<PAGE>
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JUNE 23, 1999
- --------------------------------------------------------------------------------
$220,000,000
ABFS MORTGAGE LOAN TRUST 1999-4
MORTGAGE-BACKED NOTES, SERIES 1999-4
$100,000,000 7.675% CLASS A-1 NOTES
$90,000,000 7.200% CLASS A-2 NOTES
$30,000,000 VARIABLE RATE CLASS A-3 NOTES
[LOGO](Registered)
PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
Depositor
- --------------------------------------------------------------------------------
YOU SHOULD READ THE SECTION ENTITLED
"RISK FACTORS" STARTING ON PAGE S-4
OF THIS PROSPECTUS SUPPLEMENT AND
PAGE 3 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 TRUST FUND --
o The trust fund consists primarily of three
pools of fixed-rate business and consumer
purpose home equity loans secured by first- or
second-lien mortgages on residential or
commercial real properties.
THE NOTES --
o Each class of notes will be backed primarily by
a pledge of one of the three pools of mortgage
loans.
CREDIT ENHANCEMENT --
o The notes will be unconditionally and
irrevocably guaranteed as to the timely payment
of interest and to specified payments of
principal pursuant to the terms of a financial
guaranty insurance policy to be issued by
[LOGO]
o The notes will be cross-collateralized to a
limited extent.
o The notes will have the benefit of initial
over-collateralization.
o Excess interest will be used in the early years
of the transaction to increase this
over-collateralization.
<TABLE>
<CAPTION>
ORIGINAL NOTE PRICE TO THE UNDERWRITING PROCEEDS TO THE RATINGS FINAL STATED
CLASS PRINCIPAL BALANCE PUBLIC DISCOUNT DEPOSITOR MOODY'S/S&P MATURITY DATE
- ----- ----------------- ------------- ------------ --------------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
A-1 $100,000,000 100.0000% 0.30% $99,700,000 Aaa/AAA April 15, 2031
A-2 $ 90,000,000 99.0625% 0.30% $88,886,250 Aaa/AAA April 15, 2031
A-3 $ 30,000,000 100.0000% 0.30% $29,910,000 Aaa/AAA April 15, 2031
- ----- ------------- ------------- -------- ------------- ------- ------------------
Total $220,000,000 $219,156,250 $660,000 $218,496,250
</TABLE>
In addition to the price stated above, purchasers of class A-1
notes and class A-2 notes will also be required to purchase the
interest that has accrued on their notes since December 1, 1999.
The proceeds to the depositor were calculated without taking into
account the expenses of this offering, which are estimated to be
$500,000.
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 DECEMBER 1, 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 provide more detail in progression: (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. IF THE ACCOMPANYING PROSPECTUS CONTEMPLATES MULTIPLE
OPTIONS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT AS TO
THE APPLICABLE OPTION.
We cannot sell the notes to you unless you have received both this
prospectus supplement and 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 information concerning a particular topic. The following table of
contents provides the pages on which these captions are located.
S-ii
<PAGE>
Table of Contents
Summary...................................................................S-1
Risk Factors..............................................................S-4
Transaction Overview......................................................S-8
Parties................................................................S-8
The Transaction........................................................S-9
The Mortgage Loan Pools...................................................S-9
The Pool I Mortgage Loans.............................................S-11
The Pool II Mortgage Loans............................................S-21
The Pool III Mortgage Loans...........................................S-30
Conveyance of Subsequent Mortgage Loans...............................S-38
The Originators, the Seller and the Servicer.............................S-39
The Originators.......................................................S-39
Underwriting Guidelines...............................................S-42
The Servicer..........................................................S-44
Delinquency and Loan Loss Experience..................................S-46
The Owner Trustee........................................................S-47
The Indenture Trustee....................................................S-47
The Collateral Agent.....................................................S-48
Description of the Notes and the Trust Certificates......................S-48
Book-Entry Registration...............................................S-49
Definitive Notes......................................................S-52
Assignment and Pledge of Initial Mortgage Loans.......................S-53
Assignment and Pledge of Subsequent Mortgage Loans....................S-53
Delivery of Mortgage Loan Documents...................................S-53
Representations and Warranties of the Seller..........................S-55
Payments on the Mortgage Loans........................................S-57
Calculation of LIBOR..................................................S-58
Over-collateralization Provisions.....................................S-59
Cross-collateralization Provisions....................................S-61
Flow of Funds.........................................................S-61
Events of Default.....................................................S-62
Reports to Noteholders................................................S-63
Amendment.............................................................S-63
Servicing of the Mortgage Loans..........................................S-64
Servicing Fees and Other Compensation and Payment of Expenses.........S-64
Periodic Advances and Servicer Advances...............................S-64
Prepayment Interest Shortfalls........................................S-65
Civil Relief Act Interest Shortfalls..................................S-65
Optional Purchase of Delinquent Mortgage Loans........................S-66
Servicer Reports......................................................S-66
Collection and Other Servicing Procedures.............................S-67
Hazard Insurance......................................................S-67
Realization Upon Defaulted Mortgage Loans.............................S-68
Removal and Resignation of the Servicer...............................S-68
Optional Clean-up Call on the Notes...................................S-70
Termination; Purchase of Mortgage Loans...............................S-70
The Note Insurance Policy................................................S-71
The Note Insurer.........................................................S-74
The Note Insurer......................................................S-74
Reinsurance...........................................................S-75
Ratings...............................................................S-75
Capitalization........................................................S-75
Incorporation of Certain Documents by Reference.......................S-76
Insurance Regulation..................................................S-76
Prepayment and Yield Considerations......................................S-77
Material Federal Income Tax Consequences.................................S-82
Treatment of the Notes................................................S-82
ERISA Considerations.....................................................S-83
Legal Investment.........................................................S-84
Plan of Distribution.....................................................S-84
S-iii
<PAGE>
Incorporation of Information by Reference................................S-85
Additional Information...................................................S-85
Experts..................................................................S-86
Legal Matters............................................................S-86
Ratings..................................................................S-86
Glossary.................................................................S-86
S-iv
<PAGE>
Summary
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. You should read this
entire prospectus supplement and the accompanying prospectus carefully
to understand all of the terms of the offering of the notes.
------------------------------------
The Notes and the Trust Certificates
The ABFS Mortgage Loan Trust 1999-4 will issue three classes of its
mortgage-backed notes, series 1999-4; the class A-1 notes, the class A-2 notes
and the class A-3 notes. The notes are being offered to you by this prospectus
supplement.
The class A-1 notes will be secured by the mortgage loans in pool I, the class
A-2 notes will be secured by the mortgage loans in pool II and the class A-3
notes will be secured by the mortgage loans in pool III. Each pool will
constitute a separate sub-trust of the trust.
The trust will also issue three classes of trust certificates, together
representing the entire beneficial ownership interest in the trust. The trust
certificates are not offered by this prospectus supplement.
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. Another 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 remaining class of
trust certificates will represent the ownership interest in the sub-trust of the
trust consisting of the mortgage loans in pool III. The holder of a trust
certificate is entitled to receive specified payments consisting of excess
interest from its pool of mortgage loans, but only after all other payments have
been made in respect of the notes.
Payments
Payments on the notes will be on the 15th day of each month, or, if such 15th
day is not a business day, on the next business day, beginning on January 18,
2000, to the holders of record on the preceding record date.
The record date for the class A-1 notes and the class A-2 notes will be the last
business day of the month preceding the related payment date, or, in the case of
the January 18, 2000 payment date, the closing date. The record date for the
class A-3 notes will be the business day immediately preceding each payment
date.
Payments of Interest
On each payment date, each class of notes is entitled to receive its current
interest.
o Current Interest. The current interest for a payment date is the interest
which accrues on a class of notes at that class's note rate on the
outstanding principal balance of the class of notes during the accrual
period.
o Accrual Period. The accrual period for the class A-1 notes and the class
A-2 notes is the calendar month preceding the payment date. The accrual
period for the class A-3 notes is the period from, and including, the prior
payment date (or, in the case of the January 18, 2000 payment date, the
closing date) to, but excluding, the current payment date.
All computations of interest accrued on the class A-1 notes and the class A-2
notes will be made on the basis of a 360-day year consisting of twelve 30-day
months. All computations of interest accrued on the class A-3 notes shall be
made on the basis of a 360-day year and the actual number of days elapsed in the
related accrual period.
Payments of Principal
The holders of each class of notes are entitled to receive payments of principal
on each payment date which generally reflect collections of principal during the
preceding calendar month
S-1
<PAGE>
on the mortgage loans in the pool relating to their class.
In addition, in accordance with the over-collateralization features of the
transaction, holders may also receive extra payments of principal from the
excess interest on that payment date.
Credit Enhancement
The credit enhancement provided for the benefit of the holders of the notes
consists solely of:
o over-collateralization,
o cross-collateralization, and
o the note insurance policy.
The Mortgage Loans
The mortgage loans to be included in the trust estate will be primarily
fixed-rate, closed-end, monthly pay, business purpose loans and consumer purpose
home equity loans secured by first, second or multiple mortgages or deeds of
trust on residential or commercial real properties.
On the closing date, the trust will purchase the mortgage loans. The aggregate
principal balance of the pool I mortgage loans will be approximately
$60,606,000, the aggregate principal balance of the pool II mortgage loans will
be approximately $54,545,000 and the aggregate principal balance of the pool III
mortgage loans will be approximately $18,182,000.
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
notes, placed in pre-funding accounts and used for the purchase of mortgage
loans by the trust after the closing date.
Servicing of the Mortgage Loans
American Business Credit, Inc. will act as servicer and 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.
Option of the Certificateholders to Call the Notes
The majority holder of the trust certificate in respect of the largest remaining
pool of mortgage loans, may, at its option, call the notes on any payment date
on which the aggregate outstanding principal balance of the notes is equal to or
less than 10% of the aggregate original principal balances thereof. The majority
holder of the trust certificate in respect of the largest remaining pool of
mortgage loans, may also, at its option, call any class of notes on any payment
date on which the aggregate outstanding principal balance of the respective note
balance is equal to or less than 10% of its original principal balance. If such
holder does not exercise its right to call the notes on the first payment date
on which it is entitled to do so, the servicer will have the right to call the
notes. 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
classes. If the notes are not called on the first payment date on which the
aggregate outstanding principal balance of the notes is equal to or less than
10% of the aggregate original principal balance of the notes, the interest rate
payable on the notes will be increased as described 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.
Federal Income Tax Status
It is the opinion of Brown & Wood LLP, special federal tax counsel to the trust,
that for federal income tax purposes
o the notes will be characterized as indebtedness, and
o the trust will not be characterized as an association, or a publicly
traded partnership, taxable as a corporation or a taxable mortgage
pool.
S-2
<PAGE>
Each noteholder, by the acceptance of a note, will agree to treat the notes as
indebtedness.
Legal Investment
The notes will not constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984.
Ratings
In order to be issued, the notes must be rated "AAA" by Standard & Poor's and
"Aaa" by Moody's, taking into account the note insurance policy issued with
respect to the notes. These ratings may be lowered, qualified or withdrawn by
the rating agencies.
S-3
<PAGE>
Risk Factors
In addition to the risk factors discussed in the prospectus,
prospective noteholders should consider, among other things, the following
additional factors in connection with the purchase of the notes. Unless
otherwise noted, all statistical percentages are based upon the mortgage loan
pools that existed on a statistical calculation date of December 6, 1999.
If the funds on deposit in the pre-funding accounts are not used to purchase
additional mortgage loans, those funds will be distributed as a prepayment of
principal, which may adversely affect the yield on your note.
If the principal balance of the eligible mortgage loans available for
purchase by the trust on March 31, 2000 is less than the amount on
deposit in the corresponding pre-funding account on such date, the
remaining amount will be applied as a prepayment of principal on the
following payment date to the holders of the class of notes relating to
that pre-funding account. If the amount of cash is substantial, the
notes for the related pool will receive a significant unexpected early
payment of principal. Such a prepayment could adversely affect your
yield on your note, particularly if you purchase your note at a
premium. Also, there is no assurance that affected noteholders will be
able to reinvest that cash in another investment with a comparable
yield.
Any purchase of additional mortgage loans by the trust using funds on
deposit in the pre-funding accounts is subject to the following
conditions, among others:
o each additional mortgage loan must satisfy specified
statistical criteria and representations and warranties;
o additional 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
o opinions of counsel will be delivered concerning the validity
of the conveyance of additional mortgage loans.
The ability of the originators to originate subsequent mortgage loans
meeting the requirements for inclusion in the pools described above and
under the caption "-Conveyance of Mortgage Loans on Closing Date and
Subsequent Mortgage Loans" may be affected as a result of a variety of
social and economic factors. Economic factors include interest rates,
unemployment levels, the rate of inflation and consumer perception of
economic conditions generally. However, the originators are unable to
determine and have no basis to predict whether or to what extent
economic or social factors will affect the originator's abilities to
originate additional mortgage loans and therefore the availability of
subsequent mortgage loans.
Less stringent underwriting standards and the resultant potential for
delinquencies on the mortgage loans could lead to losses on your securities.
The mortgage loans were made, in part, to borrowers who, for one reason
or another, are not able, or do not wish, to obtain financing from
traditional sources such as commercial banks. These mortgage loans may
be considered to be of a riskier nature than mortgage 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.
S-4
<PAGE>
The underwriting standards used in the origination of the mortgage
loans held by the trust 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 mortgage 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 concentration of the mortgage loans in particular jurisdictions may
result in greater losses if those jurisdictions experience economic downturns.
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets,
and, consequently, may experience higher rates of loss and delinquency
on mortgage 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 the mortgage loans held by the trust 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 following percentages of mortgage loans in pool I,
pool II and pool III on the statistical calculation date were secured
by mortgaged properties located in the following states:
New York Pennsylvania New Jersey Florida
-------- ------------ ---------- -------
Pool I 27.42% 16.37% 15.15% 10.14%
Pool II 24.57% 18.74% 14.25% 10.28%
Pool III 33.10% 5.27% 18.97% 4.76%
Because of the relative geographic concentration of the mortgage loans
within the States of New York, Pennsylvania, New Jersey, 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 country. In addition, the
economies of New York, Pennsylvania, New Jersey, 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 York,
Pennsylvania, New Jersey 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 increase and such increase may be substantial.
A portion of the mortgage loans require large balloon payments at maturity;
these balloon loans may involve a greater risk of default due to these large
payments, which could lead to losses on your note.
Approximately 45.26% of the mortgage loans in pool I on the statistical
calculation date, 45.41% of the mortgage loans in pool II on the
statistical calculation date and 41.18% of the mortgage loans in pool
III on the statistical calculation date are not fully amortized over
their terms and instead require substantial balloon payments on their
maturity dates. Because the principal balances of these balloon loans
do not fully amortize over their term, these balloon loans may involve
greater risks of default than mortgage loans whose
S-5
<PAGE>
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 his or her balloon loan will depend on the borrower's ability to
obtain adequate refinancing or funds from other sources to repay the
balloon loan. 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 the balloon
loans.
Even assuming that the mortgaged properties provide adequate security
for the balloon loans, substantial delays could be encountered in
connection with the liquidation of defaulted mortgage loans and
corresponding delays in the receipt of proceeds by the holders of the
notes could occur.
A portion of the mortgage loans are secured by subordinate mortgages; in the
event of a default, these mortgage loans are more likely to experience losses.
Approximately 17.95% of the mortgage loans in pool I, 18.15% of the
mortgage loans in pool II and 53.09% of the mortgage loans in pool III
on the statistical calculation date 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 the 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 either pays the entire amount of the
senior mortgages to the mortgagees at or prior to the foreclosure sale
or undertakes the obligation to make payments on each senior mortgage
in the event of default thereunder. In servicing business purpose loans
and consumer purpose home equity loans in its portfolio, the servicer
will generally 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 mortgage 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 and cause
the outstanding principal balances of the mortgage loans, together with
the primary senior financing thereon, to equal or exceed the value of
the mortgaged properties. This type of a decline would adversely affect
the position of a second mortgagee before having the same effect on 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. This type of increase may reduce the
likelihood of liquidation or other proceeds being sufficient to satisfy
the mortgage loan after satisfaction of any senior liens.
An increase in LIBOR could result in shortfalls in the payment of interest on
the class A-3 notes.
The note rate for the class A-3 notes is based upon the value of an
adjustable index -- one-month LIBOR -- while the interest rates on the
mortgage loans in pool III are fixed. Consequently, the interest which
becomes due on these mortgage loans and is available for payment to the
noteholders during any calendar month may be less than the amount of
interest that would accrue at one-month LIBOR plus the margin on the
class A-3
S-6
<PAGE>
notes during the accrual period, and will be limited to such lower
amount. While the class A-3 notes do have a "carry-forward" or
"catch-up" feature if the amount of interest paid is so limited, the
amount of any shortfall or carry-forward is not guaranteed by the note
insurance policy. Additionally, the ratings on the class A-3 notes do
not address the likelihood of the payment of the Class A-3 Available
Funds Cap Carry-Forward Amount. Thus, you could experience losses on
your note.
Prepayments on the mortgage loans could lead to shortfalls in the payment of
interest on your note.
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 payment 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 days' interest on
such mortgage loan, but only to the extent of the servicing fees for
such mortgage loan for 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.
Year 2000 issues could lead to delays in payment or losses on your note.
There is a significant uncertainty regarding the effect of the year
2000 problem because computer systems or other systems with embedded
technology that do not properly recognize date sensitive information
when the year changes to 2000 could generate erroneous data or
altogether fail. The servicer and the originator, as well as third
parties that have relationships with them, including vendors and
obligors, may experience significant year 2000 issues. These issues may
have a serious adverse effect on the operations of the originators, the
servicer, or these third parties, including, without limitation,
inaccurate reports or other data or 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.
If DTC experiences year 2000 problems, you could experience delays in payment or
losses on your note.
If problems associated with the year 2000 issue were to affect DTC, its
systems -- as they relate to the timely payment of interest or
principal, book-entry deliveries, and settlement of trades within DTC
-- or third parties -- including, but not limited to, issuers, their
agents and DTC's 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 -- payments to the beneficial owners of notes
could be delayed or otherwise adversely affected.
S-7
<PAGE>
Because the ratings of the notes are dependent upon creditworthiness of the note
insurer, a downgrade of the note insurer could cause a downgrade of the notes.
The ratings of the notes will depend primarily on the creditworthiness
of the note insurer as the provider of the note insurance policy
relating to the notes. Any reduction in the note insurer's insurance
financial strength and claims-paying ability ratings could result in a
reduction of the ratings on the notes.
Some of the terms used in this prospectus supplement are capitalized.
These capitalized terms have specified definitions, which are included at the
end of this prospectus supplement under the heading "Glossary."
Transaction Overview
Parties
The Trust. ABFS Mortgage Loan Trust 1999-4, a Delaware statutory
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 1999-4, Inc., a Delaware corporation, which is owned
by the originators. The principal executive office of the seller is at 3411
Silverside Road, 103 Springer Bldg., Wilmington, Delaware 19810, and its
telephone number is (302) 478-6160.
The Originators. American Business Credit, Inc., a Pennsylvania
corporation ("American Business Credit"), Home American Credit, Inc. d/b/a
Upland Mortgage, a Pennsylvania corporation, and New Jersey Mortgage and
Investment Corp., 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. American Business Credit will act as
servicer of the mortgage loans, and Upland Mortgage and New Jersey Mortgage 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, 12 East, New York, New York 10286 and its telephone number
is (212) 815-7165. 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
1111 Fannin, 12th Floor, Houston, Texas 77002, and its telephone number is (713)
427-6400.
S-8
<PAGE>
The Note Insurer. Financial Security Assurance Inc., a New York
financial guaranty insurance company. The note insurer will issue a financial
guaranty 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. and Moody's Investors Service will issue ratings
with respect to each class of notes.
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
December 1, 1999, between the owner trustee, the depositor and the seller and
the filing of a certificate of trust with the Secretary of State of the State of
Delaware. Under the Trust Agreement, the trust will also issue trust
certificates, each class 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 described 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 December 1, 1999, 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 December 1, 1999,
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 December 1, 1999, 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 December 1, 1999, among the note insurer, the trust, the
depositor, the seller, the originators and the servicer.
The Mortgage Loan Pools
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 a
statistical calculation date, in this case December 6, 1999. Pool I aggregated
approximately $48,369,500.70 as of the Cut-Off Date, pool II aggregated
approximately $43,208,271.36 as of the Cut-Off Date and pool III aggregated
approximately $14,698,689.12 as of the Cut-Off Date. The seller expects that the
actual pools will represent approximately $60,606,000 in aggregate principal
balance of mortgage loans in pool I, as of the Cut-Off Date, approximately
$54,545,000 in aggregate principal balance of mortgage loans in pool II, as of
the Cut-Off Date and approximately $18,182,000 in aggregate principal balance of
mortgage loans in pool III, 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
S-9
<PAGE>
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 by the amount of any shortfall.
Additional mortgage loans are intended to be purchased by the trust
from time to time after the closing date and on or before March 31, 2000 from
funds on deposit in the pre-funding accounts. These 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 Mortgage Loans on the
Closing Date and Subsequent Mortgage Loans."
The mortgage loans will be predominantly business purpose loans or
consumer purpose residential home equity loans used to refinance an existing
mortgage loan, to consolidate debt, or to obtain cash proceeds by borrowing
against the mortgagor's equity in the related mortgaged property in order to
provide funds for working capital for business, business expansion, equipment
acquisition, or 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
manufactured home or a unit in a planned unit development -- and commercial or
mixed use property. The mortgaged properties may be owner-occupied properties,
which include second and vacation homes, non-owner occupied investment
properties or business purpose properties.
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:
o a fee equal to a percentage, which is negotiated at
origination, of the outstanding principal balance of the
mortgage loan,
o 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
o 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 earlier than
would be required to be paid if the actuarial method of
calculating interest was utilized.
The following sections describe the statistical characteristics of the
mortgage loan pools. Unless otherwise noted, all statistical percentages in this
prospectus supplement are approximate and are measured by the aggregate
principal balance of the applicable mortgage loans in relation to the aggregate
principal balance of the mortgage loans in the applicable pool, in each case, as
of the statistical calculation date.
The combined loan-to-value ratios or CLTV's 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.
S-10
<PAGE>
The Pool I Mortgage Loans
As of the Cut-Off Date, the mortgage loans in pool I on the statistical
calculation date had the following characteristics:
o there were 736 mortgage loans under which the related
mortgaged properties are located in 31 states,
o the aggregate principal balance, after application of all
payments due on or before the statistical calculation date,
was $48,369,500.70,
o the minimum principal balance was $9,773.89, the maximum
principal balance was $240,000.00, and the average principal
balance was $65,719.43,
o the mortgage interest rates ranged from 8.25% to 17.99% per
annum, and the weighted average mortgage interest rate was
approximately 11.79% per annum,
o the original term to stated maturity ranged from 60 months to
360 months and the weighted average original term to stated
maturity was approximately 239 months,
o the remaining term to stated maturity ranged from 60 months to
360 months and the weighted average remaining term to stated
maturity was approximately 239 months,
o approximately 54.74% of the mortgage loans by aggregate
principal balance require monthly payments of principal that
will fully amortize these mortgage loans by their respective
maturity dates, and approximately 45.26% of the mortgage loans
by aggregate principal balance are balloon loans,
o the weighted average CLTV was approximately 75.36%,
o approximately 82.05% of mortgage loans by aggregate principal
balance are secured by first liens, and approximately 17.95%
of mortgage loans by aggregate principal balance are secured
by second liens, and
o approximately 27.42%, 16.37%, 15.15% and 10.14% of the
mortgage loans by aggregate principal balance are secured by
mortgaged properties located in the States of New York,
Pennsylvania, New Jersey and Florida, respectively.
On or prior to March 31, 2000, 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 $40,404,000.
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%.
S-11
<PAGE>
Geographical Distribution of Mortgaged Properties
Pool I
<TABLE>
<CAPTION>
Number of Mortgage Aggregate Unpaid % of Statistical Calculation Date
State Loans Principal Balance Aggregate Principal Balance
- ------------------- --------------------- --------------------- ---------------------------------------
<S> <C> <C> <C>
Arkansas 2 $99,000.00 0.20%
Colorado 1 113,400.00 0.23
Connecticut 13 692,010.42 1.43
Delaware 9 803,352.00 1.66
Florida 81 4,906,950.01 10.14
Georgia 43 2,636,707.26 5.45
Illinois 36 1,975,182.32 4.08
Indiana 4 190,806.91 0.39
Kansas 1 39,184.81 0.08
Kentucky 2 78,500.00 0.16
Maine 1 26,124.00 0.05
Maryland 22 1,518,770.04 3.14
Massachusetts 6 351,607.36 0.73
Minnesota 1 90,000.00 0.19
Mississippi 1 104,000.00 0.22
Missouri 3 262,867.48 0.54
New Hampshire 2 185,600.00 0.38
New Jersey 104 7,326,980.29 15.15
New York 159 13,263,347.80 27.42
North Carolina 15 1,070,279.08 2.21
Ohio 22 1,629,393.93 3.37
Pennsylvania 157 7,918,522.83 16.37
Rhode Island 1 19,500.00 0.04
South Carolina 7 482,285.72 1.00
Tennessee 16 929,437.56 1.92
Utah 1 83,931.70 0.17
Vermont 2 259,900.00 0.54
Virginia 20 1,173,188.69 2.43
Washington 2 87,670.49 0.18
West Virginia 1 34,500.00 0.07
Wisconsin 1 16,500.00 0.03
--------------------- --------------------- ---------------------------------------
Total 736 $48,369,500.70 100.00%
===================== ===================== =======================================
</TABLE>
S-12
<PAGE>
Distribution of CLTV Ratios
Pool I
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
CLTV Range Mortgage Loans Principal Balance Aggregate Principal Balance
---------- -------------- ----------------- ---------------------------
<S> <C> <C> <C>
10.00% less than CLTV less than or equal to 15.00% 3 $80,500.00 0.17%
15.00 less than CLTV less than or equal to 20.00 4 80,919.98 0.17
20.00 less than CLTV less than or equal to 25.00 6 118,229.88 0.24
25.00 less than CLTV less than or equal to 30.00 8 215,227.81 0.44
30.00 less than CLTV less than or equal to 35.00 8 389,828.64 0.81
35.00 less than CLTV less than or equal to 40.00 10 338,577.39 0.70
40.00 less than CLTV less than or equal to 45.00 16 639,777.41 1.32
45.00 less than CLTV less than or equal to 50.00 24 1,614,451.46 3.34
50.00 less than CLTV less than or equal to 55.00 26 1,294,757.00 2.68
55.00 less than CLTV less than or equal to 60.00 36 2,072,704.34 4.29
60.00 less than CLTV less than or equal to 65.00 42 2,560,112.29 5.29
65.00 less than CLTV less than or equal to 70.00 62 4,189,305.80 8.66
70.00 less than CLTV less than or equal to 75.00 72 5,109,764.41 10.56
75.00 less than CLTV less than or equal to 80.00 161 12,484,203.52 25.81
80.00 less than CLTV less than or equal to 85.00 123 8,799,324.13 18.19
85.00 less than CLTV less than or equal to 90.00 132 8,158,040.39 16.87
90.00 less than CLTV less than or equal to 95.00 1 170,000.00 0.35
95.00 less than CLTV less than or equal to 100.00 2 53,776.25 0.11
------------ ----------------- -----------------------
Total 736 $48,369,500.70 100.00%
============ ================= =======================
</TABLE>
S-13
<PAGE>
Distribution of Gross Interest Rates
Pool I
<TABLE>
<CAPTION>
Range of Gross Number of Aggregate Unpaid % of Statistical Calculation Date
Interest Rates Mortgage Loans Principal Balance Aggregate Principal Balance
-------------- -------------- ----------------- ---------------------------
<S> <C> <C> <C>
8.00% less than Gross Coupon less than or equal to 8.25% 1 $74,868.96 0.15%
8.75 less than Gross Coupon less than or equal to 9.00 2 331,848.16 0.69
9.00 less than Gross Coupon less than or equal to 9.25 4 346,059.71 0.72
9.25 less than Gross Coupon less than or equal to 9.50 9 804,738.21 1.66
9.50 less than Gross Coupon less than or equal to 9.75 31 2,181,204.24 4.51
9.75 less than Gross Coupon less than or equal to 10.00 51 3,825,694.34 7.91
10.00 less than Gross Coupon less than or equal to 10.25 15 943,560.61 1.95
10.25 less than Gross Coupon less than or equal to 10.50 47 4,022,276.36 8.32
10.50 less than Gross Coupon less than or equal to 10.75 29 2,727,204.58 5.64
10.75 less than Gross Coupon less than or equal to 11.00 92 7,091,508.31 14.66
11.00 less than Gross Coupon less than or equal to 11.25 34 2,154,740.28 4.45
11.25 less than Gross Coupon less than or equal to 11.50 60 4,776,608.95 9.88
11.50 less than Gross Coupon less than or equal to 11.75 27 1,581,399.80 3.27
11.75 less than Gross Coupon less than or equal to 12.00 69 3,770,989.96 7.80
12.00 less than Gross Coupon less than or equal to 12.25 30 1,349,687.95 2.79
12.25 less than Gross Coupon less than or equal to 12.50 46 2,219,670.35 4.59
12.50 less than Gross Coupon less than or equal to 12.75 17 766,227.99 1.58
12.75 less than Gross Coupon less than or equal to 13.00 37 1,522,054.86 3.15
13.00 less than Gross Coupon less than or equal to 13.25 2 47,742.94 0.10
13.25 less than Gross Coupon less than or equal to 13.50 14 616,341.08 1.27
13.50 less than Gross Coupon less than or equal to 13.75 6 249,757.55 0.52
13.75 less than Gross Coupon less than or equal to 14.00 19 644,352.88 1.33
14.00 less than Gross Coupon less than or equal to 14.25 2 107,500.00 0.22
14.25 less than Gross Coupon less than or equal to 14.50 6 229,900.00 0.48
14.75 less than Gross Coupon less than or equal to 15.00 3 156,400.00 0.32
15.00 less than Gross Coupon less than or equal to 15.25 2 30,012.00 0.06
15.25 less than Gross Coupon less than or equal to 15.50 1 123,343.92 0.26
15.50 less than Gross Coupon less than or equal to 15.75 7 452,772.07 0.94
15.75 less than Gross Coupon less than or equal to 16.00 6 451,709.68 0.93
16.00 less than Gross Coupon less than or equal to 16.25 51 3,672,817.71 7.59
16.25 less than Gross Coupon less than or equal to 16.50 13 709,864.72 1.47
16.75 less than Gross Coupon less than or equal to 17.00 2 276,642.53 0.57
17.50 less than Gross Coupon less than or equal to 18.00 1 110,000.00 0.23
---------- --------------- --------------------
Total 736 $48,369,500.70 100.00%
========== =============== ====================
</TABLE>
S-14
<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>
48 less than Orig. Term less than or equal to 60 14 $282,003.09 0.58%
60 less than Orig. Term less than or equal to 72 1 23,702.27 0.05
72 less than Orig. Term less than or equal to 84 4 128,974.94 0.27
84 less than Orig. Term less than or equal to 96 1 14,817.83 0.03
96 less than Orig. Term less than or equal to 108 1 60,600.00 0.13
108 less than Orig. Term less than or equal to 120 70 3,052,691.43 6.31
132 less than Orig. Term less than or equal to 144 5 301,895.95 0.62
144 less than Orig. Term less than or equal to 156 2 78,600.00 0.16
168 less than Orig. Term less than or equal to 180 311 19,023,885.71 39.33
180 less than Orig. Term less than or equal to 192 1 72,573.26 0.15
204 less than Orig. Term less than or equal to 216 4 168,445.00 0.35
228 less than Orig. Term less than or equal to 240 174 11,157,932.17 23.07
288 less than Orig. Term less than or equal to 300 19 1,868,654.25 3.86
336 less than Orig. Term less than or equal to 348 1 46,500.00 0.10
348 less than Orig. Term less than or equal to 360 128 12,088,224.80 24.99
-------------- ----------------- ---------------------
Total 736 $48,369,500.70 100.00%
============== ================= =====================
</TABLE>
S-15
<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>
48 less than Rem. Term less than or equal to 60 14 $282,003.09 0.58%
60 less than Rem. Term less than or equal to 72 1 23,702.27 0.05
72 less than Rem. Term less than or equal to 84 4 128,974.94 0.27
84 less than Rem. Term less than or equal to 96 1 14,817.83 0.03
96 less than Rem. Term less than or equal to 108 1 60,600.00 0.13
108 less than Rem. Term less than or equal to 120 70 3,052,691.43 6.31
132 less than Rem. Term less than or equal to 144 5 301,895.95 0.62
144 less than Rem. Term less than or equal to 156 2 78,600.00 0.16
168 less than Rem. Term less than or equal to 180 311 19,023,885.71 39.33
180 less than Rem. Term less than or equal to 192 1 72,573.26 0.15
204 less than Rem. Term less than or equal to 216 4 168,445.00 0.35
228 less than Rem. Term less than or equal to 240 174 11,157,932.17 23.07
288 less than Rem. Term less than or equal to 300 19 1,868,654.25 3.86
336 less than Rem. Term less than or equal to 348 1 46,500.00 0.10
348 less than Rem. Term less than or equal to 360 128 12,088,224.80 24.99
-------------- ----------------- ----------------------
Total 736 $48,369,500.70 100.00%
============== ================= ======================
</TABLE>
S-16
<PAGE>
Distribution of Original Principal Balances
Pool I
<TABLE>
<CAPTION>
Range of Original 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 or equal to $10,000 6 $59,639.68 0.12%
10,000 less than Balance less than or equal to 15,000 23 308,440.91 0.64
15,000 less than Balance less than or equal to 20,000 46 857,033.80 1.77
20,000 less than Balance less than or equal to 25,000 51 1,198,522.04 2.48
25,000 less than Balance less than or equal to 30,000 47 1,328,395.94 2.75
30,000 less than Balance less than or equal to 35,000 42 1,398,464.25 2.89
35,000 less than Balance less than or equal to 40,000 52 1,989,467.83 4.11
40,000 less than Balance less than or equal to 45,000 32 1,378,146.15 2.85
45,000 less than Balance less than or equal to 50,000 42 2,030,716.83 4.20
50,000 less than Balance less than or equal to 55,000 39 2,061,048.79 4.26
55,000 less than Balance less than or equal to 60,000 39 2,261,086.12 4.67
60,000 less than Balance less than or equal to 65,000 34 2,140,782.19 4.43
65,000 less than Balance less than or equal to 70,000 30 2,036,948.17 4.21
70,000 less than Balance less than or equal to 75,000 26 1,905,659.47 3.94
75,000 less than Balance less than or equal to 80,000 20 1,549,349.98 3.20
80,000 less than Balance less than or equal to 85,000 18 1,493,270.88 3.09
85,000 less than Balance less than or equal to 90,000 19 1,677,367.54 3.47
90,000 less than Balance less than or equal to 95,000 13 1,208,313.65 2.50
95,000 less than Balance less than or equal to 100,000 14 1,367,473.69 2.83
100,000 less than Balance less than or equal to 105,000 11 1,132,180.20 2.34
105,000 less than Balance less than or equal to 110,000 13 1,403,711.18 2.90
110,000 less than Balance less than or equal to 115,000 12 1,360,343.08 2.81
115,000 less than Balance less than or equal to 120,000 18 2,133,055.63 4.41
120,000 less than Balance less than or equal to 125,000 16 1,965,179.74 4.06
125,000 less than Balance less than or equal to 130,000 14 1,788,916.46 3.70
130,000 less than Balance less than or equal to 135,000 1 135,000.00 0.28
135,000 less than Balance less than or equal to 140,000 6 826,898.63 1.71
140,000 less than Balance less than or equal to 145,000 5 712,964.92 1.47
145,000 less than Balance less than or equal to 150,000 5 741,255.55 1.53
150,000 less than Balance less than or equal to 200,000 29 5,027,038.95 10.39
200,000 less than Balance less than or equal to 250,000 13 2,892,828.45 5.98
------------ --------------- ------------------
Total 736 $48,369,500.70 100.00%
============ =============== ==================
</TABLE>
S-17
<PAGE>
Distribution of Current Principal Balances
Pool I
<TABLE>
<CAPTION>
Range of Current 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 or equal to $10,000 6 $59,639.68 0.12%
10,000 less than Balance less than or equal to 15,000 23 308,440.91 0.64
15,000 less than Balance less than or equal to 20,000 46 857,033.80 1.77
20,000 less than Balance less than or equal to 25,000 51 1,198,522.04 2.48
25,000 less than Balance less than or equal to 30,000 47 1,328,395.94 2.75
30,000 less than Balance less than or equal to 35,000 42 1,398,464.25 2.89
35,000 less than Balance less than or equal to 40,000 52 1,989,467.83 4.11
40,000 less than Balance less than or equal to 45,000 32 1,378,146.15 2.85
45,000 less than Balance less than or equal to 50,000 43 2,080,499.53 4.30
50,000 less than Balance less than or equal to 55,000 38 2,011,266.09 4.16
55,000 less than Balance less than or equal to 60,000 39 2,261,086.12 4.67
60,000 less than Balance less than or equal to 65,000 34 2,140,782.19 4.43
65,000 less than Balance less than or equal to 70,000 30 2,036,948.17 4.21
70,000 less than Balance less than or equal to 75,000 26 1,905,659.47 3.94
75,000 less than Balance less than or equal to 80,000 20 1,549,349.98 3.20
80,000 less than Balance less than or equal to 85,000 18 1,493,270.88 3.09
85,000 less than Balance less than or equal to 90,000 19 1,677,367.54 3.47
90,000 less than Balance less than or equal to 95,000 14 1,303,295.69 2.69
95,000 less than Balance less than or equal to 100,000 13 1,272,491.65 2.63
100,000 less than Balance less than or equal to 105,000 11 1,132,180.20 2.34
105,000 less than Balance less than or equal to 110,000 13 1,403,711.18 2.90
110,000 less than Balance less than or equal to 115,000 12 1,360,343.08 2.81
115,000 less than Balance less than or equal to 120,000 18 2,133,055.63 4.41
120,000 less than Balance less than or equal to 125,000 16 1,965,179.74 4.06
125,000 less than Balance less than or equal to 130,000 14 1,788,916.46 3.70
130,000 less than Balance less than or equal to 135,000 1 135,000.00 0.28
135,000 less than Balance less than or equal to 140,000 6 826,898.63 1.71
140,000 less than Balance less than or equal to 145,000 5 712,964.92 1.47
145,000 less than Balance less than or equal to 150,000 5 741,255.55 1.53
150,000 less than Balance less than or equal to 200,000 29 5,027,038.95 10.39
200,000 less than Balance less than or equal to 250,000 13 2,892,828.45 5.98
----------- -------------- -------------------
Total 736 $48,369,500.70 100.00%
=========== ============== ===================
</TABLE>
S-18
<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 506 $39,686,972.11 82.05%
Second Lien 230 8,682,528.59 17.95
-------------- ----------------- ---------------------------
Total 736 $48,369,500.70 100.00%
============== ================= ===========================
</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 384 $26,478,617.56 54.74%
Balloon Loans 352 21,890,883.14 45.26
-------------- ----------------- ---------------------------
Total 736 $48,369,500.70 100.00%
============== ================= ===========================
</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 620 $39,788,981.82 82.26%
Investor 70 4,797,527.42 9.92
Vacation/Second Home 9 551,195.73 1.14
Business 37 3,231,795.73 6.68
-------------- ----------------- ---------------------------
Total 736 $48,369,500.70 100.00%
============== ================= ===========================
</TABLE>
S-19
<PAGE>
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 25 $2,327,404.78 4.81%
Planned Unit Development 9 783,383.38 1.62
Commercial 11 809,890.95 1.67
Townhouses 58 2,517,923.49 5.21
2-4 Family 79 7,192,961.87 14.87
Condominiums 16 616,228.93 1.27
Single Family Detached 524 33,291,805.86 68.83
Mobile Home 11 556,901.44 1.15
5+ Family 3 273,000.00 0.56
-------------- ----------------- ---------------------------
Total 736 $48,369,500.70 100.00%
============== ================= ===========================
</TABLE>
S-20
<PAGE>
The Pool II Mortgage Loans
As of the Cut-Off Date, the mortgage loans in pool II on the
statistical calculation date had the following characteristics:
o there were 692 mortgage loans under which the related
mortgaged properties are located in 26 states,
o the aggregate principal balance, after application of all
payments due on or before the statistical calculation date,
was $43,208.271.36,
o the minimum principal balance was $9,855.50, the maximum
principal balance was $240,000.00 and the average principal
balance was $62,439.70,
o the mortgage interest rates ranged from 7.99% to 16.99% per
annum, and the weighted average mortgage interest rate was
approximately 11.69% per annum,
o the original term to stated maturity ranged from 36 months to
360 months and the weighted average original term to stated
maturity was approximately 241 months,
o the remaining term to stated maturity ranged from 36 months to
360 months and the weighted average remaining term to stated
maturity was approximately 240 months,
o approximately 54.59% of the mortgage loans by aggregate
principal balance require monthly payments of principal that
will fully amortize these mortgage loans by their respective
maturity dates, and approximately 45.41% of the mortgage loans
by aggregate principal balance of the mortgage loans are
balloon loans,
o the weighted average CLTV was approximately 75.66%,
o approximately 81.85% of mortgage loans by aggregate principal
balance are secured by first liens, and approximately 18.15%
of mortgage loans are secured by second liens, and
o approximately 24.57%, 18.74%, 14.25% and 10.28% of the
mortgage loans by aggregate principal balance are secured by
mortgaged properties located in the States of New York,
Pennsylvania, New Jersey and Florida, respectively.
On or prior to March 31, 2000, 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 $36,364,000.
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%.
S-21
<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>
Alabama 1 $62,500.00 0.14%
Arkansas 1 53,550.00 0.12
Connecticut 13 1,037,798.98 2.40
Delaware 14 1,041,079.34 2.41
Florida 71 4,441,411.75 10.28
Georgia 38 2,162,545.23 5.00
Illinois 28 2,043,042.99 4.73
Indiana 6 318,293.24 0.74
Kentucky 4 132,474.86 0.31
Maryland 15 898,946.99 2.08
Massachusetts 7 557,450.00 1.29
Michigan 2 251,475.00 0.58
Missouri 3 105,200.00 0.24
Montana 1 70,967.98 0.16
Nebraska 1 79,200.00 0.18
New Jersey 98 6,158,555.72 14.25
New York 143 10,615,469.33 24.57
North Carolina 17 975,797.09 2.26
Ohio 24 1,521,662.24 3.52
Oklahoma 1 36,000.00 0.08
Pennsylvania 158 8,099,006.96 18.74
Rhode Island 1 50,000.00 0.12
South Carolina 10 467,848.06 1.08
Tennessee 10 574,808.80 1.33
Virginia 21 1,200,871.75 2.78
West Virginia 4 252,315.05 0.58
-------------- ----------------- ---------------------------
Total 692 $43,208,271.36 100.00%
============== ================= ===========================
</TABLE>
S-22
<PAGE>
Distribution of CLTV Ratios
Pool II
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
CLTV Range Mortgage Loans Principal Balance Aggregate Principal Balance
---------- -------------- ----------------- ---------------------------
<S> <C> <C> <C>
10.00% less than CLTV less than or equal to 15.00% 4 $87,000.00 0.20%
15.00 less than CLTV less than or equal to 20.00 2 79,927.77 0.18
20.00 less than CLTV less than or equal to 25.00 6 161,932.40 0.37
25.00 less than CLTV less than or equal to 30.00 6 220,953.66 0.51
30.00 less than CLTV less than or equal to 35.00 4 124,953.39 0.29
35.00 less than CLTV less than or equal to 40.00 7 259,604.37 0.60
40.00 less than CLTV less than or equal to 45.00 13 553,255.38 1.28
45.00 less than CLTV less than or equal to 50.00 24 1,428,245.32 3.31
50.00 less than CLTV less than or equal to 55.00 19 826,046.84 1.91
55.00 less than CLTV less than or equal to 60.00 28 1,165,995.75 2.70
60.00 less than CLTV less than or equal to 65.00 45 3,284,985.79 7.60
65.00 less than CLTV less than or equal to 70.00 56 3,510,575.81 8.12
70.00 less than CLTV less than or equal to 75.00 74 4,502,053.31 10.42
75.00 less than CLTV less than or equal to 80.00 172 12,257,003.70 28.37
80.00 less than CLTV less than or equal to 85.00 121 7,468,532.43 17.28
85.00 less than CLTV less than or equal to 90.00 110 7,257,337.09 16.80
95.00 less than CLTV less than or equal to 100.00 1 19,868.35 0.05
-------- -------------- --------------------
Total 692 $43,208,271.36 100.00%
======== ============== ====================
</TABLE>
S-23
<PAGE>
Distribution of Gross Interest Rates
Pool II
<TABLE>
<CAPTION>
Range of Gross Number of Aggregate Unpaid % of Statistical Calculation Date
Interest Rates Mortgage Loans Principal Balance Aggregate Principal Balance
-------------- -------------- ----------------- ---------------------------
<S> <C> <C> <C>
7.75% less than Gross Coupon less than or equal to 8.00% 1 $34,899.94 0.08%
8.75 less than Gross Coupon less than or equal to 9.00 7 664,120.49 1.54
9.00 less than Gross Coupon less than or equal to 9.25 8 490,140.14 1.13
9.25 less than Gross Coupon less than or equal to 9.50 13 1,019,539.84 2.36
9.50 less than Gross Coupon less than or equal to 9.75 20 1,518,778.71 3.52
9.75 less than Gross Coupon less than or equal to 10.00 46 3,307,467.43 7.65
10.00 less than Gross Coupon less than or equal to 10.25 10 762,485.44 1.76
10.25 less than Gross Coupon less than or equal to 10.50 35 2,667,096.05 6.17
10.50 less than Gross Coupon less than or equal to 10.75 29 1,626,697.22 3.76
10.75 less than Gross Coupon less than or equal to 11.00 93 7,164,118.11 16.58
11.00 less than Gross Coupon less than or equal to 11.25 31 1,821,091.20 4.21
11.25 less than Gross Coupon less than or equal to 11.50 62 4,234,946.75 9.80
11.50 less than Gross Coupon less than or equal to 11.75 31 1,863,561.89 4.31
11.75 less than Gross Coupon less than or equal to 12.00 83 4,842,935.93 11.21
12.00 less than Gross Coupon less than or equal to 12.25 25 1,468,626.77 3.40
12.25 less than Gross Coupon less than or equal to 12.50 29 1,521,828.39 3.52
12.50 less than Gross Coupon less than or equal to 12.75 14 795,927.37 1.84
12.75 less than Gross Coupon less than or equal to 13.00 31 1,252,988.29 2.90
13.00 less than Gross Coupon less than or equal to 13.25 6 178,267.18 0.41
13.25 less than Gross Coupon less than or equal to 13.50 14 410,977.41 0.95
13.50 less than Gross Coupon less than or equal to 13.75 4 126,248.30 0.29
13.75 less than Gross Coupon less than or equal to 14.00 24 1,031,895.73 2.39
14.00 less than Gross Coupon less than or equal to 14.25 6 196,968.59 0.46
14.25 less than Gross Coupon less than or equal to 14.50 6 212,270.07 0.49
14.50 less than Gross Coupon less than or equal to 14.75 2 94,200.00 0.22
14.75 less than Gross Coupon less than or equal to 15.00 2 43,200.00 0.10
15.00 less than Gross Coupon less than or equal to 15.25 1 12,000.00 0.03
15.50 less than Gross Coupon less than or equal to 15.75 4 152,971.78 0.35
15.75 less than Gross Coupon less than or equal to 16.00 4 164,438.16 0.38
16.00 less than Gross Coupon less than or equal to 16.25 36 2,599,499.94 6.02
16.25 less than Gross Coupon less than or equal to 16.50 13 788,334.24 1.82
16.75 less than Gross Coupon less than or equal to 17.00 2 139,750.00 0.32
--------- -------------- --------------------
Total 692 $43,208,271.36 100.00%
========= ============== ====================
</TABLE>
S-24
<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>
24 less than Orig. Term less than or equal to 36 1 $17,000.00 0.04%
48 less than Orig. Term less than or equal to 60 17 573,003.34 1.33
72 less than Orig. Term less than or equal to 84 2 42,000.00 0.10
84 less than Orig. Term less than or equal to 96 1 54,000.00 0.12
108 less than Orig. Term less than or equal to 120 65 2,065,002.10 4.78
132 less than Orig. Term less than or equal to 144 2 87,660.25 0.20
144 less than Orig. Term less than or equal to 156 2 72,000.00 0.17
168 less than Orig. Term less than or equal to 180 290 16,811,554.08 38.91
180 less than Orig. Term less than or equal to 192 1 90,000.00 0.21
204 less than Orig. Term less than or equal to 216 2 154,000.00 0.36
228 less than Orig. Term less than or equal to 240 175 10,571,497.85 24.47
288 less than Orig. Term less than or equal to 300 14 1,586,654.10 3.67
336 less than Orig. Term less than or equal to 348 3 271,000.00 0.63
348 less than Orig. Term less than or equal to 360 117 10,812,899.64 25.03
-------------- ----------------- ---------------------------
Total 692 $43,208,271.36 100.00%
============== ================= ===========================
</TABLE>
S-25
<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>
24 less than Rem. Term less than or equal to 36 1 $17,000.00 0.04%
48 less than Rem. Term less than or equal to 60 17 573,003.34 1.33
72 less than Rem. Term less than or equal to 84 2 42,000.00 0.10
84 less than Rem. Term less than or equal to 96 1 54,000.00 0.12
108 less than Rem. Term less than or equal to 120 65 2,065,002.10 4.78
132 less than Rem. Term less than or equal to 144 2 87,660.25 0.20
144 less than Rem. Term less than or equal to 156 2 72,000.00 0.17
168 less than Rem. Term less than or equal to 180 290 16,811,554.08 38.91
180 less than Rem. Term less than or equal to 192 1 90,000.00 0.21
204 less than Rem. Term less than or equal to 216 2 154,000.00 0.36
228 less than Rem. Term less than or equal to 240 175 10,571,497.85 24.47
288 less than Rem. Term less than or equal to 300 14 1,586,654.10 3.67
336 less than Rem. Term less than or equal to 348 3 271,000.00 0.63
348 less than Rem. Term less than or equal to 360 117 10,812,899.64 25.03
-------------- -------------- -------------------
Total 692 $43,208,271.36 100.00%
============== ============== ===================
</TABLE>
S-26
<PAGE>
Distribution of Original Principal Balances
Pool II
<TABLE>
<CAPTION>
Range of Original 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 or equal to $10,000 5 $49,778.32 0.12%
10,000 less than Balance less than or equal to 15,000 24 320,529.58 0.74
15,000 less than Balance less than or equal to 20,000 45 838,905.46 1.94
20,000 less than Balance less than or equal to 25,000 51 1,196,400.07 2.77
25,000 less than Balance less than or equal to 30,000 48 1,356,634.67 3.14
30,000 less than Balance less than or equal to 35,000 41 1,366,169.00 3.16
35,000 less than Balance less than or equal to 40,000 53 2,027,196.80 4.69
40,000 less than Balance less than or equal to 45,000 32 1,380,148.34 3.19
45,000 less than Balance less than or equal to 50,000 42 2,027,929.75 4.69
50,000 less than Balance less than or equal to 55,000 39 2,059,462.02 4.77
55,000 less than Balance less than or equal to 60,000 40 2,318,710.48 5.37
60,000 less than Balance less than or equal to 65,000 33 2,078,703.23 4.81
65,000 less than Balance less than or equal to 70,000 31 2,103,757.80 4.87
70,000 less than Balance less than or equal to 75,000 26 1,908,297.60 4.42
75,000 less than Balance less than or equal to 80,000 20 1,552,162.01 3.59
80,000 less than Balance less than or equal to 85,000 17 1,410,462.26 3.26
85,000 less than Balance less than or equal to 90,000 17 1,495,508.44 3.46
90,000 less than Balance less than or equal to 95,000 14 1,301,856.45 3.01
95,000 less than Balance less than or equal to 100,000 13 1,270,402.40 2.94
100,000 less than Balance less than or equal to 105,000 11 1,130,778.61 2.62
105,000 less than Balance less than or equal to 110,000 13 1,403,915.56 3.25
110,000 less than Balance less than or equal to 115,000 5 560,234.66 1.30
125,000 less than Balance less than or equal to 130,000 2 259,625.00 0.60
130,000 less than Balance less than or equal to 135,000 11 1,468,323.45 3.40
135,000 less than Balance less than or equal to 140,000 7 963,598.35 2.23
140,000 less than Balance less than or equal to 145,000 5 717,100.00 1.66
145,000 less than Balance less than or equal to 150,000 4 593,475.00 1.37
150,000 less than Balance less than or equal to 200,000 31 5,383,459.63 12.46
200,000 less than Balance less than or equal to 250,000 12 2,664,746.42 6.17
---------- -------------- ---------------------
Total 692 $43,208,271.36 100.00%
========== ============== =====================
</TABLE>
S-27
<PAGE>
Distribution of Current Principal Balances
Pool II
<TABLE>
<CAPTION>
Range of Current 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 or equal to $10,000 5 $49,778.32 0.12%
10,000 less than Balance less than or equal to 15,000 24 320,529.58 0.74
15,000 less than Balance less than or equal to 20,000 45 838,905.46 1.94
20,000 less than Balance less than or equal to 25,000 51 1,196,400.07 2.77
25,000 less than Balance less than or equal to 30,000 48 1,356,634.67 3.14
30,000 less than Balance less than or equal to 35,000 41 1,366,169.00 3.16
35,000 less than Balance less than or equal to 40,000 53 2,027,196.80 4.69
40,000 less than Balance less than or equal to 45,000 32 1,380,148.34 3.19
45,000 less than Balance less than or equal to 50,000 43 2,077,791.03 4.81
50,000 less than Balance less than or equal to 55,000 38 2,009,600.74 4.65
55,000 less than Balance less than or equal to 60,000 40 2,318,710.48 5.37
60,000 less than Balance less than or equal to 65,000 34 2,143,598.54 4.96
65,000 less than Balance less than or equal to 70,000 30 2,038,862.49 4.72
70,000 less than Balance less than or equal to 75,000 26 1,908,297.60 4.42
75,000 less than Balance less than or equal to 80,000 20 1,552,162.01 3.59
80,000 less than Balance less than or equal to 85,000 17 1,410,462.26 3.26
85,000 less than Balance less than or equal to 90,000 17 1,495,508.44 3.46
90,000 less than Balance less than or equal to 95,000 14 1,301,856.45 3.01
95,000 less than Balance less than or equal to 100,000 13 1,270,402.40 2.94
100,000 less than Balance less than or equal to 105,000 11 1,130,778.61 2.62
105,000 less than Balance less than or equal to 110,000 13 1,403,915.56 3.25
110,000 less than Balance less than or equal to 115,000 5 560,234.66 1.30
125,000 less than Balance less than or equal to 130,000 2 259,625.00 0.60
130,000 less than Balance less than or equal to 135,000 11 1,468,323.45 3.40
135,000 less than Balance less than or equal to 140,000 7 963,598.35 2.23
140,000 less than Balance less than or equal to 145,000 5 717,100.00 1.66
145,000 less than Balance less than or equal to 150,000 4 593,475.00 1.37
150,000 less than Balance less than or equal to 200,000 31 5,383,459.63 12.46
200,000 less than Balance less than or equal to 250,000 12 2,664,746.42 6.17
-------------- ----------------- -------------------
Total 692 $43,208,271.36 100.00%
============== ================= ===================
</TABLE>
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 476 $35,366,535.23 81.85%
Second Lien 216 7,841,736.13 18.15
-------------- ----------------- ---------------------------
Total 692 $43,208,271.36 100.00%
============== ================= ===========================
</TABLE>
S-28
<PAGE>
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 363 $23,588,272.51 54.59%
Balloon Loans 329 19,619,998.85 45.41
-------------- ----------------- ---------------------------
Total 692 $43,208,271.36 100.00%
============== ================= ===========================
</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 599 $36,534,794.36 84.56%
Investor 56 3,638,465.45 8.42
Vacation/Second Home 10 796,948.02 1.84
Business 27 2,238,063.53 5.18
-------------- ----------------- ---------------------------
Total 692 $43,208,271.36 100.00%
============== ================= ===========================
</TABLE>
Distribution by Property Type
Pool II
<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 18 $1,335,229.29 3.09%
Planned Unit Development 7 796,978.68 1.84
Commercial 9 902,834.24 2.09
Townhouses 66 2,724,144.68 6.30
2-4 Family 75 6,415,282.27 14.85
Condominiums 14 678,131.21 1.57
Single Family Detached 494 29,730,645.99 68.81
Mobile Home 6 229,725.00 0.53
5+ Family 3 395,300.00 0.91
-------------- ----------------- ---------------------------
Total 692 $43,208,271.36 100.00%
============== ================= ===========================
</TABLE>
S-29
<PAGE>
The Pool III Mortgage Loans
As of the Cut-Off Date, the mortgage loans in pool III on the
statistical calculation date had the following characteristics:
o there were 100 mortgage loans under which the related
mortgaged properties are located in 16 states,
o the aggregate principal balance, after application of all
payments due on or before the statistical calculation date,
was $14,698,689.12,
o the minimum principal balance was $21,000.00, the maximum
principal balance was $499,946.29 and the average principal
balance was $146,986.89,
o the mortgage interest rates ranged from 9.50% to 16.50% per
annum, and the weighted average mortgage interest rate was
approximately 13.09% per annum,
o the original term to stated maturity ranged from 60 months to
360 months and the weighted average original term to stated
maturity was approximately 227 months,
o the remaining term to stated maturity ranged from 60 months to
360 months and the weighted average remaining term to stated
maturity was approximately 227 months,
o approximately 58.82% of the mortgage loans by aggregate
principal balance require monthly payments of principal that
will fully amortize these mortgage loans by their respective
maturity dates, and approximately 41.18% of the mortgage loans
by aggregate principal balance of the mortgage loans are
balloon loans,
o the weighted average CLTV was approximately 69.96%,
o approximately 46.91% of mortgage loans by aggregate principal
balance are secured by first liens, and approximately 53.09%
of mortgage loans are secured by second liens, and
o approximately 33.10%, 18.97%, 5.27% and 4.76% of the mortgage
loans by aggregate principal balance are secured by mortgaged
properties located in the States of New York, New Jersey,
Pennsylvania and Florida, respectively.
On or prior to March 31, 2000, the trust is expected to purchase,
subject to availability, subsequent mortgage loans to be added to pool III. The
maximum aggregate principal balance of subsequent mortgage loans that may be
purchased is expected to be approximately $12,121,000.
The following tables set forth certain statistical information with
respect to the mortgage loans in pool III. Due to rounding, the percentages
shown may not precisely total 100.00%.
S-30
<PAGE>
Geographical Distribution of Mortgaged Properties
Pool III
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
State Mortgage Loans Principal Balance Aggregate Principal Balance
----- -------------- ----------------- ---------------------------
<S> <C> <C> <C>
Connecticut 5 $910,785.88 6.20%
Florida 3 699,364.01 4.76
Georgia 3 521,500.00 3.55
Illinois 6 759,550.00 5.17
Indiana 2 361,751.08 2.46
Maryland 3 417,000.00 2.84
Massachusetts 1 370,000.00 2.52
Michigan 1 256,000.00 1.74
New Jersey 20 2,788,067.43 18.97
New York 38 4,865,480.06 33.10
North Carolina 1 80,000.00 0.54
Ohio 2 507,500.00 3.45
Pennsylvania 8 774,444.41 5.27
South Carolina 1 95,790.39 0.65
Tennessee 1 272,405.34 1.85
Virginia 5 1,019,050.52 6.93
-------------- ----------------- ---------------------------
Total 100 $14,698,689.12 100.00%
============== ================= ===========================
</TABLE>
Distribution of CLTV Ratios
Pool III
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
CLTV Range Mortgage Loans Principal Balance Aggregate Principal Balance
---------- -------------- ----------------- ---------------------------
<S> <C> <C> <C>
30.00% less than CLTV less than or equal to 35.00% 2 $575,000.00 3.91%
35.00 less than CLTV less than or equal to 40.00 1 400,000.00 2.72
40.00 less than CLTV less than or equal to 45.00 1 50,000.00 0.34
45.00 less than CLTV less than or equal to 50.00 3 944,732.17 6.43
50.00 less than CLTV less than or equal to 55.00 2 350,000.00 2.38
55.00 less than CLTV less than or equal to 60.00 6 1,402,800.00 9.54
60.00 less than CLTV less than or equal to 65.00 7 1,506,331.49 10.25
65.00 less than CLTV less than or equal to 70.00 8 1,091,775.59 7.43
70.00 less than CLTV less than or equal to 75.00 10 1,629,149.52 11.08
75.00 less than CLTV less than or equal to 80.00 28 3,753,768.51 25.54
80.00 less than CLTV less than or equal to 85.00 13 1,684,143.07 11.46
85.00 less than CLTV less than or equal to 90.00 18 1,250,988.77 8.51
95.00 less than CLTV less than or equal to 100.00 1 60,000.00 0.41
------------ -------------- --------------------
Total 100 $14,698,689.12 100.00%
============ ============== ====================
</TABLE>
S-31
<PAGE>
Distribution of Gross Interest Rates
Pool III
<TABLE>
<CAPTION>
Range of Gross Number of Aggregate Unpaid % of Statistical Calculation Date
Interest Rates Mortgage Loans Principal Balance Aggregate Principal Balance
-------------- -------------- ----------------- ---------------------------
<S> <C> <C> <C>
9.25% less than Gross Coupon less than or equal to 9.50% 1 $350,000.00 2.38%
9.50 less than Gross Coupon less than or equal to 9.75 2 142,487.26 0.97
9.75 less than Gross Coupon less than or equal to 10.00 6 1,352,860.67 9.20
10.00 less than Gross Coupon less than or equal to 10.25 1 248,000.00 1.69
10.25 less than Gross Coupon less than or equal to 10.50 6 983,736.00 6.69
10.50 less than Gross Coupon less than or equal to 10.75 5 838,645.00 5.71
10.75 less than Gross Coupon less than or equal to 11.00 7 1,138,235.52 7.74
11.00 less than Gross Coupon less than or equal to 11.25 3 147,831.49 1.01
11.25 less than Gross Coupon less than or equal to 11.50 9 892,161.77 6.07
11.50 less than Gross Coupon less than or equal to 11.75 2 120,200.00 0.82
11.75 less than Gross Coupon less than or equal to 12.00 5 725,251.11 4.93
12.00 less than Gross Coupon less than or equal to 12.25 1 85,417.65 0.58
12.25 less than Gross Coupon less than or equal to 12.50 4 229,510.80 1.56
12.50 less than Gross Coupon less than or equal to 12.75 5 286,653.83 1.95
12.75 less than Gross Coupon less than or equal to 13.00 10 962,782.14 6.55
13.00 less than Gross Coupon less than or equal to 13.25 1 21,000.00 0.14
13.25 less than Gross Coupon less than or equal to 13.50 3 298,800.00 2.03
13.75 less than Gross Coupon less than or equal to 14.00 5 540,500.00 3.68
14.25 less than Gross Coupon less than or equal to 14.50 3 168,994.00 1.15
15.50 less than Gross Coupon less than or equal to 15.75 1 180,000.00 1.22
15.75 less than Gross Coupon less than or equal to 16.00 2 666,800.00 4.54
16.00 less than Gross Coupon less than or equal to 16.25 13 3,192,721.88 21.72
16.25 less than Gross Coupon less than or equal to 16.50 5 1,126,100.00 7.66
-------------- ----------------- ---------------------------
Total 100 $14,698,689.12 100.00%
============== ================= ===========================
</TABLE>
S-32
<PAGE>
Distribution of Original Terms to M urity
(in months)
Pool III
<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 or equal to 6 1 $45,000.00 0.31%
72 less than Orig. Term less than or equal to 8 2 100,000.00 0.68
108 less than Orig. Term less than or equal to 12 9 591,029.75 4.02
144 less than Orig. Term less than or equal to 15 2 116,000.00 0.79
168 less than Orig. Term less than or equal to 18 43 7,415,765.40 50.45
180 less than Orig. Term less than or equal to 19 1 55,000.00 0.37
204 less than Orig. Term less than or equal to 216 1 77,256.00 0.53
228 less than Orig. Term less than or equal to 240 21 2,907,756.32 19.78
288 less than Orig. Term less than or equal to 300 4 645,224.78 4.39
348 less than Orig. Term less than or equal to 360 16 2,745,656.87 18.68
-------------- --------------- ---------------
Total 100 $14,698,689.12 100.00%
============== =============== ===============
</TABLE>
S-33
<PAGE>
Distribution of Remaining Terms to Maturity
(in months)
Pool III
<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 or equal to 60 1 $45,000.00 0.31%
72 less than Rem. Term less than or equal to 84 2 100,000.00 0.68
108 less than Rem. Term less than or equal to 120 9 591,029.75 4.02
144 less than Rem. Term less than or equal to 156 2 116,000.00 0.79
168 less than Rem. Term less than or equal to 180 43 7,415,765.40 50.45
180 less than Rem. Term less than or equal to 192 1 55,000.00 0.37
204 less than Rem. Term less than or equal to 216 1 77,256.00 0.53
228 less than Rem. Term less than or equal to 240 21 2,907,756.32 19.78
288 less than Rem. Term less than or equal to 300 4 645,224.78 4.39
348 less than Rem. Term less than or equal to 360 16 2,745,656.87 18.68
-------------- ----------------- ---------------------------
Total 100 $14,698,689.12 100.00%
============== ================= ===========================
</TABLE>
S-34
<PAGE>
Distribution of Original Principal Balances
Pool III
<TABLE>
<CAPTION>
Range of Original Number of Aggregate Unpaid % of Statistical Calculation Date
Principal Balances Mortgage Loans Principal Balance Aggregate Principal Balance
------------------ -------------- ----------------- ---------------------------
<S> <C> <C> <C>
$20,000 less than Balance less than or equal to $25,000 1 $21,000.00 0.14%
30,000 less than Balance less than or equal to 35,000 2 63,923.83 0.43
35,000 less than Balance less than or equal to 40,000 3 115,282.90 0.78
40,000 less than Balance less than or equal to 45,000 3 133,238.00 0.91
45,000 less than Balance less than or equal to 50,000 10 490,464.00 3.34
50,000 less than Balance less than or equal to 55,000 6 323,084.69 2.20
55,000 less than Balance less than or equal to 60,000 4 231,390.00 1.57
60,000 less than Balance less than or equal to 65,000 5 309,472.00 2.11
65,000 less than Balance less than or equal to 70,000 5 343,000.00 2.33
70,000 less than Balance less than or equal to 75,000 2 143,175.00 0.97
75,000 less than Balance less than or equal to 80,000 3 233,953.08 1.59
80,000 less than Balance less than or equal to 85,000 4 328,845.83 2.24
85,000 less than Balance less than or equal to 90,000 3 262,617.65 1.79
90,000 less than Balance less than or equal to 95,000 1 94,785.88 0.64
95,000 less than Balance less than or equal to 100,000 3 290,277.65 1.97
105,000 less than Balance less than or equal to 110,000 2 214,500.00 1.46
110,000 less than Balance less than or equal to 115,000 3 337,250.00 2.29
125,000 less than Balance less than or equal to 130,000 1 126,751.08 0.86
130,000 less than Balance less than or equal to 135,000 1 134,676.00 0.92
145,000 less than Balance less than or equal to 150,000 3 446,000.00 3.03
150,000 less than Balance less than or equal to 200,000 4 705,775.59 4.80
200,000 less than Balance less than or equal to 250,000 9 2,140,014.00 14.56
250,000 less than Balance less than or equal to 300,000 10 2,747,554.87 18.69
300,000 less than Balance less than or equal to 350,000 6 2,031,710.78 13.82
350,000 less than Balance less than or equal to 400,000 5 1,930,000.00 13.13
450,000 less than Balance less than or equal to 500,000 1 499,946.29 3.40
---------- -------------- ----------------
Total 100 $14,698,689.12 100.00%
========== ============== ================
</TABLE>
S-35
<PAGE>
Distribution of Current Principal Balances
Pool III
<TABLE>
<CAPTION>
Range of Current Number of Aggregate Unpaid % of Statistical Calculation Date
Principal Balances Mortgage Loans Principal Balance Aggregate Principal Balance
------------------ -------------- ----------------- ---------------------------
<S> <C> <C> <C>
$20,000 less than Balance less than or equal to $25,000 1 $21,000.00 0.14%
30,000 less than Balance less than or equal to 35,000 2 63,923.83 0.43
35,000 less than Balance less than or equal to 40,000 3 115,282.90 0.78
40,000 less than Balance less than or equal to 45,000 3 133,238.00 0.91
45,000 less than Balance less than or equal to 50,000 10 490,464.00 3.34
50,000 less than Balance less than or equal to 55,000 6 323,084.69 2.20
55,000 less than Balance less than or equal to 60,000 4 231,390.00 1.57
60,000 less than Balance less than or equal to 65,000 5 309,472.00 2.11
65,000 less than Balance less than or equal to 70,000 5 343,000.00 2.33
70,000 less than Balance less than or equal to 75,000 2 143,175.00 0.97
75,000 less than Balance less than or equal to 80,000 3 233,953.08 1.59
80,000 less than Balance less than or equal to 85,000 4 328,845.83 2.24
85,000 less than Balance less than or equal to 90,000 3 262,617.65 1.79
90,000 less than Balance less than or equal to 95,000 1 94,785.88 0.64
95,000 less than Balance less than or equal to 100,000 3 290,277.65 1.97
105,000 less than Balance less than or equal to 110,000 2 214,500.00 1.46
110,000 less than Balance less than or equal to 115,000 3 337,250.00 2.29
125,000 less than Balance less than or equal to 130,000 1 126,751.08 0.86
130,000 less than Balance less than or equal to 135,000 1 134,676.00 0.92
145,000 less than Balance less than or equal to 150,000 3 446,000.00 3.03
150,000 less than Balance less than or equal to 200,000 4 705,775.59 4.80
200,000 less than Balance less than or equal to 250,000 9 2,140,014.00 14.56
250,000 less than Balance less than or equal to 300,000 10 2,747,554.87 18.69
300,000 less than Balance less than or equal to 350,000 6 2,031,710.78 13.82
350,000 less than Balance less than or equal to 400,000 5 1,930,000.00 13.13
450,000 less than Balance less than or equal to 500,000 1 499,946.29 3.40
-------- -------------- -----------------
Total 100 $14,698,689.12 100.00%
======== ============== =================
</TABLE>
Distribution by Lien Status
Pool III
<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 23 $6,895,765.65 46.91%
Second Lien 77 7,802,923.47 53.09
-------------- -------------- -------------------
Total 100 $14,698,689.12 100.00%
============== ============== ===================
</TABLE>
S-36
<PAGE>
Distribution by Amortization Type
Pool III
<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 61 $8,645,695.90 58.82%
Balloon Loans 39 6,052,993.22 41.18
-------------- ----------------- ---------------------------
Total 100 $14,698,689.12 100.00%
============== ================= ===========================
</TABLE>
Distribution by Occupancy Status
Pool III
<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 87 $11,673,389.12 79.42%
Investor 5 897,800.00 6.11
Business 8 2,127,500.00 14.47
--------- -------------- ----------------
Total 100 $14,698,689.12 100.00%
========= ============== ================
</TABLE>
Distribution by Property Type
Pool III
<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 4 $870,000.00 5.92%
Planned Unit Development 4 520,164.01 3.54
Commercial 4 1,257,500.00 8.56
Townhouses 1 80,755.00 0.55
2-4 Family 15 1,628,602.46 11.08
Condominiums 4 553,775.59 3.77
Single Family Detached 66 9,265,092.06 63.03
5+ Family 2 522,800.00 3.56
-------------- ----------------- ---------------------------
Total 100 $14,698,689.12 100.00%
============== ================= ===========================
</TABLE>
S-37
<PAGE>
Conveyance of Subsequent Mortgage Loans
On the closing date, in addition to the mortgage loans included in the
statistical information as of the statistical calculation date, the seller
expects to deliver a substantial amount of additional mortgage loans that will
have been originated after the Cut-Off Date but before the closing date. It is
expected that the amount of such additional mortgage loans will be approximately
$27,050,000. Furthermore, the Indenture permits the trust to acquire subsequent
mortgage loans after the closing date 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 $40,404,000 for
pool I, $36,364,000 for pool II and $12,121,000 for pool III. Accordingly, the
statistical characteristics of the mortgage loans in pool I, pool II and pool
III will vary upon the acquisition of the subsequent mortgage loans.
The obligation of the trust to purchase the subsequent mortgage loans
on any subsequent transfer date during the pre-funding period are subject to the
following requirements:
o such subsequent mortgage loan may not be 30 or more days
contractually delinquent as of a subsequent Cut-Off Date;
o the original term to maturity of such subsequent mortgage loan
may not exceed 360 months;
o such subsequent mortgage loan must have a gross interest rate
of at least 8.25% for pool I, 7.99% for pool II and 9.50% for
pool III;
o the note insurer and the rating agencies must consent to the
purchase of the subsequent mortgage loans notwithstanding the
fact that the subsequent mortgage loans meet the parameters
stated herein;
o the principal balance of any such subsequent mortgage loan may
not exceed $240,000 for pool I, $240,000 for pool II and
$500,000 for pool III;
o no more than 18.00% for pool I, 18.25% for pool II and 53.10%
for pool III of the aggregate principal balance of such
subsequent mortgage loans may be Second Liens;
o no such subsequent mortgage loan shall have a CLTV of more
than (a) for consumer purpose loans, 100% and (b) for business
purpose loans, 75%;
o no more than 45.25% for pool I, 45.45% for pool II and 41.20%
for pool III of such subsequent mortgage loans may be balloon
loans;
o no more than 7.05% for pool I, 6.10% for pool II and 18.00%
for pool III of such subsequent mortgage loans may be secured
by mixed-use properties, commercial properties, or five or
more unit multifamily properties; and
o following the purchase of such subsequent mortgage loans by
the trust, the mortgage loans, including the subsequent
mortgage loans,
o will have a weighted average gross interest rate, (a)
for consumer purpose loans, of at least 11.20% for
pool I, 11.25% for pool II and 11.35% for pool III
and (b) for business purpose loans, of at least
16.00% for pool I, 16.00% for pool II and 16.00% for
pool III; and
o will have a weighted average CLTV of not more than
(a) for consumer purpose loans, 77% for pool I, 77%
for pool II and 78% for pool III, and (b) for
business purpose loans, 65% for pool I, 63% for pool
II and 60% for pool III.
S-38
<PAGE>
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 concerning maximum principal balance.
The Originators, the Seller and the Servicer
American Business Credit, the servicer and an originator, is a
wholly-owned subsidiary of American Business Financial Services, Inc. Upland
Mortgage, an originator and a subservicer, is a wholly-owned subsidiary of
American Business Credit. New Jersey Mortgage, an originator and a subservicer,
is a wholly-owned subsidiary of American Business Credit. The seller is owned by
American Business Credit, Upland Mortgage and New Jersey Mortgage.
American Business Financial Services is a financial services holding
company operating, through its subsidiaries, primarily in the eastern half of
the United States. American Business Financial Services, through American
Business Credit, originates, sells and services loans to businesses secured by
real estate and other business assets, and, through Upland Mortgage and New
Jersey Mortgage, originates, sells and services non-conforming mortgage loans,
typically to credit impaired borrowers, secured by mortgages on single-family
residences. In addition, American Business Credit, acting through Upland
Mortgage, operates a bank alliance program with several financial institutions
pursuant to which Upland Mortgage will purchase home equity loans that do not
meet the underwriting guidelines of the selling institution but meet Upland
Mortgage's underwriting criteria.
American Business Credit'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 the
most favorable credit characteristics. These borrowers generally have impaired
or unsubstantiated credit characteristics and/or unverifiable income and respond
favorably to American Business Financial Services' marketing efforts. The second
category of customers includes borrowers who would qualify for loans from
traditional lending sources but elect to utilize American Business Financial
Services' products and services. American Business Financial Services'
experience has indicated that these borrowers are attracted to American Business
Financial Services' loan products as a result of its marketing efforts, the
personalized service provided by American Business Financial Services' staff of
lending officers and the timely response to loan requests. Historically, both
categories of customers have been willing to pay American Business Financial
Services' origination fees and interest rates which are generally higher than
those charged by traditional lending sources. American Business Financial
Services also markets mortgage loans to borrowers with favorable credit
histories.
American Business Financial Services was incorporated in Delaware in
1985. American Business Financial Services 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 American Business Financial Services
and its operating entities are located at Balapointe Office Centre, 111
Presidential Boulevard, Suite 125, 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.
S-39
<PAGE>
The business purpose mortgage loans were or will be originated by
American Business Credit, 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 Mortgage has or
will originate or purchase such mortgage loans. The consumer purpose mortgage
loans were or will be originated or purchased by Upland Mortgage and New Jersey
Mortgage.
None of American Business Credit, Upland Mortgage or New Jersey
Mortgage will insure or guarantee the notes.
American Business Credit. American Business Credit originates, services
and sells business purpose loans collateralized by real estate. American
Business Credit's operating subsidiaries include:
o Upland Mortgage, a consumer purpose residential mortgage
company;
o Process Servicing Center, Inc., a loan processor for home
equity loans generated by the bank alliance program;
o American Business Leasing, Inc., a small-ticket equipment
leasing company;
o ABC Holdings Corporation, a holder of foreclosed real estate;
and
o New Jersey Mortgage, a residential mortgage company.
American Business Credit was incorporated in 1988 pursuant to the laws
of the Commonwealth of Pennsylvania and maintains its corporate headquarters in
the metropolitan Philadelphia area.
American Business Credit currently markets its financial services and
originates business loans through a retail network of salespeople in
Pennsylvania, Delaware, Florida, Georgia, Maryland, New Jersey, New York,
Virginia, Ohio and Connecticut. American Business Credit's origination program
is primarily a retail marketing program utilizing various forms of advertising
and a direct sales force. American Business Credit'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. American Business Credit advertises through
newspapers and radio as well as by conducting large direct mail campaigns
targeted at owners of small businesses located in American Business Credit's
market area.
American Business Credit makes business purpose mortgage loans to
corporations, partnerships, other business entities and sole proprietors.
American Business Credit primarily makes loans to borrowers with imperfect,
impaired and/or unsubstantiated credit histories. As a result, American Business
Credit 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. American Business Credit, 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.
American Business Credit makes loans for various business purposes
including, but not limited to, working capital, business expansion, equipment
acquisition and debt-consolidation. American Business Credit does not target any
particular industries or trade pools.
Loans made by American Business Credit generally range from $15,000 to
$350,000 and average approximately $80,000.
S-40
<PAGE>
HomeAmerican Credit, Inc. d/b/a Upland Mortgage. Upland Mortgage,
American Business Credit's home equity lending subsidiary, is a Pennsylvania
corporation and was incorporated in May 1991. Upland Mortgage primarily
originates residential mortgages and consumer home equity loans. Upland Mortgage
is licensed to act and currently operates as a first and/or second mortgage
banker/lender in forty-five states, including Pennsylvania, New Jersey,
Delaware, Georgia, Maryland, North Carolina, South Carolina, Georgia, Florida,
Virginia, Connecticut, New York and Ohio.
Upland Mortgage originates business loans on behalf of American
Business Credit 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 Mortgage are identical to those
utilized by American Business Credit. As such, American Business Credit's
lending procedures and policies govern Upland Mortgage when it is originating
business purpose mortgage loans.
Upland Mortgage primarily markets its residential mortgage and consumer
home equity loans through print advertisements in various newspapers, television
and radio advertisements, an interactive web site and through telemarketing and
direct mail campaigns in the states where it originates or purchases mortgage
loans. Upland Mortgage takes applications from potential borrowers over the
phone, in person or over the Internet through its interactive web site. The loan
request is then processed and closed. Upland Mortgage 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 Mortgage'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
Mortgage's market.
Prior to 1995, each of the non-business residential mortgages and home
equity consumer loans originated and funded by Upland Mortgage was sold to one
of several third party lenders, at a premium. Upland Mortgage presently
accumulates portfolios of such non-business loans for the purpose of selling
such loans in bulk or engaging in securitizations. The business loans made by
Upland Mortgage are either securitized or sold to third parties. Upland
Mortgage'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 American Business Credit.
In fiscal 1996, Upland Mortgage, 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 Mortgage.
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 Mortgage's underwriting guidelines. If
the borrower qualifies under Upland Mortgage's underwriting standards, the loan
will be originated by the financial institution and subsequently sold to Upland
Mortgage.
Since the introduction of the bank alliance program, agreements have
been entered into with eight financial institutions which provide Upland
Mortgage with the opportunity to underwrite, process and
S-41
<PAGE>
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, 1999, $35.4 million
of loans were purchased pursuant to the bank alliance program. Upland Mortgage
continues to market this program to other regional and national banking
institutions. Upland Mortgage is also negotiating with other financial
institutions regarding their participation in the program.
During fiscal 1999, Upland Mortgage launched an Internet loan
distribution channel under the name www.UplandMortgage.com. Through this
interactive web site, borrowers can calculate interest payments and submit an
application via the Internet. The Upland Mortgage Internet platform provides
borrowers with convenient access to the mortgage loan application process, 7
days a week, 24 hours a day. Upland Mortgage believes that the addition of this
distribution channel maximizes the efficiency of the application process and
could reduce its transaction costs in the future to the extent the volume of
loan applications received via the web page increases. Throughout the loan
processing period, borrowers who submit applications on line are supported by
Upland Mortgage's staff of highly trained officers. Upland Mortgage intends to
continue to enhance its web site in order to permit online underwriting,
approval and processing of a loan application.
New Jersey Mortgage and Investment Corp. American Business Credit, as
assignee of American Business Financial Services acquired New Jersey Mortgage, a
mortgage company based in Roseland, New Jersey, and its subsidiaries, including
a leasing company, in October 1997. New Jersey Mortgage 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, New Jersey Mortgage
originated loans for sale to third parties with servicing released. American
Business Credit intends that New Jersey Mortgage will continue to originate
first mortgage loans for sale in the secondary market and the home equity loans
originated by New Jersey Mortgage will be securitized and sold pursuant to
American Business Financial Services' current securitization program. Loans
originated by New Jersey Mortgage 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. Through its
subsidiary, American Household Mortgage, New Jersey Mortgage originates
conforming first lien mortgage loans, FHA and VA purchase money loans. New
Jersey Mortgage's home equity loan customers primarily include credit-impaired
borrowers while borrowers on its first mortgage loans are generally borrowers
with favorable credit histories.
American Business Credit, Upland Mortgage and New Jersey Mortgage
originate loans in 45 states.
Underwriting Guidelines
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 applicant is
required to fill out a detailed application providing pertinent credit
information. As part of the description of the prospective borrower's financial
condition, the prospective borrower is required to provide information
concerning assets, liabilities, income, credit, employment history and other
demographic and personal information. If the application demonstrates the
prospective 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 prospective borrower and verification
of the prospective borrower's income. 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.
S-42
<PAGE>
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.
The due dates for monthly payments on the mortgage loans occur
throughout a month. 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:
o 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,
o 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
o 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 earlier 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 American Business Credit.
It should be noted that such policies and practices will be altered, amended and
supplemented as conditions warrant. American Business Credit 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 75%.
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 60%. In addition, in substantially all instances, American Business Credit
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 Mortgage and New
Jersey Mortgage. It should be noted that such policies and practices will be
altered, amended and supplemented as conditions warrant. Upland Mortgage and New
Jersey Mortgage 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
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Mortgage's and New Jersey Mortgage's portfolios is generally 90%. The consumer
purpose loans originated by Upland Mortgage and New Jersey Mortgage had an
average loan-to-value ratio of 78% for the fiscal year ended June 30, 1999. When
the loan-to-value ratio is equal to 70% or greater, neither Upland Mortgage nor
New Jersey Mortgage 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 Mortgage and
New Jersey Mortgage 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 Mortgage and New Jersey Mortgage 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 Mortgage and New Jersey Mortgage permit borrowers to prepay
such loans. Where permitted by applicable law, Upland Mortgage and New Jersey
Mortgage may impose a prepayment fee. Whether a prepayment fee is imposed and
the amount of such penalty, if any, is negotiated between Upland Mortgage or New
Jersey Mortgage 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 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
American Business Credit will be responsible for servicing the mortgage
loans in accordance with its established servicing procedures and the terms of
the Sale and Servicing Agreement. American Business Credit will contract with
Upland Mortgage and New Jersey Mortgage to act as subservicers with
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respect to the servicing of the consumer purpose mortgage loans. Upland Mortgage
and New Jersey Mortgage follow the same servicing procedures described below
with respect to American Business Credit.
American Business Credit begins the collection process approximately
twenty days prior to the payment date by sending an invoice to the mortgagor.
American Business Credit generally initiates the telephone collection process
one day after a borrower misses a monthly due date. American Business Credit's
daily automated collection system identifies delinquent mortgage loans and
places them in 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, American Business Credit generates a payment reminder letter to the
borrower three days after a missed monthly due date, a late notice is sent to
the borrower seven days after the due date and if no payment or arrangement for
payment has been made fifteen days after the borrower's due date, an attorney
referral letter is sent. When a mortgage loan is fifteen 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 to sixty days delinquent, it is transferred to
American Business Credit'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, American Business Credit may advance funds to keep the first mortgage
current or may choose to pay off the senior mortgage.
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 American Business Credit's collection and accounting
functions is a network of computer hardware and software. American Business
Credit'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 American
Business Credit'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.
American Business Financial Services 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, American Business Financial Services 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.
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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 American Business
Credit's, Upland Mortgage's and New Jersey Mortgage's servicing portfolio for
the periods shown. The delinquency and loan loss experience represents the
historical experience of American Business Credit, Upland Mortgage and New
Jersey Mortgage, 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 American Business Credit's, Upland Mortgage's and New
Jersey Mortgage's overall servicing portfolio.
Delinquency and Foreclosure Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Quarter Ended
At June 30, 1997 At June 30, 1998 At June 30, 1999 At September 30, 1999
---------------- ---------------- ---------------- ---------------------
% of % of % of % of
Amount Amount Amount Amount Amount Amount Amount Amount
Serviced Serviced Serviced Serviced Serviced Serviced Serviced Serviced
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Servicing portfolio.......... $ 167,190 100.00% $ 450,935 100.00% $ 1,007,738 100.00% $ 1,171,902 100.00%
60-day past due loans: $
60-89 days................... $ 803 0.48% $ 1,950 0.43% $ 4,624 0.46% 5,972 0.51%
90 days or more.............. $ 801 0.48% $ 7,103 1.58% $ 23,958 2.38% $ 29,111 2.48%
----------- ----- ---------- ----- ------------ ----- ----------- -----
Total 60-day past due loans.. $ 1,604 0.96% $ 9,053 2.01% $ 28,582 2.84% $ 35,083 2.99%
REO Properties............... $ 605 0.36% $ 922 0.20% $ 9,948 0.99% $ 12,307 1.05%
----------- ----- ---------- ----- ------------ ------ ----------- -----
Total 60-day past due loans,
foreclosures pending and REO
Properties................... $ 2,209 1.32% $ 9,975 2.21% $ 38,530 3.83% $ 47,390 4.04%
=========== ===== ========== ===== ============ ===== =========== =====
</TABLE>
The preceding table was prepared using the following assumptions:
o 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.
o total past due loans includes pending foreclosures, and
o an REO property is a property acquired and held as a result of
foreclosure or deed in lieu of foreclosure.
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Loan Charge-Off Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Quarter Ended
At June 30, At June 30, At June 30, At September 30,
1997 1998 1999 1999
---- ---- ---- ----
Amount Amount Amount Amount
Serviced Serviced Serviced Serviced
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Servicing portfolio.............................. $167,190 $450,935 $1,007,738 $1,171,902
Average outstanding.............................. $111,237 $309,063 $ 729,337 $1,089,820
Gross losses................................... $ 81 $ 203 $ 780 $ 21
Loan recoveries................................ $ 47 $ 65 $ 0 $ 2
------ ------ ------ ------
Net loan charge-offs........................... $ 34 $ 138 $ 780 $ 19
Net loan charge-offs as a
percentage of servicing
portfolio at period end..................... 0.02% 0.03% 0.08% 0.002%
===== ===== ===== ======
Net loan charge-offs as a
percentage of average
outstanding................................. 0.03% 0.04% 0.11% 0.002%
===== ===== ===== ======
</TABLE>
The preceding table was prepared using the following assumptions:
o "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, and
o "gross losses" means the outstanding principal balance plus
accrued but unpaid interest on liquidated mortgage loans.
The above delinquency, foreclosure and loan charge-off statistics
represent the servicer's recent experience and indicate notable increases during
fiscal year 1999, which is not necessarily indicative of whether this recent
trend will continue or whether this experience will apply to the mortgage loans
included in the trust. 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 servicing portfolio. The mortgage loans in the trust may have
characteristics which distinguish them from the majority of the loans in the
servicing portfolio.
The Owner Trustee
First Union Trust Company, National Association, a national banking
association, has its corporate trust offices located at One Rodney Square, 920
King Street, Suite 102, Wilmington, Delaware 19801. The owner trustee will
perform limited administrative functions on behalf of the trust pursuant to the
Trust Agreement. The owner trustee's duties are limited solely to its express
obligations under the Trust Agreement.
The Indenture Trustee
The Bank of New York, a New York banking corporation, has an office at
101 Barclay Street, 12 East, New York, New York 10286. The indenture trustee
will act as initial authenticating agent, paying agent and note registrar
pursuant to the terms of the Indenture.
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<PAGE>
The Collateral Agent
Chase Bank of Texas, N.A., a national banking association, has its
corporate trust office at 1111 Fannin, 12th Floor, Houston, Texas 77002. The
collateral agent's duties are limited solely to its express obligations under
the Sale and Servicing Agreement.
Description of the Notes and the Trust Certificates
On the closing date, the trust will issue the class A-1 notes, the
class A-2 notes and the class A-3 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 and the pool III 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 and the pool
III mortgage loans. Each class A-3 note represents a debt obligation of the
trust secured by a pledge of the portion of the trust estate consisting of the
pool III mortgage loans and, to the extent provided herein, the pool I mortgage
loans and pool II mortgage loans. Pursuant to the Trust Agreement, the trust
will also issue three classes of trust certificates, together representing the
entire beneficial ownership interest in the trust. Each class of trust
certificates 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 seller and American Business Financial Services. 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,
o the mortgage loans, together with the mortgage files relating
thereto and all collections thereon and proceeds thereof
collected after the Cut-Off Date,
o such assets as from time to time are identified as REO
property and collections thereon and proceeds thereof,
o 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,
o 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,
o Liquidation Proceeds, and
o 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.
The notes are available in book-entry form only, through the facilities of DTC.
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<PAGE>
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 representing an obligation of the
trust, except under the limited circumstances described herein. Beneficial
owners may elect to hold their interests through DTC, in the United States, or
Cedelbank or the Euroclear System, in Europe. Transfers within DTC, Cedelbank 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., 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 Cedelbank or Euroclear, on the other,
will be effected in DTC through Citibank, N.A., the relevant depositories of
Cedelbank or Euroclear, respectively, and each a participating member of DTC.
The notes will initially be registered in the name of Cede & Co. 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.
The beneficial owners of notes may elect to hold their notes through
DTC in the United States, or Cedelbank or Euroclear if they are participants in
such systems, 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 &
Co., the nominee of DTC. Cedelbank and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Cedelbank's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A. will act as depositary
for Cedelbank and The Chase Manhattan Bank will act as depositary for Euroclear.
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 or definitive
note representing such note. Unless and until definitive notes are issued, it is
anticipated that the only "holder" of such notes will be Cede & Co., 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 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 on the records 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 Cedelbank 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
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<PAGE>
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly through
"indirect participants".
Under the rules, regulations and procedures creating and affecting DTC
and its operations, 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 payments 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 payments 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
payments 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
Cedelbank or Euroclear as a result of a transaction with a participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedelbank participants on such business day. Cash received in
Cedelbank or Euroclear as a result of sales of securities by or through a
Cedelbank participant or Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Cedelbank 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 "Material Federal Income Tax Consequences"
in the accompanying prospectus.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Cedelbank 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 Cedelbank
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. 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. Cedelbank
participants and Euroclear participants may not deliver instructions directly to
the European Depositaries.
Cedelbank is incorporated under the laws of Luxembourg as a
professional depository. Cedelbank holds securities for its participant
organizations and facilitates the clearance and settlement of securities
transactions between Cedelbank participants through electronic book-entry
changes in accounts of Cedelbank participants, thereby eliminating the need for
physical movement of notes. Transactions may be settled in Cedelbank in any of
28 currencies, including United States dollars. Cedelbank provides
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<PAGE>
to its Cedelbank participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Cedelbank interfaces with domestic markets
in several countries. As a professional depository, Cedelbank is subject to
regulation by the Luxembourg Monetary Institute. Cedelbank 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 Cedelbank is also available
to others, such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Cedelbank participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear 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, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation. 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 Euroclear Clearance. Euroclear
Clearance establishes policy for Euroclear on behalf of Euroclear participants.
Euroclear participants include banks (including central banks), securities
brokers and dealers and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly.
The Euroclear operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law. 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.
Payments on the book-entry notes will be made on each payment date by
the indenture trustee to Cede & Co., 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 & Co., as nominee of DTC. Payments
with respect to notes held through Cedelbank or Euroclear will be credited to
the cash accounts of Cedelbank participants or Euroclear participants in
accordance with the
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relevant system's rules and procedures, to the extent received by the relevant
depositary. Such payments will be subject to tax reporting in accordance with
relevant United States tax laws and regulations. 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 DTC
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 & Co., as nominee of DTC, may be made available to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting DTC, 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 beneficial
ownership interests of the book-entry notes held by Cede & Co., as nominee for
DTC, or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of notes among participants of DTC,
Cedelbank 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) DTC 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 DTC 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. Payments 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
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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 (x) 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 (y) 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 from the
closing date until the earliest of,
o the date on which the amount on deposit in related pre-funding
account is less than $100,000,
o the date on which an event of default occurs under the terms
of the Indenture, or
o the close of business on March 31, 2000.
The amount on deposit in the pre-funding accounts will be reduced
during this period by the amount thereof used to purchase subsequent mortgage
loans in accordance with the terms of the 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 March 31, 2000. To the extent funds in the pre-funding accounts
are not used to purchase subsequent mortgage loans by March 31, 2000, such funds
will be used to prepay the principal of the related class of notes on the
following payment 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 with respect to each mortgage loan which constitute the
mortgage file:
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(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 (x) a copy of the title
insurance policy, or (y) 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 mortgage file within
thirty days after the closing date or the subsequent transfer date, as
applicable -- or, with respect to any Qualified Substitute Mortgage Loan, within
thirty 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,
o all documents required to be delivered to it pursuant to the
Sale and Servicing Agreement are in its possession,
o 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
o 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 mortgage file delivered on such date.
If the collateral agent, during the process of reviewing the mortgage
files, finds any document constituting a part of a 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
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constituting part of a mortgage file of which it is so notified by the
collateral agent. If, however, within sixty 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 a substitution adjustment
equal to the amount of any such shortfall 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 (x) all accrued and unpaid interest
thereon and (y) thirty 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 payment account
on the next succeeding servicer remittance date after deducting therefrom any
amounts received in respect of such repurchased mortgage loan or loans and being
held in the payment account for future payment 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.
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
mortgage files, including all material documents related thereto, has been or
will be delivered to the 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 manufactured
dwelling, 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,
o a unit in a cooperative apartment,
o a property constituting part of a syndication,
o a time share unit,
o a property held in trust,
o a log-constructed home, or
o a recreational vehicle;
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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,
o the lien of current real property taxes and assessments which
are not delinquent,
o any related first mortgage loan,
o 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
o 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 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,
o promptly cure such breach in all material respects,
o 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 payment date the
amount of such shortfall, or
o 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 (x) all accrued and unpaid interest thereon and
(y) thirty days' interest thereon computed at the mortgage
interest rate, net of the servicing fee if American Business
Credit is the servicer, plus the amount of any unreimbursed
servicing advances made by the servicer,
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and deposit such purchase price into the payment account on the next succeeding
servicer remittance date after deducting therefrom any amounts received in
respect of such repurchased mortgage loan or mortgage loans and being held in
the payment account for future payment 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 depositor, 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 the collection
account, which will generally be (x) 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 (y) trust accounts maintained with a depository
institution acceptable to each rating agency and the note insurer. 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 eligible 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
payment 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:
o all payments on account of principal, including prepayments of
principal;
o all payments on account of interest on the mortgage loans;
o 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;
o all Net REO Proceeds;
o all other amounts required to be deposited in the collection
account pursuant to the Sale and Servicing Agreement; and
o 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 a payment account
with respect to each class of notes into which the servicer will deposit or
cause to be deposited the servicer remittance amount on the 10th day of each
month.
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The servicer remittance amount for a servicer remittance date is equal
to the sum, without duplication, of,
o 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,
o 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
o 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 a particular mortgage loan, with respect
to which the servicer has previously made an unreimbursed
Periodic Advance, as late payments of interest, or as Net
Liquidation Proceeds, to the extent of such unreimbursed
Periodic Advance;
(b) amounts received on a particular mortgage loan with respect to
which the servicer has previously made an unreimbursed
servicing advance, to the extent of such unreimbursed
servicing advance;
(c) for such servicer remittance date, the aggregate servicing
fee;
(d) all net income from eligible 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
remittance date.
Calculation of LIBOR
On the second business day preceding each payment date or, in the case
of the January 18, 2000 payment date, on the second business day preceding the
closing date, the indenture trustee will determine the London interbank offered
rate for one-month U.S. dollar deposits for the next accrual period for the
class A-3 notes on the basis of the offered rates of the reference banks for
one-month U.S. dollar deposits, as such rates appear on Telerate Page 3750, as
of 11:00 a.m., London time, on such day. As used in this section, "business day"
means a day on which banks are open for dealing in foreign currency and exchange
in London and New York City; "Telerate Page 3750" means the display designated
as page 3750 on the Telerate Service, or such other page as may replace page
3750 on that service for the purpose of displaying London interbank offered
rates of major banks; and "reference banks" means leading banks selected by the
indenture trustee and engaged in transactions in Eurodollar deposits in the
international Eurocurrency market,
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o with an established place of business in London,
o whose quotations appear on the Telerate Page 3750 on the day
in question,
o which have been designated as such by the indenture trustee,
and
o which do not control, are not controlled by, and or not under
common control with, the servicer or the indenture trustee.
On each interest determination date, LIBOR for the accrual period for
the class A-3 notes will be established by the indenture trustee as follows:
(a) If on such interest determination date two or more reference
banks provide such offered quotations, LIBOR for the accrual
period for the class A-3 notes shall be the arithmetic mean of
such offered quotations -- rounded upwards if necessary to the
nearest whole multiple of 1/16%.
(b) If on such interest determination date fewer than two
reference banks provide such offered quotations, LIBOR for the
accrual period for the class A-3 notes shall be the higher of
(x) LIBOR as determined on the previous interest determination
date and (y) the reserve interest rate.
The "reserve interest rate" shall be the rate per annum that the
indenture trustee determines to be either,
o the arithmetic mean -- rounded upwards if necessary to the
nearest whole multiple of 1/16% -- of the one-month U.S.
dollar lending rates which New York City banks selected by the
indenture trustee are quoting on the relevant interest
determination date to the principal London offices of leading
banks in the London interbank market or, in the event that the
indenture trustee can determine no such arithmetic mean,
o the lowest one-month U.S. dollar lending rate which New York
City banks selected by the indenture trustee are quoting on
such interest determination date to leading European banks.
The establishment of LIBOR on each interest determination date by the
indenture trustee and the indenture trustee's calculation of the rate of
interest applicable to the class A-3 notes for the accrual period shall, in the
absence of manifest error, be final and binding.
Over-collateralization Provisions
Over-collateralization Resulting from Cash Flow Structure. The
Indenture requires that, starting with the first payment 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 payment 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 from a pool of mortgage loans will be used,
o to reimburse the note insurer for any amounts due to it,
o as needed to make pro rata, based on the amount needed by the
other pools, cross-collateralization payments in respect of
the other pools of mortgage loans,
o as a payment of principal to the related class of notes until
the payment date on which the amount of over-collateralization
has reached the required level,
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o as needed to fund pro rata, based on the amount needed by the
other pools, the cross-collateralization reserve account
relating to the other pools of mortgage loans,
o as needed to pay pro rata, based on the relative amounts of
any shortfalls, Net Mortgage Loan Interest Shortfalls relating
to all classes, and
o with respect to Pool III, as needed to pay Class A-3 Available
Funds Cap Carry-Forward Amounts.
The Indenture requires that, starting with the first payment 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 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, to the extent remaining after
making required cross-collateralization payments as described above, will be
used as a payment of principal to accelerate the amortization of the related
class of notes. Initially, the Over-collateralized Amount of each pool of
mortgage loans will be an amount equal to approximately 1.00% 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 payment date in the future, the Indenture
provides that a portion of the principal which would otherwise be paid to the
holders of the related class of notes on such payment date shall instead be paid
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. If, on any payment date, the Excess
Over-collateralized Amount is, or, after taking into account all other payments
to be made on such payment 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 certain amounts relating to principal which
would otherwise be paid to the holders of the related class of notes on such
payment date shall instead be paid in the priority set forth herein under
"--Flow of Funds", in an amount equal to the Over-collateralization Reduction
Amount.
The Indenture provides that, on any payment 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 will be paid to the holders of
the related class of notes on such payment date. 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 paid to the holders of the related class of notes on
the payment 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 payment date,
will require the payment of an Over-collateralization Increase Amount on such
payment date, or, if insufficient funds are available on such payment date, on
subsequent payment 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 trust certificates by
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reducing, or eliminating entirely, payments of Excess Interest and
Over-collateralization Reduction Amounts which such holder would otherwise
receive.
Over-collateralization and the Note Insurance Policy. 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 payment
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 payment date. The note insurer has the option on
any payment 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 therefor. 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 payments of principal.
Cross-collateralization Provisions
Cross-collateralization Payments. On each payment date, available
Excess Interest from a pool of mortgage loans, if any, will be paid pro rata,
based on the amount needed by the other pools, to the holders of the class of
notes relating to the other pools of mortgage loans to the extent of the
Shortfall Amount for such other pools. 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 pools of mortgage loans, except to the limited extent
provided herein.
Cross-collateralization Reserve Account. Each class of notes will have
the benefit of a cross-collateralization reserve account. On each payment date,
available Excess Interest from a pool of mortgage loans after payment of the
Over-collateralization Increase Amount for such payment date, if any, will be
paid pro rata, based on the amount needed by the other pools, into the
cross-collateralization reserve account relating to the other pools of mortgage
loans, until the amount of funds on deposit therein equals the Specified Reserve
Amount for such other pools. If the amount on deposit in the
cross-collateralization reserve account for a pool of mortgage loans on any
payment date exceeds the Specified Reserve Amount for such pool and such payment
date, the amount of such excess shall be paid in the priority set forth herein
under "--Flow of Funds."
Funds on deposit in a cross-collateralization reserve account will be
used on any payment date to make payments with respect to the Shortfall Amount
for the related pool, to the extent that there is no Excess Interest available
therefor on such payment date.
Flow of Funds
On each payment date, the indenture trustee, based solely on the
information received from the servicer in the servicer remittance report prior
to such payment date, shall make payments in respect of 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 payment 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;
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(b) from amounts then on deposit in the related payment account,
excluding any Insured Payments, to the note insurer the
Reimbursement Amount as of such payment date;
(c) from amounts then on deposit in the related payment account,
the Interest Payment Amount for the related class of notes;
(d) from amounts then on deposit in the related payment account,
the Principal Payment 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 payment account,
to the holders of the other classes of notes, the Shortfall
Amount for such other classes pro rata based on the relative
Shortfall Amounts;
(f) from amounts then on deposit in the related payment account,
to the cross-collateralization reserve accounts relating to
the other classes of notes, pro rata, based on the relative
deficiencies in those accounts, the amounts necessary for the
balance of such accounts to equal the applicable Specified
Reserve Amount;
(g) from amounts then on deposit in the related payment account,
the amount of any Net Mortgage Loan Interest Shortfalls for
the related class of notes;
(h) from amounts then on deposit in the related payment account,
to the holders of the other classes of notes, the amount of
any Net Mortgage Loan Interest Shortfalls for such other
classes of notes, pro rata, based on the relative amounts of
such shortfalls;
(i) with respect to the class A-3 notes only, from amounts then on
deposit in the payment account relating to such class, to the
holders of the class A-3 notes, the Class A-3 Available Funds
Cap Carry-Forward Amount; and
(j) 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 payment date in the related payment account,
if any.
Events of Default
Upon the occurrence of an event of default, the indenture trustee, upon
the direction of the note insurer -- or the majority holders if the note insurer
is in default under the Insurance Agreement -- shall declare 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:
1. the trust shall fail to pay or cause to be paid to the indenture
trustee, for the benefit of the holders of the notes, on any payment date, all
or part of any Interest Payment Amount due on the notes on such payment date and
all or a part of any Net Mortgage Loan Interest Shortfalls or Class A-3
Available Funds Cap Carry-Forward Amounts due on the notes on the maturity date
of such class of notes; or
2. the trust shall fail to pay or cause to be paid to the indenture
trustee, for the benefit of the holders of the notes, (x) on any payment date an
amount equal to the principal due on the outstanding notes on such payment date,
to the extent that sufficient funds are on deposit in the collection account or
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(y) on the final stated maturity date for any class of notes, the aggregate
outstanding principal balance of the related class of notes; or
3. the trust shall breach or default in the due observance of any one
or more of the negative covenants under the Indenture; or
4. 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; or
5. 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; or
6. 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 days after the date of
entry thereof; or
7. 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 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 property, and such jurisdiction, custody or control
shall remain in force unrelinquished, unstayed or unterminated for a period of
ninety days.
Reports to Noteholders
Pursuant to the Indenture, on each payment 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 remittance report containing information
including, without limitation, the amount of the payment on such payment date,
the amount of such payment allocable to principal and allocable to interest, the
aggregate outstanding principal balance of the notes as of such payment date,
the amount of any Insured Payment included in such payment on such payment 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 (i) an opinion of counsel delivered to, but not obtained at the
expense of,
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the indenture trustee or (ii) a letter from each rating agency confirming that
such amendment will not cause the reduction, qualification or withdrawal of the
then-current ratings of the notes, 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 paid 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 the 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 paid 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
American Business Credit will act as the servicer of the mortgage loan
pools. Upland Mortgage and New Jersey Mortgage will act as subservicers with
respect to a portion of the mortgage loans. See "The Originators, the Seller,
the Servicer and the Subservicer" herein. The servicer and the subservicers will
be required to use the same care as they customarily employ in servicing and
administering mortgage loans for their 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 holders of the notes
on them.
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 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. The servicer is required to make Periodic Advances
on each servicer remittance date, subject to the servicer's determination that
such advance would be recoverable. 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
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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. The servicer is required to advance amounts with
respect to the mortgage loans, subject to the servicer's determination that such
advance would be recoverable and that a prudent mortgage lender would make a
like advance if it or an affiliate owned the related mortgage loan, constituting
"out-of-pocket" costs and expenses relating to,
o the preservation and restoration of the mortgaged property,
o enforcement proceedings, including foreclosures,
o expenditures relating to the purchase or maintenance of a
first lien not included in the trust estate on the mortgaged
property, and
o certain other customary amounts described in the Sale and
Servicing Agreement.
These 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 be recoverable, 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 payment 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 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 10th day of each month, the
servicer is required to remit to the indenture trustee a payment of Compensating
Interest in respect of Prepayment Interest Shortfalls and shall not have the
right to reimbursement therefor. 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 will not
reduce the amount of Current Interest due to the holders of the class A-1 notes,
class A-2 notes and class A-3 notes, respectively. However, in the event the
full amount of Current Interest is not available on any payment 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
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respect of over-collateralization, cross-collateralization or to the holder of
the trust certificate relating to the applicable pool.
Optional Purchase of Delinquent 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 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 American Business Credit 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. However, after the seller or its
affiliates have purchased delinquent mortgage loans with an aggregate principal
balance of more than 1% of the sum of (x) the aggregate original principal
balance of the mortgage loans held by the trust on the closing date and (y) the
amount on deposit in the pre-funding accounts on the closing date, then,
notwithstanding the foregoing, unless the note insurer consents, the seller or
its affiliates can only purchase the mortgage loan or loans that have been
delinquent for the longest period of time, until the seller or its affiliates
have purchased delinquent mortgage loans with an aggregate principal balance
equal to 5% of the sum of (x) the aggregate original principal balance of the
mortgage loans held by the trust on the closing date and (y) the amount on
deposit in the pre-funding accounts on the closing date. Thereafter, the seller
and its affiliates may only purchase delinquent mortgage loans with the prior
consent of the note insurer.
Servicer Reports
On each servicer remittance date, the servicer is required to deliver
to the note insurer, the indenture trustee, and the collateral agent, a servicer
remittance report setting forth the information necessary for the indenture
trustee to make the payments set forth under "--Flow of Funds" herein and
containing the information to be included in the indenture trustee's remittance
report for such payment date.
The servicer is required to deliver to the note insurer, the indenture
trustee, the collateral agent and the rating agencies, not later than April 30th
of each year, starting in 2000, an officer's certificate stating that,
o the servicer has fully complied with the servicing provisions
of the Sale and Servicing Agreement,
o 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
o 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.
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, and the rating agencies 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
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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 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, waive any late payment charge and 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 Loans -- 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 payment 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 payment account the sums which would have been deposited
therein but for such clause.
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In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms and therefore will not contain identical terms
and conditions, the terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other
weather-related causes, earth movement, including earthquakes, landslides and
mudflows, nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive.
The hazard insurance policies covering the mortgaged properties
typically contain a co-insurance clause which in effect requires the insured at
all times to carry insurance of a specified percentage, generally 80% to 90%, of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(x) the replacement cost of the improvements less physical depreciation or (y)
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 the servicer believes such foreclosure, correction or
restoration will 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
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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%; or
(b) the failure by the servicer to make any required servicing
advance which failure continues unremedied for a period of
thirty 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; or
(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 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; or
(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 ninety days; or
(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; or
(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; or
(g) the delinquency or loss experience of the mortgage loans
exceeds certain levels specified in the Sale and Servicing
Agreement; or
(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.
Except to permit New Jersey Mortgage and Upland Mortgage to act as
subservicers, 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, American Business Credit, if
American Business Credit 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
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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 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.
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
March 30, 2000, which term will be extendable by the note insurer by notice to
the indenture trustee for successive terms of three calendar months each, until
the termination of the trust estate. The servicer will, upon its receipt of each
such notice of extension, become bound for the duration of the term covered by
such 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 day prior to the last day of any term of the servicer the indenture
trustee shall not have received any extension notice from the note insurer, the
indenture trustee will, within five 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 month term of the servicer, in the absence of a servicer 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 majority holder of the trust certificate in respect of the largest
remaining pool of mortgage loans, may, at its option, call the notes on the
Clean-up Call Date by depositing an amount equal to the aggregate outstanding
principal balance of the mortgage loans on such payment date, plus accrued and
unpaid interest thereon, into the related payment account. The majority holder
of the trust certificate in respect of the largest remaining pool of mortgage
loans may also, at its option, call any class of notes on the Note Clean-up Call
Date by depositing an amount equal to the aggregate outstanding principal
balance of the related class of notes on such payment date, plus accrued and
unpaid interest thereon, into the related payment account. If such holder does
not exercise its right to call the notes on the Clean-up Call Date or the Note
Clean-up Call Date, then the servicer will have the right to call the notes by
depositing into the related payment account the amounts set forth in the
preceding sentences. 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 classes.
Termination; Purchase of Mortgage Loans
The Indenture will terminate upon notice to the indenture trustee of
either: (a) the later of the payment to noteholders of the final payment or
collection with respect to the last mortgage loan, or
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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 years after the death
of the last surviving lineal descendant of the person named in the Trust
Agreement.
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 payment date to the
indenture trustee, for the benefit of the holders of the notes, of the Insured
Payment 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.
In addition, with respect to any payment date occurring on a date when an event
of default under the Insurance Agreement 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
and Class A-3 Available Funds Cap Carry Forward Amounts 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 payment 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
o the date when due to be paid pursuant to the order referred to
below, or
o the first to occur of,
o 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
paid with respect to a note during the term of the
note insurance policy because such payments were
avoidable preferences under applicable bankruptcy
law, (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
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<PAGE>
o 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 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 payment 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., 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 a Saturday or Sunday or 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 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.
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<PAGE>
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:
o 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;
o the right to consent to or direct any waivers of defaults by
the servicer;
o the right to remove the indenture trustee pursuant to the
Indenture;
o the right to direct the actions of the indenture trustee
during the continuation of a servicer default;
o the right to require the seller to repurchase mortgage loans
for breach of representation and warranty or defect in
documentation;
o the right to direct foreclosures upon the failure of the
servicer to do so in accordance with the Sale and Servicing
Agreement;
o the right to direct all matters relating to a bankruptcy or
other insolvency proceeding involving the seller; and
o 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.
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, the 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:
o 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,
o 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,
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<PAGE>
o 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,
o 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,
o 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
o 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. 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 as to the accuracy or completeness of such information.
The Note Insurer
Financial Security Assurance Inc. is a monoline insurance company
incorporated in 1984 under the laws of the State of New York. Financial Security
Assurance Inc. is licensed to engage in the financial guaranty insurance
business in all 50 states, the District of Columbia and Puerto Rico.
Financial Security Assurance Inc. 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 Assurance Inc. 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 Assurance Inc. insures both
newly issued securities sold in the primary market and outstanding securities
sold in the secondary market that satisfy Financial Security Assurance Inc.'s
underwriting criteria.
Financial Security Assurance Inc. is a wholly-owned subsidiary of
Financial Security Assurance Holdings Ltd., a New York Stock Exchange listed
company. Major shareholders of Financial Security Assurance Holdings Ltd.
include White Mountains Insurance Group, Inc., MediaOne Capital Corporation, The
Tokio Marine and Fire Insurance Co., Ltd. and XL Capital Ltd. No shareholder of
Financial Security Assurance Holdings Ltd. is obligated to pay any debt of
Financial Security Assurance Inc. or any claim under any insurance policy issued
by Financial Security Assurance Inc. or to make any additional contribution to
the capital of Financial Security Assurance Inc.
The principal executive offices of Financial Security Assurance Inc.
are located at 350 Park Avenue, New York, New York 10022, and its telephone
number at that location is (212) 826-0100.
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<PAGE>
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by Financial Security
Assurance Inc. or 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 Assurance Inc. 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 Assurance Inc. as a risk management device and to
comply with statutory and rating agency requirements; it does not alter or limit
Financial Security Assurance Inc.'s obligations under any financial guaranty
insurance policy.
Ratings
Financial Security Assurance Inc.'s insurance financial strength is
rated "Aaa" by Moody's. Financial Security Assurance Inc.'s insurer financial
strength is rated "AAA" by Standard & Poor's and Standard & Poor's (Australia)
Pty. Ltd. Financial Security Assurance Inc.'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
Assurance Inc. and its wholly owned subsidiaries on the basis of generally
accepted accounting principles as of September 30, 1999:
September 30, 1999
unaudited
(in thousands)
------------------
Deferred Premium Revenue
(net of prepaid reinsurance premiums) $ 550,165
Surplus Notes.......................................... 120,000
Minority Interest...................................... 22,002
Shareholders' Equity:
Common Stock...................................... 15,000
Additional Paid-In Capital........................ 706,117
Accumulated Other Comprehensive Loss
(net of deferred income taxes).............. (23,005)
Accumulated Earnings.............................. 450,593
-------
Total Shareholders' Equity............................. $1,148,705
----------
Total Deferred Premium Revenue, Surplus Notes,
Minority Interest and Shareholder's Equity............. $1,840,872
----------
For further information concerning Financial Security Assurance Inc.,
see the Consolidated Financial Statements of Financial Security Assurance Inc.
and Subsidiaries, and the notes thereto, incorporated by reference herein. The
Consolidated Financial Statements of Financial Security Assurance
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<PAGE>
Inc. and Subsidiaries are included as exhibits to the annual report on Form 10-K
and Quarterly Reports on Form 10-Q that are filed with the Securities and
Exchange Commission by Financial Security Assurance Holdings Ltd. and may be
reviewed at the EDGAR website maintained by the Securities and Exchange
Commission and at Financial Security Assurance Holdings Ltd.'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
Assurance Inc. are available upon request to the State of New York Insurance
Department.
Incorporation of Certain Documents by Reference
In addition to the documents described under "Incorporation of
Information by Reference" in the prospectus, the consolidated financial
statements of the note insurer included in or as exhibits to the following
documents, which have been filed with the Securities and Exchange Commission by
Financial Security Assurance Holdings Ltd. ("Holdings"), are hereby incorporated
by reference in this prospectus supplement: (a) the Annual Report on Form 10-K,
as amended, of Holdings for the year ended December 31, 1998 and (b) the
Quarterly Report on Form 10-Q for the period ended September 30, 1999.
All financial statements of Financial Security Assurance Inc. included
in documents filed by Holdings under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
prospectus supplement and prior to the termination of the offering of the notes
shall be deemed to be incorporated by reference into this prospectus supplement
and to be a part of this prospectus supplement from the respective dates of
filing the documents.
The seller will without charge to any person to whom this prospectus
supplement is delivered, upon oral or written request of that person, a copy of
any or all of the foregoing financial statements incorporated by reference.
Request for copies should be directed to the seller at 111 Presidential
Boulevard, Suite 127, Bala Cynwyd, Pennsylvania 19004.
The seller on behalf of the trust will undertake, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the trust's annual report under section 13(a) or section 15(d) of the
Securities Exchange Act; and each filing of the financial statements of the note
insurer included in or as an exhibit to the annual report of Holdings filed
under section 13(a) or section 15(d) of the Securities Exchange Act that is
incorporated by reference in the registration statement, as defined in the
prospectus, will be deemed to be a new registration statement relating to the
securities offered by this prospectus supplement, and the offering of the
securities at that time will be deemed to be the initial bona fide offering
thereof.
Insurance Regulation
Financial Security Assurance Inc. 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 Assurance Inc. and
its 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 Assurance Inc. 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 Assurance Inc.,
regulate, among other things, permitted investments, payment of dividends,
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<PAGE>
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 American Business Credit or an affiliate of American Business Credit 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.
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 that the mortgage loans in 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 April 15, 2031 for the
class A-1 notes, the class A-2 notes and the class A-3 notes. Each final stated
maturity date was calculated using the assumption that the final stated maturity
date is thirteen 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 March 15, 2030 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
payment date with respect to any class of the notes could occur significantly
earlier than the final stated maturity date because:
o prepayments, including, for this purpose, prepayments
attributable to foreclosure, liquidation, repurchase and the
like, on mortgage loans are likely to occur,
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<PAGE>
o thirteen months have been added to obtain the final stated
maturity date above,
o the over-collateralization provisions of the transaction
result in the application of Excess Interest to the payment of
principal;
o the majority holder of a trust certificate of a particular
pool (as described herein) or, if such majority holder elects
not to do so, the servicer may, at their respective option as
described herein, call the notes when the aggregate
outstanding principal balance of the notes is equal to or less
than 10% of the aggregate original principal balance of the
notes, or call a class of notes when the aggregate outstanding
principal balance of the respective note balance is less than
or equal to 10% of its original principal balance.
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 prepayment model used in this prospectus
supplement, Home Equity Prepayment or HEP is a 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 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 in the trust estate.
The following tables, addressing the weighted average lives of the
notes, have been prepared on the basis of the following modeling assumptions:
o the mortgage loans prepay at the indicated percentage of the
prepayment assumption,
o payments on the notes are received in cash on the 15th day of
each month commencing in January 2000,
o 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,
o scheduled payments are assumed to be received on the last day
of each month commencing in December 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 December
1999, or as set forth in the following table, and include
thirty days' interest thereon,
o the notes are purchased on December 22, 1999,
o the Specified Over-collateralized Amount is as set forth in
the Indenture,
o on each payment 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,
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<PAGE>
o one-month LIBOR remains constant at 6.47875%,
o the remaining terms to maturity are calculated from the
assumed date of transfer of the mortgage loans to the trust,
o the mortgage loans in pool I consist of 6 mortgage loans
having the following characteristics:
<TABLE>
<CAPTION>
Mortgage Net Mortgage Original Remaining Remaining Term
Mortgage Loan Principal Interest Interest Amortizing Term Amortizing Term to Maturity
Number Balance ($) Rate (%) Rate (%) (in months) (in months) (in months)
- ------------------- --------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
(1) $11,067,801.55 12.907% 12.407% 162 162 162
(2) 11,208,694.00 11.178 10.678 239 239 239
(3) 18,792,445.23 10.665 10.165 358 358 358
(4) 34,688,634.98 11.448 10.948 329 329 199
(5) 13,689,646.92 11.409 10.909 273 273 273
(6) 11,562,878.33 11.448 10.948 329 329 199
</TABLE>
The preceding table was prepared using the following assumptions for
mortgage loans (5) and (6):
- the mortgage loans are transferred to the trust in March 2000
and have the characteristics set forth above -- the actual
characteristics of such mortgage loans may vary from such
assumptions,
- scheduled payments are received on the last day of each month
commencing in March 2000,
- prepayments are received on the last day of each month
commencing in March 2000 and include 30 days' interest
thereon, and
- during the first three due periods, interest is assumed to be
available for payment to the notes and the note insurer at an
assumed net mortgage interest rate of 7.885%.
o The mortgage loans in pool II consists of 6 mortgage loans
having the following characteristics:
<TABLE>
<CAPTION>
Mortgage Net Mortgage Original Remaining Remaining Term
Mortgage Loan Principal Interest Interest Amortizing Term Amortizing Term to Maturity
Number Balance ($) Rate (%) Rate (%) (in months) (in months) (in months)
- ------------------- --------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
(1) $ 9,961,021.42 12.907% 12.407% 162 162 162
(2) 10,087,824.60 11.178 10.678 239 239 239
(3) 16,913,200.70 10.665 10.165 358 358 358
(4) 31,219,771.47 11.448 10.948 329 329 199
(5) 12,320,682.23 11.409 10.909 273 273 273
(6) 10,406,590.49 11.448 10.948 329 329 199
</TABLE>
The preceding table was prepared using the following assumptions for
mortgage loans (5) and (6):
- the mortgage loans are transferred to the trust in March 2000
and have the characteristics set forth above -- the actual
characteristics of such mortgage loans may vary from such
assumptions,
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<PAGE>
- scheduled payments are received on the last day of each month
commencing in March 2000,
- prepayments are received on the last day of each month
commencing in March 2000 and include 30 days' interest
thereon, and
- during the first three due periods, interest is assumed to be
available for payment to the notes and the note insurer at an
assumed net mortgage interest rate of 7.410%.
o The mortgage loans in pool III consists of 5 mortgage loans
having the following characteristics:
<TABLE>
<CAPTION>
Mortgage Net Mortgage Original Remaining Remaining Term
Mortgage Loan Principal Interest Interest Amortizing Term Amortizing Term to Maturity
Number Balance ($) Rate (%) Rate (%) (in months) (in months) (in months)
- ------------------- --------------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
(1) $ 8,004,874.59 14.379% 13.879% 201 201 201
(2) 5,852,813.81 10.251 9.751 360 360 360
(3) 8,869,584.32 12.727 12.227 341 341 205
(4) 4,619,229.47 12.636 12.136 268 268 268
(5) 2,956,528.11 12.727 12.227 341 341 205
</TABLE>
The preceding table was prepared using the following assumptions for
mortgage loans (4) and (5):
- the mortgage loans are transferred to the trust in March 2000
and have the characteristics set forth above -- the actual
characteristics of such mortgage loans may vary from such
assumptions,
- scheduled payments are received on the last day of each month
commencing in March 2000,
- prepayments are received on the last day of each month
commencing in March 2000 and include 30 days' interest
thereon, and
- during the first three due periods, interest is assumed to be
available for payment to the notes and the note insurer at an
assumed net mortgage interest rate of 7.13875%.
----------------------
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.
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<PAGE>
Weighted Average Lives
<TABLE>
<CAPTION>
Class A-1 Notes
Prepayment Weighted Average Earliest
Assumption (HEP) Life in Years Retirement Date
- ---------------------------------- ------------------------------------------ --------------------------------------------
<S> <C> <C>
0% 14.29 7/15/22
15% 4.99 3/15/12
20% 3.90 7/15/09
25% 3.19 9/15/07
30% 2.69 5/15/06
35% 2.32 5/15/05
<CAPTION>
Class A-2 Notes
Prepayment Weighted Average Earliest
Assumption (HEP) Life in Years Retirement Date
- ---------------------------------- ------------------------------------------ --------------------------------------------
<S> <C> <C>
0% 14.29 7/15/22
15% 4.99 3/15/12
20% 3.89 7/15/09
25% 3.18 9/15/07
30% 2.68 5/15/06
35% 2.31 5/15/05
<CAPTION>
Class A-3 Notes
Prepayment Weighted Average Earliest
Assumption (HEP) Life in Years Retirement Date
- ---------------------------------- ------------------------------------------ --------------------------------------------
<S> <C> <C>
0% 14.54 7/15/22
15% 5.02 3/15/12
20% 3.91 7/15/09
25% 3.19 9/15/07
30% 2.68 5/15/06
35% 2.31 5/15/05
</TABLE>
The preceding tables were prepared using the following assumptions:
o 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 payment 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, and
o the notes are called on the first payment date on which the
aggregate outstanding principal balance of all the then
outstanding classes of the notes is equal to or less than 10%
of the aggregate original principal balances.
----------------------
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
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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 depositor or the servicer.
Material Federal Income Tax Consequences
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 "Material 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 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 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, Brown & Wood LLP, special tax counsel to the depositor, is of the
opinion that, for federal income tax purposes, (i) the notes will be treated as
indebtedness, (ii) the trust will not be classified as an association or as a
publicly traded partnership taxable as a corporation or as a taxable mortgage
pool and (iii) none of the sub trusts will be classified as an association or as
a publicly traded partnership taxable as a corporation or as a taxable mortgage
pool. See "Material 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
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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 "Material 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 25% HEP. See "Prepayment and Yield Considerations" in this
prospectus supplement. 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 "Material 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 be subject to the "market
premium" rules of the Code. See "Material Federal Income Tax Consequences
Discount and Premium -- 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 "Material
Federal Income Tax Consequences -- Debt Securities -- Sale or Exchange of Debt
Securities" in the accompanying prospectus.
Other Matters. For a discussion of backup withholding and taxation of
foreign investors in the notes, see "Material Federal Income Tax Consequences --
Backup Withholding" and " --Foreign Investors -- Grantor Trust, REMIC Regular
and Debt Securities" in the accompanying prospectus.
ERISA Considerations
The Employee Retirement Income Security Act of 1974 and the Code impose
certain restrictions on,
o employee benefit plans, as defined in Section 3(3) of ERISA,
o plans described in section 4975(e)(1) of the Code, including
individual retirement accounts or Keogh plans,
o any entities whose underlying assets include plan assets by
reason of a plan's investment in such entities and
o persons who have certain specified relationships to such plans
-- "parties-in-interest" under ERISA and "disqualified
persons" under the Code.
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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 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 this 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 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 trust 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: 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.
Plan of Distribution
Subject to the terms and conditions of the Underwriting Agreement dated
October 21, 1999 between the depositor and Prudential Securities Incorporated,
as 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.
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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.
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
"Underwriting" 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.
Incorporation of Information by Reference
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 Information by
Reference" and the consolidated financial statements of Financial Security
Assurance Inc. and Subsidiaries 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, as amended, for the year ended
December 31, 1998; and
o the Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
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.
Additional Information
Prudential Securities Secured Financing Corporation has filed with the
Securities and Exchange Commission a registration statement (Registration No.
333-75489) under the Securities Act of 1933, with
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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.
Experts
The consolidated balance sheets of Financial Security Assurance Inc.
and its subsidiaries as of December 31, 1998 and 1997 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, 1998,
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.
Legal Matters
Certain legal matters in connection with the notes will be passed upon
for the originators and the servicer by Blank Rome Comisky & McCauley LLP,
Philadelphia, Pennsylvania, for the trust by Stradley, Ronon, Stevens & Young,
LLP, Wilmington, Delaware, for the depositor and the underwriter by Brown & Wood
LLP, Washington, DC, and for the seller by Dewey Ballantine LLP, New York, New
York.
Ratings
It is a condition to the original issuance of the notes that they will
receive ratings of "AAA" by Standard & Poor's 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, 55 Water Street, New York, New York
10041. 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.
Additionally, the ratings on the class A-3 notes do not address the likelihood
of the payment of the Class A-3 Available Funds Cap Carry-Forward Amount.
Glossary
The following terms have the meanings given below when used in this
prospectus supplement.
Available Amount for any pool of mortgage loans and any payment date is
the amount on deposit in the related payment account, exclusive of the amount of
any Insured Payment and the servicing fee, on that payment date.
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Class A-1 Carry-Forward Amount for any payment date is the sum of (a)
the amount, if any, by which (x) the Class A-1 Interest Payment Amount as of the
immediately preceding payment date exceeded (y) the amount of interest actually
paid to the holders of the class A-1 notes on such immediately preceding payment
date and (b) thirty days' interest on the amount described in clause (a),
calculated at an interest rate equal to the Class A-1 note rate.
Class A-1 Interest Payment Amount for any payment date will be an
amount equal to the sum of the Current Interest for the class A-1 notes on such
payment date, less the amount of any Class A-1 Mortgage Loan Interest Shortfalls
relating to such payment date, plus the Class A-1 Carry-Forward Amount, less any
amounts paid by the note insurer in respect of such Class A-1 Carry-Forward
Amount, in each case, as of such payment date.
Class A-1 Mortgage Loan Interest Shortfalls for any payment date will
be the aggregate of the Mortgage Loan Interest Shortfalls in pool I, if any, for
such payment 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 payment date, the per annum
rate equal to 7.675%; provided, that, on any payment date after the Clean-Up
Call Date, the Class A-1 Note Rate will be 8.175%.
Class A-2 Carry-Forward Amount for any payment date is the sum of (a)
the amount, if any, by which (x) the Class A-2 Interest Payment Amount as of the
immediately preceding payment date exceeded (y) the amount of interest actually
paid to the holders of the class A-2 notes on such immediately preceding payment
date and (b) thirty days' interest on the amount described in clause (a),
calculated at an interest rate equal to the Class A-2 note rate.
Class A-2 Interest Payment Amount for any payment date will be an
amount equal to the sum of the Current Interest for the class A-2 notes on such
payment date, less the amount of any Class A-2 Mortgage Loan Interest Shortfalls
relating to such payment date, plus the Class A-2 Carry-Forward Amount, less any
amounts paid by the note insurer in respect of such Class A-2 Carry-Forward
Amount, in each case, as of such payment date.
Class A-2 Mortgage Loan Interest Shortfalls for any payment date will
be the aggregate of the Mortgage Loan Interest Shortfalls in pool II, if any,
for such payment 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 payment date, the per annum
rate equal to 7.200%; provided, that, on any payment date after the Clean-Up
Call Date, the Class A-2 Note Rate will be 7.700%.
Class A-3 Available Funds Cap Carry-Forward Amount is, with respect to
the class A-3 notes and any payment date, the sum of
(a) the excess of (x) the Class A-3 Current Interest calculated at the
Class A-3 Formula Note Rate over (y) the Class A-3 Current
Interest calculated at the Class A-3 Available Funds Cap Rate, in
each case as of such payment date,
(b) the amount of any Class A-3 Available Funds Cap Carry-Forward
Amount remaining unpaid from any previous payment date, with
interest thereon at the Class A-3 Formula Note Rate.
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Class A-3 Available Funds Cap Rate is a per annum rate equal to the
weighted average mortgage interest rate with respect to the mortgage loans in
pool III, less the note insurer premium percentage, less the servicing fee rate,
less the rate at which the indenture trustee fee is then calculated, less 0.75%.
Class A-3 Carry-Forward Amount as of any payment date, is the sum of
(a) the amount, if any, by which (x) the Class A-3 Interest Payment Amount as of
the immediately preceding payment date exceeded (y) the amount of interest
actually paid to the holders of the class A-3 notes on such immediately
preceding payment date and (b) thirty days' interest on the amount described in
clause (a), calculated at an interest rate equal to the Class A-3 Formula Note
Rate.
Class A-3 Formula Note Rate is a per annum rate equal to the lesser of
(i) LIBOR plus 0.45% provided, that, on any payment date after the Clean-Up Call
Date, such rate will be equal to LIBOR plus 0.90% annum and (ii) 13.00%.
Class A-3 Interest Payment Amount for any payment date will be an
amount equal to the sum of the Current Interest for the class A-3 notes on such
payment date, less the amount of any Class A-3 Mortgage Loan Interest Shortfalls
relating to such payment date plus the Class A-3 Carry-Forward Amount less any
amounts paid by the Note Insurer in respect of such Class A-3 Carry- Forward
Amount, in each case, as of such payment date.
Class A-3 Mortgage Loan Interest Shortfalls for any payment date will
be the aggregate of the Mortgage Loan Interest Shortfalls in pool III, if any,
for such payment date, to the extent such Mortgage Loan Interest Shortfalls are
not paid by the servicer as Compensating Interest.
Class A-3 Note Rate with respect to any payment date, is the per annum
rate equal to the lesser of (x) the Class A-3 Formula Note Rate and (y) the
Class A-3 Available Funds Cap Rate for such payment date.
Clean-Up Call Date means the first payment date on which the aggregate
outstanding principal balance of the notes is equal to or less than 10% of the
aggregate original principal balance of the notes.
Compensating Interest means an amount equal to the lesser of (a) the
aggregate of the Prepayment Interest Shortfalls for the related payment date
resulting from principal prepayments in full during the related due period and
(b) its aggregate servicing fees received in the related due period; provided,
however, that Compensating Interest with respect to any mortgage loan and any
payment date shall not exceed the servicing fees due in respect of such mortgage
loan on such payment date.
Current Interest for any pool of mortgage loans and any payment date is
the interest that will accrue on the related class of notes at the Class A-1
Note Rate, the Class A-2 Note Rate or the Class A-3 Note Rate, as the case may
be, on the aggregate outstanding principal balance of such class during the
related accrual period.
Cut-Off Date means, with respect to the initial mortgage loans, the
close of business on November 30, 1999; provided, that with respect to mortgage
loans originated after November 30, 1999, the Cut-Off Date shall be the date of
origination of such mortgage loans, and, with respect to any subsequent mortgage
loans, the close of business on the last day of the calendar month preceding the
month in which the subsequent mortgage loans were acquired by the trust;
provided, that, with respect to mortgage loans that were originated after such
date, the Cut-off Date shall be the date of origination of such mortgage loans.
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Excess Interest for any pool of mortgage loans and any payment date is
equal to the excess of (x) the Available Amount for such pool and such payment
date over (y) the sum of
o the Interest Payment Amount for such pool and such payment
date,
o Principal Payment Amount for such pool and such payment date
-- calculated for this purpose without regard to any
Over-collateralization Increase Amount or portion thereof
included therein,
o any Reimbursement Amount or other amount owed to the note
insurer relating to such pool, and
o the indenture trustee's fees for such pool and such payment
date.
Excess Over-collateralized Amount means, with respect to each pool of
mortgage loans and a payment date, the difference, if any, between (a) the
Over-collateralized Amount that would apply on such payment date after taking
into account all payments to be made on such payment date, except for any
payments of related Over-collateralization Reduction Amounts, and (b) the
Specified Over-collateralized Amount, provided that for the six month period
beginning with and following the date the Specified Over-collateralized Amount
steps down, the Excess Over-collateralized Amount will gradually increase such
that the full amount of the Excess Over-collateralized Amount is paid by the end
of such six month period, in accordance with the Indenture.
Foreclosure Profits as to any servicer remittance date, are the excess,
if any, of (x) 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 remittance date over (y) 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 Payment Amount for any pool of mortgage loans and any payment
date, is the sum of,
o the Interest Payment Amount for such pool and such payment
date,
o the amount of the Over-collateralization Deficit applicable to
such pool and such payment date, if any, and
o with respect to the payment 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 payment date
will equal the amount by which the Insured Payment Amount for such pool and such
payment date exceeds the Available Amount less the indenture trustee's fees for
such pool and such payment date.
Interest Payment Amount means the Class A-1 Interest Payment Amount,
the Class A-2 Interest Payment Amount or the Class A-3 Interest Payment Amount,
as applicable.
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Liquidated Loan Loss as to any Liquidated Mortgage Loan is the excess,
if any, of (x) 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 (y) the sum of the
Net Liquidation Proceeds and the amount of any previously unreimbursed Periodic
Advances in respect of such mortgage loan.
Liquidated Mortgage Loan is a mortgage loan that is being liquidated by
the servicer in connection with (x) the taking of all or a part of a Mortgaged
Property by exercise of the power of eminent domain or condemnation or (y) the
liquidation of a defaulted mortgage loan through a sale, foreclosure sale, REO
disposition or otherwise.
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.
Liquidation Proceeds are amounts, other than Insurance Proceeds,
received by the servicer in connection with (x) the taking of all or a part of a
Mortgaged Property by exercise of the power of eminent domain or condemnation or
(y) 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 remittance date, are the
excess, if any, of (x) the aggregate Foreclosure Profits with respect to such
servicer remittance date over (y) Liquidated Loan Losses with respect to such
servicer remittance 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, the Class A-2 Mortgage Loan Interest Shortfalls or the
Class A-3 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.
Note Clean-up Call Date means the first payment date on which the
aggregate outstanding principal balance of a class of notes is less than or
equal to 10% of its original principal balance.
Over-collateralization Deficit for any payment date, is the amount by
which the aggregate outstanding principal balance of the notes exceeds the sum
of
o the aggregate principal balance of the mortgage loans,
o any amount on deposit in the pre-funding accounts on such
payment date, and
o any amounts on deposit in the cross- collateralization reserve
accounts on such payment date, after application of all
amounts due on such payment date.
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Over-collateralization Increase Amount for any pool of mortgage loans
and any payment 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.
Over-collateralization Reduction Amount with respect to any pool of
mortgage loans and any payment date, is the lesser of (a) the Excess
Over-collateralized Amount for such pool and such payment date and (b) the
Principal Payment Amount for such pool and such payment date (without regard to
clause (b)(11) of the definition of Principal Payment Amount).
Over-collateralized Amount means, with respect to any payment date and
a pool of mortgage loans, the excess, if any, of (a) the sum of (x) 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 (y) the amounts,
if any, on deposit in the related pre-funding accounts, over (b) the aggregate
principal balance of the related class of notes as of such payment date
- --following the making of all payments on such payment date, other than with
respect to any Over-collateralization Increase Amount for such payment date.
Periodic Advances means advances made by the servicer on each payment
date with respect to delinquent payments of interest on the mortgage loans, at a
rate equal to the interest rate on the related mortgage note, less the servicing
fee rate.
Prepayment Interest Shortfall means, with respect to any payment date,
an amount equal to the excess, if any, of (a) thirty 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 and/or any reduction by a
court of the monthly payment due on such mortgage loan -- 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.
Principal Payment Amount for any pool of mortgage loans and any payment
date will be the lesser of:
(a) the excess of (x) the sum, as of such payment date, of (A) the
Available Amount for such pool and (B) any Insured Payment
with respect to the related class of notes over (y) the sum of
Interest Payment Amount for such pool, the indenture trustee's
fees, and the Reimbursement Amount allocable to the related
class of notes; and
(b) the sum, without duplication, of:
(1) all principal in respect of the mortgage loans in
such pool actually collected during the related due
period;
(2) the principal balance of each mortgage loan that
either was repurchased by the seller or purchased by
the servicer on the related servicer remittance date
from such pool, to the extent such principal balance
is actually received by the indenture trustee;
(3) any Substitution Adjustments delivered by the seller
on the related servicer remittance date in connection
with a substitution of a
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<PAGE>
mortgage loan in such pool, to the extent such
Substitution Adjustments are actually received by the
indenture trustee;
(4) 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;
(5) on the January 2000, February 2000, March 2000 or
April 2000 payment dates, moneys released from the
related pre-funding account, if any;
(6) the proceeds received by the indenture trustee upon
the exercise by the trust certificateholder or the
servicer, as applicable, of its option to call the
notes -- to the extent such proceeds relate to
principal;
(7) the amount of any Over-collateralization Deficit with
respect to such pool for such payment date;
(8) 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;
(9) the amount of any Over-collateralization Increase
Amount with respect to such pool for such payment
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 the Shortfall Amount for the
other pools and such payment date;
(10) if the note insurer shall so elect, an amount of
principal -- including Liquidated Loan Losses -- that
would have been payable pursuant to clauses (1)
through (9) above if sufficient funds were available
therefor; minus
(11) the amount of any Over-collateralization Reduction
Amount for such pool for such payment date.
In no event will the Principal Payment Amount for a pool with respect
to any payment date be (x) less than zero or (y) greater than the then
outstanding aggregate principal balance for the notes.
Qualified Substitute Mortgage Loan means any mortgage loan or mortgage
loans substituted for a deleted mortgage loan and which, among other things,
o 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,
o matures or mature no later than, and not more than one year
earlier than, the deleted mortgage loan,
o has or have a LTV or LTV at the time of such substitution no
higher than the LTV of the deleted mortgage loan,
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<PAGE>
o has or have a CLTV or CLTVs at the time of such substitution
no higher than the CLTV of the deleted mortgage loan,
o 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,
o has or have a mortgage interest rate of at least the same
interest rate as the deleted mortgage loan and
o complies or comply, as of the date of substitution, with each
representation and warranty set forth in the Unaffiliated
Seller's Agreement.
Reimbursement Amount means, with respect to each pool of mortgage loans
and each payment date, the lesser of (a) the excess of (x) the amount then on
deposit in the payment account over (y) the Insured Payment Amounts for such
pool and such payment date and (b) 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.
REO Proceeds are monies received in respect of any REO property,
including, without limitation, proceeds from the rental of the related mortgaged
property.
Shortfall Amount means, with respect to a pool of mortgage loans and
any payment date, the sum of
o any shortfall in the amount of the Interest Payment Amount for
such pool actually paid to the holders of the related class of
notes,
o the amount of any actual realized losses on the mortgage loans
in such pool,
o the amount of any Over-collateralization Deficit for such pool
and such payment date, and
o any shortfall in the payment of any amounts owed the note
insurer.
Specified Over-collateralized Amount with respect to a pool of mortgage
loans and any payment date will be the amount of over-collateralization which
the note insurer requires with respect to such pool and such payment date and
which amount may step up or step down as determined in the insurance agreement.
Specified Reserve Amount means, with respect to each pool of mortgage
loans and any payment date, the difference between (x) the Specified
Over-collateralized Amount for such pool and such payment date and (y) the
Over-collateralized Amount for such pool on such payment date.
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<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Report of Independent Auditors
First Union Trust Company, National Association,
as Owner Trustee of
ABFS Mortgage Loan Trust 1999-4
We have audited the accompanying balance sheet of ABFS Mortgage Loan
Trust 1999-4, a Delaware business trust as of December 16, 1999. This balance
sheet is the responsibility of the trust. Our responsibility is to express an
opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of ABFS Mortgage Loan Trust
1999-4, at December 16, 1999, in conformity with generally accepted accounting
principles.
BDO Seidman LLP
December 16, 1999
Philadelphia, Pennsylvania
A-1
<PAGE>
Index to Financial Statements
Page
----
Report of Independent Auditors.........................................A-1
Balance Sheet of the Trust as of December 16, 1999.....................A-3
Notes to Balance Sheet.................................................A-4
A-2
<PAGE>
ABFS Mortgage Loan Trust 1999-4
Balance Sheet
December 16, 1999
- --------------------------------------------------------------------------------
Assets
Cash.......................................................$ 1,000
-------
Total assets..........................................$ 1,000
=======
Liabilities and Certificateholders' Equity
Liabilities................................................$ 0
Certificateholders equity..................................$ 1,000
-------
Total liabilities and certificateholders' equity......$ 1,000
=======
See accompanying notes.
A-3
<PAGE>
ABFS Mortgage Loan Trust 1999-4
Notes to Balance Sheet
December 16, 1999
1 Formation
ABFS Mortgage Loan Trust 1999-4, a Delaware statutory business trust,
was formed in the state of Delaware on December 16, 1999, with First Union Trust
Company, National Association, as its owner trustee.
The trust was formed to engage exclusively in the following business
and financial activities: to purchase or acquire from certain direct and
indirect subsidiaries of American Business Financial Services, Inc. certain
property relating to certain receivables consisting of business purpose loans
and consumer purpose home equity loans, and to pledge such receivables or
interests therein to The Bank of New York, as indenture trustee.
2 Capital Contribution
ABFS 1999-4, Inc. made an initial capital contribution of $1,000 to the
trust on December 16, 1999.
3 Registration Statement
At December 16, 1999, the trust was in the process of preparing to
issue up to $220 million of its Mortgage-Backed Notes, Series 1999-4.
A-4
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
Prudential Securities Secured
Financing Corporation Asset-Backed Securities
Sponsor Issuable in Series
- --------------------------------------------------------------------------------
- ----------------------------------
You should read the The Securities
section entitled "Risk
Factors" starting on o will be issued from time to time in
page 3 of this prospectus series,
and consider these factors
before making a decision o will consist of either asset-backed
to invest in the securities. certificates or asset-backed notes,
o will be issued by a trust or other
special purpose entity established by
Retain this prospectus for the sponsor,
future reference. This
prospectus may not be used to o will be backed by one or more pools
consummate sales of securities of mortgage loans or manufactured
unless accompanied by the housing contracts held by the issuer,
prospectus supplement
relating to the offering of the o may have one or more forms of credit
securities. enhancement, such as insurance
policies or reserve funds.
- ----------------------------------
Neither the Securities and Exchange Commission nor any state
securities commission has approved of disapproved of these
securities or passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
PRUDENTIAL SECURITIES
The date of this prospectus is June 23, 1999
<PAGE>
Table of Contents
Summary of Prospectus..............................1
Risk Factors.......................................3
The Sponsor........................................6
Use of Proceeds....................................6
The Trustee........................................6
The Trust Funds....................................7
The Mortgage Loans...........................7
The Contracts...............................14
Fixed Retained Yield........................16
Insurance Policies..........................16
Acquisition of the Loans from the
Originator................................17
Assignment of the Loans.....................18
Representations and Warranties..............19
Pre-Funding Accounts........................22
Description of the Securities.....................23
Distributions...............................24
Principal and Interest on the Securities....25
Form of Securities..........................25
Credit Enhancement................................27
Subordination...............................28
Overcollateralization.......................28
Cross-Collateralization.....................28
Surety Bonds................................28
Letters of Credit...........................29
Special Hazard Insurance Policies...........29
Reserve Funds...............................29
Other Insurance, Guarantees and
Similar Instruments or Agreements.........30
Reduction or Substitution of Credit
Enhancement...............................30
Prepayment and Yield Considerations...............30
Interest Rates..............................30
Interest Shortfalls Due to Principal
Prepayments...............................31
Weighted Average Life of Securities.........31
Servicing of the Loans............................33
The Servicer................................33
Payments on Loans...........................33
Advances and Limitations Thereon............36
Adjustment to Servicing
Compensation in Connection with
Prepaid and Liquidated Loans..............36
Reports to Securityholders..................36
Collection and Other Servicing Procedures...37
Enforcement of Due-on-Sale Clauses;
Realization Upon Defaulted Loans..........38
Servicing Compensation and Payment of Expenses39
Evidence as to Compliance...................40
Matters Regarding the Servicer..............40
Events of Default; Rights Upon Event
of Default................................41
Amendment...................................44
Termination; Purchase or Other
Disposition of Loans......................44
Material Legal Aspects of the Loans...............45
The Mortgage Loans..........................45
The Contracts...............................52
Installment Contracts.......................56
Soldiers' and Sailors' Civil Relief Act.....58
Type of mortgaged property..................59
Material Matters Relating to Insolvency.....59
Bankruptcy Laws.............................59
Material Federal Income Tax Consequences..........61
Grantor Trust Securities....................61
REMIC Securities............................63
Debt Securities.............................70
Partnership Interests.......................71
FASIT Securities............................73
Discount and Premium........................76
Backup Withholding..........................79
Foreign Investors...........................80
State Tax Considerations..........................81
ERISA Considerations..............................81
Certificates................................82
Notes.......................................84
Consultation with Counsel...................84
Legal Investment..................................85
Plan of Distribution..............................86
Incorporation of Information by Reference.........87
Additional Information............................88
Legal Matters.....................................89
Ratings...........................................89
Glossary..........................................90
ii
<PAGE>
Summary of Prospectus
This summary highlights selected information from this prospectus
and does not contain all of the information that you need to
consider in making your investment decision. To understand all of
the terms of the offering of your series of securities, read
carefully this entire prospectus and the accompanying prospectus
supplement.
The Sponsor
Prudential Securities Secured Financing Corporation will act as the
sponsor of the issuers, meaning that it will establish the issuers and cause
them to issue the securities.
Securities Offered
Each class of securities will consist of one or more classes of ownership
securities or debt securities. Ownership securities represent beneficial
ownership interests in the assets held by the issuer. Ownership securities will
be issued in the form of certificates. Debt securities represent indebtedness
secured by the assets of the issuer. Debt securities will be issued in the form
of notes.
Each series of securities will be issued in one or more classes, one or
more of which may be classes of:
o fixed-rate securities,
o adjustable-rate securities,
o compound-interest or accrual securities,
o planned-amortization-class securities,
o principal-only securities,
o interest-only securities,
o participating securities,
o senior securities, or
o subordinated securities.
The interest rate, principal balance, notional balance, minimum
denomination and form of each class of securities will be described in the
accompanying prospectus supplement. The securities will be available in either
fully registered or book-entry form, as described in the accompanying
prospectus supplement.
The Loans
Each issuer will hold one or more pools of loans, which may include:
o conventional mortgage loans or manufactured housing contracts secured
by one-to-four family residential properties and/or manufactured
homes,
o mortgage loans secured by security interests in shares issued by
private, non-profit cooperative housing corporations,
o mortgage loans secured by junior liens on the mortgaged properties,
o mortgage loans with loan-to-value ratios in excess of the appraised
value of the mortgaged property,
o home improvement retail installment contracts, and
o revolving home equity lines of credit.
The sponsor will direct the issuer to acquire the loans from affiliated
originators, unaffiliated originators or warehouse trusts created by the
sponsor or an affiliate to finance the origination of loans.
Distributions on the Securities
Owners of securities will be entitled to receive payments in the manner
described in
1
<PAGE>
the accompanying prospectus supplement, which will specify:
o whether distributions will be made monthly, quarterly, semi-annually
or at other intervals and dates,
o the amount allocable to payments of principal and interest on any
distribution date, and
o whether distributions will be made on a pro rata, random lot, or
other basis.
Credit Enhancement
A series of securities, or classes within a series, may have the benefit
of one or more types of credit enhancement, including:
o the use of excess interest to cover losses and to create
over-collateralization,
o the subordination of distributions on the lower classes to the
distributions on more senior classes,
o the allocation of losses on the underlying loans to the lower
classes, and
o the use of cross support, reserve funds, financial guarantee
insurance policies, guarantees and letters of credit.
The protection against losses afforded by any credit enhancement will be
limited in the manner described in the accompanying prospectus supplement.
Redemption or Repurchase of Securities
One or more classes of securities may be redeemed or repurchased in whole
or in part by the issuer, the servicer, the provider of credit enhancement, or
their affiliates at the times described in the accompanying prospectus
supplement and at the price at least equal to the amount necessary to pay all
outstanding principal and accrued interest on the redeemed classes.
ERISA Limitations
Employee benefit plans should carefully review with their own legal
advisors whether the purchase or holding of the securities could give rise to a
transaction prohibited or otherwise impermissible under ERISA or the Internal
Revenue Code.
Material Federal Income Tax Consequences
Each class of securities offered by this prospectus and the accompanying
prospectus supplement will constitute one of the following for federal income
tax purposes:
o interests in a trust treated as a grantor trust,
o regular interests or residual interests in a trust treated as one or
more real estate mortgage investment conduits,
o debt issued by the issuer,
o interests in an issuer which is treated as a partnership, or
o regular interests, high-yield interests or ownership interests in a
trust treated as one or more financial asset securitization investment
trusts.
2
<PAGE>
Risk Factors
You should consider the following risk factors prior to any purchase
of any class of securities. You should also consider the information under the
caption "Risk Factors" in the accompanying prospectus supplement.
Your investment in any security may be an illiquid investment; you should be
prepared to hold your security to maturity.
A secondary market for these securities is unlikely to develop. If it
does develop, it may not provide you with sufficient liquidity of
investment or continue for the life of these securities. The
underwriter(s) may establish a secondary market in the securities,
although no underwriter will be obligated to do so. The securities are
not expected to be listed on any securities exchange or quoted in the
automated quotation system of a registered securities association.
Issuance of the securities in book-entry form may also reduce the
liquidity in the secondary trading market, since some investors may be
unwilling to purchase securities for which they cannot obtain
definitive physical securities.
As a result of prepayment on the loans or early redemption of the securities,
you could be fully paid significantly earlier than would otherwise be the case,
which may adversely affect the yield to maturity on your securities.
The yield to maturity of the securities may be adversely affected by a
higher or lower than anticipated rate of prepayments on the loans. The
yield to maturity on interest-only securities purchased at premiums or
discounts to par will be extremely sensitive to the rate of
prepayments on the loans.
The underlying loans may be prepaid in full or in part at any time,
although prepayment may require the borrower to pay of a prepayment
penalty or premium. These penalties will generally not be property of
the issuer, and will not be available to fund distributions owing to
you. We cannot predict the rate of prepayments of the loans, which is
influenced by a wide variety of economic, social and other factors,
including prevailing mortgage market interest rates, the availability
of alternative financing, local and regional economic conditions and
homeowner mobility. Therefore, we can give no assurance as to the
level of prepayments that a trust fund will experience.
Prepayments may result from mandatory prepayments relating to unused
monies held in pre-funding accounts, voluntary early payments by
borrowers, including payments in connection with refinancings of the
first mortgages, sales of mortgaged properties subject to
"due-on-sale" provisions and liquidations due to default, as well as
the receipt of proceeds from physical damage, credit life and
disability insurance policies. In addition, repurchases or purchases
from the issuer of loans or the payment of substitution adjustments
will have the same effect on the securities as a prepayment of the
loans.
One or more classes of securities of any series may be subject to
optional or mandatory redemption or in whole or in part, on or after a
specified date, or on or after the time when the aggregate outstanding
principal amount of the underlying loans or the securities is less
than a specified amount or percentage. You will bear the risk of
reinvesting unscheduled distributions resulting from a redemption.
3
<PAGE>
Any of the foregoing principal prepayments may adversely affect the
yield to maturity of the prepaid securities. Since prevailing interest
rates are subject to fluctuation, there can be no assurance that you
will be able to reinvest these prepayments at a yield equaling or
exceeding the yield on your securities.
Credit enhancement, even if provided, will in any event be limited in both
amount and scope of coverage, and may not be sufficient to cover all losses or
risks on your investment.
Credit enhancement may be provided in limited amounts to cover some,
but not all, types of losses on the underlying loans and, in most
cases, will reduce over time in accordance with a schedule or formula.
Furthermore, credit enhancement may provide only very limited coverage
as to some types of losses, and may provide no coverage as to other
types of losses. Generally, credit enhancement does not directly or
indirectly guarantee to the investors any specified rate of
prepayments, which is one of the principal risks of your investment.
The amount and types of coverage, the identification of any entity
providing the coverage, the terms of any subordination and any other
information will be described in the accompanying prospectus
supplement.
Property values may decline, leading to higher losses on the loans.
An investment in securities such as these, which are backed by
residential real estate loans, may be affected by a decline in real
estate values and changes in the borrowers' financial condition. If
property values were to decline, the rates of delinquencies and
foreclosures may rise, thereby increasing the likelihood of loss. If
these losses are not covered by any credit enhancement, you will bear
all risk of these losses 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 loans.
Foreclosure of mortgaged properties involve delays and expense and could cause
losses on the loans.
Even if the mortgaged properties provide adequate security for the
loans, substantial delays could be encountered in connection with the
foreclosure of defaulted loans, and corresponding delays in the
receipt of the foreclosure proceeds could occur. Foreclosures are
regulated by state statutes, rules and judicial decisions and are
subject to many of the delays and expenses of other lawsuits,
sometimes requiring several years to complete. The servicer will be
entitled to reimburse itself for any expenses it has paid in
attempting to recover amounts due on the liquidated loans, including
payments to prior lienholders, accrued fees of the servicer, legal
fees and costs of legal action, real estate taxes, and maintenance and
preservation expenses, which will reduce the amount of the net
recovery by the trust.
Environmental conditions on the mortgaged property may give rise to liability
for the issuer.
Real property pledged as security to a lender may be subject to
environmental risks which could cause losses on your securities. Under
the laws of some states, contamination of a mortgaged property may
give rise to a lien on the mortgaged property to assure the costs of
clean-up. In several states, this type of lien has priority over the
lien of an existing mortgage or owner's interest against the property.
In addition, under the laws of some states and under CERCLA, a lender
may be liable, as an "owner" or "operator," for costs of addressing
releases
4
<PAGE>
or threatened releases of hazardous substances that require remedy at a
property, if agents or employees of the lender have become sufficiently
involved in the operations of the borrower, regardless of whether or
not the environmental damage or threat was caused by a prior owner. A
lender also will increase its risk of environmental liability upon the
foreclosure of the mortgaged property, since the lender may then become
the legal owner of the property.
State and federal credit protection laws may limit collection of principal and
interest on the loans.
Residential mortgage lending is highly regulated at both the federal
and state levels and violations of these laws, policies and principles
may limit the ability of the servicer to collect all or part of the
amounts due on the loans, may entitle the borrower to a refund of
amounts previously paid and, in addition, could subject the issuer, as
the owner of the loan, to damages and administrative enforcement. The
occurrence of any of the foregoing could cause losses on your
securities.
The Soldiers' and Sailors' Civil Relief Act may limit the ability to collect on
the loans.
The terms of the Soldiers' and Sailors' Civil Relief Act of 1940, or
similar state legislation, benefit mortgagors who enter military
service after the origination of his or her loan, including a
mortgagor who is a member of the National Guard or is in reserve
status at the time of the origination of the loan and is later called
to active duty. These mortgagors may not be charged interest,
including fees and charges, above an annual rate of 6% during the
period of the mortgagor's active duty status, unless a court orders
otherwise upon application of the lender. The implementation of the
Soldiers' and Sailors' Civil Relief Act could have an adverse effect,
for an indeterminate period of time, on the ability of the servicer to
collect full amounts of interest on these loans.
In addition, the Soldiers' and Sailors' Civil Relief Act imposes
limitations that would impair the ability of the servicer to foreclose
on loans during the mortgagor's period of active duty status. Thus, in
the event that these loans go into default, there may be delays and
losses occasioned by the inability to realize upon the mortgaged
property in a timely fashion.
The ratings assigned to your securities may be lowered or withdrawn.
The ratings assigned to the securities will be based on, among other
things, the adequacy of the value of the trust fund and any credit
enhancement for a series. Any rating which is assigned may not remain
in effect for any given period of time or may be lowered or withdrawn
entirely by the rating agencies if, in their judgment, circumstances
in the future so warrant. Ratings may also be lowered or withdrawn
because of an adverse change in the financial or other condition of a
provider of credit enhancement or a change in the rating of a credit
enhancement provider's long term debt.
5
<PAGE>
Some of the terms used in this prospectus are capitalized. These
capitalized terms have specified definitions, which are included at the end of
this prospectus under the heading "Glossary."
The Sponsor
Prudential Securities Secured Financing Corporation was incorporated
in the State of Delaware on August 26, 1988 as a wholly-owned, limited purpose
finance subsidiary of Prudential Securities Group Inc., a wholly-owned indirect
subsidiary of The Prudential Insurance Company of America. The sponsor's
principal executive offices are located at One New York Plaza, 14th Floor, New
York, New York 10292. Its telephone number is (212) 778-1000.
Unless otherwise specified in the applicable prospectus supplement,
the sponsor will have no servicing obligations or responsibilities for any
mortgage loan pool, contract pool or trust fund. The sponsor does not have, nor
is it expected in the future to have, any significant assets.
Neither the sponsor nor Prudential Securities Group Inc. nor any of
their affiliates, including The Prudential Insurance Company of America, will
insure or guarantee the securities of any series.
Use of Proceeds
Unless otherwise specified in the applicable prospectus supplement,
substantially all of the net proceeds from the sale of each series of
securities will be used for the purchase of the loans represented by the
securities of a series or to reimburse amounts previously used to effect the
purchase of the loans, the costs of carrying the loans until the sale of the
securities and other expenses connected with pooling the loans and issuing the
securities.
The Trustee
The prospectus supplement for each series of securities will specify
the entity acting as trustee for a series. The commercial bank or trust company
serving as trustee may have normal banking relationships with the sponsor, the
issuer, the servicer or any of their respective affiliates. The trustee's
liability in connection with the issuance and sale of the securities is limited
solely to the express obligations of the trustee enumerated in the agreements
under which a series was issued.
The trustee may resign at any time, in which event the servicer will
be obligated to appoint a successor trustee. The servicer or the issuer may
also remove the trustee if the trustee ceases to be eligible to act as trustee
for a series under the Issuing 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 these circumstances, the servicer or the issuer, as the case
may be, will become obligated to appoint a successor trustee. The trustee may
also be removed at any time by the holders of securities evidencing not less
than a specified percentage of the voting interest in the trust fund. Any
resignation and removal of the trustee, and the appointment of a successor
trustee, will not become effective until acceptance of the 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.
6
<PAGE>
The Trust Funds
The securities offered by this prospectus will consist of either
asset-backed certificates or asset-backed notes, which represent either
beneficial ownership interests in, or debt secured by, the trust fund
consisting of the assets of a trust or another special-purpose entity issuing
the securities. The trust fund for each series of securities will consist
primarily of a segregated pool of loans comprised of mortgage loans and/or
manufactured housing contracts. In addition, a trust fund may also include one
or more of the following:
o amounts held from time to time in the Collection Account relating
to the securities;
o the issuer's interest in any primary mortgage insurance, hazard
insurance, title insurance and/or other insurance policies
relating to a loan;
o 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;
o any manufactured home which initially secured a contract and
which is acquired by repossession;
o any reserve funds;
o one or more guarantees, letters of credit, insurance policies,
surety bonds or any other credit enhancement arrangement; and
o any other assets as may be specified in the accompanying
prospectus supplement.
Some of the loans may be delinquent to the extent and as specified in
the accompanying prospectus supplement. The percentage of those loans which are
delinquent shall not exceed 10% of the aggregate principal balance of the loans
in the pool as of the cut-off date for that series. Unless otherwise specified
in the applicable prospectus supplement, the trust fund will not include,
however, the portion of interest on the loans which constitutes the Fixed
Retained Yield, if any. See "--Fixed Retained Yield" below.
The mortgage loan pool and/or contract pool for a series will be
originated or acquired by an originator of mortgage loans and/or contracts and
transferred to the issuer either directly by the originator or through a
special-purpose affiliate thereof. The mortgage loan pool or contract pool
relating to a series will be serviced by a servicer specified in the
accompanying prospectus supplement, which may be the originator, under a
Servicing Agreement.
The Mortgage Loans
Each mortgage loan pool will consist of mortgage loans evidenced by
promissory notes or other evidences of indebtedness that provide for an
original term to maturity of not more than 40 years, for monthly payments and
for interest on the outstanding principal amounts thereof at a rate that is
either fixed or adjustable, as described in the accompanying prospectus
supplement. The mortgage loans may provide for fixed level payments or be
graduated payment loans, graduated equity loans, balloon loans, buy-down loans
or mortgage loans with other payment characteristics as described in the
accompanying prospectus supplement. In addition, the mortgage loan pools may
include participation interests in mortgage loans, in which event references in
this prospectus to payments on mortgage loans underlying the participations
shall mean payments thereon allocable to the participation interests, and the
meaning of other terms relating to mortgage loans will be similarly adjusted.
Similarly, the mortgage loan pools may
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include mortgage loans for which a Fixed Retained Yield has been retained by the
originator, in which event references in this prospectus to mortgage loans and
payments thereon shall mean the mortgage loans exclusive of the Fixed Retained
Yield. The prospectus supplement for a series will specify whether there will be
any Fixed Retained Yield in any mortgage loan and, if so, the owner thereof. See
"Servicing of the Loans--Fixed Retained Yield" in this prospectus. The mortgage
loans will be secured by mortgages, deeds of trust or other similar security
instruments 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, the
District of Columbia or the Commonwealth of Puerto Rico. 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 loan pool may also
contain cooperative apartment loans evidenced by promissory notes secured by
security interests in shares issued by private, non-profit, cooperative housing
corporations and in the proprietary leases or occupancy agreements granting
exclusive rights to occupy specific dwellings in the cooperatives' buildings. In
the case of a cooperative apartment loan, the proprietary lease or occupancy
agreement securing the cooperative apartment loan is generally subordinate to
any blanket mortgage on the cooperative apartment building and/or the underlying
land. Additionally, the proprietary lease or occupancy agreement is subject to
termination and the cooperative shares are subject to cancellation by the
cooperative if the tenant-stockholder fails to pay maintenance or other
obligations or charges owed by the tenant-stockholder.
Each mortgage loan must have an original term of maturity of not less
than 5 years and not more than 40 years. Mortgage loans having LTVs at the time
of origination exceeding 80% will generally be supported by external credit
enhancement or be covered by primary mortgage insurance providing coverage on
at least the amount of the 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 the mortgage loan is reduced to 80% of the original fair
market value. 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 mortgaged property
determined in an appraisal obtained by the originator of the mortgage loan at
origination, acquisition, or, in the case of a refinancing, an appraisal
obtained at the origination of the refinanced mortgage loan, and (y) the sale
price for the mortgaged property.
No assurance can be given that values of the mortgaged properties have
remained or will remain at the levels which existed on the dates of origination
of the mortgage loans. If the residential real estate market should experience
an overall decline in property values that caused the outstanding balances of
the mortgage loans and any secondary financing on the mortgaged properties in a
particular trust fund to 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 the losses are not covered by the methods
of credit enhancement for the series or the insurance policies described in
this prospectus, they will be borne by holders of the securities of the series
relating to the trust fund. Furthermore, in a declining real estate market a
new appraisal could render the cut-off date LTVs of the mortgage loans as
unreliable measures of leverage.
The prospectus supplement for each series will describe selected
characteristics of the mortgage loan pool, which may include the aggregate
principal balance of the mortgage loans as of the cut-off date, the range of
original terms to maturity of the mortgage loans, the weighted average
remaining term to stated maturity at the cut-off date of the mortgage loans,
the earliest and latest origination dates of the mortgage loans, the range of
loan interest rates and Net Loan Rates borne by the mortgage loans, the
weighted average loan interest rate at the cut-off date of the mortgage loans,
the range of LTVs at the time of origination and the highest outstanding
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principal balance at origination of any mortgage loan. A maximum of 5% of the
mortgage loans, by aggregate principal balance as of the cut-off date, that are
included in a trust fund may deviate from the characteristics that are
described in the accompanying prospectus supplement.
All of the mortgage loans in a trust fund will have monthly payments
due on a specified day of each month and will, for mortgage loans secured by
residential mortgaged properties, require at least monthly payments of interest
on any outstanding balance. The mortgage loan pools may include adjustable-rate
mortgage loans that provide for payment adjustments to be made less frequently
than adjustments in the payments. Each adjustment in the loan interest 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 either a decrease, if the loan interest rate
rises, or an increase, if the loan interest rate declines, in the rate of
amortization of the mortgage loan. Moreover, these payment adjustments on the
mortgage loans may be subject to a number of limitations, as specified in the
accompanying prospectus supplement, which may also affect the rate of
amortization on the mortgage loan. As a result of these provisions, or in
accordance with the payment schedules of some graduated payment 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 of these months, no
principal would be payable on the mortgage loan and, if the accrued interest
exceeded the scheduled monthly payment, there would be deferred interest.
Deferred interest is added to the principal balance of the mortgage loan and
will bear interest at the loan interest rate until paid. If these limitations
prevent the payments from being sufficient to amortize fully the mortgage loan
by its stated maturity date, a lump sum payment equal to the remaining unpaid
principal balance of the mortgage loan will be due on its stated maturity date.
See "Prepayment and Yield Considerations" in this prospectus.
The mortgaged properties will consist of residential properties,
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, except for a de minimis
portion of any trust fund which may be comprised of other types of 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 the mortgaged properties, or liens on shares
issued by cooperatives and the proprietary leases or occupancy agreements
occupy specified units in the cooperatives' buildings. The geographic
distribution of mortgaged properties will be included in the accompanying
prospectus supplement. Each prospectus supplement will also describe the
percentage of the aggregate principal balance as of the cut-off date of the
mortgage loans in the mortgage loan pool representing the refinancing of
existing mortgage indebtedness and the types of mortgaged properties.
Buy-Down Loans. A trust fund may contain mortgage loans subject to
temporary buy-down plans under 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 shortfall in payment made by the
mortgagor under the terms of the buy-down plan will be compensated for from an
amount contributed by the originator of the mortgage loan or another source
and, if so specified in the accompanying prospectus supplement, placed in a
custodial account by the servicer. If the mortgagor on a buy-down loan prepays
the mortgage loan in its entirety, or defaults on the 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
scheduled monthly payment otherwise due on the buy-down loan, the unpaid
principal balance of the buy-down loan will be reduced by the amounts remaining
in the custodial
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account for the buy-down loan, and the amounts shall be deposited in the
Collection Account, net of any amounts paid in connection with the buy-down loan
by any insurer, guarantor or other person under a credit enhancement arrangement
described in the accompanying prospectus supplement.
Balloon Loans. 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 that causes the
outstanding principal balance of the mortgage loan to be due and payable at
maturity in an amount greater than the regular scheduled payment. If specified
in the accompanying prospectus supplement, the originator will be obligated to
refinance its balloon loan at its maturity at a new interest rate determined
prior to maturity by reference to an index plus a margin specified in the
mortgage note. The mortgagor is not, however, obligated to refinance the
balloon loan through the 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" in this prospectus.
Home Equity Lines of Credit. The trust fund may include "home equity
revolving lines of credit" or home equity lines. A home equity line establishes
a maximum credit limit for the borrower, and permits the borrower to draw
additional funds, and repay the aggregate outstanding balance in each case from
time to time in a manner so that the aggregate outstanding balance of the home
equity line does not exceed the maximum credit limit. Home equity lines are
generally evidenced by a 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. 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 a number of 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 period established
at the time of the initial advance. The amortization period is the length of
time in which the initial advance plus interest will be repaid in full and
generally ranges from 5 years to 15 years depending on the credit limit
assigned. Generally, the amortization period 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:
o a basic monthly payment in an amount necessary to completely
repay the then-outstanding balance and the applicable finance
charge in equal installments over the assigned amortization
period;
o any monthly escrow charges;
o any delinquency or other similar charges; and
o any past due amounts, including past due finance charges.
The basic monthly payment amount is typically recomputed each time the
loan interest rate adjusts and whenever additional funds are advanced; the
recomputation in the case of an additional advance of funds may also reset the
amortization schedule. The effect of each additional advance of funds on the
home equity line is to reset the commencement date of the original maturity
term to the date of the additional advance. For example, a home equity line
made originally with a 15-year maturity from date of origination changes at the
time of the next adjustment or additional advance of funds to a home equity
line with a maturity of 15 years from the date of the additional advance of
funds. For some home equity lines, the same type of recomputation exists for
adjustments of the loan interest rate.
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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.
Junior Liens. Mortgage loans which are secured by junior mortgages are
subordinate to the rights of the mortgagees under the senior mortgage or
mortgages. Accordingly, liquidation, insurance and condemnation proceeds
received in connection with the mortgaged property will be available to satisfy
the outstanding balance of the mortgage loan only to the extent that the claims
of the senior mortgages have been satisfied in full, including any liquidation
and foreclosure costs. In addition, a junior mortgagee foreclosing on its
mortgage may be required to purchase the 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 mortgaged property, through foreclosure, deed-in-lieu of
foreclosure or otherwise may take the property subject to any senior mortgages
and continue to perform the obligations on 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.
High LTV Loans. A mortgage loan pool may include mortgage loans with
combined LTVs in excess of 100%, generally up to a maximum of 125%. For these
high LTV loans, more emphasis in the underwriting analysis is placed on the
borrower's payment history and ability to repay debt, rather than on the
collateral value of the mortgaged property. High LTV loans are generally
targeted as debt consolidation loans for repeat or frequent borrowers with
generally strong credit ratings. Lending decisions for high LTV loans are based
on an analysis of the prospective mortgagor's documented cash flow and credit
history supplemented by a collateral evaluation deemed appropriate by the
originator.
Graduated Equity Loans. A mortgage loan pool may include graduated
equity loans. Graduated equity loans are fixed-rate, fully-amortizing mortgage
loans which provide for monthly payments based on a 10- to 30-year amortization
schedule, and which provide for scheduled annual payment increases for a number
of years and level payments thereafter. The full amount of the scheduled
payment increases during the early years is applied to reduce the outstanding
principal balance of the mortgage loans.
Graduated Payment Loans. A mortgage loan pool may include graduated
payment loans. Graduated payment 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. 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 the mortgage loan are not sufficient to pay the full interest
accruing on the mortgage loan, the interest payments on the mortgage loan may
not be sufficient in its early years to meet its proportionate share of the
distributions expected to be made on the securities. Thus, if the mortgage
loans include graduated payment loans, the servicer will establish a reserve
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fund which, together with reinvestment income thereon, will be sufficient to
cover the amount by which payments of interest on the graduated payment loans
assumed in calculating distributions expected to be made on the securities of a
series exceed scheduled interest payments according to the relevant graduated
payment mortgage plan for the period during which excess occurs.
Convertible Mortgage Loans. A trust fund may contain convertible
mortgage loans which may either (x) switch from a fixed-rate mortgage to an
adjustable-rate mortgage under the terms of the underlying mortgage note or (y)
switch from an adjustable-rate mortgage to a fixed-rate mortgage under the
terms of the underlying mortgage note. These mortgage loans will be
automatically repurchased by the originator or the servicer upon the occurrence
of the conversion.
Payment Terms.
The payment terms of the mortgage loans to be included in a trust fund
for a series will be described in the accompanying prospectus supplement and
may include any of the following features of combinations thereof or other
features described in the accompanying prospectus supplement:
o Interest may be payable at a loan interest rate that may be a
fixed rate, a rate adjustable from time to time in relation to an
index, a rate that is fixed for a period of time and is followed
by an adjustable rate, a rate that otherwise varies from time to
time, or a rate that is convertible from an adjustable rate to a
fixed rate or a fixed rate to an adjustable rate. Changes to a
loan interest rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of these
limitations. Accrued interest may be deferred and added to the
principal of a mortgage loan for these periods and under other
circumstances as may be specified in the accompanying prospectus
supplement. Mortgage loans may provide for the payment of
interest at a rate lower than the specified loan interest rate
for a period of time of for the life of the mortgage loan, and
the amount of any difference may be contributed from funds
supplied by the seller of the mortgaged property or another
source.
o Principal may be payable on a level debt service basis to fully
amortize the mortgage loan over its term, may be calculated on
the basis of an assumed amortization schedule that is
significantly longer than the original term to maturity or on a
loan interest rate that is different from the loan interest rate
or may not be amortized during all or a portion of the original
term. Payment of all or a substantial portion of the principal
may be due on maturity. Principal may include deferred interest
that has been added to the principal balance of the mortgage
loan.
o Monthly payments of principal and interest may be fixed for the
life of the mortgage loan, may increase over a specified period
of time or may change from period to period. mortgage loans may
include limits on periodic increases or decreases in the amount
of monthly payments and may include maximum or minimum amounts of
monthly payments.
o Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the mortgage loan or may
decline over time, and may be prohibited for the life of the
mortgage loan or for specified periods. Some mortgage loans may
permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in
connection with any subsequent prepayment. Other mortgage loans
may
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permit prepayments without payment of a fee unless the prepayment
occurs during specified time periods. The mortgage loans may
include "due on sale" clauses which permit the mortgagee to
demand payment of the entire mortgage loan in connection with the
sale or particular transfers of the mortgaged property. Other
mortgage loans may be assumable by persons meeting the then
applicable underwriting standards of the originator.
Amortization of the Mortgage Loans.
The mortgage loans will provide for payments that are allocated to
principal and interest according to either the actuarial method, the simple
interest method or the "Rule of 78s" method, as described in the accompanying
prospectus supplement. The accompanying prospectus supplement will state
whether any of the mortgage loans will provide for deferred interest or
negative amortization.
An actuarial mortgage loan provides for payments in level monthly
installments -- except, in the case of balloon loans, for the final payment --
consisting of interest equal to one-twelfth of the applicable loan interest
rate times the unpaid principal balance, with the remainder of the payment
applied to principal.
A simple interest mortgage loan provides for the amortization of the
amount financed under the mortgage loan over a series of equal monthly payments
- -- except, in the case of a balloon loan, for the final payment. Each monthly
payment consists of an installment of interest which is calculated on the basis
of the outstanding principal balance of the mortgage loan being multiplied by
the stated loan interest rate and further multiplied by a fraction, the
numerator of which is the number of days in the period elapsed since the
preceding payment of interest was made and the denominator of which is the
number of days in the annual period for which interest accrues on the mortgage
loan. As payments are received under a simple interest mortgage loan, the
amount received is applied first to interest accrued to the date of payment and
the balance is applied to reduce the unpaid principal balance. Accordingly, if
a borrower pays a fixed monthly installment on a simple interest mortgage loan
before its scheduled due date, the portion of the payment allocable to interest
for the period since the preceding payment was made will be less than it would
have been had the payment been made as scheduled, and the portion of the
payment applied to reduce the unpaid principal balance will be correspondingly
greater. However, the next succeeding payment will result in an allocation of a
greater amount to interest if the payment is made on its scheduled due date.
Conversely, if a borrower pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment under a simple interest
mortgage loan is made on or prior to its scheduled due date, the principal
balance of the mortgage loan will amortize in the manner described in the
preceding paragraph. However, if the borrower consistently makes scheduled
payments after the scheduled due date, the mortgage loan will amortize more
slowly than scheduled. If a simple interest mortgage loan is prepaid, the
borrower is required to pay interest only to the date of prepayment.
Some of the mortgage loans held by an issuer may be loans insured
under the FHA Title I credit insurance program created under Sections 1 and
2(a) of the National Housing Act of 1934. Under the Title I program, the FHA is
authorized and empowered to insure qualified lending institutions against
losses on eligible loans. The Title I program operates as a coinsurance program
in which the FHA insures up to 90% of specified losses incurred on an
individual insured loan, including the unpaid principal balance of the loan,
but only to the extent of the
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insurance coverage available in the lender's FHA insurance coverage reserve
account. The owner of the loan bears the uninsured loss on each loan. The types
of loans which are eligible for insurance by the FHA under the Title I program
include property improvement loans made to finance actions or items that
substantially protect or improve the basic livability or utility of a property
and includes:
o single family, multifamily and nonresidential property
improvement loans;
o manufactured home improvement loans, where the home is classified
as personality;
o historic preservation loans; and
o fire safety equipment loans for existing health care facilities.
If specific information respecting the mortgage loans to be included
in a trust fund is not known to the issuer at the time the securities of a
series are initially offered, more general information of the nature described
above will be provided in the prospectus supplement and final specific
information will be disclosed in a Current Report on Form 8-K to be available
to investors on the date of issuance thereof and to be filed with the
Securities and Exchange Commission promptly after the initial issuance of the
securities. A copy of the Issuing Agreement for each series of securities will
be attached to the Form 8-K and will be available for inspection at the
corporate trust office of the trustee specified in the accompanying prospectus
supplement. A schedule of the mortgage loans relating to a series will be
attached to the Issuing Agreement delivered to the trustee upon delivery of the
securities.
The Contracts
Each contract pool will consist of conventional manufactured housing
installment sales contracts and installment loan agreements originated by the
originator, or by a manufactured housing dealer in the ordinary course of
business and purchased by the originator. Each contract will be secured by
manufactured homes, each of which will be located in any of the fifty states,
the District of Columbia and the Commonwealth of Puerto Rico. The contracts
will be fully amortizing and will bear interest at a fixed or adjustable annual
percentage rate. The contract pool may include contracts for which a Fixed
Retained Yield has been retained, in which event references in this prospectus
to contracts and payments thereon shall mean the contracts exclusive of the
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" in this prospectus.
The originator will represent that the manufactured homes securing the
contracts consist of "manufactured homes" within the meaning of 42 United
States Code, Section 5402(6), which defines a "manufactured home" as "a
structure, transportable in one or more sections, which in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis designed to be used as a dwelling with or without
a permanent foundation when connected to the required utilities, and includes
the plumbing, heating, air-conditioning, and electrical systems contained
therein; except that this term shall include any structure which meets all the
requirements of [this] paragraph except the size requirements and with respect
to which the manufacturer voluntarily files a certification required by the
Secretary of Housing and Urban Development and complies with the standards
established under [this] chapter."
Manufactured homes, unlike site-built homes, generally depreciate in
value. Consequently, at any time after origination it is possible, especially
in the case of contracts with
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high LTVs at origination, that the market value of a manufactured home may be
lower than the principal amount outstanding under the contract.
The prospectus supplement for each series will describe a number of
characteristics of the contracts, which may include the aggregate principal
balance of the contracts in the contract pool as of the cut-off date for a
series, the range of original terms to maturity of the contracts in the
contract pool, the weighted average remaining term to stated maturity at the
cut-off date of the contracts, the earliest and latest origination dates of the
contracts, the range of loan interest rates and Net Loan Rates borne by the
contracts, the weighted average Net Loan Rate at the cut-off date of the
contracts, the range of the contracts which had loan-to-value ratios at the
time of origination of the contracts and the highest outstanding principal
balance at origination of any contract. A maximum of 5%, by aggregate principal
balance as of the cut-off date, of the aggregate contracts that are included in
a trust fund will deviate from the characteristics that are described in the
accompanying prospectus supplement.
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 manufactured home determined in an appraisal
obtained by the originator at origination or acquisition and (y) the sale price
for the property, plus, in either case, sales and other taxes and, to the
extent financed, filing and recording fees imposed by law, premiums for
insurance and prepaid finance charges.
The contracts in a trust fund will generally have due dates on the
first of each month and will be fully-amortizing contracts. Contracts may have
due dates which occur on a date other than the first of each month. The
contract pools may include adjustable rate contracts that provide for payment
adjustments to be made less frequently than adjustments in the payments. Each
adjustment in the loan interest rate which is not made at the time of a
corresponding adjustment in payments will result in a decrease, if the loan
interest rate rises, or an increase, if the loan interest rate declines, in the
rate of amortization of the contract. Moreover, the payment adjustments on the
contracts may be subject to specified limitations, as specified in the
prospectus supplement, which may also affect the rate of amortization on the
contract. As a result of these provisions, the amount of interest accrued in
any month may equal or exceed the scheduled monthly payment on the contract. In
any of these months, no principal would be payable on the contract, and if the
accrued interest exceeded the scheduled monthly payment, the excess interest
due would become deferred interest that is added to the principal balance of
the contract. Deferred interest will bear interest at the loan interest rate
until paid. If these 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 its stated
maturity date. See "Prepayment and Yield Considerations" in this prospectus.
The geographic distribution of manufactured homes will be stated in
the accompanying prospectus supplement. Each prospectus supplement will state
the percentage of the aggregate principal balance of any contracts as of the
cut-off date in the contract pool which are secured by manufactured homes which
have become permanently affixed to real estate. Each prospectus supplement will
also state the percentage of the aggregate principal balance of the contracts
as of the cut-off date in the contract pool representing the refinancing of
existing mortgage indebtedness.
If specific information respecting the contracts to be included in a
trust fund is not known to the issuer at the time the securities of a series
are initially offered, more general information of the nature described above
will be provided in the prospectus supplement and final specific information
will be disclosed in a Current Report on Form 8-K to be available to investors
on the
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date of issuance thereof and to be filed with the Securities and Exchange
Commission promptly after the initial issuance of the securities.
Fixed Retained Yield
The prospectus supplement for a series will specify whether a Fixed
Retained Yield has been retained for the loans of a series, and, if so, the
owner thereof. Any Fixed Retained Yield will be established on a loan-by-loan
basis and will be specified in the schedule of loans attached as an exhibit to
the applicable Issuing Agreement. The servicer may deduct the Fixed Retained
Yield from payments as received and prior to deposit of these payments in the
Collection Account for a series or may, unless an election has been made to
treat the trust fund, or a portion of the trust fund, as a REMIC, withdraw the
Fixed Retained Yield from the Collection Account after the entire payment has
been deposited in the Collection Account. Notwithstanding the foregoing, any
partial payment or recovery of interest received by the servicer relating to a
loan, whether paid by the mortgagor or obligor or received as Liquidation
Proceeds, Insurance Proceeds or otherwise, after deduction of all applicable
servicing fees, will be allocated between Fixed Retained Yield, if any, and
interest on a pari passu basis.
Insurance Policies
The Issuing Agreement may require the servicer to cause to be
maintained for each loan a standard hazard insurance policy issued by a
generally acceptable insurer insuring the mortgaged property underlying the
mortgage loan or the manufactured home underlying the contract against loss by
fire, with extended coverage. Standard hazard insurance policies will generally
be in an amount at least equal to the lesser of 100% of the insurable value of
the improvements which are a part of the mortgaged property or manufactured
home or the principal balance of the loan; provided, however, that this
insurance may not be less than the minimum amount required to fully compensate
for any damage or loss on a replacement cost basis. The servicer may also
maintain on property acquired upon foreclosure, or deed in lieu of foreclosure,
of any mortgage loan, and on any manufactured home acquired by repossession a
standard hazard insurance policy in an amount that is at least equal to the
lesser of 100% of the insurable value of the improvements which are a part of
the property or the insurable value of the manufactured home or the principal
balance of the loan plus, if required by the applicable Issuing Agreement,
accrued interest and liquidation expenses; provided, however, that this
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 insurance policies, other than amounts to be applied to the restoration or
repair of the mortgaged property or manufactured home or released to the
borrower in accordance with normal servicing procedures, will be deposited in
the Collection Account.
The standard hazard insurance policies covering the mortgaged
properties generally will cover physical damage to, or destruction of, the
improvements on the mortgaged property caused by fire, lightning, explosion,
smoke, windstorm, hail, riot, strike and civil commotion, subject to the
conditions and exclusions particularized in each policy. Because the standard
hazard insurance policies relating to the mortgage loans will be underwritten
by different insurers and will cover mortgaged properties located in various
states, these 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 of these 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 some cases, vandalism. The foregoing list
is merely indicative of particular kinds of uninsured risks and is not intended
to be all-inclusive.
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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 the 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 the flood insurance has been made
available, the Issuing 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 Issuing Agreement will require that the flood
insurance be in an amount not less than the lesser of (x) the amount required
to compensate for any loss or damage to the mortgaged property on a replacement
cost basis and (y) the maximum amount of insurance which is available under the
federal flood insurance program.
Any losses incurred in connection with loans due to uninsured risks,
including earthquakes, mudflows, floods, hazardous wastes and hazardous
substances, or insufficient hazard insurance proceeds could affect
distributions to the securityholders.
The servicer shall obtain and maintain at its own expense and keep in
full force and effect a blanket fidelity bond and an error and omissions
insurance policy covering the servicer's officers and employees as well as
office persons acting on behalf of the servicer in connection with the
servicing of the trust fund.
Although the terms and conditions of primary mortgage insurance
policies differ, each primary mortgage insurance policy will generally cover
losses up to an amount equal to the excess of the unpaid principal amount of a
defaulted mortgage loan or contract, plus accrued and unpaid interest thereon
and approved expenses, over a specified percentage of the value of the
mortgaged property or manufactured home.
As conditions precedent to the filing or payment of a claim under a
primary mortgage insurance policy, the insured will typically be required, in
the event of default by the mortgagor, among other things, to:
o advance or discharge (x) hazard insurance premiums and (y) as
necessary and approved in advance by the insurer, real estate
taxes, protection and preservation expenses and foreclosure and
similar costs;
o in the event of any physical loss or damage to the mortgaged
property, have the mortgaged property restored to at least its
condition at the effective date of the primary mortgage insurance
policy; and
o if the insurer pays the entire amount of the loss or damage,
tender to the insurer good and merchantable title to, and
possession of, the mortgaged property.
Acquisition of the Loans from the Originator
The loans underlying a series of securities will be acquired by the
issuer from the originator, either directly or through a special-purpose
affiliate of the originator, under a Loan Sale Agreement. Each loan so acquired
will have been originated or acquired by the originator
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thereof in accordance with the underwriting criteria specified in the
accompanying prospectus supplement. In the Loan Sale Agreement, the originator
will make a number of representations and warranties concerning the loans being
acquired from the originator as described in this prospectus under
"--Representations and Warranties".
Assignment of the Loans
At the time of the issuance of the securities of a series, the issuer
will cause the mortgage loans comprising the mortgage loan pool, including any
rights to, or security interests in, leases, rents and personal property, or
the contracts comprising the contract pool included in the trust fund to be
assigned to the trustee, together with all principal and interest received by
or on behalf of the issuer on or in connection with the loans after the cut-off
date, other than principal and interest due on or before the cut-off date and
other than any Fixed Retained Yield, and the originator shall thereupon be
liable to the trustee for defective loan documents or an uncured breach of the
representations or warranties regarding the loans, to the extent described
below. The trustee or its agent will, concurrently with the assignment,
authenticate and deliver the securities evidencing a series to the issuer in
exchange for the loans. Each loan will be identified in a schedule appearing as
an exhibit to the applicable Issuing Agreement. Each schedule will include,
among other things, the unpaid principal balance as of the close of business on
the applicable cut-off date, the scheduled monthly payment of principal, if
any, and interest, the maturity date and the loan interest rate for each loan
in the trust fund.
For each mortgage loan in a trust fund, the mortgage note or other
promissory note, any assumption, modification or conversion to fixed interest
rate agreement, a copy of any recorded UCC-1 financing statements and
continuation statements, together with original executed UCC-2 or UCC-3
financing statements disclosing an assignment of a security interest in any
personal property constituting security for repayment of the mortgage loan to
the trustee, an executed re-assignment of assignment of leases, rents and
profits to the trustee if the assignment of leases, rents and profits is
separate from the mortgage, a mortgage assignment in recordable form and the
recorded mortgage or other documents as are required under applicable law to
create a perfected security interest in the mortgaged property in favor of the
trustee will be delivered to the trustee or to a designated custodian;
provided, that, in instances where recorded documents cannot be delivered due
to delays in connection with recording, copies thereof, certified by the
originator to be true and complete copies of these documents, sent for
recording, may be delivered and the original recorded documents will be
delivered promptly upon receipt. As to each mortgage loan for which there is
primary mortgage insurance, the certificate of primary mortgage insurance will
be delivered to the trustee. The assignment of each mortgage will be recorded
promptly after the initial issuance of securities for the trust fund, except in
states where, the recording is not required to protect the trustee's interest
in the mortgage loan against the claim of any subsequent transferee or any
successor to or creditor of the originator or any affiliate of the originator.
For any mortgage loans which are cooperative apartment loans, the
issuer will cause to be delivered to the trustee or to a designated custodian
the 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 blank stock powers. The originator will
cause to be filed in the appropriate office an assignment and a refinancing
statement evidencing the trustee's security interest in each cooperative
apartment loan.
For each contract, there will be delivered to the trustee or to a
designated custodian the original contract and copies of documents and
instruments to each contract and the security interest in the property securing
each contract. In order to give notice of the right, title and interest of
securityholders to the contracts, the sponsor will cause a UCC-1 financing
statement to be executed identifying the trustee as the secured party and
identifying all contracts as collateral.
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The contracts will not be stamped or otherwise marked to reflect their
assignment to the issuer. Therefore, if, through negligence, fraud or otherwise,
a subsequent purchaser were able to take physical possession of the contracts
without notice of the assignment, the interest of securityholders in the
contracts could be defeated. See "Material Legal Aspects of the Loans."
The trustee or the designated custodian will hold the documents
relating to mortgage loans generally or contracts in trust for the benefit of
securityholders of the series and will review the documents within 45 days of
the date of the applicable Issuing Agreement. If any document is not delivered
or is found to be defective in any material respect or has not been recorded as
required by the applicable Loan Sale Agreement, the trustee or a designated
custodian shall immediately notify the servicer and the issuer, and the
servicer shall immediately notify the originator. If the originator cannot cure
the omission or defect within 60 days after receipt of notice, the originator
will be obligated, under the Loan Sale Agreement, either to repurchase the loan
from the trustee within 60 days after receipt of notice, at a price equal to
the then unpaid principal balance thereof, plus accrued and unpaid interest at
the applicable loan interest rate, less any Fixed Retained Yield and less the
rate, if any, of servicing fee payable in connection with the loan, through the
last day of the month in which the repurchase takes place or to substitute one
or more new loans for the loan. In the case of a loan so repurchased, the
purchase price will be deposited in the Collection Account. In the case of a
substitution, the substitution will be made in accordance with the standards
described in "-- Representations and Warranties" below.
There can be no assurance that the originator will fulfill this
repurchase or substitution obligation. The servicer will be obligated to
enforce the obligation to the same extent as it must enforce the obligation of
the originator for a breach of representation or warranty. However, as in the
case of an uncured breach of a representation or warranty, neither the
servicer, unless the servicer is the originator, nor the issuer will be
obligated to purchase or substitute for the loan if the originator defaults on
its repurchase or substitution obligation, unless the breach also constitutes a
breach of the representations or warranties of the servicer or the issuer, as
the case may be. This repurchase or substitution obligation constitutes the
sole remedy available to the securityholders or the trustee for omission of, or
a material defect in, a constituent document.
The trustee will be authorized to appoint a custodian to maintain
possession of the documents relating to the loans. The custodian will keep the
documents as the trustee's agent under a custodial agreement.
Representations and Warranties
The originator, in the Loan Sale Agreement, will have made a number of
representations and warranties concerning the mortgage loans. The originator
will have represented, among other things, substantially to the effect that:
o immediately prior to the sale and transfer of the mortgage loans,
the originator had good title to, and was the sole owner of, each
mortgage loan and there had been no other assignment or pledge
thereof;
o as of the date of the transfer, the mortgage loans are subject to
no offsets, defenses or counterclaims;
o each mortgage loan at the time it was made complied in all
material respects with applicable state and federal laws,
including, usury, equal credit opportunity and disclosure laws;
o a lender's policy of title insurance was issued on the date of
the origination of each mortgage loan and each policy is valid
and remains in full force and effect;
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o as of the date of the transfer, each mortgaged property is free
of material damage and is in adequate repair and each mortgage is
a valid lien on the mortgaged property, subject only to
o the lien of current real property taxes and assessments,
o covenants, conditions and restrictions, rights of way,
easements and other matters of public record as of the date
of the recording of the mortgage, 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 (x) specifically referred to in the
appraisal made in connection with the origination of the
mortgage loan or (y) which do not adversely affect the
appraised value of the mortgaged property as set forth in
the appraisal,
o 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
o in the case of second or more junior loans any senior loans
of record as of the date of recording of the mortgage loan;
o as of the date of the transfer, there are no delinquent tax or
assessment liens against the mortgaged property that would permit
taxing authority to initiate foreclosure proceedings; and
o for 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 particular
circumstances to the availability of flood insurance under the
federal flood insurance program, the mortgaged property is
covered by flood insurance meeting the requirements of the
applicable Issuing Agreement.
The originator, in the Loan Sale Agreement, will have made a number of
representations and warranties concerning the contracts. The originator will
have represented, among other things, substantially to the effect that:
o immediately prior to the sale and transfer of the contracts, the
originator had good title to, and was the sole owner of, each
contract and there had been no other assignment or pledge
thereof,
o as of the date of the transfer, the contracts are subject to no
offsets, defenses or counterclaims,
o 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,
o as of the date of the transfer, each contract is a valid first
lien on the manufactured home and the manufactured home is free
of material damage and is in adequate repair,
o as of the date of the transfer, there are no delinquent tax or
assessment liens against the manufactured home, and
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o for each contract, the manufactured home securing the contract is
covered by a standard hazard insurance policy in the amount
required by the Issuing Agreement and all premiums then due on
the insurance have been paid in full.
All of the representations and warranties of the originator concerning
a loan will have been made as of the date on which the originator sold the loan
to the issuer. A substantial period of time may have elapsed between the date
as of which the representations and warranties were made and the later date of
initial issuance of the securities. Since the representations and warranties
referred to in the preceding paragraphs are the only representations and
warranties that will be made by the originator, the repurchase obligation
described below will not arise if, during the period commencing on the date of
sale of a loan by the originator, the relevant event occurs that would have
given rise to this kind of obligation had the event occurred prior to sale of
the affected loan. However, the issuer will not include any loan in the trust
fund for any series of securities if anything has come to the issuer's
attention that would cause it to believe that the representations and
warranties of the originator will not be accurate and complete in all material
respects concerning the loan as of the date of initial issuance of the
securities.
The servicer, or the trustee if the servicer is the originator, will
promptly notify the originator of any breach of any representation or warranty
made by it concerning a loan which materially and adversely affects the
interests of the securityholders in the loan. If the originator cannot cure the
breach within 60 days after notice from the servicer or the trustee, as the
case may be, then the originator will be obligated either (1) to repurchase the
loan from the trust fund at the applicable purchase price or (2) subject to the
trustee's approval and to the extent permitted by the Issuing Agreement, to
substitute for the Deleted Loan one or more loans, as the case may be, but only
if (a) for a trust fund or a portion of the trust fund for which a REMIC
election is to be made, the substitution is effected within two years of the
date of initial issuance of the securities or (b) for a trust fund for which no
REMIC election is to be made, the substitution is effected within 120 days of
the date of initial issuance of the securities.
Any substitute loan will, on the date of substitution:
o have a LTV no greater than that of the Deleted Loan,
o have a loan interest rate not less than the loan interest rate of
the Deleted Loan,
o have a Net Loan Rate not less than the Net Loan Rate of the
Deleted Loan,
o have a remaining term to maturity not greater than that of the
Deleted Loan, and
o comply with all of the representations and warranties contained
in the Loan Sale Agreement as of the date of substitution.
If substitution is to be made for a Deleted Loan with an adjustable
loan interest 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 above will be determined on the basis of
aggregate principal balances -- provided, that in all events the tests for a
"qualified mortgage" as described in Section 860G of the Code are met as to
each substituted loan -- the rates will be determined on the basis of weighted
average loan interest rates and Net Loan Rates, as the case may be, and the
terms 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 designated
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custodian and the originator will pay an amount equal to the excess of (x) the
unpaid principal balance of the Deleted Loan, over (y) the unpaid principal
balance of the substitute loan or loans, together with interest on the excess at
the loan interest rate to the next scheduled due date of the Deleted Loan. This
amount will be deposited in the Collection Account for distribution to
securityholders. Except in those cases in which the servicer is the originator,
the servicer will be required under the applicable Issuing Agreement to enforce
this repurchase or substitution obligation for the benefit of the trustee and
the holders of the securities, following the practices it would employ in its
good faith business judgment were it the owner of the loan. This repurchase or
substitution obligation will constitute the sole remedy available to holders of
securities or the trustee for a breach of representation by the originator.
None of the sponsor, the issuer or the servicer, unless the servicer
is the originator, will be obligated to purchase or substitute for a loan if
the originator defaults on its obligation to do so, and no assurance can be
given that the originator will carry out their respective repurchase
obligations.
The originator, the servicer or another entity specified in the
accompanying prospectus supplement, will make the representations and
warranties as to the types and geographical concentration of the mortgage loan
pool or contract pool and as to other matters concerning the pools as may be
described the accompanying prospectus supplement. Upon a breach of any
representation or warranty which materially and adversely affects the interests
of the securityholders in a loan, the entity making the representation or
warranty will be obligated either to cure the breach in all material respects,
repurchase the loan at the purchase price or substitute for the loan in the
manner, and subject to the conditions, described above regarding the
obligations of the originator in connection with missing or defective loan
documents or the breach of the originator's representations and warranties.
This repurchase or substitution obligation constitutes the sole remedy
available to the securityholders or the trustee for a breach of a
representation or warranty by the originator, the servicer or the other party,
respectively.
Pre-Funding Accounts
A trust fund may include one or more Pre-Funding Accounts. On the
closing date for a series, a portion of the proceeds of the sale of the
securities of a series will be deposited in the Pre-Funding Account and may be
used to acquire additional loans or subsequent loans during the Pre-Funding
Period. If any funds remain on deposit in the Pre-Funding Account at the end of
Pre-Funding Period, that amount will be applied in the manner specified in the
accompanying prospectus supplement to prepay the securities of that series.
If a Pre-Funding Account is established,
o the Pre-Funding Period will not extend beyond the last day of the
third full month after the closing date,
o the additional loans to be acquired during the Pre-Funding Period
will be subject to the same representations and warranties and
satisfy the same eligibility requirements as the loans included
in the trust fund on the closing date, subject to the exceptions
that are expressly stated in the accompanying prospectus
supplement, and
o prior to the purchase of additional loans, the amount on deposit
in the Pre-Funding Account will be invested in one or more
eligible investments allowed by the rating agencies or any Credit
Enhancer, which eligible investment must mature no later than the
business day prior to the next distribution date.
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If a Pre-Funding Account is established, one or more capitalized
interest accounts may be established and maintained with the trustee, for the
benefit of the securityholders. On the closing date for a series, a portion of
the proceeds of the sale of the securities of a series will be deposited in the
capitalized interest account and used to fund the excess, if any, of (a) the
sum of the amount of interest accrued on the securities of a series and
specified fees or expenses during the Pre-Funding Period, over (b) the amount
of interest available therefor from the loans in the trust fund. Any amounts on
deposit in the capitalized interest account at the end of the Pre-Funding
Period that are not necessary for these purposes will be distributed to the
person specified in the accompanying prospectus supplement.
If a trust fund includes a Pre-Funding Account and the principal
balance of additional loans delivered to the issuer during the Pre-Funding
Period is less than the original amount on deposit in the Pre-Funding Account,
the securityholders will receive a prepayment of principal as and to the extent
described in the accompanying prospectus supplement. Any principal prepayment
may adversely affect the yield to maturity of these securities. Since
prevailing interest rates are subject to fluctuation, there can be no assurance
that investors will be able to reinvest these prepayments at yields equaling or
exceeding the yields on the securities. It is possible that the yield on any
reinvestment will be lower, and may be significantly lower, than the yield on
the securities.
Description of the Securities
The securities will be issued in series. Each series of securities or,
in some instances, two or more series of securities will be issued under an
Issuing Agreement. The following summaries describe particular provisions of
the Issuing Agreements. The summaries are not complete and are subject to all
of the provisions of the Issuing Agreement for the issuer and the accompanying
prospectus supplement. We will file each Issuing Agreement executed and
delivered for each series with the Securities and Exchange Commission as an
exhibit to a Current Report on Form 8-K promptly after issuance of the
securities of a series. We will provide a copy of the Issuing Agreement,
without exhibits, relating to any series without charge upon written request of
a holder of a security of a series addressed to Prudential Securities Secured
Financing Corporation, One New York Plaza, 14th Floor, New York, New York
10292, Attention: Managing Director-Asset Backed Finance Group.
Neither the securities nor the underlying loans will be guaranteed or
insured by any governmental agency or instrumentality or the sponsor, the
issuer, the servicer, the trustee, the originator or any of their respective
affiliates.
The securities will consist of two basic types: certificates
representing beneficial ownership interests in the assets held by the issuer
and notes representing debt secured by the assets held by the issuer. Each
series or class of securities may have a different Interest Rate, which may be
fixed or adjustable. The accompanying prospectus supplement will specify the
Interest Rate for each series or class of securities, or the initial Interest
Rate and the method for determining subsequent changes to the Interest Rate.
A series may include one or more classes of Strip Securities or
Accrual Securities. In addition, a series may include two or more classes that
differ as to timing, sequential order, priority of payment, Interest Rate or
amount of distributions of principal or interest or both. Distributions of
principal or interest or both on any class may be made upon the occurrence of
specified events, in accordance with a schedule or formula, or on the basis of
collections from designated portions of the pool.
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A series of securities may include one or more classes of securities
that are senior to one or more classes of securities which are subordinate to
particular distributions of principal and interest and allocations of losses on
the loans. In addition, some classes of senior or subordinate securities may be
senior to other classes of senior or subordinate securities in connection with
the distributions or losses.
Each issuer may also issue classes of Equity Participation Securities.
These classes of securities may constitute what are commonly referred to as the
"residual interest," "ownership interest", "seller's interest" or the "general
partnership interest," depending upon the treatment of the issuer for federal
income tax purposes and generally will not be styled as having principal and
interest components. Any losses suffered by the trust fund will generally be
absorbed first by the class of Equity Participation Securities.
Distributions.
Securityholders will be entitled to receive payments on their
securities on specified distribution dates. Distribution dates will occur
monthly, quarterly or semi-annually, as specified in the accompanying
prospectus supplement. The distribution date will be the specified day of each
month, or, in the case of quarterly-pay securities, the specified day of every
third month; and, in the case of semi-annually-pay securities, the specified
day of every sixth month, or if this day is not a business day, the next
succeeding business day.
The accompanying prospectus supplement will describe a record date
preceding the distribution date, as of which the trustee or its paying agent
will fix the identity of the securityholders for the purpose of receiving
payments on the next succeeding distribution date. The record date will be
either the close of business as of the last day of the calendar month which
precedes the distribution date or the day immediately prior to the distribution
date.
The accompanying prospectus supplement and the Issuing Agreement will
describe a remittance period which occurs prior to each distribution date. For
example, in the case of monthly-pay securities, the calendar month preceding
the month in which a distribution date occurs. Interest accrued and principal
collected on the pool during a remittance period will be required to be
remitted by the servicer to the trustee prior to the distribution date and will
be used to distribute payments to securityholders on the distribution date. The
Issuing Agreement may provide that all or a portion of the principal collected
on the pool may be applied by the trustee to the acquisition of additional
loans during a specified period, rather than used to distribute payments of
principal to securityholders during that period, with the result that the
securities possess an interest-only period, also commonly referred to as a
revolving period, which will be followed by an amortization period. Any
interest-only or revolving period may, upon the occurrence of specified events,
terminate prior to the end of the specified period and result in the earlier
than expected amortization of the securities.
Beginning on the distribution date in the month following the month --
or, in the case of quarterly-pay securities, the third month following the
month and each third month thereafter or, in the case of semi-annually-pay
securities, the sixth month following the month and each sixth month thereafter
- -- in which the cut-off date occurs for a series of securities, distributions
of principal and accrued interest or, where applicable, of principal-only or
interest-only, on each class of securities entitled thereto will be made either
by the trustee or a paying agent appointed by the trustee, to the persons who
are registered as securityholders at the close of business on the record date.
Interest that accrues and is not payable on a class of securities will
generally be added to the principal balance of each security of a class.
Distributions will be made in immediately available funds, by wire transfer or
otherwise, to the account of a securityholder at a bank or other entity having
appropriate facilities therefor, if the securityholder has so notified the
trustee or the paying agent, as the case may be, and the Issuing Agreement
provides for the form
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of payment, or by check mailed to the address of the person entitled thereto as
it appears on the security register; provided, however, that the final
distribution in retirement of the securities, other than any book-entry
securities, will be made only upon presentation and surrender of the securities
at the office or agency of the trustee specified in the notice to
securityholders of the final distribution.
Principal and Interest on the Securities
The method of determining, and the amount of, distributions of
principal and interest, or, where applicable, of principal-only or
interest-only, on a particular series of securities will be described in the
accompanying prospectus supplement. Each class of securities, other than
particular classes of Strip Securities, may bear interest at a different
Interest Rate. The accompanying prospectus supplement will specify the Interest
Rate for each class, or in the case of an adjustable Interest Rate, the initial
Interest Rate and the method for determining the Interest Rate. Interest on the
securities will be calculated either on the basis of a 360-day year consisting
of twelve 30-day months, on the basis of the actual number of days in the
accrual period over 360 or on the basis of the actual number of days in the
accrual period over 365.
On each distribution date for a series of securities, the trustee will
distribute or cause the paying agent to distribute, as the case may be, to each
holder of record on the record date of a class of securities, an amount equal
to the percentage interest represented by the security held by the holder
multiplied by the distribution amount for that class. The distribution amount
for a class of securities for any distribution date will be the portion, if
any, of the principal distribution amount allocable to a class for the
distribution date, plus, if the class is entitled to payments of interest on
the distribution date, the interest accrued at the applicable Interest Rate on
the principal balance or notional amount of a class, less the amount of any
deferred interest added to the principal balance of the mortgage loans and/or
the outstanding balance of one or more classes of securities on the due date
and any other interest shortfalls allocable to securityholders which are not
covered by advances or the applicable credit enhancement.
In the case of a series of securities that includes two or more
classes of securities, the timing, sequential order, priority of payment or
amount of distributions of principal, and any schedule or formula or other
provisions applicable to the determination thereof, including distributions
among multiple classes of senior securities or subordinate securities, of each
class shall be as provided in the accompanying prospectus supplement.
Generally, distributions of principal of any class of securities will be made
on a pro rata basis among all of the securities of a class.
On or prior to the second business day next preceding the distribution
date, or any earlier day as shall be agreed by the Credit Enhancer, if any, and
the trustee, the trustee will determine the amounts of principal and interest
which will be passed through to securityholders on the immediately succeeding
distribution date. If the amount in the Collection Account is insufficient to
cover the amount to be passed through to securityholders, the trustee will be
required to notify the Credit Enhancer, if any, under the Issuing Agreement for
the purpose of funding this deficiency.
Form of Securities
The securities of each series will be issued as physical certificates
in fully registered form only in the denominations specified in the
accompanying prospectus supplement, and will be transferable and exchangeable
at the corporate trust office of the registrar of the securities named in the
accompanying prospectus supplement. No service charge will be made for any
registration of exchange or transfer of securities, but the trustee may require
payment of a sum sufficient to cover any tax or other governmental charge.
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If so specified in the accompanying prospectus supplement, specified
classes of a series of securities will be issued in uncertificated book-entry
form, and will be registered in the name of Cede, the nominee of DTC. DTC is a
limited purpose trust company organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the UCC and a "clearing agency" registered under the provisions
of Section 17A of the Securities Exchange Act of 1934. DTC was created to hold
securities for its participating organizations and facilitate the clearance and
settlement of securities transactions between these participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
other organizations. Indirect access to the DTC system also is available to
others like brokers, dealers, banks and trust companies that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly.
Under a book-entry format, securityholders that are not participants
or indirect participants but desire to purchase, sell or otherwise transfer
ownership of securities registered in the name of Cede & Co., as nominee of
DTC, may do so only through participants and Indirect participants. In
addition, these securityholders will receive all distributions of principal of
and interest on the securities from the trustee through DTC and its
participants. Under a book-entry format, securityholders will receive payments
after the distribution date because, while payments are required to be
forwarded to Cede & Co., as nominee for DTC, on each distribution date, DTC
will forward the payments to its participants, which thereafter will be
required to forward the payments to indirect participants or securityholders.
Unless and until physical securities are issued, it is anticipated that the
only securityholder will be Cede & Co., as nominee of DTC, and that the
beneficial holders of book-entry securities will not be recognized by the
trustee as securityholders under the Issuing Agreement. The beneficial holders
of the securities will only be permitted to exercise the rights of
securityholders under the Issuing Agreement indirectly through DTC and its
participants who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
participants on whose behalf it acts in connection with the securities and is
required to receive and transmit payments of principal of and interest on the
securities. Participants and indirect participants with which securityholders
have accounts for their book-entry securities similarly are required to make
book-entry transfers and receive and transmit the payments on behalf of their
respective securityholders. Accordingly, although securityholders will not
possess securities, the rules provide a mechanism by which securityholders will
receive distributions and will be able to transfer their interests.
Unless and until physical securities are issued, securityholders who
are not participants may transfer ownership of securities only through
participants by instructing the participants to transfer securities, by
book-entry transfer, through DTC for the account of the purchasers of the
securities, which account is maintained with their respective participants.
Under the rules and in accordance with DTC's normal procedures, transfers of
ownership of securities will be executed through DTC and the accounts of the
respective participants at DTC will be debited and credited. Similarly, the
respective participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing securityholders.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and banks, the ability of a securityholder to
pledge securities to persons or entities that do not participate in the DTC
system, or otherwise take actions concerning the securities may be limited due
to the lack of a physical security.
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DTC in general advises that it will take any action permitted to be
taken by a securityholder under an Issuing Agreement only at the direction of
one or more participants to whose account with DTC the securities are credited.
Additionally, DTC in general advises that it will take these actions in
connection with specified percentages of the securityholders only at the
direction of and on behalf of participants whose holdings include current
principal amounts of outstanding securities that satisfy the specified
percentages. DTC may take conflicting actions in connection with other current
principal amounts of outstanding securities to the extent that these actions
are taken on behalf of participants whose holdings include the requisite
current principal amounts of outstanding securities.
Any securities initially registered in the name of Cede & Co., as
nominee of DTC, will be issued in fully registered, certificated form to
securityholders or their nominees, rather than to DTC or its nominee only under
the events specified in the Issuing Agreement and described in the accompanying
prospectus supplement. Upon the occurrence of any of the events specified in
the Issuing Agreement and the prospectus supplement, DTC will be required to
notify all participants of the availability through DTC of physical securities.
Upon surrender by DTC of the securities representing the securities and
instruction for reregistration, the trustee will issue the securities in the
form of physical certificates, and thereafter the trustee will recognize the
holders of the physical certificates as securityholders. Thereafter, payments
of principal of and interest on the securities will be made by the trustee
directly to securityholders in accordance with the procedures described in this
prospectus and in the Issuing Agreement. The final distribution of any
security, whether physical certificates or securities registered in the name of
Cede & Co., however, will be made only upon presentation and surrender of the
securities on the final distribution date at the office or agency as is
specified in the notice of final payment to securityholders.
None of the sponsor, the issuer, the originator, the servicer or the
trustee will have any liability for any actions taken by DTC, or its nominee,
or Cedelbank or the Euroclear System, including, without limitation, actions
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the securities held by Cede & Co., as nominee
for DTC, or for maintaining, supervising or reviewing any records relating to
the beneficial ownership interests.
Credit Enhancement
Various forms of credit enhancement may be provided for one or more
classes of a series of securities or for the loans in the trust fund. Credit
enhancement may be in the form of:
o the subordination of one or more classes of subordinate
securities to provide credit support to one or more classes of
senior securities,
o overcollateralization,
o cross-collateralization,
o the use of a surety bond, financial guaranty insurance policy,
special hazard insurance policy, letter of credit or other third
party guarantees,
o the use of a reserve fund, or
o any combination of the foregoing.
Any credit enhancement may not provide protection against all risks of
loss and may not guarantee repayment of the entire principal balance of the
securities and interest thereon. If
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losses occur that exceed the amount covered by credit enhancement or are not
covered by the credit enhancement, holders of one or more classes of securities
will bear their allocable share of deficiencies.
The descriptions of any insurance policies or bonds described in this
prospectus or any prospectus supplement and the coverage thereunder are not
complete and are qualified in their entirety by reference to the actual forms
of the policies, copies of which are available upon request.
Subordination
The subordination of one or more classes of subordinate securities
provides credit enhancement to the senior securities. For any
senior/subordinate series of securities, the total amount available for
distribution on each distribution date, as well as the method for allocating
this amount among the various classes of securities included in a series, will
be described in the accompanying prospectus supplement. Generally, the amount
available for contribution will be allocated first to interest on the senior
securities of a series, and then to principal of the senior securities up to
the amounts determined as specified in the accompanying prospectus supplement
and the Issuing Agreement, prior to allocation to the subordinate securities of
a series. In the event of any realized losses on the loans, the rights of the
subordinate securityholders to receive distributions from the loans will be
subordinate to the rights of the senior securityholders.
Overcollateralization
Subordination provisions of a series may be used to accelerate the
amortization of one or more classes of securities relative to the amortization
of the underlying loans. The accelerated amortization is achieved by the
application of excess interest to the payment of principal of one or more
classes of securities. This acceleration feature creates, for the loans or
groups thereof, overcollateralization which results from the excess of the
aggregate principal balance of the loans, or a group thereof, over the
principal balance of the class. This acceleration may continue for the life of
the security, or may be limited. In the case of limited acceleration, once the
required level of overcollateralization is reached, the limited acceleration
feature may cease, unless necessary to maintain the required level of
overcollateralization.
Cross-Collateralization
The beneficial ownership of separate groups of assets included in a
trust fund or the obligations to make payments secured by a pledge of a
separate group of assets included in a trust fund may be evidenced by separate
classes of the series. In this case, credit enhancement may be provided by a
cross-collateralization feature which requires that distributions to be made on
one class of securities may be made from excess amounts available from other
asset groups within the same trust fund which support other classes of
securities. The prospectus supplement for a series that includes a
cross-collateralization feature will describe the manner and conditions for
applying the cross-collateralization feature.
The coverage provided by one or more forms of credit enhancement may
apply concurrently to two or more separate trust funds. If applicable, the
prospectus supplement will identify the trust funds to which the
credit-collateralization relates and the manner of determining the amount of
the coverage provided thereby and of the application of the coverage to the
identified trust funds.
Surety Bonds
A surety bond or financial guaranty insurance policy may be obtained
and maintained for each class or series of securities. The bond insurer will be
described in the accompanying prospectus supplement. This description will
include financial information for the bond insurer.
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A surety bond will unconditionally and irrevocably guarantee to
securityholders that an amount equal to each full and complete insured payment
will be received by the trustee on behalf of securityholders, for distribution
by the trustee to each securityholder. The amount of any insured payment will
be defined in the accompanying prospectus supplement, and will generally equal
the full amount of the distributions of principal and interest to which
securityholders are entitled under the Issuing Agreement plus any other amounts
specified in the Issuing Agreement or in the accompanying prospectus
supplement.
The specific terms of any surety bond will be described in the
accompanying prospectus supplement. Surety bonds may apply only to specified
classes, or may apply at the loan level and only to specified loans. Surety
bonds may have limitations including limitations on the bond insurer's
obligation to guarantee the obligations of the originator to repurchase or
substitute for any loans. surety bonds will not guarantee any specified rate of
prepayments. In addition, insured payments will generally not be available to
cover interest shortfalls arising from the application of the Soldiers' and
Sailors' Civil Relief Act.
Subject to the terms of the Issuing Agreement, the bond insurer may be
subrogated to the rights of each securityholder to receive payments under the
securities to the extent of any payment by the bond insurer under the surety
bond.
Letters of Credit
A letter of credit may be obtained from a bank and delivered to the
trustee. The letter of credit may provide direct coverage for the securities or
support the issuer's or any other person's obligation under a purchase
obligation to make payments to the trustee on one or more components of credit
enhancement. The bank issuing the letter of credit, as well as the amount
available under the letter of credit for each component of credit enhancement,
will be specified in the accompanying prospectus supplement and the Issuing
Agreement.
Special Hazard Insurance Policies
Any insurance policy covering special hazard losses which may be
obtained by the issuer for a trust fund will be issued by the insurer named in
the accompanying prospectus supplement. Each special hazard insurance policy
will protect holders of the series of securities from (x) losses due to direct
physical damage to a mortgaged property other than any loss of a type covered
by a hazard insurance policy or a flood insurance policy, if applicable, and
(y) losses from partial damage caused by reason of the application of the
co-insurance clauses contained in hazard insurance policies. Aggregate claims
under a special hazard insurance policy will be limited to a maximum amount of
coverage, as stated in the accompanying prospectus supplement and the Issuing
Agreement.
Reserve Funds
If so provided in the accompanying prospectus supplement, the issuer
will deposit or cause to be deposited in reserve fund any combination of cash,
one or more irrevocable letters of credit or one or more eligible investments
in specified amounts, amounts otherwise distributable to subordinate
securityholders, or any other instrument satisfactory to the rating agencies
rating the series, which will be applied and maintained in the manner and under
the conditions specified in the accompanying prospectus supplement. In the
alternate or in addition to an initial deposit, a reserve fund may be funded
through application of all or a portion of amounts otherwise payable on any
subordinate securities, on any Equity Participation Security or otherwise.
Amounts in a reserve fund may be distributed to securityholders, or applied to
reimburse the servicer for outstanding advances or may be used for other
purposes.
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Other Insurance, Guarantees and Similar Instruments or Agreements
A trust fund may include in lieu of some or all of the foregoing or in
addition thereto, third party guarantees, and other arrangements for
maintaining timely payments or providing additional protection against losses
on all or any specified portion of the assets included in the trust fund,
paying administrative expenses, or accomplishing the other purpose as may be
described in the prospectus supplement. The trust fund may include a guaranteed
investment contract or reinvestment agreement under which funds held in one or
more accounts will be invested at a specified rate. If any class of securities
has a floating Interest Rate, or if any of the loans has a floating coupon
rate, the trust fund may include an interest rate swap contract, an interest
rate cap agreement or similar contract providing limited protection against
interest rate risks.
Reduction or Substitution of Credit Enhancement
The amount of credit support provided by any of the forms of credit
enhancement, including, without limitation, a surety bond, special hazard
insurance policy, letter of credit, or any alternative form of credit
enhancement, may be reduced under specified circumstances. In most cases, the
amount available under any credit enhancement will be subject to periodic
reduction in accordance with a schedule or formula on a nondiscretionary basis
under the terms of the Issuing Agreement as the aggregate outstanding principal
balance of the loans declines. Additionally, in some cases, the credit
enhancement, and any replacements therefor, may be replaced, reduced or
terminated upon the written assurance from each rating agency rating a series
that the then current rating of the securities will not be adversely affected.
Furthermore, in the event that the credit rating of any obligor under any
Credit Enhancer is downgraded, the credit rating of the securities may be
downgraded to a corresponding level, and neither the sponsor nor the issuer
thereafter will be obligated to obtain replacement credit enhancement in order
to restore the rating of the securities, and also will be permitted to replace
the credit enhancement with other credit enhancement instruments issued by
Credit Enhancer whose credit ratings are equivalent to the downgraded level and
in lower amounts which would satisfy the downgraded level; provided, that the
then current, albeit downgraded, rating of the series of securities is
maintained. Where the credit enhancement is in the form of a reserve fund, a
permitted reduction in the amount of credit enhancement will result in a
release of all or a portion of the assets in the reserve fund to any of the
holders of the Equity Participation Securities, the sponsor, the servicer, the
originator or the other person that is entitled thereto. Any assets so released
will not be available to fund distribution obligations in future periods.
Prepayment and Yield Considerations
Interest Rates
Any class of securities of a series may have a fixed Interest Rate, or
an Interest Rate which varies based on changes in an index or based on changes
based on the underlying loans or may receive interest payments from the
underlying loans in another manner specified in the accompanying prospectus
supplement.
The prospectus supplement for each series will specify the range and
the weighted average of the loan interest rates and Net Loan Rates for the
loans underlying a series as of the cut-off date. Each monthly interest payment
on a loan will generally be calculated as the product of one-twelfth of the
applicable loan interest rate at the time of the calculation and the then
unpaid principal balance on the loan. If the trust fund includes
adjustable-rate loans or includes loans with different Net Loan Rates, the
weighted average Net Loan Rate may vary from time to time as described below.
See "The Trust Funds." The prospectus supplement for a series will
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also specify the initial Interest Rate for each class of securities of a series
having an Interest Rate and will specify whether each Interest Rate is fixed or
is variable.
The Net Loan Rate for any adjustable rate loan will change with any
changes in the index specified in the accompanying prospectus supplement on
which the loan interest rate adjustments are based, subject to any applicable
periodic or aggregate caps or floors on the loan interest rate or other
limitations described in the accompanying prospectus supplement. The weighted
average Net Loan Rate for any series may vary due to changes in the Net Loan
Rates of adjustable rate loans, to the timing of the loan interest rate
readjustments of the loans and to different rates of payment of principal of
fixed or adjustable rate loans bearing different loan interest rates.
If the trust fund for a series includes adjustable rate loans, any
limitations on the periodic changes in a mortgagor's or obligor's monthly
payment, any limitations on the adjustments to the Net Loan Rates or loan
interest rates, any provision that could result in deferred interest and the
effects, if any, thereof on the yield on securities of the series will be
discussed in the accompanying prospectus supplement.
No distribution of principal and only a partial distribution of
interest will be made to securityholders on a negatively amortizing loan.
Distribution of the portion of scheduled interest at the applicable Net Loan
Rate representing deferred interest on the loan will be passed through to the
securityholders on the distribution date following the due date on which it is
received. Deferred interest will bear interest at the Net Loan Rate for the
loan. For federal income tax purposes, deferred interest may constitute
interest income to the trust fund and to securityholders at the time that it
accrues, rather than at the time that it is paid. See "Material Federal Income
Tax Consequences."
Interest Shortfalls Due to Principal Prepayments
When a loan is prepaid in full, the mortgagor or obligor pays interest
on the amount prepaid only to the date of prepayment and not thereafter.
Similarly, Liquidation Proceeds and Insurance Proceeds are also likely to
include interest only to the time of payment. When a loan is prepaid in part,
and the prepayment is applied as of a date other than the due date occurring in
the month of receipt or the due date occurring in the month following the month
of receipt, the mortgagor or obligor pays interest on the amount prepaid only
to the date of prepayment and not thereafter. The effect of the foregoing is to
reduce the aggregate amount of interest which would otherwise be passed through
to securityholders if the loan were outstanding, or if the partial prepayment
were applied, on the succeeding due date. To mitigate this reduction in yield,
the Issuing Agreement will provide whether, in connection with any principal
prepayment or liquidation of any loan underlying the securities of a series,
the servicer will pay into the Collection Account for a series to the extent
funds are available for this purpose from the aggregate servicing fees, or
portion thereof as specified in the accompanying prospectus supplement, which
the servicer is entitled to receive relating to mortgagor or obligor payments
or other recoveries distributed on the distribution date, the amount, if any,
as may be necessary to assure that the amount paid into the Collection Account
from the loan includes an amount equal to interest at the Net Loan Rate for the
loan for the period from the date of the prepayment or liquidation to but not
including the next due date. See "Servicing of the Loans--Adjustment to
Servicing Compensation in Connection with Prepaid and Liquidated Loans."
Weighted Average Life of Securities
Weighted average life of a security refers to the average amount of
time that will elapse from the date of issuance of the security until each
dollar in reduction of the principal amount of the security is distributed to
the investor. The weighted average life and the yield to maturity of
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any class of the securities of a series will be influenced by, among other
things, the rate at which principal on the loans included in the mortgage loan
pool or contract pool for the security is paid, which is determined by scheduled
amortization and prepayments. For this purpose, the term "prepayments" includes
prepayments and liquidations due to default, casualty, condemnation and the
like.
The loans may generally be prepaid in full or in part at any time, and
fixed rate loans will generally contain due-on-sale clauses permitting the
holder to accelerate the maturity of the loan upon conveyance of the mortgaged
property or manufactured home.
Prepayments on loans are commonly measured relative to a prepayment
standard or model. The prospectus supplement for each series will describe one
or more the prepayment standards or models and will contain tables setting
forth the weighted average life of each class and the percentage of the
original aggregate principal amount of each class that would be outstanding on
specified distribution dates for a series based on the assumptions stated in
the accompanying prospectus supplement, including assumptions that prepayments
on the loans are made at rates corresponding to various percentages of the
prepayment standard or model specified in the accompanying prospectus
supplement.
There is, however, no assurance that prepayment of the loans
underlying a series of securities will conform to any level of the prepayment
standard or model specified in the accompanying prospectus supplement. A number
of economic, geographic, social and other factors may affect prepayment
experience. These factors may include homeowner mobility, economic conditions,
changes in mortgagor's or obligor's housing needs, job transfers, unemployment,
mortgagor's or obligor's net equity in the properties securing the loans,
servicing decisions, enforceability of due-on-sale clauses, market interest
rates, the magnitude of taxes, and the availability of funds for refinancing.
In general, however, if prevailing interest rates fall significantly below the
loan interest rates on the loans underlying a series of securities, the
prepayment rates of the loans are likely to be higher than if prevailing rates
remain at or above the rates borne by the loans. It should be noted that
securities of a series may evidence an interest in a trust fund with different
loan interest rates. Accordingly, the prepayment experience of the securities
will to some extent be a function of the mix of loan interest rates of the
loans. In addition, the terms of the Servicing Agreement will require the
servicer to enforce any due-on-sale clause to the extent specified in the
Servicing Agreement. See "Servicing of the Loans--Enforcement of Due-on-Sale
Clauses; Realization Upon Defaulted Loans" and "Material Legal Aspects of the
Loans--Due-On-Sale Clauses" for a description of particular provisions of each
Servicing Agreement and a number of legal developments that may affect the
prepayment experience on the loans.
A lower rate of principal prepayments than anticipated would
negatively affect the total return to investors in any securities of a series
that are offered at a discount to their principal amount or, if applicable,
their parity price, and a higher rate of principal prepayments than anticipated
would negatively affect the total return to investors in the securities of a
series that are offered at a premium to their principal amount or, if
applicable, their parity price. Parity price is the price at which a security
will yield its coupon, after giving effect to any payment delay. In addition,
the yield to investors in a class of securities which bears interest at an
adjustable Interest Rate, will also be affected by changes in the index on
which any adjustable Interest Rate is based. Changes in the index may not
correlate with changes in prevailing mortgage interest rates or financing rates
for manufactured housing, and the effect, if any, thereof on the yield of the
securities will be discussed in the accompanying prospectus supplement. The
yield on some types of securities may be particularly sensitive to prepayment
rates, and further information concerning the yield on the securities will be
included in the applicable prospectus supplement.
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At the request of the mortgagor or obligor, the servicer may refinance
the loans in any trust fund by accepting prepayments thereon and making new
loans secured by a mortgage on the same property or a security interest in the
same manufactured home. Upon this 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 a refinancing. Any refinancing will have the same
effect as a prepayment in full of the loan.
The originator may be obligated, under specified circumstances, to
repurchase some of the loans. In addition, the terms of insurance policies
relating to the loans may permit the applicable insurer to purchase delinquent
loans. The proceeds of any repurchase will be deposited in the Collection
Account and the repurchase will have the same effect as a prepayment in full of
the loan. See "The Trust Funds--Assignment of the Loans." In addition, the
servicer may have the option to purchase all, but not less than all, of the
loans in any trust fund under specified limited conditions. For any series of
securities for which an election has been made to treat the trust fund or a
portion of the trust fund as a REMIC, any purchase may be effected only in a
"qualified liquidation," as defined in Code Section 860F(a)(4)(A). See
"Servicing of the Loans--Termination; Purchase or other Disposition of Loans."
Servicing of the Loans
The following summaries describe particular provisions of the
Servicing Agreements which relate to trust funds comprised of loans. The
summaries do not purport to be complete and are subject to and are qualified in
their entirety by reference to, all the provisions of the Servicing Agreement
for each series which may further modify the provisions summarized below. The
provisions of each Servicing Agreement will vary depending upon the nature of
the securities to be issued thereunder and the nature of the trust fund. We
will file each Servicing Agreement executed and delivered for each series with
the Securities and Exchange Commission as an exhibit to a Current Report on
Form 8-K promptly after issuance of the securities of a series.
The Servicer
The servicer under each Servicing Agreement will be named in the
accompanying prospectus supplement. The servicer for each series will service
the loans contained in the trust fund for a series. For trust funds comprised
of mortgage loans, the servicer will be a seller/servicer approved by FNMA or
FHLMC. Any servicer may delegate its servicing responsibilities to one or more
sub-servicers, but will not be relieved of its liabilities with respect
thereto.
The servicer will make a number of representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Servicing Agreement. An uncured breach of a
representation or warranty that in any respect materially and adversely affects
the interests of the securityholders will constitute an event of default by the
servicer under the Servicing Agreement. See "Servicing of the Loans--Rights
Upon Event of Default; Events of Default--Loans."
Payments on Loans
The servicer or the trustee will, as to each series of securities,
establish and maintain, or cause to be established and maintained the
Collection Account. The Collection Account will be maintained with a depository
(1) whose long-term debt obligations at the time of any deposit in the
Collection Account are rated not lower than the rating on the series of
securities at the time of the initial issuance thereof, (2) the deposits in
which are insured by the Federal Deposit Insurance Corporation through either
the Bank Insurance Fund or the Savings Association Insurance Fund,
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to the limit established by the FDIC, and the uninsured deposits in which
accounts are otherwise secured so that, as evidenced by an opinion of counsel,
the trustee for the benefit of the securityholders of the series has a claim to
funds in the Collection Account for a series, or a perfected security interest
in any collateral, which shall be limited to eligible investments, securing the
funds, that is superior to the claims of any other sponsor or general creditor
of the depository or (3) which is otherwise acceptable to each rating agency
rating a series.
A Collection Account may be maintained as an interest bearing or a
non-interest bearing account, or the funds held in the Collection Account may
be invested pending each succeeding distribution date in eligible investments
satisfactory to the rating agencies or any Credit Enhancer. Any of these
eligible investments shall mature not later than the business day preceding the
next distribution date and none of these investments shall be sold or disposed
of prior to the maturity date of the eligible investment; however, in the event
that an election has been made to treat the trust fund or a portion of the
trust fund of a series as a REMIC, no 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 the sale or
disposition will not cause the trust fund or a portion of the trust fund to be
subject to the tax on "prohibited transactions" imposed by Code Section
860F(a)(1), otherwise subject the trust fund or a portion of the trust fund to
tax, or cause the trust fund of a portion of the trust fund to fail to qualify
as a REMIC. Any interest or other income earned on funds in the Collection
Account is generally paid to the servicer or its designee as additional
servicing compensation.
The servicer will deposit in the Collection Account for each series of
securities any amounts representing scheduled payments of principal and
interest on the loans due after the applicable cut-off date but received prior
thereto, and, the following payments and collections received or made by it on
the loans subsequent to the applicable cut-off date, other than payments due on
or before the cut-off date:
o 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;
o Net Liquidation Proceeds;
o Net Insurance Proceeds;
o all amounts required to be deposited in the Collection Account
from any reserve fund, and amounts available under any other form
of credit enhancement applicable to a series;
o all advances made by the servicer;
o all amounts withdrawn from buy-down funds or other funds
described in the accompanying prospectus supplement, if any, for
the loans, in accordance with the terms of the respective
agreements applicable thereto;
o all proceeds from the repurchase of loans by the originator; and
o all other amounts required to be deposited in the Collection
Account under the Servicing Agreement
Notwithstanding the foregoing, the servicer will be entitled, at its
election, either (a) to withhold and pay itself the applicable servicing fee
and/or to withhold and pay to the owner thereof any Fixed Retained Yield from
any payment or other recovery on account of interest as received and prior to
deposit in the Collection Account or (b) to withdraw the applicable servicing
fee and/or any Fixed Retained Yield from the Collection Account after the
entire
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payment or recovery has been deposited in the Collection Account; however, for
each trust fund or a portion of the trust fund 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 payment or recovery in
the Collection Account.
Advances, amounts withdrawn from any reserve fund, and amounts
available under any other form of credit enhancement will be deposited in the
Collection Account not later than the business day preceding the distribution
date on which the amounts are required to be distributed. All other amounts
will be deposited in the Collection Account not later than the business day
next following the day of receipt and posting by the servicer.
If the servicer deposits in the Collection Account for a series any
amount not required to be deposited in the Collection Account, it may at any
time withdraw this amount from the Collection Account.
The servicer is permitted, from time to time, to make withdrawals from
the Collection Account for the following purposes, to the extent permitted in
the applicable Servicing Agreement:
o to reimburse itself for advances;
o to reimburse itself from Liquidation Proceeds for expenses
incurred by the servicer in connection with the liquidation of
any defaulted loan or property acquired in respect thereof and
for amounts expended in good faith in connection with the
restoration of damaged property, to reimburse itself from
Insurance Proceeds for expenses incurred by the servicer in
connection with the restoration, preservation or repair of the
mortgaged properties or manufactured homes and expenses incurred
in connection with collecting on the insurance policies and, to
the extent that Liquidation Proceeds or Insurance Proceeds after
the reimbursement are in excess of the unpaid principal balance
of the loans together with accrued and unpaid interest thereon at
the applicable Net Loan Rate through the last day of the month in
which the Liquidation Proceeds or Insurance Proceeds were
received, to pay to itself out of the excess the amount of any
unpaid servicing fees and any assumption fees, late payment
charges or other mortgagor or obligor charges on the loans;
o 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 the amounts out
of any payment or other recovery on a particular loan prior to
the deposit of the payment or recovery in the Collection Account;
o to reimburse itself and the issuer for specified expenses,
including taxes paid on behalf of the trust fund, incurred by and
recoverable by or reimbursable to it or the issuer, as the case
may be;
o to pay to the originator for each loan or property acquired in
respect thereof that has been repurchased by the originator, as
the case may be, all amounts received thereon and not distributed
as of the date as of which the purchase price of the loan was
determined;
o to pay itself any interest earned on or investment income earned
on funds in the Collection Account, all interest or income to be
withdrawn not later than the next distribution date;
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o to make withdrawals from the Collection Account in order to make
distributions to securityholders; and
o to clear and terminate the Collection Account.
Advances and Limitations Thereon
The accompanying prospectus supplement will describe the
circumstances, if any, under which the servicer will make advances relating to
delinquent payments on loans. The servicer will be obligated to make advances,
and the obligation may be limited in amount, or may not be activated until a
portion of a specified reserve fund is depleted. Advances are intended to
provide liquidity and not to guarantee or insure against losses. Accordingly,
any funds advanced are recoverable by the servicer out of amounts received on
particular loans which represent late recoveries of principal or interest,
proceeds of insurance policies or Liquidation Proceeds respecting which any
advance was made. If an advance is made and subsequently determined to be
nonrecoverable from late collections, proceeds of insurance policies, or
Liquidation Proceeds from the loan, the servicer may be entitled to
reimbursement from other funds in the Collection Account, or from a specified
reserve fund as applicable, to the extent specified in the accompanying
prospectus supplement.
Adjustment to Servicing Compensation in Connection with Prepaid and Liquidated
Loans
When a mortgagor or obligor prepays a loan in full, the mortgagor or
obligor pays interest on the amount prepaid only to the date on which the
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 claims. Further, when a
loan is prepaid in part, and the prepayment is applied as of a date other than
a due date, the mortgagor or obligor pays interest on the amount prepaid only
to the date of prepayment and not thereafter. The effect of the foregoing is to
reduce the aggregate amount of interest which would otherwise be passed through
to securityholders if the loan were outstanding, or if the partial prepayment
were applied, on the succeeding due date. In order to mitigate the adverse
effect to securityholders of a series resulting from the prepayment or
liquidation of a loan or settlement of an insurance claim with respect thereto,
the amount of the aggregate servicing fees may be reduced by an amount equal to
the accrual of interest on any prepaid or liquidated loan at the Net Loan Rate
from the date of its prepayment or liquidation or the date of the insurance
settlement to the next due date. These reductions in the aggregate servicing
fees will be made by the servicer on the loans under the applicable Servicing
Agreement but only to the extent that the aggregate amount of this interest
does not exceed the aggregate servicing fees relating to mortgagor or obligor
payments or other recoveries distributed on the distribution date. The amount
of the offset against the aggregate servicing fees will be included in the
scheduled distributions to securityholders on the distribution date on which
the principal prepayments, Liquidation Proceeds or Insurance Proceeds are
passed through to securityholders. See "Prepayment and Yield Considerations."
Reports to Securityholders
Unless otherwise specified or modified in the Servicing Agreement for
each series, a statement setting forth the following information, if
applicable, will be included with each distribution to securityholders of
record of a series:
(a) the amount of principal distributed to holders of the
securities and the outstanding principal balance of the securities
following the distribution;
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(b) the amount of interest distributed to holders of the
securities and the current interest on the securities;
(c) the amounts of
(1) any overdue accrued interest included in the
distribution,
(2) any remaining overdue accrued interest on the securities
or
(3) any current shortfall in amounts to be distributed as
accrued interest to holders of the securities;
(d) the amounts of
(1) any overdue payments of scheduled principal included in
the distribution,
(2) any remaining overdue principal amounts on the
securities,
(3) any current shortfall in receipt of scheduled principal
payments on the loans or
(4) any realized losses or Liquidation Proceeds to be
allocated as reductions in the outstanding principal
balances of the securities;
(e) the amount received under any credit enhancement, and the
remaining amount available under the credit enhancement;
(f) the amount of any delinquencies on the payments on the loans;
(g) the book value of any REO property acquired by the trust
fund; and
(h) any other information as specified in the Issuing Agreement.
In addition, within a reasonable period of time after the end of each
calendar year, the trustee will furnish to each holder of record at any time
during the calendar year (x) the aggregate of amounts reported under clauses
(a), (b), and (d)(4) above for the calendar year and (y) the information
specified in the Issuing Agreement to enable securityholders to prepare their
tax returns including, without limitation, the amount of original issue
discount accrued on the securities, if applicable. Information in the
distribution date and annual statements provided to the holders will not have
been examined and reported upon by an independent public accountant. However,
the servicer will provide to the trustee a report by independent public
accountants concerning the servicer's servicing of the loans. See "--Evidence
as to Compliance" in this prospectus.
A series of securities or one or more classes of a series may be
issued in book-entry form. In this event, owners of beneficial interests in the
securities will not be considered holders and will not receive the reports
directly from the trustee. The trustee will forward the reports only to the
entity or its nominee which is the registered holder of the global certificate
which evidences the book-entry securities. Beneficial owners will receive the
reports from the participants and indirect participants of the applicable
book-entry system in accordance with the practices and procedures of these
entities.
Collection and Other Servicing Procedures
The servicer, directly or through sub-servicers, will make reasonable
efforts to collect all payments called for under the loans and will, consistent
with the Servicing Agreement, follow the collection procedures as it follows
for mortgage loans or manufactured housing contracts serviced by it that are
comparable to the loans, as the case may be. Consistent with the above, the
servicer may, in its discretion, (x) waive any prepayment charge, assumption
fee, late payment charge or any other charge in connection with the prepayment
of a loan and (y) arrange with a mortgagor or
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obligor a schedule for the liquidation of deficiencies running for not more than
six months after the applicable due date.
In accordance with the Servicing Agreement, the servicer, to the
extent permitted by law, will establish and maintain or will cause to be
established and maintained one or more escrow accounts 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 escrow accounts 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 escrow
accounts, if required, to repair or otherwise protect the mortgaged properties
or manufactured homes and to clear and terminate this account. The servicer
will be responsible for the administration of each escrow account. The servicer
will be obligated to advance particular amounts which are not timely paid by
mortgagors or obligors, to the extent that the servicer determines that the
amounts will be recoverable out of Insurance Proceeds, Liquidation Proceeds, or
otherwise. Alternatively, if specified in the Servicing Agreement, in lieu of
establishing a escrow account, the servicer may procure a performance bond or
other form of insurance coverage, in an amount acceptable to each rating agency
rating the series of securities, covering loss occasioned by the failure to
escrow these amounts.
Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Loans
Each Servicing Agreement will provide that, when any mortgaged
property or manufactured home is conveyed by the mortgagor or obligor, the
servicer will exercise its rights to accelerate the maturity of the loan under
any "due-on-sale" clause applicable thereto, if any, unless (a) it is not
exercisable under applicable law or (b) this exercise would result in loss of
insurance coverage on the loan. In this case, the servicer is authorized to
take or enter into an assumption and modification agreement from or with the
person to whom the mortgaged property or manufactured home has been or is about
to be conveyed, and the person will become liable under the mortgage note or
contract and, unless prohibited by applicable state law, the mortgagor or
obligor remains liable thereon; provided, that the loan will continue to be
covered by any pool insurance policy and any primary mortgage insurance policy,
and the loan interest rate for the loan and the payment terms shall remain
unchanged. The servicer will also be authorized, with the prior approval of any
pool insurer and any primary mortgage insurer, if any, to enter into a
substitution of liability agreement with this person, and the original
mortgagor or obligor will be released from liability and this person will be
substituted as mortgagor or obligor and becomes liable under the mortgage note
or contract.
The servicer is obligated under the Servicing Agreement to realize
upon defaulted loans to the extent provided in the Servicing Agreement.
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 (x) that this foreclosure, repossession or
restoration will increase the proceeds to securityholders of a series of
liquidation of the loan after reimbursement of the servicer for its expenses
and (y) that these 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 Collection Account for a series an amount equal to all costs and
expenses incurred by it.
The servicer may foreclose against property securing a defaulted loan
either by foreclosure, by sale or by strict foreclosure and in the event a
deficiency judgment is available against the mortgagor or other person may
proceed for the deficiency. See "Material Legal Aspects of the Loans--The
Mortgage Loans--Anti-Deficiency Legislation and Other Limitations
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on Lenders" for a description of the availability of deficiency judgments. It is
anticipated that in most cases the servicer will not seek deficiency judgments
against any mortgagor or obligor, and the servicer is not required under the
Servicing Agreement to seek deficiency judgments.
For a trust fund, or one or more segregated pools of assets in the
trust fund, as to which a REMIC election has been made, if the trustee acquires
ownership of any mortgaged property or manufactured home as a result of a
default or imminent default of any loan secured by the mortgaged property or
manufactured home, the trustee generally will be required to dispose of the
property with two (2) years following its acquisition by the trust fund. The
servicer also will be required to administer the mortgaged property or
manufactured home in a manner which does not cause the mortgaged property or
manufactured home to fail to qualify as "foreclosure property" within the
meaning of Code Section 860G(a)(8) or result in the receipt by the trust fund
of any "net income from foreclosure property" within the meaning of Code
Section 860G(c). In general, this would preclude the holding of the mortgaged
property or manufactured home as a dealer in the property or the receipt of
rental income based on the profits of the lessee.
The servicer may modify, waive or amend the terms of any loan without
the consent of the trustee or any securityholder. These modifications, waivers
or amendments shall only be given if the servicer determines that it is in the
best interests of securityholders and, generally, only if the loan is in
default or the servicer has determined that default is reasonably foreseeable.
Servicing Compensation and Payment of Expenses
For each series of securities, the servicer will be entitled to be
paid a servicing fee on the loans until termination of the Servicing Agreement.
The servicer, at its election, will pay itself the servicing fee for a series
on each loan by (a) withholding the servicing fee from any scheduled payment of
interest prior to deposit of the payment in the Collection Account for a series
or (b) withdrawing the servicing fee from the Collection Account after the
entire interest payment has been deposited in the Collection Account. The
servicer may also pay itself out of the Liquidation Proceeds or Insurance
Proceeds from a loan, or withdraw from the Collection Account, the servicing
fee on the loan or other recoveries with respect thereto to the extent provided
in the Servicing Agreement. The servicing fee on the loans underlying the
securities of a series will be specified in the applicable prospectus
supplement. Any additional servicing compensation in the form of prepayment
charges, assumption fees, late payment charges or otherwise will be retained by
the servicer to the extent not required to be deposited in the Collection
Account.
In addition to amounts payable to any sub-servicer, the servicer will
pay all expenses incurred in connection with the servicing of the loans
underlying a series, including, without limitation, payment of the hazard
insurance policy premiums and fees or other amounts payable in accordance with
any applicable agreement for the provision of credit enhancement for a series,
payment of the fees and disbursements of the trustee and any custodian, fees
due to the independent accountants and expenses incurred in connection with
distributions and reports to securityholders. However, some of these expenses
may be reimbursable to the servicer under the terms of the Issuing Agreement.
In addition, the servicer will be entitled to reimbursement for particular
expenses incurred by it in connection with the liquidation of defaulted loans.
In the event that claims are either not made or are not fully paid from any
applicable form of credit enhancement, the 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 loan, plus accrued interest thereon at the Net
Loan Rate. In addition, the servicer will be entitled to reimbursement of
expenditures incurred by it in connection with the restoration of any mortgaged
property or manufactured home, the right of reimbursement being prior to the
rights of the securityholders to receive Liquidation Proceeds and Insurance
Proceeds. The servicer is also entitled to reimbursement
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from the Collection Account of advances, of advances made by it to pay taxes or
insurance premiums on any mortgaged property or manufactured home and of
particular losses against which it is indemnified by the trust fund.
Evidence as to Compliance
The applicable Servicing Agreement for each series will provide that
each year, a firm of independent public accountants will furnish a statement to
the trustee to the effect that this firm has examined specified documents and
records relating to the servicing of the loans by the servicer and that, on the
basis of the examination, this firm is of the opinion that the servicing has
been conducted in compliance with the Servicing Agreement, except for (x) any
exceptions as the firm believes to be immaterial and (y) any other exceptions
as are stated in this statement.
The applicable Servicing Agreement for each series will also provide
for delivery to the trustee for a series of an annual statement signed by an
officer of the servicer to the effect that the servicer has fulfilled its
obligations under the Servicing Agreement throughout the preceding calendar
year.
Matters Regarding the Servicer
The servicer may not resign from its obligations and duties under the
Servicing Agreement for each series, except upon its determination that its
duties thereunder are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities of a
type and nature presently carried on by it. No resignation will become
effective until the trustee for a series or a successor servicer has assumed
the servicer's obligations and duties under the Servicing Agreement. If the
servicer resigns for any of the foregoing reasons and the trustee is unable or
unwilling to assume responsibility for servicing the loans, it may appoint
another institution as servicer, as described under "Servicing of the
Loans--Events of Default; Rights Upon Event of Default " below.
The Servicing Agreement will provide that neither the servicer nor any
director, officer, employee or agent of either of them will be under any
liability to the trust fund or the securityholders, for the taking of any
action or for refraining from the taking of any action in good faith in
accordance with the Servicing Agreement or for errors in judgment; provided,
however, that none of the servicer or any director, officer, employee or agent
of the servicer will be protected against any liability that would otherwise be
imposed by reason of willful misfeasance, bad faith or negligence in the
performance of his or its duties or by reason of reckless disregard of his or
its obligations and duties thereunder. The Servicing Agreement will further
provide that the servicer and any director, officer, employee or agent of the
servicer shall be entitled to indemnification by the trust fund and will be
held harmless against any loss, liability or expense incurred in connection
with any legal action relating to the Servicing Agreement or the securities
other than any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence in the performance of his or its duties
thereunder or by reason of reckless disregard of his or its obligations and
duties thereunder. In addition, the Servicing Agreement will provide that the
servicer will not be under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its duties under the Servicing Agreement
and that in its opinion may involve it in any expense or liability. The
servicer may, however, in its discretion, undertake any action deemed by it
necessary or desirable in connection with the Servicing Agreement and the
rights and duties of the parties thereto and the interests of the
securityholders thereunder. In this event, the legal expenses and costs of the
action and any liability resulting therefrom will be expenses, costs and
liabilities of the trust fund, and the servicer will be entitled to be
reimbursed therefor out of the Collection Account, and any loss to the trust
fund arising from the right of reimbursement will be allocated pro rata among
the various classes of securities unless otherwise specified in the applicable
Servicing Agreement.
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Any person into which the servicer may be merged or consolidated, or
any person resulting from any merger, conversion or consolidation to which the
servicer is a party, or any person succeeding to the business through the
transfer of substantially all of its assets, or otherwise, of the servicer will
be the successor of the servicer under the Servicing Agreement; provided, that
the successor or resulting entity is qualified to service mortgage loans for
FNMA or FHLMC and that each rating agency's rating of any securities for a
series in effect immediately prior to this event is not adversely affected
thereby.
The servicer also may have the right to assign its rights and delegate
its duties and obligations under the Servicing Agreement to an affiliate or in
connection with a sale or transfer of a substantial portion of its mortgage or
manufactured housing servicing portfolio; provided, that
o in the case of a transfer by a servicer of mortgage loans, the
purchaser or transferee accepting the assignment or delegation is
qualified to service mortgage loans for FNMA or FHLMC,
o the purchaser or transferee is reasonably satisfactory to the
issuer and the trustee for a series and executes and delivers to
the issuer and the trustee an agreement, in form and substance
reasonably satisfactory to the issuer and the trustee, which
contains an assumption by the purchaser or transferee of the due
and punctual performance and observance of each covenant and
condition to be performed or observed by the servicer under the
Servicing Agreement from and after the date of the agreement; and
o each rating agency's rating of any securities for a series in
effect immediately prior to the assignment, sale or transfer is
not qualified, downgraded or withdrawn as a result of the
assignment, sale or transfer or
In the case of any assignment or delegation, the servicer will be
released from its obligations under the Servicing Agreement except for
liabilities and obligations incurred prior to the assignment and delegation.
Events of Default; Rights Upon Event of Default
Servicing Agreement. Events of default under the Servicing Agreement
generally include:
o any failure by the servicer to deposit amounts in the Collection
Account, which failure continues unremedied for the number of
days specified in the accompanying prospectus supplement after
the giving of written notice of any failure to the servicer by
the trustee for a series, or to the servicer and the trustee by
the holders of a series evidencing not less than a specified
percentage of the aggregate voting rights of the securities for a
series,
o any failure by the servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
applicable Issuing Agreement which continues unremedied for the
number of days specified in the accompanying prospectus
supplement after the giving of written notice of any failure to
the servicer by the trustee, or to the servicer and the trustee
by the holders of a series evidencing not less than a specified
percentage of the aggregate voting rights of the securities for a
series, and
o particular events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings and
particular actions by the servicer indicating its insolvency,
reorganization or inability to pay its obligations.
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The Servicing Agreement will specify the circumstances under which the
trustee of the holders of securities may remove the servicer upon the
occurrence and continuance of an event of default thereunder, whereupon the
trustee will succeed to all the responsibilities, duties and liabilities of the
servicer under the Servicing Agreement and will be entitled to reasonable
servicing compensation not to exceed the applicable servicing fee, together
with other servicing compensation in the form of assumption fees, late payment
charges or otherwise as provided in the Servicing Agreement.
In the event that the trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the accompanying prospectus supplement to act as successor servicer under the
provisions of the applicable Servicing Agreement. The successor servicer would
be entitled to reasonable servicing compensation in an amount not to exceed the
servicing fee stated in the accompanying prospectus supplement, together with
the other servicing compensation in the form of assumption fees, late payment
charges or otherwise, as provided in the Servicing Agreement.
During the continuance of any event of default of a servicer under a
Servicing Agreement, the trustee will have the right to take action to enforce
its rights and remedies and to protect and enforce the rights and remedies of
the holders of a series, and holders of securities evidencing not less than a
specified percentage of the aggregate voting rights of the securities for a
series may direct the time, method and place of conducting any proceeding for
any remedy available to the trustee or exercising any trust or power conferred
upon that trustee. However, the trustee will not be under any obligation to
pursue any remedy or to exercise any of these trusts or powers unless the
securityholders have offered the trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the trustee
in pursuing the remedy. The trustee may decline to follow any direction by the
securityholders if the trustee determines that the action or proceeding so
directed may not lawfully be taken or would involve it in personal liability or
be unjustly prejudicial to the nonassenting holders.
Indenture. Events of default under the indenture for each series of
notes generally include:
o a default in the payment of any principal of or interest on any
note of a series, which continues for the period of time
specified in the accompanying prospectus supplement;
o failure to perform any other covenant of the issuer in the
indenture which continues for the period of time specified in the
accompanying prospectus supplement after notice thereof is given
in accordance with the procedures described in the accompanying
prospectus supplement;
o any representation or warranty made by the issuer in the
indenture or in any certificate or other writing delivered
pursuant to the indenture or in connection with the indenture
concerning or affecting a series having been incorrect in a
material respect as of the time made, and the breach is not cured
within the period of time specified in the accompanying
prospectus supplement after notice thereof is given in accordance
with the procedures described in the accompanying prospectus
supplement;
o specified events of bankruptcy, insolvency, receivership or
liquidation of the issuer; or
o any other event of default provided for the notes of that series.
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If an event of default on the notes of any series at the time
outstanding occurs and is continuing, either the trustee or the holders of a
majority of the then aggregate outstanding amount of the notes of a series may
declare the principal amount of all the notes of a series to be due and payable
immediately. This declaration may, under some circumstances, be rescinded and
annulled by the holders of a majority in aggregate outstanding amount of the
notes of a series.
If, following an event of default for any series of notes, the notes
of a series have been declared to be due and payable, the trustee may, in its
discretion, notwithstanding this acceleration, elect to maintain possession of
the collateral securing the notes of a series and to continue to apply
distributions on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes of a series as they would
have become due if there had not been a declaration. In addition, the trustee
may not sell or otherwise liquidate the collateral securing the notes of a
series following an event of default other than a default in the payment of any
principal or interest on any note of a series for thirty (30) days or more,
unless (a) the holders of 100% of the then aggregate outstanding amount of the
notes of a series consent to the sale, (b) the proceeds of the sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding notes of a series at the date of the sale or
(c) the trustee determines that the collateral would not be sufficient on an
ongoing basis to make all payments on the notes as these payments would have
become due if the notes had not been declared due and payable, and the trustee
obtains the consent of the holders of a specified percentage of the then
aggregate outstanding amount of the notes of a series.
In the event that the trustee liquidates the collateral in connection
with an event of default involving a default for thirty (30) days or more in
the payment of principal of or interest on the notes of a series, the indenture
provides that the trustee will have a prior lien on the proceeds of any
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
this event of default, the amount available for distribution to the noteholders
may be less than would otherwise be the case. However, the trustee may not
institute a proceeding for the enforcement of its lien except in connection
with a proceeding for the enforcement of the lien of the Indenture for the
benefit of the noteholders after the occurrence of this event of default.
In the event the principal of the notes of a series is declared due
and payable, as described above, the holders of any notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of the discount which is unamortized.
Subject to the provisions of the indenture relating to the duties of
the trustee, in case an event of default shall occur and be continuing for a
series of Notes, the trustee will be under no obligation to exercise any of the
rights or powers under the indenture at the request or direction of any of the
holders of notes of a series, unless the holders offered to the trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with the request or
direction. Subject to these provisions for indemnification and specified
limitations contained in the indenture, the holders of a majority of the then
aggregate outstanding amount of the notes of a series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee or exercising any trust or power conferred on the
trustee for the notes of a series, and the holders of a majority of the then
aggregate outstanding amount of the notes of a series may, in some cases, waive
any default with respect thereto, except a default in the payment of principal
or interest or a default of a covenant or provision of the indenture that
cannot be modified without the waiver or consent of all the holders of the
outstanding notes of a series affected thereby.
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Amendment
Each Issuing Agreement may be amended by the parties thereto without
the consent of the securityholders,
o to cure any ambiguity,
o to correct or supplement any provision of the Issuing Agreement
that may be inconsistent with any over provision of the Issuing
Agreement,
o to comply with the requirements of the Code, or
o to make any other provisions concerning matters or questions
arising under the Issuing Agreement that are not inconsistent
with the provisions thereof;
provided, that the action will not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of the securityholders
of the series.
The Issuing Agreement may also be amended by the with the consent of
the holders of securities evidencing interests aggregating not less than a
specified percentage of the voting interests evidenced by the securities
affected thereby, for the purpose of adding any provisions to or changing in
any manner or eliminating, any of the provisions of the Issuing Agreement or of
modifying in any manner the rights of the securityholders; provided, however,
that no amendment may (x) reduce in any manner the amount of, or delay the
timing of, any payments received on or in connection with loans that are
required to be distributed on any securities, without the consent of the holder
of the security, (y) adversely affect in any material respect the interests of
the holders of a class of securities of a series in a manner other than that
described in clause (i) above without the consent of the holders of securities
aggregating not less than a specified percentage of the Voting Interests
evidenced by the class, or (iii) reduce the aforesaid percentage of the
securities, the holders of which are required to consent to the amendment,
without the consent of the holders of all securities of the class affected then
outstanding.
Termination; Purchase or Other Disposition of Loans
The obligations created by the Issuing Agreement for a series of
securities will terminate upon the earlier of (i) the later of the final
payment or other liquidation of the last loan subject thereto and the
disposition of all property acquired upon foreclosure of any loan and (ii) any
purchase or disposition described in the following paragraph. In no event,
however, will the trust created by the Issuing Agreement continue beyond the
expiration of 21 years from the death of the late survivor of persons named in
the Issuing Agreement. For each series of securities, the trustee will give
written notice of termination of the Issuing Agreement to each securityholder,
and the final distribution will be made only upon surrender and cancellation of
the securities at an office or agency appointed by the sponsor and specified in
the notice of termination.
Repurchase of the Remaining Loans. The Issuing Agreement for each
series may permit, but not require, the servicer or other entity specified in
the accompanying prospectus supplement to purchase from the trust fund for a
series all remaining loans at a price equal to 100% of the aggregate principal
balance of the loans plus, for any property acquired in respect of a loan, if
any, the outstanding principal balance of the loan at the time of foreclosure,
less, in either case, unreimbursed advances, in the case of the loans, only to
the extent not already reflected in the computation of the aggregate principal
balance of the loans, and unreimbursed expenses that are reimbursable under the
terms of the Issuing Agreement plus, in either case, accrued interest thereon
at the weighted average rate on the loans through the last day of the
remittance period in which the repurchase occurs; provided, however, that if an
election is made for treatment as a REMIC under the Code, the repurchase price
may equal the greater of (a) 100% of the aggregate principal balance of the
loans, plus accrued interest thereon at the applicable Net Loan Rates on
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the loans through the last day of the month of the repurchase and (b) the
aggregate fair market value of the loans plus the fair market value of any
property acquired in respect of a loan and remaining in the trust fund. The
exercise of this right will effect early retirement of the securities of a
series, but this entity's right to so purchase is subject to the aggregate
principal balance of the loans at the time of repurchase being less than a fixed
percentage, which shall not exceed 20%, to be stated in the Issuing Agreement,
of the aggregate principal balance of the loans as of the cut-off date.
Mandatory Termination; Auction Sale. The trustee, the servicer or the
originator may be required to effect early retirement of a series of securities
by soliciting competitive bids for the purchase of the trust fund.
The mandatory termination may take the form of an auction sale. Within
a particular period following the failure of the holder of the optional
termination right to exercise the right, the required party shall solicit bids
for the purchase of all loans remaining in the trust fund. In the event that
satisfactory bids, which would not be less than an amount necessary to pay all
principal and interest on the securities outstanding, are received as specified
in the Issuing Agreement, the net sale proceeds will be distributed to
securityholders, in the same order of priority as collections received on the
loans. If satisfactory bids are not received, this party shall decline to sell
the loans and shall not be under any obligation to solicit any further bids or
otherwise negotiate any further sale of the loans. This sale and consequent
termination of the trust fund must constitute a "qualified liquidation" of each
REMIC established by the issuer under Section 860F of the Code, including,
without limitation, the requirement that the qualified liquidation takes place
over a period not to exceed 90 days.
Material Legal Aspects of the Loans
The following discussion contains summaries of particular legal
aspects of mortgage loans and manufactured housing contracts which are general
in nature. Because these legal aspects are governed by applicable state law,
which laws may differ substantially, the summaries do not purport to be
complete nor to reflect the laws of any particular state, nor to encompass the
laws of all states in which the security for the loans is situated. The
summaries are qualified in their entirety by reference to the applicable
federal and state laws governing the loans.
The Mortgage Loans
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, who is similar to a mortgagor, a lender called the beneficiary, who is
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, for a 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 like a
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tenant's interest in a lease of land or improvements, or both, and the leasehold
estate created by the lease. A mortgage covering an interest in real property
other than the fee estate requires special provisions in the instrument creating
the interest or in the mortgage to protect the mortgagee against termination of
the 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, by 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 some
states, this foreclosure also may be accomplished by judicial action in the
manner provided for foreclosure of mortgages. In some states, the trustee must
record a notice of default and send a copy to the borrower-trustor and to any
person who has recorded a request for a copy of a notice of default and notice
of sale. In addition, the trustee must provide notice in some states to any
other individual having an interest of record in the real property, including
any junior lienholders. If the deed of trust is not reinstated within any
applicable cure period, a notice of sale must be posted in a public place and,
in most states, published for a specified period of time in one or more
newspapers. In addition, some state be laws require that a copy of the notice
of sale be posted on the property and sent to all parties having an interest of
record in the property.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, the borrower, or any other person having, a junior encumbrance on the
real estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Some 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 the 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.
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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
described 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 the tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by the
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate the 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 the 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 the 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 UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale
be conducted in a "commercially reasonable" manner. Whether a foreclosure sale
has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See
"--Anti-Deficiency Legislation and Other Limitations on Lenders" below.
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Rights of Redemption
In some states, after sale in accordance with a deed of trust and/or
foreclosure of a mortgage, the borrower and particular foreclosed junior
lienors are given a statutory period in which to redeem the property from the
foreclosure sale. In most states where the right of redemption is available,
statutory redemption may occur upon payment of the foreclosure purchase price,
accrued interest and taxes. In some states, the right to redeem is an equitable
right. The effect of a right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser at a foreclosure sale, or of any
purchaser from the lender subsequent to judicial foreclosure or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has run.
Junior Mortgages; Rights of Senior Mortgages
The mortgage loans are secured by mortgages or deeds of trust some of
which are junior to other mortgages or deeds of trust held by other lenders or
institutional investors. The rights of the Trust, and therefore the
securityholders, as mortgagee under a junior mortgage or beneficiary under a
junior deed of trust, are subordinate to those of the mortgagee under the
senior mortgage or beneficiary under the senior deed of trust, including the
prior rights of the senior mortgagee to receive hazard insurance and
condemnation proceeds and to cause the property securing the mortgage loan to
be sold upon default of the mortgagor or trustor, thereby extinguishing the
junior mortgagee's or junior beneficiary's lien unless the junior mortgagee or
junior beneficiary asserts its subordinate interest in the property in
foreclosure litigation and, possibly, satisfies the defaulted senior mortgage
or deed of trust. As discussed more fully below, a junior mortgagee or junior
beneficiary may satisfy a defaulted senior loan in full and, in some states,
may cure the 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 originators 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 originators, 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 the proceeds and awards to any indebtedness secured
by the mortgage or deed of trust. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event
the property is taken by condemnation, the mortgagee or beneficiary under any
underlying senior mortgages will have the prior right to collect and apply any
insurance proceeds payable under a hazard insurance policy to restore or repair
the property if feasible, and to collect any remaining insurance proceeds or
any award of damages in connection with the condemnation and to apply the same
to the indebtedness secured by the senior mortgages or deeds of trust. Proceeds
in excess of the amount of senior mortgage indebtedness, in most cases, may be
applied to the indebtedness of a junior mortgage or trust deed.
The form of mortgage or deed of trust used by most institutional
lenders typically contains a "future advance" clause, which provides, in
essence, that additional amounts advanced to or on behalf of the mortgagor or
trustor by the mortgagee or beneficiary are to be secured by the mortgage or
deed of trust. The priority of any advance made under the clause depends, in
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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 the 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 the 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 originators, 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 some 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
Some 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 some other states, the lender has the option of
bringing a personal action against the borrower on the debt without first
exhausting the security; however, in some of these states, the lender,
following judgment on the personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies on 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 the
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.
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In some states, exceptions to the anti-deficiency statutes are
provided for in particular instances where the value of the lender's security
has been impaired by acts or omissions of the borrower, for example, in the
event of waste of the property.
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the 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 the shares and the proprietary lease or
occupancy agreement, was conducted in a commercially reasonable manner.
In addition to anti-deficiency and similar legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act and state laws affording
relief to debtors, may interfere with or affect the ability of a secured
mortgage lender to realize upon its security. For example, in a Chapter 13
proceeding under the federal Bankruptcy Code, when a court determines that the
value of a home is less than the principal balance of the loan, the court may
prevent a lender from foreclosing on the home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the value
of the home as it exists at the time of the proceeding, leaving the lender as a
general unsecured creditor for the difference between that value and the amount
of outstanding indebtedness. A bankruptcy court may grant the debtor a
reasonable time to cure a payment default, and in the case of a mortgage loan
not secured by the debtor's principal residence, also may reduce the monthly
payments due under the mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule. Some court decisions have applied the relief
to claims secured by the debtor's principal residence.
The Code, provides priority to specified tax liens over the lien of
the mortgage or deed of trust. The laws of some states provide priority to
these tax liens over the lien of the mortgage of deed of trust. Some
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 similar 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 the clauses in many states.
However, effective October 15, 1982, Congress enacted the Garn Act which
purports to preempt state laws which prohibit the enforcement of "due-on-sale"
clauses by providing among other matters, that "due-on-sale" clauses in some
loans, which loans may include the mortgage loans, made after the effective
date of the Garn Act are enforceable, within specified limitations as set forth
in the Garn Act and the regulations promulgated thereunder. "Due-on-sale"
clauses contained in mortgage loans originated by federal savings and loan
associations or federal savings banks are fully enforceable under regulations
of the Office of Thrift Supervision, as successor to the Federal Home Loan Bank
Board, which preempt state law restrictions on the enforcement of
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the clauses. Similarly, "due-on-sale" clauses in mortgage loans made by national
banks and federal credit unions are now fully enforceable under preemptive
regulations of the Office of the Comptroller of the Currency and the National
Credit Union Administration, respectively.
The Garn Act created a limited exemption from its general rule of
enforceability for "due-on-sale" clauses in some "window period" mortgage loans
which were originated by non-federal lenders and made or assumed in some
"window period" states during the "window 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. Though neither
the Garn Act nor the OTS regulations promulgated thereunder actually names the
window period states, FHLMC has taken the position, in prescribing mortgage
loan servicing standards for 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 Garn 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 mortgage 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 these states.
By virtue of the Garn Act, the servicer may generally be permitted to
accelerate any conventional mortgage loan which contains a "due-on-sale" clause
upon transfer of an interest in the property subject to the mortgage or deed of
trust. For any mortgage loan secured by a residence occupied or to be occupied
by the borrower, this ability to accelerate will not apply to particular types
of transfers, including:
o the granting of a leasehold interest which has a term of three
years or less and which does not contain an option to purchase,
o 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,
o 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,
o 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 the lien
or encumbrance is not created by a contract for deed,
o a transfer by devise, descent or operation of law on the death of
a joint tenant or tenant by the entirety, and
o other transfers as set forth in the Garn Act and the regulations
thereunder.
The extent of the effect of the Garn Act on the average lives and
delinquency rates of the mortgage loans cannot be predicted. See "Prepayment and
Yield Considerations."
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, provides that state usury limitations shall not apply to
specified types of residential first mortgage loans originated by specified
lenders after March 31, 1980. The OTS is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute
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authorized any state to reimpose interest 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 specified other
loan charges.
Unless otherwise specified in the accompanying prospectus supplement,
the originator will represent and warrant in the Loan Sale Agreement that all
of the mortgage loans 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 some states may provide that mortgage notes relating to
adjustable rate loans are not negotiable instruments under the UCC. In this
event, the trustee will not be deemed to be a "holder in due course" within the
meaning of the UCC and may take this mortgage note subject to a number of
restrictions on its ability to foreclose and to a number of contractual
defenses available to a mortgagor.
Enforceability of 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 some states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Some states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan
is prepaid. Under the servicing agreement, late charges and prepayment fees, to
the extent permitted by law and not waived by the servicer, will be retained by
the servicer as additional servicing compensation.
Courts have applied general equitable principles upon foreclosure.
These equitable principles are generally designed to relieve the borrower from
the legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have sustained their judgment for the
lender's judgment and have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders
to foreclose if the default under the mortgage instrument is not monetary, like
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
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
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interest in the manufactured home to secure repayment of the loan. Particular
aspects of both features of the contracts are described more fully below.
The contracts generally are "chattel paper" as defined in the UCC in
effect in the states in which the manufactured homes initially were registered.
Under the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the servicing
agreement, the servicer will transfer physical possession of the contracts to
the trustee or a designated custodian or may retain possession of the contracts
as custodian for the trustee. In addition, the servicer will make an
appropriate filing of a UCC-1 financing statement in the appropriate states to
give notice of the trustee's ownership of the contracts. Unless otherwise
specified in the accompanying prospectus supplement, the contracts will not be
stamped or marked otherwise to reflect their assignment from the issuer to the
trustee. Therefore, if through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of the assignment, the trustee's interest in contracts could be defeated.
Security Interests in the manufactured homes
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 under
the provisions of the UCC is required. The servicer may effect the 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
the notation or delivery, or files the security interest under the wrong law,
the securityholders may not have a first priority security interest in the
manufactured home securing a contract. As manufactured homes have become larger
and often have been attached to their sites without any apparent intention to
move them, courts in many states have held that manufactured homes, under some
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 originator and transferred
to the issuer. For a series of securities and if so described in the
accompanying 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
securities it has obtained a perfected first priority security interest by
proper notation or delivery of the required documents and fees for
substantially all of the manufactured homes securing the contracts.
The sponsor will cause the security interests in the manufactured homes
to be assigned to the trustee on behalf of the securityholders. Unless otherwise
specified in the accompanying prospectus supplement, neither the sponsor nor the
trustee will amend the securities of title to identify the trustee or the trust
fund as the new secured party, and neither the sponsor nor the
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servicer will deliver the securities of title to the trustee or note thereon the
interest of the trustee. Accordingly, the servicer or the originator, which
continue to be named as the secured party on the securities of title relating to
the manufactured homes. In many states, the assignment is an effective
conveyance of the security interest without amendment of any lien noted on the
certificate of title and the new secured party succeeds to the issuer's rights
as the secured party. However, in some states there exists a risk that, in the
absence of an amendment to the certificate of title, the assignment of the
security interest in the manufactured home might not be effective or perfected
or that, in the absence of this notation or delivery to the trustee, the
assignment of the security interest in the manufactured home might not be
effective against creditors of the servicer, or the originator, or a trustee in
bankruptcy of the servicer, or the originator.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the manufactured home owner, or administrative
error by state recording officials, the notation of the lien of the servicer or
the originator, on the certificate of title or delivery of the required
documents and fees will be sufficient to protect the securityholders against
the rights of subsequent purchasers of a manufactured home or subsequent
lenders who take a security interest in the manufactured home. If there are any
manufactured homes as to which the security interest assigned to the trustee is
not perfected, the security interest would be subordinate to, among others,
subsequent purchasers for value of manufactured homes and holders of perfected
security interests. There also exists a risk in not identifying the trustee as
the new secured party on the certificate of title that, through fraud or
negligence, the security interest of the securityholders could be released.
In the event that the owner of a manufactured home moves it to a state
other than the state in which the 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 relocation and
thereafter until the owner re-registers the manufactured home in this state. If
the owner were to relocate a manufactured home to another state and not
re-register the manufactured home in this state, and if steps are not taken to
re-perfect the trustee's security interest in this state, the security interest
in the manufactured home would cease to be perfected. A majority of states
generally require surrender of a certificate of title to re-register a
manufactured home; accordingly, the trustee must surrender possession if it
holds the certificate of title to the 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 the
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 designated 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
manufactured housing conditional sales contract before release of the lien.
Under the Servicing Agreement, the servicer is obligated to take steps, at the
servicer's expense, as are necessary to maintain perfection of security
interests in the manufactured homes.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority over a
perfected security interest. The originator will represent in the Loan Sale
Agreement that it has no knowledge of any liens on any manufactured home
securing payment on any contract. However, these liens could arise at any
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time during the term of a contract. No notice will be given to the trustee or
securityholders in the event this type of lien arises.
Enforcement of Security Interests in manufactured homes
The servicer on behalf of the trustee, to the extent required by the
Servicing Agreement, may take action to enforce the trustee's security interest
for contracts in default by repossession and resale of the manufactured homes
securing these 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" 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 a repossession 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 this resale. In
the event of a repossession and resale of a manufactured home, the trustee
would be entitled to be paid out of the sale proceeds before the 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 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.
Some 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 specified lenders and assignees, to transfer the contract free
of notice of claims by the debtor thereunder. The effect of this rule is to
subject the assignee of this type of contract to all claims and defenses which
the debtor could assert against the seller of goods. Liability under this rule
is limited to amounts paid under a contract; however, the obligor also may be
able to asset the rule to set off remaining amounts due as a defense against a
claim brought by the trustee against the obligor. Numerous other federal and
state consumer protection laws impose requirements applicable to the
origination and lending under 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 contract.
Transfers of manufactured homes; Enforceability of "Due-on-Sale" Clauses
The contracts, in general, prohibit the sale or transfer of the
manufactured homes without the consent of the servicer and permit the
acceleration of the maturity of the contracts by the servicer upon any sale or
transfer that is not consented to.
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In the case of a transfer of a manufactured home after which the
servicer desires to accelerate the maturity of the contract, the servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn Act preempts, subject to a number of 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 on some manufactured
homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that, subject to the following conditions, state
usury limitations shall not apply to any loan which is secured by a first lien
on particular kinds of manufactured housing. The contracts would be covered if
they satisfy a number of 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 unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, and state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered by
Title V. The originator will represent that all of the contracts comply with
applicable usury law.
Formaldehyde Litigation Involving 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 the 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
persons in the distribution process. The sponsor is aware of a limited number
of cases in which plaintiffs have won judgments in these lawsuits.
The holder of any contract secured by a manufactured home for which a
formaldehyde claim has been successfully asserted may be liable to the obligor
for the amount paid by the obligor on the contract and may be unable to collect
amounts still due under the contract. The successful assertion of the claim
constitutes a breach of a representation or warranty of the person specified in
the accompanying prospectus supplement, and the securityholders would suffer a
loss only to the extent that (x) this person breached its obligation to
repurchase the contract in the event an obligor is successful in asserting a
claim, and (y) this person, the servicer or the trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of the
securityholders against the manufacturer or other persons who were directly
liable to the plaintiff for the damages. Typical products liability insurance
policies held by manufacturers and component suppliers of manufactured homes
may not cover liabilities arising from formaldehyde in manufactured housing,
with the result that recoveries from the manufacturers, suppliers or other
persons may be limited to their corporate assets without the benefit of
insurance.
Installment Contracts
The loans may also consist of installment contracts. Under an
installment contract the lender retains legal title to the property and enters
into an agreement with the borrower for the payment of the purchase price, plus
interest, over the term of the 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
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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 under 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 this
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 these statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the borrower
may be granted some grace period during which the contract may be reinstated
upon full payment of the default amount and the borrower may have a
post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
Installment contract for the sale of real estate to share in the proceeds of
sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the
lender's procedures for obtaining possession and clear title under an
Installment contract for the sale of real estate in a given state are simpler
and less time-consuming and costly than are the procedures for foreclosing and
obtaining clear title to a mortgaged property.
Environmental Risks
Real property pledged for a loan as security to a lender may be
subject to unforeseen environmental risks. Of particular concern may be those
mortgaged properties which have been the site of manufacturing, industrial or
disposal activity. These environmental risks may give rise to (a) a diminution
in value of property securing any loan or the inability to foreclose against
the property or (b) in some circumstances as more fully described below,
liability for clean-up costs or other remedial actions, which liability could
exceed the value of the property or the principal balance of the loan.
Under the laws of some states, failure to perform the remediation
required or demanded by the state of any environmental condition or
circumstance that
o may pose an imminent or substantial endangerment to the public
health or welfare or the environment,
o may result in a release or threatened release of any hazardous
material,
o may give rise to any environmental claim or demand, or
o may give rise to a lien on the property to ensure the
reimbursement of remedial costs incurred by the state to remedy
the environmental condition.
In several states these liens have priority over the lien of an
existing mortgage against the property. The value of a mortgaged property as
collateral for a loan could therefore be adversely affected by the existence of
any environmental condition.
The state of the law is currently unclear as to whether and under what
circumstances clean-up costs, or the obligation to take remedial actions, could
be imposed on a secured lender
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like the trust fund. Under the laws of some states and under the 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 the
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". This exemption for holders of a security interest like 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 the 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 the 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 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 these persons or entities may be
bankrupt or otherwise judgment proof. Furthermore, this action against the
borrower may be adversely affected by the limitations on recourse in the
documents in the loan document file. Similarly, in some states anti-deficiency
legislation and other statues requiring the lender to exhaust its security
before bringing a personal action against the borrower-trustor may curtail the
lender's ability to recover from its borrower the environmental clean-up and
other costs and liabilities by the lender. See "--Anti-Deficiency Legislation
and Other Limitations on Lenders".
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, a borrower who enters military service after the origination of
the borrower's loan, including a borrower who is a member of the National Guard
or is in reserve status at the time of the origination of the loan and is later
called to active duty, may not be charged interest above an annual rate of 6%
during the period of the borrower's active duty status, unless a court orders
otherwise upon application of the lender. It is possible that this action could
have an effect, for an indeterminate period of time, on the ability of the
servicer to collect full amounts of interest on
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some of the loans in a trust fund. Any shortfall in interest collections
resulting from the application of the Soldiers' and Sailors' Civil Relief Act
could result in losses to the holders of the securities of the series. In
addition, the Soldiers' and Sailors' Civil Relief Act imposes limitations which
would impair the ability of the servicer to foreclose on an affected loan during
the borrower's period of active duty status. Thus, in the event that this type
of loan goes into default, there may be delays and losses occasioned by the
inability to realize upon the mortgaged property or manufactured home in a
timely fashion.
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: (x) hotels and motels are typically operated in accordance with
franchise, management and operating agreements which may be terminable by the
operator; and (y) 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 these
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.
Material Matters Relating to Insolvency
The originator, the issuer and the sponsor intend that the transfer of
the loans to the issuer constitute a sale rather for a pledge of the loans to
secure indebtedness of the originator. However, if the originator were to
become a debtor under the federal bankruptcy code or be placed in a
conservatorship or receivership under FIRREA, as the case may be, it is
possible that a creditor, receiver, conservator or trustee-in-bankruptcy of the
originator may argue that the sale of the loans by the originator is a pledge
of the loans rather than a sale. This position, if argued or accepted by a
court, could result in a delay in or reduction of distributions to the
securityholders.
Under FIRREA, the FDIC as receiver or conservator of a servicer
subject to its jurisdiction may enforce a contract notwithstanding any
provision of the contract providing for termination thereof by reason of the
insolvency of, or appointment of a receiver or conservator for, the servicer.
Consequently, provisions in a Servicing Agreement providing for an Event of
Default upon specified 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 these 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
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petition, and, often, no interest or principal payments are made during the
course of the bankruptcy proceeding. The delay and the consequences thereof
caused by or on behalf of a junior lienor may stay the senior lender from taking
action to foreclose out the 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 on 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 the 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 on the mortgaged property if the 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
o if the assignment is not fully perfected under state law prior to
commencement of the bankruptcy proceeding,
o to the extent these rents are used by the borrower to maintain
the mortgaged property, or for other court authorized expenses,
or
o 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 property, the ability may be
impaired by the commencement of a bankruptcy proceeding relating to a lessee
under the 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 for 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. These
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.
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Although the lessee is obligated to make all lease payments currently during the
post-petition period, there is a risk that the 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 on 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, under 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 mortgage loan. Moreover, some recent court decisions
suggest that even a non-collusive, regularly conducted foreclosure sale may be
challenged in a bankruptcy proceeding as a "fraudulent conveyance," regardless
of the parties' intent, if a bankruptcy court determines that the mortgaged
property has been sold for less than fair consideration while the mortgagor was
insolvent and within one year, or within any longer state statutes of
limitations if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law, of the filing of bankruptcy.
Material Federal Income Tax Consequences
The following is a discussion of the material federal income tax
consequences to investors of the purchase, ownership and disposition of the
securities offered hereby. The discussion is based upon laws, regulations,
rulings and decisions now in effect, all of which are subject to change. The
discussion below does not purport to deal with all federal tax consequences
applicable to all categories of investors, some of which may be subject to
special rules. Investors are urged to consult their own tax advisors in
determining the particular federal, state and local consequences to them of the
purchase, ownership and disposition of the securities.
The following discussion addresses securities of five general types:
o Grantor Trust Securities,
o REMIC Securities,
o Debt Securities,
o Partnership Interests, and
o FASIT Securities.
The prospectus supplement for each series of securities will indicate
whether a REMIC or FASIT election(s) will be made for the trust and, if a REMIC
or FASIT election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC or all "regular interests," "high-yield
interests" and the "ownership interest" in the FASIT.
The Taxpayer Relief Act of 1997 adds provisions to the Code that
require the recognition of gain upon the "constructive sale of an appreciated
financial position." A constructive sale of an appreciated financial position
occurs if a taxpayer enters into particular transactions or series of
transactions in connection with a financial instrument that have the effect of
substantially eliminating the taxpayer's risk of loss and opportunity for gain
on the financial instrument. These provisions apply only to classes of
securities that do not have a principal balance.
Grantor Trust Securities
For each series of Grantor Trust Securities, special tax counsel to
the sponsor, will deliver its opinion to the sponsor that the trust will be
classified as a grantor trust and not as an association taxable as a
corporation. This opinion shall be attached on Form 8-K to be filed with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the
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securities or filed with the Commission as a post-effective amendment to the
prospectus. Accordingly, each beneficial owner of a Grantor Trust Security will
generally be treated as the owner of an interest in the loans included in the
grantor trust.
Special Tax Attributes
Unless otherwise disclosed in a accompanying prospectus supplement,
special tax counsel to the sponsor, will deliver its opinion to the sponsor
that (a) Grantor Trust Fractional Interest Securities will represent interests
in (x) "loans . . . secured by an interest in real property" within the meaning
of section 7701(a)(19)(C)(v) of the Code; and (y) "obligations (including any
participation or certificate of beneficial ownership therein) which . . . are
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code; and (b) interest on Grantor Trust Fractional
Interest Securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Section 856(c)(3)(B) of the Code. In addition, the Grantor Trust Strip
Securities will be "obligations (including any participation or certificate of
beneficial ownership therein) . . . principally secured by an interest in real
property" within the meaning of Section 860G(a)(3)(A) of the Code. We will file
this opinion with the Securities and Exchange Commission on Form 8-K within
fifteen (15) days after the initial issuance of the securities or as a
post-effective amendment to the prospectus.
Taxation of Beneficial Owners of Grantor Trust Securities
Beneficial owners of Grantor Trust Fractional Interest Securities
generally will be required to report on their federal income tax returns their
respective shares of the income from the loans, including amounts used to pay
reasonable servicing fees and other expenses but excluding amounts payable to
beneficial owners of any corresponding Grantor Trust Strip Securities, and,
subject to the limitations described below, will be entitled to deduct their
shares of any reasonable servicing fees and other expenses. If a beneficial
owner acquires a Grantor Trust Fractional Interest Security for an amount that
differs from its outstanding principal amount, the amount includible in income
on a Grantor Trust Fractional Interest Security may differ from the amount of
interest distributable thereon. See "--Discount and Premium," below.
Individuals holding a Grantor Trust Fractional Interest Security directly or
through some pass-through entities will be allowed a deduction for reasonable
servicing fees and expenses only to the extent that the aggregate of the
beneficial owner's miscellaneous itemized deductions exceeds 2% of the
beneficial owner's adjusted gross income. Further, beneficial owners, other
than corporations, subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining alternative minimum taxable
income.
Beneficial owners of Grantor Trust Strip Securities generally will be
required to treat the securities as "stripped coupons" under Section 1286 of
the Code. Accordingly, beneficial owner will be required to treat the excess of
the total amount of payments on a Grantor Trust Strip Security over the amount
paid for the security as original issue discount and to include the discount in
income as it accrues over the life of the 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 a Grantor Trust Fractional Interest Security, and
perhaps all stated interest thereon, would be classified as original issue
discount and includible in the beneficial owner's income as it accrues,
regardless of the beneficial owner's method of accounting, as described below
under "--Discount and Premium." The coupon stripping rules will not apply,
however, if (x) the pass-
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through rate is no more than 100 basis points lower than the gross rate of
interest payable on the underlying loans and (y) the difference between the
outstanding principal balance on the security and the amount paid for the
security is less than 0.25% of the 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,
which is equal to the difference between the amount realized on the sale and
the adjusted basis of the 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 originator, including original issue discount and
market discount income, and reduced, but not below zero, by any previously
reported losses, any amortized premium and by any distributions of principal.
Grantor Trust Reporting
The trustee will furnish to each beneficial owner of a Grantor Trust
Fractional Interest Security with each distribution a statement setting forth
the amount of the distribution allocable to principal on the underlying loans
and to interest thereon at the interest rate attributable to the security. In
addition, within a reasonable time after the end of each calendar year, based
on information provided by the servicer, the trustee will furnish to each
beneficial owner during the year any customary factual information as the
servicer deems necessary or desirable to enable beneficial owners of Grantor
Trust Securities to prepare their tax returns and will furnish comparable
information to the Internal Revenue Service as and when required to do so by
law.
REMIC Securities
If provided in a accompanying prospectus supplement, an election will
be made to treat an issuer as a REMIC under the Code. Qualification as a REMIC
requires ongoing compliance with a number of conditions. For each series of
securities for which a REMIC election is made, special tax counsel to the
sponsor, will deliver its opinion to the sponsor that, assuming compliance with
the Issuing Agreement, the issuer will be treated as a REMIC for federal income
tax purposes. We will file this opinion with the Commission on Form 8-K within
fifteen days after the initial issuance of the securities or as a
post-effective amendment to the prospectus.
A REMIC Trust will not be subject to federal income tax except for
income from prohibited transactions and in particular other instances described
below. See "--Taxes on a REMIC Trust." Generally, the total income from the
loans in a REMIC Trust will be taxable to the beneficial owners of the
securities of that series, as described below.
The REMIC Regulations provide some guidance regarding the federal
income tax consequences associated with the purchase, ownership and disposition
of REMIC Securities. While a number of 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
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the calendar year may be limited to the portion of the assets of the 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 described in the
preceding sentence. For purposes of applying this limitation, a REMIC Trust
should be treated as owning the assets represented by the qualified mortgages.
The assets of the trust fund will include, in addition to the loans, payments on
the loans held pending distribution on the REMIC Regular Securities and REMIC
Residual Securities and any reinvestment income thereon. REMIC Regular
Securities and REMIC Residual Securities held by a financial institution to
which Section 585, 586 or 593 of the Code applies will be treated as evidences
of indebtedness for purposes of Section 582(c)(1) of the Code. REMIC Regular
Securities will also be qualified mortgages in connection with other REMICs and
FASITs.
Taxation of Beneficial Owners of REMIC Regular Securities
Except as indicated below in this federal income tax discussion, the
REMIC Regular Securities will be treated for federal income tax purposes as
debt instruments issued by the REMIC Trust on the Settlement Date and not as
ownership interests in the REMIC Trust or its assets. Beneficial owners of
REMIC Regular Securities that otherwise report income under a cash method of
accounting will be required to report income on the securities under an accrual
method. For additional tax consequences relating to REMIC Regular Securities
purchased at a discount or with premium, see "--Discount and Premium," below.
Taxation of Beneficial Owners of REMIC Residual Securities
Daily Portions. Except as indicated below, a beneficial owner of a
REMIC Residual Security for a REMIC Trust generally will be required to report
its daily portion of the taxable income or net loss of the REMIC Trust for each
day during a calendar quarter that the beneficial owner owned the 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 the quarter and by allocating
the amount so allocated among the beneficial owners of REMIC Residual
Securities on this day in accordance with their percentage interests on this
day. Any amount included in the gross income or allowed as a loss of any
beneficial owner of this REMIC Residual Security by virtue of this paragraph
will be treated as ordinary income or loss.
The requirement that each beneficial owner of a REMIC Residual
Security report its daily portion of the taxable income or net loss of the
REMIC Trust will continue until there are no securities of any class
outstanding, even though the beneficial owner of the REMIC Residual Security
may have received full payment of the stated interest and principal on its
REMIC Residual Security.
The trustee will provide to beneficial owners of REMIC Residual
Securities of each series of securities (x) the information as is necessary to
enable them to prepare their federal income tax returns and (y) any reports
regarding the securities of a 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. This
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 specified 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)
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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 in the qualified mortgages 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. See "--Discount and Premium--Original Issue Discount," below. The
basis to a REMIC Trust in the qualified mortgages is the aggregate of the issue
prices of all the REMIC Regular Securities and REMIC Residual Securities in the
REMIC Trust on the Settlement Date. If, however, a substantial amount of a class
of REMIC Regular Securities or REMIC Residual Securities has not been sold to
the public, then the fair market value of all the REMIC Regular Securities or
REMIC Residual Securities in that class as of the date of the prospectus
supplement should be substituted for the issue price.
The third modification is that no item of income, gain, loss or
deduction allocable to a prohibited transaction will be taken into account. See
"--Taxes on a REMIC Trust--Prohibited Transactions" below. 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, the excess will
be a net loss for the REMIC Trust for that calendar quarter. The REMIC
Regulations also provide that any gain or loss to a REMIC Trust from the
disposition of any asset, including a qualified mortgage or "permitted
investment", as defined in Section 860G(a)(5) of the Code, will be treated as
ordinary gain or loss.
A beneficial owner of a REMIC Residual Security may be required to
recognize taxable income without being entitled to receive a corresponding
amount of cash. This could occur, for example, if the qualified mortgages are
considered to be purchased by the REMIC Trust at a discount, some or all of the
REMIC Regular Securities are issued at a discount, and the discount included as
a result of a prepayment on a loan that is used to pay principal on the REMIC
Regular Securities exceeds the REMIC Trust's deduction for unaccrued original
issue discount relating to the 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 on any given loan expressed as a
percentage of the outstanding principal amount of that loan, will remain
constant over time.
Basis Rules and Distributions. A beneficial owner of a REMIC Residual
Security has an initial basis in its security equal to the amount paid for the
REMIC Residual Security. This basis is increased by amounts included in the
income of the beneficial owner and decreased by distributions and by any net
loss taken into account on the REMIC Residual Security. A distribution on a
REMIC Residual Security to a beneficial owner is not included in gross income
to the extent it does not exceed the beneficial owner's basis in the REMIC
Residual Security, adjusted as described above, and, to the extent it exceeds
the adjusted basis of the REMIC Residual Security, shall be treated as gain
from the sale of the REMIC Residual Security.
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A beneficial owner of a REMIC Residual Security is not allowed to take
into account any net loss for any calendar quarter to the extent the net loss
exceeds the beneficial owner's adjusted basis in its REMIC Residual Security as
of the close of the calendar quarter, determined without regard to the 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 on a REMIC Residual Security
are subject to a number of special tax rules. For a beneficial owner of a REMIC
Residual Security, the excess inclusion for any calendar quarter is defined as
the excess, if any, of the daily portions of taxable income over the sum of the
"daily accruals" for each day during this quarter that the REMIC Residual
Security was held by the beneficial owner. The daily accruals are determined by
allocating to each day during a calendar quarter its ratable portion of the
product of the "adjusted issue price" of the REMIC Residual Security at the
beginning of the calendar quarter and 120% of the "federal long-term rate" in
effect on the Settlement Date, based on quarterly compounding, and properly
adjusted for the length of the 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 on the REMIC Residual Security before the beginning of the
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, beneficial owners of REMIC Residual Securities with excess
inclusion income cannot offset the income by losses from other activities. For
beneficial owners that are subject to tax only on unrelated business taxable
income, as defined in Section 511 of the Code, an excess inclusion of the
beneficial owner is treated as unrelated business taxable income. For variable
contracts, within the meaning of Section 817 of the Code, a life insurance
company cannot adjust its reserve to the extent of any excess inclusion, except
as provided in regulations. The REMIC Regulations indicate that if a beneficial
owner of a REMIC Residual Security is a member of an affiliated group filing a
consolidated income tax return, the taxable income of the affiliated group
cannot be less than the sum of the excess inclusions attributable to all
residual interests in REMICs held by members of the affiliated group. For a
discussion of the effect of excess inclusions on particular 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 this type of rule. If this type of rule were
adopted, it is unclear how significant value would be determined for these
purposes. If no 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 on the 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 the trust in
proportion to the dividends received by the shareholders from the trust, and
any amount so allocated will be treated as an excess inclusion on a REMIC
Residual Security as if held directly by the shareholder. Similar rules will
apply in the case of regulated investment companies, common trust funds and
some cooperatives that hold a REMIC Residual Security.
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Pass-Through of Servicing and Guaranty Fees to Individuals. A
beneficial owner of a REMIC Residual Security who is an individual will be
required to include in income a share of any servicing and guaranty fees. A
deduction for the fees will be allowed to the beneficial owner only to the
extent that the fees, along with some of the beneficial owner's other
miscellaneous itemized deductions exceed 2% of the beneficial owner's adjusted
gross income. In addition, a beneficial owner of a REMIC Residual Security may
not be able to deduct any portion of the fees in computing the beneficial
owner's alternative minimum tax liability. A beneficial owner's share of the
fees will generally be determined by (x) allocating the amount of the expenses
for each calendar quarter on a pro rata basis to each day in the calendar
quarter and (y) allocating the daily amount among the beneficial owners in
proportion to their respective holdings on this 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
in accordance with specified exceptions, the receipt of investment income from
a source other than a loan or 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", which is generally the same as the Settlement Date.
Exceptions are provided for cash contributions to a REMIC:
o during the three month period beginning on the startup day,
o made to a qualified reserve fund by a beneficial owner of a
residual interest,
o in the nature of a guarantee,
o made to facilitate a qualified liquidation or clean-up call, and
o as otherwise permitted by Treasury regulations.
Net Income from Foreclosure Property. The Code imposes a tax on a
REMIC equal to the highest corporate rate on "net income from foreclosure
property." The terms "foreclosure property", which includes property acquired
by deed in lieu of foreclosure, and "net income from foreclosure property" are
defined by reference to the rules applicable to real estate investment trusts.
Generally, foreclosure property would be treated as such for a period of three
years, with a possible extension. Net income from foreclosure property
generally means gain from the sale of foreclosure property that is inventory
property and gross income from foreclosure property other than qualifying rents
and other qualifying income for a real estate investment trust.
Sales of REMIC Securities
Except as provided below, if a REMIC Regular Security 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 the security to the seller, increased by any original issue
discount or market discount included in the seller's gross income on the
security and reduced by distributions on the 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 on the security.
See "--Discount and Premium." The adjusted basis of a REMIC Residual Security
is determined as described above under "--Taxation of Beneficial Owners of
REMIC Residual
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Securities--Basis Rules and Distributions." Except as provided in the following
paragraph or under Section 582(c) of the Code, any gain or loss will be capital
gain or loss, provided the security is held as a "capital asset", which is
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 the gain
does not exceed the excess, if any, of (x) the amount that would have been
includible in the income of the beneficial owner of a REMIC Regular Security
had income accrued at a rate equal to 110% of the "applicable federal rate",
generally, an average of current yields on Treasury securities, as of the date
of purchase over (y) the amount actually includible in the beneficial owner's
income. In addition, gain recognized on this type of sale by a beneficial owner
of a REMIC Regular Security who purchased the security at a market discount
would also be taxable as ordinary income in an amount not exceeding the portion
of the discount that accrued during the period the security was held by the
beneficial owner, reduced by any market discount includible in income under the
rules described below under "--Discount and Premium."
If a beneficial owner of a REMIC Residual Security sells its REMIC
Residual Security at a loss, the loss will not be recognized if, within six
months before or after the sale of the REMIC Residual Security, the beneficial
owner 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. This 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 regulations on this point 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, some cooperatives, and nominees, that owns a
REMIC Residual Security if this 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 by a
purchase, a default under a secured lending agreement or otherwise.
The term "disqualified organization" includes the United States, any
state or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing,
other than specified 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 the 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 (x) residual
interests in the entity are not held by disqualified organizations and (y)
information necessary for the application of the tax described in this
prospectus will be made available. Restrictions on the transfer of a REMIC
Residual Security and 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 accompanying 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 in the REMIC
Residual Security. 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 the tax liability if (a) the transferee furnishes to the transferor, or the
transferee's agent, an affidavit
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that the transferee is not a disqualified organization, and (b) 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 for an interest in the REMIC Residual Security
owned by a disqualified organization if (x) the record-holder of this interest
furnishes to the pass-through entity an affidavit that it is not a disqualified
organization, and (y) during the period, the pass-through entity has no actual
knowledge that the affidavit is false.
The Taxpayer Relief Act of 1997 adds provisions to the Code that will
apply to an "electing large partnership." If an electing large partnership
holds a Residual Certificate, all interests in the electing large partnership
are treated as held by disqualified organizations for purposes of the tax
imposed upon a pass-through entity by Section 860E(e) of the Code. An exception
to this tax, otherwise available to a pass-through entity that is furnished
affidavits by record holders of interests in the entity and that does not know
the affidavits are false, is not available to an electing large partnership.
Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" to a U.S. Person, as defined below in "Foreign Investors--Grantor
Trust Securities and REMIC Regular Securities", will be disregarded for all
federal tax purposes unless no significant purpose of the transfer is to impede
the assessment or collection of tax. A REMIC Residual Security would be treated
as constituting a noneconomic residual interest unless, at the time of the
transfer, (x) 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" on the security and the highest corporate rate
of tax for the year in which the transfer occurs, and (y) 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 the 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
the security is transferred and based on events that have occurred as of that
date and on the Prepayment Assumption. See "--Discount and Premium" and
"--Taxation of Beneficial Owners of REMIC Residual Securities--Excess
Inclusions."
The REMIC Regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC Residual Security has "improper knowledge" -i.e., either
knew, or should have known, that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC Trust. A
transferor is presumed not to have improper knowledge if (x) 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 (y) the
transferee makes a number of 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 these transfers.
Reporting and Other Administrative Matters. For purposes of the
administrative provisions of the Code, each REMIC Trust will be treated as a
partnership and the beneficial owners of REMIC Residual Securities will be
treated as partners. The trustee will prepare, sign and file federal income tax
returns for each REMIC Trust, which returns are subject to audit by the IRS.
Moreover, within a reasonable time after the end of each calendar year, the
trustee will furnish to each beneficial owner that received a distribution
during the year a statement setting forth the portions of any distributions
that constitute interest distributions, original issue discount,
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and any other information as is required by Treasury regulations and, for
beneficial owners of REMIC Residual Securities in a REMIC Trust, information
necessary to compute the daily portions of the taxable income, or net loss, of
the REMIC Trust for each day during this year. The trustee will also act as the
tax matters partner for each REMIC Trust, either in its capacity as a beneficial
owner of a REMIC Residual Security or in a fiduciary capacity. Each beneficial
owner of a REMIC Residual Security, by the acceptance of its REMIC Residual
Security, agrees that the trustee will act as its fiduciary in the performance
of any duties required of it in the event that it is the tax matters partner.
Each beneficial owner of a REMIC Residual Security is required to
treat items on its return consistently with the treatment on the return of the
REMIC Trust, unless the beneficial owner either files a statement identifying
the inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC Trust. The IRS may assert a deficiency
resulting from a failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC Trust level.
Termination
In general, no special tax consequences will apply to a beneficial
owner of a REMIC Regular Security upon the termination of a REMIC Trust by
virtue of the final payment or liquidation of the last loan remaining in the
trust fund. If a beneficial owner of a REMIC Residual Security's adjusted basis
in its REMIC Residual Security at the time the termination occurs exceeds the
amount of cash distributed to the beneficial owner in liquidation of its
interest, although the matter is not entirely free from doubt, it would appear
that the beneficial owner of the REMIC Residual Security is entitled to a loss
equal to the amount of this excess.
Debt Securities
For each series of Debt Securities, special tax counsel to the
sponsor, will deliver its opinion to the sponsor that the securities will be
classified as debt secured by the loans. We will file this opinion with the
Securities and Exchange Commission on Form 8-K within fifteen days after the
initial issuance of the securities or as a post-effective amendment to the
prospectus. Accordingly, the Debt Securities will not be treated as ownership
interests in the loans or the issuer. Beneficial owners will be required to
report income received on 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 specified
special tax attributes by virtue of their being ownership interests in the
underlying loans. Similarly, REMIC Securities will possess similar attributes
by virtue of the REMIC provisions of the Code. In general, Debt Securities will
not possess these special tax attributes. Investors to whom these attributes
are important should consult their own tax advisors regarding investment in
Debt Securities.
Sale or Exchange of Debt Securities
If a beneficial owner of a Debt Security sells or exchanges the
security, the beneficial owner will recognize gain or loss equal to the
difference, if any, between the amount received and the beneficial owner's
adjusted basis in the security. The adjusted basis in the security generally
will equal its initial cost, increased by any original issue discount or market
discount previously included in the seller's gross income on 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 particular 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.
Debt Securities Reporting
The trustee will furnish to each beneficial owner of a Debt Security
with each distribution a statement setting forth the amount of the distribution
allocable to principal on the underlying loans and to interest thereon at the
interest rate attributable to the security. In addition, within a reasonable
time after the end of each calendar year, based on information provided by the
servicer, the trustee will furnish to each beneficial owner during this year
any customary factual information as the servicer deems necessary or desirable
to enable beneficial owners of Debt Securities to prepare their tax returns and
will furnish comparable information to the IRS as and when required to do so by
law.
Partnership Interests
For each series of Partnership Interests, special tax counsel to the
sponsor, will deliver its opinion to the sponsor that the issuer will be
treated as a partnership and not an association taxable as a corporation for
federal income tax purposes. We will file this opinion with the Securities and
Exchange Commission on Form 8-K within fifteen days after the initial issuance
of the securities or as a post-effective amendment to the prospectus.
Accordingly, each beneficial owner of a Partnership Interest will generally be
treated as the owner of an interest in the loans.
Special Tax Attributes
As described above, REMIC Securities will possess specified special
tax attributes by virtue of the REMIC provisions of the Code. In general,
Partnership Interests will not possess these special tax attributes. Investors
to whom these attributes are important should consult their own tax advisors
regarding investment in Partnership Interests.
Taxation of Beneficial Owners of Partnership Interests
If the issuer is treated as a partnership for federal income tax
purposes, the issuer will not be subject to federal income tax. Instead, each
beneficial owner of a Partnership Interest will be required to separately take
into account its allocable share of income, gains, losses, deductions, credits
and other tax items of the issuer. These partnership allocations are made in
accordance with the Code, Treasury regulations and the partnership agreement or
in this case, the trust agreement or other similar agreement.
The issuer's assets will be the assets of the partnership. The
issuer's income will consist primarily of interest and finance charges earned
on the underlying loans. The issuer's deductions will consist primarily of
interest accruing on any indebtedness issued by the issuer, servicing and other
fees, and losses or deductions upon collection or disposition of the issuer's
assets.
In some instances, the issuer could have an obligation to make
payments of withholding tax on behalf of a beneficial owner of a Partnership
Interest. See "--Backup Withholding" and "--Foreign Investors."
Substantially all of the taxable income allocated to a beneficial
owner of a Partnership Interest that is a pension, profit sharing or employee
benefit plan or other tax-exempt entity, including an individual retirement
account, will constitute "unrelated business taxable income" generally taxable
to that holder under the Code.
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Under Section 708 of the Code, the issuer will be deemed to terminate
for federal income tax purposes if 50% or more of the capital and profits
interests in the issuer are sold or exchanged within a 12-month period. Under
Treasury regulations issued on May 9, 1997 if a termination occurs, the issuer
is deemed to contribute all of its assets and liabilities to a newly formed
partnership in exchange for a partnership interest. Immediately thereafter, the
terminated partnership distributes interests in the new partnership to the
purchasing partner and remaining partners in proportion to their interests in
liquidation of the terminated partnership.
Sale or Exchange of Partnership Interests
Generally, capital gain or loss will be recognized on a sale or
exchange of Partnership Interests in an amount equal to the difference between
the amount realized and the seller's tax basis in the Partnership Interests
sold. A beneficial owner's tax basis in a Partnership Interest will generally
equal the beneficial owner's cost increased by the beneficial owner's share of
issuer income and decreased by any distributions received on the Partnership
Interest. In addition, both the tax basis in the Partnership Interest and the
amount realized on a sale of a Partnership Interest would take into account the
beneficial owner's share of any indebtedness of the issuer. A beneficial owner
acquiring Partnership Interests at different prices may be required to maintain
a single aggregate adjusted tax basis in the Partnership Interest, and upon
sale or other disposition of some of the Partnership Interests, allocate a
portion of the aggregate tax basis to the Partnership Interests sold, rather
than maintaining a separate tax basis in each Partnership Interest for purposes
of computing gain or loss on a sale of that Partnership Interest.
Any gain on the sale of a Partnership Interest attributable to the
beneficial owner's share of unrecognized accrued market discount on the assets
of the issuer would generally be treated as ordinary income to the holder and
would give rise to special tax reporting requirements. If a beneficial owner of
a Partnership Interest is required to recognize an aggregate amount of income
over the life of the Partnership Interest that exceeds the aggregate cash
distributions with respect thereto, the excess will generally give rise to a
capital loss upon the retirement of the Partnership Interest. If a beneficial
owner sells its Partnership Interest at a profit or loss, the transferee will
have a higher or lower basis in the Partnership Interests than the transferor
had. The tax basis of the issuer's assets will not be adjusted to reflect that
higher or lower basis unless the issuer files an election under Section 754 of
the Code.
Partnership Reporting
The trustee is required to
o keep complete and accurate books of the issuer,
o file a partnership information return on IRS Form 1065 with the
IRS for each taxable year of the issuer and
o report each beneficial owner's allocable share of items of issuer
income and expense to beneficial owners and the IRS on Schedule
K-1.
The issuer will provide the Schedule K-1 information to nominees that
fail to provide the issuer with the information statement described below and
the nominees will be required to forward the information to the beneficial
owners of the Partnership Interests. Generally, beneficial owners of a
Partnership Interest must file tax returns that are consistent with the
information return filed by the issuer or be subject to penalties unless the
beneficial owner of a Partnership Interest notifies the IRS of all
inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Interests as a nominee at any time during a calendar year is required to
furnish the issuer with a statement containing
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specified information on the nominee, the beneficial owners and the Partnership
Interests so held. This information includes
o the name, address and taxpayer identification number of the
nominee and
o as to each beneficial owner
o the name, address and identification number of this person,
o whether this person is a United States person, a tax-exempt
entity or a foreign government, an international
organization, or any wholly owned agency or instrumentality
of either of the foregoing, and
o specified information on Partnership Interests that were
held, bought or sold on behalf of this person throughout the
year.
In addition, brokers and financial institutions that hold Partnership
Interests through a nominee are required to furnish directly to the issuer
information as to themselves and their ownership of Partnership Interests. A
clearing agency registered under Section 17A of the Securities Exchange Act of
1934, is not required to furnish any of this information statement to the
issuer. Nominees, brokers and financial institutions that fail to provide the
issuer with the information described above may be subject to penalties.
The Code provides for administrative examination of a partnership as
if the partnership were a separate and distinct taxpayer. Generally, the
statute of limitations for partnership items does not expire before three years
after the date on which the partnership information return is filed. Any
adverse determination following an audit of the return of the issuer by the
appropriate taxing authorities could result in an adjustment of the returns of
the beneficial owner of a Partnership Interests, and, under particular
circumstances, a beneficial owner of a Partnership Interest may be precluded
from separately litigating a proposed adjustment to the items of the issuer. An
adjustment could also result in an audit of the beneficial owner of a
Partnership Interest's returns and adjustments of items note related to the
income and losses of the issuer.
FASIT Securities
If provided in a accompanying prospectus supplement, an election will
be made to treat the issuer as a FASIT within the meaning of Code Section
860L(a). Qualification as a FASIT requires ongoing compliance with a number of
conditions. For each series of securities for which an election is made,
special tax counsel to the sponsor, will deliver its opinion to the sponsor
that, assuming compliance with the Issuing Agreement, the issuer will be
treated as a FASIT for federal income tax purposes. We will file this opinion
with the securities and Exchange Commission on Form 8-K within fifteen days
after the initial issuance of the securities or as a post-effective amendment
to the prospectus.
Special Tax Attributes
FASIT Securities held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Sections
856(c)(5)(A) and 856(c)(6) and interest on the FASIT Regular Securities will be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section 856(c)(3)(B) in
the same proportion that, for both purposes, the assets of the FASIT Trust and
the income thereon would be so treated. FASIT Regular Securities held by a
domestic building and loan association will be treated as "regular interest[s]
in a FASIT" under Code Section 7701(a)(19)(C)(xi), but only in the proportion
that the FASIT Trust holds "loans . . . secured by an interest in real property
which is . . . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v). If at all times 95% or more of the assets of the FASIT Trust
or the
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income thereon qualify for the foregoing treatments, the FASIT Regular
Securities will qualify for the corresponding status in their entirety. For
purposes of Code Section 856(c)(5)(A), payments of principal and interest on a
loan that are reinvested pending distribution to holders of FASIT Regular
Securities should qualify for this treatment. FASIT Regular Securities held by a
regulated investment company will not constitute "government securities" within
the meaning of Code Section 851(b)(4)(A)(i). FASIT Regular Securities held by
particular financial institutions will constitute an "evidence of indebtedness"
within the meaning of Code Section 582(c)(1).
Taxation of Beneficial Owners of FASIT Regular Securities
A FASIT Trust will not be subject to federal income tax except on
income from prohibited transactions and in some other instances as described
below. The FASIT Regular Securities generally will be treated for federal
income tax purposes as newly-originated debt instruments. In general, interest,
original issue discount and market discount on a FASIT Regular Security will be
treated as ordinary income to the beneficial owner, and principal payments,
other than principal payments that do not exceed accrued market discount, on an
FASIT Regular Security will be treated as a return of capital to the extent of
the beneficial owner's basis allocable thereto. Beneficial owners must use the
accrual method of accounting in connection with FASIT Regular Securities,
regardless of the method of accounting otherwise used by the beneficial owners.
See "--Discount and Premium" below.
In order for the FASIT Trust to qualify as a FASIT, there must be
ongoing compliance with the requirements set forth in the Code. The FASIT must
fulfill an asset test, which requires that substantially all the assets of the
FASIT, as of the close of the third calendar month beginning after the Startup
Day, and at all times thereafter, must consist of cash or cash equivalents,
particular debt instruments, other than debt instruments issued by the owner of
the FASIT or a related party, and hedges, and contracts to acquire the same,
foreclosure property and regular interests in another FASIT or in a REMIC.
Based on identical statutory language applicable to REMICs, it appears that the
"substantially all" requirement should be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than one percent of the
aggregate adjusted basis of all the FASIT's assets. The FASIT provisions of the
Code, Sections 860H through 860L, also require the FASIT ownership interest and
particular "high-yield regular interests" to be held only by specified fully
taxable domestic corporations.
Permitted debt instruments must bear interest, if any, at a fixed or
qualified variable rate. Permitted hedges include interest rate or foreign
currency notional principal contracts, letters of credit, insurance, guarantees
of payment default and similar instruments to be provided in regulations, and
which are reasonably required to guarantee or hedge against the FASIT's risks
associated with being the obligor on interests issued by the FASIT. Foreclosure
property is real property acquired by the FASIT in connection with the default
or imminent default of a qualified mortgage, provided the issuer had no
knowledge or reason to know as of the date the asset was acquired by the FASIT
that a default had occurred or would occur.
In addition to the foregoing requirements, the various interests in a
FASIT also must meet a number of requirements. All of the interests in a FASIT
must be either of the following: (a) one or more classes of regular interests
or (b) a single class of ownership interest. A regular interest is an interest
in a FASIT that is issued on or after the Startup Day with fixed terms, is
designated as a regular interest, and
(1) unconditionally entitles the holder to receive a specified
principal amount, or other similar amount,
(2) provides that interest payments, or other similar amounts, if
any, at or before maturity either are payable based on a fixed
rate or a qualified variable rate,
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(3) has a stated maturity of not longer than 30 years,
(4) has an issue price not greater than 125% of its stated principal
amount, and
(5) has a yield to maturity not greater than five percentage points
higher than the applicable Federal rate, as defined in Code
Section 1274(d).
A regular interest that is described in the preceding sentence except
that if fails to meet one or more of requirements (1), (2) (4) or (5) is a
"high-yield regular interest." A high-yield regular interest that fails
requirement (2) must consist of a specified, nonvarying portion of the interest
payments on the permitted assets, by reference to the REMIC rules. An ownership
interest is an interest in a FASIT other than a regular interest that is issued
on the Startup Day, is designated an ownership interest and is held by a
single, fully-taxable, domestic corporation. An interest in a FASIT may be
treated as a regular interest even if payments of principal on this interest
are subordinated to payments on other regular interests or the ownership
interest in the FASIT, and are dependent on the absence of defaults or
delinquencies on permitted assets lower than reasonably expected returns on
permitted assets, unanticipated expenses incurred by the FASIT or prepayment
interest shortfalls.
If an entity fails to comply with one or more of the ongoing
requirements of the Code for status as a FASIT during any taxable year, the
Code provides that the entity or applicable potion thereof will not be treated
as a FASIT thereafter. In this event, any entity that holds mortgage loans and
is the obligor on debt obligations with two or more maturities, like the trust
fund, may be treated as a separate association taxable as a corporation, and
the FASIT Regular Securities may be treated as equity interests the FASIT
Regular Securities. The legislative history to the FASIT Provisions indicates,
however, that an entity can continue to be a FASIT if loss of its status was
inadvertent, it takes prompt steps to requalify and other requirements that may
be provided in Treasury regulations are met. Loss of FASIT status results in
retirement of all regular interests and their reissuance. If the resulting
instruments would be treated as equity under general tax principles,
cancellation of debt income may result.
Taxes on a FASIT Trust
Income from particular transactions by a FASIT, called prohibited
transactions, are taxable to the holder of the ownership interest in a FASIT at
a 100% rate. Prohibited transactions generally include
o the disposition of a permitted asset other than for
o foreclosure, default, or imminent default,
o bankruptcy or insolvency of the FASIT,
o a qualified or complete liquidation,
o substitution for another permitted debt instrument or
distribution of the debt instrument to the holder of the
ownership interest to reduce overcollateralization, but
only if a principal purpose of acquiring the debt
instrument which is disposed of was not the recognition
of gain, or the reduction of a loss, on the withdrawn
asset as a result of an increase in the market value of
the asset after its acquisition by the FASIT or
o the retirement of a class of FASIT regular interests;
o the receipt of income from nonpermitted assets;
o the receipt of compensation for services; or
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o the receipt of any income derived from a loan originated by the
FASIT.
It is unclear the extent to which tax on these transactions could be
collected from the FASIT Trust directly under the applicable statutes rather
than from the holder of the FASIT Residual Security.
Due to the complexity of these rules, the absence of Treasury
Regulations and the current uncertainty as to the manner to their application
to the trust and to holders of FASIT Securities, it is particularly important
that potential investors consult their own tax advisors regarding the tax
treatment of their acquisition, ownership and disposition of the FASIT Regular
Securities.
Discount and Premium
A security purchased for an amount other than its outstanding
principal amount will be subject to the rules governing original issue
discount, market discount or premium. In addition, all Grantor Trust Strip
Securities and some 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,
o original issue discount is treated as a form of interest and must
be included in a beneficial owner's income as it accrues,
regardless of the beneficial owner's regular method of
accounting, using a constant yield method;
o market discount is treated as ordinary income and must be
included in a beneficial owner's income as principal payments are
made on the security, or upon a sale of a security; and
o if a beneficial owner so elects, premium may be amortized over
the life of the security and offset against inclusions of
interest income.
These tax consequences are discussed in greater detail below.
Original Issue Discount
In general, a security will be considered to be issued with original
issue discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The issue price of a security is the initial
offering price to the public, excluding bond houses and brokers, at which a
substantial number of the securities were sold. The issue price also includes
any accrued interest attributable to the period between the beginning of the
first Accrual Period and the Settlement Date. The stated redemption price at
maturity of a security that has a notional principal amount or receives
principal only or that is or may be an Accrual Security is equal to the sum of
all distributions to be made under the security. The stated redemption price at
maturity of any other security is its stated principal amount, plus an amount
equal to the excess, if any, of the interest payable on the first distribution
date over the interest that accrues for the period from the Settlement Date to
the first distribution date. The trustee will supply, at the time and in the
manner required by the IRS, to beneficial owners, brokers and middlemen
information concerning the original issue discount accruing on the securities.
Notwithstanding the general definition, original issue discount will
be treated as zero if the discount is less than 0.25% of the stated redemption
price at maturity of the security multiplied by its weighted average life. The
weighted average life of a security is apparently computed for this purpose as
the sum, for all distributions included in the stated redemption price at
maturity, of the amounts determined by multiplying (x) the number of complete
years, rounding down for partial years, from the Settlement Date until the date
on which each distribution is expected to be made under the Prepayment
Assumption by (y) a fraction, the
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numerator of which is the amount of the distribution and the denominator of
which is the security's stated redemption price at maturity. Even if original
issue discount is treated as zero under this rule, the actual amount of original
issue discount must be allocated to the principal distributions on the security
and, when each distribution is received, gain equal to the discount allocated to
the distribution will be recognized.
Section 1272(a)(6) of the Code contains special original issue
discount rules directly applicable to REMIC Securities and Debt Securities. The
Taxpayer Relief Act of 1997 extends application of Section 1272(a)(6) to the
Grantor Trust Securities for tax years beginning after August 5, 1997. Under
these rules, (a) 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 the variable rate is based
remains equal to the value of that rate on the Settlement Date, and (b)
adjustments will be made in the amount of discount accruing in each taxable
year in which the actual prepayment rate differs from the Prepayment
Assumption.
Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the
manner prescribed in Treasury regulations. To date, no regulations of this type
have been promulgated. The legislative history of this Code provision indicates
that the assumed prepayment rate must be the rate used by the parties in
pricing the particular transaction. The sponsor anticipates that the Prepayment
Assumption for each series of securities will be consistent with this standard.
The sponsor makes no representation, however, that the loans for a given series
will prepay at the rate reflected in the Prepayment Assumption for that series
or at any other rate. Each investor must make its own decision as to the
appropriate prepayment assumption to be used in deciding whether or not to
purchase any of the securities.
Each beneficial owner must include in gross income the sum of the
"daily portions" of original issue discount on its security for each day during
its taxable year on which it held the security. For this purpose, in the case
of an original beneficial owner, the daily portions of original issue discount
will be determined as follows. A calculation will first be made of the portion
of the original issue discount that accrued during each "accrual period."
Original issue discount calculations must be based on accrual periods of no
longer than one year either (x) beginning on a distribution date, or, in the
case of the first accrual period, the Settlement Date, and ending on the day
before the next distribution date or (y) beginning on the next day following a
distribution date and ending on the next distribution date.
Under Section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (x) 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 the security during the accrual period
of amounts included in the stated redemption price at maturity, over (y) the
adjusted issue price of the 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
o the yield to maturity of the security, calculated as of the
Settlement Date, giving effect to the Prepayment Assumption,
o events, including actual prepayments, that have occurred prior to
the end of the accrual period,
o the Prepayment Assumption, and
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o in the case of a security calling for a variable rate of
interest, an assumption that the value of the index upon which
this variable rate is based remains the same as its value on the
Settlement Date over the entire life of the security.
The adjusted issue price of a security at any time will equal the
issue price of the security, increased by the aggregate amount of previously
accrued original issue discount on the security, and reduced by the amount of
any distributions made on the 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 some 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 the negative
amounts. The legislative history to Section 1272(a)(6) indicates that the
negative amounts may be used to offset subsequent positive accruals but may not
offset prior accruals and may not be allowed as a deduction item in a taxable
year in which negative accruals exceed positive accruals. Beneficial owners of
the securities should consult their own tax advisors concerning the treatment
of the negative accruals.
A subsequent purchaser of a security that purchases the 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 the
security, the daily portion of original issue discount on the security -- but
reduced, if the cost of the security to the purchaser exceeds its adjusted
issue price, by an amount equal to the product of (x) the daily portion and (y)
a constant fraction, the numerator of which is the excess and the denominator
of which is the sum of the daily portions of original issue discount on the
security for all days on or after the day of purchase.
Market Discount
A beneficial owner that purchases a security at a market discount,
that is, at a purchase price less than the remaining stated redemption price at
maturity of the 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 the distribution does not exceed the aggregate
amount of accrued market discount on the security not previously included in
income. For securities that have unaccrued original issue discount, the market
discount must be included in income in addition to any original issue discount.
A beneficial owner that incurs or continues indebtedness to acquire a security
at a market discount may also be required to defer the deduction of all or a
portion of the interest on this 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 (x) under a constant yield method or
(y) in proportion to remaining accruals of original issue discount, if any, or
if none, in proportion to remaining distributions of interest on the security,
in any case taking into account the Prepayment Assumption. The trustee will
make available, as required by the IRS, to beneficial owners of securities
information necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a security will be
considered to be zero if the discount is less than 0.25% of the remaining
stated redemption price at maturity of the 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
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security and, when each distribution is received, gain equal to the discount
allocated to the distribution will be recognized.
Premium
A purchaser of a Premium Security need not include in income any
remaining original issue discount and may elect, under Section 171(c)(2) of the
Code, to treat the premium as "amortizable bond premium." If a beneficial owner
makes this election, the amount of any interest payment that must be included
in the beneficial owner's income for each period ending on a distribution date
will be reduced by the portion of the premium allocable to the period based on
the Premium Security's yield to maturity. This premium amortization should be
made using constant yield principles. If the election is made by the beneficial
owner, the election will also apply to all fully taxable bonds, or bonds the
interest on which is not excludible from gross income, held by the beneficial
owner at the beginning of the first taxable year to which the election applies
and to all fully taxable bonds thereafter acquired by it, and is irrevocable
without the consent of the IRS. If this election is not made, (x) the
beneficial owner must include the full amount of each interest payment in
income as it accrues, and (y) the premium must be allocated to the principal
distributions on the Premium Security and when each distribution is received a
loss equal to the premium allocated to the 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
the securities from the rules generally applicable to debt instruments issued
at a premium. In particular, it is possible that these securities 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 this event, Section
1272(a)(6) of the Code would govern the accrual of the original issue discount,
but a beneficial owner 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 the securities,
the trustee intends to furnish tax information to beneficial owners of the
securities in accordance with the rules described in the preceding paragraph.
Special Election
For any security acquired on or after April 4, 1994, a beneficial
owner may elect to include in gross income all "interest" that accrues on the
security by using a constant yield method. For purposes of the election, the
term "interest" includes stated interest, acquisition discount, original issue
discount, de minimis original issue discount, market discount, de minimis
market discount and unstated interest as adjusted by any amortizable bond
premium or acquisition premium. A beneficial owner should consult its own tax
advisor regarding the time and manner of making and the scope of the election
and the implementation of the constant yield method.
Backup Withholding
Distributions of interest and principal, as well as distributions of
proceeds from the sale of securities, may be subject to the "backup withholding
tax" under Section 3406 of the Code at a rate of 31% if recipients of the
distributions fail to furnish to the payor particular information, including
their taxpayer identification numbers, or otherwise fail to establish an
exemption from this tax. Any amounts deducted and withheld from a distribution
to a recipient would be allowed as a credit against the recipient's federal
income tax. Furthermore, penalties may be imposed by
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the IRS on a recipient of distributions that is required to supply information
but that does not do so in the proper manner.
The Internal Revenue Service recently issued final "withholding
regulations", which change some of the rules relating to particular
presumptions currently available relating to information reporting and backup
withholding. The withholding regulations would provide alternative methods of
satisfying the beneficial ownership certification requirement. The withholding
regulations are effective December 31, 2000, although valid withholding
certificates that are held on December 31, 2000 remain valid until the earlier
of December 31, 2001 or the due date of expiration of the certificate under the
rules as currently in effect.
Foreign Investors
The withholding regulations would require, in the case of securities
held by a foreign partnership, that (x) the certification described above be
provided by the partners rather than by the foreign partnership and (y) the
partnership provide specified information, including a United States taxpayer
identification number. See "--Backup Withholding" above. A look-through rule
would apply in the case of tiered partnerships. Non-U.S. Persons should consult
their own tax advisors regarding the application to them of the withholding
regulations.
Grantor Trust Securities and REMIC Regular Securities
Distributions made on a Grantor Trust Security, Debt Security or a
REMIC Regular Security to, or on behalf of, a beneficial owner that is not a
U.S. Person generally will be exempt from U.S. federal income and withholding
taxes. This exemption is applicable provided
o the beneficial owner is not subject to U.S. tax as a result of a
connection to the United States other than ownership of the
security,
o the beneficial owner signs a statement under penalties of perjury
that certifies that the beneficial owner is not a U.S. Person,
and provides the name and address of the beneficial owner, and
o the last U.S. Person in the chain of payment to the beneficial
owner receives the statement from the beneficial owner or a
financial institution holding on its behalf and does not have
actual knowledge that the statement is false.
Beneficial owners should be aware that the IRS might take the position
that this exemption does not apply to a beneficial owner that also owns 10% or
more of the REMIC Residual Securities of any REMIC trust, or to a beneficial
owner that is a "controlled foreign corporation" described in Section
881(c)(3)(C) of the Code.
REMIC Residual Securities
Amounts distributed to a beneficial owner of a REMIC Residual Security
that is a not a U.S. Person generally will be treated as interest for purposes
of applying the 30%, or lower treaty rate, withholding tax on income that is
not effectively connected with a U.S. trade or business. Temporary Treasury
Regulations clarify that amounts not constituting excess inclusions that are
distributed on a REMIC Residual Security to a beneficial owner that is not a
U.S. Person generally will be exempt from U.S. federal income and withholding
tax, subject to the same conditions applicable to distributions on Grantor
Trust Securities, Debt Securities and REMIC Regular Securities, as described
above, but only to the extent that the obligations directly underlying the
REMIC Trust that issued the REMIC Residual Security, for example, loans or
regular interests in another REMIC or FASIT, were issued after July 18, 1984.
In no case will any portion of REMIC income that constitutes an excess
inclusion be entitled to any exemption from the withholding tax or a reduced
treaty rate for withholding. See "--REMIC Securities--
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Taxation of Beneficial Owners of REMIC Residual Securities--Excess Inclusions"
in this prospectus.
Partnership Interests
Depending upon the particular terms of the Issuing Agreement and Loan
Sale Agreement, an issuer may be considered to be engaged in a trade or
business in the United States for purposes of federal withholding taxes for
non-U.S. Persons. If the issuer is considered to be engaged in a trade or
business in the United States for these purposes and the issuer is treated as a
partnership, the income of the issuer distributable to a non-U.S. Person would
be subject to federal withholding tax. Also, in these cases, a non-U.S.
beneficial owner of a Partnership Interest that is a corporation may be subject
to the branch profits tax. If the issuer is notified that a beneficial owner of
a Partnership Interest is a foreign person, the issuer may withhold as if it
were engaged in a trade or business in the United States in order to protect
the issuer from possible adverse consequences of a failure to withhold. A
foreign holder generally would be entitled to file with the IRS a claim for
refund of withheld taxes, taking the position that no taxes were due because
the issuer was not in a U.S.
trade or business.
FASIT Regular Securities
Some "high-yield" FASIT Regular Securities may not be sold to or
beneficially owned by non-U.S. Persons. Any purported transfer will be null and
void and, upon the trustee's discovery of any purported transfer in violation
of this requirement and the last preceding owner of the high-yield FASIT
Regular Securities will be restored to ownership thereof as completely as
possible. The last preceding owner will, in any event, be taxable on all income
on the high-yield FASIT Regular Securities for federal income tax purposes. The
Issuing Agreement will provide that, as a condition to transfer of a high-yield
FASIT Regular Security, the proposed transferee must furnish an affidavit as to
its status as a U.S. Person and otherwise as a permitted transferee.
State Tax Considerations
In addition to the federal income tax consequences described in
"Material Federal Income Tax Consequences," potential investors should consider
the state and local income tax consequences of the acquisition, ownership, and
disposition of the securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors concerning
the various state and local tax consequences of an investment in the
securities.
The federal income tax discussions set forth above are included for
general information only and may not be applicable depending upon an investor's
particular tax situation. Prospective purchasers should consult their tax
advisers concerning 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
ERISA and Section 4975 of the Code impose a number of requirements on
those employee benefit plans to which they apply and on those persons who are
fiduciaries of these plans. The following is a general discussion of the
requirements, and a number of applicable exceptions to and administrative
exemptions from the requirements.
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Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing or other employee benefit plan and some individual retirement
arrangements from engaging in specified transactions involving "plan assets"
with persons that are "parties in interest" under ERISA or "disqualified
persons" under the Code for the plan, unless a statutory or administrative
exemption applies to the transaction. ERISA and the Code also prohibit
generally a number of actions involving conflicts of interest by persons who
are fiduciaries of these plans or arrangements. A violation of these
"prohibited transaction" rules may generate excise tax and other liabilities
under ERISA and the Code for these persons. In addition, investments by plans
are subject to ERISA's general fiduciary requirements, including the
requirement of investment prudence and diversification and the requirement that
a plan's investments be made in accordance with the documents governing the
plan. Employee benefit plans that are governmental plans, as defined in Section
3(32) of ERISA, and some church plans, as defined in Section 3(33) of ERISA,
are not subject to ERISA requirements. Accordingly, assets of these plans may
be invested in securities without regard to the ERISA considerations discussed
below, subject to the provisions of other applicable federal, state and local
law. Any plan which is qualified and exempt from taxation under Sections 401(a)
and 501(a) of the Code, however, is subject to the prohibited transaction rules
set forth in Section 503 of the Code.
Some transactions involving the issuer might be deemed to constitute
prohibited transactions under ERISA and the Code for a plan, including an
individual retirement arrangement, that purchased securities, if the assets of
the issuer were deemed to be assets of the Plan. Under a "plan asset
regulation" issued by the United States Department of Labor, the assets of the
issuer would be treated as plan assets of a plan for the purposes of ERISA and
the Code only if the plan acquired an equity interest in the issuer and none of
the exceptions contained in the plan asset regulation were applicable. An
"equity interest" is defined under the plan asset regulation as an interest
other than an instrument which is treated as indebtedness under applicable
local law and which has no substantial equity features. In addition, in John
Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank, 510 U.S. 86
(1993), the United States Supreme Court ruled that assets held in an insurance
company's general account may be deemed to be "plan assets" for ERISA purposes
under particular circumstances. Therefore, in the absence of an exemption, the
purchase, sale or holding of a security by a plan, including some individual
retirement arrangements, subject to Section 406 of ERISA or Section 4975 of the
Code might result in prohibited transactions and the imposition of excise taxes
and civil penalties.
Certificates
The Department of Labor has issued to various underwriters individual
prohibited transaction exemptions, which generally exempt from the application
of the prohibited transaction provisions of Sections 406(a), 406(b)(1),
406(b)(2) and 407(a) of ERISA and the excise taxes imposed under Sections
4975(a) and (b) of the Code, particular transactions in connection with the
initial purchase, the holding and the subsequent resale by plans of
certificates in pass-through trusts that consist of secured receivables,
secured loans and other secured obligations that meet the conditions and
requirements of these underwriter exemptions. These underwriter exemptions will
only be available for securities that are certificates.
Among the conditions that must be satisfied in order for the
underwriter exemptions to apply to offered certificates are the following:
(a) the acquisition of the certificates by a plan is on terms,
including the price for the certificates, that are at least as favorable to
the plan as they would be in an arm's-length transaction with an unrelated
party;
(b) the rights and interests evidenced by the certificates acquired by
the plan are not subordinated to the rights and interests evidenced by
other certificates of the trust;
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(c) the certificates acquired by the p1lan have received a rating at
the time of the acquisition that is one of the three highest generic rating
categories from Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Moody's Investors Service, Inc., Duff & Phelps
Credit Rating Co., or Fitch IBCA, Inc.;
(d) the trustee is not an affiliate of any other member of the
Restricted Group;
(e) the sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of
all payments made to and retained by the originators and the sponsor under
the assignment of the loans to the trust fund represents not more than the
fair market value of the loans; the sum of all payments made to and
retained by any servicer represents not more than reasonable compensation
for this person's services under the pooling and servicing agreement and
reimbursement of this person's reasonable expenses in connection therewith;
(f) the plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D under the Securities Act of
1933; and
(g) in the event that all of the obligations used to fund the trust
have not been transferred to the trust on the closing date, additional
obligations of the types specified in the prospectus supplement and/or
pooling and servicing agreement having an aggregate value equal to no more
than 25% of the total principal amount of the certificates being offered by
the trust may be transferred to the trust, in exchange for amounts credited
to the account funding the additional obligations, within a funding period
of no longer than 90 days or 3 months following the closing date.
The trust fund must also meet the following requirements:
o the corpus of the trust fund must consist solely of assets of the type
that have been included in other investment pools;
o certificates in the other investment pools must have been rated in one
of the three highest rating categories of Standard & Poor's, Moody's,
Fitch IBCA or Duff & Phelps for at least one year prior to the plan's
acquisition of certificates; and
o certificates evidencing interests in the other investment pools must
have been purchased by investors other than plans for at least one (1)
year prior to the plan's acquisition of certificates.
Moreover, the underwriter exemptions provide relief from specified
self-dealing/conflict of interest prohibited transactions that may occur when
the plan fiduciary causes a plan to acquire certificates in a trust in which the
fiduciary, or its affiliate, is an obligor on the receivables held in the trust;
provided, that, among other requirements,
(1) in the case of an acquisition in connection with the initial issuance
of certificates, at least fifty percent of each class of certificates
in which plans have invested is acquired by persons independent of the
Restricted Group and at least fifty percent of the aggregate interest
in the trust is acquired by persons independent of the Restricted
Group;
(2) the fiduciary, or its affiliate, is an obligor in connection with five
percent or less of the fair market value of the obligations contained
in the trust;
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(3) the plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class
outstanding at the time of the acquisition; and
(4) immediately after the acquisition, no more than twenty-five percent of
the assets of the plan for which this person is a fiduciary are
invested in certificates representing an interest in one or more
trusts containing assets sold or serviced by the same entity.
The underwriter exemptions do not apply to plans sponsored by the
Restricted Group.
In addition to the underwriter exemptions, the Department of Labor has
issued PTCE 83-1 which provides an exemption for particular transactions
involving the sale or exchange of specified residential mortgage pool
pass-through certificates by plans and for transactions in connection with the
servicing and operation of the mortgage loan pool.
Notes
The underwriter exemptions will not be available for securities which are
notes. If the notes are treated as having substantial equity features, the
purchase, holding and resale of the notes could result in a transaction that is
prohibited under ERISA or the Code. However, if the notes are treated as
indebtedness without substantial equity features, the issuer's assets would not
be deemed assets of a plan. The acquisition or holding of the notes by or on
behalf of a plan could nevertheless give rise to a prohibited transaction, if
the acquisition and holding of Notes by or on behalf of a plan were deemed to be
a prohibited loan to a party in interest for this plan. Some exemptions from the
prohibited transaction rules could be applicable to the purchase and holding of
notes by a plan, depending on the type and circumstances of the plan fiduciary
making the decision to acquire the notes. Included among these exemptions are:
PTCE 84-14, regarding specified transactions effected by "qualified professional
asset managers"; PTCE 90-1, regarding specified transactions entered into by
insurance company pooled separate accounts; PTCE 91-38, regarding specified
transactions entered into by bank collective investment funds; PTCE 95-60,
regarding specified transactions entered into by insurance company general
accounts; and PTCE 96-23, regarding specified transactions effected by "in-house
asset managers". Each purchaser and each transferee of a note that is treated as
debt for purposes of the plan asset regulation may be required to represent and
warrant that its purchase and holding of the note will be covered by one of the
exemptions listed above or by another Department of Labor class exemption.
Consultation with Counsel
The prospectus supplement for each series of securities will provide
further information which plans should consider before purchasing the offered
securities. A plan fiduciary considering the purchase of securities should
consult its tax and/or legal advisors regarding whether the assets of the issuer
would be considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other ERISA issues and their potential
consequences. Moreover, each plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the securities is appropriate for the plan, taking into account
the overall investment policy of the plan and the composition of the plan's
investment portfolio. The sale of securities to a plan is in no respect a
representation by the sponsor, the issuer or the underwriter(s) that this
investment meets all relevant requirements for investments by plans generally or
any particular plan or that this investment is appropriate for plans generally
or any particular plan.
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Legal Investment
If specified in the accompanying prospectus supplement, the securities
of one or more classes offered by this prospectus will constitute "mortgage
related securities" for purposes of 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," the
securities will constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities, including,
but not limited to, state-chartered savings banks, commercial banks, savings
and loan associations and insurance companies, as well as trustees and state
government employee retirement systems, created in accordance with 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 the entities. Under
SMMEA, a number of states enacted legislation, on or before the October 3, 1991
cutoff for the enactments, limiting to varying extends the ability of
particular 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 the legislation will be authorized to invest in the securities only
to the extent provided in the 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 the regulations as the applicable federal regulatory authority may
prescribe. In this connection, federal credit unions should review National
Credit Union Administration 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 National
Credit Union Administration has adopted rules, effective December 2, 1991,
which prohibit federal credit unions from investing in particular mortgage
related securities, including securities like some series or classes of the
securities, except under limited circumstances.
All depository institutions considering an investment in the
securities should review the "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992 of the Federal Financial Institutions
Examination Council. This 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 National Credit Union
Administration, with a number of modifications, effective June 26, 1992,
prohibits institutions from investing in some "high-risk" mortgage securities,
including securities like some classes of the securities, except under limited
circumstances, and sets forth specified 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 these authorities before purchasing any
securities, as some series or classes may be deemed unsuitable investments, or
may otherwise be restricted, under the rules, policies or guidelines, in
specified instances irrespective of SMMEA.
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The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions
which may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying" and, with regard to any securities issued
in book-entry form, provisions which may restrict or prohibit investment in
securities which are issued in book-entry form.
Other classes of securities offered by this prospectus will not
constitute "mortgage related securities" under SMMEA because they will not
represent beneficial ownership interests in qualifying mortgage loans under
SMMEA. The appropriate characterization of those securities under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase the securities, may be subject to significant
interpretive uncertainties. All investors whose investment authority is subject
to legal restrictions should consult their own legal advisors to determine
whether, and to what extent, the securities will constitute legal investments
for them.
No representation is made as to the proper characterization of the
securities for legal investment or financial institution regulatory purposes,
or as to the ability of particular investors to purchase securities under
applicable legal investment restrictions. The uncertainties described above,
and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the securities, may
adversely affect the liquidity of the non-SMMEA securities.
Investors should consult with their own legal advisors in determining
whether and to what extent the securities constitute legal investments for
these investors.
Plan of Distribution
The issuer may sell the securities offered hereby in series either
directly or through underwriters. The accompanying prospectus supplement or
prospectus supplements for each series will describe the terms of the offering
for that series and will state the public offering or purchase price of each
class of securities of a series, or the method by which the price is to be
determined, and the net proceeds to the issuer from the sale.
If the sale of any securities is made in accordance with an
underwriting agreement under which one or more underwriters agree to act in
this capacity, the securities will be acquired by these 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,
for the offer and sale of a particular series of securities will be printed on
the cover of the prospectus supplement for a series and the members of the
underwriting syndicate, if any, will be named in the accompanying prospectus
supplement. The prospectus supplement will describe any discounts and
commissions to be allowed or paid by the issuer to the underwriters, any other
items constituting underwriting compensation and any discounts and commissions
to be allowed or paid to the dealers. The obligations of the underwriters will
be subject to a number of conditions precedent. Unless otherwise provided in
the accompanying prospectus supplement, the underwriters of a sale of any class
of securities will be obligated to purchase all of the securities if any are
purchased. In accordance with each underwriting agreement, the sponsor will
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indemnity the underwriters against specified civil liabilities, including
liabilities under the Securities Act of 1933.
In connection with any offering, the underwriters may over-allot or
effect transactions which stabilize or maintain the market prices of the
securities at levels above those which might otherwise prevail in the open
market. This stabilizing, if commenced by the underwriters, may be discontinued
at any time.
If any securities are offered other than through underwriters acting
under underwriting agreements, the accompanying prospectus supplement or
prospectus supplements will contain information regarding the terms of the
offering and any agreements to be entered into in connection with the offering.
Purchasers of securities, including dealers, may, depending on the
facts and circumstances of the purchases, be deemed to be "underwriters" within
the meaning of the Securities Act, in connection with reoffers and sales by
them of securities. securityholders should consult with their legal advisors in
this regard prior to any reoffer and sale.
If specified in the prospectus supplement relating to a series of
securities, the sponsor, any affiliate thereof or any other person or persons
specified in the prospectus supplement may purchase some or all of one or more
classes of securities of a series from the underwriter or underwriters or any
other person or persons specified in the accompanying prospectus supplement.
The purchaser may thereafter from time to time offer and sell, by this
prospectus and the accompanying prospectus supplement, some or all of the
securities so purchased, directly, through one or more underwriters to be
designated at the time of the offering of the securities, through dealers
acting as agent and/or principal as in any other manner as may be specified in
the accompanying prospectus supplement. The offering may be restricted in the
manner specified in the accompanying prospectus supplement. These 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 the
purchaser's offering of the securities may receive compensation in the form of
underwriting discounts or commissions from the purchaser and the dealers may
receive commissions from the investors purchasing the securities for whom they
may act as agent, which discounts or commissions will not exceed those
customary in those types of transactions involved. Any dealer that participates
in the distribution of the securities may be deemed to be an "underwriter"
within the meaning of the Securities Act of 1933, and any commissions and
discounts received by the dealer and any profit on the resale of the securities
by the dealer might be deemed to be underwriting discounts and commissions
under the Securities Act of 1933.
Incorporation of Information by Reference
There are incorporated in this prospectus by reference all documents
and reports filed or caused to be filed by the sponsor under Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, after the date of
this prospectus and prior to the termination of any offering of securities
evidencing interests in this prospectus, including the sponsor's latest annual
report on Form 10-K. Any statement contained in a document incorporated or
deemed to be incorporated by reference in this prospectus shall be deemed to be
modified or superseded for all purposes of this prospectus to the extent that a
statement contained in this prospectus, in the accompanying prospectus
supplement or in any other subsequently filed document which also is or is
deemed to be incorporated by reference modifies or replaces the statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this prospectus.
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The sponsor will provide, or cause to be provided, without charge to
each person to whom this prospectus is delivered in connection with the
offering of one or more classes of a series, a list identifying all filings of
the sponsor under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act, since the latest fiscal year covered by its annual report on Form 10-K,
and a copy of any or all documents or reports incorporated in this prospectus
by reference, in each case to the extent the documents or reports relate to one
or more of classes of a series, other than the exhibits to the documents,
unless the exhibits are specifically incorporated by reference in the
documents. Requests to the sponsor should be directed to: Prudential Securities
Secured Financing Corporation, One New York Plaza, 14th Floor, New York, New
York 10292, Attention: Managing Director-Asset-Backed Finance Group, (212)
778-1000.
Additional Information
The sponsor has filed a registration statement under the Securities
Act of 1933 with the Securities and Exchange Commission for the securities
offered by this prospectus. This prospectus contains, and the prospectus
supplement for each series of securities will contain, a summary of the
material terms of the documents referred to in this prospectus and in the
accompanying prospectus, but neither contains nor will contain all of the
information included in the registration statement of which this prospectus is
a part. For further information, you should read the registration statement and
any amendments thereof and exhibits thereto. You may obtain a copy of the
registration statement from the Public Reference Room of the Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 upon
payment of the prescribed charges, or you may examine the registration
statement free of charge at the Securities and Exchange Commission's offices,
450 Fifth Street, N.W., Washington, D.C. 20549 or at the regional offices of
the Securities and Exchange Commission located at Room 1400, 75 Park Place, New
York, New York 10007 and Northwestern Atrium Center, 500 West Madison Street,
Suite 400, Chicago, Illinois 60661-2511. Information about the operation of the
Public Reference Room may be obtained by contracting the Securities and
Exchange Commission at 1-800-SEC-0330. In addition, the Securities and Exchange
Commission maintains a site on the World Wide Web containing reports, proxy and
information statements and other items. The address of the site is
http://www.sec.gov.
Each issuer will be required to file particular reports with the
Securities and Exchange Commission in accordance with the requirements of the
Securities Exchange Act of 1934. Each issuer will suspend filing the reports if
and when the reports are no longer required under the Securities Exchange Act
of 1934.
In connection with each distribution, and annually, the sponsor will
cause the servicer to furnish securityholders with statements containing
information about the assets of the issuer, as described in this prospectus and
in the prospectus supplement for a series. See "Servicing of the Loans--Reports
to Securityholders." The servicer for each series will furnish periodic
statements setting forth specified information to the trustee for a series and,
in addition, annually will furnish the trustee with a statement from a firm of
independent public accounts concerning the examination of specified documents
and records relating to the servicing of the mortgage loans and/or manufactured
housing contracts held by the issuer. See "Servicing of the Loans--Evidence as
to Compliance" in this prospectus. Copies of the monthly and annual statements
provided by the servicer to the trustee will be furnished to securityholders of
the series upon request addressed to Prudential Securities Secured Financing
Corporation, One New York Plaza, 14th Floor, New York, New York 10292,
Attention: Managing Director-Asset-Backed Finance Group, (212) 778-1000.
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Copies of FHLMC's most recent Offering Circular for FHLMC securities,
FHLMCs Information Statement and the most recent Supplement to the Information
Statement and any quarterly report made available by FHLMC can be obtained by
writing or calling the Investor Inquiry Department at FHLMC at 8200 Jones
Branch Drive, McLean Virginia 22102. Outside Washington, D.C. metropolitan
area, telephone 800-336-FMPC; within Washington, D.C. metropolitan area,
telephone 703-759-8160. The sponsor has not and will not participate in the
preparation of FHLMC's Offering Circulars, Information Statements or
Supplements.
Copies of FNMA's most recent prospectus for FNMA securities and FNMA's
annual report and quarterly financial statements as well as other financial
information are available from the Senior Vice President for Investor Relations
of FNMA, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7115).
The sponsor has not and will not participate in the preparation of FNMA's
prospectuses.
You should rely only on the information contained in this prospectus
and in the accompanying prospectus supplement. We have not authorized anyone to
provide any information that is different. This prospectus and any accompanying
prospectus supplement do not constitute an offer to sell or a solicitation of
an offer to buy any securities other than the securities offered hereby and
thereby nor an offer of the securities to any person in any state or other
jurisdiction in which the offer would be unlawful. The information included in
this prospectus speaks as of the date hereof. You should not assume that it
will remain correct after this date.
Legal Matters
A number of legal matters and tax matters will be passed upon for the
sponsor by Dewey Ballantine LLP, New York, New York and/or any other counsel as
will be named on the accompanying prospectus supplement.
Ratings
At the date of issuance of each series of securities, the securities
offered hereby will be rated in one of the four highest categories by at least
one nationally recognized statistical rating agency. These ratings address, in
the opinion of the rating agency, the likelihood that the issuer will be able
to make timely payment of all amounts due on the series of securities in
accordance with their terms. The ratings will neither address any prepayment or
yield considerations applicable to any securities nor constitute a
recommendation to buy, sell or hold any 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.
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Glossary
The following terms have the meanings given below when used in this
prospectus or the accompanying prospectus supplement.
Accrual Securities means one or more classes of securities as to which
a portion of the accrued interest will not be distributed but rather will be
added to the principal balance of the security, or notional principal balance
in the case of Accrual Securities which are also Strip Securities, on each
distribution date.
CERCLA means the federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980.
Collection Account means a segregated trust account or accounts for a
series, established and maintained with the trustee, for the benefit of the
securityholders, for the deposit of collections on the underlying loans.
Credit Enhancer means the provider of any credit enhancement for a
series, including bond insurers, guarantors and letter of credit banks.
Debt Securities means securities that are intended to be treated for
federal income tax purposes as indebtedness secured by the underlying loans
held by the issuer.
Deleted Loan means a loan which breaches the representations and
warranties made by the originator in the Loan Sale Agreement and which must be
repurchased or substituted for by the originator.
Equity Participation Securities means any class of securities or
interests in the issuer which represent the right to receive the proceeds of
the trust fund after all required payments have been made to the holders of the
securities and following any required deposits to any reserve fund that may be
established for the benefit of the securities, including FASIT Ownership
Securities and REMIC Residual Securities.
FASIT Ownership Securities means securities of the one separate class
of a series which has been designated as the "ownership interest" of the FASIT
Trust in the accompanying prospectus supplement.
FASIT Regular Securities means securities of each class of a series
which has been designated as the "regular interests" or "high-yield regular
interests" of the FASIT Trust in the accompanying prospectus supplement.
FASIT Securities means securities representing interests in a trust,
or a segregated pool or pools of assets therein, which the issuer will covenant
to elect to have treated as a FASIT under Sections 860H through 860L of the
Code.
FASIT Trust means an issuer for which a FASIT election is made.
FIRREA means the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989.
Fixed Retained Yield means, for any loan, the portion, if any, of
interest, at the loan interest rate, that is retained by the issuer or other
owner thereof and not included in the trust fund.
Garn Act means the Garn-St Germain Depository Institutions Act of 1982.
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Grantor Trust Fractional Interest Security means a Grantor Trust
Security representing an undivided equitable ownership interest in the
principal of the loans constituting the grantor trust, together with interest
thereon at a pass-through rate.
Grantor Trust Securities means securities representing interests in a
grantor trust which the issuer will covenant not to elect to have treated as a
REMIC or a FASIT.
Grantor Trust Strip Security means a Grantor Trust Security
representing ownership of all or a portion of the difference between interest
paid on the loans constituting the grantor trust and interest paid to the
beneficial owners of Grantor Trust Fractional Interest Securities issued by the
grantor trust.
Insurance Proceeds means all proceeds received by the servicer under
any title, hazard or other insurance policy covering any loan, other than
proceeds to be applied to the restoration or repair of the mortgaged property
or manufactured home or released to the mortgagor or obligor in accordance with
the Servicing Agreement.
Interest Rate means, for each class of securities, the rate at which
interest accrues on the securities, which may be fixed rate, adjustable rate,
or rate based upon the underlying loans, as specified in the accompanying
prospectus supplement.
Issuing Agreement means, means
o for each series of Grantor Trust Securities, REMIC Securities and
FASIT Securities, a pooling and servicing agreement,
o for each series of Debt Securities, an indenture, and
o for each series of Partnership Interests, a trust agreement or
other similar agreement.
Liquidation Proceeds means all amounts received by the servicer in
connection with the liquidation of defaulted loans or property acquired in
respect thereof, whether through foreclosure sale or otherwise, including
payments in connection with defaulted loans received from the mortgagor or
obligor other than amounts required to be paid to the mortgagor or obligor
under the terms of the applicable loan or otherwise in accordance with law.
Loan Sale Agreement means the agreement or agreement under which the
issuer obtained the loans from the originator, either directly or through a
special-purpose affiliate or the originator.
Net Insurance Proceeds means Insurance Proceeds, less expenses
incurred in connection with collecting on insurance policies, less any
unreimbursed advances on the loan, less, in the discretion of the servicer, but
only to the extent of the amount permitted to be withdrawn from the Collection
Account, any unpaid servicing fees on the loan.
Net Liquidation Proceeds means Liquidation Proceeds, less expenses
incurred in connection with the liquidation, less other reimbursed servicing
costs associated with the liquidation, less specified amounts applied to the
restoration, preservation or repair of the mortgaged property or manufactured
home, less any unreimbursed advances on the loan and, in the discretion of the
servicer, but only to the extent of the amount permitted to be withdrawn from
the Collection Account, less any unpaid servicing fees on the loans or the
mortgaged properties or manufactured homes.
Net Loan Rate means, for each loan, the loan interest rate, less the
Fixed Retained Yield, if any, less any servicing fee applicable to the loan.
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Partnership Interests means securities representing interests in a
trust that is intended to be treated as a partnership under the Code.
PCTE means a Prohibited Transaction Class Exemption issued by the
Department of Labor.
Pre-Funding Account means a segregated trust account or accounts
established and maintained with the trustee, for the benefit of the
securityholders, for the deposit of funds to be used by the issuer to purchase
additional loans during the Pre-Funding Period.
Pre-Funding Period means the period stated in the accompanying
prospectus supplement during which additional loans may be purchased by the
issuer with the funds on deposit in the Pre-Funding Account.
Premium Security means a security that is purchased at a cost greater
than its remaining stated redemption price at maturity.
Prepayment Assumption means the assumption used to calculate the rate
at which the loans prepay, as specified in the accompanying prospectus
supplement.
REMIC Regular Securities means the securities of each class of a
series which have been designated as "regular interests" of the REMIC Trust in
the accompanying prospectus supplement.
REMIC Regulations means the regulations issued by the Treasury
Department on December 23, 1992 for REMICs.
REMIC Residual Securities means the securities of each class of a
series which have been designated as "residual interests" of the REMIC Trust in
the accompanying prospectus supplement.
REMIC Securities means securities representing interests in a trust,
or a segregated pool or pools of assets therein, which the issuer will covenant
to elect to have treated as a REMIC under Sections 860A through 860G of the
Code.
REMIC Trust means an issuer for which a REMIC election is made.
Restricted Group means the sponsor, the issuer, the underwriter(s),
the trustee, the servicer, any obligor on loans included in the trust fund
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the trust fund, or any affiliate of these parties.
Servicing Agreement means, for a series of securities, the agreement
concerning the servicing of the loans, which may be a servicing agreement,
pooling and servicing agreement, sale and servicing agreement, or other similar
agreement.
Settlement Date means, unless otherwise stated in the accompanying
prospectus supplement, the date the securities are first sold to the public.
SMMEA means the Secondary Mortgage Market Enhancement Act of 1984.
Startup Day means, unless otherwise stated in the accompanying
prospectus supplement, the date of the initial issuance of the FASIT
Securities.
Strip Securities means securities entitled to (x) principal
distributions, with disproportionate, nominal or no interest distributions, or
(y) interest distributions, with disproportionate, nominal or no principal
distributions.
U.S. Person means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political
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subdivision thereof, an estate that is subject to U.S. federal income tax
regardless of the source of its income, or a trust if a court within the United
States can exercise primary supervision over its administration and at least one
United States person has the authority to control all substantial decisions of
the trust.
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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-4
Transaction Overview.................................. S-8
The Mortgage Loan Pools............................... S-9
The Originators, the Seller and the Servicer.......... S-39
The Owner Trustee..................................... S-47
The Indenture Trustee................................. S-47
The Collateral Agent.................................. S-48
Description of the Notes and the Trust Certificates... S-48
Servicing of the Mortgage Loans....................... S-64
The Note Insurance Policy............................. S-71
The Note Insurer...................................... S-74
Prepayment and Yield Considerations................... S-77
Material Federal Income Tax Consequences.............. S-82
ERISA Considerations.................................. S-83
Legal Investment...................................... S-84
Plan of Distribution.................................. S-84
Incorporation of Information by Reference............. S-85
Additional Information................................ S-85
Experts............................................... S-86
Legal Matters......................................... S-86
Ratings............................................... S-86
Glossary.............................................. S-86
PROSPECTUS
Summary of Prospectus................................. 1
Risk Factors.......................................... 3
The Sponsor........................................... 6
Use of Proceeds....................................... 6
The Trustee........................................... 6
The Trust Funds....................................... 7
Description of the Securities......................... 23
Credit Enhancement.................................... 27
Prepayment and Yield Considerations................... 30
Servicing of the Loans................................ 33
Material Legal Aspects of the Loans................... 45
Material Federal Income Tax Consequences.............. 61
State Tax Considerations.............................. 81
ERISA Considerations.................................. 81
Legal Investment...................................... 85
Plan of Distribution.................................. 86
Incorporation of Information by Reference............. 87
Additional Information................................ 88
Legal Matters......................................... 89
Ratings............................................... 89
Glossary.............................................. 90
$220,000,000
ABFS MORTGAGE LOAN TRUST 1999-4
ISSUER
AMERICAN BUSINESS FINANCIAL
SERVICES, INC.
SELLER
AMERICAN BUSINESS CREDIT, INC.
SERVICER
PRUDENTIAL SECURITIES
SECURED FINANCING CORPORATION
DEPOSITOR
$100,000,000
CLASS A-1 NOTES
$90,000,000
CLASS A-2 NOTES
$30,000,000
CLASS A-3 NOTES
MORTGAGE-BACKED NOTES,
SERIES 1999-4
----------------------
PROSPECTUS SUPPLEMENT
----------------------
PRUDENTIAL SECURITIES
DECEMBER 1, 1999
