Prospectus supplement to prospectus dated June 23, 1999
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$211,994,000
Mortgage Lenders Network Home Equity Loan Trust 2000-1
Pass-Through Certificates, Series 2000-1
$64,000,000 Class A-1 Variable Pass-Through Rate
$62,000,000 Class A-2 7.605% Pass-Through Rate
$54,994,000 Class A-3 7.770% Pass-Through Rate
$10,000,000 Class A-4 8.040% Pass-Through Rate
$21,000,000 Class A-5 7.670% Pass-Through Rate
[MLN Logo]
Mortgage Lenders Network USA, Inc.
Seller and Servicer
Prudential Securities Secured Financing Corporation
Depositor
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You should read the section entitled The trust fund
"Risk Factors" starting on page S-7
of this prospectus supplement and o The trust fund consists primarily of a pool of fixed and
page 3 of the accompanying adjustable rate residential mortgage loans.
prospectus and consider these
factors before making a decision to The certificates
invest in the certificates.
o The Class A-1 Certificates will accrue interest at a rate
The certificates represent equal to one-month LIBOR plus a fixed margin, subject to
ownership interests in the trust certain limitations described in this prospectus supplement.
fund only and are not interests
in or obligations of any other person. o The Class A-2, Class A-3, Class A-4 and Class A-5 Certificates
will accrue interest at the fixed rates specified
Neither the certificates nor the above, subject to certain limitations described in this
underlying mortgage loans will prospectus supplement.
be insured or guaranteed by any
governmental agency or Credit enhancement
instrumentality.
o The certificates will be unconditionally and irrevocably
guaranteed as to certain payments of scheduled interest
and the ultimate payment of principal pursuant to the terms
of a financial guaranty insurance policy to be issued by
[FSA Logo]
o The certificates also have the benefit of initial
overcollateralization.
o Excess interest will be used in the early years of the
transaction to increase overcollateralization.
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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 or the accompanying
prospectus. Any representation to the contrary is a criminal offense.
The Prudential Securities Incorporated will offer the certificates
offered by this prospectus supplement from time to time at varying prices to
be determined at the time of sale. The certificates will be available for
delivery to investors in book-entry form through the facilities of The
Depository Trust Company, Clearstream Luxembourg and the Euroclear System on
or about April 14, 2000.
Prudential Securities
The date of this prospectus supplement is April 10, 2000
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Important notice about the information presented in this
prospectus supplement and the accompanying prospectus
We provide information to you about the certificates in two separate
documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
your series of certificates, and (2) this prospectus supplement, which
describes the specific terms of your series of certificates. If the
accompanying prospectus contemplates multiple options, you should rely on the
information in this prospectus supplement as to the applicable option.
We cannot sell the certificates 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.
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TABLE OF CONTENTS
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SUMMARY...........................................................................................................4
RISK FACTORS......................................................................................................7
Higher Expected Delinquencies of the Mortgage Loans........................................................7
Unpredictability of Prepayments and Effect on Yields.......................................................7
Potential Inadequacy of Credit Enhancement for the Offered Certificates....................................8
Rating of the Offered Certificates Based Primarily on Rating of the Certificate Insurer....................8
Effect of the Rate Caps on Certain Classes of Certificates.................................................8
Interest Payments May be Insufficient......................................................................8
Delay in Receipt of Liquidation Proceeds; Liquidation Proceeds May Be Less than Mortgage Loan
Balance....................................................................................................9
High Loan-to-Value Ratios Increase Risk of Loss............................................................9
Balloon Loans..............................................................................................9
Origination Risks; Seller's Reliance on Brokers and Correspondents.........................................9
The Servicer Does Not Have Any Significant Historical Loss and Delinquency Data............................9
Geographic Concentration of Mortgage Loans................................................................10
Risks Due to Prior Liens..................................................................................10
Assignment of Mortgages Will Only Be Recorded under Limited Circumstances.................................10
Other Legal Considerations................................................................................10
THE MORTGAGE POOL................................................................................................12
General...................................................................................................12
Mortgage Loan Statistics..................................................................................12
Payments on the Mortgage Loans............................................................................21
THE SELLER AND THE SERVICER......................................................................................21
Mortgage Lenders Network USA, Inc.........................................................................21
Underwriting Standards; Representations...................................................................21
The PMI Policy............................................................................................26
The Servicer..............................................................................................27
THE POOLING AND SERVICING AGREEMENT..............................................................................29
General...................................................................................................29
Assignment of the Mortgage Loans..........................................................................29
The Trustee...............................................................................................30
Servicing and Other Compensation and Payment of Expenses..................................................31
Adjustment to Servicing Fee in Connection with Certain Prepaid Mortgage Loans.............................31
Advances..................................................................................................32
Certain Matters Regarding the Certificate Insurer.........................................................32
DESCRIPTION OF THE CERTIFICATES..................................................................................33
General...................................................................................................33
Book-Entry Certificates...................................................................................33
Distributions.............................................................................................38
Deposits into the Collection Account......................................................................38
Withdrawals from the Collection Account...................................................................39
Deposits into the Certificate Account.....................................................................40
Withdrawals from the Certificate Account..................................................................40
Allocation of Available Funds.............................................................................40
Definitions...............................................................................................42
Calculation of One-Month LIBOR............................................................................45
Credit Enhancement........................................................................................46
Example of Distributions..................................................................................49
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS......................................................................50
General...................................................................................................50
Weighted Average Lives....................................................................................52
Reports to Holders of the Certificates....................................................................61
Amendment.................................................................................................62
Optional Termination......................................................................................62
Optional Purchase of Defaulted Loans......................................................................63
Events of Default; Servicer Termination Trigger Event.....................................................63
Rights Upon Event of Default or Servicer Termination Trigger Event........................................63
THE CERTIFICATE INSURER..........................................................................................64
General...................................................................................................64
Reinsurance...............................................................................................65
Ratings...................................................................................................65
Capitalization............................................................................................66
Incorporation of certain documents by reference...........................................................66
Insurance Regulation......................................................................................67
USE OF PROCEEDS..................................................................................................67
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.........................................................................67
STATE TAXES......................................................................................................68
ERISA CONSIDERATIONS.............................................................................................68
LEGAL INVESTMENT CONSIDERATIONS..................................................................................70
PLAN OF DISTRIBUTION.............................................................................................70
ADDITIONAL INFORMATION...........................................................................................71
LEGAL MATTERS....................................................................................................71
RATINGS..........................................................................................................71
EXPERTS..........................................................................................................72
INDEX OF DEFINED TERMS...........................................................................................73
ANNEX I..........................................................................................................76
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SUMMARY
o This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the offering
of the certificates, read carefully this entire document and the
accompanying prospectus.
o This summary provides an overview of certain calculations, cash flow
priorities and other information to aid your understanding and is
qualified by the full description of these calculations, cash flow
priorities and other information in this prospectus supplement and the
accompanying prospectus. Some of the information consists of
forward-looking statements relating to future economic performance or
projections and other financial items. Forward-looking statements are
subject to a variety of risks and uncertainties that could cause actual
results to differ from the projected results. Those risks and
uncertainties include, among others, general economic and business
conditions, regulatory initiatives and compliance with governmental
regulations, and various other matters, all of which are beyond our
control. Accordingly, what actually happens may be very different from
what we predict in our forward-looking statements.
Offered Certificates
The Mortgage Lenders Network Home Equity Loan Trust 2000-1 Pass-Through
Certificates, Series 2000-1 will consist of seven classes of certificates,
five of which are being offered by this prospectus supplement and the
accompanying prospectus.
Other Certificates
The trust will issue two classes of certificates that are not being offered to
the public by this prospectus supplement. These certificates will be
designated the Class X and the Class R Certificates. The Class X and the Class
R Certificates will not have original principal balances.
Cut-off Date
April 1, 2000.
Closing Date
On or about April 14, 2000.
Servicer and Seller
Mortgage Lenders Network USA, Inc., a Delaware corporation.
The Depositor
Prudential Securities Secured Financing Corporation, a Delaware corporation.
Trustee
Norwest Bank Minnesota, National Association, a national banking association.
Certificate Insurer
Financial Security Assurance Inc., a New York stock insurance company.
Designations
Each class of certificates will have different characteristics, some of which
are reflected in the following general designations.
o Offered Certificates:
Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Certificates.
o Non-accelerated Senior Certificates:
Class A-5 Certificates
o Floating Rate Certificates:
Class A-1 Certificates
o Fixed Rate Certificates:
Class A-2, Class A-3, Class A-4 and Class A-5 Certificates
o Book-Entry Certificates:
Offered Certificates
o Physical Certificates:
Class X and Class R Certificates
o Residual Certificates:
Class R Certificates
Mortgage Loans
On the closing date the trust will acquire a pool of fixed and adjustable
rate, first and junior lien residential mortgage loans. As of the cut-off
date, the mortgage loans are expected to have an aggregate outstanding
principal balance of approximately $214,136,014.
Distribution Dates
Beginning in May 2000, the trustee will make distributions on the certificates
on the 25th day of each calendar month to holders of record of the
certificates on the last day of the month preceding the month of such
distribution. If the 25th day of a month is not a business day, then the
distribution will be made on the next business day.
Payments on the Certificates
Interest Payments
The pass-through rate for each class of offered certificates will be
calculated at the per annum rates specified below, subject to the limitations
described under "Description of the Certificates" in this prospectus
supplement:
Class A-1 One-Month LIBOR+0.14%
Class A-2 7.605%
Class A-3 7.770%
Class A-4 8.040%
Class A-5 7.670%
In addition, if the majority holder of the Class X Certificates and the
servicer each fail to exercise its option to terminate the trust on the
earliest permitted date as described below under "Optional Termination", the
pass-through rates on the Class A-4 Certificates will increase to 8.540% per
annum.
Interest payable on each class of certificates accrues during an accrual
period. Except for the first accrual period, the accrual period for the Class
A-1 Certificates is the period from the distribution date in the prior month
to the day prior to the current distribution date. The first accrual period
for the Class A-1 Certificates will begin on the closing date and end on May
24, 2000. Interest will be calculated for the Class A-1 Certificates on the
basis of the actual number of days in the accrual period, based on an assumed
360-day year. The accrual period for the fixed rate certificates for any
distribution date is the prior calendar month. Interest on the fixed rate
certificates will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
Principal Payments
Principal will be distributed to holders of the offered certificates on each
distribution date in the amounts described herein under "Description of the
Certificates -- Allocation of Available Funds."
Payment Priorities
In general, funds available for distribution on any distribution date from
payments and other amounts received on the mortgage loans will be distributed,
first, to cover certain trust expenses, second, to pay interest on the offered
certificates and, third, to pay principal on the offered certificates.
Application of Excess Funds
Generally, because the payments of interest and principal on the mortgage
loans exceed the sum of trust expenses and payments of interest and principal
on the offered certificates, in the absence of delinquencies and losses on the
mortgage loans there will be excess funds each month above that required to
pay principal and interest on the offered certificates. Excess funds will be
used to pay down the certificate principal balance of the offered certificates
in order to reach a required level of overcollateralization. After reaching
the required level of overcollateralization, any excess funds remaining after
payments on the offered certificates will be distributed to the Class X
Certificates.
Advances
The servicer is required to make cash advances to cover delinquent payments of
principal and interest unless it reasonably believes that the cash advances
are not recoverable from future payments on the related mortgage loans.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the certificates and are not intended to guarantee or
insure against losses.
Compensating Interest Payments
The servicer will make interest payments to compensate in part for any
shortfall in interest payments on the certificates which result from a
mortgagor prepaying all or part of a mortgage loan. The amount of such
payments will not exceed the servicing fee payable for related period. The
certificate insurance policy does not cover shortfalls in interest arising
from prepayments.
Optional Termination
The majority holder of the Class X Certificates may purchase all of the
mortgage loans and retire the certificates when the current aggregate
certificate principal balances are equal to or less than 10% of the aggregate
certificate principal balances on the closing date. If the majority holder of
the Class X Certificates does not exercise its option to purchase the mortgage
loans then the servicer will have the option to purchase the mortgage loans.
Credit Enhancement
The credit enhancement provided for the benefit of the holders of the offered
certificates consists solely of:
o overcollateralization, and
o the certificate insurance policy.
Overcollateralization
On the closing date, the initial principal balance of the mortgage loans will
exceed the certificate principal balances of the certificates (i.e., the
mortgage balance is "overcollateralized") by approximately $2,142,000.
Furthermore, the terms of the pooling and servicing agreement are designed to
cause a limited acceleration of the offered certificates relative to the
amortization of the mortgage loans, thereby causing additional
overcollateralization. The purpose of overcollateralization is to ensure that
there are excess funds available to pay interest and principal on the offered
certificates so that the offered certificates will have some protection
against payment shortfalls.
The required level of overcollateralization may increase or decrease over
time. Any increase may result in an accelerated amortization of the offered
certificates until the required level is reached. Any decrease will result in
slower amortization of the offered certificates until the required level is
reached.
Certificate Insurance Policy
The certificate insurance policy will guaranty the payment of principal and
interest on the offered certificates to the extent described in this
prospectus supplement.
Ratings
In order to be issued, the offered certificates must be rated as follows:
Standard &
Poor's Moody's
Class Rating Rating
----- ---------- -------
A-1 AAA Aaa
A-2 AAA Aaa
A-3 AAA Aaa
A-4 AAA Aaa
A-5 AAA Aaa
These ratings may be lowered or withdrawn at any time by either of the rating
agencies.
Tax Status
In the opinion of Brown & Wood LLP, for federal income tax purposes the trust
will be characterized as comprising two "real estate mortgage investment
conduits" or "REMICs". The Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5 and Class X Certificates will constitute REMIC "regular interests". The
Class R Certificates will represent ownership of the sole class of "residual
interest " in each REMIC.
ERISA Considerations
Subject to the conditions described under "ERISA Considerations" herein, the
offered certificates may be purchased by any employee benefit plan or other
retirement arrangement subject to ERISA or the Internal Revenue Code.
Legal Investment
The certificates will not be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984.
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RISK FACTORS
The following information, which you should carefully consider,
identifies certain significant sources of risk associated with an investment
in the certificates. You should also carefully consider the information set
forth under "Risk Factors" in the prospectus.
Higher Expected Delinquencies of the Mortgage Loans
The mortgage loans were originated or acquired by various originators in
accordance, generally, with underwriting guidelines of the type described in
this prospectus supplement. In general, these guidelines are not as strict as
Fannie Mae or Freddie Mac guidelines, so the mortgage loans are likely to
experience rates of delinquency, foreclosure and bankruptcy that are higher,
and that may be substantially higher, than those experienced by mortgage loans
underwritten in accordance with higher standards.
Changes in the values of mortgaged properties related to the mortgage
loans may have a greater effect on the delinquency, foreclosure, bankruptcy
and loss experience of the mortgage loans in the trust fund than on mortgage
loans originated under stricter guidelines. We cannot assure you that the
values of the mortgaged properties have remained or will remain at levels in
effect on the dates of origination of the related mortgage loans.
Unpredictability of Prepayments and Effect on Yields
Borrowers may prepay their mortgage loans in whole or in part at any
time. We cannot predict the rate at which borrowers will repay their mortgage
loans. A prepayment of a mortgage loan generally will result in a prepayment
on the certificates.
o....If you purchase your certificates at a discount and principal
is repaid slower than you expect, then your yield may be lower
than you expect.
o....If you purchase your certificates at a premium and principal is
repaid faster than you expect, then your yield may be lower
than you expect.
o....The rate of prepayments on the mortgage loans will be sensitive
to prevailing interest rates. Generally, if prevailing interest
rates decline significantly below the interest rates on the
mortgage loans, the mortgage loans are more likely to prepay
than if prevailing rates remain above the interest rates on the
mortgage loans. Conversely, if prevailing interest rates rise
significantly, the prepayments on the mortgage loans are likely
to decrease.
o....Approximately 71.22% of the mortgage loans by aggregate
principal balance as of the cut-off date require the mortgagor
to pay a penalty if the mortgagor prepays the mortgage loan
during a specified period. A prepayment penalty may discourage
a mortgagor from prepaying the mortgage loan during the
applicable period.
o....The seller may be required to purchase mortgage loans from the
trust in the event certain breaches of representations and
warranties occur and are not cured. In addition, the servicer
has the option to purchase mortgage loans that become ninety
days or more delinquent, subject to certain limitations and
conditions described in this prospectus supplement. These
purchases will have the same effect on the holders of the
related class or classes of offered certificates as a
prepayment of the mortgage loans.
o....If the rate of default and the amount of losses on the mortgage
loans is higher than you expect, then your yield may be lower
than you expect.
o....The overcollateralization provisions are intended to result in
an accelerated rate of principal distributions to holders of
certain classes of the offered certificates.
Potential Inadequacy of Credit Enhancement for the Offered Certificates
The credit enhancement features applicable to the offered certificates
are intended to enhance the likelihood that holders of the offered
certificates will receive regular payments of interest and, if applicable,
principal. However, we cannot assure you that the credit enhancement will
adequately cover any shortfalls in cash available to pay your certificates as
a result of delinquencies or defaults on the mortgage loans. If delinquencies
or defaults occur on the mortgage loans, neither the servicer nor any other
entity will advance scheduled monthly payments of interest and principal on
delinquent or defaulted mortgage loans if such advances are not likely to be
recovered.
If substantial losses occur as a result of defaults and delinquent
payments on the mortgage loans, and the certificate insurer were unable to pay
under the financial guaranty policy, you may suffer losses.
Rating of the Offered Certificates Based Primarily on Rating of the Certificate
Insurer
The ratings on the offered certificates will depend primarily on the
claims-paying ability of the certificate insurer. Therefore, a reduction of
the rating assigned to the claims-paying ability of the certificate insurer
may result in a corresponding reduction on the ratings assigned to the offered
certificates. In general, the ratings address credit risk and do not address
the likelihood of prepayments.
Effect of the Rate Caps on Certain Classes of Certificates
The Class A-1, Class A-3, Class A-4 and Class A-5 Certificates will
accrue interest at the respective pass-through rates specified on the cover of
this prospectus supplement, but in each case will be subject to a rate cap.
The rate cap in each case will be based on the weighted average of the
interest rates of the mortgage loans net of certain trust expenses. 88.58% of
the mortgage loans accrue interest at various fixed rates. As a result, the
Class A-1, Class A-3, Class A-4 and Class A-5 Certificates may accrue less
interest than they would accrue if their rates were calculated solely on the
basis set forth on the cover. The related classes of certificates do not
provide for any "carry-forward" or "catch-up" if the amount of interest paid
to the holders of such certificates is reduced.
Interest Payments May be Insufficient
When a mortgage loan is prepaid in full or in part, the borrower is
charged interest only up to the date on which payment is made, rather than for
an entire month. This may result in a shortfall in interest collections
available for payment on the next distribution date. The servicer is required
to cover the shortfall in interest collections that are attributable to
prepayments in full or in part, but only up to the amount of the servicer's
fee for the related accrual period. The certificate insurer will not be
required to cover this shortfall. If the other credit enhancement is
insufficient to cover this shortfall in excess of the servicing fee, it may
adversely affect the yield on your investment.
Furthermore, certain shortfalls in interest collections arising from the
application of the Soldiers' and Sailors' Civil Relief Act of 1940 will not be
covered by either the servicer or the certificate insurer.
Delay in Receipt of Liquidation Proceeds; Liquidation Proceeds May Be Less
than Mortgage Loan Balance
Substantial delays could be encountered in connection with the
liquidation of delinquent mortgage loans. Further, liquidation expenses such
as legal fees, real estate taxes and maintenance and preservation expenses may
reduce the portion of liquidation proceeds payable to you. If a mortgaged
property fails to provide adequate security for the mortgage loan, you will
incur a loss on your investment if the certificate insurer fails to perform
its obligations under the certificate insurance policy and the other credit
enhancements are insufficient to cover the loss.
High Loan-to-Value Ratios Increase Risk of Loss
Mortgage loans with higher loan-to-value ratios may present a greater
risk of loss than mortgage loans with loan-to-value ratios of 80% or below.
Approximately 27.82% of the mortgage loans based on aggregate principal
balance as of the cut-off date had loan-to-value ratios in excess of 80%, but
no more than 100%, at origination. Approximately 23.22% of these mortgage
loans are not covered by a primary mortgage insurance policy. If borrowers
without primary mortgage insurance default on their mortgage loans, there is a
greater likelihood of losses than if the loans were insured. We cannot assure
you that the applicable credit enhancement will be adequate to cover those
losses.
Balloon Loans
Approximately 27.48% of the mortgage loans are balloon loans. Balloon
loans pose a special payment risk because the borrower must make a large lump
sum payment of principal at the end of the loan term. If the borrower is
unable to pay the lump sum or refinance the amount owed, you may suffer a loss
if the collateral for the loan is insufficient and the other forms of credit
enhancement are insufficient or unavailable to cover the loss.
Origination Risks; Seller's Reliance on Brokers and Correspondents
The seller depends largely on independent mortgage brokers and, to a
lesser extent, on correspondent lenders, for its originations and purchases of
mortgage loans, including the mortgage loans. All brokers and correspondents
in the seller's network must undergo an approval process and enter into an
agreement with the seller pursuant to which the broker or correspondent agrees
to comply with the seller's eligibility and origination requirements.
Generally, the seller underwrites all loans it funds through brokers and
purchases through correspondents, and regularly reviews the performance of
loans originated or purchased through its brokers and correspondents as well
as undertakes pre-closing and post-closing quality control procedures
involving random samples of loans to confirm that the loans are being
originated and underwritten in accordance with its guidelines (subject to
exceptions approved by the seller prior to loan funding). However, with
respect to $107,199,488 of the mortgage loans which were purchased from FC
Capital Corp., the Seller has independently underwritten only a sample of
these mortgage loans to determine conformance with its own guidelines.
The Servicer Does Not Have Any Significant Historical Loss and Delinquency Data
The servicer commenced its servicing activities for mortgage loans in
April 1997. As a result, the servicer has limited historical data available
regarding loan performance. Consequently, the servicer has been unable to
develop meaningful statistics relating to the historical performance of the
mortgage loans in its servicing portfolio. As a result, it is unknown how the
servicer's mortgage loan portfolio will perform relative to the portfolios of
other mortgage lenders and servicers. There can be no assurance regarding the
level of losses and delinquencies that the mortgage loans will experience.
Geographic Concentration of Mortgage Loans
New York with approximately 15.59% of the mortgage loans and Michigan
with approximately 7.70% of the mortgage loans (by aggregate principal
balances as of the cut-off date) have the highest concentrations of mortgage
loans.
The conditions described below will have a disproportionate impact on the
mortgage loans in general.
o....Economic conditions in states listed above that may or may not
affect real property values may affect the ability of borrowers
to repay their loans on time.
o....Declines in the residential real estate markets in the states
listed above may reduce the values of properties located in
those states, which would result in an increase in the
loan-to-value ratios.
o....Any increase in the market value of properties located in the
states listed above would reduce the loan-to-value ratios.
Lower loan-to-value ratios could make alternative sources of
financing available to the borrowers at lower interest rates,
which could result in an increased rate of prepayment of the
mortgage loans.
Risks Due to Prior Liens
Approximately 11.43% of the mortgage loans are secured by liens junior to
one or more senior liens on the related mortgaged properties. In general, a
junior lienholder may not foreclose on the related mortgaged property unless
it forecloses subject to the senior lien(s), in which case it must either pay
the entire amount due under the senior mortgage or agree to make payments
under the senior mortgage if the borrower is in default thereunder. As a
result, in general, the servicer does not expect to foreclose on mortgage
loans secured by junior liens.
Assignment of Mortgages Will Only Be Recorded under Limited Circumstances
Under the terms of the mortgage loan sale agreement between the seller
and the depositor, during the period that the certificates are outstanding,
assignments of the mortgages in favor of the trustee will be delivered in
recordable form but will not be recorded, except in certain limited instances.
The failure to record assignments of the mortgages in favor of the trustee in
many states in which the mortgaged properties are located will have the result
of making the sale of the mortgage loans potentially ineffective against:
o any creditors of the seller who may have been fraudulently or
inadvertently induced to rely on the mortgage loans as assets of the
seller, or
o any purchaser (in the event the seller fraudulently or inadvertently
sells a mortgage loan to a purchaser) who had no notice of the prior
sale to the depositor and such purchaser takes possession of the
mortgage.
Other Legal Considerations
Federal and state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices, among
other factors:
o regulate interest rates and other charges on mortgage loans;
o require certain disclosures to borrowers;
o require licensing of the seller and other originators; and
o regulate generally the origination, servicing and collection process
for the mortgage loans.
For example, as of the Cut-off Date, approximately 6.71% of the mortgage
loans (by aggregate principal balance as of the cut-off date), are subject to
the Riegle Community Development and Regulatory Improvement Act of 1994. The
Riegle Act incorporates the Home Ownership and Equity Protection Act of 1994
and certain regulations of the Truth-In-Lending Act. The Riegle Act imposes
additional disclosure and other requirements on creditors with respect to non-
purchase money home equity loans with high interest rates or high upfront fees
and charges.
Depending on the specific facts and circumstances involved, violations of
laws such as the Riegle Act may limit the ability of the trust to collect on
the mortgage loans, may entitle the borrower to a refund of amounts previously
paid and could result in liability for damages and administrative enforcement.
In addition, there may be circumstances in which the trust, as owner of the
mortgage loans, would be subject to all of the claims and defenses that a
borrower could assert against the original lender. As a result, the trust may
be subject to damages and administrative penalties arising out of unlawful
lending practices if it is determined that a violation has occurred.
<PAGE>
THE MORTGAGE POOL
The information set forth in the following paragraphs has been provided
by Mortgage Lenders Network USA, Inc. in its capacity as seller (the
"Seller"). None of the Depositor, the Underwriter, the Trustee, the
Certificate Insurer or any of their respective affiliates have made or will
make any representations as to the accuracy or completeness of such
information.
General
The mortgage pool is expected to include 3,133 mortgage loans (the
"Mortgage Loans") evidenced by mortgage notes (the "Mortgage Notes") secured
by first or junior lien mortgages or deeds of trust (the "Mortgages") on the
related mortgaged properties (the "Mortgaged Properties"). All of the Mortgage
Loans are sometimes referred to herein as the "Mortgage Pool." This subsection
describes generally the characteristics of the Mortgage Loans. The Mortgaged
Properties consist of owner-occupied properties and non-owner-occupied
investment properties. The Mortgaged Properties do not include mobile homes
which are not permanently affixed to the ground, commercial properties or
unimproved land. With respect to each Mortgage Loan, the "Cut-off Date Loan
Balance" is the unpaid principal balance of such Mortgage Loan as of the
opening of business on the Cut-off Date taking into account all scheduled
payments of principal due on or before the Cut-off Date, whether or not
received.
Mortgage Loans included in the Trust consist of fixed and adjustable rate
loans from the Seller's portfolio that are not delinquent in excess of the
levels permitted in the Pooling and Servicing Agreement. Pursuant to the
Pooling and Servicing Agreement, the Seller will make various representations
and warranties regarding the Mortgage Loans. See "The Pooling and Servicing
Agreement -- Assignment of the Mortgage Loans."
References herein to percentages of the Mortgage Loans mean percentages
based on the aggregate of the Cut-off Date Loan Balances of the Mortgage
Loans, unless otherwise specified.
Mortgage Loan Statistics
The Mortgage Loans are expected to consist of Mortgage Notes secured by
Mortgages on Mortgaged Properties located in 44 states and the District of
Columbia. Approximately 88.57% of the Mortgage Loans are secured by first
liens on the related Mortgaged Properties, and the remainder are secured by
junior liens on the related Mortgaged Properties. The aggregate Cut-off Date
Loan Balances of the Mortgage Loans (the "Cut-off Date Loan Balance") totaled
approximately $214,136,014. The Mortgage Loans bear interest at Loan Rates
ranging from approximately 6.95% to 15.65% per annum. The weighted average
Loan Rate for the Mortgage Loans was approximately 10.60% per annum. The
lowest Cut-off Date Loan Balance of any Mortgage Loan was approximately $7,575
and the highest was approximately $475,552. The average Cut-off Date Loan
Balance of the Mortgage Loans was approximately $68,349. The weighted average
original term to stated maturity of the Mortgage Loans was approximately 273
months. The weighted average remaining term to stated maturity of the Mortgage
Loans was approximately 265 months. As of the Cut-off Date, the weighted
average number of months that have elapsed since origination of the Mortgage
Loans was approximately 8 months. The lowest and highest Combined
Loan-to-Value Ratios of the Mortgage Loans at origination were approximately
12.74% and 100%, respectively. The weighted average Combined Loan-to-Value
Ratio of the Mortgage Loans was approximately 76.85%. The weighted average
Combined Loan-to-Value Ratio of the Mortgage Loans that are junior lien
Mortgage Loans was approximately 75.89%. As of the Cut-off Date, 277 Mortgage
Loans were adjustable rate Mortgage Loans, representing 11.42% of the Cut-off
Date Loan Balances.
Each adjustable rate Mortgage Loan has an interest rate equal to the sum
of a specified index and a gross margin, subject to periodic caps and lifetime
minimum and maximum rates. The index used with respect to each adjustable rate
Mortgage Loan is the average of interbank offered rates for six-month U.S.
dollar-denominated deposits in the London market ("Six-Month LIBOR"). As a
percentage of Cut-off Date Loan Balance, approximately 94.23% of the
adjustable rate Mortgage Loans have interest rates which first adjust after an
initial period of two years following origination and then adjust every 6
months thereafter; and approximately 5.60% of the adjustable rate Mortgage
Loans have interest rates which first adjust after an initial period of three
years following origination and then adjust every 6 months thereafter.
As of March 31, 2000, approximately 1.45% of the Mortgage Loans were
30-59 days Delinquent, and approximately 0.13% of the Mortgage Loans were 60
days Delinquent.
<TABLE>
<CAPTION>
Loan Balance of the Mortgage Loans
Aggregate Percentage of
Number of Cut-off Date Aggregate Cut-off
Range of Loan Balances Mortgage Loans Loan Balance Date Loan Balance
---------------------- -------------- ------------ -----------------
<S> <C> <C> <C>
$ 0.01 - 25,000.00................ 339 $ 6,610,729.54 3.09%
25,000.01 - 50,000.00................ 941 35,233,068.28 16.45
50,000.01 - 75,000.00................ 847 51,850,773.65 24.21
75,000.01 - 100,000.00................ 450 38,792,776.61 18.12
100,000.01 - 125,000.00................ 236 26,269,658.58 12.27
125,000.01 - 150,000.00................ 132 17,947,421.75 8.38
150,000.01 - 175,000.00................ 81 13,077,733.45 6.11
175,000.01 - 200,000.00................ 41 7,597,208.21 3.55
200,000.01 - 225,000.00................ 25 5,305,890.92 2.48
225,000.01 - 250,000.00................ 18 4,251,937.37 1.99
250,000.01 - 275,000.00................ 7 1,850,910.04 0.86
275,000.01 - 300,000.00................ 7 2,052,424.23 0.96
300,000.01 - 325,000.00................ 2 609,263.19 0.28
325,000.01 - 350,000.00................ 2 692,217.19 0.32
350,000.01 - 375,000.00................ 2 706,551.81 0.33
400,000.01 - 425,000.00................ 2 811,897.11 0.38
475,000.01 - 500,000.00................ 1 475,551.67 0.22
----- --------------- ------
Total............................. 3,133 $214,136,013.60 100.00%
===== =============== ======
</TABLE>
<TABLE>
<CAPTION>
Loan Rates of the Mortgage Loans
Aggregate Percentage of
Number of Cut-off Date Aggregate Cut-off
Range of Loan Rates Mortgage Loans Loan Balance Date Loan Balance
------------------- -------------- ------------ -----------------
<S> <C> <C> <C>
6.501 - 7.000%........................ 1 $ 89,925.49 0.04%
7.001 - 7.500......................... 5 482,889.11 0.23
7.501 - 8.000......................... 34 3,438,199.67 1.61
8.001 - 8.500......................... 74 7,431,830.34 3.47
8.501 - 9.000......................... 175 15,458,011.52 7.22
9.001 - 9.500......................... 208 17,953,331.68 8.38
9.501 - 10.000......................... 456 34,729,267.87 16.22
10.001 - 10.500......................... 427 30,989,690.06 14.47
10.501 - 11.000......................... 537 35,496,256.30 16.58
11.001 - 11.500......................... 352 20,940,948.77 9.78
11.501 - 12.000......................... 340 19,199,290.20 8.97
12.001 - 12.500......................... 195 10,877,172.73 5.08
12.501 - 13.000......................... 149 7,962,565.23 3.72
13.001 - 13.500......................... 84 4,246,354.50 1.98
13.501 - 14.000......................... 58 2,868,556.51 1.34
14.001 - 14.500......................... 20 1,047,301.10 0.49
14.501 - 15.000......................... 12 678,383.88 0.32
15.00 and greater........................ 6 246,038.64 0.11
----- --------------- ------
Total............................ 3,133 $214,136,013.60 100.00%
===== =============== ======
</TABLE>
<TABLE>
<CAPTION>
Combined Loan-to-Value Ratios of the Mortgage Loans
Aggregate Percentage of
Range of Combined Number of Cut-off Date Aggregate Cut-off
Loan-to-Value Ratios Mortgage Loans Loan Balance Date Loan Balance
-------------------- -------------- ------------ -----------------
<S> <C> <C> <C>
10.001 - 20.000%....................... 15 $ 415,667.94 0.19%
20.001 - 30.000........................ 43 1,537,470.47 0.72
30.001 - 40.000........................ 53 2,419,744.49 1.13
40.001 - 50.000........................ 90 4,547,242.52 2.12
50.001 - 60.000........................ 176 9,028,788.66 4.22
60.001 - 70.000........................ 458 26,592,113.52 12.42
70.001 - 80.000........................ 1,398 100,996,392.59 47.16
80.001 - 90.000........................ 889 67,765,449.94 31.65
90.001 - 100.000........................ 11 833,143.47 0.39
----- --------------- ------
Total............................ 3,133 $214,136,013.60 100.00%
===== =============== ======
</TABLE>
The weighted average Combined Loan-to-Value Ratio at origination of the
Mortgage Loans was approximately 76.85%. See "The Seller and the Servicer"
- --Underwriting Standards; Representations" herein.
<TABLE>
<CAPTION>
Geographic Distribution of Mortgaged Properties of the Mortgage Loans
Aggregate Percentage of
Number of Cut-off Date Aggregate Cut-off
Location Mortgage Loans Loan Balance Date Loan Balance
-------- -------------- ---------------- -----------------
<S> <C> <C> <C>
Alabama.............................................. 19 $ 1,051,960.56 0.49%
Arizona.............................................. 52 3,960,040.34 1.85
Arkansas............................................. 11 753,964.13 0.35
California........................................... 13 1,231,474.02 0.58
Colorado............................................. 60 4,060,394.69 1.90
Connecticut.......................................... 67 5,914,837.83 2.76
Delaware............................................. 5 328,629.22 0.15
District of Columbia................................. 9 875,518.14 0.41
Florida.............................................. 180 12,580,734.70 5.88
Georgia.............................................. 92 6,439,072.42 3.01
Idaho................................................ 5 238,886.08 0.11
Illinois............................................. 215 13,399,189.92 6.26
Indiana.............................................. 67 4,022,763.68 1.88
Iowa................................................. 7 367,392.13 0.17
Kansas............................................... 11 585,173.21 0.27
Kentucky............................................. 85 4,928,660.99 2.30
Louisiana............................................ 14 964,286.67 0.45
Maine................................................ 8 724,156.48 0.34
Maryland............................................. 107 6,335,368.63 2.96
Massachusetts........................................ 136 11,140,509.97 5.20
Michigan............................................. 263 16,481,113.47 7.70
Minnesota............................................ 9 507,501.10 0.24
Mississippi.......................................... 19 1,379,785.89 0.64
Missouri............................................. 222 10,991,982.55 5.13
Nebraska............................................. 3 128,434.06 0.06
Nevada............................................... 2 157,272.47 0.07
New Hampshire........................................ 19 1,753,701.49 0.82
New Jersey........................................... 92 6,845,603.31 3.20
New Mexico........................................... 33 2,272,827.96 1.06
New York............................................. 402 33,377,893.72 15.59
North Carolina....................................... 113 7,283,746.70 3.40
Ohio................................................. 184 12,558,823.82 5.86
Oklahoma............................................. 51 2,608,840.20 1.22
Oregon............................................... 3 280,014.25 0.13
Pennsylvania......................................... 209 13,427,677.59 6.27
Rhode Island......................................... 19 1,713,241.80 0.80
South Carolina....................................... 137 9,564,187.66 4.47
Tennessee............................................ 90 5,617,865.67 2.62
Texas................................................ 15 1,182,605.71 0.55
Utah................................................. 6 535,078.51 0.25
Vermont.............................................. 4 477,661.00 0.22
Virginia............................................. 49 3,583,054.87 1.67
Washington........................................... 2 181,591.42 0.08
West Virginia........................................ 13 660,107.62 0.31
Wisconsin............................................ 11 662,386.95 0.31
----- --------------- ------
Total...................................... 3,133 $214,136,013.60 100.00%
----- --------------- ------
</TABLE>
No more than 0.45% of the Mortgage Loans by Cut-off Date Loan Balance will
be secured by Mortgaged Properties located in any one five digit zip code area.
<TABLE>
<CAPTION>
Mortgage Loan Purpose of the Mortgage Loans
Aggregate Percentage of
Number of Cut-off Date Aggregate Cut-off
Purpose Mortgage Loans Loan Balance Date Loan Balance
--------------- -------------- ------------ ------------------
<S> <C> <C> <C>
Refinance Cash Out......................... 2,294 $147,386,186.05 68.83%
Purchase................................... 353 28,133,762.52 13.14
Refinance Rate/Term........................ 486 38,616,065.03 18.03
----- --------------- ------
Total............................ 3,133 $214,136,013.60 100.00%
===== =============== ======
</TABLE>
<TABLE>
<CAPTION>
Mortgage Loan Documentation Types of the Mortgage Loans
Aggregate Percentage of
Number of Cut-off Date Aggregate Cut-off
Documentation(1) Mortgage Loans Loan Balance Date Loan Balance
-------------------- -------------- ------------ ------------------
<S> <C> <C> <C>
Full Documentation......................... 2,625 $176,346,040.21 82.35%
Limited.................................... 89 7,577,557.09 3.54
Stated..................................... 419 30,212,416.30 14.11
----- --------------- ------
Total............................ 3,133 $214,136,013.60 100.00%
===== =============== ======
(1) See "The Seller and the Servicer--Underwriting Guidelines; Representations".
</TABLE>
<TABLE>
<CAPTION>
Occupancy Status of the Mortgage Loans
Aggregate Percentage of
Number of Cut-off Date Aggregate Cut-off
Occupancy Mortgage Loans Loan Balance Date Loan Balance
--------------- -------------- ------------ ------------------
<S> <C> <C> <C>
Primary.................................... 2,884 $200,684,096.45 93.72%
Secondary.................................. 8 547,124.56 0.26
Investor................................... 241 12,904,792.59 6.03
----- --------------- ------
Total............................ 3,133 $214,136,013.60 100.00%
===== =============== ======
</TABLE>
<TABLE>
<CAPTION>
Mortgage Property Type of the Mortgage Loans
Aggregate Percentage of
Number of Cut-off Date Aggregate Cut-off
Property Type Mortgage Loans Loan Balance Date Loan Balance
------------------ -------------- ------------ ------------------
<S> <C> <C> <C>
2-4 Family................................. 259 $ 21,376,662.31 9.98%
Condominium................................ 48 3,262,396.30 1.52
Manufactured Housing....................... 265 17,044,357.36 7.96
Multifamily................................ 2 177,160.89 0.08
Planned Unit Development................... 31 2,696,056.72 1.26
Single Family.............................. 2,527 169,494,404.40 79.15
Townhouse.................................. 1 84,975.62 0.04
----- --------------- ------
Total............................ 3,133 $214,136,013.60 100.00%
===== =============== ======
</TABLE>
<TABLE>
<CAPTION>
Seasoning of the Mortgage Loans
Aggregate Percentage of
Number of Cut-off Date Aggregate Cut-off
Seasoning (in months) Mortgage Loans Loan Balance Date Loan Balance
-------------------- -------------- ------------ ------------------
<S> <C> <C> <C>
0................................. 55 $ 3,124,988.75 1.46%
1 - 6................................. 1,605 108,634,602.14 50.73
7 - 12................................. 614 37,174,701.21 17.36
13 - 18................................. 845 63,581,059.27 29.69
19 - 24................................. 13 1,565,519.77 0.73
25 - 30................................. 1 55,142.46 0.03
----- --------------- ------
Total............................ 3,133 $214,136,013.60 100.00%
===== =============== ======
</TABLE>
<TABLE>
<CAPTION>
Original Term to Maturity of the Mortgage Loans
Aggregate Percentage of
Original Term to Maturity Number of Cut-off Date Aggregate Cut-off
(in months) Mortgage Loans Loan Balance Date Loan Balance
---------------------------- -------------- ------------ ------------------
<S> <C> <C> <C>
36 - 40............................. 1 $ 12,621.66 0.01%
56 - 60............................. 23 500,743.00 0.23
71 - 75............................. 4 79,911.43 0.04
81 - 85............................. 14 406,408.48 0.19
96 - 100............................. 5 305,682.21 0.14
106 - 110............................. 2 136,008.48 0.06
116 - 120............................. 146 4,220,246.08 1.97
131 - 135............................. 2 57,629.31 0.03
141 - 145............................. 6 285,943.49 0.13
156 - 160............................. 2 106,453.21 0.05
166 - 170............................. 3 121,905.57 0.06
176 - 180............................. 1,304 79,633,896.05 37.19
191 - 195............................. 1 200,509.49 0.09
216 - 220............................. 1 44,040.19 0.02
236 - 240............................. 365 20,532,838.13 9.59
251 - 255............................. 1 42,938.11 0.02
296 - 300............................. 58 3,890,038.28 1.82
321 - 325............................. 1 112,082.23 0.05
336 - 340............................. 1 113,278.61 0.05
346 - 350............................. 4 345,125.54 0.16
351 and greater.......................... 1,189 102,987,714.05 48.09
----- --------------- ------
Total............................ 3,133 $214,136,013.60 100.00%
===== =============== ======
</TABLE>
<TABLE>
<CAPTION>
Remaining Term to Maturity of the Mortgage Loans
Aggregate Percentage of
Number of Cut-off Date Aggregate Cut-off
Remaining Term to Maturity (in months) Mortgage Loans Loan Balance Date Loan Balance
-------------------------------------- -------------- ------------ ------------------
<S> <C> <C> <C>
21 - 25............................. 1 $ 12,621.66 0.01%
41 - 45............................. 1 22,954.79 0.01
46 - 50............................. 11 186,593.24 0.09
51 - 55............................. 7 168,136.34 0.08
56 - 60............................. 4 123,058.63 0.06
61 - 65............................. 3 60,499.51 0.03
66 - 70............................. 4 122,495.63 0.06
71 - 75............................. 5 93,190.30 0.04
76 - 80............................. 6 210,134.47 0.10
81 - 85............................. 2 97,364.18 0.05
86 - 90............................. 1 79,586.71 0.04
91 - 95............................. 2 128,731.32 0.06
96 - 100............................. 1 36,672.38 0.02
101 - 105............................. 28 840,860.06 0.39
106 - 110............................. 48 1,340,002.04 0.63
111 - 115............................. 40 1,065,850.23 0.50
116 - 120............................. 32 1,101,118.15 0.51
121 - 125............................. 1 29,381.01 0.01
126 - 130............................. 1 23,547.67 0.01
131 - 135............................. 3 135,005.08 0.06
141 - 145............................. 2 127,390.74 0.06
146 - 150............................. 1 55,142.46 0.03
151 - 155............................. 3 178,179.62 0.08
156 - 160............................. 5 500,517.25 0.23
161 - 165............................. 228 15,984,473.27 7.46
166 - 170............................. 248 13,126,364.68 6.13
171 - 175............................. 125 6,201,336.03 2.90
176 - 180............................. 699 43,816,241.52 20.46
191 - 195............................. 1 200,509.49 0.09
211 - 215............................. 1 44,040.19 0.02
216 - 220............................. 1 43,928.16 0.02
221 - 225............................. 54 2,935,456.92 1.37
226 - 230............................. 93 5,120,186.32 2.39
231 - 235............................. 55 2,854,474.78 1.33
236 - 240............................. 162 9,578,791.95 4.47
251 - 255............................. 1 42,938.11 0.02
281 - 285............................. 2 61,132.78 0.03
286 - 290............................. 17 1,134,400.56 0.53
291 - 295............................. 12 563,982.83 0.26
296 - 300............................. 27 2,130,522.11 0.99
321 - 325............................. 1 112,082.23 0.05
326 - 330............................. 1 113,278.61 0.05
336 - 340............................. 2 175,614.55 0.08
341 - 345............................. 213 21,183,463.45 9.89
346 - 350............................. 268 25,668,946.43 11.99
351 - 355............................. 183 14,570,879.68 6.80
356 and greater........................... 527 41,733,935.48 19.49
----- --------------- ------
Total............................ 3,133 $214,136,013.60 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average remaining term to maturity of
the Mortgage Loans was approximately 265.32 months.
<TABLE>
<CAPTION>
Maximum Loan Rates of the Adjustable Rate Mortgage Loans
Number of Aggregate Percentage of
Range of Maximum Adjustable Rate Cut-off Date Aggregate Cut-off
Loan Rates Mortgage Loans Loan Balance Date Loan Balance
---------- --------------- ------------ ------------------
<S> <C> <C> <C>
13.501 - 14.000%.......................... 1 $ 294,141.35 1.20%
14.001 - 14.500........................ 4 727,624.40 2.98
14.501 - 15.000........................ 4 370,744.03 1.52
15.001 - 15.500........................ 15 1,787,325.37 7.31
15.501 - 16.000........................ 12 1,353,902.61 5.54
16.001 - 16.500........................ 25 2,562,497.24 10.48
16.501 - 17.000........................ 39 3,744,025.18 15.31
17.001 - 17.500........................ 39 3,038,759.46 12.43
17.501 - 18.000........................ 45 3,698,243.80 15.12
18.001 - 18.500........................ 29 2,362,150.01 9.66
18.501 - 19.000........................ 27 2,102,396.27 8.60
19.001 - 19.500........................ 14 802,626.45 3.28
19.501 - 20.000........................ 13 948,441.09 3.88
20.001 and greater....................... 10 661,563.59 2.71
--- -------------- ------
Total............................ 277 $24,454,440.85 100.00%
--- -------------- ------
</TABLE>
<TABLE>
<CAPTION>
Minimum Loan Rates of the Adjustable Rate Mortgage Loans
Number of Aggregate Percentage of
Range of Minimum Adjustable Rate Cut-off Date Aggregate Cut-off
Loan Rates Mortgage Loans Loan Balance Date Loan Balance
---------- --------------- ------------ ------------------
<S> <C> <C> <C>
5.001 - 5.500%....................... 1 $ 94,187.26 0.39%
7.001 - 7.500........................ 1 71,369.40 0.29
7.501 - 8.000........................ 2 341,436.95 1.40
8.001 - 8.500........................ 7 1,010,160.00 4.13
8.501 - 9.000........................ 9 984,112.24 4.02
9.001 - 9.500........................ 24 2,616,075.30 10.70
9.501 - 10.000........................ 36 3,457,144.74 14.14
10.001 - 10.500........................ 45 4,065,254.83 16.62
10.501 - 11.000........................ 51 4,504,108.23 18.42
11.001 - 11.500........................ 33 2,587,658.02 10.58
11.501 - 12.000........................ 30 2,276,651.08 9.31
12.001 - 12.500........................ 15 836,278.12 3.42
12.501 - 13.000........................ 13 948,441.09 3.88
13.001 - 13.500........................ 8 546,147.54 2.23
13.501 - 14.000........................ 1 59,452.24 0.24
14.501 - 15.000........................ 1 55,963.81 0.23
--- -------------- ------
Total............................ 277 $24,454,440.85 100.00%
--- -------------- ------
</TABLE>
<TABLE>
<CAPTION>
Gross Margins of the Adjustable Rate Mortgage Loans
Number of Aggregate Percentage of
Adjustable Rate Cut-off Date Aggregate Cut-off
Gross Margins Mortgage Loans Loan Balance Date Loan Balance
----------------------- --------------- ------------ ------------------
<S> <C> <C> <C>
4.001 - 4.500%....................... 4 $ 762,149.60 3.12%
4.501 - 5.000........................ 2 249,010.23 1.02
5.001 - 5.500........................ 14 1,386,651.17 5.67
5.501 - 6.000........................ 19 1,866,540.56 7.63
6.001 - 6.500........................ 44 4,500,403.48 18.40
6.501 - 7.000........................ 40 3,555,552.99 14.54
7.001 - 7.500........................ 44 3,942,514.45 16.12
7.501 - 8.000........................ 29 2,234,614.57 9.14
8.001 - 8.500........................ 32 2,584,977.40 10.57
8.501 - 9.000........................ 28 1,913,453.68 7.82
9.001 - 9.500........................ 9 580,016.80 2.37
9.501 - 10.000........................ 11 822,592.11 3.36
10.001 - 10.500........................ 1 55,963.81 0.23
--- -------------- -----
Total............................ 277 $24,454,440.85 100.00%
--- -------------- ------
</TABLE>
<TABLE>
<CAPTION>
Next Loan Rate Adjustment Date of the Adjustable Rate Mortgage Loans
Number of Aggregate Percentage of
Month and Year of Next Adjustable Rate Cut-off Date Aggregate Cut-off
Loan Rate Adjustment Date Mortgage Loans Loan Balance Date Loan Balance
------------------------- --------------- ------------ ------------------
<S> <C> <C> <C>
September 2000............................. 3 $ 234,196.24 0.96%
October 2000............................... 1 104,460.58 0.43
November 2000.............................. 9 1,133,277.71 4.63
December 2001.............................. 15 1,373,086.76 5.61
January 2001............................... 7 591,440.03 2.42
February 2001.............................. 15 1,958,509.63 8.01
March 2001................................. 4 424,394.59 1.74
April 2001................................. 3 286,003.29 1.17
May 2001................................... 9 608,940.37 2.49
June 2001.................................. 4 229,018.73 0.94
July 2001.................................. 1 252,088.77 1.03
August 2001................................ 1 47,909.24 0.20
September 2001............................. 7 562,855.01 2.30
October 2001............................... 9 768,205.31 3.14
November 2001.............................. 27 2,389,768.78 9.77
December 2001.............................. 26 1,625,477.35 6.65
January 2002............................... 28 2,153,933.68 8.81
February 2002.............................. 47 3,917,820.80 16.02
March 2002................................. 52 5,135,915.38 21.00
April 2002................................. 4 337,437.13 1.38
May 2002................................... 3 174,092.40 0.71
June 2002.................................. 2 145,609.07 0.60
--- -------------- ------
Total............................ 277 $24,454,440.85 100.00%
--- -------------- ------
</TABLE>
<PAGE>
Payments on the Mortgage Loans
Substantially all of the Mortgage Loans provide for monthly payments by
the related Mortgagor according to the actuarial method (such Mortgage Loans,
"Actuarial Loans"). Actuarial Loans provide that interest is charged to the
Mortgagors thereunder, and payments are due from such Mortgagors, as of a
scheduled day of each month that is fixed at the time of origination.
Scheduled monthly payments made by Mortgagors on the Actuarial Loans either
earlier or later than the scheduled due dates thereof will not affect the
amortization schedule or the relative application of such payments to
principal and interest.
THE SELLER AND THE SERVICER
Mortgage Lenders Network USA, Inc.
Mortgage Lenders Network USA, Inc., the Seller under the Mortgage Loan
Purchase Agreement and the Servicer under the Pooling and Servicing Agreement,
is a Delaware corporation and a full service mortgage banker engaged in the
business of originating, purchasing, selling and servicing mortgage loans on
one- to four-family residential properties. The Seller's mortgage loans are
primarily made to borrowers whose borrowing needs are generally not being
served by traditional financial institutions because of impaired or limited
credit profiles. The Seller was formed in November 1996. The Seller currently
originates its mortgage loans primarily through independent licensed brokers
and its retail origination offices, and purchases mortgage loans from approved
correspondents. See "--Underwriting Standards; Representations" and "--The
Servicer" below.
The principal stockholders of the Seller have entered into a letter of
intent to sell as much as 80% of the capital stock of the Seller to a private
investor. The Seller expects that the transaction will be consummated in the
second quarter of 2000. There can be no assurance, however, that the
transaction will be consummated, or that it will be concluded within the
expected time frame.
The Seller has its principal offices at Middlesex Corporate Center, 213
Court Street, Middletown, Connecticut 06457 (telephone number: (860)
344-5700).
Underwriting Standards; Representations
The information set forth below with regard to the Seller's underwriting
standards has been provided to the Depositor or compiled from information
provided to the Depositor by the Seller. None of the Depositor, the Trustee,
the Underwriter or any of their respective affiliates has made any independent
investigation of such information or has made or will make any representation
as to the accuracy or completeness of such information.
The Mortgage Loans were or will be originated by the Seller or acquired
by the Seller from mortgage bankers or brokers generally in accordance with
the Underwriting Guidelines. Although approximately half of the Mortgage Loans
have been underwritten by the Seller in accordance with the following
standards, approximately $107,199,488 of the Mortgage Loans will be purchased
by the Seller on the Closing Date from FC Capital Corp. FC Capital Corp.'s
guidelines are substantially similar to those of the Seller, and an
independent underwriting of a sampling of those Mortgage Loans has been
performed by the Seller to determine conformance of the underwriting by FC
Capital Corp. with the Seller's Underwriting Guidelines.
The Seller's underwriting standards are primarily intended to assess the
ability and willingness of the borrower to repay the debt and to evaluate the
adequacy of the mortgaged property as collateral for the mortgage loan. All of
the Mortgage Loans were underwritten with a view toward the resale thereof in
the secondary mortgage market. The Seller considers, among other things, a
mortgagor's credit history, repayment ability and debt service to income ratio
("debt-to-income ratio"), as well as the value, type and use of the mortgaged
property. The Mortgage Loans generally bear higher rates of interest than
mortgage loans that are originated in accordance with Fannie Mae and Freddie
Mac standards, and may experience rates of delinquency and foreclosure that
are higher, and that may be substantially higher, than those experienced by
portfolios of mortgage loans underwritten in accordance with such Fannie Mae
or Freddie Mac standards.
Approximately 91.71% of the Mortgage Loans originated by the Seller are
based on loan application packages submitted through mortgage brokerage
companies with whom the Seller has a relationship (such mortgage loans,
"Indirect Retail Mortgage Loans"). The brokers and/or companies must meet
minimum standards based on an analysis of information submitted with an
application for approval, including resumes of the principals, valid broker's
license(s), and a satisfactory credit report. Once approved, mortgage
brokerage companies are eligible to submit loan application packages in
compliance with the terms of a signed broker agreement. All Indirect Retail
Mortgage Loans are originated in the Seller's regional offices located in
Horsham, Pennsylvania, Oak Brook, Illinois, Atlanta, Georgia, Phoenix, Arizona
and Seattle, Washington. All Indirect Retail Mortgage Loans are underwritten
according to the Seller's underwriting guidelines by the Seller in both the
regional offices and the corporate office located in Middletown, Connecticut
(the "Corporate Office"). All Indirect Retail Mortgage Loans are initially
reviewed by a loan officer for pre-approval. The credit line is processed and
reviewed by an underwriter for final approval.
Approximately 8.29% of the Mortgage Loans were originated by the Seller
either directly through its retail operation under the name "Family Credit
Connection" or purchased under the Seller's bank referral program (such
mortgage loans, "Retail Mortgage Loans"). Retail Mortgage Loans are
underwritten based on the Seller's underwriting guidelines by the Seller in
the Corporate Office. All Retail Mortgage Loans are originated at the
Illinois, Florida, Maryland or Connecticut retail office or the referral
department in Middletown, Connecticut. Retail Mortgage Loans are initially
reviewed by a loan officer to determine whether the loan application meets the
Seller's underwriting guidelines. The credit file is processed and reviewed by
an underwriter for final approval.
On a case-by-case basis, the Seller may determine that, based upon
compensating factors, a prospective mortgagor not strictly qualifying under
the underwriting risk category guidelines described below warrants an
underwriting exception. Compensating factors may include, but are not limited
to, low Loan-to-Value Ratio and/or large down payment, proven ability to
handle high debt-to-income levels, low debt-to-income ratio, large cash flow,
significant verified savings, good credit history, stable employment,
excellent mortgage history, a large reduction in monthly cash outflows and
time in residence at the applicant's current address. It is expected that a
number of the Mortgage Loans to be included in the Mortgage Pool will contain
one or more loans which have been underwritten according to such practice.
On "full-documentation" loans, the Seller's underwriters generally verify
the income of each applicant from various sources in the following manner:
salaried and hourly borrowers and those borrowers on commissions, whether at a
full time or part time job, are required to submit W-2 forms for the past one
or two years of employment and pay stubs from within the past 45-60 days;
rental income must be shown from the latest year's tax returns, or from
leases; pension income must be verified from a check, direct deposit slip, a
bank statement disclosing funds directly deposited, a W-2 form or a letter
from the pension administrator; bonus income must be demonstrated over
eighteen months via W-2 forms; alimony and child support must be documented by
a court order and proof of receipt of payment; and self-employed individuals
must submit two years of tax returns with all schedules attached.
The applicant must have a sufficiently established credit history to
qualify for the appropriate credit grade (as described below). This credit
history is substantiated by a report prepared by an independent merged credit
report agency. The report typically considers the applicant's entire credit
history and contains information relating to such matters as credit history
with local and national merchants and lenders, installment debt payments and
any record of defaults, bankruptcy, repossession, suits or judgments.
The Seller originates loans secured by single-family residences (which
may be detached, attached, part of a two-to-four unit dwelling, a condominium
unit, townhouse or unit in a planned unit development) and manufactured
housing. The Seller's guidelines are applied in accordance with a procedure
which complies with applicable federal and state laws and regulations and
require an appraisal of the mortgaged property which conforms to Fannie Mae
and the Financial Institutions Reform and Recovery Act ("FIRREA") standards.
Appraisals may only be provided by independent appraisers who satisfy the
necessary licensing standards.
Each appraisal includes a market data analysis based on recent sales of
comparable homes in the area and, where deemed inappropriate, replacement cost
analysis based on the current cost of constructing a similar home. Full
appraisals are required for all loans that are submitted. If additional
collateral information is required, the Seller may require a desk, field, or
drive-by review of the mortgaged property.
The Seller requires title insurance on all mortgage loans. The Seller
also requires that fire and extended coverage casualty insurance be maintained
on the mortgaged property in an amount at least equal to the lesser of the
principal balance of the related residential loan or the appraised value less
the value of the loan (replacement coverage will be required, if applicable).
A quality control department performs a monthly quality control audit of a
sample of all loans. The monthly underwriting analysis consists of a review of
a random sample of at least 10% of all closed loans.
In addition to the quality control audit, each underwriter will have
approximately 10% of its loans audited by the chief underwriter or his
designee each month. The loan review confirms the existence and accuracy of
legal documents, credit documentation, income computation, appraisal analysis,
and underwriting decisions. The review function allows the Seller to assess
programs for potential guidelines changes, program enhancements, appraisal
policies, areas of risk to be reduced or eliminated, and need for additional
underwriter training.
Under the Seller's mortgage loan programs, various risk categories are
used to grade the likelihood that the applicant will satisfy the repayment
conditions of the loan. These risk categories establish the maximum permitted
Loan-to-Value Ratio and loan amount, given the occupancy status of the
mortgaged property and the applicant's credit history and debt ratio. In
general, high credit risk mortgage loans are graded in categories which
reflect higher debt ratios and more (or more recent) major derogatory credit
items such as outstanding judgments or prior bankruptcies; however, as
compensating factors, these loan programs establish lower maximum
Loan-to-Value Ratios and maximum loan amounts for loans graded in such
categories.
The Seller's guidelines have the following categories and criteria for
grading the potential likelihood the applicant will satisfy the repayment
obligations of a mortgage loan, however, on a case-by-case basis, the Seller
may determine that, based on compensating factors, a prospective mortgagor not
strictly qualifying under such underwriting risk category guidelines warrants
an underwriting exception.
The "Loan-to-Value Ratio" or "LTV" of a Mortgage Loan shall generally
mean the ratio, expressed as a percentage of (a) the principal amount of the
Mortgage Loan at origination over (b) the lesser of the purchase price or the
appraised value of the related Mortgaged Property at origination. The
"Combined Loan-to-Value Ratio" or "CLTV" of a Mortgage Loan shall generally
mean that ratio, expressed as a percentage, borne by (a) the sum of the
principal amount of the Mortgage Loan at origination plus the then-current
principal balance of all mortgage loans secured by liens on the related
Mortgaged Property having priorities senior to that of the lien which secures
such Mortgage Loan over (b) the minimum of the purchase price or the appraised
value of the related Mortgaged Property at origination.
"A+": Under the A+ risk category, the applicant generally must have
repaid installment and revolving debt according to its terms with a maximum of
three isolated 30 day delinquencies in the past 12 months. The history over
the prior 13-24 months must not exhibit 90+ day delinquency on more than 50%
of the total consumer balances. One 30-day late payment within the last 12
months is permitted on an existing mortgage loan. Judgments or liens must have
been paid off within two years prior to the funding of the loan. In the case
of a prior bankruptcy, the bankruptcy must have been filed a minimum of five
years prior to the application date. No foreclosures may be in the borrower's
credit file. Generally, the mortgaged property must be in at least average
condition. Generally, a maximum Loan-to-Value Ratio of 90% is permitted for
owner occupied one- to four-unit and townhouse properties secured by first
mortgages. The maximum Loan-to-Value Ratio generally is reduced by 10% on a
mortgaged property consisting of a second home with proof of owner occupancy
for part of the year and rental properties. Generally, properties with rural
characteristics are limited to an 80% Loan-to-Value Ratio. The debt-to-income
ratio may not exceed 45%. On second lien mortgage loans, the CLTV may be as
high as 100%.
"A": Under the A risk category, the applicant's credit history report may
exhibit 30 day delinquency on all credit and a maximum of 60 day delinquency
on no more than 25% of total consumer balances over the last 12 months. A
maximum of two 30-day late payments within the 12 months is permitted on an
existing mortgage loan. Generally, a Loan-to-Value Ratio for the applied-for
mortgage of 90% or less is required on all owner occupied one- to four-unit
properties secured by a first mortgage. For purposes of determining whether a
prospective mortgagor has been 30 days late, the Seller uses a "rolling 30-day
period," i.e., a continuous sequence of 30-day late payments will be
considered as a single 30-day payment. Judgments or liens must have been paid
off within two years prior to the funding of the loan. No collection accounts
or charge-off may remain open after the funding of the loan except that those
under $500 are treated on a case-by-case basis. No bankruptcy, dismissal or
notice of default filings may have occurred during the preceding three years
and no foreclosures may be in the applicant's file. Generally, the mortgaged
property must be in at least average condition. The maximum Loan-to-Value
Ratio generally is limited to 80% on properties with rural characteristics.
Loan-to-Value Ratios for non-owner-occupied properties and second homes are
limited to 80%. The debt-to-income ratio generally may not exceed 50%.
"AA": Under the AA risk category, the applicant generally must have
repaid installment and revolving debt according to its terms with a maximum of
three isolated 30 day delinquencies in the past 12 months. The history over
the prior 13-24 months must not exhibit 60+ day delinquency on any consumer
balances. One 30-day late payment within the last 12 months or up to two
30-day late payments within the last 24 months are permitted on an existing
mortgage loan. Judgments or liens must have been paid off within two years
prior to the funding of the loan. In the case of a prior bankruptcy, the
bankruptcy must have been discharged a minimum of five years prior to the
application date with a minimum of two years of reestablished credit with no
mortgage loans. No foreclosures may be in the borrower's credit file.
Generally, the mortgaged property must be in at least average condition.
Generally, a maximum Loan-to-Value Ratio of 95% is permitted for owner
occupied one- to four-unit and townhouse properties secured by first
mortgages. Generally the debt-to-income ratio must be 45% or less.
"B+": Under the B+ risk category, the applicant must have generally
repaid installment and revolving debt according to its terms with a maximum of
60-day delinquency for minor and major creditors. A maximum of three 30-day
late payments within the last 12 months are permitted on an existing mortgage
loan. No bankruptcy, dismissal or notice of default filings may have occurred
during the preceding two years and no foreclosures may be in the applicant's
file within the previous five years. Non-medical charge-off accounts,
judgments, collection accounts and liens exceeding $500 should be more than
six months old. Generally, the mortgaged property must be in at least average
condition. Generally, a maximum Loan-to-Value Ratio of 85% is permitted for an
owner-occupied one- to four-unit condominium or townhouse property with a
first mortgage. Loan-to-Value Ratios for non-owner-occupied properties and
second homes are limited to 75%. The debt-to-income ratio generally may not
exceed 50%.
"B": Under the B risk category, consumer credit may exhibit 60 day
delinquency on all credit with a maximum of 90 day delinquency on no more than
25% of the total consumer balances. A maximum of 30-day late payments within
the last 12 months are permitted on an existing mortgage loan. No bankruptcy,
dismissal or notice of default filings may have occurred during the preceding
two years and no foreclosures within the past five years may be in the
applicant's file. Non-medical charge-off accounts, judgments, collection
accounts and liens exceeding $500 should be more than six months old.
Generally, the mortgaged property must be in at least average condition.
Generally, a maximum Loan-to-Value Ratio of 85% is permitted for an
owner-occupied one- to four-unit or townhouse property with a first mortgage.
Loan-to-Value Ratios for non-owner-occupied properties generally are limited
to 75%. Generally, the debt-to-income ratio must be 50% or less.
"C+": Under the C+ risk category, the applicant may have experienced
significant credit problems in the past. A maximum of one 60-day late payments
within the last 12 months are permitted on an existing mortgage loan. An
existing mortgage loan is not required to be current at the time the
application is submitted. No notice of foreclosure filing may have occurred
during the preceding four years. No bankruptcy filing or dismissal may have
occurred during the preceding 24 months. Generally, the mortgaged property
must be in at least average condition. Generally a maximum Loan-to-Value
Ration of 80% is permitted for an owner-occupied properties or townhouse
property secured by a first mortgage, while 70% is permitted for
non-owner-occupied properties or second homes with proof of owner occupancy
for part of the year. Generally, the debt-to-income ratio must be 50% or less.
"C": Under the C risk category, the applicant may have experienced
significant credit problems in the past. A maximum of one 60-day late payments
within the last 12 months are permitted on an existing mortgage loan. An
existing mortgage loan is not required to be current at the time the
application is submitted. No notice of foreclosure filing may have occurred
during the preceding 3 years. No bankruptcy filing or dismissal may have
occurred during the preceding 12 months. Generally, the mortgaged property
must be in at least average condition. Generally, a maximum Loan-to-Value
Ratio of 80% is permitted for an owner-occupied one-to-four unit or townhouse
property secured by a first mortgage, while 65% is permitted for
non-owner-occupied properties or second homes with proof of owner occupancy
for part of the year. Generally, the debt-to-income ratio must be 50% or less.
"C-": Under the C- risk category, the applicant may have experienced
significant credit problems in the past. A maximum of two 90-day late payments
within the past 12 months is permitted on an existing mortgage loan for full
documentation loans. A maximum of one 90-day delinquency within the past 12
months is permitted on an existing mortgage loan for limited and stated
documentation loans. An existing mortgage loan is not required to be current
at the time the application is submitted. A notice of foreclosure filing may
have occurred in the past. Bankruptcy must be dismissed. Generally, the
mortgaged property must be in at least average condition. Generally, a maximum
Loan-to-Value Ratio of 75% is permitted for non-owner-occupied properties or
second homes with proof of owner occupancy for part of the year. Generally,
the debt-to-income ratio must be 55% or less.
"D": Under the D risk category, the applicant may have experienced
significant credit problems in the past. An existing mortgage loan is not
required to be current at the time the application is submitted. Generally,
the mortgaged property must be in at least average condition. Generally, a
maximum Loan-to-Value Ratio of 70% is permitted for an owner-occupied
one-to-four unit or townhouse property secured by a first mortgage. The
maximum Loan-to-Value Ratio is generally reduced by 10% on non-owner-occupied
properties. Generally, the debt-to-income ratio may not exceed 55%.
The Seller's standards applicable to the Mortgage Loans include the
foregoing categories and characteristics as guidelines only. The foregoing
risk grade classifications are based on factors that are exclusive of the
additional protection against loss that primary mortgage insurance customarily
provides on loans which have Loan-to-Value Ratios or Combined Loan-to-Value
Ratios in excess of 80%. Approximately 32.04% of the Mortgage Loans by Cut-off
Date Loan Balance have Combined Loan-to-Value Ratios in excess of 80%
Based on the indicated underwriting standards applicable for mortgage
loans with risk features originated thereunder, and in particular Mortgage
Loans in loan classes C and D as described herein, such Mortgage Loans are
likely to experience greater rates of delinquency, foreclosure and loss, and
may experience substantially greater rates of delinquency, foreclosure and
loss, than mortgage loans underwritten under more stringent underwriting
standards. As of the Cut-off Date, 18.03% and 1.72% of the Mortgage Loans were
in loan classes C- through C+ and D, respectively, based on the Cut-off Date
Loan Balances of the Mortgage Loans.
The PMI Policy
917 Mortgage Loans by number as of the Cut-off Date (the "PMI Mortgage
Loans") with original Loan-to-Value Ratios in excess of 75% as of the cut-off
date are insured by Mortgage Guaranty Insurance Corporation (the "PMI
Insurer") pursuant to the primary mortgage insurance policy (the "PMI
Policy"). The amount of coverage provided by the PMI Policy (which is also
referred to below as the "insured percentage of the claim") varies on a
loan-by-loan basis between 19% and 32% based upon the original Loan-to-Value
Ratio of the PMI Mortgage Loan.
The PMI Policy is required to remain in force with respect to each PMI
Mortgage Loan until: (1) the Loan Balance of such PMI Mortgage Loan is paid in
full, (2) the Loan Balance of such PMI Mortgage Loan has amortized down to a
level that results in a Loan-to-Value Ratio for such Mortgage Loan of 65% or
less; provided, however, that no coverage of any PMI Mortgage Loan under the
PMI Policy is required where prohibited by applicable law or (3) any other
event specified in the PMI Policy occurs that allows for termination of the
PMI Policy. The PMI Policy may not be assigned or transferred without the
prior written consent of the PMI Insurer, provided, however that the PMI
Insurer has previously provided written consent to the assignment of the PMI
Policy from the Trustee to the Seller in connection with any Mortgage Loan
repurchased or substituted for by the Seller.
The PMI Policy generally requires that delinquencies on any PMI Mortgage
Loan must be reported to the PMI Insurer within four months of default, and
appropriate proceedings to obtain title to the property securing the PMI
Mortgage Loan must be commenced within six months of default. The PMI Policy
under which the PMI Mortgage Loans are insured contains provisions
substantially as follows: (a) for the insured to present a claim, the insured
must have acquired, and tendered to the PMI Insurer, good and merchantable
title to the property securing the PMI Mortgage Loan, free and clear of all
liens and encumbrances, including, but not limited to, any right of redemption
by the mortgagor unless such acquisition of good and merchantable title is
excused under the terms of the PMI Policy; (b) a claim generally includes
unpaid principal, accrued interest to the date of such tender to the PMI
Insurer by the insured, and certain expenses; (c) when a claim is presented
the PMI Insurer will have the option of either (i) paying the claim in full,
taking title to the property securing the PMI Mortgage Loan, and arranging for
its sale, or (ii) paying the insured percentage of the claim and with the
insured retaining title to the property securing the PMI Mortgage Loan; (d)
claims generally must be filed within 60 days after the insured has acquired
good and merchantable title to the property securing the PMI Mortgage Loan;
and (e) a claim generally must be paid within 60 days after the claim is filed
by the insured. No payment for a loss will be made under the PMI Policy unless
the property securing the PMI Mortgage Loan is in the same physical condition
as when the PMI Mortgage Loan was originally insured, except for reasonable
wear and tear and unless premiums on the standard homeowner's insurance
policy, real estate taxes and foreclosure protection and preservation expenses
have been advanced by or on behalf of the insured. The responsibilities of the
insured prescribed by the PMI Policy are required to be performed by the
Servicer.
In issuing the PMI Policy, the PMI Insurer has relied upon certain
information and data regarding the PMI Mortgage Loans furnished to the PMI
Insurer by the Seller. The PMI Policy will not insure against a loss sustained
by reason of a default arising from or involving certain matters, including
(i) fraud or negligence in origination or servicing of the PMI Mortgage Loans,
including, but not limited to, misrepresentation by the lender or certain
other persons involved in the origination of the PMI Mortgage Loan or the
application for insurance; (ii) failure to construct a property securing a PMI
Mortgage Loan in accordance with specified plans; or (iii) physical damage to
a property securing a PMI Mortgage Loan.
The Servicer
The information set forth in the following paragraphs has been provided
by Mortgage Lenders Network USA, Inc., in its capacity as Servicer (the
"Servicer"). None of the Depositor, the Trustee or the Underwriter or any of
their respective affiliates has made or will make any representation as to the
accuracy or completeness of such information.
The Servicer was incorporated in November 1996, commenced closing
mortgage loans in April 1997, and began servicing mortgages loans in the same
month. The principal business of the Servicer historically has been the
origination and sale of non-conforming mortgage loans on both a servicing
released and a servicing retained basis. The Servicer does not have a
significant history of servicing mortgage loans. The loans serviced by the
Servicer's mortgage servicing department were loans made to residents
throughout the United States.
The Servicer has the following information regarding the servicing of
mortgage loans which it considers non-conforming credits and none of the
Depositor, the Certificate Insurer or the Underwriter make any representations
or warranties as to the accuracy or completeness of such information. The
table below sets forth the overall delinquency experience on residential
one-to-four-family mortgage loans for nonconforming credits which are
currently serviced by the Servicer. No mortgage loan is considered delinquent
for purposes of the table until a payment is 30 days past due on a contractual
basis. It should be noted that the Servicer commenced its servicing activities
in April 1997. Accordingly, the Servicer does not have significant historical
delinquency, bankruptcy foreclosure or default experience that may be referred
to for estimating the future delinquency and loss experience of the Mortgage
Loans. The information in the table below is not intended to indicate or
predict the expected delinquency experience on past current or future pools of
mortgage loans for which the Servicer is the primary servicer.
Mortgage Lenders Network USA, Inc.
Non-Conforming Mortgage Loan Portfolio Experience
(Dollars in Thousands)
As of
December December December
31, 1997 31, 1998 31, 1999
-------- -------- --------
Total principal balance (at
period end)................... $790,410 $1,632,326 $2,068,316
Average portfolio principal
balance(1).................... 754,273 $1,556,162 $2,018,758
DELINQUENCIES (at period end)
30-59 Days:
Principal balance(2)...... $8,608 $37,853 $60,301
Percent(3)................ 1.09% 2.32% 2.90%
60-89 Days:
Principal balance(2)...... $2,105 $9,359 $12,175
Percent(3)................ 0.27% 0.57% 0.59%
90 Days or More:
Principal balance......... $1,314 $23,608 $55,122
Percent(3)................ 0.17% 1.45% 2.65%
Total Delinquencies:
Principal balance(4)...... $12,027 $70,819 $177,598
Percent(3)................ 1.52% 4.34% 6.17%
REO (at period end)........... $0 $1,661 $8.205
Net gains/(losses) on
liquidated loans.............. $0 $1,130) $(1,386)
Percentage of net
gains/(losses) on
liquidated loans (based
on average portfolio
principal balance)........ 0.00% 0.07% 0.07%
- ------------------------------------------
(1) Calculated by summing the actual outstanding principal balances at the
end of each month and dividing the total by the number of months in the
applicable period.
(2) Delinquency information includes loans in foreclosure.
(3) Percentages are expressed based upon the total outstanding principal
balance at the end of the indicated period.
(4) Delinquency information does not include loans which are REO.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
the mortgage portfolios set forth in the foregoing tables. The statistics
shown above represent the delinquency experience for the indicated mortgage
servicing portfolios only for the periods presented, whereas the aggregate
delinquency experience on the Mortgage Loans comprising the Mortgage Pool will
depend on the results obtained over the life of the Mortgage Pool. The
mortgage servicing portfolios set forth above include mortgage loans that were
originated using a variety of different underwriting procedures and standards
which may have been more selective. They include mortgage loans with a variety
of payment and other characteristics (including geographic location) which are
not necessarily representative of the payment and other characteristics of the
Mortgage Loans comprising the Mortgage Pool. In addition, a substantial number
of the mortgage loans in the servicing portfolio were not originated by the
Seller and were originated on the basis of underwriting standards that may
have been more stringent than those applicable to the Mortgage Loans. As a
result, there can be no assurance that the Mortgage Loans comprising the
Mortgage Pool will perform consistently with the delinquency or foreclosure
experience described herein. It should be noted that if the residential real
estate market should experience an overall decline in property values, the
actual rates of delinquencies and foreclosures could be higher than those
previously experienced by the Servicer. In addition, adverse economic
conditions may affect the timely payment by mortgagors of scheduled payments
of principal and interest on the Mortgage Loans and, accordingly, the actual
rates of delinquencies and foreclosures with respect to the Mortgage Pool.
THE POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to a pooling and servicing
agreement dated as of April 1, 2000 (the "Pooling and Servicing Agreement"),
among the Depositor, the Servicer, the Seller and the Trustee. Mortgage
Lenders Network Home Equity Loan Trust 2000-1 (the "Trust") will consist of
(i) all of the Depositor's right, title and interest in the Mortgage Loans,
including in each case the related mortgage notes, mortgages and other related
documents, (ii) all payments on or collections in respect of the Mortgage
Loans due after the Cut-off Date, together with any proceeds thereof, (iii)
any Mortgaged Properties acquired on behalf of Certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenued received
thereon, (iv) the rights of the Trustee under all insurance policies
(including the PMI Policy) required to be maintained pursuant to the Pooling
and Servicing Agreement and (v) the rights of the Depositor under the Mortgage
Loan Purchase Agreement among the Seller and the Depositor (collectively, the
"Trust Fund"). The Offered Certificates will be transferable and exchangeable
at the corporate trust offices of the Trustee.
The following summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the provisions of the
Pooling and Servicing Agreement. When particular provisions or terms used in
the Pooling and Servicing Agreement are referred to, the actual provisions
(including definitions of terms) are incorporated by reference.
Assignment of the Mortgage Loans
On the Closing Date, the Seller will transfer ownership of the Mortgage
Loans to the Depositor. Immediately after such transfer, pursuant to the
Pooling and Servicing Agreement, the Depositor will sell, transfer, assign,
set over and otherwise convey without recourse to the Trustee, in trust for
the benefit of the holders of the Certificates and the Certificate Insurer,
all right, title and interest of the Depositor in and to each such Mortgage
Loan and all right, title and interest in and to all other assets included in
the Trust Fund, including all principal and interest payments due after the
Cut-off Date.
In connection with such transfer and assignment, on the Closing Date the
Seller will deliver, or cause to be delivered, the following documents
(collectively constituting the "Trustee's Mortgage File") to the Fleet
National Bank, as custodian for the Trustee (the "Custodian"), with respect to
each Mortgage Loan: (i) the original Mortgage Note, endorsed in blank or to
the order of the Trustee, (ii) the original Mortgage with evidence of
recording thereon (or, if the original Mortgage has not been returned from the
applicable public recording office or is not otherwise available, a copy of
the Mortgage certified by a responsible officer of the Seller or by the
closing attorney or by an officer of the title insurer or agent of the title
insurer which issued the related title insurance policy or commitment therefor
to be a true and complete copy of the original Mortgage submitted for
recording); (iii) the original executed assignment of the Mortgage executed by
the Seller to the Trustee or in blank, acceptable for recording except with
respect to any currently unavailable information; (iv) the original assignment
(or, if any such assignment has not been returned from the applicable public
recording office or is not otherwise available, a copy of such assignment
certified by a responsible officer of the Seller or by the closing attorney or
by an officer of the title insurer or agent of the title insurer which issued
the related title insurance policy or commitment therefor to be a true and
complete copy of such assignment submitted for recording); (v) the original,
or a copy certified by the originator of the Mortgage Loan to be a true and
complete copy of the original, of each assumption, modification, written
assurance or substitution agreement, if any; and (vi) an original, or a copy
certified by the Seller to be a true and complete copy of the original, of a
lender's title insurance policy, or if a lender's title policy has not been
issued as of the Closing Date, a marked-up commitment (binder) (including any
marked additions thereto or deletions therefrom) to issue such policy;
provided, that with respect to the Mortgage Loans, the Seller anticipates
delivery to the Custodian of the documents set forth in (vi) above within 15
days following the Closing Date.
The Custodian will review the Mortgage Loan documents relating to the
Mortgage Loans on or prior to the Closing Date and will hold such documents in
trust for the benefit of the holders of the Certificates and the Certificate
Insurer. After the Closing Date, if any document is found to be missing or
defective in any material respect, the Custodian is required to notify the
Seller, the Servicer, the Trustee, the Depositor and the Certificate Insurer
in writing. If the Seller cannot or does not cure such omission or defect
within 60 days after its receipt of notice from the Custodian, the Seller will
be required to repurchase the related Mortgage Loan (the "Defective Loan")
from the Trust Fund at a price (the "Purchase Price") to include 100% of the
Loan Balance thereof plus accrued and unpaid interest thereon, calculated at a
rate equal to the difference between the Loan Rate and the Servicing Fee Rate
(or, if Mortgage Lenders Network USA, Inc. is no longer the Servicer, at the
applicable Loan Rate) through the day immediately preceding the due date in
the Due Period preceding the Distribution Date on which such Purchase Price
will be distributed. Rather than repurchase the Defective Loan as provided
above, the Seller may remove such Defective Loan (a "Deleted Mortgage Loan")
from the Trust Fund and substitute in its place another Mortgage Loan of like
kind (a "Replacement Mortgage Loan"); provided, however, that such
substitution is permitted only within two years after the Closing Date and may
not be made unless an opinion of counsel is provided to the effect that such
substitution would not disqualify either REMIC constituting the Trust Fund or
result in a prohibited transaction tax under the Code. Any Replacement
Mortgage Loan generally will, on the date of substitution, among other
characteristics set forth in the Pooling and Servicing Agreement, (i) have a
Loan Balance, after deduction of the principal portion of the scheduled
payment due in the Due Period ending in the month succeeding the month during
which such substitution occurred, not in excess of, and not substantially less
than the Loan Balance of the Deleted Mortgage Loan (the amount of any
shortfall to be deposited by the Seller in the Collection Account not later
than the succeeding Determination Date and held for distribution to the
holders of the Certificates on the related Distribution Date), (ii) have a
Loan Rate not less than (and not more than one percentage point greater than)
the Loan Rate of the Deleted Mortgage Loan, (iii) have a Combined
Loan-to-Value Ratio not higher than that of the Deleted Mortgage Loan, (iv)
have a remaining term to maturity not more than two years greater than, nor
more than two years less than, that of the Deleted Mortgage Loan, (v) have the
same or lower credit risk, as measured by credit risk category under the
Seller's underwriting guidelines and (vi) comply with all of the
representations and warranties set forth in the Pooling and Servicing
Agreement as of the date of substitution. This cure, repurchase or
substitution obligation constitutes the sole remedy available to the holders
of the Offered Certificates or the Trustee for omission of, or a material
defect in, a Mortgage Loan document.
The Trustee
Norwest Bank Minnesota, National Association, a national banking
association, will act as Trustee for the Certificates pursuant to the Pooling
and Servicing Agreement. The Trustee's offices for notices under the Pooling
and Servicing Agreement are located at 11000 Broken Land Parkway, Columbia,
Maryland 21044, with a copy to Norwest Bank Minnesota, National Association,
Corporate Trust Services, MAC N9311-161, Sixth Street and Marquette Avenue,
Minneapolis, Minnesota 55479, and its telephone number is (612) 667-8058.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Pooling and Servicing Agreement will consist of a
specified portion of the Trustee Fee. The "Trustee Fee" will accrue at the
rate of 0.02% per annum (the "Trustee Fee Rate") on the aggregate Loan Balance
of the Mortgage Loans (the "Trustee Fee"). The Pooling and Servicing Agreement
will provide that the Trustee and any director, officer, employee or agent of
the Trustee will be indemnified by the Trust Fund and will be held harmless
against any loss, liability or expense (not including expenses, disbursements
and advances incurred or made by the Trustee, including the compensation and
the expenses and disbursements of its agents and counsel, in the ordinary
course of the Trustee's performance in accordance with the provisions of the
Pooling and Servicing Agreement) incurred by the Trustee in connection with
the acceptance or administration of its obligations and duties under the
Pooling and Servicing Agreement, other than any loss, liability or expense (i)
resulting from a breach of the Trustee's obligations and duties under the
Pooling and Servicing Agreement, (ii) that constitutes a specific liability of
the Trustee under the Pooling and Servicing Agreement or (iii) incurred by
reason of willful misfeasance, bad faith or negligence in the performance of
the Trustee's duties under the Pooling and Servicing Agreement or as a result
of a breach, or by reason of reckless disregard, of the Trustee's obligations
and duties under the Pooling and Servicing Agreement. The Trustee will also be
entitled to receive payment for transition costs that it incurs relating to
the removal of the Servicer described in the Pooling and Servicing Agreement.
Servicing and Other Compensation and Payment of Expenses
The principal compensation to be paid to the Servicer in respect of its
servicing activities for the Certificates will consist of the Servicing Fee.
The "Servicing Fee" will accrue at a rate of 0.50% per annum (the "Servicing
Fee Rate") on the aggregate Loan Balances of the Mortgage Loans as of the
first day of the Due Period. As additional servicing compensation, the
Servicer will be entitled to retain all assumption fees, late payment charges
and other miscellaneous servicing fees to the extent collected from
mortgagors, together with any interest or other income earned on funds held in
the Collection Account and any escrow accounts.
Adjustment to Servicing Fee in Connection with Certain Prepaid Mortgage Loans
When a borrower prepays all or part of a Mortgage Loan between scheduled
monthly payment dates (each, a "due date"), the borrower pays interest on the
amount prepaid only to the date of prepayment. This results in a shortfall in
the collection of interest on the Mortgage Loan, as compared with the interest
that would otherwise have been collected and available for distribution to
Certificateholders. In order to mitigate the effect of any such shortfall in
interest distributions to holders of the Offered Certificates on any
Distribution Date (a "Prepayment Interest Shortfall"), the amount of the
Servicing Fee otherwise payable to the Servicer for such month shall, to the
extent of such shortfall, be deposited by the Servicer in the Collection
Account for distribution to holders of the Offered Certificates on such
Distribution Date. However, any such reduction in the Servicing Fee will be
made only to the extent of the Servicing Fee otherwise payable to the Servicer
with respect to payments on the Mortgage Loans received during the Due Period
relating to such Distribution Date. Any such deposit by the Servicer will be
reflected in the distributions to holders of the Offered Certificates made on
the Distribution Date on which the Principal Prepayment received would be
distributed. See "Description of the Certificates -- Example of Distributions"
herein.
Advances
Subject to the following limitations, the Servicer will be obligated to
advance or cause to be advanced prior to each Distribution Date its own funds,
or funds in the Collection Account that constitute amounts held for future
distribution, in an amount equal to the aggregate of all payments of principal
and interest, net of the Servicing Fee, that were due during the related Due
Period on the Mortgage Loans and that were delinquent on the related
Determination Date, plus certain amounts representing assumed payments not
covered by any current net income on the Mortgaged Properties acquired through
foreclosure or deed in lieu of foreclosure (any such advance, a "Delinquency
Advance").
Delinquency Advances are required to be made only to the extent they are
deemed by the Servicer to be recoverable from related late collections,
insurance proceeds or liquidation proceeds. The purpose of making such
Delinquency Advances is to maintain a regular cash flow to the
Certificateholders, rather than to guarantee or insure against losses. The
Servicer will not be required to make any Delinquency Advances with respect to
reductions in the amount of the monthly payments on the Mortgage Loans due to
bankruptcy proceedings or the application of the Civil Relief Act.
All Delinquency Advances will be reimbursable to the Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage
Loan as to which such unreimbursed Delinquency Advance was made. In addition,
any Delinquency Advances previously made in respect to any Mortgage Loan that
are at any time deemed by the Servicer to be nonrecoverable from related late
collections, insurance proceeds or liquidation proceeds may be reimbursed to
the Servicer out of any funds in the Collection Account prior to the
distributions on the Certificates. In the event the Servicer fails in its
obligation to make any such Delinquency Advance and an Event of Default (as
defined in the Pooling and Servicing Agreement) has occurred, the successor
Servicer will be obligated to make any such Delinquency Advance, to the extent
required in the Pooling and Servicing Agreement.
Certain Matters Regarding the Certificate Insurer
Pursuant to the terms of the Pooling and Servicing Agreement, unless
there exists a continuance of any failure by the Certificate Insurer to make a
required payment under the Certificate Insurance Policy (a Certificate Insurer
Default as defined herein), the Certificate Insurer will be entitled to
exercise, among others, the following rights of the holders of the Offered
Certificates, without the consent of such holders, and the holders of the
Offered Certificates may exercise such rights only with the prior written
consent of the Certificate Insurer: (i) the right to direct the Trustee to
terminate the rights and obligations of the Servicer; (ii) the right to
consent or to direct any waivers of defaults by the Servicer; (iii) the right
to remove the Trustee pursuant to the Pooling and Servicing Agreement; and
(iv) the right to institute proceedings against the Servicer in the event of
default by the Servicer and refusal of the Trustee to institute such
proceedings. In addition, unless a Certificate Insurer Default exists, the
Certificate Insurer will have the right to direct all matters relating to any
proceeding seeking the avoidance as a preferential transfer under applicable
bankruptcy, insolvency, receivership or similar law of any distribution made
with respect to the Offered Certificates, and, unless a Certificate Insurer
Default exists, the Certificate Insurer's consent will be required prior to,
among other things, (x) the removal of the Trustee, (y) the appointment of any
successor Trustee or Servicer, or (z) any amendment to the Pooling and
Servicing Agreement. Furthermore, the Certificate Insurer may require that the
services of a backup servicer be retained on behalf of the Trust, which backup
servicer would agree to assume the responsibilities of the Servicer in the
event that the Servicer is terminated.
DESCRIPTION OF THE CERTIFICATES
General
The Offered Certificates will be issued pursuant to the Pooling and
Servicing Agreement. Set forth below are summaries of the specific terms and
provisions pursuant to which the Offered Certificates will be issued. The
following summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, the provisions of the Pooling and
Servicing Agreement. When particular provisions or terms used in the Pooling
and Servicing Agreement are referred to, the actual provisions (including
definitions of terms) are incorporated by reference.
The Mortgage Lenders Network Home Equity Loan Trust 2000-1 Pass-Through
Certificates, Series 2000-1 will consist of the Class A-1 Certificates, Class
A-2 Certificates, Class A-3 Certificates, Class A-4 Certificates and Class A-5
Certificates (collectively, the "Offered Certificates"), the Class X
Certificates (the "Private Certificates"), and the Class R Certificates (the
"Residual Certificates"). The Offered Certificates, Private Certificates and
Residual Certificates are collectively referred to herein as the
"Certificates." The Residual Certificates do not have a principal balance and
will evidence a residual interest in the Trust Fund.
The Offered Certificates will have Original Certificate Principal
Balances specified on the cover hereof or described herein and, together with
the Private Certificates and the Residual Certificates, will evidence the
entire beneficial ownership interest in the Trust Fund. The aggregate of the
Original Certificate Principal Balances of the Offered Certificates is
$211,994,000.
The Offered Certificates will be issued in book-entry form as described
below. The Offered Certificates will be issued in minimum dollar denominations
of $1,000 and multiples of $1,000 in excess thereof (except that one
certificate of each Class may be issued in a denomination which is not an
integral multiple thereof). The assumed final maturity dates for the Classes
of Offered Certificates are the applicable Distribution Dates set forth in the
table below:
Classes Assumed Final Maturity Dates(1)
------------------------- ----------------------------------
Class A-1 January 25, 2014
Class A-2 June 25, 2021
Class A-3 January 25, 2027
Class A-4 April 25, 2031
Class A-5 April 25, 2031
-------------------------
(1) See "--Underwriting Guidelines; Representations" herein.
Book-Entry Certificates
The Offered Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the
Offered Certificates ("Certificate Owners") will hold such Certificates
through The Depository Trust Company ("DTC") in the United States, or
Clearstream Banking, societe anonyme (formerly Cedelbank) (hereinafter,
"Clearstream Luxembourg") or Euroclear ("Euroclear") (in Europe) if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. The Book-Entry Certificates will be issued in
one or more certificates which equal the aggregate Certificate Principal
Balance of such Certificates and will initially be registered in the name of
Cede & Co., the nominee of DTC. Clearstream Luxembourg and Euroclear will hold
omnibus positions on behalf of their participants through customers'
securities accounts in Clearstream Luxembourg's and Euroclear's names on the
books of their respective depositaries which in turn will hold such positions
in customers' securities accounts in the depositaries' names on the books of
DTC. Citibank will act as depositary for Clearstream Luxembourg and The Chase
Manhattan Bank will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Except as described below, no person acquiring a Book-Entry
Certificate (each, a "beneficial owner") will be entitled to receive a
physical certificate representing such Certificate (a "Definitive
Certificate"). Unless and until Definitive Certificates are issued, it is
anticipated that the only "Certificateholder" of the Offered Certificates will
be Cede & Co., as nominee of DTC. Certificate Owners will not be
Certificateholders as that term is used in the Pooling and Servicing
Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on
the records of DTC (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the records
of DTC, if the beneficial owner's Financial Intermediary is not a DTC
participant and on the records of Clearstream Luxembourg or Euroclear, as
appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Trustee through DTC and DTC
participants. While the Book-Entry Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and
procedures creating and affecting DTC and its operations (the "DTC Rules"),
DTC is required to make book-entry transfers among Participants on whose
behalf it acts with respect to the Book-Entry Certificates and is required to
receive and transmit distributions of principal of, and interest on, the
Book-Entry Certificates. Participants and indirect participants with whom
Certificate Owners have accounts with respect to Book-Entry Certificates are
similarly required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates representing their
respective interests in the Book-Entry Certificates, the DTC Rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interest.
Certificateholders will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless
and until Definitive Certificates are issued, Certificateholders who are not
Participants may transfer ownership of Book-Entry Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer Book-Entry Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Book-Entry
Certificates, which account is maintained with their respective Participants.
Under the DTC Rules and in accordance with DTC's normal procedures, transfers
of ownership of Book-Entry Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Certificateholders.
Because of time zone differences, credits of securities received in
Clearstream Luxembourg or Euroclear as a result of a transaction with a
Participant will be made during subsequent securities settlement processing
and dated the business day following the DTC settlement date. Such credits or
any transactions in such securities settled during such processing will be
reported to the relevant Euroclear or Clearstream Luxembourg Participants on
such business day. Cash received in Clearstream Luxembourg or Euroclear as a
result of sales of securities by or through a Clearstream Luxembourg
Participant (as defined below) or Euroclear Participant (as defined below) to
a DTC Participant will be received with value on the DTC settlement date but
will be available in the relevant Clearstream Luxembourg or Euroclear cash
account only as of the business day following settlement in DTC. For
information with respect to tax documentation procedures relating to the
Certificates, see "Material Federal Income Tax Considerations -- Foreign
Investors" and "-- Backup Withholding" in the Prospectus and "Global
Clearance, Settlement and Tax Documentation Procedures -- Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between Clearstream Luxembourg Participants and Euroclear
Participants will occur in accordance with their respective rules and
operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Luxembourg Participants or Euroclear Participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant
European international clearing system by the Relevant Depositary; however,
such cross market transactions will require delivery of instructions to the
relevant European international clearing system by the counterparty in such
system in accordance with its rules and procedures and within its established
deadlines (European time). The relevant European international clearing system
will, if the transaction meets its settlement requirements, deliver
instructions to the Relevant Depositary to take action to effect final
settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same day
funds settlement applicable to DTC. Clearstream Luxembourg Participants and
Euroclear Participants may not deliver instructions directly to the European
Depositaries.
DTC which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives)
own DTC. In accordance with its normal procedures, DTC is expected to record
the positions held by each DTC participant in the Book-Entry Certificates,
whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Certificates will be subject to
the DTC Rules, as in effect from time to time.
Clearstream Banking, societe anonyme (referred to herein as Clearstream
Luxembourg) is incorporated under the laws of Luxembourg as a professional
depository. Clearstream Luxembourg holds securities for its participating
organizations ("Clearstream Luxembourg Participants") and facilitates the
clearance and settlement of securities transactions between Clearstream
Luxembourg Participants through electronic book-entry changes in accounts of
Clearstream Luxembourg Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Clearstream
Luxembourg in any of 28 currencies, including United States dollars.
Clearstream Luxembourg provides to its Clearstream Luxembourg Participants,
among other things, services for safekeeping, administration, clearance and
settlement of internationally-traded securities and securities lending and
borrowing. Clearstream Luxembourg interfaces with domestic markets in several
countries. As a professional depository, Clearstream Luxembourg is subject to
regulation by the Luxembourg Monetary Institute. Clearstream Luxembourg
participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to Clearstream
Luxembourg is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Clearstream Luxembourg Participant, either directly or indirectly.
The Euroclear System ("Euroclear") was created in 1968 to hold securities
for its participants ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may be settled in any of 35 currencies,
including United States dollars. Euroclear includes various other services,
including securities lending and borrowing and interfaces with domestic
markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. Euroclear is operated by the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be
responsible for disbursing funds to the beneficial owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, beneficial owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since
such payments will be forwarded by the Trustee to Cede & Co. Distributions
with respect to Certificates held through Clearstream Luxembourg or Euroclear
will be credited to the cash accounts of Clearstream Luxembourg Participants
or Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "Material Federal Income Tax
Considerations -- Foreign Investors" and "-- Backup Withholding" in the
Prospectus. Because DTC can only act on behalf of Financial Intermediaries,
the ability of a beneficial owner to pledge Book-Entry Certificates to persons
or entities that do not participate in the Depository system, or otherwise
take actions in respect of such Book-Entry Certificates, may be limited due to
the lack of physical certificates for such Book-Entry Certificates. In
addition, issuance of the Book-Entry Certificates in book-entry form may
reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for
which they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co.,
as nominee of DTC, and may be made available by Cede & Co. to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting the Depository, and to the Financial Intermediaries to
whose DTC accounts the Book-Entry Certificates of such beneficial owners are
credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing
Agreement only at the direction of one or more Financial Intermediaries to
whose DTC accounts the Book-Entry Certificates are credited, to the extent
that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Book-Entry Certificates. Clearstream Luxembourg or the
Euroclear Operator, as the case may be, will take any other action permitted
to be taken by a Certificateholder under the Pooling and Servicing Agreement
on behalf of a Clearstream Luxembourg Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf
through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Book-Entry Certificates which conflict with
actions taken with respect to other Book-Entry Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a)
DTC or the Depositor advises the Trustee in writing that DTC is no longer
willing, qualified or able to discharge properly its responsibilities as
nominee and depository with respect to the Book-Entry Certificates and the
Depositor or the Trustee is unable to locate a qualified successor, (b) the
Depositor, at its sole option, with the consent of the Trustee, elects to
terminate a book-entry system through DTC or (c) after the occurrence of an
Event of Default, beneficial owners having Percentage Interests aggregating
not less than 51% of the Book-Entry Certificates advise the Trustee and DTC
through the Financial Intermediaries and the DTC participants in writing that
the continuation of a book-entry system through DTC (or a successor thereto)
is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and
thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Pooling and Servicing Agreement.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Book-Entry
Certificates among participants of DTC, Clearstream Luxembourg and Euroclear,
they are under no obligation to perform or continue to perform such procedures
and such procedures may be discontinued at any time.
None of the Depositor, the Servicer, or the 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 Certificates held
by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Distributions
Distributions on the Offered Certificates will be made by the Trustee on
the 25th day of each month, or if such day is not a Business Day, on the first
Business Day thereafter, commencing in May 2000 (each, a "Distribution Date"),
to the persons in whose names such Certificates are registered at the close of
business on the last Business Day of the month preceding the month of the
related Distribution Date (each, a "Record Date").
Deposits into the Collection Account
The Servicer shall establish and maintain or cause to be established and
maintained an account (the "Collection Account") on behalf of the Trustee for
the benefit of the Certificateholders and the Certificate Insurer. Within two
business days after receipt (or, if applicable, on or prior to such other date
as may be specified in the Pooling and Servicing Agreement), the Servicer will
remit to the Trustee (or, in the event the Collection Account is maintained
with another institution pursuant to the Pooling and Servicing Agreement, to
such institution) for deposit into the Collection Account the following
payments and collections received or made by it subsequent to the Cut-off Date
(to the extent not applied in computing the applicable Cut-off Date Loan
Balance) or received prior to the Cut-off Date but due the Trust Fund:
(i) (a) all payments on account of scheduled principal on the
Mortgage Loans (including any amount deemed to be principal with respect
to REO Property) that are due subsequent to the Cut-off Date and (b) all
Principal Prepayments;
(ii) all payments on account of interest on the Mortgage Loans (net
of the Servicing Fee or any backup servicing fee, if any) that are due
after the Cut-off Date;
(iii) with respect to any Mortgage Loan, all proceeds of any related
insurance policies (to the extent such proceeds are not applied to the
restoration of the related Mortgaged Property or released to the related
Mortgagor in accordance with the Servicer's normal servicing procedures)
("Insurance Proceeds"), and all other cash amounts received either (a)
through eminent domain or condemnation with respect to the Mortgaged
Properties or (b) in connection with the liquidation of defaulted
Mortgage Loans ("Liquidation Proceeds"), together with the net proceeds
on a monthly basis received with respect to any Mortgaged Properties
acquired by the Servicer by foreclosure, deed in lieu of foreclosure or
otherwise, net of the sum of (A) all unreimbursed Servicing Advances (as
defined in the Pooling and Servicing Agreement) and unreimbursed
Delinquency Advances, if any, with respect to such Mortgage Loan, (B) all
accrued interest on such Mortgage Loan at the applicable Loan Rate from
the due date as to which interest was last paid by the related Mortgagor
through the due date in the Due Period relating to the Distribution Date
in which such proceeds are required to be distributed on such Mortgage
Loan (to the extent not already covered in (A) above), (C) all accrued
and unpaid Servicing Fees, if any, and (D) without duplication,
liquidation expenses;
(iv) all payments made by the Servicer in respect of Prepayment
Interest Shortfalls;
(v) any amount required to be deposited by the Servicer in
connection with any losses on investment of funds in the Collection
Account;
(vi) any amounts required to be deposited by the Servicer with
respect to any deductible clause in any blanket hazard insurance policy
maintained by the Servicer in lieu of requiring each Mortgagor to
maintain a primary hazard insurance policy;
(vii) all proceeds of any Mortgage Loans or property acquired in
respect of Mortgage Loans through foreclosure and purchased by the
Servicer and all amounts required to be deposited in connection with
shortfalls in the principal amount of Replacement Mortgage Loans;
(viii) the amount of any Delinquency Advances to be deposited to the
Collection Account pursuant to the Pooling and Servicing Agreement; and
(ix) all amounts required to be deposited therein in respect of
repurchases of Mortgage Loans as provided in the Pooling and Servicing
Agreement.
Withdrawals from the Collection Account
The Servicer will withdraw funds from the Collection Account for the
following purposes:
(i) to deposit into the Certificate Account prior to 3:00 p.m., New
York time, on the Servicer Remittance Date immediately preceding each
Distribution Date (after having received Delinquency Advances for such
period) the related Interest Remittance Amount and the related Principal
Remittance Amount, net of amounts to be paid as follows:
(A) to pay to the Seller, with respect to each Mortgage
Loan that has previously been purchased or replaced, all amounts
received thereon relating to any month or Due Period subsequent to
the month of such purchase or substitution, as the case may be;
(B) to reimburse the Servicer for any Delinquency Advance
or Servicing Advance previously made that the Servicer has
determined to be nonrecoverable; and
(C) to reimburse the Depositor and the Servicer for
certain losses, liabilities, costs and expenses reimbursable to them
pursuant to the Pooling and Servicing Agreement;
(ii) to pay to the Servicer (x) when collected on the related
Mortgage Loan, all recovered and previously unreimbursed Delinquency
Advances and Servicing Advances (but only to the extent received from the
related Mortgagor) and (y) any interest or investment income earned on
funds deposited in the Collection Account (net of investment losses);
(iii) to reimburse the Trustee, for expenses reasonably incurred in
respect of any breach or defect giving rise to a repurchase obligation
under the Pooling and Servicing Agreement, including any expenses arising
out of the enforcement of the purchase obligation, but only to the extent
included in the related purchase price;
(iv) to withdraw any amount not required to be deposited into the
Collection Account, which amount shall include all interest and principal
payments as to which the related due date occurs on or prior to the
Cut-off Date;
(v) to clear and terminate the Collection Account pursuant to the
Pooling and Servicing Agreement upon the termination of the Trust Fund;
and
(vi) in the event of a prepayment or satisfaction of a Mortgage
Loan, to pay the refunds and expenses to which the Mortgagor is entitled
as set forth on requests submitted by the Servicer.
Deposits into the Certificate Account
The Trustee shall maintain a certificate account (the "Certificate
Account") for the benefit of the registered holders of the Certificates. The
Trustee shall, promptly upon receipt, deposit into the Certificate Account and
retain therein the following:
(i) the amounts withdrawn from the Collection Account as described
under clause (i) under "-- Withdrawals from the Collection Account"
above;
(ii) any amount received by the Trustee in connection with a
termination of the Trust Fund; and
(iii) any amount received from the Servicer and required to be
deposited therein in respect of losses on investment of funds in the
Certificate Account.
Withdrawals from the Certificate Account
The Trustee will withdraw funds from the Certificate Account and apply
them not later than 1:00 p.m., New York time, on each Distribution Date as
follows:
(i) first, to pay the PMI Insurer the premium (including, if
applicable, any amounts in respect of premium tax) on the PMI Policy;
(ii) second, to pay the Trustee the Trustee Fee and any
servicing-related transition expenses (not to exceed $50,000) for such
Distribution Date;
(iii) third, to pay to the Servicer any interest or investment
income earned on funds deposited in the Certificate Account (net of
investment losses); and
(iv) fourth, any remaining amounts then on deposit in the
Certificate Account (the "Available Funds"), to make distributions as
described under "-- Allocation of Available Funds" below.
Allocation of Available Funds
Distributions will be made on each Distribution Date in an amount equal
to the amount of Available Funds plus any Insured Payments, if applicable.
On each Distribution Date, the Trustee will withdraw (a) from the
Certificate Account all Available Funds then on deposit that are attributable
to the Mortgage Loans (the "Available Funds") and (b) from an account (the
"Policy Payments Account") maintained by the Trustee pursuant to the terms of
the Pooling and Servicing Agreement, the amount of any Insured Payment with
respect to the Certificates and will distribute the same in the following
order of priority:
(i) to the Certificate Insurer, the Premium Amount for such
Distribution Date (to the extent such payment will not cause an Insured
Payment to be required);
(ii) to the holders of each Class of Certificates, their pro rata
share (based on the amount of interest each Class of Certificates are
entitled to receive) of the related Interest Distribution Amounts for
such Distribution Date;
(iii) to the holders of each Class of Certificates, an amount equal
to the Basic Principal Distribution Amount, in the order of priority
specified below;
(iv) to the Certificate Insurer, the Reimbursement Amount for such
Distribution Date (to the extent such payment will not cause an Insured
Payment to be required);
(v) to holders of each Class of Certificates, in the order of
priority described below, an amount equal to the Extra Principal
Distribution Amount;
(vi) to the Trustee for servicer- related transition expenses in
excess of $50,000; and
(vii) to the holders of the Class X Certificates, an amount up to
the amount specified in the Pooling and Servicing Agreement.
All distributions of principal to holders of each Class of Certificates
on any Distribution Date will be made in the following priority:
first, to the Class A-5 Certificates, in an amount equal to the
Class A-5 Priority Distribution Amount;
second, to the Class A-1 Certificates, until their Certificate
Principal Balance is reduced to zero;
third, to the Class A-2 Certificates, until their Certificate
Principal Balance is reduced to zero;
fourth, to the Class A-3 Certificates, until their Certificate
Principal Balance is reduced to zero;
fifth, to the Class A-4 Certificates, until their Certificate
Principal Balance is reduced to zero; and
sixth, to the Class A-5 Certificates, until their Certificate
Principal Balance is reduced to zero.
The "Class A-5 Priority Distribution Amount" for any Distribution Date
will be equal the product of (a) the Basic Principal Distribution Amount and
the Extra Principal Distribution Amount, if applicable, (b) the Class A-5 Pro
Rata Percentage and (c) the Shift Percentage (such product in no event to
exceed 100% of the Basic Principal Distribution Amount and the Extra Principal
Distribution Amount, if applicable).
The "Class A-5 Pro Rata Percentage" for any Distribution Date will be
equal to a fraction, the numerator of which is the Certificate Principal
Balance of the Class A-5 Certificates on such Distribution Date and the
denominator of which is the aggregate of the Certificate Principal Balances of
all Classes of Certificates on such Distribution Date.
The "Shift Percentage" for any Distribution Date will be the percentage
indicated below:
Distribution Date occurring in Shift Percentage
------------------------------ ----------------
May 2000 through April 2003........ 0%
May 2003 through April 2005........ 45%
May 2005 through April 2006........ 80%
May 2006 through April 2007........ 100%
May 2007 and thereafter............ 300%
On each Distribution Date, any remaining amounts after giving effect to
the distributions specified above will be paid to the holders of the Class R
Certificates.
Notwithstanding the foregoing, in the event an OC Deficit exists on any
Distribution Date and the aggregate amount distributable as principal
(including any draws made under the Certificate Insurance Policy) on the
Offered Certificates is not sufficient to eliminate such OC Deficit to zero,
then all amounts distributable as principal of the Certificates on such
Distribution Date will be allocated concurrently to the outstanding Classes of
Certificates, pro rata, on the basis on their respective Certificate Principal
Balances.
Definitions
The "Accrual Period" for the Offered Certificates (other than the Class
A-1 Certificates) for a given Distribution Date will be the calendar month
preceding the month of such Distribution Date and will be calculated based on
a 360-day year consisting of twelve 30-day months. The Accrual Period for the
Class A-1 Certificates for a given Distribution Date will be the actual number
of days (based on a 360-day year) included in the period commencing on the
immediately preceding Distribution Date and ending on the day immediately
preceding such Distribution Date; provided, however, that the initial Accrual
Period for the Class A-1 Certificates will be the actual number of days
included in the period commencing on the Closing Date and ending on and
including May 24, 2000.
The "Basic Principal Distribution Amount" means with respect to any
Distribution Date, the excess of (i) the Principal Remittance Amount for such
Distribution Date over (ii) the OC Release Amount, if any, for such
Distribution Date.
The "Call Option Date" is the first Distribution Date on which the
aggregate Certificate Principal Balances is less than or equal to 10% of the
aggregate of the Certificate Principal Balances on the Closing Date.
A "Certificate Insurer Default" occurs when the Certificate Insurer fails
to make payments under the Certificate Insurance Policy in accordance with the
terms and conditions thereof.
The "Certificate Principal Balance" of each Class of Offered
Certificates, as of any Distribution Date, will be equal to the Certificate
Principal Balance of such Class on the Closing Date (the "Original Certificate
Principal Balance") minus all distributions in respect of principal allocated
to such Class on all prior Distribution Dates.
A Mortgage Loan is "Delinquent" if any monthly payment due thereon is not
made by the close of business on the day such monthly payment is scheduled to
be due. A Mortgage Loan is "30 days Delinquent" if such monthly payment has
not been received by the close of business on the corresponding day of the
month immediately succeeding the month in which such monthly payment was due
or, if there was no such corresponding day (e.g., as when a 30-day month
follows a 31-day month in which a payment was due on the 31st day of such
month), then on the last day of such immediately succeeding month; and
similarly for "60 days Delinquent", etc.
A "Due Period" with respect to any Distribution Date is the period
beginning on the second day of the month in the month preceding the
Distribution Date and ending on the first day of the month in the month in
which such Distribution Date occurs.
The "Extra Principal Distribution Amount" for any Distribution Date is
the lesser of (x) the related General Excess Available Amount and (y) the OC
Deficiency Amount.
The "General Excess Available Amount" for any Distribution Date is the
amount, if any, by which the Available Funds for such Distribution Date
exceeds the aggregate amount distributed on such Distribution Date pursuant to
subclauses (i) through (iv), as applicable, under "-- Allocation of Available
Funds" above.
The "Insured Distribution Amount" for any Distribution Date is the sum of
(i) the Interest Distribution Amounts for the related Class or Classes of
Offered Certificates and (ii) the OC Deficit.
The "Interest Distribution Amount" for any Distribution Date and each
class of Offered Certificates equals the amount of interest accrued during the
related Accrual Period on the Certificate Principal Balance of such Class at
the related Pass-Through Rate, net of (x) the Prepayment Interest Shortfalls
to the extent not covered by the Servicing Fee and (y) shortfalls resulting
from the Civil Relief Act.
The "Interest Remittance Amount" for any Distribution Date is the
aggregate amount of all scheduled interest payments due on the Mortgage Loans
during the related Due Period, which were either collected or advanced, net of
the related Servicing Fee and the related Trustee Fee, minus the aggregate of
the related Prepayment Interest Shortfalls during the previous calendar month
to the extent not covered by application of the Servicing Fee.
The "Loan Balance" of any Mortgage Loan with respect to any date of
determination is the outstanding scheduled principal balance thereof
calculated in accordance with the terms of the related Mortgage Note, after
giving effect to all payments of scheduled principal due on or prior to such
date of determination, whether or not received on the date of calculation, and
all payments of unscheduled principal received prior to the month of such date
of determination; provided, however, that the Loan Balance for any Mortgage
Loan that has been liquidated through foreclosure sale, trustee's sale,
disposition of the related REO Property or taking of the related Mortgaged
Property by eminent domain shall be zero as of the end of the month in which
such Mortgage Loan becomes liquidated and at all times thereafter.
The "Net WAC Cap" for any Distribution Date will be equal to (A) the
weighted average of the Loan Rates as of the first day of the month preceding
the month of such Distribution Date (or, in the case of the first Distribution
Date, the Cut-off Date), weighted on the basis of the related Loan Balances,
minus (B) the sum of (i) the Servicing Fee Rate, and any backup servicing fee,
if any, (ii) the Trustee Fee Rate, (iii) the rate at which the premium to the
PMI Insurer is calculated, if any, and (iv) the rate at which the premium
payable to the Certificate Insurer is calculated.
An "OC Deficiency Amount" for any Distribution Date equals the amount, if
any, by which the OC Target Amount exceeds the Overcollateralized Amount on
such Distribution Date (after giving effect to distributions in respect of the
related Basic Principal Distribution Amount on such Distribution Date).
An "OC Deficit" exists for any Distribution Date if (a) the aggregate
Certificate Principal Balances of all Classes of Offered Certificates (after
giving effect to all distributions to be made thereon on such Distribution
Date) exceeds (b) the sum of the Loan Balances on the last day of the
preceding calendar month.
"OC Release Amount" for any Distribution Date is equal to, if certain
delinquency and loss tests specified in the Pooling and Servicing Agreement
have been satisfied, the lesser of (x) the Principal Remittance Amount for
such Distribution Date and (y) the excess, if any, of (i) the
Overcollateralized Amount for such Distribution Date (assuming that 100% of
the Principal Remittance Amount is applied as a principal payment on such
Distribution Date) over (ii) the OC Target Amount for such Distribution Date
(as more fully described in the Pooling and Servicing Agreement).
The "OC Target Amount" for any Distribution Date is a specified level of
overcollateralization determined in accordance with the Pooling and Servicing
Agreement.
The "Overcollateralized Amount" for any Distribution Date is the amount,
if any, by which (a) the Loan Balances on the last day of the preceding
calendar month exceeds (b) the aggregate Certificate Principal Balance of the
Class or Classes as of such Distribution Date after giving effect to
distributions to be made thereon on such Distribution Date.
The "Pass-Through Rate" for any Distribution Date and Class of Offered
Certificates will be as follows:
Class A-1 One-Month LIBOR plus 0.14%*
Class A-2 7.605% per annum
Class A-3 7.770% per annum*
Class A-4 8.040% per annum*
Class A-5 7.670% per annum*
- --------------------
* Subject to the Net WAC Cap.
In addition, if the majority holder of the Class X Certificates and the
Servicer each fail to exercise its option to terminate the Trust on the
earliest permitted date as described below under "Optional Termination,"
the Pass-Through Rates on the Class A-4 Certificates will increase to
8.540% per annum subject to the Net WAC Cap.
The "Premium Amount" payable to the Certificate Insurer on any
Distribution Date equals one-twelfth of the product of a per annum rate set
forth in the Pooling and Servicing Agreement (which may increase after an
event of default under the Insurance Agreement) and the Certificate Principal
Balances of the Offered Certificates.
The "Principal Distribution Amount" for any Distribution Date will equal
the sum of (i) the Basic Principal Distribution Amount and (ii) the Extra
Principal Distribution Amount.
A "Principal Prepayment" is any mortgagor payment or other recovery of
principal on a Mortgage Loan that is received in advance of its scheduled due
date and is not accompanied by an amount representing scheduled interest due
on any date or dates in any month or months in or subsequent to the month of
prepayment.
The "Principal Remittance Amount" means, with respect to any Distribution
Date, the sum of the amounts specified in clause (i), clause (iii), clause
(vi), clause (vii), clause (ix) (with respect to the principal portion of such
Delinquency Advances only) and clause (x) under "-- Deposits to the Collection
Account" above with respect to the Mortgage Loans, in the case of clause
(i)(a) and clause (ix) to the extent such amounts relate to scheduled
principal payments due during the related Due Period, or any prior Due Period
for which there was no related Delinquency Advance, and received by the
related Determination Date, and, in each other case, to the extent such
amounts relate to principal and are actually received during the preceding
calendar month.
A "Realized Loss" (i) with respect to any defaulted Mortgage Loan that is
finally liquidated (a "Liquidated Loan") is the amount of loss realized equal
to the portion of the Loan Balance remaining unpaid after application of all
amounts recovered (net of amounts reimbursable for related Delinquency
Advances, expenses and Servicing Fees towards interest and principal owing on
the Mortgage Loan and (ii) with respect to certain Mortgage Loans the
principal balances or the scheduled payments of principal of which have been
reduced in connection with bankruptcy proceedings, the amount of such
reduction.
The "Reimbursement Amount" as of any Distribution Date is the amount of
all Insured Payments made by the Certificate Insurer pursuant to the
Certificate Insurance Policy and other amounts owed to the Certificate Insurer
pursuant to the Insurance Agreement (together with interest thereon at the
rate specified in the Insurance Agreement) that have not been previously
repaid as of such Distribution Date.
"Servicer Remittance Date": With respect to any Distribution Date, the
18th day of the month of such Distribution Date (or, if such day is not a
Business Day, the next following Business Day).
Calculation of One-Month LIBOR
On the second LIBOR Business Day (as defined below) preceding the
commencement of each Accrual Period with respect to the Class A-1 Certificates
following the initial Accrual Period (each such date, a "LIBOR Determination
Date"), the Trustee will determine the London interbank offered rate for
one-month United States dollar deposits ("One-Month LIBOR") for such Accrual
Period on the basis of the offered rates of the Reference Banks for one-month
United States dollar deposits, as such rates appear on the Telerate Page 3750,
as of 11:00 a.m. (London time) on such LIBOR Determination Date. As used in
this section, "LIBOR Business Day" means a day on which banks are open for
dealing in foreign currency and exchange in London and New York City;
"Telerate Page 3750" means the display page currently so designated on the
Bridge Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices); and
"Reference Banks" means leading banks selected by the Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market
(i) with an established place of business in London, (ii) whose quotations
appear on the Telerate Page 3750 on the LIBOR Determination Date in question,
(iii) which have been designated as such by the Trustee and (iv) not
controlling, controlled by or under common control with, the Depositor, the
Seller, the Servicer or any successor Servicer.
On each LIBOR Determination Date, One-Month LIBOR for the related Accrual
Period for the Class A-1 Certificates will be established by the Trustee as
follows:
(a) If on such LIBOR Determination Date two or more Reference
Banks provide such offered quotations, One-Month LIBOR for the
related Accrual Period will be the arithmetic mean of such offered
quotations (rounded upwards if necessary to the nearest whole
multiple of 0.0625%).
(b) If on such LIBOR Determination Date fewer than two
Reference Banks provide such offered quotations, One-Month LIBOR for
the related Accrual Period will be the higher of (x) One-Month LIBOR
as determined on the previous LIBOR Determination Date and (y) the
Reserve Interest Rate. The "Reserve Interest Rate" will be the rate
per annum that the Trustee determines to be either (i) the
arithmetic mean (rounded upwards if necessary to the nearest whole
multiple of 0.0625%) of the one-month United States dollar lending
rates which New York City banks selected by the Trustee are quoting
on the relevant LIBOR Determination Date to the principal London
offices of leading banks in the London interbank market or (ii) in
the event that the Trustee can determine no such arithmetic mean,
the lowest one-month United States dollar lending rate which New
York City banks selected by the Trustee are quoting on such LIBOR
Determination Date to leading European banks.
The establishment of One-Month LIBOR on each LIBOR Determination Date by
the Trustee and the Trustee's calculation of the rate of interest applicable
to the Class A-1 Certificates for the related Accrual Period will (absent
manifest error) be final and binding.
Credit Enhancement
The Certificate Insurance Policy. The following summary of the terms of
the Certificate Insurance Policy does not purport to be complete and is
qualified in its entirety by reference to the Certificate Insurance Policy. A
form of the Certificate Insurance Policy may be obtained upon request from the
Depositor.
Simultaneously with the issuance of the Offered Certificates, the
Certificate Insurer will deliver the Certificate Insurance Policy to the
Trustee for the benefit of the holders of the Offered Certificates. Under the
Certificate Insurance Policy, the Certificate Insurer will irrevocably and
unconditionally guarantee to the Trustee on each Distribution Date for the
benefit of the holders of the Offered Certificates, the full and complete
payment of Insured Payments with respect to the Offered Certificates,
calculated in accordance with the original terms of the applicable Offered
Certificates when issued and without regard to any amendment or modification
of the applicable Offered Certificates or the Pooling and Servicing Agreement
(except amendments or modifications to which the Certificate Insurer has given
its prior written consent). "Insured Payments" with respect to any
Distribution Date shall mean the sum of (i) any shortfall (other than
Prepayment Interest Shortfalls not covered by the Servicing Fee and shortfalls
resulting from application of the Civil Relief Act) in amounts available in
the Certificate Account to pay the Interest Distribution Amount on such
Certificates for such Distribution Date and (ii) any OC Deficit (such OC
Deficit to be calculated using Available Funds only). The Certificate
Insurance Policy does not cover Prepayment Interest Shortfalls, shortfalls
resulting from application of the Civil Relief Act or adjustments in the
Pass-Through Rate on any of the Offered Certificates resulting from
application of the related Net WAC Cap.
Payment of claims on the Certificate Insurance Policy made in respect of
an Insured Payment will be made by the Certificate Insurer following Receipt
by the Certificate Insurer of the appropriate notice for payment on the later
to occur of (i) 12:00 noon New York City time, on the second Business Day
following Receipt of such notice for payment and (ii) 12:00 noon New York City
time, on the date on which such payment was due on the related Offered
Certificates.
If payment of any principal or current interest on any Offered
Certificates is avoided as a preference payment under applicable bankruptcy,
insolvency, receivership or similar law, the Certificate Insurer will cause
such amount to be paid on the later of (a) the date when due to be paid
pursuant to the Order referred to below or (b) the first to occur of (i) the
fourth Business Day following Receipt by the Certificate Insurer from the
Trustee of (A) a certified copy of the order (the "Order") of the court or
other governmental body which exercised jurisdiction to the effect that the
holder of an Offered Certificate is required to return the amount of any such
interest or principal payment distributed with respect to the related Offered
Certificates during the term of the Certificate Insurance Policy because such
distributions were avoidable as preference payments under applicable
bankruptcy law, (B) a certificate of the holders of the Offered Certificate
that the Order has been entered and is not subject to any stay and (C) an
assignment duly executed and delivered by the holder of the Offered
Certificate, in such form as is reasonably required by the Certificate Insurer
and provided to the holder of the Offered Certificate by the Certificate
Insurer, irrevocably assigning to the Certificate Insurer all rights and
claims of the holder of the Offered Certificate relating to or arising under
the related Offered Certificates against the debtor which made such preference
payment or otherwise with respect to such preference payment, or (ii) the date
of Receipt by the Certificate Insurer from the Trustee of the items referred
to in clauses (A), (B) and (C) above if, at least four Business Days prior to
such date of Receipt, the Certificate Insurer shall have received written
notice from the Trustee that such items were to be delivered on such date and
such date was specified in such notice. Such payment shall be disbursed to the
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the Order and not to the Trustee or any holder of an Offered Certificate
directly (unless a holder of the Offered Certificate has previously paid such
amount to the receiver, conservator, debtor-in-possession or trustee in
bankruptcy named in the Order, in which case such payment shall be disbursed
to the Trustee for distribution to such holder of the Offered Certificate upon
proof of such payment reasonably satisfactory to the Certificate Insurer).
The terms "Receipt" and "Received" with respect to the Certificate
Insurance Policy shall mean actual delivery to the Certificate Insurer and to
its fiscal agent appointed by the Certificate Insurer at its option, if any,
prior to 12:00 noon, New York City time, on a Business Day; delivery either on
a day that is not a Business Day or after 12:00 noon, New York City time,
shall be deemed to be Receipt on the next succeeding Business Day. If any
notice or certificate given under the Certificate Insurance Policy by the
Trustee is not in proper form or is not properly completed, executed or
delivered, it shall be deemed not to have been Received, and the Certificate
Insurer or the fiscal agent shall promptly so advise the Trustee and the
Trustee may submit an amended notice.
Under the Certificate Insurance Policy, "Business Day" means any day
other than (i) a Saturday or Sunday or (ii) a day on which banking
institutions in New York, Minnesota, Maryland or Connecticut or any other city
in which the principal office of any successor Servicer or successor Trustee
are authorized or obligated by law, executive order or governmental decree to
be closed.
The Certificate Insurer's obligations under the Certificate Insurance
Policy in respect of Insured Payments shall be discharged to the extent funds
are transferred to the Trustee as provided in the Certificate Insurance
Policy, whether or not such funds are properly applied by the Trustee.
The Certificate Insurer will be subrogated to the rights of each
Certificateholder to receive payments of principal and interest, on the
Certificates to the extent of any payment by the Certificate Insurer under the
Certificate Insurance Policy. For a description of the rights and powers of
the Certificate Insurer upon an Event of Default or a Servicer Termination
Trigger Event under the Pooling and Servicing Agreement, see "--Rights upon
Event of Default or Servicer Termination Trigger Event" below.
Claims under the Certificate Insurance Policy constitute direct,
unsecured and unsubordinated obligations of the Certificate Insurer ranking
not less than pari passu with other unsecured and unsubordinated indebtedness
of the Certificate Insurer for borrowed money. Claims against the Certificate
Insurer under the Certificate Insurance Policy and claims against the
Certificate Insurer under each other financial guaranty insurance policy
issued thereby constitute pari passu claims against the general assets of the
Certificate Insurer. The terms of the Certificate Insurance Policy cannot be
modified, altered or affected by any other agreement or instrument, or by the
merger, consolidation or dissolution of the Depositor. The Certificate
Insurance Policy by its terms may not be cancelled or revoked prior to payment
in full of the Offered Certificates. The Certificate Insurance Policy is
governed by the laws of the State of New York.
The Certificate Insurance Policy is not covered by the Property/Casualty
Insurance Security fund specified in Article 76 of the New York Insurance Law.
To the fullest extent permitted by applicable law, the Certificate
Insurer agrees under the Certificate Insurance Policy not to assert, and
waives, for the benefit of each holder of Offered Certificates, all its rights
(whether by counterclaim, setoff or otherwise) and defenses (including,
without limitation, the defense of fraud), whether acquired by subrogation,
assignment or otherwise, to the extent that such rights and defenses may be
available to the Certificate Insurer to avoid payment of its obligations under
the Certificate Insurance Policy in accordance with the express provisions of
the Certificate Insurance Policy.
Pursuant to the terms of the Pooling and Servicing Agreement, unless a
Certificate Insurer Default exists, the Certificate Insurer shall be deemed to
be the holder of the Certificates for certain purposes (other than with
respect to payment on the Certificates), will be entitled to exercise all
rights of the Certificateholders thereunder, without the consent of such
holders, and the Certificateholders may exercise such rights only with the
prior written consent of the Certificate Insurer. In addition, the Certificate
Insurer will have certain additional rights as third party beneficiary to the
Pooling and Servicing Agreement.
Provided no Certificate Insurer Default (as defined in the Pooling and
Servicing Agreement) has occurred and is continuing, the Certificate Insurer
shall have the right to direct certain actions of the Servicer and Trustee.
The Depositor, the Seller, the Servicer and the Certificate Insurer will
enter into an Insurance and Indemnity Agreement (the "Insurance Agreement")
pursuant to which the Seller and the Servicer will agree to reimburse, with
interest, the Certificate Insurer for amounts paid pursuant to claims under
the Certificate Insurance Policy. Such Parties will further agree to pay the
Certificate Insurer all reasonable charges and expenses which the Certificate
Insurer may pay or incur relative to any amounts paid under the Certificate
Insurance Policy or otherwise in connection with the transaction and to
indemnify the Certificate Insurer against certain liabilities. Amounts owing
by the Seller and Servicer under the Insurance Agreement will generally be
payable solely from the Trust Fund. An event of default by the Seller or the
Servicer under the Insurance Agreement will constitute an Event of Default by
the Seller or the Servicer under the Pooling and Servicing Agreement and allow
the Certificate Insurer, among other things, to direct the Trustee to
terminate the Servicer. An "event of default" by the Company under the
Insurance Agreement includes (i) failure to pay when due any amount owed under
the Insurance Agreement or certain other documents, (ii) the Seller's or the
Servicer's untruth or incorrectness in any material respect of any
representation or warranty of the Company in the Insurance Agreement, the
Pooling and Servicing Agreement or certain other documents, (iii) the Seller's
or the Servicer's failure to perform or to observe any covenant or agreement
in the Insurance Agreement, the Pooling and Servicing Agreement and certain
other documents, (iv) the Seller's or Servicer's failure to pay its debts in
general or the occurrence of certain events of insolvency or bankruptcy with
respect to the Seller or the Servicer, (v) the occurrence of an Event of
Default under the Pooling and Servicing Agreement or certain other documents
and (vi) the failure of the Mortgage Loans to meet certain performance tests.
Overcollateralization. The weighted average of the Loan Rates for the
Mortgage Loans, net of certain Trust expenses, is generally expected to be
higher than the weighted average of the Pass-Through Rates on the
Certificates. As a result, excess interest collections will be generated and
will be applied initially to principal distributions on the Certificates. This
acceleration feature creates overcollateralization (i.e., the excess of the
Loan Balances over the aggregate Certificate Principal Balances of the Classes
of Offered Certificates). Once the required level of overcollateralization is
reached, and subject to the provisions described in the next paragraph, the
acceleration feature will cease, until necessary to maintain the required
level of overcollateralization.
The Pooling and Servicing Agreement provides that, subject to certain
floors, caps and triggers, the required level of overcollateralization may
increase or decrease over time. Any decrease in the required level of
overcollateralization below that provided for in the Pooling and Servicing
Agreement will occur at the sole discretion of the Certificate Insurer. Any
such decrease will have the effect of reducing certain amounts that otherwise
would have been distributable to holders of the Offered Certificates.
Example of Distributions
The following chart sets forth an example of distributions on the
Certificates for the first month of the Trust Fund's existence:
<TABLE>
<CAPTION>
<S> <C>
April 1, 2000 Cut-off Date.
April 2, 2000 to
May 1, 2000 Initial Due Period. The Servicer receives scheduled payments of principal and
interest. For succeeding Distribution Dates, the Due Period will commence on
the second day of the preceding calendar month and end on the first day of
such month.
April 1, 2000 to
April 30, 2000 The Servicer receives Principal Prepayments and interest thereon to the date
of such prepayment. (1)
April 30, 2000 Record Date (the last Business Day of the month preceding the month of the
related Distribution Date).(2)
May 15, 2000 Determination Date (the fifteenth day of the month of such Distribution Date
or, if such fifteenth day is not a Business Day, the preceding Business
Day).(3)
May 18, 2000 Servicer Remittance Date.(4)
May 25, 2000 Distribution Date.
</TABLE>
Succeeding monthly periods follow the pattern of above.
- ---------------
(1) Principal Prepayments received during this period will be distributed to
holders of the Certificates on May 25, 2000 (to the extent not applied
in computing the Cut-off Date Loan Balance). When a Mortgage Loan is
prepaid in full, interest on the amount prepaid is collected only from
the last due date as to which the most recent scheduled payment was made
by the borrower to the date of prepayment.
(2) Distributions of principal and interest on May 25, 2000 will be made to
holders of the Certificates of record as of the close of business on the
initial Record Date.
(3) No later than each Servicer Remittance Date, the Servicer is required to
make Delinquency Advances with respect to the Mortgage Loans.
(4) The Trustee will make distributions to holders of the Certificates on
the 25th day of the month in which the related Due Period ends, or if
such day is not a Business Day, on the next Business Day.
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS
General
The effective yield of the Offered Certificates will be affected by the
rate and timing of payments of principal on the Mortgage Loans (including, for
this purpose, prepayments and amounts received by virtue of refinancings,
liquidations of Mortgage Loans due to defaults, casualties, condemnations, and
repurchases), the amount and timing of mortgagor delinquencies and defaults
resulting in Realized Losses, and the application of excess funds on the
Offered Certificates. Such yield may be adversely affected by a higher or
lower than anticipated rate of principal payments (including Principal
Prepayments) on the Mortgage Loans. The rate of principal payments on such
Mortgage Loans will in turn be affected by the amortization schedules of such
Mortgage Loans, the rate and timing of Principal Prepayments thereon by the
mortgagors, liquidations of defaulted Mortgage Loans and optional or required
repurchases of Mortgage Loans as described herein. The timing of changes in
the rate of prepayments, liquidations and repurchases of the Mortgage Loans
may, and the timing of Realized Losses could, significantly affect the yield
to an investor, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. Since the rate and
timing of principal payments on the Mortgage Loans will depend on future
events and on a variety of factors (as described more fully herein), no
assurance can be given as to such rate or the timing of Principal Prepayments
on the Offered Certificates.
The weighted average life of the Offered Certificates will also be
influenced by the amount of excess funds generated by the Mortgage Loans, as
described herein. Because excess funds attributable to the
overcollateralization feature is derived from interest collections on the
Mortgage Loans and will be applied to reduce the Certificate Principal
Balances, the aggregate payments in reduction of the Certificate Principal
Balances on a Distribution Date will usually be greater than the aggregate
amount of principal payments (including Principal Prepayments) on the Mortgage
Loans payable on such Distribution Date until the OC Target Amount is reached
and assuming an Overcollateralization Deficit does not occur. As a
consequence, excess funds available for payment in reduction of the
Certificate Principal Balances for the Offered Certificates will increase in
proportion to the outstanding Certificate Principal Balances over time in the
absence of offsetting Realized Losses for the Mortgage Loans.
Excess funds will be paid on the Offered Certificates in reduction of the
Certificate Principal Balances on each Distribution Date to the extent the
then applicable OC Target Amount exceeds the related Overcollateralized Amount
on such Distribution Date. Any remaining excess funds will be distributable to
the holders of the Class X Certificates. If an Offered Certificate is
purchased at a price other than par, its yield to maturity will be affected by
the rate at which the excess funds is paid to the Certificateholders. If the
actual rate of excess funds applied in reduction of the Certificate Principal
Balances or the Offered Certificates is slower than the rate anticipated by an
investor who purchases an Offered Certificate at a discount, the actual yield
to such investor will be lower than such investor's anticipated yield. If the
actual rate of excess funds applied in reduction of the Certificate Principal
Balances on the Offered Certificates is faster than the rate anticipated by an
investor who purchases an Offered Certificate at a premium, the actual yield
to such investor will be lower than such investor's anticipated yield. The
amount of excess funds on any Distribution Date will be affected by, among
other things, the actual amount of interest received, collected or recovered
in respect of the Mortgage Loans during the related Due Period the level of
LIBOR and such amount will be influenced by changes in the weighted average of
the Loan Rates resulting from prepayments and liquidations of the Mortgage
Loans. The amount of excess funds paid to the Certificateholders applied to
the Certificate Principal Balances on each Distribution Date will be based on
the OC Target Amount. The Pooling and Servicing Agreement generally provides
that the OC Target Amount may, over time, decrease, or increase, subject to
certain floors, caps and triggers, including triggers that allow the Target OC
Amount to decrease or "step down" based on the performance on the Mortgage
Loans with respect to certain tests specified in the Pooling and Servicing
Agreement. Any increase in the OC Target Amount may result in an accelerated
amortization until such OC Target Amount is reached. Conversely, any decrease
in the OC Target Amount will result in a decelerated amortization of the
Offered Certificates.
The Mortgage Loans generally may be prepaid in full or in part at any
time, although a substantial portion of the Mortgage Loans provide for payment
of a prepayment penalty. The Mortgage Loans generally are not assumable and
the related Mortgaged Property will be due on sale, in which case the Servicer
shall enforce any due-on-sale clause contained in any Mortgage Note or
Mortgage, to the extent permitted under applicable law and governmental
regulations; provided, however, if the Servicer determines that it is
reasonably likely that the mortgagor will bring, or if any mortgagor does
bring legal action to declare invalid or otherwise avoid enforcement of a
due-on-sale clause contained in any Mortgage Note or Mortgage, the Servicer
will not be required to enforce the due-on-sale clause or to contest such
action.
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. The rate of default on
Mortgage Loans that are refinance or limited documentation mortgage loans, and
on Mortgage Loans with high Loan-to-Value Ratios, may be higher than for other
types of Mortgage Loans. As a result of the underwriting standards applicable
to the Mortgage Loans, the Mortgage Loans are likely to experience rates of
delinquency, foreclosure, bankruptcy and loss that are higher, and that may be
substantially higher, than those experienced by mortgage loans underwritten in
accordance with the standards applied by Fannie Mae and Freddie Mac mortgage
loan purchase programs. In addition, because of such underwriting criteria and
their likely effect on the delinquency, foreclosure, bankruptcy and loss
experience of the Mortgage Loans, the Mortgage Loans will generally be
serviced in a manner intended to result in a faster exercise of remedies,
which may include foreclosure, in the event Mortgage Loan delinquencies and
defaults occur, than would be the case of the Mortgage Loans were serviced in
accordance with such other programs. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the Mortgage Loans will be affected
by the general economic condition of the region of the country in which the
related Mortgaged Properties are located. The risk of delinquencies and loss
is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. To the extent that the
locations of the Mortgaged Properties are concentrated in a given region, the
risk of delinquencies, loss and involuntary prepayments resulting from adverse
economic conditions in such region or from other factors, such as fires,
storms, landslides and mudflows and earthquakes, is increased. Certain
information regarding the location of the Mortgaged Properties is set forth
under "The Mortgage Pool--Mortgage Loan Statistics" and "Risk
Factors--Geographic Concentration of Mortgage Loans" herein.
Certain of the Mortgage Loans are Balloon Loans which provide for a
substantial portion of the original Loan Balance in a single payment at
maturity (the "Balloon Loans"). Balloon Loans involve a greater degree of risk
than fully amortizing loans because the ability of the borrower to make a
balloon payment typically will depend upon its ability either to refinance the
loan or to sell the related Mortgaged Property. The ability of a borrower to
accomplish either of these goals will be affected by a number of factors,
including the level of available mortgage rates at the time of the attempted
sale or refinancing, the borrower's equity in the related Mortgaged Property,
the financial condition of the borrower and operating history of the related
Mortgaged Property, tax laws, prevailing economic conditions and the
availability of credit for commercial real estate projects generally.
Other factors affecting prepayment of Mortgage Loans include changes in
mortgagors' housing needs, job transfers, unemployment and mortgagors' net
equity in the mortgaged properties. Since the rate of payment of principal of
the Offered Certificates will depend on the rate of payment (including
prepayments) of the principal of the Mortgage Loans, the actual maturity of
the Offered Certificates could occur, and are expected to occur, significantly
earlier than the Assumed Final Maturity Date.
In addition, the yield to maturity of the Offered Certificates will
depend on the price paid by the holders of the Offered Certificates and the
Loan Rate. The extent to which the yield to maturity of an Offered Certificate
is sensitive to prepayments will depend upon the degree to which it is
purchased at a discount or premium.
Prepayments of principal on the Mortgage Loans will generally be passed
through to the Trustee and included in the Available Funds in the month
following the month of receipt thereof by the Servicer. Any prepayment of a
Mortgage Loan or liquidation of a Mortgage Loan (by foreclosure proceedings or
by virtue of the repurchase of a Mortgage Loan) will have the effect of
resulting in payments on the Offered Certificates of amounts that otherwise
would be paid in amortized increments over the remaining term of such Mortgage
Loan.
The Class A-5 Certificates will not be entitled to distributions of
principal, either scheduled or unscheduled, until May 25, 2003, except as
otherwise described in this prospectus supplement. After that date, the
relative entitlement of the Class A-5 Certificates to payments in respect of
principal is subject to increase in accordance with the calculation of the
Class A-5 Priority Distribution Amount. See "Description of the Certificates -
Allocation of Available Funds" herein.
To the extent that Principal Prepayments with respect to the Mortgage
Loans result in prepayments on the Offered Certificates during periods of
generally lower interest rates, Certificateholders may be unable to reinvest
such Principal Prepayments in securities having a yield and rating comparable
to the Offered Certificates.
The yield on the Offered Certificates may be affected by any delays in
receipt of payments thereon as described under "Description of the
Certificates--Book-Entry Certificates" herein.
The yield on the Offered Certificates may also be affected by a optional
termination of the Trust Fund as described under " --Optional Termination"
herein.
No representation is made as to the rate of principal payments on the
Mortgage Loans or as to the yield to maturity of the Offered Certificates. An
investor is urged to make an investment decision with respect to the Offered
Certificates based on the anticipated yield to maturity of the Offered
Certificates resulting from its price and such investor's own determination as
to anticipated Mortgage Loan prepayment rates. Prospective investors are urged
to analyze fully the effect of Mortgage Loan principal prepayments and market
conditions on the yield and value of the Offered Certificates, before
acquiring any Offered Certificates. In particular, investors that are required
to perform periodic valuations on their investment portfolios should consider
the effect of such fluctuations in value. In addition, investors should
carefully consider the factors discussed under "Risk Factors--Unpredictability
of Prepayments and Effect on Yields" herein.
Weighted Average Lives
The timing of changes in the rate of Principal Prepayments on the
Mortgage Loans may significantly affect an investor's actual yield to
maturity, even if the average rate of Principal Prepayments is consistent with
such investor's expectation. In general, the earlier a Principal Prepayment on
the Mortgage Loans occurs, the greater the effect of such Principal Prepayment
on an investor's yield to maturity. The effect on an investor's yield of
Principal Prepayments occurring at a rate faster (or slower) than the rate
anticipated by the investor during the period immediately following the
issuance of the Offered Certificates may not be fully offset by a subsequent
like decrease (or increase) in the rate of Principal Prepayments in a like
amount.
The projected weighted average life of any Class of Offered Certificates
is the average amount of time that will elapse from the Closing Date until
each dollar of principal is scheduled to be repaid to the investors in such
Class of Offered Certificates. Because it is expected that there will be
prepayments and defaults on the Mortgage Loans, the actual weighted average
lives of the Classes of Offered Certificates are expected to vary
substantially from the weighted average remaining terms to stated maturity of
the Mortgage Loans as set forth herein under "The Trust Fund."
The "Assumed Final Maturity Date" for each Class of Offered Certificates
is as set forth herein under "Description of the Certificates -- General". For
the Class A-1, Class A-2 and Class A-3 Certificates, such date is the date on
which the "Original Certificate Principal Balance" set forth herein for such
Class less all amounts distributed to the related Certificateholders on
account of principal would be reduced to zero, assuming that no prepayments
are received on the Mortgage Loans, scheduled monthly payments of principal of
and interest on each of the Mortgage Loans are timely received and no excess
cashflow is used to make accelerated payments of principal to the
Certificateholders of such Classes of Offered Certificates. For the Class A-4
and Class A-5 Certificates, such date is the month of the latest maturing
Mortgage Loan plus twelve months. The weighted average life of each Class of
Offered Certificates is likely to be shorter than would be the case if
payments actually made on the Mortgage Loans conformed to the foregoing
assumptions, and the final Distribution Date with respect to the Offered
Certificates could occur significantly earlier than the related Assumed Final
Maturity Date because (i) prepayments are likely to occur, (ii) excess
cashflow, if any, will be applied as principal of the Offered Certificates as
described herein and (iii) the majority holder of the Class X Certificates and
the Servicer may cause a termination of the Mortgage Loans in the Trust Fund
as provided herein.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The prepayment model used in this prospectus
supplement, Home Equity Prepayment or HEP is a prepayment assumption which
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. For example, 25% HEP assumes a constant prepayment rate of
2.5% per annum of the then outstanding principal balance of the mortgage loans
in the first month of the life of the mortgage loans and an additional 2.5%
per annum in each month thereafter up to and including the tenth month.
Beginning in the eleventh month and in each month thereafter during the life
of the mortgage loans, 25% HEP assumes a constant prepayment rate of 25% per
annum. As used in the table below, 0% prepayment assumption assumes prepayment
rates equal to 0% of the prepayment assumption, i.e., no prepayments on the
Mortgage Loans having the characteristics described below. The prepayment
assumption does not purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool
of mortgage loans, including the Mortgage Loans in the Trust Fund.
The tables on pages S-55 through S-59 were prepared on the basis of the
assumptions in the following paragraph and the tables set forth below. There
are certain differences between the loan characteristics included in such
assumptions and the characteristics of the actual Mortgage Loans. Any such
discrepancy may have an effect upon the percentages of Original Certificate
Principal Balances outstanding and weighted average lives of the Offered
Certificates set forth in the tables on pages S-55 through S-59. In addition,
since the actual Mortgage Loans in the Trust Fund will have characteristics
that differ from those assumed in preparing the tables set forth below, the
distributions of principal of the Offered Certificates may be made earlier or
later than indicated in the tables.
The percentages and weighted average lives in the tables on pages S-55
through S-59 were determined assuming that: (i) the Mortgage Loans consist of
pools of mortgage loans with the information set forth in the table below,
(ii) the Closing Date for the Offered Certificates occurs on April 14, 2000
and the Offered Certificates were sold to investors by the Underwriter on the
Closing Date, (iii) distributions on the Offered Certificates are made on the
25th day of each month regardless of the day on which the Distribution Date
actually occurs, commencing in May 2000, in accordance with the priorities
described herein, (iv) the prepayment rates with respect to the Mortgage Loans
are a multiple of the HEP as stated in the tables below, (v) prepayments
include thirty days' interest thereon, (vi) the Seller is not required to
substitute or repurchase any or all of the Mortgage Loans pursuant to the
Pooling and Servicing Agreement and no optional termination is exercised,
except with respect to the entries identified by the row heading "Weighted
Average Life (years) to Call Option Date" in the tables below, (vii) the OC
Target Amount is set initially as specified in the Pooling and Servicing
Agreement and thereafter decreases in accordance with the provisions of the
Pooling and Servicing Agreement, (viii) scheduled payments for all Mortgage
Loans are received on the first day of each month commencing in May 2000, the
principal portion of such payments is computed prior to giving effect to
prepayments received through the end of the prior month and there are no
losses or delinquencies with respect to such Mortgage Loans, (ix) all the
Mortgage Loans prepay at the same rate and all such payments are treated as
prepayments in full of individual Mortgage Loans, with no shortfalls in
collection of interest, (x) such prepayments are received on the last day of
each month commencing in the month of the Closing Date, (xi) no reinvestment
income from any Account is earned and available for distribution, (xii) the
PMI Insurer premium is equal to the Weighted Average Coupon Rate of the
Mortgage Loans less (a) the Net Coupon Rate of the Mortgage Loans and (b)
0.50% for the Servicing Fee, (xiii) no prepayment penalties are received on
the Mortgage Loans, (xiv) the gross coupon rate for each adjustable rate
Mortgage Loan is adjusted on its next rate adjustment date (and every six
months thereafter) to equal the sum of (a) the level of Six-Month LIBOR and
(b) the respective gross margin (subject to applicable interest rate caps and
floors), (xv) the level of Six-Month LIBOR remains constant at 6.5025%, (xvi)
no backup servicer is appointed, and (xvii) the Class A-1 Pass-Through Rate is
6.27% for each Distribution Date. Nothing contained in the foregoing
assumptions should be construed as a representation that the Mortgage Loans
will not experience delinquencies or losses.
<TABLE>
<CAPTION>
Assumed Mortgage Loan Characteristics
All Mortgage Loans
- --------------------------------------------------------------------------------------------------------------
Original
Weighted Term to Remaining Remaining Term
Fixed/ Net Coupon Average Maturity Amortization to Maturity
Adjustable Pool Rate Coupon Rate Original Balance (Months) Term (Months) (Months)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Adjustable 1 8.8113% 9.7567% $5,819,365.54 360 346 346
Adjustable 2 9.9125 10.7953 18,635,075.31 360 357 357
Fixed 3 9.9367 10.7142 20,467,857.54 360 345 165
Fixed 4 10.0899 10.6917 17,656,928.56 163 151 151
Fixed 5 9.7076 10.4875 60,762,187.56 337 324 324
Fixed 6 10.2101 10.8896 12,615,695.68 172 169 169
Fixed 7 9.4171 10.2446 43,051,936.22 329 327 327
Fixed 8 10.3156 11.0404 35,126,967.19 360 357 177
</TABLE>
<TABLE>
<CAPTION>
Adjustable Rate Mortgage Loans
Interest Initial Interest
Gross Net Life Adjustment Adjustment First Reset
Pool Margin Net Life Cap Floor Cap Cap Reset Frequency Index
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 6.2500% 15.1634% 8.6765% 1.0115% 2% 9 6 Six-Month LIBOR
2 7.3667 16.7780 7.3281 1.0000 2 21 6 Six-Month LIBOR
</TABLE>
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each Class of Offered Certificates, and
set forth the percentages of the Original Certificate Principal Balance of
each such Class that would be outstanding after each of the dates shown, at
various percentages of HEP.
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Certificate Principal Balance Outstanding at the Following HEP Percentages
Class A-1 Certificates
-------------------------------------------------------------------------
Distribution Date 0% 15% 20% 25% 30% 35%
----------------------------------- ---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100%
April 25, 2001.................... 89 44 30 15 * 0
April 25, 2002.................... 82 0 0 0 0 0
April 25, 2003.................... 78 0 0 0 0 0
April 25, 2004.................... 73 0 0 0 0 0
April 25, 2005.................... 68 0 0 0 0 0
April 25, 2006.................... 63 0 0 0 0 0
April 25, 2007.................... 57 0 0 0 0 0
April 25, 2008.................... 52 0 0 0 0 0
April 25, 2009.................... 47 0 0 0 0 0
April 25, 2010.................... 40 0 0 0 0 0
April 25, 2011.................... 33 0 0 0 0 0
April 25, 2012.................... 25 0 0 0 0 0
April 25, 2013.................... 16 0 0 0 0 0
April 25, 2014.................... 0 0 0 0 0 0
April 25, 2015.................... 0 0 0 0 0 0
April 25, 2016.................... 0 0 0 0 0 0
April 25, 2017.................... 0 0 0 0 0 0
April 25, 2018.................... 0 0 0 0 0 0
April 25, 2019.................... 0 0 0 0 0 0
April 25, 2020.................... 0 0 0 0 0 0
April 25, 2021.................... 0 0 0 0 0 0
April 25, 2022.................... 0 0 0 0 0 0
April 25, 2023.................... 0 0 0 0 0 0
April 25, 2024.................... 0 0 0 0 0 0
April 25, 2025.................... 0 0 0 0 0 0
April 25, 2026.................... 0 0 0 0 0 0
April 25, 2027.................... 0 0 0 0 0 0
April 25, 2028.................... 0 0 0 0 0 0
April 25, 2029.................... 0 0 0 0 0 0
April 25, 2030.................... 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity (1)................ 7.80 0.99 0.80 0.67 0.58 0.52
Weighted Average Life (years)
to Call Option Date (1)........ 7.80 0.99 0.80 0.67 0.58 0.52
</TABLE>
- ---------------------
* Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date on such Class of Certificates
by the number of years from the date of issuance of the Certificates to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reductions in
principal amount on such Class of Certificates.
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Certificate Principal Balance Outstanding at the Following HEP Percentages
Class A-2 Certificates
-------------------------------------------------------------------------
Distribution Date 0% 15% 20% 25% 30% 35%
----------------------------------- ---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100%
April 25, 2001.................... 100 100 100 100 100 85
April 25, 2002.................... 100 95 68 43 19 0
April 25, 2003.................... 100 55 22 0 0 0
April 25, 2004.................... 100 24 0 0 0 0
April 25, 2005.................... 100 * 0 0 0 0
April 25, 2006.................... 100 0 0 0 0 0
April 25, 2007.................... 100 0 0 0 0 0
April 25, 2008.................... 100 0 0 0 0 0
April 25, 2009.................... 100 0 0 0 0 0
April 25, 2010.................... 100 0 0 0 0 0
April 25, 2011.................... 100 0 0 0 0 0
April 25, 2012.................... 100 0 0 0 0 0
April 25, 2013.................... 100 0 0 0 0 0
April 25, 2014.................... 87 0 0 0 0 0
April 25, 2015.................... 40 0 0 0 0 0
April 25, 2016.................... 35 0 0 0 0 0
April 25, 2017.................... 29 0 0 0 0 0
April 25, 2018.................... 22 0 0 0 0 0
April 25, 2019.................... 14 0 0 0 0 0
April 25, 2020.................... 6 0 0 0 0 0
April 25, 2021.................... 0 0 0 0 0 0
April 25, 2022.................... 0 0 0 0 0 0
April 25, 2023.................... 0 0 0 0 0 0
April 25, 2024.................... 0 0 0 0 0 0
April 25, 2025.................... 0 0 0 0 0 0
April 25, 2026.................... 0 0 0 0 0 0
April 25, 2027.................... 0 0 0 0 0 0
April 25, 2028.................... 0 0 0 0 0 0
April 25, 2029.................... 0 0 0 0 0 0
April 25, 2030.................... 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1)................. 16.01 3.32 2.49 2.00 1.67 1.44
Weighted Average Life (years)
to Call Option Date(1)......... 16.01 3.32 2.49 2.00 1.67 1.44
</TABLE>
- ---------------------
* Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date on such Class of Certificates
by the number of years from the date of issuance of the Certificates to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reductions in
principal amount on such Class of Certificates.
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Certificate Principal Balance Outstanding at the Following HEP Percentages
Class A-3 Certificates
-------------------------------------------------------------------------
Distribution Date 0% 15% 20% 25% 30% 35%
---------------------------------- ---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100%
April 25, 2001.................... 100 100 100 100 100 100
April 25, 2002.................... 100 100 100 100 100 96
April 25, 2003.................... 100 100 100 93 67 43
April 25, 2004.................... 100 100 90 59 34 14
April 25, 2005.................... 100 100 63 34 13 0
April 25, 2006.................... 100 79 44 19 2 0
April 25, 2007.................... 100 63 31 9 0 0
April 25, 2008.................... 100 55 26 8 0 0
April 25, 2009.................... 100 46 19 2 0 0
April 25, 2010.................... 100 37 12 0 0 0
April 25, 2011.................... 100 28 5 0 0 0
April 25, 2012.................... 100 20 0 0 0 0
April 25, 2013.................... 100 13 0 0 0 0
April 25, 2014.................... 100 4 0 0 0 0
April 25, 2015.................... 100 0 0 0 0 0
April 25, 2016.................... 100 0 0 0 0 0
April 25, 2017.................... 100 0 0 0 0 0
April 25, 2018.................... 100 0 0 0 0 0
April 25, 2019.................... 100 0 0 0 0 0
April 25, 2020.................... 100 0 0 0 0 0
April 25, 2021.................... 95 0 0 0 0 0
April 25, 2022.................... 83 0 0 0 0 0
April 25, 2023.................... 69 0 0 0 0 0
April 25, 2024.................... 54 0 0 0 0 0
April 25, 2025.................... 37 0 0 0 0 0
April 25, 2026.................... 17 0 0 0 0 0
April 25, 2027.................... 0 0 0 0 0 0
April 25, 2028.................... 0 0 0 0 0 0
April 25, 2029.................... 0 0 0 0 0 0
April 25, 2030.................... 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1)................. 24.13 9.04 6.51 4.83 3.74 3.05
Weighted Average Life (years)
to Call Option Date(1)......... 24.03 8.78 6.29 4.73 3.74 3.05
</TABLE>
- ---------------------
* Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date on such Class of Certificates
by the number of years from the date of issuance of the Certificates to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reductions in
principal amount on such Class of Certificates.
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Certificate Principal Balance Outstanding at the Following HEP Percentages
Class A-4 Certificates
-------------------------------------------------------------------------
Distribution Date 0% 15% 20% 25% 30% 35%
---------------------------------- ---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100%
April 25, 2001.................... 100 100 100 100 100 100
April 25, 2002.................... 100 100 100 100 100 100
April 25, 2003.................... 100 100 100 100 100 100
April 25, 2004.................... 100 100 100 100 100 100
April 25, 2005.................... 100 100 100 100 100 83
April 25, 2006.................... 100 100 100 100 100 43
April 25, 2007.................... 100 100 100 100 74 26
April 25, 2008.................... 100 100 100 100 72 26
April 25, 2009.................... 100 100 100 100 55 21
April 25, 2010.................... 100 100 100 83 35 9
April 25, 2011.................... 100 100 100 57 19 0
April 25, 2012.................... 100 100 98 37 8 0
April 25, 2013.................... 100 100 72 22 0 0
April 25, 2014.................... 100 100 44 9 0 0
April 25, 2015.................... 100 73 20 0 0 0
April 25, 2016.................... 100 57 12 0 0 0
April 25, 2017.................... 100 43 5 0 0 0
April 25, 2018.................... 100 31 * 0 0 0
April 25, 2019.................... 100 22 0 0 0 0
April 25, 2020.................... 100 14 0 0 0 0
April 25, 2021.................... 100 7 0 0 0 0
April 25, 2022.................... 100 1 0 0 0 0
April 25, 2023.................... 100 0 0 0 0 0
April 25, 2024.................... 100 0 0 0 0 0
April 25, 2025.................... 100 0 0 0 0 0
April 25, 2026.................... 100 0 0 0 0 0
April 25, 2027.................... 67 0 0 0 0 0
April 25, 2028.................... 30 0 0 0 0 0
April 25, 2029.................... 2 0 0 0 0 0
April 25, 2030.................... 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1)................. 27.64 17.10 14.11 11.69 9.23 6.69
Weighted Average Life (years)
to Call Option Date(1)......... 25.95 12.20 9.36 7.53 6.20 5.15
</TABLE>
- ---------------------
* Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date on such Class of Certificates
by the number of years from the date of issuance of the Certificates to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reductions in
principal amount on such Class of Certificates.
<PAGE>
<TABLE>
<CAPTION>
Percent of Original Certificate Principal Balance Outstanding at the Following HEP Percentages
Class A-5 Certificates
-------------------------------------------------------------------------
Distribution Date 0% 15% 20% 25% 30% 35%
------------------------------------ ---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100%
April 25, 2001.................... 100 100 100 100 100 100
April 25, 2002.................... 100 100 100 100 100 100
April 25, 2003.................... 100 100 100 100 100 100
April 25, 2004.................... 99 92 90 87 85 82
April 25, 2005.................... 99 85 81 76 72 67
April 25, 2006.................... 97 73 67 60 53 46
April 25, 2007.................... 95 61 52 44 36 28
April 25, 2008.................... 88 35 24 17 12 10
April 25, 2009.................... 81 19 11 6 3 1
April 25, 2010.................... 73 11 5 2 1 *
April 25, 2011.................... 65 6 2 1 * 0
April 25, 2012.................... 57 3 1 * * 0
April 25, 2013.................... 50 2 * * 0 0
April 25, 2014.................... 28 1 * * 0 0
April 25, 2015.................... 7 * 0 0 0 0
April 25, 2016.................... 6 * 0 0 0 0
April 25, 2017.................... 5 * 0 0 0 0
April 25, 2018.................... 4 * 0 0 0 0
April 25, 2019.................... 4 * 0 0 0 0
April 25, 2020.................... 3 * 0 0 0 0
April 25, 2021.................... 2 * 0 0 0 0
April 25, 2022.................... 2 * 0 0 0 0
April 25, 2023.................... 1 0 0 0 0 0
April 25, 2024.................... 1 0 0 0 0 0
April 25, 2025.................... * 0 0 0 0 0
April 25, 2026.................... * 0 0 0 0 0
April 25, 2027.................... * 0 0 0 0 0
April 25, 2028.................... * 0 0 0 0 0
April 25, 2029.................... 0 0 0 0 0 0
April 25, 2030.................... 0 0 0 0 0 0
Weighted Average Life (years)
to Maturity(1)................. 12.29 7.40 6.87 6.46 6.14 5.88
Weighted Average Life (years)
to Call Option Date(1)......... 12.29 7.37 6.76 6.18 5.46 4.81
</TABLE>
- ---------------------
* Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of any Class of Certificates is determined by
(i) multiplying the assumed net reduction, if any, in the Certificate
Principal Balance on each Distribution Date on such Class of Certificates
by the number of years from the date of issuance of the Certificates to
the related Distribution Date, (ii) summing the results, and (iii)
dividing the sum by the aggregate amount of the assumed net reductions in
principal amount on such Class of Certificates.
<PAGE>
Reports to Holders of the Certificates
On each Distribution Date, the Trustee will make available to each holder
of a Certificate and the Certificate Insurer a statement to the extent such
information is provided to the Trustee by the Servicer generally setting
forth:
(i) the aggregate amount of the distributions, separately
identified, with respect to each Class of Offered Certificates;
(ii) the amount of such distributions allocable to principal,
separately identifying the aggregate amount of any scheduled principal,
Principal Prepayments or other unscheduled recoveries of principal
included therein;
(iii) the amount of such distributions allocable to interest and the
calculation thereof;
(iv) the Certificate Principal Balance of each Class of Offered
Certificates after giving effect to the distribution of principal on such
Distribution Date;
(v) the Pool Balance as of the end of the related Due Period;
(vi) the OC Target Amount and Overcollateralized Amount as of such
Distribution Date;
(vii) the related amount of the Servicing Fee paid to or retained by
the Servicer;
(viii) the amount of the Trustee Fee paid to the Trustee;
(ix) the amount of Delinquency Advances and Servicing Advances for
the related Due Period;
(x) the number and aggregate Loan Balance of Mortgage Loans that
were (A) delinquent (exclusive of Mortgage Loans in foreclosure) (1) 30
to 59 days, (2) 60 to 89 days and (3) 90 or more days, (B) in foreclosure
and delinquent (1) 30 to 59 days, (2) 60 to 89 days and (3) 90 or more
days and (C) in bankruptcy as of the close of business on the last day of
the calendar month preceding such Distribution Date;
(xi) with respect to any Mortgage Loan that became an REO Property
during the preceding calendar month, the loan number, the Loan Balance of
such Mortgage Loan as of the close of business on the last day of such
month and the date of acquisition thereof, as well as the total number
and Loan Balance of any REO Properties as of the close of business on the
last day of the preceding month;
(xii) the aggregate amount of Realized Losses incurred during the
preceding calendar month, as well as the cumulative amount of Realized
Losses;
(xiii) any OC Deficiency Amount after giving effect to the
distributions of principal on such Distribution Date;
(xiv) any OC Deficit after giving effect to distributions on such
Distribution Date;
(xv) the Reimbursement Amount, if any; and
(xvi) the Pass-Through Rate for each Class of Offered Certificates
for such Distribution Date.
The Trustee will make the monthly statements (and, at its option, any
additional files containing the same information in an alternative format)
available each month to Certificateholders and other parties to the Pooling
and Servicing Agreement via the Trustee's internet website and its
fax-on-demand service. The Trustee's fax-on-demand service may be accessed by
calling (301) 815-6610. The Trustee's website will be located at
"www.ctslink.com." Assistance in using the website or the fax-on-demand
service can be obtained by calling the Trustee's customer service desk at
(301) 815-6600. Parties that are unable to use the above distribution options
are entitled to have a paper copy mailed to them via first class mail by
calling the customer service desk and indicating such. The Trustee shall have
the right to change the way monthly statements are distributed in order to
make such distribution more convenient and/or more accessible to the above
parties and the Trustee shall provide timely and adequate notification to all
above parties regarding any such changes.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will prepare and deliver to each holder of a
Certificate of record during the previous calendar year a statement containing
information necessary to enable holders of the Certificates to prepare their
tax returns. Such statements will not have been examined and reported upon by
an independent public accountant.
Amendment
The Pooling and Servicing Agreement may be amended by the Depositor, the
Seller, the Servicer, and the Trustee, without the consent of the holders of
the Certificates but only with the consent of the Certificate Insurer, for
certain limited purposes set forth in The Pooling and Servicing Agreement. In
addition, the Pooling and Servicing Agreement may be amended by the Depositor,
the Seller, the Servicer, and the Trustee with the consent of the Certificate
Insurer and the holders of a majority in interest of any Class of Offered
Certificates affected thereby for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Pooling and
Servicing Agreement or of modifying in any manner the rights of the holders of
Offered Certificates; provided, however, that no such amendment may (i) reduce
in any manner the amount of, or delay the timing of, distributions required to
be made on any Offered Certificate without the consent of the holder of such
Certificate; (ii) adversely affect in any material respect the interests of
the holders of any Class of the Offered Certificates in a manner other than as
described in clause (i) above, without the consent of the holders of Offered
Certificates of such Class evidencing Percentage Interests aggregating at
least 66%; or (iii) reduce the aforesaid percentage of aggregate outstanding
principal amounts of Offered Certificates, the holders of which are required
to consent to any such amendment, without the consent of the holders of all
such Certificates.
Optional Termination
The majority holder of the Class X Certificates will have the right to
repurchase all remaining Mortgage Loans and REO Properties, if any, and
thereby effect the early retirement of the Certificates, subject to the
aggregate Certificate Principal Balances of the Certificates at the time of
repurchase being less than or equal to 10% of Certificate Principal Balances
on the Closing Date. In addition, if the majority holder of the Class X
Certificates does not exercise its right to repurchase all remaining Mortgage
Loans and REO Properties, the Servicer will have a similar option with respect
to the Trust Fund. In the event that the option is exercised, the repurchase
will be made at a price equal to the sum of (i) the greater of (a) 100% of the
Loan Balance of each Mortgage Loan and REO Property and (b) the fair market
value (net of accrued interest) of the Mortgage Loans and REO Properties
determined as set forth in the Pooling and Servicing Agreement, (ii) 30 days'
interest thereon at a rate equal to the applicable Loan Rate and (iii) the
aggregate amount of (x) all unreimbursed Delinquency Advances, (y) all
unreimbursed out-of-pocket costs and expenses previously incurred by the
Servicer in the performance of its servicing obligations, to the extent such
costs and expenses relate to the Mortgage Loans and REO Properties then held
as part of the Trust Fund and (z) any accrued and unpaid Servicing Fees and
any accrued and unpaid Trustee Fees and other amounts owed to the Trustee.
Proceeds from such repurchase will be included in Available Funds and will be
distributed to the holders of the Certificates in accordance with the Pooling
and Servicing Agreement. Any such purchase which will result in unreimbursed
Reimbursement Amounts to the Certificate Insurer will require Certificate
Insurer consent. Any such repurchase of the Mortgage Loans and REO Properties
will result in the early retirement of the Certificates.
Optional Purchase of Defaulted Loans
As to any Mortgage Loan which is delinquent in payment by 90 days or
more, the Seller may, at its option, purchase such Mortgage Loan from the
Trust Fund at a price which includes 100% of the Loan Balance thereof plus
accrued interest thereon at the applicable Loan Rate from the date through
which interest was last paid by the related Mortgagor through the day before
the due date in the Due Period in which such purchase occurs; provided,
however, that (i) the total amount of such Mortgage Loans that may be
purchased by the Seller described in this paragraph (not including Mortgage
Loans repurchased due to a breach of a representation or warranty under the
Pooling and Servicing Agreement) may not exceed 3% of the aggregate of the
Cut-off Date Loan Balances and (ii) unless the Certificate Insurer otherwise
consents, the Mortgage Loans must be purchased in the order they become
delinquent.
Events of Default; Servicer Termination Trigger Event
Events of Default will consist, among other things, of: (i) any failure
by the Servicer to deposit in the Collection Account or Certificate Account
the required amounts or remit to the Trustee any payment which continues
unremedied for two Business Days; (ii) any failure by the Servicer to observe
or perform in any material respect any of its covenants or agreements in the
Pooling and Servicing Agreement, which continues unremedied for 30 days after
the first date on which (x) the Servicer has knowledge of such failure or (y)
written notice of such failure is given to the Servicer by the Seller, the
Trustee, the Certificate Insurer, the Depositor or the holders of Offered
Certificates evidencing not less than 51% of the voting rights evidenced by
the Offered Certificates; (iii) insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings, and certain actions by or on
behalf of the Servicer indicating its insolvency or inability to pay its
obligations; (iv) certain defaults under the Insurance Agreement; or (v) other
defaults as specified in the Pooling and Servicing Agreement. As of any date
of determination, voting rights will be allocated among holders of the Offered
Certificates as described in the Pooling and Servicing Agreement. Voting
rights will be allocated among holders of the Certificates of each Class of
Offered Certificates in accordance with such holders' respective Percentage
Interests in such Class.
A "Servicer Termination Trigger Event" will occur if certain loss or
delinquency amounts are exceeded with respect to the Mortgage Loans, as
described in the Pooling and Servicing Agreement.
Rights Upon Event of Default or Servicer Termination Trigger Event
So long as an Event of Default under the Pooling and Servicing Agreement
remains unremedied, the Trustee at the direction of the Certificate Insurer or
the holders of Offered Certificates evidencing not less than 51% of the voting
rights (with the consent of the Certificate Insurer) may terminate all of the
rights and obligations of the Servicer in its capacity as servicer with
respect to the Trust Fund, as provided in the Pooling and Servicing Agreement,
whereupon the successor Servicer will succeed to all of the responsibilities
and duties of the Servicer under the Pooling and Servicing Agreement,
including the obligation to make Delinquency Advances. If a Servicer
Termination Trigger Event occurs, the Trustee shall, but only upon receipt of
instructions from the Certificate Insurer, terminate all of the rights and
obligations of the Servicer under the Pooling and Servicing Agreement and in
and to the Mortgage Loans as described in the preceding sentence. No assurance
can be given that termination of the rights and obligations of the Servicer
under the Pooling and Servicing Agreement would not adversely affect the
servicing of the Mortgage Loans, including the delinquency experience of the
Mortgage Loans.
No holder of an Offered Certificate, solely by virtue of such holder's
status as a holder of an Offered Certificate, will have any right under the
Pooling and Servicing Agreement to institute any proceeding with respect
thereto, unless such holder previously has given to the Trustee written notice
of default and unless the holders of Offered Certificates having not less than
51% of the voting rights evidenced by the Offered Certificates so agree and
have offered reasonable indemnity to the Trustee, the Certificate Insurer
shall have consented thereto and the Trustee for 60 days has neglected or
refused to institute any such proceeding.
Pursuant to the Pooling and Servicing Agreement, the Servicer covenants
and agrees to act as the Servicer for an initial term from the Closing Date to
June 30, 2000, which term will be extendable by the Certificate Insurer by
notice to the Trustee for successive terms of three (3) calendar months each,
until the termination of the Trust Fund. The Servicer will, upon its receipt
of each such notice of extension (a "Servicer Extension Notice") become bound
for the duration of the term covered by such Servicer Extension Notice to
continue as the Servicer subject to and in accordance with the other
provisions of the Pooling and Servicing Agreement. If as of the fifteenth
(15th) day prior to the last day of any term of the Servicer, the Trustee
shall not have received any Servicer Extension Notice from the Certificate
Insurer, the Trustee will, within five (5) days thereafter, give written
notice of such nonreceipt to the Certificate Insurer and the Servicer. The
Certificate Insurer has agreed to extend each 90-day term of the Servicer, in
the absence of an Event of Default or Servicer Termination Event under the
Pooling and Servicing Agreement or an event of default under the Insurance
Agreement. If a backup servicer is retained by the Trust and the Servicer is
later terminated, the backup servicer will be required to perform the
responsibilities of the Servicer.
THE CERTIFICATE INSURER
The information set forth in this section has been provided by Financial
Security Assurance Inc. (the "Certificate Insurer"). No representation is made
by the Underwriter, the Trustee, the Servicer, the Seller, the Depositor or
any of their affiliates as to the accuracy or completeness of such information
or any information related to the Certificate Insurer incorporated by
reference herein.
General
The Certificate Insurer is a monoline insurance company incorporated in
1984 under the laws of the State of New York. The Certificate Insurer is
licensed to engage in financial guaranty insurance business in all 50 states,
the District of Columbia, Puerto Rico and the U.S. Virgin Islands.
The Certificate Insurer and its subsidiaries are engaged in the business
of writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. Financial guaranty insurance provides
a guaranty of scheduled payments on an issuer's securities - thereby enhancing
the credit rating of those securities - in consideration for the payment of a
premium to the insurer. The Certificate Insurer and its subsidiaries
principally insure asset-backed, collateralized and municipal securities.
Asset-backed securities are typically supported by residential mortgage loans,
consumer or trade receivables, securities or other assets having an
ascertainable cash flow or market value. Collateralized securities include
public utility first mortgage bonds and sale/leaseback obligation bonds.
Municipal securities include general obligation bonds, special revenue bonds
and other special obligations of state and local governments. The Certificate
Insurer insures both newly issued securities sold in the primary market and
outstanding securities sold in the secondary market that satisfy the
Certificate Insurer's underwriting criteria.
The Certificate Insurer is a wholly owned subsidiary of Financial
Security Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange
listed company. Major shareholders of Holdings include White Mountains
Insurance Group, Ltd., The Tokio Marine and Fire Insurance Co., Ltd. and XL
Capital Ltd. On March 14, 2000, Holdings announced that it had entered into a
merger agreement pursuant to which Holdings would become a wholly owned
subsidiary of Dexia S.A., a publicly held Belgian corporation, subject to
receipt of shareholder and regulatory approvals and satisfaction of other
closing conditions. Dexia S.A., through its bank subsidiaries, is primarily
engaged in the business of public finance in France. No shareholder of
Holdings is obligated to pay any debt of the Certificate Insurer or any claim
under any insurance policy issued by the Certificate Insurer or to make any
additional contribution to the capital of the Certificate Insurer.
The principal executive offices of the Certificate Insurer are located at
350 Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100.
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the Certificate Insurer
or its domestic or Bermuda operating insurance company subsidiaries are
generally reinsured among such companies on an agreed-upon percentage
substantially proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. In addition, the Certificate
Insurer reinsures a portion of its liabilities under certain of its financial
guaranty insurance policies with other reinsurers under various treaties and
on a transaction-by-transaction basis. Such reinsurance is utilized by the
Certificate Insurer as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit the
Certificate Insurer's obligations under any financial guaranty insurance
policy.
Ratings
The Certificate Insurer's insurance financial strength is rated "Aaa" by
Moody's. The Certificate Insurer's insurer financial strength is rated "AAA"
by Standard & Poor's and Standard & Poor's (Australia) Pty. Ltd. The
Certificate Insurer's claims-paying ability is rated "AAA" by Fitch IBCA, Inc.
and Japan Rating and Investment Information, Inc. These ratings reflect only
the views of the respective rating agencies, are not recommendations to buy,
sell or hold securities and are subject to revision or withdrawal at any time
by such rating agencies.
Capitalization
The following table derived from the Certificate Insurer's audited
financial statements sets forth the capitalization of the Certificate Insurer
and its subsidiaries on the basis of generally accepted accounting principals,
as of December 31, 1999:
<TABLE>
<CAPTION>
December 31, 1999
-----------------
(In thousands)
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance
premiums) $559,041
Long-term Debt.............................................. 120,000
Minority Interest........................................... 32,945
Shareholder's Equity:
Common Stock................................................ 15,000
Additional Paid-In Capital.................................. 832,556
Accumulated Other Comprehensive Loss
(net of deferred income taxes)........................... (43,666)
Accumulated Earnings........................................ 491,056
Total Shareholder's Equity.................................. 1,294,946
Total Deferred Premium Revenue, Surplus
Notes, Minority Interest and Shareholder's Equity........ $2,006,932
</TABLE>
For further information concerning the Certificate Insurer, see the
Consolidated Financial Statements of the Certificate Insurer and subsidiaries,
and the notes thereto incorporated herein by reference. The Certificate
Insurer's financial statements are included as exhibits to the Annual Reports
on Form 10-K and the Quarterly Reports on Form 10-Q that are filed with the
Securities and Exchange Commission (the "Commission") by Holdings and may be
reviewed at the EDGAR web site maintained by the Commission and at Holding's
website, http://www.FSA.com. Copies of the statutory quarterly and annual
statements filed with the State of New York Insurance Department by the
Certificate Insurer are available upon request to the State of New York
Insurance Department.
Incorporation of certain documents by reference
In addition to the documents described under "Incorporation of Certain
Information by Reference" in the prospectus, the financial statements of the
Certificate Insurer and subsidiaries included in, or as exhibits to, the
following document which has been filed with the Securities and Exchange
Commission by Holdings, is hereby incorporated by reference in this prospectus
supplement: the Annual Report on Form 10-K for the year ended December 31,
1999.
All financial statements of the Certificate Insurer and subsidiaries
included in documents filed by Holdings pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the
date of this prospectus supplement and prior to the termination of the
offering of the Offered Certificates shall be deemed to be incorporated by
reference into this prospectus supplement and to be part hereof from the
respective dates of filing such documents.
The Seller will provide without charge to any person to whom this
prospectus supplement is delivered, upon the oral or written request of such
person, a copy of any or all of the foregoing financial statements
incorporated in this prospectus supplement by reference. Requests for such
copies should be directed to Middlesex Corporate Center, 213 Court Street,
Middletown, Connecticut 06457, Attention: Corporation Secretary.
The Seller on behalf of the Trust hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
trust's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934, and each filing of the financial statements
of the Certificate Insurer included in or as an exhibit to the annual report
of Holdings filed pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934, that is incorporated by reference in the registration
statement, as defined in the prospectus, shall be deemed to be a new
registration statement relating to the offered certificates offered hereby,
and the offering of those Offered Certificates at that time shall be deemed to
be the initial bona fide offering thereof.
Insurance Regulation
The Certificate Insurer is licensed and subject to regulation as a
financial guaranty insurance corporation under the laws of the State of New
York, its state of domicile. In addition, the Certificate Insurer and its
insurance subsidiaries are subject to regulation by insurance laws of the
various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State
of New York, the Certificate Insurer is subject to Article 69 of the New York
Insurance Law which, among other things, limits the business of financial
guaranty insurer to writing financial guaranty insurance and related lines,
requires that each such insurer maintain a minimum surplus to policyholders,
establishes contingency, loss and unearned premium reserve requirements for
each such insurer, and limits the size of individual transactions and the
volume of transactions that may be underwritten by each financial guaranty
insurer. Other provisions of the New York Insurance Law, applicable to
non-life insurance companies such as the Certificate Insurer, regulate, among
other things, permitted investments, payment of dividends, transactions with
affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liability for borrowings.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Offered
Certificates against the purchase price of the Mortgage Loans transferred to
the Trust Fund.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion of material federal income tax consequences of
the purchase, ownership and disposition of the certificates is to be
considered only in connection with "Material Federal Income Tax Consequences"
in the accompanying prospectus. The discussion in this prospectus supplement
and in the accompanying prospectus is based upon laws, regulations, rulings
and decisions now in effect, all of which are subject to change. The
discussion below and in the accompanying prospectus does not purport to deal
with all federal tax consequences applicable to all categories of investors,
some of which may be subject to special rules. Investors should consult their
own tax advisors in determining the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of the
certificates.
The Trustee will elect to treat the Trust Fund as comprising two "real
estate mortgage investment conduits" (each, a "REMIC") for federal income tax
purposes. In the opinion of Brown & Wood LLP, tax counsel to the Trust and
counsel to the Underwriter, assuming compliance with the Pooling and Servicing
Agreement, each portion of the Trust Fund with respect to which the Trustee
makes a REMIC election will qualify as a REMIC, the Offered Certificates and
the Class X Certificates will constitute REMIC "regular interests" and the
Residual Certificates will represent ownership of the sole class of "residual
interests" in each REMIC.
The Certificates possess special tax attributes by virtue of the REMIC
provisions of the Code. See "Material Federal Income Tax Consequences -- REMIC
Securities" in the Prospectus.
The Offered Certificates generally will be treated as debt instruments
for federal income tax purposes. Beneficial owners, or registered holders, in
the case of definitive certificates, of the class A certificates will be
required to report income on Offered Certificates in accordance with the
accrual method of accounting. It is not anticipated that the Offered
Certificates will be issued with original issue discount. See "Material
Federal Income Tax Consequences -- Original Issue Discount" in the Prospectus.
The prepayment assumption for calculating original issue discount is 100% of
the HEP. See "Yield, Payment and Maturity Considerations" herein.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Offered Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974 and the Code impose
certain restrictions on,
o employee benefit plans, as defined in Section 3(3) of ERISA,
o plans described in section 4975(e)(1) of the Code, including
individual retirement accounts or Keogh plans,
o any entities whose underlying assets include plan assets by reason of
a plan's investment in such entities and
o persons who have certain specified relationships to such plans --
"parties-in-interest" under ERISA and "disqualified persons" under the
Code.
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.
The Department of Labor has issued a regulation describing what
constitutes the assets of a plan when the plan acquires an equity interest in
another entity. This plan asset regulation states that, unless an exemption
described in the regulation is applicable, the underlying assets of an entity
in which a plan makes an equity investment will be considered, for purposes of
ERISA, to be the assets of the investing plan. Pursuant to the plan asset
regulation, if the assets of the Trust were deemed to be plan assets by reason
of a plan's investment in any Offered Certificates, such plan assets would
include an undivided interest in any assets held in such Trust. Therefore, in
the absence of an exemption, the purchase, sale or holding of any Offered
Certificate by a plan subject to Section 406 of ERISA or Section 4975 of the
Code might result in prohibited transactions and the imposition of excise
taxes and civil penalties.
The Department of Labor issued to Prudential Securities Incorporated an
individual administrative exemption, Prohibited Transaction Exemption 90-32,
from some of the prohibited transaction rules of ERISA with respect to the
initial purchase, the holding and the subsequent resale by a plan of
certificates in pass-through trusts that meet the conditions and requirements
of this exemption. Among the conditions that must be satisfied for this
exemption to apply are the following:
(a) The acquisition of the Offered Certificates by a plan is on
terms, including the price for the Offered 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 Offered Certificates
acquired by the plan are not subordinated to the rights and interests
evidenced by other Certificates of the Trust Fund;
(c) The Offered Certificates acquired by the plan have received a
rating at the time of such acquisition that is in one of the three
highest generic rating categories from any of Standard & Poor's, Moody's,
Fitch IBCA, or Duff & Phelps Credit Rating Co.;
(d) The sum of all payments made to the underwriter in connection
with the distribution of the Offered Certificates represents not more
than reasonable compensation for underwriting the Offered Certificates.
The sum of all payments made to and retained by the Servicer represents
not more than reasonable compensation for the Servicer's services under
the Pooling and Servicing Agreement and reimbursement of the Servicer's
reasonable expenses in connection therewith;
(e) The Trustee is not an affiliate of any other member of the
restricted group; and
(f) The plan investing in the Offered Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933.
The Trust Fund also must meet the following requirements:
o The corpus of the Trust Fund must consist solely of assets of the type
which have been included in other investment pools;
o certificates in such other investment pools must have been rated in
one of the three highest rating categories of Standard & Poor's,
Moody's, Duff & Phelps or Fitch IBCA for at least one year prior to
the plan's acquisition of certificates; and
o certificates evidencing interests in such other investment pools must
have been purchased by investors other than plans for at least one
year prior to any plan's acquisition of Offered Certificates.
In order for the exemption to apply to the self-dealing/conflict of
interest prohibited transactions that may occur when a plan fiduciary causes
the plan to acquire Offered Certificates, the Exemption requires, among other
matters, that:
o in the case of an acquisition in connection with the initial issuance
of certificates, at least fifty percent of each Class of Certificates
in which plans have invested is acquired by persons independent of the
restricted group and at least fifty percent of the aggregate interest
in the Trust Fund is acquired by persons independent of the restricted
group;
o such fiduciary, or its affiliate, is an obligor with respect to 5
percent or less of the fair market value of the obligations contained
in the Trust Fund;
o the plan's investment in Offered Certificates does not exceed
twenty-five percent (25%) of all of the Certificates outstanding at
the time of the acquisition and
o immediately after the acquisition, no more than twenty-five percent
(25%) of the assets of the plan are invested in Certificates
representing an interest in one or more trusts containing assets sold
or serviced by the same entity.
The exemption does not apply to specified prohibited transactions in the
case of plans sponsored by the Underwriter, the Trustee, the Servicer, any
obligor with respect to more than 5% of the fair market value of the Mortgage
Loans included in the Trust Fund, any entity deemed to be a "sponsor" of the
Trust Fund as such term is defined in the exemption, or any affiliate of any
such party.
A governmental plan as defined in Section 3(32) of ERISA is not subject
to ERISA, or Code Section 4975. However, such a governmental plan may be
subject to a federal, state, or local law, which is, to a material extent,
similar to the provisions of ERISA or Code Section 4975. A fiduciary of a
governmental plan should make its own determination as to the need for and the
availability of any exemptive relief under similar law.
The sale of certificates to a plan is in no respect a representation by
the Depositor or the Underwriter that this investment meets all relevant legal
requirements with respect to investments by plans generally or any particular
plan, or that this investment is appropriate for plans generally or any
particular ERISA plan.
LEGAL INVESTMENT CONSIDERATIONS
The Certificates will not constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). Accordingly,
many institutions with legal authority to invest in "mortgage related
securities" may not be legally authorized to invest in the Offered
Certificates.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and Prudential Securities Incorporated (the
"Underwriter"), an affiliate of the Depositor, the Depositor has agreed to
sell to the Underwriter, and the Underwriter has agreed to purchase from the
Depositor, the Offered Certificates.
The distribution of the Offered Certificates by the Underwriter will be
effected in each cash from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case,
at the time of sale. The Underwriter may effect such transactions by selling
the Offered Certificates to or through dealers, and such dealers may receive
from the Underwriter, for whom they act as agent, compensation in the form of
underwriting discounts, concessions or commissions. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the
Offered Certificates may be deemed to be an underwriter, and any discounts,
commissions or concessions received by them, and any profits on the resale of
the Certificates purchased by them, may be deemed to be underwriting discounts
and commissions under the Securities Act of 1933, as amended. The Underwriting
Agreement provides that the Depositor (and the Mortgage Loan Purchase
Agreement provides that the Seller) will indemnify the Underwriter against
certain civil liabilities, including liabilities under the Act.
The Depositor has been advised by the Underwriter that it intends to make
a market in the Offered Certificates but it has no obligation to do so. There
can be no assurance that a secondary market for the Offered Certificates will
develop or, if it does develop, that it will continue.
The Offered Certificates are offered by the Underwriter, subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to their right to reject orders in whole or in part. It is expected that
delivery of the Offered Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company on or about the Closing
Date.
The Depositor and the Seller have agreed to indemnify the Underwriter
against, or make contributions to the Underwriter with respect to, certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
ADDITIONAL INFORMATION
Prudential Securities Secured Financing Corporation has filed with the
Securities and Exchange Commission a registration statement (Registration No.
333-75489) under the Securities Act of 1933, with respect to the Offered
Certificates 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.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Offered
Certificates will be passed upon for the Depositor and for the Underwriter by
Brown & Wood LLP, Washington, DC, and for the Seller by Brown & Wood llp,
Washington, DC.
RATINGS
It is a condition to the original issuance of the Offered Certificates
that they will receive ratings of "AAA" by Standard & Poor's and "Aaa" by
Moody's. The ratings assigned to the Offered Certificates will take into
account the claims-paying ability of the Certificate Insurer. Explanations of
the significance of such ratings may be obtained from Moody's Investors
Service, Inc., 99 Church Street, New York, New York 10007 and Standard &
Poor's Rating Services, 55 Water Street, New York, New York 10041. Such
ratings will be the views only of such rating agencies. There is no assurance
that any such ratings will continue for any period of time or that such
ratings will not be revised or withdrawn. Any such revision or withdrawal of
such ratings may have an adverse effect on the market price of the Offered
Certificates.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1999 and December 31, 1998 and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1999
incorporated by reference in this Prospectus Supplement, have been
incorporated herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
<PAGE>
<TABLE>
<CAPTION>
INDEX OF DEFINED TERMS
Page
----
<S> <C>
Accrual Period..................................................................................................42
Actuarial Loans.................................................................................................21
Assumed Final Maturity Date.....................................................................................53
Available Funds.................................................................................................40
Balloon Loans...................................................................................................51
Basic Principal Distribution Amount.............................................................................42
beneficial owner................................................................................................34
Book-Entry Certificates.........................................................................................33
Business Day....................................................................................................47
Call Option Date................................................................................................42
Certificate Account.............................................................................................40
Certificate Insurer.............................................................................................64
Certificate Insurer Default.....................................................................................42
Certificate Owners..............................................................................................33
Certificate Principal Balance...................................................................................42
Certificateholder...............................................................................................34
Certificates....................................................................................................33
Class A-5 Priority Distribution Amount..........................................................................41
Class A-5 Pro Rata Percentage...................................................................................41
Clearstream Luxembourg..........................................................................................33
Clearstream Luxembourg Participants.............................................................................35
CLTV............................................................................................................23
Collection Account..............................................................................................38
Combined Loan-to-Value Ratio....................................................................................23
Commission......................................................................................................66
Cooperative.....................................................................................................36
Corporate Office................................................................................................22
Custodian.......................................................................................................29
Cut-Off Date Loan Balance.......................................................................................12
debt-to-income ratio............................................................................................22
Defective Loan..................................................................................................30
Definitive Certificate..........................................................................................34
Deleted Mortgage Loan...........................................................................................30
Delinquency Advance.............................................................................................32
Delinquent......................................................................................................42
Distribution Date...............................................................................................37
DTC.............................................................................................................33
DTC Rules.......................................................................................................34
due date........................................................................................................31
Due Period......................................................................................................43
Euroclear.......................................................................................................33
Euroclear Operator..............................................................................................36
Euroclear Participants..........................................................................................35
European Depositaries...........................................................................................34
Extra Principal Distribution Amount.............................................................................43
Financial Intermediary..........................................................................................34
FIRREA..........................................................................................................23
General Excess Available Amount.................................................................................43
Global Securities...............................................................................................76
Holdings........................................................................................................65
Indirect Retail Mortgage Loans..................................................................................22
Insurance Agreement.............................................................................................48
Insurance Proceeds..............................................................................................38
Insured Distribution Amount.....................................................................................43
Insured Payments................................................................................................46
Interest Distribution Amount....................................................................................43
Interest Remittance Amount......................................................................................43
LIBOR Business Day..............................................................................................45
LIBOR Determination Date........................................................................................45
Liquidated Loan.................................................................................................45
Liquidation Proceeds............................................................................................38
Loan Balance....................................................................................................43
Loan-to-Value Ratio.............................................................................................23
LTV.............................................................................................................23
Mortgage Loans..................................................................................................12
Mortgage Notes..................................................................................................12
Mortgage Pool...................................................................................................12
Mortgaged Properties............................................................................................12
Mortgages.......................................................................................................12
Net WAC Cap.....................................................................................................43
OC Deficiency Amount............................................................................................43
OC Deficit......................................................................................................43
OC Release Amount...............................................................................................44
OC Target Amount................................................................................................44
Offered Certificates............................................................................................33
One-Month LIBOR.................................................................................................45
Order...........................................................................................................46
Original Certificate Principal Balance..........................................................................42
Overcollateralized Amount.......................................................................................44
Pass-Through Rate...............................................................................................44
PMI Insurer.....................................................................................................26
PMI Mortgage Loans..............................................................................................26
PMI Policy......................................................................................................26
Policy Payments Account.........................................................................................40
Pooling and Servicing Agreement.................................................................................29
Premium Amount..................................................................................................44
Prepayment Interest Shortfall...................................................................................31
Principal Distribution Amount...................................................................................44
Principal Prepayment............................................................................................44
Principal Remittance Amount.....................................................................................44
Private Certificates............................................................................................33
Purchase Price..................................................................................................30
Realized Loss...................................................................................................45
Receipt.........................................................................................................47
Received........................................................................................................47
Record Date.....................................................................................................37
Reference Banks.................................................................................................45
regular interests...............................................................................................67
Reimbursement Amount............................................................................................45
Relevant Depositary.............................................................................................34
REMICs...........................................................................................................6
Replacement Mortgage Loan.......................................................................................30
Reserve Interest Rate...........................................................................................45
Residual Certificates...........................................................................................33
residual interest................................................................................................6
Retail Mortgage Loans...........................................................................................22
Seller..........................................................................................................12
Servicer........................................................................................................27
Servicer Extension Notice.......................................................................................64
Servicer Remittance Date........................................................................................45
Servicer Termination Trigger Event..............................................................................63
Servicing Fee...................................................................................................31
Servicing Fee Rate..............................................................................................31
Shift Percentage................................................................................................41
Six-Month LIBOR.................................................................................................13
SMMEA...........................................................................................................70
Telerate Page 3750..............................................................................................45
Terms and Conditions............................................................................................36
Trust...........................................................................................................29
Trust Fund......................................................................................................29
Trustee Fee.....................................................................................................30
Trustee Fee Rate................................................................................................30
Trustee's Mortgage File.........................................................................................29
Underwriter.....................................................................................................70
</TABLE>
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered Certificates will be
globally offered (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, Clearstream Banking, societe anonyme
("Clearstream Luxembourg") or Euroclear. The Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding Global Securities
through Clearstream Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage loan asset backed
certificates issues.
Secondary cross-market trading between Clearstream Luxembourg or
Euroclear and DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream Luxembourg and Euroclear (in such capacity) and as DTC
Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC.
Investors' interests in the Global Securities will be represented through
financial institutions acting on their behalf as direct and indirect
Participants in DTC. As a result, Clearstream Luxembourg and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior mortgage loan asset backed
certificates issues. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global Securities will
be credited to the securities custody accounts on the settlement date against
payment in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired
value date.
Trading Between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset backed certificates issues in same-day funds.
Trading Between Clearstream Luxembourg and/or Euroclear Participants.
Secondary market trading between Clearstream Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading Between DTC Seller And Clearstream Luxembourg Or Euroclear
Purchaser. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream
Luxembourg or Euroclear through a Clearstream Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement.
Clearstream Luxembourg or Euroclear will instruct the respective Depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
either the actual number of days in such accrual period and a year assumed to
consist of 360 days or a 360-day year of twelve 30-day months as applicable to
the related class of Global Securities. For transactions settling on the 31st
of the month, payment will include interest accrued to and excluding the first
day of the following month. Payment will then be made by the respective
Depositary of the DTC Participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Clearstream Luxembourg
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade
fails), the Clearstream Luxembourg or Euroclear cash debt will be valued
instead as of the actual settlement date.
Clearstream Luxembourg Participants and Euroclear Participants will need
to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines
of credit, as they would for any settlement occurring within Clearstream
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream Luxembourg or Euroclear until the Global Securities are
credited to their accounts one day later.
As an alternative, if Clearstream Luxembourg or Euroclear has extended a
line of credit to them, Clearstream Luxembourg Participants or Euroclear
Participants can elect not to preposition funds and allow that credit line to
be drawn upon the finance settlement. Under this procedure, Clearstream
Luxembourg Participants or Euroclear Participants purchasing Global Securities
would incur overdraft charges for one day, assuming they cleared the overdraft
when the Global Securities were credited to their accounts. However, interest
on the Global Securities would accrue from the value date. Therefore, in many
cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Clearstream Luxembourg
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream
Luxembourg Participants or Euroclear Participants. The sale proceeds will be
available to the DTC seller on the settlement date. Thus, to the DTC
Participants a cross-market transaction will settle no differently than a
trade between two DTC Participants.
Trading between Clearstream Luxembourg or Euroclear Seller and DTC
Purchaser. Due to time zone differences in their favor, Clearstream Luxembourg
Participants and Euroclear Participants may employ their customary procedures
for transactions in which Global Securities are to be transferred by the
respective clearing system, through the respective Depositary, to a DTC
Participant. The seller will send instructions to Clearstream Luxembourg or
Euroclear through a Clearstream Luxembourg Participant or Euroclear
Participant at least one business day prior to settlement. In these cases
Clearstream Luxembourg or Euroclear will instruct the respective Depositary,
as appropriate, to deliver the Global Securities to the DTC Participant's
account against payment. Payment will include interest accrued on the Global
Securities from and including the last coupon payment to and excluding the
settlement date on the basis of either the actual number of days in such
accrual period and a year assumed to consist of 360 days or a 360-day year of
twelve 30-day months as applicable to the related class of Global Securities.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the Clearstream Luxembourg
Participant or Euroclear Participant the following day, and receipt of the
cash proceeds in the Clearstream Luxembourg Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be
the preceding day, when settlement occurred in New York). Should the
Clearstream Luxembourg Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Clearstream Luxembourg
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream Luxembourg or Euroclear and
that purchase Global Securities from DTC Participants for delivery to
Clearstream Luxembourg Participants or Euroclear Participants should note that
these trades would automatically fail on the sale side unless affirmative
action were taken. At least three techniques should be readily available to
eliminate this potential problem:
(a) borrowing through Clearstream Luxembourg or Euroclear for one day
(until the purchase side of the day trade is reflected in their Clearstream
Luxembourg or Euroclear accounts) in accordance with the clearing system's
customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to the settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream Luxembourg
or Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least
one day prior to the value date for the sale to the Clearstream Luxembourg
or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Clearstream Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% U.S. withholding tax that
generally applies to payments of interest (including original issue discount)
on registered debt issued by U.S. Persons, unless (1) each clearing system,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business in the chain of intermediaries
between such beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (2) such beneficial
owner takes one of the following steps to obtain an exemption or reduced tax
rate:
Exemption for non-U.S. Persons (Form W-8 or Form W-8BEN). Beneficial
owners of Global Securities that are non-U.S. Persons can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status) or From W-8BEN (Certificate of Foreign Status of Beneficial
Owner for United States Tax Withholding). If the information shown on Form W-8
changes, a new Form W-8 of Form W-8BEN must be filed within 30 days of such
change. After December 31, 2000, only Form W-8BEN will be acceptable.
Exemption for non-U.S. Persons with effectively connected income (Form
4224 or Form W-8ECI). A non-U.S. Person, including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively
connected with its conduct of a trade or business in the United States, can
obtain an exemption from the withholding tax by filing Form 4224 (Exemption
from Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States) or Form W-8ECI (Certificate of Foreign
Person's Claim for Exemption from Withholding on Income Effectively Connected
with the Conduct of a Trade or Business in the United States).
Exemption or Reduced Rate for Non-U.S. Persons Resident In Treaty
Countries (Form 1001 or Form W-8BEN). Non-U.S. Persons that are Certificate
Owners residing in a country that has a tax treaty with the United States can
obtain an exemption or reduced tax rate (depending on the treaty terms) by
filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate) or Form
W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States
Tax Withholding). If Form 1001 is provided and the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owner
or his agent. After December 31, 2000, only Form W8-BEN will be acceptable.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8, Form 1001, and Form 4224 are
effective until December 31, 2000. Form W-8BEN and Form W-8ECI are effective
until the third succeeding calendar year from the date the form is signed.
The term "U.S. Person" means (1) a citizen or resident of the United
States, (2) a corporation or partnership organized in or under the laws of the
United States or any state or the District of Columbia (other than a
partnership that is not treated as a United States person under any applicable
Treasury regulations), (3) an estate the income of which is includible in
gross income for United States tax purposes, regardless of its source, or (4)
a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
Persons have authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in regulations,
certain trusts in existence on August 20, 1996 and treated as United States
persons prior to such date that elect to continue to be so treated also shall
be considered U.S. Persons. This summary does not deal with all aspects of
U.S. Federal income tax withholding that may be relevant to foreign holders of
the Global Securities. Investors are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of the Global
Securities.
<PAGE>
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,
the offering of the 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 April 10, 2000
<PAGE>
Table of Contents
Summary of Prospectus..............................1
Risk Factors.......................................3
The Sponsor........................................6
Use of Proceeds....................................6
The Trustee........................................6
The Trust Funds....................................7
The Mortgage Loans...........................7
The Contracts...............................14
Fixed Retained Yield........................16
Insurance Policies..........................16
Acquisition of the Loans from the Seller....17
Assignment of the Loans.....................18
Representations and Warranties..............19
Pre-Funding Accounts........................22
Description of the Securities.....................23
Distributions...............................24
Principal and Interest on the Securities....25
Form of Securities..........................25
Credit Enhancement................................27
Subordination...............................28
Overcollateralization.......................28
Cross-Collateralization.....................28
Surety Bonds................................28
Letters of Credit...........................29
Special Hazard Insurance Policies...........29
Reserve Funds...............................29
Other Insurance, Guarantees and
Similar Instruments or
Agreements................................30
Reduction or Substitution of
Credit Enhancement........................30
Prepayment and Yield Considerations...............30
Interest Rates..............................30
Interest Shortfalls Due to Principal
Prepayments...............................31
Weighted Average Life of Securities.........31
Servicing of the Loans............................33
The Servicer................................33
Payments on Loans...........................33
Advances and Limitations Thereon............36
Adjustment to Servicing Compensation
in Connection with Prepaid and
Liquidated Loans..........................36
Reports to Securityholders..................36
Collection and Other Servicing Procedures...37
Enforcement of Due-on-Sale Clauses;
Realization Upon Defaulted Loans..........38
Servicing Compensation and Payment
of Expenses...............................39
Evidence as to Compliance...................40
Matters Regarding the Servicer..............40
Events of Default; Rights Upon
Event of Default..........................41
Amendment...................................44
Termination; Purchase or Other
Disposition of Loans......................44
Material Legal Aspects of the Loans...............45
The Mortgage Loans..........................45
The Contracts...............................52
Installment Contracts.......................56
Soldiers' and Sailors' Civil Relief Act.....58
Type of mortgaged property..................59
Material Matters Relating to Insolvency.....59
Bankruptcy Laws.............................59
Material Federal Income Tax Consequences..........61
Grantor Trust Securities....................61
REMIC Securities............................63
Debt Securities.............................70
Partnership Interests.......................71
FASIT Securities............................74
Discount and Premium........................76
Backup Withholding..........................80
Foreign Investors...........................80
State Tax Considerations..........................82
ERISA Considerations..............................82
Certificates................................83
Notes.......................................84
Consultation with Counsel...................85
Legal Investment..................................85
Plan of Distribution..............................87
Incorporation of Information by Reference.........88
Additional Information............................88
Legal Matters.....................................89
Ratings...........................................90
Glossary..........................................91
<PAGE>
Summary of Prospectus
This summary highlights selected information from this
prospectus and does not contain all of the information that you
need to consider in making your investment decision. To
understand all of the terms of the offering of your series of
securities, read carefully this entire prospectus and the
accompanying prospectus supplement.
The Sponsor
Prudential Securities Secured Financing Corporation will act as the
sponsor of the issuers, meaning that it will establish the issuers and cause
them to issue the securities.
Securities Offered
Each class of securities will consist of one or more classes of ownership
securities or debt securities. Ownership securities represent beneficial
ownership interests in the assets held by the issuer. Ownership securities
will be issued in the form of certificates. Debt securities represent
indebtedness secured by the assets of the issuer. Debt securities will be
issued in the form of notes.
Each series of securities will be issued in one or more classes, one or
more of which may be classes of:
o fixed-rate securities,
o adjustable-rate securities,
o compound-interest or accrual securities,
o planned-amortization-class securities,
o principal-only securities,
o interest-only securities,
o participating securities,
o senior securities, or
o subordinated securities.
The interest rate, principal balance, notional balance, minimum
denomination and form of each class of securities will be described in the
accompanying prospectus supplement. The securities will be available in either
fully registered or book-entry form, as described in the accompanying
prospectus supplement.
The Loans
Each issuer will hold one or more pools of loans, which may include:
o conventional mortgage loans or manufactured housing contracts secured
by one-to-four family residential properties and/or manufactured
homes,
o mortgage loans secured by security interests in shares issued by
private, non-profit cooperative housing corporations,
o mortgage loans secured by junior liens on the mortgaged properties,
o mortgage loans with loan-to-value ratios in excess of the
appraised value of the mortgaged property,
o home improvement retail installment contracts, and
o revolving home equity lines of credit.
The sponsor will direct the issuer to acquire the loans from affiliated
sellers, unaffiliated sellers or warehouse trusts created by the sponsor or an
affiliate to finance the origination of loans.
Distributions on the Securities
Owners of securities will be entitled to receive payments in the manner
described in the accompanying prospectus supplement, which will specify:
o whether distributions will be made monthly, quarterly, semi-annually
or at other intervals and dates,
o the amount allocable to payments of principal and interest on any
distribution date, and
o whether distributions will be made on a pro rata, random lot, or other
basis.
Credit Enhancement
A series of securities, or classes within a series, may have the benefit
of one or more types of credit enhancement, including:
o the use of excess interest to cover losses and to create
over-collateralization,
o the subordination of distributions on the lower classes to the
distributions on more senior classes,
o the allocation of losses on the underlying loans to the lower classes,
and
o the use of cross support, reserve funds, financial guarantee
insurance policies, guarantees and letters of credit.
The protection against losses afforded by any credit enhancement will be
limited in the manner described in the accompanying prospectus supplement.
Redemption or Repurchase of Securities
One or more classes of securities may be redeemed or repurchased in whole
or in part by the issuer, the servicer, the provider of credit enhancement, or
their affiliates at the times described in the accompanying prospectus
supplement and at the price at least equal to the amount necessary to pay all
outstanding principal and accrued interest on the redeemed classes.
ERISA Limitations
Employee benefit plans should carefully review with their own legal
advisors whether the purchase or holding of the securities could give rise to
a transaction prohibited or otherwise impermissible under ERISA or the
Internal Revenue Code.
Material Federal Income Tax Consequences
Each class of securities offered by this prospectus and the accompanying
prospectus supplement will constitute one of the following for federal income
tax purposes:
o interests in a trust treated as a grantor trust,
o regular interests or residual interests in a trust treated as one or
more real estate mortgage investment conduits,
o debt issued by the issuer,
o interests in an issuer which is treated as a partnership, or
o regular interests, high-yield interests or ownership interests in a
trust treated as one or more financial asset securitization
investment trusts.
<PAGE>
Risk Factors
You should consider the following risk factors prior to any purchase of
any class of securities. You should also consider the information under the
caption "Risk Factors" in the accompanying prospectus supplement.
Your investment in any security may be an illiquid investment; you should be
prepared to hold your security to maturity.
A secondary market for these securities is unlikely to develop. If it
does develop, it may not provide you with sufficient liquidity of
investment or continue for the life of these securities. The
underwriter(s) may establish a secondary market in the securities,
although no underwriter will be obligated to do so. The securities are
not expected to be listed on any securities exchange or quoted in the
automated quotation system of a registered securities association.
Issuance of the securities in book-entry form may also reduce the
liquidity in the secondary trading market, since some investors may be
unwilling to purchase securities for which they cannot obtain definitive
physical securities.
As a result of prepayment on the loans or early redemption of the securities,
you could be fully paid significantly earlier than would otherwise be the
case, which may adversely affect the yield to maturity on your securities.
The yield to maturity of the securities may be adversely affected by a
higher or lower than anticipated rate of prepayments on the loans. The
yield to maturity on interest-only securities purchased at premiums or
discounts to par will be extremely sensitive to the rate of prepayments
on the loans.
The underlying loans may be prepaid in full or in part at any time,
although prepayment may require the borrower to pay of a prepayment
penalty or premium. These penalties will generally not be property of the
issuer, and will not be available to fund distributions owing to you. We
cannot predict the rate of prepayments of the loans, which is influenced
by a wide variety of economic, social and other factors, including
prevailing mortgage market interest rates, the availability of
alternative financing, local and regional economic conditions and
homeowner mobility. Therefore, we can give no assurance as to the level
of prepayments that a trust fund will experience.
Prepayments may result from mandatory prepayments relating to unused
monies held in pre-funding accounts, voluntary early payments by
borrowers, including payments in connection with refinancings of the
first mortgages, sales of mortgaged properties subject to "due-on-sale"
provisions and liquidations due to default, as well as the receipt of
proceeds from physical damage, credit life and disability insurance
policies. In addition, repurchases or purchases from the issuer of loans
or the payment of substitution adjustments will have the same effect on
the securities as a prepayment of the loans.
One or more classes of securities of any series may be subject to
optional or mandatory redemption or in whole or in part, on or after a
specified date, or on or after the time when the aggregate outstanding
principal amount of the underlying loans or the securities is less than a
specified amount or percentage. You will bear the risk of reinvesting
unscheduled distributions resulting from a redemption.
Any of the foregoing principal prepayments may adversely affect the yield
to maturity of the prepaid securities. Since prevailing interest rates
are subject to fluctuation, there can be no assurance that you will be
able to reinvest these prepayments at a yield equaling or exceeding the
yield on your securities.
Credit enhancement, even if provided, will in any event be limited in both
amount and scope of coverage, and may not be sufficient to cover all losses or
risks on your investment.
Credit enhancement may be provided in limited amounts to cover some, but
not all, types of losses on the underlying loans and, in most cases, will
reduce over time in accordance with a schedule or formula. Furthermore,
credit enhancement may provide only very limited coverage as to some
types of losses, and may provide no coverage as to other types of losses.
Generally, credit enhancement does not directly or indirectly guarantee
to the investors any specified rate of prepayments, which is one of the
principal risks of your investment. The amount and types of coverage, the
identification of any entity providing the coverage, the terms of any
subordination and any other information will be described in the
accompanying prospectus supplement.
Property values may decline, leading to higher losses on the loans.
An investment in securities such as these, which are backed by
residential real estate loans, may be affected by a decline in real
estate values and changes in the borrowers' financial condition. If
property values were to decline, the rates of delinquencies and
foreclosures may rise, thereby increasing the likelihood of loss. If
these losses are not covered by any credit enhancement, you will bear all
risk of these losses and will have to look primarily to the value of the
mortgaged properties for recovery of the outstanding principal and unpaid
interest on the defaulted loans.
Foreclosure of mortgaged properties involve delays and expense and could cause
losses on the loans.
Even if the mortgaged properties provide adequate security for the loans,
substantial delays could be encountered in connection with the
foreclosure of defaulted loans, and corresponding delays in the receipt
of the foreclosure proceeds could occur. Foreclosures are regulated by
state statutes, rules and judicial decisions and are subject to many of
the delays and expenses of other lawsuits, sometimes requiring several
years to complete. The servicer will be entitled to reimburse itself for
any expenses it has paid in attempting to recover amounts due on the
liquidated loans, including payments to prior lienholders, accrued fees
of the servicer, legal fees and costs of legal action, real estate taxes,
and maintenance and preservation expenses, which will reduce the amount
of the net recovery by the trust.
Environmental conditions on the mortgaged property may give rise to liability
for the issuer.
Real property pledged as security to a lender may be subject to
environmental risks which could cause losses on your securities. Under
the laws of some states, contamination of a mortgaged property may give
rise to a lien on the mortgaged property to assure the costs of clean-up.
In several states, this type of lien has priority over the lien of an
existing mortgage or owner's interest against the property. In addition,
under the laws of some states and under CERCLA, a lender may be liable,
as an "owner" or "operator," for costs of addressing releases or
threatened releases of hazardous substances that require remedy at a
property, if agents or employees of the lender have become sufficiently
involved in the operations of the borrower, regardless of whether or not
the environmental damage or threat was caused by a prior owner. A lender
also will increase its risk of environmental liability upon the
foreclosure of the mortgaged property, since the lender may then become
the legal owner of the property.
State and federal credit protection laws may limit collection of principal and
interest on the loans.
Residential mortgage lending is highly regulated at both the federal and
state levels and violations of these laws, policies and principles may
limit the ability of the servicer to collect all or part of the amounts
due on the loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the issuer, as the owner
of the loan, to damages and administrative enforcement. The occurrence of
any of the foregoing could cause losses on your securities.
The Soldiers' and Sailors' Civil Relief Act may limit the ability to collect
on the loans.
The terms of the Soldiers' and Sailors' Civil Relief Act of 1940, or
similar state legislation, benefit mortgagors who enter military service
after the origination of his or her loan, including a mortgagor who is a
member of the National Guard or is in reserve status at the time of the
origination of the loan and is later called to active duty. These
mortgagors may not be charged interest, including fees and charges, above
an annual rate of 6% during the period of the mortgagor's active duty
status, unless a court orders otherwise upon application of the lender.
The implementation of the Soldiers' and Sailors' Civil Relief Act could
have an adverse effect, for an indeterminate period of time, on the
ability of the servicer to collect full amounts of interest on these
loans.
In addition, the Soldiers' and Sailors' Civil Relief Act imposes
limitations that would impair the ability of the servicer to foreclose on
loans during the mortgagor's period of active duty status. Thus, in the
event that these loans go into default, there may be delays and losses
occasioned by the inability to realize upon the mortgaged property in a
timely fashion.
The ratings assigned to your securities may be lowered or withdrawn.
The ratings assigned to the securities will be based on, among other
things, the adequacy of the value of the trust fund and any credit
enhancement for a series. Any rating which is assigned may not remain in
effect for any given period of time or may be lowered or withdrawn
entirely by the rating agencies if, in their judgment, circumstances in
the future so warrant. Ratings may also be lowered or withdrawn because
of an adverse change in the financial or other condition of a provider of
credit enhancement or a change in the rating of a credit enhancement
provider's long term debt.
<PAGE>
Some of the terms used in this prospectus are capitalized. These
capitalized terms have specified definitions, which are included at the end of
this prospectus under the heading "Glossary."
The Sponsor
Prudential Securities Secured Financing Corporation was incorporated in
the State of Delaware on August 26, 1988 as a wholly-owned, limited purpose
finance subsidiary of Prudential Securities Group Inc., a wholly-owned
indirect subsidiary of The Prudential Insurance Company of America. The
sponsor's principal executive offices are located at One New York Plaza, 14th
Floor, New York, New York 10292. Its telephone number is (212) 778-1000.
Unless otherwise specified in the applicable prospectus supplement, the
sponsor will have no servicing obligations or responsibilities for any
mortgage loan pool, contract pool or trust fund. The sponsor does not have,
nor is it expected in the future to have, any significant assets.
Neither the sponsor nor Prudential Securities Group Inc. nor any of their
affiliates, including The Prudential Insurance Company of America, will insure
or guarantee the securities of any series.
Use of Proceeds
Unless otherwise specified in the applicable prospectus supplement,
substantially all of the net proceeds from the sale of each series of
securities will be used for the purchase of the loans represented by the
securities of a series or to reimburse amounts previously used to effect the
purchase of the loans, the costs of carrying the loans until the sale of the
securities and other expenses connected with pooling the loans and issuing the
securities.
The Trustee
The prospectus supplement for each series of securities will specify the
entity acting as trustee for a series. The commercial bank or trust company
serving as trustee may have normal banking relationships with the sponsor, the
issuer, the servicer or any of their respective affiliates. The trustee's
liability in connection with the issuance and sale of the securities is
limited solely to the express obligations of the trustee enumerated in the
agreements under which a series was issued.
The trustee may resign at any time, in which event the servicer will be
obligated to appoint a successor trustee. The servicer or the issuer may also
remove the trustee if the trustee ceases to be eligible to act as trustee for
a series under the Issuing Agreement, if the trustee becomes insolvent or in
order to change the situs of the trust fund for state-tax reasons. Upon
becoming aware of these circumstances, the servicer or the issuer, as the case
may be, will become obligated to appoint a successor trustee. The trustee may
also be removed at any time by the holders of securities evidencing not less
than a specified percentage of the voting interest in the trust fund. Any
resignation and removal of the trustee, and the appointment of a successor
trustee, will not become effective until acceptance of the appointment by the
successor trustee. The trustee, and any successor trustee, will have a
combined capital and surplus, or shall be a member of a bank holding system
with an aggregate combined capital and surplus, of at least $50,000,000 and
will be subject to supervision or examination by federal or state authorities.
The Trust Funds
The securities offered by this prospectus will consist of either
asset-backed certificates or asset-backed notes, which represent either
beneficial ownership interests in, or debt secured by, the trust fund
consisting of the assets of a trust or another special-purpose entity issuing
the securities. The trust fund for each series of securities will consist
primarily of a segregated pool of loans comprised of mortgage loans and/or
manufactured housing contracts. In addition, a trust fund may also include one
or more of the following:
o amounts held from time to time in the Collection Account relating to
the securities;
o the issuer's interest in any primary mortgage insurance, hazard
insurance, title insurance and/or other insurance policies relating to
a loan;
o any property which initially secured a mortgage loan and which has
been acquired by foreclosure or trustee's sale or deed in lieu of
foreclosure or trustee's sale;
o any manufactured home which initially secured a contract and which is
acquired by repossession;
o any reserve funds;
o one or more guarantees, letters of credit, insurance policies, surety
bonds or any other credit enhancement arrangement; and
o any other assets as may be specified in the accompanying prospectus
supplement.
Some of the loans may be delinquent to the extent and as specified in the
accompanying prospectus supplement. The percentage of those loans which are
delinquent shall not exceed 10% of the aggregate principal balance of the
loans in the pool as of the cut-off date for that series. Unless otherwise
specified in the applicable prospectus supplement, the trust fund will not
include, however, the portion of interest on the loans which constitutes the
Fixed Retained Yield, if any. See "--Fixed Retained Yield" below.
The mortgage loan pool and/or contract pool for a series will be
originated or acquired by a seller of mortgage loans and/or contracts and
transferred to the issuer either directly by the seller or through a
special-purpose affiliate thereof. The mortgage loan pool or contract pool
relating to a series will be serviced by a servicer specified in the
accompanying prospectus supplement, which may be the originator, under a
Servicing Agreement.
The Mortgage Loans
Each mortgage loan pool will consist of mortgage loans evidenced by
promissory notes or other evidences of indebtedness that provide for an
original term to maturity of not more than 40 years, for monthly payments and
for interest on the outstanding principal amounts thereof at a rate that is
either fixed or adjustable, as described in the accompanying prospectus
supplement. The mortgage loans may provide for fixed level payments or be
graduated payment loans, graduated equity loans, balloon loans, buy-down loans
or mortgage loans with other payment characteristics as described in the
accompanying prospectus supplement. In addition, the mortgage loan pools may
include participation interests in mortgage loans, in which event references
in this prospectus to payments on mortgage loans underlying the participations
shall mean payments thereon allocable to the participation interests, and the
meaning of other terms relating to mortgage loans will be similarly adjusted.
Similarly, the mortgage loan pools may include mortgage loans for which a
Fixed Retained Yield has been retained by the seller, in which event
references in this prospectus to mortgage loans and payments thereon shall
mean the mortgage loans exclusive of the Fixed Retained Yield. The prospectus
supplement for a series will specify whether there will be any Fixed Retained
Yield in any mortgage loan and, if so, the owner thereof. See "Servicing of
the Loans--Fixed Retained Yield" in this prospectus. The mortgage loans will
be secured by mortgages, deeds of trust or other similar security instruments
creating first, second or more junior liens on conventional one-to four-family
residential properties, which may include mixed-use or vacation properties,
all of which will be located in any of the fifty states, the District of
Columbia or the Commonwealth of Puerto Rico. The mortgage loans may also
consist of installment contracts for the sale of real estate. If so provided
in the applicable prospectus supplement, a mortgage loan pool may also contain
cooperative apartment loans evidenced by promissory notes secured by security
interests in shares issued by private, non-profit, cooperative housing
corporations and in the proprietary leases or occupancy agreements granting
exclusive rights to occupy specific dwellings in the cooperatives' buildings.
In the case of a cooperative apartment loan, the proprietary lease or
occupancy agreement securing the cooperative apartment loan is generally
subordinate to any blanket mortgage on the cooperative apartment building
and/or the underlying land. Additionally, the proprietary lease or occupancy
agreement is subject to termination and the cooperative shares are subject to
cancellation by the cooperative if the tenant-stockholder fails to pay
maintenance or other obligations or charges owed by the tenant-stockholder.
Each mortgage loan must have an original term of maturity of not less
than 5 years and not more than 40 years. Mortgage loans having LTVs at the
time of origination exceeding 80% will generally be supported by external
credit enhancement or be covered by primary mortgage insurance providing
coverage on at least the amount of the mortgage loan in excess of 75% of the
original fair market value of the mortgaged property and remaining in force
until the principal balance of the mortgage loan is reduced to 80% of the
original fair market value. The fair market value of the mortgaged property
securing any mortgage loan is, unless otherwise specified in the applicable
prospectus supplement, the lesser of (x) the appraised value of the mortgaged
property determined in an appraisal obtained by the originator of the mortgage
loan at origination, acquisition, or, in the case of a refinancing, an
appraisal obtained at the origination of the refinanced mortgage loan, and (y)
the sale price for the mortgaged property.
No assurance can be given that values of the mortgaged properties have
remained or will remain at the levels which existed on the dates of
origination of the mortgage loans. If the residential real estate market
should experience an overall decline in property values that caused the
outstanding balances of the mortgage loans and any secondary financing on the
mortgaged properties in a particular trust fund to become equal to or greater
than the value of the mortgaged properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced
in the mortgage lending industry. To the extent that the losses are not
covered by the methods of credit enhancement for the series or the insurance
policies described in this prospectus, they will be borne by holders of the
securities of the series relating to the trust fund. Furthermore, in a
declining real estate market a new appraisal could render the cut-off date
LTVs of the mortgage loans as unreliable measures of leverage.
The prospectus supplement for each series will describe selected
characteristics of the mortgage loan pool, which may include the aggregate
principal balance of the mortgage loans as of the cut-off date, the range of
original terms to maturity of the mortgage loans, the weighted average
remaining term to stated maturity at the cut-off date of the mortgage loans,
the earliest and latest origination dates of the mortgage loans, the range of
loan interest rates and Net Loan Rates borne by the mortgage loans, the
weighted average loan interest rate at the cut-off date of the mortgage loans,
the range of LTVs at the time of origination and the highest outstanding
principal balance at origination of any mortgage loan. A maximum of 5% of the
mortgage loans, by aggregate principal balance as of the cut-off date, that
are included in a trust fund may deviate from the characteristics that are
described in the accompanying prospectus supplement.
All of the mortgage loans in a trust fund will have monthly payments due
on a specified day of each month and will, for mortgage loans secured by
residential mortgaged properties, require at least monthly payments of
interest on any outstanding balance. The mortgage loan pools may include
adjustable-rate mortgage loans that provide for payment adjustments to be made
less frequently than adjustments in the payments. Each adjustment in the loan
interest rate which is not made at the time of a corresponding adjustment in
payments -- and which adjusted amount of interest is not paid currently on a
voluntary basis by the mortgagor -- will result in either a decrease, if the
loan interest rate rises, or an increase, if the loan interest rate declines,
in the rate of amortization of the mortgage loan. Moreover, these payment
adjustments on the mortgage loans may be subject to a number of limitations,
as specified in the accompanying prospectus supplement, which may also affect
the rate of amortization on the mortgage loan. As a result of these
provisions, or in accordance with the payment schedules of some graduated
payment loans and other mortgage loans, the amount of interest accrued in any
month may equal or exceed the scheduled monthly payment on the mortgage loan.
In any of these months, no principal would be payable on the mortgage loan
and, if the accrued interest exceeded the scheduled monthly payment, there
would be deferred interest. Deferred interest is added to the principal
balance of the mortgage loan and will bear interest at the loan interest rate
until paid. If these limitations prevent the payments from being sufficient to
amortize fully the mortgage loan by its stated maturity date, a lump sum
payment equal to the remaining unpaid principal balance of the mortgage loan
will be due on its stated maturity date. See "Prepayment and Yield
Considerations" in this prospectus.
The mortgaged properties will consist of residential properties,
including detached homes, townhouses, units in planned unit developments,
condominium units, mixed-use properties, vacation homes and small scale
multifamily properties, all of which constitute a "dwelling or mixed
residential and commercial structure" within the meaning of Section
3(a)(41)(A)(i) of the Securities Exchange Act of 1934, except for an
insubstantial portion of any trust fund which may be comprised of other types
of properties. The mortgage loans will be secured by liens on fee simple or
leasehold interests -- in those states in which long-term ground leases are
used as an alternative to fee interests -- in the mortgaged properties, or
liens on shares issued by cooperatives and the proprietary leases or occupancy
agreements occupy specified units in the cooperatives' buildings. The
geographic distribution of mortgaged properties will be included in the
accompanying prospectus supplement. Each prospectus supplement will also
describe the percentage of the aggregate principal balance as of the cut-off
date of the mortgage loans in the mortgage loan pool representing the
refinancing of existing mortgage indebtedness and the types of mortgaged
properties.
Buy-Down Loans. A trust fund may contain mortgage loans subject to
temporary buy-down plans under which the monthly payments made by the
mortgagor during the early years of the mortgage loan will be less than the
scheduled monthly payments on the mortgage loan. The shortfall in payment made
by the mortgagor under the terms of the buy-down plan will be compensated for
from an amount contributed by the originator of the mortgage loan or another
source and, if so specified in the accompanying prospectus supplement, placed
in a custodial account by the servicer. If the mortgagor on a buy-down loan
prepays the mortgage loan in its entirety, or defaults on the mortgage loan
and the mortgaged property is sold in liquidation thereof, during the period
when the mortgagor is not obligated, on account of the buy-down plan, to pay
the full scheduled monthly payment otherwise due on the buy-down loan, the
unpaid principal balance of the buy-down loan will be reduced by the amounts
remaining in the custodial account for the buy-down loan, and the amounts
shall be deposited in the Collection Account, net of any amounts paid in
connection with the buy-down loan by any insurer, guarantor or other person
under a credit enhancement arrangement described in the accompanying
prospectus supplement.
Balloon Loans. A trust fund may include mortgage loans which are
amortized over 30 years or some other term, or which do not provide for
amortization prior to maturity, but which have a shorter term that causes the
outstanding principal balance of the mortgage loan to be due and payable at
maturity in an amount greater than the regular scheduled payment. If specified
in the accompanying prospectus supplement, the originator will be obligated to
refinance its balloon loan at its maturity at a new interest rate determined
prior to maturity by reference to an index plus a margin specified in the
mortgage note. The mortgagor is not, however, obligated to refinance the
balloon loan through the originator. In the event a mortgagor refinances a
balloon loan, the new loan will not be included in the trust fund. See
"Prepayment and Yield Considerations" in this prospectus.
Home Equity Lines of Credit. The trust fund may include "home equity
revolving lines of credit" or home equity lines. A home equity line
establishes a maximum credit limit for the borrower, and permits the borrower
to draw additional funds, and repay the aggregate outstanding balance in each
case from time to time in a manner so that the aggregate outstanding balance
of the home equity line does not exceed the maximum credit limit. Home equity
lines are generally evidenced by a loan agreement rather than a note. Home
equity lines generally may be drawn down from time to time by the borrower
writing a check against the account, or acknowledging the advance in a
supplement to the loan agreement. A home equity line will be secured by either
a senior or a junior lien mortgage, and will bear interest at either a fixed
or an adjustable rate.
In a number of states, the borrower must, on the opening of an account,
draw an initial advance of not less than a specified amount. Home equity lines
generally amortize according to an amortization period established at the time
of the initial advance. The amortization period is the length of time in which
the initial advance plus interest will be repaid in full and generally ranges
from 5 years to 15 years depending on the credit limit assigned. Generally,
the amortization period will be longer the higher the credit limit. The
minimum monthly payment on a home equity line will generally be equal to the
sum of the following:
o a basic monthly payment in an amount necessary to completely repay the
then-outstanding balance and the applicable finance charge in equal
installments over the assigned amortization period;
o any monthly escrow charges;
o any delinquency or other similar charges; and
o any past due amounts, including past due finance charges.
The basic monthly payment amount is typically recomputed each time the
loan interest rate adjusts and whenever additional funds are advanced; the
recomputation in the case of an additional advance of funds may also reset the
amortization schedule. The effect of each additional advance of funds on the
home equity line is to reset the commencement date of the original maturity
term to the date of the additional advance. For example, a home equity line
made originally with a 15-year maturity from date of origination changes at
the time of the next adjustment or additional advance of funds to a home
equity line with a maturity of 15 years from the date of the additional
advance of funds. For some home equity lines, the same type of recomputation
exists for adjustments of the loan interest rate.
Prior to the expiration of a specified period, the reduction of the
account to a zero balance and the closing of a home equity line account may
result in a prepayment penalty. A prepayment penalty also may be assessed
against the borrower if a home equity line account is closed by the servicer
due to a default by the borrower under the loan agreement.
Each loan agreement will provide that the servicer has the right to
require the borrower to pay the entire balance plus all other accrued but
unpaid charges immediately, and to cancel the borrower's credit privileges
under the loan agreement if, among other things, the borrower fails to make
any minimum payment when due under the loan agreement, if there is a material
change in the borrower's ability to repay the home equity line, or if the
borrower sells any interest in the property securing the loan agreement,
thereby causing the "due-on-sale" clause in the trust deed or mortgage to
become effective.
Junior Liens. Mortgage loans which are secured by junior mortgages are
subordinate to the rights of the mortgagees under the senior mortgage or
mortgages. Accordingly, liquidation, insurance and condemnation proceeds
received in connection with the mortgaged property will be available to
satisfy the outstanding balance of the mortgage loan only to the extent that
the claims of the senior mortgages have been satisfied in full, including any
liquidation and foreclosure costs. In addition, a junior mortgagee foreclosing
on its mortgage may be required to purchase the mortgaged property for a price
sufficient to satisfy the claims of the holders of any senior mortgages which
are also being foreclosed. In the alternative, a junior mortgagee which
acquires title to a mortgaged property, through foreclosure, deed-in-lieu of
foreclosure or otherwise may take the property subject to any senior mortgages
and continue to perform the obligations on any senior mortgages, in which case
the junior mortgagee must comply with the terms of any senior mortgages or
risk foreclosure by the senior mortgagee.
High LTV Loans. A mortgage loan pool may include mortgage loans with
combined LTVs in excess of 100%, generally up to a maximum of 125%. For these
high LTV loans, more emphasis in the underwriting analysis is placed on the
borrower's payment history and ability to repay debt, rather than on the
collateral value of the mortgaged property. High LTV loans are generally
targeted as debt consolidation loans for repeat or frequent borrowers with
generally strong credit ratings. Lending decisions for high LTV loans are
based on an analysis of the prospective mortgagor's documented cash flow and
credit history supplemented by a collateral evaluation deemed appropriate by
the originator.
Graduated Equity Loans. A mortgage loan pool may include graduated equity
loans. Graduated equity loans are fixed-rate, fully-amortizing mortgage loans
which provide for monthly payments based on a 10- to 30-year amortization
schedule, and which provide for scheduled annual payment increases for a
number of years and level payments thereafter. The full amount of the
scheduled payment increases during the early years is applied to reduce the
outstanding principal balance of the mortgage loans.
Graduated Payment Loans. A mortgage loan pool may include graduated
payment loans. Graduated payment loans provide for payments of monthly
installments which increase annually in each of a specified number of initial
years and level monthly payments thereafter. Payments during the early years
are required in amounts lower than the amounts which would be payable on a
level debt service basis due to the deferral of a portion of the interest
accrued on the mortgage loan. Deferred interest is added to the principal
balance of the mortgage loan and is paid, together with interest thereon, in
the later years of the obligation. Because the monthly payments during the
early years of the mortgage loan are not sufficient to pay the full interest
accruing on the mortgage loan, the interest payments on the mortgage loan may
not be sufficient in its early years to meet its proportionate share of the
distributions expected to be made on the securities. Thus, if the mortgage
loans include graduated payment loans, the servicer will establish a reserve
fund which, together with reinvestment income thereon, will be sufficient to
cover the amount by which payments of interest on the graduated payment loans
assumed in calculating distributions expected to be made on the securities of
a series exceed scheduled interest payments according to the relevant
graduated payment mortgage plan for the period during which excess occurs.
Convertible Mortgage Loans. A trust fund may contain convertible mortgage
loans which may either (x) switch from a fixed-rate mortgage to an
adjustable-rate mortgage under the terms of the underlying mortgage note or
(y) switch from an adjustable-rate mortgage to a fixed-rate mortgage under the
terms of the underlying mortgage note. These mortgage loans will be
automatically repurchased by the seller or the servicer upon the occurrence of
the conversion.
Payment Terms.
The payment terms of the mortgage loans to be included in a trust fund
for a series will be described in the accompanying prospectus supplement and
may include any of the following features of combinations thereof or other
features described in the accompanying prospectus supplement:
o Interest may be payable at a loan interest rate that may be a fixed
rate, a rate adjustable from time to time in relation to an index, a
rate that is fixed for a period of time and is followed by an
adjustable rate, a rate that otherwise varies from time to time, or a
rate that is convertible from an adjustable rate to a fixed rate or a
fixed rate to an adjustable rate. Changes to a loan interest rate may
be subject to periodic limitations, maximum rates, minimum rates or a
combination of these limitations. Accrued interest may be deferred and
added to the principal of a mortgage loan for these periods and under
other circumstances as may be specified in the accompanying prospectus
supplement. Mortgage loans may provide for the payment of interest at
a rate lower than the specified loan interest rate for a period of
time of for the life of the mortgage loan, and the amount of any
difference may be contributed from funds supplied by the seller of the
mortgaged property or another source.
o Principal may be payable on a level debt service basis to fully
amortize the mortgage loan over its term, may be calculated on the
basis of an assumed amortization schedule that is significantly longer
than the original term to maturity or on a loan interest rate that is
different from the loan interest rate or may not be amortized during
all or a portion of the original term. Payment of all or a substantial
portion of the principal may be due on maturity. Principal may include
deferred interest that has been added to the principal balance of the
mortgage loan.
o Monthly payments of principal and interest may be fixed for the life
of the mortgage loan, may increase over a specified period of time or
may change from period to period. mortgage loans may include limits on
periodic increases or decreases in the amount of monthly payments and
may include maximum or minimum amounts of monthly payments.
o Prepayments of principal may be subject to a prepayment fee, which may
be fixed for the life of the mortgage loan or may decline over time,
and may be prohibited for the life of the mortgage loan or for
specified periods. Some mortgage loans may permit prepayments after
expiration of the applicable lockout period and may require the
payment of a prepayment fee in connection with any subsequent
prepayment. Other mortgage loans may permit prepayments without
payment of a fee unless the prepayment occurs during specified time
periods. The mortgage loans may include "due on sale" clauses which
permit the mortgagee to demand payment of the entire mortgage loan in
connection with the sale or particular transfers of the mortgaged
property. Other mortgage loans may be assumable by persons meeting the
then applicable underwriting standards of the originator.
Amortization of the Mortgage Loans.
The mortgage loans will provide for payments that are allocated to
principal and interest according to either the actuarial method, the simple
interest method or the "Rule of 78s" method, as described in the accompanying
prospectus supplement. The accompanying prospectus supplement will state
whether any of the mortgage loans will provide for deferred interest or
negative amortization.
An actuarial mortgage loan provides for payments in level monthly
installments -- except, in the case of balloon loans, for the final payment --
consisting of interest equal to one-twelfth of the applicable loan interest
rate times the unpaid principal balance, with the remainder of the payment
applied to principal.
A simple interest mortgage loan provides for the amortization of the
amount financed under the mortgage loan over a series of equal monthly
payments -- except, in the case of a balloon loan, for the final payment. Each
monthly payment consists of an installment of interest which is calculated on
the basis of the outstanding principal balance of the mortgage loan being
multiplied by the stated loan interest rate and further multiplied by a
fraction, the numerator of which is the number of days in the period elapsed
since the preceding payment of interest was made and the denominator of which
is the number of days in the annual period for which interest accrues on the
mortgage loan. As payments are received under a simple interest mortgage loan,
the amount received is applied first to interest accrued to the date of
payment and the balance is applied to reduce the unpaid principal balance.
Accordingly, if a borrower pays a fixed monthly installment on a simple
interest mortgage loan before its scheduled due date, the portion of the
payment allocable to interest for the period since the preceding payment was
made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly greater. However, the next
succeeding payment will result in an allocation of a greater amount to
interest if the payment is made on its scheduled due date.
Conversely, if a borrower pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if
any, of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment under a simple interest
mortgage loan is made on or prior to its scheduled due date, the principal
balance of the mortgage loan will amortize in the manner described in the
preceding paragraph. However, if the borrower consistently makes scheduled
payments after the scheduled due date, the mortgage loan will amortize more
slowly than scheduled. If a simple interest mortgage loan is prepaid, the
borrower is required to pay interest only to the date of prepayment.
Some of the mortgage loans held by an issuer may be loans insured under
the FHA Title I credit insurance program created under Sections 1 and 2(a) of
the National Housing Act of 1934. Under the Title I program, the FHA is
authorized and empowered to insure qualified lending institutions against
losses on eligible loans. The Title I program operates as a coinsurance
program in which the FHA insures up to 90% of specified losses incurred on an
individual insured loan, including the unpaid principal balance of the loan,
but only to the extent of the insurance coverage available in the lender's FHA
insurance coverage reserve account. The owner of the loan bears the uninsured
loss on each loan. The types of loans which are eligible for insurance by the
FHA under the Title I program include property improvement loans made to
finance actions or items that substantially protect or improve the basic
livability or utility of a property and includes:
o single family, multifamily and nonresidential property improvement
loans;
o manufactured home improvement loans, where the home is classified as
personality;
o historic preservation loans; and
o fire safety equipment loans for existing health care facilities.
If specific information respecting the mortgage loans to be included in a
trust fund is not known to the issuer at the time the securities of a series
are initially offered, more general information of the nature described above
will be provided in the prospectus supplement and final specific information
will be disclosed in a Current Report on Form 8-K to be available to investors
on the date of issuance thereof and to be filed with the Securities and
Exchange Commission promptly after the initial issuance of the securities. A
copy of the Issuing Agreement for each series of securities will be attached
to the Form 8-K and will be available for inspection at the corporate trust
office of the trustee specified in the accompanying prospectus supplement. A
schedule of the mortgage loans relating to a series will be attached to the
Issuing Agreement delivered to the trustee upon delivery of the securities.
The Contracts
Each contract pool will consist of conventional manufactured housing
installment sales contracts and installment loan agreements originated or
acquired by the seller, or by a manufactured housing dealer in the ordinary
course of business and purchased by the seller. Each contract will be secured
by manufactured homes, each of which will be located in any of the fifty
states, the District of Columbia and the Commonwealth of Puerto Rico. The
contracts will be fully amortizing and will bear interest at a fixed or
adjustable annual percentage rate. The contract pool may include contracts for
which a Fixed Retained Yield has been retained, in which event references in
this prospectus to contracts and payments thereon shall mean the contracts
exclusive of the Fixed Retained Yield. The prospectus supplement for a series
will specify whether there will be any Fixed Retained Yield in any contract,
and if so, the owner thereof. See "Fixed Retained Yield" in this prospectus.
The seller will represent that the manufactured homes securing the
contracts consist of "manufactured homes" within the meaning of 42 United
States Code, Section 5402(6), which defines a "manufactured home" as "a
structure, transportable in one or more sections, which in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which
is built on a permanent chassis designed to be used as a dwelling with or
without a permanent foundation when connected to the required utilities, and
includes the plumbing, heating, air-conditioning, and electrical systems
contained therein; except that this term shall include any structure which
meets all the requirements of [this] paragraph except the size requirements
and with respect to which the manufacturer voluntarily files a certification
required by the Secretary of Housing and Urban Development and complies with
the standards established under [this] chapter."
Manufactured homes, unlike site-built homes, generally depreciate in
value. Consequently, at any time after origination it is possible, especially
in the case of contracts with high LTVs at origination, that the market value
of a manufactured home may be lower than the principal amount outstanding
under the contract.
The prospectus supplement for each series will describe a number of
characteristics of the contracts, which may include the aggregate principal
balance of the contracts in the contract pool as of the cut-off date for a
series, the range of original terms to maturity of the contracts in the
contract pool, the weighted average remaining term to stated maturity at the
cut-off date of the contracts, the earliest and latest origination dates of
the contracts, the range of loan interest rates and Net Loan Rates borne by
the contracts, the weighted average Net Loan Rate at the cut-off date of the
contracts, the range of the contracts which had loan-to-value ratios at the
time of origination of the contracts and the highest outstanding principal
balance at origination of any contract. A maximum of 5%, by aggregate
principal balance as of the cut-off date, of the aggregate contracts that are
included in a trust fund will deviate from the characteristics that are
described in the accompanying prospectus supplement.
The fair market value of the manufactured home securing any contract is,
unless otherwise specified in the applicable prospectus supplement, either (x)
the appraised value of the manufactured home determined in an appraisal
obtained by the originator at origination or acquisition and (y) the sale
price for the property, plus, in either case, sales and other taxes and, to
the extent financed, filing and recording fees imposed by law, premiums for
insurance and prepaid finance charges.
The contracts in a trust fund will generally have due dates on the first
of each month and will be fully-amortizing contracts. Contracts may have due
dates which occur on a date other than the first of each month. The contract
pools may include adjustable rate contracts that provide for payment
adjustments to be made less frequently than adjustments in the payments. Each
adjustment in the loan interest rate which is not made at the time of a
corresponding adjustment in payments will result in a decrease, if the loan
interest rate rises, or an increase, if the loan interest rate declines, in
the rate of amortization of the contract. Moreover, the payment adjustments on
the contracts may be subject to specified limitations, as specified in the
prospectus supplement, which may also affect the rate of amortization on the
contract. As a result of these provisions, the amount of interest accrued in
any month may equal or exceed the scheduled monthly payment on the contract.
In any of these months, no principal would be payable on the contract, and if
the accrued interest exceeded the scheduled monthly payment, the excess
interest due would become deferred interest that is added to the principal
balance of the contract. Deferred interest will bear interest at the loan
interest rate until paid. If these limitations prevent the payments from being
sufficient to amortize fully the contract by its stated maturity date, a lump
sum payment equal to the remaining unpaid principal balance will be due on its
stated maturity date. See "Prepayment and Yield Considerations" in this
prospectus.
The geographic distribution of manufactured homes will be stated in the
accompanying prospectus supplement. Each prospectus supplement will state the
percentage of the aggregate principal balance of any contracts as of the
cut-off date in the contract pool which are secured by manufactured homes
which have become permanently affixed to real estate. Each prospectus
supplement will also state the percentage of the aggregate principal balance
of the contracts as of the cut-off date in the contract pool representing the
refinancing of existing mortgage indebtedness.
If specific information respecting the contracts to be included in a
trust fund is not known to the issuer at the time the securities of a series
are initially offered, more general information of the nature described above
will be provided in the prospectus supplement and final specific information
will be disclosed in a Current Report on Form 8-K to be available to investors
on the date of issuance thereof and to be filed with the Securities and
Exchange Commission promptly after the initial issuance of the securities.
Fixed Retained Yield
The prospectus supplement for a series will specify whether a Fixed
Retained Yield has been retained for the loans of a series, and, if so, the
owner thereof. Any Fixed Retained Yield will be established on a loan-by-loan
basis and will be specified in the schedule of loans attached as an exhibit to
the applicable Issuing Agreement. The servicer may deduct the Fixed Retained
Yield from payments as received and prior to deposit of these payments in the
Collection Account for a series or may, unless an election has been made to
treat the trust fund, or a portion of the trust fund, as a REMIC, withdraw the
Fixed Retained Yield from the Collection Account after the entire payment has
been deposited in the Collection Account. Notwithstanding the foregoing, any
partial payment or recovery of interest received by the servicer relating to a
loan, whether paid by the mortgagor or obligor or received as Liquidation
Proceeds, Insurance Proceeds or otherwise, after deduction of all applicable
servicing fees, will be allocated between Fixed Retained Yield, if any, and
interest on a pari passu basis.
Insurance Policies
The Issuing Agreement may require the servicer to cause to be maintained
for each loan a standard hazard insurance policy issued by a generally
acceptable insurer insuring the mortgaged property underlying the mortgage
loan or the manufactured home underlying the contract against loss by fire,
with extended coverage. Standard hazard insurance policies will generally be
in an amount at least equal to the lesser of 100% of the insurable value of
the improvements which are a part of the mortgaged property or manufactured
home or the principal balance of the loan; provided, however, that this
insurance may not be less than the minimum amount required to fully compensate
for any damage or loss on a replacement cost basis. The servicer may also
maintain on property acquired upon foreclosure, or deed in lieu of
foreclosure, of any mortgage loan, and on any manufactured home acquired by
repossession a standard hazard insurance policy in an amount that is at least
equal to the lesser of 100% of the insurable value of the improvements which
are a part of the property or the insurable value of the manufactured home or
the principal balance of the loan plus, if required by the applicable Issuing
Agreement, accrued interest and liquidation expenses; provided, however, that
this insurance may not be less than the minimum amount required to fully
compensate for any damage or loss on a replacement cost basis. Any amounts
collected under any insurance policies, other than amounts to be applied to
the restoration or repair of the mortgaged property or manufactured home or
released to the borrower in accordance with normal servicing procedures, will
be deposited in the Collection Account.
The standard hazard insurance policies covering the mortgaged properties
generally will cover physical damage to, or destruction of, the improvements
on the mortgaged property caused by fire, lightning, explosion, smoke,
windstorm, hail, riot, strike and civil commotion, subject to the conditions
and exclusions particularized in each policy. Because the standard hazard
insurance policies relating to the mortgage loans will be underwritten by
different insurers and will cover mortgaged properties located in various
states, these policies will not contain identical terms and conditions. The
most significant terms thereof, however, generally will be determined by state
law and generally will be similar. Most of these policies typically will not
cover any physical damage resulting from the following: war, revolution,
governmental actions, floods and other water-related causes, earth movement,
including earthquakes, landslides and mudflows, nuclear reaction, wet or dry
rot, vermin, rodents, insects or domestic animals, hazardous wastes or
hazardous substances, theft and, in some cases, vandalism. The foregoing list
is merely indicative of particular kinds of uninsured risks and is not
intended to be all-inclusive.
The standard hazard insurance policies covering the contracts will
provide, at a minimum, the same coverage as a standard form fire and extended
coverage insurance policy that is customary for manufactured housing in the
state in which the manufactured home is located.
The servicer may maintain a blanket policy insuring against hazard losses
on all of the mortgaged properties or manufactured homes in lieu of
maintaining the required standard hazard insurance policies. The servicer will
be liable for the amount of any deductible under a blanket policy if the
amount would have been covered by a required standard hazard insurance policy,
had it been maintained.
In general, if a mortgaged property or manufactured home is located in an
area identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards and the flood insurance has been made
available, the Issuing Agreement will require the servicer to cause to be
maintained a flood insurance policy meeting the requirements of the current
guidelines of the Federal Insurance Administration with a generally acceptable
insurance carrier. Generally, the Issuing Agreement will require that the
flood insurance be in an amount not less than the lesser of (x) the amount
required to compensate for any loss or damage to the mortgaged property on a
replacement cost basis and (y) the maximum amount of insurance which is
available under the federal flood insurance program.
Any losses incurred in connection with loans due to uninsured risks,
including earthquakes, mudflows, floods, hazardous wastes and hazardous
substances, or insufficient hazard insurance proceeds could affect
distributions to the securityholders.
The servicer shall obtain and maintain at its own expense and keep in
full force and effect a blanket fidelity bond and an error and omissions
insurance policy covering the servicer's officers and employees as well as
office persons acting on behalf of the servicer in connection with the
servicing of the trust fund.
Although the terms and conditions of primary mortgage insurance policies
differ, each primary mortgage insurance policy will generally cover losses up
to an amount equal to the excess of the unpaid principal amount of a defaulted
mortgage loan or contract, plus accrued and unpaid interest thereon and
approved expenses, over a specified percentage of the value of the mortgaged
property or manufactured home.
As conditions precedent to the filing or payment of a claim under a
primary mortgage insurance policy, the insured will typically be required, in
the event of default by the mortgagor, among other things, to:
o advance or discharge (x) hazard insurance premiums and (y) as
necessary and approved in advance by the insurer, real estate taxes,
protection and preservation expenses and foreclosure and similar
costs;
o in the event of any physical loss or damage to the mortgaged property,
have the mortgaged property restored to at least its condition at the
effective date of the primary mortgage insurance policy; and
o if the insurer pays the entire amount of the loss or damage, tender to
the insurer good and merchantable title to, and possession of, the
mortgaged property.
Acquisition of the Loans from Sellers
The loans underlying a series of securities will be acquired by the
issuer either directly or through a special-purpose affiliate of the issuer,
from originators or Sellers which may be affiliates of the issuer, under Loan
Sale Agreements. Each loan so acquired will have been originated or acquired
by the sellers thereof in accordance with the underwriting criteria specified
in the accompanying prospectus supplement. In the Loan Sale Agreements, the
sellers will make a number of representations and warranties concerning the
loans being acquired from the sellers as described in this prospectus under
"--Representations and Warranties".
Assignment of the Loans
At the time of the issuance of the securities of a series, the issuer
will cause the mortgage loans comprising the mortgage loan pool, including any
rights to, or security interests in, leases, rents and personal property, or
the contracts comprising the contract pool included in the trust fund to be
assigned to the trustee, together with all principal and interest received by
or on behalf of the issuer on or in connection with the loans after the
cut-off date, other than principal and interest due on or before the cut-off
date and other than any Fixed Retained Yield, and the seller shall thereupon
be liable to the trustee for defective loan documents or an uncured breach of
the representations or warranties regarding the loans, to the extent described
below. The trustee or its agent will, concurrently with the assignment,
authenticate and deliver the securities evidencing a series to the issuer in
exchange for the loans. Each loan will be identified in a schedule appearing
as an exhibit to the applicable Issuing Agreement. Each schedule will include,
among other things, the unpaid principal balance as of the close of business
on the applicable cut-off date, the scheduled monthly payment of principal, if
any, and interest, the maturity date and the loan interest rate for each loan
in the trust fund.
For each mortgage loan in a trust fund, the mortgage note or other
promissory note, any assumption, modification or conversion to fixed interest
rate agreement, a copy of any recorded UCC-1 financing statements and
continuation statements, together with original executed UCC-2 or UCC-3
financing statements disclosing an assignment of a security interest in any
personal property constituting security for repayment of the mortgage loan to
the trustee, an executed re-assignment of assignment of leases, rents and
profits to the trustee if the assignment of leases, rents and profits is
separate from the mortgage, a mortgage assignment in recordable form and the
recorded mortgage or other documents as are required under applicable law to
create a perfected security interest in the mortgaged property in favor of the
trustee will be delivered to the trustee or to a designated custodian;
provided, that, in instances where recorded documents cannot be delivered due
to delays in connection with recording, copies thereof, certified by the
seller to be true and complete copies of these documents, sent for recording,
may be delivered and the original recorded documents will be delivered
promptly upon receipt. As to each mortgage loan for which there is primary
mortgage insurance, the certificate of primary mortgage insurance will be
delivered to the trustee. The assignment of each mortgage will be recorded
promptly after the initial issuance of securities for the trust fund, except
in states where, the recording is not required to protect the trustee's
interest in the mortgage loan against the claim of any subsequent transferee
or any successor to or creditor of the seller or any affiliate of the seller.
For any mortgage loans which are cooperative apartment loans, the issuer
will cause to be delivered to the trustee or to a designated custodian the
original cooperative note, the security agreement, the proprietary lease or
occupancy agreement, the recognition agreement, an executed financing
agreement and the relevant stock certificate and blank stock powers. The
sellers will cause to be filed in the appropriate office an assignment and a
refinancing statement evidencing the trustee's security interest in each
cooperative apartment loan.
For each contract, there will be delivered to the trustee or to a
designated custodian the original contract and copies of documents and
instruments to each contract and the security interest in the property
securing each contract. In order to give notice of the right, title and
interest of securityholders to the contracts, the sponsor will cause a UCC-1
financing statement to be executed identifying the trustee as the secured
party and identifying all contracts as collateral. The contracts will not be
stamped or otherwise marked to reflect their assignment to the issuer.
Therefore, if, through negligence, fraud or otherwise, a subsequent purchaser
were able to take physical possession of the contracts without notice of the
assignment, the interest of securityholders in the contracts could be
defeated. See "Material Legal Aspects of the Loans."
The trustee or the designated custodian will hold the documents relating
to mortgage loans generally or contracts in trust for the benefit of
securityholders of the series and will review the documents within 45 days of
the date of the applicable Issuing Agreement. If any document is not delivered
or is found to be defective in any material respect or has not been recorded
as required by the applicable Loan Sale Agreement, the trustee or a designated
custodian shall immediately notify the servicer and the issuer, and the
servicer shall immediately notify the seller. If the seller cannot cure the
omission or defect within 60 days after receipt of notice, the seller will be
obligated, under the Loan Sale Agreement, either to repurchase the loan from
the trustee within 60 days after receipt of notice, at a price equal to the
then unpaid principal balance thereof, plus accrued and unpaid interest at the
applicable loan interest rate, less any Fixed Retained Yield and less the
rate, if any, of servicing fee payable in connection with the loan, through
the last day of the month in which the repurchase takes place or to substitute
one or more new loans for the loan. In the case of a loan so repurchased, the
purchase price will be deposited in the Collection Account. In the case of a
substitution, the substitution will be made in accordance with the standards
described in "-- Representations and Warranties" below.
There can be no assurance that the seller will fulfill this repurchase or
substitution obligation. The servicer will be obligated to enforce the
obligation to the same extent as it must enforce the obligation of the seller
for a breach of representation or warranty. However, as in the case of an
uncured breach of a representation or warranty, neither the servicer, unless
the servicer is the seller, nor the issuer will be obligated to purchase or
substitute for the loan if the seller defaults on its repurchase or
substitution obligation, unless the breach also constitutes a breach of the
representations or warranties of the servicer or the issuer, as the case may
be. This repurchase or substitution obligation constitutes the sole remedy
available to the securityholders or the trustee for omission of, or a material
defect in, a constituent document.
The trustee will be authorized to appoint a custodian to maintain
possession of the documents relating to the loans. The custodian will keep the
documents as the trustee's agent under a custodial agreement.
Representations and Warranties
Unless otherwise specified in the related Prospectus Supplement, each
seller, in the Loan Sale Agreements, will have made a number of
representations and warranties concerning the mortgage loans. The seller will
have represented, among other things, substantially to the effect that:
o immediately prior to the sale and transfer of the mortgage loans, the
seller had good title to, and was the sole owner of, each mortgage
loan and there had been no other assignment or pledge thereof;
o as of the date of the transfer, the mortgage loans are subject to no
offsets, defenses or counterclaims;
o each mortgage loan at the time it was made complied in all material
respects with applicable state and federal laws, including, usury,
equal credit opportunity and disclosure laws;
o a lender's policy of title insurance was issued on the date of the
origination of each mortgage loan and each policy is valid and remains
in full force and effect;
o as of the date of the transfer, each mortgaged property is free of
material damage and is in adequate repair and each mortgage is a valid
lien on the mortgaged property, subject only to
o the lien of current real property taxes and assessments,
o covenants, conditions and restrictions, rights of way, easements
and other matters of public record as of the date of the recording
of the mortgage, exceptions appearing of record and either being
acceptable to mortgage lending institutions generally or
specifically reflected in the lender's policy of title insurance
issued on the date of origination and either (x) specifically
referred to in the appraisal made in connection with the
origination of the mortgage loan or (y) which do not adversely
affect the appraised value of the mortgaged property as set forth
in the appraisal,
o other matters to which like properties are commonly subject which
do not materially interfere with the benefits of the security
intended to be provided by the mortgage, and
o in the case of second or more junior loans any senior loans of
record as of the date of recording of the mortgage loan;
o as of the date of the transfer, there are no delinquent tax or
assessment liens against the mortgaged property that would permit
taxing authority to initiate foreclosure proceedings; and
o for each mortgage loan, if the mortgaged property is located in an
area identified by the Federal Emergency Management Agency as having
special flood hazards and subject in particular circumstances to the
availability of flood insurance under the federal flood insurance
program, the mortgaged property is covered by flood insurance meeting
the requirements of the applicable Issuing Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
seller, in the Loan Sale Agreement, will have made a number of representations
and warranties concerning the contracts. The seller will have represented,
among other things, substantially to the effect that:
o immediately prior to the sale and transfer of the contracts, the
seller had good title to, and was the sole owner of, each contract and
there had been no other assignment or pledge thereof,
o as of the date of the transfer, the contracts are subject to no
offsets, defenses or counterclaims,
o each contract at the time it was made complied in all material
respects with applicable state and federal laws, including usury,
equal credit opportunity and disclosure laws,
o as of the date of the transfer, each contract is a valid first lien on
the manufactured home and the manufactured home is free of material
damage and is in adequate repair,
o as of the date of the transfer, there are no delinquent tax or
assessment liens against the manufactured home, and
o for each contract, the manufactured home securing the contract is
covered by a standard hazard insurance policy in the amount required
by the Issuing Agreement and all premiums then due on the insurance
have been paid in full.
All of the representations and warranties of the seller concerning a loan
will have been made as of the date on which the seller sold the loan to the
issuer, or one of its affiliates. A substantial period of time may have
elapsed between the date as of which the representations and warranties were
made and the later date of initial issuance of the securities. Since the
representations and warranties referred to in the preceding paragraphs are the
only representations and warranties that will be made by the seller, the
repurchase obligation described below will not arise if, during the period
commencing on the date of sale of a loan by the seller, the relevant event
occurs that would have given rise to this kind of obligation had the event
occurred prior to sale of the affected loan. However, the issuer will not
include any loan in the trust fund for any series of securities if anything
has come to the issuer's attention that would cause it to believe that the
representations and warranties of the seller will not be accurate and complete
in all material respects concerning the loan as of the date of initial
issuance of the securities.
The servicer, or the trustee if the servicer is the seller, will promptly
notify the seller of any breach of any representation or warranty made by it
concerning a loan which materially and adversely affects the interests of the
securityholders in the loan. If the seller cannot cure the breach within 60
days after notice from the servicer or the trustee, as the case may be, then
the seller will be obligated either (1) to repurchase the loan from the trust
fund at the applicable purchase price or (2) subject to the trustee's approval
and to the extent permitted by the Issuing Agreement, to substitute for the
Deleted Loan one or more loans, as the case may be, but only if (a) for a
trust fund or a portion of the trust fund for which a REMIC election is to be
made, the substitution is effected within two years of the date of initial
issuance of the securities or (b) for a trust fund for which no REMIC election
is to be made, the substitution is effected within 120 days of the date of
initial issuance of the securities.
Any substitute loan will, on the date of substitution:
o have a LTV no greater than that of the Deleted Loan,
o have a loan interest rate not less than the loan interest rate of the
Deleted Loan,
o have a Net Loan Rate not less than the Net Loan Rate of the Deleted
Loan,
o have a remaining term to maturity not greater than that of the Deleted
Loan, and
o comply with all of the representations and warranties contained in the
Loan Sale Agreement as of the date of substitution.
If substitution is to be made for a Deleted Loan with an adjustable loan
interest rate, the substitute loan will also bear interest based on the same
index, margin, frequency and month of adjustment as the Deleted Loan. In the
event that one substitute loan is substituted for more than one Deleted Loan,
or more than one substitute loan is substituted for one or more Deleted Loans,
then the amount described above will be determined on the basis of aggregate
principal balances -- provided, that in all events the tests for a "qualified
mortgage" as described in Section 860G of the Code are met as to each
substituted loan -- the rates will be determined on the basis of weighted
average loan interest rates and Net Loan Rates, as the case may be, and the
terms will be determined on the basis of weighted average remaining terms to
maturity. In the case of a substitute loan, the mortgage file relating,
thereto will be delivered to the trustee or the designated custodian and the
seller will pay an amount equal to the excess of (x) the unpaid principal
balance of the Deleted Loan, over (y) the unpaid principal balance of the
substitute loan or loans, together with interest on the excess at the loan
interest rate to the next scheduled due date of the Deleted Loan. This amount
will be deposited in the Collection Account for distribution to
securityholders. Except in those cases in which the servicer is the seller,
the servicer will be required under the applicable Issuing Agreement to
enforce this repurchase or substitution obligation for the benefit of the
trustee and the holders of the securities, following the practices it would
employ in its good faith business judgment were it the owner of the loan. This
repurchase or substitution obligation will constitute the sole remedy
available to holders of securities or the trustee for a breach of
representation by the seller.
None of the sponsor, the issuer or the servicer, unless the servicer is
the seller, will be obligated to purchase or substitute for a loan if the
seller defaults on its obligation to do so, and no assurance can be given that
the seller will carry out their respective repurchase obligations.
The seller, the servicer or another entity specified in the accompanying
prospectus supplement, will make the representations and warranties as to the
types and geographical concentration of the mortgage loan pool or contract
pool and as to other matters concerning the pools as may be described the
accompanying prospectus supplement. Upon a breach of any representation or
warranty which materially and adversely affects the interests of the
securityholders in a loan, the entity making the representation or warranty
will be obligated either to cure the breach in all material respects,
repurchase the loan at the purchase price or substitute for the loan in the
manner, and subject to the conditions, described above regarding the
obligations of the seller in connection with missing or defective loan
documents or the breach of the seller's representations and warranties. This
repurchase or substitution obligation constitutes the sole remedy available to
the securityholders or the trustee for a breach of a representation or
warranty by the seller, the servicer or the other party, respectively.
Pre-Funding Accounts
A trust fund may include one or more Pre-Funding Accounts. On the closing
date for a series, a portion of the proceeds of the sale of the securities of
a series will be deposited in the Pre-Funding Account and may be used to
acquire additional loans or subsequent loans during the Pre-Funding Period. If
any funds remain on deposit in the Pre-Funding Account at the end of
Pre-Funding Period, that amount will be applied in the manner specified in the
accompanying prospectus supplement to prepay the securities of that series.
If a Pre-Funding Account is established,
o the Pre-Funding Period will not extend beyond the last day of the
third full month after the closing date,
o the additional loans to be acquired during the Pre-Funding Period will
be subject to the same representations and warranties and satisfy the
same eligibility requirements as the loans included in the trust fund
on the closing date, subject to the exceptions that are expressly
stated in the accompanying prospectus supplement, and
o prior to the purchase of additional loans, the amount on deposit in
the Pre-Funding Account will be invested in one or more eligible
investments allowed by the rating agencies or any Credit Enhancer,
which eligible investment must mature no later than the business day
prior to the next distribution date.
If a Pre-Funding Account is established, one or more capitalized interest
accounts may be established and maintained with the trustee, for the benefit
of the securityholders. On the closing date for a series, a portion of the
proceeds of the sale of the securities of a series will be deposited in the
capitalized interest account and used to fund the excess, if any, of (a) the
sum of the amount of interest accrued on the securities of a series and
specified fees or expenses during the Pre-Funding Period, over (b) the amount
of interest available therefor from the loans in the trust fund. Any amounts
on deposit in the capitalized interest account at the end of the Pre-Funding
Period that are not necessary for these purposes will be distributed to the
person specified in the accompanying prospectus supplement.
If a trust fund includes a Pre-Funding Account and the principal balance
of additional loans delivered to the issuer during the Pre-Funding Period is
less than the original amount on deposit in the Pre-Funding Account, the
securityholders will receive a prepayment of principal as and to the extent
described in the accompanying prospectus supplement. Any principal prepayment
may adversely affect the yield to maturity of these securities. Since
prevailing interest rates are subject to fluctuation, there can be no
assurance that investors will be able to reinvest these prepayments at yields
equaling or exceeding the yields on the securities. It is possible that the
yield on any reinvestment will be lower, and may be significantly lower, than
the yield on the securities.
Description of the Securities
The securities will be issued in series. Each series of securities or, in
some instances, two or more series of securities will be issued under an
Issuing Agreement. The following summaries describe particular provisions of
the Issuing Agreements. The summaries are not complete and are subject to all
of the provisions of the Issuing Agreement for the issuer and the accompanying
prospectus supplement. We will file each Issuing Agreement executed and
delivered for each series with the Securities and Exchange Commission as an
exhibit to a Current Report on Form 8-K promptly after issuance of the
securities of a series. We will provide a copy of the Issuing Agreement,
without exhibits, relating to any series without charge upon written request
of a holder of a security of a series addressed to Prudential Securities
Secured Financing Corporation, One New York Plaza, 14th Floor, New York, New
York 10292, Attention: Managing Director-Asset Backed Finance Group.
Neither the securities nor the underlying loans will be guaranteed or
insured by any governmental agency or instrumentality or the sponsor, the
issuer, the servicer, the trustee, the seller or any of their respective
affiliates.
The securities will consist of two basic types: certificates representing
beneficial ownership interests in the assets held by the issuer and notes
representing debt secured by the assets held by the issuer. Each series or
class of securities may have a different Interest Rate, which may be fixed or
adjustable. The accompanying prospectus supplement will specify the Interest
Rate for each series or class of securities, or the initial Interest Rate and
the method for determining subsequent changes to the Interest Rate.
A series may include one or more classes of Strip Securities or Accrual
Securities. In addition, a series may include two or more classes that differ
as to timing, sequential order, priority of payment, Interest Rate or amount
of distributions of principal or interest or both. Distributions of principal
or interest or both on any class may be made upon the occurrence of specified
events, in accordance with a schedule or formula, or on the basis of
collections from designated portions of the pool.
A series of securities may include one or more classes of securities that
are senior to one or more classes of securities which are subordinate to
particular distributions of principal and interest and allocations of losses
on the loans. In addition, some classes of senior or subordinate securities
may be senior to other classes of senior or subordinate securities in
connection with the distributions or losses.
Each issuer may also issue classes of Equity Participation Securities.
These classes of securities may constitute what are commonly referred to as
the "residual interest," "ownership interest", "seller's interest" or the
"general partnership interest," depending upon the treatment of the issuer for
federal income tax purposes and generally will not be styled as having
principal and interest components. Any losses suffered by the trust fund will
generally be absorbed first by the class of Equity Participation Securities.
Distributions.
Securityholders will be entitled to receive payments on their securities
on specified distribution dates. Distribution dates will occur monthly,
quarterly or semi-annually, as specified in the accompanying prospectus
supplement. The distribution date will be the specified day of each month, or,
in the case of quarterly-pay securities, the specified day of every third
month; and, in the case of semi-annually-pay securities, the specified day of
every sixth month, or if this day is not a business day, the next succeeding
business day.
The accompanying prospectus supplement will describe a record date
preceding the distribution date, as of which the trustee or its paying agent
will fix the identity of the securityholders for the purpose of receiving
payments on the next succeeding distribution date. The record date will be
either the close of business as of the last day of the calendar month which
precedes the distribution date or the day immediately prior to the
distribution date.
The accompanying prospectus supplement and the Issuing Agreement will
describe a remittance period which occurs prior to each distribution date. For
example, in the case of monthly-pay securities, the calendar month preceding
the month in which a distribution date occurs. Interest accrued and principal
collected on the pool during a remittance period will be required to be
remitted by the servicer to the trustee prior to the distribution date and
will be used to distribute payments to securityholders on the distribution
date. The Issuing Agreement may provide that all or a portion of the principal
collected on the pool may be applied by the trustee to the acquisition of
additional loans during a specified period, rather than used to distribute
payments of principal to securityholders during that period, with the result
that the securities possess an interest-only period, also commonly referred to
as a revolving period, which will be followed by an amortization period. Any
interest-only or revolving period may, upon the occurrence of specified
events, terminate prior to the end of the specified period and result in the
earlier than expected amortization of the securities.
Beginning on the distribution date in the month following the month --
or, in the case of quarterly-pay securities, the third month following the
month and each third month thereafter or, in the case of semi-annually-pay
securities, the sixth month following the month and each sixth month
thereafter -- in which the cut-off date occurs for a series of securities,
distributions of principal and accrued interest or, where applicable, of
principal-only or interest-only, on each class of securities entitled thereto
will be made either by the trustee or a paying agent appointed by the trustee,
to the persons who are registered as securityholders at the close of business
on the record date. Interest that accrues and is not payable on a class of
securities will generally be added to the principal balance of each security
of a class. Distributions will be made in immediately available funds, by wire
transfer or otherwise, to the account of a securityholder at a bank or other
entity having appropriate facilities therefor, if the securityholder has so
notified the trustee or the paying agent, as the case may be, and the Issuing
Agreement provides for the form of payment, or by check mailed to the address
of the person entitled thereto as it appears on the security register;
provided, however, that the final distribution in retirement of the
securities, other than any book-entry securities, will be made only upon
presentation and surrender of the securities at the office or agency of the
trustee specified in the notice to securityholders of the final distribution.
Principal and Interest on the Securities
The method of determining, and the amount of, distributions of principal
and interest, or, where applicable, of principal-only or interest-only, on a
particular series of securities will be described in the accompanying
prospectus supplement. Each class of securities, other than particular classes
of Strip Securities, may bear interest at a different Interest Rate. The
accompanying prospectus supplement will specify the Interest Rate for each
class, or in the case of an adjustable Interest Rate, the initial Interest
Rate and the method for determining the Interest Rate. Interest on the
securities will be calculated either on the basis of a 360-day year consisting
of twelve 30-day months, on the basis of the actual number of days in the
accrual period over 360 or on the basis of the actual number of days in the
accrual period over 365.
On each distribution date for a series of securities, the trustee will
distribute or cause the paying agent to distribute, as the case may be, to
each holder of record on the record date of a class of securities, an amount
equal to the percentage interest represented by the security held by the
holder multiplied by the distribution amount for that class. The distribution
amount for a class of securities for any distribution date will be the
portion, if any, of the principal distribution amount allocable to a class for
the distribution date, plus, if the class is entitled to payments of interest
on the distribution date, the interest accrued at the applicable Interest Rate
on the principal balance or notional amount of a class, less the amount of any
deferred interest added to the principal balance of the mortgage loans and/or
the outstanding balance of one or more classes of securities on the due date
and any other interest shortfalls allocable to securityholders which are not
covered by advances or the applicable credit enhancement.
In the case of a series of securities that includes two or more classes
of securities, the timing, sequential order, priority of payment or amount of
distributions of principal, and any schedule or formula or other provisions
applicable to the determination thereof, including distributions among
multiple classes of senior securities or subordinate securities, of each class
shall be as provided in the accompanying prospectus supplement. Generally,
distributions of principal of any class of securities will be made on a pro
rata basis among all of the securities of a class.
On or prior to the second business day next preceding the distribution
date, or any earlier day as shall be agreed by the Credit Enhancer, if any,
and the trustee, the trustee will determine the amounts of principal and
interest which will be passed through to securityholders on the immediately
succeeding distribution date. If the amount in the Collection Account is
insufficient to cover the amount to be passed through to securityholders, the
trustee will be required to notify the Credit Enhancer, if any, under the
Issuing Agreement for the purpose of funding this deficiency.
Form of Securities
The securities of each series will be issued as physical certificates in
fully registered form only in the denominations specified in the accompanying
prospectus supplement, and will be transferable and exchangeable at the
corporate trust office of the registrar of the securities named in the
accompanying prospectus supplement. No service charge will be made for any
registration of exchange or transfer of securities, but the trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
If so specified in the accompanying prospectus supplement, specified
classes of a series of securities will be issued in uncertificated book-entry
form, and will be registered in the name of Cede, the nominee of DTC. DTC is a
limited purpose trust company organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the UCC and a "clearing agency" registered under the provisions
of Section 17A of the Securities Exchange Act of 1934. DTC was created to hold
securities for its participating organizations and facilitate the clearance
and settlement of securities transactions between these participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
other organizations. Indirect access to the DTC system also is available to
others like brokers, dealers, banks and trust companies that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly.
Under a book-entry format, securityholders that are not participants or
indirect participants but desire to purchase, sell or otherwise transfer
ownership of securities registered in the name of Cede & Co., as nominee of
DTC, may do so only through participants and Indirect participants. In
addition, these securityholders will receive all distributions of principal of
and interest on the securities from the trustee through DTC and its
participants. Under a book-entry format, securityholders will receive payments
after the distribution date because, while payments are required to be
forwarded to Cede & Co., as nominee for DTC, on each distribution date, DTC
will forward the payments to its participants, which thereafter will be
required to forward the payments to indirect participants or securityholders.
Unless and until physical securities are issued, it is anticipated that the
only securityholder will be Cede & Co., as nominee of DTC, and that the
beneficial holders of book-entry securities will not be recognized by the
trustee as securityholders under the Issuing Agreement. The beneficial holders
of the securities will only be permitted to exercise the rights of
securityholders under the Issuing Agreement indirectly through DTC and its
participants who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
participants on whose behalf it acts in connection with the securities and is
required to receive and transmit payments of principal of and interest on the
securities. Participants and indirect participants with which securityholders
have accounts for their book-entry securities similarly are required to make
book-entry transfers and receive and transmit the payments on behalf of their
respective securityholders. Accordingly, although securityholders will not
possess securities, the rules provide a mechanism by which securityholders
will receive distributions and will be able to transfer their interests.
Unless and until physical securities are issued, securityholders who are
not participants may transfer ownership of securities only through
participants by instructing the participants to transfer securities, by
book-entry transfer, through DTC for the account of the purchasers of the
securities, which account is maintained with their respective participants.
Under the rules and in accordance with DTC's normal procedures, transfers of
ownership of securities will be executed through DTC and the accounts of the
respective participants at DTC will be debited and credited. Similarly, the
respective participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing securityholders.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and banks, the ability of a securityholder to
pledge securities to persons or entities that do not participate in the DTC
system, or otherwise take actions concerning the securities may be limited due
to the lack of a physical security.
DTC in general advises that it will take any action permitted to be taken
by a securityholder under an Issuing Agreement only at the direction of one or
more participants to whose account with DTC the securities are credited.
Additionally, DTC in general advises that it will take these actions in
connection with specified percentages of the securityholders only at the
direction of and on behalf of participants whose holdings include current
principal amounts of outstanding securities that satisfy the specified
percentages. DTC may take conflicting actions in connection with other current
principal amounts of outstanding securities to the extent that these actions
are taken on behalf of participants whose holdings include the requisite
current principal amounts of outstanding securities.
Any securities initially registered in the name of Cede & Co., as nominee
of DTC, will be issued in fully registered, certificated form to
securityholders or their nominees, rather than to DTC or its nominee only
under the events specified in the Issuing Agreement and described in the
accompanying prospectus supplement. Upon the occurrence of any of the events
specified in the Issuing Agreement and the prospectus supplement, DTC will be
required to notify all participants of the availability through DTC of
physical securities. Upon surrender by DTC of the securities representing the
securities and instruction for reregistration, the trustee will issue the
securities in the form of physical certificates, and thereafter the trustee
will recognize the holders of the physical certificates as securityholders.
Thereafter, payments of principal of and interest on the securities will be
made by the trustee directly to securityholders in accordance with the
procedures described in this prospectus and in the Issuing Agreement. The
final distribution of any security, whether physical certificates or
securities registered in the name of Cede & Co., however, will be made only
upon presentation and surrender of the securities on the final distribution
date at the office or agency as is specified in the notice of final payment to
securityholders.
None of the sponsor, the issuer, the seller, the servicer or the trustee
will have any liability for any actions taken by DTC, or its nominee, or
Cedelbank or the Euroclear System, including, without limitation, actions for
any aspect of the records relating to or payments made on account of
beneficial ownership interests in the securities held by Cede & Co., as
nominee for DTC, or for maintaining, supervising or reviewing any records
relating to the beneficial ownership interests.
Credit Enhancement
Various forms of credit enhancement may be provided for one or more
classes of a series of securities or for the loans in the trust fund. Credit
enhancement may be in the form of:
o the subordination of one or more classes of subordinate securities to
provide credit support to one or more classes of senior securities,
o overcollateralization,
o cross-collateralization,
o the use of a surety bond, financial guaranty insurance policy, special
hazard insurance policy, letter of credit or other third party
guarantees,
o the use of a reserve fund, or
o any combination of the foregoing.
Any credit enhancement may not provide protection against all risks of
loss and may not guarantee repayment of the entire principal balance of the
securities and interest thereon. If losses occur that exceed the amount
covered by credit enhancement or are not covered by the credit enhancement,
holders of one or more classes of securities will bear their allocable share
of deficiencies.
The descriptions of any insurance policies or bonds described in this
prospectus or any prospectus supplement and the coverage thereunder are not
complete and are qualified in their entirety by reference to the actual forms
of the policies, copies of which are available upon request.
Subordination
The subordination of one or more classes of subordinate securities
provides credit enhancement to the senior securities. For any
senior/subordinate series of securities, the total amount available for
distribution on each distribution date, as well as the method for allocating
this amount among the various classes of securities included in a series, will
be described in the accompanying prospectus supplement. Generally, the amount
available for contribution will be allocated first to interest on the senior
securities of a series, and then to principal of the senior securities up to
the amounts determined as specified in the accompanying prospectus supplement
and the Issuing Agreement, prior to allocation to the subordinate securities
of a series. In the event of any realized losses on the loans, the rights of
the subordinate securityholders to receive distributions from the loans will
be subordinate to the rights of the senior securityholders.
Overcollateralization
Subordination provisions of a series may be used to accelerate the
amortization of one or more classes of securities relative to the amortization
of the underlying loans. The accelerated amortization is achieved by the
application of excess interest to the payment of principal of one or more
classes of securities. This acceleration feature creates, for the loans or
groups thereof, overcollateralization which results from the excess of the
aggregate principal balance of the loans, or a group thereof, over the
principal balance of the class. This acceleration may continue for the life of
the security, or may be limited. In the case of limited acceleration, once the
required level of overcollateralization is reached, the limited acceleration
feature may cease, unless necessary to maintain the required level of
overcollateralization.
Cross-Collateralization
The beneficial ownership of separate groups of assets included in a trust
fund or the obligations to make payments secured by a pledge of a separate
group of assets included in a trust fund may be evidenced by separate classes
of the series. In this case, credit enhancement may be provided by a
cross-collateralization feature which requires that distributions to be made
on one class of securities may be made from excess amounts available from
other asset groups within the same trust fund which support other classes of
securities. The prospectus supplement for a series that includes a
cross-collateralization feature will describe the manner and conditions for
applying the cross-collateralization feature.
The coverage provided by one or more forms of credit enhancement may
apply concurrently to two or more separate trust funds. If applicable, the
prospectus supplement will identify the trust funds to which the
credit-collateralization relates and the manner of determining the amount of
the coverage provided thereby and of the application of the coverage to the
identified trust funds.
Surety Bonds
A surety bond or financial guaranty insurance policy may be obtained and
maintained for each class or series of securities. The bond insurer will be
described in the accompanying prospectus supplement. This description will
include financial information for the bond insurer.
A surety bond will unconditionally and irrevocably guarantee to
securityholders that an amount equal to each full and complete insured payment
will be received by the trustee on behalf of securityholders, for distribution
by the trustee to each securityholder. The amount of any insured payment will
be defined in the accompanying prospectus supplement, and will generally equal
the full amount of the distributions of principal and interest to which
securityholders are entitled under the Issuing Agreement plus any other
amounts specified in the Issuing Agreement or in the accompanying prospectus
supplement.
The specific terms of any surety bond will be described in the
accompanying prospectus supplement. Surety bonds may apply only to specified
classes, or may apply at the loan level and only to specified loans. Surety
bonds may have limitations including limitations on the bond insurer's
obligation to guarantee the obligations of the seller to repurchase or
substitute for any loans. surety bonds will not guarantee any specified rate
of prepayments. In addition, insured payments will generally not be available
to cover interest shortfalls arising from the application of the Soldiers' and
Sailors' Civil Relief Act.
Subject to the terms of the Issuing Agreement, the bond insurer may be
subrogated to the rights of each securityholder to receive payments under the
securities to the extent of any payment by the bond insurer under the surety
bond.
Letters of Credit
A letter of credit may be obtained from a bank and delivered to the
trustee. The letter of credit may provide direct coverage for the securities
or support the issuer's or any other person's obligation under a purchase
obligation to make payments to the trustee on one or more components of credit
enhancement. The bank issuing the letter of credit, as well as the amount
available under the letter of credit for each component of credit enhancement,
will be specified in the accompanying prospectus supplement and the Issuing
Agreement.
Special Hazard Insurance Policies
Any insurance policy covering special hazard losses which may be obtained
by the issuer for a trust fund will be issued by the insurer named in the
accompanying prospectus supplement. Each special hazard insurance policy will
protect holders of the series of securities from (x) losses due to direct
physical damage to a mortgaged property other than any loss of a type covered
by a hazard insurance policy or a flood insurance policy, if applicable, and
(y) losses from partial damage caused by reason of the application of the
co-insurance clauses contained in hazard insurance policies. Aggregate claims
under a special hazard insurance policy will be limited to a maximum amount of
coverage, as stated in the accompanying prospectus supplement and the Issuing
Agreement.
Reserve Funds
If so provided in the accompanying prospectus supplement, the issuer will
deposit or cause to be deposited in reserve fund any combination of cash, one
or more irrevocable letters of credit or one or more eligible investments in
specified amounts, amounts otherwise distributable to subordinate
securityholders, or any other instrument satisfactory to the rating agencies
rating the series, which will be applied and maintained in the manner and
under the conditions specified in the accompanying prospectus supplement. In
the alternate or in addition to an initial deposit, a reserve fund may be
funded through application of all or a portion of amounts otherwise payable on
any subordinate securities, on any Equity Participation Security or otherwise.
Amounts in a reserve fund may be distributed to securityholders, or applied to
reimburse the servicer for outstanding advances or may be used for other
purposes.
Other Insurance, Guarantees and Similar Instruments or Agreements
A trust fund may include in lieu of some or all of the foregoing or in
addition thereto, third party guarantees, and other arrangements for
maintaining timely payments or providing additional protection against losses
on all or any specified portion of the assets included in the trust fund,
paying administrative expenses, or accomplishing the other purpose as may be
described in the prospectus supplement. The trust fund may include a
guaranteed investment contract or reinvestment agreement under which funds
held in one or more accounts will be invested at a specified rate. If any
class of securities has a floating Interest Rate, or if any of the loans has a
floating coupon rate, the trust fund may include an interest rate swap
contract, an interest rate cap agreement or similar contract providing limited
protection against interest rate risks.
Reduction or Substitution of Credit Enhancement
The amount of credit support provided by any of the forms of credit
enhancement, including, without limitation, a surety bond, special hazard
insurance policy, letter of credit, or any alternative form of credit
enhancement, may be reduced under specified circumstances. In most cases, the
amount available under any credit enhancement will be subject to periodic
reduction in accordance with a schedule or formula on a nondiscretionary basis
under the terms of the Issuing Agreement as the aggregate outstanding
principal balance of the loans declines. Additionally, in some cases, the
credit enhancement, and any replacements therefor, may be replaced, reduced or
terminated upon the written assurance from each rating agency rating a series
that the then current rating of the securities will not be adversely affected.
Furthermore, in the event that the credit rating of any obligor under any
Credit Enhancer is downgraded, the credit rating of the securities may be
downgraded to a corresponding level, and neither the sponsor nor the issuer
thereafter will be obligated to obtain replacement credit enhancement in order
to restore the rating of the securities, and also will be permitted to replace
the credit enhancement with other credit enhancement instruments issued by
Credit Enhancer whose credit ratings are equivalent to the downgraded level
and in lower amounts which would satisfy the downgraded level; provided, that
the then current, albeit downgraded, rating of the series of securities is
maintained. Where the credit enhancement is in the form of a reserve fund, a
permitted reduction in the amount of credit enhancement will result in a
release of all or a portion of the assets in the reserve fund to any of the
holders of the Equity Participation Securities, the sponsor, the servicer, the
seller or the other person that is entitled thereto. Any assets so released
will not be available to fund distribution obligations in future periods.
Prepayment and Yield Considerations
Interest Rates
Any class of securities of a series may have a fixed Interest Rate, or an
Interest Rate which varies based on changes in an index or based on changes
based on the underlying loans or may receive interest payments from the
underlying loans in another manner specified in the accompanying prospectus
supplement.
The prospectus supplement for each series will specify the range and the
weighted average of the loan interest rates and Net Loan Rates for the loans
underlying a series as of the cut-off date. Each monthly interest payment on a
loan will generally be calculated as the product of one-twelfth of the
applicable loan interest rate at the time of the calculation and the then
unpaid principal balance on the loan. If the trust fund includes
adjustable-rate loans or includes loans with different Net Loan Rates, the
weighted average Net Loan Rate may vary from time to time as described below.
See "The Trust Funds." The prospectus supplement for a series will also
specify the initial Interest Rate for each class of securities of a series
having an Interest Rate and will specify whether each Interest Rate is fixed
or is variable.
The Net Loan Rate for any adjustable rate loan will change with any
changes in the index specified in the accompanying prospectus supplement on
which the loan interest rate adjustments are based, subject to any applicable
periodic or aggregate caps or floors on the loan interest rate or other
limitations described in the accompanying prospectus supplement. The weighted
average Net Loan Rate for any series may vary due to changes in the Net Loan
Rates of adjustable rate loans, to the timing of the loan interest rate
readjustments of the loans and to different rates of payment of principal of
fixed or adjustable rate loans bearing different loan interest rates.
If the trust fund for a series includes adjustable rate loans, any
limitations on the periodic changes in a mortgagor's or obligor's monthly
payment, any limitations on the adjustments to the Net Loan Rates or loan
interest rates, any provision that could result in deferred interest and the
effects, if any, thereof on the yield on securities of the series will be
discussed in the accompanying prospectus supplement.
No distribution of principal and only a partial distribution of interest
will be made to securityholders on a negatively amortizing loan. Distribution
of the portion of scheduled interest at the applicable Net Loan Rate
representing deferred interest on the loan will be passed through to the
securityholders on the distribution date following the due date on which it is
received. Deferred interest will bear interest at the Net Loan Rate for the
loan. For federal income tax purposes, deferred interest may constitute
interest income to the trust fund and to securityholders at the time that it
accrues, rather than at the time that it is paid. See "Material Federal Income
Tax Consequences."
Interest Shortfalls Due to Principal Prepayments
When a loan is prepaid in full, the mortgagor or obligor pays interest on
the amount prepaid only to the date of prepayment and not thereafter.
Similarly, Liquidation Proceeds and Insurance Proceeds are also likely to
include interest only to the time of payment. When a loan is prepaid in part,
and the prepayment is applied as of a date other than the due date occurring
in the month of receipt or the due date occurring in the month following the
month of receipt, the mortgagor or obligor pays interest on the amount prepaid
only to the date of prepayment and not thereafter. The effect of the foregoing
is to reduce the aggregate amount of interest which would otherwise be passed
through to securityholders if the loan were outstanding, or if the partial
prepayment were applied, on the succeeding due date. To mitigate this
reduction in yield, the Issuing Agreement will provide whether, in connection
with any principal prepayment or liquidation of any loan underlying the
securities of a series, the servicer will pay into the Collection Account for
a series to the extent funds are available for this purpose from the aggregate
servicing fees, or portion thereof as specified in the accompanying prospectus
supplement, which the servicer is entitled to receive relating to mortgagor or
obligor payments or other recoveries distributed on the distribution date, the
amount, if any, as may be necessary to assure that the amount paid into the
Collection Account from the loan includes an amount equal to interest at the
Net Loan Rate for the loan for the period from the date of the prepayment or
liquidation to but not including the next due date. See "Servicing of the
Loans--Adjustment to Servicing Compensation in Connection with Prepaid and
Liquidated Loans."
Weighted Average Life of Securities
Weighted average life of a security refers to the average amount of time
that will elapse from the date of issuance of the security until each dollar
in reduction of the principal amount of the security is distributed to the
investor. The weighted average life and the yield to maturity of any class of
the securities of a series will be influenced by, among other things, the rate
at which principal on the loans included in the mortgage loan pool or contract
pool for the security is paid, which is determined by scheduled amortization
and prepayments. For this purpose, the term "prepayments" includes prepayments
and liquidations due to default, casualty, condemnation and the like.
The loans may generally be prepaid in full or in part at any time, and
fixed rate loans will generally contain due-on-sale clauses permitting the
holder to accelerate the maturity of the loan upon conveyance of the mortgaged
property or manufactured home.
Prepayments on loans are commonly measured relative to a prepayment
standard or model. The prospectus supplement for each series will describe one
or more the prepayment standards or models and will contain tables setting
forth the weighted average life of each class and the percentage of the
original aggregate principal amount of each class that would be outstanding on
specified distribution dates for a series based on the assumptions stated in
the accompanying prospectus supplement, including assumptions that prepayments
on the loans are made at rates corresponding to various percentages of the
prepayment standard or model specified in the accompanying prospectus
supplement.
There is, however, no assurance that prepayment of the loans underlying a
series of securities will conform to any level of the prepayment standard or
model specified in the accompanying prospectus supplement. A number of
economic, geographic, social and other factors may affect prepayment
experience. These factors may include homeowner mobility, economic conditions,
changes in mortgagor's or obligor's housing needs, job transfers,
unemployment, mortgagor's or obligor's net equity in the properties securing
the loans, servicing decisions, enforceability of due-on-sale clauses, market
interest rates, the magnitude of taxes, and the availability of funds for
refinancing. In general, however, if prevailing interest rates fall
significantly below the loan interest rates on the loans underlying a series
of securities, the prepayment rates of the loans are likely to be higher than
if prevailing rates remain at or above the rates borne by the loans. It should
be noted that securities of a series may evidence an interest in a trust fund
with different loan interest rates. Accordingly, the prepayment experience of
the securities will to some extent be a function of the mix of loan interest
rates of the loans. In addition, the terms of the Servicing Agreement will
require the servicer to enforce any due-on-sale clause to the extent specified
in the Servicing Agreement. See "Servicing of the Loans--Enforcement of
Due-on-Sale Clauses; Realization Upon Defaulted Loans" and "Material Legal
Aspects of the Loans--Due-On-Sale Clauses" for a description of particular
provisions of each Servicing Agreement and a number of legal developments that
may affect the prepayment experience on the loans.
A lower rate of principal prepayments than anticipated would negatively
affect the total return to investors in any securities of a series that are
offered at a discount to their principal amount or, if applicable, their
parity price, and a higher rate of principal prepayments than anticipated
would negatively affect the total return to investors in the securities of a
series that are offered at a premium to their principal amount or, if
applicable, their parity price. Parity price is the price at which a security
will yield its coupon, after giving effect to any payment delay. In addition,
the yield to investors in a class of securities which bears interest at an
adjustable Interest Rate, will also be affected by changes in the index on
which any adjustable Interest Rate is based. Changes in the index may not
correlate with changes in prevailing mortgage interest rates or financing
rates for manufactured housing, and the effect, if any, thereof on the yield
of the securities will be discussed in the accompanying prospectus supplement.
The yield on some types of securities may be particularly sensitive to
prepayment rates, and further information concerning the yield on the
securities will be included in the applicable prospectus supplement.
At the request of the mortgagor or obligor, the servicer may refinance
the loans in any trust fund by accepting prepayments thereon and making new
loans secured by a mortgage on the same property or a security interest in the
same manufactured home. Upon this refinancing, the new loans will not be
included in the trust fund. A mortgagor or obligor may be legally entitled to
require the servicer to allow a refinancing. Any refinancing will have the
same effect as a prepayment in full of the loan.
The seller may be obligated, under specified circumstances, to repurchase
some of the loans. In addition, the terms of insurance policies relating to
the loans may permit the applicable insurer to purchase delinquent loans. The
proceeds of any repurchase will be deposited in the Collection Account and the
repurchase will have the same effect as a prepayment in full of the loan. See
"The Trust Funds--Assignment of the Loans." In addition, the servicer may have
the option to purchase all, but not less than all, of the loans in any trust
fund under specified limited conditions. For any series of securities for
which an election has been made to treat the trust fund or a portion of the
trust fund as a REMIC, any purchase may be effected only in a "qualified
liquidation," as defined in Code Section 860F(a)(4)(A). See "Servicing of the
Loans--Termination; Purchase or other Disposition of Loans."
Servicing of the Loans
The following summaries describe particular provisions of the Servicing
Agreements which relate to trust funds comprised of loans. The summaries do
not purport to be complete and are subject to and are qualified in their
entirety by reference to, all the provisions of the Servicing Agreement for
each series which may further modify the provisions summarized below. The
provisions of each Servicing Agreement will vary depending upon the nature of
the securities to be issued thereunder and the nature of the trust fund. We
will file each Servicing Agreement executed and delivered for each series with
the Securities and Exchange Commission as an exhibit to a Current Report on
Form 8-K promptly after issuance of the securities of a series.
The Servicer
The servicer under each Servicing Agreement will be named in the
accompanying prospectus supplement. The servicer for each series will service
the loans contained in the trust fund for a series. For trust funds comprised
of mortgage loans, the servicer will be a seller/servicer approved by FNMA or
FHLMC. Any servicer may delegate its servicing responsibilities to one or more
sub-servicers, but will not be relieved of its liabilities with respect
thereto.
The servicer will make a number of representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Servicing Agreement. An uncured breach of a
representation or warranty that in any respect materially and adversely
affects the interests of the securityholders will constitute an event of
default by the servicer under the Servicing Agreement. See "Servicing of the
Loans--Rights Upon Event of Default; Events of Default--Loans."
Payments on Loans
The servicer or the trustee will, as to each series of securities,
establish and maintain, or cause to be established and maintained the
Collection Account. The Collection Account will be maintained with a
depository (1) whose long-term debt obligations at the time of any deposit in
the Collection Account are rated not lower than the rating on the series of
securities at the time of the initial issuance thereof, (2) the deposits in
which are insured by the Federal Deposit Insurance Corporation through either
the Bank Insurance Fund or the Savings Association Insurance Fund, to the
limit established by the FDIC, and the uninsured deposits in which accounts
are otherwise secured so that, as evidenced by an opinion of counsel, the
trustee for the benefit of the securityholders of the series has a claim to
funds in the Collection Account for a series, or a perfected security interest
in any collateral, which shall be limited to eligible investments, securing
the funds, that is superior to the claims of any other sponsor or general
creditor of the depository or (3) which is otherwise acceptable to each rating
agency rating a series.
A Collection Account may be maintained as an interest bearing or a
non-interest bearing account, or the funds held in the Collection Account may
be invested pending each succeeding distribution date in eligible investments
satisfactory to the rating agencies or any Credit Enhancer. Any of these
eligible investments shall mature not later than the business day preceding
the next distribution date and none of these investments shall be sold or
disposed of prior to the maturity date of the eligible investment; however, in
the event that an election has been made to treat the trust fund or a portion
of the trust fund of a series as a REMIC, no eligible investments will be sold
or disposed of at a gain prior to maturity unless the servicer has received an
opinion of counsel or other evidence satisfactory to it that the sale or
disposition will not cause the trust fund or a portion of the trust fund to be
subject to the tax on "prohibited transactions" imposed by Code Section
860F(a)(1), otherwise subject the trust fund or a portion of the trust fund to
tax, or cause the trust fund of a portion of the trust fund to fail to qualify
as a REMIC. Any interest or other income earned on funds in the Collection
Account is generally paid to the servicer or its designee as additional
servicing compensation.
The servicer will deposit in the Collection Account for each series of
securities any amounts representing scheduled payments of principal and
interest on the loans due after the applicable cut-off date but received prior
thereto, and, the following payments and collections received or made by it on
the loans subsequent to the applicable cut-off date, other than payments due
on or before the cut-off date:
o all payments on account of principal, including prepayments, and
interest, net of any portion thereof retained by a sub-servicer as its
servicing compensation and net of any Fixed Retained Yield;
o Net Liquidation Proceeds;
o Net Insurance Proceeds;
o all amounts required to be deposited in the Collection Account from
any reserve fund, and amounts available under any other form of credit
enhancement applicable to a series;
o all advances made by the servicer;
o all amounts withdrawn from buy-down funds or other funds described in
the accompanying prospectus supplement, if any, for the loans, in
accordance with the terms of the respective agreements applicable
thereto;
o all proceeds from the repurchase of loans by the seller; and
o all other amounts required to be deposited in the Collection Account
under the Servicing Agreement
Notwithstanding the foregoing, the servicer will be entitled, at its
election, either (a) to withhold and pay itself the applicable servicing fee
and/or to withhold and pay to the owner thereof any Fixed Retained Yield from
any payment or other recovery on account of interest as received and prior to
deposit in the Collection Account or (b) to withdraw the applicable servicing
fee and/or any Fixed Retained Yield from the Collection Account after the
entire payment or recovery has been deposited in the Collection Account;
however, for each trust fund or a portion of the trust fund as to which a
REMIC election has been made, the servicer will, in each instance, withhold
and pay to the owner thereof the Fixed Retained Yield prior to deposit of the
payment or recovery in the Collection Account.
Advances, amounts withdrawn from any reserve fund, and amounts available
under any other form of credit enhancement will be deposited in the Collection
Account not later than the business day preceding the distribution date on
which the amounts are required to be distributed. All other amounts will be
deposited in the Collection Account not later than the business day next
following the day of receipt and posting by the servicer.
If the servicer deposits in the Collection Account for a series any
amount not required to be deposited in the Collection Account, it may at any
time withdraw this amount from the Collection Account.
The servicer is permitted, from time to time, to make withdrawals from
the Collection Account for the following purposes, to the extent permitted in
the applicable Servicing Agreement:
o to reimburse itself for advances;
o to reimburse itself from Liquidation Proceeds for expenses incurred by
the servicer in connection with the liquidation of any defaulted loan
or property acquired in respect thereof and for amounts expended in
good faith in connection with the restoration of damaged property, to
reimburse itself from Insurance Proceeds for expenses incurred by the
servicer in connection with the restoration, preservation or repair of
the mortgaged properties or manufactured homes and expenses incurred
in connection with collecting on the insurance policies and, to the
extent that Liquidation Proceeds or Insurance Proceeds after the
reimbursement are in excess of the unpaid principal balance of the
loans together with accrued and unpaid interest thereon at the
applicable Net Loan Rate through the last day of the month in which
the Liquidation Proceeds or Insurance Proceeds were received, to pay
to itself out of the excess the amount of any unpaid servicing fees
and any assumption fees, late payment charges or other mortgagor or
obligor charges on the loans;
o to pay to itself the applicable servicing fee and/or pay the owner
thereof any Fixed Retained Yield, in the event the servicer is not
required, and has elected not, to withhold the amounts out of any
payment or other recovery on a particular loan prior to the deposit of
the payment or recovery in the Collection Account;
o to reimburse itself and the issuer for specified expenses, including
taxes paid on behalf of the trust fund, incurred by and recoverable by
or reimbursable to it or the issuer, as the case may be;
o to pay to the seller for each loan or property acquired in respect
thereof that has been repurchased by the seller, as the case may be,
all amounts received thereon and not distributed as of the date as of
which the purchase price of the loan was determined;
o to pay itself any interest earned on or investment income earned on
funds in the Collection Account, all interest or income to be
withdrawn not later than the next distribution date;
o to make withdrawals from the Collection Account in order to make
distributions to securityholders; and
o to clear and terminate the Collection Account.
Advances and Limitations Thereon
The accompanying prospectus supplement will describe the circumstances,
if any, under which the servicer will make advances relating to delinquent
payments on loans. The servicer will be obligated to make advances, and the
obligation may be limited in amount, or may not be activated until a portion
of a specified reserve fund is depleted. Advances are intended to provide
liquidity and not to guarantee or insure against losses. Accordingly, any
funds advanced are recoverable by the servicer out of amounts received on
particular loans which represent late recoveries of principal or interest,
proceeds of insurance policies or Liquidation Proceeds respecting which any
advance was made. If an advance is made and subsequently determined to be
nonrecoverable from late collections, proceeds of insurance policies, or
Liquidation Proceeds from the loan, the servicer may be entitled to
reimbursement from other funds in the Collection Account, or from a specified
reserve fund as applicable, to the extent specified in the accompanying
prospectus supplement.
Adjustment to Servicing Compensation in Connection with Prepaid and Liquidated
Loans
When a mortgagor or obligor prepays a loan in full, the mortgagor or
obligor pays interest on the amount prepaid only to the date on which the
principal prepayment is made. Similarly, Liquidation Proceeds from a mortgaged
property or manufactured home will not include interest for any period after
the date on which the liquidation took place, and Insurance Proceeds may
include interest only to the date of settlement of the claims. Further, when a
loan is prepaid in part, and the prepayment is applied as of a date other than
a due date, the mortgagor or obligor pays interest on the amount prepaid only
to the date of prepayment and not thereafter. The effect of the foregoing is
to reduce the aggregate amount of interest which would otherwise be passed
through to securityholders if the loan were outstanding, or if the partial
prepayment were applied, on the succeeding due date. In order to mitigate the
adverse effect to securityholders of a series resulting from the prepayment or
liquidation of a loan or settlement of an insurance claim with respect
thereto, the amount of the aggregate servicing fees may be reduced by an
amount equal to the accrual of interest on any prepaid or liquidated loan at
the Net Loan Rate from the date of its prepayment or liquidation or the date
of the insurance settlement to the next due date. These reductions in the
aggregate servicing fees will be made by the servicer on the loans under the
applicable Servicing Agreement but only to the extent that the aggregate
amount of this interest does not exceed the aggregate servicing fees relating
to mortgagor or obligor payments or other recoveries distributed on the
distribution date. The amount of the offset against the aggregate servicing
fees will be included in the scheduled distributions to securityholders on the
distribution date on which the principal prepayments, Liquidation Proceeds or
Insurance Proceeds are passed through to securityholders. See "Prepayment and
Yield Considerations."
Reports to Securityholders
Unless otherwise specified or modified in the Servicing Agreement for
each series, a statement setting forth the following information, if
applicable, will be included with each distribution to securityholders of
record of a series:
(a) the amount of principal distributed to holders of the securities
and the outstanding principal balance of the securities following the
distribution;
(b) the amount of interest distributed to holders of the securities
and the current interest on the securities;
(c) the amounts of
(1) any overdue accrued interest included in the distribution,
(2) any remaining overdue accrued interest on the securities or
(3) any current shortfall in amounts to be distributed as
accrued interest to holders of the securities;
(d) the amounts of
(1) any overdue payments of scheduled principal included in the
distribution,
(2) any remaining overdue principal amounts on the securities,
(3) any current shortfall in receipt of scheduled principal
payments on the loans or
(4) any realized losses or Liquidation Proceeds to be allocated
as reductions in the outstanding principal balances of the
securities;
(e) the amount received under any credit enhancement, and the
remaining amount available under the credit enhancement;
(f) the amount of any delinquencies on the payments on the loans;
(g) the book value of any REO property acquired by the trust fund;
and
(h) any other information as specified in the Issuing Agreement.
In addition, within a reasonable period of time after the end of each
calendar year, the trustee will furnish to each holder of record at any time
during the calendar year (x) the aggregate of amounts reported under clauses
(a), (b), and (d)(4) above for the calendar year and (y) the information
specified in the Issuing Agreement to enable securityholders to prepare their
tax returns including, without limitation, the amount of original issue
discount accrued on the securities, if applicable. Information in the
distribution date and annual statements provided to the holders will not have
been examined and reported upon by an independent public accountant. However,
the servicer will provide to the trustee a report by independent public
accountants concerning the servicer's servicing of the loans. See "--Evidence
as to Compliance" in this prospectus.
A series of securities or one or more classes of a series may be issued
in book-entry form. In this event, owners of beneficial interests in the
securities will not be considered holders and will not receive the reports
directly from the trustee. The trustee will forward the reports only to the
entity or its nominee which is the registered holder of the global certificate
which evidences the book-entry securities. Beneficial owners will receive the
reports from the participants and indirect participants of the applicable
book-entry system in accordance with the practices and procedures of these
entities.
Collection and Other Servicing Procedures
The servicer, directly or through sub-servicers, will make reasonable
efforts to collect all payments called for under the loans and will,
consistent with the Servicing Agreement, follow the collection procedures as
it follows for mortgage loans or manufactured housing contracts serviced by it
that are comparable to the loans, as the case may be. Consistent with the
above, the servicer may, in its discretion, (x) waive any prepayment charge,
assumption fee, late payment charge or any other charge in connection with the
prepayment of a loan and (y) arrange with a mortgagor or obligor a schedule
for the liquidation of deficiencies running for not more than six months after
the applicable due date.
In accordance with the Servicing Agreement, the servicer, to the extent
permitted by law, will establish and maintain or will cause to be established
and maintained one or more escrow accounts in which the servicer will be
required to deposit or cause to be deposited payments by mortgagors or
obligors, as applicable, for taxes, assessments, mortgage and hazard insurance
premiums and other comparable items. Withdrawals from the escrow accounts may
be made to effect timely payment of taxes, assessments, mortgage and hazard
insurance, to refund to mortgagors or obligors amounts determined to be
overages, to pay interest to mortgagors or obligors on balances in the escrow
accounts, if required, to repair or otherwise protect the mortgaged properties
or manufactured homes and to clear and terminate this account. The servicer
will be responsible for the administration of each escrow account. The
servicer will be obligated to advance particular amounts which are not timely
paid by mortgagors or obligors, to the extent that the servicer determines
that the amounts will be recoverable out of Insurance Proceeds, Liquidation
Proceeds, or otherwise. Alternatively, if specified in the Servicing
Agreement, in lieu of establishing a escrow account, the servicer may procure
a performance bond or other form of insurance coverage, in an amount
acceptable to each rating agency rating the series of securities, covering
loss occasioned by the failure to escrow these amounts.
Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Loans
Each Servicing Agreement will provide that, when any mortgaged property
or manufactured home is conveyed by the mortgagor or obligor, the servicer
will exercise its rights to accelerate the maturity of the loan under any
"due-on-sale" clause applicable thereto, if any, unless (a) it is not
exercisable under applicable law or (b) this exercise would result in loss of
insurance coverage on the loan. In this case, the servicer is authorized to
take or enter into an assumption and modification agreement from or with the
person to whom the mortgaged property or manufactured home has been or is
about to be conveyed, and the person will become liable under the mortgage
note or contract and, unless prohibited by applicable state law, the mortgagor
or obligor remains liable thereon; provided, that the loan will continue to be
covered by any pool insurance policy and any primary mortgage insurance
policy, and the loan interest rate for the loan and the payment terms shall
remain unchanged. The servicer will also be authorized, with the prior
approval of any pool insurer and any primary mortgage insurer, if any, to
enter into a substitution of liability agreement with this person, and the
original mortgagor or obligor will be released from liability and this person
will be substituted as mortgagor or obligor and becomes liable under the
mortgage note or contract.
The servicer is obligated under the Servicing Agreement to realize upon
defaulted loans to the extent provided in the Servicing Agreement. However, in
the case of foreclosure or of damage to a mortgaged property or manufactured
home from an uninsured cause, the servicer is not required to expend its own
funds to foreclose, repossess or restore any damaged property, unless it
reasonably determines (x) that this foreclosure, repossession or restoration
will increase the proceeds to securityholders of a series of liquidation of
the loan after reimbursement of the servicer for its expenses and (y) that
these expenses will be recoverable to it through Liquidation Proceeds or
Insurance Proceeds. In the event that the servicer has expended its own funds
for foreclosure or to restore damaged property, it will be entitled to charge
the Collection Account for a series an amount equal to all costs and expenses
incurred by it.
The servicer may foreclose against property securing a defaulted loan
either by foreclosure, by sale or by strict foreclosure and in the event a
deficiency judgment is available against the mortgagor or other person may
proceed for the deficiency. See "Material Legal Aspects of the Loans--The
Mortgage Loans--Anti-Deficiency Legislation and Other Limitations on Lenders"
for a description of the availability of deficiency judgments. It is
anticipated that in most cases the servicer will not seek deficiency judgments
against any mortgagor or obligor, and the servicer is not required under the
Servicing Agreement to seek deficiency judgments.
For a trust fund, or one or more segregated pools of assets in the trust
fund, as to which a REMIC election has been made, if the trustee acquires
ownership of any mortgaged property or manufactured home as a result of a
default or imminent default of any loan secured by the mortgaged property or
manufactured home, the trustee generally will be required to dispose of the
property with two (2) years following its acquisition by the trust fund. The
servicer also will be required to administer the mortgaged property or
manufactured home in a manner which does not cause the mortgaged property or
manufactured home to fail to qualify as "foreclosure property" within the
meaning of Code Section 860G(a)(8) or result in the receipt by the trust fund
of any "net income from foreclosure property" within the meaning of Code
Section 860G(c). In general, this would preclude the holding of the mortgaged
property or manufactured home as a dealer in the property or the receipt of
rental income based on the profits of the lessee.
The servicer may modify, waive or amend the terms of any loan without the
consent of the trustee or any securityholder. These modifications, waivers or
amendments shall only be given if the servicer determines that it is in the
best interests of securityholders and, generally, only if the loan is in
default or the servicer has determined that default is reasonably foreseeable.
Servicing Compensation and Payment of Expenses
For each series of securities, the servicer will be entitled to be paid a
servicing fee on the loans until termination of the Servicing Agreement. The
servicer, at its election, will pay itself the servicing fee for a series on
each loan by (a) withholding the servicing fee from any scheduled payment of
interest prior to deposit of the payment in the Collection Account for a
series or (b) withdrawing the servicing fee from the Collection Account after
the entire interest payment has been deposited in the Collection Account. The
servicer may also pay itself out of the Liquidation Proceeds or Insurance
Proceeds from a loan, or withdraw from the Collection Account, the servicing
fee on the loan or other recoveries with respect thereto to the extent
provided in the Servicing Agreement. The servicing fee on the loans underlying
the securities of a series will be specified in the applicable prospectus
supplement. Any additional servicing compensation in the form of prepayment
charges, assumption fees, late payment charges or otherwise will be retained
by the servicer to the extent not required to be deposited in the Collection
Account.
In addition to amounts payable to any sub-servicer, the servicer will pay
all expenses incurred in connection with the servicing of the loans underlying
a series, including, without limitation, payment of the hazard insurance
policy premiums and fees or other amounts payable in accordance with any
applicable agreement for the provision of credit enhancement for a series,
payment of the fees and disbursements of the trustee and any custodian, fees
due to the independent accountants and expenses incurred in connection with
distributions and reports to securityholders. However, some of these expenses
may be reimbursable to the servicer under the terms of the Issuing Agreement.
In addition, the servicer will be entitled to reimbursement for particular
expenses incurred by it in connection with the liquidation of defaulted loans.
In the event that claims are either not made or are not fully paid from any
applicable form of credit enhancement, the trust fund will suffer a loss to
the extent that Net Liquidation Proceeds and Net Insurance Proceeds are less
than the principal balance of the loan, plus accrued interest thereon at the
Net Loan Rate. In addition, the servicer will be entitled to reimbursement of
expenditures incurred by it in connection with the restoration of any
mortgaged property or manufactured home, the right of reimbursement being
prior to the rights of the securityholders to receive Liquidation Proceeds and
Insurance Proceeds. The servicer is also entitled to reimbursement from the
Collection Account of advances, of advances made by it to pay taxes or
insurance premiums on any mortgaged property or manufactured home and of
particular losses against which it is indemnified by the trust fund.
Evidence as to Compliance
The applicable Servicing Agreement for each series will provide that each
year, a firm of independent public accountants will furnish a statement to the
trustee to the effect that this firm has examined specified documents and
records relating to the servicing of the loans by the servicer and that, on
the basis of the examination, this firm is of the opinion that the servicing
has been conducted in compliance with the Servicing Agreement, except for (x)
any exceptions as the firm believes to be immaterial and (y) any other
exceptions as are stated in this statement.
The applicable Servicing Agreement for each series will also provide for
delivery to the trustee for a series of an annual statement signed by an
officer of the servicer to the effect that the servicer has fulfilled its
obligations under the Servicing Agreement throughout the preceding calendar
year.
Matters Regarding the Servicer
The servicer may not resign from its obligations and duties under the
Servicing Agreement for each series, except upon its determination that its
duties thereunder are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities of a
type and nature presently carried on by it. No resignation will become
effective until the trustee for a series or a successor servicer has assumed
the servicer's obligations and duties under the Servicing Agreement. If the
servicer resigns for any of the foregoing reasons and the trustee is unable or
unwilling to assume responsibility for servicing the loans, it may appoint
another institution as servicer, as described under "Servicing of the
Loans--Events of Default; Rights Upon Event of Default " below.
The Servicing Agreement will provide that neither the servicer nor any
director, officer, employee or agent of either of them will be under any
liability to the trust fund or the securityholders, for the taking of any
action or for refraining from the taking of any action in good faith in
accordance with the Servicing Agreement or for errors in judgment; provided,
however, that none of the servicer or any director, officer, employee or agent
of the servicer will be protected against any liability that would otherwise
be imposed by reason of willful misfeasance, bad faith or negligence in the
performance of his or its duties or by reason of reckless disregard of his or
its obligations and duties thereunder. The Servicing Agreement will further
provide that the servicer and any director, officer, employee or agent of the
servicer shall be entitled to indemnification by the trust fund and will be
held harmless against any loss, liability or expense incurred in connection
with any legal action relating to the Servicing Agreement or the securities
other than any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence in the performance of his or its duties
thereunder or by reason of reckless disregard of his or its obligations and
duties thereunder. In addition, the Servicing Agreement will provide that the
servicer will not be under any obligation to appear in, prosecute or defend
any legal action that is not incidental to its duties under the Servicing
Agreement and that in its opinion may involve it in any expense or liability.
The servicer may, however, in its discretion, undertake any action deemed by
it necessary or desirable in connection with the Servicing Agreement and the
rights and duties of the parties thereto and the interests of the
securityholders thereunder. In this event, the legal expenses and costs of the
action and any liability resulting therefrom will be expenses, costs and
liabilities of the trust fund, and the servicer will be entitled to be
reimbursed therefor out of the Collection Account, and any loss to the trust
fund arising from the right of reimbursement will be allocated pro rata among
the various classes of securities unless otherwise specified in the applicable
Servicing Agreement.
Any person into which the servicer may be merged or consolidated, or any
person resulting from any merger, conversion or consolidation to which the
servicer is a party, or any person succeeding to the business through the
transfer of substantially all of its assets, or otherwise, of the servicer
will be the successor of the servicer under the Servicing Agreement; provided,
that the successor or resulting entity is qualified to service mortgage loans
for FNMA or FHLMC and that each rating agency's rating of any securities for a
series in effect immediately prior to this event is not adversely affected
thereby.
The servicer also may have the right to assign its rights and delegate
its duties and obligations under the Servicing Agreement to an affiliate or in
connection with a sale or transfer of a substantial portion of its mortgage or
manufactured housing servicing portfolio; provided, that
o in the case of a transfer by a servicer of mortgage loans, the
purchaser or transferee accepting the assignment or delegation is
qualified to service mortgage loans for FNMA or FHLMC,
o the purchaser or transferee is reasonably satisfactory to the issuer
and the trustee for a series and executes and delivers to the issuer
and the trustee an agreement, in form and substance reasonably
satisfactory to the issuer and the trustee, which contains an
assumption by the purchaser or transferee of the due and punctual
performance and observance of each covenant and condition to be
performed or observed by the servicer under the Servicing Agreement
from and after the date of the agreement; and
o each rating agency's rating of any securities for a series in effect
immediately prior to the assignment, sale or transfer is not
qualified, downgraded or withdrawn as a result of the assignment, sale
or transfer or
In the case of any assignment or delegation, the servicer will be
released from its obligations under the Servicing Agreement except for
liabilities and obligations incurred prior to the assignment and delegation.
Events of Default; Rights Upon Event of Default
Servicing Agreement. Events of default under the Servicing Agreement
generally include:
o any failure by the servicer to deposit amounts in the Collection
Account, which failure continues unremedied for the number of days
specified in the accompanying prospectus supplement after the giving
of written notice of any failure to the servicer by the trustee for a
series, or to the servicer and the trustee by the holders of a series
evidencing not less than a specified percentage of the aggregate
voting rights of the securities for a series,
o any failure by the servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the applicable
Issuing Agreement which continues unremedied for the number of days
specified in the accompanying prospectus supplement after the giving
of written notice of any failure to the servicer by the trustee, or to
the servicer and the trustee by the holders of a series evidencing not
less than a specified percentage of the aggregate voting rights of the
securities for a series, and
o particular events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and particular actions
by the servicer indicating its insolvency, reorganization or inability
to pay its obligations.
The Servicing Agreement will specify the circumstances under which the
trustee of the holders of securities may remove the servicer upon the
occurrence and continuance of an event of default thereunder, whereupon the
trustee will succeed to all the responsibilities, duties and liabilities of
the servicer under the Servicing Agreement and will be entitled to reasonable
servicing compensation not to exceed the applicable servicing fee, together
with other servicing compensation in the form of assumption fees, late payment
charges or otherwise as provided in the Servicing Agreement.
In the event that the trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the accompanying prospectus supplement to act as successor servicer under the
provisions of the applicable Servicing Agreement. The successor servicer would
be entitled to reasonable servicing compensation in an amount not to exceed
the servicing fee stated in the accompanying prospectus supplement, together
with the other servicing compensation in the form of assumption fees, late
payment charges or otherwise, as provided in the Servicing Agreement.
During the continuance of any event of default of a servicer under a
Servicing Agreement, the trustee will have the right to take action to enforce
its rights and remedies and to protect and enforce the rights and remedies of
the holders of a series, and holders of securities evidencing not less than a
specified percentage of the aggregate voting rights of the securities for a
series may direct the time, method and place of conducting any proceeding for
any remedy available to the trustee or exercising any trust or power conferred
upon that trustee. However, the trustee will not be under any obligation to
pursue any remedy or to exercise any of these trusts or powers unless the
securityholders have offered the trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the
trustee in pursuing the remedy. The trustee may decline to follow any
direction by the securityholders if the trustee determines that the action or
proceeding so directed may not lawfully be taken or would involve it in
personal liability or be unjustly prejudicial to the nonassenting holders.
Indenture. Events of default under the indenture for each series of notes
generally include:
o a default in the payment of any principal of or interest on any note
of a series, which continues for the period of time specified in the
accompanying prospectus supplement;
o failure to perform any other covenant of the issuer in the indenture
which continues for the period of time specified in the accompanying
prospectus supplement after notice thereof is given in accordance with
the procedures described in the accompanying prospectus supplement;
o any representation or warranty made by the issuer in the indenture or
in any certificate or other writing delivered pursuant to the
indenture or in connection with the indenture concerning or affecting
a series having been incorrect in a material respect as of the time
made, and the breach is not cured within the period of time specified
in the accompanying prospectus supplement after notice thereof is
given in accordance with the procedures described in the accompanying
prospectus supplement;
o specified events of bankruptcy, insolvency, receivership or
liquidation of the issuer; or
o any other event of default provided for the notes of that series.
If an event of default on the notes of any series at the time outstanding
occurs and is continuing, either the trustee or the holders of a majority of
the then aggregate outstanding amount of the notes of a series may declare the
principal amount of all the notes of a series to be due and payable
immediately. This declaration may, under some circumstances, be rescinded and
annulled by the holders of a majority in aggregate outstanding amount of the
notes of a series.
If, following an event of default for any series of notes, the notes of a
series have been declared to be due and payable, the trustee may, in its
discretion, notwithstanding this acceleration, elect to maintain possession of
the collateral securing the notes of a series and to continue to apply
distributions on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes of a series as they would
have become due if there had not been a declaration. In addition, the trustee
may not sell or otherwise liquidate the collateral securing the notes of a
series following an event of default other than a default in the payment of
any principal or interest on any note of a series for thirty (30) days or
more, unless (a) the holders of 100% of the then aggregate outstanding amount
of the notes of a series consent to the sale, (b) the proceeds of the sale or
liquidation are sufficient to pay in full the principal of and accrued
interest due and unpaid on the outstanding notes of a series at the date of
the sale or (c) the trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the notes as these
payments would have become due if the notes had not been declared due and
payable, and the trustee obtains the consent of the holders of a specified
percentage of the then aggregate outstanding amount of the notes of a series.
In the event that the trustee liquidates the collateral in connection
with an event of default involving a default for thirty (30) days or more in
the payment of principal of or interest on the notes of a series, the
indenture provides that the trustee will have a prior lien on the proceeds of
any liquidation for unpaid fees and expenses. As a result, upon the occurrence
of this event of default, the amount available for distribution to the
noteholders may be less than would otherwise be the case. However, the trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the noteholders after the occurrence of this event of
default.
In the event the principal of the notes of a series is declared due and
payable, as described above, the holders of any notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of the discount which is unamortized.
Subject to the provisions of the indenture relating to the duties of the
trustee, in case an event of default shall occur and be continuing for a
series of Notes, the trustee will be under no obligation to exercise any of
the rights or powers under the indenture at the request or direction of any of
the holders of notes of a series, unless the holders offered to the trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with the request or
direction. Subject to these provisions for indemnification and specified
limitations contained in the indenture, the holders of a majority of the then
aggregate outstanding amount of the notes of a series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee or exercising any trust or power conferred on the
trustee for the notes of a series, and the holders of a majority of the then
aggregate outstanding amount of the notes of a series may, in some cases,
waive any default with respect thereto, except a default in the payment of
principal or interest or a default of a covenant or provision of the indenture
that cannot be modified without the waiver or consent of all the holders of
the outstanding notes of a series affected thereby.
Amendment
Each Issuing Agreement may be amended by the parties thereto without the
consent of the securityholders,
o to cure any ambiguity,
o to correct or supplement any provision of the Issuing Agreement that
may be inconsistent with any over provision of the Issuing Agreement,
o to comply with the requirements of the Code, or
o to make any other provisions concerning matters or questions arising
under the Issuing Agreement that are not inconsistent with the
provisions thereof;
provided, that the action will not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of the securityholders
of the series.
The Issuing Agreement may also be amended by the with the consent of the
holders of securities evidencing interests aggregating not less than a
specified percentage of the voting interests evidenced by the securities
affected thereby, for the purpose of adding any provisions to or changing in
any manner or eliminating, any of the provisions of the Issuing Agreement or
of modifying in any manner the rights of the securityholders; provided,
however, that no amendment may (x) reduce in any manner the amount of, or
delay the timing of, any payments received on or in connection with loans that
are required to be distributed on any securities, without the consent of the
holder of the security, (y) adversely affect in any material respect the
interests of the holders of a class of securities of a series in a manner
other than that described in clause (i) above without the consent of the
holders of securities aggregating not less than a specified percentage of the
Voting Interests evidenced by the class, or (iii) reduce the aforesaid
percentage of the securities, the holders of which are required to consent to
the amendment, without the consent of the holders of all securities of the
class affected then outstanding.
Termination; Purchase or Other Disposition of Loans
The obligations created by the Issuing Agreement for a series of
securities will terminate upon the earlier of (i) the later of the final
payment or other liquidation of the last loan subject thereto and the
disposition of all property acquired upon foreclosure of any loan and (ii) any
purchase or disposition described in the following paragraph. In no event,
however, will the trust created by the Issuing Agreement continue beyond the
expiration of 21 years from the death of the late survivor of persons named in
the Issuing Agreement. For each series of securities, the trustee will give
written notice of termination of the Issuing Agreement to each securityholder,
and the final distribution will be made only upon surrender and cancellation
of the securities at an office or agency appointed by the sponsor and
specified in the notice of termination.
Repurchase of the Remaining Loans. The Issuing Agreement for each series
may permit, but not require, the servicer or other entity specified in the
accompanying prospectus supplement to purchase from the trust fund for a
series all remaining loans at a price equal to 100% of the aggregate principal
balance of the loans plus, for any property acquired in respect of a loan, if
any, the outstanding principal balance of the loan at the time of foreclosure,
less, in either case, unreimbursed advances, in the case of the loans, only to
the extent not already reflected in the computation of the aggregate principal
balance of the loans, and unreimbursed expenses that are reimbursable under
the terms of the Issuing Agreement plus, in either case, accrued interest
thereon at the weighted average rate on the loans through the last day of the
remittance period in which the repurchase occurs; provided, however, that if
an election is made for treatment as a REMIC under the Code, the repurchase
price may equal the greater of (a) 100% of the aggregate principal balance of
the loans, plus accrued interest thereon at the applicable Net Loan Rates on
the loans through the last day of the month of the repurchase and (b) the
aggregate fair market value of the loans plus the fair market value of any
property acquired in respect of a loan and remaining in the trust fund. The
exercise of this right will effect early retirement of the securities of a
series, but this entity's right to so purchase is subject to the aggregate
principal balance of the loans at the time of repurchase being less than a
fixed percentage, which shall not exceed 20%, to be stated in the Issuing
Agreement, of the aggregate principal balance of the loans as of the cut-off
date.
Mandatory Termination; Auction Sale. The trustee, the servicer or the
seller may be required to effect early retirement of a series of securities by
soliciting competitive bids for the purchase of the trust fund.
The mandatory termination may take the form of an auction sale. Within a
particular period following the failure of the holder of the optional
termination right to exercise the right, the required party shall solicit bids
for the purchase of all loans remaining in the trust fund. In the event that
satisfactory bids, which would not be less than an amount necessary to pay all
principal and interest on the securities outstanding, are received as
specified in the Issuing Agreement, the net sale proceeds will be distributed
to securityholders, in the same order of priority as collections received on
the loans. If satisfactory bids are not received, this party shall decline to
sell the loans and shall not be under any obligation to solicit any further
bids or otherwise negotiate any further sale of the loans. This sale and
consequent termination of the trust fund must constitute a "qualified
liquidation" of each REMIC established by the issuer under Section 860F of the
Code, including, without limitation, the requirement that the qualified
liquidation takes place over a period not to exceed 90 days.
Material Legal Aspects of the Loans
The following discussion contains summaries of particular legal aspects
of mortgage loans and manufactured housing contracts which are general in
nature. Because these legal aspects are governed by applicable state law,
which laws may differ substantially, the summaries do not purport to be
complete nor to reflect the laws of any particular state, nor to encompass the
laws of all states in which the security for the loans is situated. The
summaries are qualified in their entirety by reference to the applicable
federal and state laws governing the loans.
The Mortgage Loans
The mortgage loans will, in general, be secured by either first, second
or more junior mortgages, deeds of trust, or other similar security agreements
depending upon the prevailing practice in the state in which the underlying
property is located. A mortgage creates a lien upon the real property
described in the mortgage. There are two parties to a mortgage: the mortgagor,
who is the borrower; and the mortgagee, who is the lender. In a mortgage state
instrument, the mortgagor delivers to the mortgagee a note or bond evidencing
the loan and the mortgage. Although a deed of trust is similar to a mortgage,
a deed of trust has three parties: a borrower called the trustor, who is
similar to a mortgagor, a lender called the beneficiary, who is similar to a
mortgagee, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grant the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
loan. The trustee's authority under a deed of trust and the mortgage's
authority under a mortgage are governed by the express provisions of the deed
of trust or mortgage, applicable law, and, in some cases, for a deed of trust,
the directions of the beneficiary.
The real property covered by a mortgage is most often the fee estate in
land and improvements. However, a mortgage may encumber other interests in
real property like a tenant's interest in a lease of land or improvements, or
both, and the leasehold estate created by the lease. A mortgage covering an
interest in real property other than the fee estate requires special
provisions in the instrument creating the interest or in the mortgage to
protect the mortgagee against termination of the interest before the mortgage
is paid.
Foreclosure
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in
completion of the foreclosure occasionally may result from difficulties in
locating necessary parties defendant. When the mortgagee's right of
foreclosure is contested, the legal proceedings necessary to resolve the issue
can be time-consuming. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a
receiver or other officer to conduct the sale of the property. In some states,
mortgages may also be foreclosed by advertisement, by a power of sale provided
in the mortgage. Foreclosure of a mortgage by advertisement is essentially
similar to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust
that authorizes the trustee to sell the property to a third party upon any
default by the borrower under the terms of the note or deed of trust. In some
states, this foreclosure also may be accomplished by judicial action in the
manner provided for foreclosure of mortgages. In some states, the trustee must
record a notice of default and send a copy to the borrower-trustor and to any
person who has recorded a request for a copy of a notice of default and notice
of sale. In addition, the trustee must provide notice in some states to any
other individual having an interest of record in the real property, including
any junior lienholders. If the deed of trust is not reinstated within any
applicable cure period, a notice of sale must be posted in a public place and,
in most states, published for a specified period of time in one or more
newspapers. In addition, some state be laws require that a copy of the notice
of sale be posted on the property and sent to all parties having an interest
of record in the property.
In some states, the borrower-trustor has the right to reinstate the loan
at any time following default until shortly before the trustee's sale. In
general, the borrower, or any other person having, a junior encumbrance on the
real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation. Some state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the receiver or other designated officer, or by the trustee, is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at the
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or receiver for an amount equal to the unpaid principal
amount of the note, accrued and unpaid interest and the expenses of
foreclosure. Thereafter, subject to the right of the borrower in some states
to remain in possession during the redemption period, the lender will assume
the burdens of ownership, including obtaining hazard insurance and making the
repairs at its own expense as are necessary to render the property suitable
for sale. The lender commonly will obtain the services of a real estate broker
and pay the broker a commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. Any loss may
be reduced by the receipt of mortgage insurance proceeds.
Foreclosure on Shares of Cooperatives
The cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer described
in the cooperative's certificate of incorporation and by-laws, as well as the
proprietary lease of occupancy agreement, and may be cancelled by the
cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by the tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by the
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate the lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender
and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under the proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on
a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender
is not limited in any rights it may have to dispossess the
tenant-stockholders.
Foreclosure on the cooperative shares is accomplished by a sale in
accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale
be conducted in a "commercially reasonable" manner. Whether a foreclosure sale
has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will
look to the notice given the debtor and the method, manner, time, place and
terms of the foreclosure. Generally, a sale conducted according to the usual
practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy
the indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative corporation to
receive sums due under the proprietary lease or occupancy agreement. If there
are proceeds remaining, the lender must account to the tenant-stockholder for
the surplus. Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See
"--Anti-Deficiency Legislation and Other Limitations on Lenders" below.
Rights of Redemption
In some states, after sale in accordance with a deed of trust and/or
foreclosure of a mortgage, the borrower and particular foreclosed junior
lienors are given a statutory period in which to redeem the property from the
foreclosure sale. In most states where the right of redemption is available,
statutory redemption may occur upon payment of the foreclosure purchase price,
accrued interest and taxes. In some states, the right to redeem is an
equitable right. The effect of a right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The exercise of a right
of redemption would defeat the title of any purchaser at a foreclosure sale,
or of any purchaser from the lender subsequent to judicial foreclosure or sale
under a deed of trust. Consequently, the practical effect of the redemption
right is to force the lender to maintain the property and pay the expenses of
ownership until the redemption period has run.
Junior Mortgages; Rights of Senior Mortgages
The mortgage loans are secured by mortgages or deeds of trust some of
which are junior to other mortgages or deeds of trust held by other lenders or
institutional investors. The rights of the Trust, and therefore the
securityholders, as mortgagee under a junior mortgage or beneficiary under a
junior deed of trust, are subordinate to those of the mortgagee under the
senior mortgage or beneficiary under the senior deed of trust, including the
prior rights of the senior mortgagee to receive hazard insurance and
condemnation proceeds and to cause the property securing the mortgage loan to
be sold upon default of the mortgagor or trustor, thereby extinguishing the
junior mortgagee's or junior beneficiary's lien unless the junior mortgagee or
junior beneficiary asserts its subordinate interest in the property in
foreclosure litigation and, possibly, satisfies the defaulted senior mortgage
or deed of trust. As discussed more fully below, a junior mortgagee or junior
beneficiary may satisfy a defaulted senior loan in full and, in some states,
may cure the default and loan. In most states, no notice of default is
required to be given to a junior mortgagee or junior beneficiary and junior
mortgagees or junior beneficiaries are seldom given notice of defaults or
senior mortgages. In order for a foreclosure action in some states to be
effective against a junior mortgagee or junior beneficiary, the junior
mortgagee or junior beneficiary must be named in any foreclosure action, thus
giving notice to junior lienors. It is standard practice of the originators to
protect their interest by attending any sale of which they have notice or
appearing and bidding for, or redeeming, the property if it is in their best
interest to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, including the originators, confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy and all awards made in connection with any condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured
by the mortgage or deed of trust. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event
the property is taken by condemnation, the mortgagee or beneficiary under any
underlying senior mortgages will have the prior right to collect and apply any
insurance proceeds payable under a hazard insurance policy to restore or
repair the property if feasible, and to collect any remaining insurance
proceeds or any award of damages in connection with the condemnation and to
apply the same to the indebtedness secured by the senior mortgages or deeds of
trust. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of a junior mortgage or trust
deed.
The form of mortgage or deed of trust used by most institutional lenders
typically contains a "future advance" clause, which provides, in essence, that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage or deed of trust.
The priority of any advance made under the clause depends, in some states, on
whether the advance was an "obligatory" or "optional" advance. If the
mortgagee or beneficiary is obligated to advance the additional amounts, the
advance is entitled to receive the same priority as amounts initially advanced
under the mortgage or deed of trust, notwithstanding the fact that there may
be junior mortgages or deeds of trust and other liens which intervene between
the date of recording of the mortgage or deed of trust and the date of the
future advance, and, in some states, notwithstanding that the mortgagee or
beneficiary had actual knowledge of the intervening junior mortgages or deeds
of trust and other liens at the time of the advance. Where the mortgagee or
beneficiary is not obligated to advance additional amounts or, in some states,
has actual knowledge of the intervening junior mortgages or deeds of trust and
other liens, the advance will be subordinate to the intervening junior
mortgages or deeds of trust and other liens. Priority of advances under a
"future advance" cause rests, in some states, on state statutes giving
priority to all advances made under the loan agreement to a "credit limit"
amount stated in the recorded mortgage.
Another provision sometimes included in the form of the mortgage or deed
of trust used by institutional lenders, and included in some of the forms used
by the originators, obligates the mortgagor or trustor to pay, before
delinquency, all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to
perform any of these obligations, the mortgagee or beneficiary is given the
right under some mortgages or deeds of trust to perform the obligations
itself, at its election, with the mortgagor or trustor agreeing to reimburse
the mortgagee or beneficiary for any sums expended by the mortgagee or
beneficiary on behalf of the mortgagor or trustor. All sums so expended by the
mortgagee or beneficiary become part of the indebtedness secured by the
mortgage or deed of trust.
Anti-Deficiency Legislation and Other Limitations on Lenders
Some states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgage under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the foreclosure sale.
Some state statutes may require the beneficiary or mortgagee to exhaust
the security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In some other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting the
security; however, in some of these states, the lender, following judgment on
the personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies on the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
former borrower following a foreclosure sale to the excess of the outstanding
debt over the fair market value of the property at the time of the sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided
for in particular instances where the value of the lender's security has been
impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the proprietary lease or occupancy agreement and foreclosure on the
beneficial interest in a land trust. Some courts have interpreted Section
9-504 of the UCC to prohibit a deficiency award unless the creditor
establishes that the sale of the collateral, which, in the case of a mortgage
loan secured by shares of a cooperative, would be the shares and the
proprietary lease or occupancy agreement, was conducted in a commercially
reasonable manner.
In addition to anti-deficiency and similar legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act and state laws affording
relief to debtors, may interfere with or affect the ability of a secured
mortgage lender to realize upon its security. For example, in a Chapter 13
proceeding under the federal Bankruptcy Code, when a court determines that the
value of a home is less than the principal balance of the loan, the court may
prevent a lender from foreclosing on the home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the
value of the home as it exists at the time of the proceeding, leaving the
lender as a general unsecured creditor for the difference between that value
and the amount of outstanding indebtedness. A bankruptcy court may grant the
debtor a reasonable time to cure a payment default, and in the case of a
mortgage loan not secured by the debtor's principal residence, also may reduce
the monthly payments due under the mortgage loan, change the rate of interest
and alter the mortgage loan repayment schedule. Some court decisions have
applied the relief to claims secured by the debtor's principal residence.
The Code, provides priority to specified tax liens over the lien of the
mortgage or deed of trust. The laws of some states provide priority to these
tax liens over the lien of the mortgage of deed of trust. Some environmental
protection laws may also impose liability for cleanup expenses on owners by
foreclosure on real property, which liability may exceed the value of the
property involved. Numerous federal and some state consumer protection laws
impose substantive requirements upon mortgage lenders in connection with the
origination, servicing and the enforcement of mortgage loans. These laws
include the federal Truth in Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act, and similar statutes and regulations. These federal laws and
state laws impose specific statutory liabilities upon lenders who originate or
service mortgage loans and who fail to comply with the provisions of the law.
In some cases, this liability may affect assignees of the mortgage loans.
"Due-on-Sale" Clauses
The forms of note, mortgage and deed of trust relating to conventional
mortgage loans may contain a "due-on-sale" clause permitting acceleration of
the maturity of a loan if the borrower transfers its interest in the property.
In recent years, court decisions and legislative actions placed substantial
restrictions on the right of lenders to enforce the clauses in many states.
However, effective October 15, 1982, Congress enacted the Garn Act which
purports to preempt state laws which prohibit the enforcement of "due-on-sale"
clauses by providing among other matters, that "due-on-sale" clauses in some
loans, which loans may include the mortgage loans, made after the effective
date of the Garn Act are enforceable, within specified limitations as set
forth in the Garn Act and the regulations promulgated thereunder.
"Due-on-sale" clauses contained in mortgage loans originated by federal
savings and loan associations or federal savings banks are fully enforceable
under regulations of the Office of Thrift Supervision, as successor to the
Federal Home Loan Bank Board, which preempt state law restrictions on the
enforcement of the clauses. Similarly, "due-on-sale" clauses in mortgage loans
made by national banks and federal credit unions are now fully enforceable
under preemptive regulations of the Office of the Comptroller of the Currency
and the National Credit Union Administration, respectively.
The Garn Act created a limited exemption from its general rule of
enforceability for "due-on-sale" clauses in some "window period" mortgage
loans which were originated by non-federal lenders and made or assumed in some
"window period" states during the "window period," prior to October 15, 1982,
in which that state prohibited the enforcement of "due-on-sale" clauses by
constitutional provision, statute or statewide court decision. Though neither
the Garn Act nor the OTS regulations promulgated thereunder actually names the
window period states, FHLMC has taken the position, in prescribing mortgage
loan servicing standards for mortgage loans which it has purchased, that the
window period states were: Arizona, Arkansas, California, Colorado, Georgia,
Iowa, Michigan, Minnesota, New Mexico, Utah and Washington. Under the Garn
Act, unless a window period state took action by October 15, 1985, the end of
the window period, to further regulate enforcement of "due-on-sale" clauses in
window period mortgage loans, "due-on-sale" clauses would become enforceable
even in window period loans. Five of the window period states, Arizona,
Minnesota, Michigan, New Mexico and Utah, have taken actions which restrict
the enforceability of "due-on-sale" clauses in window period loans beyond
October 15, 1985. The actions taken vary among these states.
By virtue of the Garn Act, the servicer may generally be permitted to
accelerate any conventional mortgage loan which contains a "due-on-sale"
clause upon transfer of an interest in the property subject to the mortgage or
deed of trust. For any mortgage loan secured by a residence occupied or to be
occupied by the borrower, this ability to accelerate will not apply to
particular types of transfers, including:
o the granting of a leasehold interest which has a term of three years
or less and which does not contain an option to purchase,
o a transfer to a relative resulting from the death of a borrower, or a
transfer where the spouse or children becomes an owner of the property
in each case where the transferee(s) will occupy the property,
o a number resulting from a decree of dissolution of marriage, legal
separation agreement or from an incidental property settlement
agreement by which the spouse becomes an owner of the property,
o the creation of a lien or other encumbrance subordinate to the
lender's security instrument which does not relate to a transfer of
rights of occupancy in the property; provided, that the lien or
encumbrance is not created by a contract for deed,
o a transfer by devise, descent or operation of law on the death of a
joint tenant or tenant by the entirety, and
o other transfers as set forth in the Garn Act and the regulations
thereunder.
The extent of the effect of the Garn Act on the average lives and
delinquency rates of the mortgage loans cannot be predicted. See "Prepayment
and Yield Considerations."
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, provides that state usury limitations shall not apply to
specified types of residential first mortgage loans originated by specified
lenders after March 31, 1980. The OTS is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title
V. The statute authorized any state to reimpose interest rate limits by
adopting before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. Fifteen states have adopted
laws reimposing or reserving the right to impose interest rate limits. In
addition, even where Title V is not so rejected, any state is authorized to
adopt a provision limiting specified other loan charges.
Unless otherwise specified in the accompanying prospectus supplement, the
seller will represent and warrant in the Loan Sale Agreement that all of the
mortgage loans were originated in full compliance with applicable state laws,
including usury laws. See "The Trust Funds--Representations and Warranties."
Adjustable Rate Loans
The laws of some states may provide that mortgage notes relating to
adjustable rate loans are not negotiable instruments under the UCC. In this
event, the trustee will not be deemed to be a "holder in due course" within
the meaning of the UCC and may take this mortgage note subject to a number of
restrictions on its ability to foreclose and to a number of contractual
defenses available to a mortgagor.
Enforceability of Provisions
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In some states, there
are or may be specific limitations upon late charges which a lender may
collect from a borrower for delinquent payments. Some states also limit the
amounts that a lender may collect from a borrower as an additional charge if
the loan is prepaid. Under the servicing agreement, late charges and
prepayment fees, to the extent permitted by law and not waived by the
servicer, will be retained by the servicer as additional servicing
compensation.
Courts have applied general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have sustained their judgment for
the lender's judgment and have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders
to foreclose if the default under the mortgage instrument is not monetary,
like the borrower failing to adequately maintain the property or the borrower
executing a second mortgage or deed of trust affecting the property. In other
cases, some courts have been faced with the issue whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under deeds of trust receive notices in addition to the
statutorily-prescribed minimum requirements. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust or under a mortgage having a power of
sale does not involve sufficient state action to afford constitutional
protections to the borrower.
The Contracts
As a result of the assignment of the contracts to the trustee, the trust
fund will succeed collectively to all of the rights, including the right to
receive payment on the contracts, and will assume the obligations of the
obligee under the contracts. Each contract evidences both (a) the obligation
of the obligor to repay the loan evidenced thereby, and (b) the grant of a
security interest in the manufactured home to secure repayment of the loan.
Particular aspects of both features of the contracts are described more fully
below.
The contracts generally are "chattel paper" as defined in the UCC in
effect in the states in which the manufactured homes initially were
registered. Under the UCC, the sale of chattel paper is treated in a manner
similar to perfection of a security interest in chattel paper. Under the
servicing agreement, the servicer will transfer physical possession of the
contracts to the trustee or a designated custodian or may retain possession of
the contracts as custodian for the trustee. In addition, the servicer will
make an appropriate filing of a UCC-1 financing statement in the appropriate
states to give notice of the trustee's ownership of the contracts. Unless
otherwise specified in the accompanying prospectus supplement, the contracts
will not be stamped or marked otherwise to reflect their assignment from the
issuer to the trustee. Therefore, if through negligence, fraud or otherwise, a
subsequent purchaser were able to take physical possession of the contracts
without notice of the assignment, the trustee's interest in contracts could be
defeated.
Security Interests in the manufactured homes
Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by
delivery of the required documents and payment of a fee to the state motor
vehicle authority, depending on state law. In some non-title states,
perfection under the provisions of the UCC is required. The servicer may
effect the notation or delivery of the required documents and fees, and obtain
possession of the certificate of title, as appropriate under the laws of the
state in which any manufactured home securing a manufactured housing
conditional sales contract is registered. In the event the servicer fails, due
to clerical errors, to effect the notation or delivery, or files the security
interest under the wrong law, the securityholders may not have a first
priority security interest in the manufactured home securing a contract. As
manufactured homes have become larger and often have been attached to their
sites without any apparent intention to move them, courts in many states have
held that manufactured homes, under some circumstances, may become subject to
real estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate
law. In order to perfect a security interest in a manufactured home under real
estate laws, the secured party must file either a "fixture filing" under the
provisions of the UCC or a real estate mortgage under the real estate laws of
the state where the home is located. These filings must be made in the real
estate records office of the county where the home is located. Substantially
all of the contracts contain provisions prohibiting the borrower from
permanently attaching the manufactured home to its site. So long as the
borrower does not violate this agreement, a security interest in the
manufactured home will be governed by the certificate of title laws or the
UCC, and the notation of the security interest on the certificate of title or
the filing of a UCC financing statement will be effective to maintain the
priority of the security interest in the manufactured home. If, however, a
manufactured home is permanently attached to its site, other parties could
obtain an interest in the manufactured home which is prior to the security
interest originally retained by the seller and transferred to the issuer. For
a series of securities and if so described in the accompanying prospectus
supplement, the servicer may be required to perfect a security interest in the
manufactured home under applicable real estate laws. The servicer will
represent that at the date of the initial issuance of the securities it has
obtained a perfected first priority security interest by proper notation or
delivery of the required documents and fees for substantially all of the
manufactured homes securing the contracts.
The sponsor will cause the security interests in the manufactured homes
to be assigned to the trustee on behalf of the securityholders. Unless
otherwise specified in the accompanying prospectus supplement, neither the
sponsor nor the trustee will amend the securities of title to identify the
trustee or the trust fund as the new secured party, and neither the sponsor
nor the servicer will deliver the securities of title to the trustee or note
thereon the interest of the trustee. Accordingly, the servicer or the seller,
which continue to be named as the secured party on the securities of title
relating to the manufactured homes. In many states, the assignment is an
effective conveyance of the security interest without amendment of any lien
noted on the certificate of title and the new secured party succeeds to the
issuer's rights as the secured party. However, in some states there exists a
risk that, in the absence of an amendment to the certificate of title, the
assignment of the security interest in the manufactured home might not be
effective or perfected or that, in the absence of this notation or delivery to
the trustee, the assignment of the security interest in the manufactured home
might not be effective against creditors of the servicer, or the seller, or a
trustee in bankruptcy of the servicer, or the seller.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the manufactured home owner, or
administrative error by state recording officials, the notation of the lien of
the servicer or the seller, on the certificate of title or delivery of the
required documents and fees will be sufficient to protect the securityholders
against the rights of subsequent purchasers of a manufactured home or
subsequent lenders who take a security interest in the manufactured home. If
there are any manufactured homes as to which the security interest assigned to
the trustee is not perfected, the security interest would be subordinate to,
among others, subsequent purchasers for value of manufactured homes and
holders of perfected security interests. There also exists a risk in not
identifying the trustee as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the
securityholders could be released.
In the event that the owner of a manufactured home moves it to a state
other than the state in which the manufactured home initially is registered,
under the laws of most states the perfected security interest in the
manufactured home would continue for four months after relocation and
thereafter until the owner re-registers the manufactured home in this state.
If the owner were to relocate a manufactured home to another state and not
re-register the manufactured home in this state, and if steps are not taken to
re-perfect the trustee's security interest in this state, the security
interest in the manufactured home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
manufactured home; accordingly, the trustee must surrender possession if it
holds the certificate of title to the manufactured home or, in the case of
manufactured homes registered in states which provide for notation of lien,
the servicer would receive notice of surrender if the security interest in the
manufactured home is noted on the certificate of title. Accordingly, the
trustee would have the opportunity to re-perfect its security interest in the
manufactured home in the state of relocation. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing conditional sales contracts, the servicer takes steps to effect the
re-perfection upon receipt of notice of registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a manufactured home, the trustee or
its designated custodian must surrender possession of the certificate of title
or the servicer will receive notice as a result of its lien noted thereon and
accordingly will have an opportunity to require satisfaction of the
manufactured housing conditional sales contract before release of the lien.
Under the Servicing Agreement, the servicer is obligated to take steps, at the
servicer's expense, as are necessary to maintain perfection of security
interests in the manufactured homes.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority over a
perfected security interest. The seller will represent in the Loan Sale
Agreement that it has no knowledge of any liens on any manufactured home
securing payment on any contract. However, these liens could arise at any time
during the term of a contract. No notice will be given to the trustee or
securityholders in the event this type of lien arises.
Enforcement of Security Interests in manufactured homes
The servicer on behalf of the trustee, to the extent required by the
Servicing Agreement, may take action to enforce the trustee's security
interest for contracts in default by repossession and resale of the
manufactured homes securing these defaulted contracts. So long as the
manufactured home has not become subject to the real estate law, a creditor
can repossess a manufactured home securing a contract by voluntary surrender,
by "self-help" repossession that is "peaceful" or, in the absence of voluntary
surrender and the ability to repossess without breach of the peace, by
judicial process. The holder of a contract must give the debtor a number of
days' notice, which varies from 10 to 30 days depending on the state, prior to
commencement of any repossession. The UCC and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting a repossession
sale. The law in most states also requires that the debtor be given notice of
any sale prior to resale of the unit so that the debtor may redeem at or
before this resale. In the event of a repossession and resale of a
manufactured home, the trustee would be entitled to be paid out of the sale
proceeds before the proceeds could be applied to the payment of the claims of
unsecured creditors or the holders of subsequently perfected security
interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a
judgment.
Some other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction, and
specified lenders and assignees, to transfer the contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of this type of contract to all claims and defenses which the debtor
could assert against the seller of goods. Liability under this rule is limited
to amounts paid under a contract; however, the obligor also may be able to
asset the rule to set off remaining amounts due as a defense against a claim
brought by the trustee against the obligor. Numerous other federal and state
consumer protection laws impose requirements applicable to the origination and
lending under the contracts, including the Truth in Lending Act, the Federal
Trade Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting
Act, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act
and the Uniform Consumer Credit Code. In the case of some of these laws, the
failure to comply with their provisions may affect the enforceability of the
contract.
Transfers of manufactured homes; Enforceability of "Due-on-Sale" Clauses
The contracts, in general, prohibit the sale or transfer of the
manufactured homes without the consent of the servicer and permit the
acceleration of the maturity of the contracts by the servicer upon any sale or
transfer that is not consented to.
In the case of a transfer of a manufactured home after which the servicer
desires to accelerate the maturity of the contract, the servicer's ability to
do so will depend on the enforceability under state law of the "due-on-sale"
clause. The Garn Act preempts, subject to a number of exceptions and
conditions, state laws prohibiting enforcement of "due-on-sale" clauses
applicable to the manufactured homes. Consequently, in some states the
servicer may be prohibited from enforcing a "due-on-sale" clause on some
manufactured homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 provides that, subject to the following conditions, state usury
limitations shall not apply to any loan which is secured by a first lien on
particular kinds of manufactured housing. The contracts would be covered if
they satisfy a number of conditions, among other things, governing the terms
of any prepayments, late charges and deferral fees and requiring a 30-day
notice period prior to instituting any action leading to repossession of the
unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, and state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered
by Title V. The seller will represent that all of the contracts comply with
applicable usury law.
Formaldehyde Litigation Involving Contracts
A number of lawsuits have been brought in the United States alleging
personal injury from exposure to the chemical formaldehyde, which is preset in
many building materials, including the components of manufactured housing as
plywood flooring and wall paneling. Some of these lawsuits were brought
against manufacturers of manufactured housing, suppliers of component parts,
and persons in the distribution process. The sponsor is aware of a limited
number of cases in which plaintiffs have won judgments in these lawsuits.
The holder of any contract secured by a manufactured home for which a
formaldehyde claim has been successfully asserted may be liable to the obligor
for the amount paid by the obligor on the contract and may be unable to
collect amounts still due under the contract. The successful assertion of the
claim constitutes a breach of a representation or warranty of the person
specified in the accompanying prospectus supplement, and the securityholders
would suffer a loss only to the extent that (x) this person breached its
obligation to repurchase the contract in the event an obligor is successful in
asserting a claim, and (y) this person, the servicer or the trustee were
unsuccessful in asserting any claim of contribution or subrogation on behalf
of the securityholders against the manufacturer or other persons who were
directly liable to the plaintiff for the damages. Typical products liability
insurance policies held by manufacturers and component suppliers of
manufactured homes may not cover liabilities arising from formaldehyde in
manufactured housing, with the result that recoveries from the manufacturers,
suppliers or other persons may be limited to their corporate assets without
the benefit of insurance.
Installment Contracts
The loans may also consist of installment contracts. Under an installment
contract the lender retains legal title to the property and enters into an
agreement with the borrower for the payment of the purchase price, plus
interest, over the term of the contract. Only after full performance by the
borrower of the contract is the lender obligated to convey title to the real
estate to the purchaser. As with mortgage or deed of trust financing, during
the effective period of the Installment contract, the borrower is generally
responsible for maintaining the property in good condition and for paying real
estate taxes, assessments and hazard insurance premiums associated with the
property.
The method of enforcing the rights of the lender under an installment
contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able under state statute, to enforce the contract
strictly according to the terms. The terms of installment contracts generally
provide that upon a default by the borrower, the borrower loses his or her
right to occupy the property, the entire indebtedness is accelerated, and the
buyer's equitable interest in the property is forfeited. The lender in this
situation does not have to foreclosure in order to obtain title to the
property, although in some cases a quiet title action is in order if the
borrower has filed the Installment contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
installment contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under installment contracts from the harsh consequences of
forfeiture. Under these statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the
borrower may be granted some grace period during which the contract may be
reinstated upon full payment of the default amount and the borrower may have a
post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
Installment contract for the sale of real estate to share in the proceeds of
sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the
lender's procedures for obtaining possession and clear title under an
Installment contract for the sale of real estate in a given state are simpler
and less time-consuming and costly than are the procedures for foreclosing and
obtaining clear title to a mortgaged property.
Environmental Risks
Real property pledged for a loan as security to a lender may be subject
to unforeseen environmental risks. Of particular concern may be those
mortgaged properties which have been the site of manufacturing, industrial or
disposal activity. These environmental risks may give rise to (a) a diminution
in value of property securing any loan or the inability to foreclose against
the property or (b) in some circumstances as more fully described below,
liability for clean-up costs or other remedial actions, which liability could
exceed the value of the property or the principal balance of the loan.
Under the laws of some states, failure to perform the remediation
required or demanded by the state of any environmental condition or
circumstance that
o may pose an imminent or substantial endangerment to the public health
or welfare or the environment,
o may result in a release or threatened release of any hazardous
material,
o may give rise to any environmental claim or demand, or
o may give rise to a lien on the property to ensure the reimbursement of
remedial costs incurred by the state to remedy the environmental
condition.
In several states these liens have priority over the lien of an existing
mortgage against the property. The value of a mortgaged property as collateral
for a loan could therefore be adversely affected by the existence of any
environmental condition.
The state of the law is currently unclear as to whether and under what
circumstances clean-up costs, or the obligation to take remedial actions,
could be imposed on a secured lender like the trust fund. Under the laws of
some states and under the CERCLA, a lender may be liable as an "owner or
operator" for costs of addressing releases or threatened releases of hazardous
substances on a mortgaged property if the lender or its agents or employees
have participated in the management of the operations of the borrower, even
though CERCLA's definition of "owner or operator," however, is a person "who
without participating in the management of the facility, holds indicia of
ownership primarily to protect his security interest". This exemption for
holders of a security interest like a secured lender applies only when the
lender seeks to protect its security interest in the contaminated facility or
property. Thus, if a lender's activities begin to encroach on the actual
management of the facility or property, the lender faces potential liability
as an "owner or operator" under CERCLA. Similarly, when a lender forecloses
and takes title to a contaminated facility or property, whether it holds the
facility or property as an investment or leases it to a third party, the
lender may incur potential CERCLA liability.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly
contained CERCLA's secured-creditor exemption. The court held that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under
CERCLA; rather, liability could attach to a lender if its involvement with the
management of the facility is broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence the decisions
could be inferred from the extent of its involvement in the facility's
financial management. A subsequent decision by the United States Court of
Appeals for the Ninth Circuit in In re Bergsoe Metal Corp., disagreeing with
the Fleet Factors court, held that a secured lender had no liability absent
"some actual management of the facility" on the part of the lender. On April
29, 1992, the United States Environmental Protection Agency issued a final
rule interpreting and delineating CERCLA's secured-creditor exemption. The
final rule defines a specific the range of permissible actions that may be
undertaken by a holder of a contaminated facility without exceeding the bounds
of the secured-creditor exemption. Issuance of this rule by the EPA under
CERCLA would not necessarily affect the potential for liability in actions by
either a state or a private party under CERCLA or in actions under other
federal or state laws which may impose liability on "owners or operators" but
do not incorporate the second-creditor exemption.
If a lender is or becomes liable for clean-up costs, it may bring an
action for contribution against the current owners or operators, the owners or
operators at the time of on-site disposal activity or any other party who
contributed to the environmental hazard, but these persons or entities may be
bankrupt or otherwise judgment proof. Furthermore, this action against the
borrower may be adversely affected by the limitations on recourse in the
documents in the loan document file. Similarly, in some states anti-deficiency
legislation and other statues requiring the lender to exhaust its security
before bringing a personal action against the borrower-trustor may curtail the
lender's ability to recover from its borrower the environmental clean-up and
other costs and liabilities by the lender. See "--Anti-Deficiency Legislation
and Other Limitations on Lenders".
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, a borrower who enters military service after the origination of the
borrower's loan, including a borrower who is a member of the National Guard or
is in reserve status at the time of the origination of the loan and is later
called to active duty, may not be charged interest above an annual rate of 6%
during the period of the borrower's active duty status, unless a court orders
otherwise upon application of the lender. It is possible that this action
could have an effect, for an indeterminate period of time, on the ability of
the servicer to collect full amounts of interest on some of the loans in a
trust fund. Any shortfall in interest collections resulting from the
application of the Soldiers' and Sailors' Civil Relief Act could result in
losses to the holders of the securities of the series. In addition, the
Soldiers' and Sailors' Civil Relief Act imposes limitations which would impair
the ability of the servicer to foreclose on an affected loan during the
borrower's period of active duty status. Thus, in the event that this type of
loan goes into default, there may be delays and losses occasioned by the
inability to realize upon the mortgaged property or manufactured home in a
timely fashion.
Type of mortgaged property
The lender may be subject to additional risk depending upon the type and
use of the mortgaged property in question. For instance, mortgaged properties
which are hospitals, nursing homes or convalescent homes may present special
risks to lenders in large part due to significant governmental regulation of
the operation, maintenance, control and financing of health care institutions.
Mortgages on mortgaged properties which are owned by the borrower under a
condominium form of ownership are subject to the declaration, by-laws and
other rules and regulations of the condominium association. mortgaged
properties which are hotels or motels may present additional risk to the
lender in that: (x) hotels and motels are typically operated in accordance
with franchise, management and operating agreements which may be terminable by
the operator; and (y) the transferability of the hotel's operating, liquor and
other licenses to the entity acquiring the hotel either through purchase or
foreclosure is subject to the vagaries of local law requirements. In addition,
mortgaged properties which are multifamily residential properties may be
subject to rent control laws, which could impact the future cash flows of
these properties. Finally, mortgaged properties which are financed in the
installment sales contract method may leave the holder of the note exposed to
tort and other claims as the true owner of the property which could impact the
availability of cash to pass through to investors.
Material Matters Relating to Insolvency
The seller, the issuer and the sponsor intend that the transfer of the
loans to the issuer constitute a sale rather for a pledge of the loans to
secure indebtedness of the seller. However, if the seller were to become a
debtor under the federal bankruptcy code or be placed in a conservatorship or
receivership under FIRREA, as the case may be, it is possible that a creditor,
receiver, conservator or trustee-in-bankruptcy of the seller may argue that
the sale of the loans by the seller is a pledge of the loans rather than a
sale. This position, if argued or accepted by a court, could result in a delay
in or reduction of distributions to the securityholders.
Under FIRREA, the FDIC as receiver or conservator of a servicer subject
to its jurisdiction may enforce a contract notwithstanding any provision of
the contract providing for termination thereof by reason of the insolvency of,
or appointment of a receiver or conservator for, the servicer. Consequently,
provisions in a Servicing Agreement providing for an Event of Default upon
specified events of insolvency, receivership or conservatorship of the
servicer may not be enforceable against the FDIC as receiver or conservator to
the extent that the exercise of these rights is based solely upon the
insolvency of or appointment of a receiver or conservator for the servicer. In
addition, the FDIC may transfer the assets and liabilities of an institution
in receivership or conservatorship to another institution.
Bankruptcy Laws
Numerous statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to obtain payment of the loan, to
realize upon collateral and/or enforce a deficiency judgment. For example,
under federal bankruptcy law, virtually all actions, including foreclosure
actions and deficiency judgment proceedings, are automatically stayed upon the
filing of the bankruptcy petition, and, often, no interest or principal
payments are made during the course of the bankruptcy proceeding. The delay
and the consequences thereof caused by or on behalf of a junior lienor may
stay the senior lender from taking action to foreclose out the junior lien. In
a case under the Bankruptcy Code, the lender is precluded from foreclosing
without authorization from the bankruptcy court. In addition, a court with
federal bankruptcy jurisdiction may permit a debtor through his or her Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default on a mortgage
loan on the debtor's residence by paying arrearage within a reasonable time
period and reinstating the original mortgage loan payment schedule even though
the lender accelerated the mortgage loan and final judgment of foreclosure had
been entered in state court, provided no sale of the residence had yet
occurred, prior to the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that the modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule, and reducing the lender's security interest to the value
of the residence, thus leaving the lender in the position of a general
unsecured creditor for the difference between the value of the residence and
the outstanding balance of the loan.
Federal bankruptcy law may also interfere with or affect the ability of
the secured mortgage lender to enforce an assignment by a mortgagor of rent
and leases on the mortgaged property if the mortgagor is in a bankruptcy
proceeding. Under Section 362 of the Bankruptcy Code, the mortgagee will be
stayed from enforcing the assignment, and the legal proceedings necessary to
resolve the issue can be time-consuming and may result in significant delays
in the receipt of the rents. Rents may also escape an assignment thereof
o if the assignment is not fully perfected under state law prior to
commencement of the bankruptcy proceeding,
o to the extent these rents are used by the borrower to maintain the
mortgaged property, or for other court authorized expenses, or
o to the extent other collateral may be substituted for the rents.
To the extent a mortgagor's ability to make payment on a mortgage loan is
dependent on payments under a lease of the property, the ability may be
impaired by the commencement of a bankruptcy proceeding relating to a lessee
under the lease. Under the federal bankruptcy laws, the filing of a petition
in bankruptcy by or on behalf of a lessee results in a stay in bankruptcy
against the commencement or continuation of any state court proceeding for
past due rent, for accelerated rent, for damages or for a summary eviction
order for a default under the lease that occurred prior to the filing of the
lessee's petition.
In addition, federal bankruptcy law generally provides that a trustee or
debtor in possession in a bankruptcy or reorganization case under the
Bankruptcy Code may, subject to approval of the court (a) assume the lease and
retain it or assign it to a third party or (b) reject the lease. If the lease
is assumed, the trustee or debtor in possession, or assignee, if applicable,
must cure any defaults under the lease, compensate the lessor for its losses
and provide the lessor with "adequate assurance" of future performance. These
remedies may be insufficient, however, as the lessor may be forced to continue
under the lease with a lessee that is a poor credit risk or an unfamiliar
tenant if the lease was assigned, and any assurances provided to the lessor
may, in fact, be inadequate. Furthermore, there is likely to be a period of
time between the date upon which a lessee files a bankruptcy petition and the
date upon which the lease is assumed or rejected. Although the lessee is
obligated to make all lease payments currently during the post-petition
period, there is a risk that the payments will not be made due to the lessee's
poor financial condition. If the lease is rejected, the lessor will be treated
as an unsecured creditor on its claim for damages for termination of the lease
and the mortgagor must release the mortgage property before the flow of lease
payments will recommence. In addition, under Section 502(b)(6) of the
Bankruptcy Code, a lessor's damages for lease rejection are limited by a
formula.
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer to the trust fund of any payments made by
the mortgagor under the mortgage loan. Moreover, some recent court decisions
suggest that even a non-collusive, regularly conducted foreclosure sale may be
challenged in a bankruptcy proceeding as a "fraudulent conveyance," regardless
of the parties' intent, if a bankruptcy court determines that the mortgaged
property has been sold for less than fair consideration while the mortgagor
was insolvent and within one year, or within any longer state statutes of
limitations if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law, of the filing of bankruptcy.
Material Federal Income Tax Consequences
The following is a discussion of the material federal income tax
consequences to investors of the purchase, ownership and disposition of the
securities offered hereby. The discussion is based upon laws, regulations,
rulings and decisions now in effect, all of which are subject to change. The
discussion below does not purport to deal with all federal tax consequences
applicable to all categories of investors, some of which may be subject to
special rules. Investors are urged to consult their own tax advisors in
determining the particular federal, state and local consequences to them of
the purchase, ownership and disposition of the securities.
The following discussion addresses securities of five general types:
o Grantor Trust Securities,
o REMIC Securities,
o Debt Securities,
o Partnership Interests, and
o FASIT Securities.
The prospectus supplement for each series of securities will indicate
whether a REMIC or FASIT election(s) will be made for the trust and, if a
REMIC or FASIT election is to be made, will identify all "regular interests"
and "residual interests" in the REMIC or all "regular interests," "high-yield
interests" and the "ownership interest" in the FASIT.
The Taxpayer Relief Act of 1997 adds provisions to the Code that require
the recognition of gain upon the "constructive sale of an appreciated
financial position." A constructive sale of an appreciated financial position
occurs if a taxpayer enters into particular transactions or series of
transactions in connection with a financial instrument that have the effect of
substantially eliminating the taxpayer's risk of loss and opportunity for gain
on the financial instrument. These provisions apply only to classes of
securities that do not have a principal balance.
Grantor Trust Securities
For each series of Grantor Trust Securities, special tax counsel to the
sponsor, will deliver its opinion to the sponsor that the trust will be
classified as a grantor trust and not as an association taxable as a
corporation. This opinion shall be attached on Form 8-K to be filed with the
Securities and Exchange Commission within fifteen days after the initial
issuance of the securities or filed with the Commission as a post-effective
amendment to the prospectus. Accordingly, each beneficial owner of a Grantor
Trust Security will generally be treated as the owner of an interest in the
loans included in the grantor trust.
Special Tax Attributes
Unless otherwise disclosed in a accompanying prospectus supplement,
special tax counsel to the sponsor, will deliver its opinion to the sponsor
that (a) Grantor Trust Fractional Interest Securities will represent interests
in (x) "loans . . . secured by an interest in real property" within the
meaning of section 7701(a)(19)(C)(v) of the Code; and (y) "obligations
(including any participation or certificate of beneficial ownership therein)
which . . . are principally secured by an interest in real property" within
the meaning of Section 860G(a)(3)(A) of the Code; and (b) interest on Grantor
Trust Fractional Interest Securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the Code. In addition,
the Grantor Trust Strip Securities will be "obligations (including any
participation or certificate of beneficial ownership therein) . . .
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code. We will file this opinion with the
Securities and Exchange Commission on Form 8-K within fifteen (15) days after
the initial issuance of the securities or as a post-effective amendment to the
prospectus.
Taxation of Beneficial Owners of Grantor Trust Securities
Beneficial owners of Grantor Trust Fractional Interest Securities
generally will be required to report on their federal income tax returns their
respective shares of the income from the loans, including amounts used to pay
reasonable servicing fees and other expenses but excluding amounts payable to
beneficial owners of any corresponding Grantor Trust Strip Securities, and,
subject to the limitations described below, will be entitled to deduct their
shares of any reasonable servicing fees and other expenses. If a beneficial
owner acquires a Grantor Trust Fractional Interest Security for an amount that
differs from its outstanding principal amount, the amount includible in income
on a Grantor Trust Fractional Interest Security may differ from the amount of
interest distributable thereon. See "--Discount and Premium," below.
Individuals holding a Grantor Trust Fractional Interest Security directly or
through some pass-through entities will be allowed a deduction for reasonable
servicing fees and expenses only to the extent that the aggregate of the
beneficial owner's miscellaneous itemized deductions exceeds 2% of the
beneficial owner's adjusted gross income. Further, beneficial owners, other
than corporations, subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining alternative minimum taxable
income.
Beneficial owners of Grantor Trust Strip Securities generally will be
required to treat the securities as "stripped coupons" under Section 1286 of
the Code. Accordingly, beneficial owner will be required to treat the excess
of the total amount of payments on a Grantor Trust Strip Security over the
amount paid for the security as original issue discount and to include the
discount in income as it accrues over the life of the security. See
"--Discount and Premium," below.
Grantor Trust Fractional Interest Securities may also be subject to the
coupon stripping rules if a class of Grantor Trust Strip Securities is issued
as part of the same series of securities. The consequences of the application
of the coupon stripping rules would appear to be that any discount arising
upon the purchase of a Grantor Trust Fractional Interest Security, and perhaps
all stated interest thereon, would be classified as original issue discount
and includible in the beneficial owner's income as it accrues, regardless of
the beneficial owner's method of accounting, as described below under
"--Discount and Premium." The coupon stripping rules will not apply, however,
if (x) the pass-through rate is no more than 100 basis points lower than the
gross rate of interest payable on the underlying loans and (y) the difference
between the outstanding principal balance on the security and the amount paid
for the security is less than 0.25% of the principal balance times the
weighted average remaining maturity of the security.
Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a Grantor Trust Security,
which is equal to the difference between the amount realized on the sale and
the adjusted basis of the Grantor Trust Security, will be capital gain or
loss, except to the extent of accrued and unrecognized market discount, which
will be treated as ordinary income, and in the case of banks and other
financial institutions except as provided under Section 582(c) of the Code.
The adjusted basis of a Grantor Trust Security will generally equal its cost,
increased by any income reported by the seller, including original issue
discount and market discount income, and reduced, but not below zero, by any
previously reported losses, any amortized premium and by any distributions of
principal.
Grantor Trust Reporting
The trustee will furnish to each beneficial owner of a Grantor Trust
Fractional Interest Security with each distribution a statement setting forth
the amount of the distribution allocable to principal on the underlying loans
and to interest thereon at the interest rate attributable to the security. In
addition, within a reasonable time after the end of each calendar year, based
on information provided by the servicer, the trustee will furnish to each
beneficial owner during the year any customary factual information as the
servicer deems necessary or desirable to enable beneficial owners of Grantor
Trust Securities to prepare their tax returns and will furnish comparable
information to the Internal Revenue Service as and when required to do so by
law.
REMIC Securities
If provided in a accompanying prospectus supplement, an election will be
made to treat an issuer as a REMIC under the Code. Qualification as a REMIC
requires ongoing compliance with a number of conditions. For each series of
securities for which a REMIC election is made, special tax counsel to the
sponsor, will deliver its opinion to the sponsor that, assuming compliance
with the Issuing Agreement, the issuer will be treated as a REMIC for federal
income tax purposes. We will file this opinion with the Commission on Form 8-K
within fifteen days after the initial issuance of the securities or as a
post-effective amendment to the prospectus.
A REMIC Trust will not be subject to federal income tax except for income
from prohibited transactions and in particular other instances described
below. See "--Taxes on a REMIC Trust." Generally, the total income from the
loans in a REMIC Trust will be taxable to the beneficial owners of the
securities of that series, as described below.
The REMIC Regulations provide some guidance regarding the federal income
tax consequences associated with the purchase, ownership and disposition of
REMIC Securities. While a number of material provisions of the REMIC
Regulations are discussed below, investors should consult their own tax
advisors regarding the possible application of the REMIC Regulations in their
specific circumstances.
Special Tax Attributes
REMIC Regular Securities and REMIC Residual Securities will be "regular
or residual interests in a REMIC" within the meaning of Section
7701(a)(19)(C)(xi) of the Code and "real estate assets" within the meaning of
Section 856(c)(5)(A) of the Code. If at any time during a calendar year less
than 95% of the assets of a REMIC Trust consist of "qualified mortgages",
within the meaning of Section 860G(a)(3) of the Code, then the portion of the
REMIC Regular Securities and REMIC Residual Securities that are qualifying
assets under those Sections during the calendar year may be limited to the
portion of the assets of the REMIC Trust that are qualified mortgages.
Similarly, income on the REMIC Regular Securities and REMIC Residual
Securities will be treated as "interest on obligations secured by mortgages on
real property" within the meaning of Section 856(c)(3)(B) of the Code, subject
to the same limitation described in the preceding sentence. For purposes of
applying this limitation, a REMIC Trust should be treated as owning the assets
represented by the qualified mortgages. The assets of the trust fund will
include, in addition to the loans, payments on the loans held pending
distribution on the REMIC Regular Securities and REMIC Residual Securities and
any reinvestment income thereon. REMIC Regular Securities and REMIC Residual
Securities held by a financial institution to which Section 585, 586 or 593 of
the Code applies will be treated as evidences of indebtedness for purposes of
Section 582(c)(1) of the Code. REMIC Regular Securities will also be qualified
mortgages in connection with other REMICs and FASITs.
Taxation of Beneficial Owners of REMIC Regular Securities
Except as indicated below in this federal income tax discussion, the
REMIC Regular Securities will be treated for federal income tax purposes as
debt instruments issued by the REMIC Trust on the Settlement Date and not as
ownership interests in the REMIC Trust or its assets. Beneficial owners of
REMIC Regular Securities that otherwise report income under a cash method of
accounting will be required to report income on the securities under an
accrual method. For additional tax consequences relating to REMIC Regular
Securities purchased at a discount or with premium, see "--Discount and
Premium," below.
Taxation of Beneficial Owners of REMIC Residual Securities
Daily Portions. Except as indicated below, a beneficial owner of a REMIC
Residual Security for a REMIC Trust generally will be required to report its
daily portion of the taxable income or net loss of the REMIC Trust for each
day during a calendar quarter that the beneficial owner owned the REMIC
Residual Security. For this purpose, the daily portion shall be determined by
allocating to each day in the calendar quarter its ratable portion of the
taxable income or net loss of the REMIC Trust for the quarter and by
allocating the amount so allocated among the beneficial owners of REMIC
Residual Securities on this day in accordance with their percentage interests
on this day. Any amount included in the gross income or allowed as a loss of
any beneficial owner of this REMIC Residual Security by virtue of this
paragraph will be treated as ordinary income or loss.
The requirement that each beneficial owner of a REMIC Residual Security
report its daily portion of the taxable income or net loss of the REMIC Trust
will continue until there are no securities of any class outstanding, even
though the beneficial owner of the REMIC Residual Security may have received
full payment of the stated interest and principal on its REMIC Residual
Security.
The trustee will provide to beneficial owners of REMIC Residual
Securities of each series of securities (x) the information as is necessary to
enable them to prepare their federal income tax returns and (y) any reports
regarding the securities of a series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net
loss of a REMIC Trust will be the income from the qualified mortgages it holds
and any reinvestment earnings less deductions allowed to the REMIC Trust. This
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with specified modifications.
The first modification is that a deduction will be allowed for accruals of
interest, including any original issue discount, but without regard to the
investment interest limitation in Section 163(d) of the Code, on the REMIC
Regular Securities, but not the REMIC Residual Securities, even though REMIC
Regular Securities are for non-tax purposes evidences of beneficial ownership
rather than indebtedness of a REMIC Trust. Second, market discount or premium
equal to the difference between the total stated principal balances of the
qualified mortgages and the basis to the REMIC Trust in the qualified
mortgages generally will be included in income, in the case of discount, or
deductible, in the case of premium, by the REMIC Trust as it accrues under a
constant yield method, taking into account the Prepayment Assumption. See
"--Discount and Premium--Original Issue Discount," below. The basis to a REMIC
Trust in the qualified mortgages is the aggregate of the issue prices of all
the REMIC Regular Securities and REMIC Residual Securities in the REMIC Trust
on the Settlement Date. If, however, a substantial amount of a class of REMIC
Regular Securities or REMIC Residual Securities has not been sold to the
public, then the fair market value of all the REMIC Regular Securities or
REMIC Residual Securities in that class as of the date of the prospectus
supplement should be substituted for the issue price.
The third modification is that no item of income, gain, loss or deduction
allocable to a prohibited transaction will be taken into account. See "--Taxes
on a REMIC Trust--Prohibited Transactions" below. Fourth, a REMIC Trust
generally may not deduct any item that would not be allowed in calculating the
taxable income of a partnership by virtue of Section 703(a)(2) of the Code.
Finally, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code will not be applied at the REMIC Trust
level to any servicing and guaranty fees. See, however, "--Pass-Through of
Servicing and Guaranty Fees to Individuals" below. In addition, under the
REMIC Regulations, any expenses that are incurred in connection with the
formation of a REMIC Trust and the issuance of the REMIC Regular Securities
and REMIC Residual Securities are not treated as expenses of the REMIC Trust
for which a deduction is allowed. If the deductions allowed to a REMIC Trust
exceed its gross income for a calendar quarter, the excess will be a net loss
for the REMIC Trust for that calendar quarter. The REMIC Regulations also
provide that any gain or loss to a REMIC Trust from the disposition of any
asset, including a qualified mortgage or "permitted investment", as defined in
Section 860G(a)(5) of the Code, will be treated as ordinary gain or loss.
A beneficial owner of a REMIC Residual Security may be required to
recognize taxable income without being entitled to receive a corresponding
amount of cash. This could occur, for example, if the qualified mortgages are
considered to be purchased by the REMIC Trust at a discount, some or all of
the REMIC Regular Securities are issued at a discount, and the discount
included as a result of a prepayment on a loan that is used to pay principal
on the REMIC Regular Securities exceeds the REMIC Trust's deduction for
unaccrued original issue discount relating to the REMIC Regular Securities.
Taxable income may also be greater in earlier years because interest expense
deductions, expressed as a percentage of the outstanding principal amount of
the REMIC Regular Securities, may increase over time as the earlier classes of
REMIC Regular Securities are paid, whereas interest income on any given loan
expressed as a percentage of the outstanding principal amount of that loan,
will remain constant over time.
Basis Rules and Distributions. A beneficial owner of a REMIC Residual
Security has an initial basis in its security equal to the amount paid for the
REMIC Residual Security. This basis is increased by amounts included in the
income of the beneficial owner and decreased by distributions and by any net
loss taken into account on the REMIC Residual Security. A distribution on a
REMIC Residual Security to a beneficial owner is not included in gross income
to the extent it does not exceed the beneficial owner's basis in the REMIC
Residual Security, adjusted as described above, and, to the extent it exceeds
the adjusted basis of the REMIC Residual Security, shall be treated as gain
from the sale of the REMIC Residual Security.
A beneficial owner of a REMIC Residual Security is not allowed to take
into account any net loss for any calendar quarter to the extent the net loss
exceeds the beneficial owner's adjusted basis in its REMIC Residual Security
as of the close of the calendar quarter, determined without regard to the net
loss. Any loss disallowed by reason of this limitation may be carried forward
indefinitely to future calendar quarters and, subject to the same limitation,
may be used only to offset income from the REMIC Residual Security.
Excess Inclusions. Any excess inclusions on a REMIC Residual Security are
subject to a number of special tax rules. For a beneficial owner of a REMIC
Residual Security, the excess inclusion for any calendar quarter is defined as
the excess, if any, of the daily portions of taxable income over the sum of
the "daily accruals" for each day during this quarter that the REMIC Residual
Security was held by the beneficial owner. The daily accruals are determined
by allocating to each day during a calendar quarter its ratable portion of the
product of the "adjusted issue price" of the REMIC Residual Security at the
beginning of the calendar quarter and 120% of the "federal long-term rate" in
effect on the Settlement Date, based on quarterly compounding, and properly
adjusted for the length of the quarter. For this purpose, the adjusted issue
price of a REMIC Residual Security as of the beginning of any calendar quarter
is equal to the issue price of the REMIC Residual Security, increased by the
amount of daily accruals for all prior quarters and decreased by any
distributions made on the REMIC Residual Security before the beginning of the
quarter. The issue price of a REMIC Residual Security is the initial offering
price to the public, excluding bond houses and brokers, at which a substantial
number of the REMIC Residual Securities was sold. The federal long-term rate
is a blend of current yields on Treasury securities having a maturity of more
than nine years, computed and published monthly by the IRS.
In general, beneficial owners of REMIC Residual Securities with excess
inclusion income cannot offset the income by losses from other activities. For
beneficial owners that are subject to tax only on unrelated business taxable
income, as defined in Section 511 of the Code, an excess inclusion of the
beneficial owner is treated as unrelated business taxable income. For variable
contracts, within the meaning of Section 817 of the Code, a life insurance
company cannot adjust its reserve to the extent of any excess inclusion,
except as provided in regulations. The REMIC Regulations indicate that if a
beneficial owner of a REMIC Residual Security is a member of an affiliated
group filing a consolidated income tax return, the taxable income of the
affiliated group cannot be less than the sum of the excess inclusions
attributable to all residual interests in REMICs held by members of the
affiliated group. For a discussion of the effect of excess inclusions on
particular foreign investors that own REMIC Residual Securities, see
"--Foreign Investors" below.
The Treasury Department also has the authority to issue regulations that
would treat all taxable income of a REMIC Trust as excess inclusions if the
REMIC Residual Security does not have "significant value." Although the
Treasury Department did not exercise this authority in the REMIC Regulations,
future regulations may contain this type of rule. If this type of rule were
adopted, it is unclear how significant value would be determined for these
purposes. If no rule is applicable, excess inclusions should be calculated as
discussed above.
In the case of any REMIC Residual Securities that are held by a real
estate investment trust, the aggregate excess inclusions on the REMIC Residual
Securities reduced, but not below zero, by the real estate investment trust
taxable income, within the meaning of Section 857(b)(2) of the Code, excluding
any net capital gain, will be allocated among the shareholders of the trust in
proportion to the dividends received by the shareholders from the trust, and
any amount so allocated will be treated as an excess inclusion on a REMIC
Residual Security as if held directly by the shareholder. Similar rules will
apply in the case of regulated investment companies, common trust funds and
some cooperatives that hold a REMIC Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A beneficial
owner of a REMIC Residual Security who is an individual will be required to
include in income a share of any servicing and guaranty fees. A deduction for
the fees will be allowed to the beneficial owner only to the extent that the
fees, along with some of the beneficial owner's other miscellaneous itemized
deductions exceed 2% of the beneficial owner's adjusted gross income. In
addition, a beneficial owner of a REMIC Residual Security may not be able to
deduct any portion of the fees in computing the beneficial owner's alternative
minimum tax liability. A beneficial owner's share of the fees will generally
be determined by (x) allocating the amount of the expenses for each calendar
quarter on a pro rata basis to each day in the calendar quarter and (y)
allocating the daily amount among the beneficial owners in proportion to their
respective holdings on this day.
Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a REMIC equal to 100%
of the net income derived from "prohibited transactions." In general, a
prohibited transaction means the disposition of a qualified mortgage other
than in accordance with specified exceptions, the receipt of investment income
from a source other than a loan or other permitted investments, the receipt of
compensation for services, or the disposition of an asset purchased with the
payments on the qualified mortgages for temporary investment pending
distribution on the regular and residual interests.
Contributions to a REMIC after the Startup Day. The Code imposes a tax on
a REMIC equal to 100% of the value of any property contributed to the REMIC
after the "startup day", which is generally the same as the Settlement Date.
Exceptions are provided for cash contributions to a REMIC:
o during the three month period beginning on the startup day,
o made to a qualified reserve fund by a beneficial owner of a residual
interest,
o in the nature of a guarantee,
o made to facilitate a qualified liquidation or clean-up call, and
o as otherwise permitted by Treasury regulations.
Net Income from Foreclosure Property. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property", which includes property acquired by deed in
lieu of foreclosure, and "net income from foreclosure property" are defined by
reference to the rules applicable to real estate investment trusts. Generally,
foreclosure property would be treated as such for a period of three years,
with a possible extension. Net income from foreclosure property generally
means gain from the sale of foreclosure property that is inventory property
and gross income from foreclosure property other than qualifying rents and
other qualifying income for a real estate investment trust.
Sales of REMIC Securities
Except as provided below, if a REMIC Regular Security or REMIC Residual
Security is sold, the seller will recognize gain or loss equal to the
difference between the amount realized in the sale and its adjusted basis in
the security. The adjusted basis of a REMIC Regular Security generally will
equal the cost of the security to the seller, increased by any original issue
discount or market discount included in the seller's gross income on the
security and reduced by distributions on the security previously received by
the seller of amounts included in the stated redemption price at maturity and
by any premium that has reduced the seller's interest income on the security.
See "--Discount and Premium." The adjusted basis of a REMIC Residual Security
is determined as described above under "--Taxation of Beneficial Owners of
REMIC Residual Securities--Basis Rules and Distributions." Except as provided
in the following paragraph or under Section 582(c) of the Code, any gain or
loss will be capital gain or loss, provided the security is held as a "capital
asset", which is generally, property held for investment, within the meaning
of Section 1221 of the Code.
Gain from the sale of a REMIC Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent that the gain
does not exceed the excess, if any, of (x) the amount that would have been
includible in the income of the beneficial owner of a REMIC Regular Security
had income accrued at a rate equal to 110% of the "applicable federal rate",
generally, an average of current yields on Treasury securities, as of the date
of purchase over (y) the amount actually includible in the beneficial owner's
income. In addition, gain recognized on this type of sale by a beneficial
owner of a REMIC Regular Security who purchased the security at a market
discount would also be taxable as ordinary income in an amount not exceeding
the portion of the discount that accrued during the period the security was
held by the beneficial owner, reduced by any market discount includible in
income under the rules described below under "--Discount and Premium."
If a beneficial owner of a REMIC Residual Security sells its REMIC
Residual Security at a loss, the loss will not be recognized if, within six
months before or after the sale of the REMIC Residual Security, the beneficial
owner purchases another residual interest in any REMIC or any interest in a
taxable mortgage pool, as defined in Section 7701(i) of the Code, comparable
to a residual interest in a REMIC. This disallowed loss would be allowed upon
the sale of the other residual interest, or comparable interest, if the rule
referred to in the preceding sentence does not apply to that sale. While this
rule may be modified by Treasury regulations, no regulations on this point
have yet been published.
Transfers of REMIC Residual Securities. Section 860E(e) of the Code
imposes a substantial tax, payable by the transferor, or, if a transfer is
through a broker, nominee, or other middleman as the transferee's agent,
payable by that agent, upon any transfer of a REMIC Residual Security to a
disqualified organization and upon a pass-through entity, including regulated
investment companies, real estate investment trusts, common trust funds,
partnerships, trusts, estates, some cooperatives, and nominees, that owns a
REMIC Residual Security if this pass-through entity has a disqualified
organization as a record-holder. For purposes of the preceding sentence, a
transfer includes any transfer of record or beneficial ownership, whether by a
purchase, a default under a secured lending agreement or otherwise.
The term "disqualified organization" includes the United States, any
state or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing,
other than specified taxable instrumentalities, any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas, or any organization, other than a farmers' cooperative, that is exempt
from federal income tax, unless the organization is subject to the tax on
unrelated business income. Moreover, an entity will not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that (x) residual
interests in the entity are not held by disqualified organizations and (y)
information necessary for the application of the tax described in this
prospectus will be made available. Restrictions on the transfer of a REMIC
Residual Security and other provisions that are intended to meet this
requirement are described in the pooling and servicing agreement, and will be
discussed more fully in the accompanying prospectus supplement relating to the
offering of any REMIC Residual Security. In addition, a pass-through entity,
including a nominee, that holds a REMIC Residual Security may be subject to
additional taxes if a disqualified organization is a record-holder in the
REMIC Residual Security. A transferor of a REMIC Residual Security, or an
agent of a transferee of a REMIC Residual Security, as the case may be, will
be relieved of the tax liability if (a) the transferee furnishes to the
transferor, or the transferee's agent, an affidavit that the transferee is not
a disqualified organization, and (b) the transferor, or the transferee's
agent, does not have actual knowledge that the affidavit is false at the time
of the transfer. Similarly, no such tax will be imposed on a pass-through
entity for a period for an interest in the REMIC Residual Security owned by a
disqualified organization if (x) the record-holder of this interest furnishes
to the pass-through entity an affidavit that it is not a disqualified
organization, and (y) during the period, the pass-through entity has no actual
knowledge that the affidavit is false.
The Taxpayer Relief Act of 1997 adds provisions to the Code that will
apply to an "electing large partnership." If an electing large partnership
holds a Residual Certificate, all interests in the electing large partnership
are treated as held by disqualified organizations for purposes of the tax
imposed upon a pass-through entity by Section 860E(e) of the Code. An
exception to this tax, otherwise available to a pass-through entity that is
furnished affidavits by record holders of interests in the entity and that
does not know the affidavits are false, is not available to an electing large
partnership.
Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" to a U.S. Person, as defined below in "Foreign Investors--Grantor
Trust Securities and REMIC Regular Securities", will be disregarded for all
federal tax purposes unless no significant purpose of the transfer is to
impede the assessment or collection of tax. A REMIC Residual Security would be
treated as constituting a noneconomic residual interest unless, at the time of
the transfer, (x) the present value of the expected future distributions on
the REMIC Residual Security is no less than the product of the present value
of the "anticipated excess inclusions" on the security and the highest
corporate rate of tax for the year in which the transfer occurs, and (y) the
transferor reasonably expects that the transferee will receive distributions
from the applicable REMIC Trust in an amount sufficient to satisfy the
liability for income tax on any "excess inclusions" at or after the time when
the liability accrues. Anticipated excess inclusions are the excess inclusions
that are anticipated to be allocated to each calendar quarter, or portion
thereof, following the transfer of a REMIC Residual Security, determined as of
the date the security is transferred and based on events that have occurred as
of that date and on the Prepayment Assumption. See "--Discount and Premium"
and "--Taxation of Beneficial Owners of REMIC Residual Securities--Excess
Inclusions."
The REMIC Regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC Residual Security has "improper knowledge" -- i.e.,
either knew, or should have known, that the transferee would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC Trust.
A transferor is presumed not to have improper knowledge if (x) the transferor
conducts, at the time of a transfer, a reasonable investigation of the
financial condition of the transferee and, as a result of the investigation,
the transferor finds that the transferee has historically paid its debts as
they come due and finds no significant evidence to indicate that the
transferee will not continue to pay its debts as they come due in the future;
and (y) the transferee makes a number of representations to the transferor in
the affidavit relating to disqualified organizations discussed above.
Transferors of a REMIC Residual Security should consult with their own tax
advisors for further information regarding these transfers.
Proposed Treasury regulations issued on February 4, 2000 (the "New
Proposed Regulations") would modify the safe harbor under which transfers of
noneconomic residual interests are treated as not disregarded for federal
income tax purposes. Under the New Proposed Regulations, a transfer of a
noneconomic residual interest would not qualify under this safe harbor unless
the present value of the anticipated tax liabilities associated with holding
the residual interest does not exceed the sum of the present value of the sum
of (i) any consideration given to the transferee to acquire the interest, (ii)
future distributions on the interest, and (iii) any anticipated tax savings
associated with holding the interest as the REMIC generates losses. For
purposes of this calculation, the present value generally is calculated using
a discount rate equal to the applicable federal rate. The New Proposed
Regulations have a proposed effective date of February 4, 2000.
In addition, President Clinton's Fiscal Year 2001 Budget Proposal
contains a provision under which a REMIC would be secondarily liable for the
tax liability of its residual interest. The proposal states that it would be
effective for REMICs created after the date of enactment. It is unknown
whether this provision will be included in any bill introduced to Congress
this year or if introduced whether it will be enacted.
Prospective investors in REMIC Residual Securities should consult their
tax advisors regarding the New Proposed Regulations and the Fiscal Year 2001
Budget Proposals.
Reporting and Other Administrative Matters. For purposes of the
administrative provisions of the Code, each REMIC Trust will be treated as a
partnership and the beneficial owners of REMIC Residual Securities will be
treated as partners. The trustee will prepare, sign and file federal income
tax returns for each REMIC Trust, which returns are subject to audit by the
IRS. Moreover, within a reasonable time after the end of each calendar year,
the trustee will furnish to each beneficial owner that received a distribution
during the year a statement setting forth the portions of any distributions
that constitute interest distributions, original issue discount, and any other
information as is required by Treasury regulations and, for beneficial owners
of REMIC Residual Securities in a REMIC Trust, information necessary to
compute the daily portions of the taxable income, or net loss, of the REMIC
Trust for each day during this year. The trustee will also act as the tax
matters partner for each REMIC Trust, either in its capacity as a beneficial
owner of a REMIC Residual Security or in a fiduciary capacity. Each beneficial
owner of a REMIC Residual Security, by the acceptance of its REMIC Residual
Security, agrees that the trustee will act as its fiduciary in the performance
of any duties required of it in the event that it is the tax matters partner.
Each beneficial owner of a REMIC Residual Security is required to treat
items on its return consistently with the treatment on the return of the REMIC
Trust, unless the beneficial owner either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC Trust. The IRS may assert a deficiency
resulting from a failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC Trust level.
Termination
In general, no special tax consequences will apply to a beneficial owner
of a REMIC Regular Security upon the termination of a REMIC Trust by virtue of
the final payment or liquidation of the last loan remaining in the trust fund.
If a beneficial owner of a REMIC Residual Security's adjusted basis in its
REMIC Residual Security at the time the termination occurs exceeds the amount
of cash distributed to the beneficial owner in liquidation of its interest,
although the matter is not entirely free from doubt, it would appear that the
beneficial owner of the REMIC Residual Security is entitled to a loss equal to
the amount of this excess.
Debt Securities
For each series of Debt Securities, special tax counsel to the sponsor,
will deliver its opinion to the sponsor that the securities will be classified
as debt secured by the loans. We will file this opinion with the Securities
and Exchange Commission on Form 8-K within fifteen days after the initial
issuance of the securities or as a post-effective amendment to the prospectus.
Accordingly, the Debt Securities will not be treated as ownership interests in
the loans or the issuer. Beneficial owners will be required to report income
received on the Debt Securities in accordance with their normal method of
accounting. For additional tax consequences relating to Debt Securities
purchased at a discount or with premium, see "--Discount and Premium," below.
Special Tax Attributes
As described above, Grantor Trust Securities will possess specified
special tax attributes by virtue of their being ownership interests in the
underlying loans. Similarly, REMIC Securities will possess similar attributes
by virtue of the REMIC provisions of the Code. In general, Debt Securities
will not possess these special tax attributes. Investors to whom these
attributes are important should consult their own tax advisors regarding
investment in Debt Securities.
Sale or Exchange of Debt Securities
If a beneficial owner of a Debt Security sells or exchanges the security,
the beneficial owner will recognize gain or loss equal to the difference, if
any, between the amount received and the beneficial owner's adjusted basis in
the security. The adjusted basis in the security generally will equal its
initial cost, increased by any original issue discount or market discount
previously included in the seller's gross income on the security and reduced
by the payments previously received on the security, other than payments of
qualified stated interest, and by any amortized premium.
In general, except as described in "--Discount and Premium--Market
Discount," below, except for particular financial institutions subject to
Section 582(c) of the Code, any gain or loss on the sale or exchange of a Debt
Security recognized by an investor who holds the security as a capital asset,
within the meaning of Section 1221 of the Code, will be capital gain or loss
and will be long-term or short-term depending on whether the security has been
held for more than one year.
Debt Securities Reporting
The trustee will furnish to each beneficial owner of a Debt Security with
each distribution a statement setting forth the amount of the distribution
allocable to principal on the underlying loans and to interest thereon at the
interest rate attributable to the security. In addition, within a reasonable
time after the end of each calendar year, based on information provided by the
servicer, the trustee will furnish to each beneficial owner during this year
any customary factual information as the servicer deems necessary or desirable
to enable beneficial owners of Debt Securities to prepare their tax returns
and will furnish comparable information to the IRS as and when required to do
so by law.
Partnership Interests
For each series of Partnership Interests, special tax counsel to the
sponsor, will deliver its opinion to the sponsor that the issuer will be
treated as a partnership and not an association taxable as a corporation for
federal income tax purposes. We will file this opinion with the Securities and
Exchange Commission on Form 8-K within fifteen days after the initial issuance
of the securities or as a post-effective amendment to the prospectus.
Accordingly, each beneficial owner of a Partnership Interest will generally be
treated as the owner of an interest in the loans.
Special Tax Attributes
As described above, REMIC Securities will possess specified special tax
attributes by virtue of the REMIC provisions of the Code. In general,
Partnership Interests will not possess these special tax attributes. Investors
to whom these attributes are important should consult their own tax advisors
regarding investment in Partnership Interests.
Taxation of Beneficial Owners of Partnership Interests
If the issuer is treated as a partnership for federal income tax
purposes, the issuer will not be subject to federal income tax. Instead, each
beneficial owner of a Partnership Interest will be required to separately take
into account its allocable share of income, gains, losses, deductions, credits
and other tax items of the issuer. These partnership allocations are made in
accordance with the Code, Treasury regulations and the partnership agreement
or in this case, the trust agreement or other similar agreement.
The issuer's assets will be the assets of the partnership. The issuer's
income will consist primarily of interest and finance charges earned on the
underlying loans. The issuer's deductions will consist primarily of interest
accruing on any indebtedness issued by the issuer, servicing and other fees,
and losses or deductions upon collection or disposition of the issuer's
assets.
In some instances, the issuer could have an obligation to make payments
of withholding tax on behalf of a beneficial owner of a Partnership Interest.
See "--Backup Withholding" and "--Foreign Investors."
Substantially all of the taxable income allocated to a beneficial owner
of a Partnership Interest that is a pension, profit sharing or employee
benefit plan or other tax-exempt entity, including an individual retirement
account, will constitute "unrelated business taxable income" generally taxable
to that holder under the Code.
Under Section 708 of the Code, the issuer will be deemed to terminate for
federal income tax purposes if 50% or more of the capital and profits
interests in the issuer are sold or exchanged within a 12-month period. Under
Treasury regulations issued on May 9, 1997 if a termination occurs, the issuer
is deemed to contribute all of its assets and liabilities to a newly formed
partnership in exchange for a partnership interest. Immediately thereafter,
the terminated partnership distributes interests in the new partnership to the
purchasing partner and remaining partners in proportion to their interests in
liquidation of the terminated partnership.
Sale or Exchange of Partnership Interests
Generally, capital gain or loss will be recognized on a sale or exchange
of Partnership Interests in an amount equal to the difference between the
amount realized and the seller's tax basis in the Partnership Interests sold.
A beneficial owner's tax basis in a Partnership Interest will generally equal
the beneficial owner's cost increased by the beneficial owner's share of
issuer income and decreased by any distributions received on the Partnership
Interest. In addition, both the tax basis in the Partnership Interest and the
amount realized on a sale of a Partnership Interest would take into account
the beneficial owner's share of any indebtedness of the issuer. A beneficial
owner acquiring Partnership Interests at different prices may be required to
maintain a single aggregate adjusted tax basis in the Partnership Interest,
and upon sale or other disposition of some of the Partnership Interests,
allocate a portion of the aggregate tax basis to the Partnership Interests
sold, rather than maintaining a separate tax basis in each Partnership
Interest for purposes of computing gain or loss on a sale of that Partnership
Interest.
Any gain on the sale of a Partnership Interest attributable to the
beneficial owner's share of unrecognized accrued market discount on the assets
of the issuer would generally be treated as ordinary income to the holder and
would give rise to special tax reporting requirements. If a beneficial owner
of a Partnership Interest is required to recognize an aggregate amount of
income over the life of the Partnership Interest that exceeds the aggregate
cash distributions with respect thereto, the excess will generally give rise
to a capital loss upon the retirement of the Partnership Interest. If a
beneficial owner sells its Partnership Interest at a profit or loss, the
transferee will have a higher or lower basis in the Partnership Interests than
the transferor had. The tax basis of the issuer's assets will not be adjusted
to reflect that higher or lower basis unless the issuer files an election
under Section 754 of the Code.
Partnership Reporting
The trustee is required to
o keep complete and accurate books of the issuer,
o file a partnership information return on IRS Form 1065 with the IRS
for each taxable year of the issuer and
o report each beneficial owner's allocable share of items of issuer
income and expense to beneficial owners and the IRS on Schedule K-1.
The issuer will provide the Schedule K-1 information to nominees that
fail to provide the issuer with the information statement described below and
the nominees will be required to forward the information to the beneficial
owners of the Partnership Interests. Generally, beneficial owners of a
Partnership Interest must file tax returns that are consistent with the
information return filed by the issuer or be subject to penalties unless the
beneficial owner of a Partnership Interest notifies the IRS of all
inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Interests as a nominee at any time during a calendar year is required to
furnish the issuer with a statement containing specified information on the
nominee, the beneficial owners and the Partnership Interests so held. This
information includes
o the name, address and taxpayer identification number of the nominee
and
o as to each beneficial owner
o the name, address and identification number of this person,
o whether this person is a United States person, a tax-exempt entity
or a foreign government, an international organization, or any
wholly owned agency or instrumentality of either of the foregoing,
and
o specified information on Partnership Interests that were held,
bought or sold on behalf of this person throughout the year.
In addition, brokers and financial institutions that hold Partnership
Interests through a nominee are required to furnish directly to the issuer
information as to themselves and their ownership of Partnership Interests. A
clearing agency registered under Section 17A of the Securities Exchange Act of
1934, is not required to furnish any of this information statement to the
issuer. Nominees, brokers and financial institutions that fail to provide the
issuer with the information described above may be subject to penalties.
The Code provides for administrative examination of a partnership as if
the partnership were a separate and distinct taxpayer. Generally, the statute
of limitations for partnership items does not expire before three years after
the date on which the partnership information return is filed. Any adverse
determination following an audit of the return of the issuer by the
appropriate taxing authorities could result in an adjustment of the returns of
the beneficial owner of a Partnership Interests, and, under particular
circumstances, a beneficial owner of a Partnership Interest may be precluded
from separately litigating a proposed adjustment to the items of the issuer.
An adjustment could also result in an audit of the beneficial owner of a
Partnership Interest's returns and adjustments of items note related to the
income and losses of the issuer.
FASIT Securities
If provided in a accompanying prospectus supplement, an election will be
made to treat the issuer as a FASIT within the meaning of Code Section
860L(a). Qualification as a FASIT requires ongoing compliance with a number of
conditions. For each series of securities for which an election is made,
special tax counsel to the sponsor, will deliver its opinion to the sponsor
that, assuming compliance with the Issuing Agreement, the issuer will be
treated as a FASIT for federal income tax purposes. We will file this opinion
with the securities and Exchange Commission on Form 8-K within fifteen days
after the initial issuance of the securities or as a post-effective amendment
to the prospectus.
Special Tax Attributes
FASIT Securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of Code Sections 856(c)(5)(A) and
856(c)(6) and interest on the FASIT Regular Securities will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B) in the same
proportion that, for both purposes, the assets of the FASIT Trust and the
income thereon would be so treated. FASIT Regular Securities held by a
domestic building and loan association will be treated as "regular interest[s]
in a FASIT" under Code Section 7701(a)(19)(C)(xi), but only in the proportion
that the FASIT Trust holds "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning of Code
Section 7701(a)(19)(C)(v). If at all times 95% or more of the assets of the
FASIT Trust or the income thereon qualify for the foregoing treatments, the
FASIT Regular Securities will qualify for the corresponding status in their
entirety. For purposes of Code Section 856(c)(5)(A), payments of principal and
interest on a loan that are reinvested pending distribution to holders of
FASIT Regular Securities should qualify for this treatment. FASIT Regular
Securities held by a regulated investment company will not constitute
"government securities" within the meaning of Code Section 851(b)(4)(A)(i).
FASIT Regular Securities held by particular financial institutions will
constitute an "evidence of indebtedness" within the meaning of Code Section
582(c)(1).
Taxation of Beneficial Owners of FASIT Regular Securities
A FASIT Trust will not be subject to federal income tax except on income
from prohibited transactions and in some other instances as described below.
The FASIT Regular Securities generally will be treated for federal income tax
purposes as newly-originated debt instruments. In general, interest, original
issue discount and market discount on a FASIT Regular Security will be treated
as ordinary income to the beneficial owner, and principal payments, other than
principal payments that do not exceed accrued market discount, on an FASIT
Regular Security will be treated as a return of capital to the extent of the
beneficial owner's basis allocable thereto. Beneficial owners must use the
accrual method of accounting in connection with FASIT Regular Securities,
regardless of the method of accounting otherwise used by the beneficial
owners. See "--Discount and Premium" below.
In order for the FASIT Trust to qualify as a FASIT, there must be ongoing
compliance with the requirements set forth in the Code. The FASIT must fulfill
an asset test, which requires that substantially all the assets of the FASIT,
as of the close of the third calendar month beginning after the Startup Day,
and at all times thereafter, must consist of cash or cash equivalents,
particular debt instruments, other than debt instruments issued by the owner
of the FASIT or a related party, and hedges, and contracts to acquire the
same, foreclosure property and regular interests in another FASIT or in a
REMIC. Based on identical statutory language applicable to REMICs, it appears
that the "substantially all" requirement should be met if at all times the
aggregate adjusted basis of the nonqualified assets is less than one percent
of the aggregate adjusted basis of all the FASIT's assets. The FASIT
provisions of the Code, Sections 860H through 860L, also require the FASIT
ownership interest and particular "high-yield regular interests" to be held
only by specified fully taxable domestic corporations.
Permitted debt instruments must bear interest, if any, at a fixed or
qualified variable rate. Permitted hedges include interest rate or foreign
currency notional principal contracts, letters of credit, insurance,
guarantees of payment default and similar instruments to be provided in
regulations, and which are reasonably required to guarantee or hedge against
the FASIT's risks associated with being the obligor on interests issued by the
FASIT. Foreclosure property is real property acquired by the FASIT in
connection with the default or imminent default of a qualified mortgage,
provided the issuer had no knowledge or reason to know as of the date the
asset was acquired by the FASIT that a default had occurred or would occur.
In addition to the foregoing requirements, the various interests in a
FASIT also must meet a number of requirements. All of the interests in a FASIT
must be either of the following: (a) one or more classes of regular interests
or (b) a single class of ownership interest. A regular interest is an interest
in a FASIT that is issued on or after the Startup Day with fixed terms, is
designated as a regular interest, and
(1) unconditionally entitles the holder to receive a specified principal
amount, or other similar amount,
(2) provides that interest payments, or other similar amounts, if any,
at or before maturity either are payable based on a fixed rate or a
qualified variable rate,
(3) has a stated maturity of not longer than 30 years,
(4) has an issue price not greater than 125% of its stated principal
amount, and
(5) has a yield to maturity not greater than five percentage points
higher than the applicable Federal rate, as defined in Code Section
1274(d).
A regular interest that is described in the preceding sentence except
that if fails to meet one or more of requirements (1), (2) (4) or (5) is a
"high-yield regular interest." A high-yield regular interest that fails
requirement (2) must consist of a specified, nonvarying portion of the
interest payments on the permitted assets, by reference to the REMIC rules. An
ownership interest is an interest in a FASIT other than a regular interest
that is issued on the Startup Day, is designated an ownership interest and is
held by a single, fully-taxable, domestic corporation. An interest in a FASIT
may be treated as a regular interest even if payments of principal on this
interest are subordinated to payments on other regular interests or the
ownership interest in the FASIT, and are dependent on the absence of defaults
or delinquencies on permitted assets lower than reasonably expected returns on
permitted assets, unanticipated expenses incurred by the FASIT or prepayment
interest shortfalls.
If an entity fails to comply with one or more of the ongoing requirements
of the Code for status as a FASIT during any taxable year, the Code provides
that the entity or applicable potion thereof will not be treated as a FASIT
thereafter. In this event, any entity that holds mortgage loans and is the
obligor on debt obligations with two or more maturities, like the trust fund,
may be treated as a separate association taxable as a corporation, and the
FASIT Regular Securities may be treated as equity interests the FASIT Regular
Securities. The legislative history to the FASIT Provisions indicates,
however, that an entity can continue to be a FASIT if loss of its status was
inadvertent, it takes prompt steps to requalify and other requirements that
may be provided in Treasury regulations are met. Loss of FASIT status results
in retirement of all regular interests and their reissuance. If the resulting
instruments would be treated as equity under general tax principles,
cancellation of debt income may result.
Taxes on a FASIT Trust
Income from particular transactions by a FASIT, called prohibited
transactions, are taxable to the holder of the ownership interest in a FASIT
at a 100% rate. Prohibited transactions generally include
o the disposition of a permitted asset other than for
o foreclosure, default, or imminent default,
o bankruptcy or insolvency of the FASIT,
o a qualified or complete liquidation,
o substitution for another permitted debt instrument or distribution
of the debt instrument to the holder of the ownership interest to
reduce overcollateralization, but only if a principal purpose of
acquiring the debt instrument which is disposed of was not the
recognition of gain, or the reduction of a loss, on the withdrawn
asset as a result of an increase in the market value of the asset
after its acquisition by the FASIT or
o the retirement of a class of FASIT regular interests;
o the receipt of income from nonpermitted assets;
o the receipt of compensation for services; or
o the receipt of any income derived from a loan originated by the FASIT.
It is unclear the extent to which tax on these transactions could be
collected from the FASIT Trust directly under the applicable statutes rather
than from the holder of the FASIT Residual Security.
Proposed FASIT Regulations
The Treasury Department filed proposed regulations interpreting the FASIT
Provisions ("proposed FASIT regulations") with the Federal Register on Friday,
February 4, 2000. The proposed FASIT regulations generally would be effective
on the date they are issued as final regulations. Certain anti-abuse rules
are, however, proposed to be effective on February 4, 2000. The proposed FASIT
regulations would, among other things, provide procedures for making a FASIT
election, refine the definition of certain terms used in the FASIT provisions,
provide penalties that would apply upon cessation of FASIT status, provide
rules for the tax treatment of transfers of assets to the FASIT, and establish
anti-abuse rules to preclude use of the FASIT vehicle for a transaction that
did not primarily concern the securitization of financial assets.
Discount and Premium
A security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and some
Grantor Trust Fractional Interest Securities will be treated as having
original issue discount by virtue of the coupon stripping rules in Section
1286 of the Code. In very general terms,
o original issue discount is treated as a form of interest and must be
included in a beneficial owner's income as it accrues, regardless of
the beneficial owner's regular method of accounting, using a constant
yield method;
o market discount is treated as ordinary income and must be included in
a beneficial owner's income as principal payments are made on the
security, or upon a sale of a security; and
o if a beneficial owner so elects, premium may be amortized over the
life of the security and offset against inclusions of interest income.
These tax consequences are discussed in greater detail below.
Original Issue Discount
In general, a security will be considered to be issued with original
issue discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The issue price of a security is the initial
offering price to the public, excluding bond houses and brokers, at which a
substantial number of the securities were sold. The issue price also includes
any accrued interest attributable to the period between the beginning of the
first Accrual Period and the Settlement Date. The stated redemption price at
maturity of a security that has a notional principal amount or receives
principal only or that is or may be an Accrual Security is equal to the sum of
all distributions to be made under the security. The stated redemption price
at maturity of any other security is its stated principal amount, plus an
amount equal to the excess, if any, of the interest payable on the first
distribution date over the interest that accrues for the period from the
Settlement Date to the first distribution date. The trustee will supply, at
the time and in the manner required by the IRS, to beneficial owners, brokers
and middlemen information concerning the original issue discount accruing on
the securities.
Notwithstanding the general definition, original issue discount will be
treated as zero if the discount is less than 0.25% of the stated redemption
price at maturity of the security multiplied by its weighted average life. The
weighted average life of a security is apparently computed for this purpose as
the sum, for all distributions included in the stated redemption price at
maturity, of the amounts determined by multiplying (x) the number of complete
years, rounding down for partial years, from the Settlement Date until the
date on which each distribution is expected to be made under the Prepayment
Assumption by (y) a fraction, the numerator of which is the amount of the
distribution and the denominator of which is the security's stated redemption
price at maturity. Even if original issue discount is treated as zero under
this rule, the actual amount of original issue discount must be allocated to
the principal distributions on the security and, when each distribution is
received, gain equal to the discount allocated to the distribution will be
recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules directly applicable to REMIC Securities and Debt Securities. The
Taxpayer Relief Act of 1997 extends application of Section 1272(a)(6) to the
Grantor Trust Securities for tax years beginning after August 5, 1997. Under
these rules, (a) the amount and rate of accrual of original issue discount on
each series of securities will be based on (x) the Prepayment Assumption, and
(y) in the case of a security calling for a variable rate of interest, an
assumption that the value of the index upon which the variable rate is based
remains equal to the value of that rate on the Settlement Date, and (b)
adjustments will be made in the amount of discount accruing in each taxable
year in which the actual prepayment rate differs from the Prepayment
Assumption.
Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the
manner prescribed in Treasury regulations. To date, no regulations of this
type have been promulgated. The legislative history of this Code provision
indicates that the assumed prepayment rate must be the rate used by the
parties in pricing the particular transaction. The sponsor anticipates that
the Prepayment Assumption for each series of securities will be consistent
with this standard. The sponsor makes no representation, however, that the
loans for a given series will prepay at the rate reflected in the Prepayment
Assumption for that series or at any other rate. Each investor must make its
own decision as to the appropriate prepayment assumption to be used in
deciding whether or not to purchase any of the securities.
Each beneficial owner must include in gross income the sum of the "daily
portions" of original issue discount on its security for each day during its
taxable year on which it held the security. For this purpose, in the case of
an original beneficial owner, the daily portions of original issue discount
will be determined as follows. A calculation will first be made of the portion
of the original issue discount that accrued during each "accrual period."
Original issue discount calculations must be based on accrual periods of no
longer than one year either (x) beginning on a distribution date, or, in the
case of the first accrual period, the Settlement Date, and ending on the day
before the next distribution date or (y) beginning on the next day following a
distribution date and ending on the next distribution date.
Under Section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (x) the sum of (A) the present values of all the distributions
remaining to be made on the security, if any, as of the end of the accrual
period and (B) the distribution made on the security during the accrual period
of amounts included in the stated redemption price at maturity, over (y) the
adjusted issue price of the security at the beginning of the accrual period.
The present value of the remaining distributions referred to in the preceding
sentence will be calculated based on
o the yield to maturity of the security, calculated as of the Settlement
Date, giving effect to the Prepayment Assumption,
o events, including actual prepayments, that have occurred prior to the
end of the accrual period,
o the Prepayment Assumption, and
o in the case of a security calling for a variable rate of interest, an
assumption that the value of the index upon which this variable rate
is based remains the same as its value on the Settlement Date over the
entire life of the security.
The adjusted issue price of a security at any time will equal the issue
price of the security, increased by the aggregate amount of previously accrued
original issue discount on the security, and reduced by the amount of any
distributions made on the security as of that time of amounts included in the
stated redemption price at maturity. The original issue discount accruing
during any accrual period will then be allocated ratably to each day during
the period to determine the daily portion of original issue discount.
In the case of Grantor Trust Strip Securities and some REMIC Securities,
the calculation described in the preceding paragraph may produce a negative
amount of original issue discount for one or more accrual periods. No
definitive guidance has been issued regarding the treatment of the negative
amounts. The legislative history to Section 1272(a)(6) indicates that the
negative amounts may be used to offset subsequent positive accruals but may
not offset prior accruals and may not be allowed as a deduction item in a
taxable year in which negative accruals exceed positive accruals. Beneficial
owners of the securities should consult their own tax advisors concerning the
treatment of the negative accruals.
A subsequent purchaser of a security that purchases the security at a
cost less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds the
security, the daily portion of original issue discount on the security -- but
reduced, if the cost of the security to the purchaser exceeds its adjusted
issue price, by an amount equal to the product of (x) the daily portion and
(y) a constant fraction, the numerator of which is the excess and the
denominator of which is the sum of the daily portions of original issue
discount on the security for all days on or after the day of purchase.
Market Discount
A beneficial owner that purchases a security at a market discount, that
is, at a purchase price less than the remaining stated redemption price at
maturity of the security, or, in the case of a security with original issue
discount, its adjusted issue price, will be required to allocate each
principal distribution first to accrued market discount on the security, and
recognize ordinary income to the extent the distribution does not exceed the
aggregate amount of accrued market discount on the security not previously
included in income. For securities that have unaccrued original issue
discount, the market discount must be included in income in addition to any
original issue discount. A beneficial owner that incurs or continues
indebtedness to acquire a security at a market discount may also be required
to defer the deduction of all or a portion of the interest on this
indebtedness until the corresponding amount of market discount is included in
income. In general terms, market discount on a security may be treated as
accruing either (x) under a constant yield method or (y) in proportion to
remaining accruals of original issue discount, if any, or if none, in
proportion to remaining distributions of interest on the security, in any case
taking into account the Prepayment Assumption. The trustee will make
available, as required by the IRS, to beneficial owners of securities
information necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a security will be
considered to be zero if the discount is less than 0.25% of the remaining
stated redemption price at maturity of the security multiplied by its weighted
average remaining life. Weighted average remaining life presumably would be
calculated in a manner similar to weighted average life, taking into account
payments, including prepayments, prior to the date of acquisition of the
security by the subsequent purchaser. If market discount on a security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the security and, when
each distribution is received, gain equal to the discount allocated to the
distribution will be recognized.
Premium
A purchaser of a Premium Security need not include in income any
remaining original issue discount and may elect, under Section 171(c)(2) of
the Code, to treat the premium as "amortizable bond premium." If a beneficial
owner makes this election, the amount of any interest payment that must be
included in the beneficial owner's income for each period ending on a
distribution date will be reduced by the portion of the premium allocable to
the period based on the Premium Security's yield to maturity. This premium
amortization should be made using constant yield principles. If the election
is made by the beneficial owner, the election will also apply to all fully
taxable bonds, or bonds the interest on which is not excludible from gross
income, held by the beneficial owner at the beginning of the first taxable
year to which the election applies and to all fully taxable bonds thereafter
acquired by it, and is irrevocable without the consent of the IRS. If this
election is not made, (x) the beneficial owner must include the full amount of
each interest payment in income as it accrues, and (y) the premium must be
allocated to the principal distributions on the Premium Security and when each
distribution is received a loss equal to the premium allocated to the
distribution will be recognized. Any tax benefit from the premium not
previously recognized will be taken into account in computing gain or loss
upon the sale or disposition of the Premium Security.
Some securities may provide for only nominal distributions of principal
in comparison to the distributions of interest thereon. It is possible that
the IRS or the Treasury Department may issue guidance excluding the securities
from the rules generally applicable to debt instruments issued at a premium.
In particular, it is possible that these securities will be treated as having
original issue discount equal to the excess of the total payments to be
received thereon over its issue price. In this event, Section 1272(a)(6) of
the Code would govern the accrual of the original issue discount, but a
beneficial owner would recognize substantially the same income in any given
period as would be recognized if an election were made under Section 171(c)(2)
of the Code. Unless and until the Treasury Department or the IRS publishes
specific guidance relating to the tax treatment of the securities, the trustee
intends to furnish tax information to beneficial owners of the securities in
accordance with the rules described in the preceding paragraph.
Special Election
For any security acquired on or after April 4, 1994, a beneficial owner
may elect to include in gross income all "interest" that accrues on the
security by using a constant yield method. For purposes of the election, the
term "interest" includes stated interest, acquisition discount, original issue
discount, de minimis original issue discount, market discount, de minimis
market discount and unstated interest as adjusted by any amortizable bond
premium or acquisition premium. A beneficial owner should consult its own tax
advisor regarding the time and manner of making and the scope of the election
and the implementation of the constant yield method.
Backup Withholding
Distributions of interest and principal, as well as distributions of
proceeds from the sale of securities, may be subject to the "backup
withholding tax" under Section 3406 of the Code at a rate of 31% if recipients
of the distributions fail to furnish to the payor particular information,
including their taxpayer identification numbers, or otherwise fail to
establish an exemption from this tax. Any amounts deducted and withheld from a
distribution to a recipient would be allowed as a credit against the
recipient's federal income tax. Furthermore, penalties may be imposed by the
IRS on a recipient of distributions that is required to supply information but
that does not do so in the proper manner.
The Internal Revenue Service recently issued final "withholding
regulations", which change some of the rules relating to particular
presumptions currently available relating to information reporting and backup
withholding. The withholding regulations would provide alternative methods of
satisfying the beneficial ownership certification requirement. The withholding
regulations are effective December 31, 2000, although valid withholding
certificates that are held on December 31, 2000 remain valid until the earlier
of December 31, 2001 or the due date of expiration of the certificate under
the rules as currently in effect.
Foreign Investors
The withholding regulations would require, in the case of securities held
by a foreign partnership, that (x) the certification described above be
provided by the partners rather than by the foreign partnership and (y) the
partnership provide specified information, including a United States taxpayer
identification number. See "--Backup Withholding" above. A look-through rule
would apply in the case of tiered partnerships. Non-U.S. Persons should
consult their own tax advisors regarding the application to them of the
withholding regulations.
Grantor Trust Securities and REMIC Regular Securities
Distributions made on a Grantor Trust Security, Debt Security or a REMIC
Regular Security to, or on behalf of, a beneficial owner that is not a U.S.
Person generally will be exempt from U.S. federal income and withholding
taxes. This exemption is applicable provided
o the beneficial owner is not subject to U.S. tax as a result of a
connection to the United States other than ownership of the security,
o the beneficial owner signs a statement under penalties of perjury that
certifies that the beneficial owner is not a U.S. Person, and provides
the name and address of the beneficial owner, and
o the last U.S. Person in the chain of payment to the beneficial owner
receives the statement from the beneficial owner or a financial
institution holding on its behalf and does not have actual knowledge
that the statement is false.
Beneficial owners should be aware that the IRS might take the position
that this exemption does not apply to a beneficial owner that also owns 10% or
more of the REMIC Residual Securities of any REMIC trust, or to a beneficial
owner that is a "controlled foreign corporation" described in Section
881(c)(3)(C) of the Code.
REMIC Residual Securities
Amounts distributed to a beneficial owner of a REMIC Residual Security
that is a not a U.S. Person generally will be treated as interest for purposes
of applying the 30%, or lower treaty rate, withholding tax on income that is
not effectively connected with a U.S. trade or business. Temporary Treasury
Regulations clarify that amounts not constituting excess inclusions that are
distributed on a REMIC Residual Security to a beneficial owner that is not a
U.S. Person generally will be exempt from U.S. federal income and withholding
tax, subject to the same conditions applicable to distributions on Grantor
Trust Securities, Debt Securities and REMIC Regular Securities, as described
above, but only to the extent that the obligations directly underlying the
REMIC Trust that issued the REMIC Residual Security, for example, loans or
regular interests in another REMIC or FASIT, were issued after July 18, 1984.
In no case will any portion of REMIC income that constitutes an excess
inclusion be entitled to any exemption from the withholding tax or a reduced
treaty rate for withholding. See "--REMIC Securities--Taxation of Beneficial
Owners of REMIC Residual Securities--Excess Inclusions" in this prospectus.
Partnership Interests
Depending upon the particular terms of the Issuing Agreement and Loan
Sale Agreement, an issuer may be considered to be engaged in a trade or
business in the United States for purposes of federal withholding taxes for
non-U.S. Persons. If the issuer is considered to be engaged in a trade or
business in the United States for these purposes and the issuer is treated as
a partnership, the income of the issuer distributable to a non-U.S. Person
would be subject to federal withholding tax. Also, in these cases, a non-U.S.
beneficial owner of a Partnership Interest that is a corporation may be
subject to the branch profits tax. If the issuer is notified that a beneficial
owner of a Partnership Interest is a foreign person, the issuer may withhold
as if it were engaged in a trade or business in the United States in order to
protect the issuer from possible adverse consequences of a failure to
withhold. A foreign holder generally would be entitled to file with the IRS a
claim for refund of withheld taxes, taking the position that no taxes were due
because the issuer was not in a U.S. trade or business.
FASIT Regular Securities
Some "high-yield" FASIT Regular Securities may not be sold to or
beneficially owned by non-U.S. Persons. Any purported transfer will be null
and void and, upon the trustee's discovery of any purported transfer in
violation of this requirement and the last preceding owner of the high-yield
FASIT Regular Securities will be restored to ownership thereof as completely
as possible. The last preceding owner will, in any event, be taxable on all
income on the high-yield FASIT Regular Securities for federal income tax
purposes. The Issuing Agreement will provide that, as a condition to transfer
of a high-yield FASIT Regular Security, the proposed transferee must furnish
an affidavit as to its status as a U.S. Person and otherwise as a permitted
transferee.
State Tax Considerations
In addition to the federal income tax consequences described in "Material
Federal Income Tax Consequences," potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or
locality. Therefore, potential investors should consult their own tax advisors
concerning the various state and local tax consequences of an investment in
the securities.
The federal income tax discussions set forth above are included for
general information only and may not be applicable depending upon an
investor's particular tax situation. Prospective purchasers should consult
their tax advisers concerning the tax consequences to them of the purchase,
ownership and disposition of the securities, including the tax consequences
under state, local, foreign and other tax laws and the possible effects of
changes in federal or other tax laws.
ERISA Considerations
ERISA and Section 4975 of the Code impose a number of requirements on
those employee benefit plans to which they apply and on those persons who are
fiduciaries of these plans. The following is a general discussion of the
requirements, and a number of applicable exceptions to and administrative
exemptions from the requirements.
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing or other employee benefit plan and some individual retirement
arrangements from engaging in specified transactions involving "plan assets"
with persons that are "parties in interest" under ERISA or "disqualified
persons" under the Code for the plan, unless a statutory or administrative
exemption applies to the transaction. ERISA and the Code also prohibit
generally a number of actions involving conflicts of interest by persons who
are fiduciaries of these plans or arrangements. A violation of these
"prohibited transaction" rules may generate excise tax and other liabilities
under ERISA and the Code for these persons. In addition, investments by plans
are subject to ERISA's general fiduciary requirements, including the
requirement of investment prudence and diversification and the requirement
that a plan's investments be made in accordance with the documents governing
the plan. Employee benefit plans that are governmental plans, as defined in
Section 3(32) of ERISA, and some church plans, as defined in Section 3(33) of
ERISA, are not subject to ERISA requirements. Accordingly, assets of these
plans may be invested in securities without regard to the ERISA considerations
discussed below, subject to the provisions of other applicable federal, state
and local law. Any plan which is qualified and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
Some transactions involving the issuer might be deemed to constitute
prohibited transactions under ERISA and the Code for a plan, including an
individual retirement arrangement, that purchased securities, if the assets of
the issuer were deemed to be assets of the Plan. Under a "plan asset
regulation" issued by the United States Department of Labor, the assets of the
issuer would be treated as plan assets of a plan for the purposes of ERISA and
the Code only if the plan acquired an equity interest in the issuer and none
of the exceptions contained in the plan asset regulation were applicable. An
"equity interest" is defined under the plan asset regulation as an interest
other than an instrument which is treated as indebtedness under applicable
local law and which has no substantial equity features. In addition, in John
Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank, 510 U.S.
86 (1993), the United States Supreme Court ruled that assets held in an
insurance company's general account may be deemed to be "plan assets" for
ERISA purposes under particular circumstances. Therefore, in the absence of an
exemption, the purchase, sale or holding of a security by a plan, including
some individual retirement arrangements, subject to Section 406 of ERISA or
Section 4975 of the Code might result in prohibited transactions and the
imposition of excise taxes and civil penalties.
Certificates
The Department of Labor has issued to various underwriters individual
prohibited transaction exemptions, which generally exempt from the application
of the prohibited transaction provisions of Sections 406(a), 406(b)(1),
406(b)(2) and 407(a) of ERISA and the excise taxes imposed under Sections
4975(a) and (b) of the Code, particular transactions in connection with the
initial purchase, the holding and the subsequent resale by plans of
certificates in pass-through trusts that consist of secured receivables,
secured loans and other secured obligations that meet the conditions and
requirements of these underwriter exemptions. These underwriter exemptions
will only be available for securities that are certificates.
Among the conditions that must be satisfied in order for the underwriter
exemptions to apply to offered certificates are the following:
(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 p1lan have received a rating at
the time of the acquisition that is one of the three highest generic
rating categories from Standard & Poor's Rating Services, a division of
The McGraw-Hill Companies, Moody's Investors Service, Inc., Duff & Phelps
Credit Rating Co., or Fitch IBCA, Inc.;
(d) the trustee is not an affiliate of any other member of the
Restricted Group;
(e) the sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates represents not
more than reasonable compensation for underwriting the certificates; the
sum of all payments made to and retained by the sellers and the sponsor
under the assignment of the loans to the trust fund represents not more
than the fair market value of the loans; the sum of all payments made to
and retained by any servicer represents not more than reasonable
compensation for this person's services under the pooling and servicing
agreement and reimbursement of this person's reasonable expenses in
connection therewith;
(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.
Notes
The underwriter exemptions will not be available for securities which are
notes. If the notes are treated as having substantial equity features, the
purchase, holding and resale of the notes could result in a transaction that
is prohibited under ERISA or the Code. However, if the notes are treated as
indebtedness without substantial equity features, the issuer's assets would
not be deemed assets of a plan. The acquisition or holding of the notes by or
on behalf of a plan could nevertheless give rise to a prohibited transaction,
if the acquisition and holding of Notes by or on behalf of a plan were deemed
to be a prohibited loan to a party in interest for this plan. Some exemptions
from the prohibited transaction rules could be applicable to the purchase and
holding of notes by a plan, depending on the type and circumstances of the
plan fiduciary making the decision to acquire the notes. Included among these
exemptions are: PTCE 84-14, regarding specified transactions effected by
"qualified professional asset managers"; PTCE 90-1, regarding specified
transactions entered into by insurance company pooled separate accounts; PTCE
91-38, regarding specified transactions entered into by bank collective
investment funds; PTCE 95-60, regarding specified transactions entered into by
insurance company general accounts; and PTCE 96-23, regarding specified
transactions effected by "in-house asset managers". Each purchaser and each
transferee of a note that is treated as debt for purposes of the plan asset
regulation may be required to represent and warrant that its purchase and
holding of the note will be covered by one of the exemptions listed above or
by another Department of Labor class exemption.
Consultation with Counsel
The prospectus supplement for each series of securities will provide
further information which plans should consider before purchasing the offered
securities. A plan fiduciary considering the purchase of securities should
consult its tax and/or legal advisors regarding whether the assets of the
issuer would be considered plan assets, the possibility of exemptive relief
from the prohibited transaction rules and other ERISA issues and their
potential consequences. Moreover, each plan fiduciary should determine whether
under the general fiduciary standards of investment prudence and
diversification, an investment in the securities is appropriate for the plan,
taking into account the overall investment policy of the plan and the
composition of the plan's investment portfolio. The sale of securities to a
plan is in no respect a representation by the sponsor, the issuer or the
underwriter(s) that this investment meets all relevant requirements for
investments by plans generally or any particular plan or that this investment
is appropriate for plans generally or any particular plan.
Legal Investment
If specified in the accompanying prospectus supplement, the securities of
one or more classes offered by this prospectus will constitute "mortgage
related securities" for purposes of SMMEA, so long as they are rated in one of
the two highest rating categories by at least one nationally recognized
statistical rating organization. As "mortgage related securities," the
securities will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business
entities, including, but not limited to, state-chartered savings banks,
commercial banks, savings and loan associations and insurance companies, as
well as trustees and state government employee retirement systems, created in
accordance with or existing under the laws of the United States or of any
state, including the District of Columbia and Puerto Rico, whose authorized
investments are subject to state regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for the entities. Under SMMEA, a number of states
enacted legislation, on or before the October 3, 1991 cutoff for the
enactments, limiting to varying extends the ability of particular entities, in
particular, insurance companies, to invest in "mortgage related securities,"
in most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Accordingly, the investors affected by the
legislation will be authorized to invest in the securities only to the extent
provided in the legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with mortgage
related securities without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in mortgage related
securities, and national banks may purchase mortgage related securities for
their own account without regard to the limitations generally applicable to
investment securities set forth in 12 U.S.C. Section 24 (Seventh), subject in
each case to the regulations as the applicable federal regulatory authority
may prescribe. In this connection, federal credit unions should review
National Credit Union Administration Letter to Credit Unions No. 96, as
modified by Letter No. 108, which includes guidelines to assist federal credit
unions in making investment decisions for mortgage related securities. The
National Credit Union Administration has adopted rules, effective December 2,
1991, which prohibit federal credit unions from investing in particular
mortgage related securities, including securities like some series or classes
of the securities, except under limited circumstances.
All depository institutions considering an investment in the securities
should review the "Supervisory Policy Statement on Securities Activities"
dated January 28, 1992 of the Federal Financial Institutions Examination
Council. This Policy Statement, which has been adopted by the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Comptroller of the Currency and the Office of Thrift
Supervision, effective February 10, 1992, and by the National Credit Union
Administration, with a number of modifications, effective June 26, 1992,
prohibits institutions from investing in some "high-risk" mortgage securities,
including securities like some classes of the securities, except under limited
circumstances, and sets forth specified investment practices deemed to be
unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by these authorities before purchasing any
securities, as some series or classes may be deemed unsuitable investments, or
may otherwise be restricted, under the rules, policies or guidelines, in
specified instances irrespective of SMMEA.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits,
provisions which may restrict or prohibit investment in securities which are
not "interest-bearing" or "income-paying" and, with regard to any securities
issued in book-entry form, provisions which may restrict or prohibit
investment in securities which are issued in book-entry form.
Other classes of securities offered by this prospectus will not
constitute "mortgage related securities" under SMMEA because they will not
represent beneficial ownership interests in qualifying mortgage loans under
SMMEA. The appropriate characterization of those securities under various
legal investment restrictions, and thus the ability of investors subject to
these restrictions to purchase the securities, may be subject to significant
interpretive uncertainties. All investors whose investment authority is
subject to legal restrictions should consult their own legal advisors to
determine whether, and to what extent, the securities will constitute legal
investments for them.
No representation is made as to the proper characterization of the
securities for legal investment or financial institution regulatory purposes,
or as to the ability of particular investors to purchase securities under
applicable legal investment restrictions. The uncertainties described above,
and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the securities, may
adversely affect the liquidity of the non-SMMEA securities.
Investors should consult with their own legal advisors in determining
whether and to what extent the securities constitute legal investments for
these investors.
Plan of Distribution
The issuer may sell the securities offered hereby in series either
directly or through underwriters. The accompanying prospectus supplement or
prospectus supplements for each series will describe the terms of the offering
for that series and will state the public offering or purchase price of each
class of securities of a series, or the method by which the price is to be
determined, and the net proceeds to the issuer from the sale.
If the sale of any securities is made in accordance with an underwriting
agreement under which one or more underwriters agree to act in this capacity,
the securities will be acquired by these underwriters for their own account
and may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
to be determined at the time of sale or at the time of commitment therefor.
Firm commitment underwriting and public reoffering by underwriters may be done
through underwriting syndicates or through one or more firms acting alone. The
specific managing underwriter or underwriters, if any, for the offer and sale
of a particular series of securities will be printed on the cover of the
prospectus supplement for a series and the members of the underwriting
syndicate, if any, will be named in the accompanying prospectus supplement.
The prospectus supplement will describe any discounts and commissions to be
allowed or paid by the issuer to the underwriters, any other items
constituting underwriting compensation and any discounts and commissions to be
allowed or paid to the dealers. The obligations of the underwriters will be
subject to a number of conditions precedent. Unless otherwise provided in the
accompanying prospectus supplement, the underwriters of a sale of any class of
securities will be obligated to purchase all of the securities if any are
purchased. In accordance with each underwriting agreement, the sponsor will
indemnity the underwriters against specified civil liabilities, including
liabilities under the Securities Act of 1933.
In connection with any offering, the underwriters may over-allot or
effect transactions which stabilize or maintain the market prices of the
securities at levels above those which might otherwise prevail in the open
market. This stabilizing, if commenced by the underwriters, may be
discontinued at any time.
If any securities are offered other than through underwriters acting
under underwriting agreements, the accompanying prospectus supplement or
prospectus supplements will contain information regarding the terms of the
offering and any agreements to be entered into in connection with the
offering.
Purchasers of securities, including dealers, may, depending on the facts
and circumstances of the purchases, be deemed to be "underwriters" within the
meaning of the Securities Act, in connection with reoffers and sales by them
of securities. securityholders should consult with their legal advisors in
this regard prior to any reoffer and sale.
If specified in the prospectus supplement relating to a series of
securities, the sponsor, any affiliate thereof or any other person or persons
specified in the prospectus supplement may purchase some or all of one or more
classes of securities of a series from the underwriter or underwriters or any
other person or persons specified in the accompanying prospectus supplement.
The purchaser may thereafter from time to time offer and sell, by this
prospectus and the accompanying prospectus supplement, some or all of the
securities so purchased, directly, through one or more underwriters to be
designated at the time of the offering of the securities, through dealers
acting as agent and/or principal as in any other manner as may be specified in
the accompanying prospectus supplement. The offering may be restricted in the
manner specified in the accompanying prospectus supplement. These transactions
may be effected at market prices prevailing at the time of sale, at negotiated
prices or at fixed prices. Any underwriters and dealers participating in the
purchaser's offering of the securities may receive compensation in the form of
underwriting discounts or commissions from the purchaser and the dealers may
receive commissions from the investors purchasing the securities for whom they
may act as agent, which discounts or commissions will not exceed those
customary in those types of transactions involved. Any dealer that
participates in the distribution of the securities may be deemed to be an
"underwriter" within the meaning of the Securities Act of 1933, and any
commissions and discounts received by the dealer and any profit on the resale
of the securities by the dealer might be deemed to be underwriting discounts
and commissions under the Securities Act of 1933.
Incorporation of Information by Reference
There are incorporated in this prospectus by reference all documents and
reports filed or caused to be filed by the sponsor under Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934, after the date of this
prospectus and prior to the termination of any offering of securities
evidencing interests in this prospectus, including the sponsor's latest annual
report on Form 10-K. Any statement contained in a document incorporated or
deemed to be incorporated by reference in this prospectus shall be deemed to
be modified or superseded for all purposes of this prospectus to the extent
that a statement contained in this prospectus, in the accompanying prospectus
supplement or in any other subsequently filed document which also is or is
deemed to be incorporated by reference modifies or replaces the statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this prospectus.
The sponsor will provide, or cause to be provided, without charge to
each person to whom this prospectus is delivered in connection with the
offering of one or more classes of a series, a list identifying all filings of
the sponsor under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act, since the latest fiscal year covered by its annual report on Form 10-K,
and a copy of any or all documents or reports incorporated in this prospectus
by reference, in each case to the extent the documents or reports relate to
one or more of classes of a series, other than the exhibits to the documents,
unless the exhibits are specifically incorporated by reference in the
documents. Requests to the sponsor should be directed to: Prudential
Securities Secured Financing Corporation, One New York Plaza, 14th Floor, New
York, New York 10292, Attention: Managing Director-Asset-Backed Finance Group,
(212) 778-1000.
Additional Information
The sponsor has filed a registration statement under the Securities
Act of 1933 with the Securities and Exchange Commission for the securities
offered by this prospectus. This prospectus contains, and the prospectus
supplement for each series of securities will contain, a summary of the
material terms of the documents referred to in this prospectus and in the
accompanying prospectus, but neither contains nor will contain all of the
information included in the registration statement of which this prospectus is
a part. For further information, you should read the registration statement
and any amendments thereof and exhibits thereto. You may obtain a copy of the
registration statement from the Public Reference Room of the Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 upon
payment of the prescribed charges, or you may examine the registration
statement free of charge at the Securities and Exchange Commission's offices,
450 Fifth Street, N.W., Washington, D.C. 20549 or at the regional offices of
the Securities and Exchange Commission located at Room 1400, 75 Park Place,
New York, New York 10007 and Northwestern Atrium Center, 500 West Madison
Street, Suite 400, Chicago, Illinois 60661-2511. Information about the
operation of the Public Reference Room may be obtained by contracting the
Securities and Exchange Commission at 1-800-SEC-0330. In addition, the
Securities and Exchange Commission maintains a site on the World Wide Web
containing reports, proxy and information statements and other items. The
address of the site is http://www.sec.gov.
Each issuer will be required to file particular reports with the
Securities and Exchange Commission in accordance with the requirements of the
Securities Exchange Act of 1934. Each issuer will suspend filing the reports
if and when the reports are no longer required under the Securities Exchange
Act of 1934.
In connection with each distribution, and annually, the sponsor will
cause the servicer to furnish securityholders with statements containing
information about the assets of the issuer, as described in this prospectus
and in the prospectus supplement for a series. See "Servicing of the
Loans--Reports to Securityholders." The servicer for each series will furnish
periodic statements setting forth specified information to the trustee for a
series and, in addition, annually will furnish the trustee with a statement
from a firm of independent public accounts concerning the examination of
specified documents and records relating to the servicing of the mortgage
loans and/or manufactured housing contracts held by the issuer. See "Servicing
of the Loans--Evidence as to Compliance" in this prospectus. Copies of the
monthly and annual statements provided by the servicer to the trustee will be
furnished to securityholders of the series upon request addressed to
Prudential Securities Secured Financing Corporation, One New York Plaza, 14th
Floor, New York, New York 10292, Attention: Managing Director-Asset-Backed
Finance Group, (212) 778-1000.
Copies of FHLMC's most recent Offering Circular for FHLMC securities,
FHLMCs Information Statement and the most recent Supplement to the Information
Statement and any quarterly report made available by FHLMC can be obtained by
writing or calling the Investor Inquiry Department at FHLMC at 8200 Jones
Branch Drive, McLean Virginia 22102. Outside Washington, D.C. metropolitan
area, telephone 800-336-FMPC; within Washington, D.C. metropolitan area,
telephone 703-759-8160. The sponsor has not and will not participate in the
preparation of FHLMC's Offering Circulars, Information Statements or
Supplements.
Copies of FNMA's most recent prospectus for FNMA securities and
FNMA's annual report and quarterly financial statements as well as other
financial information are available from the Senior Vice President for
Investor Relations of FNMA, 3900 Wisconsin Avenue, N.W., Washington, D.C.
20016 (202-752-7115). The sponsor has not and will not participate in the
preparation of FNMA's prospectuses.
You should rely only on the information contained in this prospectus
and in the accompanying prospectus supplement. We have not authorized anyone
to provide any information that is different. This prospectus and any
accompanying prospectus supplement do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the securities
offered hereby and thereby nor an offer of the securities to any person in any
state or other jurisdiction in which the offer would be unlawful. The
information included in this prospectus speaks as of the date hereof. You
should not assume that it will remain correct after this date.
Legal Matters
A number of legal matters and tax matters will be passed upon for the
sponsor by Brown & Wood LLP, Washington, D.C. and/or any other counsel as will
be named on the accompanying prospectus supplement.
Ratings
At the date of issuance of each series of securities, the securities
offered hereby will be rated in one of the four highest categories by at least
one nationally recognized statistical rating agency. These ratings address, in
the opinion of the rating agency, the likelihood that the issuer will be able
to make timely payment of all amounts due on the series of securities in
accordance with their terms. The ratings will neither address any prepayment
or yield considerations applicable to any securities nor constitute a
recommendation to buy, sell or hold any securities and may be subject to
revision or withdrawal at any time by the assigning rating agency. Each
securities rating should be evaluated independently of any other rating.
<PAGE>
Glossary
The following terms have the meanings given below when used in this
prospectus or the accompanying prospectus supplement.
Accrual Securities means one or more classes of securities as to
which a portion of the accrued interest will not be distributed but rather
will be added to the principal balance of the security, or notional principal
balance in the case of Accrual Securities which are also Strip Securities, on
each distribution date.
CERCLA means the federal Comprehensive Environmental Response,
Compensation, and Liability Act of 1980.
Collection Account means a segregated trust account or accounts for a
series, established and maintained with the trustee, for the benefit of the
securityholders, for the deposit of collections on the underlying loans.
Credit Enhancer means the provider of any credit enhancement for a
series, including bond insurers, guarantors and letter of credit banks.
Debt Securities means securities that are intended to be treated for
federal income tax purposes as indebtedness secured by the underlying loans
held by the issuer.
Deleted Loan means a loan which breaches the representations and
warranties made by the seller in the Loan Sale Agreement and which must be
repurchased or substituted for by the seller.
Equity Participation Securities means any class of securities or
interests in the issuer which represent the right to receive the proceeds of
the trust fund after all required payments have been made to the holders of
the securities and following any required deposits to any reserve fund that
may be established for the benefit of the securities, including FASIT
Ownership Securities and REMIC Residual Securities.
FASIT Ownership Securities means securities of the one separate class
of a series which has been designated as the "ownership interest" of the FASIT
Trust in the accompanying prospectus supplement.
FASIT Regular Securities means securities of each class of a series
which has been designated as the "regular interests" or "high-yield regular
interests" of the FASIT Trust in the accompanying prospectus supplement.
FASIT Securities means securities representing interests in a trust,
or a segregated pool or pools of assets therein, which the issuer will
covenant to elect to have treated as a FASIT under Sections 860H through 860L
of the Code.
FASIT Trust means an issuer for which a FASIT election is made.
FIRREA means the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989.
Fixed Retained Yield means, for any loan, the portion, if any, of
interest, at the loan interest rate, that is retained by the issuer or other
owner thereof and not included in the trust fund.
Garn Act means the Garn-St Germain Depository Institutions Act of 1982.
Grantor Trust Fractional Interest Security means a Grantor Trust
Security representing an undivided equitable ownership interest in the
principal of the loans constituting the grantor trust, together with interest
thereon at a pass-through rate.
Grantor Trust Securities means securities representing interests in a
grantor trust which the issuer will covenant not to elect to have treated as a
REMIC or a FASIT.
Grantor Trust Strip Security means a Grantor Trust Security
representing ownership of all or a portion of the difference between interest
paid on the loans constituting the grantor trust and interest paid to the
beneficial owners of Grantor Trust Fractional Interest Securities issued by
the grantor trust.
Insurance Proceeds means all proceeds received by the servicer under
any title, hazard or other insurance policy covering any loan, other than
proceeds to be applied to the restoration or repair of the mortgaged property
or manufactured home or released to the mortgagor or obligor in accordance
with the Servicing Agreement.
Interest Rate means, for each class of securities, the rate at which
interest accrues on the securities, which may be fixed rate, adjustable rate,
or rate based upon the underlying loans, as specified in the accompanying
prospectus supplement.
Issuing Agreement means, means
o for each series of Grantor Trust Securities, REMIC Securities
and FASIT Securities, a pooling and servicing agreement,
o for each series of Debt Securities, an indenture, and
o for each series of Partnership Interests, a trust agreement or
other similar agreement.
Liquidation Proceeds means all amounts received by the servicer in
connection with the liquidation of defaulted loans or property acquired in
respect thereof, whether through foreclosure sale or otherwise, including
payments in connection with defaulted loans received from the mortgagor or
obligor other than amounts required to be paid to the mortgagor or obligor
under the terms of the applicable loan or otherwise in accordance with law.
Loan Sale Agreement means the agreement or agreement under which the
issuer obtained the loans from the seller, either directly or through a
special-purpose affiliate or the seller.
Net Insurance Proceeds means Insurance Proceeds, less expenses
incurred in connection with collecting on insurance policies, less any
unreimbursed advances on the loan, less, in the discretion of the servicer,
but only to the extent of the amount permitted to be withdrawn from the
Collection Account, any unpaid servicing fees on the loan.
Net Liquidation Proceeds means Liquidation Proceeds, less expenses
incurred in connection with the liquidation, less other reimbursed servicing
costs associated with the liquidation, less specified amounts applied to the
restoration, preservation or repair of the mortgaged property or manufactured
home, less any unreimbursed advances on the loan and, in the discretion of the
servicer, but only to the extent of the amount permitted to be withdrawn from
the Collection Account, less any unpaid servicing fees on the loans or the
mortgaged properties or manufactured homes.
Net Loan Rate means, for each loan, the loan interest rate, less the
Fixed Retained Yield, if any, less any servicing fee applicable to the loan.
Partnership Interests means securities representing interests in a
trust that is intended to be treated as a partnership under the Code.
PCTE means a Prohibited Transaction Class Exemption issued by the
Department of Labor.
Pre-Funding Account means a segregated trust account or accounts
established and maintained with the trustee, for the benefit of the
securityholders, for the deposit of funds to be used by the issuer to purchase
additional loans during the Pre-Funding Period.
Pre-Funding Period means the period stated in the accompanying
prospectus supplement during which additional loans may be purchased by the
issuer with the funds on deposit in the Pre-Funding Account.
Premium Security means a security that is purchased at a cost greater
than its remaining stated redemption price at maturity.
Prepayment Assumption means the assumption used to calculate the rate
at which the loans prepay, as specified in the accompanying prospectus
supplement.
REMIC Regular Securities means the securities of each class of a
series which have been designated as "regular interests" of the REMIC Trust in
the accompanying prospectus supplement.
REMIC Regulations means the regulations issued by the Treasury
Department on December 23, 1992 for REMICs.
REMIC Residual Securities means the securities of each class of a
series which have been designated as "residual interests" of the REMIC Trust
in the accompanying prospectus supplement.
REMIC Securities means securities representing interests in a trust,
or a segregated pool or pools of assets therein, which the issuer will
covenant to elect to have treated as a REMIC under Sections 860A through 860G
of the Code.
REMIC Trust means an issuer for which a REMIC election is made.
Restricted Group means the sponsor, the issuer, the underwriter(s),
the trustee, the servicer, any obligor on loans included in the trust fund
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the trust fund, or any affiliate of these parties.
Servicing Agreement means, for a series of securities, the agreement
concerning the servicing of the loans, which may be a servicing agreement,
pooling and servicing agreement, sale and servicing agreement, or other
similar agreement.
Settlement Date means, unless otherwise stated in the accompanying
prospectus supplement, the date the securities are first sold to the public.
SMMEA means the Secondary Mortgage Market Enhancement Act of 1984.
Startup Day means, unless otherwise stated in the accompanying
prospectus supplement, the date of the initial issuance of the FASIT
Securities.
Strip Securities means securities entitled to (x) principal
distributions, with disproportionate, nominal or no interest distributions, or
(y) interest distributions, with disproportionate, nominal or no principal
distributions.
U.S. Person means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate that
is subject to U.S. federal income tax regardless of the source of its income,
or a trust if a court within the United States can exercise primary
supervision over its administration and at least one United States person has
the authority to control all substantial decisions of the trust.
<PAGE>
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$211,994,000 Pass-Through Certificates, Series 2000-1
Mortgage Lenders Network Home Equity Loan Trust 2000-1
[LOGO]
Mortgage Lenders Network USA, Inc.
Seller and Servicer
Prudential Securities Secured Financing Corporation
Depositor
------------------------------
Prospectus Supplement
------------------------------
Prudential Securities
April 10, 2000
You should rely only on the information incorporated by reference or
provided in this prospectus supplement and the accompanying prospectus. We
have not authorized anyone else to provide you with different information.
We are not offering the certificates offered hereby in any state where
such offer is not permitted.
We represent the accuracy of the information in this prospectus
supplement and the accompanying prospectus only as of the dates on their
respective covers.
Dealers will be required to deliver a prospectus supplement and
prospectus when acting as underwriters of the certificates offered hereby and
with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the certificates, whether or not participating in this
offering, may be required to deliver a prospectus supplement and prospectus
for ninety days following the date of this prospectus supplement.
==============================================================================
