<PAGE>
Supplement dated September 27, 2000 to Prospectus Supplement dated September 8,
2000 for the ABFS Mortgage Loan Trust 2000-3
AMERICAN BUSINESS FINANCIAL SERVICES
FILES FORM 8-K WITH SECURITIES AND EXCHANGE COMMISSION
Bala Cynwyd, PA, September 27, 2000... American Business Financial Services,
Inc., (NASDAQ: ABFI) a diversified financial services company operating
throughout the United States, today announced that it will be filing its Form
10-K and reporting fiscal 2000 earnings within 15 days of September 28, 2000 as
provided by the Securities and Exchange Commission's rules. The delay in filing
the Form 10-K is the result of the Company being unable to obtain the
information necessary to complete the evaluation of the carrying value of
certain assets at this time. The Company anticipates recording a write-down of
its interest-only strips as a result of a contemplated change in the discount
rate used to valued the interest-only strips. The adjustment to the carrying
value of the interest-only strips will be recorded as an expense and the Company
believes it will have a loss for the fourth quarter of fiscal 2000.
ABFI believes that this valuation adjustment will allow it to realize higher
accretion income in the future. The decision to use a higher discount rate was
made in light of a period of sustained higher interest rates and other external
forces, and not because of any deterioration in the asset quality of the
loan-servicing portfolio.
The Company expects to report the impact of the adjustment along with complete
financial reporting for fiscal 2000 on or before October 13, 2000. The Company
also filed a Form 8-K regarding this matter with the SEC.
American Business Financial Services, Inc. is a diversified financial services
company which provides business loans and first and second home equity mortgage
loans. The Company offers its products and services to consumers and businesses
nationwide.
For further information, contact Albert W. Mandia, Executive Vice President and
CFO, 610-617-4939, Keith Bratz, VP-Corporate Communications, 610-617-7475, or
David R. Evanson, Gregory FCA Communications, 610-649-3604.
Certain statements contained in this press release, which are not
historical fact, may be deemed to be forward-looking statements under federal
securities laws. There are many important factors that could cause American
Business Financial Services, Inc. and its subsidiaries' actual results to differ
materially from those indicated in the forward-looking statements. Such factors
include, but are not limited to, general economic conditions, including interest
rate risk, future residential real estate values, regulatory changes
(legislative or otherwise) affecting the real estate market and mortgage lending
activities, competition, demand for American Business Financial Services, Inc.
and its subsidiaries' services, availability of funding, loan payment rates,
delinquency and default rates, changes in factors influencing the loan
securitization market and other risks identified in American Business Financial
Services, Inc.'s Securities and Exchange Commission filings.
<PAGE>
Prospectus supplement to prospectus dated August 11, 2000
--------------------------------------------------------------------------------
$150,000,000
ABFS Mortgage Loan Trust 2000-3
Mortgage-Backed Notes, Series 2000-3
$150,000,000 7.610% Class A Notes
[GRAPHIC OMITTED](R)
Prudential Securities Secured Financing Corporation
Depositor
--------------------------------------------------------------------------------
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You should read the section entitled "Risk Factors" starting on page S-3 of this
prospectus supplement and page 3 of the accompanying prospectus and consider
these factors before making a decision to invest in the notes.
The notes represent non-recourse obligations of the trust only and are not
interests in or obligations of any other person.
Neither the notes nor the underlying mortgage loans will be insured or
guaranteed by any governmental agency or instrumentality.
--------------------------------------------------------------------------------
The trust fund --
o The trust fund consists primarily of a pool of fixed-rate business and
consumer purpose home equity loans secured by first- or second-lien
mortgages on residential real properties and to a limited extent, loans
secured by commercial real properties.
The notes --
o The notes will be secured primarily by a pledge of the pool of mortgage
loans.
Credit enhancement --
o The notes will be unconditionally and irrevocably guaranteed as to the
timely payment of interest and as to specified payments of principal
pursuant to the terms of a financial guaranty insurance policy to be
issued by
[AMBAC GRAPHIC OMITTED]
o Excess interest will be used in the early years of the transaction to
create and build 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.
The notes offered by this prospectus supplement will be purchased by
Prudential Securities Incorporated and offered from time to time to the public
in negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Proceeds to the issuer from the sale of the notes are
anticipated to be approximately $149,550,000 before the deduction of expenses
payable by the issuer, estimated to be approximately $425,000. 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 September 28, 2000.
Prudential Securities
The date of this prospectus supplement is September 8, 2000
<PAGE>
Important notice about the information presented in this
prospectus supplement and the accompanying prospectus
We provide information to you about the notes in two separate documents
that provide more detail in progression: (1) the accompanying prospectus, which
provides general information, some of which may not apply to your series of
notes, and (2) this prospectus supplement, which describes the specific terms of
your series of notes. If the accompanying prospectus contemplates multiple
options, you should rely on the information in this prospectus supplement as to
the applicable option.
We cannot sell the notes to you unless you have received both this
prospectus supplement and the accompanying prospectus.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further information concerning a particular topic. The following table of
contents provides the pages on which these captions are located.
S-ii
<PAGE>
Table of Contents
Summary...........................................S-1
Risk Factors......................................S-3
Transaction Overview..............................S-6
Parties........................................S-6
The Transaction................................S-6
The Mortgage Loan Pool............................S-7
The Originators, the Seller and the Servicer.....S-18
The Originators...............................S-18
Underwriting Guidelines.......................S-21
The Servicer..................................S-24
Delinquency and Loan Loss Experience..........S-25
The Owner Trustee................................S-26
The Indenture Trustee and the Collateral Agent...S-26
Description of the Notes and the Trust
Certificates ....................................S-27
Book-Entry Registration.......................S-27
Definitive Notes..............................S-31
Assignment and Pledge of the Mortgage Loans...S-31
Delivery of Mortgage Loan Documents...........S-32
Representations and Warranties of the Seller..S-33
Payments on the Mortgage Loans................S-35
Over-collateralization Provisions.............S-37
Flow of Funds.................................S-38
Indenture Events of Default...................S-38
Reports to Noteholders........................S-39
Amendment.....................................S-40
Servicing of the Mortgage Loans..................S-40
Servicing Fees and Other Compensation
and Payment of Expenses ......................S-40
Periodic Advances and Servicer Advances.......S-41
Prepayment Interest Shortfalls................S-41
Relief Act Shortfalls.........................S-42
Optional Purchase of Delinquent Mortgage LoansS-42
Servicer Reports..............................S-42
Collection and Other Servicing Procedures.....S-43
Hazard Insurance..............................S-43
Realization Upon Defaulted Mortgage Loans.....S-44
Removal and Resignation of the Servicer.......S-44
Optional Clean-up Call on the Notes...........S-46
Termination; Purchase of Mortgage Loans.......S-46
The Policy.......................................S-46
Drawings Under the Policy.....................S-47
The Note Insurer.................................S-47
Prepayment and Yield Considerations..............S-49
Material Federal Income Tax Consequences.........S-52
Treatment of the Notes........................S-52
ERISA Considerations.............................S-53
Legal Investment.................................S-54
Plan of Distribution.............................S-55
Incorporation of Information by Reference........S-55
Additional Information...........................S-56
Experts..........................................S-56
Legal Matters....................................S-56
Ratings..........................................S-56
Glossary.........................................S-57
S-iii
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
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Summary
This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need
to consider in making your investment decision. You should read this
entire prospectus supplement and the accompanying prospectus
carefully to understand all of the terms of the offering of the
notes.
-------------------------------------------------
The Notes and the Trust Certificates
The ABFS Mortgage Loan Trust 2000-3 will issue one class of its mortgage-backed
notes, series 2000-3: the class A notes. The class A notes will be secured by
the assets of the trust, which consist primarily of the mortgage loans. The
notes are being offered to you by this prospectus supplement.
The trust will also issue one class of trust certificates, representing the
entire beneficial ownership interest in the trust. The holder of a trust
certificate is entitled to receive specified payments consisting of excess
interest from the mortgage loans, but only after all other payments have been
made in respect of the notes. The trust certificates are not offered by this
prospectus supplement.
Payments
Payments on the notes will be on the 15th day of each month, or, if such 15th
day is not a business day, on the next business day, beginning on October 16,
2000, to the holders of record on the preceding record date.
The record date for the notes will be the last business day of the month
preceding the related payment date, or, in the case of the October 16, 2000
payment date, the closing date.
Payments of Interest
On each payment date, the notes are entitled to receive current interest.
o Current Interest. The current interest for a payment date is the interest
which accrues on the notes at the note rate on the outstanding principal
balance of the notes during the accrual period.
<PAGE>
o Accrual Period. The accrual period for the notes is the calendar month
preceding the payment 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.
Payments of Principal
The holders of the notes are entitled to receive payments of principal on each
payment date which generally reflects the collections of principal on the
mortgage loans during the preceding calendar month.
In addition, in accordance with the over-collateralization features of the
transaction, holders may also receive extra payments of principal from the
excess interest on that payment date.
Credit Enhancement
The credit enhancement provided for the benefit of the holders of the notes
consists solely of:
o over-collateralization, and
o the note insurance policy.
The Mortgage Loans
The mortgage loans to be included in the trust estate will be primarily
fixed-rate, closed-end, monthly pay, business purpose loans and consumer purpose
home equity loans secured by first, second or multiple mortgages or deeds of
trust on residential or commercial real properties.
On the closing date, the trust will purchase the mortgage loans. The aggregate
principal balance of the mortgage loans will be approximately $150,000,000.
S-1
<PAGE>
Servicing of the Mortgage Loans
American Business Credit, Inc. will act as servicer and will be obligated to
service and administer the mortgage loans on behalf of the trust, for the
benefit of the note insurer and the holders of the notes.
Option of the Certificateholders to Call the Notes
The majority holder of the trust certificates may, at its option, call the notes
on any payment date on which the aggregate outstanding principal balance of the
notes is equal to or less than 10% of the aggregate original principal balance
of the notes. If such holder does not exercise its right to call the notes on
the first payment date on which it is entitled to do so, the servicer will have
the right to call the notes. If the notes are not called on the first payment
date on which the aggregate outstanding principal balance of the notes is equal
to or less than 10% of the aggregate original principal balance of the notes,
the interest rate payable on the notes will be increased as described herein.
The note insurer must consent to the call on the notes if the call would result
in a draw under the policy.
ERISA Considerations
Subject to the conditions described under "ERISA Considerations" herein, the
notes may be purchased by any employee benefit plan or other retirement
arrangement subject to ERISA or the Internal Revenue Code.
Federal Income Tax Status
It is the opinion of Brown & Wood LLP, special tax counsel to the trust, that
for federal income tax purposes
o the notes will be characterized as indebtedness, and
o the trust will not be characterized as an association, or a publicly traded
partnership, taxable as a corporation or a taxable mortgage pool.
Each noteholder, by the acceptance of a note, will agree to treat the notes as
indebtedness.
Legal Investment
The notes will not constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984.
Ratings
In order to be issued, the notes must be rated "AAA" by Standard & Poor's and
"Aaa" by Moody's, taking into account the note insurance policy issued with
respect to the notes. These ratings may be lowered, qualified or withdrawn by
the rating agencies.
S-2
<PAGE>
Risk Factors
In addition to the risk factors discussed in the prospectus,
prospective noteholders should consider, among other things, the following
additional factors in connection with the purchase of the notes. Unless
otherwise noted, all statistical percentages are based upon the mortgage loan
pool that existed on a statistical calculation date of August 22, 2000.
Less stringent underwriting standards and the resultant potential for
delinquencies on the mortgage loans could lead to losses on your securities.
The mortgage loans were made, in part, to borrowers who, for one
reason or another, are not able, or do not wish, to obtain
financing from traditional sources such as commercial banks. These
mortgage loans may be considered to be of a riskier nature than
mortgage loans made by traditional sources of financing, so that
the holders of the notes may be deemed to be at greater risk than
if the mortgage loans were made to other types of borrowers.
The underwriting standards used in the origination of the mortgage
loans held by the trust are generally less stringent than those of
Fannie Mae or Freddie Mac with respect to a borrower's credit
history and in certain other respects. Borrowers on the mortgage
loans may have an impaired or unsubstantiated credit history. As a
result of this less stringent approach to underwriting, the
mortgage loans purchased by the trust may experience higher rates
of delinquencies, defaults and foreclosures than mortgage loans
underwritten in a manner which is more similar to the Fannie Mae
and Freddie Mac guidelines.
Geographic concentration of the mortgage loans in particular jurisdictions may
result in greater losses if those jurisdictions experience economic downturns.
Certain geographic regions of the United States from time to time
will experience weaker regional economic conditions and housing
markets, and, consequently, may experience higher rates of loss
and delinquency on mortgage loans generally. Any concentration of
the mortgage loans in such a region may present risk
considerations in addition to those generally present for similar
mortgage-backed securities without such concentration. The
mortgaged properties underlying the mortgage loans are located
primarily on the eastern seaboard of the United States. This may
subject the mortgage loans held by the trust to the risk that a
downturn in the economy in this region of the country would more
greatly affect the pool than if the pool were more diversified.
In particular, the following percentages of mortgage loans on the
statistical calculation date were secured by mortgaged properties
located in the following states:
New York New Jersey Florida Pennsylvania
-------- ---------- ------- ------------
24.54% 12.05% 9.49% 9.11%
Because of the relative geographic concentration of the mortgage
loans within the States of New York, New Jersey, Florida and
Pennsylvania, losses on the mortgage loans may be higher than
would be the case if the mortgage loans were more geographically
diversified. For example, certain of the mortgaged properties may
be more susceptible to certain types of special hazards, such as
hurricanes, and other natural disasters and major civil
disturbances, than residential or commercial properties located in
other parts of the country. In addition, the economies of New
York, New Jersey, Florida and Pennsylvania may be adversely
affected to a greater degree than the economies of other areas of
the country by certain regional developments. If the New York, New
S-3
<PAGE>
Jersey, Florida and Pennsylvania residential or commercial real
estate markets experience an overall decline in property values
after the dates of origination of the respective mortgage loans,
then the rates of delinquencies, foreclosures and losses on the
mortgage loans may increase and such increase may be substantial.
A portion of the mortgage loans require large balloon payments at maturity;
these balloon loans may involve a greater risk of default due to these large
payments, which could lead to losses on your note.
Approximately 46.70% of the mortgage loans on the statistical
calculation date are not fully amortized over their terms and
instead require substantial balloon payments on their maturity
dates. Because the principal balances of these balloon loans do
not fully amortize over their term, these balloon loans may
involve greater risks of default than mortgage loans whose
principal balance is fully amortized over the term of the mortgage
loan. The borrower's ability to pay the balloon amount due at
maturity of his or her balloon loan will depend on the borrower's
ability to obtain adequate refinancing or funds from other sources
to repay the balloon loan. The originators have only limited
historical default data with respect to their balloon loans and
they do not believe that their data is sufficient to predict the
default experience of the balloon loans.
Even assuming that the mortgaged properties provide adequate
security for the balloon loans, substantial delays and foreclosure
costs could be encountered in connection with the liquidation of
defaulted mortgage loans and corresponding delays in the receipt
of proceeds by the holders of the notes could occur.
A portion of the mortgage loans are secured by subordinate mortgages; in the
event of a default, these mortgage loans are more likely to experience losses.
Approximately 13.39% of the mortgage loans on the statistical
calculation date are secured by subordinate or junior mortgages
which are subordinate to the rights of the holder of the related
senior mortgages. It is anticipated that junior lien mortgage
loans may represent up to approximately 16% of the closing date
mortgage loan pool. As a result, the proceeds from any
liquidation, insurance or condemnation proceedings will be
available to satisfy the principal balance of the mortgage loan
only to the extent that the claims, if any, of each related senior
mortgagee are satisfied in full, including any related foreclosure
costs. In addition, a holder of a junior mortgage may not
foreclose on the mortgaged property securing such mortgage unless
it either pays the entire amount of the senior mortgages to the
mortgagees at or prior to the foreclosure sale or undertakes the
obligation to make payments on each senior mortgage in the event
of default thereunder. In servicing business and consumer purpose
home equity loans in its portfolio, the servicer will generally
satisfy or reinstate each such first mortgage at or prior to the
foreclosure sale only to the extent that it determines any amount
so paid will be recoverable from future payments and collections
on the mortgage loans or otherwise. The trust will have no source
of funds to satisfy any senior mortgage or make payments due to
any senior mortgagee.
An overall decline in the residential or commercial real estate
markets could adversely affect the values of the mortgaged
properties and cause the outstanding principal balances of the
mortgage loans, together with the primary senior financing
thereon, to equal or exceed the value of the mortgaged properties.
This type of a decline would adversely affect the position of a
S-4
<PAGE>
second mortgagee before having the same effect on the related
first mortgagee. A rise in interest rates over a period of time
and the general condition of the mortgaged property as well as
other factors may have the effect of reducing the value of the
mortgaged property from the appraised value at the time the
mortgage loan was originated. If there is a reduction in value of
the mortgaged property, the ratio of the amount of the mortgage
loan to the value of the mortgaged property may increase over what
it was at the time the mortgage loan was originated. This type of
increase may reduce the likelihood of liquidation or other
proceeds being sufficient to satisfy the mortgage loan after
satisfaction of any senior liens.
Prepayments on the mortgage loans could lead to shortfalls in the payment of
interest on your note.
The scheduled monthly payment dates with respect to the mortgage
loans occur throughout a month. When a principal prepayment in
full is made on a mortgage loan, the mortgagor is charged interest
only up to the date of such prepayment, instead of for a full
month. However, such principal receipts will only be passed
through to the holders of the notes once a month on the payment
date which follows the calendar month in which such prepayment was
received by the servicer. The servicer is obligated to pay,
without any right of reimbursement, those shortfalls in interest
collections payable on the notes that are attributable to the
difference between the interest paid by a mortgagor in connection
with a prepayment in full and thirty days' interest on such
mortgage loan, but only to the extent of the servicing fees for
such mortgage loan for such calendar month.
If the servicer fails to make such payments or the shortfall
exceeds the servicing fee, there will be less funds available for
the payment of interest on the notes. Such shortfalls of interest,
if they result in the inability of the trust to pay the full
amount of the current interest on the notes, are not covered by
the policy.
Some of the mortgage loans do not have a scheduled payment in the first month.
8.71% of the mortgage loans in the closing date mortgage loan pool
are not scheduled to make their first payment until October 2000.
This will result in a smaller amount of funds being deposited into
the trust with respect to the initial payment date. Although it is
expected that the trust will have sufficient funds to make the
required payments of interest on the notes on the initial payment
date, there will be less funds available for the creation and
buildup of over-collateralization on such payment date.
Because the ratings of the notes are dependent upon creditworthiness of the note
insurer, a downgrade of the note insurer could cause a downgrade of the notes.
The ratings of the notes will depend primarily on the
creditworthiness of the note insurer as the provider of the policy
relating to the notes. Any reduction in the note insurer's
insurance financial strength and claims-paying ability ratings
could result in a reduction of the ratings on the notes.
Some of the terms used in this prospectus supplement are capitalized.
These capitalized terms have specified definitions, which are included at the
end of this prospectus supplement under the heading "Glossary."
S-5
<PAGE>
Transaction Overview
Parties
The Trust. ABFS Mortgage Loan Trust 2000-3, a Delaware statutory
business trust. The principal executive office of the trust is in Wilmington,
Delaware, in care of the owner trustee, at the address of the owner trustee
specified below.
The Depositor. Prudential Securities Secured Financing Corporation, a
Delaware corporation. The principal executive office of the depositor is located
at One New York Plaza, 14th Floor, New York, New York 10292, and its telephone
number is (212) 778-1000.
The Seller. ABFS 2000-3, Inc., a Delaware corporation. The principal
executive office of the seller is at 3411 Silverside Road, 103 Springer Bldg.,
Wilmington, Delaware 19810, and its telephone number is (302) 478-6160.
The Originators. American Business Credit, Inc., a Pennsylvania
corporation, HomeAmerican Credit, Inc. d/b/a Upland Mortgage, a Pennsylvania
corporation, and New Jersey Mortgage and Investment Corp., a New Jersey
corporation, originated or purchased the mortgage loans. For a description of
the business of the originators, see "The Originators, the Seller and the
Servicer" herein.
The Servicer and the Subservicers. American Business Credit will act as
servicer of the mortgage loans, and Upland Mortgage and New Jersey Mortgage will
act as subservicers with respect to different portions of the mortgage loans.
For a description of the business of the servicer, see "The Originators, the
Seller and the Servicer" herein.
The Indenture Trustee and the Collateral Agent. The Chase Manhattan
Bank, a New York banking corporation. The corporate trust office of the
indenture trustee is located at 450 West 33rd Street, 14th Floor, New York, New
York 10001 and its telephone number is (212) 946-3200. For a description of the
indenture trustee and the collateral agent, see "The Indenture Trustee and the
Collateral Agent" herein.
The Owner Trustee. First Union Trust Company, National Association, a
national banking association. The corporate trust office of the owner trustee is
located at One Rodney Square, 920 King Street, Suite 102, Wilmington, Delaware
19801, and its telephone number is (302) 888-7539. For a description of the
owner trustee and its responsibilities with respect to the notes and the
mortgage loans, see "The Owner Trustee" herein.
The Note Insurer. Ambac Assurance Corporation, a Wisconsin-domiciled
stock insurance corporation. 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
Policy" and "The Note Insurer" herein.
The Rating Agencies. Standard & Poor's Ratings Services, a division of
the McGraw-Hill Companies, Inc. and Moody's Investors Service, Inc. will issue
ratings with respect to the notes.
S-6
<PAGE>
The Transaction
Formation of the Trust and Issuance of the Trust Certificates. The
trust will be formed pursuant to the terms of a Trust Agreement, dated as of
September 1, 2000, between the owner trustee, the depositor and the seller and
the filing of a certificate of trust with the Secretary of State of the State of
Delaware. Under the Trust Agreement, the trust will also issue one class of
trust certificates, evidencing the entire beneficial ownership interest in the
trust.
Sale and Servicing of the Mortgage Loans. The mortgage loans have been
originated or purchased by the originators pursuant to their respective
underwriting guidelines, as described under "The Originators, the Seller and the
Servicer." The originators will sell the mortgage loans to the seller, and the
seller will sell the mortgage loans to the depositor pursuant to an Unaffiliated
Seller's Agreement, dated as of September 1, 2000, among the originators, the
seller and the depositor. The depositor will sell the mortgage loans to the
trust pursuant to a Sale and Servicing Agreement, dated as of September 1, 2000,
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 September 1, 2000, 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 Policy. The note insurer will issue the policy pursuant
to the terms of an Insurance and Indemnity Agreement, dated as of September 28,
2000, among the note insurer, the trust, the depositor, the seller, the
originators, the servicer and the indenture trustee.
The Mortgage Loan Pool
Difference between Statistical Calculation Date and Closing Date Pool.
The statistical information presented in this prospectus supplement concerning
the mortgage loans is based on the pool of mortgage loans that existed on a
statistical calculation date, in this case August 22, 2000. The mortgage loans
aggregated $124,568,256.73 as of the statistical calculation date. The seller
expects that the actual closing date mortgage loan pool will represent
approximately $150,000,000 in aggregate principal balance of mortgage loans,
measured 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. On the closing date, in addition to the mortgage loans included in
the statistical information as of the statistical calculation date, the seller
expects to deliver a substantial amount of additional mortgage loans that will
have been originated after the statistical calculation date but before the
closing date. In addition, with respect to the mortgage loan pool as of the
statistical calculation date as to which statistical information is presented
herein, some amortization will occur prior to the closing date. Moreover,
certain mortgage loans included in the mortgage loan pool as of the statistical
calculation date may prepay in full, or may be determined not to meet the
eligibility requirements for the final mortgage loan pool, and may not be
included in the final mortgage loan pool. As a result of the foregoing, the
statistical distribution of characteristics as of the closing date for the final
mortgage loan pool will vary somewhat from the statistical distribution of such
characteristics as of the statistical calculation date as presented in this
prospectus supplement, although such variance should not be material, except for
the percentage of junior lien mortgage loans, which may represent up to
approximately 16% of the aggregate principal balance of the final mortgage pool.
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 in order to provide funds for
working capital for business, business expansion, equipment acquisition, or
personal acquisitions by borrowing against the mortgagor's equity in the related
mortgaged property. The mortgaged properties securing the mortgage loans consist
primarily of single-family residences -- which may be detached, part of a
multi-family dwelling, a condominium unit, a townhouse, a manufactured home or a
unit in a planned unit development -- and commercial or mixed use property. The
mortgaged properties may be owner-occupied properties, which include second and
vacation homes, non-owner occupied investment properties or business purpose
properties.
S-7
<PAGE>
Approximately 90.75% of the mortgage loans have a prepayment fee
clause. Such prepayment fee clauses generally provide that the mortgagor pay,
upon prepayment, one or more of the following:
o a fee equal to a percentage, which is negotiated at origination,
of the outstanding principal balance of the mortgage loan;
o a fee which is designed to allow the holder of the mortgage note
to earn interest on the mortgage loan as if the mortgage loan
remained outstanding until a designated point in time; or
o a fee equal to the amount of interest on the outstanding principal
balance of the mortgage loan calculated pursuant to a rule of 78's
calculation, which has the effect of requiring the mortgagor to
pay a greater amount of interest earlier than would be required to
be paid if the actuarial method of calculating interest was
utilized.
The following section describes the statistical characteristics of the
mortgage loans. Unless otherwise noted, all statistical percentages in this
prospectus supplement are approximate and are measured by the aggregate
principal balance of the mortgage loans as of the statistical calculation date.
The combined loan-to-value ratios, or CLTV's, described herein were
calculated based upon the appraised values of the related mortgaged properties
used for loan origination. No assurance can be given that such appraised values
of the mortgaged properties have remained or will remain at the levels that
existed on the dates of origination of the related mortgage loans. If property
values decline such that the outstanding principal balances of the mortgage
loans, together with the outstanding principal balances of any first liens,
become equal to or greater than the value of the mortgaged properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those historically experienced by the servicer, as set forth below under "The
Originators, the Seller and the Servicer -- Delinquency and Loan Loss
Experience," and in the mortgage lending industry generally.
The Mortgage Loan Pool . As of the statistical calculation date, the
mortgage loans had the following characteristics:
o there were 1,466 mortgage loans under which the related mortgaged
properties are located in 29 states and the District of Columbia;
o the aggregate principal balance, after application of all payments
due on or before the statistical calculation date, was
$124,568,256.73;
o the minimum principal balance was $9,946.66, the maximum principal
balance was $544,000.00 and the average principal balance was
$84,971.53;
o the mortgage interest rates ranged from 9.25% to 17.99% per annum,
and the weighted average mortgage interest rate was approximately
11.82% per annum;
o the original term to stated maturity ranged from 36 months to 360
months and the weighted average original term to stated maturity was
approximately 248 months;
S-8
<PAGE>
o the remaining term to stated maturity ranged from 36 months to 360
months and the weighted average remaining term to stated maturity
was approximately 248 months;
o approximately 53.30% of the mortgage loans by aggregate principal
balance require monthly payments of principal that will fully
amortize these mortgage loans by their respective maturity dates,
and approximately 46.70% of the mortgage loans by aggregate
principal balance are balloon loans;
o the weighted average CLTV was approximately 77.30%;
o approximately 86.61% of the mortgage loans by aggregate principal
balance are secured by first liens, and approximately 13.39% of the
mortgage loans by aggregate principal balance are secured by second
liens; and
o approximately 24.54%, 12.05%, 9.49% and 9.11% of the mortgage loans
by aggregate principal balance are secured by mortgaged properties
located in the States of New York, New Jersey, Florida and
Pennsylvania, respectively.
The following tables set forth certain statistical information with
respect to the mortgage loans. Due to rounding, the percentages shown may not
precisely total 100.00%.
S-9
<PAGE>
Geographical Distribution of Mortgaged Properties
<TABLE>
<CAPTION>
Aggregate Unpaid % of Statistical Calculation Date Aggregate
State Number of Mortgage Loans Principal Balance Principal Balance
------------------- ------------------------ ----------------- -------------------------------------------
<S> <C> <C> <C>
Connecticut 19 $ 2,463,957.80 1.98%
Delaware 19 1,943,576.26 1.56
Dist of Columbia 1 101,250.00 0.08
Florida 163 11,827,605.14 9.49
Georgia 61 4,100,505.88 3.29
Illinois 75 6,311,043.52 5.07
Indiana 24 1,612,203.55 1.29
Iowa 9 420,048.45 0.34
Kansas 11 720,229.63 0.58
Kentucky 8 494,972.25 0.40
Maryland 35 4,052,719.46 3.25
Massachusetts 66 6,459,293.10 5.19
Michigan 40 3,372,319.79 2.71
Minnesota 11 1,121,974.16 0.90
Mississippi 15 979,171.59 0.79
Missouri 31 2,574,441.85 2.07
Nebraska 4 369,469.67 0.30
New Hampshire 5 449,000.00 0.36
New Jersey 168 15,015,139.05 12.05
New York 281 30,563,545.83 24.54
North Carolina 50 3,498,798.57 2.81
Ohio 89 5,795,746.68 4.65
Pennsylvania 176 11,348,912.93 9.11
Rhode Island 4 280,489.82 0.23
South Carolina 16 1,294,892.41 1.04
Tennessee 22 1,657,980.84 1.33
Vermont 2 89,000.00 0.07
Virginia 55 5,233,295.59 4.20
West Virginia 1 42,400.00 0.03
Wisconsin 5 374,272.91 0.30
------------- --------------- ----------------------
Total 1,466 $124,568,256.73 100.00%
============= =============== ======================
</TABLE>
S-10
<PAGE>
Distribution of CLTV Ratios
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
CLTV Ratio Range Mortgage Loans Principal Balance Aggregate Principal Balance
---------------------------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
5.00% < CLTV < = 10.00% 2 $ 47,000.00 0.04%
10.00 < CLTV < = 15.00 3 60,926.53 0.05
15.00 < CLTV < = 20.00 10 467,909.91 0.38
20.00 < CLTV < = 25.00 5 213,753.03 0.17
25.00 < CLTV < = 30.00 14 659,220.16 0.53
30.00 < CLTV < = 35.00 11 593,974.36 0.48
35.00 < CLTV < = 40.00 10 543,324.60 0.44
40.00 < CLTV < = 45.00 23 1,579,838.96 1.27
45.00 < CLTV < = 50.00 39 2,176,560.01 1.75
50.00 < CLTV < = 55.00 44 3,153,567.45 2.53
55.00 < CLTV < = 60.00 45 3,869,496.19 3.11
60.00 < CLTV < = 65.00 65 4,823,672.79 3.87
65.00 < CLTV < = 70.00 122 10,198,518.10 8.19
70.00 < CLTV < = 75.00 170 12,939,319.71 10.39
75.00 < CLTV < = 80.00 310 26,967,928.04 21.65
80.00 < CLTV < = 85.00 285 27,342,920.06 21.95
85.00 < CLTV < = 90.00 303 28,444,748.52 22.83
90.00 < CLTV < = 95.00 5 485,578.31 0.39
--------- --------------- ----------------
Total 1,466 $124,568,256.73 100.00%
========= =============== ================
</TABLE>
S-11
<PAGE>
Distribution of Gross Interest Rates
<TABLE>
<CAPTION>
Range of Gross Number of Aggregate Unpaid % of Statistical Calculation Date
Interest Rates Mortgage Loans Principal Balance Aggregate Principal Balance
-------------------------------------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
9.00% < Gross Coupon <= 9.25% 1 $ 220,800.00 0.18%
9.25 < Gross Coupon <= 9.50 2 359,987.23 0.29
9.50 < Gross Coupon <= 9.75 7 664,746.88 0.53
9.75 < Gross Coupon <= 10.00 52 7,157,356.93 5.75
10.00 < Gross Coupon <= 10.25 50 6,013,613.23 4.83
10.25 < Gross Coupon <= 10.50 97 7,846,271.39 6.30
10.50 < Gross Coupon <= 10.75 86 8,459,662.34 6.79
10.75 < Gross Coupon <= 11.00 150 18,052,106.07 14.49
11.00 < Gross Coupon <= 11.25 95 9,318,297.28 7.48
11.25 < Gross Coupon <= 11.50 124 10,538,372.39 8.46
11.50 < Gross Coupon <= 11.75 132 9,758,586.78 7.83
11.75 < Gross Coupon <= 12.00 131 10,615,442.40 8.52
12.00 < Gross Coupon <= 12.25 71 5,140,919.39 4.13
12.25 < Gross Coupon <= 12.50 72 4,561,531.18 3.66
12.50 < Gross Coupon <= 12.75 51 3,451,819.68 2.77
12.75 < Gross Coupon <= 13.00 81 4,511,229.36 3.62
13.00 < Gross Coupon <= 13.25 19 1,052,266.26 0.84
13.25 < Gross Coupon <= 13.50 37 2,135,046.45 1.71
13.50 < Gross Coupon <= 13.75 20 1,133,255.28 0.91
13.75 < Gross Coupon <= 14.00 47 2,089,391.01 1.68
14.00 < Gross Coupon <= 14.25 19 847,664.09 0.68
14.25 < Gross Coupon <= 14.50 7 635,206.34 0.51
14.50 < Gross Coupon <= 14.75 3 106,185.42 0.09
14.75 < Gross Coupon <= 15.00 4 226,452.38 0.18
15.00 < Gross Coupon <= 15.25 1 44,000.00 0.04
15.50 < Gross Coupon <= 15.75 11 1,122,642.59 0.90
15.75 < Gross Coupon <= 16.00 1 140,000.00 0.11
16.00 < Gross Coupon <= 16.25 91 8,177,154.38 6.56
16.25 < Gross Coupon <= 16.50 3 165,250.00 0.13
17.50 < Gross Coupon <= 18.00 1 23,000.00 0.02
---------- ---------------- ------------------------
Total 1,466 $124,568,256.73 100.00%
========== ================ ========================
</TABLE>
S-12
<PAGE>
Distribution of Original Term to Maturity
(in months)
<TABLE>
<CAPTION>
Range of Original Term Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
---------------------------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
24 < Orig. Term <= 36 3 $ 142,500.00 0.11%
48 < Orig. Term <= 60 13 549,865.33 0.44
60 < Orig. Term <= 72 1 25,000.00 0.02
72 < Orig. Term <= 84 5 304,200.00 0.24
84 < Orig. Term <= 96 2 69,725.03 0.06
96 < Orig. Term <= 108 2 106,622.57 0.09
108 < Orig. Term <= 120 95 4,141,776.59 3.32
132 < Orig. Term <= 144 2 153,502.64 0.12
144 < Orig. Term <= 156 2 46,804.09 0.04
168 < Orig. Term <= 180 507 42,519,250.62 34.13
192 < Orig. Term <= 204 1 74,307.23 0.06
204 < Orig. Term <= 216 5 405,960.99 0.33
228 < Orig. Term <= 240 482 37,862,617.45 30.40
288 < Orig. Term <= 300 43 4,913,595.95 3.94
336 < Orig. Term <= 348 7 608,158.69 0.49
348 < Orig. Term <= 360 296 32,644,369.55 26.21
----------- --------------- ---------------------
Total 1,466 $124,568,256.73 100.00%
=========== =============== =====================
</TABLE>
S-13
<PAGE>
Distribution of Remaining Term to Maturity
(in months)
<TABLE>
<CAPTION>
Range of Remaining Term Number of Aggregate Unpaid % of Statistical Calculation Date
(in months) Mortgage Loans Principal Balance Aggregate Principal Balance
--------------------------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
24 < Rem. Term <= 36 3 $ 142,500.00 0.11%
48 < Rem. Term <= 60 13 549,865.33 0.44
60 < Rem. Term <= 72 1 25,000.00 0.02
72 < Rem. Term <= 84 5 304,200.00 0.24
84 < Rem. Term <= 96 2 69,725.03 0.06
96 < Rem. Term <= 108 2 106,622.57 0.09
108 < Rem. Term <= 120 95 4,141,776.59 3.32
132 < Rem. Term <= 144 2 153,502.64 0.12
144 < Rem. Term <= 156 2 46,804.09 0.04
168 < Rem. Term <= 180 507 42,519,250.62 34.13
192 < Rem. Term <= 204 1 74,307.23 0.06
204 < Rem. Term <= 216 5 405,960.99 0.33
228 < Rem. Term <= 240 483 37,897,617.45 30.42
288 < Rem. Term <= 300 43 4,913,595.95 3.94
336 < Rem. Term <= 348 7 608,158.69 0.49
348 < Rem. Term <= 360 295 32,609,369.55 26.18
---------- --------------- --------------------
Total 1,466 $124,568,256.73 100.00%
========== =============== ====================
</TABLE>
S-14
<PAGE>
Distribution of Original Principal Balances
<TABLE>
<CAPTION>
Range of Original Number of Aggregate Unpaid % of Statistical Calculation Date
Principal Balances Mortgage Loans Principal Balance Aggregate Principal Balance
----------------------------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
$ 5,000 < Balance <= $10,000 1 $ 9,946.66 0.01%
10,000 < Balance <= 15,000 1 12,000.00 0.01
15,000 < Balance <= 20,000 12 217,553.62 0.17
20,000 < Balance <= 25,000 59 1,448,504.29 1.16
25,000 < Balance <= 30,000 90 2,549,588.95 2.05
30,000 < Balance <= 35,000 77 2,550,372.33 2.05
35,000 < Balance <= 40,000 93 3,548,559.82 2.85
40,000 < Balance <= 45,000 70 3,029,229.30 2.43
45,000 < Balance <= 50,000 89 4,303,440.82 3.45
50,000 < Balance <= 55,000 77 4,051,913.72 3.25
55,000 < Balance <= 60,000 97 5,632,025.48 4.52
60,000 < Balance <= 65,000 73 4,604,293.58 3.70
65,000 < Balance <= 70,000 65 4,406,955.96 3.54
70,000 < Balance <= 75,000 64 4,664,490.47 3.74
75,000 < Balance <= 80,000 48 3,760,112.33 3.02
80,000 < Balance <= 85,000 44 3,638,231.81 2.92
85,000 < Balance <= 90,000 39 3,427,274.71 2.75
90,000 < Balance <= 95,000 31 2,880,249.54 2.31
95,000 < Balance <= 100,000 41 4,029,357.63 3.23
100,000 < Balance <= 105,000 26 2,665,978.34 2.14
105,000 < Balance <= 110,000 28 3,017,116.25 2.42
110,000 < Balance <= 115,000 13 1,466,283.44 1.18
115,000 < Balance <= 120,000 28 3,295,812.37 2.65
120,000 < Balance <= 125,000 20 2,461,628.75 1.98
125,000 < Balance <= 130,000 23 2,934,694.50 2.36
130,000 < Balance <= 135,000 13 1,719,123.02 1.38
135,000 < Balance <= 140,000 15 2,068,049.60 1.66
140,000 < Balance <= 145,000 19 2,714,440.30 2.18
145,000 < Balance <= 150,000 12 1,776,995.58 1.43
150,000 < Balance <= 200,000 114 19,491,728.56 15.65
200,000 < Balance <= 250,000 53 12,034,775.78 9.66
250,000 < Balance <= 300,000 15 4,123,271.71 3.31
300,000 < Balance <= 350,000 8 2,679,007.51 2.15
350,000 < Balance <= 400,000 4 1,504,250.00 1.21
400,000 < Balance <= 450,000 2 848,000.00 0.68
450,000 < Balance <= 500,000 1 459,000.00 0.37
500,000 < Balance <= 550,000 1 544,000.00 0.44
--------- --------------- ----------------------
Total 1,466 $124,568,256.73 100.00%
========= =============== ======================
</TABLE>
S-15
<PAGE>
Distribution of Current Principal Balances
<TABLE>
<CAPTION>
Number of
Range of Current Mortgage Aggregate Unpaid % of Statistical Calculation Date
Principal Balances Loans Principal Balance Aggregate Principal Balance
---------------------------------- --------- ------------------ ---------------------------------
<S> <C> <C> <C>
$ 5,000 < Balance <= $10,000 1 $ 9,946.66 0.01%
10,000 < Balance <= 15,000 1 12,000.00 0.01
15,000 < Balance <= 20,000 12 217,553.62 0.17
20,000 < Balance <= 25,000 59 1,448,504.29 1.16
25,000 < Balance <= 30,000 90 2,549,588.95 2.05
30,000 < Balance <= 35,000 78 2,585,305.01 2.08
35,000 < Balance <= 40,000 92 3,513,627.14 2.82
40,000 < Balance <= 45,000 70 3,029,229.30 2.43
45,000 < Balance <= 50,000 90 4,353,158.08 3.49
50,000 < Balance <= 55,000 76 4,002,196.46 3.21
55,000 < Balance <= 60,000 97 5,632,025.48 4.52
60,000 < Balance <= 65,000 73 4,604,293.58 3.70
65,000 < Balance <= 70,000 65 4,406,955.96 3.54
70,000 < Balance <= 75,000 64 4,664,490.47 3.74
75,000 < Balance <= 80,000 48 3,760,112.33 3.02
80,000 < Balance <= 85,000 44 3,638,231.81 2.92
85,000 < Balance <= 90,000 39 3,427,274.71 2.75
90,000 < Balance <= 95,000 31 2,880,249.54 2.31
95,000 < Balance <= 100,000 41 4,029,357.63 3.23
100,000 < Balance <= 105,000 26 2,665,978.34 2.14
105,000 < Balance <= 110,000 28 3,017,116.25 2.42
110,000 < Balance <= 115,000 14 1,580,436.54 1.27
115,000 < Balance <= 120,000 27 3,181,659.27 2.55
120,000 < Balance <= 125,000 20 2,461,628.75 1.98
125,000 < Balance <= 130,000 23 2,934,694.50 2.36
130,000 < Balance <= 135,000 13 1,719,123.02 1.38
135,000 < Balance <= 140,000 16 2,208,028.92 1.77
140,000 < Balance <= 145,000 18 2,574,460.98 2.07
145,000 < Balance <= 150,000 12 1,776,995.58 1.43
150,000 < Balance <= 200,000 114 19,491,728.56 15.65
200,000 < Balance <= 250,000 53 12,034,775.78 9.66
250,000 < Balance <= 300,000 15 4,123,271.71 3.31
300,000 < Balance <= 350,000 8 2,679,007.51 2.15
350,000 < Balance <= 400,000 4 1,504,250.00 1.21
400,000 < Balance <= 450,000 2 848,000.00 0.68
450,000 < Balance <= 500,000 1 459,000.00 0.37
500,000 < Balance <= 550,000 1 544,000.00 0.44
------ --------------- -----------------
Total 1,466 $124,568,256.73 100.00%
====== =============== =================
</TABLE>
S-16
<PAGE>
Distribution by Lien Status
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Lien Status Mortgage Loans Principal Balance Aggregate Principal Balance
---------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
First Lien 1,161 $107,888,697.03 86.61%
Second Lien 305 16,679,559.70 13.39
-------------- ----------------- ---------------------------------
Total 1,466 $124,568,256.73 100.00%
============== ================= =================================
</TABLE>
Distribution by Amortization Type
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Amortization Type Mortgage Loans Principal Balance Aggregate Principal Balance
--------------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Fully Amortizing 803 $ 66,396,228.97 53.30%
Balloon Loans 663 58,172,027.76 46.70
-------------- ----------------- ---------------------------------
Total 1,466 $124,568,256.73 100.00%
============== ================= =================================
</TABLE>
Distribution by Occupancy Status
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Occupancy Status Mortgage Loans Principal Balance Aggregate Principal Balance
----------------------- -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Owner Occupied 1,352 $114,417,895.66 91.85%
Investor 71 5,457,603.96 4.38
Vacation/Second Home 5 319,900.00 0.26
Commercial 33 3,555,157.11 2.85
Other 5 817,700.00 0.66
-------------- ----------------- ---------------------------------
Total 1,466 $124,568,256.73 100.00%
============== ================= =================================
</TABLE>
Distribution by Property Type
<TABLE>
<CAPTION>
Number of Aggregate Unpaid % of Statistical Calculation Date
Property Type Mortgage Loans Principal Balance Aggregate Principal Balance
------------------------ -------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Mixed Use 34 $ 3,405,167.47 2.73%
Planned Unit Development 19 2,084,579.14 1.67
Commercial 16 1,753,986.33 1.41
Townhouses 69 3,970,731.24 3.19
2-4 Family 135 14,142,791.96 11.35
Condominiums 48 3,367,382.79 2.70
Single Family Detached 1,121 93,801,596.59 75.30
Single Family Attached 1 129,160.00 0.10
Manufactured Housing 20 1,330,371.39 1.07
5+ Family 3 582,489.82 0.47
-------------- ----------------- ---------------------------------
Total 1,466 $124,568,256.73 100.00%
============== ================= =================================
</TABLE>
S-17
<PAGE>
The Originators, the Seller and the Servicer
American Business Credit, the servicer and an originator, is a
wholly-owned subsidiary of American Business Financial Services, Inc. Upland
Mortgage, an originator and a subservicer, is a wholly-owned subsidiary of
American Business Credit. New Jersey Mortgage, an originator and a subservicer,
is a wholly-owned subsidiary of American Business Credit. The seller is owned by
American Business Financial Services, Inc.
American Business Financial Services is a financial services holding
company operating, through its subsidiaries, primarily in the eastern half of
the United States. American Business Financial Services, through American
Business Credit, originates, sells and services loans to businesses secured by
real estate and other business assets, and, through Upland Mortgage and New
Jersey Mortgage, originates, sells and services non-conforming mortgage loans,
typically to credit impaired borrowers, secured by mortgages on single-family
residences. In addition, Upland Mortgage, operates a bank alliance program with
several financial institutions pursuant to which Upland Mortgage will purchase
home equity loans that do not meet the underwriting guidelines of the selling
institution, but meet Upland Mortgage's underwriting criteria.
American Business Financial Services' customers currently consist
primarily of two groups. The first category of customers includes credit
impaired borrowers who generally are unable to obtain financing from banks or
savings and loan associations that have historically provided loans only to
individuals with the most favorable credit characteristics. These borrowers
generally have impaired or unsubstantiated credit characteristics and/or
unverifiable income and respond favorably to American Business Financial
Services' marketing efforts. The second category of customers includes borrowers
who would qualify for loans from traditional lending sources but elect to
utilize American Business Financial Services' products and services. American
Business Financial Services' experience has indicated that these borrowers are
attracted to American Business Financial Services' loan products as a result of
its marketing efforts, the personalized service provided by American Business
Financial Services' staff of lending officers and the timely response to loan
requests. Historically, both categories of customers have been willing to pay
American Business Financial Services' origination fees and interest rates which
are generally higher than those charged by traditional lending sources. American
Business Financial Services also markets mortgage loans to borrowers with
favorable credit histories.
American Business Financial Services was incorporated in Delaware in
1985. American Business Financial Services is a publicly traded company and its
common stock is listed on the Nasdaq National Market System under the symbol
"ABFI." The principal executive offices of American Business Financial Services
and its operating entities are located at Balapointe Office Centre, 111
Presidential Boulevard, Suite 127, Bala Cynwyd, Pennsylvania 19004. Its
telephone number at such address is (610) 668-2440.
The Originators
The mortgage loans were or will be originated or purchased by the
originators directly in the ordinary course of their business. The originators'
primary source of loan product is retail marketing, directly targeting small
businesses and consumers through various advertising media.
S-18
<PAGE>
The business purpose mortgage loans were or will be originated by
American Business Credit, except for mortgage loans which are secured by
properties located in states where the originating or purchasing of mortgage
loans requires a mortgage banking license, in which case Upland Mortgage has or
will originate or purchase such mortgage loans. The consumer purpose mortgage
loans were or will be originated or purchased by Upland Mortgage and New Jersey
Mortgage.
None of American Business Credit, Upland Mortgage or New Jersey
Mortgage will insure or guarantee the notes.
American Business Credit. American Business Credit originates, services
and sells business purpose loans collateralized by real estate. American
Business Credit's operating subsidiaries include:
o Upland Mortgage, a consumer purpose residential mortgage company;
o Process Servicing Center, Inc., a loan processor for home equity
loans generated by the bank alliance program;
o American Business Leasing, Inc., a small-ticket equipment leasing
company;
o Tiger Relocation Company, a holder of foreclosed real estate;
o New Jersey Mortgage, a residential mortgage company; and
o NJLQ Holdings, Inc., a holder of foreclosed liquor licenses in New
Jersey.
American Business Credit was incorporated in 1988 pursuant to the laws
of the Commonwealth of Pennsylvania and maintains its corporate headquarters in
the metropolitan Philadelphia area.
American Business Credit currently markets its financial services and
originates business loans through a retail network of salespeople in
Pennsylvania, Delaware, Florida, Georgia, Illinois, Indiana, Maryland, New
Jersey, New York, North Carolina, South Carolina, Virginia, Ohio, Rhode Island
and Connecticut. American Business Credit's origination program is primarily a
retail marketing program utilizing various forms of advertising and a direct
sales force. American Business Credit's marketing effort is principally
undertaken by its commissioned sales staff, which consists of full time
professional sales persons who are responsible for converting advertising leads
into loan applications. American Business Credit advertises through newspapers
and radio as well as by conducting large direct mail campaigns targeted at
owners of small businesses located in American Business Credit's market area.
American Business Credit makes business purpose mortgage loans to
corporations, partnerships, other business entities and sole proprietors.
American Business Credit primarily makes loans to borrowers with imperfect,
impaired and/or unsubstantiated credit histories. As a result, American Business
Credit typically requires lower loan-to-value ratios than are generally required
of borrowers with unblemished credit histories. All such loans are
collateralized by a first or second mortgage lien on a principal residence or
some other parcel of real property, such as office and apartment buildings and
mixed use buildings owned by the borrower, a principal of the borrower, or a
guarantor of the borrower. American Business Credit, generally, further
collateralizes its loans by obtaining a lien on the borrower's other tangible
and intangible assets and by filing appropriate UCC financing statements.
American Business Credit makes loans for various business purposes
including, but not limited to, working capital, business expansion, equipment
acquisition and debt-consolidation. American Business Credit does not target any
particular industries or trade pools.
Loans made by American Business Credit generally range from $15,000 to
$500,000 and average approximately $80,000.
HomeAmerican Credit, Inc. d/b/a Upland Mortgage. Upland Mortgage,
American Business Credit's home equity lending subsidiary, is a Pennsylvania
corporation and was incorporated in May 1991. Upland Mortgage primarily
S-19
<PAGE>
originates residential mortgages and consumer home equity loans. Upland Mortgage
is licensed to act and currently operates as a first and/or second mortgage
banker/lender in forty-five states, including Pennsylvania, New Jersey,
Delaware, Georgia, Maryland, North Carolina, South Carolina, Georgia, Florida,
Virginia, Connecticut, New York and Ohio.
Upland Mortgage originates business loans on behalf of American
Business Credit in instances where state licensing laws require a mortgage
license in order to make such loans. In such circumstances, the credit criteria
and collateral requirements utilized by Upland Mortgage are identical to those
utilized by American Business Credit. As such, American Business Credit's
lending procedures and policies govern Upland Mortgage when it is originating
business purpose mortgage loans.
Upland Mortgage primarily markets its residential mortgage and consumer
home equity loans through print advertisements in various newspapers, television
and radio advertisements, an interactive web site and through telemarketing and
direct mail campaigns in the states where it originates or purchases mortgage
loans. Upland Mortgage takes applications from potential borrowers over the
phone, in person or over the Internet through its interactive web site. The loan
request is then processed and closed. Upland Mortgage attempts to provide its
home equity borrowers with a loan approval within 24 hours and to close its home
equity loans within approximately seven to ten days of obtaining a loan
approval.
Upland Mortgage's growth strategy includes geographic expansion into
the markets where it has recently been granted mortgage licenses and may include
the acquisition of other mortgage bankers and brokers which compliment Upland
Mortgage's market.
Prior to 1995, each of the non-business residential mortgages and home
equity consumer loans originated and funded by Upland Mortgage was sold to one
of several third party lenders, at a premium. Upland Mortgage presently
accumulates portfolios of such non-business loans for the purpose of selling
such loans in bulk or engaging in securitizations. The business loans made by
Upland Mortgage are either securitized or sold to third parties. Upland
Mortgage's residential mortgages and consumer home equity loans are currently
made in accordance with loan-to-value standards set forth in the underlying
credit manual. The loan-to-value ratios and terms and conditions utilized for
its business loans are identical to those utilized by American Business Credit.
In fiscal 1996, Upland Mortgage, in conjunction with the Processing
Service Center, Inc., implemented the bank alliance program, which is designed
to provide an additional source of home equity loans. The bank alliance program
targets traditional financial institutions, such as banks, which because of
their strict underwriting and credit guidelines have generally provided mortgage
financing only to the most credit-worthy borrowers. The bank alliance program
enables such financial institutions to originate loans to credit impaired
borrowers in order to achieve certain community reinvestment objectives and
subsequently sell such loans to Upland Mortgage.
Under the bank alliance program, a borrower who fails to meet a
financial institution's underwriting guidelines will be referred to the
Processing Service Center, Inc. which will process the loan application and
underwrite the loan pursuant to Upland Mortgage's underwriting guidelines. If
the borrower qualifies under Upland Mortgage's underwriting standards, the loan
will be originated by the financial institution and subsequently sold to Upland
Mortgage.
Since the introduction of the bank alliance program, agreements have
been entered into with thirty financial institutions which provide Upland
Mortgage with the opportunity to underwrite, process and purchase loans
generated by the branch networks of such institutions, which consist of
approximately 1,500 branches located in twenty states including Pennsylvania,
Delaware, New Jersey, Ohio, Kentucky, Indiana, Montana, Texas, Michigan and
S-20
<PAGE>
Maryland. During the fiscal year ended June 30, 2000, approximately $54 million
of loans were purchased pursuant to the bank alliance program. Upland Mortgage
continues to market this program to other regional and national banking
institutions. Upland Mortgage is also negotiating with other financial
institutions regarding their participation in the program.
During fiscal 1999, Upland Mortgage launched an Internet loan
distribution channel under the name www.UplandMortgage.com. Through this
interactive web site, borrowers can calculate interest payments and submit an
application via the Internet. The Upland Mortgage Internet platform provides
borrowers with convenient access to the mortgage loan application process, 7
days a week, 24 hours a day. Upland Mortgage believes that the addition of this
distribution channel maximizes the efficiency of the application process and
could reduce its transaction costs in the future to the extent the volume of
loan applications received via the web page increases. Throughout the loan
processing period, borrowers who submit applications on line are supported by
Upland Mortgage's staff of highly trained officers. Upland Mortgage intends to
continue to enhance its web site in order to permit online underwriting,
approval and processing of a loan application.
New Jersey Mortgage and Investment Corp. American Business Credit, as
assignee of American Business Financial Services, acquired New Jersey Mortgage,
a mortgage company based in Roseland, New Jersey, and its subsidiaries,
including a leasing company, in October 1997. New Jersey Mortgage is a
full-service diversified residential lender, which directly and through its
subsidiaries offers a broad range of loan products, including home equity loans,
first mortgage loans, and equipment leases. Historically, New Jersey Mortgage
originated loans for sale to third parties with servicing released. American
Business Credit intends that New Jersey Mortgage will continue to originate
first mortgage loans for sale in the secondary market and the home equity loans
originated by New Jersey Mortgage will be securitized and sold pursuant to
American Business Financial Services' current securitization program. Loans
originated by New Jersey Mortgage are secured by properties located in 21
states. Such loans are originated through its network of six branch sales
offices and three satellite offices located in eight states. Through its
subsidiary, American Household Mortgage, New Jersey Mortgage originates
conforming first lien mortgage loans, FHA and VA purchase money loans. New
Jersey Mortgage's home equity loan customers primarily include credit-impaired
borrowers while borrowers on its first mortgage loans are generally borrowers
with favorable credit histories.
American Business Credit, Upland Mortgage and New Jersey Mortgage
originate loans in 45 states and the District of Columbia.
Underwriting Guidelines
The originators' loan underwriting standards are applied to evaluate
prospective borrowers' credit standing and repayment ability and the value and
adequacy of the mortgaged property as collateral. Initially, the applicant is
required to fill out a detailed application providing pertinent credit
information. As part of the description of the prospective borrower's financial
condition, the prospective borrower is required to provide information
concerning assets, liabilities, income, credit, employment history and other
demographic and personal information. If the application demonstrates the
prospective borrower's ability to repay the debt as well as sufficient income
and equity, loan processing personnel obtain and review an independent credit
bureau report on the credit history of the prospective borrower and verification
of the prospective borrower's income. Once all applicable employment, credit and
property information is obtained, a determination is made as to whether
sufficient unencumbered equity in the property exists and whether the
prospective borrower has sufficient monthly income available to meet the
borrower's monthly obligations.
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<PAGE>
The originators endeavor at all times to keep their interest and other
charges competitive with the lending rates of other finance companies for
similar type loans. Generally, loans are made at fixed rates for fixed terms
ranging from 5 to 30 years. Generally, the originators compute interest due on
their outstanding loans by the simple interest method. The originators require
that title insurance be obtained in connection with their mortgage loans.
In determining the adequacy of the mortgaged property as collateral, an
appraisal is made of each property considered for financing. The appraisal is
completed by an independent qualified appraiser and generally includes pictures
of comparable properties and pictures of the subject property's interior. With
respect to business and consumer purpose loans, the appraisal is completed by a
qualified appraiser on a Fannie Mae form.
The due dates for monthly payments on the mortgage loans occur
throughout a month. The majority of the mortgage loans have a prepayment fee
clause. Such prepayment fee clauses generally provide that the borrower pay one
or more of the following:
o a fee equal to a percentage of the outstanding principal balance
of the mortgage loan, such percentage having been negotiated at
the time of origination,
o a fee which is designed to allow the holder of the Mortgage Note
to earn interest on the mortgage loan as if the mortgage loan
remained outstanding until a designated point in time, or
o a fee equal to the amount of interest on the outstanding principal
balance of the mortgage loan calculated pursuant to a Rule of 78's
calculation, which has the effect of requiring the mortgagor to
pay a greater amount of interest earlier than would be required to
be paid if the actuarial method of calculating interest was
utilized.
See "Material Legal Aspects of the Loans -- The Mortgage Loans" in the
accompanying prospectus.
Lending Policies and Practices for Business Purpose Mortgage Loans.
Summarized below are the current lending policies and practices with respect to
the business purpose loans originated or purchased by American Business Credit.
It should be noted that such policies and practices will be altered, amended and
supplemented as conditions warrant. American Business Credit reserves the right
to make changes in its day-to-day practices and policies in its sole discretion.
Generally, business purpose loans collateralized by residential real
estate must have an overall loan-to-value ratio -- based solely on the
independent appraised fair market value of the real estate collateral securing
the loan -- on the properties collateralizing the loans of no greater than 75%.
Business purpose loans collateralized by commercial real estate generally must
have an overall loan-to-value ratio (based solely on the independent appraised
fair market value of the real estate collateral securing the loan) of no greater
than 60%. In addition, in substantially all instances, American Business Credit
receives additional collateral in the form of, among other things, pledges of
securities, assignments of contract rights, life insurance and lease payments
and liens on business equipment and other business assets, as available.
Lending Policies and Practices for Consumer Purpose Mortgage Loans.
Summarized below are the current lending policies and practices with respect to
the consumer purpose loans originated or purchased by Upland Mortgage and New
Jersey Mortgage. It should be noted that such policies and practices will be
altered, amended and supplemented as conditions warrant. Upland Mortgage and New
Jersey Mortgage reserve the right to make changes in their day-to-day practices
and policies in their sole discretion. The maximum allowed loan-to-value ratio
S-22
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for consumer purpose loans held in Upland Mortgage's and New Jersey Mortgage's
portfolios is generally 90%. The consumer purpose loans originated by Upland
Mortgage and New Jersey Mortgage had an average loan-to-value ratio of 79.2% for
the fiscal year ended June 30, 2000. When the loan-to-value ratio is equal to
70% or greater, neither Upland Mortgage nor New Jersey Mortgage will make a
second mortgage loan when the second mortgage loan amount is less than 15% of
the existing first lien mortgage loan amount. When the fair market value of a
property exceeds $450,000, Upland Mortgage and New Jersey Mortgage will only
lend 50% of the property's value exceeding $450,000. Occasionally, exceptions to
these maximum loan-to-value ratios are made if other collateral is available or
if there are compensating factors. Title insurance generally is obtained in
connection with all real estate secured loans.
Upland Mortgage and New Jersey Mortgage attempt to keep their interest
rates and other charges competitive with the lending rates of other finance
companies and banks. Generally, its consumer purpose loans are made at fixed
rates for fixed terms and may extend for a term of up to 30 years. In all
instances, Upland Mortgage and New Jersey Mortgage permit borrowers to prepay
such loans. Where permitted by applicable law, Upland Mortgage and New Jersey
Mortgage may impose a prepayment fee. Whether a prepayment fee is imposed and
the amount of such penalty, if any, is negotiated between Upland Mortgage or New
Jersey Mortgage and the individual borrower prior to closing the loan.
Terms of the Mortgage Loans. The principal amount of the mortgage loans
outstanding bears interest at a fixed rate as indicated on the mortgage notes.
Interest with respect to the mortgage loans included or to be included in the
mortgage loan pool accrue interest on a simple interest method. The simple
interest method provides for the amortization of the amount of such mortgage
loan over a series of monthly payments. Each monthly interest payment is
calculated by multiplying the outstanding principal balance of such mortgage
loan by the stated interest rate. Such product is then multiplied by a fraction,
the numerator of which is the number of days elapsed since the preceding payment
of interest was made and the denominator of which is 360. Generally, payments
received on a mortgage loan are applied first to interest accrued to the date of
payment, then to late fees and other charges and then to reduce the unpaid
principal balance of such mortgage loan. Accordingly, if a borrower makes a
payment less than 30 days after the previous payment, the portion of the payment
allocable to interest for the most recent payment period will be less than if
the most recent payment period had been made 30 days after the prior payment,
the portion of the payment applied to reduce the principal balance will be
correspondingly greater, and the principal balance of the mortgage loan will be
amortized more rapidly than scheduled. Conversely, if a borrower makes a payment
more than 30 days after the previous payment, the portion of the payment
allocable to interest for the most recent payment period will be greater than if
the most recent payment had been made 30 days after the prior payment, the
portion of the payment applied to reduce the principal balance will be
correspondingly less, and the principal balance of the mortgage loan will be
amortized more slowly than scheduled, in which case a larger portion of the
principal balance may be due on the final scheduled payment date.
A majority of the mortgage loans are fully amortized over their terms.
The remainder of the mortgage loans are not fully amortized over their terms and
instead require substantial balloon payments on their maturity dates.
The mortgage notes provide the holder with the right to require the
borrower to make immediate payment of the entire principal balance plus all
accrued but unpaid interest under the loan agreement if, among other things, the
borrower fails to make any payment under the loan agreement when due, subject to
a grace period or right to cure a default required by state law, or if the
borrower transfers any interest in the property securing the loan agreement.
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<PAGE>
In the event of default on a mortgage that is senior to a mortgage
loan, the second mortgagee has the right in many states to satisfy the defaulted
first mortgage in full, or to cure such default and make the defaulted senior
mortgage current as to payment, in either event adding any amounts expended in
connection with such satisfaction or cure to the then current principal balance
due for such mortgage loan. In such an event of default, the servicer will
either take the actions described above, take other appropriate actions, or
refrain from taking any action based upon the servicer's practices in connection
with servicing loans for itself and others. See "Material Legal Aspects of the
Loans -- The Mortgage Loans" in the accompanying prospectus.
The Servicer
American Business Credit will be responsible for servicing the mortgage
loans in accordance with its established servicing procedures and the terms of
the Sale and Servicing Agreement. American Business Credit will contract with
Upland Mortgage and New Jersey Mortgage to act as subservicers with respect to
the servicing of the consumer purpose mortgage loans. Upland Mortgage and New
Jersey Mortgage follow the same servicing procedures described below with
respect to American Business Credit.
American Business Credit begins the collection process approximately
twenty days prior to the payment date by sending an invoice to the mortgagor.
American Business Credit generally initiates the telephone collection process
one day after a borrower misses a monthly due date. American Business Credit's
daily automated collection system identifies delinquent mortgage loans and
places them in a collector's delinquency file. A collector then attempts to call
the delinquent borrower. The collector attempts to contact the delinquent
borrower until either a promise to pay has been made by such borrower or such
borrower makes all delinquent payments. When a delinquent borrower makes a
promise to pay, the collector attempts to contact the borrower by phone on the
expected payment date. If telephone contact is not made, the collector sends a
computer generated reminder notice to the borrower. During any period of
delinquency, American Business Credit generates a payment reminder letter to the
borrower five days after a missed monthly due date, a late notice is sent to the
borrower seven days after the due date and if no payment or arrangement for
payment has been made fifteen days after the borrower's due date, another
collector's letter is sent. When a mortgage loan is fifteen days past due and no
contact has been made with the borrower, a supervisor reviews the account of the
borrower to ensure that all procedures and contacts have been made. At this
time, new contact letters are sent to the delinquent borrower. With respect to
second mortgage loans, if applicable, the servicer of the first mortgage loan is
contacted to determine if the borrower is also delinquent on the first mortgage
loan. When a mortgage loan becomes forty-five to sixty days delinquent, it is
transferred to American Business Credit's loan work-out department.
When a mortgage loan is received in the work-out department, telephone
contact continues, a new default notice is sent to the borrower, an updated
property value report is ordered for the collateral, the tax status of the
mortgage loan is determined, and the first lien holder, if applicable, is
contacted to determine the status of its loan. If a first mortgage is in
default, American Business Credit may advance funds to keep the first mortgage
current or may choose to pay off the senior mortgage.
If the borrower has declared bankruptcy or the first mortgagor is
foreclosing, the matter is immediately referred to outside counsel. The work-out
department will attempt to reinstate the loan, seek a payoff, or enter into a
loan modification agreement with the borrower to avoid foreclosure.
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<PAGE>
Supporting American Business Credit's collection and accounting
functions is a network of computer hardware and software. American Business
Credit's current computer system produces mortgage loan invoices, payment
reminders and late notices. In addition to these collection functions, the
computer provides an in-depth customer contact system which enables American
Business Credit's collectors to manage each borrower's loan history by
individually logging all correspondence into the system's data base. The system
also generates numerous management reports detailing collection activity and
accounting information.
Delinquency and Loan Loss Experience
The following tables set forth information relating to the delinquency
and loan loss experience on the mortgage loans included in American Business
Credit's, Upland Mortgage's and New Jersey Mortgage's servicing portfolio for
the periods shown. The delinquency and loan loss experience represents the
historical experience of American Business Credit, Upland Mortgage and New
Jersey Mortgage, and there can be no assurance that the future experience on the
mortgage loans in the trust will be the same as, or more favorable than, that of
the mortgage loans in American Business Credit's, Upland Mortgage's and New
Jersey Mortgage's overall servicing portfolio.
Delinquency and Foreclosure Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Quarter Ended
At June 30, 1997 At June 30, 1998 At June 30, 1999 At March 31, 2000
---------------- ---------------- ---------------- -----------------
% of % of % of % of
Amount Amount Amount Amount Amount Amount Amount Amount
Serviced Serviced Serviced Serviced Serviced Serviced Serviced Serviced
-------- -------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Servicing portfolio.......... $167,190 100.00% $450,935 100.00% $1,007,738 100.00% $1,562,362 100.00%
60+days past due loans:
61-90 days................... $ 803 0.48% $ 1,950 0.43% $ 4,624 0.46% $ 5,804 0.37%
more than 90 days............ $ 833 0.50% $ 7,103 1.58% $ 23,958 2.38% $ 38,971 2.49%
-------- ------ -------- ------ ---------- ------ ---------- ----
Total 60+days past due loans. $ 1,636 0.98% $ 9,053 2.01% $ 28,582 2.84% $ 44,775 2.87%
REO Properties............... $ 605 0.36% $ 922 0.20% $ 9,948 0.99% $ 14,460 0.93%
-------- ------ -------- ------ ---------- ------ ---------- ----
Total 60+days past due loans,
foreclosures pending and REO
Properties................... $ 2,241 1.34% $ 9,975 2.21% $ 38,530 3.82% $ 59,235 3.79%
======== ====== ======== ====== ========== ====== ========== ====
</TABLE>
The preceding table was prepared using the following assumptions:
o the past due period is based on the actual number of days that a
payment is contractually past due; a loan as to which a monthly
payment was due 61-90 days prior to the reporting period is
considered 61-90 days past due, etc.
o total past due loans includes pending foreclosures, and
o an REO property is a property acquired and held as a result of
foreclosure or deed in lieu of foreclosure.
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<PAGE>
Loan Charge-Off Experience
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Quarter Ended
At June 30, At June 30, At June 30, At March 31,
1997 1998 1999 2000
----------- ----------- ----------- -------------
Amount Amount Amount Amount
Serviced Serviced Serviced Serviced
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Servicing portfolio.............................. $167,190 $450,935 $1,007,738 $1,562,362
Average outstanding.............................. $111,237 $309,063 $ 729,337 $1,444,600
Gross losses................................... $ 81 $ 138 $ 820 $ 751
Loan recoveries................................ $ 47 $ 0 $ 3 $ 0
-------- -------- ---------- ----------
Net loan charge-offs........................... $ 34 $ 138 $ 817 $ 751
Net loan charge-offs as a
percentage of servicing
portfolio at period end..................... 0.02% 0.03% 0.08% 0.19%
======== ======== ========== ==========
Net loan charge-offs as a
percentage of average
outstanding................................. 0.03% 0.04% 0.11% 0.21%
===== ===== ===== =====
</TABLE>
The preceding table was prepared using the following assumptions:
o "average outstanding" presented is the arithmetic average of the
principal balances of the loans in the originators' servicing portfolio
outstanding at the opening and closing of business for such period,
o "gross losses" means the outstanding principal balance plus accrued but
unpaid interest on liquidated mortgage loans; and
o "net loan charge-offs as a percentage of servicing portfolio at period
end" and "net loan charge-offs as a percentage of average outstanding"
for the quarter ended at March 31, 2000 are annualized numbers.
The above delinquency, foreclosure and loan charge-off statistics
represent the servicer's recent experience and indicate notable increases during
fiscal year 1999 and the quarter ended March 31, 2000. The servicer believes
that this trend is a result of the maturation of its servicing portfolio rather
than a change in the credit quality of the mortgage loans that have been
originated recently. Furthermore, the statistical data in the tables is based on
all of the mortgage loans in the servicing portfolio. The mortgage loans in the
trust may have characteristics which distinguish them from the majority of the
mortgage loans in the servicing portfolio. Accordingly, such data 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 included in the trust.
The Owner Trustee
First Union Trust Company, National Association, a national banking
association, has its corporate trust offices located at One Rodney Square, 920
King Street, Suite 102, Wilmington, Delaware 19801. The owner trustee will
perform limited administrative functions on behalf of the trust pursuant to the
Trust Agreement. The owner trustee's duties are limited solely to its express
obligations under the Trust Agreement.
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<PAGE>
The Indenture Trustee and the Collateral Agent
The Chase Manhattan Bank, a New York banking corporation, has an office
at 450 West 33rd Street, 14th Floor, New York, New York 10001. The indenture
trustee will act as initial authenticating agent, paying agent and note
registrar pursuant to the terms of the Indenture. 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 notes pursuant to the
Indenture. The notes represent debt obligations of the trust secured by a pledge
of the trust estate. Pursuant to the Trust Agreement, the trust will also issue
one class of trust certificates representing the entire beneficial ownership
interest in the trust. There will be one trust certificate which will be held by
the seller. The trust certificates may not be transferred without the consent of
the note insurer and compliance with the transfer provisions of the Trust
Agreement.
The trust estate consists of,
o the mortgage loans, together with the mortgage files relating
thereto and all collections thereon and proceeds thereof collected
after the Cut-Off Date,
o such assets as from time to time are identified as REO property
and collections thereon and proceeds thereof,
o assets that are deposited in the accounts, and invested in
accordance with the Indenture and the Sale and Servicing
Agreement,
o the indenture trustee's rights with respect to the mortgage loans
under all insurance policies required to be maintained pursuant to
the Sale and Servicing Agreement and any insurance proceeds,
o Liquidation Proceeds, and
o released mortgaged property proceeds.
In addition, the seller will cause the note insurer to issue the policy
under which it will guarantee payments to the holders of the notes as described
herein.
The notes will be issued only in book-entry form, in denominations of
$1,000 initial principal balance and integral multiples of $1,000 in excess
thereof, except that one note may be issued in a different amount. The notes are
available in book-entry form only, through the facilities of DTC.
Book-Entry Registration
The notes are sometimes referred to in this prospectus supplement as
"book-entry notes." No person acquiring an interest in the book-entry notes will
be entitled to receive a definitive note representing an obligation of the
trust, except under the limited circumstances described herein. Beneficial
owners may elect to hold their interests through DTC, in the United States, or
Clearstream or the Euroclear System, in Europe. Transfers within DTC,
Clearstream or Euroclear, as the case may be, will be in accordance with the
usual rules and operating procedures of the relevant system. So long as the
notes are book-entry notes, such notes will be evidenced by one or more notes
registered in the name of Cede & Co., which will be the "holder" of such notes,
as the nominee of DTC or one of the relevant depositaries. Cross-market
transfers between persons holding directly or indirectly through DTC, on the one
hand, and counterparties holding directly or indirectly through Clearstream or
Euroclear, on the other, will be effected in DTC through Citibank, N.A., the
relevant depositories of Clearstream or Euroclear, respectively, and each a
participating member of DTC. The notes will initially be registered in the name
of Cede & Co. The interests of the holders of such notes will be represented by
book-entries on the records of DTC and participating members thereof. All
references herein to any notes reflect the rights of beneficial owners only as
such rights may be exercised through DTC and its participating organizations for
so long as such notes are held by DTC.
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<PAGE>
The beneficial owners of notes may elect to hold their notes through
DTC in the United States, or Clearstream or Euroclear if they are participants
in such systems, or indirectly through organizations which are participants in
such systems. The book-entry notes will be issued in one or more notes which in
the aggregate equal the outstanding principal balance of the notes and will
initially be registered in the name of Cede & Co., the nominee of DTC.
Clearstream and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Clearstream's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A. will act as depositary for Clearstream
and The Chase Manhattan Bank will act as depositary for Euroclear. Investors may
hold such beneficial interests in the book-entry notes in minimum denominations
representing principal amounts of $1,000. Except as described below, no
beneficial owner will be entitled to receive a physical or definitive note
representing such note. Unless and until definitive notes are issued, it is
anticipated that the only "holder" of such notes will be Cede & Co., as nominee
of DTC. Beneficial owners will not be "holders" or "noteholders" as those terms
are used in the Indenture and the Sale and Servicing Agreement. Beneficial
owners are only permitted to exercise their rights indirectly through
participants and DTC.
The beneficial owner's ownership of a book-entry note will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary that maintains the beneficial owner's account for such
purpose. In turn, the financial intermediary's ownership of such book-entry note
will be recorded on the records of DTC or on the records of a participating firm
that acts as agent for the financial intermediary, whose interest will in turn
be recorded on the records of DTC, if the beneficial owner's financial
intermediary is not a DTC participant and on the records of Clearstream or
Euroclear, as appropriate.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and to facilitate the clearance and settlement
of securities transactions between participants through electronic book-entries,
thereby eliminating the need for physical movement of notes. Participants
include securities brokers and dealers, including the underwriter, banks, trust
companies and clearing corporations. Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly through "indirect participants".
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers of book-entry
notes, such as the notes, among participants on whose behalf it acts with
respect to the book-entry notes and to receive and transmit payments of
principal of and interest on the book-entry notes. Participants and indirect
participants with which beneficial owners have accounts with respect to the
book-entry notes similarly are required to make book-entry transfers and receive
and transmit such payments on behalf of their respective beneficial owners.
Beneficial owners that are not participants or indirect participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, book-entry notes may do so only through participants and indirect
participants. In addition, beneficial owners will receive all payments of
principal and interest from the indenture trustee, or a paying agent on behalf
of the indenture trustee, through DTC participants. DTC will forward such
payments to its participants, which thereafter will forward them to indirect
participants or beneficial owners. Beneficial owners will not be recognized by
the indenture trustee, the servicer or any paying agent as holders of the notes,
and beneficial owners will be permitted to exercise the rights of the holders of
the notes only indirectly through DTC and its participants.
S-28
<PAGE>
Because of time zone differences, credits of securities received in
Clearstream 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 participants on such business day. Cash received in
Clearstream or Euroclear as a result of sales of securities by or through a
Clearstream participant or Euroclear participant to a DTC participant will be
received with value on the DTC settlement date but will be available in the
relevant Clearstream or Euroclear cash account only as of the business day
following settlement in DTC. For information with respect to tax documentation
procedures relating to the notes, see "Material Federal Income Tax Consequences"
in the accompanying prospectus.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Clearstream 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
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines. The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to the relevant depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same day funds settlement applicable to DTC. Clearstream
participants and Euroclear participants may not deliver instructions directly to
the European Depositaries.
Clearstream Banking, societe anonyme (formerly Cedelbank) is
incorporated under the laws of Luxembourg as a professional depository.
Clearstream holds securities for its participant organizations and facilitates
the clearance and settlement of securities transactions between Clearstream
participants through electronic book-entry changes in accounts of Clearstream
participants, thereby eliminating the need for physical movement of notes.
Transactions may be settled in Clearstream in any of 28 currencies, including
United States dollars. Clearstream provides to its Clearstream participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally traded securities and securities lending and
borrowing. Clearstream interfaces with domestic markets in several countries. As
a professional depository, Clearstream is subject to regulation by the
Luxembourg Monetary Institute. Clearstream 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 is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Clearstream participant, either directly or
indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment, thereby
eliminating the need for physical movement of notes and any risk from lack of
simultaneous transfers of securities and cash. Transactions may now be settled
in any of 31 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation. All operations are conducted by the Euroclear Operator,
and all Euroclear Securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear operator, not Euroclear Clearance. Euroclear
Clearance establishes policy for Euroclear on behalf of Euroclear participants.
Euroclear participants include banks (including central banks), securities
brokers and dealers and other professional financial intermediaries. Indirect
access to Euroclear is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly.
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The Euroclear operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law. The Terms and Conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear, and receipts of
payments with respect to securities in Euroclear. All securities in Euroclear
are held on a fungible basis without attribution of specific notes to specific
securities clearance accounts. The Euroclear operator acts under the Terms and
Conditions only on behalf of Euroclear participants, and has no record of or
relationship with persons holding through Euroclear participants.
Payments on the book-entry notes will be made on each payment date by
the indenture trustee to Cede & Co., as nominee of DTC. DTC will be responsible
for crediting the amount of such payments to the accounts of the applicable DTC
participants in accordance with DTC's normal procedures. Each DTC participant
will be responsible for disbursing such payment to the beneficial owners of the
book-entry notes that it represents and to each financial intermediary for which
it acts as agent. Each such financial intermediary will be responsible for
disbursing funds to the beneficial owners of the book-entry notes that it
represents.
Under a book-entry format, beneficial owners of the book-entry notes
may experience some delay in their receipt of payments, since such payments will
be forwarded by the indenture trustee to Cede & Co., as nominee of DTC. Payments
with respect to notes held through Clearstream or Euroclear will be credited to
the cash accounts of Clearstream participants or Euroclear participants in
accordance with the relevant system's rules and procedures, to the extent
received by the relevant depositary. Such payments will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Because DTC can only act on behalf of financial intermediaries, the ability of a
beneficial owner to pledge book-entry notes to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
book-entry notes, may be limited due to the lack of physical notes for such
book-entry notes. In addition, issuance of the book-entry notes in book-entry
form may reduce the liquidity of such notes in the secondary market since
certain potential investors may be unwilling to purchase notes for which they
cannot obtain physical notes.
Monthly and annual reports on the trust provided by the indenture
trustee to Cede & Co., as nominee of DTC, may be made available to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting DTC, and to the financial intermediaries to whose DTC
accounts the book-entry notes of such beneficial owners are credited.
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DTC has advised the depositor and the servicer that it will take any
action permitted to be taken by a holder of the notes under the Indenture only
at the direction of one or more participants to whose accounts with DTC the
book-entry notes are credited. Additionally, DTC has advised the depositor that
it will take such actions with respect to specified percentages of voting rights
only at the direction of and on behalf of participants whose holdings of
book-entry notes evidence such specified percentages of voting rights. DTC may
take conflicting actions with respect to percentages of voting rights to the
extent that participants whose holdings of book-entry notes evidence such
percentages of voting rights authorize divergent action.
None of the trust, the owner trustee, the depositor, the servicer, the
note insurer or the indenture trustee will have any responsibility for any
aspect of the records relating to or payments made on account of beneficial
ownership interests of the book-entry notes held by Cede & Co., as nominee for
DTC, or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of notes among participants of DTC,
Clearstream and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
Definitive Notes
The notes, which will be issued initially as book-entry notes, will be
converted to definitive notes and reissued to beneficial owners or their
nominees, rather than to DTC or its nominee, only if (a) DTC or the servicer
advises the indenture trustee in writing that DTC is no longer willing or able
to discharge properly its responsibilities as depository with respect to the
book-entry notes and DTC or the servicer is unable to locate a qualified
successor or (b) the indenture trustee, at its option, elects to terminate the
book-entry system through DTC.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify all participants of the availability
through DTC of definitive notes. Upon delivery of definitive notes, the
indenture trustee will reissue the book-entry notes as definitive notes to
beneficial owners. Payments of principal of, and interest on, the book-entry
notes will thereafter be made by the indenture trustee, or a paying agent on
behalf of the indenture trustee, directly to holders of definitive notes in
accordance with the procedures set forth in the Indenture.
Definitive notes will be transferable and exchangeable at the offices
of the indenture trustee or the note registrar. No service charge will be
imposed for any registration of transfer or exchange, but the 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 the Mortgage Loans
Pursuant to the Unaffiliated Seller's Agreement, the originators will
sell, transfer, assign, set over and otherwise convey the mortgage loans,
without recourse, to the seller and the seller will sell, transfer, assign, set
over and otherwise convey the mortgage loans, including all principal
outstanding as of, and interest due after, the Cut-Off Date, without recourse,
to the depositor on the closing date. Pursuant to the Sale and Servicing
Agreement, the depositor will sell, transfer, assign, set over and otherwise
convey without recourse to the trust, all right, title and interest in and to
each mortgage loan, including all principal outstanding as of, and interest due
after, the Cut-Off Date. Each such transfer will convey all right, title and
interest in and to (a) principal outstanding as of the Cut-Off Date, and (b)
interest due on each such mortgage loan after the Cut-Off Date; provided,
however, that the originators will not convey, and the originators reserve and
retain all their respective right, title and interest in and to (x) principal,
including principal prepayments in full and curtailments (i.e., partial
prepayments), received on each such mortgage loan on or prior to the Cut-Off
Date and (y) interest due on each mortgage loan on or prior to the Cut-Off Date.
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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.
Delivery of Mortgage Loan Documents
In connection with the sale, transfer, assignment or pledge of the
mortgage loans to the trust, the trust will cause to be delivered to the
collateral agent, on behalf of the indenture trustee, on the closing date, the
following documents with respect to each mortgage loan which constitute the
mortgage file:
(a) the original mortgage note, endorsed without recourse in blank
by the related originator, including all intervening
endorsements showing a complete chain of endorsement;
(b) the related original mortgage with evidence of recording
indicated thereon or, in certain limited circumstances, a copy
thereof certified by the applicable recording office;
(c) the recorded mortgage assignment(s), or copies thereof
certified by the applicable recording office, if any, showing
a complete chain of assignment from the originator of the
related mortgage loan to the related originator -- which
assignment may, at such originator's option, be combined with
the assignment referred to in clause (d) below;
(d) a mortgage assignment in recordable form, which, if acceptable
for recording in the relevant jurisdiction, may be included in
a blanket assignment or assignments, of each mortgage from the
related originator to the indenture trustee;
(e) originals of all assumption, modification and substitution
agreements in those instances where the terms or provisions of
a mortgage or mortgage note have been modified or such
mortgage or mortgage note has been assumed; and
(f) an original title insurance policy or (x) a copy of the title
insurance policy, or (y) a binder thereof or copy of such
binder together with a certificate from the originator that
the original mortgage has been delivered to the title
insurance company that issued such binder for recordation.
Pursuant to the Sale and Servicing Agreement, the collateral agent, on
behalf of the indenture trustee, agrees to execute and deliver on or prior to
the closing date, an acknowledgment of receipt of the original mortgage note,
item (a) above, with respect to each of the mortgage loans, with any exceptions
noted. The collateral agent, on behalf of the indenture trustee, agrees, for the
benefit of the holders of the notes and the note insurer, to review, or cause to
be reviewed, each mortgage file within thirty days after the closing date -- or,
with respect to any Qualified Substitute Mortgage Loan, within thirty days after
the receipt by the collateral agent thereof -- and to deliver a certification
generally to the effect that, as to each mortgage loan listed in the schedule of
mortgage loans,
o all documents required to be delivered to it pursuant to the
Sale and Servicing Agreement are in its possession;
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o each such document has been reviewed by it and has not been
mutilated, damaged, torn or otherwise physically altered,
appears regular on its face and relates to such mortgage loan;
and
o based on its examination and only as to the foregoing
documents, certain information set forth on the schedule of
mortgage loans accurately reflects the information set forth
in the mortgage file delivered on such date.
If the collateral agent, during the process of reviewing the mortgage
files, finds any document constituting a part of a mortgage file which is not
executed, has not been received or is unrelated to the mortgage loans, or that
any mortgage loan does not conform to the requirements above or to the
description thereof as set forth in the schedule of mortgage loans, the
collateral agent shall promptly so notify the indenture trustee, the servicer,
the seller and the note insurer in writing with details thereof. The seller
agrees to use reasonable efforts to cause to be remedied a material defect in a
document constituting part of a mortgage file of which it is so notified by the
collateral agent. If, however, within forty-five days after the collateral
agent's notice of such defect, the seller has not caused the defect to be
remedied and the defect materially and adversely affects the interest of the
holders of the notes or the interests of the note insurer in the mortgage loan,
the seller or the related originator will either (a) substitute in lieu of such
mortgage loan a Qualified Substitute Mortgage Loan and, if the then outstanding
principal balance of such Qualified Substitute Mortgage Loan is less than the
principal balance of such mortgage loan as of the date of such substitution plus
accrued and unpaid interest thereon, deliver to the servicer a substitution
adjustment equal to the amount of any such shortfall or (b) purchase such
mortgage loan at a price equal to the outstanding principal balance of such
mortgage loan as of the date of purchase, plus the greater of (x) all accrued
and unpaid interest thereon and (y) thirty days' interest thereon, computed at
the related mortgage interest rate, net of the servicing fee if the servicer is
effecting the repurchase, plus the amount of any unreimbursed servicing advances
made by the servicer, which purchase price shall be deposited in the payment
account on the next succeeding servicer remittance date after deducting
therefrom any amounts received in respect of such repurchased mortgage loan or
loans and being held in the payment account for future payment to the extent
such amounts have not yet been applied to principal or interest on such mortgage
loan. In addition, the seller and the originators shall be obligated to
indemnify the trust, the owner trustee, the indenture trustee, the collateral
agent, the holders of the notes and the note insurer for any third-party claims
arising out of a breach by the seller or the originators of representations or
warranties regarding the mortgage loans. The obligation of the seller and the
originators to cure such breach or to substitute or purchase any mortgage loan
and to indemnify constitute the sole remedies respecting a material breach of
any such representation or warranty to the holders of the notes, the indenture
trustee, the collateral agent and the note insurer.
Representations and Warranties of the Seller
The seller will represent, among other things, with respect to each
mortgage loan, as of the closing date, the following:
1. the information set forth in the schedule of mortgage loans with
respect to each mortgage loan is true and correct;
2. all of the original or certified documentation constituting the
mortgage files, including all material documents related thereto, has been or
will be delivered to the collateral agent, on behalf of the indenture trustee,
on the closing date;
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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, or a manufactured dwelling, or an individual unit
in a planned unit development, or a commercial property, or a mixed use or a
multiple purpose property, or a mobile home or a commercial property. Such
residence, dwelling or unit is not,
o a unit in a cooperative apartment,
o a property constituting part of a syndication,
o a time share unit,
o a property held in trust,
o a log-constructed home, or
o a recreational vehicle;
4. each mortgage or deed of trust is a valid first or second lien on a
fee simple, or its equivalent under applicable state law, estate in the real
property securing the amount owed by the mortgagor under the mortgage note
subject only to,
o the lien of current real property taxes and assessments which are
not delinquent,
o any related first mortgage loan,
o covenants, conditions and restrictions, rights of way, easements
and other matters of public record as of the date of recording of
such mortgage, such exceptions appearing of record being
acceptable to mortgage lending institutions generally in the area
wherein the property subject to the mortgage is located or
specifically reflected in the appraisal obtained in connection
with the origination of the related mortgage loan obtained by the
seller, and
o other matters to which like properties are commonly subject which
do not materially interfere with the benefits of the security
intended to be provided by such mortgage;
5. to the best of the seller's knowledge none of the mortgage loans are
Section 32 loans subject to the Home Ownership and Equity Protection Act;
6. immediately prior to the transfer and assignment by the seller to
the depositor, the seller had good title to, and was the sole owner of each
mortgage loan, free of any interest of any other person, and the seller has
transferred all right, title and interest in each mortgage loan to the
depositor;
7. each mortgage loan conforms, and all such mortgage loans in the
aggregate conform, to the description thereof set forth in this prospectus
supplement; and
8. all of the mortgage loans were originated in accordance with the
underwriting criteria set forth in this prospectus supplement.
Pursuant to the Sale and Servicing Agreement, upon the discovery by any
of the holder of the notes, the seller, the servicer, any subservicer, the note
insurer, the collateral agent or the indenture trustee that any of the
representations and warranties contained in the Sale and Servicing Agreement
have been breached in any material respect as of the closing date, with the
result that the interests of the holders of the notes in the related mortgage
loan or the interests of the note insurer were materially and adversely
affected, notwithstanding that such representation and warranty was made to the
seller's or the originator's best knowledge and the seller or the originator
lacked knowledge of such breach, the party discovering such breach is required
to give prompt written notice to the other parties. Subject to certain
provisions of the Sale and Servicing Agreement, within sixty days of the earlier
to occur of the seller's or an originator's discovery or its receipt of notice
of any such breach, the seller or the originators will,
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o promptly cure such breach in all material respects,
o remove each mortgage loan which has given rise to the requirement
for action by the seller or the originators, substitute one or
more Qualified Substitute Mortgage Loans and, if the outstanding
principal balance of such Qualified Substitute Mortgage Loans as
of the date of such substitution is less than the outstanding
principal balance, plus accrued and unpaid interest thereon, of
the replaced mortgage loans as of the date of substitution,
deliver to the trust as part of the amounts remitted by the
servicer on such payment date the amount of such shortfall, or
o purchase such mortgage loan at a price equal to the principal
balance of such mortgage loan as of the date of purchase plus the
greater of (x) all accrued and unpaid interest thereon and (y)
thirty days' interest thereon computed at the mortgage interest
rate, net of the servicing fee if American Business Credit is the
servicer, plus the amount of any unreimbursed servicing advances
made by the servicer,
and deposit such purchase price into the payment account on the next succeeding
servicer remittance date after deducting therefrom any amounts received in
respect of such repurchased mortgage loan or mortgage loans and being held in
the payment account for future payment to the extent such amounts have not yet
been applied to principal or interest on such mortgage loan.
In addition, the seller and the originators shall be obligated to
indemnify the trust, the depositor, the owner trustee, the indenture trustee,
the collateral agent, the holders of the notes and the note insurer for any
third-party claims arising out of a breach by the seller or the originators of
representations or warranties regarding the mortgage loans. The obligation of
the seller and the originators to cure such breach or to substitute or purchase
any mortgage loan and to indemnify constitute the sole remedies respecting a
material breach of any such representation or warranty to the holders of the
notes, the indenture trustee, the collateral agent and the note insurer.
Payments on the Mortgage Loans
The Sale and Servicing Agreement provides that the servicer, for the
benefit of the holders of the notes, shall establish and maintain the collection
account, which will generally be (x) an account maintained with a depository
institution or trust company whose long term unsecured debt obligations are
rated by each rating agency in one of its two highest rating categories at the
time of any deposit therein or (y) trust accounts maintained with a depository
institution acceptable to each rating agency and the note insurer. The Sale and
Servicing Agreement permits the servicer to direct any depository institution
maintaining the collection account to invest the funds in the collection account
in one or more eligible investments that mature, unless payable on demand, no
later than the business day preceding the date on which the servicer is required
to transfer the servicer remittance amount from the collection account to the
payment account, as described below.
The servicer is obligated to deposit or cause to be deposited in the
collection account on a daily basis, amounts representing the following payments
received and collections made by it after the Cut-Off Date, other than in
respect of monthly payments on the mortgage loans due on each mortgage loan up
to and including any due date occurring on or prior to the Cut-Off Date:
o all payments on account of principal, including prepayments of
principal;
o all payments on account of interest on the mortgage loans;
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o all Liquidation Proceeds and all Insurance Proceeds to the extent
such proceeds are not to be applied to the restoration of the
related mortgaged property or released to the related borrower in
accordance with the express requirements of law or in accordance
with prudent and customary servicing practices;
o all Net REO Proceeds;
o all other amounts required to be deposited in the collection
account pursuant to the Sale and Servicing Agreement; and
o any amounts required to be deposited in connection with net losses
realized on investments of funds in the collection account.
The indenture trustee will be obligated to set up a payment account
with respect to the notes into which the servicer will deposit or cause to be
deposited the servicer remittance amount on the 10th 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 with respect to
payments due to be received on the mortgage loans on the related
due date; and
o any other amounts required to be placed in the collection account
by the servicer pursuant to the Sale and Servicing Agreement,
but excluding the following:
(a) amounts received on a particular mortgage loan, with respect
to which the servicer has previously made an unreimbursed
Periodic Advance, as late payments of interest, or as Net
Liquidation Proceeds, to the extent of such unreimbursed
Periodic Advance;
(b) amounts received on a particular mortgage loan with respect to
which the servicer has previously made an unreimbursed
servicing advance, to the extent of such unreimbursed
servicing advance;
(c) for such servicer remittance date, the aggregate servicing
fee;
(d) all net income from eligible investments that is held in the
collection account for the account or payment account of the
servicer;
(e) all amounts actually recovered from the servicer in respect of
late fees, assumption fees, prepayment fees and similar fees;
(f) Net Foreclosure Profits; and
(g) certain other amounts which are reimbursable to the servicer,
as provided in the Sale and Servicing Agreement.
The amounts described in clauses (a) through (g) above may be withdrawn
by the servicer from the collection account on or prior to each servicer
remittance date.
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Over-collateralization Provisions
Over-collateralization Resulting from Cash Flow Structure. The
Indenture requires that, starting with the first payment date, the Excess
Interest, if any, will be applied on each payment date as an accelerated payment
of principal on the notes, but only to the limited extent hereafter described.
The application of Excess Interest as a payment of principal has the effect of
accelerating the amortization of the notes relative to the amortization of the
mortgage loans. The Excess Interest will be used,
o to reimburse the note insurer for any amounts due to it;
o as a payment of principal to the notes until the payment date
on which the amount of over-collateralization has reached the
required level; or
o as needed to pay Net Mortgage Loan Interest Shortfalls.
The Indenture requires that, starting with the first payment date,
Excess Interest will be applied as an accelerated payment of principal on the
notes until the Over-collateralized Amount has increased to the level required
by the Indenture. After such time, if it is necessary to re-establish the
required level of over-collateralization, Excess Interest will again be applied
as an accelerated payment of principal on the notes. Notwithstanding the
foregoing, in the event certain tests set forth in the Indenture are violated,
all available Excess Interest will be used as a payment of principal to
accelerate the amortization of the notes. Initially, the Over-collateralized
Amount will be zero.
In the event that the required level of the Specified
Over-collateralized Amount is permitted to decrease or "step down" on a payment
date in the future, the Indenture provides that a portion of the principal which
would otherwise be paid to the holders of the notes on such payment date shall
instead be paid in the priority set forth herein under "--Flow of Funds." This
has the effect of decelerating the amortization of the notes relative to the
amortization of the mortgage loans, and of reducing the Over-collateralized
Amount. If, on any payment date, the Excess Over-collateralized Amount is, or,
after taking into account all other payments to be made on such payment date
would be, greater than zero -- i.e., the Over-collateralized Amount is or would
be greater than the Specified Over-collateralized Amount -- then certain amounts
relating to principal which would otherwise be paid to the holders of the notes
on such payment date shall instead be paid in the priority set forth herein
under "--Flow of Funds", in an amount equal to the Over-collateralization
Reduction Amount.
The Indenture provides that, on any payment date, all amounts collected
on account of principal -- other than any such amount applied to the payment of
an Over-collateralization Reduction Amount --during the prior calendar month
will be paid to the holders of the notes on such payment date. In addition, the
Sale and Servicing Agreement provides that the principal balance of any mortgage
loan which becomes a Liquidated Mortgage Loan shall then equal zero. The Sale
and Servicing Agreement does not contain any rule which requires that the amount
of any Liquidated Loan Loss be paid to the holders of the notes on the payment
date which immediately follows the event of loss; i.e., the Sale and Servicing
Agreement does not require the current recovery of losses. However, the
occurrence of a Liquidated Loan Loss will reduce the Over-collateralized Amount,
which, to the extent that such reduction causes the Over-collateralized Amount
to be less than the Specified Over-collateralized Amount applicable to the
related payment date, will require the payment of an Over-collateralization
Increase Amount on such payment date, or, if insufficient funds are available on
such payment date, on subsequent payment dates, until the Over-collateralized
Amount equals the Specified Over-collateralized Amount. The effect of the
foregoing is to allocate losses to the holders of the trust certificates by
reducing, or eliminating entirely, payments of Excess Interest and
Over-collateralization Reduction Amounts which such holder would otherwise
receive.
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Over-collateralization and the Policy. The Indenture requires the
indenture trustee to make a claim for an Insured Payment under the policy not
later than the third business day prior to any payment date as to which the
indenture trustee has determined that an Over-collateralization Deficit will
occur for the purpose of applying the proceeds of such Insured Payment as a
payment of principal to the holders of the notes on such payment date. The note
insurer has the option on any payment date to make a payment of principal,
including in respect of Liquidated Loan Losses, up to the amount that would have
been payable to the holders of the notes if sufficient funds were available
therefor. Additionally, under the terms of the Indenture, the note insurer will
have the option to cause Excess Interest to be applied without regard to any
limitation upon the occurrence of certain trigger events, or in the event of an
"event of default" under the Insurance Agreement. However, investors in the
notes should realize that, under extreme loss or delinquency scenarios, they may
temporarily receive no payments of principal.
Flow of Funds
On each payment date, the indenture trustee, based solely on the
information received from the servicer in the servicer remittance report prior
to such payment date, shall make payments to the holders of the notes and
reimbursement to the note insurer under the Insurance Agreement, to the extent
of funds, including any Insured Payments, on deposit in the payment account, as
follows:
(a) to the indenture trustee, an amount equal to the fees then due
to it;
(b) from amounts then on deposit in the payment account, to the
note insurer the Premium Amount for such payment date;
(c) from amounts then on deposit in the payment account, the
Interest Payment Amount for the notes;
(d) from amounts then on deposit in the payment account, the
Principal Payment Amount for the notes, until the principal
balance of the notes is reduced to zero;
(e) from amounts then on deposit in the payment account, the
Reimbursement Amount for the notes;
(f) from amounts then on deposit in the payment account, the
amount of any Net Mortgage Loan Interest Shortfalls for the
notes; and
(g) following the making by the indenture trustee of all
allocations, transfers and disbursements described above, to
the holders of the trust certificates, the amount remaining on
such payment date in the payment account, if any.
Indenture Events of Default
Upon the occurrence of an event of default, the indenture trustee, upon
the direction of the note insurer -- or the majority holders of the notes if the
note insurer is in default under the Insurance Agreement -- shall declare the
aggregate outstanding principal balance of all the notes to be due and payable
together with all accrued and unpaid interest thereon without presentment,
demand, protest or other notice of any kind, all of which are waived by the
trust. An event of default, wherever used herein, means any one of the following
events:
1. the trust shall fail to pay or cause to be paid to the indenture
trustee, for the benefit of the holders of the notes, on any payment date, all
or part of any Interest Payment Amount due on the notes on such payment date and
all or a part of any Net Mortgage Loan Interest Shortfalls due on the notes on
the maturity date of the notes; or
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2. the trust shall fail to pay or cause to be paid to the indenture
trustee, for the benefit of the holders of the notes, (x) on any payment date an
amount equal to the principal due on the outstanding notes on such payment date,
to the extent that sufficient funds are on deposit in the collection account or
(y) on the final stated maturity date for the notes, the aggregate outstanding
principal balance of the notes; or
3. the trust shall breach or default in the due observance of any one
or more of the negative covenants under the Indenture; or
4. the trust shall consent to the appointment of a custodian, receiver,
trustee or liquidator, or other similar official, of itself, or of a substantial
part of its property, or shall admit in writing its inability to pay its debts
generally as they come due, or a court of competent jurisdiction shall determine
that the trust is generally not paying its debts as they come due, or the trust
shall make a general assignment for the benefit of creditors; or
5. the trust shall file a voluntary petition in bankruptcy or a
voluntary petition or an answer seeking reorganization in a proceeding under any
bankruptcy laws, as now or hereafter in effect, or an answer admitting the
material allegation of a petition filed against the trust in any such
proceeding, or the trust shall, by voluntary petition, answer or consent, seek
relief under the provisions of any now existing or future bankruptcy or other
similar law providing for the reorganization or winding-up of debtors, or
providing for an agreement, composition, extension or adjustment with its
creditors; or
6. an order, judgment or decree shall be entered in any proceeding by
any court of competent jurisdiction appointing, without the consent, express or
legally implied, of the trust, a custodian, receiver, trustee or liquidator, or
other similar official, of the trust or any substantial part of its property, or
sequestering any substantial part of its respective property, and any such
order, judgment or decree or appointment or sequestration shall remain in force
undismissed, unstayed or unvacated for a period of ninety days after the date of
entry thereof; or
7. a petition against the trust in a proceeding under applicable
bankruptcy laws or other insolvency laws, as now or hereafter in effect, shall
be filed and shall not be stayed, withdrawn or dismissed within ninety days
thereafter, or if, under the provisions of any law providing for reorganization
or winding-up of debtors which may apply to the trust, any court of competent
jurisdiction shall assume jurisdiction, custody or control of the trust or any
substantial part of its property, and such jurisdiction, custody or control
shall remain in force unrelinquished, unstayed or unterminated for a period of
ninety days.
Reports to Noteholders
Pursuant to the Indenture, on each payment date the indenture trustee
will deliver to the depositor and each holder of a note or a trust certificate a
written remittance report, provided to the indenture trustee and the note
insurer by the servicer, containing information, including, without limitation,
the amount of the payment on such payment date, the amount of such payment
allocable to principal and allocable to interest, the aggregate outstanding
principal balance of the notes as of such payment date, the amount of any
Insured Payment included in such payment on such payment date and such other
information as required by the Indenture.
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Amendment
The Indenture may be amended from time to time by the trust and the
indenture trustee by written agreement, upon the prior written consent of the
note insurer, without notice to, or consent of, the holder of the notes, to cure
any ambiguity, to correct or supplement any provisions herein, to comply with
any changes in the Code, or to make any other provisions with respect to matters
or questions arising under the Indenture which shall not be inconsistent with
the provisions of the Indenture; provided, that such action shall not, as
evidenced by (i) an opinion of counsel delivered to, but not obtained at the
expense of, the indenture trustee or (ii) a letter from each rating agency
confirming that such amendment will not cause the reduction, qualification or
withdrawal of the then-current ratings of the notes, adversely affect in any
material respect the interests of any holder of the notes; provided, further,
that no such amendment shall reduce in any manner the amount of, or delay the
timing of, payments received on mortgage loans which are required to be paid on
any note without the consent of the holder of such note, or change the rights or
obligations of any other party to the Indenture without the consent of such
party.
The Indenture may be amended from time to time by the trust and the
indenture trustee with the consent of the note insurer, and the holders of the
majority of the percentage interest of the notes and the trust certificates for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Indenture or of modifying in any manner the rights
of the holders; provided, however, that no such amendment shall reduce in any
manner the amount of, or delay the timing of, payments received on mortgage
loans which are required to be paid on any note without the consent of the
holder of such note or reduce the percentage of the notes whose holders are
required to consent to any such amendment without the consent of the holders of
100% of the notes.
The Unaffiliated Seller's Agreement and the Sale and Servicing
Agreement contain substantially similar restrictions regarding amendment.
Servicing of the Mortgage Loans
American Business Credit will act as the servicer of the mortgage
loans. Upland Mortgage and New Jersey Mortgage will act as subservicers with
respect to a portion of the mortgage loans. See "The Originators, the Seller,
the Servicer and the Subservicer" herein. The servicer and the subservicers will
be required to use the same care as they customarily employ in servicing and
administering mortgage loans for their own account, in accordance with accepted
mortgage servicing practices of prudent lending institutions, and giving due
consideration to the reliance of the note insurer and the holders of the notes
on them.
Servicing Fees and Other Compensation and Payment of Expenses
As compensation for its activities as servicer under the Sale and
Servicing Agreement, the servicer shall be entitled with respect to each
mortgage loan to the servicing fee, which shall be payable monthly from amounts
on deposit in the collection account. The servicing fee shall be an amount equal
to interest at one-twelfth of the servicing fee rate for such mortgage loan on
the outstanding principal balance of such mortgage loan. The servicing fee rate
with respect to each mortgage loan will be 0.50% per annum. In addition, the
servicer shall be entitled to receive, as additional servicing compensation, to
the extent permitted by applicable law and the related mortgage notes, any late
payment charges, assumption fees, prepayment fees or similar items. The servicer
shall also be entitled to withdraw from the collection account any net interest
or other income earned on deposits therein. The servicer shall pay all expenses
incurred by it in connection with its servicing activities under the Sale and
Servicing Agreement and shall not be entitled to reimbursement therefor except
as specifically provided in the Sale and Servicing Agreement.
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Periodic Advances and Servicer Advances
Periodic Advances. The servicer is required to make Periodic Advances
on each servicer remittance date, subject to the servicer's determination that
such advance would be recoverable. Such Periodic Advances by the servicer are
reimbursable to the servicer subject to certain conditions and restrictions, and
are intended to provide both sufficient funds for the payment of interest to the
holders of the notes, plus an additional amount intended to maintain a specified
level of over-collateralization and to pay the indenture trustee's fees, and the
premium due the note insurer. Notwithstanding the servicer's good faith
determination that a Periodic Advance was recoverable when made, if such
Periodic Advance becomes a nonrecoverable advance, the servicer will be entitled
to reimbursement therefor from the trust estate. See "Description of the Notes
-- Payments on the Mortgage Loans" herein.
Servicing Advances. The servicer is required to advance amounts with
respect to the mortgage loans, subject to the servicer's determination that such
advance would be recoverable and that a prudent mortgage lender would make a
like advance if it or an affiliate owned the related mortgage loan, constituting
"out-of-pocket" costs and expenses relating to,
o the preservation and restoration of the mortgaged property,
o enforcement proceedings, including foreclosures,
o expenditures relating to the purchase or maintenance of a first
lien not included in the trust estate on the mortgaged property,
and
o certain other customary amounts described in the Sale and
Servicing Agreement.
These servicing advances by the servicer are reimbursable to the
servicer subject to certain conditions and restrictions. In the event that,
notwithstanding the servicer's good faith determination at the time such
servicing advance was made, that it would be recoverable, such servicing advance
becomes a nonrecoverable advance, the servicer will be entitled to reimbursement
therefor from the trust estate.
Recovery of Advances. The servicer may recover Periodic Advances and
servicing advances to the extent permitted by the Sale and Servicing Agreement
or, if not recovered from the mortgagor on whose behalf such servicing advance
or Periodic Advance was made, from late collections on the related mortgage
loan, including Liquidation Proceeds, Insurance Proceeds and such other amounts
as may be collected by the servicer from the mortgagor or otherwise relating to
the mortgage loan. In the event a Periodic Advance or a servicing advance
becomes a nonrecoverable advance, the servicer may be reimbursed for such
advance from the payment account.
The servicer shall not be required to make any Periodic Advance or
servicing advance which it determines would be a nonrecoverable Periodic Advance
or nonrecoverable servicing advance. A Periodic Advance or servicing advance is
"nonrecoverable" if in the good faith judgment of the servicer, such Periodic
Advance or servicing advance would not ultimately be recoverable.
Prepayment Interest Shortfalls
Not later than the close of business on the 10th day of each month, the
servicer is required to remit to the indenture trustee a payment of Compensating
Interest in respect of Prepayment Interest Shortfalls and shall not have the
right to reimbursement therefor. Insured Payments do not cover Prepayment
Interest Shortfalls.
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Relief Act Shortfalls
The reduction, if any, in interest payable on the mortgage loans
attributable to the application of the Soldiers' and Sailors' Civil Relief Act
of 1940 will not reduce the amount of Current Interest due to the holders of the
notes. However, in the event the full amount of Current Interest is not
available on any payment date due to Relief Act Shortfalls, the amount of such
shortfall will not be covered by the policy. Such shortfalls in Current Interest
will be paid from the Excess Interest, if any, otherwise payable to the holders
of the trust certificates.
Optional Purchase of Delinquent Mortgage Loans
The seller, or any affiliate of the seller, has the option, but is not
obligated, to purchase from the trust any mortgage loan ninety days or more
delinquent at a purchase price equal to the outstanding principal balance
thereof as of the date of purchase, plus all accrued and unpaid interest on such
principal balance, computed at the related mortgage interest rate -- net of the
related servicing fee, if American Business Credit is the servicer -- plus the
amount of any unreimbursed Periodic Advances and servicing advances made by the
servicer with respect to such mortgage loan in accordance with the provisions
specified in the Sale and Servicing Agreement. However, after the seller or its
affiliates have purchased delinquent mortgage loans with an aggregate principal
balance of more than 1% of the aggregate original principal balance of the
mortgage loans held by the trust on the closing date, then, notwithstanding the
foregoing, unless the note insurer consents, the seller or its affiliates can
only purchase the mortgage loan or loans that have been delinquent for the
longest period of time, until the seller or its affiliates have purchased
delinquent mortgage loans with an aggregate principal balance equal to 5% of the
aggregate original principal balance of the mortgage loans held by the trust on
the closing date. Thereafter, the seller and its affiliates may only purchase
delinquent mortgage loans with the prior consent of the note insurer.
Servicer Reports
On each servicer remittance date, the servicer is required to deliver
to the note insurer, the indenture trustee, and the collateral agent, a servicer
remittance report setting forth the information necessary for the indenture
trustee to make the payments set forth under "--Flow of Funds" herein and
containing the information to be included in the written remittance report for
such payment date delivered by the indenture trustee.
The servicer is required to deliver to the note insurer, the indenture
trustee, the collateral agent and the rating agencies, not later than April 30th
of each year, starting in 2001, an officer's certificate stating that,
o the servicer has fully complied with the servicing provisions of
the Sale and Servicing Agreement,
o a review of the activities of the servicer during the preceding
calendar year and of performance under the Sale and Servicing
Agreement has been made under such officer's supervision, and
o to the best of such officer's knowledge, based on such review, the
servicer has fulfilled all its obligations under the Sale and
Servicing Agreement for such year, or, if there has been a default
in the fulfillment of any such obligation, specifying each such
default known to such officer and the nature and status thereof
including the steps being taken by the servicer to remedy such
default.
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Not later than April 30th of each year, the servicer, at its expense,
is required to cause to be delivered to the note insurer, the indenture trustee,
the collateral agent, and the rating agencies from a firm of independent
certified public accountants, who may also render other services to the
servicer, a statement to the effect that such firm has examined certain
documents and records relating to the servicing of the mortgage loans during the
preceding calendar year, or such longer period from the closing date to the end
of the following calendar year, and that, on the basis of such examination
conducted substantially in compliance with generally accepted auditing standards
and the requirements of the Uniform Single Attestation Program for Mortgage
Bankers or the Audit Program for Mortgages serviced for Freddie Mac, such
servicing has been conducted in compliance with the Sale and Servicing Agreement
except for such significant exceptions or errors in records that, in the opinion
of such firm, generally accepted auditing standards and the Uniform Single
Attestation Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for Freddie Mac require it to report, in which case such exceptions and
errors shall be so reported.
Collection and Other Servicing Procedures
The servicer will be responsible for making reasonable efforts to
collect all payments called for under the mortgage loans and will, consistent
with the Sale and Servicing Agreement, follow such collection procedures as it
follows with respect to loans held for its own account which are comparable to
the mortgage loans. Consistent with the above, the servicer may, in its
discretion, waive any late payment charge and arrange with a mortgagor a
schedule for the liquidation of delinquencies, subject to the provisions of the
Sale and Servicing Agreement.
If a mortgaged property has been or is about to be conveyed by the
mortgagor, the servicer will be obligated to accelerate the maturity of the
mortgage loan, unless it reasonably believes it is unable to enforce that
mortgage loan's "due-on-sale" clause under applicable law. If it reasonably
believes it may be restricted for any reason from enforcing such a "due-on-sale"
clause, the servicer may enter into an assumption and modification agreement
with the person to whom such property has been or is about to be conveyed,
pursuant to which such person becomes liable under the mortgage note.
Any fee collected by the servicer for entering into an assumption
agreement will be retained by the servicer as additional servicing compensation.
In connection with any such assumption, the mortgage interest rate borne by the
mortgage note relating to each mortgage loan may not be decreased. For a
description of circumstances in which the servicer may be unable to enforce
"due-on-sale" clauses, see "Material Legal Aspects of the Loans -- The Mortgage
Loans -- "Due-on-Sale" Clauses" in the accompanying prospectus.
Hazard Insurance
The servicer is required to cause to be maintained for each mortgaged
property a hazard insurance policy with coverage which contains a standard
mortgagee's clause in an amount equal to the lesser of (a) the maximum insurable
value of such mortgaged property or (b) the principal balance of such mortgage
loan plus the outstanding balance of any mortgage loan senior to such mortgage
loan, but in no event may such amount be less than is necessary to prevent the
borrower from becoming a coinsurer thereunder. As set forth above, all amounts
collected by the servicer under any hazard policy, except for amounts to be
applied to the restoration or repair of the mortgaged property or released to
the borrower in accordance with the servicer's normal servicing procedures, to
the extent they constitute Net Liquidation Proceeds or Insurance Proceeds, will
ultimately be deposited in the payment account. The ability of the servicer to
assure that hazard insurance proceeds are appropriately applied may be dependent
on its being named as an additional insured under any hazard insurance policy,
or upon the extent to which information in this regard is furnished to the
servicer by a borrower. The Sale and Servicing Agreement provides that the
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servicer may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy issued by an insurer acceptable to the rating
agencies insuring against losses on the mortgage loans. If such blanket policy
contains a deductible clause, the servicer is obligated to deposit in the
payment account the sums which would have been deposited therein but for such
clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms and therefore will not contain identical terms
and conditions, the terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other
weather-related causes, earth movement, including earthquakes, landslides and
mudflows, nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive.
The hazard insurance policies covering the mortgaged properties
typically contain a co-insurance clause which in effect requires the insured at
all times to carry insurance of a specified percentage, generally 80% to 90%, of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(x) the replacement cost of the improvements less physical depreciation or (y)
such proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such improvements.
Since residential and commercial properties, generally, have
historically appreciated in value over time, if the amount of hazard insurance
maintained on the improvements securing the mortgage loans were to decline as
the principal balances owing thereon decreased, hazard insurance proceeds could
be insufficient to restore fully the damaged property in the event of a partial
loss.
Realization Upon Defaulted Mortgage Loans
The servicer will foreclose upon, or otherwise comparably convert to
ownership, mortgaged properties securing such of the mortgage loans as come into
default when, in the opinion of the servicer, no satisfactory arrangements can
be made for the collection of delinquent payments. In connection with such
foreclosure or other conversion, the servicer will follow such practices as it
deems necessary or advisable and as are in keeping with the servicer's general
loan servicing activities and the Sale and Servicing Agreement; provided, that
the servicer will not expend its own funds in connection with foreclosure or
other conversion, correction of a default on a senior mortgage or restoration of
any property unless the servicer believes such foreclosure, correction or
restoration will increase Net Liquidation Proceeds.
Removal and Resignation of the Servicer
The note insurer may, pursuant to the Sale and Servicing Agreement,
remove the servicer upon the occurrence and continuation beyond the applicable
cure period of an event described in clauses (g), (h) or (i) below and the
indenture trustee shall, at the direction of the note insurer, or may, at the
direction of the majority holders of the notes, with the consent of the note
insurer, in the case of any direction of the majority holders of the notes,
remove the servicer upon the occurrence and continuation beyond the applicable
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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 such failure, requiring the same to be
remedied, shall have been given to the servicer and the note
insurer by the indenture trustee or to the servicer and the
indenture trustee by the note insurer or the holders of notes
evidencing percentage interests of at least 25%; or
(b) the failure by the servicer to make any required servicing
advance which failure continues unremedied for a period of
thirty days after the date on which written notice of such
failure, requiring the same to be remedied, shall have been
given to the servicer by the indenture trustee or to the
servicer and the indenture trustee by any holder of a note or
the note insurer; or
(c) any failure on the part of the servicer duly to observe or
perform in any material respect any other of the covenants or
agreements on the part of the servicer contained in the Sale
and Servicing Agreement, or the failure of any representation
and warranty set forth in the Sale and Servicing Agreement,
which continues unremedied for a period of thirty days after
the date on which written notice of such failure, requiring
the same to be remedied, shall have been given to the servicer
by the indenture trustee, or to the servicer and the indenture
trustee by any holder of a note or the note insurer; or
(d) a decree or order of a court or agency or supervisory
authority having jurisdiction in an involuntary case under any
present or future federal or state bankruptcy, insolvency or
similar law or for the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of
debt, marshalling of assets and liabilities or similar
proceedings, or for the winding-up or liquidation of its
affairs, shall have been entered against the servicer and such
decree or order shall have remained in force, undischarged or
unstayed for a period of ninety days; or
(e) the servicer shall consent to the appointment of a conservator
or receiver or liquidator in any insolvency, readjustment of
debt, marshalling of assets and liabilities or similar
proceedings of or relating to the servicer or of or relating
to all or substantially all of the servicer's property; or
(f) the servicer shall admit in writing its inability generally to
pay its debts as they become due, file a petition to take
advantage of any applicable insolvency or reorganization
statute, make an assignment for the benefit of its creditors,
or voluntarily suspend payment of its obligations; or
(g) the delinquency or loss experience of the mortgage loans
exceeds certain levels specified in the Sale and Servicing
Agreement; or
(h) the note insurer shall notify the indenture trustee of any
"event of default" under the Insurance Agreement; or
(i) the occurrence of an event of default under the Indenture.
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Except to permit New Jersey Mortgage and Upland Mortgage to act as
subservicers, the servicer may not assign its obligations under the Sale and
Servicing Agreement nor resign from the obligations and duties thereby imposed
on it except by mutual consent of the servicer, American Business Credit, if
American Business Credit is not the servicer, the note insurer, the collateral
agent and the indenture trustee, or upon the determination that the servicer's
duties thereunder are no longer permissible under applicable law and such
incapacity cannot be cured by the servicer without the incurrence, in the
reasonable judgment of the note insurer, of unreasonable expense. No such
resignation shall become effective until a successor has assumed the servicer's
responsibilities and obligations in accordance with the Sale and Servicing
Agreement.
Upon removal or resignation of the servicer, the indenture trustee will
be the successor servicer. The indenture trustee, as successor servicer, will be
obligated to make Periodic Advances and servicing advances and certain other
advances unless it determines reasonably and in good faith that such advances
would not be recoverable. If, however, the indenture trustee is unwilling or
unable to act as successor servicer, or if the majority holders of the notes,
with the consent of the note insurer, or the note insurer so requests, the
indenture trustee shall appoint, or petition a court of competent jurisdiction
to appoint, in accordance with the provisions of the Sale and Servicing
Agreement and subject to the approval of the note insurer, any established
mortgage loan servicing institution acceptable to the note insurer having a net
worth of not less than $15,000,000 as the successor servicer in the assumption
of all or any part of the responsibilities, duties or liabilities of the
servicer.
The indenture trustee and any other successor servicer in such capacity
is entitled to the same reimbursement for advances and no more than the same
servicing compensation as the servicer. See "--Servicing and Other Compensation
and Payment of Expenses" herein.
Optional Clean-up Call on the Notes
The majority holder of the trust certificates may, at its option, call
the notes on the Clean-up Call Date by depositing an amount equal to the
aggregate outstanding principal balance of the mortgage loans on such payment
date, plus accrued and unpaid interest thereon, into the payment account. If
such holder does not exercise its right to call the notes on the Clean-up Call
Date, then the servicer will have the right to call the notes by depositing into
the payment account the amounts set forth in the preceding sentence. The note
insurer must consent to the call on the notes if the call would result in a draw
under the policy.
Termination; Purchase of Mortgage Loans
The Indenture will terminate upon notice to the indenture trustee of
either: (a) the later of the payment to noteholders of the final payment or
collection with respect to the last mortgage loan, or Periodic Advances of same
by the servicer, or the disposition of all funds with respect to the last
mortgage loan and the remittance of all funds due under the Indenture and the
payment of all amounts due and payable to the note insurer, the collateral agent
and the indenture trustee or (b) mutual consent of the servicer, the note
insurer and all holders in writing; provided, however, that in no event will the
trust terminate later than twenty-one years after the death of the last
surviving lineal descendant of the person named in the Trust Agreement.
The Policy
The note insurer will issue a financial guaranty insurance policy for
the notes. This policy unconditionally guarantees the payment of Insured Amounts
and Preference Amounts on the notes. The note insurer will make each required
Insured Payment to the indenture trustee on the later of (1) the payment date
the Insured Payment is distributable to the holders under the indenture, and (2)
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the next business day following the business day the note insurer shall have
received telephonic or telegraphic notice, subsequently confirmed in writing, or
written notice by registered or certified mail, from the indenture trustee,
specifying that an Insured Payment is due in accordance with the terms of the
policy.
The note insurer's obligation under the policy will be discharged to
the extent that funds are received by the indenture trustee for distribution to
the holders, whether or not those funds are properly distributed by the
indenture trustee.
For purposes of the policy, a holder as to a particular note, does not
and may not include the trust, the servicer, the seller or the originators.
The note insurer only insures the timely receipt of interest on the
notes, calculated at the Class A Note Rate, the amount of any
Over-collateralization Deficit, payable on each payment date on the notes and
the principal balance of the notes on the final payment date. The policy will
not cover the Net Mortgage Loan Interest Shortfalls, nor does the policy
guarantee to the holders of the notes any particular rate of principal payment.
The policy expires and terminates without any action on the part of the note
insurer or any other person on the date that is one year and one day following
the date the notes have been paid in full.
In the absence of payments under the policy, holders will directly bear
the credit risks associated with their notes.
The policy is non-cancelable.
The policy is issued under and shall be construed under, the laws of
the State of New York, without giving effect to the conflict of laws principles
of the State of New York.
The policy is not covered by the property/casualty insurance security
fund specified in Article 76 of the New York Insurance Law.
Drawings Under the Policy
Not later than three business days prior to each payment date, the
indenture trustee is required to determine, pursuant to the indenture, for the
next payment date, the Net Available Amount to be on deposit in each payment
account on that payment date. If there is a Deficiency Amount for a payment
date, the indenture trustee is required to complete, pursuant to the indenture,
a telephone or telegraphic notice, promptly confirmed in writing by telecopy
substantially in the form of Exhibit A to the policy, the original of which is
subsequently delivered by registered or certified mail, and submit the notice to
the note insurer no later than 12:00 noon New York City time on the second
business day preceding the payment date as a claim for an Insured Payment in an
amount equal to the Deficiency Amount.
The Note Insurer
The following information has been obtained from Ambac Assurance
Corporation, the note insurer, for inclusion in this prospectus supplement. No
representation is made by the seller, the originators, the servicer, the
depositor, the trust, the owner trustee or the underwriter or any of its
affiliates as to the accuracy or completeness of the information.
The note insurer is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Commonwealth of Puerto Rico and the Territory of Guam. The note insurer
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primarily insures newly issued municipal and structured finance obligations. The
note insurer is a wholly-owned subsidiary of Ambac Financial Group, Inc.
(formerly, AMBAC Inc.), a 100% publicly-held company. Moody's Investors Service,
Inc., Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. and Fitch, Inc. have each assigned a triple-A financial strength
rating to the note insurer.
The consolidated financial statements of the note insurer and
subsidiaries as of December 31, 1999 and December 31, 1998 and for each of the
years in the three-year period ended December 31, 1999, prepared in accordance
with generally accepted accounting principles, included in the Annual Report on
Form 10-K of Ambac Financial Group, Inc. -- which was filed with the Securities
and Exchange Commission on March 30, 2000; Securities and Exchange Commission
File No. 1-10777 -- and the unaudited consolidated financial statements of the
note insurer and subsidiaries as of June 30, 2000 and for the periods ending
June 30, 2000 and June 30, 1999, included in the Quarterly Report on Form 10-Q
of Ambac Financial Group, Inc. for the period ended June 30, 2000 -- which was
filed with the Securities and Exchange Commission on August 11, 2000 -- are
incorporated by reference into this prospectus supplement and are deemed to
constitute a part of this prospectus supplement. Any statement contained in a
document incorporated by reference shall be modified or superseded for the
purposes of this prospectus supplement to the extent that a statement contained
by reference in this prospectus supplement also modifies or supersedes that
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this prospectus
supplement.
All financial statements of the note insurer and its subsidiaries
included in documents filed by Ambac Financial Group, Inc. with the Securities
and Exchange Commission under section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, subsequent to the date of this prospectus
supplement and prior to the termination of the offering of the notes are deemed
to be incorporated by reference into this prospectus supplement and to be a part
of this prospectus supplement from the respective dates of filing of the
financial statements.
The following table sets forth the capitalization of the note insurer
as of December 31, 1998, December 31, 1999 and June 30, 2000, respectively, in
conformity with generally accepted accounting principles.
Ambac Assurance Corporation
Consolidated Capitalization Table
(Dollars in Millions)
<TABLE>
<CAPTION>
December 31, December 31, June 30,
1998 1999 2000
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
Unearned premiums.............................. $ 1,303 $ 1,442 $ 1,452
Other liabilities.............................. 548 524 504
------- ------- -------
Total liabilities.............................. $ 1,851 $ 1,966 $ 1,956
======= ======= =======
Stockholder's equity:
Common stock................................ 82 $ 82 $ 82
Additional paid-in capital.................. 541 752 753
Accumulated other comprehensive income (loss) 138 (92) (46)
Retained earnings........................... 1,405 1,674 1,834
------- ------- -------
Total stockholder's equity..................... 2,166 2,416 2,623
------- ------- -------
Total liabilities and stockholder's equity..... $ 4,017 $ 4,382 $ 4,579
======= ======= =======
</TABLE>
For additional financial information concerning the note insurer, see
the audited financial statements of the note insurer incorporated by reference
in this prospectus supplement. Copies of the financial statements of the note
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insurer incorporated by reference in this prospectus supplement and copies of
the note insurer's annual statement for the year ended December 31, 1999
prepared in accordance with statutory accounting standards are available,
without charge, from the note insurer. The address of the note insurer's
administrative offices and its telephone number are One State Street Plaza, 17th
Floor, New York, New York 10004 and (212) 668-0340.
The note insurer makes no representation regarding the notes or the
advisability of investing in the notes and makes no representation regarding,
nor has it participated in the preparation of, this prospectus supplement other
than the information supplied by the note insurer and presented under the
headings "The Note Insurer" and "The Policy" in this prospectus supplement and
in the financial statements incorporated in this prospectus supplement by
reference.
Prepayment and Yield Considerations
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, a note will be directly related to the rate of payment of
principal of the mortgage loans, including for this purpose voluntary payment in
full of mortgage loans prior to stated maturity, liquidations due to defaults,
casualties and condemnations, and repurchases of or substitutions for mortgage
loans by American Business Credit or an affiliate of American Business Credit as
required or permitted under the Indenture, the Sale and Servicing Agreement or
the Unaffiliated Seller's Agreement.
The actual rate of principal prepayments on pools of mortgage loans is
influenced by a variety of economic, tax, geographic, demographic, social, legal
and other factors and has fluctuated considerably in recent years. In addition,
the rate of principal prepayments may differ among pools of mortgage loans at
any time because of specific factors relating to the mortgage loans in the
particular pool, including, among other things, the age of the mortgage loans,
the geographic locations of the properties securing the loans and the extent of
the mortgagors' equity in such properties, and changes in the mortgagors'
housing needs, job transfers and unemployment.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates fall significantly below the interest rates of certain mortgage loans at
the time of origination, such mortgage loans may be subject to higher prepayment
rates than if prevailing rates remain at or above those at the time such
mortgage loans were originated. Conversely, if prevailing interest rates rise
appreciably above the interest rates of certain mortgage loans at the time of
origination, such mortgage loans may experience a lower prepayment rate than if
prevailing rates remain at or below those at the time such mortgage loans were
originated. However, there can be no assurance that the mortgage loans will
conform to the prepayment experience of conventional mortgage loans or to any
past prepayment experience or any published prepayment forecast. No assurance
can be given as to the level of prepayments that the mortgage loans in the trust
estate will experience.
As indicated above, if purchased at other than par, the yield to
maturity on a note will be affected by the rate of the payment of principal on
the mortgage loans. If the actual rate of payments on the mortgage loans is
slower than the rate anticipated by an investor who purchases a note at a
discount, the actual yield to such investor will be lower than such investor's
anticipated yield. If the actual rate of payments on the mortgage loans is
faster than the rate anticipated by an investor who purchases a note at a
premium, the actual yield to such investor will be lower than such investor's
anticipated yield.
The final stated maturity date is expected to be September 15, 2031 for
the notes. The final stated maturity date was calculated using the assumption
that the final stated maturity date is twelve months after the final stated
maturity date of the mortgage loan having the latest maturity date. The weighted
average life of the notes is likely to be shorter than would be the case if
payments actually made on the mortgage loans conformed to the foregoing
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assumptions, and the final payment date with respect to the notes could occur
significantly earlier than the final stated maturity date because:
o prepayments, including, for this purpose, prepayments attributable
to foreclosure, liquidation, repurchase and the like, on mortgage
loans are likely to occur;
o twelve months have been added to obtain the final stated maturity
date above;
o the over-collateralization provisions of the transaction result in
the application of Excess Interest to the payment of principal;
and
o the majority holder of the trust certificates or, if such majority
holder elects not to do so, the servicer may, at their respective
option as described herein, call the notes when the aggregate
outstanding principal balance of the notes is equal to or less
than 10% of the aggregate original principal balance of the notes.
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security is scheduled to be repaid to an investor. The weighted average
life of the notes will be influenced by the rate at which principal of the
related mortgage loans is paid, which may be in the form of scheduled
amortization or prepayments -- for this purpose, the term "prepayment" includes
liquidations due to default.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The prepayment model used in this prospectus
supplement, Home Equity Prepayment, or HEP, is a prepayment assumption which
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. For example, 23% HEP assumes a constant prepayment rate of 2.3%
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 2.3% 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, 23% HEP assumes a constant prepayment rate of 23% 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 mortgage loans, including the mortgage
loans in the trust estate.
The following tables, addressing the weighted average lives of the
notes, have been prepared on the basis of the following modeling assumptions:
o the mortgage loans prepay at the indicated percentage of the
prepayment assumption,
o payments on the notes are received in cash on the 15th day of each
month commencing in October 2000,
o no defaults or delinquencies in, or modifications, waivers or
amendments respecting the payment by the mortgagors of principal
and interest on the mortgage loans occur,
o scheduled payments are assumed to be received on the last day of
each month commencing in September 2000, or as set forth in the
following table, and prepayments represent payments in full of
individual mortgage loans and are assumed to be received on the
last day of each month, commencing in September 2000, or as set
forth in the following table, and include thirty days' interest
thereon,
o the notes are purchased on September 28, 2000,
o the Specified Over-collateralized Amount is as set forth in the
Indenture,
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o on each payment date, all Excess Interest is applied to build up
over-collateralization necessary to satisfy the Specified
Over-Collateralized Amount,
o the remaining terms to maturity are calculated from the assumed
date of transfer of the mortgage loans to the trust, and
o the mortgage loans consist of 4 mortgage loans having the
following characteristics:
<TABLE>
<CAPTION>
Mortgage Net Mortgage Original Remaining Remaining Term
Mortgage Loan Principal Interest Interest Amortizing Term Amortizing Term to Maturity
Number Balance ($) Rate (%) Rate (%) (in months) (in months) (in months)
------------- ------------- -------- ------------ --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1 70,048,376.63 11.835 11.335 340 340 208
2 18,004,064.99 13.092 12.592 166 166 166
3 21,610,080.70 11.605 11.105 240 240 240
4 40,337,477.67 11.336 10.836 358 358 358
</TABLE>
----------------------
The foregoing modeling assumptions are assumptions and are not
necessarily indicative of actual performance.
Based upon the foregoing modeling assumptions, the tables below
indicate the weighted average life and earliest retirement date of the notes
assuming that the related mortgage loans prepay according to the indicated
percentages of the prepayment assumption.
Weighted Average Lives
<TABLE>
<CAPTION>
Class A Notes
Prepayment Weighted Average Earliest
Assumption (HEP) Life in Years Retirement Date
---------------- ---------------- ---------------
<S> <C> <C>
0% 15.16 2/15/2026
15% 4.97 1/15/2013
20% 3.85 4/15/2010
23% 3.39 2/15/2009
30% 2.63 2/15/2007
35% 2.25 2/15/2006
</TABLE>
The preceding table was prepared using the following assumptions:
o the weighted average life of the notes is determined by (a)
multiplying the amount of each principal payment used to retire
the notes by the number of years from the closing date to the
final payment date when the notes are fully retired; (b) adding
the results; and (c) dividing the sum by the original principal
balance of the notes, and
o the notes are called on the first payment date on which the
aggregate outstanding principal balance of all the then
outstanding notes is equal to or less than 10% of the aggregate
original principal balances.
----------------------
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There is no assurance that prepayments will occur or, if they do occur,
that they will occur at any percentage of HEP.
The Indenture provides that none of the note insurer, the trust, the
owner trustee, the indenture trustee, the seller, the depositor, the originators
or the servicer will be liable to any holder for any loss or damage incurred by
such holder as a result of any difference in the rate of return received by such
holder as compared to the Class A Note Rate, with respect to any holder of notes
upon reinvestment of the funds received in connection with any premature
repayment of principal on the notes, including any such repayment resulting from
any prepayment by the mortgagor, any liquidation of such mortgage loan, or any
repurchase of or substitution for any mortgage loan by the depositor or the
servicer.
Material Federal Income Tax Consequences
The following discussion of certain material federal income tax
consequences of the purchase, ownership and disposition of the notes is to be
considered only in connection with "Material Federal Income Tax Consequences" in
the accompanying prospectus. The discussion herein and in the accompanying
prospectus is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change. The discussion below and in the accompanying
prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the notes.
Treatment of the Notes
The originators, the seller, the depositor and the trust agree, and the
holders of the notes will agree by their purchase of the notes, to treat the
notes as indebtedness for all federal, state and local income tax purposes.
There are no regulations, published rulings or judicial decisions involving the
characterization for federal income tax purpose of securities with terms
substantially the same as the notes. In general, whether instruments such as the
notes constitute indebtedness for federal income tax purposes is a question of
fact, the resolution of which is based primarily upon the economic substance of
the instruments and the transaction pursuant to which they are issued rather
than merely upon the form of the transaction or the manner in which the
instruments are labeled. The IRS and the courts have set forth various factors
to be taken into account in determining, for federal income tax purposes,
whether an instrument constitutes indebtedness and whether a transfer of
property is a sale because the transferor has relinquished substantial incidents
of ownership in the property or whether such transfer is a borrowing secured by
the property. On the basis of its analysis of such factors as applied to the
facts and its analysis of the economic substance of the contemplated
transaction, Brown & Wood LLP, special tax counsel to the depositor, is of the
opinion that, for federal income tax purposes, (i) the notes will be treated as
indebtedness and (ii) the trust will not be classified as an association or as a
publicly traded partnership taxable as a corporation or as a taxable mortgage
pool. 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.
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<PAGE>
Possible Alternative Characterizations of the Notes. Although, as
described above, it is the opinion of special tax counsel that for federal
income tax purposes, the notes will be characterized as indebtedness, such
opinion is not binding on the IRS and thus no assurance can be given that such a
characterization will prevail. If the IRS successfully asserted that the notes
did not represent debt for federal income tax purposes, holders of the notes
would likely be treated as owning an interest in a partnership and not an
interest in an association, or a publicly traded partnership, taxable as a
corporation or a taxable mortgage pool. If the holders of the notes were treated
as owning an equitable interest in a partnership, the partnership itself would
not be subject to federal income tax; rather each partner would be taxed
individually on their respective distributive share of the partnership's income,
gain, loss, deductions and credits. The amount, timing and characterization of
items of income and deduction for a holder of a note would differ if the notes
were held to constitute partnership interests, rather than indebtedness. Since
the parties will treat the notes as indebtedness for federal income tax
purposes, none of the servicer, the indenture trustee or the owner trustee will
attempt to satisfy the tax reporting requirements that would apply under this
alternative characterization of the notes. Investors that are foreign persons
are strongly advised to consult their own tax advisors in determining the
federal, state, local and other tax consequences to them of the purchase,
ownership and disposition of the notes.
Special Tax Attributes. The notes will not represent "real estate
assets" for purposes of Section 856(c)(4)(A) of the Code or "[l]oans ... secured
by an interest in real property" within the meaning of Section 7701(a)(19)(C) of
the Code.
Discount and Premium. It is not anticipated that the notes will be
issued with any original issue discount. See "Material Federal Income Tax
Consequences -- Discount and Premium -- Original Issue Discount" in the
accompanying prospectus. The prepayment assumption that will be used for
purposes of computing original issue discount, if any, for federal income tax
purposes is 23% HEP. See "Prepayment and Yield Considerations" in this
prospectus supplement. In addition, a subsequent purchaser who buys a note for
less than its principal amount may be subject to the "market discount" rules of
the Code. See "Material Federal Income Tax Consequences -- Discount and Premium
-- Market Discount" in the accompanying prospectus. A subsequent purchaser who
buys a note for more than its principal amount may be subject to the "market
premium" rules of the Code. See "Material Federal Income Tax Consequences
Discount and Premium -- Premium" in the accompanying prospectus.
Sale or Redemption of the Notes. If a note is sold or retired, the
seller will recognize gain or loss equal to the difference between the amount
realized on the sale and such holder's adjusted basis in the note. See "Material
Federal Income Tax Consequences -- Debt Securities -- Sale or Exchange of Debt
Securities" in the accompanying prospectus.
Other Matters. For a discussion of backup withholding and taxation of
foreign investors in the notes, see "Material Federal Income Tax Consequences --
Backup Withholding" and " --Foreign Investors -- Grantor Trust Securities and
REMIC Regular Securities" in the accompanying prospectus.
ERISA Considerations
The Employee Retirement Income Security Act of 1974 and the Code impose
certain restrictions on,
o employee benefit plans, as defined in Section 3(3) of ERISA,
o plans described in section 4975(e)(1) of the Code, including
individual retirement accounts or Keogh plans,
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<PAGE>
o any entities whose underlying assets include plan assets by reason
of a plan's investment in such entities and
o persons who have certain specified relationships to such plans --
"parties-in-interest" under ERISA and "disqualified persons" under
the Code.
Section 406 of ERISA prohibits plans from engaging in certain
transactions involving the assets of such plans with parties-in- interest with
respect to such plans, unless a statutory or administrative exemption is
applicable to the transaction. Excise taxes under Section 4975 of the Code,
penalties under Section 502 of ERISA and other penalties may be imposed on plan
fiduciaries and parties-in-interest, or disqualified persons, that engage in
"prohibited transactions" involving assets of a plan. Individual retirement
arrangements and other plans that are not subject to ERISA, but are subject to
Section 4975 of the Code, and disqualified persons with respect to such
arrangements and plans, also may be subject to excise taxes and other penalties
if they engage in prohibited transactions. Moreover, based on the reasoning of
the United States Supreme Court in John Hancock Life Ins. Co. v. Harris Trust
and Sav. Bank, 114 S. Ct. 517 (1993), an insurance company's general account may
be deemed to include assets of the plans investing in the general account --
e.g., through the purchase of an annuity contract. ERISA also imposes certain
duties on persons who are fiduciaries of plans subject to ERISA.
Certain transactions involving the purchase, holding or transfer of the
notes might be deemed to constitute prohibited transactions under ERISA and the
Code if assets of the trust were deemed to be assets of a plan. Under a
regulation issued by the United States Department of Labor, the assets of the
trust would be treated as plan assets of a plan for the purposes of ERISA and
the Code only if the plan acquires an "equity interest" in the trust and none of
the exceptions contained in this plan assets regulation is applicable. An equity
interest is defined under the plan assets regulation as an interest other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Although there is little guidance on
the subject, the notes should be treated as indebtedness without substantial
equity features for purposes of the plan assets regulation. This determination
is based in part on the traditional debt features of the notes, including the
reasonable expectation of purchasers of the notes that the notes will be repaid
when due, as well as the absence of conversion rights, warrants and other
typical equity features. The debt treatment of the notes could change if the
trust incurs losses. However, even if the notes are treated as debt for such
purposes, the acquisition or holding of notes by or on behalf of a plan could be
considered to give rise to a prohibited transaction if the trust or any of its
affiliates is or becomes a party-in-interest or a disqualified person with
respect to such plan. In such case, certain exemptions from the prohibited
transaction rules could be applicable depending on the type and circumstances of
the plan fiduciary making the decision to acquire a note. Included among these
exemptions are: PTCE 90-1, regarding investments by insurance company pooled
separate accounts; PTCE 95-60, regarding investments by insurance company
general accounts; PTCE 91-38, regarding investments by bank collective
investment funds; PTCE 96-23, regarding transactions affected by in-house asset
managers; and PTCE 84-14, regarding transactions effected by "qualified
professional asset managers." Each investor using the assets of a plan which
acquires the notes, or to whom the notes are transferred, will be deemed to have
represented that the acquisition and continued holding of the notes will be
covered by one of the exemptions listed above or by another Department of Labor
Class Exemption.
Legal Investment
The notes will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984.
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<PAGE>
Plan of Distribution
Subject to the terms and conditions of the Underwriting Agreement dated
September 8, 2000 between the depositor and Prudential Securities Incorporated,
as underwriter, the depositor has agreed to sell to the underwriter and the
underwriter has agreed to purchase from the depositor the notes. The depositor
is obligated to sell, and the underwriter is obligated to purchase, all of the
notes offered hereby if any are purchased.
The underwriter has advised the depositor that it proposes to offer the
notes purchased by the underwriter for sale from time to time in one or more
negotiated transactions or otherwise, at market prices prevailing at the time of
sale, at prices related to such market prices or at negotiated prices. The
underwriter may effect such transactions by selling such notes to or through
dealers, and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the underwriter or purchasers of the
notes for whom they may act as agent. Any dealers that participate with the
underwriter in the distribution of the notes purchased by the underwriter may be
deemed to be underwriters, and any discounts or commissions received by them or
the underwriter and any profit on the resale of notes by them or the underwriter
may be deemed to be underwriting discounts or commissions under the Securities
Act of 1933.
In connection with the offering of the notes, the underwriter and its
affiliates may engage in transactions that stabilize, maintain or otherwise
affect the market price of the notes. Such transactions may include
stabilization transactions effected in accordance with Rule 104 of Regulation M,
pursuant to which such person may bid for or purchase the notes for the purpose
of stabilizing its market price. Any of the transactions described in this
paragraph may result in the maintenance of the price of the notes at a level
above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are taken,
may be discontinued at any time without notice.
For further information regarding any offer or sale of the notes
pursuant to this prospectus supplement and the accompanying prospectus, see
"Plan of Distribution" in the accompanying prospectus.
The Underwriting Agreement provides that the depositor will indemnify
the underwriter or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
Prudential Securities Incorporated is an affiliate of the depositor.
Incorporation of Information by Reference
The Securities and Exchange Commission allows us to "incorporate by
reference" certain information already on file with it. This means that we can
disclose important information to you by referring you to those documents. Such
information is considered part of this prospectus supplement, and later
information that is filed will automatically update and supersede this
information. We incorporate by reference all of the documents listed in the
accompanying prospectus under the heading "Incorporation of Information by
Reference" and the consolidated financial statements of Ambac Assurance
Corporation and subsidiaries included in, or as exhibits to, the Annual Report
on Form 10-K, as amended, for the year ended December 31, 1999, and the
Quarterly Report on Form 10-Q as described under "The Note Insurer" each of
which has been filed by Ambac Financial Group, Inc.
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
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<PAGE>
accompanying prospectus is accurate as of any date other than the date on the
cover page of this prospectus supplement or the accompanying prospectus.
Additional Information
Prudential Securities Secured Financing Corporation has filed with the
Securities and Exchange Commission a registration statement (Registration No.
333-37256) under the Securities Act of 1933, with respect to the notes offered
pursuant to this prospectus supplement. This prospectus supplement and the
accompanying prospectus, which form a part of the registration statement, omit
certain information contained in such registration statement pursuant to the
rules and regulations of the Securities and Exchange Commission. You may read
and copy the registration statement at the Public Reference Room at the
Securities and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. and at the Securities and Exchange Commission's regional
offices at Seven World Trade Center, 13th Floor, New York, New York, 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the Public Reference Rooms. In
addition, the Securities and Exchange Commission maintains a site on the World
Wide Web containing reports, proxy materials, information statements and other
items. The address is http://www.sec.gov.
Experts
The consolidated financial statements of Ambac Assurance Corporation
and subsidiaries as of December 31, 1999 and 1998 and for each of the years in
the three year period ended December 31, 1999, are incorporated by reference in
this prospectus supplement and in the registration statement, in reliance on the
report of KPMG LLP, independent certified public accountants incorporated by
reference in this prospectus supplement, and upon the authority of that firm as
experts in accounting and auditing.
Legal Matters
Certain legal matters in connection with the notes will be passed upon
for the originators and the servicer by Blank Rome Comisky & McCauley LLP,
Philadelphia, Pennsylvania, for the trust by Stradley, Ronon, Stevens & Young,
LLP, Wilmington, Delaware, for the depositor and the underwriter by Brown & Wood
LLP, Washington, DC, and for the seller by Dewey Ballantine LLP, New York, New
York.
Ratings
It is a condition to the original issuance of the notes that they will
receive ratings of "AAA" by Standard & Poor's and "Aaa" by Moody's. The ratings
assigned to the notes will take into account the claims-paying ability of the
note insurer. Explanations of the significance of such ratings may be obtained
from Moody's Investors Service, Inc., 99 Church Street, New York, New York 10007
and Standard & Poor's Rating Services, a division of the McGraw Hill Companies,
Inc., 55 Water Street, New York, New York 10041. Such ratings will be the views
only of such rating agencies. There is no assurance that any such ratings will
continue for any period of time or that such ratings will not be revised or
withdrawn. Any such revision or withdrawal of such ratings may have an adverse
effect on the market price of the notes.
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<PAGE>
Glossary
The following terms have the meanings given below when used in this
prospectus supplement.
Available Amount for any payment date is the amount on deposit in the
payment account, exclusive of the amount of any Insured Payment and the
servicing fee, on that payment date.
Class A Carry-Forward Amount for any payment date is the sum of (a) the
amount, if any, by which (x) the Class A Interest Payment Amount as of the
immediately preceding payment date exceeded (y) the amount of interest actually
paid to the holders of the class A notes on such immediately preceding payment
date and (b) thirty days' interest on the amount described in clause (a),
calculated at an interest rate equal to the Class A Note Rate.
Class A Interest Payment Amount for any payment date will be an amount
equal to the sum of the Current Interest for the class A notes on such payment
date, less the amount of any Net Mortgage Loan Interest Shortfalls relating to
such payment date, plus the Class A Carry-Forward Amount, less any amounts paid
by the note insurer in respect of such Class A Carry-Forward Amount, in each
case, as of such payment date.
Class A Note Rate with respect to any payment date, the per annum rate
equal to 7.610%; provided, that, on any payment date after the Clean-Up Call
Date, the Class A Note Rate will be 8.110%.
Clean-Up Call Date means the first payment date on which the aggregate
outstanding principal balance of the notes is equal to or less than 10% of the
aggregate original principal balance of the notes.
Compensating Interest means an amount equal to the lesser of (a) the
aggregate of the Prepayment Interest Shortfalls for the related payment date
resulting from principal prepayments in full during the related due period and
(b) the aggregate of the servicing fees received by the servicer in the related
due period; provided, however, that Compensating Interest with respect to any
mortgage loan and any payment date shall not exceed the servicing fees due in
respect of such mortgage loan on such payment date.
Current Interest for any payment date is the sum of the interest that
accrued on the notes at the Class A Note Rate on the aggregate outstanding
principal balance of such class during the related accrual period.
Cut-Off Date means the close of business on August 31, 2000; provided,
that with respect to mortgage loans originated after August 31, 2000, the
Cut-Off Date shall be the date of origination of such mortgage loans.
Deficiency Amount means, for any payment date, the excess, if any, of
Required Distributions over the Net Available Amount.
Due for Payment means, the payment date on which Insured Amounts are
due.
Excess Interest for any payment date is equal to the excess of (x) the
Available Amount for such payment date over (y) the sum of
o the Interest Payment Amount for such payment date,
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o the Principal Payment Amount for such payment date -- calculated
for this purpose without regard to any Over-collateralization
Increase Amount or portion thereof included therein,
o any Premium Amount, Reimbursement Amount or other amount owed to
the note insurer, and
o the indenture trustee's fees for such payment date.
Excess Over-collateralized Amount means, with respect to a payment
date, the difference, if any, between (a) the Over-collateralized Amount that
would apply on such payment date after taking into account all payments to be
made on such payment date, except for any payments of related
Over-collateralization Reduction Amounts, and (b) the Specified
Over-collateralized Amount.
Foreclosure Profits as to any servicer remittance date, are the excess,
if any, of (x) Net Liquidation Proceeds in respect of each mortgage loan that
became a Liquidated Mortgage Loan during the month immediately preceding the
month of such servicer remittance date over (y) the sum of such unpaid principal
balance of each such Liquidated Mortgage Loan plus accrued and unpaid interest
on the unpaid principal balance from the due date to which interest was last
paid by the mortgagor.
Insurance Proceeds are proceeds paid by any insurer other than the note
insurer pursuant to any insurance policy covering a mortgage loan to the extent
such proceeds are not applied to the restoration of the related mortgaged
property or released to the related mortgagor. "Insurance Proceeds" do not
include "Insured Payments."
Insured Amounts means, with respect to any payment date, any Deficiency
Amount for such payment date.
Insured Payments shall mean, the aggregate amount actually paid by the
note insurer to the indenture trustee in respect of (i) Insured Amounts for a
payment date and (ii) Preference Amounts for any given business day.
Interest Payment Amount means the Class A Interest Payment Amount.
Liquidated Loan Loss as to any Liquidated Mortgage Loan is the excess,
if any, of (x) the unpaid principal balance of such Liquidated Mortgage Loan
plus accrued and unpaid interest on such unpaid principal balance from the due
date to which interest was last paid by the mortgagor over (y) the sum of the
Net Liquidation Proceeds and the amount of any previously unreimbursed Periodic
Advances in respect of such mortgage loan.
Liquidated Mortgage Loan is a mortgage loan that is being liquidated by
the servicer in connection with (x) the taking of all or a part of a Mortgaged
Property by exercise of the power of eminent domain or condemnation or (y) the
liquidation of a defaulted mortgage loan through a sale, foreclosure sale, REO
disposition or otherwise.
Liquidation Expenses as to any Liquidated Mortgage Loan are all
expenses incurred by the servicer in connection with the liquidation of such
mortgage loan, including, without duplication, unreimbursed expenses for real
property taxes and unreimbursed servicing advances. In no event may Liquidation
Expenses with respect to a Liquidated Mortgage Loan exceed the related
Liquidation Proceeds.
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<PAGE>
Liquidation Proceeds are amounts, other than Insurance Proceeds,
received by the servicer in connection with (x) the taking of all or a part of a
Mortgaged Property by exercise of the power of eminent domain or condemnation or
(y) the liquidation of a defaulted mortgage loan through a sale, foreclosure
sale, REO disposition or otherwise.
Mortgage Loan Interest Shortfalls means Relief Act Shortfalls and
Prepayment Interest Shortfalls.
Net Available Amount is, for any payment date, the Available Amount,
less the indenture trustee's fees, the owner trustee's fees and the premiums due
to the note insurer on that payment date.
Net Foreclosure Profits as to any servicer remittance date, are the
excess, if any, of (x) the aggregate Foreclosure Profits with respect to such
servicer remittance date over (y) Liquidated Loan Losses with respect to such
servicer remittance date.
Net Liquidation Proceeds as to any Liquidated Mortgage Loan, are
Liquidation Proceeds net of Liquidation Expenses and net of any unreimbursed
Periodic Advances made by the servicer.
Net Mortgage Loan Interest Shortfalls for any payment date will be the
aggregate of the Mortgage Loan Interest Shortfalls, if any, for such payment
date, to the extent such Mortgage Loan Interest Shortfalls are not paid by the
servicer as Compensating Interest.
Net REO Proceeds as to any REO property, are REO Proceeds net of any
related expenses of the servicer.
Over-collateralization Deficit for any payment date, is the amount by
which the aggregate outstanding principal balance of the notes exceeds the
aggregate principal balance of the mortgage loans.
Over-collateralization Increase Amount for any payment date is the
amount of Excess Interest to be applied as an accelerated payment of principal
on the notes until the over-collateralization reaches the Specified
Over-collateralized Amount. Such payment is limited to the extent of the
Available Amount.
Over-collateralization Reduction Amount with respect to any payment
date, is the lesser of (a) the Excess Over-collateralized Amount for such
payment date and (b) the Principal Payment Amount for such payment date (without
regard to clause (b)(10) of the definition of Principal Payment Amount).
Over-collateralized Amount means, with respect to any payment date, the
excess, if any, of (a) the aggregate principal balances of the mortgage loans as
of the close of business on the last day of the preceding calendar month over
(b) the aggregate principal balance of the notes as of such payment date --
following the making of all payments on such payment date, other than with
respect to any Over-collateralization Increase Amount for such payment date.
Periodic Advances means advances made by the servicer on each payment
date with respect to delinquent payments of interest on the mortgage loans, at a
rate equal to the interest rate on the related mortgage note, less the servicing
fee rate.
Preference Amount means any payment of principal or interest on a note
which has become Due for Payment and which is made to an owner of a note by or
on behalf of the indenture trustee which has been deemed a preferential transfer
and was previously recovered from its owner pursuant to the United States
Bankruptcy Code in accordance with a final, nonappealable order of a court of
competent jurisdiction.
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<PAGE>
Premium Amount means the premium payable to the note insurer on each
payment date pursuant to the policy.
Prepayment Interest Shortfall means, with respect to any payment date,
an amount equal to the excess, if any, of (a) thirty days' interest on the
outstanding principal balance of such mortgage loans at a per annum rate equal
to the related mortgage interest rate -- or at such lower rate as may be in
effect for such mortgage loan because of application of the Soldiers' and
Sailors' Civil Relief Act of 1940, any reduction as a result of a bankruptcy
proceeding and/or any reduction by a court of the monthly payment due on such
mortgage loan -- minus the rate at which the servicing fee is calculated, over
(b) the amount of interest actually remitted by the related mortgagor in
connection with such principal prepayment in full, less the servicing fee for
such mortgage loan in such month.
Principal Payment Amount for any payment date will be the lesser of:
(a) the excess of (x) the sum, as of such payment date, of (A) the
Available Amount and (B) any Insured Payment over (y) the sum of the Interest
Payment Amount, the indenture trustee's fees, the Premium Amount and the
Reimbursement Amount; and
(b) the sum, without duplication, of:
(1) all principal in respect of the mortgage loans actually
collected during the related due period;
(2) the principal balance of each mortgage loan that either was
repurchased by the seller or purchased by the servicer on the
related servicer remittance date, to the extent such
principal balance is actually received by the indenture
trustee;
(3) any substitution adjustments delivered by the seller on the
related servicer remittance date in connection with a
substitution of a mortgage loan, to the extent such
substitution adjustments are actually received by the
indenture trustee;
(4) the Net Liquidation Proceeds actually collected by the
servicer of all mortgage loans during the prior calendar
month -- to the extent such Net Liquidation Proceeds relate
to principal;
(5) the proceeds received by the indenture trustee upon the
exercise by the trust certificateholder or the servicer, as
applicable, of its option to call the notes -- to the extent
such proceeds relate to principal;
(6) the amount of any Over-collateralization Deficit for such
payment date;
(7) the proceeds received by the indenture trustee on any
termination of the trust -- to the extent such proceeds
relate to principal;
(8) the amount of any Over-collateralization Increase Amount for
such payment date, to the extent of any Excess Interest
available for such purpose;
S-60
<PAGE>
(9) if the note insurer shall so elect, an amount of principal --
including Liquidated Loan Losses -- that would have been
payable pursuant to clauses (1) through (8) above if
sufficient funds were available therefor;
minus
-----
(10) the amount of any Over-collateralization Reduction Amount for
such payment date.
In no event will the Principal Payment Amount with respect to any
payment date be (x) less than zero or (y) greater than the then outstanding
aggregate principal balance of the notes.
Qualified Substitute Mortgage Loan means any mortgage loan or mortgage
loans substituted for a deleted mortgage loan and which, among other things,
o relates or relate to a detached one-family residence or to the
same type of residential dwelling or commercial property as the
deleted mortgage loan and, has or have the same or a better lien
priority as the deleted mortgage loan and has or have the same
occupancy status as the deleted mortgage loan or is or are
owner-occupied mortgaged property or properties,
o matures or mature no later than, and not more than one year
earlier than, the deleted mortgage loan,
o has or have a LTV or LTV at the time of such substitution no
higher than the LTV of the deleted mortgage loan,
o has or have a CLTV or CLTVs at the time of such substitution no
higher than the CLTV of the deleted mortgage loan,
o has or have a principal balance or principal balances, after
application of all payments received on or prior to the date of
substitution, not substantially less and not more than the
principal balance of the deleted mortgage loan as of such date,
o has or have a mortgage interest rate of at least the same interest
rate as the deleted mortgage loan and
o complies or comply, as of the date of substitution, with each
representation and warranty set forth in the Unaffiliated Seller's
Agreement.
Reimbursement Amount means, with respect to each payment date, the
amount of all Insured Payments and other amounts due to the note insurer
pursuant to the Insurance Agreement which have not been previously paid.
Relief Act Shortfalls are interest shortfalls resulting from the
application of the Soldier's and Sailors' Civil Relief Act of 1940.
Required Distributions means, with respect to (1) any payment date
occurring prior to the payment date in September 2031, the sum of (x) the
Interest Payment Amount -- net of any Net Mortgage Loan Interest Shortfalls --
and (y) the Over-collateralization Deficit, and (2) the final scheduled payment
date, the sum of (x) the amount set forth in clause (1)(x) above and (y) the
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<PAGE>
aggregate outstanding principal balance, if any, of the notes, after giving
effect to all other payments of principal on the notes on that payment date.
REO Proceeds are monies received in respect of any REO property,
including, without limitation, proceeds from the rental of the related mortgaged
property.
Specified Over-collateralized Amount with respect to any payment date
will be the amount of over-collateralization which the note insurer requires
with respect to such payment date and which amount may step up or step down as
determined in the insurance agreement.
S-62
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Report of Independent Auditors
First Union Trust Company, National Association,
as Owner Trustee of
ABFS Mortgage Loan Trust 2000-3
We have audited the accompanying balance sheet of ABFS Mortgage Loan
Trust 2000-3, a Delaware business trust as of September 21, 2000. This balance
sheet is the responsibility of the trust. Our responsibility is to express an
opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of ABFS Mortgage Loan Trust
2000-3, at September 21, 2000, in conformity with generally accepted accounting
principles.
BDO Seidman LLP
September 21, 2000
Philadelphia, Pennsylvania
A-1
<PAGE>
Index to Financial Statements
Page
----
Report of Independent Auditors.........................................A-1
Balance Sheet of the Trust as of September 21, 2000....................A-2
Notes to Balance Sheet.................................................A-4
A-2
<PAGE>
ABFS Mortgage Loan Trust 2000-3
Balance Sheet
September 21, 2000
--------------------------------------------------------------------------------
Assets
Cash.......................................................$ 1,000
-------
Total assets..........................................$ 1,000
=======
Liabilities and Certificateholders' Equity
Liabilities.............................................$ 0
Certificateholders equity..................................$ 1,000
-------
Total liabilities and certificateholders' equity......$ 1,000
=======
See accompanying notes.
A-3
<PAGE>
ABFS Mortgage Loan Trust 2000-3
Notes to Balance Sheet
September 21, 2000
1. Formation
ABFS Mortgage Loan Trust 2000-3, a Delaware statutory business trust,
was formed in the state of Delaware on September 18, 2000, with First Union
Trust Company, National Association, as its owner trustee.
The trust was formed to engage exclusively in the following business
and financial activities: to purchase or acquire from certain direct and
indirect subsidiaries of American Business Financial Services, Inc. certain
property relating to certain receivables consisting of business purpose loans
and consumer purpose home equity loans, and to pledge such receivables or
interests therein to The Chase Manhattan Bank, as indenture trustee.
2. Capital Contribution
ABFS 2000-3, Inc. made an initial capital contribution of $1,000 to the
trust on September 21, 2000.
3. Registration Statement
At September 21, 2000, the trust was in the process of preparing to
issue up to $150,000,000 of its Mortgage-Backed Notes, Series 2000-3.
A-4
<PAGE>
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
<TABLE>
<CAPTION>
<S> <C> <C>
Summary of Prospectus..............................1 Collection and Other Servicing Procedures...41
Risk Factors.......................................3 Enforcement of Due-on-Sale Clauses;
The Sponsor........................................7 Realization Upon Defaulted Loans..........41
Use of Proceeds....................................7 Servicing Compensation and Payment of
The Trustee........................................7 Expenses..................................42
The Trust Funds....................................8 Evidence as to Compliance...................43
The Mortgage Loans...........................8 Matters Regarding the Servicer..............43
The Contracts...............................15 Events of Default; Rights Upon Event of
Commercial Loans............................17 Default...................................44
MBS ........................................18 Amendment...................................47
Fixed Retained Yield........................19 Termination; Purchase or Other Disposition
Insurance Policies..........................19 of Loans..................................47
Acquisition of the Trust Assets.............21 Material Legal Aspects of the Loans...............48
Assignment of the Loans.....................21 The Mortgage Loans..........................48
Representations and Warranties..............22 The Contracts...............................56
Pre-Funding Accounts........................25 Installment Contracts.......................60
Description of the Securities.....................26 Soldiers' and Sailors' Civil Relief Act.....62
Distributions...............................27 Type of mortgaged property..................62
Principal and Interest on the Securities....28 Commercial Loans............................62
Form of Securities..........................29 Leases and Rents............................63
Credit Enhancement................................30 Material Matters Relating to Insolvency.....63
Subordination...............................31 Bankruptcy Laws.............................64
Overcollateralization.......................31 Material Federal Income Tax Consequences..........65
Cross-Collateralization.....................31 Grantor Trust Securities....................66
Surety Bonds................................32 REMIC Securities............................67
Letters of Credit...........................32 Debt Securities.............................75
Special Hazard Insurance Policies...........32 Partnership Interests.......................76
Reserve Funds...............................32 FASIT Securities............................78
Other Insurance, Guarantees and Discount and Premium........................81
Similar Instruments or Backup Withholding..........................84
Agreements................................33 Foreign Investors...........................84
Reduction or Substitution of Credit State Tax Considerations..........................86
Enhancement...............................33 ERISA Considerations..............................86
Prepayment and Yield Considerations...............33 Certificates................................87
Interest Rates..............................33 Notes.......................................89
Interest Shortfalls Due to Principal Consultation with Counsel...................89
Prepayments...............................34 Legal Investment..................................89
Weighted Average Life of Securities.........35 Plan of Distribution..............................91
Servicing of the Loans............................36 Incorporation of Information by Reference.........92
The Servicer................................36 Additional Information............................92
Payments on Loans...........................36 Legal Matters.....................................94
Advances and Limitations Thereon............39 Ratings...........................................94
Adjustment to Servicing Compensation in Glossary..........................................95
Connection with Prepaid and
Liquidated Loans..........................39
Reports to Securityholders..................40
</TABLE>
ii
<PAGE>
Summary of Prospectus
This summary highlights selected information from this prospectus
and does not contain all of the information that you need to
consider in making your investment decision. To understand all of
the terms of the offering of your series of securities, read
carefully this entire prospectus and the accompanying prospectus
supplement.
The Sponsor
Prudential Securities Secured Financing Corporation will act as the sponsor
of the issuers, meaning that it will establish the issuers and cause them to
issue the securities.
Securities Offered
Each class of securities will consist of one or more classes of ownership
securities or debt securities. Ownership securities represent beneficial
ownership interests in the assets held by the issuer. Ownership securities will
be issued in the form of certificates. Debt securities represent indebtedness
secured by the assets of the issuer. Debt securities will be issued in the form
of notes.
Each series of securities will be issued in one or more classes, one or
more of which may be classes of:
o fixed-rate securities,
o adjustable-rate securities,
o compound-interest or accrual securities,
o planned-amortization-class securities,
o principal-only securities,
o interest-only securities,
o participating securities,
o senior securities, or
o subordinated securities.
The interest rate, principal balance, notional balance, minimum
denomination and form of each class of securities will be described in the
accompanying prospectus supplement. The securities will be available in either
fully registered or book-entry form, as described in the accompanying prospectus
supplement.
The 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.
1
<PAGE>
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.
2
<PAGE>
Risk Factors
You should consider the following risk factors prior to any purchase of
any class of securities. You should also consider the information under the
caption "Risk Factors" in the accompanying prospectus supplement.
Your investment in any security may be an illiquid investment; you should be
prepared to hold your security to maturity.
A secondary market for these securities is unlikely to develop. If it
does develop, it may not provide you with sufficient liquidity of
investment or continue for the life of these securities. The
underwriter(s) may establish a secondary market in the securities,
although no underwriter will be obligated to do so. The securities are
not expected to be listed on any securities exchange or quoted in the
automated quotation system of a registered securities association.
Issuance of the securities in book-entry form may also reduce the
liquidity in the secondary trading market, since some investors may be
unwilling to purchase securities for which they cannot obtain
definitive physical securities.
As a result of prepayment on the loans or early redemption of the securities,
you could be fully paid significantly earlier than would otherwise be the case,
which may adversely affect the yield to maturity on your securities.
The yield to maturity of the securities may be adversely affected by a
higher or lower than anticipated rate of prepayments on the loans. The
yield to maturity on interest-only securities purchased at premiums or
discounts to par will be extremely sensitive to the rate of prepayments
on the loans.
The underlying loans may be prepaid in full or in part at any time,
although prepayment may require the borrower to pay of a prepayment
penalty or premium. These penalties will generally not be property of
the issuer, and will not be available to fund distributions owing to
you. We cannot predict the rate of prepayments of the loans, which is
influenced by a wide variety of economic, social and other factors,
including prevailing mortgage market interest rates, the availability
of alternative financing, local and regional economic conditions and
homeowner mobility. Therefore, we can give no assurance as to the level
of prepayments that a trust fund will experience.
Prepayments may result from mandatory prepayments relating to unused
monies held in pre-funding accounts, voluntary early payments by
borrowers, including payments in connection with refinancings of the
first mortgages, sales of mortgaged properties subject to "due-on-sale"
provisions and liquidations due to default, as well as the receipt of
proceeds from physical damage, credit life and disability insurance
policies. In addition, repurchases or purchases from the issuer of
loans or the payment of substitution adjustments will have the same
effect on the securities as a prepayment of the loans.
One or more classes of securities of any series may be subject to
optional or mandatory redemption or in whole or in part, on or after a
specified date, or on or after the time when the aggregate outstanding
principal amount of the underlying loans or the securities is less than
a specified amount or percentage. You will bear the risk of reinvesting
unscheduled distributions resulting from a redemption.
3
<PAGE>
Any of the foregoing principal prepayments may adversely affect the
yield to maturity of the prepaid securities. Since prevailing interest
rates are subject to fluctuation, there can be no assurance that you
will be able to reinvest these prepayments at a yield equaling or
exceeding the yield on your securities.
Credit enhancement, even if provided, will in any event be limited in both
amount and scope of coverage, and may not be sufficient to cover all losses or
risks on your investment.
Credit enhancement may be provided in limited amounts to cover some,
but not all, types of losses on the underlying loans and, in most
cases, will reduce over time in accordance with a schedule or formula.
Furthermore, credit enhancement may provide only very limited coverage
as to some types of losses, and may provide no coverage as to other
types of losses. Generally, credit enhancement does not directly or
indirectly guarantee to the investors any specified rate of
prepayments, which is one of the principal risks of your investment.
The amount and types of coverage, the identification of any entity
providing the coverage, the terms of any subordination and any other
information will be described in the accompanying prospectus
supplement.
Property values may decline, leading to higher losses on the loans.
An investment in securities such as these, which are backed by
residential real estate loans, may be affected by a decline in real
estate values and changes in the borrowers' financial condition. If
property values were to decline, the rates of delinquencies and
foreclosures may rise, thereby increasing the likelihood of loss. If
these losses are not covered by any credit enhancement, you will bear
all risk of these losses and will have to look primarily to the value
of the mortgaged properties for recovery of the outstanding principal
and unpaid interest on the defaulted loans.
Foreclosure of mortgaged properties involve delays and expense and could cause
losses on the loans.
Even if the mortgaged properties provide adequate security for the
loans, substantial delays could be encountered in connection with the
foreclosure of defaulted loans, and corresponding delays in the receipt
of the foreclosure proceeds could occur. Foreclosures are regulated by
state statutes, rules and judicial decisions and are subject to many of
the delays and expenses of other lawsuits, sometimes requiring several
years to complete. The servicer will be entitled to reimburse itself
for any expenses it has paid in attempting to recover amounts due on
the liquidated loans, including payments to prior lienholders, accrued
fees of the servicer, legal fees and costs of legal action, real estate
taxes, and maintenance and preservation expenses, which will reduce the
amount of the net recovery by the trust.
Environmental conditions on the mortgaged property may give rise to liability
for the issuer.
Real property pledged as security to a lender may be subject to
environmental risks which could cause losses on your securities. Under
the laws of some states, contamination of a mortgaged property may give
rise to a lien on the mortgaged property to assure the costs of
clean-up. In several states, this type of lien has priority over the
lien of an existing mortgage or owner's interest against the property.
In addition, under the laws of some states and under CERCLA, a lender
may be liable, as an "owner" or "operator," for costs of addressing
releases or threatened releases of hazardous substances that require
4
<PAGE>
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
5
<PAGE>
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.
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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.
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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
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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
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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
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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
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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
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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
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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
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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."
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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
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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
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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
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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,
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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.
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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.
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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;
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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,
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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
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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
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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
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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
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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.
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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.
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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,
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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
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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
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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.
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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."
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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
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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
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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
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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;
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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."
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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.
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Collection and Other Servicing Procedures
The servicer, directly or through sub-servicers, will make reasonable
efforts to collect all payments called for under the loans and will, consistent
with the Servicing Agreement, follow 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
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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
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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
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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
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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;
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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,
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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".
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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
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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
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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.
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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.
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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
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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.
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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.
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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
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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.
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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,
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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,
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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
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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.
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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.
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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
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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
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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,
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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.
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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.
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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
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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
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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
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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
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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
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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
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qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code,
however, is subject to the prohibited transaction rules set forth in Section 503
of the Code.
Some transactions involving the issuer might be deemed to constitute
prohibited transactions under ERISA and the Code for a plan, including an
individual retirement arrangement, that purchased securities, if the assets of
the issuer were deemed to be assets of the Plan. Under a "plan asset regulation"
issued by the United States Department of Labor, the assets of the issuer would
be treated as plan assets of a plan for the purposes of ERISA and the Code only
if the plan acquired an equity interest in the issuer and none of the exceptions
contained in the plan asset regulation were applicable. An "equity interest" is
defined under the plan asset regulation as an interest other than an instrument
which is treated as indebtedness under applicable local law and which has no
substantial equity features. In addition, in John Hancock Mutual Life Insurance
Co. v. Harris Trust and Savings Bank, 510 U.S. 86 (1993), the United States
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be "plan assets" for ERISA purposes under particular
circumstances. Therefore, in the absence of an exemption, the purchase, sale or
holding of a security by a plan, including some individual retirement
arrangements, subject to Section 406 of ERISA or Section 4975 of the Code might
result in prohibited transactions and the imposition of excise taxes and civil
penalties.
Certificates
The Department of Labor has issued to various underwriters individual
prohibited transaction exemptions, which generally exempt from the application
of the prohibited transaction provisions of Sections 406(a), 406(b)(1),
406(b)(2) and 407(a) of ERISA and the excise taxes imposed under Sections
4975(a) and (b) of the Code, particular transactions in connection with the
initial purchase, the holding and the subsequent resale by plans of certificates
in pass-through trusts that consist of secured receivables, secured loans and
other secured obligations that meet the conditions and requirements of these
underwriter exemptions. These underwriter exemptions will only be available for
securities that are certificates.
Among the conditions that must be satisfied in order for the
underwriter exemptions to apply to offered certificates are the following:
(a) the acquisition of the certificates by a plan is on terms,
including the price for the certificates, that are at least as
favorable to the plan as they would be in an arm's-length transaction
with an unrelated party;
(b) the rights and interests evidenced by the certificates
acquired by the plan are not subordinated to the rights and interests
evidenced by other certificates of the trust;
(c) 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.;
(d) the trustee is not an affiliate of any other member of the
Restricted Group;
(e) the sum of all payments made to and retained by the
underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
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
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pooling and servicing agreement and reimbursement of this person's
reasonable expenses in connection therewith;
(f) the plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D under the
Securities Act of 1933; and
(g) in the event that all of the obligations used to fund the
trust have not been transferred to the trust on the closing date,
additional obligations of the types specified in the prospectus
supplement and/or pooling and servicing agreement having an aggregate
value equal to no more than 25% of the total principal amount of the
certificates being offered by the trust may be transferred to the
trust, in exchange for amounts credited to the account funding the
additional obligations, within a funding period of no longer than 90
days or 3 months following the closing date.
The trust fund must also meet the following requirements:
o the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools;
o certificates in the other investment pools must have been rated in
one of the three highest rating categories of Standard & Poor's,
Moody's, Fitch IBCA or Duff & Phelps for at least one year prior
to the plan's acquisition of certificates; and
o certificates evidencing interests in the other investment pools
must have been purchased by investors other than plans for at
least one (1) year prior to the plan's acquisition of
certificates.
Moreover, the underwriter exemptions provide relief from specified
self-dealing/conflict of interest prohibited transactions that may occur when
the plan fiduciary causes a plan to acquire certificates in a trust in which the
fiduciary, or its affiliate, is an obligor on the receivables held in the trust;
provided, that, among other requirements,
(1) in the case of an acquisition in connection with the initial
issuance of certificates, at least fifty percent of each class of
certificates in which plans have invested is acquired by persons
independent of the Restricted Group and at least fifty percent of
the aggregate interest in the trust is acquired by persons
independent of the Restricted Group;
(2) the fiduciary, or its affiliate, is an obligor in connection with
five percent or less of the fair market value of the obligations
contained in the trust;
(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.
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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
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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.
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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.
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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
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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
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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.
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Glossary
The following terms have the meanings given below when used in this
prospectus or the accompanying prospectus supplement.
Accrual Securities means one or more classes of securities as to which
a portion of the accrued interest will not be distributed but rather will be
added to the principal balance of the security, or notional principal balance in
the case of Accrual Securities which are also Strip Securities, on each
distribution date.
CERCLA means the federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980.
Collection Account means a segregated trust account or accounts for a
series, established and maintained with the trustee, for the benefit of the
securityholders, for the deposit of collections on the underlying loans.
Credit Enhancer means the provider of any credit enhancement for a
series, including bond insurers, guarantors and letter of credit banks.
Debt Securities means securities that are intended to be treated for
federal income tax purposes as indebtedness secured by the underlying loans held
by the issuer.
Deleted Loan means a loan which breaches the representations and
warranties made by the 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.
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Grantor Trust Fractional Interest Security means a Grantor Trust
Security representing an undivided equitable ownership interest in the principal
of the loans constituting the grantor trust, together with interest thereon at a
pass-through rate.
Grantor Trust Securities means securities representing interests in a
grantor trust which the issuer will covenant not to elect to have treated as a
REMIC or a FASIT.
Grantor Trust Strip Security means a Grantor Trust Security
representing ownership of all or a portion of the difference between interest
paid on the loans constituting the grantor trust and interest paid to the
beneficial owners of Grantor Trust Fractional Interest Securities issued by the
grantor trust.
Insurance Proceeds means all proceeds received by the servicer under
any title, hazard or other insurance policy covering any loan, other than
proceeds to be applied to the restoration or repair of the mortgaged property or
manufactured home or released to the mortgagor or obligor in accordance with the
Servicing Agreement.
Interest Rate means, for each class of securities, the rate at which
interest accrues on the securities, which may be fixed rate, adjustable rate, or
rate based upon the underlying loans, as specified in the accompanying
prospectus supplement.
Issuing Agreement means, means
o for each series of Grantor Trust Securities, REMIC Securities and
FASIT Securities, a pooling and servicing agreement,
o for each series of Debt Securities, an indenture, and
o for each series of Partnership Interests, a trust agreement or
other similar agreement.
Liquidation Proceeds means all amounts received by the servicer in
connection with the liquidation of defaulted loans or property acquired in
respect thereof, whether through foreclosure sale or otherwise, including
payments in connection with defaulted loans received from the mortgagor or
obligor other than amounts required to be paid to the mortgagor or obligor under
the terms of the applicable loan or otherwise in accordance with law.
Loan Sale Agreement means the agreement or agreement under which the
issuer obtained the loans from the 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.
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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.
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No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this prospectus supplement and
the prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the depositor or by the
underwriter. This prospectus supplement and the prospectus do not constitute an
offer to sell, or a solicitation of an offer to buy, the securities offered
hereby by anyone in any jurisdiction in which such an offer or solicitation is
not authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make any such offer or
solicitation. Neither the delivery of this prospectus supplement and the
prospectus nor any sale made hereunder shall, under any circumstances, create an
implication that information herein or therein is correct as of any time since
the date of this prospectus supplement or the prospectus.
Table of Contents
Prospectus Supplement
Table of Contents............................ S-iii
Summary...................................... S-1
Risk Factors................................. S-3
Transaction Overview......................... S-6
The Mortgage Loan Pool....................... S-7
The Originators, the Seller and the Servicer. S-18
The Owner Trustee............................ S-26
The Indenture Trustee
and the Collateral Agent..................... S-26
Description of the Notes and the Trust
Certificates................................ S-27
Servicing of the Mortgage Loans.............. S-40
The Policy................................... S-46
The Note Insurer............................. S-47
Prepayment and Yield Considerations.......... S-49
Material Federal Income Tax Consequences..... S-52
ERISA Considerations......................... S-53
Legal Investment............................. S-54
Plan of Distribution......................... S-55
Incorporation of Information by Reference.... S-55
Additional Information....................... S-56
Experts...................................... S-56
Legal Matters................................ S-56
Ratings...................................... S-56
Glossary..................................... S-57
Prospectus
Summary of Prospectus........................ 1
Risk Factors................................. 3
The Sponsor.................................. 7
Use of Proceeds.............................. 7
The Trustee.................................. 7
The Trust Funds.............................. 8
Description of the Securities................ 26
Credit Enhancement........................... 30
Prepayment and Yield Considerations.......... 33
Servicing of the Loans....................... 36
Material Legal Aspects of the Loans.......... 48
Material Federal Income Tax Consequences..... 65
State Tax Considerations..................... 86
ERISA Considerations......................... 86
Legal Investment............................. 89
Plan of Distribution......................... 91
Incorporation of Information by Reference.... 92
Additional Information....................... 92
Legal Matters................................ 94
Ratings...................................... 94
Glossary..................................... 95
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<PAGE>
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$150,000,000
[GRAPHIC OMITTED] (R)
ABFS Mortgage Loan Trust 2000-3
Issuer
American Business Credit, Inc.
Servicer
Prudential Securities
Secured Financing Corporation
Depositor
$150,000,000
Class A Notes
Mortgage-Backed Notes
Series 2000-3
--------------------
PROSPECTUS SUPPLEMENT
--------------------
Prudential Securities
September 8, 2000
================================================================================
