As filed with the Securities and Exchange Commission on August 9, 2000
Registration Statement No. 333-37256
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PRUDENTIAL SECURITIES SECURED FINANCING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware One New York Plaza 13-3526694
(Jurisdiction) New York, New York 10292 (I.R.S. Employer
(212) 778-1000 Identification No.)
(Address of registrant's principal executive offices)
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P. Carter Rise
Prudential Securities Secured
Financing Corporation
One New York Plaza
New York, New York 10292
(Name and address of agent for service)
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Copies to:
H. John Steele
Brown & Wood LLP
1666 K Street, N.W.
Washington, D.C. 20006-1208
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box.[ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
If any securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
============================================ ===================== ===================== ===================== ===================
Proposed Maximum Proposed Maximum
Amount Being Offering Price Per Aggregate Offering Amount of
Title of Securities Being Registered Registered Unit(1) Price(1) Registration Fee(2)
-------------------------------------------- --------------------- --------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
Mortgage Backed Securities............. $2,000,000,000 100% $2,000,000,000 $527,736
============================================ ===================== ===================== ===================== ===================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $264.00 previously paid.
Pursuant to Rule 429 under the Securities Act of 1933, the prospectus
which is part of this Registration Statement is a combined prospectus and
includes all the information currently required in a prospectus relating to
securities covered by Registration Statement No. 333-75489 previously filed by
the Registrant.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<TABLE>
<CAPTION>
FORM OF PROSPECTUS
SUPPLEMENT -- CERTIFICATES
Prospectus supplement to prospectus dated ____________
================================================================================================================================
$-----------
----------------------
Mortgage-Backed Certificates, Series _______
$_____ ___% Class A-1 Certificates $_______ ____% Class A-2 Certificates
_____________ Prudential Securities Secured
Depositor Financing Corporation
Sponsor
<S> <C>
You should read the section The trust fund --
entitled "Risk Factors" starting on
page S-__ of this prospectus o The trust fund consists primarily of [two] pools of
supplement and page __ of the [fixed-rate/adjustable rate] loans secured by [first- or
accompanying prospectus and second lien mortgages on one- to four-family residential real
consider these factors before properties] [first- or second lien one- to four-family
making a decision to invest in the residential home equity mortgage loans] [loans evidenced by
certificates. retail installment sales or installment loan agreements]
[manufactured housing installment sales contracts and
installment loan agreements] [mortgaged backed
The certificates ownership certificates insured or guaranteed by [ ]]
interests in the trust fund only [private mortgage backed certificates] [and to a
and are not interests in or limited extent, loans secured by commercial
obligations of any other person. real properties].
Neither the certificates nor the The certificates --
underlying mortgage loans will be
insured or guaranteed by any o Each class of offered certificates will
governmental agency or represent a beneficial ownership
instrumentality. interest in one pool of mortgage loans.
Credit enhancement --
o The certificates will have the benefit of a financial guaranty insurance
policy to be issued by [certificate insurer]
o The certificates will be cross-collateralized to a limited extent.
o The certificates 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.
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 Incorporated will offer the certificates offered by this prospectus supplement from time to time at
varying prices to be determined at the time of sale. The certificates will be available for delivery to investors in book-entry
form through the facilities of The Depository Trust Company, Clearstream Luxembourg and the Euroclear System on or about
______________.
Prudential Securities
The date of this prospectus supplement is ________
</TABLE>
<PAGE>
Important notice about the information presented in this
prospectus supplement and the accompanying prospectus
We provide information to you about the certificates in two separate
documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
your series of certificates, and (2) this prospectus supplement, which
describes the specific terms of your series of certificates. 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.
Table of Contents
Summary......................................... 1
Distributions of Interest.................... 1
Distributions of Principal................... 2
Risk Factors.................................... 4
Unpredictability of Prepayments and
Effect on Yields........................... 7
Potential Inadequacy of Credit
Enhancement for the Offered
Certificates............................... 8
Rating of the Offered Certificates Based
Primarily on Rating of the Certificate
Insurer................................... 8
Effect of the Rate Caps on Certain
Classes of Certificates 8
Interest Payments May be Insufficient........ 8
Delay in Receipt of Liquidation
Proceeds; Liquidation Proceeds May
Be Less than Mortgage Loan Balance........ 9
Origination Risks; Seller's Reliance on
Brokers and Correspondents................ 9
The Servicer Does Not Have Any
Significant Historical Loss and
Delinquency Data.......................... 9
Other Legal Considerations................. 10
Transaction Overview........................... 11
Parties..................................... 11
The Transaction............................. 12
The Mortgage Loan Pools........................ 13
The Pool I Mortgage Loans................... 14
The Pool II Mortgage Loans.................. 18
Conveyance of subsequent mortgage loans..... 21
The Originators, the Depositor and the Servicer 22
Underwriting Guidelines..................... 22
The Servicer................................ 22
Delinquency and Loan Loss Experience........ 22
The Trustee.................................... 24
The Collateral Agent........................... 24
Description of the Certificates................ 24
Book-Entry Registration..................... 25
Definitive Certificates..................... 29
Assignment and Pledge of Initial
Mortgage Loans............................ 29
Assignment and Pledge of Subsequent
Mortgage Loans............................ 30
Delivery of Mortgage Loan Documents......... 30
Representations and Warranties of
the Depositor............................. 32
Payments on the Mortgage Loans.............. 34
Over-collateralization Provisions........... 36
Cross-collateralization Provisions.......... 37
Flow of Funds............................... 38
Reports to Certificateholders............... 39
Amendment................................... 39
Servicing of the Mortgage Loans................ 39
The Servicer................................ 39
Servicing Fees and Other Compensation
and Payment of Expenses................... 40
Periodic Advances and Servicer Advances..... 40
Prepayment Interest Shortfalls.............. 41
Civil Relief Act Interest Shortfalls........ 41
Optional Purchase of Defaulted Mortgage
Loans..................................... 41
Servicer Reports............................ 41
Collection and Other Servicing Procedures... 42
Hazard Insurance............................ 42
Realization Upon Defaulted Mortgage Loans... 43
Removal and Resignation of the Servicer..... 44
Termination; Purchase of Mortgage Loans..... 45
The Certificate Insurance Policy............... 46
The Certificate Insurer........................ 49
The Certificate Insurer..................... 50
Reinsurance................................. 50
Ratings..................................... 50
Capitalization.............................. 50
Insurance Regulation........................ 51
Certain Prepayment And Yield Considerations.... 51
General..................................... 51
Weighted Average Lives...................... 54
Reports to Holders of the Certificates...... 60
Material Federal Income Tax Considerations..... 61
State Taxes.................................... 62
ERISA Considerations........................... 62
Legal Investment............................... 64
Plan of Distribution........................... 65
Incorporation of Information by Reference...... 65
Additional Information......................... 66
Experts........................................ 66
Legal Matters.................................. 66
Ratings........................................ 66
INDEX OF DEFINED TERMS......................... 67
ANNEX I........................................ 68
Initial Settlement.......................... 68
Secondary Market Trading.................... 69
Certain U.S. Federal Income Tax
Documentation Requirements................ 70
<PAGE>
Summary
o This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need
to consider in making your investment decision. To understand all of
the terms of the offering of the certificates, carefully read this
entire prospectus supplement and the accompanying prospectus.
o This summary provides an overview of certain calculations, cash flow
priorities and other information to aid your understanding and is
qualified by the full description of these calculations, cash flow
priorities and other information in this prospectus supplement and
the accompanying prospectus. Some of the information consists of
forward-looking statements relating to future economic performance or
projections and other financial items. Forward-looking statements are
subject to a variety of risks and uncertainties that could cause
actual results to differ from the projected results. Those risks and
uncertainties include, among others, general economic and business
conditions, regulatory initiatives and compliance with governmental
regulations, and various other matters, all of which are beyond our
control. Accordingly, what actually happens may be very different
from what we predict in our forward-looking statements.
-------------------------------
The Certificates
The ___________ will issue the class A-1 certificates and the class A-2
certificates.
The trust will also issue one class of residual certificates, the class R
certificates, for each class of class A certificates. The class R certificates
are not offered by this prospectus supplement.
Cut-off Date
__________.
Closing Date
On or about __________.
Servicer and Seller
_________________.
The Depositor
Prudential Securities Secured Financing Corporation, a Delaware corporation.
Trustee
______________________________, a national banking association.
Certificate Insurer
___________________________, a _________ stock insurance company.
Distribution Dates
Distributions on the certificates will be made on the ____ day of each month,
or, if the ____ day is not a business day, on the next business day, beginning
on _________.
Distributions of Interest
On each distribution date, certificateholders will receive the interest that
has accrued on the certificates. The accrual period for the certificates is
the calendar month preceding the distribution date. All computations of
interest accrued on the certificates will be made on the basis of a 360-day
year consisting of twelve 30-day months.
Distributions of Principal
On each distribution date, certificateholders will receive principal
distributions. The amount of these distributions will be based on the amount
of principal collected on the underlying mortgage loans during the prior
calendar month. In addition, in accordance with the over-collateralization
features of the transaction, holders may also receive extra distributions of
principal from excess interest on a distribution date.
The Mortgage Loans
The mortgage loans will be primarily [fixed-rate/adjustable rate] loans
secured by [first- or second lien mortgages on one- to four-family residential
real properties] [first- or second lien one- to four-family residential home
equity mortgage loans] [loans evidenced by retail installment sales or
installment loan agreements] [manufactured housing installment sales contracts
and installment loan agreements] [mortgaged backed certificates insured or
guaranteed by [ ]] [private mortgage backed certificates] [and to a limited
extent, loans secured by commercial real properties].
On the closing date, the aggregate principal balance of the pool I mortgage
loans will be approximately $_____________ and the aggregate principal balance
of the pool II mortgage loans will be approximately $_________.
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 the difference will be placed in the pre-funding accounts
and used for the purchase of mortgage loans after the closing date.
Advances
The servicer is required to make cash advances to cover delinquent payments of
principal and interest unless it reasonably believes that the cash advances
are not recoverable from future payments on the related mortgage loans.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the certificates and are not intended to guarantee or
insure against losses.
Compensating Interest Payments
The servicer will make interest payments to compensate in part for any
shortfall in interest payments on the certificates which result from a
mortgagor prepaying all or part of a mortgage loan. The amount of such
payments will not exceed the servicing fee payable for related period. The
certificate insurance policy does not cover shortfalls in interest arising
from prepayments.
Option of the Servicer to Terminate the Trust
The servicer may, at its option, terminate the trust on any distribution date
after the aggregate outstanding principal balance of all mortgage loans is
less than 10% of the sum of the aggregate original principal balance of the
mortgage loans purchased on the closing date and the amount on deposit in the
pre-funding accounts on the closing date.
Credit Enhancement
The credit enhancement provided for the benefit of the holders of the offered
certificates consists solely of: overcollateralization, and the certificate
insurance policy.
Overcollateralization
On the closing date, the initial principal balance of the mortgage loans will
exceed the certificate principal balances of the certificates (i.e., the
mortgage balance is "overcollateralized") by approximately $2,142,000.
Furthermore, the terms of the pooling and servicing agreement are designed to
cause a limited acceleration of the offered certificates relative to the
amortization of the mortgage loans, thereby causing additional
overcollateralization. The purpose of overcollateralization is to ensure that
there are excess funds available to pay interest and principal on the offered
certificates so that the offered certificates will have some protection
against payment shortfalls.
The required level of overcollateralization may increase or decrease over
time. Any increase may result in an accelerated amortization of the offered
certificates until the required level is reached. Any decrease will result in
slower amortization of the offered certificates until the required level is
reached.
Certificate Insurance Policy
The certificate insurance policy will guaranty the payment of principal and
interest on the offered certificates to the extent described in this
prospectus supplement.
ERISA Considerations
Subject to the conditions described under "ERISA Considerations" in this
prospectus supplement, the certificates may be purchased by any employee
benefit plan or other retirement arrangement subject to ERISA or the Internal
Revenue Code.
Federal Income Tax Status
An election will be made to treat the trust fund as a REMIC. The class A
certificates will be designated as "regular interests" and the class R
certificates will be designated as "residual interests" in the REMIC. The
class A certificates will be treated as newly originated debt instruments and
the beneficial owners will be required to report income thereon in accordance
with the accrual method of accounting.
Ratings
In order to be issued, the certificates must be rated [ ]by ________ and [ ]
by ________, taking into account the certificate insurance policy issued for
the certificates.
<PAGE>
Risk Factors
Investors should consider, among other things, the following factors
-- as well as the factors listed under "Risk Factors" in the accompanying
prospectus -- before deciding to invest in the certificates.
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 certificate.
If the principal balance of the eligible mortgage loans
available for purchase by the trust on _____________ is less
than the amount on deposit in either pre-funding account on
that date, the remaining amount will be applied as a
prepayment of principal on the following distribution date
to the holders of the class of certificates relating to that
pre-funding account. You will bear the risk of reinvesting
these unscheduled distributions and there can be no
assurance that you will be able to reinvest them at a yield
equaling or exceeding the yield on your certificate. If the
originators do not have sufficient additional mortgage loans
that satisfy the requirements listed on pages S-16 and S-17
of this prospectus supplement, a prepayment will occur.
Because many of the mortgage loans backing your certificate were made to
borrowers with impaired or unsubstantiated credit histories, there is a
greater risk of delinquent payments on these mortgage loans, which could lead
to greater risk of losses on your certificate.
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 like 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
certificates may be deemed to be at greater risk than if the
mortgage loans were made to other types of borrowers.
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 concerning
a borrower's credit history and in 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.
Some geographic regions of the United States from time to
time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher
rates of loss and delinquency on mortgage loans generally.
Any concentration of the mortgage loans in any of these
regions may present risk considerations in addition to those
generally present for similar mortgage-backed securities
without this 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 states listed below had the following
percentages of mortgage loans in pool I and pool II,
measured as of _______, ______, which are secured by
mortgaged properties located in the their states:
_________ ________ _________ ________ _________
Pool I % % % % %
Pool II % % % % %
Because of the relative geographic concentration of the
mortgage loans within the states of _____________,
_____________, _____________, _____________ and
_____________, losses on the mortgage loans may be higher
than would be the case if the mortgage loans were more
geographically diversified. For example, some of the
mortgaged properties may be more susceptible to particular
types of special hazards, like 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 _____________, _____________,
_____________, _____________ and _____________ may be
adversely affected to a greater degree than the economies of
other areas of the country by regional developments. If the
_____________, _____________, _____________, _____________
and _____________ residential or commercial real estate
markets experience an overall decline in property values
after the dates of origination of the respective mortgage
loans, then the rates of delinquencies, foreclosures and
losses on the mortgage loans may be expected to increase and
this increase may be substantial.
[Moreover, regardless of its location, manufactured housing
generally depreciates in value. Consequently, the market
value of the manufactured homes could be or become lower
than the principal balances of the related retail
installment sales contracts.]
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 securities.
Approximately ____% of the mortgage loans in pool I,
measured as of _____, ____, and ____% of the mortgage loans
in pool II, measured as of ____, ____, 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 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
concerning their balloon loans and they do not believe that
their data is sufficient to predict the default experience
of the balloon loans.
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 _____% of the mortgage loans in pool I,
measured as of ____, _____, and ____% of the mortgage loans
in pool II, measured as of ____, ____, are secured by
subordinate or junior mortgages which are subordinate to the
rights of the holder of the 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 senior mortgagee are satisfied in
full, including any foreclosure costs. In addition, a holder
of a junior mortgage may not foreclose on the mortgaged
property securing the mortgage unless it either pays the
entire amount of each of the senior mortgages to the
mortgagees at or prior to the foreclosure sale or undertakes
the obligations to make payments on each of the senior
mortgages in the event of default thereunder. In servicing
business and consumer purpose home equity loans in its
portfolio, it is the servicer's practice to satisfy or
reinstate each such first mortgage at or prior to the
foreclosure sale only to the extent that it determines any
amount so paid will be recoverable from future payments and
collections on the 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, equals or exceeds the value of the
mortgaged properties. This type of decline would adversely
affect the position of a second mortgagee before having the
same effect on the 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 first liens.
A portion of the mortgage loans are high LTV loans which may not have adequate
security in the event of a default, which could lead to losses on your note.
Even though all of the mortgage loans are secured by
residential real estate, approximately _____% of the
mortgage loans in pool I, measured as of ____, _____, and
____% of the mortgage loans in pool II, measured as of ____,
____, are secured by real estate which has a value that may
be close to, or even less than, the amount of the loan. As a
result, the mortgaged properties may not provide adequate
security for these high LTV loans. Underwriting analysis of
high LTV loans relies more heavily on the mortgagor's
creditworthiness than on the protection afforded by the
security interest in the underlying mortgaged property.
Additionally, there is also the risk that if the borrower
moves, he or she will be unable to pay the loan in full from
the proceeds of the sale of the property. The costs incurred
by the servicer in the collection and liquidation of high
LTV loans may be higher for high LTV loans than for other
types of loans, because the servicer may be required to
pursue collection solely against the borrower. Consequently,
the losses on defaulted high LTV loans may be more severe as
there is no assurance that any proceeds will be recovered,
which could lead to losses on your certificate.
Security interests in the manufactured homes may not be perfected and the
issuer may not realize upon the full amount due under the loan.
Approximately _____% of the mortgage loans in pool I,
measured as of ____, _____, and ____% of the mortgage loans
in pool II, measured as of ____, ____, are secured by
manufactured homes and, in some cases, the real estate on
which the manufactured home is located. [Approximately
_____% of the loans in pool I, measured as of ____, _____,
and ____% of the loans in pool II, measured as of ____,
____, are retail installments sales contracts or loan
agreements secured by manufactured homes.] Some federal and
state laws, which do not apply to other types of mortgage
loans, limit the issuer's ability to foreclose on
manufactured homes or may limit the amount realized to less
than the amount due under the loan. These limitations could
cause losses on your certificate.
Unpredictability of Prepayments and Effect on Yields
Borrowers may prepay their mortgage loans in whole or in
part at any time. We cannot predict the rate at which
borrowers will repay their mortgage loans. A prepayment of a
mortgage loan generally will result in a prepayment on the
certificates.
o If you purchase your certificates at a discount and
principal is repaid slower than you expect, then your
yield may be lower than you expect.
o If you purchase your certificates at a premium and
principal is repaid faster than you expect, then your
yield may be lower than you expect.
o The rate of prepayments on the mortgage loans will be
sensitive to prevailing interest rates. Generally, if
prevailing interest rates decline significantly below
the interest rates on the mortgage loans, the mortgage
loans are more likely to prepay than if prevailing
rates remain above the interest rates on the mortgage
loans. Conversely, if prevailing interest rates rise
significantly, the prepayments on the mortgage loans
are likely to decrease.
o Approximately ____% of the mortgage loans by aggregate
principal balance as of the cut-off date require the
mortgagor to pay a penalty if the mortgagor prepays
the mortgage loan during a specified period. A
prepayment penalty may discourage a mortgagor from
prepaying the mortgage loan during the applicable
period.
o The seller may be required to purchase mortgage loans
from the trust in the event certain breaches of
representations and warranties occur and are not
cured. In addition, the servicer has the option to
purchase mortgage loans that become ninety days or
more delinquent, subject to certain limitations and
conditions described in this prospectus supplement.
These purchases will have the same effect on the
holders of the related class or classes of offered
certificates as a prepayment of the mortgage loans.
o If the rate of default and the amount of losses on the
mortgage loans is higher than you expect, then your
yield may be lower than you expect.
o The overcollateralization provisions are intended to
result in an accelerated rate of principal
distributions to holders of certain classes of the
offered certificates.
Potential Inadequacy of Credit Enhancement for the Offered Certificates
The credit enhancement features applicable to the offered
certificates are intended to enhance the likelihood that
holders of the offered certificates will receive regular
payments of interest and, if applicable, principal. However,
we cannot assure you that the credit enhancement will
adequately cover any shortfalls in cash available to pay
your certificates as a result of delinquencies or defaults
on the mortgage loans. If delinquencies or defaults occur on
the mortgage loans, neither the servicer nor any other
entity will advance scheduled monthly payments of interest
and principal on delinquent or defaulted mortgage loans if
such advances are not likely to be recovered.
If substantial losses occur as a result of defaults and delinquent payments on
the mortgage loans, and the certificate insurer were unable to pay under the
financial guaranty policy, you may suffer losses.
Rating of the Offered Certificates Based Primarily on Rating of the Certificate
Insurer
The ratings on the offered certificates will depend
primarily on the claims-paying ability of the certificate
insurer. Therefore, a reduction of the rating assigned to
the claims-paying ability of the certificate insurer may
result in a corresponding reduction on the ratings assigned
to the offered certificates. In general, the ratings address
credit risk and do not address the likelihood of
prepayments.
Effect of the Rate Caps on Certain Classes of Certificates
The Class ___ Certificates will accrue interest at the
respective pass-through rates specified on the cover of this
prospectus supplement, but in each case will be subject to a
rate cap. The rate cap in each case will be based on the
weighted average of the interest rates of the mortgage loans
net of certain trust expenses. _____% of the mortgage loans
accrue interest at various fixed rates. As a result, the
Class ___ Certificates may accrue less interest than they
would accrue if their rates were calculated solely on the
basis set forth on the cover. The related classes of
certificates do not provide for any "carry-forward" or
"catch-up" if the amount of interest paid to the holders of
such certificates is reduced.
Interest Payments May be Insufficient
When a mortgage loan is prepaid in full or in part, the
borrower is charged interest only up to the date on which
payment is made, rather than for an entire month. This may
result in a shortfall in interest collections available for
payment on the next distribution date. The servicer is
required to cover the shortfall in interest collections that
are attributable to prepayments in full or in part, but only
up to the amount of the servicer's fee for the related
accrual period. The certificate insurer will not be required
to cover this shortfall. If the other credit enhancement is
insufficient to cover this shortfall in excess of the
servicing fee, it may adversely affect the yield on your
investment.
Furthermore, certain shortfalls in interest collections
arising from the application of the Soldiers' and Sailors'
Civil Relief Act of 1940 will not be covered by either the
servicer or the certificate insurer.
Delay in Receipt of Liquidation Proceeds; Liquidation Proceeds May Be Less
than Mortgage Loan Balance
Substantial delays could be encountered in connection with
the liquidation of delinquent mortgage loans. Further,
liquidation expenses such as legal fees, real estate taxes
and maintenance and preservation expenses may reduce the
portion of liquidation proceeds payable to you. If a
mortgaged property fails to provide adequate security for
the mortgage loan, you will incur a loss on your investment
if the certificate insurer fails to perform its obligations
under the certificate insurance policy and the other credit
enhancements are insufficient to cover the loss.
Origination Risks; Seller's Reliance on Brokers and Correspondents
The seller depends largely on independent mortgage brokers
and, to a lesser extent, on correspondent lenders, for its
originations and purchases of mortgage loans, including the
mortgage loans. All brokers and correspondents in the
seller's network must undergo an approval process and enter
into an agreement with the seller pursuant to which the
broker or correspondent agrees to comply with the seller's
eligibility and origination requirements. Generally, the
seller underwrites all loans it funds through brokers and
purchases through correspondents, and regularly reviews the
performance of loans originated or purchased through its
brokers and correspondents as well as undertakes pre-closing
and post-closing quality control procedures involving random
samples of loans to confirm that the loans are being
originated and underwritten in accordance with its
guidelines (subject to exceptions approved by the seller
prior to loan funding).
The Servicer Does Not Have Any Significant Historical Loss and Delinquency Data
The servicer commenced its servicing activities for mortgage
loans in __________. As a result, the servicer has limited
historical data available regarding loan performance.
Consequently, the servicer has been unable to develop
meaningful statistics relating to the historical performance
of the mortgage loans in its servicing portfolio. As a
result, it is unknown how the servicer's mortgage loan
portfolio will perform relative to the portfolios of other
mortgage lenders and servicers. There can be no assurance
regarding the level of losses and delinquencies that the
mortgage loans will experience.
Other Legal Considerations
Federal and state laws, public policy and general principles
of equity relating to the protection of consumers, unfair
and deceptive practices, among other factors:
o regulate interest rates and other charges on mortgage
loans;
o require certain disclosures to borrowers;
o require licensing of the seller and other originators;
and
o regulate generally the origination, servicing and
collection process for the mortgage loans.
For example, as of the Cut-off Date, approximately ____% of
the mortgage loans (by aggregate principal balance as of the
cut-off date), are subject to the Riegle Community
Development and Regulatory Improvement Act of 1994. The
Riegle Act incorporates the Home Ownership and Equity
Protection Act of 1994 and certain regulations of the
Truth-In-Lending Act. The Riegle Act imposes additional
disclosure and other requirements on creditors with respect
to non- purchase money home equity loans with high interest
rates or high upfront fees and charges.
Depending on the specific facts and circumstances involved,
violations of laws such as the Riegle Act may limit the
ability of the trust to collect on the mortgage loans, may
entitle the borrower to a refund of amounts previously paid
and could result in liability for damages and administrative
enforcement. In addition, there may be circumstances in
which the trust, as owner of the mortgage loans, would be
subject to all of the claims and defenses that a borrower
could assert against the original lender. As a result, the
trust may be subject to damages and administrative penalties
arising out of unlawful lending practices if it is
determined that a violation has occurred.
[The recording of mortgages in the name of MERS may affect the yield on the
certificates.
The mortgages or assignments of mortgage for some of the mortgage
loans have been or may be recorded in the name of Mortgage Electronic
Registration Systems, Inc, or MERS, solely as nominee for the originator and
its successors and assigns. Subsequent assignments of those mortgages are
registered electronically through the MERS(R) System. However, if MERS
discontinues the MERS(R) System and it becomes necessary to record an
assignment of the mortgage to the trustee, then any related expenses shall be
paid by the trust and will reduce the amount available to pay principal of and
interest on the outstanding class or classes of certificates with the lowest
payment priorities. The recording of mortgages in the name of MERS is a new
practice in the mortgage lending industry. Public recording officers and
others may have limited, if any, experience with lenders seeking to foreclose
mortgages, assignments of which are registered with MERS. Accordingly, delays
and additional costs in commencing, prosecuting and completing foreclosure
proceedings and conducting foreclosure sales of the mortgaged properties could
result. Those delays and additional costs could in turn delay the distribution
of liquidation proceeds to noteholders and increase the amount of losses on
the mortgage loans.]
[The [Ginnie Mae] Certificates are limited obligations of [Ginnie Mae].
The [Ginnie Mae] Certificates do not constitute a liability of, or
evidence any recourse against, the trust, the depositor or any affiliate of
the depositor, and the only recourse of the trustee as a registered holder of
the certificates is to enforce the guarantee of [Ginnie Mae.]]
[Because the trust fund includes unsecured retail installment sales contracts,
there is a greater risk of loss on your certificates.
Approximately _____% of the loans in pool I, measured as of ____,
_____, and ____% of the loans in pool II, measured as of ____, ____, are
secured by retail installment sales contracts or loan agreements which are not
secured by any interest in real or personal property. The obligations of the
borrower under any unsecured contract will not be secured by an interest in
the related real estate or otherwise, and the trust, as the owner of that
unsecured contract and the trustee, as assignee for the benefit of the
noteholders, of the trust's interest in that unsecured contract, will be a
general unsecured creditor as to such obligations. As a consequence, in the
event of a default under an unsecured contract, the trust and the trustee will
have recourse only against the borrower's assets generally, along with all
other general unsecured creditors of the borrower. In a bankruptcy or
insolvency proceeding relating to a borrower on an unsecured contract, the
obligations of the borrower under that unsecured contract may be discharged in
their entirety, notwithstanding the fact that the portion of that borrower's
assets made available to the trustee as a general unsecured creditor to pay
amounts due and owing thereunder are insufficient to pay all those amounts. A
borrower on an unsecured contract may not demonstrate the same degree of
concern over performance of its obligations under the unsecured contract as if
the obligations were secured by a single family residence owned by that
borrower.]
[Cash flow limited in early years of home equity revolving credit line
mortgage loans.
During the first [ ]-year draw down period under the credit line
agreements, borrowers are not required to make monthly payments of principal.
As a result, collections on the mortgage loans may vary. With respect to some
of the mortgage loans, during the second [ ]-year draw down period, no monthly
payments of principal are required. Collections on the mortgage loans may also
vary due to seasonal purchasing and payment habits of borrowers. As a result,
there may be limited collections available to make payments to you.
General credit risk may also be greater to you than to holders of
instruments representing interests in level payment first mortgage loans since
no payment of principal of the mortgage loans generally is required until
after either a five- or ten-year interest-only period. Minimum monthly
payments are required to equal or exceed accrued interest on the mortgage
loans.]
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 Sponsor. Prudential Securities Secured Financing Corporation, a
Delaware corporation. The principal executive office of the sponsor is located
at One New York Plaza, 14th Floor, New York, New York 10292, and its telephone
number is (212) 778-1000.
The Depositor. ________________, a __________ corporation, which is
owned by the originators. The principal executive office of the depositor is
at ___________________________, and its telephone number is ____________.
The Originators. _____________, a _____________ corporation, and
_____________, a _____________ corporation, originated or purchased the
mortgage loans. For a description of the business of the originators, see "The
Originators, the Depositor and the Servicer" in this prospectus supplement.
The Servicer and the Subservicers. _____________ will act as
servicer of the mortgage loans, and _____________ and _____________ will act
as subservicers for different portions of the mortgage loans. For a
description of the business of the servicer, see "The Originators, the
Depositor and the Servicer" in this prospectus supplement.
The Trustee. _____________, a _____________ banking corporation. The
corporate trust office of the trustee is located at _____________, and its
telephone number is _____________. For a description of the trustee and its
responsibilities concerning the certificates, see "The Trustee" in this
prospectus supplement.
The Collateral Agent. _________________________, a national banking
association. The corporate trust office of the collateral agent is located at
________________________, and its telephone number is _____________.
The Certificate Insurer. ___________________________, a _____________
financial guaranty insurance company. The certificate insurer will issue a
financial guaranty insurance policy for the benefit of the holders of the
certificates. For a description of the business and selected financial
information of the certificate insurer, see "The Certificate Insurance Policy"
and "The Certificate Insurer" in this prospectus supplement.
The Rating Agencies. ________________ and ________________ will
issue ratings for each class of certificates.
The Transaction
Formation of the Trust and Issuance of the Certificates. The trust
will be formed pursuant to the terms of a Pooling and Servicing Agreement,
dated as of _____________, between the trustee, the collateral agent, the
servicer and the depositor. Under the Pooling and Servicing Agreement, the
trust will also issue the certificates to the depositor, together evidencing
the entire beneficial ownership interest in the sub-trust of the trust
consisting of a pool of mortgage loans.
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 Depositor
and the Servicer." The originators will sell the mortgage loans to the
depositor, pursuant to Loan Sale Agreement, dated as of _____________, among
the originators and the depositor. The depositor will deposit the mortgage
loans in the trust pursuant to the Pooling and Servicing Agreement. The
servicer will service the mortgage loans pursuant to the terms of the Pooling
and Servicing Agreement.
Issuance of the Certificate Insurance Policy. The certificate
insurer will issue the certificate insurance policy pursuant to the terms of
an Insurance and Indemnity Agreement, dated as of _____________, among the
certificate insurer, the trust, the depositor, 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 _______, ____. Pool I
aggregated $_____________ as of the statistical calculation date and pool II
aggregated $_____________ as of the statistical calculation date. The
depositor expects that the actual pools on the closing date will represent
approximately $_____________ in aggregate principal balance of mortgage loans
in pool I, as of a cut-off date of ________, ____, and approximately
$_____________ in aggregate principal balance of mortgage loans in pool II, as
of the cut-off date. The additional mortgage loans will represent mortgage
loans acquired or to be acquired by the trust on or prior to the closing date.
In addition, the pools that existed on the statistical calculation date for
which statistical information is presented in this prospectus supplement, will
amortize in part prior to the closing date. Moreover, some 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 the characteristics as of the statistical calculation date as
presented in this prospectus supplement, although this 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 this date, the depositor will increase the size of the
pre-funding accounts and the capitalized interest accounts, as applicable.
Additional mortgage loans are intended to be purchased by the trust
from time to time on or before _____________ 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 depositor and then sold by the depositor to the
trust. The Pooling and Servicing Agreement will provide that the mortgage
loans, following the conveyance of the subsequent mortgage loans, must in the
aggregate conform to specified characteristics described below under " --
Conveyance of subsequent mortgage loans."
Unless otherwise noted, all statistical percentages in this
prospectus supplement are approximate and are measured by the aggregate
principal balance of the 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 mortgage loans will be predominantly business 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 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 mobile home or
a unit in a planned unit development -- and commercial or mixed use property.
The mortgaged properties may be owner-occupied properties, which includes
second and vacation homes, non-owner occupied investment properties or
business purpose properties.
The majority of the mortgage loans have a prepayment fee clause.
These prepayment fee clauses generally provide that the mortgagor pay, upon
prepayment, one or more of the following:
o a fee equal to a percentage, 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 than would be
required to be paid if the actuarial method of calculating
interest was utilized.
[The "contracts" consist of fixed rate and variable rate manufactured
housing installment sales contracts and installment loan agreements (the
"manufactured housing contracts"). The manufactured housing contracts are
secured by security interests in manufactured homes (the "manufactured homes")
purchased with the proceeds of the contracts and, with respect to certain of
the contracts (the "land-and-home contracts"), secured by liens on the real
estate on which the related manufactured homes are located. The contracts, as
of origination, were secured by manufactured homes or mortgaged properties
located in [ ] states. The statistical information presented in this
Prospectus Supplement concerning the contract pool is based on the contract
pool of contracts as of the Cut-off Date.]
[A borrower may access a home equity loan by writing a check. On all
home equity loans, there is [a ten-year] draw down period as long as the
borrower is not in default under the loan agreement. Home equity loans bear
interest at a variable rate which may change bi-weekly. Home equity loans may
be subject to a maximum per annum interest rate of ____% and in all cases, are
subject to applicable usury limitations. The loan rate is the sum of the index
rate plus a spread which generally ranges between ____% and ____%, divided by
365 days or 366 days.]
The Pool I Mortgage Loans
As of the statistical calculation date, each of the mortgage loans in
pool I had a remaining term to maturity of no greater than 360 months and had
a mortgage interest rate of at least ____% per annum.
The combined loan-to-value ratios or CLTV's described in this
prospectus supplement were calculated based upon the appraised values of the
mortgaged properties at the time of origination. No assurance can be given
that the appraised values of the mortgaged properties have remained or will
remain at the levels that existed on the dates of origination of the mortgage
loans. If property values decline and cause the outstanding principal balances
of the mortgage loans, together with the outstanding principal balances of any
first liens, 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 historically experienced by the servicer, as described
below under "The Originators, the Depositor and the Servicer -- Delinquency
and Loan Loss Experience," and in the mortgage lending industry generally.
As of the statistical calculation date, the mortgage loans in pool I
had the following characteristics:
o there were ___ mortgage loans under which the mortgaged properties are
located in __ states,
o the aggregate principal balance, after application of all payments due on
or before the statistical calculation date, was $_____________,
o the minimum principal balance was $_____________, the maximum principal
balance was $_____________, and the average principal balance was
$_____________,
o the mortgage interest rates ranged from _____% to ____% per annum, and
the weighted average mortgage interest rate was approximately ____% per
annum,
o the original term to stated maturity ranged from ___ months to 360
months,
o the remaining term to stated maturity ranged from __ months to ____
months, the weighted average original term to stated maturity was
approximately ___ months and the weighted average remaining term to
stated maturity was approximately ____ months,
o no mortgage loan had a maturity later than _________,
o approximately _______% of the aggregate principal balance of the mortgage
loans require monthly payments of principal that will fully amortize
these mortgage loans by their respective maturity dates, and
approximately ____% of the aggregate principal balance of the mortgage
loans are balloon loans,
o the weighted average CLTV was approximately _____%,
o approximately _____% of mortgage loans are secured by first liens, and
approximately _____% of mortgage loans are secured by second liens, and
o approximately _____%, _____%, ____%, _____% and ____% of the mortgage
loans are secured by mortgaged properties located in the States of
_____________, _____________, _____________, _____________ and
_____________, respectively.
On or prior to _____________, 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 $_____________.
The following tables present statistical information on the mortgage
loans in pool I. Due to rounding, the percentages shown may not precisely
total 100.00%.
<TABLE>
<CAPTION>
Geographical Distribution of Mortgaged Properties
Pool I
<S> <C> <C> <C>
Number of Aggregate Unpaid % of Statistical Calculation Date
State Mortgage Loans Principal Balance Aggregate Principal Balance
----------------- -------------- ----------------- ---------------------------
Total
Distribution of CLTV Ratios
Pool I
Original Number of Aggregate Unpaid % of Statistical Calculation Date
CLTV Range Mortgage Loans Principal Balance Aggregate Principal Balance
----------------------- -------------- ----------------- ---------------------------
Total ========== ================ ==============
Distribution of Gross Mortgage Interest Rates
Pool I
Gross Mortgage Number of Aggregate Unpaid % of Statistical Calculation Date
Interest Rate Range Mortgage Loans Principal Balance Aggregate Principal Balance
---------------------------- -------------- ----------------- ---------------------------
Total ========= ================ =============
Distribution of Original Terms to Maturity
(in months)
Pool I
Range of Original Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
----------------------- -------------- ----------------- ---------------------------
Total ========= ================ =============
Distribution of Remaining Terms to Maturity
(in months)
Pool I
Range of Remaining Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------ -------------- ----------------- ---------------------------
Total ========= ================ ==============
Distribution of Original Principal Balances
Pool I
Range of Original Mortgage
Loan Number of Aggregate Unpaid % of Statistical Calculation Date
Principal Balances Mortgage Loans Principal Balance Aggregate Principal Balance
-------------------------- -------------- ----------------- ---------------------------
Total ========= ================ =============
Distribution of Current Principal Balances
Pool I
Range of Current Mortgage Loan Number of Aggregate Unpaid % of Statistical Calculation Date
Principal Balances Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------------ -------------- ---------------- ---------------------------------
Total ========= ================ =============
Distribution by Lien Status
Pool I
Number of Aggregate Unpaid % of Statistical Calculation Date
Lien Status Mortgage Loans Principal Balance Aggregate Principal Balance
----------- -------------- ----------------- ---------------------------
Total ========= ================ =============
Distribution by Amortization Type
Pool I
Number of Aggregate Unpaid % of Statistical Calculation Date
Amortization Type Mortgage Loans Principal Balance Aggregate Principal Balance
----------------- -------------- ----------------- ---------------------------
Total ========= ================ =============
Distribution by Occupancy Status
Pool I
Occupancy Status Number of Aggregate Unpaid % of Statistical Calculation Date
Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------ -------------- ----------------- ---------------------------
Total ========= ================ =============
Distribution by Property Type
Pool I
Number of Aggregate Unpaid % of Statistical Calculation Date
Property Type Mortgage Loans Principal Balance Aggregate Principal Balance
--------------------- -------------- ----------------- ---------------------------
Total ========= ================ =============
</TABLE>
The Pool II Mortgage Loans
As of the statistical calculation date, each of the mortgage loans in
pool II had a remaining term to maturity of no greater than 360 months and had
a mortgage interest rate of at least _____% per annum.
The CLTVs described in this prospectus supplement were calculated
based upon the appraised values of the mortgaged properties at the time of
origination. No assurance can be given that the appraised values of the
mortgaged properties have remained or will remain at the levels that existed
on the dates of origination of the mortgage loans. If property values decline
and cause the outstanding principal balances of the mortgage loans, together
with the outstanding principal balances of any first liens, 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 historically
experienced by the servicer, as described below under "The Originators, the
Depositor and the Servicer -- Delinquency and Loan Loss Experience," and in
the mortgage lending industry.
As of the statistical calculation date, the mortgage loans in pool II
had the following characteristics:
o there were ___ mortgage loans under which the mortgaged
properties are located in ___ states,
o the aggregate principal balance, after application of all
payments due on or before the statistical calculation date, was
$_____________,
o the minimum principal balance was $_____________, the maximum
principal balance was $_____________, and the average principal
balance was $_____________,
o the mortgage interest rates ranged from ____% to ___% per
annum, and the weighted average mortgage interest rate was
approximately ___% per annum,
o the original term to stated maturity ranged from __ months to
360 months,
o the remaining term to stated maturity ranged from __ months to
___ months, the weighted average original term to stated
maturity was approximately ___ months and the weighted average
remaining term to stated maturity was approximately ___ months,
o no mortgage loan had a maturity later than _____________,
o approximately ____% of the aggregate principal balance of the
mortgage loans require monthly payments of principal that will
fully amortize these mortgage loans by their respective
maturity dates, and approximately ____% of the aggregate
principal balance of the mortgage loans are balloon loans,
o the weighted average CLTV was approximately ____%,
o approximately ____% of mortgage loans are secured by first
liens, and approximately ____% of mortgage loans are secured by
second liens, and
o approximately ___%, ___%, ____%, ____% and ____% of the
mortgage loans are secured by mortgaged properties located in
the States of _____________, _____________, _____________,
_____________ and _____________, respectively.
On or prior to _____________, 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 $_____________.
The following tables present statistical information on the mortgage
loans in pool II. Due to rounding, the percentages shown may not precisely
total 100.00%.
<TABLE>
<CAPTION>
Geographical Distribution of Mortgaged Properties
Pool II
<S> <C> <C> <C>
Number of Aggregate Unpaid % of Statistical Calculation Date
State Mortgage Loans Principal Balance Aggregate Principal Balance
------------------ -------------- ----------------- ---------------------------
Total
========== ================ ==================
Distribution of CLTV Ratios
Pool II
Number of Aggregate Unpaid % of Statistical Calculation Date
Original CLTV Ratio Mortgage Loans Principal Balance Aggregate Principal Balance
------------------- -------------- ----------------- ---------------------------------
Total
========== ================ ==================
Distribution of Gross Mortgage Interest Rates
Pool II
Gross Mortgage Number of Aggregate Unpaid % of Statistical Calculation Date
Interest Rate Range Mortgage Loans Principal Balance Aggregate Principal Balance
------------------- -------------- ----------------- ---------------------------
Total
========== ================ ==================
Distribution of Original Terms to Maturity
(in months)
Pool II
Range of Original Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
----------------------- -------------- ----------------- ---------------------------
Total
========== ================ ==================
Distribution of Remaining Terms to Maturity
(in months)
Pool II
Range of Remaining Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------- -------------- ----------------- ---------------------------
Total
========== ================ ==================
Distribution of Original Principal Balances
Pool II
Range of Original Mortgage Number of Aggregate Unpaid % of Statistical Calculation Date
Loan Principal Balances Mortgage Loans Principal Balance Aggregate Principal Balance
-------------------------- -------------- ----------------- ---------------------------
Total
=============== ================ ==============================
Distribution of Current Principal Balances
Pool II
Range of Current
Mortgage Loan Number of Aggregate Unpaid % of Statistical Calculation
Principal Balances Mortgage Loans Principal Balance Date Aggregate Principal Balance
------------------ -------------- ----------------- --------------------------------
Total
========== ================ ==================
Distribution by Lien Status
Pool II
Number of Aggregate Unpaid % of Statistical Calculation Date
Lien Status Mortgage Loans Principal Balance Aggregate Principal Balance
----------------- -------------- ----------------- ---------------------------
Total
========== ================ ==================
Distribution by Amortization Type
Pool II
Number of Aggregate Unpaid % of Statistical Calculation Date
Amortization Type Mortgage Loans Principal Balance Aggregate Principal Balance
----------------- -------------- ----------------- ---------------------------
Total
========== ================ ==================
Distribution by Occupancy Status
Pool II
Number of Aggregate Unpaid % of Statistical Calculation Date
Occupancy Status Mortgage Loans Principal Balance Aggregate Principal Balance
------------------ -------------- ----------------- ---------------------------
Total
========== ================ ==================
Distribution By Property Type
Pool II
Number of Aggregate Unpaid % of Statistical Calculation
Property Type Mortgage Loans Principal Balance Date Aggregate Principal Balance
------------- -------------- ----------------- --------------------------------
Total
========== ================ ==================
</TABLE>
Conveyance of subsequent mortgage loans
The Pooling and Servicing Agreement permits the trust to acquire
subsequent mortgage loans with the funds on deposit in the pre-funding
accounts. It is expected that the amount on deposit in the pre-funding
accounts on the closing date will be approximately $_____________ for pool I
and $_____________ for pool II. Accordingly, the statistical characteristics
of the mortgage loans in pool I and pool II will vary as of any subsequent
cut-off date upon the acquisition of subsequent mortgage loans.
The obligation of the trust to purchase the subsequent mortgage loans
on any subsequent transfer date during the Pre-Funding Period is subject to
the following requirements:
o the subsequent mortgage loan may not be 30 or more days
contractually delinquent as of a subsequent cut-off date which
is the close of business on the last day of the calendar month
preceding the month in which the subsequent mortgage loan was
purchased by the trust;
o the original term to maturity of the subsequent mortgage loan
may not exceed 360 months for pool I and 360 months for pool
II;
o the subsequent mortgage loan must have a mortgage interest rate
of at least ____% for pool I and ____% for pool II;
o the purchase of the subsequent mortgage loans is consented to
by the certificate insurer and the rating agencies,
notwithstanding the fact that the subsequent mortgage loans
meet the parameters stated in this prospectus supplement;
o the principal balance of any subsequent mortgage loan may not
exceed $_____________ for pool I and $_____________ for pool
II;
o no more than _____% for pool I and ____% for pool II of the
aggregate principal balance of the 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, ___% for pool I and ____% for
pool II, and (b) for business purpose loans, ___% for pool I
and ___% for pool II;
o no more than ____% for pool I and ___% for pool II of the
subsequent mortgage loans may be balloon loans;
o no more than ____% for pool I and ____% for pool II of the
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 the subsequent mortgage loans by the
trust, the mortgage loans, including the subsequent mortgage
loans, (a) will have a weighted average mortgage interest rate,
(I) for consumer purpose loans, of at least ____% for pool I
and ____% for pool II and (II) for business purpose loans, of
at least ____% for pool I and ____% for pool II; and (b) will
have a weighted average CLTV of not more than (I) for consumer
purpose loans, ____% for pool I and ____% for pool II, and (II)
for business purpose loans, ____% for pool I and ____% for pool
II.
The Pooling and Servicing Agreement will provide that any of these
requirements may be waived or modified in any respect upon prior written
consent of the certificate insurer, with the exception of the requirements
concerning maximum principal balance.
The Originators, the Depositor and the Servicer
[Corporate description]
[To be supplied by originators, depositor and servicer]
Underwriting Guidelines
[To be supplied by originators]
The Servicer
[To be supplied by servicer]
Delinquency and Loan Loss Experience
The following tables present information relating to the delinquency
and loan loss experience on the mortgage loans included in originators
servicing portfolio for the periods shown. The delinquency and loan loss
experience represents the historical experience of the originators, 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 the originators' overall servicing portfolio.
<TABLE>
<CAPTION>
Delinquency and Foreclosure Experience
(Dollars in Thousands)
At At At
------------------ ------------------- -------------------
% of % of % of
Amount Amount Amount Amount Amount Amount
Serviced Serviced Serviced Serviced Serviced Serviced
<S> <C> <C> <C> <C> <C> <C>
Servicing portfolio..............
Past due loans:
60-89 days...................
90 days or more ............. ======== ========= ========= ========= ========= =========
Total past due loans.............
REO Properties................... ======== ========= ========= ========= ========= =========
Total past due loans,
foreclosures pending and REO
Properties(3)....................
</TABLE>
o The foregoing table was prepared assuming that:
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.
Loan Charge-Off Experience
(Dollars in Thousands)
At At At
---- ---- ----
Servicing portfolio at period end......
Average outstanding....................
Gross losses.........................
Loan recoveries......................
Net loan charge-offs.................
Net loan charge-offs as a percentage
of servicing portfolio at period end.
Net loan charge-offs as a percentage
of average outstanding...............
The foregoing table was prepared assuming that:
o "average outstanding" 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 this period; and
o "gross losses" means the outstanding principal balance plus
accrued but unpaid interest on liquidated mortgage loans.
While the above delinquency and foreclosure and loan charge-off
experiences are typical of the originators' experiences at the dates for the
periods indicated, there can be no assurance that the delinquency and
foreclosure and loan charge-off experiences on the mortgage loans will be
similar. Accordingly, the information should not be considered to reflect the
credit quality of the mortgage loans included in the trust, or as a basis of
assessing the likelihood, amount or severity of losses on the mortgage loans.
The statistical data in the tables is based on all of the mortgage loans in
the originators' servicing portfolio. The mortgage loans, in general, may have
characteristics which distinguish them from the majority of the loans in the
originators' servicing portfolio.
The Trustee
________________________, a ____________ banking corporation, has an
office at ________________________. The trustee will act as initial
authenticating agent, paying agent and certificate registrar pursuant to the
terms of the Pooling and Servicing Agreement.
The Collateral Agent
________________________, a national banking association, has its
corporate trust office at ________________________. The collateral agent's
duties are limited solely to its express obligations under the Pooling and
Servicing Agreement.
Description of the Certificates
On the closing date, the trust will issue the class A-1
certificates, the class A-2 certificates and both classes of class R
certificates pursuant to the Pooling and Servicing Agreement. Each class A-1
certificate represents a beneficial ownership interest in the portion of the
trust estate consisting of the pool I mortgage loans and, to the extent
provided in this prospectus supplement, the pool II mortgage loans. Each class
A-2 certificate represents a beneficial ownership interest in the portion of
the trust estate consisting of the pool II mortgage loans and, to the extent
provided in this prospectus supplement, the pool I mortgage loans. Pursuant to
the Pooling and Servicing Agreement, the trust will also issue two class R
certificates, one relating to the class A-1 certificates and the other
relating to the class A-2 certificates. Together the class A certificate and
the related class R certificate represent the entire beneficial ownership
interest in the portion of the trust consisting of the related pool of
mortgage loans. None of the class R certificates may be transferred without
the consent of the certificate insurer and compliance with the transfer
provisions of the Pooling and Servicing 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 the 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 relating to the
trust, including amounts on deposit in the Accounts and
invested in accordance with the Pooling and Servicing
Agreement,
o the trustee's rights under all insurance policies required to
be maintained on the mortgage loans pursuant to the Pooling and
Servicing Agreement and any insurance proceeds,
o Liquidation Proceeds and
o released mortgaged property proceeds. In addition, the
depositor will cause the certificate insurer to issue the
certificate insurance policy under which it will guarantee
payments to the holders of the certificates as described in
this prospectus supplement.
The class A certificates will be issued only in book-entry form, in
denominations of $1,000 initial principal balance and integral multiples of
$1,000 in excess thereof, except that one certificate of each class may be
issued in a different amount.
Book-Entry Registration
The Offered Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests
in the Offered Certificates ("Certificate Owners") will hold such Certificates
through The Depository Trust Company ("DTC") in the United States, or
Clearstream Banking, societe anonyme (formerly Cedelbank) (hereinafter,
"Clearstream Luxembourg") or Euroclear ("Euroclear") (in Europe) if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Certificates will be issued in
one or more certificates which equal the aggregate Certificate Principal
Balance of such Certificates and will initially be registered in the name of
Cede & Co., the nominee of DTC. Clearstream Luxembourg and Euroclear will hold
omnibus positions on behalf of their participants through customers'
securities accounts in Clearstream Luxembourg's and Euroclear's names on the
books of their respective depositaries which in turn will hold such positions
in customers' securities accounts in the depositaries' names on the books of
DTC. Citibank will act as depositary for Clearstream Luxembourg and The Chase
Manhattan Bank will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Except as described below, no person acquiring a Book-Entry
Certificate (each, a "beneficial owner") will be entitled to receive a
physical certificate representing such Certificate (a "Definitive
Certificate"). Unless and until Definitive Certificates are issued, it is
anticipated that the only "Certificateholder" of the Offered Certificates will
be Cede & Co., as nominee of DTC. Certificate Owners will not be
Certificateholders as that term is used in the Pooling and Servicing
Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on
the records of DTC (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the records
of DTC, if the beneficial owner's Financial Intermediary is not a DTC
participant and on the records of Clearstream Luxembourg or Euroclear, as
appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and
procedures creating and affecting DTC and its operations (the "DTC Rules"),
DTC is required to make book-entry transfers among Participants on whose
behalf it acts with respect to the Book-Entry Certificates and is required to
receive and transmit distributions of principal of, and interest on, the
Book-Entry Certificates. Participants and indirect participants with whom
Certificate Owners have accounts with respect to Book-Entry Certificates are
similarly required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates representing their
respective interests in the Book-Entry Certificates, the DTC Rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interest.
Certificateholders will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless
and until Definitive Certificates are issued, Certificateholders who are not
Participants may transfer ownership of Book-Entry Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer Book-Entry Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Book-Entry
Certificates, which account is maintained with their respective Participants.
Under the DTC Rules and in accordance with DTC's normal procedures, transfers
of ownership of Book-Entry Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Certificateholders.
Because of time zone differences, credits of securities received in
Clearstream Luxembourg 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 Clearstream Luxembourg Participants on
such business day. Cash received in Clearstream Luxembourg or Euroclear as a
result of sales of securities by or through a Clearstream Luxembourg
Participant (as defined below) or Euroclear Participant (as defined below) to
a DTC Participant will be received with value on the DTC settlement date but
will be available in the relevant Clearstream Luxembourg 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
Certificates, see "Material Federal Income Tax Considerations -- Foreign
Investors" and "-- Backup Withholding" in the Prospectus and "Global
Clearance, Settlement and Tax Documentation Procedures -- Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC
Rules. Transfers between Clearstream Luxembourg 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 Clearstream
Luxembourg Participants or Euroclear Participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant
European international clearing system by the Relevant Depositary; however,
such cross market transactions will require delivery of instructions to the
relevant European international clearing system by the counterparty in such
system in accordance with its rules and procedures and within its established
deadlines (European time). The relevant European international clearing system
will, if the transaction meets its settlement requirements, deliver
instructions to the Relevant Depositary to take action to effect final
settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same day
funds settlement applicable to DTC. Clearstream Luxembourg Participants and
Euroclear Participants may not deliver instructions directly to the European
Depositaries.
DTC which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the
Book-Entry Certificates, whether held for its own account or as a nominee for
another person. In general, beneficial ownership of Book-Entry Certificates
will be subject to the DTC Rules, as in effect from time to time.
Clearstream Banking, societe anonyme (referred to herein as
Clearstream Luxembourg) is incorporated under the laws of Luxembourg as a
professional depository. Clearstream Luxembourg holds securities for its
participating organizations ("Clearstream Luxembourg Participants") and
facilitates the clearance and settlement of securities transactions between
Clearstream Luxembourg Participants through electronic book-entry changes in
accounts of Clearstream Luxembourg Participants, thereby eliminating the need
for physical movement of certificates. Transactions may be settled in
Clearstream Luxembourg in any of 28 currencies, including United States
dollars. Clearstream Luxembourg provides to its Clearstream Luxembourg
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally-traded securities and securities
lending and borrowing. Clearstream Luxembourg interfaces with domestic markets
in several countries. As a professional depository, Clearstream Luxembourg is
subject to regulation by the Luxembourg Monetary Institute. Clearstream
Luxembourg 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 Clearstream Luxembourg is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Clearstream Luxembourg Participant, either
directly or indirectly.
The Euroclear System ("Euroclear") was created in 1968 to hold
securities for its participants ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need
for physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may be settled in any of 35
currencies, including United States dollars. Euroclear includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries generally similar to the arrangements
for cross-market transfers with DTC described above. Euroclear is operated by
the Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to 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 payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be
responsible for disbursing funds to the beneficial owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since
such payments will be forwarded by the Trustee to Cede & Co. Distributions
with respect to Certificates held through Clearstream Luxembourg or Euroclear
will be credited to the cash accounts of Clearstream Luxembourg Participants
or Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "Material Federal Income Tax
Considerations -- Foreign Investors" and "-- Backup Withholding" in the
Prospectus. Because DTC can only act on behalf of Financial Intermediaries,
the ability of a beneficial owner to pledge Book-Entry Certificates to persons
or entities that do not participate in the Depository system, or otherwise
take actions in respect of such Book-Entry Certificates, may be limited due to
the lack of physical certificates for such Book-Entry Certificates. In
addition, issuance of the Book-Entry Certificates in book-entry form may
reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for
which they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede &
Co., as nominee of DTC, and may be made available by Cede & Co. to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the Depository, and to the Financial Intermediaries to
whose DTC accounts the Book-Entry Certificates of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing
Agreement only at the direction of one or more Financial Intermediaries to
whose DTC accounts the Book-Entry Certificates are credited, to the extent
that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Book-Entry Certificates. Clearstream Luxembourg or the
Euroclear Operator, as the case may be, will take any other action permitted
to be taken by a Certificateholder under the Pooling and Servicing Agreement
on behalf of a Clearstream Luxembourg Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf
through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Book-Entry Certificates which conflict with
actions taken with respect to other Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a)
DTC or the Depositor advises the Trustee in writing that DTC is no longer
willing, qualified or able to discharge properly its responsibilities as
nominee and depository with respect to the Book-Entry Certificates and the
Depositor or the Trustee is unable to locate a qualified successor, (b) the
Depositor, at its sole option, with the consent of the Trustee, elects to
terminate a book-entry system through DTC or (c) after the occurrence of an
Event of Default, beneficial owners having Percentage Interests aggregating
not less than 51% of the Book-Entry Certificates advise the Trustee and DTC
through the Financial Intermediaries and the DTC participants in writing that
the continuation of a book-entry system through DTC (or a successor thereto)
is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and
thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Pooling and Servicing Agreement.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Book-Entry
Certificates among participants of DTC, Clearstream Luxembourg 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 Certificates
The certificates, which will be issued initially as book-entry
certificates, will be converted to definitive certificates and reissued to
beneficial owners or their nominees, rather than to DTC or its nominee, only
if (a) DTC or the servicer advises the trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities as
depository of the book-entry certificates and DTC or the servicer is unable to
locate a qualified successor or (b) the trustee, at its option, elects to
terminate the book-entry system through DTC.
Upon the occurrence of any event described in the immediately
preceding paragraph, DTC will be required to notify all participants of the
availability through DTC of definitive certificates. Upon delivery of
definitive certificates, the trustee will reissue the book-entry certificates
as definitive certificates to beneficial owners. Distributions of principal
of, and interest on, the book-entry certificates will thereafter be made by
the trustee, or a paying agent on behalf of the trustee, directly to holders
of definitive certificates in accordance with the procedures set forth in the
Pooling and Servicing Agreement.
Definitive certificates will be transferable and exchangeable at the
offices of the trustee or the certificate registrar. No service charge will be
imposed for any registration of transfer or exchange, but the trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
Assignment and Pledge of Initial Mortgage Loans
Pursuant to the Loan Sale Agreement, the originators will sell,
transfer, assign, set over and otherwise convey the mortgage loans, without
recourse, to the depositor on the closing date. Pursuant to the Pooling and
Servicing Agreement, the depositor will sell, transfer, assign, set over and
otherwise convey without recourse to the trustee, on behalf of 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
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 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, principal, including principal prepayments in
full and curtailments or partial prepayments, received on each mortgage loan
on or prior to the cut-off date and (ii) interest due on each mortgage loan on
or prior to the cut-off date.
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 pre-funding account
is less than $100,000,
o the date on which an event of default occurs under the terms of
the Pooling and Servicing Agreement, or
o the close of business on ____________.
The amount on deposit in the pre-funding accounts will be reduced
during the this period by the amount thereof used to purchase subsequent
mortgage loans in accordance with the terms of the Pooling and Servicing
Agreement. The depositor expects that the amount on deposit in each of the
pre-funding accounts will be reduced to less than $100,000 by ____________. To
the extent funds in the pre-funding accounts are not used to purchase
subsequent mortgage loans by ____________, these funds will be used to prepay
the principal of the certificates on the following distribution date.
Subsequent mortgage loans will be transferred by the originators to the
depositor and transferred by the depositor to the trust. The trust will then
pledge the subsequent mortgage loans to the trustee, on behalf of the holders
of the certificates and the certificate 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 trustee, on the closing date, the following
documents concerning each mortgage loan which constitute the mortgage file:
the original mortgage note, endorsed without recourse in blank by the
originator, including all intervening endorsements showing a complete chain of
endorsement;
the original mortgage with evidence of recording indicated thereon or, in
limited circumstances, a copy thereof certified by the applicable recording
office;
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 mortgage loan to the originator -- which assignment
may, at the originator's option, be combined with the assignment referred to
in clause (d) below;
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 originator to the trustee;
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 the mortgage or mortgage note has been assumed; and
an original title insurance policy or (A) a copy of the title insurance
policy, or (B) a binder thereof or copy of the binder together with a
certificate from the originator that the original mortgage has been delivered
to the title insurance company that issued the binder for recordation.
Pursuant to the Pooling and Servicing Agreement, the collateral
agent, on behalf of the trustee, agrees to execute and deliver on or prior to
the closing date, or, for subsequent mortgage loans, on or prior to the
subsequent transfer date, an acknowledgment of receipt of the original
mortgage note, item (a) above, for each of the mortgage loans, with any
exceptions noted. The collateral agent, on behalf of the trustee, agrees, for
the benefit of the holders of the certificates and the certificate 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, for 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
Pooling and Servicing Agreement are in its possession,
o each of these documents has been reviewed by it and has not
been mutilated, damaged, torn or otherwise physically altered,
appears regular on its face and relates to the mortgage loan,
and
o based on its examination and only as to the foregoing
documents, specified information included on the schedule of
mortgage loans accurately reflects the information included in
the mortgage file delivered on that date.
If the collateral agent, during the process of reviewing the mortgage
files, finds any document constituting a part of an 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 included in the schedule of mortgage loans, the
collateral agent shall promptly so notify the trustee, the servicer, the
depositor and the certificate insurer in writing with details thereof. The
depositor agrees to use reasonable efforts to cause to be remedied a material
defect in a document constituting part of an mortgage file of which it is so
notified by the collateral agent. If, however, within sixty days after the
collateral agent's notice of the defect, the depositor has not caused the
defect to be remedied and the defect materially and adversely affects the
interest of the holders of the certificates or the interests of the
certificate insurer in the mortgage loan, the depositor or the originator will
either (a) substitute in lieu of the mortgage loan a Qualified Substitute
Mortgage Loan and, if the then outstanding principal balance of the Qualified
Substitute Mortgage Loan is less than the principal balance of the mortgage
loan as of the date of the substitution plus accrued and unpaid interest
thereon, deliver to the servicer a substitution adjustment equal to the amount
of this shortfall or (b) purchase the mortgage loan at a price equal to the
outstanding principal balance of the mortgage loan as of the date of purchase,
plus the greater of (1) all accrued and unpaid interest thereon and (2) thirty
days' interest thereon, computed at the 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 Distribution Account on the next succeeding servicer
remittance date after deducting therefrom any amounts received in respect of
the repurchased mortgage loan or Loans and being held in the Distribution
Account for future distribution to the extent these amounts have not yet been
applied to principal or interest on the mortgage loan. In addition, the
depositor and the originators shall be obligated to indemnify the trustee, the
collateral agent, the holders of the certificates and the certificate insurer
for any third-party claims arising out of a breach by the depositor or the
originators of representations or warranties regarding the mortgage loans. The
obligation of the depositor and the originators to cure a breach or to
substitute or purchase any mortgage loan and to indemnify constitute the sole
remedies respecting a material breach of any representation or warranty to the
holders of the certificates, the trustee, the collateral agent and the
certificate insurer.
[The original mortgages for some of the mortgage loans have been, or
in the future may be, at the sole discretion of the servicer, recorded in the
name of Mortgage Electronic Registration Systems, Inc, or MERS, solely as
nominee for the originator and its successors and assigns, and subsequent
assignments of those mortgages have been, or in the future may be, at the sole
discretion of the master servicer, registered electronically through the
MERS(R)System. In some other cases, the original mortgage was recorded in the
name of the originator of the mortgage loan, record ownership was later
assigned to MERS, solely as nominee for the owner of the mortgage loan, and
subsequent assignments of the mortgage were, or in the future may be, at the
sole discretion of the servicer, registered electronically through the
MERS(R)System. For each of these mortgage loans, MERS serves as mortgagee of
record on the mortgage solely as a nominee in an administrative capacity on
behalf of the trustee, and does not have any interest in the mortgage loan.
The recording of mortgages in the name of MERS is a new practice in
the mortgage lending industry. While the depositor expects that the servicer
or applicable subservicer will be able to commence foreclosure proceedings on
the mortgaged properties, when necessary and appropriate, public recording
officers and others, however, may have limited, if any, experience with
lenders seeking to foreclose mortgages, assignments of which are registered
with MERS. Accordingly, delays and additional costs in commencing, prosecuting
and completing foreclosure proceedings, defending litigation commenced by
third parties and conducting foreclosure sales of the mortgaged properties
could result. Those delays and additional costs could in turn delay the
distribution of liquidation proceeds to the noteholders and increase the
amount of realized losses on the mortgage loans. In addition, if, as a result
of MERS discontinuing or becoming unable to continue operations in connection
with the MERS(R) System, it becomes necessary to remove any mortgage loan from
registration on the MERS(R) System and to arrange for the assignment of the
related mortgages to the trustee, then any related expenses shall be
reimbursable by the trust to the servicer, which will reduce the amount
available to pay principal of and interest on the outstanding class or classes
of notes with the lowest payment priorities.]
Representations and Warranties of the Depositor
The depositor will represent, among other things, for each mortgage
loan, as of the closing date or the subsequent transfer date, as applicable,
the following:
1. the information included in the schedule of mortgage loans for
each mortgage loan is true and correct;
2. all of the original or certified documentation constituting the
mortgage files, including all material documents concerning the mortgage
loans, has been or will be delivered to the collateral agent, on behalf of the
trustee, on the closing date or the subsequent transfer date, as applicable;
3. the mortgaged property consists of a single parcel of real
property separately assessed for tax purposes, upon which is erected a
detached or an attached one-family residence or a detached two- to six-family
dwelling, or an individual condominium unit in a low-rise condominium, or a
mobile home unit, or an individual unit in a planned unit development, or a
commercial property, or a mixed use or multiple purpose property. The
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 manufactured dwelling,
o a log-constructed home, or
o a recreational vehicle;
4. each mortgage is a valid first or second lien on a fee simple, or
its equivalent under applicable state law, estate in the real property
securing the amount owed by the mortgagor under the mortgage note subject only
to,
o the lien of current real property taxes and assessments which
are not delinquent,
o any first mortgage loan on the property,
o covenants, conditions and restrictions, rights of way,
easements and other matters of public record as of the date of
recording of the mortgage, the 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 mortgage loan obtained
by the depositor, 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 the mortgage;
5. immediately prior to the transfer and assignment by the depositor
to the depositor, the depositor had good title to, and was the sole owner of
each mortgage loan, free of any interest of any other person, and the
depositor has transferred all right, title and interest in each mortgage loan
to the depositor;
6. each mortgage loan conforms, and all the mortgage loans in the
aggregate conform, to the description thereof in this prospectus supplement;
and
7. all of the mortgage loans were originated in accordance with the
underwriting criteria described in this prospectus supplement.
Pursuant to the Pooling and Servicing Agreement, upon the discovery
by any of the holder of the certificates, the depositor, the servicer, any
subservicer, the certificate insurer, the collateral agent or the trustee that
any of the representations and warranties contained in the Pooling and
Servicing Agreement have been breached in any material respect as of the
closing date or the subsequent transfer date, as applicable, with the result
that the interests of the holders of the certificates in the mortgage loan or
the interests of the certificate insurer were materially and adversely
affected, notwithstanding that any representation and warranty was made to the
depositor's or the originator's best knowledge and the depositor or the
originator lacked knowledge of the breach, the party discovering the breach is
required to give prompt written notice to the other parties. Subject to
specified provisions of the Pooling and Servicing Agreement, within sixty days
of the earlier to occur of the depositor's or an originator's discovery or its
receipt of notice of any breach, the depositor or the originators will
o promptly cure the breach in all material respects,
o remove each mortgage loan which has given rise to the
requirement for action by the depositor or the originators,
substitute one or more Qualified Substitute Mortgage Loans and,
if the outstanding principal balance of the Qualified
Substitute Mortgage Loans as of the date of the 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 the distribution date the
amount of the shortfall, or
o purchase the mortgage loan at a price equal to the principal
balance of the mortgage loan as of the date of purchase plus
the greater of
o all accrued and unpaid interest thereon and
o thirty days' interest thereon computed at the mortgage
interest rate, net of the servicing fee if ____________ is
the servicer, plus the amount of any unreimbursed
servicing advances made by the servicer,
and deposit the purchase price into the Distribution Account on the next
succeeding servicer remittance date after deducting therefrom any amounts
received in respect of this repurchased mortgage loan or mortgage loans and
being held in the Distribution Account for future distribution to the extent
these amounts have not yet been applied to principal or interest on the
mortgage loan. In addition, the depositor and the originators shall be
obligated to indemnify the trust, the trustee, the collateral agent, the
holders of the certificates and the certificate insurer for any third-party
claims arising out of a breach by the depositor or the originators of
representations or warranties regarding the mortgage loans. The obligation of
the depositor and the originators to cure any breach or to substitute or
purchase any mortgage loan and to indemnify constitute the sole remedies
respecting a material breach of any representation or warranty to the holders
of the certificates, the trustee, the collateral agent and the certificate
insurer.
Payments on the Mortgage Loans
The Pooling and Servicing Agreement provides that the servicer, for
the benefit of the holders of the certificates, shall establish and maintain
the Collection Account, which will generally be (a) 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 (b) trust accounts maintained
with a depository institution acceptable to each rating agency and the
certificate insurer. The Pooling and Servicing Agreement permits the servicer
to direct any depository institution maintaining the Collection Account to
invest the funds in the Collection Account in one or more 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 Distribution Account, as
described below.
The servicer is obligated to deposit or cause to be deposited in the
Collection Account on a daily basis, amounts representing the following
payments received and collections made by it after the cut-off date, other
than in respect of monthly payments on the mortgage loans due on each mortgage
loan up to and including any due date occurring on or prior to the cut-off
date:
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 the proceeds are not to be applied to the restoration of
the mortgaged property or released to the 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 Pooling 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 trustee will be obligated to set up an account for each class of
certificates a distribution account into which the servicer will deposit or
cause to be deposited the servicer remittance amount on the _____ day of each
month.
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 which relate to
payments due to be received on the mortgage loans on the due
date and
o any other amounts required to be placed in the Collection
Account by the servicer pursuant to the Pooling and Servicing
Agreement,
but excluding the following:
(a) amounts received on particular mortgage loans, for which the
servicer has previously made an unreimbursed Periodic
Advance, as late payments of interest, or as Net Liquidation
Proceeds, to the extent of the unreimbursed Periodic
Advance;
(b) amounts received on a particular mortgage loan for which the
servicer has previously made an unreimbursed servicing
advance, to the extent of the unreimbursed servicing
advance;
(c) for the servicer remittance date, the aggregate servicing fee;
(d) all net income from eligible investment 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) other amounts which are reimbursable to the servicer, as
provided in the Pooling and Servicing Agreement.
The amounts described in clauses (a) through (g) above may be
withdrawn by the servicer from the Collection Account on or prior to each
servicer remittance date.
Over-collateralization Provisions
Over-collateralization Resulting from Cash Flow Structure. The
Pooling and Servicing Agreement requires that, starting with the second
distribution date, the Excess Interest for a pool of mortgage loans, if any,
that is not used to make cross-collateralization payments will be applied on
each distribution date as an accelerated payment of principal on the class of
certificates for that pool, 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 certificates
relative to the amortization of the pool of mortgage loans for that class. The
Excess Interest from a pool of mortgage loans will be used
o to reimburse the certificate insurer for any amounts due to it,
o as needed to pay Net Mortgage Loan Interest Shortfalls relating
to that class,
o as needed to make cross-collateralization payments in respect
of the other pool of mortgage loans,
o as a payment of principal to the class of certificates for that
pool until the distribution date on which the amount of
over-collateralization has reached the required level, and
o as needed to fund the Cross-collateralization Reserve Account
relating to the other pool of mortgage loans.
Notwithstanding the foregoing, in the event specified tests
enumerated in the Pooling and Servicing Agreement are violated, all available
Excess Interest will be used as a payment of principal to the class of
certificates for that pool to accelerate the amortization of the certificates.
The Pooling and Servicing Agreement requires that, starting with the
second distribution date, Excess Interest from a pool of mortgage loans that
is not used to make cross-collateralization payments will be applied as an
accelerated payment of principal on the class of certificates for that pool
until the Over-collateralized Amount has increased to the level required by
the Pooling and Servicing Agreement. After this 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 class of certificates for that pool.
Notwithstanding the foregoing, in the event specified tests enumerated in the
Pooling and Servicing Agreement are violated, all available Excess Interest
from each pool of mortgage loans will be used as a payment of principal to
accelerate the amortization of the class of certificates for that pool.
Initially, the Over-collateralized Amount of each pool of mortgage loans will
be an amount equal to approximately 0.50% of the sum of (x) the aggregate
principal balance of the mortgage loans in each pool on the closing date and
(y) the original amount on deposit in the related pre-funding account for that
pool on the closing date.
In the event that the required level of the Specified
Over-collateralized Amount for a pool of mortgage loans is permitted to
decrease or "step down" on a distribution date in the future, the Pooling and
Servicing Agreement provides that a portion of the principal which would
otherwise be distributed to the holders of the class of certificates for that
pool on the distribution date shall instead be distributed in the priority
described in this prospectus supplement under "--Flow of Funds." This has the
effect of decelerating the amortization of the class of certificates for that
pool relative to the amortization of that pool of mortgage loans, and of
reducing the Over-collateralized Amount. If, on any distribution date, the
Excess Over-collateralized Amount is, or, after taking into account all other
distributions to be made on the distribution date would be, greater than zero
-- i.e., the Over-collateralized Amount is or would be greater than the
Specified Over-collateralized Amount -- then any amounts relating to principal
which would otherwise be distributed to the holders of the class of
certificates for that pool on this distribution date shall instead be
distributed in the priority described in this prospectus supplement under
"--Flow of Funds", in an amount equal to the Over-collateralization Reduction
Amount.
The Pooling and Servicing Agreement provides that, on any
distribution date, all amounts collected on account of principal -- other than
any amount applied to the payment of an Over-collateralization Reduction
Amount -- for each pool of mortgage loans during the a due period of the prior
calendar month will be distributed to the holders of the class of certificates
for that pool on the distribution date. In addition, the Pooling and Servicing
Agreement provides that the principal balance of any mortgage loan which
becomes a Liquidated Mortgage Loan shall then equal zero. The Pooling and
Servicing Agreement does not contain any rule which requires that the amount
of any Liquidated Loan Loss be distributed to the holders of the class of
certificates for that pool on the distribution date which immediately follows
the event of loss; i.e., the Pooling and Servicing Agreement does not require
the current recovery of losses. However, the occurrence of a Liquidated Loan
Loss will reduce the Over-collateralized Amount for that pool of mortgage
loans, which, to the extent that the reduction causes the Over-collateralized
Amount to be less than the Specified Over-collateralized Amount applicable to
that distribution date, will require the payment of an Over-collateralization
Increase Amount on that distribution date, or, if insufficient funds are
available on that distribution date, on subsequent distribution dates, until
the Over-collateralized Amount equals the Specified Over-collateralized
Amount. The effect of the foregoing is to allocate losses to the holders of
the class R certificates for that pool by reducing, or eliminating entirely,
payments of Excess Interest and Over-collateralization Reduction Amounts which
the holders would otherwise receive.
Over-collateralization and the Certificate Insurance Policy. The
Pooling and Servicing Agreement requires the trustee to make a claim for an
Insured Payment under the certificate insurance policy not later than the
third business day prior to any distribution date as to which the trustee has
determined that an Over-collateralization Deficit will occur for the purpose
of applying the proceeds of the Insured Payment as a payment of principal to
the holders of the class of certificates for that pool on that distribution
date. The certificate insurer has the option on any distribution date to make
a payment of principal, including in respect of Liquidated Loan Losses, up to
the amount that would have been payable to the holders of the certificates if
sufficient funds were available thereof. Additionally, under the terms of the
Pooling and Servicing Agreement, the certificate insurer will have the option
to cause Excess Interest to be applied without regard to any limitation upon
the occurrence of particular trigger events, or in the event of an "event of
default" under the Insurance Agreement. However, investors in the certificates
should realize that, under extreme loss or delinquency scenarios, they may
temporarily receive no distributions of principal.
Cross-collateralization Provisions
Cross-collateralization Payments. On each distribution date,
available Excess Interest from a pool of mortgage loans, if any, will be paid
to the holders of the class of certificates relating to the other pool of
mortgage loans to the extent of the Shortfall Amount for the other pool. The
cross-collateralization provisions of the transaction are limited to the
payment of specified credit losses, some interest shortfalls and any amounts
due the certificate insurer. Excess Interest from one pool of mortgage loans
will not be used to build over-collateralization for the other pool of
mortgage loans.
Cross-collateralization Reserve Account. Each class of certificates
will have the benefit of a Cross-collateralization Reserve Account. On each
distribution date, available Excess Interest from a pool of mortgage loans, if
any, will be paid into the Cross-collateralization Reserve Account relating to
the other pool of mortgage loans, until the amount of funds on deposit therein
equals the Specified Reserve Amount for the other pool. If the amount on
deposit in the Cross-collateralization Reserve Account for a pool of mortgage
loans on any distribution date exceeds the Specified Reserve Amount for the
pool and the distribution date, the amount of this excess shall be distributed
in the priority described in this prospectus supplement under "--Flow of
Funds."
Funds on deposit in a Cross-collateralization Reserve Account will be
used on any distribution date to make payments in respect of the Shortfall
Amount for either pool, to the extent that there is no Excess Interest
available therefor on that distribution date.
Flow of Funds
On each distribution date, the trustee, based solely on the
information received from the servicer in the servicer remittance report prior
to the distribution date, shall make payments in respect of each pool of
mortgage loans to the holders of the class of certificates for that pool and
reimbursement to the certificate insurer under the Insurance Agreement, to the
extent of funds, including any Insured Payments, on deposit in the
Distribution Account for that pool, as follows:
(a) to the trustee, an amount equal to the fees then due to it for
that class of certificates;
(b) from amounts then on deposit in the related Distribution
Account, excluding any Insured Payments, to the certificate
insurer the Reimbursement Amount as of that distribution date;
(c) from amounts then on deposit in the Distribution Account for
that pool, the Interest Distribution Amount for that class of
certificates;
(d) from amounts then on deposit in the Distribution Account for
that pool, the Principal Distribution Amount for that class of
certificates, until the principal balance of the class of
certificates is reduced to zero;
(e) from amounts then on deposit in the Distribution Account for
that pool, the amount of any Net Mortgage Loan Interest
Shortfalls for that class of certificates;
(f) from amounts then on deposit in the Distribution Account for
that pool, to the holders of the other class of certificates,
the Shortfall Amount for the other class;
(g) from amounts then on deposit in the Distribution Account for
that pool, to the Cross-collateralization Reserve Account for
the other class of certificates, the amount necessary for the
balance of the account to equal the Specified Reserve Amount;
and
(h) following the making by the trustee of all allocations,
transfers and disbursements described above, to the holders of
the class R certificates for that pool, the amount remaining on
the distribution date in the Distribution Account for that
pool, if any.
Reports to Certificateholders
Pursuant to the Pooling and Servicing Agreement, on each distribution
date the trustee will deliver to the servicer, the certificate insurer, the
depositor and each holder of a certificate or a class R certificate a written
remittance report containing information including, without limitation, the
amount of the distribution on the distribution date, the amount of the
distribution allocable to principal and allocable to interest, the aggregate
outstanding principal balance of the certificates as of the distribution date,
the amount of any Insured Payment included in the distributions on the
distribution date and any other information as required by the Pooling and
Servicing Agreement.
Amendment
The Pooling and Servicing Agreement may be amended from time to time
by the trust and the trustee by written agreement, upon the prior written
consent of the certificate insurer, without notice to, or consent of, the
holder of the certificates, to cure any ambiguity, to correct or supplement
any provisions in this prospectus supplement, to comply with any changes in
the Code, or to make any other provisions concerning matters or questions
arising under the Pooling and Servicing Agreement which shall not be
inconsistent with the provisions of the Pooling and Servicing Agreement;
provided, that this action shall not, as evidenced by an opinion of counsel
delivered to, but not obtained at the expense of, the trustee, adversely
affect in any material respect the interests of any holder of the
certificates; provided, further, that no amendment shall reduce in any manner
the amount of, or delay the timing of, payments received on mortgage loans
which are required to be distributed on any certificate without the consent of
the holder of the certificate, or change the rights or obligations of any
other party to the Pooling and Servicing Agreement without the consent of that
party.
The Pooling and Servicing Agreement may be amended from time to time
by the trust and the trustee with the consent of the certificate insurer, and
the holders of the majority of the percentage interest of the certificates and
class R certificates for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of the Pooling and
Servicing Agreement or of modifying in any manner the rights of the holders;
provided, however, that no amendment shall reduce in any manner the amount of,
or delay the timing of, payments received on mortgage loans which are required
to be distributed on any certificate without the consent of the holder of the
certificate or reduce the percentage for each class whose holders are required
to consent to any amendment without the consent of the holders of 100% of each
class of certificates affected thereby.
The Loan Sale Agreement contains substantially similar restrictions
regarding amendment.
Servicing of the Mortgage Loans
The Servicer
____________ will act as the servicer of the mortgage loan pools
____________ and ____________ will act as subservicers for a portion of the
mortgage loans. See "The Originators, the Depositor, the Servicer and the
Subservicer" in this prospectus supplement. The servicer and the subservicers
will service the mortgage loans on behalf of the trust, for the benefit of the
certificateholders and the certificate insurer and 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 certificate insurer and the holders of the certificates on
them.
Servicing Fees and Other Compensation and Payment of Expenses
As compensation for its activities as servicer under the Pooling and
Servicing Agreement, the servicer shall be entitled to a servicing fee for
each mortgage loan, 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 the mortgage loan on the
outstanding principal balance of the mortgage loan. The servicing fee rate for
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 mortgage notes, any late payment charges,
assumption fees, prepayment fees or similar items. The servicer shall also be
entitled to withdraw from the Collection Account any net interest or other
income earned on deposits therein. The servicer shall pay all expenses
incurred by it in connection with its servicing activities under the Pooling
and Servicing Agreement and shall not be entitled to reimbursement therefor
except as specifically provided in the Pooling and Servicing Agreement.
Periodic Advances and Servicer Advances
Periodic Advances. Subject to the servicer's determination that the
action would not constitute a nonrecoverable advance, the servicer is required
to make Periodic Advances on each servicer remittance date. This Periodic
Advances by the servicer are reimbursable to the servicer subject to a number
of conditions and restrictions, and are intended to provide both sufficient
funds for the payment of interest to the holders of the certificates, plus an
additional amount intended to maintain a specified level of
over-collateralization and to pay the trustee's fees, and the premium due the
certificate insurer. Notwithstanding the servicer's good faith determination
that a Periodic Advance was recoverable when made, if the Periodic Advance
becomes a nonrecoverable advance, the servicer will be entitled to
reimbursement therefor from the trust estate. See "Description of the
Certificates -- Payments on the Mortgage Loans" in this prospectus supplement.
Servicing Advances. Subject to the servicer's determination that the
action would not constitute a nonrecoverable advance and that a prudent
mortgage lender would make a like advance if it or an affiliate owned the
mortgage loan, the servicer is required to advance amounts on the mortgage
loans 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 other customary amounts described in the Pooling and Servicing
Agreement.
These servicing advances by the servicer are reimbursable to the
servicer subject to a number of conditions and restrictions. In the event
that, notwithstanding the servicer's good faith determination at the time the
servicing advance was made, that it would not be a nonrecoverable advance, the
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 Pooling and Servicing
Agreement or, if not recovered from the mortgagor on whose behalf the
servicing advance or Periodic Advance was made, from late collections on the
mortgage loan, including Liquidation Proceeds, Insurance Proceeds and any
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 the advance from the Distribution Account.
The servicer shall not be required to make any Periodic Advance or
servicing advance which it determines would be a nonrecoverable Periodic
Advance or nonrecoverable servicing advance. A Periodic Advance or servicing
advance is "nonrecoverable" if in the good faith judgment of the servicer, the
Periodic Advance or servicing advance would not ultimately be recoverable.
Prepayment Interest Shortfalls
Not later than the close of business on the _____ day of each month,
the servicer is required to remit to the 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 certificates or class A-2 certificates, respectively. However, in the
event the full amount of Current Interest is not available on any distribution
date due to Civil Relief Act interest shortfalls in the applicable pool, the
amount of this shortfall will not be covered by the certificate insurance
policy. These shortfalls in Current Interest will be paid from the Excess
Interest, if any, otherwise payable in respect of over-collateralization,
cross-collateralization or to the holder of the class R certificate relating
to the applicable pool. See "Risk Factors -- Legal Considerations" in this
prospectus supplement.
Optional Purchase of Defaulted Mortgage Loans
The depositor, or any affiliate of the depositor, 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
the principal balance, computed at the mortgage interest rate -- net of the
servicing fee, if ________ is the servicer -- plus the amount of any
unreimbursed Periodic Advances and servicing advances made by the servicer for
the mortgage loan in accordance with the provisions specified in the Pooling
and Servicing Agreement.
Servicer Reports
On each servicer remittance date, the servicer is required to deliver
to the certificate insurer, the trustee, and the collateral agent, a servicer
remittance report setting forth the information necessary for the trustee to
make the distributions described under "--Flow of Funds" in this prospectus
supplement and containing the information to be included in the trustee's
remittance report for that distribution date.
The servicer is required to deliver to the certificate insurer, the
trustee, the collateral agent, S&P and Moody's, not later than April 30th of
each year, starting in ________, an officer's certificate stating that
o the servicer has fully complied with the servicing provisions
of the Pooling and Servicing Agreement,
o a review of the activities of the servicer during the preceding
calendar year and of performance under the Pooling and
Servicing Agreement has been made under the officer's
supervision, and
o to the best of the officer's knowledge, based on that review,
the servicer has fulfilled all its obligations under the
Pooling and Servicing Agreement for that year, or, if there has
been a default in the fulfillment of any obligation, specifying
each default known to that officer and the nature and status
thereof including the steps being taken by the servicer to
remedy the default.
Not later than April 30th of each year, the servicer, at its expense,
is required to cause to be delivered to the certificate insurer, the trustee,
the collateral agent, S&P and Moody's from a firm of independent certified
public accountants, who may also render other services to the servicer, a
statement to the effect that the firm has examined specified documents and
records relating to the servicing of the mortgage loans during the preceding
calendar year, or any longer period from the closing date to the end of the
following calendar year, and that, on the basis of the examination conducted
substantially in compliance with generally accepted auditing standards and the
requirements of the Uniform Single Attestation Program for Mortgage Bankers or
the Audit Program for Mortgages serviced for Freddie Mac, the servicing has
been conducted in compliance with the Pooling and Servicing Agreement except
for any significant exceptions or errors in records that, in the opinion of
the 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 the exceptions
and errors shall be so reported.
Collection and Other Servicing Procedures
The servicer will be responsible for making reasonable efforts to
collect all payments called for under the mortgage loans and will, consistent
with the Pooling and Servicing Agreement, follow the collection procedures as
it follows for loans held for its own account which are comparable to the
mortgage loans. Consistent with the above, the servicer may, in its
discretion, (a) waive any late payment charge and (b) arrange with a mortgagor
a schedule for the liquidation of delinquencies, subject to the provisions of
the Pooling and Servicing Agreement.
If a mortgaged property has been or is about to be conveyed by the
mortgagor, the servicer will be obligated to accelerate the maturity of the
mortgage loan, unless it reasonably believes it is unable to enforce that
mortgage loan's "due-on-sale" clause under applicable law. If it reasonably
believes it may be restricted for any reason from enforcing any "due-on-sale"
clause, the servicer may enter into an assumption and modification agreement
with the person to whom the property has been or is about to be conveyed,
pursuant to which that 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 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 "Material Legal Aspects of the
Mortgage Loans and Contracts -- The Mortgage Loans -- 'Due-on-Sale' Clauses"
in the accompanying prospectus.
Hazard Insurance
The servicer is required to cause to be maintained for each mortgaged
property a hazard insurance policy with coverage which contains a standard
mortgagee's clause in an amount equal to the lesser of (a) the maximum
insurable value of the mortgaged property or (b) the principal balance of the
mortgage loan plus the outstanding balance of any mortgage loan senior to the
mortgage loan, but in no event may this amount be less than is necessary to
prevent the borrower from becoming a coinsurer thereunder. As stated 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 Distribution Account
for that pool. The ability of the servicer to assure that hazard insurance
proceeds are appropriately applied may be dependent on its being named as an
additional insured under any hazard insurance policy, or upon the extent to
which information in this regard is furnished to the servicer by a borrower.
The Pooling and Servicing Agreement provides that the servicer may satisfy its
obligation to cause hazard policies to be maintained by maintaining a blanket
policy issued by an insurer acceptable to the rating agencies insuring against
losses on the mortgage loans. If this blanket policy contains a deductible
clause, the servicer is obligated to deposit in the Distribution Account for
that pool the sums which would have been deposited therein but for that
clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property
by fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers under different state laws in accordance
with different applicable state forms and therefore will not contain identical
terms and conditions, the terms thereof are dictated by respective state laws,
and most of these 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 some cases, vandalism. The
foregoing list is merely indicative of the types 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, that clause generally provides
that the insurer's liability in the event of partial loss does not exceed the
greater of (a) the replacement cost of the improvements less physical
depreciation or (b) this proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of
these 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 each of the mortgage loans that 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 the foreclosure or other conversion, the servicer will follow
the practices as it deems necessary or advisable and as are in keeping with
the servicer's general loan servicing activities and the Pooling and Servicing
Agreement; provided, 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 foreclosure,
correction or restoration is determined to increase Net Liquidation Proceeds.
Removal and Resignation of the Servicer
The certificate insurer may, pursuant to the Pooling and Servicing
Agreement, remove the servicer upon the occurrence and continuation beyond the
applicable cure period of an event described in clauses (g), (h) or (i) below
and the trustee, only at the direction of the certificate insurer or the
majority holders of certificates, with the consent of the certificate 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 trustee any payment
required to be made by the servicer under the terms of the
Pooling and Servicing Agreement, other than servicing advances
covered by clause (b) below, which continues unremedied for one
business day after the date upon which written notice of any
failure, requiring the same to be remedied, shall have been
given to the servicer and the certificate insurer by the
trustee or to the servicer and the trustee by the certificate
insurer or the holders of certificates evidencing percentage
interests of at least 25%;
(b) the failure by the servicer to make any required servicing
advance which failure continues unremedied for a period of
thirty days after the date on which written notice of any
failure, requiring the same to be remedied, shall have been
given to the servicer by the trustee or to the servicer and the
trustee by any holder of a certificate or the certificate
insurer;
(c) any failure on the part of the servicer duly to observe or
perform in any material respect any other of the covenants or
agreements on the part of the servicer contained in the Pooling
and Servicing Agreement, or the failure of any representation
and warranty enumerated in the Pooling and Servicing Agreement,
which continues unremedied for a period of thirty days after
the date on which written notice of any failure, requiring the
same to be remedied, shall have been given to the servicer by
the trustee, or to the servicer and the trustee by any holder
of a certificate or the certificate insurer;
(d) a decree or order of a court or agency or supervisory authority
having jurisdiction in an involuntary case under any present or
future federal or state bankruptcy, insolvency or similar law
or for the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings, or for the
winding-up or liquidation of its affairs, shall have been
entered against the servicer and this decree or order shall
have remained in force, undischarged or unstayed for a period
of sixty days;
(e) the servicer shall consent to the appointment of a conservator
or receiver or liquidator in any insolvency, readjustment of
debt, marshalling of assets and liabilities or similar
proceedings of or relating to the servicer or of or relating to
all or substantially all of the servicer's property;
(f) the servicer shall admit in writing its inability generally to
pay its debts as they become due, file a petition to take
advantage of any applicable insolvency or reorganization
statute, make an assignment for the benefit of its creditors,
or voluntarily suspend payment of its obligations;
(g) the delinquency or loss experience of the mortgage loans
exceeds levels specified in the Pooling and Servicing
Agreement; or
(h) the certificate insurer shall notify the trustee of any "event
of default" under the Insurance Agreement.
The servicer may not assign its obligations under the Pooling and
Servicing Agreement nor resign from the obligations and duties thereby imposed
on it except by mutual consent of the servicer, ________, if ________ is not
the servicer, the certificate insurer, the collateral agent and the trustee,
or upon the determination that the servicer's duties thereunder are no longer
permissible under applicable law and the incapacity cannot be cured by the
servicer without the incurrence, in the reasonable judgment of the certificate
insurer, of unreasonable expense. No resignation shall become effective until
a successor has assumed the servicer's responsibilities and obligations in
accordance with the Pooling and Servicing Agreement.
Upon removal or resignation of the servicer, the trustee will be the
successor servicer. The trustee, as successor servicer, will be obligated to
make Periodic Advances and servicing advances and other advances unless it
determines reasonably and in good faith that the advances would not be
recoverable. If, however, the trustee is unwilling or unable to act as
successor servicer, or if the majority holders, with the consent of the
certificate insurer, or the certificate insurer so requests, the trustee shall
appoint, or petition a court of competent jurisdiction to appoint, in
accordance with the provisions of the Pooling and Servicing Agreement and
subject to the approval of the certificate insurer, any established mortgage
loan servicing institution acceptable to the certificate insurer having a net
worth of not less than $____________ as the successor servicer in the
assumption of all or any part of the responsibilities, duties or liabilities
of the servicer.
Pursuant to the Pooling and Servicing Agreement, the servicer
covenants and agrees to act as the servicer for an initial term from the
closing date to ____________, which term will be extendable by the certificate
insurer by notice to the trustee for successive terms of three calendar months
each, until the termination of the trust estate. The servicer will, upon its
receipt of each notice of extension, become bound for the duration of the term
covered by the extension notice to continue as the servicer subject to and in
accordance with the other provisions of the Pooling and Servicing Agreement.
If as of the fifteenth day prior to the last day of any term of the servicer
the trustee shall not have received any extension notice from the certificate
insurer, the trustee will, within five days thereafter, give written notice of
non-receipt to the certificate insurer and the servicer. The certificate
insurer has agreed to extend each three month term of the servicer, in the
absence of a servicer event of default under the Pooling and Servicing
Agreement.
The trustee and any other successor servicer in that 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" in this prospectus supplement.
Termination; Purchase of Mortgage Loans
The Pooling and Servicing Agreement will terminate upon notice to the
trustee of either: (a) the later of the distribution to certificateholders of
the final payment or collection on the last mortgage loan, or Periodic
Advances of same by the servicer, or the disposition of all funds from the
last mortgage loan and the remittance of all funds due under the Pooling and
Servicing Agreement and the payment of all amounts due and payable to the
certificate insurer, the collateral agent and the trustee or (b) mutual
consent of the servicer, the certificate 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.
Subject to provisions in the Pooling and Servicing Agreement
concerning adopting a plan of complete liquidation, the servicer may, at its
option and at its sole cost and expense, terminate the Pooling and Servicing
Agreement on any date on which the aggregate principal balance of the mortgage
loans is less than 10% of the sum of (x) the aggregate original principal
balance of the mortgage loans purchased on the closing date and (y) the
original amount on deposit in the pre-funding accounts, by purchasing, on the
next succeeding distribution date, all of the outstanding mortgage loans and
REO Properties at a price equal to the sum of
o 100% of the principal balance of each outstanding mortgage loan
and each REO property,
o the greater of (a) the aggregate amount of accrued and unpaid
interest on the mortgage loans through the due period and (b)
thirty days' accrued interest thereon computed at a rate equal
to the mortgage interest rate, in each case net of the
servicing fee,
o any unreimbursed amounts due to the certificate insurer under
the Pooling and Servicing Agreement, the Insurance Agreement
and, without duplication, accrued and unpaid Insured Payments,
and
o the trustee's fees.
Any such purchase shall be accomplished by depositing into each
Distribution Account the portion of the purchase price specified above which
relates to the class of certificates. No termination is permitted without the
prior written consent of the certificate insurer if it would result in a draw
on the certificate insurance policy.
The Certificate Insurance Policy
The following summary of the terms of the certificate insurance
policy does not purport to be complete and is qualified in its entirety by
reference to the certificate insurance policy. A form of the certificate
insurance policy may be obtained, upon request, from the depositor.
Simultaneously with the issuance of the certificates, the certificate
insurer will deliver the certificate insurance policy to the trustee, for the
benefit of the holders of the certificates. Under the certificate insurance
policy, the certificate insurer will irrevocably and unconditionally guarantee
payment on each distribution date to the trustee, for the benefit of the
holders of the certificates, of the Insured Distribution Amounts for the
certificates calculated in accordance with the original terms of the
certificates when issued and without regard to any amendment or modification
of the certificates or the Pooling and Servicing Agreement except amendments
or modifications to which the certificate insurer has given its prior written
consent. In addition, for any distribution date occurring on a date when an
event of default under the Insurance Agreement, as described below, has
occurred and is continuing or a date on or after the first date on which a
claim is made under the certificate insurance policy, the certificate insurer
at its sole option, may pay any or all of the outstanding principal balance of
the certificates. Mortgage Loan Interest Shortfalls will not be covered by
payments under the certificate insurance policy.
Payment of claims under the certificate insurance policy will be made
by the certificate insurer following receipt by the certificate insurer of the
appropriate notice for payment on the later to occur of (a) 12:00 noon, New
York City time, on the second business day following receipt of notice for
payment, and (b) 12:00 noon, New York City time, on the relevant distribution
date.
If any payment of an amount guaranteed by the certificate insurer
pursuant to the certificate insurance policy is avoided as a preference
payment under applicable bankruptcy, insolvency, receivership or similar law
the certificate insurer will pay the amount out of the funds of the
certificate insurer on the later of
o the date when due to be paid pursuant to the bankruptcy order
referred to below or
o the first to occur of
o the fourth business day following receipt by the
certificate insurer from the trustee of (A) a certified
copy of the order of the court or other governmental body
which exercised jurisdiction to the effect that a holder
is required to return principal or interest distributed on
a certificate during the term of the certificate insurance
policy because these distributions were avoidable
preferences under applicable bankruptcy law, (B) a
certificate of the holder(s) that the bankruptcy order has
been entered and is not subject to any stay, and (C) an
assignment duly executed and delivered by the holder(s),
in the form that is reasonably required by the certificate
insurer and provided to the holder(s) by the certificate
insurer, irrevocably assigning to the certificate insurer
all rights and claims of the holder(s) relating to or
arising under the certificates against the debtor which
made the preference payment or otherwise concerning the
preference payment, or
o the date of receipt by the certificate insurer from the
trustee of the items referred to in clauses (A), (B) and
(C) above if, at least four business days prior to the
date of receipt, the certificate insurer shall have
received written notice from the trustee that these items
were to be delivered on that date and that date was
specified in the notice.
This payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the bankruptcy order
and not to the trustee or any holder directly -- unless a holder has
previously paid the amount to the receiver, conservator, debtor-in-possession
or trustee in bankruptcy named in the bankruptcy order, in which case the
payment shall be disbursed to the trustee for distribution to the holder upon
proof of the payment reasonably satisfactory to the certificate insurer.
The terms "receipt" and "received," under the certificate insurance
policy, mean actual delivery to the certificate insurer and to its fiscal
agent appointed by the certificate insurer at its option, if any, prior to
12:00 p.m., New York City time, on a business day; delivery either on a day
that is not a business day or after 12:00 p.m., New York City time, shall be
deemed to be receipt on the next succeeding business day. If any notice or
certificate given under the certificate insurance policy by the trustee is not
in proper form or is not properly completed, executed or delivered, it shall
be deemed not to have been received, and the certificate insurer or the fiscal
agent shall promptly so advise the trustee and the trustee may submit an
amended notice.
Under the certificate insurance policy, "business day" means any day
other than 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 certificate insurer's
obligations under the certificate insurance policy to make Insured Payments
shall be discharged to the extent funds are transferred to the trustee as
provided in the certificate insurance policy, whether or not the funds are
properly applied by the trustee.
The certificate insurer shall be subrogated to the rights of each
holder to receive payments of principal and interest, as applicable, from
distributions on the certificates to the extent of any payment by the
certificate insurer under the certificate insurance policy. To the extent the
certificate insurer makes Insured Payments, either directly or indirectly, as
by paying through the trustee, to the holders of certificates, the certificate
insurer will be subrogated to the rights of the holders, as applicable, to the
extent this 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 certificate insurance policy will rank equally with
any other unsecured debt and unsubordinated obligations of the certificate
insurer except for particular obligations in respect of tax and other payments
to which preference is or may become afforded by statute. Claims against the
certificate insurer under the certificate insurance policy constitute pari
passu claims against the general assets of the certificate insurer. The terms
of the certificate insurance policy cannot be modified or altered by any other
agreement or instrument, or by the merger, consolidation or dissolution of the
trust. The certificate insurance policy is governed by the laws of the State
of New York. The certificate insurance policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
To the fullest extent permitted by applicable law, the certificate
insurer agrees under the certificate insurance policy not to assert, and
waives, for the benefit of each 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 these rights and defenses may be available to
the certificate insurer to avoid payment of its obligations under the
certificate insurance policy in accordance with the express provisions of the
certificate insurance policy.
Pursuant to the terms of the Pooling and Servicing Agreement, unless
a certificate insurer default exists, the certificate insurer shall be deemed
to be the holder of the certificates for all purposes, other than for payment
on the certificates, will be entitled to exercise all rights of the holders
thereunder, without the consent of the holders, and the holders may exercise
these rights only with the prior written consent of the certificate insurer.
In addition, the certificate insurer will, as a third-party beneficiary to the
Pooling and Servicing Agreement and the Loan Sale 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 Pooling 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 trustee pursuant to the Pooling and
Servicing Agreement;
o the right to direct the actions of the trustee during the
continuation of a servicer default;
o the right to require the depositor 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 Pooling and Servicing
Agreement;
o the right to direct all matters relating to a bankruptcy or
other insolvency proceeding involving the depositor; and
o the right to direct the trustee to investigate specified
matters.
The certificate insurer's consent will be required prior to, among
other things, (x) the removal of the trustee, (y) the appointment of any
successor trustee or servicer or (z) any amendment to the Pooling and
Servicing Agreement.
The trust, the depositor, the servicer, the originators and the
certificate insurer will enter into the Insurance Agreement pursuant to which
the trust, the depositor, the servicer and the originators will agree to
reimburse, with interest, the certificate insurer for amounts paid pursuant to
claims under the certificate insurance policy; provided, the payment
obligations shall be non-recourse obligations of the depositor, the
originators, the trust and the servicer and shall be payable only from monies
available for the payment in accordance with the provisions of the Pooling and
Servicing Agreement. The servicer will further agree to pay the certificate
insurer all reasonable charges and expenses which the certificate insurer may
pay or incur relative to any amounts paid under the certificate insurance
policy or otherwise in connection with the transaction and to indemnify the
certificate insurer against specified 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 Pooling and Servicing
Agreement and a servicer event of default under the Pooling and Servicing
Agreement and allow the certificate insurer, among other things, to direct the
trustee to terminate the servicer. An "event of default" under the Insurance
Agreement includes:
o the originators', the depositor's or the servicer's failure to
pay when due any amount owed under the Insurance Agreement or
other documents,
o the inaccuracy or incompleteness in any material respect of any
representation or warranty of the originators, the depositor or
the servicer in the Insurance Agreement, the Pooling and
Servicing Agreement or other documents,
o the originators', the depositor's or the servicer's failure to
perform or to comply with any covenant or agreement in the
Insurance Agreement, the Pooling and Servicing Agreement and
other documents,
o a finding or ruling by a governmental authority or agency that
the Insurance Agreement, the Pooling and Servicing Agreement or
other documents are not binding on the originators, the
depositor or the servicer,
o the originators', the depositor's or the servicer's failure to
pay its debts in general or the occurrence of specified events
of insolvency or bankruptcy concerning the depositor or the
servicer, and
o the occurrence of specified "performance test violations"
designed to measure the performance of the mortgage loans.
The Certificate Insurer
The following information has been obtained from
____________________ and has not been verified by the originators, the
servicer, the depositor or the underwriter. No representation or warranty is
made by the depositor, the originators, the servicer, the depositor or the
underwriter with respect thereto.
The Certificate Insurer
____________ is a monoline insurance company incorporated in ______
under the laws of the State of ____________. ________________________ is
licensed to engage in the financial guaranty insurance business in all 50
states, the District of Columbia and Puerto Rico.
___________ 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. ____________
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. ____________ insures both newly issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy ____________ underwriting criteria.
The principal executive offices of ____________ are located at
________________________, and its telephone number at that location is
____________.
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by ____________ or
any of its domestic operating insurance company subsidiaries are generally
reinsured among these companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, ____________ reinsures a
portion of its liabilities under some of its financial guaranty insurance
policies with other reinsurers under various treaties and on a
transaction-by-transaction basis. This reinsurance is utilized by ____________
as a risk management device and to comply with statutory and rating agency
requirements; it does not alter or limit ____________ obligations under any
financial guaranty insurance policy.
Ratings
____________ insurance financial strength is rated "Aaa" by Moody's
and ____________ insurer financial strength is rated "AAA" by Standard & Poor's
and Standard & Poor's (Australia) Pty. Ltd. ____________ claims-paying ability
is rated "AAA" by Fitch IBCA, Inc. and Japan Rating and Investment Information,
Inc. These 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 the rating agencies.
Capitalization
The following table sets forth the capitalization of ____________ and
its wholly owned subsidiaries on ____________ the basis of generally accepted
accounting principles as of ____________:
[Certificate insurer to provide]
For further information concerning ____________, see the Consolidated
Financial Statements of ____________, and the certificates thereto,
incorporated by reference in this prospectus supplement. ____________
financial statements are included as exhibits to the annual report on Form
10-K and Quarterly Reports on Form 10-Q filed with the Commission by
____________ and may be reviewed at the EDGAR website maintained by the
Commission. Copies of the statutory quarterly and annual statements filed with
the State of ____________ Insurance Department by ____________ are available
upon request to the State of ____________ Insurance Department.
Insurance Regulation
____________ is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of ____________,
its state of domicile. In addition, ____________ and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial
guaranty insurance corporation licensed to do business in the State of
____________, ____________ is subject to Article __ of the ____________
Insurance Law which, among other things, limits the business of each financial
guaranty insurer to financial guaranty insurance and similar lines, requires
that each financial guaranty insurer maintain a minimum surplus to
policyholders, establishes contingency, loss and unearned premium reserve
requirements for each financial guaranty insurer, and limits the size of
individual transactions -- "single risks" -- and the volume of transactions --
"aggregate risks" -- that may be underwritten by each financial guaranty
insurer. Other provisions of the ____________ Insurance Law, applicable to
non-life insurance companies such as ____________, regulate, among other
things, permitted investments, payment of dividends, transactions with
affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liability for borrowings.
(1) Business Day, on the next Business Day.
Certain Prepayment And Yield Considerations
General
The effective yield of the Offered Certificates will be affected by
the rate and timing of payments of principal on the Mortgage Loans (including,
for this purpose, prepayments and amounts received by virtue of refinancings,
liquidations of Mortgage Loans due to defaults, casualties, condemnations, and
repurchases), the amount and timing of mortgagor delinquencies and defaults
resulting in Realized Losses, and the application of excess funds on the
Offered Certificates. Such yield may be adversely affected by a higher or
lower than anticipated rate of principal payments (including Principal
Prepayments) on the Mortgage Loans. The rate of principal payments on such
Mortgage Loans will in turn be affected by the amortization schedules of such
Mortgage Loans, the rate and timing of Principal Prepayments thereon by the
mortgagors, liquidations of defaulted Mortgage Loans and optional or required
repurchases of Mortgage Loans as described herein. The timing of changes in
the rate of prepayments, liquidations and repurchases of the Mortgage Loans
may, and the timing of Realized Losses could, significantly affect the yield
to an investor, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. Since the rate and
timing of principal payments on the Mortgage Loans will depend on future
events and on a variety of factors (as described more fully herein), no
assurance can be given as to such rate or the timing of Principal Prepayments
on the Offered Certificates.
The weighted average life of the Offered Certificates will also be
influenced by the amount of excess funds generated by the Mortgage Loans, as
described herein. Because excess funds attributable to the
overcollateralization feature is derived from interest collections on the
Mortgage Loans and will be applied to reduce the Certificate Principal
Balances, the aggregate payments in reduction of the Certificate Principal
Balances on a Distribution Date will usually be greater than the aggregate
amount of principal payments (including Principal Prepayments) on the Mortgage
Loans payable on such Distribution Date until the OC Target Amount is reached
and assuming an Overcollateralization Deficit does not occur. As a
consequence, excess funds available for payment in reduction of the
Certificate Principal Balances for the Offered Certificates will increase in
proportion to the outstanding Certificate Principal Balances over time in the
absence of offsetting Realized Losses for the Mortgage Loans.
Excess funds will be paid on the Offered Certificates in reduction of
the Certificate Principal Balances on each Distribution Date to the extent the
then applicable OC Target Amount exceeds the related Overcollateralized Amount
on such Distribution Date. Any remaining excess funds will be distributable to
the holders of the Class X Certificates. If an Offered Certificate is
purchased at a price other than par, its yield to maturity will be affected by
the rate at which the excess funds is paid to the Certificateholders. If the
actual rate of excess funds applied in reduction of the Certificate Principal
Balances or the Offered Certificates is slower than the rate anticipated by an
investor who purchases an Offered Certificate at a discount, the actual yield
to such investor will be lower than such investor's anticipated yield. If the
actual rate of excess funds applied in reduction of the Certificate Principal
Balances on the Offered Certificates is faster than the rate anticipated by an
investor who purchases an Offered Certificate at a premium, the actual yield
to such investor will be lower than such investor's anticipated yield. The
amount of excess funds on any Distribution Date will be affected by, among
other things, the actual amount of interest received, collected or recovered
in respect of the Mortgage Loans during the related Due Period the level of
LIBOR and such amount will be influenced by changes in the weighted average of
the Loan Rates resulting from prepayments and liquidations of the Mortgage
Loans. The amount of excess funds paid to the Certificateholders applied to
the Certificate Principal Balances on each Distribution Date will be based on
the OC Target Amount. The Pooling and Servicing Agreement generally provides
that the OC Target Amount may, over time, decrease, or increase, subject to
certain floors, caps and triggers, including triggers that allow the Target OC
Amount to decrease or "step down" based on the performance on the Mortgage
Loans with respect to certain tests specified in the Pooling and Servicing
Agreement. Any increase in the OC Target Amount may result in an accelerated
amortization until such OC Target Amount is reached. Conversely, any decrease
in the OC Target Amount will result in a decelerated amortization of the
Offered Certificates.
The Mortgage Loans generally may be prepaid in full or in part at any
time, although a substantial portion of the Mortgage Loans provide for payment
of a prepayment penalty. The Mortgage Loans generally are not assumable and
the related Mortgaged Property will be due on sale, in which case the Servicer
shall enforce any due-on-sale clause contained in any Mortgage Note or
Mortgage, to the extent permitted under applicable law and governmental
regulations; provided, however, if the Servicer determines that it is
reasonably likely that the mortgagor will bring, or if any mortgagor does
bring legal action to declare invalid or otherwise avoid enforcement of a
due-on-sale clause contained in any Mortgage Note or Mortgage, the Servicer
will not be required to enforce the due-on-sale clause or to contest such
action.
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans. The rate of default on
Mortgage Loans that are refinance or limited documentation mortgage loans, and
on Mortgage Loans with high Loan-to-Value Ratios, may be higher than for other
types of Mortgage Loans. As a result of the underwriting standards applicable
to the Mortgage Loans, the Mortgage Loans are likely to experience rates of
delinquency, foreclosure, bankruptcy and loss that are higher, and that may be
substantially higher, than those experienced by mortgage loans underwritten in
accordance with the standards applied by Fannie Mae and Freddie Mac mortgage
loan purchase programs. In addition, because of such underwriting criteria and
their likely effect on the delinquency, foreclosure, bankruptcy and loss
experience of the Mortgage Loans, the Mortgage Loans will generally be
serviced in a manner intended to result in a faster exercise of remedies,
which may include foreclosure, in the event Mortgage Loan delinquencies and
defaults occur, than would be the case of the Mortgage Loans were serviced in
accordance with such other programs. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the Mortgage Loans will be affected
by the general economic condition of the region of the country in which the
related Mortgaged Properties are located. The risk of delinquencies and loss
is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. To the extent that the
locations of the Mortgaged Properties are concentrated in a given region, the
risk of delinquencies, loss and involuntary prepayments resulting from adverse
economic conditions in such region or from other factors, such as fires,
storms, landslides and mudflows and earthquakes, is increased. Certain
information regarding the location of the Mortgaged Properties is set forth
under "The Mortgage Pool--Mortgage Loan Statistics" and "Risk
Factors--Geographic Concentration of Mortgage Loans" herein.
Certain of the Mortgage Loans are Balloon Loans which provide for a
substantial portion of the original Loan Balance in a single payment at
maturity (the "Balloon Loans"). Balloon Loans involve a greater degree of risk
than fully amortizing loans because the ability of the borrower to make a
balloon payment typically will depend upon its ability either to refinance the
loan or to sell the related Mortgaged Property. The ability of a borrower to
accomplish either of these goals will be affected by a number of factors,
including the level of available mortgage rates at the time of the attempted
sale or refinancing, the borrower's equity in the related Mortgaged Property,
the financial condition of the borrower and operating history of the related
Mortgaged Property, tax laws, prevailing economic conditions and the
availability of credit for commercial real estate projects generally.
Other factors affecting prepayment of Mortgage Loans include changes
in mortgagors' housing needs, job transfers, unemployment and mortgagors' net
equity in the mortgaged properties. Since the rate of payment of principal of
the Offered Certificates will depend on the rate of payment (including
prepayments) of the principal of the Mortgage Loans, the actual maturity of
the Offered Certificates could occur, and are expected to occur, significantly
earlier than the Assumed Final Maturity Date.
In addition, the yield to maturity of the Offered Certificates will
depend on the price paid by the holders of the Offered Certificates and the
Loan Rate. The extent to which the yield to maturity of an Offered Certificate
is sensitive to prepayments will depend upon the degree to which it is
purchased at a discount or premium.
Prepayments of principal on the Mortgage Loans will generally be
passed through to the Trustee and included in the Available Funds in the month
following the month of receipt thereof by the Servicer. Any prepayment of a
Mortgage Loan or liquidation of a Mortgage Loan (by foreclosure proceedings or
by virtue of the repurchase of a Mortgage Loan) will have the effect of
resulting in payments on the Offered Certificates of amounts that otherwise
would be paid in amortized increments over the remaining term of such Mortgage
Loan.
The Class ___ Certificates will not be entitled to distributions of
principal, either scheduled or unscheduled, until ____________, except as
otherwise described in this prospectus supplement. After that date, the
relative entitlement of the Class ___ Certificates to payments in respect of
principal is subject to increase in accordance with the calculation of the
Class ___ Priority Distribution Amount. See "Description of the Certificates -
Allocation of Available Funds" herein.
To the extent that Principal Prepayments with respect to the Mortgage
Loans result in prepayments on the Offered Certificates during periods of
generally lower interest rates, Certificateholders may be unable to reinvest
such Principal Prepayments in securities having a yield and rating comparable
to the Offered Certificates.
The yield on the Offered Certificates may be affected by any delays
in receipt of payments thereon as described under "Description of the
Certificates--Book-Entry Certificates" herein.
The yield on the Offered Certificates may also be affected by a
optional termination of the Trust Fund as described under " --Optional
Termination" herein.
No representation is made as to the rate of principal payments on the
Mortgage Loans or as to the yield to maturity of the Offered Certificates. An
investor is urged to make an investment decision with respect to the Offered
Certificates based on the anticipated yield to maturity of the Offered
Certificates resulting from its price and such investor's own determination as
to anticipated Mortgage Loan prepayment rates. Prospective investors are urged
to analyze fully the effect of Mortgage Loan principal prepayments and market
conditions on the yield and value of the Offered Certificates, before
acquiring any Offered Certificates. In particular, investors that are required
to perform periodic valuations on their investment portfolios should consider
the effect of such fluctuations in value. In addition, investors should
carefully consider the factors discussed under "Risk Factors--Unpredictability
of Prepayments and Effect on Yields" herein.
Weighted Average Lives
The timing of changes in the rate of Principal Prepayments on the
Mortgage Loans may significantly affect an investor's actual yield to
maturity, even if the average rate of Principal Prepayments is consistent with
such investor's expectation. In general, the earlier a Principal Prepayment on
the Mortgage Loans occurs, the greater the effect of such Principal Prepayment
on an investor's yield to maturity. The effect on an investor's yield of
Principal Prepayments occurring at a rate faster (or slower) than the rate
anticipated by the investor during the period immediately following the
issuance of the Offered Certificates may not be fully offset by a subsequent
like decrease (or increase) in the rate of Principal Prepayments in a like
amount.
The projected weighted average life of any Class of Offered
Certificates is the average amount of time that will elapse from the Closing
Date until each dollar of principal is scheduled to be repaid to the investors
in such Class of Offered Certificates. Because it is expected that there will
be prepayments and defaults on the Mortgage Loans, the actual weighted average
lives of the Classes of Offered Certificates are expected to vary
substantially from the weighted average remaining terms to stated maturity of
the Mortgage Loans as set forth herein under "The Trust Fund."
The "Assumed Final Maturity Date" for each Class of Offered
Certificates is as set forth herein under "Description of the Certificates --
General". For the Class ___ Certificates, such date is the date on which the
"Original Certificate Principal Balance" set forth herein for such Class less
all amounts distributed to the related Certificateholders on account of
principal would be reduced to zero, assuming that no prepayments are received
on the Mortgage Loans, scheduled monthly payments of principal of and interest
on each of the Mortgage Loans are timely received and no excess cashflow is
used to make accelerated payments of principal to the Certificateholders of
such Classes of Offered Certificates. For the Class A-4 and Class A-5
Certificates, such date is the month of the latest maturing Mortgage Loan plus
twelve months. The weighted average life of each Class of Offered Certificates
is likely to be shorter than would be the case if payments actually made on
the Mortgage Loans conformed to the foregoing assumptions, and the final
Distribution Date with respect to the Offered Certificates could occur
significantly earlier than the related Assumed Final Maturity Date because (i)
prepayments are likely to occur, (ii) excess cashflow, if any, will be applied
as principal of the Offered Certificates as described herein and (iii) the
majority holder of the Class X Certificates and the Servicer may cause a
termination of the Mortgage Loans in the Trust Fund as provided herein.
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 Fund.
The tables on pages S-55 through S-59 were prepared on the basis of
the assumptions in the following paragraph and the tables set forth below.
There are certain differences between the loan characteristics included in
such assumptions and the characteristics of the actual Mortgage Loans. Any
such discrepancy may have an effect upon the percentages of Original
Certificate Principal Balances outstanding and weighted average lives of the
Offered Certificates set forth in the tables on pages S-55 through S-59. In
addition, since the actual Mortgage Loans in the Trust Fund will have
characteristics that differ from those assumed in preparing the tables set
forth below, the distributions of principal of the Offered Certificates may be
made earlier or later than indicated in the tables.
The percentages and weighted average lives in the tables on pages
S-55 through S-59 were determined assuming that: (i) the Mortgage Loans
consist of pools of mortgage loans with the information set forth in the table
below, (ii) the Closing Date for the Offered Certificates occurs on
______________ and the Offered Certificates were sold to investors by the
Underwriter on the Closing Date, (iii) distributions on the Offered
Certificates are made on the 25th day of each month regardless of the day on
which the Distribution Date actually occurs, commencing in ________, in
accordance with the priorities described herein, (iv) the prepayment rates
with respect to the Mortgage Loans are a multiple of the HEP as stated in the
tables below, (v) prepayments include thirty days' interest thereon, (vi) the
Seller is not required to substitute or repurchase any or all of the Mortgage
Loans pursuant to the Pooling and Servicing Agreement and no optional
termination is exercised, except with respect to the entries identified by the
row heading "Weighted Average Life (years) to Call Option Date" in the tables
below, (vii) the OC Target Amount is set initially as specified in the Pooling
and Servicing Agreement and thereafter decreases in accordance with the
provisions of the Pooling and Servicing Agreement, (viii) scheduled payments
for all Mortgage Loans are received on the first day of each month commencing
in ________, the principal portion of such payments is computed prior to
giving effect to prepayments received through the end of the prior month and
there are no losses or delinquencies with respect to such Mortgage Loans, (ix)
all the Mortgage Loans prepay at the same rate and all such payments are
treated as prepayments in full of individual Mortgage Loans, with no
shortfalls in collection of interest, (x) such prepayments are received on the
last day of each month commencing in the month of the Closing Date, (xi) no
reinvestment income from any Account is earned and available for distribution,
(xii) the PMI Insurer premium is equal to the Weighted Average Coupon Rate of
the Mortgage Loans less (a) the Net Coupon Rate of the Mortgage Loans and (b)
____% for the Servicing Fee, (xiii) no prepayment penalties are received on
the Mortgage Loans, (xiv) the gross coupon rate for each adjustable rate
Mortgage Loan is adjusted on its next rate adjustment date (and every six
months thereafter) to equal the sum of (a) the level of Six-Month LIBOR and
(b) the respective gross margin (subject to applicable interest rate caps and
floors), (xv) the level of Six-Month LIBOR remains constant at ____%, (xvi) no
backup servicer is appointed, and (xvii) the Class ___ Pass-Through Rate is
____% for each Distribution Date. Nothing contained in the foregoing
assumptions should be construed as a representation that the Mortgage Loans
will not experience delinquencies or losses.
<TABLE>
<CAPTION>
Assumed Mortgage Loan Characteristics
All Mortgage Loans
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Original Remaining Remaining
Net Coupon Weighted Term to Amortization Term to
Fixed/ Coupon Average Original Maturity Term Maturity
Adjustable Pool Rate Coupon Rate Balance (Months) (Months) (Months)
1
2
</TABLE>
<TABLE>
<CAPTION>
Adjustable Rate Mortgage Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Initial Interest
Gross Net Life Adjustment Adjustment First Reset
Pool Margin Net Life Cap Floor Cap Cap Reset Frequency Index
----------------------------------------------------------------------------------------------------------
1
2
</TABLE>
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Offered Certificates, and
set forth the percentages of the Original Certificate Principal Balance of
each such Class that would be outstanding after each of the dates shown, at
various percentages of HEP.
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Certificate Principal Balance Outstanding at the Following HEP Percentages
Class ___ Certificates
-------------------------------------------------------------------------
Distribution Date 0% 15% 20% 25% 30% 35%
-------------------- ---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100%
Weighted Average Life (years)
to Maturity (1)................
Weighted Average Life (years)
to Call Option Date (1)........
---------------------
* Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of any Class of Certificates is determined by (i) multiplying the assumed net reduction, if any,
in the Certificate Principal Balance on each Distribution Date on such Class of Certificates by the number of years from
the date of issuance of the Certificates to the related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in principal amount on such Class of Certificates.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Certificate Principal Balance Outstanding at the Following HEP Percentages
Class ___ Certificates
-------------------------------------------------------------------------
Distribution Date 0% 15% 20% 25% 30% 35%
-------------------- ---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100%
Weighted Average Life (years)
to Maturity(1).................
Weighted Average Life (years)
to Call Option Date(1).........
---------------------
* Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of any Class of Certificates is determined by (i) multiplying the assumed net reduction, if any,
in the Certificate Principal Balance on each Distribution Date on such Class of Certificates by the number of years from
the date of issuance of the Certificates to the related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in principal amount on such Class of Certificates.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Certificate Principal Balance Outstanding at the Following HEP Percentages
Class ___ Certificates
-------------------------------------------------------------------------
Distribution Date 0% 15% 20% 25% 30% 35%
------------------------ ---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100%
Weighted Average Life (years)
to Maturity(1).................
Weighted Average Life (years)
to Call Option Date(1).........
---------------------
* Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of any Class of Certificates is determined by (i) multiplying the assumed net reduction, if any,
in the Certificate Principal Balance on each Distribution Date on such Class of Certificates by the number of years from
the date of issuance of the Certificates to the related Distribution Date, (ii) summing the results, and (iii) dividing
the sum by the aggregate amount of the assumed net reductions in principal amount on such Class of Certificates.
</TABLE>
<PAGE>
Reports to Holders of the Certificates
On each Distribution Date, the Trustee will make available to each
holder of a Certificate and the Certificate Insurer a statement to the extent
such information is provided to the Trustee by the Servicer generally setting
forth:
(i) the aggregate amount of the distributions, separately
identified, with respect to each Class of Offered Certificates;
(ii) the amount of such distributions allocable to principal,
separately identifying the aggregate amount of any scheduled
principal, Principal Prepayments or other unscheduled recoveries of
principal included therein;
(iii) the amount of such distributions allocable to interest
and the calculation thereof;
(iv) the Certificate Principal Balance of each Class of Offered
Certificates after giving effect to the distribution of principal on
such Distribution Date;
(v) the Pool Balance as of the end of the related Due Period;
(vi) the OC Target Amount and Overcollateralized Amount as of
such Distribution Date;
(vii) the related amount of the Servicing Fee paid to or
retained by the Servicer;
(viii) the amount of the Trustee Fee paid to the Trustee;
(ix) the amount of Delinquency Advances and Servicing Advances
for the related Due Period;
(x) the number and aggregate Loan Balance of Mortgage Loans
that were (A) delinquent (exclusive of Mortgage Loans in
foreclosure) (1) 30 to 59 days, (2) 60 to 89 days and (3) 90 or more
days, (B) in foreclosure and delinquent (1) 30 to 59 days, (2) 60 to
89 days and (3) 90 or more days and (C) in bankruptcy as of the
close of business on the last day of the calendar month preceding
such Distribution Date;
(xi) with respect to any Mortgage Loan that became an REO
Property during the preceding calendar month, the loan number, the
Loan Balance of such Mortgage Loan as of the close of business on
the last day of such month and the date of acquisition thereof, as
well as the total number and Loan Balance of any REO Properties as
of the close of business on the last day of the preceding month;
(xii) the aggregate amount of Realized Losses incurred during
the preceding calendar month, as well as the cumulative amount of
Realized Losses;
(xiii) any OC Deficiency Amount after giving effect to the
distributions of principal on such Distribution Date;
(xiv) any OC Deficit after giving effect to distributions on
such Distribution Date;
(xv) the Reimbursement Amount, if any; and
(xvi) the Pass-Through Rate for each Class of Offered
Certificates for such Distribution Date.
The Trustee will make the monthly statements (and, at its option, any
additional files containing the same information in an alternative format)
available each month to Certificateholders and other parties to the Pooling
and Servicing Agreement via the Trustee's internet website and its
fax-on-demand service. The Trustee's fax-on-demand service may be accessed by
calling ______________. The Trustee's website will be located at
"________________." Assistance in using the website or the fax-on-demand
service can be obtained by calling the Trustee's customer service desk at
______________. Parties that are unable to use the above distribution options
are entitled to have a paper copy mailed to them via first class mail by
calling the customer service desk and indicating such. The Trustee shall have
the right to change the way monthly statements are distributed in order to
make such distribution more convenient and/or more accessible to the above
parties and the Trustee shall provide timely and adequate notification to all
above parties regarding any such changes.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement containing
information necessary to enable holders of the Certificates to prepare their
tax returns. Such statements will not have been examined and reported upon by
an independent public accountant.
Material Federal Income Tax Considerations
The following discussion of material federal income tax consequences
of the purchase, ownership and disposition of the certificates is to be
considered only in connection with "Material Federal Income Tax Consequences"
in the accompanying prospectus. The discussion in this prospectus supplement
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
certificates.
The Trustee will elect to treat the Trust Fund as comprising two
"real estate mortgage investment conduits" (each, a "REMIC") for federal
income tax purposes. In the opinion of Brown & Wood LLP, tax counsel to the
Trust and counsel to the Underwriter, assuming compliance with the Pooling and
Servicing Agreement, each portion of the Trust Fund with respect to which the
Trustee makes a REMIC election will qualify as a REMIC, the Offered
Certificates and the Class X Certificates will constitute REMIC "regular
interests" and the Residual Certificates will represent ownership of the sole
class of "residual interests" in each REMIC.
The Certificates possess special tax attributes by virtue of the
REMIC provisions of the Code. See "Material Federal Income Tax Consequences --
REMIC Securities" in the Prospectus.
The Offered Certificates generally will be treated as debt
instruments for federal income tax purposes. Beneficial owners, or registered
holders, in the case of definitive certificates, of the class A certificates
will be required to report income on Offered Certificates in accordance with
the accrual method of accounting. It is not anticipated that the Offered
Certificates will be issued with original issue discount. See "Material
Federal Income Tax Consequences -- Original Issue Discount" in the Prospectus.
The prepayment assumption for calculating original issue discount is 100% of
the HEP. See "Yield, Payment and Maturity Considerations" herein.
State Taxes
The Depositor makes no representations regarding the tax consequences
of purchase, ownership or disposition of the Offered Certificates under the
tax laws of any state. Investors considering an investment in the Offered
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Offered Certificates.
ERISA Considerations
The Employee Retirement Income Security Act of 1974 and the Code
impose 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 those entities and
o persons who have specified relationships to those Plans --
"Parties-in-Interest" under ERISA and "Disqualified Persons"
under the Code.
Section 406 of ERISA prohibits plans from engaging in specified
transactions involving the assets of those plans with Parties-in-Interest
under those 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 under these 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
specified duties on persons who are fiduciaries of plans subject to ERISA.
The Department of Labor has issued a regulation describing what
constitutes the assets of a lan when the plan acquires an equity interest in
another entity. This plan asset regulation states that, unless an exemption
described in the regulation is applicable, the underlying assets of an entity
in which a plan makes an equity investment will be considered, for purposes of
ERISA, to be the assets of the investing plan. Pursuant to the plan asset
regulation, if the assets of the trust were deemed to be plan assets by reason
of a plan's investment in any class A certificates, such plan assets would
include an undivided interest in any assets held in such trust. Therefore, in
the absence of an exemption, the purchase, sale or holding of any class A
certificate by a plan subject to Section 406 of ERISA or Section 4975 of the
Code might result in prohibited transactions and the imposition of excise
taxes and civil penalties.
On _______, the Department of Labor issued to ____________________ an
individual administrative exemption, Prohibited Transaction Exemption ____,
from some of the prohibited transaction rules of ERISA with respect to the
initial purchase, the holding and the subsequent resale by a plan of
certificates in pass-through trusts that meet the conditions and requirements
of this exemption. Among the conditions that must be satisfied for this
exemption to apply are the following:
(a) The acquisition of the class A certificates by a plan is
on terms, including the price for the class A certificates, that are
at least as favorable to the plan as they would be in an arm's length
transaction with an unrelated party;
(b) The rights and interests evidenced by the class A
certificates acquired by the plan are not subordinated to the rights
and interests evidenced by other certificates of the trust fund;
(c) The class A certificates acquired by the plan have
received a rating at the time of such acquisition that is in one of
the three highest generic rating categories from any of Standard &
Poor's, Moody's, Fitch IBCA, or Duff & Phelps Credit Rating Co.;
(d) The sum of all payments made to the underwriter in
connection with the distribution of the class A certificates
represents not more than reasonable compensation for underwriting the
class A certificates. The sum of all payments made to and retained by
the servicer represents not more than reasonable compensation for the
servicer's services under the Pooling and Servicing Agreement and
reimbursement of the servicer's reasonable expenses in connection
therewith;
(e) The trustee is not an affiliate of any other member of
the restricted group; and
(f) The plan investing in the class A certificates is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of
1933.
The trust fund also must meet the following requirements:
o The corpus of the trust fund must consist solely of assets of
the type which have been included in other investment pools;
o certificates in such other investment pools must have been
rated in one of the three highest rating categories of Standard
& Poor's, Moody's, Duff & Phelps or Fitch IBCA for at least one
year prior to the plan's acquisition of certificates; and
o certificates evidencing interests in such other investment
pools must have been purchased by investors other than plans
for at least one year prior to any plan's acquisition of class
A certificates.
In order for the exemption to apply to the self-dealing/conflict of
interest prohibited transactions that may occur when a plan fiduciary causes
the plan to acquire class A certificates, the Exemption requires, among other
matters, that:
o in the case of an acquisition in connection with the initial
issuance of certificates, at least fifty percent of each class
of certificates in which plans have invested is acquired by
persons independent of the restricted group and at least fifty
percent of the aggregate interest in the trust fund is acquired
by persons independent of the restricted group;
o such fiduciary, or its affiliate, is an obligor with respect to
5 percent or less of the fair market value of the obligations
contained in the trust fund;
o the plan's investment in class A certificates does not exceed
twenty-five percent (25%) of all of the certificates
outstanding at the time of the acquisition and
o immediately after the acquisition, no more than twenty-five
percent (25%) of the assets of the plan are invested in
certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity.
The exemption does not apply to specified prohibited transactions in
the case of plans sponsored by the underwriter, the trustee, the servicer, any
obligor with respect to more than 5% of the fair market value of the mortgage
loans included in the trust fund, any entity deemed to be a "sponsor" of the
trust fund as such term is defined in the exemption, or any affiliate of any
such party.
The exemption may be available for the purchase of the certificates
by plans following the expiration of the Pre-Funding Period. Before purchasing
a class A certificate, a fiduciary of an ERISA plan should make its own
determination as to the availability of the exemptive relief provided in the
exemption and whether the conditions of such exemption will be applicable to
the class A certificates. Any fiduciary of an ERISA plan considering whether
to purchase a class A certificate should also carefully review with its own
legal advisors the applicability of the fiduciary duty and prohibited
transaction provisions of ERISA and the Code to such investment. The exemption
will not apply with respect to the certificates until such time that the
balance of the Pre-Funding Account for that class is reduced to zero.
Accordingly, until such time, the certificates may not be purchased by any
entity using the assets of a plan.
A governmental plan as defined in Section 3(32) of ERISA is not
subject to ERISA, or Code Section 4975. However, such a governmental plan may
be subject to a federal, state, or local law, which is, to a material extent,
similar to the provisions of ERISA or Code Section 4975. A fiduciary of a
governmental plan should make its own determination as to the need for and the
availability of any exemptive relief under similar law.
The sale of certificates to a plan is in no respect a representation
by the depositor or the underwriter that this investment meets all relevant
legal requirements with respect to investments by plans generally or any
particular plan, or that this investment is appropriate for lans generally or
any particular ERISA plan.
Legal Investment
The certificates 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 set forth in the Underwriting
Agreement between the Depositor and Prudential Securities Incorporated (the
"Underwriter"), an affiliate of the Depositor, the Depositor has agreed to
sell to the Underwriter, and the Underwriter has agreed to purchase from the
Depositor, the Offered Certificates.
The distribution of the Offered Certificates by the Underwriter will
be effected in each cash from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case,
at the time of sale. The Underwriter may effect such transactions by selling
the Offered Certificates to or through dealers, and such dealers may receive
from the Underwriter, for whom they act as agent, compensation in the form of
underwriting discounts, concessions or commissions. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the
Offered Certificates may be deemed to be an underwriter, and any discounts,
commissions or concessions received by them, and any profits on the resale of
the Certificates purchased by them, may be deemed to be underwriting discounts
and commissions under the Securities Act of 1933, as amended. The Underwriting
Agreement provides that the Depositor (and the Mortgage Loan Purchase
Agreement provides that the Seller) will indemnify the Underwriter against
certain civil liabilities, including liabilities under the Act.
The Depositor has been advised by the Underwriter that it intends to
make a market in the Offered Certificates but it has no obligation to do so.
There can be no assurance that a secondary market for the Offered Certificates
will develop or, if it does develop, that it will continue.
The Offered Certificates are offered by the Underwriter, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to their right to reject orders in whole or in part. It is expected
that delivery of the Offered Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company on or about the Closing
Date.
The Depositor and the Seller have agreed to indemnify the Underwriter
against, or make contributions to the Underwriter with respect to, certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
Incorporation of Information by Reference
The Securities and Exchange Commission allows us to "incorporate by
reference" information already on file with it. This means that we can
disclose important information to you by referring you to those documents.
This 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 financial statements of ________________________ included
in, or as exhibits to, the following documents:
o the Annual Report on Form 10-K for the year ended ____________;
and
o the Quarterly Report on Form 10-Q for the quarter ended
____________.
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 under the
Securities Act of 1933, for the certificates offered pursuant to this
prospectus supplement. This prospectus supplement and the accompanying
prospectus, which form a part of the registration statement, omit specified
information contained in the 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 ____________ and subsidiaries as
of ____________ 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 ________________________, incorporated by reference in this prospectus
supplement, have been incorporated in this prospectus supplement in reliance
on the report of ____________, independent accountants, given on the authority
of that firm as experts in accounting and auditing.
Legal Matters
Specified legal matters in connection with the certificates will be
passed upon for the originators, the depositor and the servicer by
____________, ____________, for the trust by ____________, ____________, and
for the depositor and the underwriter by ____________, ____________.
Ratings
It is a condition to the original issuance of the certificates that
they will receive ratings of [ ] by ________ and [ ] by ________. The ratings
assigned to the certificates will take into account the claims-paying ability
of the certificate insurer. Explanations of the significance of these ratings
may be obtained from ________________________ and _______________________.
These ratings will be the views only of the rating agencies. There is no
assurance that any of these ratings will continue for any period of time or
that these ratings will not be revised or withdrawn. Any such revision or
withdrawal of these ratings may have an adverse effect on the market price of
the certificates.
<PAGE>
<TABLE>
<CAPTION>
INDEX OF DEFINED TERMS
Page
<S> <C>
accredited investor..............................................................................................62
Assumed Final Maturity Date......................................................................................53
average outstanding..............................................................................................22
Balloon Loans....................................................................................................51
beneficial owner.................................................................................................24
Book-Entry Certificates..........................................................................................24
business day.....................................................................................................46
Certificate Owners...............................................................................................24
Certificateholder................................................................................................24
Clearstream Luxembourg...........................................................................................24
Clearstream Luxembourg Participants..............................................................................26
Cooperative......................................................................................................26
Definitive Certificate...........................................................................................24
DTC..............................................................................................................24
Euroclear........................................................................................................24
Euroclear Operator...............................................................................................26
Euroclear Participants...........................................................................................26
European Depositaries............................................................................................24
event of default.................................................................................................47
Financial Intermediary...........................................................................................24
Global Securities................................................................................................67
gross losses.....................................................................................................23
lock-up..........................................................................................................67
Original Certificate Principal Balance...........................................................................53
overcollateralized................................................................................................2
performance test violations......................................................................................48
receipt..........................................................................................................46
received.........................................................................................................46
regular interests................................................................................................60
Relevant Depositary..............................................................................................24
REMIC............................................................................................................60
REO property.....................................................................................................22
residual interests...............................................................................................60
servicer remittance amount.......................................................................................33
sponsor..........................................................................................................63
Terms and Conditions.............................................................................................27
U.S. Person......................................................................................................70
Underwriter......................................................................................................64
</TABLE>
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered Certificates
will be globally offered (the "Global Securities") and will be available only
in book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, Clearstream Banking, societe anonyme
("Clearstream Luxembourg") or Euroclear. The Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding Global Securities
through Clearstream Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage loan asset backed
certificates issues.
Secondary cross-market trading between Clearstream Luxembourg or
Euroclear and DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream Luxembourg and Euroclear (in such capacity) and as DTC
Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC.
Investors' interests in the Global Securities will be represented
through financial institutions acting on their behalf as direct and indirect
Participants in DTC. As a result, Clearstream Luxembourg and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior mortgage loan asset backed
certificates issues. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will
be credited to the securities custody accounts on the settlement date against
payment in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading Between DTC Participants. Secondary market trading between
DTC Participants will be settled using the procedures applicable to prior
mortgage loan asset backed certificates issues in same-day funds.
Trading Between Clearstream Luxembourg and/or Euroclear Participants.
Secondary market trading between Clearstream Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading Between DTC Seller And Clearstream Luxembourg Or Euroclear
Purchaser. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream
Luxembourg or Euroclear through a Clearstream Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement.
Clearstream Luxembourg or Euroclear will instruct the respective Depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
either the actual number of days in such accrual period and a year assumed to
consist of 360 days or a 360-day year of twelve 30-day months as applicable to
the related class of Global Securities. For transactions settling on the 31st
of the month, payment will include interest accrued to and excluding the first
day of the following month. Payment will then be made by the respective
Depositary of the DTC Participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Clearstream Luxembourg
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade
fails), the Clearstream Luxembourg or Euroclear cash debt will be valued
instead as of the actual settlement date.
Clearstream Luxembourg Participants and Euroclear Participants will
need to make available to the respective clearing systems the funds necessary
to process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines
of credit, as they would for any settlement occurring within Clearstream
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream Luxembourg or Euroclear until the Global Securities are
credited to their accounts one day later.
As an alternative, if Clearstream Luxembourg or Euroclear has
extended a line of credit to them, Clearstream Luxembourg Participants or
Euroclear Participants can elect not to preposition funds and allow that
credit line to be drawn upon the finance settlement. Under this procedure,
Clearstream Luxembourg Participants or Euroclear Participants purchasing
Global Securities would incur overdraft charges for one day, assuming they
cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the
value date. Therefore, in many cases the investment income on the Global
Securities earned during that one-day period may substantially reduce or
offset the amount of such overdraft charges, although this result will depend
on each Clearstream Luxembourg Participant's or Euroclear Participant's
particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global
Securities to the respective European Depositary for the benefit of
Clearstream Luxembourg Participants or Euroclear Participants. The sale
proceeds will be available to the DTC seller on the settlement date. Thus, to
the DTC Participants a cross-market transaction will settle no differently
than a trade between two DTC Participants.
Trading between Clearstream Luxembourg or Euroclear Seller and DTC
Purchaser. Due to time zone differences in their favor, Clearstream Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective Depositary, to a DTC
Participant. The seller will send instructions to Clearstream Luxembourg or
Euroclear through a Clearstream Luxembourg Participant or Euroclear
Participant at least one business day prior to settlement. In these cases
Clearstream Luxembourg or Euroclear will instruct the respective Depositary,
as appropriate, to deliver the Global Securities to the DTC Participant's
account against payment. Payment will include interest accrued on the Global
Securities from and including the last coupon payment to and excluding the
settlement date on the basis of either the actual number of days in such
accrual period and a year assumed to consist of 360 days or a 360-day year of
twelve 30-day months as applicable to the related class of Global Securities.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the Clearstream Luxembourg
Participant or Euroclear Participant the following day, and receipt of the
cash proceeds in the Clearstream Luxembourg Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be
the preceding day, when settlement occurred in New York). Should the
Clearstream Luxembourg Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Clearstream Luxembourg
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream Luxembourg or Euroclear and
that purchase Global Securities from DTC Participants for delivery to
Clearstream Luxembourg Participants or Euroclear Participants should note that
these trades would automatically fail on the sale side unless affirmative
action were taken. At least three techniques should be readily available to
eliminate this potential problem:
(a) borrowing through Clearstream Luxembourg or Euroclear for one day
(until the purchase side of the day trade is reflected in their
Clearstream Luxembourg or Euroclear accounts) in accordance with the
clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to the settlement, which would
give the Global Securities sufficient time to be reflected in their
Clearstream Luxembourg or Euroclear account in order to settle the sale
side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant is
at least one day prior to the value date for the sale to the Clearstream
Luxembourg or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Clearstream Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue discount)
on registered debt issued by U.S. Persons, unless (1) each clearing system,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business in the chain of intermediaries
between such beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (2) such beneficial
owner takes one of the following steps to obtain an exemption or reduced tax
rate:
Exemption for non-U.S. Persons (Form W-8 or Form W-8BEN). Beneficial
owners of Global Securities that are non-U.S. Persons can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status) or From W-8BEN (Certificate of Foreign Status of Beneficial
Owner for United States Tax Withholding). If the information shown on Form W-8
changes, a new Form W-8 of Form W-8BEN must be filed within 30 days of such
change. After December 31, 2000, only Form W-8BEN will be acceptable.
Exemption for non-U.S. Persons with effectively connected income
(Form 4224 or Form W-8ECI). A non-U.S. Person, including a non-U.S.
corporation or bank with a U.S. branch, for which the interest income is
effectively connected with its conduct of a trade or business in the United
States, can obtain an exemption from the withholding tax by filing Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States) or Form W-8ECI
(Certificate of Foreign Person's Claim for Exemption from Withholding on
Income Effectively Connected with the Conduct of a Trade or Business in the
United States).
Exemption or Reduced Rate for Non-U.S. Persons Resident In Treaty
Countries (Form 1001 or Form W-8BEN). Non-U.S. Persons that are Certificate
Owners residing in a country that has a tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate) or Form
W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States
Tax Withholding). If Form 1001 is provided and the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owner
or his agent. After December 31, 2000, only Form W8-BEN will be acceptable.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of
a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8, Form 1001, and Form 4224 are
effective until December 31, 2000. Form W-8BEN and Form W-8ECI are effective
until the third succeeding calendar year from the date the form is signed.
The term "U.S. Person" means (1) a citizen or resident of the United
States, (2) a corporation or partnership organized in or under the laws of the
United States or any state or the District of Columbia (other than a
partnership that is not treated as a United States person under any applicable
Treasury regulations), (3) an estate the income of which is includible in
gross income for United States tax purposes, regardless of its source, or (4)
a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
Persons have authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in regulations,
certain trusts in existence on August 20, 1996 and treated as United States
persons prior to such date that elect to continue to be so treated also shall
be considered U.S. Persons. This summary does not deal with all aspects of
U.S. Federal income tax withholding that may be relevant to foreign holders of
the Global Securities. Investors are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of the Global
Securities.
<PAGE>
==============================================================================
$__________ Pass-Through Certificates, Series ______
________________________ Home Equity Loan Trust ______
[LOGO]
----------------------------------
Seller and Servicer
Prudential Securities Secured Financing Corporation
Depositor
---------------------
Prospectus Supplement
---------------------
Prudential Securities
[Date]
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.
We are not offering the certificates offered hereby in any state
where such offer is not permitted. We represent the accuracy of the
information in this prospectus supplement and the accompanying
prospectus only as of the dates on their respective covers.
Dealers will be required to deliver a prospectus supplement and
prospectus when acting as underwriters of the certificates offered hereby and
with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the certificates, whether or not participating in this
offering, may be required to deliver a prospectus supplement and prospectus
for ninety days following the date of this prospectus supplement.
==============================================================================
<PAGE>
FORM OF PROSPECTUS
SUPPLEMENT -- NOTES
Prospectus supplement to prospectus dated [[ ]]
-------------------------------------------------------------------------------
$-----------
----------------------
Mortgage-Backed Notes, Series _______
$______ _____% Class A-1 Notes $________ ______% Class A-2 Notes
_____________
Depositor
You should read the section
entitled "Risk Factors"
starting on page S-__ of this
prospectus supplement and
page __ 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.
----------------------------------
Prudential Securities Secured
Financing Corporation
Sponsor
----------------------------------
The trust fund --
o The trust fund consists primarily of [two] pools of
[fixed-rate/adjustable rate] loans secured by [first- or
second lien mortgages on one- to four-family residential
real properties] [first- or second lien one- to four-family
residential home equity mortgage loans] [loans evidenced
by retail installment sales or installment loan agreements]
[manufactured housing installment sales contracts and
installment loan agreements] [mortgaged backed
certificates insured or guaranteed by [ ]] [private
mortgage backed certificates] [and to a limited extent,
loans secured by commercial real properties].
The notes --
o Each class of notes will be backed primarily by a pledge
of one of the two pools of mortgage loans.
Credit enhancement --
o The notes will have the benefit of a financial guaranty
insurance policy to be issued by
[note insurer]
o The notes will be cross-collateralized to a limited extent.
o The notes 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.
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 Incorporated will offer the notes offered by this
prospectus supplement from time to time at varying prices to be determined at
the time of sale. The notes will be available for delivery to investors in
book-entry form through the facilities of The Depository Trust Company,
Clearstream Luxembourg and the Euroclear System on or about ______________.
Prudential Securities
The date of this prospectus supplement is ________
<PAGE>
Important notice about the information presented in this
prospectus supplement and the accompanying prospectus
We provide information to you about the notes in two separate documents
that progressively provide more detail: (1) the accompanying prospectus, which
provides general information, some of which may not apply to your series of
notes, and (2) this prospectus supplement, which describes the specific terms
of your series of notes. 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.
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY.......................................................................5
RISK FACTORS..................................................................8
TRANSACTION OVERVIEW.........................................................15
PARTIES...................................................................15
THE TRANSACTION...........................................................16
THE MORTGAGE LOAN POOLS......................................................16
THE POOL I MORTGAGE LOANS.................................................18
THE POOL II MORTGAGE LOANS................................................22
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS...................................25
THE ORIGINATORS, THE DEPOSITOR AND THE SERVICER..............................26
UNDERWRITING GUIDELINES...................................................26
THE SERVICER..............................................................26
DELINQUENCY AND LOAN LOSS EXPERIENCE......................................26
THE OWNER TRUSTEE............................................................28
THE INDENTURE TRUSTEE........................................................28
THE COLLATERAL AGENT.........................................................28
DESCRIPTION OF THE NOTES AND THE TRUST CERTIFICATES..........................28
BOOK-ENTRY REGISTRATION...................................................29
DEFINITIVE NOTES..........................................................33
ASSIGNMENT AND PLEDGE OF INITIAL MORTGAGE LOANS...........................33
ASSIGNMENT AND PLEDGE OF SUBSEQUENT MORTGAGE LOANS........................34
DELIVERY OF MORTGAGE LOAN DOCUMENTS.......................................34
REPRESENTATIONS AND WARRANTIES OF THE DEPOSITOR...........................36
PAYMENTS ON THE MORTGAGE LOANS............................................38
OVER-COLLATERALIZATION PROVISIONS.........................................40
CROSS-COLLATERALIZATION PROVISIONS........................................41
FLOW OF FUNDS.............................................................42
EVENTS OF DEFAULT.........................................................42
REPORTS TO NOTEHOLDERS....................................................44
AMENDMENT.................................................................44
SERVICING OF THE MORTGAGE LOANS..............................................44
THE SERVICER..............................................................44
SERVICING FEES AND OTHER COMPENSATION AND PAYMENT OF EXPENSES.............45
PERIODIC ADVANCES AND SERVICER ADVANCES...................................45
PREPAYMENT INTEREST SHORTFALLS............................................46
CIVIL RELIEF ACT INTEREST SHORTFALLS......................................46
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS.............................46
SERVICER REPORTS..........................................................46
COLLECTION AND OTHER SERVICING PROCEDURES.................................47
HAZARD INSURANCE..........................................................47
REALIZATION UPON DEFAULTED MORTGAGE LOANS.................................48
REMOVAL AND RESIGNATION OF THE SERVICER...................................49
OPTIONAL CLEAN-UP CALL ON THE NOTES.......................................50
TERMINATION; PURCHASE OF MORTGAGE LOANS...................................51
THE NOTE INSURANCE POLICY....................................................51
THE NOTE INSURER.............................................................55
THE NOTE INSURER..........................................................55
REINSURANCE...............................................................55
RATINGS...................................................................55
CAPITALIZATION............................................................56
INSURANCE REGULATION......................................................56
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS..................................56
GENERAL...................................................................56
WEIGHTED AVERAGE LIVES....................................................59
REPORTS TO HOLDERS OF THE NOTES...........................................65
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS...................................66
TREATMENT OF THE NOTES....................................................66
TREATMENT OF THE TRUST....................................................68
ERISA Considerations.........................................................68
LEGAL INVESTMENT.............................................................69
PLAN OF DISTRIBUTION.........................................................69
INCORPORATION OF INFORMATION BY REFERENCE....................................69
ADDITIONAL INFORMATION.......................................................70
EXPERTS......................................................................70
LEGAL MATTERS................................................................70
RATINGS......................................................................70
INDEX OF DEFINED TERMS.......................................................72
ANNEX I......................................................................75
INITIAL SETTLEMENT........................................................75
SECONDARY MARKET TRADING..................................................76
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS................77
<PAGE>
Summary
o This summary highlights selected information from this
prospectus supplement and does not contain all of the
information that you need to consider in making your investment
decision. To understand all of the terms of the offering of the
notes, carefully read this entire prospectus supplement and the
accompanying prospectus.
o This summary provides an overview of certain calculations,
cash flow priorities and other information to aid your
understanding and is qualified by the full description of these
calculations, cash flow priorities and other information in this
prospectus supplement and the accompanying prospectus. Some of
the information consists of forward-looking statements relating
to future economic performance or projections and other
financial items. Forward-looking statements are subject to a
variety of risks and uncertainties that could cause actual
results to differ from the projected results. Those risks and
uncertainties include, among others, general economic and
business conditions, regulatory initiatives and compliance with
governmental regulations, and various other matters, all of
which are beyond our control. Accordingly, what actually happens
may be very different from what we predict in our forward-
looking statements.
-------------------------------
<PAGE>
The Notes and the Trust Certificates
The __________________ will issue the class A-1
notes and the class A-2 notes.
The trust will also issue two classes of trust
certificates which are not offered by this
prospectus supplement.
Cut-off Date
----------.
Closing Date
On or about __________.
Servicer and Seller
--------------------.
The Depositor
Prudential Securities Secured Financing
Corporation, a Delaware corporation.
Trustee
______________________________, a national
banking association.
Note Insurer
___________________________, a _________
stock insurance company.
Distribution Dates
Distributions on the notes will be made on the
____ day of each month, or, if the ____ day is
not a business day, on the next business day,
beginning on _________.
Distributions of Interest
On each distribution date, noteholders will
receive the interest that has accrued on the notes.
The accrual period for the notes is the calendar
month preceding the distribution date. All
computations of interest accrued on the notes
will be made on the basis of a 360-day year
consisting of twelve 30-day months.
Distributions of Principal
On each distribution date, noteholders will
receive principal distributions. The amount of
these distributions will be based on the amount
of principal collected on the underlying
mortgage loans during the prior calendar month.
In addition, in accordance with the over-
collateralization features of the transaction,
holders may also receive extra distributions of
principal from excess interest on a distribution date.
The Mortgage Loans
The mortgage loans will be primarily [fixed-
rate/adjustable rate] loans secured by [first- or
second lien mortgages on one- to four-family
residential real properties] [first- or second lien
one- to four-family residential home equity
mortgage loans] [loans evidenced by retail
installment sales or installment loan agreements]
[manufactured housing installment sales
contracts and installment loan agreements]
[mortgaged backed certificates insured or
guaranteed by [ ]] [private mortgage backed
certificates] [and to a limited extent, loans
secured by commercial real properties].
On the closing date, the aggregate principal
balance of the pool I mortgage loans will be
approximately $_____________ and the aggregate
principal balance of the pool II mortgage loans
will be approximately $-------------.
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 the difference will
be placed in the pre-funding accounts and used
for the purchase of mortgage loans after the
closing date.
Option of the Servicer to Call Either Class of
Notes
The servicer may, at its option, call the class A-1
notes or the class A-2 notes on any distribution
date after the aggregate outstanding principal
balance of the class is equal to or less than 10% of
the aggregate original principal balance of the
class.
Option of the Servicer to Terminate the Trust
The servicer may, at its option, terminate the
trust on any distribution date after the aggregate
outstanding principal balance of all mortgage
loans is less than 10% of the sum of the
aggregate original principal balance of the
mortgage loans purchased on the closing date
and the amount on deposit in the pre-funding
accounts on the closing date.
Credit Enhancement
The credit enhancement provided for the benefit of the holders of the notes
consists solely of:
o overcollateralization, and
o the note insurance policy.
Overcollateralization
On the closing date, the initial principal balance
of the mortgage loans will exceed the note
principal balances of the notes (i.e., the
mortgage balance is "overcollateralized") by
approximately $_________. Furthermore, the
terms of the Indenture are designed to cause a
limited acceleration of the notes relative to the
amortization of the mortgage loans, thereby
causing additional overcollateralization. The
purpose of overcollateralization is to ensure that
there are excess funds available to pay interest
and principal on the notes so that the notes will
have some protection against payment shortfalls.
The required level of overcollateralization may
increase or decrease over time. Any increase
may result in an accelerated amortization of the
notes until the required level is reached. Any
decrease will result in slower amortization of the
notes until the required level is reached.
Note Insurance Policy
The note insurance policy will guaranty the
payment of principal and interest on the notes to
the extent described in this prospectus
supplement.
ERISA Considerations
Subject to the conditions described under
"ERISA Considerations" in this prospectus
supplement, 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 ____________, 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 as a taxable mortgage pool.
Each noteholder, by the acceptance of a note,
will agree to treat the notes as indebtedness.
Ratings
In order to be issued, the notes must be rated
[ ] by ________________ and [ ] by
____________, taking into account the note
insurance policy issued for the notes.
<PAGE>
Risk Factors
Investors should consider, among other things, the following factors --
as well as the factors listed under "Risk Factors" in the accompanying
prospectus -- before deciding to invest in the notes.
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 _____________ is less than the amount on deposit in
either pre-funding account on that date, the remaining amount will be applied
as a prepayment of principal on the following distribution date to the holders
of the class of notes relating to that pre-funding account. You will bear the
risk of reinvesting these unscheduled distributions and there can be no
assurance that you will be able to reinvest them at a yield equaling or
exceeding the yield or your note.
If the originators do not have sufficient additional mortgage loans that
satisfy the requirements listed on pages S-16 and S-17 of this prospectus
supplement, a prepayment will occur.
Because many of the mortgage loans backing your note were made to
borrowers with impaired or unsubstantiated credit histories, there is a
greater risk of delinquent payments on these mortgage loans, which could lead
to greater risk of losses on your note.
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 like 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.
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 concerning a borrower's credit history and in 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.
Some geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and,
consequently, will experience higher rates of loss and delinquency on mortgage
loans generally. Any concentration of the mortgage loans in any of these
regions may present risk considerations in addition to those generally present
for similar mortgage-backed securities without this 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 states listed below had the following percentages of
mortgage loans in pool I and pool II, measured as of _______, ______, which
are secured by mortgaged properties located in the their states:
_______ _______ ______ _______ ________
Pool I................ % % % % %
Pool II............... % % % % %
Because of the relative geographic concentration of the mortgage loans
within the states of _____________, _____________, _____________,
_____________ and _____________, losses on the mortgage loans may be higher
than would be the case if the mortgage loans were more geographically
diversified. For example, some of the mortgaged properties may be more
susceptible to particular types of special hazards, like 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 _____________, _____________, _____________, _____________ and
_____________ may be adversely affected to a greater degree than the economies
of other areas of the country by regional developments. If the _____________,
_____________, _____________, _____________ and _____________ residential or
commercial real estate markets experience an overall decline in property
values after the dates of origination of the respective mortgage loans, then
the rates of delinquencies, foreclosures and losses on the mortgage loans may
be expected to increase and this increase may be substantial.
[Moreover, regardless of its location, manufactured housing generally
depreciates in value. Consequently, the market value of the manufactured homes
could be or become lower than the principal balances of the related retail
installment sales contracts.]
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 securities.
Approximately ____% of the mortgage loans in pool I, measured as of
_____, ____, and ____% of the mortgage loans in pool II, measured as of ____,
____, 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 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 concerning their balloon loans and they do not
believe that their data is sufficient to predict the default experience of the
balloon loans.
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 _____% of the mortgage loans in pool I, measured as of
____, _____, and ____% of the mortgage loans in pool II, measured as of ____,
____, are secured by subordinate or junior mortgages which are subordinate to
the rights of the holder of the 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 senior mortgagee are satisfied in full, including
any foreclosure costs. In addition, a holder of a junior mortgage may not
foreclose on the mortgaged property securing the mortgage unless it either
pays the entire amount of each of the senior mortgages to the mortgagees at or
prior to the foreclosure sale or undertakes the obligation to make payments on
each of the senior mortgages in the event of default thereunder. In servicing
business and consumer purpose home equity loans in its portfolio, it is the
servicer's practice to satisfy or reinstate each 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, equals or exceeds the value of the mortgaged
properties. This type of decline would adversely affect the position of a
second mortgagee before having the same effect on the 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 first liens.
A portion of the mortgage loans are high LTV loans which may not have adequate
security in the event of a default, which could lead to losses on your note.
Even though all of the mortgage loans are secured be residential real
estate, approximately _____% of the mortgage loans in pool I, measured as of
____, _____, and ____% of the mortgage loans in pool II, measured as of ____,
____, are secured by real estate which has a value that may be close to, or
even less than, the amount of the loan. As a result, the mortgaged properties
may not provide adequate security for these high LTV loans. Underwriting
analysis of high LTV loans relies more heavily on the mortgagor's
creditworthiness than on the protection afforded by the security interest in
the underlying mortgaged property.
Additionally, there is also the risk that if the borrower moves, he or
she will be unable to pay the loan in full from the proceeds of the sale of
the property. The costs incurred by the servicer in the collection and
liquidation of high LTV loans may be higher for high LTV than for other types
loans, because the servicer may be required to pursue collection solely
against the borrower. Consequently, the losses on defaulted high LTV loans may
be more severe as there is no assurance that any proceeds will be recovered,
which could lead to losses on your note.
Security interests in the manufactured homes may not be perfected and the
issuer may not realize upon the full amount due under the loan.
Approximately _____% of the mortgage loans in pool I, measured as of
____, _____, and ____% of the mortgage loans in pool II, measured as of ____,
____, are secured by manufactured homes and, in some cases, the real estate on
which the manufactured home is located. [Approximately _____% of the loans in
pool I, measured as of ____, _____, and ____% of the loans in pool II,
measured as of ____, ____, are retail installments sales contracts or loan
agreements secured by manufactured homes.] Some federal and state laws, which
do not apply to other types of mortgage loans, limit the issuer's ability to
foreclose on manufactured homes or may limit the amount realized to less than
the amount due under the loan. These limitations could cause losses on your
note.
Unpredictability of Prepayments and Effect on Yields
Borrowers may prepay their mortgage loans in whole or in part at any
time. We cannot predict the rate at which borrowers will repay their mortgage
loans. A prepayment of a mortgage loan generally will result in a prepayment
on the notes.
o If you purchase your notes at a discount and principal is repaid
slower than you expect, then your yield may be lower than you
expect.
o If you purchase your notes at a premium and principal is repaid
faster than you expect, then your yield may be lower than you
expect.
o The rate of prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, if prevailing interest rates
decline significantly below the interest rates on the mortgage
loans, the mortgage loans are more likely to prepay than if
prevailing rates remain above the interest rates on the mortgage
loans. Conversely, if prevailing interest rates rise significantly,
the prepayments on the mortgage loans are likely to decrease.
o Approximately ____% of the mortgage loans by aggregate principal
balance as of the cut-off date require the mortgagor to pay a
penalty if the mortgagor prepays the mortgage loan during a
specified period. A prepayment penalty may discourage a mortgagor
from prepaying the mortgage loan during the applicable period.
o The seller may be required to purchase mortgage loans from the
trust in the event certain breaches of representations and warranties
occur and are not cured. In addition, the servicer has the option to
purchase mortgage loans that become ninety days or more delinquent,
subject to certain limitations and conditions described in this
prospectus supplement. These purchases will have the same effect on
the holders of the related class or classes of notes as a prepayment
of the mortgage loans.
o If the rate of default and the amount of losses on the mortgage
loans is higher than you expect, then your yield may be lower than
you expect.
o The overcollateralization provisions are intended to result in an
accelerated rate of principal distributions to holders of certain
classes of the notes.
Potential Inadequacy of Credit Enhancement for the Notes
The credit enhancement features applicable to the notes are intended to
enhance the likelihood that holders of the notes will receive regular payments
of interest and, if applicable, principal. However, the credit enhancement may
not adequately cover any shortfalls in cash available to pay your notes as a
result of delinquencies or defaults on the mortgage loans. If delinquencies or
defaults occur on the mortgage loans, neither the servicer nor any other
entity will advance scheduled monthly payments of interest and principal on
delinquent or defaulted mortgage loans if such advances are not likely to be
recovered.
If substantial losses occur as a result of defaults and delinquent
payments on the mortgage loans, and the note insurer were unable to pay under
the financial guaranty policy, you may suffer losses.
Rating of the Notes Based Primarily on Rating of the Note Insurer
The ratings on the notes will depend primarily on the claims-paying
ability of the note insurer. Therefore, a reduction of the rating assigned to
the claims-paying ability of the note insurer may result in a corresponding
reduction on the ratings assigned to the notes. In general, the ratings
address credit risk and do not address the likelihood of prepayments.
Effect of the Rate Caps on Certain Classes of Notes
The Class ___ Notes will accrue interest at the respective rates
specified on the cover of this prospectus supplement, but in each case will be
subject to a rate cap. The rate cap in each case will be based on the weighted
average of the interest rates of the mortgage loans net of certain trust
expenses. _____% of the mortgage loans accrue interest at various fixed rates.
As a result, the Class ___ Notes may accrue less interest than they would
accrue if their rates were calculated solely on the basis set forth on the
cover. The related classes of notes do not provide for any "carry-forward" or
"catch-up" if the amount of interest paid to the holders of such notes is
reduced.
Interest Payments May be Insufficient
When a mortgage loan is prepaid in full or in part, the borrower is
charged interest only up to the date on which payment is made, rather than for
an entire month. This may result in a shortfall in interest collections
available for payment on the next distribution date. The servicer is required
to cover the shortfall in interest collections that are attributable to
prepayments in full or in part, but only up to the amount of the servicer's
fee for the related accrual period. The note insurer will not be required to
cover this shortfall. If the other credit enhancement is insufficient to cover
this shortfall in excess of the servicing fee, it may adversely affect the
yield on your investment.
Furthermore, certain shortfalls in interest collections arising from the
application of the Soldiers' and Sailors' Civil Relief Act of 1940 will not be
covered by either the servicer or the note insurer.
Delay in Receipt of Liquidation Proceeds; Liquidation Proceeds May Be Less
than Mortgage Loan Balance
Substantial delays could be encountered in connection with the
liquidation of delinquent mortgage loans. Further, liquidation expenses such
as legal fees, real estate taxes and maintenance and preservation expenses may
reduce the portion of liquidation proceeds payable to you. If a mortgaged
property fails to provide adequate security for the mortgage loan, you will
incur a loss on your investment if the note insurer fails to perform its
obligations under the note insurance policy and the other credit enhancements
are insufficient to cover the loss.
Origination Risks; Seller's Reliance on Brokers and Correspondents
The seller depends largely on independent mortgage brokers and, to a
lesser extent, on correspondent lenders, for its originations and purchases of
mortgage loans, including the mortgage loans. All brokers and correspondents
in the seller's network must undergo an approval process and enter into an
agreement with the seller pursuant to which the broker or correspondent agrees
to comply with the seller's eligibility and origination requirements.
Generally, the seller underwrites all loans it funds through brokers and
purchases through correspondents, and regularly reviews the performance of
loans originated or purchased through its brokers and correspondents as well
as undertakes pre-closing and post-closing quality control procedures
involving random samples of loans to confirm that the loans are being
originated and underwritten in accordance with its guidelines (subject to
exceptions approved by the seller prior to loan funding).
The Servicer Does Not Have Any Significant Historical Loss and Delinquency Data
The servicer commenced its servicing activities for mortgage loans in
__________. As a result, the servicer has limited historical data available
regarding loan performance. Consequently, the servicer has been unable to
develop meaningful statistics relating to the historical performance of the
mortgage loans in its servicing portfolio. As a result, it is unknown how the
servicer's mortgage loan portfolio will perform relative to the portfolios of
other mortgage lenders and servicers. There can be no assurance regarding the
level of losses and delinquencies that the mortgage loans will experience.
Other Legal Considerations
Federal and state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices, among
other factors:
o regulate interest rates and other charges on mortgage loans;
o require certain disclosures to borrowers;
o require licensing of the seller and other originators; and
o regulate generally the origination, servicing and collection process
for the mortgage loans.
For example, as of the Cut-off Date, approximately ____% of the mortgage
loans (by aggregate principal balance as of the cut-off date), are subject to
the Riegle Community Development and Regulatory Improvement Act of 1994. The
Riegle Act incorporates the Home Ownership and Equity Protection Act of 1994
and certain regulations of the Truth-In-Lending Act. The Riegle Act imposes
additional disclosure and other requirements on creditors with respect to non-
purchase money home equity loans with high interest rates or high upfront fees
and charges.
Depending on the specific facts and circumstances involved, violations of
laws such as the Riegle Act may limit the ability of the trust to collect on
the mortgage loans, may entitle the borrower to a refund of amounts previously
paid and could result in liability for damages and administrative enforcement.
In addition, there may be circumstances in which the trust, as owner of the
mortgage loans, would be subject to all of the claims and defenses that a
borrower could assert against the original lender. As a result, the trust may
be subject to damages and administrative penalties arising out of unlawful
lending practices if it is determined that a violation has occurred.
Prepayments on the mortgage loans could lead to shortfalls in the payment of
interest on your note.
The scheduled monthly payment dates for 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 the prepayment,
instead of for a full month. However, the principal receipts will only be
passed through to the holders of the notes once a month, on the distribution
date which follows the calendar month in which the 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
the mortgage loan, but only to the extent of the servicing fee for that
calendar month.
If the servicer fails to make these payments or the shortfall exceeds the
servicing fee, there will be less funds available for the payment of interest
on a class of notes. These shortfalls of interest, if they result in the
inability of the trust to pay the full amount of the current interest on that
class of notes, are not covered by the note insurance policy.
[The recording of mortgages in the name of MERS may affect the yield on
the notes.
The mortgages or assignments of mortgage for some of the mortgage loans
have been or may be recorded in the name of Mortgage Electronic Registration
Systems, Inc, or MERS, solely as nominee for the originator and its successors
and assigns. Subsequent assignments of those mortgages are registered
electronically through the MERS(R) System. However, if MERS discontinues the
MERS(R) System and it becomes necessary to record an assignment of the
mortgage to the trustee, then any related expenses shall be paid by the trust
and will reduce the amount available to pay principal of and interest on the
outstanding class or classes of notes with the lowest payment priorities. The
recording of mortgages in the name of MERS is a new practice in the mortgage
lending industry. Public recording officers and others may have limited, if
any, experience with lenders seeking to foreclose mortgages, assignments of
which are registered with MERS. Accordingly, delays and additional costs in
commencing, prosecuting and completing foreclosure proceedings and conducting
foreclosure sales of the mortgaged properties could result. Those delays and
additional costs could in turn delay the distribution of liquidation proceeds
to noteholders and increase the amount of losses on the mortgage loans.]
[The [Ginnie Mae] Certificates are limited obligations of [Ginnie Mae].
The [Ginnie Mae] Certificates do not constitute a liability of, or
evidence any recourse against, the trust, the depositor or any affiliate of
the depositor, and the only recourse of the trustee as a registered holder of
the certificates is to enforce the guarantee of [Ginnie Mae.]]
[Because the trust fund includes unsecured retail installment sales contracts,
there is a greater risk of loss on your notes.
Approximately _____% of the loans in pool I, measured as of ____, _____,
and ____% of the loans in pool II, measured as of ____, ____, are secured by
retail installment sales contracts or loan agreements which are not secured by
any interest in real or personal property. The obligations of the borrower
under any unsecured contract will not be secured by an interest in the related
real estate or otherwise, and the trust, as the owner of that unsecured
contract and the trustee, as assignee for the benefit of the noteholders, of
the trust's interest in that unsecured contract, will be a general unsecured
creditor as to such obligations. As a consequence, in the event of a default
under an unsecured contract, the trust and the trustee will have recourse only
against the borrower's assets generally, along with all other general
unsecured creditors of the borrower. In a bankruptcy or insolvency proceeding
relating to a borrower on an unsecured contract, the obligations of the
borrower under that unsecured contract may be discharged in their entirety,
notwithstanding the fact that the portion of that borrower's assets made
available to the trustee as a general unsecured creditor to pay amounts due
and owing thereunder are insufficient to pay all those amounts. A borrower on
an unsecured contract may not demonstrate the same degree of concern over
performance of its obligations under the unsecured contract as if the
obligations were secured by a single family residence owned by that borrower.]
[Cash flow limited in early years of home equity revolving credit line
mortgage loans.
During the first [ ]-year draw down period under the credit line
agreements, borrowers are not required to make monthly payments of principal.
As a result, collections on the mortgage loans may vary. With respect to some
of the mortgage loans, during the second [ ]-year draw down period, no monthly
payments of principal are required. Collections on the mortgage loans may also
vary due to seasonal purchasing and payment habits of borrowers. As a result,
there may be limited collections available to make payments to you.
General credit risk may also be greater to you than to holders of
instruments representing interests in level payment first mortgage loans since
no payment of principal of the mortgage loans generally is required until
after either a five- or ten-year interest-only period. Minimum monthly
payments are required to equal or exceed accrued interest on the mortgage
loans.]
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. ___________________, a Delaware business trust. The principal
executive office of the trust is in Wilmington, Delaware, in care of the owner
trustee, at the address of the owner trustee specified below.
The Sponsor. Prudential Securities Secured Financing Corporation, a
Delaware corporation. The principal executive office of the sponsor is located
at One New York Plaza, 14th Floor, New York, New York 10292, and its telephone
number is (212) 778-1000.
The Depositor. ________________, a __________ corporation, which is owned
by the originators. The principal executive office of the depositor is at
___________________________, and its telephone number is ______________.
The Originators. _____________, a _____________ corporation, and
_____________, a _____________ corporation, originated or purchased the
mortgage loans. For a description of the business of the originators, see "The
Originators, the Depositor and the Servicer" in this prospectus supplement.
The Servicer and the Subservicers. _____________ will act as servicer of
the mortgage loans, and _____________ and _____________ will act as
subservicers for different portions of the mortgage loans. For a description
of the business of the servicer, see "The Originators, the Depositor and the
Servicer" in this prospectus supplement.
The Indenture Trustee. _____________, a _____________ banking
corporation. The corporate trust office of the indenture trustee is located at
_____________, and its telephone number is _____________. For a description of
the indenture trustee and its responsibilities concerning the notes, see "The
Indenture Trustee" in this prospectus supplement.
The Owner Trustee. ___________________________, a national banking
association. The corporate trust office of the owner trustee is located at
_______________________, and its telephone number is _____________. For a
description of the owner trustee and its responsibilities concerning the notes
and the mortgage loans, see "The Owner Trustee" in this prospectus supplement.
The Collateral Agent. _________________________, a national banking
association. The corporate trust office of the collateral agent is located at
________________________, and its telephone number is _____________.
The Note Insurer. ___________________________, a _____________ 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" in this
prospectus supplement.
The Rating Agencies. ________________________________ and
__________________ will issue ratings for 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
_____________, between the owner trustee and the depositor. Under the Trust
Agreement, the trust will also issue the trust certificates to the depositor,
each evidencing the entire beneficial ownership interest in the sub-trust of
the trust consisting of a pool of mortgage loans.
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 Depositor
and the Servicer." The originators will sell the mortgage loans to the
depositor, pursuant to Loan Sale Agreement, dated as of _____________, among
the originators and the depositor. The depositor will sell the mortgage loans
to the trust pursuant to a Sale and Servicing Agreement, dated as of
_____________, 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
_____________, 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 _____________, among the note insurer, the trust, the
depositor, 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 _______, ____. Pool I aggregated
$_____________ as of the statistical calculation date and pool II aggregated
$_____________ as of the statistical calculation date. The depositor expects
that the actual pools on the closing date will represent approximately
$_____________ in aggregate principal balance of mortgage loans in pool I, as
of a cut-off date of ______________, ___________, and approximately
$_____________ in aggregate principal balance of mortgage loans in pool II, as
of the cut-off date. The additional mortgage loans will represent mortgage
loans acquired or to be acquired by the trust on or prior to the closing date.
In addition, the pools that existed on the statistical calculation date, for
which statistical information is presented in this prospectus supplement, will
amortize in part prior to the closing date. Moreover, some 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 the characteristics as of the statistical calculation date as
presented in this prospectus supplement, although this 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 this date, the depositor will increase the size of the
pre-funding accounts and the capitalized interest accounts, as applicable.
Additional mortgage loans are intended to be purchased by the trust from
time to time on or before _____________ 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 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
specified characteristics described below under " -- Conveyance of subsequent
mortgage loans."
Unless otherwise noted, all statistical percentages in this prospectus
supplement are approximate and are measured by the aggregate principal balance
of the 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 mortgage loans will be predominantly business 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 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 mobile home or
a unit in a planned unit development -- and commercial or mixed use property.
The mortgaged properties may be owner-occupied properties, which includes
second and vacation homes, non-owner occupied investment properties or
business purpose properties.
The majority of the mortgage loans have a prepayment fee clause. These
prepayment fee clauses generally provide that the mortgagor pay, upon
prepayment, one or more of the following:
o a fee equal to a percentage, 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 than would be required to be paid if
the actuarial method of calculating interest was utilized.
[The "contracts" consist of fixed rate and variable rate manufactured
housing installment sales contracts and installment loan agreements (the
"manufactured housing contracts"). The manufactured housing contracts are
secured by security interests in manufactured homes (the "manufactured homes")
purchased with the proceeds of the contracts and, with respect to certain of
the contracts (the "land-and-home contracts"), secured by liens on the real
estate on which the related manufactured homes are located. The contracts, as
of origination, were secured by manufactured homes or mortgaged properties
located in [ ] states. The statistical information presented in this
Prospectus Supplement concerning the contract pool is based on the contract
pool of contracts as of the Cut-off Date.]
[A borrower may access a home equity loan by writing a check. On all home
equity loans, there is [a ten-year] draw down period as long as the borrower
is not in default under the loan agreement. Home equity loans bear interest at
a variable rate which may change bi-weekly. Home equity loans may be subject
to a maximum per annum interest rate of ____% and in all cases, are subject to
applicable usury limitations. The loan rate is the sum of the index rate plus
a spread which generally ranges between ____% and ____%, divided by 365 days
or 366 days.]
The Pool I Mortgage Loans
As of the statistical calculation date, each of the mortgage loans in
pool I had a remaining term to maturity of no greater than 360 months and had
a mortgage interest rate of at least ____% per annum.
The combined loan-to-value ratios or CLTV's described in this prospectus
supplement were calculated based upon the appraised values of the mortgaged
properties at the time of origination. No assurance can be given that the
appraised values of the mortgaged properties have remained or will remain at
the levels that existed on the dates of origination of the mortgage loans. If
property values decline and cause the outstanding principal balances of the
mortgage loans, together with the outstanding principal balances of any first
liens, 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 historically experienced by the servicer, as described
below under "The Originators, the Depositor and the Servicer -- Delinquency
and Loan Loss Experience," and in the mortgage lending industry generally.
As of the statistical calculation date, the mortgage loans in pool I had
the following characteristics:
o there were ___ mortgage loans under which the mortgaged properties
are located in __ states,
o the aggregate principal balance, after application of all payments
due on or before the statistical calculation date, was
$_____________,
o the minimum principal balance was $_____________, the maximum
principal balance was $_____________, and the average principal
balance was $_____________,
o the mortgage interest rates ranged from _____% to ____% per annum,
and the weighted average mortgage interest rate was approximately
____% per annum,
o the original term to stated maturity ranged from ___ months to 360
months,
o the remaining term to stated maturity ranged from __ months to ____
months, the weighted average original term to stated maturity was
approximately ___ months and the weighted average remaining term to
stated maturity was approximately ____ months,
o no mortgage loan had a maturity later than _________,
o approximately _______% of the aggregate principal balance of the
mortgage loans require monthly payments of principal that will fully
amortize these mortgage loans by their respective maturity dates,
and approximately ____% of the aggregate principal balance of the
mortgage loans are balloon loans,
o the weighted average CLTV was approximately _____%,
o approximately _____% of mortgage loans are secured by first liens,
and approximately _____% of mortgage loans are secured by second
liens, and
o approximately _____%, _____%, ____%, _____% and ____% of the
mortgage loans are secured by mortgaged properties located in the
States of _____________, _____________, _____________, _____________
and _____________, respectively.
On or prior to _____________, 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 $_____________.
<PAGE>
The following tables present statistical information on the mortgage
loans in pool I. Due to rounding, the percentages shown may not precisely
total 100.00%.
<TABLE>
<CAPTION>
Pool I
Geographical Distribution of Mortgaged Properties
<S> <C> <C> <C>
Number of Aggregate Unpaid % of Statistical Calculation Date
State Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution of CLTV Ratios
Original Number of Aggregate Unpaid % of Statistical Calculation Date
CLTV Range Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution of Gross Mortgage Interest Rates
Gross Mortgage
Interest Rate Number of Aggregate Unpaid % of Statistical Calculation Date
Range Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution of Original Terms to Maturity
(in months)
Range of
Original
Terms Number of Aggregate Unpaid % of Statistical Calculation Date
in months) Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution of Remaining Terms to Maturity
(in months)
Range of
Remaining
Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution of Original Principal Balances
Range of
Original
Mortgage Loan
Principal Number of Aggregate Unpaid % of Statistical Calculation Date
Balances Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution of Current Principal Balances
Range of
Current
Mortgage Loan
Principal Number of Aggregate Unpaid % of Statistical Calculation Date
Balances Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution by Lien Status
Number of Aggregate Unpaid % of Statistical Calculation Date
Lien Status Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution by Amortization Type
Amortization Number of Aggregate Unpaid % of Statistical Calculation Date
Type Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution by Occupancy Status
Occupancy Number of Aggregate Unpaid % of Statistical Calculation Date
Status Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution by Property Type
Property Number of Aggregate Unpaid % of Statistical Calculation Date
Type Mortgage Loans Principal Balance Aggregate Principal Balance
Total
</TABLE>
The Pool II Mortgage Loans
As of the statistical calculation date, each of the mortgage loans in
pool II had a remaining term to maturity of no greater than 360 months and had
a mortgage interest rate of at least _____% per annum.
The CLTVs described in this prospectus supplement were calculated based
upon the appraised values of the mortgaged properties at the time of
origination. No assurance can be given that the appraised values of the
mortgaged properties have remained or will remain at the levels that existed
on the dates of origination of the mortgage loans. If property values decline
and cause the outstanding principal balances of the mortgage loans, together
with the outstanding principal balances of any first liens, 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 historically
experienced by the servicer, as described below under "The Originators, the
Depositor and the Servicer -- Delinquency and Loan Loss Experience," and in
the mortgage lending industry.
As of the statistical calculation date, the mortgage loans in pool II had
the following characteristics:
o there were ___ mortgage loans under which the mortgaged properties
are located in ___ states,
o the aggregate principal balance, after application of all payments
due on or before the statistical calculation date, was
$_____________,
o the minimum principal balance was $_____________, the maximum
principal balance was $_____________, and the average principal
balance was $_____________,
o the mortgage interest rates ranged from ____% to ___% per annum, and
the weighted average mortgage interest rate was approximately ___%
per annum,
o the original term to stated maturity ranged from __ months to 360
months,
o the remaining term to stated maturity ranged from __ months to ___
months, the weighted average original term to stated maturity was
approximately ___ months and the weighted average remaining term to
stated maturity was approximately ___ months,
o no mortgage loan had a maturity later than _____________,
o approximately ____% of the aggregate principal balance of the
mortgage loans require monthly payments of principal that will fully
amortize these mortgage loans by their respective maturity dates,
and approximately ____% of the aggregate principal balance of the
mortgage loans are balloon loans,
o the weighted average CLTV was approximately ____%,
o approximately ____% of mortgage loans are secured by first liens,
and approximately ____% of mortgage loans are secured by second
liens, and
o approximately ___%, ___%, ____%, ____% and ____% of the mortgage
loans are secured by mortgaged properties located in the States of
_____________, _____________, _____________, _____________ and
_____________, respectively.
On or prior to _____________, 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 $_____________.
The following tables present statistical information on the mortgage
loans in pool II. Due to rounding, the percentages shown may not precisely
total 100.00%.
<TABLE>
<CAPTION>
Geographical Distribution of Mortgaged Properties
<S> <C> <C> <C>
Number of Aggregate Unpaid % of Statistical Calculation Date
State Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution of CLTV Ratios
Original Number of Aggregate Unpaid % of Statistical Calculation Date
CLTV Ratio Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution of Gross Mortgage Interest Rates
Gross Mortgage
Interest Rate Number of Aggregate Unpaid % of Statistical Calculation Date
Range Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution of Original Terms to Maturity
(in months)
Range of
Original
Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution of Remaining Terms to Maturity
(in months)
Range of
Remaining
Terms Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution of Original Principal Balances
Range of
Original
Mortgage
Loan Principal Number of Aggregate Unpaid % of Statistical Calculation Date
Balances Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution of Current Principal Balances
Range of
Current
Mortgage
Loan
Principal Number of Aggregate Unpaid % of Statistical Calculation Date
Balances Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution by Lien Status
Number of Aggregate Unpaid % of Statistical Calculation Date
Lien Status Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution by Amortization Type
Amortization Number of Aggregate Unpaid % of Statistical Calculation Date
Type Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution by Occupancy Status
Occupancy Number of Aggregate Unpaid % of Statistical Calculation Date
Status Mortgage Loans Principal Balance Aggregate Principal Balance
Total
Distribution by Property Type
Number of Aggregate Unpaid % of Statistical Calculation Date
Property Type Mortgage Loans Principal Balance Aggregate Principal Balance
Total
</TABLE>
Conveyance of subsequent mortgage loans
The Indenture permits the trust to acquire subsequent mortgage loans with
the funds on deposit in the pre-funding accounts. It is expected that the
amount on deposit in the pre-funding accounts on the closing date will be
approximately $_____________ for pool I and $_____________ for pool II.
Accordingly, the statistical characteristics of the mortgage loans in pool I
and pool II will vary as of any subsequent cut-off date upon the acquisition
of subsequent mortgage loans.
The obligation of the trust to purchase the subsequent mortgage loans on
any subsequent transfer date during the Pre-Funding Period is subject to the
following requirements:
o the subsequent mortgage loan may not be 30 or more days
contractually delinquent as of a subsequent cut-off date which is
the close of business on the last day of the calendar month
preceding the month in which the subsequent mortgage loan was
purchased by the trust;
o the original term to maturity of the subsequent mortgage loan may
not exceed 360 months for pool I and 360 months for pool II;
o the subsequent mortgage loan must have a mortgage interest rate of
at least ____% for pool I and ____% for pool II;
o the purchase of the subsequent mortgage loans is consented to by the
note insurer and the rating agencies, notwithstanding the fact that
the subsequent mortgage loans meet the parameters stated in this
prospectus supplement;
o the principal balance of any subsequent mortgage loan may not exceed
$_____________ for pool I and $_____________ for pool II;
o no more than _____% for pool I and ____% for pool II of the
aggregate principal balance of the subsequent mortgage loans may be
second liens;
o no subsequent mortgage loan shall have a CLTV of more than (a) for
consumer purpose loans, ___% for pool I and ____% for pool II, and
(b) for business purpose loans, ___% for pool I and ___% for pool
II;
o no more than ____% for pool I and ___% for pool II of the subsequent
mortgage loans may be balloon loans;
o no more than ____% for pool I and ____% for pool II of the
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 the subsequent mortgage loans by the
trust, the mortgage loans, including the subsequent mortgage loans,
(a) will have a weighted average mortgage interest rate, (I) for
consumer purpose loans, of at least ____% for pool I and ____% for
pool II and (II) for business purpose loans, of at least ____% for
pool I and ____% for pool II; and (b) will have a weighted average
CLTV of not more than (I) for consumer purpose loans, ____% for pool
I and ____% for pool II, and (II) for business purpose loans, ____%
for pool I and ____% for pool II.
The Indenture will provide that any of these 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 Depositor and the Servicer
[Corporate description]
[To be supplied by originators, depositor and servicer]
Underwriting Guidelines
[To be supplied by originators]
The Servicer
[To be supplied by servicer]
Delinquency and Loan Loss Experience
The following tables present information relating to the delinquency and
loan loss experience on the mortgage loans included in originators servicing
portfolio for the periods shown. The delinquency and loan loss experience
represents the historical experience of the originators, 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 the
originators' overall servicing portfolio.
<TABLE>
<CAPTION>
Delinquency and Foreclosure Experience
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
At At At
% of % of % of
Amount Amount Amount Amount Amount Amount
Serviced Serviced Serviced Serviced Serviced Serviced
Servicing portfolio.....
Past due loans:
60-89 days..........
90 days or more ....
Total past due loans....
REO Properties..........
Total past due loans,
foreclosures pending
and REO Properties(3)...
</TABLE>
The foregoing table was prepared assuming that:
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.
Loan Charge-Off Experience
(Dollars in Thousands)
At At At
Servicing portfolio at period end.........
Average outstanding.......................
Gross losses............................
Loan recoveries.........................
Net loan charge-offs....................
Net loan charge-offs as a percentage
of servicing portfolio at period end....
Net loan charge-offs as a percentage
of average outstanding..................
The foregoing table was prepared assuming that:
o "average outstanding" 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 this period; and
o "gross losses" means the outstanding principal balance plus accrued but
unpaid interest on liquidated mortgage loans.
While the above delinquency and foreclosure and loan charge-off
experiences are typical of the originators' experiences at the dates for the
periods indicated, there can be no assurance that the delinquency and
foreclosure and loan charge-off experiences on the mortgage loans will be
similar. Accordingly, the information should not be considered to reflect the
credit quality of the mortgage loans included in the trust, or as a basis of
assessing the likelihood, amount or severity of losses on the mortgage loans.
The statistical data in the tables is based on all of the mortgage loans in
the originators' servicing portfolio. The mortgage loans, in general, may have
characteristics which distinguish them from the majority of the loans in the
originators' servicing portfolio.
The Owner Trustee
________________________, a national banking association, has its
corporate trust offices located at ________________________. The owner trustee
will perform limited administrative functions on behalf of the trust pursuant
to the Trust Agreement. The owner trustee's duties in connection with the
issuance and sale of the notes are limited solely to its express obligations
under the Trust Agreement.
The Indenture Trustee
________________________, a ____________ banking corporation, has an
office at ________________________. The indenture trustee will act as initial
authenticating agent, paying agent and note registrar pursuant to the terms of
the Indenture.
The Collateral Agent
________________________, a national banking association, has its
corporate trust office at ________________________. 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 and the
Class A-2 notes pursuant to the Indenture. Each Class A-1 note represents a
debt obligation of the trust secured by a pledge of the portion of the trust
estate consisting of the pool I mortgage loans and, to the extent provided in
this prospectus supplement, the pool II mortgage loans. Each Class A-2 note
represents a debt obligation of the trust secured by a pledge of the portion
of the trust estate consisting of the pool II mortgage loans and, to the
extent provided in this prospectus supplement, the pool I mortgage loans.
Pursuant to the Trust Agreement, the trust will also issue two classes of
trust certificates, together representing the entire beneficial ownership
interest in the trust. Each class of trust certificate will represent the
entire beneficial ownership interest in one pool of mortgage loans. 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 the 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 relating to the trust,
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 under all insurance policies required to
be maintained on the mortgage loans pursuant to the Sale and Servicing
Agreement and any insurance proceeds,
o Liquidation Proceeds and
o released mortgaged property proceeds. In addition, the depositor 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 in this
prospectus supplement.
The notes will be issued only in book-entry form, in denominations of
$1,000 initial principal balance and integral multiples of $1,000 in excess
thereof, except that one note of each class may be issued in a different
amount.
Book-Entry Registration
The notes are sometimes referred to in this prospectus supplement as
"book-entry notes." No person acquiring an interest in the book-entry notes
will be entitled to receive a definitive note representing an obligation of
the trust, except under the limited circumstances described in this prospectus
supplement.
The beneficial owner's ownership of a Book-Entry Note will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Note will be recorded on the records of DTC (or
of a participating firm that acts as agent for the Financial Intermediary,
whose interest will in turn be recorded on the records of DTC, if the
beneficial owner's Financial Intermediary is not a DTC participant and on the
records of Clearstream Luxembourg or Euroclear, as appropriate).
Note Owners will receive all distributions of principal of and interest
on the Book-Entry Notes from the Trustee through DTC and DTC participants.
While the Book-Entry Notes are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "DTC Rules"), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect
to the Book-Entry Notes and is required to receive and transmit distributions
of principal of, and interest on, the Book-Entry Notes. Participants and
indirect participants with whom Note Owners have accounts with respect to
Book-Entry Notes are similarly required to make book-entry transfers and
receive and transmit such distributions on behalf of their respective Note
Owners. Accordingly, although Note Owners will not possess notes representing
their respective interests in the Book-Entry Notes, the DTC Rules provide a
mechanism by which Note Owners will receive distributions and will be able to
transfer their interest.
Noteholders will not receive or be entitled to receive notes representing
their respective interests in the Book-Entry Notes, except under the limited
circumstances described below. Unless and until Definitive Notes are issued,
Noteholders who are not Participants may transfer ownership of Book-Entry
Notes only through Participants and indirect participants by instructing such
Participants and indirect participants to transfer Book-Entry Notes, by
book-entry transfer, through DTC for the account of the purchasers of such
Book-Entry Notes, which account is maintained with their respective
Participants. Under the DTC Rules and in accordance with DTC's normal
procedures, transfers of ownership of Book-Entry Notes will be executed
through DTC and the accounts of the respective Participants at DTC will be
debited and credited. Similarly, the Participants and indirect participants
will make debits or credits, as the case may be, on their records on behalf of
the selling and purchasing Noteholders.
Because of time zone differences, credits of securities received in
Clearstream Luxembourg 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 Clearstream Luxembourg Participants on
such business day. Cash received in Clearstream Luxembourg or Euroclear as a
result of sales of securities by or through a Clearstream Luxembourg
Participant (as defined below) or Euroclear Participant (as defined below) to
a DTC Participant will be received with value on the DTC settlement date but
will be available in the relevant Clearstream Luxembourg 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 Considerations -- Foreign Investors"
and "-- Backup Withholding" in the Prospectus and "Global Clearance,
Settlement and Tax Documentation Procedures -- Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between Clearstream Luxembourg 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 Clearstream
Luxembourg Participants or Euroclear Participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant
European international clearing system by the Relevant Depositary; however,
such cross market transactions will require delivery of instructions to the
relevant European international clearing system by the counterparty in such
system in accordance with its rules and procedures and within its established
deadlines (European time). The relevant European international clearing system
will, if the transaction meets its settlement requirements, deliver
instructions to the Relevant Depositary to take action to effect final
settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same day
funds settlement applicable to DTC. Clearstream Luxembourg Participants and
Euroclear Participants may not deliver instructions directly to the European
Depositaries.
DTC which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives)
own DTC. In accordance with its normal procedures, DTC is expected to record
the positions held by each DTC participant in the Book-Entry Notes, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Notes will be subject to the DTC Rules, as
in effect from time to time.
Clearstream Banking, societe anonyme (referred to herein as Clearstream
Luxembourg) is incorporated under the laws of Luxembourg as a professional
depository. Clearstream Luxembourg holds securities for its participating
organizations ("Clearstream Luxembourg Participants") and facilitates the
clearance and settlement of securities transactions between Clearstream
Luxembourg Participants through electronic book-entry changes in accounts of
Clearstream Luxembourg Participants, thereby eliminating the need for physical
movement of notes. Transactions may be settled in Clearstream Luxembourg in
any of 28 currencies, including United States dollars. Clearstream Luxembourg
provides to its Clearstream Luxembourg Participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally-traded securities and securities lending and borrowing.
Clearstream Luxembourg interfaces with domestic markets in several countries.
As a professional depository, Clearstream Luxembourg is subject to regulation
by the Luxembourg Monetary Institute. Clearstream Luxembourg 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 Clearstream Luxembourg is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Clearstream
Luxembourg Participant, either directly or indirectly.
The Euroclear System ("Euroclear") was created in 1968 to hold securities
for its participants ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of notes and any risk from lack of simultaneous transfers of
securities and cash. Transactions may be settled in any of 35 currencies,
including United States dollars. Euroclear includes various other services,
including securities lending and borrowing and interfaces with domestic
markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. Euroclear is operated by the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific notes to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Notes will be made on each Distribution
Date by the Trustee to DTC. DTC will be responsible for crediting the amount
of such payments to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments 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 Trustee to Cede & Co. Distributions with respect to Notes
held through Clearstream Luxembourg or Euroclear will be credited to the cash
accounts of Clearstream Luxembourg Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Material Federal Income Tax Considerations -- Foreign Investors" and "--
Backup Withholding" in the Prospectus. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a beneficial owner to pledge
Book-Entry Notes to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Notes, may be limited due to the lack of physical notes for such Book-Entry
Notes. In addition, issuance of the Book-Entry Notes in book-entry form may
reduce the liquidity of such Notes in the secondary market since certain
potential investors may be unwilling to purchase Notes for which they cannot
obtain physical notes.
Monthly and annual reports on the Trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the Depository, and to the Financial Intermediaries to
whose DTC accounts the Book-Entry Notes of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive Notes are
issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Notes under the Pooling and Servicing Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Notes are credited, to the extent that such actions are taken on
behalf of Financial Intermediaries whose holdings include such Book-Entry
Notes. Clearstream Luxembourg or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by a Noteholder under the
Pooling and Servicing Agreement on behalf of a Clearstream Luxembourg
Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to the ability of the Relevant Depositary to
effect such actions on its behalf through DTC. DTC may take actions, at the
direction of the related Participants, with respect to some Book-Entry Notes
which conflict with actions taken with respect to other Book-Entry Notes.
Definitive Notes will be issued to beneficial owners of the Book-Entry
Notes, or their nominees, rather than to DTC, only if (a) DTC or the Depositor
advises the Trustee in writing that DTC is no longer willing, qualified or
able to discharge properly its responsibilities as nominee and depository with
respect to the Book-Entry Notes and the Depositor or the Trustee is unable to
locate a qualified successor, (b) the Depositor, at its sole option, with the
consent of the Trustee, elects to terminate a book-entry system through DTC or
(c) after the occurrence of an Event of Default, beneficial owners having
Percentage Interests aggregating not less than 51% of the Book-Entry Notes
advise the Trustee and DTC through the Financial Intermediaries and the DTC
participants in writing that the continuation of a book-entry system through
DTC (or a successor thereto) is no longer in the best interests of beneficial
owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Notes. Upon surrender by DTC of the global note or notes
representing the Book-Entry Notes and instructions for re-registration, the
Trustee will issue Definitive Notes, and thereafter the Trustee will recognize
the holders of such Definitive Notes as Noteholders under the Pooling and
Servicing Agreement.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Book-Entry Notes
among participants of DTC, Clearstream Luxembourg 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 of 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. Distributions of principal of, and interest on, the
book-entry notes will thereafter be made by the indenture trustee, or a paying
agent on behalf of the indenture trustee, directly to holders of definitive
notes in accordance with the procedures set forth in the Indenture.
Definitive notes will be transferable and exchangeable at the offices of
the indenture trustee or the note registrar. No service charge will be imposed
for any registration of transfer or exchange, but the indenture trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
Assignment and Pledge of Initial Mortgage Loans
Pursuant to the Loan Sale Agreement, the originators will sell, transfer,
assign, set over and otherwise convey the mortgage loans, 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 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 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, principal, including
principal prepayments in full and curtailments or partial prepayments,
received on each mortgage loan on or prior to the cut-off date and 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 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 ____________.
The amount on deposit in the pre-funding accounts will be reduced during
the this period by the amount thereof used to purchase subsequent mortgage
loans in accordance with the terms of the Indenture. The depositor expects
that the amount on deposit in each of the pre-funding accounts will be reduced
to less than $100,000 by ____________. To the extent funds in the pre-funding
accounts are not used to purchase subsequent mortgage loans by ____________,
these funds will be used to prepay the principal of the notes on the following
distribution date. Subsequent mortgage loans will be transferred by the
originators 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 concerning each mortgage loan which constitute the
mortgage file:
(a) the original mortgage note, endorsed without recourse in blank by
the originator, including all intervening endorsements showing a
complete chain of endorsement;
(b) the original mortgage with evidence of recording indicated thereon
or, in 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 mortgage loan to the
originator -- which assignment may, at the 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 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 the mortgage or
mortgage note has been assumed; and
(f) an original title insurance policy or (A) a copy of the title
insurance policy, or (B) a binder thereof or copy of the binder
together with a certificate from the originator that the original
mortgage has been delivered to the title insurance company that
issued the 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, for subsequent mortgage loans, on or prior to the
subsequent transfer date, an acknowledgment of receipt of the original
mortgage note, item (a) above, for 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, for 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 of these documents has been reviewed by it and has not been
mutilated, damaged, torn or otherwise physically altered, appears
regular on its face and relates to the mortgage loan, and
o based on its examination and only as to the foregoing documents,
specified information included on the schedule of mortgage loans
accurately reflects the information included in the mortgage file
delivered on that date.
If the collateral agent, during the process of reviewing the mortgage
files, finds any document constituting a part of an 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 included in the schedule of mortgage loans, the
collateral agent shall promptly so notify the indenture trustee, the servicer,
the depositor and the note insurer in writing with details thereof. The
depositor agrees to use reasonable efforts to cause to be remedied a material
defect in a document constituting part of an mortgage file of which it is so
notified by the collateral agent. If, however, within sixty days after the
collateral agent's notice of the defect, the depositor 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 depositor or the originator will either (a) substitute
in lieu of the mortgage loan a Qualified Substitute Mortgage Loan and, if the
then outstanding principal balance of the Qualified Substitute Mortgage Loan
is less than the principal balance of the mortgage loan as of the date of the
substitution plus accrued and unpaid interest thereon, deliver to the servicer
a substitution adjustment equal to the amount of this shortfall or (b)
purchase the mortgage loan at a price equal to the outstanding principal
balance of the mortgage loan as of the date of purchase, plus the greater of
(1) all accrued and unpaid interest thereon and (2) thirty days' interest
thereon, computed at the 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 Distribution Account on the next succeeding servicer
remittance date after deducting therefrom any amounts received in respect of
the repurchased mortgage loan or Loans and being held in the Distribution
Account for future distribution to the extent these amounts have not yet been
applied to principal or interest on the mortgage loan. In addition, the
depositor and the originators shall be obligated to indemnify the indenture
trustee, the collateral agent, the holders of the notes and the note insurer
for any third-party claims arising out of a breach by the depositor or the
originators of representations or warranties regarding the mortgage loans. The
obligation of the depositor and the originators to cure a breach or to
substitute or purchase any mortgage loan and to indemnify constitute the sole
remedies respecting a material breach of any representation or warranty to the
holders of the notes, the indenture trustee, the collateral agent and the note
insurer.
[The original mortgages for some of the mortgage loans have been, or in
the future may be, at the sole discretion of the servicer, recorded in the
name of Mortgage Electronic Registration Systems, Inc, or MERS, solely as
nominee for the originator and its successors and assigns, and subsequent
assignments of those mortgages have been, or in the future may be, at the sole
discretion of the master servicer, registered electronically through the
MERS(R)System. In some other cases, the original mortgage was recorded in the
name of the originator of the mortgage loan, record ownership was later
assigned to MERS, solely as nominee for the owner of the mortgage loan, and
subsequent assignments of the mortgage were, or in the future may be, at the
sole discretion of the servicer, registered electronically through the
MERS(R)System. For each of these mortgage loans, MERS serves as mortgagee of
record on the mortgage solely as a nominee in an administrative capacity on
behalf of the trustee, and does not have any interest in the mortgage loan.
The recording of mortgages in the name of MERS is a new practice in the
mortgage lending industry. While the depositor expects that the servicer or
applicable subservicer will be able to commence foreclosure proceedings on the
mortgaged properties, when necessary and appropriate, public recording
officers and others, however, may have limited, if any, experience with
lenders seeking to foreclose mortgages, assignments of which are registered
with MERS. Accordingly, delays and additional costs in commencing, prosecuting
and completing foreclosure proceedings, defending litigation commenced by
third parties and conducting foreclosure sales of the mortgaged properties
could result. Those delays and additional costs could in turn delay the
distribution of liquidation proceeds to the noteholders and increase the
amount of realized losses on the mortgage loans. In addition, if, as a result
of MERS discontinuing or becoming unable to continue operations in connection
with the MERS(R) System, it becomes necessary to remove any mortgage loan from
registration on the MERS(R) System and to arrange for the assignment of the
related mortgages to the trustee, then any related expenses shall be
reimbursable by the trust to the servicer, which will reduce the amount
available to pay principal of and interest on the outstanding class or classes
of notes with the lowest payment priorities.]
Representations and Warranties of the Depositor
The depositor will represent, among other things, for each mortgage loan,
as of the closing date or the subsequent transfer date, as applicable, the
following:
1. the information included in the schedule of mortgage loans for
each mortgage loan is true and correct;
2. all of the original or certified documentation constituting the
mortgage files, including all material documents concerning the mortgage
loan, 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 mobile home unit, or an individual unit in a planned
unit development, or a commercial property, or a mixed use or multiple
purpose property. The 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 manufactured dwelling,
o a log-constructed home, or
o a recreational vehicle;
4. each mortgage is a valid first or second lien on a fee simple, or
its equivalent under applicable state law, estate in the real property
securing the amount owed by the mortgagor under the mortgage note subject
only to,
o the lien of current real property taxes and assessments which are
not delinquent,
o any first mortgage loan on the property,
o covenants, conditions and restrictions, rights of way, easements and
other matters of public record as of the date of recording of the
mortgage, the 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 mortgage loan obtained by the depositor, 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 the mortgage;
5. immediately prior to the transfer and assignment by the depositor
to the depositor, the depositor had good title to, and was the sole owner
of each mortgage loan, free of any interest of any other person, and the
depositor has transferred all right, title and interest in each mortgage
loan to the depositor;
6. each mortgage loan conforms, and all the mortgage loans in the
aggregate conform, to the description thereof in this prospectus
supplement; and
7. all of the mortgage loans were originated in accordance with the
underwriting criteria described in this prospectus supplement.
Pursuant to the Sale and Servicing Agreement, upon the discovery by any
of the holder of the notes, the depositor, 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 mortgage loan or the interests of the note
insurer were materially and adversely affected, notwithstanding that any
representation and warranty was made to the depositor's or the originator's
best knowledge and the depositor or the originator lacked knowledge of the
breach, the party discovering the breach is required to give prompt written
notice to the other parties. Subject to specified provisions of the Sale and
Servicing Agreement, within sixty days of the earlier to occur of the
depositor's or an originator's discovery or its receipt of notice of any
breach, the depositor or the originators will
o promptly cure the breach in all material respects,
o remove each mortgage loan which has given rise to the requirement
for action by the depositor or the originators, substitute one or
more Qualified Substitute Mortgage Loans and, if the outstanding
principal balance of the Qualified Substitute Mortgage Loans as of
the date of the 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 the distribution
date the amount of the shortfall, or
o purchase the mortgage loan at a price equal to the principal balance
of the mortgage loan as of the date of purchase plus the greater of
o all accrued and unpaid interest thereon and
o thirty days' interest thereon computed at the mortgage interest
rate, net of the servicing fee if ____________ is the servicer,
plus the amount of any unreimbursed servicing advances made by
the servicer,
and deposit the purchase price into the Distribution Account on the next
succeeding servicer remittance date after deducting therefrom any amounts
received in respect of this repurchased mortgage loan or mortgage loans and
being held in the Distribution Account for future distribution to the extent
these amounts have not yet been applied to principal or interest on the
mortgage loan. In addition, the depositor 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 depositor or the originators
of representations or warranties regarding the mortgage loans. The obligation
of the depositor and the originators to cure any breach or to substitute or
purchase any mortgage loan and to indemnify constitute the sole remedies
respecting a material breach of any 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 (a) 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 (b) 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 Distribution Account, as described below.
The servicer is obligated to deposit or cause to be deposited in the
Collection Account on a daily basis, amounts representing the following
payments received and collections made by it after the cut-off date, other
than in respect of monthly payments on the mortgage loans due on each mortgage
loan up to and including any due date occurring on or prior to the cut-off
date:
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
the proceeds are not to be applied to the restoration of the
mortgaged property or released to the 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 an account for each
class of notes a distribution account into which the servicer will deposit or
cause to be deposited the servicer remittance amount on the _____ day of each
month.
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 which relate to payments
due to be received on the mortgage loans on the 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 particular mortgage loans, for which the
servicer has previously made an unreimbursed Periodic Advance, as
late payments of interest, or as Net Liquidation Proceeds, to the
extent of the unreimbursed Periodic Advance;
(b) amounts received on a particular mortgage loan for which the
servicer has previously made an unreimbursed servicing advance, to
the extent of the unreimbursed servicing advance;
(c) for the servicer remittance date, the aggregate servicing fee;
(d) all net income from eligible investment 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) 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.
Over-collateralization Provisions
Over-collateralization Resulting from Cash Flow Structure. The Indenture
requires that, starting with the second distribution date, the Excess Interest
for a pool of mortgage loans, if any, that is not used to make
cross-collateralization payments will be applied on each distribution date as
an accelerated payment of principal on the class of notes for that pool, 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 pool of
mortgage loans for that class. 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 pay Net Mortgage Loan Interest Shortfalls relating to
that class,
o as needed to make cross-collateralization payments in respect of the
other pool of mortgage loans,
o as a payment of principal to the class of notes for that pool until
the distribution date on which the amount of over-collateralization
has reached the required level, and
o as needed to fund the Cross-collateralization Reserve Account
relating to the other pool of mortgage loans.
Notwithstanding the foregoing, in the event specified tests enumerated in
the Indenture are violated, all available Excess Interest will be used as a
payment of principal to the class of notes for that pool to accelerate the
amortization of the notes.
The Indenture requires that, starting with the second distribution date,
Excess Interest from a pool of mortgage loans that is not used to make
cross-collateralization payments will be applied as an accelerated payment of
principal on the class of notes for that pool until the Over-collateralized
Amount has increased to the level required by the Indenture. After this 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 class of notes for that pool.
Notwithstanding the foregoing, in the event specified tests enumerated in the
Indenture are violated, all available Excess Interest from each pool of
mortgage loans will be used as a payment of principal to accelerate the
amortization of the class of notes for that pool. Initially, the
Over-collateralized Amount of each pool of mortgage loans will be an amount
equal to approximately 0.50% of the sum of (x) the aggregate principal balance
of the mortgage loans in each pool on the closing date and (y) the original
amount on deposit in the pre-funding account for that pool on the closing
date.
In the event that the required level of the Specified Over-collateralized
Amount for a pool of mortgage loans is permitted to decrease or "step down" on
a distribution date in the future, the Indenture provides that a portion of
the principal which would otherwise be distributed to the holders of the class
of notes for that pool on the distribution date shall instead be distributed
in the priority described in this prospectus supplement under "--Flow of
Funds." This has the effect of decelerating the amortization of the class of
notes for that pool relative to the amortization of that pool of mortgage
loans, and of reducing the Over-collateralized Amount. If, on any distribution
date, the Excess Over-collateralized Amount is, or, after taking into account
all other distributions to be made on the distribution date would be, greater
than zero -- i.e., the Over-collateralized Amount is or would be greater than
the Specified Over-collateralized Amount -- then any amounts relating to
principal which would otherwise be distributed to the holders of the class of
notes for that pool on this distribution date shall instead be distributed in
the priority described in this prospectus supplement under "--Flow of Funds",
in an amount equal to the Over-collateralization Reduction Amount.
The Indenture provides that, on any distribution date, all amounts
collected on account of principal -- other than any amount applied to the
payment of an Over-collateralization Reduction Amount -- for each pool of
mortgage loans during the a due period of the prior calendar month will be
distributed to the holders of the class of notes for that pool on the
distribution 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
distributed to the holders of the class of notes for that pool on the
distribution date which immediately follows the event of loss; i.e., the Sale
and Servicing Agreement does not require the current recovery of losses.
However, the occurrence of a Liquidated Loan Loss will reduce the
Over-collateralized Amount for that pool of mortgage loans, which, to the
extent that the reduction causes the Over-collateralized Amount to be less
than the Specified Over-collateralized Amount applicable to that distribution
date, will require the payment of an Over-collateralization Increase Amount on
that distribution date, or, if insufficient funds are available on that
distribution date, on subsequent distribution dates, until the
Over-collateralized Amount equals the Specified Over-collateralized Amount.
The effect of the foregoing is to allocate losses to the holders of the trust
certificates for that pool by reducing, or eliminating entirely, payments of
Excess Interest and Over-collateralization Reduction Amounts which the holders
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
distribution date as to which the indenture trustee has determined that an
Over-collateralization Deficit will occur for the purpose of applying the
proceeds of the Insured Payment as a payment of principal to the holders of
the class of notes for that pool on that distribution date. The note insurer
has the option on any distribution date to make a payment of principal,
including in respect of Liquidated Loan Losses, up to the amount that would
have been payable to the holders of the notes if sufficient funds were
available thereof. Additionally, under the terms of the Indenture, the note
insurer will have the option to cause Excess Interest to be applied without
regard to any limitation upon the occurrence of particular trigger events, or
in the event of an "event of default" under the Insurance Agreement. However,
investors in the notes should realize that, under extreme loss or delinquency
scenarios, they may temporarily receive no distributions of principal.
Cross-collateralization Provisions
Cross-collateralization Payments. On each distribution date, available
Excess Interest from a pool of mortgage loans, if any, will be paid to the
holders of the class of notes relating to the other pool of mortgage loans to
the extent of the Shortfall Amount for the other pool. The
cross-collateralization provisions of the transaction are limited to the
payment of specified credit losses, specified 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 for the other pool of
mortgage loans.
Cross-collateralization Reserve Account. Each class of notes will have
the benefit of a Cross-collateralization Reserve Account. On each distribution
date, available Excess Interest from a pool of mortgage loans, if any, will be
paid into the Cross-collateralization Reserve Account relating to the other
pool of mortgage loans, until the amount of funds on deposit therein equals
the Specified Reserve Amount for the other pool. If the amount on deposit in
the Cross-collateralization Reserve Account for a pool of mortgage loans on
any distribution date exceeds the Specified Reserve Amount for the pool and
the distribution date, the amount of this excess shall be distributed in the
priority described in this prospectus supplement under "--Flow of Funds."
Funds on deposit in a Cross-collateralization Reserve Account will be
used on any distribution date to make payments in respect of the Shortfall
Amount for either pool, to the extent that there is no Excess Interest
available therefor on that distribution date.
Flow of Funds
On each distribution date, the indenture trustee, based solely on the
information received from the servicer in the servicer remittance report prior
to the distribution date, shall make payments in respect of each pool of
mortgage loans to the holders of the class of notes for that pool and
reimbursement to the note insurer under the Insurance Agreement, to the extent
of funds, including any Insured Payments, on deposit in the Distribution
Account for that pool, as follows:
(a) to the indenture trustee, an amount equal to the fees then due to it
for that class of notes;
(b) from amounts then on deposit in the Distribution Account for that
pool, excluding any Insured Payments, to the note insurer the
Reimbursement Amount as of that distribution date;
(c) from amounts then on deposit in the Distribution Account for that
pool, the Interest Distribution Amount for that class of notes;
(d) from amounts then on deposit in the Distribution Account for that
pool, the Principal Distribution Amount for that class of notes,
until the principal balance of the class of notes is reduced to
zero;
(e) from amounts then on deposit in the Distribution Account for that
pool, the amount of any Net Mortgage Loan Interest Shortfalls for
that class of notes;
(f) from amounts then on deposit in the Distribution Account for that
pool, to the holders of the other class of notes, the Shortfall
Amount for the other class;
(g) from amounts then on deposit in the Distribution Account for that
pool, to the Cross-collateralization Reserve Account for the other
class of notes, the amount necessary for the balance of the account
to equal the Specified Reserve Amount; and
(h) following the making by the indenture trustee of all allocations,
transfers and disbursements described above, to the holders of the
trust certificates for that pool, the amount remaining on the
distribution date in the Distribution Account for that pool, if any.
Events of Default
Upon the occurrence of an event of default, the indenture trustee, upon
the direction of the majority holders -- which shall be the note insurer in
the absence of a default by the note insurer under the Insurance Agreement --
shall declare or, in the case of an event of default described in clauses (1)
through (7) below, the occurrence shall result in the automatic declaration
of, the aggregate outstanding principal balance of all the notes to be due and
payable together with all accrued and unpaid interest thereon without
presentment, demand, protest or other notice of any kind, all of which are
waived by the trust. An event of default, wherever used in this prospectus
supplement, means any one of the following events:
1. the trust shall fail to distribute or cause to be
distributed to the indenture trustee, for the benefit of the holders
of the notes, on any distribution date, all or part of any Interest
Distribution Amount due on the notes on the distribution date and
all or a part of any Net Mortgage Loan Interest Shortfalls due on
the notes on the distribution date;
2. the trust shall fail to distribute or cause to be
distributed to the indenture trustee, for the benefit of the holders
of the notes, (x) on any distribution date an amount equal to the
principal due on the outstanding notes on the distribution date, to
the extent that sufficient funds are on deposit in the Collection
Account or (y) on the final stated maturity date for any class of
notes, the aggregate outstanding principal balance of that class of
notes.
3. the trust shall breach or default in the due observance of
any one or more of the negative covenants under the Indenture.
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;
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 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;
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 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 this
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 distribution date the indenture
trustee will deliver to the servicer, the note insurer, the depositor and each
holder of a note or a trust certificate a written remittance report containing
information including, without limitation, the amount of the distribution on
the distribution date, the amount of the distribution allocable to principal
and allocable to interest, the aggregate outstanding principal balance of the
notes as of the distribution date, the amount of any Insured Payment included
in the distributions on the distribution date and any 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 in this prospectus
supplement, to comply with any changes in the Code, or to make any other
provisions concerning matters or questions arising under the Indenture which
shall not be inconsistent with the provisions of the Indenture; provided, that
this action shall not, as evidenced by an opinion of counsel delivered to, but
not obtained at the expense of, the indenture trustee, adversely affect in any
material respect the interests of any holder of the notes; provided, further,
that no amendment shall reduce in any manner the amount of, or delay the
timing of, payments received on mortgage loans which are required to be
distributed on any note without the consent of the holder of the note, or
change the rights or obligations of any other party to the Indenture without
the consent of that party.
The Indenture may be amended from time to time by the trust and the
indenture trustee with the consent of the note insurer, and the holders of the
majority of the percentage interest of the notes and trust certificates for
the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Indenture or of modifying in any
manner the rights of the holders; provided, however, that no amendment shall
reduce in any manner the amount of, or delay the timing of, payments received
on mortgage loans which are required to be distributed on any note without the
consent of the holder of the note or reduce the percentage for each class
whose holders are required to consent to any amendment without the consent of
the holders of 100% of each class of notes affected thereby.
The Loan Sale Agreement and the Sale and Servicing Agreement contain
substantially similar restrictions regarding amendment.
Servicing of the Mortgage Loans
The Servicer
____________ will act as the servicer of the mortgage loan pools
____________ and ____________ will act as subservicers for a portion of the
mortgage loans. See "The Originators, the Depositor, the Servicer and the
Subservicer" in this prospectus supplement. The servicer and the subservicers
will service the mortgage loans on behalf of the trust, for the benefit of the
note insurer and the holders of the notes and 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 to a servicing fee for
each mortgage loan, 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 the mortgage loan on the
outstanding principal balance of the mortgage loan. The servicing fee rate for
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 mortgage notes, any late payment charges,
assumption fees, prepayment fees or similar items. The servicer shall also be
entitled to withdraw from the Collection Account any net interest or other
income earned on deposits therein. The servicer shall pay all expenses
incurred by it in connection with its servicing activities under the Sale and
Servicing Agreement and shall not be entitled to reimbursement therefor except
as specifically provided in the Sale and Servicing Agreement.
Periodic Advances and Servicer Advances
Periodic Advances. Subject to the servicer's determination that the
action would not constitute a nonrecoverable advance, the servicer is required
to make Periodic Advances on each servicer remittance date. This Periodic
Advances by the servicer are reimbursable to the servicer subject to a number
of conditions and restrictions, and are intended to provide both sufficient
funds for the payment of interest to the holders of the notes, plus an
additional amount intended to maintain a specified level of
over-collateralization and to pay the indenture trustee's fees, and the
premium due the note insurer. Notwithstanding the servicer's good faith
determination that a Periodic Advance was recoverable when made, if the
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" in this prospectus supplement.
Servicing Advances. Subject to the servicer's determination that the
action would not constitute a nonrecoverable advance and that a prudent
mortgage lender would make a like advance if it or an affiliate owned the
mortgage loan, the servicer is required to advance amounts on the mortgage
loans 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 other customary amounts described in the Sale and Servicing
Agreement.
These servicing advances by the servicer are reimbursable to the servicer
subject to a number of conditions and restrictions. In the event that,
notwithstanding the servicer's good faith determination at the time the
servicing advance was made, that it would not be a nonrecoverable advance, the
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 the servicing advance
or Periodic Advance was made, from late collections on the mortgage loan,
including Liquidation Proceeds, Insurance Proceeds and any 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 the
advance from the Distribution Account.
The servicer shall not be required to make any Periodic Advance or
servicing advance which it determines would be a nonrecoverable Periodic
Advance or nonrecoverable servicing advance. A Periodic Advance or servicing
advance is "nonrecoverable" if in the good faith judgment of the servicer, the
Periodic Advance or servicing advance would not ultimately be recoverable.
Prepayment Interest Shortfalls
Not later than the close of business on the _____ 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 or class A-2 notes, respectively. However, in the event the full amount
of Current Interest is not available on any distribution date due to Civil
Relief Act interest shortfalls in the applicable pool, the amount of this
shortfall will not be covered by the note insurance policy. These shortfalls
in Current Interest will be paid from the Excess Interest, if any, otherwise
payable in respect of over-collateralization, cross-collateralization or to
the holder of the trust note relating to the applicable pool. See "Risk
Factors -- Legal Considerations" in this prospectus supplement.
Optional Purchase of Defaulted Mortgage Loans
The depositor, or any affiliate of the depositor, 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
the principal balance, computed at the mortgage interest rate -- net of the
servicing fee, if ________ is the servicer -- plus the amount of any
unreimbursed Periodic Advances and servicing advances made by the servicer for
the mortgage loan in accordance with the provisions specified in the Sale and
Servicing Agreement.
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 distributions described under "--Flow of Funds" in this
prospectus supplement and containing the information to be included in the
indenture trustee's remittance report for that distribution date.
The servicer is required to deliver to the note insurer, the indenture
trustee, the collateral agent, S&P and Moody's, not later than April 30th of
each year, starting in ___________, 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 the officer's supervision, and
o to the best of the officer's knowledge, based on that review, the
servicer has fulfilled all its obligations under the Sale and
Servicing Agreement for that year, or, if there has been a default
in the fulfillment of any obligation, specifying each default known
to that officer and the nature and status thereof including the
steps being taken by the servicer to remedy the 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, S&P and Moody's from a firm of independent certified
public accountants, who may also render other services to the servicer, a
statement to the effect that the firm has examined specified documents and
records relating to the servicing of the mortgage loans during the preceding
calendar year, or any longer period from the closing date to the end of the
following calendar year, and that, on the basis of the examination conducted
substantially in compliance with generally accepted auditing standards and the
requirements of the Uniform Single Attestation Program for Mortgage Bankers or
the Audit Program for Mortgages serviced for Freddie Mac, the servicing has
been conducted in compliance with the Sale and Servicing Agreement except for
any significant exceptions or errors in records that, in the opinion of the
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 the 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 the collection procedures as it follows
for loans held for its own account which are comparable to the mortgage loans.
Consistent with the above, the servicer may, in its discretion, (a) waive any
late payment charge and (b) 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 any "due-on-sale"
clause, the servicer may enter into an assumption and modification agreement
with the person to whom the property has been or is about to be conveyed,
pursuant to which that 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 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 "Material Legal Aspects of the
Mortgage Loans and Contracts -- The Mortgage Loans -- 'Due-on-Sale' Clauses"
in the accompanying prospectus.
Hazard Insurance
The servicer is required to cause to be maintained for each mortgaged
property a hazard insurance policy with coverage which contains a standard
mortgagee's clause in an amount equal to the lesser of (a) the maximum
insurable value of the mortgaged property or (b) the principal balance of the
mortgage loan plus the outstanding balance of any mortgage loan senior to the
mortgage loan, but in no event may this amount be less than is necessary to
prevent the borrower from becoming a coinsurer thereunder. As stated 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 Distribution Account
for that pool. 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 this blanket policy contains a deductible
clause, the servicer is obligated to deposit in the Distribution Account for
that pool the sums which would have been deposited therein but for that
clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the mortgage loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms and therefore will not contain identical terms and
conditions, the terms thereof are dictated by respective state laws, and most
of these 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 some cases, vandalism. The foregoing list is
merely indicative of the types 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, that clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater
of (a) the replacement cost of the improvements less physical depreciation or
(b) this proportion of the loss as the amount of insurance carried bears to
the specified percentage of the full replacement cost of these 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 each of the mortgage loans that 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 the foreclosure or other conversion, the servicer will follow
the 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 foreclosure,
correction or restoration is determined to increase Net Liquidation Proceeds.
Removal and Resignation of the Servicer
The note insurer may, pursuant to the Sale and Servicing Agreement,
remove the servicer upon the occurrence and continuation beyond the applicable
cure period of an event described in clauses (g), (h) or (i) below and the
indenture trustee, only at the direction of the note insurer or the majority
holders of notes, with the consent of the note insurer, in the case of any
direction of the majority holders, may remove the servicer upon the occurrence
and continuation beyond the applicable cure period of an event described in
clause (a), (b), (c), (d), (e) or (f) below. Each of the following constitutes
a servicer event of default:
(a) any failure by the servicer to remit to the indenture
trustee any payment required to be made by the servicer
under the terms of the Sale and Servicing Agreement, other
than servicing advances covered by clause (b) below, which
continues unremedied for one business day after the date
upon which written notice of any failure, requiring the same
to be remedied, shall have been given to the servicer and
the note insurer by the indenture trustee or to the servicer
and the indenture trustee by the note insurer or the holders
of notes evidencing percentage interests of at least 25%;
(b) the failure by the servicer to make any required servicing
advance which failure continues unremedied for a period of
thirty days after the date on which written notice of any
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;
(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 enumerated in the Sale and
Servicing Agreement, which continues unremedied for a period
of thirty days after the date on which written notice of any
failure, requiring the same to be remedied, shall have been
given to the servicer by the indenture trustee, or to the
servicer and the indenture trustee by any holder of a note
or the note insurer;
(d) a decree or order of a court or agency or supervisory
authority having jurisdiction in an involuntary case under
any present or future federal or state bankruptcy,
insolvency or similar law or for the appointment of a
conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities
or similar proceedings, or for the winding-up or liquidation
of its affairs, shall have been entered against the servicer
and this decree or order shall have remained in force,
undischarged or unstayed for a period of sixty days;
(e) the servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities
or similar proceedings of or relating to the servicer or of
or relating to all or substantially all of the servicer's
property;
(f) the servicer shall admit in writing its inability generally
to pay its debts as they become due, file a petition to take
advantage of any applicable insolvency or reorganization
statute, make an assignment for the benefit of its
creditors, or voluntarily suspend payment of its
obligations;
(g) the delinquency or loss experience of the mortgage loans
exceeds levels specified in the Sale and Servicing
Agreement;
(h) the note insurer shall notify the indenture trustee of any
"event of default" under the Insurance Agreement; or
(i) the occurrence of an event of default under the Indenture.
The servicer may not assign its obligations under the Sale and Servicing
Agreement nor resign from the obligations and duties thereby imposed on it
except by mutual consent of the servicer, _______, if _______ 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 the incapacity cannot be cured by the
servicer without the incurrence, in the reasonable judgment of the note
insurer, of unreasonable expense. No 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 other
advances unless it determines reasonably and in good faith that the 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 $____________ 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
____________, 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 notice of extension, become bound for the duration of the term covered
by the 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 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 that 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" in this prospectus supplement.
Optional Clean-up Call on the Notes
The servicer may, at its option, call the class A-1 notes or the class
A-2 notes, separately, on the Note Clean-up Call Date by depositing an amount
equal to the aggregate outstanding principal balance of the class of notes on
that distribution date, plus accrued and unpaid interest thereon, and any
unpaid amounts due the note insurer for a class of notes into the Distribution
Account for that class. The mortgage loans relating to the redeemed class will
remain pledged to the indenture trustee, for the benefit of the holders of the
notes, to secure the cross-collateralization obligations of the trust with
regard to the other class.
Termination; Purchase of Mortgage Loans
The Indenture will terminate upon notice to the indenture trustee of
either: (a) the later of the distribution to noteholders of the final payment
or collection on the last mortgage loan, or Periodic Advances of same by the
servicer, or the disposition of all funds from 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.
Subject to provisions in the Indenture concerning adopting a plan of
complete liquidation, the servicer may, at its option and at its sole cost and
expense, terminate the Indenture on any date on which the aggregate principal
balance of the mortgage loans is less than 10% of the sum of (x) the aggregate
original principal balance of the mortgage loans purchased on the closing date
and (y) the original amount on deposit in the pre-funding accounts, by
purchasing, on the next succeeding distribution date, all of the outstanding
mortgage loans and REO Properties at a price equal to the sum of
o 100% of the principal balance of each outstanding mortgage loan and
each REO property,
o the greater of (a) the aggregate amount of accrued and unpaid
interest on the mortgage loans through the due period and (b) thirty
days' accrued interest thereon computed at a rate equal to the
mortgage interest rate, in each case net of the servicing fee,
o any unreimbursed amounts due to the note insurer under the
Indenture, the Sale and Servicing Agreement, the Insurance Agreement
and, without duplication, accrued and unpaid Insured Payments, and
o the indenture trustee's fees.
Any purchase shall be accomplished by depositing into each Distribution
Account the portion of the purchase price specified above which relates to the
class of notes. No termination is permitted without the prior written consent
of the note insurer if it would result in a draw on the note insurance policy.
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 depositor.
Simultaneously with the issuance of the notes, the note insurer will
deliver the note insurance policy to the indenture trustee, for the benefit of
the holders of the notes. Under the note insurance policy, the note insurer
will irrevocably and unconditionally guarantee payment on each distribution
date to the indenture trustee, for the benefit of the holders of the notes, of
the Insured Distribution Amounts for the 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, for any distribution date occurring on a date when an event of
default under the Insurance Agreement, as described below, has occurred and is
continuing or a date on or after the first date on which a claim is made under
the note insurance policy, the note insurer at its sole option, may pay any or
all of the outstanding principal balance of the notes. Mortgage Loan Interest
Shortfalls will not be covered by payments under the note insurance policy.
Payment of claims under the note insurance policy will be made by the
note insurer following receipt by the note insurer of the appropriate notice
for payment on the later to occur of (a) 12:00 noon, New York City time, on
the second business day following receipt of notice for payment, and (b) 12:00
noon, New York City time, on the relevant distribution date.
If any payment of an amount guaranteed by the note insurer pursuant to
the note insurance policy is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law the note insurer will pay
the amount out of the funds of the note insurer on the later of
o the date when due to be paid pursuant to the bankruptcy 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 distributed on a note during the term of
the note insurance policy because these distributions were
avoidable preferences under applicable bankruptcy law, (B) a
certificate of the holder(s) that the bankruptcy order has been
entered and is not subject to any stay, and (C) an assignment
duly executed and delivered by the holder(s), in the form that
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 the
preference payment or otherwise concerning the preference
payment, or
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 the date of
receipt, the note insurer shall have received written notice
from the indenture trustee that these items were to be delivered
on that date and that date was specified in the notice.
This payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the bankruptcy order
and not to the indenture trustee or any holder directly -- unless a holder has
previously paid the amount to the receiver, conservator, debtor-in-possession
or trustee in bankruptcy named in the bankruptcy order, in which case the
payment shall be disbursed to the indenture trustee for distribution to the
holder upon proof of the payment reasonably satisfactory to the note insurer.
The terms "receipt" and "received," under the note insurance policy, mean
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 the funds are properly applied by the
indenture trustee.
The note insurer shall be subrogated to the rights of each holder to
receive payments of principal and interest, as applicable, from distributions
on the notes to the extent of any payment by the note insurer under the note
insurance policy. To the extent the note insurer makes Insured Payments,
either directly or indirectly, as by paying through the indenture trustee, to
the holders of notes, the note insurer will be subrogated to the rights of the
holders, as applicable, to the extent of this 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
particular 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
these rights and defenses may be available to the note insurer to avoid
payment of its obligations under the note insurance policy in accordance with
the express provisions of the note insurance policy.
Pursuant to the terms of the Indenture, unless a note insurer default
exists, the note insurer shall be deemed to be the holder of the notes for all
purposes, other than for payment on the notes, will be entitled to exercise
all rights of the holders thereunder, without the consent of the holders, and
the holders may exercise these 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 Loan
Sale 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 depositor 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 depositor; and
o the right to direct the indenture trustee to investigate specified
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 servicer, the originators and the note
insurer will enter into the Insurance Agreement pursuant to which the trust,
the depositor, 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 of the depositor, the originators, the trust and the servicer and
shall be payable only from monies available for the 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 specified 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 depositor's or the servicer's failure to pay
when due any amount owed under the Insurance Agreement or other
documents,
o the inaccuracy or incompleteness in any material respect of any
representation or warranty of the originators, the depositor or the
servicer in the Insurance Agreement, the Sale and Servicing
Agreement, the Indenture or other documents,
o the originators', 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 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 other documents are not binding on the originators, the depositor
or the servicer,
o the originators', the depositor's or the servicer's failure to pay
its debts in general or the occurrence of specified events of
insolvency or bankruptcy concerning the depositor or the servicer,
and
o the occurrence of specified "performance test violations" designed
to measure the performance of the mortgage loans.
The Note Insurer
The following information has been obtained from ________________________
and has not been verified by the originators, the servicer, the depositor or
the underwriter. No representation or warranty is made by the depositor, the
originators, the servicer, the depositor or the underwriter with respect
thereto.
The Note Insurer
____________ is a monoline insurance company incorporated in ______ under
the laws of the State of ____________. ________________________ is licensed to
engage in the financial guaranty insurance business in all 50 states, the
District of Columbia and Puerto Rico.
___________ 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. ____________ 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. ____________ insures both newly issued securities sold in the
primary market and outstanding securities sold in the secondary market that
satisfy ____________ underwriting criteria.
The principal executive offices of ____________ are located at
________________________, and its telephone number at that location is
____________.
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by ____________ or any of
its domestic operating insurance company subsidiaries are generally reinsured
among these companies on an agreed-upon percentage substantially proportional
to their respective capital, surplus and reserves, subject to applicable
statutory risk limitations. In addition, ____________ reinsures a portion of
its liabilities under some of its financial guaranty insurance policies with
other reinsurers under various treaties and on a transaction-by-transaction
basis. This reinsurance is utilized by ____________ as a risk management
device and to comply with statutory and rating agency requirements; it does
not alter or limit ____________ obligations under any financial guaranty
insurance policy.
Ratings
____________ insurance financial strength is rated "Aaa" by Moody's and
____________ insurer financial strength is rated "AAA" by Standard & Poor's
and Standard & Poor's (Australia) Pty. Ltd. ____________ claims-paying ability
is rated "AAA" by Fitch IBCA, Inc. and Japan Rating and Investment
Information, Inc. These 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 the rating agencies.
Capitalization
The following table sets forth the capitalization of ____________ and its
wholly owned subsidiaries on ____________ the basis of generally accepted
accounting principles as of ____________:
[Note insurer to provide]
For further information concerning ____________, see the Consolidated
Financial Statements of ____________, and the notes thereto, incorporated by
reference in this prospectus supplement. ____________ financial statements are
included as exhibits to the annual report on Form 10-K and Quarterly Reports
on Form 10-Q filed with the Commission by ____________ and may be reviewed at
the EDGAR website maintained by the Commission. Copies of the statutory
quarterly and annual statements filed with the State of ____________ Insurance
Department by ____________ are available upon request to the State of
____________ Insurance Department.
Insurance Regulation
____________ is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of ____________,
its state of domicile. In addition, ____________ and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial
guaranty insurance corporation licensed to do business in the State of
____________, ____________ is subject to Article __ of the ____________
Insurance Law which, among other things, limits the business of each financial
guaranty insurer to financial guaranty insurance and similar lines, requires
that each financial guaranty insurer maintain a minimum surplus to
policyholders, establishes contingency, loss and unearned premium reserve
requirements for each financial guaranty insurer, and limits the size of
individual transactions -- "single risks" -- and the volume of transactions --
"aggregate risks" -- that may be underwritten by each financial guaranty
insurer. Other provisions of the ____________ Insurance Law, applicable to
non-life insurance companies such as ____________, regulate, among other
things, permitted investments, payment of dividends, transactions with
affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liability for borrowings.
Certain Prepayment and Yield Considerations
General
The effective yield of the Notes will be affected by the rate and timing
of payments of principal on the Mortgage Loans (including, for this purpose,
prepayments and amounts received by virtue of refinancings, liquidations of
Mortgage Loans due to defaults, casualties, condemnations, and repurchases),
the amount and timing of mortgagor delinquencies and defaults resulting in
Realized Losses, and the application of excess funds on the Notes. Such yield
may be adversely affected by a higher or lower than anticipated rate of
principal payments (including Principal Prepayments) on the Mortgage Loans.
The rate of principal payments on such Mortgage Loans will in turn be affected
by the amortization schedules of such Mortgage Loans, the rate and timing of
Principal Prepayments thereon by the mortgagors, liquidations of defaulted
Mortgage Loans and optional or required repurchases of Mortgage Loans as
described herein. The timing of changes in the rate of prepayments,
liquidations and repurchases of the Mortgage Loans may, and the timing of
Realized Losses could, significantly affect the yield to an investor, even if
the average rate of principal payments experienced over time is consistent
with an investor's expectation. Since the rate and timing of principal
payments on the Mortgage Loans will depend on future events and on a variety
of factors (as described more fully herein), no assurance can be given as to
such rate or the timing of Principal Prepayments on the Notes.
The weighted average life of the Notes will also be influenced by the
amount of excess funds generated by the Mortgage Loans, as described herein.
Because excess funds attributable to the overcollateralization feature is
derived from interest collections on the Mortgage Loans and will be applied to
reduce the Note Principal Balances, the aggregate payments in reduction of the
Note Principal Balances on a Distribution Date will usually be greater than
the aggregate amount of principal payments (including Principal Prepayments)
on the Mortgage Loans payable on such Distribution Date until the OC Target
Amount is reached and assuming an Overcollateralization Deficit does not
occur. As a consequence, excess funds available for payment in reduction of
the Note Principal Balances for the Notes will increase in proportion to the
outstanding Note Principal Balances over time in the absence of offsetting
Realized Losses for the Mortgage Loans.
Excess funds will be paid on the Notes in reduction of the Note Principal
Balances on each Distribution Date to the extent the then applicable OC Target
Amount exceeds the related Overcollateralized Amount on such Distribution
Date. Any remaining excess funds will be distributable to the owners of the
trust. If an Note is purchased at a price other than par, its yield to
maturity will be affected by the rate at which the excess funds is paid to the
Noteholders. If the actual rate of excess funds applied in reduction of the
Note Principal Balances or the Notes is slower than the rate anticipated by an
investor who purchases an Note at a discount, the actual yield to such
investor will be lower than such investor's anticipated yield. If the actual
rate of excess funds applied in reduction of the Note Principal Balances on
the Notes is faster than the rate anticipated by an investor who purchases an
Note at a premium, the actual yield to such investor will be lower than such
investor's anticipated yield. The amount of excess funds on any Distribution
Date will be affected by, among other things, the actual amount of interest
received, collected or recovered in respect of the Mortgage Loans during the
related Due Period the level of LIBOR and such amount will be influenced by
changes in the weighted average of the Loan Rates resulting from prepayments
and liquidations of the Mortgage Loans. The amount of excess funds paid to the
Noteholders applied to the Note Principal Balances on each Distribution Date
will be based on the OC Target Amount. The Trust Agreement generally provides
that the OC Target Amount may, over time, decrease, or increase, subject to
certain floors, caps and triggers, including triggers that allow the Target OC
Amount to decrease or "step down" based on the performance on the Mortgage
Loans with respect to certain tests specified in the Trust Agreement. Any
increase in the OC Target Amount may result in an accelerated amortization
until such OC Target Amount is reached. Conversely, any decrease in the OC
Target Amount will result in a decelerated amortization of the Notes.
The Mortgage Loans generally may be prepaid in full or in part at any
time, although a substantial portion of the Mortgage Loans provide for payment
of a prepayment penalty. The Mortgage Loans generally are not assumable and
the related Mortgaged Property will be due on sale, in which case the Servicer
shall enforce any due-on-sale clause contained in any Mortgage Note or
Mortgage, to the extent permitted under applicable law and governmental
regulations; provided, however, if the Servicer determines that it is
reasonably likely that the mortgagor will bring, or if any mortgagor does
bring legal action to declare invalid or otherwise avoid enforcement of a
due-on-sale clause contained in any Mortgage Note or Mortgage, the Servicer
will not be required to enforce the due-on-sale clause or to contest such
action.
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. The rate of default on
Mortgage Loans that are refinance or limited documentation mortgage loans, and
on Mortgage Loans with high Loan-to-Value Ratios, may be higher than for other
types of Mortgage Loans. As a result of the underwriting standards applicable
to the Mortgage Loans, the Mortgage Loans are likely to experience rates of
delinquency, foreclosure, bankruptcy and loss that are higher, and that may be
substantially higher, than those experienced by mortgage loans underwritten in
accordance with the standards applied by Fannie Mae and Freddie Mac mortgage
loan purchase programs. In addition, because of such underwriting criteria and
their likely effect on the delinquency, foreclosure, bankruptcy and loss
experience of the Mortgage Loans, the Mortgage Loans will generally be
serviced in a manner intended to result in a faster exercise of remedies,
which may include foreclosure, in the event Mortgage Loan delinquencies and
defaults occur, than would be the case of the Mortgage Loans were serviced in
accordance with such other programs. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the Mortgage Loans will be affected
by the general economic condition of the region of the country in which the
related Mortgaged Properties are located. The risk of delinquencies and loss
is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. To the extent that the
locations of the Mortgaged Properties are concentrated in a given region, the
risk of delinquencies, loss and involuntary prepayments resulting from adverse
economic conditions in such region or from other factors, such as fires,
storms, landslides and mudflows and earthquakes, is increased. Certain
information regarding the location of the Mortgaged Properties is set forth
under "The Mortgage Pool--Mortgage Loan Statistics" and "Risk
Factors--Geographic Concentration of Mortgage Loans" herein.
Certain of the Mortgage Loans are Balloon Loans which provide for a
substantial portion of the original Loan Balance in a single payment at
maturity (the "Balloon Loans"). Balloon Loans involve a greater degree of risk
than fully amortizing loans because the ability of the borrower to make a
balloon payment typically will depend upon its ability either to refinance the
loan or to sell the related Mortgaged Property. The ability of a borrower to
accomplish either of these goals will be affected by a number of factors,
including the level of available mortgage rates at the time of the attempted
sale or refinancing, the borrower's equity in the related Mortgaged Property,
the financial condition of the borrower and operating history of the related
Mortgaged Property, tax laws, prevailing economic conditions and the
availability of credit for commercial real estate projects generally.
Other factors affecting prepayment of Mortgage Loans include changes in
mortgagors' housing needs, job transfers, unemployment and mortgagors' net
equity in the mortgaged properties. Since the rate of payment of principal of
the Notes will depend on the rate of payment (including prepayments) of the
principal of the Mortgage Loans, the actual maturity of the Notes could occur,
and are expected to occur, significantly earlier than the Assumed Final
Maturity Date.
In addition, the yield to maturity of the Notes will depend on the price
paid by the holders of the Notes and the Loan Rate. The extent to which the
yield to maturity of an Note is sensitive to prepayments will depend upon the
degree to which it is purchased at a discount or premium.
Prepayments of principal on the Mortgage Loans will generally be passed
through to the Trustee and included in the Available Funds in the month
following the month of receipt thereof by the Servicer. Any prepayment of a
Mortgage Loan or liquidation of a Mortgage Loan (by foreclosure proceedings or
by virtue of the repurchase of a Mortgage Loan) will have the effect of
resulting in payments on the Notes of amounts that otherwise would be paid in
amortized increments over the remaining term of such Mortgage Loan.
The Class ___ Notes will not be entitled to distributions of principal,
either scheduled or unscheduled, until ____________, except as otherwise
described in this prospectus supplement. After that date, the relative
entitlement of the Class ___ Notes to payments in respect of principal is
subject to increase in accordance with the calculation of the Class ___
Priority Distribution Amount. See "Description of the Notes - Allocation of
Available Funds" herein.
To the extent that Principal Prepayments with respect to the Mortgage
Loans result in prepayments on the Notes during periods of generally lower
interest rates, Noteholders may be unable to reinvest such Principal
Prepayments in securities having a yield and rating comparable to the Notes.
The yield on the Notes may be affected by any delays in receipt of
payments thereon as described under "Description of the Notes--Book-Entry
Notes" herein.
The yield on the Notes may also be affected by a optional termination of
the Trust Fund as described under " --Optional Termination" herein.
No representation is made as to the rate of principal payments on the
Mortgage Loans or as to the yield to maturity of the Notes. An investor is
urged to make an investment decision with respect to the Notes based on the
anticipated yield to maturity of the Notes resulting from its price and such
investor's own determination as to anticipated Mortgage Loan prepayment rates.
Prospective investors are urged to analyze fully the effect of Mortgage Loan
principal prepayments and market conditions on the yield and value of the
Notes, before acquiring any Notes. In particular, investors that are required
to perform periodic valuations on their investment portfolios should consider
the effect of such fluctuations in value. In addition, investors should
carefully consider the factors discussed under "Risk Factors--Unpredictability
of Prepayments and Effect on Yields" herein.
Weighted Average Lives
The timing of changes in the rate of Principal Prepayments on the
Mortgage Loans may significantly affect an investor's actual yield to
maturity, even if the average rate of Principal Prepayments is consistent with
such investor's expectation. In general, the earlier a Principal Prepayment on
the Mortgage Loans occurs, the greater the effect of such Principal Prepayment
on an investor's yield to maturity. The effect on an investor's yield of
Principal Prepayments occurring at a rate faster (or slower) than the rate
anticipated by the investor during the period immediately following the
issuance of the Notes may not be fully offset by a subsequent like decrease
(or increase) in the rate of Principal Prepayments in a like amount.
The projected weighted average life of any Class of Notes is the average
amount of time that will elapse from the Closing Date until each dollar of
principal is scheduled to be repaid to the investors in such Class of Notes.
Because it is expected that there will be prepayments and defaults on the
Mortgage Loans, the actual weighted average lives of the Classes of Notes are
expected to vary substantially from the weighted average remaining terms to
stated maturity of the Mortgage Loans as set forth herein under "The Trust
Fund."
The "Assumed Final Maturity Date" for each Class of Notes is as set forth
herein under "Description of the Notes -- General". For the Class ___ Notes,
such date is the date on which the "Original Note Principal Balance" set forth
herein for such Class less all amounts distributed to the related Noteholders
on account of principal would be reduced to zero, assuming that no prepayments
are received on the Mortgage Loans, scheduled monthly payments of principal of
and interest on each of the Mortgage Loans are timely received and no excess
cashflow is used to make accelerated payments of principal to the Noteholders
of such Classes of Notes. For the Class A-4 and Class A-5 Notes, such date is
the month of the latest maturing Mortgage Loan plus twelve months. The
weighted average life of each Class of Notes is likely to be shorter than
would be the case if payments actually made on the Mortgage Loans conformed to
the foregoing assumptions, and the final Distribution Date with respect to the
Notes could occur significantly earlier than the related Assumed Final
Maturity Date because (i) prepayments are likely to occur, (ii) excess
cashflow, if any, will be applied as principal of the Notes as described
herein and (iii) the majority holder of the trust notes and the Servicer may
cause a termination of the Mortgage Loans in the Trust Fund as provided
herein.
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 Fund.
The tables on pages S-55 through S-59 were prepared on the basis of the
assumptions in the following paragraph and the tables set forth below. There
are certain differences between the loan characteristics included in such
assumptions and the characteristics of the actual Mortgage Loans. Any such
discrepancy may have an effect upon the percentages of Original Note Principal
Balances outstanding and weighted average lives of the Notes set forth in the
tables on pages S-55 through S-59. In addition, since the actual Mortgage
Loans in the Trust Fund will have characteristics that differ from those
assumed in preparing the tables set forth below, the distributions of
principal of the Notes may be made earlier or later than indicated in the
tables.
The percentages and weighted average lives in the tables on pages S-55
through S-59 were determined assuming that: (i) the Mortgage Loans consist of
pools of mortgage loans with the information set forth in the table below,
(ii) the Closing Date for the Notes occurs on ______________ and the Notes
were sold to investors by the Underwriter on the Closing Date, (iii)
distributions on the Notes are made on the 25th day of each month regardless
of the day on which the Distribution Date actually occurs, commencing in
________, in accordance with the priorities described herein, (iv) the
prepayment rates with respect to the Mortgage Loans are a multiple of the HEP
as stated in the tables below, (v) prepayments include thirty days' interest
thereon, (vi) the Seller is not required to substitute or repurchase any or
all of the Mortgage Loans pursuant to the Trust Agreement and no optional
termination is exercised, except with respect to the entries identified by the
row heading "Weighted Average Life (years) to Call Option Date" in the tables
below, (vii) the OC Target Amount is set initially as specified in the Trust
Agreement and thereafter decreases in accordance with the provisions of the
Trust Agreement, (viii) scheduled payments for all Mortgage Loans are received
on the first day of each month commencing in ________, the principal portion
of such payments is computed prior to giving effect to prepayments received
through the end of the prior month and there are no losses or delinquencies
with respect to such Mortgage Loans, (ix) all the Mortgage Loans prepay at the
same rate and all such payments are treated as prepayments in full of
individual Mortgage Loans, with no shortfalls in collection of interest, (x)
such prepayments are received on the last day of each month commencing in the
month of the Closing Date, (xi) no reinvestment income from any Account is
earned and available for distribution, (xii) the PMI Insurer premium is equal
to the Weighted Average Coupon Rate of the Mortgage Loans less (a) the Net
Coupon Rate of the Mortgage Loans and (b) ____% for the Servicing Fee, (xiii)
no prepayment penalties are received on the Mortgage Loans, (xiv) the gross
coupon rate for each adjustable rate Mortgage Loan is adjusted on its next
rate adjustment date (and every six months thereafter) to equal the sum of (a)
the level of Six-Month LIBOR and (b) the respective gross margin (subject to
applicable interest rate caps and floors), (xv) the level of Six-Month LIBOR
remains constant at ____%, (xvi) no backup servicer is appointed, and (xvii)
the Class ___ Pass-Through Rate is ____% for each Distribution Date. Nothing
contained in the foregoing assumptions should be construed as a representation
that the Mortgage Loans will not experience delinquencies or losses.
<TABLE>
<CAPTION>
Assumed Mortgage Loan Characteristics
All Mortgage Loans
Original
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted Term to Remaining Remaining Term
Fixed/ Net Coupon Average Original Maturity Amortization to Maturity
Pool Adjustable Rate Coupon Rate Balance (Months) Term (Months) (Months)
1
2
</TABLE>
<TABLE>
<CAPTION>
Adjustable Rate Mortgage Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Interest Interest
Gross Net Net Adjustment Adjustment First Reset
Pool Margin Life Cap Life Floor Cap Cap Reset Frequency Index
---- ------ -------- ---------- --- --- ----- --------- -----
1
2
</TABLE>
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Notes, and set forth the
percentages of the Original Note Principal Balance of each such Class that
would be outstanding after each of the dates shown, at various percentages of
HEP.
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Note Principal Balance Outstanding at the Following HEP Percentages
Class ___ Notes
-------------------------------------------------------------------------
0% 15% 20% 25% 30% 35%
Distribution Date ---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100%
Weighted Average Life (years)
to Maturity (1)................
Weighted Average Life (years)
to Call Option Date (1)........
---------------------
* Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of any Class of Notes is determined by (i) multiplying the assumed net reduction, if any, in the
Note Principal Balance on each Distribution Date on such Class of Notes by the number of years from the date of issuance of
the Notes to the related Distribution Date, (ii) summing the results, and (iii) dividing the sum by the aggregate amount of
the assumed net reductions in principal amount on such Class of Notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Note Principal Balance Outstanding at the Following HEP Percentages
Class ___ Notes
-------------------------------------------------------------------------
Distribution Date 0% 15% 20% 25% 30% 35%
---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100%
Weighted Average Life (years)
to Maturity(1).................
Weighted Average Life (years)
to Call Option Date(1).........
---------------------
* Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of any Class of Notes is determined by (i) multiplying the assumed net reduction, if any, in the
Note Principal Balance on each Distribution Date on such Class of Notes by the number of years from the date of issuance of
the Notes to the related Distribution Date, (ii) summing the results, and (iii) dividing the sum by the aggregate amount of
the assumed net reductions in principal amount on such Class of Notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Note Principal Balance Outstanding at the Following HEP Percentages
Class ___ Notes
-------------------------------------------------------------------------
Distribution Date 0% 15% 20% 25% 30% 35%
---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100%
Weighted Average Life (years)
to Maturity(1).................
Weighted Average Life (years)
to Call Option Date(1).........
---------------------
* Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of any Class of Notes is determined by (i) multiplying the assumed net reduction, if any, in the
Note Principal Balance on each Distribution Date on such Class of Notes by the number of years from the date of issuance of
the Notes to the related Distribution Date, (ii) summing the results, and (iii) dividing the sum by the aggregate amount of
the assumed net reductions in principal amount on such Class of Notes.
</TABLE>
<PAGE>
Reports to Holders of the Notes
On each Distribution Date, the Trustee will make available to each
holder of a Note and the Note Insurer a statement to the extent such
information is provided to the Trustee by the Servicer generally setting
forth:
(i) the aggregate amount of the distributions, separately
identified, with respect to each Class of Notes;
(ii) the amount of such distributions allocable to principal,
separately identifying the aggregate amount of any scheduled principal,
Principal Prepayments or other unscheduled recoveries of principal
included therein;
(iii) the amount of such distributions allocable to interest and the
calculation thereof;
(iv) the Note Principal Balance of each Class of Notes after giving
effect to the distribution of principal on such Distribution Date;
(v) the Pool Balance as of the end of the related Due Period;
(vi) the OC Target Amount and Overcollateralized Amount as of such
Distribution Date;
(vii) the related amount of the Servicing Fee paid to or retained by
the Servicer;
(viii) the amount of the Trustee Fee paid to the Trustee;
(ix) the amount of Delinquency Advances and Servicing Advances for
the related Due Period;
(x) the number and aggregate Loan Balance of Mortgage Loans that
were (A) delinquent (exclusive of Mortgage Loans in foreclosure) (1) 30
to 59 days, (2) 60 to 89 days and (3) 90 or more days, (B) in foreclosure
and delinquent (1) 30 to 59 days, (2) 60 to 89 days and (3) 90 or more
days and (C) in bankruptcy as of the close of business on the last day of
the calendar month preceding such Distribution Date;
(xi) with respect to any Mortgage Loan that became an REO Property
during the preceding calendar month, the loan number, the Loan Balance of
such Mortgage Loan as of the close of business on the last day of such
month and the date of acquisition thereof, as well as the total number
and Loan Balance of any REO Properties as of the close of business on the
last day of the preceding month;
(xii) the aggregate amount of Realized Losses incurred during the
preceding calendar month, as well as the cumulative amount of Realized
Losses;
(xiii) any OC Deficiency Amount after giving effect to the
distributions of principal on such Distribution Date;
(xiv) any OC Deficit after giving effect to distributions on such
Distribution Date;
(xv) the Reimbursement Amount, if any; and
(xvi) the Pass-Through Rate for each Class of Notes for such
Distribution Date.
The Trustee will make the monthly statements (and, at its option, any
additional files containing the same information in an alternative format)
available each month to Noteholders and other parties to the Trust Agreement
via the Trustee's internet website and its fax-on-demand service. The
Trustee's fax-on-demand service may be accessed by calling ______________. The
Trustee's website will be located at "________________." Assistance in using
the website or the fax-on-demand service can be obtained by calling the
Trustee's customer service desk at ______________. Parties that are unable to
use the above distribution options are entitled to have a paper copy mailed to
them via first class mail by calling the customer service desk and indicating
such. The Trustee shall have the right to change the way monthly statements
are distributed in order to make such distribution more convenient and/or more
accessible to the above parties and the Trustee shall provide timely and
adequate notification to all above parties regarding any such changes.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a Note
of record during the previous calendar year a statement containing information
necessary to enable holders of the Notes to prepare their tax returns. Such
statements will not have been examined and reported upon by an independent
public accountant.
Material Federal Income Tax Considerations
The following discussion of 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 in this prospectus supplement 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 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 like the
notes constitute indebtedness for federal income tax purposes is a question of
fact, the resolution of which is based primarily upon the economic substance
of the instruments and the transaction pursuant to which they are issued
rather than merely upon the form of the transaction or the manner in which the
instruments are labeled. The Internal Revenue Service and the courts have
stated 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 the
transfer is a borrowing secured by the property. On the basis of its analysis
of these factors as applied to the facts and its analysis of the economic
substance of the contemplated transaction, ________________________, special
tax counsel to the depositor, is of the opinion that, for federal income tax
purposes, the notes will be treated as indebtedness, and not as an ownership
interest in the mortgage loans, or an equity interest in the sub-trust of the
trust consisting of the pool I mortgage loans or the pool II mortgage loans,
as the case may be, or in a separate association taxable as a corporation or
other taxable entity. See "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, this opinion is not
binding on the IRS and thus no assurance can be given that this
characterization will prevail. If the IRS successfully asserted that the notes
did not represent debt for federal income tax purposes, holders of the notes
would likely be treated as owning an interest in a partnership and not an
interest in an association, or a publicly traded partnership, taxable as a
corporation or a taxable mortgage pool. If the holders of the notes were
treated as owing an equitable interest in a partnership, the partnership
itself would not be subject to federal income tax; rather each partner would
be taxed individually on their respective distributive share of the
partnership's income, gain, loss, deductions and credits. The amount, timing
and characterization of items of income and deduction for a holder of a note
would differ if the notes were held to constitute partnership interests,
rather than indebtedness. Since the parties will treat the notes as
indebtedness for federal income tax purposes, none of the servicer, the
indenture trustee or the owner trustee will attempt to satisfy the tax
reporting requirements that would apply under this alternative
characterization of the notes. Investors that are foreign persons are strongly
advised to consult their own tax advisors in determining the federal, state,
local and other tax consequences to them of the purchase, ownership and
disposition of the notes.
Special Tax Attributes. The notes will not represent "real estate
assets" for purposes of Section 856(c)(4)(A) of the Code or "loans ... 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 the prepayment assumption using 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 -- Securities
Purchased at a Premium" in the accompanying prospectus.
Sale or Redemption of the Notes. If a note is sold or retired, the
seller will recognize gain or loss equal to the difference between the amount
realized on the sale and that holder's adjusted basis in the note. See
"Material Federal Income Tax Consequences -- Debt Securities -- Sale or
Exchange" in the accompanying prospectus.
Other Matters. For a discussion of backup withholding and taxation of
foreign investors in the notes, see "Material Federal Income Tax Consequences
-- Backup Withholding" and " --Foreign Investors -- Grantor Trust, REMIC
Regular and Debt Securities" in the accompanying prospectus.
Treatment of the Trust
Tax counsel is of the opinion that neither the sub-trust of the trust
consisting of the pool I mortgage loans nor the sub-trust of the trust
consisting of the pool II mortgage loans will be characterized as an
association, or a publicly traded partnership, taxable as a corporation or a
taxable mortgage pool.
ERISA Considerations
The Employee Retirement Income Security Act of 1974 and the Code
impose 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 those entities and
o persons who have specified relationships to those plans --
"Parties-in-Interest" under ERISA and "Disqualified Persons"
under the Code.
Section 406 of ERISA prohibits plans from engaging in particular
transactions involving the assets of those plans with Parties-in-Interest
under those 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 under these 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
Savings. 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
specified duties on persons who are fiduciaries of Plans subject to ERISA.
Some 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 loan 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 depositor believes that the notes should
be treated as indebtedness without substantial equity features for purposes of
the plan assets regulation. This determination is based in part on the
traditional debt features of the notes, including the reasonable expectation
of purchasers of the notes that the notes will be repaid when due, as well as
the absence of conversion rights, warrants and other typical equity features.
The debt treatment of the notes could change if the trust incurs losses.
However, even if the notes are treated as debt for those 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 under that plan. In
this case, particular 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 set forth in the Underwriting
Agreement between the Depositor and Prudential Securities Incorporated (the
"Underwriter"), an affiliate of the Depositor, the Depositor has agreed to
sell to the Underwriter, and the Underwriter has agreed to purchase from the
Depositor, the Notes.
The distribution of the Notes by the Underwriter will be effected in
each cash from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined, in each case, at the time of
sale. The Underwriter may effect such transactions by selling the Notes to or
through dealers, and such dealers may receive from the Underwriter, for whom
they act as agent, compensation in the form of underwriting discounts,
concessions or commissions. The Underwriter and any dealers that participate
with the Underwriter in the distribution of the Notes may be deemed to be an
underwriter, and any discounts, commissions or concessions received by them,
and any profits on the resale of the Notes purchased by them, may be deemed to
be underwriting discounts and commissions under the Securities Act of 1933, as
amended. The Underwriting Agreement provides that the Depositor (and the
Mortgage Loan Purchase Agreement provides that the Seller) will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Act.
The Depositor has been advised by the Underwriter that it intends to
make a market in the Notes but it has no obligation to do so. There can be no
assurance that a secondary market for the Notes will develop or, if it does
develop, that it will continue.
The Notes are offered by the Underwriter, subject to prior sale,
when, as and if delivered to and accepted by the Underwriter and subject to
their right to reject orders in whole or in part. It is expected that delivery
of the Notes will be made in book-entry form only through the facilities of
The Depository Trust Company on or about the Closing Date.
The Depositor and the Seller have agreed to indemnify the Underwriter
against, or make contributions to the Underwriter with respect to, certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
Incorporation of Information by Reference
The Securities and Exchange Commission allows us to "incorporate by
reference" information already on file with it. This means that we can
disclose important information to you by referring you to those documents.
This 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 financial statements of ________________________ included
in, or as exhibits to, the following documents:
o the Annual Report on Form 10-K for the year ended ____________;
and
o the Quarterly Report on Form 10-Q for the quarter ended
____________.
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 under the
Securities Act of 1933, for the notes offered pursuant to this prospectus
supplement. This prospectus supplement and the accompanying prospectus, which
form a part of the registration statement, omit specified information
contained in the 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 ____________ and subsidiaries as
of ____________ 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 ________________________, incorporated by reference in this prospectus
supplement, have been incorporated in this prospectus supplement in reliance
on the report of ____________, 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, the depositor and the servicer by ____________,
____________, for the trust by ____________, ____________, and for the
depositor and the underwriter by ____________, ____________.
Ratings
It is a condition to the original issuance of the notes that they
will receive ratings of "[ ]" by _________ and "[ ]" by ___________. The
ratings assigned to the notes will take into account the claims-paying ability
of the note insurer. Explanations of the significance of these ratings may be
obtained from ______________________________________ and
____________________________. These ratings will be the views only of the
rating agencies. There is no assurance that any of these ratings will continue
for any period of time or that these ratings will not be revised or withdrawn.
Any revision or withdrawal of these ratings may have an adverse effect on the
market price of the notes.
<PAGE>
<TABLE>
<CAPTION>
INDEX OF DEFINED TERMS
<S> <C>
Accrual Period...................................................................................................S-
Actuarial Loans..................................................................................................S-
Assumed Final Maturity Date......................................................................................S-
Available Funds..................................................................................................S-
Balloon Loans....................................................................................................S-
Basic Principal Distribution Amount..............................................................................S-
beneficial owner.................................................................................................S-
Book-Entry Notes.................................................................................................S-
Business Day.....................................................................................................S-
Call Option Date.................................................................................................S-
Class A-5 Priority Distribution Amount...........................................................................S-
Class A-5 Pro Rata. Percentage...................................................................................S-
Clearstream Luxembourg...........................................................................................S-
Clearstream Luxembourg Participants..............................................................................S-
CLTV.............................................................................................................S-
Collection Account...............................................................................................S-
Combined Loan-to-Value Ratio.....................................................................................S-
Commission.......................................................................................................S-
Cooperative :...................................................................................................S-
Corporate Office.................................................................................................S-
Custodian........................................................................................................S-
Cut-Off Date Loan Balance........................................................................................S-
debt-to-income ratio.............................................................................................S-
Defective Loan...................................................................................................S-
Definitive Note..................................................................................................S-
Deleted Mortgage Loan............................................................................................S-
Delinquency Advance..............................................................................................S-
Delinquent.......................................................................................................S-
Distribution Date................................................................................................S-
DTC..............................................................................................................S-
DTC Rules........................................................................................................S-
due date.........................................................................................................S-
Due Period.......................................................................................................S-
Euroclear........................................................................................................S-
Euroclear Operator...............................................................................................S-
Euroclear Participants...........................................................................................S-
European Depositaries............................................................................................S-
Extra Principal Distribution Amount..............................................................................S-
Financial Intermediary...........................................................................................S-
FIRREA...........................................................................................................S-
General Excess Available Amount..................................................................................S-
Global Securities................................................................................................S-
Holdings.........................................................................................................S-
Indirect Retail Mortgage Loans...................................................................................S-
Insurance Agreement..............................................................................................S-
Insurance Proceeds...............................................................................................S-
Insured Distribution Amount......................................................................................S-
Insured Payments.................................................................................................S-
Interest Distribution Amount.....................................................................................S-
Interest Remittance Amount.......................................................................................S-
LIBOR Business Day...............................................................................................S-
LIBOR Determination Date.........................................................................................S-
Liquidated Loan..................................................................................................S-
Liquidation Proceeds.............................................................................................S-
Loan Balance.....................................................................................................S-
Loan-to-Value Ratio..............................................................................................S-
LTV..............................................................................................................S-
Mortgage Loans...................................................................................................S-
Mortgage Notes...................................................................................................S-
Mortgage Pool....................................................................................................S-
Mortgaged Properties.............................................................................................S-
Mortgages........................................................................................................S-
Net WAC Cap......................................................................................................S-
Note Account.....................................................................................................S-
Note Insurer.....................................................................................................S-
Note Insurer Default.............................................................................................S-
Note Owners......................................................................................................S-
Note Principal Balance...........................................................................................S-
Noteholder.......................................................................................................S-
Notes............................................................................................................S-
OC Deficiency Amount.............................................................................................S-
OC Deficit.......................................................................................................S-
OC Release Amount................................................................................................S-
OC Target Amount.................................................................................................S-
One-Month LIBOR..................................................................................................S-
Order............................................................................................................S-
Original Note Principal Balance..................................................................................S-
Overcollateralized Amount........................................................................................S-
Pass-Through Rate................................................................................................S-
PMI Insurer......................................................................................................S-
PMI Mortgage Loans...............................................................................................S-
PMI Policy.......................................................................................................S-
Policy Payments Account..........................................................................................S-
Pooling and Servicing Agreement..................................................................................S-
Premium Amount...................................................................................................S-
Prepayment Interest Shortfall....................................................................................S-
Principal Distribution Amount....................................................................................S-
Principal Prepayment.............................................................................................S-
Principal Remittance Amount......................................................................................S-
Purchase Price...................................................................................................S-
Realized Loss....................................................................................................S-
Receipt..........................................................................................................S-
Received.........................................................................................................S-
Record Date......................................................................................................S-
Reference Banks..................................................................................................S-
Reimbursement Amount.............................................................................................S-
Relevant Depositary..............................................................................................S-
REMICs...........................................................................................................S-
Replacement Mortgage Loan........................................................................................S-
Reserve Interest Rate............................................................................................S-
Retail Mortgage Loans............................................................................................S-
Seller...........................................................................................................S-
Servicer.........................................................................................................S-
Servicer Extension Notice........................................................................................S-
Servicer Remittance Date.........................................................................................S-
Servicer Termination Trigger Event...............................................................................S-
Servicing Fee....................................................................................................S-
Servicing Fee Rate...............................................................................................S-
Shift Percentage.................................................................................................S-
Six-Month LIBOR..................................................................................................S-
SMMEA............................................................................................................S-
Telerate Page 3750...............................................................................................S-
Teems and Conditions.............................................................................................S-
Trust............................................................................................................S-
Trust Fund.......................................................................................................S-
Trustee Fee......................................................................................................S-
Trustee Fee Rate.................................................................................................S-
Trustee's Mortgage File..........................................................................................S-
Underwriter......................................................................................................S-
</TABLE>
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Notes will be globally
offered (the "Global Securities") and will be available only in book-entry
form. Investors in the Global Securities may hold such Global Securities
through any of DTC, Clearstream Banking, societe anonyme ("Clearstream
Luxembourg") or Euroclear. The Global Securities will be tradeable as home
market instruments in both the European and U.S. domestic markets.
Initial settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage loan asset backed notes
issues.
Secondary cross-market trading between Clearstream Luxembourg or
Euroclear and DTC Participants holding Notes will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream Luxembourg and Euroclear (in such capacity) and as DTC
Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC.
Investors' interests in the Global Securities will be represented
through financial institutions acting on their behalf as direct and indirect
Participants in DTC. As a result, Clearstream Luxembourg and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior mortgage loan asset backed
notes issues. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date. Investors
electing to hold their Global Securities through Clearstream Luxembourg or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading Between DTC Participants. Secondary market trading between
DTC Participants will be settled using the procedures applicable to prior
mortgage loan asset backed notes issues in same-day funds.
Trading Between Clearstream Luxembourg and/or Euroclear Participants.
Secondary market trading between Clearstream Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading Between DTC Seller And Clearstream Luxembourg Or Euroclear
Purchaser. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream
Luxembourg or Euroclear through a Clearstream Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement.
Clearstream Luxembourg or Euroclear will instruct the respective Depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
either the actual number of days in such accrual period and a year assumed to
consist of 360 days or a 360-day year of twelve 30-day months as applicable to
the related class of Global Securities. For transactions settling on the 31st
of the month, payment will include interest accrued to and excluding the first
day of the following month. Payment will then be made by the respective
Depositary of the DTC Participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Clearstream Luxembourg
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade
fails), the Clearstream Luxembourg or Euroclear cash debt will be valued
instead as of the actual settlement date.
Clearstream Luxembourg Participants and Euroclear Participants will
need to make available to the respective clearing systems the funds necessary
to process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines
of credit, as they would for any settlement occurring within Clearstream
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream Luxembourg or Euroclear until the Global Securities are
credited to their accounts one day later.
As an alternative, if Clearstream Luxembourg or Euroclear has
extended a line of credit to them, Clearstream Luxembourg Participants or
Euroclear Participants can elect not to preposition funds and allow that
credit line to be drawn upon the finance settlement. Under this procedure,
Clearstream Luxembourg Participants or Euroclear Participants purchasing
Global Securities would incur overdraft charges for one day, assuming they
cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the
value date. Therefore, in many cases the investment income on the Global
Securities earned during that one-day period may substantially reduce or
offset the amount of such overdraft charges, although this result will depend
on each Clearstream Luxembourg Participant's or Euroclear Participant's
particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global
Securities to the respective European Depositary for the benefit of
Clearstream Luxembourg Participants or Euroclear Participants. The sale
proceeds will be available to the DTC seller on the settlement date. Thus, to
the DTC Participants a cross-market transaction will settle no differently
than a trade between two DTC Participants.
Trading between Clearstream Luxembourg or Euroclear Seller and DTC
Purchaser. Due to time zone differences in their favor, Clearstream Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective Depositary, to a DTC
Participant. The seller will send instructions to Clearstream Luxembourg or
Euroclear through a Clearstream Luxembourg Participant or Euroclear
Participant at least one business day prior to settlement. In these cases
Clearstream Luxembourg or Euroclear will instruct the respective Depositary,
as appropriate, to deliver the Global Securities to the DTC Participant's
account against payment. Payment will include interest accrued on the Global
Securities from and including the last coupon payment to and excluding the
settlement date on the basis of either the actual number of days in such
accrual period and a year assumed to consist of 360 days or a 360-day year of
twelve 30-day months as applicable to the related class of Global Securities.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the Clearstream Luxembourg
Participant or Euroclear Participant the following day, and receipt of the
cash proceeds in the Clearstream Luxembourg Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be
the preceding day, when settlement occurred in New York). Should the
Clearstream Luxembourg Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Clearstream Luxembourg
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream Luxembourg or Euroclear and
that purchase Global Securities from DTC Participants for delivery to
Clearstream Luxembourg Participants or Euroclear Participants should note that
these trades would automatically fail on the sale side unless affirmative
action were taken. At least three techniques should be readily available to
eliminate this potential problem:
(a) borrowing through Clearstream Luxembourg or Euroclear for
one day (until the purchase side of the day trade is reflected in
their Clearstream Luxembourg or Euroclear accounts) in accordance
with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to the settlement, which
would give the Global Securities sufficient time to be reflected in
their Clearstream Luxembourg or Euroclear account in order to settle
the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the sale
to the Clearstream Luxembourg or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Clearstream Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue discount)
on registered debt issued by U.S. Persons, unless (1) each clearing system,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business in the chain of intermediaries
between such beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (2) such beneficial
owner takes one of the following steps to obtain an exemption or reduced tax
rate:
Exemption for non-U.S. Persons (Form W-8 or Form W-8BEN). Beneficial
owners of Global Securities that are non-U.S. Persons can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Note of
Foreign Status) or From W-8BEN (Note of Foreign Status of Beneficial Owner for
United States Tax Withholding). If the information shown on Form W-8 changes,
a new Form W-8 of Form W-8BEN must be filed within 30 days of such change.
After December 31, 2000, only Form W-8BEN will be acceptable.
Exemption for non-U.S. Persons with effectively connected income
(Form 4224 or Form W-8ECI). A non-U.S. Person, including a non-U.S.
corporation or bank with a U.S. branch, for which the interest income is
effectively connected with its conduct of a trade or business in the United
States, can obtain an exemption from the withholding tax by filing Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States) or Form W-8ECI
(Certificate of Foreign Person's Claim for Exemption from Withholding on
Income Effectively Connected with the Conduct of a Trade or Business in the
United States).
Exemption or Reduced Rate for Non-U.S. Persons Resident In Treaty
Countries (Form 1001 or Form W-8BEN). Non-U.S. Persons that are Note Owners
residing in a country that has a tax treaty with the United States can obtain
an exemption or reduced tax rate (depending on the treaty terms) by filing
Form 1001 (Ownership, Exemption or Reduced Rate Certificate) or Form W-8BEN
(Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). If Form 1001 is provided and the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Noteholder or his
agent. After December 31, 2000, only Form W8-BEN will be acceptable.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Noteholder of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8, Form 1001, and Form 4224 are
effective until December 31, 2000. Form W-8BEN and Form W-8ECI are effective
until the third succeeding calendar year from the date the form is signed.
The term "U.S. Person" means (1) a citizen or resident of the United
States, (2) a corporation or partnership organized in or under the laws of the
United States or any state or the District of Columbia (other than a
partnership that is not treated as a United States person under any applicable
Treasury regulations), (3) an estate the income of which is includible in
gross income for United States tax purposes, regardless of its source, or (4)
a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
Persons have authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in regulations,
certain trusts in existence on August 20, 1996 and treated as United States
persons prior to such date that elect to continue to be so treated also shall
be considered U.S. Persons. This summary does not deal with all aspects of
U.S. Federal income tax withholding that may be relevant to foreign holders of
the Global Securities. Investors are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of the Global
Securities.
===============================================================================
<PAGE>
$__________ Mortgage-Backed Notes, Series ______
________________________ Home Equity Loan Trust ______
[LOGO]
----------------------------------
Seller and Servicer
Prudential Securities Secured Financing Corporation
Depositor
---------------------
Prospectus Supplement
---------------------
Prudential Securities
[Date]
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.
We are not offering the notes offered hereby in any state where such
offer is not permitted.
We represent the accuracy of the information in this prospectus
supplement and the accompanying prospectus only as of the dates on their
respective covers.
Dealers will be required to deliver a prospectus supplement and
prospectus when acting as underwriters of the notes offered hereby and with
respect to their unsold allotments or subscriptions. In addition, all dealers
selling the notes, whether or not participating in this offering, may be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
===============================================================================
PROSPECTUS
-------------------------------------------------------------------------------
Prudential Securities Secured
Financing Corporation Asset-Backed Securities
Sponsor Issuable in Series
-------------------------------------------------------------------------------
--------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
You should read the section entitled The Securities
"Risk Factors" starting on page 3 of
this prospectus and consider these o will be issued from time to time in series,
factors before making a decision to
invest in the securities. o will consist of either asset-backed
certificates or asset-backed notes,
o will be issued by a trust or other special
Retain this prospectus for future purpose entity established by the sponsor,
reference. This prospectus may not
be used to consummate sales of o will be backed by one or more pools of
securities unless accompanied by the mortgage loans or manufactured housing
prospectus supplement relating to contracts held by the issuer or private
the offering of the securities. securities or agency securities,
o may have one or more forms
of credit enhancement, such as
insurance policies or reserve funds.
--------------------------------------------
</TABLE>
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 August 10, 2000
<PAGE>
Table of Contents
Summary of Prospectus.............................1
Risk Factors......................................3
The Sponsor.......................................7
Use of Proceeds...................................7
The Trustee.......................................7
The Trust Funds...................................8
The Mortgage Loans..........................8
The Contracts..............................15
Commercial Loans...........................17
MBS........................................18
Fixed Retained Yield.......................19
Insurance Policies.........................19
Acquisition of the Trust Assets............21
Assignment of the Loans....................21
Representations and Warranties.............22
Pre-Funding Accounts.......................25
Description of the Securities....................26
Distributions..............................27
Principal and Interest on the Securities...28
Form of Securities.........................29
Credit Enhancement...............................30
Subordination..............................31
Overcollateralization......................31
Cross-Collateralization....................31
Surety Bonds...............................32
Letters of Credit..........................32
Special Hazard Insurance Policies..........32
Reserve Funds..............................32
Other Insurance, Guarantees and
Similar Instruments or
Agreements...............................33
Reduction or Substitution of Credit
Enhancement..............................33
Prepayment and Yield Considerations..............33
Interest Rates.............................33
Interest Shortfalls Due to Principal
Prepayments..............................34
Weighted Average Life of Securities........35
Servicing of the Loans...........................36
The Servicer...............................36
Payments on Loans..........................36
Advances and Limitations Thereon...........39
Adjustment to Servicing
Compensation in Connection with
Prepaid and Liquidated Loans.............39
Reports to Securityholders.................40
Collection and Other Servicing Procedures..41
Enforcement of Due-on-Sale Clauses;
Realization Upon Defaulted Loans.........41
Servicing Compensation and Payment
of Expenses..............................42
Evidence as to Compliance..................43
Matters Regarding the Servicer.............43
Events of Default; Rights Upon Event
of Default...............................44
Amendment..................................47
Termination; Purchase or Other
Disposition of Loans.....................47
Material Legal Aspects of the Loans..............48
The Mortgage Loans.........................48
The Contracts..............................56
Installment Contracts......................60
Soldiers' and Sailors' Civil Relief Act....62
Type of mortgaged property.................62
Commercial, Multifamily and Mixed
Use Loans................................62
Leases and Rents...........................63
Material Matters Relating to Insolvency....63
Bankruptcy Laws............................64
Material Federal Income Tax Consequences.........65
Grantor Trust Securities...................66
REMIC Securities...........................67
Debt Securities............................75
Partnership Interests......................76
FASIT Securities...........................78
Discount and Premium.......................81
Backup Withholding.........................84
Foreign Investors..........................84
State Tax Considerations.........................86
ERISA Considerations.............................86
Certificates...............................87
Notes......................................89
Consultation with Counsel..................89
Legal Investment.................................89
Plan of Distribution.............................91
Incorporation of Information by Reference........92
Additional Information...........................92
Legal Matters....................................94
Ratings..........................................94
Glossary.........................................95
<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 Assets
Each issuer will hold one or more pools of:
o conventional mortgage loans or manufactured housing contracts secured
by one-to-four family residential properties, manufactured homes
and/or commercial properties,
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,
o revolving home equity lines of credit, and
o private or agency securities.
The sponsor will direct the issuer to acquire the assets from affiliated
sellers, unaffiliated sellers 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 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,
their affiliates or a designated securityholder 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.
<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.
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 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.
Commercial mortgage loans may involve greater risk of loss than residential
mortgage loans, which could lead to losses on your securities.
Mortgage loans made with respect to commercial properties, including
traditional commercial properties, and multifamily and mixed use
properties that are predominantly used for commercial purposes, may
entail risks of delinquency and foreclosure, and risks of loss in the
event thereof, that are greater than similar risks associated with
single family property. The ability of a mortgagor to repay a loan
secured by an income-producing property typically is dependent
primarily upon the successful operation of such property rather than
any independent income or assets of the mortgagor; thus, the value of
an income-producing property is directly related to the net operating
income derived from such property. In contrast, the ability of a
mortgagor to repay a single family loan typically is dependent
primarily upon the mortgagor's household income, rather than the
capacity of the property to produce income; thus, other than in
geographical areas where employment is dependent upon a particular
employer or an industry, the mortgagor's income tends not to reflect
directly the value of such property. A decline in the net operating
income of an income-producing property will likely affect both the
performance of the related loan as well as the liquidation value of
such property, whereas a decline in the income of a mortgagor on a
single family property will likely affect the performance of the
related loan but may not affect the liquidation value of such
property. Moreover, a decline in the value of a mortgaged property
will increase the risk of loss particularly with respect to any
related junior mortgage loan.
The performance of a mortgage loan secured by an income-producing
property leased by the mortgagor to tenants as well as the
liquidation value of such property may be dependent upon the business
operated by such tenants in connection with such property, the
creditworthiness of such tenants or both. The risks associated with
such loans may be offset by the number of tenants or, if applicable,
a diversity of types of business operated by such tenants.
The mortgage loans may be nonrecourse loans or loans for which
recourse may be limited. With respect to those limited recourse
mortgage loans, in the event of mortgagor default, recourse may be
had only against the specific property and such other assets, if any,
as have been pledged to secure the related mortgage loan. With
respect to those mortgage loans that provide for recourse against the
mortgagor and its assets generally, there can be no assurance that
such recourse will ensure a recovery in respect of a defaulted
mortgage loan greater than the liquidation value of the related
mortgaged property.
Further, the concentration of default, foreclosure and loss risks in
individual mortgagors or mortgage loans on commercial properties
could be greater than for single family loans because the related
mortgage loans could have higher principal balances and may consist
of leases to only a single lessee or a limited number of lessees.
<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.
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 or private or agency securities ("MBS"). As
used herein, loans refers to both whole loans (or certain balances thereof)
and loans underlying MBS. 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 a seller of mortgage loans and/or contracts and
transferred to the issuer either directly by the seller 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 include mortgage loans for which a
Fixed Retained Yield has been retained by the seller, 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
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 that no more
than five percent (5%) of any trust fund may be comprised of commercial
properties, including traditional commercial properties, multifamily
properties and mixed use properties that are predominantly used for commercial
purposes. 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 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.
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
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 seller 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 or 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 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 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 or
acquired by the seller, or by a manufactured housing dealer in the ordinary
course of business and purchased by the seller. 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 seller 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 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 date of issuance thereof and to be filed with the Securities and
Exchange Commission promptly after the initial issuance of the securities.
Commercial Loans
The mortgage loans may be secured by liens on, or security interests
in, mortgaged properties consisting of (1) primarily residential properties
consisting of five or more rental or cooperatively owned dwelling units in
high-rise, mid-rise or garden apartment buildings and which may include
limited retail, office or other commercial space ("multifamily properties,"
and the related loans, "multi-family loans"), (2) retail stores and
establishments, (3) office buildings, or (4) hotels or motels, nursing homes,
assisted living facilities, continuum care facilities, day care centers,
schools, hospitals or other healthcare related facilities, industrial
properties, warehouse facilities, mini-warehouse facilities, self-storage
facilities, distribution centers, transportation centers, parking facilities,
entertainment and/or recreation facilities, movie theaters, restaurants, golf
courses, car washes, automobile dealerships, mobile home parks, mixed use
(including mixed commercial uses and mixed commercial and residential uses)
and/or unimproved land (collectively, the "commercial properties" and the
related loans, "commercial loans"). The mortgage loans will be secured by
first or junior mortgages or deeds of trust or other similar security
instruments creating a first or junior lien on mortgaged property. Commercial
loans will generally also be secured by an assignment of leases and rents
and/or operating or other cash flow guarantees relating to the mortgage loan.
It is anticipated that the mortgagors will be required to maintain hazard
insurance on the mortgaged properties in accordance with the terms of the
underlying mortgage loan documents.
Multifamily properties are residential income-producing properties
consisting of five or more rental or cooperatively owned dwelling units in
high-rise, mid-rise or garden apartment buildings and which may include
limited retail, office or other commercial space. Multifamily leases tend to
be relatively short-term (i.e., one to five years). Multifamily properties
face competition from other such properties within the same geographical area,
and compete on the basis of rental rates, amenities, physical condition and
proximity to retail centers and transportation. Certain states and
municipalities may regulate the relationships between landlords and
residential tenants and may impose restrictions on rental rates.
Retail properties are generally income-producing properties leased by
borrowers to tenants that sell various goods and services. The leases may be
short- or long-term and may have a base rent component and an additional
rental component tied to sales. Retail properties may include single- or
multiple-tenant properties, in the latter case such as shopping malls or strip
shopping centers. Some retail properties have anchor tenants or are located
adjacent to an anchor store. While there is no strict definition of an anchor,
it is generally understood that a retail anchor tenant is proportionately
larger in size and is vital in attracting customers to the retail property,
whether or not such retail anchor is located on the related mortgaged
property. Retail properties compete on the basis of the physical attributes of
the properties, access to major roadways, availability of parking and rental
rates. Retail properties may face competition from sources within the
geographical real estate market, and in addition, unlike other income
producing properties, from sources outside a given real estate market.
Catalogue retailers, home shopping networks, the Internet, telemarketing and
outlet centers all compete with more traditional retail properties for
consumer dollars spent on products and services sold in retail stores.
Continued growth of these alternative retail outlets (which are often
characterized by lower operating costs) could adversely affect the rents
collectible at retail properties.
Office properties are income-producing properties in which the
borrower leases space to commercial tenants for office use. Such properties
may be single- or multiple-tenant properties and may be high-rise, mid-rise or
low-rise buildings. Leases may be short- or long-term leases. Office
properties compete on the basis of the physical attributes of and amenities
provided by the building, proximity to sources of transportation and rental
rates.
Pursuant to a lease assignment, the related mortgagor may assign its
rights, title and interest as lessor under each lease and the income derived
therefrom to the related mortgagee, while retaining a license to collect the
rents for so long as there is no default. If the mortgagor defaults, the
license terminates and the mortgagee or its agent is entitled to collect the
rents from the related lessee or lessees for application to the monetary
obligations of the mortgagor. State law may limit or restrict the enforcement
of the lease assignments by a mortgagee until it takes possession of the
related mortgaged property and/or a receiver is appointed.
MBS
Any MBS will have been issued pursuant to a pooling and servicing
agreement, a participation agreement, a trust agreement, an indenture or
similar agreement (an "MBS Agreement"). A seller (the "MBS Issuer") and/or
servicer (the "MBS Servicer") of the underlying mortgage loans (or underlying
MBS) will have entered into the MBS Agreement with a trustee or a custodian
under the MBS Agreement (the "MBS Trustee"), if any, or with the original
purchaser of the interest in the underlying mortgage loans or MBS evidenced by
the MBS.
Distributions of any principal or interest, as applicable, will be
made on MBS on the dates specified in the related Prospectus Supplement. The
MBS may be issued in one or more classes with characteristics similar to the
classes of securities described in this prospectus. Any principal or interest
distributions will be made on the MBS by the MBS Trustee or the MBS Servicer.
The MBS Issuer or the MBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the MBS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other
forms of credit support similar to that described for the securities under
"Credit Enhancement" in this prospectus may be provided with respect to the
MBS. The type, characteristics and amount of such credit support, if any, will
be a function of certain characteristics of the underlying mortgage loans or
underlying MBS evidenced by or securing such MBS and other factors and
generally will have been established for the MBS on the basis of requirements
of either any rating agency that may have assigned a rating to the MBS or the
initial purchasers of the MBS.
The Prospectus Supplement for a series of securities evidencing
interests in mortgage loans that include MBS will specify, to the extent
available to the Depositor, (i) the aggregate approximate initial and
outstanding principal amount or notional amount, as applicable, and type of
the MBS to be included in the Trust Fund, (ii) the original and remaining term
to stated maturity of the MBS, if applicable, (iii) whether such MBS is
entitled only to interest payments, only to principal payments or to both,
(iv) the pass-through or bond rate of the MBS or formula for determining such
rates, if any, (v) the applicable payment provisions for the MBS, including,
but not limited to, any priorities, payment schedules and subordination
features, (vi) the MBS Issuer, MBS servicer and MBS trustee, as applicable,
(vii) certain characteristics of the credit support, if any, such as
subordination, reserve funds, insurance policies, letters of credit or
guarantees relating to the related underlying mortgage loans, the underlying
MBS or directly to such MBS, (viii) the terms on which the related underlying
mortgage loans or underlying MBS for such MBS or the MBS may, or are required
to, be purchased prior to their maturity, (ix) the terms on which mortgage
loans or underlying MBS may be substituted for those originally underlying the
MBS, (x) the servicing fees payable under the MBS Agreement, (xi) the type of
information in respect of the underlying mortgage loans described above, and
the type of information in respect of the Underlying MBS described in this
paragraph, (xii) the characteristics of any cash flow agreements that are
included as part of the trust fund evidenced or secured by the MBS and (xiii)
whether the MBS is in certificated form or held through a depository such as
The Depository Trust Company.
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.
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 Trust Assets
The loans underlying a series of securities will be acquired by the
issuer either directly or through a special-purpose affiliate of the issuer,
from originators or sellers which may be affiliates of the issuer, under Loan
Sale Agreements. Each loan so acquired will have been originated or acquired
by the sellers thereof in accordance with the underwriting criteria specified
in the accompanying prospectus supplement. In the Loan Sale Agreements, the
sellers will make a number of representations and warranties concerning the
loans being acquired from the sellers 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 seller 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
seller 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 seller or any affiliate of the seller.
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
sellers 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. 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 seller. If the seller cannot cure the
omission or defect within 60 days after receipt of notice, the seller 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 seller 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 seller 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 seller, nor the issuer will be obligated to
purchase or substitute for the loan if the seller 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
Unless otherwise specified in the related Prospectus Supplement, each
seller, in the Loan Sale Agreements, will have made a number of
representations and warranties concerning the mortgage loans. The seller will
have represented, among other things, substantially to the effect that:
o immediately prior to the sale and transfer of the mortgage
loans, the seller 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;
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.
Unless otherwise specified in the related Prospectus Supplement, each
seller, in the Loan Sale Agreement, will have made a number of representations
and warranties concerning the contracts. The seller will have represented,
among other things, substantially to the effect that:
o immediately prior to the sale and transfer of the contracts, the
seller 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
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 seller concerning a
loan will have been made as of the date on which the seller sold the loan to
the issuer, or one of its affiliates. 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 seller, the
repurchase obligation described below will not arise if, during the period
commencing on the date of sale of a loan by the seller, 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 seller 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 seller, will
promptly notify the seller 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 seller cannot cure the
breach within 60 days after notice from the servicer or the trustee, as the
case may be, then the seller 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 custodian and the
seller 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 seller,
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 seller.
None of the sponsor, the issuer or the servicer, unless the servicer
is the seller, will be obligated to purchase or substitute for a loan if the
seller defaults on its obligation to do so, and no assurance can be given that
the seller will carry out their respective repurchase obligations.
The seller, 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 seller in connection with missing or
defective loan documents or the breach of the seller'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 seller, 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 period
specified in the accompanying prospectus supplement,
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.
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 seller 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.
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 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.
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.
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 seller, 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 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.
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 seller 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.
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
seller 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 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 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.
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 seller 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. 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, 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 seller; 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 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 seller for each loan or property acquired in
respect thereof that has been repurchased by the seller, 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;
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;
(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 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 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 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.
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 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 under the standards
set forth in the Servicing Agreement,
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.
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.
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.
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
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
seller 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 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.
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.
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
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.
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 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 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 seller 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.
Some of the commercial loans will include a "debt-acceleration"
clause, which permits the lender to accelerate the full debt upon a monetary
or nonmonetary default of the borrower. The courts of all states will enforce
clauses providing for acceleration in the event of a material payment default
after giving effect to any appropriate notices. The courts of any state,
however, may refuse to permit foreclosure of a mortgage or deed of trust when
an acceleration of the indebtedness would be inequitable or unjust or the
circumstances would render the acceleration unconscionable. Furthermore, in
some states, the borrower may avoid foreclosure and reinstate an accelerated
loan by paying only the defaulted amounts and the costs and attorneys' fees
incurred by the lender in collecting such defaulted payments.
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 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 seller 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 servicer will deliver the securities of title to the trustee or note
thereon the interest of the trustee. Accordingly, the servicer or the seller,
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 seller, or a
trustee in bankruptcy of the servicer, or the seller.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the manufactured home owner, or
administrative error by state recording officials, the notation of the lien of
the servicer or the seller, 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 seller 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 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.
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 seller 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 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 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 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 , motels, golf courses, restaurants, movie
theaters, car washes, and auto dealerships 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.
The ability of borrowers under commercial loans to make timely
payment on their loans may be dependent upon such factors as location, market
demographics, the presence of certain other retail outlets in the same
shopping center, competition from catalog and internet retailers and
insolvency of tenants. Furthermore, such factors as the management skill,
experience and financial resources of the operator (which may be other than
the borrower), national and regional economic conditions and other factors may
affect the ability of borrowers to make payments when due.
Commercial Loans
The market value of any commercial property, including traditional
commercial, multifamily and mixed use properties that are predominantly used
for commercial purposes, obtained in foreclosure or by deed in lieu of
foreclosure will be based substantially on the operating income obtained from
renting the units. Because a default on a commercial loan is likely to have
occurred because operating income, net of expenses, is insufficient to make
debt service payments on such mortgage loan, it can be anticipated that the
market value of such property will be less than was anticipated when such
mortgage loan was originated. To the extent that the equity in the property
does not absorb the loss in market value and such loss is not covered by other
credit support, a loss may be experienced. With respect to multifamily
property consisting of an apartment building owned by a cooperative, the
cooperative's ability to meet debt service obligations on the mortgage loan,
as well as all other operating expenses, will be dependent in large part on
the receipt of maintenance payments from the tenant-stockholders.
Unanticipated expenditures may in some cases have to be paid by special
assessments of the tenant-stockholders. The cooperative's ability to pay the
principal amount of the mortgage loan at maturity may depend on its ability to
refinance the mortgage loan. The depositor, the seller and the master Servicer
will have no obligation to provide refinancing for any such mortgage loan.
Leases and Rents
Mortgages that encumber income-producing property often contain an
assignment of rents and leases, pursuant to which the mortgagor assigns its
right, title and interest as landlord under each lease and the income derived
therefrom to the lender, while the mortgagor retains a revocable license to
collect the rents for so long as there is not default. Under such assignments,
the mortgagor typically assigns its right, title and interest as lessor under
each lease and the income derived therefrom to the mortgagee, while retaining
a license to collect the rents for so long as there is no default under the
mortgage loan documentation. The manner of perfecting the mortgagee's interest
in rents may depend on whether the mortgagor's assignment was absolute or one
granted as security for the loan. Failure to properly perfect the mortgagee's
interest in rents may result in the loss of substantial pool of funds, which
could otherwise serve as a source of repayment of such loan. If the mortgagor
defaults, the license terminates and the lender is entitled to collect the
rents. Local law may require that the lender take possession of the property
and/or obtain a court-appointed receiver before becoming entitled to collect
the rents. In most states, hotel and motel room rates are considered accounts
receivable under the UCC; generally these rates are either assigned by the
mortgagor, which remains entitled to collect such rates absent a default, or
pledged by the mortgagor, as security for the loan. In general, the lender
must file financing statements in order to perfect its security interest in
the rates and must file continuation statements, generally every five years,
to maintain perfection of such security interest. Even if the lender's
security interest in room rates is perfected under the UCC, the lender will
generally be required to commence a foreclosure or otherwise take possession
of the property in order to collect the room rates after a default.
Even after a foreclosure, the potential rent payments from the
property may be less than the periodic payments that had been due under the
mortgage. For instance, the net income that would otherwise be generated from
the property may be less than the amount that would have been needed to
service the mortgage debt if the leases on the property are at below-market
rents, or as the result of excessive maintenance, repair or other obligations
which a lender succeeds to as landlord.
Material Matters Relating to Insolvency
The seller, 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 seller. However, if the seller 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 seller may argue that
the sale of the loans by the seller 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 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. 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 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-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 seller, including original issue
discount and market discount income, and reduced, but not below zero, by any
previously reported losses, any amortized premium and by any distributions of
principal.
Grantor Trust Reporting
The trustee will furnish to each 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 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) 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.
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.
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 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 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.
Proposed Treasury regulations issued on February 4, 2000 (the "New
Proposed Regulations") would modify the safe harbor under which transfers of
noneconomic residual interests are treated as not disregarded for federal
income tax purposes. Under the New Proposed Regulations, a transfer of a
noneconomic residual interest would not qualify under this safe harbor unless
the present value of the anticipated tax liabilities associated with holding
the residual interest does not exceed the sum of the present value of the sum
of (i) any consideration given to the transferee to acquire the interest, (ii)
future distributions on the interest, and (iii) any anticipated tax savings
associated with holding the interest as the REMIC generates losses. For
purposes of this calculation, the present value generally is calculated using
a discount rate equal to the applicable federal rate. The New Proposed
Regulations have a proposed effective date of February 4, 2000.
In addition, President Clinton's Fiscal Year 2001 Budget Proposal
contains a provision under which a REMIC would be secondarily liable for the
tax liability of its residual interest. The proposal states that it would be
effective for REMICs created after the date of enactment. It is unknown
whether this provision will be included in any bill introduced to Congress
this year or if introduced whether it will be enacted.
Prospective investors in REMIC Residual Securities should consult
their tax advisors regarding the New Proposed Regulations and the Fiscal Year
2001 Budget Proposals.
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, 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.
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.
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 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 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,
(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
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.
Proposed FASIT Regulations
The Treasury Department filed proposed regulations interpreting the
FASIT Provisions ("proposed FASIT regulations") with the Federal Register on
Friday, February 4, 2000. The proposed FASIT regulations generally would be
effective on the date they are issued as final regulations. Certain anti-abuse
rules are, however, proposed to be effective on February 4, 2000. The proposed
FASIT regulations would, among other things, provide procedures for making a
FASIT election, refine the definition of certain terms used in the FASIT
provisions, provide penalties that would apply upon cessation of FASIT status,
provide rules for the tax treatment of transfers of assets to the FASIT, and
establish anti-abuse rules to preclude use of the FASIT vehicle for a
transaction that did not primarily concern the securitization of financial
assets.
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 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
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 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 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--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.
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:
(i) 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;
(j) 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;
(k) the certificates acquired by the plan 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.;
(l) the trustee is not an affiliate of any other member
of the Restricted Group;
(m) 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
sellers 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;
(n) 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
(o) 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;
(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.
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.
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 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.
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.
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 Brown & Wood LLP, Washington, D.C. 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.
<PAGE>
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 seller in the Loan Sale Agreement and which must be
repurchased or substituted for by the seller.
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.
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 seller, either directly or through a
special-purpose affiliate or the seller.
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.
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 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.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses in connection with the
issuance and distribution of the Securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are
estimates, except the SEC registration fee.
<TABLE>
<CAPTION>
<S> <C>
SEC registration Fee...................................................................... $527,736
Legal fees and expenses*.................................................................. 375,000
Accounting fees and expenses*............................................................. 150,000
Blue Sky fees and expenses*............................................................... 60,000
Rating Agency fees*....................................................................... 850,000
Owner Trustee fees and expenses*.......................................................... 60,000
Indenture Trustee fees and expenses*...................................................... 120,000
Credit Enhancer*.......................................................................... 200,000
Printing and engraving*................................................................... 150,000
Miscellaneous*............................................................................ 200,000
--------------
Total............................................................................ $2,692,736
</TABLE>
* Estimated in accordance with Item 511 of Regulation S-K.
Item 15. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law provides that a
Delaware corporation may indemnify any persons, including officers and
directors, who are, or are threatened to be made, parties to any threatened,
pending or completed legal action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation), by reason of the fact that such person was an
officer or director of such corporation, or is or was serving at the request
of such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such officer or director acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's
best interests and, for criminal proceedings, had no reasonable cause to
believe that his conduct was illegal. A Delaware corporation may indemnify
officers and directors in an action by or in the right of the corporation
under the same conditions, except that no indemnification is permitted without
judicial approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such officer of director actually and
reasonably incurred.
The agreements which the Registrant will enter into for each series
of Securities will provide that the Registrant and any director, officer,
employee or agent of the Registrant will be entitled to indemnification by the
Trust Fund and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to such agreements or
the Securities, other than any loss, liability or expense incurred by reason
of willful misfeasance, bad faith or negligence in the performance of his or
its duties thereunder or by reason of reckless disregard of his or its
obligations and duties thereunder.
Section 8 of the form of underwriting agreements filed as a part of
Exhibit 1 to this Registration Statement provides for indemnification of
directors and officers who sign the Registration Statement and controlling
persons of the Registrant by the underwriters, and for indemnification of each
underwriter and its controlling person by the Registrant, against certain
liabilities.
Item 16. Exhibits.
<TABLE>
<CAPTION>
Exhibit
<S> <C>
1.1* Form of Underwriting Agreement
4.1* Form of Pooling and Servicing Agreement, including form of Certificates.
4.2* Form of Indenture, including form of Notes and certain other related agreements as Exhibits thereto.
4.3* Form of Trust Agreement.
4.4* Form of Securitization Sponsorship Agreement.
5.1** Opinion of Brown & Wood LLP regarding legality (including consent of such firm).
8.1 Opinion of Brown & Wood LLP regarding tax matters (including consent of such firm included in
Exhibit 5.1).
10.1* Form of Loan Sale Agreement.
10.2* Form of Sale and Servicing Agreement.
23.1 Consent of Brown & Wood LLP (included as part of Exhibits 5.1).
24.1 Power of Attorney (included on page II-4).
25.1* Statement of Eligibility and Qualification of the Indenture Trustee (Form T-1).
</TABLE>
-------------------
* Incorporated herein by reference to Amendment No. 1 to Registration
Statement on Form S-3 (Reg. No. 333-75489), filed with the Commission on
May 20, 1999.
** Previously filed.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933,
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement. Notwithstanding
the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not
exceed that which is registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in
the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the Registration Statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the Securities being registered which remain unsold at the
termination of the offering.
(b) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report pursuant
to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that
is incorporated by reference in this Registration Statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referred to in Item 15 of
this Registration Statement, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the Securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(d) That,
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(e) To file an application for the purpose of determining the
eligibility of the trustee to act under subsection (a) of Section 310 of the
Trust Indenture Act in accordance with the rules and regulations prescribed by
the Commission under Section 305(b)(2) of the Trust Indenture Act.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York on the
9th day of August, 2000.
PRUDENTIAL SECURITIES SECURED FINANCING
CORPORATION
By: /s/ Vincent T. Pica, II
-------------------------------
Vincent T. Pica, II
President and Director
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement on Form S-3 has been signed below by the
following persons in the capacities and on the dates indicated. Each person
whose signature appears below constitutes and appoints Vincent T. Pica, II, P.
Carter Rise and Kathy A. Jones, and each of them his or her true and lawful
attorney-in-fact and agent, acting together or alone, with full powers of
substitution and resubstitution, for them and in their name, place and stead,
to sign any or all amendments to this Registration Statement (including any
pre-effective or post-effective amendment), and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, acting together or alone, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as they might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, acting together or alone, or other substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Vincent T. Pica, II President (Principal Executive August 9, 2000
-------------------------------------------- Officer) and Director
Vincent T. Pica, II
/s/ P. Carter Rise Director August 9, 2000
--------------------------------------------
P. Carter Rise
/s/ Kathy A. Jones Director August 9, 2000
--------------------------------------------
Kathy A. Jones
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description of Document
------- -----------------------
<S> <C>
1.1* Form of Underwriting Agreement.
4.1* Form of Pooling and Servicing Agreement, including form of Certificates.
4.2* Form of Indenture, including form of Notes and certain other related agreements as Exhibits thereto.
4.3* Form of Trust Agreement.
4.4* Form of Securitization Sponsorship Agreement.
5.1** Opinion of Brown & Wood LLP regarding legality (including consent of such firm).
8.1 Opinion of Brown & Wood LLP regarding tax matters (including consent of such firm included in
Exhibit 5.1).
10.1* Form of Loan Sale Agreement.
10.2* Form of Sale and Servicing Agreement.
23.1 Consent of Brown & Wood LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included on page II-4).
25.1* Statement of Eligibility and Qualification of the Indenture Trustee (Form T-1).
</TABLE>
-------------------
* Incorporated herein by reference to Amendment No. 1 to Registration
Statement on Form S-3 (Reg. No. 333-75489), filed with the Commission on
May 20, 1999.
** Previously filed.
