junior mortgagee or
junior beneficiary asserts its subordinate interest in the property in
foreclosure litigation and, possibly, satisfies the defaulted senior mortgage
or deed of trust. As discussed more fully below, a junior mortgagee or junior
beneficiary may satisfy a defaulted senior loan in full and, in some states,
may cure such default and loan. In most states, no notice of default is
required to be given to a junior mortgagee or junior beneficiary and junior
mortgagees or junior beneficiaries are seldom given notice of defaults or
senior mortgages. In order for a foreclosure action in some states to be
effective against a junior mortgagee or junior beneficiary, the junior
mortgagee or junior beneficiary must be named in any foreclosure action, thus
giving notice to junior lienors. It is standard practice of the Sellers to
protect their interest by attending any sale of which they have notice or
appearing and bidding for, or redeeming, the property if it is in their best
interest to do so.
The standard form of the mortgage or deed of trust used by
most institutional lenders, (including the sellers) confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage or deed of trust. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event
the property is taken by condemnation, the mortgagee or beneficiary under any
underlying senior mortgages will have the prior right to collect and apply any
insurance proceeds payable under a hazard insurance policy to restore or repair
the property if feasible, and to collect any remaining insurance proceeds or
any award of damages in connection with the condemnation and to apply the same
to the indebtedness secured by the senior mortgages or deeds of trust. Proceeds
in excess of the amount of senior mortgage indebtedness, in most cases, may be
applied to the indebtedness of a junior mortgage or trust deed.
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The form of mortgage or deed of trust used by most
institutional lenders typically contains a "future advance" clause, which
provides, in essence, that additional amounts advanced to or on behalf of the
mortgagor or trustor by the mortgagee or beneficiary are to be secured by the
mortgage or deed of trust. The priority of any advance made under the clause
depends, in some states, on whether the advance was an "obligatory" or
"optional" advance. If the mortgagee or beneficiary is obligated to advance the
additional amounts, the advance is entitled to receive the same priority as
amounts initially advanced under the mortgage or deed of trust, notwithstanding
the fact that there may be junior mortgages or deeds of trust and other liens
which intervene between the date of recording of the mortgage or deed of trust
and the date of the future advance, and, in some states, notwithstanding that
the mortgagee or beneficiary had actual knowledge of such intervening junior
mortgages or deeds of trust and other liens at the time of the advance. Where
the mortgagee or beneficiary is not obligated to advance additional amounts or,
in some states, has actual knowledge of the intervening junior mortgages or
deeds of trust and other liens, the advance will be subordinate to such
intervening junior mortgages or deeds of trust and other liens. Priority of
advances under a "future advance" cause rests, in some states, on state
statutes giving priority to all advances made under the loan agreement to a
"credit limit" amount stated in the recorded mortgage.
Another provision sometimes included in the form of the
mortgage or deed of trust used by institutional lenders (and included in some
of the forms used by the Sellers) obligates the mortgagor or trustor to pay,
before delinquency, all taxes and assessments on the property and, when due,
all encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to
perform any of these obligations, the mortgagee or beneficiary is given the
right under certain mortgages or deeds of trust to perform the obligations
itself, at its election, with the mortgagor or trustor agreeing to reimburse
the mortgagee or beneficiary for any sums expended by the mortgagee or
beneficiary on behalf of the mortgagor or trustor. All sums so expended by the
mortgagee or beneficiary become part of the indebtedness secured by the
mortgage or deed of trust.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit
the remedies of a beneficiary under a deed of trust or a mortgage under a
mortgage. In some states, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment is a personal
judgment against the former borrower equal in most cases to the difference
between the amount due to the lender and the net amount realized upon the
foreclosure sale.
Some state statutes may require the beneficiary or mortgagee
to exhaust the security afforded under a deed of trust or mortgage by
foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the borrower. In certain other states, the lender has the option
of bringing a personal action against the borrower on the debt without first
exhausting such security; however, in some of these states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. Consequently, the practical effect of the election requirement, when
applicable, is that lenders will usually proceed first against the security
rather than bringing a personal action against the borrower.
Other statutory provisions may limit any deficiency judgment
against the former borrower following a foreclosure sale to the excess of the
outstanding debt over the fair market value of the property at the time of such
sale. The purpose of these statutes is to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes
are provided for in certain instances where the value of the lender's security
has been impaired by acts or omissions of the borrower, for example, in the
event of waste of the property.
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Generally, Article 9 of the UCC governs foreclosure on
cooperative shares and the related proprietary lease or occupancy agreement and
foreclosure on the beneficial interest in a land trust. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Mortgage Loan secured by shares of a cooperative, would be such shares and the
related proprietary lease or occupancy agreement) was conducted in a
commercially reasonable manner.
In addition to anti-deficiency and related legislation,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws, the federal Soldiers' and Sailors' Civil Relief Act of 1940
and state laws affording relief to debtors, may interfere with or affect the
ability of a secured mortgage lender to realize upon its security. For example,
in a Chapter 13 proceeding under the Federal Bankruptcy Code, when a court
determines that the value of a home is less than the principal balance of the
loan, the court may prevent a lender from foreclosing on the home, and, as part
of the rehabilitation plan, reduce the amount of the secured indebtedness to
the value of the home as it exists at the time of the proceeding, leaving the
lender as a general unsecured creditor for the difference between that value
and the amount of outstanding indebtedness. A bankruptcy court may grant the
debtor a reasonable time to cure a payment default, and in the case of a
mortgage loan not secured by the debtor's principal residence, also may reduce
the monthly payments due under such mortgage loan, change the rate of interest
and alter the mortgage loan repayment schedule. Certain court decisions have
applied such relief to claims secured by the debtor's principal residence.
The Internal Revenue Code of 1986, as amended, provides
priority to certain tax liens over the lien of the mortgage or deed of trust.
The laws of some states provide priority to certain tax liens over the lien of
the mortgage of deed of trust. Certain environmental protection laws may also
impose liability for cleanup expenses on owners by foreclosure on real
property, which liability may exceed the value of the property involved.
Numerous federal and some state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination,
servicing and the enforcement of mortgage loans. These laws include the federal
Truth in Lending Act, Real Estate Settlement Procedures Act, Equal Credit
Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and
related statutes and regulations. These federal laws and state laws impose
specific statutory liabilities upon lenders who originate or service mortgage
loans and who fail to comply with the provisions of the law. In some cases,
this liability may affect assignees of the mortgage loans.
"Due-on-Sale" Clauses
The forms of note, mortgage and deed of trust relating to
conventional Mortgage Loans may contain a "due-on-sale" clause permitting
acceleration of the maturity of a loan if the borrower transfers its interest
in the property. In recent years, court decisions and legislative actions
placed substantial restrictions on the right of lenders to enforce such clauses
in many states. However, effective October 15, 1982, Congress enacted the
Garn-St Germain Depository Institutions Act of 1982 (the "Act") which purports
to preempt state laws which prohibit the enforcement of "due-on-sale" clauses
by providing among other matters, that "due-on-sale" clauses in certain loans
(which loans may include the Mortgage Loans) made after the effective date of
the Act are enforceable, within certain limitations as set forth in the Act and
the regulations promulgated thereunder. "Due-on-sale" clauses contained in
mortgage loans originated by federal savings and loan associations or federal
savings banks are fully enforceable pursuant to regulations of the Office of
Thrift Supervision ("OTS"), as successor to the Federal Home Loan Bank Board
("FHLBB"), which preempt state law restrictions on the enforcement of such
clauses. Similarly, "due-on-sale" clauses in mortgage loans made by national
banks and federal credit unions are now fully enforceable pursuant to
preemptive regulations of the Office of the Comptroller of the Currency and the
National Credit Union Administration, respectively.
The Act created a limited exemption from its general rule of
enforceability for "due-on-sale" clauses in certain mortgage loans ("Window
Period Loans") which were originated by non-federal lenders and made or assumed
in certain states ("Window Period States") during the period, prior to October
15, 1982, in which that state prohibited the enforcement of "due-on-sale"
clauses by constitutional provision, statute or statewide court decision (the
"Window Period"). Though neither the Act nor the
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FHLBB regulations promulgated thereunder actually names the Window Period
States, FHLMC has taken the position, in prescribing mortgage loan servicing
standards with respect to mortgage loans which it has purchased, that the
Window Period States were: Arizona, Arkansas, California, Colorado, Georgia,
Iowa, Michigan, Minnesota, New Mexico, Utah and Washington. Under the Act,
unless a Window Period State took action by October 15, 1985, the end of the
Window Period, to further regulate enforcement of "due-on-sale" clauses in
Window Period Loans, "due-on-sale" clauses would become enforceable even in
Window Period Loans. Five of the Window Period States (Arizona, Minnesota,
Michigan, New Mexico and Utah) have taken actions which restrict the
enforceability of "due-on-sale" clauses in Window Period Loans beyond October
15, 1985. The actions taken vary among such states.
By virtue of the Act, the Servicer may generally be permitted
to accelerate any conventional Mortgage Loan which contains a "due-on-sale"
clause upon transfer of an interest in the property subject to the mortgage or
deed of trust. With respect to any Mortgage Loan secured by a residence
occupied or to be occupied by the borrower, this ability to accelerate will not
apply to certain types of transfers, including (i) the granting of a leasehold
interest which has a term of three years or less and which does not contain an
option to purchase, (ii) a transfer to a relative resulting from the death of a
borrower, or a transfer where the spouse or children becomes an owner of the
property in each case where the transferee(s) will occupy the property, (iii) a
number resulting from a decree of dissolution of marriage, legal separation
agreement or from an incidental property settlement agreement by which the
spouse becomes an owner of the property, (iv) the creation of a lien or other
encumbrance subordinate to the lender's security instrument which does not
relate to a transfer of rights of occupancy in the property (provided that such
lien or encumbrance is not created pursuant to a contract for deed), (v) a
transfer by devise, descent or operation of law on the death of a joint tenant
or tenant by the entirety, and (vi) other transfers as set forth in the Act and
the regulations thereunder. The extent of the effect of the Act on the average
lives and delinquency rates of the Mortgage Loans cannot be predicted. See
"Prepayment and Yield Considerations."
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980, as amended ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The OTS (as successor
to the FHLBB) is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. The statute authorized any
state to reimpose Stated Rate limits by adopting before April 1, 1983, a law or
constitutional provision which expressly rejects application of the federal
law. Fifteen states have adopted laws reimposing or reserving the right to
impose interest rate limits. In addition, even where Title V is not so
rejected, any state is authorized to adopt a provision limiting certain other
loan charges.
Unless otherwise specified in the applicable Prospectus
Supplement, each Unaffiliated Seller will represent and warrant in the related
Loan Sale Agreement that all Mortgage Loans sold by such Unaffiliated Seller to
the Depositor were originated in full compliance with applicable state laws,
including usury laws. See "The Trust Funds--Representations and Warranties."
Adjustable Rate Loans
The laws of certain states may provide that mortgage notes
relating to adjustable rate loans are not negotiable instruments under the
Uniform Commercial Code. In such event, the Trustee will not be deemed to be a
"holder in due course" within the meaning of the Uniform Commercial Code and
may take such a mortgage note subject to certain restrictions on its ability to
foreclose and to certain contractual defenses available to a mortgagor.
Enforceability of Certain Provisions
Standard forms of note, mortgage and deed of trust generally
contain provisions obligating the borrower to pay a late charge if payments are
not timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states,
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there are or may be specific limitations upon late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if
the loan is prepaid. Under the Pooling and Servicing Agreement, late charges
and prepayment fees (to the extent permitted by law and not waived by the
Servicer) will be retained by the Servicer as additional servicing
compensation.
Courts have Unposed general equitable principles upon
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of defaults under the loan documents. Examples
of judicial remedies that may be fashioned include judicial requirements that
the lender undertake affirmative and expensive actions to determine the causes
for the borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have sustained their judgment for the
lender's judgment and have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders
to foreclose if the default under the mortgage instrument is not monetary, such
as the borrower failing to adequately maintain the property or the borrower
executing a second mortgage or deed of trust affecting the property. In other
cases, some courts have been faced with the issue whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under deeds of trust receive notices in addition to the
statutorily-prescribed minimum requirements. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust or under a mortgage having a power of
sale does not involve sufficient state action to afford constitutional
protections to the borrower.
The Contracts
General
As a result of the assignment of the Contracts to the
Trustee, the Trust Fund will succeed collectively to all of the rights
(including the right to receive payment on the Contracts) and will assume the
obligations of the obligee under the Contracts. Each Contract evidences both
(a) the obligation of the obligor to repay the loan evidenced thereby, and (b)
the grant of a security interest in the Manufactured Home to secure repayment
of such loan. Certain aspects of both features of the Contracts are described
more fully below.
The Contracts generally are "chattel paper" as defined in the
Uniform Commercial Code (the "UCC") in effect in the states in which the
Manufactured Homes initially were registered. Pursuant to the UCC, the sale of
chattel paper is treated in a manner similar to perfection of a security
interest in chattel paper. Under the Pooling and Servicing Agreement, the
Servicer will transfer physical possession of the Contracts to the Trustee or a
designated custodian or may retain possession of the Contracts as custodian for
the Trustee. In addition, the Servicer will make an appropriate filing of a
UCC-1 financing statement in the appropriate states to give notice of the
Trustee's ownership of the Contracts. Unless otherwise specified in the related
Prospectus Supplement, the Contracts will not be stamped or marked otherwise to
reflect their assignment from the Depositor to the Trustee. Therefore, if
through negligence, fraud or otherwise, a subsequent purchaser were able to
take physical possession of the Contracts without notice of such assignment,
the Trustee's interest in Contracts could be defeated.
Security Interests in the Manufactured Homes
The Manufactured Homes securing the Contracts may be located
in all 50 states. Security interests in manufactured homes may be perfected
either by notation of the secured party's lien on the certificate of title or
by delivery of the required documents and payment of a fee to the state motor
vehicle authority, depending on state law. In some non-title states, perfection
pursuant to the provisions of the UCC is required. The Servicer may effect such
notation or delivery of the required documents and fees, and obtain possession
of the certificate of title, as appropriate under the laws of the state in
which any manufactured home securing a manufactured housing conditional sales
contract is registered. In the event the Servicer fails, due to clerical
errors, to effect such notation or delivery, or files the security interest
under the wrong law (for example, under a motor vehicle title statute rather
than under the UCC, in a few
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states), the Certificateholders may not have a first priority security interest
in the Manufactured Home securing a Contract. As manufactured homes have become
larger and often have been attached to their sites without any apparent
intention to move them, courts in many states have held that manufactured
homes, under certain circumstances, may become subject to real estate title and
recording laws. As a result, a security interest in a manufactured home could
be rendered subordinate to the interests of other parties claiming an interest
in the home under applicable state real estate law. In order to perfect a
security interest in a manufactured home under real estate laws, the secured
party must file either a "fixture filing" under the provisions of the UCC or a
real estate mortgage under the real estate laws of the state where the home is
located. These filings must be made in the real estate records office of the
county where the home is located. Substantially all of the Contracts contain
provisions prohibiting the borrower from permanently attaching the Manufactured
Home to its site. So long as the borrower does not violate this agreement, a
security interest in the Manufactured Home will be governed by the certificate
of title laws or the UCC, and the notation of the security interest on the
certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to its site,
other parties could obtain an interest in the Manufactured Home which is prior
to the security interest originally retained by the Unaffiliated Seller and
transferred to the Depositor. With respect to a Series of Certificates and if
so described in the related Prospectus Supplement, the Servicer may be required
to perfect a security interest in the Manufactured Home under applicable real
estate laws. The Servicer will represent that at the date of the initial
issuance of the related Certificates it has obtained a perfected first priority
security interest by proper notation or delivery of the required documents and
fees with respect to substantially all of the Manufactured Homes securing the
Contracts.
The Depositor will cause the security interests in the
Manufactured Homes to be assigned to the Trustee on behalf of the
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, neither the Depositor nor the Trustee will amend the certificates
of title to identify the Trustee or the Trust Fund as the new secured party,
and neither the Depositor nor the Servicer will deliver the certificates of
title to the Trustee or note thereon the interest of the Trustee. Accordingly,
the Servicer (or the Unaffiliated Seller) which continue to be named as the
secured party on the certificates of title relating to the Manufactured Homes.
In many states, such assignment is an effective conveyance of such security
interest without amendment of any lien noted on the related certificate of
title and the new secured party succeeds to the Depositor's rights as the
secured party. However, in some states there exists a risk that, in the absence
of an amendment to the certificate of title, such assignment of the security
interest in the Manufactured Home might not be effective or perfected or that,
in the absence of such notation or delivery to the Trustee, the assignment of
the security interest in the Manufactured Home might not be effective against
creditors of the Servicer (or the Unaffiliated Seller) or a trustee in
bankruptcy of the Servicer (or the Unaffiliated Seller).
In the absence of fraud, forgery or permanent affixation of
the Manufactured Home to its site by the Manufactured Home owner, or
administrative error by state recording officials, the notation of the lien of
the Servicer (or the Unaffiliated Seller) on the certificate of title or
delivery of the required documents and fees will be sufficient to protect the
Certificateholders against the rights of subsequent purchasers of a
Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the security
interest assigned to the Trustee is not perfected, such security interest would
be subordinate to, among others, subsequent purchasers for value of
Manufactured Homes and holders of perfected security interests. There also
exists a risk in not identifying the Trustee as the new secured party on the
certificate of title that, through fraud or negligence, the security interest
of the Certificateholders could be released.
In the event that the owner of a Manufactured Home moves it
to a state other than the state in which such Manufactured Home initially is
registered, under the laws of most states the perfected security interest in
the Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and not
re-register the Manufactured Home in such state, and if steps are not taken to
re-perfect the Trustee's security interest in such state, the security interest
in the Manufactured Home would cease to be perfected. A majority of states
generally require surrender of a
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certificate of title to re-register a Manufactured Home; accordingly, the
Trustee must surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Servicer would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to
re-perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
In the ordinary course of servicing the manufactured housing conditional sales
contracts, the Servicer takes steps to effect such re-perfection upon receipt
of notice of registration or information from the obligor as to relocation.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the Trustee (or its custodian) must
surrender possession of the certificate of title or the Servicer will receive
notice as a result of its lien noted thereon and accordingly will have an
opportunity to require satisfaction of the related manufactured housing
conditional sales contract before release of the lien. Under the Pooling and
Servicing Agreement, the Servicer is obligated to take steps, at the Servicer's
expense, as are necessary to maintain perfection of security interests in the
Manufactured Homes.
Under the laws of most states, liens for repairs performed on
a Manufacturer Home and liens for personal property taxes take priority over a
perfected security interest. The Unaffiliated Seller will represent in the
Pooling and Servicing Agreement that it has no knowledge of any such liens with
respect to any Manufactured Home securing payment on any Contract. However,
such liens could arise at any time during the term of a Contract. No notice
will be given to the Trustee or Certificateholders in the event such a lien
arises.
Enforcement of Security Interests in Manufactured Homes
The Servicer on behalf of the Trustee, to the extent required
by the related Pooling and Servicing Agreement, may take action to enforce the
Trustee's security interest with respect to Contracts in default by
repossession and resale of the Manufactured Homes securing such defaulted
Contracts. So long as the Manufactured Home has not become subject to the real
estate law, a creditor can repossess a Manufactured Home securing a Contract by
voluntary surrender, by "self-help" repossession that is "peaceful" (i.e.,
without breach of the peace) or, in the absence of voluntary surrender and the
ability to repossess without breach of the peace, by judicial process. The
holder of a Contract must give the debtor a number of days' notice, which
varies from 10 to 30 days depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial reasonableness in effecting such a sale. The law in most
states also requires that the debtor be given notice of any sale prior to
resale of the unit so that the debtor may redeem at or before such resale. In
the event of such repossession and resale of a Manufactured Home, the Trustee
would be entitled to be paid out of the sale proceeds before such proceeds
could be applied to the payment of the claims of unsecured creditors or the
holders of subsequently perfected security interests or, thereafter, to the
debtor.
Under the laws applicable in most states, a creditor is
entitled to obtain a deficiency judgment from a debtor for any deficiency on
repossession and resale of the manufactured home securing such a debtor's loan.
However, some states impose prohibitions or limitations on deficiency
judgments, and in many cases the defaulting borrower would have no assets with
which to pay a judgment.
Certain other statutory provisions, including federal and
state bankruptcy and insolvency laws and general equitable principles, may
limit or delay the ability of a lender to repossess and resell collateral or
enforce a deficiency judgment.
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
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claims and defenses which the debtor could assert against the seller of goods.
Liability under this rule is limited to amounts paid under a Contract; however,
the obligor also may be able to asset the rule to set off remaining amounts due
as a defense against a claim brought by the Trustee against such obligor.
Numerous other federal and state consumer protection laws impose requirements
applicable to the origination and lending pursuant to the Contracts, including
the Truth in Lending Act, the Federal Trade Commission Act, the Fair Credit
Billing Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act,
the Fair Debt Collection Practices Act and the Uniform Consumer Credit Code. In
the case of some of these laws, the failure to comply with their provisions may
affect the enforceability of the related Contract.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses
The Contracts, in general, prohibit the sale or transfer of
the related Manufactured Homes without the consent of the Servicer and permit
the acceleration of the maturity of the Contracts by the Servicer upon any such
sale or transfer that is not consented to.
In the case of a transfer of a Manufactured Home after which
the Servicer desires to accelerate the maturity of the related Contract, the
Servicer's ability to do so will depend on the enforceability under state law
of the "due-on-sale" clause. The Garn-St Germain Depository Institutions Act of
1982 preempts, subject to certain exceptions and conditions, state laws
prohibiting enforcement of "due-on-sale" clauses applicable to the Manufactured
Homes. Consequently, in some states the Servicer may be prohibited from
enforcing a "due-on-sale" clause in respect of certain Manufactured Homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980, as amended ("Title V"), provides that, subject to
the following conditions, state usury limitations shall not apply to any loan
which is secured by a first lien on certain kinds of manufactured housing. The
Contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action leading to
repossession of the related unit.
Title V authorized any state to reimpose limitations on
interest rates and finance charges by adopting before April 1, 1983 a law or
constitutional provision which expressly rejects application of the federal
law. Fifteen states adopted such a law prior to the April 1, 1983 deadline. In
addition, even where Title V was not so rejected, and state is authorized by
the law to adopt a provision limiting discount points or other charges on loans
covered by Title V. The Unaffiliated Seller will represent that all of the
Contracts comply with applicable usury law.
Formaldehyde Litigation with Respect to Contracts
A number of lawsuits have been brought in the United States
alleging personal injury from exposure to the chemical formaldehyde, which is
preset in many building materials, including such components of manufactured
housing as plywood flooring and wall paneling. Some of these lawsuits were
brought against manufacturers of manufactured housing, suppliers of component
parts, and related persons in the distribution process. Depositor is aware of a
limited number of cases in which plaintiffs have won judgments in these
lawsuits.
The holder of any Contract secured by a Manufactured Home
with respect to which a formaldehyde claim has been successfully asserted may
be liable to the obligor for the amount paid by the obligor on the related
Contract and may be unable to collect amounts still due under the Contract. The
successful assertion of such claim constitutes a breach of a representation or
warranty of the person specified in the related Prospectus Supplement, and the
Certificateholders would suffer a loss only to the extent that (i) such person
breached its obligation to repurchase the Contract in the event an obligor is
successful in asserting such a claim, and (ii) such person, the Servicer or the
Trustee were unsuccessful in asserting any claim of contribution or subrogation
on behalf of the Certificateholders against the
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manufacturer or other persons who were directly liable to the plaintiff for the
damages. Typical products liability insurance policies held by manufacturers
and component suppliers of manufactured homes may not cover liabilities arising
from formaldehyde in manufactured housing, with the result that recoveries from
such manufacturers, suppliers or other persons may be limited to their
corporate assets without the benefit of insurance.
Installment Contracts
Mortgage Loans and Contracts
The Mortgage Loan and Contracts may also consist of
Installment Contracts. Under an Installment Contract the seller (hereinafter
referred to in this Section as the "lender") retains legal title to the
property and enters into an agreement with the purchaser (hereinafter referred
to in this Section as the "borrower" for the payment of the purchase price,
plus interest, over the term of such contract. Only after full performance by
the borrower of the contract is the lender obligated to convey title to the
real estate to the purchaser. As with mortgage or deed of trust financing,
during the effective period of the Installment Contract, the borrower is
generally responsible for maintaining the property in good condition and for
paying real estate taxes, assessments and hazard insurance premiums associated
with the property.
The method of enforcing the rights of the lender under an
Installment Contract varies on a state-by-state basis depending upon the extent
to which state courts are willing, or able pursuant to state statute, to
enforce the contract strictly according to the terms. The terms of Installment
Contracts generally provide that upon a default by the borrower, the borrower
loses his or her right to occupy the property, the entire indebtedness is
accelerated, and the buyer's equitable interest in the property is forfeited.
The lender in such a situation does not have to foreclosure in order to obtain
title to the property, although in some cases a quiet title action is in order
if the borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of
forfeiture. Under such statute, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the borrower
may be granted some grace period during which the contract may be reinstated
upon full payment of the default amount and the borrower may have a
post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
Installment Contract for the sale of real estate to share in the proceeds of
sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the
lender's procedures for obtaining possession and clear title under an
Installment Contract for the sale of real estate in a given state are simpler
and less time-consuming and costly than are the procedures for foreclosing and
obtaining clear title to a mortgaged property.
Environmental Risks
Real property pledged for a Mortgaged Loan or Contract as
security to a lender may be subject to unforeseen environmental risks. Of
particular concern may be those mortgaged properties which have been the site
of manufacturing, industrial or disposal activity. Such environmental risks may
give rise to (a) a diminution in value of property securing any Mortgage Loan
or the inability to foreclose against such property or (b) in certain
circumstances as more fully described below, liability for clean-up costs or
other remedial actions, which liability could exceed the value of such property
or the principal balance of the related Mortgage Loan.
Under the laws of certain states, failure to perform the
remediation required or demanded by the state of any condition or circumstance
that (i) may pose an imminent or substantial endangerment to the public health
or welfare or the environment, (ii) may result in a release or threatened
release of any Hazardous Material, or (iii) may give rise to any environmental
claim or demand (each such condition or circumstance, or "Environmental
Condition") may give rise to a lien on the property to ensure the
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reimbursement of remedial costs incurred by the state. In several states such
lien has priority over the lien of an existing mortgage against such property.
The value of a Mortgaged Property as collateral for a Mortgage Loan could
therefore be adversely affected by the existence of any such Environmental
Condition.
The state of the law is currently unclear as to whether and
under what circumstances clean-up costs, or the obligation to take remedial
actions, could be Unposed on a secured lender such as the Trust Fund. Under the
laws of some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), a lender may be
liable as an "owner or operator" for costs of addressing releases or threatened
releases of hazardous substances on a mortgaged property if such lender or its
agents or employees have participated in the management of the operations of
the borrower, even though CERCLA's definition of "owner or operator," however,
is a person "who without participating in the management of the facility, holds
indicia of ownership primarily to protect his security interest" (the
"secured-creditor exemption"). This exemption for holders of a security
interest such as a secured lender applies only when the lender seeks to protect
its security interest in the contaminated facility or property. Thus, if a
lender's activities begin to encroach on the actual management of such facility
or property, the lender faces potential liability as an "owner or operator"
under CERCLA. Similarly, when a lender forecloses and takes title to a
contaminated facility or property (whether it holds the facility or property as
an investment or leases it to a third party), the lender may incur potential
CERCLA liability.
A decision in May 1990 of the United States Court of Appeals
for the Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly
contained CERCLA's secured-creditor exemption. The court held that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under
CERCLA; rather, liability could attach to a lender if its involvement with the
management of the facility is broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence such decisions
could be inferred from the extent of its involvement in the facility's
financial management. A subsequent decision by the United States Court of
Appeals for the Ninth Circuit in In re Bergsoe Metal Corp., disagreeing with
the Fleet Factors court, held that a secured lender had no liability absent
"some actual management of the facility" on the part of the lender. On April
29, 1992, the United States Environmental Protection Agency (the "EPA") issued
a final rule interpreting and delineating CERCLA's secured-creditor exemption.
The final rule defines a specific the range of permissible actions that may be
undertaken by a holder of a contaminated facility without exceeding the bounds
of the secured-creditor exemption. Issuance of this rule by the EPA under
CERCLA would not necessarily affect the potential for liability in actions by
either a state or a private party under CERCLA or in actions under other
federal or state laws which may impose liability on "owners or operators" but
do not incorporate the second-creditor exemption.
If a lender is or becomes liable for clean-up costs, it may
bring an action for contribution against the current owners or operators, the
owners or operators at the time of on-site disposal activity or any other party
who contributed to the environmental hazard, but such persons or entities may
be bankrupt or otherwise judgment proof. Furthermore, such action against the
borrower may be adversely affected by the limitations on recourse in the
documents in the Mortgage Document File. Similarly, in some states
anti-deficiency legislation and other statues requiring the lender to exhaust
its security before bringing a personal action against the borrower-trustor
(see "Anti-Deficiency Legislation and Other Limitations on Lenders" below) may
curtail the lender's ability to recover from its borrower the environmental
clean-up and other related costs and liabilities by the lender.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended (the "Relief Act"), a borrower who enters
military service after the origination of such borrower's Mortgage Loan or
Contract (including a borrower who is a member of the National Guard or is in
reserve status at the time of the origination of the Mortgage Loan or Contract
and is later called to active duty) may not be charged interest above an annual
rate of 6% during the period of such borrower's active duty status, unless a
court orders otherwise upon application of the lender. It is possible that such
action could have an
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effect, for an indeterminate period of time, on the ability of the Servicer to
collect full amounts of interest on certain of the Mortgage Loans or Contracts
in a Trust Fund. Any shortfall in interest collections resulting from the
application of the Relief Act could result in losses to the holders of the
Certificates of the related Series. In addition, the Relief Act imposes
limitations which would impair the ability of the Servicer to foreclose on an
affected Mortgage Loan or Contract during the borrower's period of active duty
status. Thus, in the event that such a Mortgage Loan or Contract goes into
default, there may be delays and losses occasioned by the inability to realize
upon the Mortgaged Property or Manufactured Home in a timely fashion.
Type of Mortgaged Property
The lender may be subject to additional risk depending upon
the type and use of the Mortgaged Property in question. For instance, Mortgaged
Properties which are hospitals, nursing homes or convalescent homes may present
special risks to lenders in large part due to significant governmental
regulation of the operation, maintenance, control and financing of health care
institutions. Mortgages on Mortgaged Properties which are owned by the Borrower
under a condominium form of ownership are subject to the declaration, by-laws
and other rules and regulations of the condominium association. Mortgaged
Properties which are hotels or motels may present additional risk to the lender
in that: (i) hotels and motels are typically operated pursuant to franchise,
management and operating agreements which may be terminable by the operator;
and (ii) the transferability of the hotel's operating, liquor and other
licenses to the entity acquiring the hotel either through purchase or
foreclosure is subject to the vagaries of local law requirements. In addition,
Mortgaged Properties which are multifamily residential properties may be
subject to rent control laws, which could impact the future cash flows of such
properties. Finally, Mortgaged Properties which are financed in the installment
sales contract method may leave the holder of the note exposed to tort and
other claims as the true owner of the property which could impact the
availability of cash to pass through to investors.
Certain Matters Relating to Insolvency
The Unaffiliated Seller of the Mortgage Loans or Contracts
and the Depositor intend that the transfer of such Mortgage Loans or Contracts
to the Trust Fund constitute a sale rather for a pledge of the Mortgage Loans
or Contracts to secure indebtedness of the seller of the Mortgage Loans or
Contracts. However, if the Unaffiliated Seller were to become a debtor under
the federal bankruptcy code or be placed in a conservatorship or receivership
under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA"), as the case may be, it is possible that a creditor, receiver,
conservator or trustee-in-bankruptcy of such seller may argue that the sale of
the Mortgage Loans or Contracts by the Unaffiliated Seller is a pledge of the
Mortgage Loans or Contracts rather than a sale. This position, if argued or
accepted by a court, could result in a delay in or reduction of distributions
to the related Certificateholders.
Under FIRREA the FDIC as receiver or conservator of a
Servicer subject to its jurisdiction may enforce a contract notwithstanding any
provision of the contract providing for termination thereof by reason of the
insolvency of, or appointment of a receiver or conservator for, the Servicer.
Consequently, provisions in a Pooling and Servicing Agreement providing for an
Event of Default upon certain events of insolvency, receivership or
conservatorship of the Servicer may not be enforceable against the FDIC as
receiver or conservator to the extent that the exercise of such rights is based
solely upon the insolvency of or appointment of a receiver or conservator for
the Servicer. In addition, the FDIC may transfer the assets and liabilities of
an institution in receivership or conservatorship to another institution.
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
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consequences thereof caused by or on behalf of a junior lienor may stay the
senior lender from taking action to foreclose out such junior lien. In a case
under the Bankruptcy Code, the lender is precluded from foreclosing without
authorization from the bankruptcy court. In addition, a court with federal
bankruptcy jurisdiction may permit a debtor through his or her Chapter 11 or
Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on the debtor's residence by paying arrearage within a reasonable
time period and reinstating the original mortgage loan payment schedule even
though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court (provided no sale of the residence
had yet occurred) prior to the filing of the debtor's petition. Some courts
with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also
indicated that the terms of a mortgage loan secured by property of the debtor
may be modified. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule, and reducing the lender's security
interest to the value of the residence, thus leaving the lender in the position
of a general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan.
Federal bankruptcy law may also interfere with or affect the
ability of the secured mortgage lender to enforce an assignment by a mortgagor
of rent and leases related to the Mortgaged Property if the related mortgagor
is in a bankruptcy proceeding. Under Section 362 of the Bankruptcy Code, the
mortgagee will be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue can be time-consuming and may result
in significant delays in the receipt of the rents. Rents may also escape an
assignment thereof (i) if the assignment is not fully perfected under state law
prior to commencement of the bankruptcy proceeding, (ii) to the extent such
rents are used by the borrower to maintain the mortgaged property, or for other
court authorized expenses, or (iii) to the extent other collateral may be
substituted for the rents.
To the extent a mortgagor's ability to make payment on a
mortgage loan is dependent on payments under a lease of the related property,
such ability may be impaired by the commencement of a bankruptcy proceeding
relating to a lessee under such lease. Under the federal bankruptcy laws, the
filing of a petition in bankruptcy by or on behalf of a lessee results in a
stay in bankruptcy against the commencement or continuation of any state court
proceeding for past due rent, for accelerated rent, for damages or for a
summary eviction order with respect to a default under the lease that occurred
prior to the filing of the lessee's petition.
In addition, federal bankruptcy law generally provides that a
trustee or debtor in possession in a bankruptcy or reorganization case under
the Bankruptcy Code may, subject to approval of the court (a) assume the lease
and retain it or assign it to a third party or (b) reject the lease. If the
lease is assumed, the trustee or debtor in possession (or assignee, if
applicable) must cure any defaults under the lease, compensate the lessor for
its losses and provide the lessor with "adequate assurance" of future
performance. Such remedies may be insufficient, however, as the lessor may be
forced to continue under the lease with a lessee that is a poor credit risk or
an unfamiliar tenant if the lease was assigned, and any assurances provided to
the lessor may, in fact, be inadequate. Furthermore, there is likely to be a
period of time between the date upon which a lessee files a bankruptcy petition
and the date upon which the lease is assumed or rejected. Although the lessee
is obligated to make all lease payments currently with respect to the
post-petition period, there is a risk that such payments will not be made due
to the lessee's poor financial condition. If the lease is rejected, the lessor
will be treated as an unsecured creditor with respect to its claim for damages
for termination of the lease and the mortgagor must release the mortgage
property before the flow of lease payments will recommence. In addition,
pursuant to Section 502(b)(6) of the Bankruptcy Code, a lessor's damages for
lease rejection are limited by a formula.
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
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the parties' intent, if a bankruptcy court determines that the mortgaged
property has been sold for less than fair consideration while the mortgagor was
insolvent and within one year (or within any longer state statutes of
limitations if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law) of the filing of bankruptcy.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of the material
anticipated federal income tax consequences to investors of the purchase,
ownership and disposition of the Securities offered hereby. The discussion is
based upon laws, regulations, rulings and decisions now in effect, all of which
are subject to change. The discussion below does not purport to deal with all
federal tax consequences applicable to all categories of investors, some of
which may be subject to special rules. Investors should consult their own tax
advisors in determining the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of the
Securities. For purposes of this discussion, references to a "Securityholder"
or a "Holder" are to the beneficial owner of a Security.
The following discussion addresses securities of three
general types: (i) securities ("Grantor Trust Securities") representing
interests in a Trust Estate (a "Grantor Trust Estate") which the Sponsor will
covenant not to elect to have treated as a real estate mortgage investment
conduit ("REMIC"); (ii) securities ("REMIC Securities") representing interests
in a Trust Estate, or a portion thereof, which the Sponsor will covenant to
elect to have treated as a REMIC under sections 860A through 860G of the
Internal Revenue Code of 1986, as amended (the "Code"); and (iii) securities
("Debt Securities") that are intended to be treated for federal income tax
purposes as indebtedness secured by the underlying Mortgage Loans. This
Prospectus does not address the tax treatment of partnership interests or
interests in a FASIT. Such a discussion will be set forth in the related
Prospectus Supplement for any Trust issuing Securities characterized as
partnership interests or interests in a FASIT. The Prospectus Supplement for
each series of Securities will indicate whether a REMIC or FASIT election (or
elections) will be made for the related Trust Estate and, if a REMIC or FASIT
election is to be made, will identify all "regular interests" and "residual
interests" in the REMIC or all "regular interests," "high-yield interests" or
"ownership interest" in the FASIT. Pursuant to the Small Business Job
Protection Act of 1996, enacted on August 20, 1996 (the "1996 Act"), a FASIT
election can be made on or after September 1, 1997.
Grantor Trust Securities
With respect to each series of Grantor Trust Securities,
special tax counsel to the Sponsor, will deliver its opinion to the Sponsor
that (unless otherwise limited in the related Prospectus Supplement) the
related Grantor Trust Estate will be classified as a grantor trust and not as a
partnership or an association taxable as a corporation. Accordingly, each
Holder of a Grantor Trust Security will generally be treated as the owner of an
interest in the Mortgage Loans included in the Grant or Trust Estate.
For purposes of the following discussion, a Grantor Trust
Security representing an undivided equitable ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Estate,
together with interest thereon at a pass-through rate, will be referred to as a
"Grantor Trust Fractional Interest Security." A Grantor Trust Security
representing ownership of all or a portion of the difference between interest
paid on the Mortgage Loans constituting the related Grantor Trust Estate and
interest paid to the Holders of Grantor Trust Fractional Interest Securities
issued with respect to such Grantor Trust Estate will be referred to as a
"Grantor Trust Strip Security."
Special Tax Attributes
Unless otherwise disclosed in a related Prospectus
Supplement, special tax counsel to the Sponsor, will deliver its opinion to the
Sponsor that (a) Grantor Trust Fractional Interest Securities will
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represent interests in (i) "loans . . . secured by an interest in real
property" within the meaning of section 7701(a)(19)(C)(v) of the Code; and (ii)
"obligations (including any participation or certificate of beneficial
ownership therein) which . . . are principally secured by an interest in real
property" within the meaning of section 860G(a)(3)(A) of the Code; and (b)
interest on Grantor Trust Fractional Interest Securities will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of section 856(c)(3)(B) of the Code. In
addition, the Grantor Trust Strip Securities will be "obligations (including
any participation or certificate of beneficial ownership therein) . . .
principally secured by an interest in real property" within the meaning of
section 860G(a)(3)(A) of the Code.
The 1996 Act repeals the bad debt reserve method of
accounting for mutual savings banks and domestic building and loan associations
for tax years beginning after December 31, 1995. As a result, section 593(d) of
the Code is no longer applicable to treat the Certificates as "qualifying real
property loans."
Taxation of Holders of Grantor Trust Securities
Holders of Grantor Trust Fractional Interest Securities
generally will be required to report on their federal income tax returns their
respective shares of the income from the Mortgage Loans (including amounts used
to pay reasonable servicing fees and other expenses but excluding amounts
payable to Holders of any corresponding Grantor Trust Strip Securities) and,
subject to the limitations described below, will be entitled to deduct their
shares of any such reasonable servicing fees and other expenses. If a Holder
acquires a Grantor Trust Fractional Interest Security for an amount that
differs from its outstanding principal amount, the amount includible in income
on a Grantor Trust Fractional Interest Security may differ from the amount of
interest distributable thereon. See "--Discount and Premium," below.
Individuals holding a Grantor Trust Fractional Interest Security directly or
through certain pass-through entities will be allowed a deduction for such
reasonable servicing fees and expenses only to the extent that the aggregate of
such Holder's miscellaneous itemized deductions exceeds 2% of such Holder's
adjusted gross income. Further, Holders (other than corporations) subject to
the alternative minimum tax may not deduct miscellaneous itemized deductions in
determining alternative minimum taxable income.
Holders of Grantor Trust Strip Securities generally will be
required to treat such Securities as "stripped coupons" under section 1286 of
the Code. Accordingly, such a Holder will be required to treat the excess of
the total amount of payments on such a Security over the amount paid for such
Security as original issue discount and to include such discount in income as
it accrues over the life of such Security. See "--Discount and Premium," below.
Grantor Trust Fractional Interest Securities may also be
subject to the coupon stripping rules if a class of Grantor Trust Strip
Securities is issued as part of the same series of Securities. The consequences
of the application of the coupon stripping rules would appear to be that any
discount arising upon the purchase of such a Security (and perhaps all stated
interest thereon) would be classified as original issue discount and includible
in the Holder's income as it accrues (regardless of the Holder's method of
accounting), as described below under "--Discount and Premium." The coupon
stripping rules will not apply, however, if (i) the pass-through rate is no
more than 100 basis points lower than the gross rate of interest payable on the
underlying Mortgage Loans and (ii) the difference between the outstanding
principal balance on the Security and the amount paid for such Security is less
than 0.25% of such principal balance times the weighted average remaining
maturity of the Security.
Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a Grantor Trust
Security (equal to the difference between the amount realized on the sale and
the adjusted basis of such Grantor Trust Security) will be capital gain or
loss, except to the extent of accrued and unrecognized market discount, which
will be treated as ordinary income, and in the case of banks and other
financial institutions except as provided under section 582(c) of the Code. The
adjusted basis of a Grantor Trust Security will generally equal its cost,
increased by any income reported by the seller (including original issue
discount and market discount
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income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions of principal.
Grantor Trust Reporting
The Trustee will furnish to each Holder of a Grantor Trust
Fractional Interest Security with each distribution a statement setting forth
the amount of such distribution allocable to principal on the underlying
Mortgage Loans and to interest thereon at the related Pass-Through Rate. In
addition, within a reasonable time after the end of each calendar year, based
on information provided by the Master Servicer, the Trustee will furnish to
each Holder during such year such customary factual information as the Master
Servicer deems necessary or desirable to enable Holders of Grantor Trust
Securities to prepare their tax returns and will furnish comparable information
to the Internal Revenue Service (the "IRS") as and when required to do so by
law.
REMIC Securities
If provided in a related Prospectus Supplement, an election
will be made to treat a Trust Estate as a REMIC under the Code. Qualification
as a REMIC requires ongoing compliance with certain conditions. With respect to
each series of Securities for which such an election is made, special tax
counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless
otherwise limited in the related Prospectus Supplement), assuming compliance
with the Pooling and Servicing Agreement, the Trust Estate will be treated as a
REMIC for federal income tax purposes. A Trust Estate for which a REMIC
election is made will be referred to herein as a "REMIC Trust." The Securities
of each class will be designated as "regular interests" in the REMIC Trust
except that a separate class will be designated as the "residual interest" in
the REMIC Trust. The Prospectus Supplement for each series of Securities will
state whether Securities of each class will constitute a regular interest (a
"REMIC Regular Security") or a residual interest (a "REMIC Residual Security").
A REMIC Trust will not be subject to federal income tax
except with respect to income from prohibited transactions and in certain other
instances described below. See "--Taxes on a REMIC Trust." Generally, the total
income from the Mortgage Loans in a REMIC Trust will be taxable to the Holders
of the Securities of that series, as described below.
Regulations issued by the Treasury Department (the "REMIC
Regulations") provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of REMIC
Securities. While certain material provisions of the REMIC Regulations are
discussed below, investors should consult their own tax advisors regarding the
possible application of the REMIC Regulations in their specific circumstances.
Special Tax Attributes
REMIC Regular Securities and REMIC Residual Securities will
be "regular or residual interests in a REMIC" within the meaning of section
7701(a)(19)(C)(xi) of the Code and "real estate assets" within the meaning of
section 856(c)(5)(A) of the Code. If at any time during a calendar year less
than 95% of the assets of a REMIC Trust consist of "qualified mortgages"
(within the meaning of section 860G(a)(3) of the Code) then the portion of the
REMIC Regular Securities and REMIC Residual Securities that are qualifying
assets under those sections during such calendar year may be limited to the
portion of the assets of such REMIC Trust that are qualified mortgages.
Similarly, income on the REMIC Regular Securities and REMIC Residual Securities
will be treated as "interest on obligations secured by mortgages on real
property" within the meaning of section 856(c)(3)(B) of the Code, subject to
the same limitation as set forth in the preceding sentence. For purposes of
applying this limitation, a REMIC Trust should be treated as owning the assets
represented by the qualified mortgages. The assets of the Trust Estate will
include, in addition to the Mortgage Loans, payments on the Mortgage Loans held
pending distribution on the REMIC Regular Securities and REMIC Residual
Securities and any reinvestment income thereon. REMIC Regular Securities and
REMIC Residual Securities held by a financial institution to which section 585,
586 or 593 of the Code applies will be treated as evidences of indebtedness for
purposes of section
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582(c)(1) of the Code. REMIC Regular Securities will also be qualified
mortgages with respect to other REMICs.
The 1996 Act repeals the bad debt reserve method of
accounting for mutual savings banks and domestic building and loan associations
for tax years beginning after December 31, 1995. As a result, section 593(d) of
the Code is no longer applicable to treat the Certificates as "qualifying real
property loans."
Taxation of Holders of REMIC Regular Securities
Except as indicated below in this federal income tax
discussion, the REMIC Regular Securities will be treated for federal income tax
purposes as debt instruments issued by the REMIC Trust on the date such
Securities are first sold to the public (the "Settlement Date") and not as
ownership interests in the REMIC Trust or its assets. Holders of REMIC Regular
Securities that otherwise report income under a cash method of accounting will
be required to report income with respect to such Securities under an accrual
method. For additional tax consequences relating to REMIC Regular Securities
purchased at a discount or with premium, see "--Discount and Premium," below.
Taxation of Holders of REMIC Residual Securities
Daily Portions. Except as indicated below, a Holder of a
REMIC Residual Security for a REMIC Trust generally will be required to report
its daily portion of the taxable income or net loss of the REMIC Trust for each
day during a calendar quarter that the Holder owned such REMIC Residual
Security. For this purpose, the daily portion shall be determined by allocating
to each day in the calendar quarter its ratable portion of the taxable income
or net loss of the REMIC Trust for such quarter and by allocating the amount so
allocated among the Residual Holders (on such day) in accordance with their
percentage interests on such day. Any amount included in the gross income or
allowed as a loss of any Residual Holder by virtue of this paragraph will be
treated as ordinary income or loss.
The requirement that each Holder of a REMIC Residual Security
report its daily portion of the taxable income or net loss of the REMIC Trust
will continue until there are no Securities of any class outstanding, even
though the Holder of the REMIC Residual Security may have received full payment
of the stated interest and principal on its REMIC Residual Security.
The Trustee will provide to Holders of REMIC Residual
Securities of each series of Securities (i) such information as is necessary to
enable them to prepare their federal income tax returns and (ii) any reports
regarding the Securities of such series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust. The taxable
income or net loss of a REMIC Trust will be the income from the qualified
mortgages it holds and any reinvestment earnings less deductions allowed to the
REMIC Trust. Such taxable income or net loss for a given calendar quarter will
be determined in the same manner as for an individual having the calendar year
as the taxable year and using the accrual method of accounting, with certain
modifications. The first modification is that a deduction will be allowed for
accruals of interest (including any original issue discount, but without regard
to the investment interest limitation in section 163(d) of the Code) on the
REMIC Regular Securities (but not the REMIC Residual Securities), even though
REMIC Regular Securities are for non-tax purposes evidences of beneficial
ownership rather than indebtedness of a REMIC Trust. Second, market discount or
premium equal to the difference between the total stated principal balances of
the qualified mortgages and the basis to the REMIC Trust therein generally will
be included in income (in the case of discount) or deductible (in the case of
premium) by the REMIC Trust as it accrues under a constant yield method, taking
into account the "Prepayment Assumption" (as defined in the Related Prospectus
Supplement, see "--Discount and Premium--Original Issue Discount," below). The
basis to a REMIC Trust in the qualified mortgages is the aggregate of the issue
prices of all the REMIC Regular Securities and REMIC Residual Securities in the
REMIC Trust on the Settlement Date. If, however, a substantial amount of a
class of REMIC Regular Securities or REMIC Residual Securities has not been
sold to the public, then the fair
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market value of all the REMIC Regular Securities or REMIC Residual Securities
in that class as of the date of the Prospectus Supplement should be substituted
for the issue price.
Third, no item of income, gain, loss or deduction allocable
to a prohibited transaction (see "--Taxes on a REMIC Trust--Prohibited
Transactions" below) will be taken into account. Fourth, a REMIC Trust
generally may not deduct any item that would not be allowed in calculating the
taxable income of a partnership by virtue of section 703(a)(2) of the Code.
Finally, the limitation on miscellaneous itemized deductions imposed on
individuals by section 67 of the Code will not be applied at the REMIC Trust
level to any servicing and guaranty fees. (See, however, "--Pass-Through of
Servicing and Guaranty Fees to Individuals" below.) In addition, under the
REMIC Regulations, any expenses that are incurred in connection with the
formation of a REMIC Trust and the issuance of the REMIC Regular Securities and
REMIC Residual Securities are not treated as expenses of the REMIC Trust for
which a deduction is allowed. If the deductions allowed to a REMIC Trust exceed
its gross income for a calendar quarter, such excess will be a net loss for the
REMIC Trust for that calendar quarter. The REMIC Regulations also provide that
any gain or loss to a REMIC Trust from the disposition of any asset, including
a qualified mortgage or "permitted investment" (as defined in section
860G(a)(5) of the Code) will be treated as ordinary gain or loss.
A Holder of a REMIC Residual Security may be required to
recognize taxable income without being entitled to receive a corresponding
amount of cash. This could occur, for example, if the qualified mortgages are
considered to be purchased by the REMIC Trust at a discount, some or all of the
REMIC Regular Securities are issued at a discount, and the discount included as
a result of a prepayment on a Mortgage Loan that is used to pay principal on
the REMIC Regular Securities exceeds the REMIC Trust's deduction for unaccrued
original issue discount relating to such REMIC Regular Securities. Taxable
income may also be greater in earlier years because interest expense
deductions, expressed as a percentage of the outstanding principal amount of
the REMIC Regular Securities, may increase over time as the earlier classes of
REMIC Regular Securities are paid, whereas interest income with respect to any
given Mortgage Loan expressed as a percentage of the outstanding principal
amount of that Mortgage Loan, will remain constant over time.
Basis Rules and Distributions. A Holder of a REMIC Residual
Security has an initial basis in its Security equal to the amount paid for such
REMIC Residual Security. Such basis is increased by amounts included in the
income of the Holder and decreased by distributions and by any net loss taken
into account with respect to such REMIC Residual Security. A distribution on a
REMIC Residual Security to a Holder is not included in gross income to the
extent it does not exceed such Holder's basis in the REMIC Residual Security
(adjusted as described above) and, to the extent it exceeds the adjusted basis
of the REMIC Residual Security, shall be treated as gain from the sale of the
REMIC Residual Security.
A Holder of a REMIC Residual Security is not allowed to take
into account any net loss for any calendar quarter to the extent such net loss
exceeds such Holder's adjusted basis in its REMIC Residual Security as of the
close of such calendar quarter (determined without regard to such net loss).
Any loss disallowed by reason of this limitation may be carried forward
indefinitely to future calendar quarters and, subject to the same limitation,
may be used only to offset income from the REMIC Residual Security.
Excess Inclusions. Any excess inclusions with respect to a
REMIC Residual Security are subject to certain special tax rules. With respect
to a Holder of a REMIC Residual Security, the excess inclusion for any calendar
quarter is defined as the excess (if any) of the daily portions of taxable
income over the sum of the "daily accruals" for each day during such quarter
that such REMIC Residual Security was held by such Holder. The daily accruals
are determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC Residual
Security at the beginning of the calendar quarter and 120% of the "federal
long-term rate" in effect on the Settlement Date, based on quarterly
compounding, and properly adjusted for the length of such quarter. For this
purpose, the adjusted issue price of a REMIC Residual Security as of the
beginning of any calendar quarter is equal to the issue price of the REMIC
Residual Security, increased by the amount of daily accruals for all prior
quarters and decreased by any distributions made with respect to such REMIC
Residual Security before the
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beginning of such quarter. The issue price of a REMIC Residual Security is the
initial offering price to the public (excluding bond houses and brokers) at
which a substantial number of the REMIC Residual Securities was sold. The
federal long-term rate is a blend of current yields on Treasury securities
having a maturity of more than nine years, computed and published monthly by
the IRS.
In general, Holders of REMIC Residual Securities with excess
inclusion income cannot offset such income by losses from other activities. For
Holders that are subject to tax only on unrelated business taxable income (as
defined in section 511 of the Code), an excess inclusion of such Holder is
treated as unrelated business taxable income. With respect to variable
contracts (within the meaning of section 817 of the Code), a life insurance
company cannot adjust its reserve to the extent of any excess inclusion, except
as provided in regulations. The REMIC Regulations indicate that if a Holder of
a REMIC Residual Security is a member of an affiliated group filing a
consolidated income tax return, the taxable income of the affiliated group
cannot be less than the sum of the excess inclusions attributable to all
residual interests in REMICS held by members of the affiliated group. For a
discussion of the effect of excess inclusions on certain foreign investors that
own REMIC Residual Securities, see "--Foreign Investors" below.
The Treasury Department also has the authority to issue
regulations that would treat all taxable income of a REMIC Trust as excess
inclusions if the REMIC Residual Security does not have "significant value."
Although the Treasury Department did not exercise this authority in the REMIC
Regulations, future regulations may contain such a rule. If such a rule were
adopted, it is unclear how significant value would be determined for these
purposes. If no such rule is applicable, excess inclusions should be calculated
as discussed above.
In the case of any REMIC Residual Securities that are held by
a real estate investment trust, the aggregate excess inclusions with respect to
such REMIC Residual Securities reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of section 857(b)(2) of the
Code, excluding any net capital gain) will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Security as if held directly by such
shareholder. Similar rules will apply in the case of regulated investment
companies, common trust funds and certain cooperatives that hold a REMIC
Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A
Holder of a REMIC Residual Security who is an individual will be required to
include in income a share of any servicing and guaranty fees. A deduction for
such fees will be allowed to such Holder only to the extent that such fees,
along with certain of such Holder's other miscellaneous itemized deductions
exceed 2% of such Holder's adjusted gross income. In addition, a Holder of a
REMIC Residual Security may not be able to deduct any portion of such fees in
computing such Holder's alternative minimum tax liability. A Holder's share of
such fees will generally be determined by (i) allocating the amount of such
expenses for each calendar quarter on a pro rata basis to each day in the
calendar quarter, and (ii) allocating the daily amount among the Holders in
proportion to their respective holdings on such day.
Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a REMIC
equal to 100% of the net income derived from "prohibited transactions." In
general, a prohibited transaction means the disposition of a qualified mortgage
other than pursuant to certain specified exceptions, the receipt of investment
income from a source other than a Mortgage Loan or certain other permitted
investments, the receipt of compensation for services, or the disposition of an
asset purchased with the payments on the qualified mortgages for temporary
investment pending distribution on the regular and residual interests.
Contributions to a REMIC after the Startup Day. The Code
imposes a tax on a REMIC equal to 100% of the value of any property contributed
to the REMIC after the "startup day" (generally the same as the Settlement
Date). Exceptions are provided for cash contributions to a REMIC (i) during the
three month period beginning on the startup day, (ii) made to a qualified
reserve fund by a Holder of a
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residual interest, (iii) in the nature of a guarantee, (iv) made to facilitate
a qualified liquidation or clean-up call, and (v) as otherwise permitted by
Treasury regulations.
Net Income from Foreclosure Property. The Code imposes a tax
on a REMIC equal to the highest corporate rate on "net income from foreclosure
property." The terms "foreclosure property" (which includes property acquired
by deed in lieu of foreclosure) and "net income from foreclosure property" are
defined by reference to the rules applicable to real estate investment trusts.
Generally, foreclosure property would be treated as such for a period of two
years, with possible extensions. Net income from foreclosure property generally
means gain from the sale of foreclosure property that is inventory property and
gross income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
Sales of REMIC Securities
General. Except as provided below, if a Regular or REMIC
Residual Security is sold, the seller will recognize gain or loss equal to the
difference between the amount realized in the sale and its adjusted basis in
the Security. The adjusted basis of a REMIC Regular Security generally will
equal the cost of such Security to the seller, increased by any original issue
discount or market discount included in the seller's gross income with respect
to such Security and reduced by distributions on such Security previously
received by the seller of amounts included in the stated redemption price at
maturity and by any premium that has reduced the seller's interest income with
respect to such Security. See "--Discount and Premium." The adjusted basis of a
REMIC Residual Security is determined as described above under "--Taxation of
Holders of REMIC Residual Securities--Basis Rules and Distributions." Except as
provided in the following paragraph or under section 582(c) of the Code, any
such gain or loss will be capital gain or loss, provided such Security is held
as a "capital asset" (generally, property held for investment) within the
meaning of section 1221 of the Code.
Gain from the sale of a REMIC Regular Security that might
otherwise be capital gain will be treated as ordinary income to the extent that
such gain does not exceed the excess, if any, of (i) the amount that would have
been includible in the income of the Holder of a REMIC Regular Security had
income accrued at a rate equal to 110% of the "applicable federal rate"
(generally, an average of current yields on Treasury securities) as of the date
of purchase over (ii) the amount actually includible in such Holder's income.
In addition, gain recognized on such a sale by a Holder of a REMIC Regular
Security who purchased such a Security at a market discount would also be
taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period such Security was held by such Holder,
reduced by any market discount includible in income under the rules described
below under "--Discount and Premium."
If a Holder of a REMIC Residual Security sells its REMIC
Residual Security at a loss, the loss will not be recognized if, within six
months before or after the sale of the REMIC Residual Security, such Holder
purchases another residual interest in any REMIC or any interest in a taxable
mortgage pool (as defined in section 7701(i) of the Code) comparable to a
residual interest in a REMIC. Such disallowed loss would be allowed upon the
sale of the other residual interest (or comparable interest) if the rule
referred to in the preceding sentence does not apply to that sale. While this
rule may be modified by Treasury regulations, no such regulations have yet been
published.
Transfers of REMIC Residual Securities. Section 860E(e) of
the Code imposes a substantial tax, payable by the transferor (or, if a
transfer is through a broker, nominee, or other middleman as the transferee's
agent, payable by that agent) upon any transfer of a REMIC Residual Security to
a disqualified organization and upon a pass-through entity (including regulated
investment companies, real estate investment trusts, common trust funds,
partnerships, trusts, estates, certain cooperatives, and nominees) that owns a
REMIC Residual Security if such pass-through entity has a disqualified
organization as a record-holder. For purposes of the preceding sentence, a
transfer includes any transfer of record or beneficial ownership, whether
pursuant to a purchase, a default under a secured lending agreement or
otherwise.
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The term "disqualified organization" includes the United
States, any state or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(other than certain taxable instrumentalities), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas, or any organization (other than a farmers' cooperative) that is exempt
from federal income tax, unless such organization is subject to the tax on
unrelated business income. Moreover, an entity will not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that (i) residual
interests in such entity are not held by disqualified organizations and (ii)
information necessary for the application of the tax described herein will be
made available. Restrictions on the transfer of a REMIC Residual Security and
certain other provisions that are intended to meet this requirement are
described in the Pooling and Servicing Agreement, and will be discussed more
fully in the related Prospectus Supplement relating to the offering of any
REMIC Residual Security. In addition, a pass-through entity (including a
nominee) that holds a REMIC Residual Security may be subject to additional
taxes if a disqualified organization is a record-holder therein. A transferor
of a REMIC Residual Security (or an agent of a transferee of a REMIC Residual
Security, as the case may be) will be relieved of such tax liability if (i) the
transferee furnishes to the transferor (or the transferee's agent) an affidavit
that the transferee is not a disqualified organization, and (ii) the transferor
(or the transferee's agent) does not have actual knowledge that the affidavit
is false at the time of the transfer. Similarly, no such tax will be imposed on
a pass-through entity for a period with respect to an interest therein owned by
a disqualified organization if (i) the record-holder of such interest furnishes
to the pass-through entity an affidavit that it is not a disqualified
organization, and (ii) during such period, the pass-through entity has no
actual knowledge that the affidavit is false.
Under the REMIC Regulations, a transfer of a "noneconomic
residual interest" to a U.S. Person (as defined below in "--Foreign
Investors--Grantor Trust Securities and REMIC Regular Securities") will be
disregarded for all federal tax purposes unless no significant purpose of the
transfer is to impede the assessment or collection of tax. A REMIC Residual
Security would be treated as constituting a noneconomic residual interest
unless, at the time of the transfer, (i) the present value of the expected
future distributions on the REMIC Residual Security is no less than the product
of the present value of the "anticipated excess inclusions" with respect to
such Security and the highest corporate rate of tax for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the transferee
will receive distributions from the applicable REMIC Trust in an amount
sufficient to satisfy the liability for income tax on any "excess inclusions"
at or after the time when such liability accrues. Anticipated excess inclusions
are the excess inclusions that are anticipated to be allocated to each calendar
quarter (or portion thereof) following the transfer of a REMIC Residual
Security, determined as of the date such Security is transferred and based on
events that have occurred as of that date and on the Prepayment Assumption. See
"--Discount and Premium" and "--Taxation of Holders of REMIC Residual
Securities-- Excess Inclusions."
The REMIC Regulations provide that a significant purpose to
impede the assessment or collection of tax exists if, at the time of the
transfer, a transferor of a REMIC Residual Security has "improper knowledge"
(i.e., either knew, or should have known, that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC Trust). A transferor is presumed not to have improper knowledge if (i)
the transferor conducts, at the time of a transfer, a reasonable investigation
of the financial condition of the transferee and, as a result of the
investigation, the transferor finds that the transferee has historically paid
its debts as they come due and finds no significant evidence to indicate that
the transferee will not continue to pay its debts as they come due in the
future; and (ii) the transferee makes certain representations to the transferor
in the affidavit relating to disqualified organizations discussed above.
Transferors of a REMIC Residual Security should consult with their own tax
advisors for further information regarding such transfers.
Reporting and Other Administrative Matters. For purposes of
the administrative provisions of the Code, each REMIC Trust will be treated as
a partnership and the Holders of REMIC Residual Securities will be treated as
partners. The Trustee will prepare, sign and file federal income tax returns
for each REMIC Trust, which returns are subject to audit by the IRS. Moreover,
within a reasonable time after the end of each calendar year, the Trustee will
furnish to each Holder that received a distribution during such year a
statement setting forth the portions of any such distributions that constitute
interest distributions, original issue discount, and such other information as
is required by Treasury
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regulations and, with respect to Holders of REMIC Residual Securities in a
REMIC Trust, information necessary to compute the daily portions of the taxable
income (or net loss) of such REMIC Trust for each day during such year. The
Trustee will also act as the tax matters partner for each REMIC Trust, either
in its capacity as a Holder of a REMIC Residual Security or in a fiduciary
capacity. Each Holder of a REMIC Residual Security, by the acceptance of its
REMIC Residual Security, agrees that the Trustee will act as its fiduciary in
the performance of any duties required of it in the event that it is the tax
matters partner.
Each Holder of a REMIC Residual Security is required to treat
items on its return consistently with the treatment on the return of the REMIC
Trust, unless the Holder either files a statement identifying the inconsistency
or establishes that the inconsistency resulted from incorrect information
received from the REMIC Trust. The IRS may assert a deficiency resulting from a
failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC Trust level. Unless otherwise specified
in the related Prospectus Supplement, the Trustee does not intend to register
any REMIC Trust as a tax shelter pursuant to section 6111 of the Code.
Termination
In general, no special tax consequences will apply to a
Holder of a REMIC Regular Security upon the termination of a REMIC Trust by
virtue of the final payment or liquidation of the last Mortgage Loan remaining
in the Trust Estate. If a Holder of a REMIC Residual Security's adjusted basis
in its REMIC Residual Security at the time such termination occurs exceeds the
amount of cash distributed to such Holder in liquidation of its interest,
although the matter is not entirely free from doubt, it would appear that the
Holder of the REMIC Residual Security is entitled to a loss equal to the amount
of such excess.
Debt Securities
General
With respect to each series of Debt Securities, Dewey
Ballantine, special tax counsel to the Sponsor, will deliver its opinion to the
Sponsor that (unless otherwise limited in the related Prospectus Supplement)
the Securities will be classified as debt of the Sponsor secured by the related
Mortgage Loans. Consequently, the Debt Securities will not be treated as
ownership interests in the Mortgage Loans or the Trust. Holders will be
required to report income received with respect to the Debt Securities in
accordance with their normal method of accounting. For additional tax
consequences relating to Debt Securities purchased at a discount or with
premium, see "--Discount and Premium," below.
Special Tax Attributes
As described above, Grantor Trust Securities will possess
certain special tax attributes by virtue of their being ownership interests in
the underlying Mortgage Loans. Similarly, REMIC Securities will possess similar
attributes by virtue of the REMIC provisions of the Code. In general, Debt
Securities will not possess such special tax attributes. Investors to whom such
attributes are important should consult their own tax advisors regarding
investment in Debt Securities.
Sale or Exchange
If a Holder of a Debt Security sells or exchanges such
Security, the Holder will recognize gain or loss equal to the difference, if
any, between the amount received and the Holder's adjusted basis in the
Security. The adjusted basis in the Security generally will equal its initial
cost, increased by any original issue discount or market discount previously
included in the seller's gross income with respect to the Security and reduced
by the payments previously received on the Security, other than payments of
qualified stated interest, and by any amortized premium.
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In general (except as described in "--Discount and
Premium--Market Discount," below), except for certain financial institutions
subject to section 582(c) of the Code, any gain or loss on the sale or exchange
of a Debt Security recognized by an investor who holds the Security as a
capital asset (within the meaning of section 1221 of the Code), will be capital
gain or loss and will be long-term or short-term depending on whether the
Security has been held for more than one year.
Discount and Premium
A Security purchased for an amount other than its outstanding
principal amount will be subject to the rules governing original issue
discount, market discount or premium. In addition, all Grantor Trust Strip
Securities and certain Grantor Trust Fractional Interest Securities will be
treated as having original issue discount by virtue of the coupon stripping
rules in section 1286 of the Code. In very general terms, (i) original issue
discount is treated as a form of interest and must be included in a Holder's
income as it accrues (regardless of the Holder's regular method of accounting)
using a constant yield method; (ii) market discount is treated as ordinary
income and must be included in a Holder's income as principal payments are made
on the Security (or upon a sale of a Security); and (iii) if a Holder so
elects, premium may be amortized over the life of the Security and offset
against inclusions of interest income. These tax consequences are discussed in
greater detail below.
Original Issue Discount
In general, a Security will be considered to be issued with
original issue discount equal to the excess, if any, of its "stated redemption
price at maturity" over its "issue price." The issue price of a Security is the
initial offering price to the public (excluding bond houses and brokers) at
which a substantial number of the Securities was sold. The issue price also
includes any accrued interest attributable to the period between the beginning
of the first Remittance Period and the Settlement Date. The stated redemption
price at maturity of a Security that has a notional principal amount or
receives principal only or that is or may be an Accrual Security is equal to
the sum of all distributions to be made under such Security. The stated
redemption price at maturity of any other Security is its stated principal
amount, plus an amount equal to the excess (if any) of the interest payable on
the first Payment Date over the interest that accrues for the period from the
Settlement Date to the first Payment Date.
Notwithstanding the general definition, original issue
discount will be treated as zero if such discount is less than 0.25% of the
stated redemption price at maturity multiplied by its weighted average life.
The weighted average life of a Security is apparently computed for this purpose
as the sum, for all distributions included in the stated redemption price at
maturity of the amounts determined by multiplying (i) the number of complete
years (rounding down for partial years) from the Settlement Date until the date
on which each such distribution is expected to be made under the assumption
that the Mortgage Loans prepay at the rate specified in the related Prospectus
Supplement (the "Prepayment Assumption") by (ii) a fraction, the numerator of
which is the amount of such distribution and the denominator of which is the
Security's stated redemption price at maturity. If original issue discount is
treated as zero under this rule, the actual amount of original issue discount
must be allocated to the principal distributions on the Security and, when each
such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Section 1272(a)(6) of the Code contains special original
issue discount rules directly applicable to REMIC Securities and Debt
Securities and applicable by analogy to Grantor Trust Securities. Investors in
Grantor Trust Securities should be aware that there can be no assurance that
the rules described below will be applied to such Securities. Under these rules
(described in greater detail below), (i) the amount and rate of accrual of
original issue discount on each series of Securities will be based on (x) the
Prepayment Assumption, and (y) in the case of a Security calling for a variable
rate of interest, an assumption that the value of the index upon which such
variable rate is based remains equal to the value of that rate on the
Settlement Date, and (ii) adjustments will be made in the amount of discount
accruing in each taxable year in which the actual prepayment rate differs from
the Prepayment Assumption.
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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 Mortgage Loans for a
given series will prepay at the rate reflected in the Prepayment Assumption for
that series or at any other rate. Each investor must make its own decision as
to the appropriate prepayment assumption to be used in deciding whether or not
to purchase any of the Securities.
Each Securityholder must include in gross income the sum of
the "daily portions" of original issue discount on its Security for each day
during its taxable year on which it held such Security. For this purpose, in
the case of an original Holder, the daily portions of original issue discount
will be determined as follows. A calculation will first be made of the portion
of the original issue discount that accrued during each "accrual period." The
Trustee will supply, at the time and in the manner required by the IRS, to
Securityholders, brokers and middlemen information with respect to the original
issue discount accruing on the Securities. Unless otherwise disclosed in the
related Prospectus Supplement, the Trustee will report original issue discount
based on accrual periods of one month, each beginning on a payment date (or, in
the case of the first such period, the Settlement Date) and ending on the day
before the next payment date.
Under section 1272(a)(6) of the Code, the portion of original
issue discount treated as accruing for any accrual period will equal the
excess, if any, of (i) the sum of (A) the present values of all the
distributions remaining to be made on the Security, if any, as of the end of
the accrual period and (B) the distribution made on such Security during the
accrual period of amounts included in the stated redemption price at maturity,
over (ii) the adjusted issue price of such Security at the beginning of the
accrual period. The present value of the remaining distributions referred to in
the preceding sentence will be calculated based on (i) the yield to maturity of
the Security, calculated as of the Settlement Date, giving effect to the
Prepayment Assumption, (ii) events (including actual prepayments) that have
occurred prior to the end of the accrual period, (iii) the Prepayment
Assumption, and (iv) in the case of a Security calling for a variable rate of
interest, an assumption that the value of the index upon which such variable
rate is based remains the same as its value on the Settlement Date over the
entire life of such Security. The adjusted issue price of a Security at any
time will equal the issue price of such Security, increased by the aggregate
amount of previously accrued original issue discount with respect to such
Security, and reduced by the amount of any distributions made on such Security
as of that time of amounts included in the stated redemption price at maturity.
The original issue discount accruing during any accrual period will then be
allocated ratably to each day during the period to determine the daily portion
of original issue discount.
In the case of Grantor Trust Strip Securities and certain
REMIC Securities, the calculation described in the preceding paragraph may
produce a negative amount of original issue discount for one or more accrual
periods. No definitive guidance has been issued regarding the treatment of such
negative amounts. The legislative history to section 1272(a)(6) indicates that
such negative amounts may be used to offset subsequent positive accruals but
may not offset prior accruals and may not be allowed as a deduction item in a
taxable year in which negative accruals exceed positive accruals. Holders of
such Securities should consult their own tax advisors concerning the treatment
of such negative accruals.
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 Holder that purchases a Security at a market discount, that
is, at a purchase price less than the remaining stated redemption price at
maturity of such Security (or, in the case of a Security with original issue
discount, its adjusted issue price), will be required to allocate each
principal distribution first to accrued market discount on the Security, and
recognize ordinary income to the extent such distribution does not exceed the
aggregate amount of accrued market discount on such Security not previously
included in income. With respect to Securities that have unaccrued original
issue discount, such market discount must be included in income in addition to
any original issue discount. A Holder that incurs or continues indebtedness to
acquire a Security at a market discount may also be required to defer the
deduction of all or a portion of the interest on such indebtedness until the
corresponding amount of market discount is included in income. In general
terms, market discount on a Security may be treated as accruing either (i)
under a constant yield method or (ii) in proportion to remaining accruals of
original issue discount, if any, or if none, in proportion to remaining
distributions of interest on the Security, in any case taking into account the
Prepayment Assumption. The Trustee will make available, as required by the IRS,
to Holders of Securities information necessary to compute the accrual of market
discount.
Notwithstanding the above rules, market discount on a
Security will be considered to be zero if such discount is less than 0.25% of
the remaining stated redemption price at maturity of such Security multiplied
by its weighted average remaining life. Weighted average remaining life
presumably would be calculated in a manner similar to weighted average life,
taking into account payments (including prepayments) prior to the date of
acquisition of the Security by the subsequent purchaser. If market discount on
a Security is treated as zero under this rule, the actual amount of market
discount must be allocated to the remaining principal distributions on the
Security and, when each such distribution is received, gain equal to the
discount allocated to such distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a Security that purchases such Security at a
cost greater than its remaining stated redemption price at maturity will be
considered to have purchased such Security (a "Premium Security") at a premium.
Such a purchaser need not include in income any remaining original issue
discount and may elect, under section 171(c)(2) of the Code, to treat such
premium as "amortizable bond premium." If a Holder makes such an election, the
amount of any interest payment that must be included in such Holder's income
for each period ending on a Payment Date will be reduced by the portion of the
premium allocable to such period based on the Premium Security's yield to
maturity. The legislative history of the Tax Reform Act of 1986 states that
such premium amortization should be made under principles analogous to those
governing the accrual of market discount (as discussed above under "--Market
Discount"). If such election is made by the Holder, the election will also
apply to all bonds the interest on which is not excludible from gross income
("fully taxable bonds") held by the Holder at the beginning of the first
taxable year to which the election applies and to all such fully taxable bonds
thereafter acquired by it, and is irrevocable without the consent of the IRS.
If such an election is not made, (i) such a Holder must include the full amount
of each interest payment in income as it accrues, and (ii) the premium must be
allocated to the principal distributions on the Premium Security and, when each
such distribution is received, a loss equal to the premium allocated to such
distribution will be recognized. Any tax benefit from the premium not
previously recognized will be taken into account in computing gain or loss upon
the sale or disposition of the Premium Security.
Some Securities may provide for only nominal distributions of
principal in comparison to the distributions of interest thereon. It is
possible that the IRS or the Treasury Department may issue guidance excluding
such Securities from the rules generally applicable to debt instruments issued
at a premium. In particular, it is possible that such a Security will be
treated as having original issue discount equal to the excess of the total
payments to be received thereon over its issue price. In such event, section
1272(a)(6) of the Code would govern the accrual of such original issue
discount, but a Holder would recognize substantially the same income in any
given period as would be recognized if an election were made under section
171(c)(2) of the Code. Unless and until the Treasury Department or the IRS
publishes specific guidance relating to the tax treatment of such Securities,
the Trustee intends to furnish tax
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information to Holders of such Securities in accordance with the rules
described in the preceding paragraph.
Special Election
A Holder may elect to include in gross income all "interest"
that accrues on the Security by using a constant yield method. For purposes of
the election, the term "interest" includes stated interest, acquisition
discount, original issue discount, de minimis original issue discount, market
discount, de minimis market discount and unstated interest as adjusted by any
amortizable bond premium or acquisition premium. A Holder should consult its
own tax advisor regarding the time and manner of making and the scope of the
election and the implementation of the constant yield method.
Backup Withholding
Distributions of interest and principal, as well as
distributions of proceeds from the sale of Securities, may be subject to the
"backup withholding tax" under section 3406 of the Code at a rate of 31% if
recipients of such distributions fail to furnish to the payor certain
information, including their taxpayer identification numbers, or otherwise fail
to establish an exemption from such tax. Any amounts deducted and withheld from
a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore, certain penalties may be imposed
by the IRS on a recipient of distributions that is required to supply
information but that does not do so in the proper manner.
Foreign Investors
Grantor Trust, REMIC Regular and Debt Securities
Interest, including original issue discount, distributable on
Grantor Trust, REMIC Regular or Debt Securities received by a Holder who or
which is not a United States person, as defined below (other than a foreign
bank and certain other persons), generally will not be subject to the normal 30
percent United States withholding tax (or lower treaty rate) imposed with
respect to such payments, provided that such Holder fulfills certain
certification requirements. Under such requirements, the Holder must certify,
under penalties of perjury, that it is not a "United States person" and provide
its name and address. If income or gain with respect to a security is
effectively connected with a United States trade or business carried on by a
Holder who or which is not a United States person, the 30 percent withholding
tax will not apply but such Holder will be subject to United States federal
income tax at graduated rates applicable to United States persons.
For this purpose, "United States person" means a person who
or which is for United States federal income tax purposes a citizen or resident
of the United States, a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political
subdivision thereof, or an estate or trust that is subject to United States
federal income tax, regardless of the source of its income. Proposed Treasury
regulations, which would be effective for payments made after December 31,
1997, if adopted in their current form, would provide alternative certification
requirements and means for claiming the exemption from federal income and
withholding tax. Investors who are Non-U.S. Persons should consult their own
tax advisors regarding the specific tax consequences to them of owning a
Grantor Trust, REMIC Regular or Debt Security.
REMIC Residual Securities
Amounts distributed to a Holder of a REMIC Residual Security
that is a not a U.S. Person generally will be treated as interest for purposes
of applying the 30% (or lower treaty rate) withholding tax on income that is
not effectively connected with a U.S. trade or business. Temporary Treasury
Regulations clarify that amounts not constituting excess inclusions that are
distributed on a REMIC Residual Security to a Holder that is not a U.S. Person
generally will be exempt from U.S. federal income and withholding tax, subject
to the same conditions as described above, but only to the extent that
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the obligations directly underlying the REMIC Trust that issued the REMIC
Residual Security (e.g., Mortgage Loans or regular interests in another REMIC)
were issued after July 18, 1984. In no case will any portion of REMIC income
that constitutes an excess inclusion be entitled to any exemption from the
withholding tax or a reduced treaty rate for withholding. See "--REMIC
Securities--Taxation of Holders of REMIC Residual Securities--Excess
Inclusions."
THE FEDERAL INCOME TAX DISCUSSIONS SET FORTH ABOVE ARE
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON
AN INVESTOR'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT
THEIR TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE SECURITIES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Code impose certain requirements on
those employee benefit plans to which they apply ("Plans") and on those persons
who are fiduciaries with respect to such Plans. The following is a general
discussion of such requirements, and certain applicable exceptions to and
administrative exemptions from such requirements.
Before purchasing any Certificates, a Plan fiduciary should
determine whether there exists any prohibition to such purchase under the
requirements of ERISA, whether prohibited transaction exemptions such as PTE
83-1 or any individual administrative exemption (as described below) applies,
including whether the appropriate conditions set forth therein would be met, or
whether any statutory prohibited transaction exemption is applicable, and
further should consult the applicable Prospectus Supplement relating to such
Series of Certificates.
Certain Requirements Under ERISA
General
In accordance with ERISA's general fiduciary standards,
before investing in a Certificate a Plan fiduciary should determine whether to
do so is permitted under the governing Plan instruments and is appropriate for
the Plan in view of its overall investment policy and the composition and
diversification of its portfolio. A Plan fiduciary should especially consider
the ERISA requirement of investment prudence and the sensitivity of the return
on the Certificates to the rate of principal repayments (including prepayments)
on the Mortgage Loans or Contracts, as discussed in the related Prospectus
Supplement and in "Prepayment and Yield Considerations" herein.
Parties in Interest/Disqualified Persons. Other provisions of
ERISA (and corresponding provisions of the Code) prohibit certain transactions
involving the assets of a Plan and persons who have certain specified
relationships to the Plan (so-called "parties in interest" within the meaning
of ERISA or "disqualified persons" within the meaning of the Code). The
Depositor, the Servicer (if any) or the Trustee or certain affiliates thereof
might be considered or might become "parties in interest" or "disqualified
persons" with respect to a Plan. If so, the acquisition or holding of
Certificates by or on behalf of such Plan could be considered to give rise to a
"prohibited transaction" within the meaning of ERISA and the Code unless an
administrative exemption described below or some other exemption is available.
Special caution should be exercised before the assets of a
Plan are used to purchase a Certificate if, with respect to such assets, the
Depositor, the Servicer (if any) or the Trustee or an affiliate thereof either:
(a) has investment discretion with respect to the investment of such assets of
such Plan; or
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(b) has authority or responsibility to give, or regularly gives investment
advice with respect to such assets for a fee and pursuant to an agreement or
understanding that such advice will serve as a primary basis for investment
decisions with respect to such assets and that such advice will be based on the
particular investment needs of the Plan.
Delegation of Fiduciary Duty
Further, if the assets included in a Trust Fund were deemed
to constitute Plan assets, it is possible that a Plan's investment in the
Certificates might be deemed to constitute a delegation, under ERISA, of the
duty to manage Plan assets by the fiduciary deciding to invest in the
Certificates, and certain transactions involved in the operation of the Trust
Fund might be deemed to constitute prohibited transactions under ERISA and the
Code.
The U.S. Department of Labor (the "Department") has published
final regulations (the "Regulations") concerning whether or not a Plan's assets
would be deemed to include an interest in the underlying assets of an entity
(such as a Trust Fund) for purposes of the reporting and disclosure and general
fiduciary responsibility provisions of ERISA, as well as for the prohibited
transaction provisions of ERISA and the Code, if the Plan acquires an "equity
interest" (such as a Certificate) in such entity.
Certain exceptions are provided in the Regulations whereby an
investing Plan's assets would be deemed merely to include its interest in the
Certificates instead of being deemed to include an interest in the assets of a
Trust Fund. However, it cannot be predicted in advance nor can there be any
continuing assurance whether such exceptions may be met. For example, one of
the exceptions in the Regulations states that the underlying assets of an
entity will not be considered "plan assets" if, immediately after the most
recent acquisition of any equity interest in the entity, whether or not from
the issuer or an underwriter, less than 25% of the value of each class of
equity interest is held by "benefit plan investors," which are defined as
Plans, individual retirement accounts, and employee benefit plans not subject
to ERISA (for example, governmental plans), but this exception is tested
immediately after each acquisition of an equity interest in the entity whether
upon initial issuance or in the secondary market.
Administrative Exemptions
Individual Administrative Exemptions. Several underwriters of
mortgage-backed securities have applied for and obtained ERISA prohibited
transaction exemptions (each, an "Individual Exemption") which are in some
respects broader than Prohibited Transaction Class Exemption 83-1 (described
below). Such exemptions can only apply to mortgage-backed securities which
among other conditions, are sold in an offering with respect to which such
underwriter serves as the sole or a managing underwriter, or as a selling or
placement agent. If such an Individual Exemption might be applicable to a
Series of Certificates, the related Prospectus Supplement will refer to such
possibility. An Individual Exemption does not apply to Plans sponsored by the
Restricted Group (as defined below) or the Trustee.
Some of the conditions that must be satisfied for an
Individual Exemption to apply are the following:
(1) The rights and interests evidenced by Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other Certificates of the Trust Fund;
(2) The Certificates acquired by the Plan have received a
rating at the time of such acquisition that is one of the three
highest generic rating categories from any of Standard & Poor's
Structural Ratings Group, Moody's Investors Service, Inc., Duff &
Phelps Credit Rating Co., or Fitch Investors Service, L.P. ("National
Credit Rating Agencies");
(3) The Trustee is not an affiliate of any of the Depositor,
the underwriter specified in the applicable Prospectus Supplement, the
Servicer (if any), any obligor with respect to Mortgage Loans included
in the Trust Fund constituting more than five percent of the aggregate
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unamortized principal balance of the assets in the Trust Fund, or any
affiliate of such parties (the "Restricted Group"); and
(4) The Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
(5) The sum of all payments made to and retained by such
underwriters must represent not more than reasonable compensation for
underwriting the Certificates; the sum of all payments made to and
retained by the Seller pursuant to the assignment of the obligations
or receivables to the related Trust Fund must represent not more than
the fair market value of such obligations; and the sum of all payments
made to and retained by the Servicer and any Sub-servicer must
represent not more than reasonable compensation for such person's
services under the Pooling and Servicing Agreement and reimbursement
of such person's reasonable expenses in connection there with;
(6) (i) the investment pool consists only of assets of the
type enumerated in the exemption and which have bene included in other
investment pools; (ii) certificates evidencing interests in such other
investment pools have been rated in one of the three highest generic
rating categories by one of the National Credit Rating agencies for at
least one year prior to a Plan's acquisition of certificates; and
(iii) certificates evidencing interests in such other investment pools
have been purchased by investors other than Plans for at least one
year prior to a Plan's acquisition of certificates; and
(7) The acquisition of Certificates by certain Plans must be
on terms that are at least as favorable to the Plan as they would be
in any arm's length transaction with an unrelated party.
If the conditions to an Individual Exemption are met, whether
or not a Plan's assets would be deemed to include an ownership interest in the
Mortgage Loans in a Mortgage Pool, the acquisition, holding and resale of the
Certificates by Plans would be exempt from the prohibited transaction
provisions of ERISA and the Code.
Moreover, an Individual Exemption can provide relief from
certain self-dealing/conflict of interest prohibited transactions, only if,
among other requirements, (i) a Plan's investment in Certificates of any class
does not exceed twenty-five percent of all of the Certificates of that Class
outstanding at the time of the acquisition and (ii) immediately after the
acquisition no more than twenty-five percent of the assets of the Plan with
respect to which such person is a fiduciary are invested in Certificates
representing an interest in one or more trusts containing assets sold or served
by the same person.
PTE 83-1. Prohibited Transaction Class Exemption 83-1 for
Certain Transactions Involving Mortgage Pool Investment Trusts ("PTE 83-1")
permits certain transactions involving the creation, maintenance and
termination of certain residential mortgage pools and the acquisition and
holding of certain residential mortgage pool pass-through certificates by
Plans, whether or not the Plan's assets would be deemed to include an ownership
interest in the mortgages in the mortgage pool, and whether or not such
transactions would otherwise be prohibited under ERISA.
The term "mortgage pool pass-through certificate" is defined
in PTE 83-1 as "a certificate representing a beneficial undivided fractional
interest in a mortgage pool and entitling the holder of such a certificate to
pass-through payment of principal and interest from the pooled mortgage loans,
less any fees retained by the pool sponsor." It appears that, for purposes of
PTE 83-1, the term "mortgage pool pass-through certificate" would include
Certificates issued in a single Class or in multiple classes that evidence a
beneficial undivided fractional interest in a mortgage pool of one- to
four-family residential mortgage loans and entitle the holder thereof to both a
specified percentage of future interest payments (after permitted deductions)
and a specified percentage of future principal payments.
99
<PAGE>
However, it appears that PTE 83-1 does or might not apply to
the purchase and holding of (a) Certificates that evidence the beneficial
ownership only of a specified percentage of future interest payments (after
permitted deductions) on a Trust Fund or only of a specified percentage of
future principal payments on a Trust Fund, (b) Residual Certificates, (c)
Certificates evidencing ownership interests in a Trust Fund which includes
Mortgage Loans secured by multifamily residential properties or shares issued
by cooperative housing corporations, or (d) Certificates which are subordinated
to other classes of Certificates of such Series. Accordingly, unless exemptive
relief other than PTE 83-1 applies, Plans should not purchase any such
Certificates.
PTE 83-1 sets forth certain "general conditions" and
"specific conditions" to its applicability. Section 11 of PTE 83-1 sets forth
the following general conditions to the application of the exemption: (i) the
maintenance of a system of insurance or other protection for the pooled
mortgage loans or the property securing such loans, and for indemnifying
certificateholders against reductions in pass-through payments due to property
damage or defaults in loan payments; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a requirement that the sum
of all payments made to and retained by the pool sponsor, and all funds inuring
to the benefit of the pool sponsor as a result of the administration of the
mortgage pool, must represent not more than adequate consideration for selling
the mortgage loans plus reasonable compensation for services provided by the
pool sponsor to the pool. The system of insurance or protection referred to in
clause (i) above must provide such protection and indemnification up to an
amount not less than the greater of 1% of the aggregate unpaid principal
balance of the pooled mortgages or the unpaid principal balance of the largest
mortgage in the pool. It should be noted that in promulgating PTE 83-1 (and a
predecessor exemption), the Department did not have under its consideration
interests in pools of the exact nature as some of the Certificates described
herein.
Exempt Plans
Employee benefit plans which are governmental plans (as
defined in Section 3(32) of ERISA), and certain church plans (as defined in
Section 3(33) of ERISA) are not subject to ERISA requirements and assets of
such plans may be invested in Senior Certificates without regard to the ERISA
considerations described above, subject to the provisions of other applicable
federal and state law.
Unrelated Business Taxable Income--Residual Certificates
The purchase of a Residual Certificate by such plans, or by
most varieties of ERISA Plans, may give rise to "unrelated business taxable
income" as described in Code Sections 511-515 and 860E. Further, prior to the
purchase of Residual Certificates, a prospective transferee may be required to
provide an affidavit to a transferor that it is not a "Disqualified
Organization" which term includes certain tax-exempt entities not subject to
Code Section 511, including certain governmental plans, as discussed herein
under the caption "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for REMIC Certificates--Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates--Tax-Related Restrictions on
Transfer of Residual Certificates."
Due to the complexity of these rules and the penalties
imposed upon persons involved in prohibited transactions, it is particularly
important that potential investors who are Plan fiduciaries carefully consider
the consequences under ERISA of their acquisition and ownership of
Certificates.
The sale of Certificates to a Plan is in no respect a
representation by the Depositor or the applicable underwriter that this
investment meets all relevant legal requirements with respect to investments by
Plan generally or any particular Plan, or that this investment is appropriate
for Plans generally or any particular Plan.
100
<PAGE>
LEGAL INVESTMENT
If specified in the related Prospectus Supplement, the
Certificates of one or more classes offered pursuant to this Prospectus will
constitute "mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as amended ("SMMEA"), so long as they are rated
in one of the two highest rating categories by at least one nationally
recognized statistical rating organization. As "mortgage related securities,"
such Certificates will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including, but not limited to, state-chartered savings banks, commercial
banks, savings and loan associations and insurance companies, as well as
trustees and state government employee retirement systems) created pursuant to
or existing under the laws of the United States or of any state (including the
District of Columbia and Puerto Rico) whose authorized investments are subject
to state regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or
any agency or instrumentality thereof constitute legal investments for such
entities. Pursuant to SMMEA, a number of states enacted legislation, on or
before the October 3, 1991 cutoff for such enactments, limiting to varying
extends the ability of certain entities (in particular, insurance companies) to
invest in "mortgage related securities," in most cases by requiring the
affected investors to rely solely upon existing state law, and not SMMEA.
Accordingly, the investors affected by such legislation will be authorized to
invest in the Certificates only to the extent provided in such legislation.
SMMEA also amended the legal investment authority of
federally chartered depository institutions as follows: federal savings and
loan associations and federal savings banks may invest in, sell or otherwise
deal with mortgage related securities without limitation as to the percentage
of their assets represented thereby, federal credit unions may invest in
mortgage related securities, and national banks may purchase mortgage related
securities for their own account without regard to the limitations generally
applicable to investment securities set forth in 12 U.S.C. ss. 24 (Seventh),
subject in each case to such regulations as the applicable federal regulatory
authority may prescribe. In this connection, federal credit unions should
review National Credit Union Administration (the "NCUA") Letter to Credit
Unions No. 96, as modified by Letter No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage
related securities. The NCUA has adopted rules, effective December 2, 1991,
which prohibit federal credit unions from investing in certain mortgage related
securities (including securities such as certain series, Classes or Subclasses
of Certificates), except under limited circumstances.
All depository institutions considering an investment in the
Certificates should review the "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992 (the "Policy Statement") of the Federal
Financial Institutions Examination Council. The Policy Statement, which has
been adopted by the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the Comptroller of the Currency and the
Office of Thrift Supervision, effective February 10, 1992, and by the NCUA
(with certain modifications), effective June 26, 1992, prohibits depository
institutions from investing in certain "high-risk" mortgage securities
(including securities such as certain series, Classes or Subclasses of
Certificates), except under limited circumstances, and sets forth certain
investment practices deemed to be unsuitable for regulated institutions.
Institutions whose investment activities are subject to
regulation by federal or state authorities should review rules, policies and
guidelines adopted from time to time by such authorities before purchasing any
Certificates, as certain series, Classes or Subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the
applicability of statutes, rules, regulations, orders, guidelines or agreements
generally governing investments made by a particular investor, including, but
not limited to, "prudent investor" provisions, percentage-of-assets limits,
provisions which may restrict or prohibit investment in securities which are
not "interest-bearing" or "income-paying" and, with regard to any Certificates
issued in book-entry form, provisions which may restrict or prohibit investment
in securities which are issued in book-entry form.
101
<PAGE>
Other classes of Certificates offered pursuant to this
Prospectus will not constitute "mortgage related securities" under SMMEA
because they will not represent beneficial ownership interests in qualifying
mortgage loans under SMMEA. The appropriate characterization of those
Certificates under various legal investment restrictions, and thus the ability
of investors subject to these restrictions to purchase the Certificates, may be
subject to significant interpretive uncertainties. All investors whose
investment authority is subject to legal restrictions should consult their own
legal advisors to determine whether, and to what extent, the Certificates will
constitute legal investments for them.
No representation is made as to the proper characterization
of the Certificates for legal investment or financial institution regulatory
purposes, or as to the ability of particular investors to purchase Certificates
under applicable legal investment restrictions. The uncertainties described
above may (and any unfavorable future determinations concerning legal
investment or financial institution regulatory characteristics of the
Certificates adversely affect the liquidity of the non-SMMEA Certificates.
Investors should consult with their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments for such investors.
PLAN OF DISTRIBUTION
The Depositor may sell the Certificates offered hereby in
Series either directly or through underwriters. The related Prospectus
Supplement or Prospectus Supplements for each Series will describe the terms of
the offering for that Series and will state the public offering or purchase
price of each Class of Certificates of such Series, or the method by which such
price is to be determined, and the net proceeds to the Depositor from such
sale.
If the sale of any Certificates is made pursuant to an
underwriting agreement pursuant to which one or more underwriters agree to act
in such capacity, such Certificates will be acquired by such underwriters for
their own account and may be resold from time to time in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices to be determined at the time of sale or at the time
of commitment therefor. Firm commitment underwriting and public reoffering by
underwriters may be done through underwriting syndicates or through one or more
firms acting alone. The specific managing underwriter or underwriters, if any,
with respect to the offer and sale of a particular Series of Certificates will
be set forth on the cover of the Prospectus Supplement related to such Series
and the members of the underwriting syndicate, if any, will be named in such
Prospectus Supplement. The Prospectus Supplement will describe any discounts
and commissions to be allowed or paid by the Depositor to the underwriters, any
other items constituting underwriting compensation and any discounts and
commissions to be allowed or paid to the dealers. The obligations of the
underwriters will be subject to certain conditions precedent. Unless otherwise
provided in the related Prospectus Supplement, the underwriters with respect to
a sale of any Class of Certificates will be obligated to purchase all such
Certificates if any are purchased. Pursuant to each such underwriting
agreement, the Depositor will indemnity the related underwriters against
certain civil liabilities, including liabilities under the Securities Act.
If any Certificates are offered other than through
underwriters pursuant to such underwriting agreements, the related Prospectus
Supplement or Prospectus Supplements will contain information regarding the
terms of such offering and any agreements to be entered into in connection with
such offering.
Purchasers of Certificates, including dealers, may, depending
on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Certificates. Certificateholders should
consult with their legal advisors in this regard prior to any such reoffer and
sale.
102
<PAGE>
If specified in the Prospectus Supplement relating to a
Series of Certificates, the Depositor, any affiliate thereof or any other
person or persons specified therein may purchase some or all of one or more
Classes of Certificates of such Series from the underwriter or underwriters or
such other person or persons specified in such Prospectus Supplement. Such
purchaser may thereafter from time to time offer and sell, pursuant to this
Prospectus and the related Prospectus Supplement, some or all of such
Certificates so purchased, directly, through one or more underwriters to be
designated at the time of the offering of such Certificates, through dealers
acting as agent and/or principal as in such other manner as may be specified in
the related Prospectus Supplement. Such offering may be restricted in the
manner specified in such Prospectus Supplement. Such transactions may be
effected at market prices prevailing at the time of sale, at negotiated prices
or at fixed prices. Any underwriters and dealers participating in such
purchaser's offering of such Certificates may receive compensation in the form
of underwriting discounts or commissions from such purchaser and such dealers
may receive commissions from the investors purchasing such Certificates for
whom they may act as agent (which discounts or commissions will not exceed
those customary in those types of transactions involved). Any dealer that
participates in the distribution of such Certificates may be deemed to be an
"underwriter" within the meaning of the Securities Act of 1933, and any
commissions and discounts received by such dealer and any profit on the resale
of such Certificates by such dealer might be deemed to be underwriting
discounts and commissions under the Securities Act of 1933.
LEGAL MATTERS
Certain legal matters and certain tax matters will be passed
upon for the Depositor by Dewey Ballantine, New York, New York and/or such
other counsel as will be named on the related Prospectus Supplement.
RATING
At the date of issuance of each Series of Certificates, the
Certificates offered hereby will be rated in one of the four highest categories
by at least one Rating Agency. See "Ratings" in the related Prospectus
Supplement. A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. Each securities rating should be evaluated
independently of any other rating.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this
Prospectus forms a part and the exhibits thereto are on file at the offices of
the Commission in Washington, D.C. Copies may be obtained at rates prescribed
by the Commission upon request to the Commission, and may be inspected, without
charge, at the offices of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549. See "Available Information."
Copies of FHLMC's most recent Offering Circular for FHLMC
Certificates, FHLMCs Information Statement and the most recent Supplement to
such Information Statement and any quarterly report made available by FHLMC can
be obtained by writing or calling the Investor Inquiry Department at FHLMC at
8200 Jones Branch Drive, McLean Virginia 22102 (outside Washington, D.C.
metropolitan area, telephone 800-336-FMPC; within Washington, D.C. metropolitan
area, telephone 703-759-8160). The Depositor has not and will not participate
in the preparation of FHLMC's Offering Circulars, Information Statements or
Supplements.
Copies of FNMA's most recent Prospectus for FNMA Certificates
and FNMA's annual report and quarterly financial statements as well as other
financial information are available from the Senior Vice President for Investor
Relations of FNMA, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016
(202-752-7115). The Depositor has not and will not participate in the
preparation of FNMA's Prospectuses.
103
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
Term Page
1996 Act...................................................................84
Act........................................................................74
Additional Balance.........................................................20
Advance....................................................................59
Advance Reserve............................................................45
Advances...................................................................10
APR........................................................................21
ARM Buy-Outs...............................................................21
Balloon Loan...............................................................19
Balloon Period.............................................................19
Basic Monthly Amount.......................................................20
Basic Senior Class Distribution............................................36
Buy-Down Account...........................................................19
Buy-Down Loans.............................................................19
CERCLA.....................................................................81
Certificate Account........................................................56
Certificate Account Depository.............................................56
Certificateholders..........................................................1
Class.......................................................................1
Closing Date...............................................................32
Code...................................................................11, 84
Commission..................................................................3
Compound Interest Certificates.............................................32
Contract Pool..............................................................17
Contract Rate...........................................................7, 21
Contracts...............................................................1, 21
Convertible Mortgage Loans.................................................17
Cooperative Loans..........................................................17
Cooperative Notes..........................................................17
cooperatives...............................................................17
Credit Enhancer............................................................16
Cut-Off Date Aggregate Principal Balance...............................18, 22
Debt Securities........................................................11, 84
Deferred Interest..................................................13, 19, 22
Definitive Certificate.....................................................30
Deleted Loan...............................................................28
Depositor............................................................1, 4, 53
Determination Date.........................................................33
Direct or Indirect Participants............................................16
Disqualified Organization..................................................30
DTC........................................................................31
Due Date...............................................................18, 22
Due Period.................................................................42
Eligible Investments.......................................................45
Environmental Condition....................................................80
EPA........................................................................81
ERISA..................................................................11, 97
FASIT.......................................................................2
FASIT High-Yield Securities.............................................2, 11
FASIT Ownership Interest....................................................2
104
<PAGE>
FASIT Regular Securities................................................2, 11
FDIC.......................................................................56
FHLBB......................................................................74
FIRREA.....................................................................82
Fixed Retained Yield.......................................................17
Forward Purchase Agreement..............................................8, 32
Funding Period.............................................................32
Gain From Acquired Property................................................35
GEM Loans..................................................................20
GPM Fund...................................................................21
GPM Mortgage Loans.........................................................21
Grantor Trust Estate.......................................................84
Grantor Trust Securities...............................................11, 84
Home Equity Lines..........................................................20
Indemnification Payments...................................................35
Individual Exemption.......................................................98
Initial Deposit............................................................44
Insurance Proceeds.........................................................57
Interest Accrual Period....................................................51
Interest Rate...............................................................1
IRS........................................................................86
Liquidated Contract........................................................35
Liquidated Mortgage Loan...............................................14, 35
Liquidation Proceeds...................................................14, 57
Loan Agreement.............................................................20
Loan Sale Agreement........................................................25
Loan-to-Value Ratio....................................................18, 22
Mortgage Loans..........................................................1, 24
Mortgage Notes.............................................................17
Mortgage Pool..............................................................17
Mortgage Rate...............................................................7
Mortgaged Properties.......................................................19
Mortgages..................................................................17
Mortgagor..................................................................13
Multi-Class Certificates....................................................1
National Credit Rating Agencies............................................98
NCUA......................................................................101
Net Insurance Proceeds.....................................................57
Net Liquidation Proceeds...................................................57
Notional Amount.............................................................1
OTS........................................................................74
Partnership Interests......................................................11
Pass-Through Rate...........................................................7
Paying Agent...............................................................59
Payment Deficiencies.......................................................44
Percentage Certificates....................................................31
Plans......................................................................97
Policy Statement..........................................................101
Pool........................................................................1
Pool Distribution Amount...................................................33
Pool Value Group...........................................................40
Pool Value.................................................................40
Pre-Funding Account.....................................................8, 32
Premium Security...........................................................95
Prepayment Assumption......................................................93
Prepayment Interest Shortfall..............................................60
105
<PAGE>
PTE 83-1...................................................................99
Purchase Obligation........................................................12
Purchase Price.............................................................26
Rating Agency..............................................................11
Record Date.................................................................7
Registration Statement......................................................3
Regular Certificates....................................................2, 30
Relief Act.............................................................16, 81
REMIC...................................................................2, 84
REMIC Regular Securities...................................................11
REMIC Regular Security.....................................................86
REMIC Regulations..........................................................86
REMIC Residual Securities..................................................11
REMIC Residual Security....................................................86
REMIC Securities...........................................................84
Repurchase Proceeds........................................................33
Residual Certificates...................................................2, 30
Restricted Group...........................................................99
Scheduled Principal........................................................34
Securities Act..............................................................3
Senior Certificates.....................................................2, 30
Senior Class Distributable Amount..........................................34
Senior Class Principal Portion.............................................34
Senior Class Pro Rata Share................................................36
Senior Class Shortfall.....................................................36
Senior Class Shortfall Accruals............................................37
Series......................................................................1
Servicer....................................................................1
Servicing Account..........................................................62
Settlement Date............................................................87
Shifting Interest Certificates..............................................2
Shifting Interest Certificates.............................................32
SMMEA.................................................................10, 101
Special Distributions......................................................43
Special Hazard Contract....................................................47
Special Hazard Mortgage Loan...............................................47
Standard Certificates.......................................................1
Standard Hazard Insurance Policy...........................................23
Stated Amount...............................................................1
Stripped Certificates.......................................................1
Subclass....................................................................1
Subordinated Amount.........................................................9
Subordinated Certificates...............................................2, 30
Subordinated Class Distributable Amount....................................34
Subordinated Class Principal Portion.......................................35
Subordinated Class Pro Rata Share..........................................36
Subordination Reserve Fund..................................................9
Sub-Servicer............................................................4, 56
Sub-Servicing Account......................................................57
Substitute Loan............................................................28
The Pooling and Servicing Agreement................................35, 36, 38
The Trust Funds........................................................35, 38
Title V................................................................75, 79
Trust Fund..................................................................1
UCC....................................................................71, 76
Unaffiliated Sellers........................................................4
106
<PAGE>
Underwriting Guidelines....................................................25
Unpaid Interest Shortfall..................................................37
Voting Interests...........................................................67
Window Period..............................................................74
Window Period Loans........................................................74
Window Period States.......................................................74
107
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<PAGE>
===============================================================================
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this prospectus supplement and
the prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the depositor or by the
underwriter. This prospectus supplement and the prospectus do not constitute an
offer to sell, or a solicitation of an offer to buy, the securities offered
hereby by anyone in any jurisdiction in which such an offer or solicitation is
not authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make any such offer
or solicitation. Neither the delivery of this prospectus supplement and the
prospectus nor any sale made hereunder shall, under any circumstances, create
an implication that information herein or therein is correct as of any time
since the date of this prospectus supplement or the prospectus.
--------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Table of Contents..................................S-iii
Summary..............................................S-1
Risk Factors.........................................S-7
Transaction Overview................................S-15
The Mortgage Loan Pools.............................S-16
The Originators, the Seller and the Servicer........S-32
The Owner Trustee...................................S-39
The Indenture Trustee...............................S-39
The Collateral Agent................................S-39
Description of the Notes and the Trust Certificates.S-40
Servicing of the Mortgage Loans.....................S-57
The Note Insurance Policy...........................S-64
The Note Insurer....................................S-66
Prepayment and Yield Considerations.................S-68
Certain Federal Income Tax Considerations...........S-71
ERISA Considerations................................S-73
Legal Investment....................................S-74
Underwriting........................................S-74
Experts.............................................S-75
Ratings.............................................S-75
Legal Matters.......................................S-75
Index of Principal Defined Terms....................S-76
PROSPECTUS
Reports................................................3
Available Information..................................3
Incorporation of Certain Information By Reference......3
Summary of Prospectus..................................4
Risk Factors..........................................12
The Trust Funds.......................................17
Description of the Notes..............................29
Credit Support........................................43
Prepayment and Yield Considerations...................49
Use of Proceeds.......................................53
The Depositor.........................................53
Underwriting Guidelines...............................54
Servicing of the Mortgage Loans and Contracts.........55
The Pooling and Servicing Agreement...................66
Certain Legal Aspects of the Mortgage Loans and
Contracts.........................................69
Certain Federal Income Tax Consequences...............84
ERISA Considerations..................................97
Legal Investment.....................................101
Plan of Distribution.................................102
Legal Matters........................................103
Rating...............................................103
Additional Information...............................103
Index of Significant Definitions.....................104
===============================================================================
===============================================================================
$184,075,000
ABFS Mortgage Loan Trust 1999-1
Issuer
American Business Financial
Services, Inc.
Sponsor
American Business Credit, Inc.
Servicer
Prudential Securities
Secured Financing Corporation
Depositor
$100,000,000
Class A-1 Notes
$84,075,000
Class A-2 Notes
Mortgage-Backed Notes,
Series 1999-1
__________________
PROSPECTUS SUPPLEMENT
__________________
Prudential Securities
March 24, 1999
===============================================================================
