<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1998
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
AND POST-EFFECTIVE AMENDMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DELTA FUNDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 11-2609517
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1000 WOODBURY ROAD
WOODBURY, NEW YORK 11797
(516) 364-8500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
RICHARD BLASS
CHIEF FINANCIAL OFFICER
DELTA FUNDING CORPORATION
1000 WOODBURY ROAD
WOODBURY, NEW YORK 11797
(516) 364-8500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copy to:
REED D. AUERBACH
STROOCK & STROOCK & LAVAN LLP
180 MAIDEN LANE
NEW YORK, NEW YORK 10038
(212) 806-5400
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /x/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Asset Backed Notes and Asset
Backed Certificates......... $1,000,000 100% $1,000,000 $295.00
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus
included in this Registration Statement is a combined prospectus and relates to
Registration Statement No. 333-3418 as previously filed by the Registrant on
Form S-3. Such Registration Statement No. 333-3418 was declared effective on
January 17, 1997. This Registration Statement, which is a new registration
statement, also constitutes Post-Effective Amendment No. 1 to Registration
Statement No. 333-3418, and such Post-Effective Amendment shall hereafter become
effective concurrently with the effectiveness of this Registration Statement and
in accordance with Section 8(c) of the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH STATE.
SUBJECT TO COMPLETION DATED MAY 1, 1998
PROSPECTUS SUPPLEMENT
(To Prospectus dated , 199 )
$
DELTA FUNDING HOME EQUITY LOAN TRUST 199
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES,
SERIES 199
DELTA FUNDING CORPORATION
(SELLER AND SERVICER)
-------------------
The Home Equity Loan Asset-Backed Certificates, Series 199 (the
'Certificates') will represent the entire beneficial interest in Delta Funding
Home Equity Loan Trust 199 (the 'Trust'). Only the Classes identified in the
table below (collectively, the 'Offered Certificates') are offered hereby.
(cover continued on next page)
-------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER 'RISK
FACTORS' BEGINNING ON PAGE S-12 HEREIN AND ON PAGE 13 IN THE ACCOMPANYING
PROSPECTUS.
-------------------
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE SELLER, THE SERVICER, THE TRUSTEE OR ANY
AFFILIATE THEREOF. NEITHER THE CERTIFICATES NOR THE MORTGAGE LOANS
ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
INITIAL CLASS CERTIFICATE PRICE TO UNDERWRITING PROCEEDS TO
PRINCIPAL BALANCE RATE PUBLIC(1) DISCOUNT SELLER(1)(2)
<S> <C> <C> <C> <C> <C>
Class A-1F............... $ (3) % % %
Class A-2F............... $ %(4) % % %
Class A-3F............... $ %(4) % % %
Class A-4F............... $ %(4) % % %
Class A-5F............... $ %(4)(5) % % %
Class A-6F............... $ %(4) % % %
Class IOF................ (6) % (7) (7) (7)
Class M-1F............... $ (3) % % %
Class M-2F............... $ (3) % % %
Class B-1F............... $ (3) % % %
Class A-1A............... $ %(4) % % %
Class A-2A............... $ (3) % % %
Class IOA................ (6) % (7) (7) (7)
Class M-1A............... $ (3) % % %
Class M-2A............... $ (3) % % %
Class B-1A............... $ (3) % % %
Total $ $ $ $
</TABLE>
(1) Plus accrued interest, if any, at the respective Certificate Rates from
, 199 (or in the case of the Adjustable Rate Certificates from
, 199 ).
(2) Before deduction of expenses payable by the Seller estimated to be $ .
(3) The Certificate Rate for this Class will be calculated by reference to the
London interbank offered rate for one-month U.S. dollar deposits ('1-Month
LIBOR') subject to the limitations described herein. See 'Description of the
Certificates--Interest Distributions' herein.
(4) Subject to the applicable Available Funds Rate.
(5) The Certificate Rate will be increased by % after the Optional
Termination Date.
(6) This Class does not have an Initial Class Principal Balance but will have a
Notional Amount initially equal to $ and $ for the Class
IOF and Class IOA Certificates, respectively. Each such Notional Amount may
decline as provided herein and will be zero on and after the 37th
Distribution Date.
(7) This Class is being offered by from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the Seller from the sale of these Classes of Certificates
are expected to be approximately $ before deducting the expenses
referred to in footnote (2) above.
The Offered Certificates are offered by the Underwriters subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters. The Underwriters reserve
the right to withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that the Offered Certificates will be issued on or
about , 1998 (the 'Closing Date'), and will thereafter be available
from the Underwriters through the facilities of The Depository Trust Company on
the Same Day Funds Settlement System and Cedel Bank, societe anonyme, and the
Euroclear System.
[NAMES OF UNDERWRITERS]
, 199
<PAGE>
(Cover continued from front page)
The assets of the Trust consist primarily of two pools (each, a 'Loan
Group' and each constituting a separate sub-trust) of closed-end mortgage loans
(the 'Mortgage Loans') secured by first and second liens primarily on one- to
four-family residential properties. The Mortgage Loans in one Loan Group ('Loan
Group F') bear interest at fixed rates and the Mortgage Loans in the other Loan
Group ('Loan Group A') bear interest at adjustable rates.
Distributions on the Offered Certificates will be made on the 25th day of
each month or, if such date is not a Business Day, then on the next succeeding
Business Day, commencing in 199 (each, a 'Distribution Date'). On each
Distribution Date, holders of the Offered Certificates will be entitled to
receive, from and to the limited extent of funds available in the Distribution
Account (as defined herein), distributions calculated as set forth herein.
The Underwriters intend to make a secondary market in the Offered
Certificates, but no Underwriter has any obligation to do so. There is currently
no market for the Offered Certificates and there can be no assurance that such a
market will develop or if it does develop that it will continue or will provide
sufficient liquidity of investment. See 'RISK FACTORS' herein.
Separate elections will be made to treat certain assets of the Trust as a
'real estate mortgage investment conduit' (a 'REMIC') for federal income tax
purposes, creating a two-tier REMIC structure. As described more fully herein
and in the Prospectus, the Offered Certificates will constitute 'regular
interests' in a REMIC. See 'FEDERAL INCOME TAX CONSIDERATIONS' herein and in the
Prospectus.
THE YIELD TO INVESTORS ON EACH CLASS OF OFFERED CERTIFICATES WILL BE
SENSITIVE IN VARYING DEGREES TO, AMONG OTHER THINGS, THE RATE AND TIMING OF
PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS IN THE RELATED
LOAN GROUP, WHICH MAY VARY SIGNIFICANTLY OVER TIME. THE YIELDS ON THE NOTIONAL
AMOUNT CERTIFICATES WILL BE EXTREMELY SENSITIVE TO HIGH LEVELS OF PREPAYMENTS ON
THE MORTGAGE LOANS IN THE RELATED LOAN GROUP. INVESTORS IN THE NOTIONAL AMOUNT
CERTIFICATES SHOULD CONSIDER THE ASSOCIATED RISKS, INCLUDING THE RISK THAT IF
THE LEVEL OF SUCH PREPAYMENTS IS SUFFICIENTLY HIGH, SUCH INVESTORS COULD FAIL TO
RECOUP THEIR INITIAL INVESTMENTS. THE YIELD ON THE ADJUSTABLE RATE CERTIFICATES
ALSO WILL BE SENSITIVE TO CHANGES IN THE LEVEL OF 1-MONTH LIBOR. THE YIELD TO
INVESTORS IN THE OFFERED CERTIFICATES, PARTICULARLY THE SUBORDINATE CERTIFICATES
(AS DEFINED HEREIN), WILL BE ADVERSELY AFFECTED BY LOSSES ON THE MORTGAGE LOANS
AND OTHER SHORTFALLS IN AVAILABLE FUNDS. NO REPRESENTATION IS MADE AS TO THE
ANTICIPATED RATE OF PREPAYMENTS ON THE MORTGAGE LOANS, THE LEVEL OF 1-MONTH
LIBOR, THE AMOUNT AND TIMING OF REALIZED LOSSES, OR AS TO THE RESULTING YIELD TO
MATURITY ON ANY CLASS OF OFFERED CERTIFICATES.
The Mortgage Loans will include (i) the mortgage loans identified as of
, 199 , and described herein (the 'Statistic Calculation Mortgage
Loans'), (ii) additional closed-end fixed and adjustable rate home equity loans
to be delivered on the Closing Date (together with the Statistic Calculation
Mortgage Loans, the 'Initial Mortgage Loans') and (iii) additional mortgage
loans to be purchased by the Trust from the Seller from time to time on or prior
to , 199 , (the 'Subsequent Mortgage Loans,' and together with the
Initial Mortgage Loans, the 'Mortgage Loans'). The maximum amount of Subsequent
Mortgage Loans to be transferred to the Trust on or before , 199 ,
for Loan Group F and Loan Group A is $ and $ ,
respectively (each, a 'Maximum Funding Amount').
------------------------
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS ACTING AS
UNDERWRITERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the certificates
offered hereby. Such transactions may include stabilizing and the purchase of
the Offered Certificates to cover syndicate short positions. For a description
of these activities, see 'Underwriting' herein.
------------------------
The Offered Certificates constitute part of a separate series of
Asset-Backed Securities being offered by Delta Funding Corporation from time to
time pursuant to its Prospectus dated , 199 . This Prospectus
Supplement does not contain complete information about the offering of the
Offered Certificates. Additional information is contained in the Prospectus and
investors are urged to read both this Prospectus Supplement and the Prospectus
in full. Sales of the Offered Certificates may not be consummated unless the
purchaser has received both this Prospectus Supplement and the Prospectus.
S-2
<PAGE>
SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and the accompanying Prospectus. Certain capitalized terms
used in the Summary are defined elsewhere in this Prospectus Supplement or in
the Prospectus. Reference is made to Index of Principal Terms beginning on page
S-12 herein and the Glossary of Terms beginning on page 76 in the Prospectus for
the definitions of certain capitalized terms.
<TABLE>
<S> <C>
Issuer.................................... Delta Funding Home Equity Loan Trust 199 (the 'Trust').
Securities Offered........................ Home Equity Loan Asset-Backed Certificates, Series 199 - (the
'Certificates'), in the Classes listed on the cover page hereof
(collectively, the 'Offered Certificates'). Only the Offered
Certificates are offered hereby. The Offered Certificates will have
the Initial Class Principal Balances or Notional Amount listed on the
cover page hereof or described herein and will accrue interest at the
rates (each, a 'Certificate Rate') set forth on the cover page hereof
or described herein.
The Notional Amount of the Class IOF Certificates for any
Distribution Date prior to the 37th Distribution Date will equal the
lesser of (i) $ and (ii) the sum of the Class Principal
Balance of the Class A-6F Certificates and the last $ of
the Class M-1F Certificates outstanding. The Notional Amount of the
Class IOA Certificates for any Distribution Date prior to the 37th
Distribution Date will equal the lesser of (i) $ and (ii)
the sum of the Class Principal Balances of the Class M-1A and Class
M-2A Certificates and the last $ of the Class B-1A
Certificates outstanding. On and after the 37th Distribution Date,
the Notional Amount of each Class of Notional Amount Cerfitificates
will be zero.
Certificates other than the Offered
Certificates............................ In addition to the Offered Certificates, the Trust will issue the
Class R-1 and Class R-2 Certificates, none of which are offered
hereby.
The Class R-1 and Class R-2 Certificates (collectively, the 'Residual
Certificates') do not have Class Principal Balances and do not accrue
interest. The Residual Certificates will be entitled to certain
residual cashflows from the Trust.
Only the Offered Certificates are offered hereby. Any information
contained herein with respect to the Class R-1 or Class R-2
Certificates is provided only to permit a better understanding of the
Offered Certificates.
Designations
Book-Entry Certificates................. Group F Certificates and Group A Certificates.
Fixed Rate Certificates................. All Classes of Offered Certificates other than the Adjustable Rate
Certificates.
Adjustable Rate Certificates............ Class A-1F, Class M-1F, Class M-2F, Class B-1F, Class A-2A, Class
M-1A, Class M-2A and Class B-1A Certificates.
Group F Certificates.................... Class A-1F, Class A-2F, Class A-3F, Class A-4F, Class A-5F, Class
A-6F, Class IOF, Class M-1F, Class M-2F and Class B-1F Certificates.
Group A Certificates.................... Class A-1A, Class A-2A, Class IOA, Class M-1A, Class M-2A and Class
B-1A Certificates.
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
Loan Group F............................ All Mortgage Loans bearing interest at fixed rates.
Loan Group A............................ All Mortgage Loans bearing interest at adjustable rates, including
Mortgage Loans which bear interest at rates that are fixed for two or
three years after origination and thereafter adjust every six months
based on the Loan Index.
Notional Amount Certificates............ Class IOF and Class IOA Certificates.
Senior Certificates..................... Class A-1F, Class A-2F, Class A-3F, Class A-4F, Class A-5F, Class
A-6F, Class IOF, Class A-1A, Class A-2A and Class IOA Certificates.
Subordinate Certificates................ Mezzanine Certificates and Class B Certificates.
Mezzanine Certificates.................. Class M-1F, Class M-2F, Class M-1A and Class M-2A Certificates.
Class B Certificates.................... Class B-1F and Class B-1A Certificates.
Seller and Servicer....................... Delta Funding Corporation (the 'Seller' or the 'Servicer,' as
applicable). The principal executive offices of the Servicer are
located at 1000 Woodbury Road, Woodbury, New York 11797 (telephone:
(516) 364-8500). See 'THE SELLER AND THE SERVICER' in the Prospectus.
Trustee................................... (the 'Trustee').
Custodian................................. (the 'Custodian').
Pooling and Servicing Agreement........... The Trust will be formed, and the Certificates will be issued,
pursuant to a Pooling and Servicing Agreement, to be dated as of
, 199 (the 'Agreement'), among the Seller, the
Servicer and the Trustee.
Cut-off Date.............................. The close of business on , 199 , except that the Cut-
off Date for any Mortgage Loan originated after ,
199 , will be the date of origination of such Mortgage Loan.
Closing Date.............................. On or about , 199 .
Distribution Dates........................ The 25th day of each month or, if such day is not a business day, the
first business day thereafter, commencing in
(each, a 'Distribution Date').
Record Dates.............................. For the Fixed Rate Certificates and any Distribution Date, the last
business day of the calendar month immediately preceding the calendar
month in which such Distribution Date occurs. For the Adjustable Rate
Certificates and any Distribution Date, the day immediately preceding
such Distribution Date.
Final Scheduled Distribution Dates........ The Final Scheduled Distribution Date for each Class of Offered
Certificates is as follows:
</TABLE>
<TABLE>
<CAPTION>
FINAL SCHEDULED FINAL SCHEDULED
CLASS DISTRIBUTION DATE CLASS DISTRIBUTION DATE
----- ------------------ ----- ------------------
<S> <C> <C> <C> <C>
A-1F M-2F
A-2F B-1F
A-3F A-1A
A-4F A-2A
A-5F IOA
A-6F M-1A
IOF M-2A
M-1F B-1A
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
Each such date has been calculated as described under 'DESCRIPTION OF
THE CERTIFICATES--Final Scheduled Distribution Date' herein.
The Mortgage Loans........................ The Statistic Calculation Mortgage Loans have an aggregate unpaid
principal balance as of the Cut-off Date of $ . The
Mortgage Loans consist of closed-end, fixed- and adjustable-rate home
equity loans secured by first and second deeds of trust or mortgages
primarily on one- to four-family residential properties (the
'Mortgaged Properties').
The Mortgage Loans will be divided into two groups (each, a 'Loan
Group' and each constituting a separate sub-trust): 'Loan Group F'
and 'Loan Group A.' The aggregate Principal Balance of the Mortgage
Loans in a Loan Group as of any date of determination is referred to
herein as a 'Loan Group Balance.' The 'Principal Balance' of a
Mortgage Loan as of any date of determination is the unpaid principal
balance thereof as of the Cut-off Date minus all amounts credited
against such principal balance prior to such date of determination.
Interest on each Mortgage Loan is payable monthly on the outstanding
Principal Balance thereof at a rate per annum (the 'Loan Rate')
specified in the related Mortgage Note. Each Mortgage Loan in Loan
Group F will bear interest at a fixed rate that is calculated on the
'simple interest' method. Certain of the Mortgage Loans in Loan Group
F will have original terms to stated maturity of up to 15 years and
amortization schedules of up to 30 years ('Balloon Loans'), leaving a
substantial payment due at the stated maturity (each, a 'Balloon
Payment'). The Mortgage Loans in Loan Group F are secured by first or
second liens on the related Mortgaged Properties.
Each Mortgage Loan in Loan Group A will bear interest at an
adjustable rate (each an 'ARM') that is calculated on the 'simple
interest' method. The Loan Rate borne by each ARM is subject to
adjustment on the date set forth in the related Mortgage Note and at
regular intervals thereafter (each, a 'Change Date') to equal the sum
of (i) the applicable index (the 'Loan Index') and (ii) the
percentage set forth in such Mortgage Note (the 'Gross Margin'),
subject to rounding and to the effects of the applicable Periodic
Cap, the applicable Lifetime Cap and the applicable Lifetime Floor.
The 'Periodic Cap' limits changes in the Loan Rate for each ARM on
each Change Date. The 'Lifetime Cap' is the maximum Loan Rate that
may be borne by an ARM at any point. The 'Lifetime Floor' is the
minimum Loan Rate that may be borne by an ARM at any point. The ARMs
do not provide for negative amortization. The Mortgage Loans in Loan
Group A are secured by first liens on the related Morgaged
Properties. See 'DESCRIPTION OF THE MORTGAGE LOANS' herein.
Pre-Funding Account....................... On the Closing Date, cash in an amount not to exceed approximately
$ (the 'Pre-Funded Amount') will be deposited into a
segregated account maintained with the Trustee on behalf of the Trust
(the 'Pre-Funding Account'). Amounts in the Pre-Funding Account may
be used only (i) to acquire Subsequent Mortgage Loans equal to the
Maximum Funding Amount for Loan Group F and Loan Group A,
respectively, and (ii) to make accelerated payments of principal on
the Certificates. See 'DESCRIPTION OF THE MORTGAGE LOANS--Conveyance
of Subsequent Mortgage Loans' herein. During the period (the 'Funding
Period') from the Closing Date until the earliest of (i) the date on
which the amount on
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
deposit in the Pre-Funding Account is less than $100,000, (ii) the
date on which an Event of Default occurs under the Agreement or (iii)
the close of business on , 199 , amounts will, from time
to time, be withdrawn from the Pre-Funding Account to purchase
Subsequent Mortgage Loans in accordance with the Agreement. Any
amounts remaining at the end of the Funding Period in the Pre-Funding
Account in respect of each Loan Group will be transferred by the
Trustee into the Distribution Account, and will be distributed as a
principal prepayment to Certificateholders of the related Certificate
Group then entitled to distributions of principal. The Pre-Funding
Account will not be an asset of any REMIC. See 'RISK FACTORS--The
Subsequent Mortgage Loans,' 'PREPAYMENT AND YIELD CONSIDERATIONS,'
and 'DESCRIPTION OF THE CERTIFICATES--Principal Distributions'
herein.
Initial Interest Coverage Account......... On the Closing Date, cash will be deposited in a segregated account
maintained with the Trustee on behalf of the Trust (the 'Initial
Interest Coverage Account'). The amount on deposit in the Initial
Interest Coverage Account, including reinvestment income thereon,
will be used by the Trustee to fund certain interest shortfalls on
the Distribution Dates during and immediately following the Funding
Period as described under 'THE POOLING AND SERVICING
AGREEMENT--Initial Interest Coverage Account' herein. Amounts
remaining in the Initial Interest Coverage Account not used for such
purpose are required to be paid to the Seller. The Initial Interest
Coverage Account will not be an asset of any REMIC.
Denominations............................. The Offered Certificates will be offered for purchase in
denominations of $25,000 and integral multiples of $1,000 in excess
thereof.
Registration of Offered Certificates...... The Offered Certificates will initially be issued in book-entry form.
Persons acquiring beneficial ownership interests in the Offered
Certificates ('Certificate Owners') will hold their Offered
Certificate interests through The Depository Trust Company ('DTC'),
in the United States, or Cedel Bank, societe anonyme ('Cedel') or the
Euroclear System ('Euroclear'), in Europe. Transfers within DTC,
Cedel or Euroclear, as the case may be, will be in accordance with
the usual rules and operating procedures of the relevant system. So
long as the Offered Certificates are Book-Entry Certificates (as
defined herein), such Certificates will be evidenced by one or more
Certificates registered in the name of Cede & Co. ('Cede'), as the
nominee of DTC, or one of the relevant depositaries (collectively,
the 'European Depositaries'). Cross-market transfers between persons
holding directly or indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly through Cedel or
Euroclear, on the other, will be effected in DTC through Citibank
N.A. ('Citibank') or The Chase Manhattan Bank ('Chase'), the relevant
depositaries of Cedel and Euroclear, respectively, and each a
participating member of DTC. The interests of such Certificateholders
will be represented by book-entries on the records of DTC and
participating members thereof. No Certificate Owner will be entitled
to receive a definitive certificate representing such person's
interest, except in the event that Definitive Certificates (as
defined herein) are issued under the limited circumstances described
herein. All references in this Prospectus Supplement to any Offered
Certificates reflect the rights of Certificate Owners only as such
rights may be exercised through DTC and its participating
organizations for so long as such Offered
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
Certificates are held by DTC. See 'RISK FACTORS--Book-Entry
Registration May Affect Liquidity,' 'DESCRIPTION OF THE
CERTIFICATES--Book-Entry Certificates' and 'ANNEX I' hereto.
Interest
General................................. On each Distribution Date, to the extent of funds available therefor
as described herein under 'DESCRIPTION OF THE CERTIFICATES--Interest
Distributions,' interest will be distributed with respect to each
Class of Offered Certificates in an amount (each, a 'Class Interest
Distribution') equal to the sum of (a) interest for the related
Interest Period at the related Certificate Rate on the related Class
Principal Balance or Notional Amount (the 'Class Monthly Interest
Amount') and (b) any Class Interest Carryover Shortfall for such
Class of Offered Certificates for such Distribution Date. As to any
Distribution Date and Class of Offered Certificates, 'Class Interest
Carryover Shortfall' is the sum of (i) the excess, if any, of the
related Class Monthly Interest Amount for the preceding Distribution
Date and any outstanding Class Interest Carryover Shortfall with
respect to such Class on such preceding Distribution Date, over the
amount in respect of interest that is actually distributed on the
Certificates of such Class on such preceding Distribution Date plus
(ii) one month's interest on such excess, to the extent permitted by
law, at the related Certificate Rate.
Interest Period......................... For the Fixed Rate Certificates, the calendar month preceding the
month of the applicable Distribution Date, calculated on the basis of
a 360-day year comprised of twelve 30-day months. For the Adjustable
Rate Certificates, the period from the prior Distribution Date (or,
in the case of the first Distribution Date, from the Closing Date)
through the day preceding the current Distribution Date, calculated
on the basis of a 360-day year and the actual number of days elapsed
in such period; provided, however, that interest accrued on any Class
of Offered Certificates at the applicable Available Funds Cap will be
calculated on the basis of a 360-day year comprised of twelve 30-day
months. See 'DESCRIPTION OF THE CERTIFICATES--Interest
Distributions.'
Certificate Rates....................... The Certificate Rate for each Class of Fixed Rate Certificates is set
forth on the cover page hereof. The Certificate Rate on each Class of
Certificates, other than the Notional Amount Certificates, is subject
to the applicable Available Funds Cap.
As to either Loan Group and any Distribution Date, the 'Available
Funds Cap' will equal the lesser of (A) % in the case of
Certificate Group F and % in the case of Certificate Group A and
(B) a rate equal to (i) the weighted average Net Loan Rate of the
Mortgage Loans in the applicable Loan Group minus (ii) the product of
(x) the Certificate Rate on the Class of Notional Amount Certificates
related to such Loan Group and (y) a fraction, the numerator of which
is the Notional Amount of such Class of Notional Amount Certificates
and the denominator of which is the Loan Group Balance of the related
Loan Group as of the beginning of the related Due Period. The 'Net
Loan Rate' of a Mortgage Loan is the Loan Rate minus % (the
'Expense Fee Rate').
The Certificate Rate for each Class of Notional Amount Certificates
will equal: (a) for any Distribution Date prior to the 37th
Distribution Date the applicable per annum rate set forth on the
cover page hereof and; (b) for any Distribution Date on or after the
37th Distribution Date, 0.00%.
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
The Certificate Rate for the Adjustable Rate Certificates for any
Interest Period will equal the lesser of (i) the sum of 1-Month LIBOR
and the applicable Certificate Margin and (ii) the applicable
Available Funds Cap. The 'Certificate Margin' for each Class of
Adjustable Rate Certificates will be as follows:
</TABLE>
<TABLE>
<CAPTION>
CERTIFICATE
MARGIN
----------------
CLASS (1) (2)
----- ----- -----
<S> <C> <C> <C>
A-1F
M-1F
M-2F
B-1F
A-2A
M-1A
M-2A
B-1A
</TABLE>
<TABLE>
<S> <C>
------------------------
(1) Prior to or on the Optional Termination Date.
(2) After the Optional Termination Date.
If on any Distribution Date, the Certificate Rate for one or more
Classes of the Adjustable Rate Certificates, other than the Class
A-1F Certificates, is limited by the applicable Available Funds Cap,
Holders of the applicable Class will be entitled to receive the LIBOR
Carryover (as defined herein), to the extent funds are available
therefor as described herein.
Principal................................. On each Distribution Date, to the extent funds are available therefor
as described herein under 'DESCRIPTION OF THE CERTIFICATES--Principal
Distributions' and '--Certain Definitions,' principal will be
distributed to the Holders of the Offered Certificates then entitled
to distributions of principal in an amount equal to the Principal
Distribution Amount for the related Certificate Group for such
Distribution Date. The 'Principal Distribution Amount' for any
Certificate Group and any Distribution Date will equal the sum of (i)
the Basic Principal Amount for such Certificate Group minus the
related Excess Overcollateralization Amount and (ii) the
Subordination Increase Amount, if any, for such Certificate Group for
such Distribution Date.
The 'Basic Principal Amount' for any Distribution Date and
Certificate Group will be an amount equal to the sum of the following
amounts (without duplication) with respect to the immediately
preceding Due Period (as defined below): (i) each payment of
principal on a Mortgage Loan in the related Loan Group received by
the Servicer during such Due Period, including all full and partial
principal prepayments; (ii) the Net Liquidation Proceeds in respect
of principal received during the immediately preceding Due Period;
(iii) the portion of the Purchase Price allocable to principal of all
repurchased Defective Mortgage Loans in the related Loan Group with
respect to such Due Period; and (iv) any Substitution Adjustment
Amounts received on or prior to the previous Determination Date and
not yet distributed with respect to the related Loan Group.
'Due Period' means, (a) with respect to the first Distribution Date
for collections of both interest and principal, the period from and
including 1, 199 , through and including 1, 199 ,
and (b) with respect to each Distribution Date thereafter for
collections of both interest and principal the period from and
including the second day of the month preceding the month of such
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
Distribution Date to and including the first day of the month of such
Distribution Date.
The 'Excess Overcollateralization Amount' for a Certificate Group and
any Distribution Date will equal the excess of (i) the related
Overcollateralization Amount (assuming 100% of the related Basic
Principal Amount is distributed on the Offered Certificates in
such Certificate Group) over (ii) the related Required
Overcollateralization Amount.
Credit Enhancement
General................................. Credit enhancement for the Offered Certificates will be provided by
(i) the subordination of the Subordinate Certificates to the Senior
Certificates, (ii) the further subordination within such Subordinate
Certificates, (iii) the use of certain amounts in respect of interest
to create overcollateralization and (iv) the crosscollateralization
feature of the Trust.
Subordination........................... The rights of the Holders of the Subordinate Certificates in a
Certificate Group to receive distributions with respect to the
Mortgage Loans in the related Loan Group will be subordinated to such
rights of the Holders of the related Senior Certificates, and the
rights of the Holders of each Class of Subordinate Certificates will
be further subordinated to such rights of the Holders of the Class or
Classes of Subordinate Certificates in the related Certificate Group
with lower numerical Class designations, in each case, to the extent
provided herein.
The subordination of the Subordinate Certificates to the related
Senior Certificates, and the further subordination within such
Subordinate Certificates, is intended to increase the likelihood of
timely receipt by the Holders of Certificates with higher relative
payment priority of the maximum amount to which they are entitled on
any Distribution Date and to provide such Holders protection against
losses on the Mortgage Loans in the related Loan Group to the extent
described herein. However, in certain circumstances the amount of
available subordination may be exhausted and shortfalls in
distribution on the Certificates could result.
For all purposes hereof, the Class B Certificates in each Certificate
Group will be deemed to have the highest numerical Class designation
and the lowest payment priority of any Class of Subordinate
Certificates in such Certificate Group.
Overcollateralization................... The 'Excess Interest' for any Loan Group and Distribution Date will
equal the excess, if any, of (x) the Interest Remittance Amount for
such Loan Group over (y) the sum of (i) the Class Interest
Distributions for the related Senior Certificates, (ii) the Class
Monthly Interest Amounts for the related Subordinate Certificates and
(iii) the Trustee Fee for such Loan Group. The Excess Interest will
be applied to, among other things, the accelerated amortization of
the Offered Certificates in the related Certificate Group then
entitled to distributions of principal until the
Overcollateralization Amount for such Certificate Group equals the
related Required Overcollateralization Amount.
The 'Overcollateralization Amount' for a Certificate Group and any
Distribution Date is the excess, if any, of (i) the sum of (x) the
related Loan Group Balance as of the end of the related Due Period
and (y) the Pre-Funding Amount allocable to such Certificate Group in
the Pre-Funding Account over (ii) the aggregate Class Principal
Balance of the Offered Certificates in such Certificate Group after
giving effect to the distributions of principal on such Distribution
Date.
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
The 'Required Overcollateralization Amount' for a Certificate Group
and any Distribution Date will equal (a) prior to the related
Stepdown Date, the product of (i) % for Certificate Group F and
% for Certificate Group A and (ii) the aggregate Initial Class
Principal Balances of the Offered Certificates in such Certificate
Group as of the Closing Date; and (b) on and after such Stepdown
Date, the greater of (i) the product of % for Certificate Group
F and % for Certificate Group A and the related Loan Group
Balance as of the end of the related Due Period and (ii) the related
OC Floor; provided, however, that on each Distribution Date during
the continuance of a Cumulative Loss Event or a Trigger Event, the
related Required Overcollateralization Amount will equal the Required
Overcollateralization Amount in effect as of the Distribution Date
immediately preceding the date on which such Cumulative Loss Event or
Trigger Event first occured. See 'PREPAYMENT AND YIELD
CONSIDERATIONS' and 'DESCRIPTION OF THE
CERTIFICATES--Overcollateralization Provisions.'
Certificates Involve Risks................ An investment in the Offered Certificates, and particularly the
Notional Amount Certificates and the Subordinate Certificates,
involves material risks and should be considered only by investors
which, either alone or together with their investment advisors, have
the ability to understand such risks. See 'RISK FACTORS' beginning on
page S-12 herein and on page 13 in the Prospectus.
Optional Termination by the Servicer...... The Servicer may, at its option, terminate the Agreement on any
Distribution Date following the Due Period at the end of which the
aggregate Principal Balance of the Mortgage Loans is less than 10% of
the sum of the Principal Balances of the Initial Mortgage Loans and
Subsequent Mortgage Loans as of the Cut-Off Date (the 'Optional
Termination Date'). See 'DESCRIPTION OF THE
CERTIFICATES--Termination; Purchase of Mortgage Loans' herein.
Federal Income Tax Considerations......... Separate elections will be made to treat certain assets of the Trust
(exclusive of the Initial Interest Coverage Account, the Pre-Funding
Account and the LIBOR Carryover Reserve Fund) as a 'real estate
mortgage investment conduit' (the 'REMIC'), creating a two-tier REMIC
structure. The Offered Certificates will be designated as 'regular
interests' in a REMIC and will be treated as debt instruments of a
REMIC for federal income tax purposes.
The Holders of the Offered Certificates will be required to include
in income interest on such Certificates in accordance with the
accrual method of accounting. The Notional Amount Certificates will,
and the other Classes of Offered Certificates may, depending on their
issue price, be treated as having been issued with original issue
discount for federal income tax purposes.
The Adjustable Rate Certificates in Certificate Group F, other than
the Class A-1F Certificates (the 'Adjustable Covered Certificates')
also will represent the beneficial interest in the right to receive
payments from the LIBOR Carryover Reserve Fund pursuant to the
Interest Rate Cap Agreement (as defined herein). The LIBOR Carryover
Reserve Fund will be treated as an 'outside reserve fund' for
purposes of the Code.
Beneficial owners of the Adjustable Covered Certificates will be
treated for federal income tax purposes as having purchased an
undivided beneficial interest in regular interests in a REMIC and as
having acquired rights under the Interest Rate Cap Agreement, both to
the extent of the owner's proportionate interest in the Adjustable
Covered Certificates. An Adjustable Covered Certificateholder
generally will recognize ordinary income equal to such
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
Certificateholder's proportionate share of interest and original
issue discount, if any, accrued on the Adjustable Covered Certificate
and will take into account a proportionate share of any payments
received under the Interest Rate Cap Agreement. An Adjustable Covered
Certificateholder's income derived from payments received under the
Interest Rate Cap Agreement generally must be accounted for under the
notional principal contract regulations.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see 'FEDERAL INCOME TAX
CONSIDERATIONS' herein and in the Prospectus.
ERISA Considerations...................... The acquisition of an Offered Certificate by a pension or other
employee benefit plan (a 'Plan') subject to the Employee Retirement
Income Security Act of 1974, as amended ('ERISA'), could, in some
instances, result in a 'prohibited transaction' or other violation of
the fiduciary responsibility provisions of ERISA and Code Section
4975. Certain exemptions from the prohibited transaction rules could
be applicable to the acquisition of the Senior Certificates. Any Plan
fiduciary considering whether to purchase any Offered Certificate on
behalf of a Plan should consult with its counsel regarding the
applicability of the provisions of ERISA and the Code. See 'ERISA
CONSIDERATIONS' herein and in the Prospectus. Subject to the
considerations and conditions described under 'ERISA CONSIDERATIONS'
herein, it is expected that the Senior Certificates may be purchased
by a Plan.
Legal Investment Considerations........... Upon termination of the Funding Period, the Class A-1A, Class A-2A
and Class M-1A Certificates will constitute 'mortgage related
securities' for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ('SMMEA') so long as they are rated in one of the two
highest rating categories by at least one nationally recognized
statistical rating organization and, as such, are legal investments
for certain entities to the extent provided for in SMMEA. The other
Classes of Offered Certificates will NOT constitute 'mortgage related
securities' for purposes of SMMEA. Accordingly, many institutions
with legal authority to invest in comparably rated securities may not
be legally authorized to invest such Certificates. See 'LEGAL
INVESTMENT CONSIDERATIONS' herein and 'LEGAL INVESTMENT' in the
Prospectus.
Certificate Rating........................ It is a condition to the issuance of the Offered Certificates that
they receive ratings by (' ') and
(' ') (each a 'Rating Agency') as follows:
</TABLE>
<TABLE>
<CAPTION>
---- -----
<S> <C> <C> <C>
Senior Certificates
Class M-1F
Class M-1A
Class M-2F
Class M-2A
Class B-1F and Class B-1A
</TABLE>
<TABLE>
<S> <C>
In general, ratings address credit risk and do not address the
likelihood of prepayments. The ratings do not address the possibility
that Holders of the Notional Amount Certificates may fail to recoup
their initial investments or the likelihood that Holders of the
Adjustable Rate Certificates, other than the Class A-1F Certificates,
will receive any LIBOR Carryover. See 'RATINGS' herein and 'RISK
FACTORS--Ratings Are Not Recommendations' in the Prospectus.
</TABLE>
S-11
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following risk factors
and the risk factors set forth on page 13 of the Prospectus in connection with
the purchase of the Offered Certificates.
TRUST ASSETS ARE THE ONLY SOURCE OF CREDIT ENHANCEMENT. The subordination
of the Subordinate Certificates to the Senior Certificates, the further
subordination within the Subordinate Certificates, and the overcollateralization
and cross-collateralization provisions of the Trust are the sole sources of
protection against losses on the Mortgage Loans and other shortfalls in
available funds. If losses or other shortfalls exceed the protection afforded by
such mechanisms, Holders of the Offered Certificates affected thereby will bear
their proportionate share of such losses and shortfalls in decreasing order of
numerical priority. The Certificates represent interests only in the Trust and
do not represent interests in, or obligations of, the Seller, the Servicer, the
Trustee or any of their respective affiliates. The assets of the Trust are the
sole source of funds for distributions on the Certificates.
SUBORDINATE CERTIFICATES HAVE ADDITIONAL RISKS. The weighted average lives
of, and the yields to maturity on, the Subordinate Certificates, in increasing
order of their numerical Class designations, will be progressively more
sensitive to the rate and timing of mortgagor defaults and the severity of
ensuing losses on the Mortgage Loans in the related Loan Group. If the actual
rate and severity of losses on the related Mortgage Loans is higher than those
assumed by a Holder of Subordinate Certificate, the actual yield to maturity of
such Certificate may be lower than the yield expected by such Holder based on
such assumption. The timing of losses on the Mortgage Loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the Trust are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity. Realized Losses on the Mortgage Loans in a Loan
Group will reduce the Class Principal Balance of the related Class of
Subordinate Certificates then outstanding with the highest numerical Class
designation if and to the extent that the aggregate of the Class Principal
Balance of all Classes of Certificates in the related Certificate Group,
following all distributions on a Distribution Date, exceeds the applicable Loan
Group Balance. As a result of such reductions, less interest will accrue on such
Class of Subordinate Certificates than otherwise would be the case.
The Subordinate Certificates in a Certificate Group will not be entitled to
any principal distributions prior to the related Stepdown Date or during the
continuation of a Trigger Event for such Certificate Group (unless all of the
Certificates in such Certificate Group with a higher payment priority have been
paid in full). As a result, the weighted average lives of the Subordinate
Certificates will be longer than would be the case if distributions of principal
were to be allocated on a pro rata basis among the Senior and Subordinate
Certificates in a Certificate Group. As a result of the longer weighted average
lives of the Subordinate Certificates, the Holders of such Certificates have a
greater risk of suffering a loss on their investments.
SPECIAL RISKS ASSOCIATED WITH THE NOTIONAL AMOUNT CERTIFICATES. As the
owner of interest-only strip securities, the Holders of the Notional Amount
Certificates will be entitled to receive monthly distributions only of interest,
as described herein. Because they will not receive any distributions of
principal, the Holders of the Notional Amount Certificates will generally be
affected by prepayments, liquidations and other dispositions (including any
optional purchase described herein) of the Mortgage Loans in the related Loan
Group to a greater degree than Holders of the other Classes of Offered
Certificates. However, the Notional Amount of each Class of Notional Amount
Certificates will amortize, if at all, only with certain Classes of Certificates
that are not expected to receive principal distributions during the first 36
months. Thus, the yield sensitivities of the Notional Amount Certificates are
expected to be more stable than if such Notional Amounts were calculated based
on the amortization of the underlying Mortgage Loans directly. However, there
can be no assurance that such will be the case. In addition, a portion of the
Notional Amount of the Class IOF Certificates, and all of the Notional Amount of
the Class IOA Certificates, is calculated by reference to the Class Principal
Balance of one or more Classes of Subordinate Certificates in the related
Certificate Group. If losses on the Mortgage Loans were to be sufficiently high,
the Class Principal Balance(s) of such Class(es) of Subordinate Certificates
would be reduced, thereby reducing the Notional Amount of the applicable Class
of Notional Amount Certificates. HOLDERS OF THE NOTIONAL AMOUNT CERTIFICATES
WILL NOT BE ENTITLED TO ANY DISTRIBUTIONS AFTER THE 36TH DISTRIBUTION DATE.
RISK OF LOAN RATES REDUCING THE CERTIFICATE RATE ON THE ADJUSTABLE RATE
CERTIFICATES. The calculation of the Certificate Rate on the Adjustable Rate
Certificates in Certificate Group A is based upon (i) 1-Month LIBOR (which is
different from the rates applicable to the Mortgage Loans which are based upon
Six-Month LIBOR) and (ii) the weighted average Loan Rates of the Mortgage Loans
in Loan Group A which are subject to periodic
S-12
<PAGE>
adjustment caps, lifetime rate caps and minimum rate floors. Approximately
% and % of the Mortgage Loans (by Principal Balance) of the Statistic
Calculation Mortgage Loans in Loan Group A are 2/28 Loans and 3/27 Loans,
respectively, which, after the initial fixed rate period, adjust semi-annually
based on Six-Month LIBOR. However, the Certificate Rates on the Adjustable Rate
Certificates in Certificate Group A adjust monthly based upon 1-Month LIBOR.
Consequently, the interest which becomes due on the Mortgage Loans (net of the
Servicing Fee and the Trustee Fee) during any Due Period may not equal the
amount of interest that would accrue at 1-Month LIBOR plus the related margin on
the Adjustable Rate Certificates in Certificate Group A during the related
Interest Period. As a result, in a rising interest rate environment, collections
on the Mortgage Loans in respect of interest may be less than would be the case
if the interest rates on the Mortgage Loans were adjusted monthly.
With respect to the Adjustable Rate Certificates in Group F, the Mortgage
Loans in Loan Group F accrue interest at a fixed rate while such Certificates
accrue interest based on 1-Month LIBOR. To the extent that the Mortgage Loans in
Loan Group F with higher Loan Rates experience prepayments in full during a
period of increased 1-Month LIBOR rates, there will be less interest available
from the Mortgage Loans to cover interest due to the holders of the Adjustable
Rate Certificates in Group F. See 'PREPAYMENT AND YIELD CONSIDERATIONS.'
PREPAYMENTS MAY VARY. All of the Mortgage Loans may be prepaid in whole or
in part at any time. However, Mortgage Loans secured by first liens on Mortgaged
Properties in New York are subject to a prepayment penalty for the first 12
months following origination. In addition, Mortgage Loans secured by Mortgaged
Properties in other jurisdictions may be subject to prepayment penalties to the
extent permitted by law. Home equity loans, such as the Mortgage Loans, have
been originated in significant volume only during the past few years and the
Seller is unaware of any publicly available studies or statistics on the rate of
prepayment of such loans. Generally, home equity loans are not viewed by
borrowers as permanent financing. Accordingly, the Mortgage Loans may experience
a higher rate of prepayment than traditional loans. The Trust's prepayment
experience may be affected by a wide variety of factors, including general
economic conditions, interest rates, the availability of alternative financing
and homeowner mobility. In addition, substantially all of the Mortgage Loans
contain due-on-sale provisions and the Servicer will be required by the
Agreement to enforce such provisions unless (i) such enforcement is not
permitted by applicable law or (ii) the Servicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the related Mortgaged
Property to assume the Mortgage Loan. To the extent permitted by applicable law,
such assumption will not release the original borrower from its obligation under
any such Mortgage Loan. See 'Certain Legal Aspects of the Loans--Due-on-Sale
Clauses in Mortgage Loans' in the Prospectus.
UNDERWRITING STANDARDS MAY AFFECT PERFORMANCE. As described in the
Prospectus under 'The Seller and the Servicer--Underwriting,' the Seller's
underwriting standards generally are less stringent than those of FNMA or FHLMC
with respect to a borrower's credit history and in certain other respects. A
borrower's past credit history may not preclude the Seller from making a loan;
however, it will reduce the size (and consequently the Combined Loan-to-Value
Ratio) of the loan that the Seller is willing to make. As a result of this
approach to underwriting, the Mortgage Loans may experience higher rates of
delinquencies, defaults and foreclosures than mortgage loans underwritten in a
more traditional manner.
RISK OF EARLY DEFAULTS. Substantially all of the Initial Mortgage Loans
have been originated within 12 months prior to the Closing Date. Although little
data is available, defaults on mortgage loans, including home equity loans
similar to the Initial Mortgage Loans, are generally expected to occur with
greater frequency in the early years of the terms of mortgage loans. Liquidation
proceeds received upon liquidation of a Mortgaged Property following a default
on the related Mortgage Loan will have the same effect as a principal prepayment
on the yield to maturity of the Class of Offered Certificates receiving such
proceeds. In general, the earlier a prepayment is received, the greater will be
the effect on the yield to maturity. In addition, Holders may not be able to
reinvest such prepayment at yields equal to the yields on the Certificates of
such Holders.
BALLOON LOANS MAY ADVERSELY AFFECT PERFORMANCE. Approximately % (by
Principal Balance) of the Statistic Calculation Mortgage Loans in Loan Group F
have monthly payments of principal that will not be sufficient to amortize such
Mortgage Loans by their maturity (collectively, 'Balloon Loans'). As a result,
upon the maturity of a Balloon Loan, the Mortgagor will be required to make a
'balloon payment' which will be significantly larger than such Mortgagor's
previous monthly payments. The ability of a Mortgagor to repay a Balloon Loan at
maturity frequently depends on such Mortgagor's ability to refinance the
Mortgage Loan which, in turn, will be affected by a number of factors, including
the level of available mortgage rates at the time, the value of the related
Mortgaged
S-13
<PAGE>
Property, the Mortgagor's equity in the related Mortgaged Property, the
financial condition of the Mortgagor, the tax laws and general economic
conditions at the time.
Although a low interest rate environment may facilitate the refinancing of
a balloon payment, the receipt and reinvestment by Certificateholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing and may result in delinquencies or defaults. None of the Seller, the
Servicer or the Trustee will be obligated to provide funds to refinance any
Mortgage Loans.
SECOND LIENS CREATE RISKS. Based on appraisals at the time of origination
of each Mortgage Loan, each such Mortgage Loan will have been fully secured at
such time. However, even if the Mortgaged Properties provide adequate security
for the Mortgage Loans, substantial delays could be encountered in connection
with the liquidation of Mortgage Loans that are delinquent and resulting
shortfalls in distributions to Certificateholders could occur. Further,
liquidation expenses (such as legal fees, real estate taxes, and maintenance and
preservation expenses) will reduce the proceeds payable to Certificateholders
and thereby reduce the security for the Mortgage Loans. In the event any of the
Mortgaged Properties fail to provide adequate security for the related Mortgage
Loans, Certificateholders could experience a loss.
Approximately 6.37% (by Principal Balance) of the Statistic Calculation
Mortgage Loans in Loan Group F are secured by second liens on the related
Mortgaged Properties. All of the Statistic Calculation Mortgage Loans in Loan
Group A are secured by first liens. With respect to Mortgage Loans that are
junior in priority to liens having a first priority with respect to the related
Mortgaged Property ('First Liens'), the Servicer has the power under certain
circumstances to consent to a new mortgage lien on such Mortgaged Property
having priority over such Mortgage Loan in connection with the refinancing of
such First Lien. Mortgage Loans secured by second mortgages are entitled to
proceeds that remain from the sale of the related Mortgaged Property after any
related senior mortgage loan and prior statutory liens have been satisfied. In
the event that such proceeds are insufficient to satisfy such loans and prior
liens in the aggregate, the Trust and, accordingly, the Certificateholders, bear
(i) the risk of delay in distributions while a deficiency judgment against the
borrower is sought and (ii) the risk of loss if the deficiency judgment cannot
be obtained or is not realized upon. See 'Certain Legal Aspects of the Loans' in
the Prospectus.
GEOGRAPHIC CONCENTRATION. Approximately % (by Principal Balance) of
the Statistic Calculation Mortgage Loans in Loan Group F are secured by
Mortgaged Properties located in New York. Approximately %, % and %
(by Principal Balance) of the Statistic Calculation Mortgage Loans in Loan Group
A are secured by Mortgaged Properties located in Michigan, New York and New
Jersey, respectively. To the extent that any of those states experienced or may
experience in the future weaker economic conditions or greater rates of decline
in real estate values than the United States generally, such a concentration of
the Mortgage Loans may be expected to exacerbate the foregoing risks. The Seller
can neither quantify the impact of any recent property value declines on the
Mortgage Loans nor predict whether, to what extent or for how long such declines
may continue.
THE SUBSEQUENT MORTGAGE LOANS. The Seller will not select Subsequent
Mortgage Loans in a manner that it believes is adverse to the interest of the
Certificateholders. However, Subsequent Mortgage Loans sold to the Trust may
have been originated using credit criteria different from those which were
applied to the Initial Mortgage Loans and may be of a different credit quality.
Therefore, following the transfer of Subsequent Mortgage Loans to the Trust, the
aggregate characteristics of the Mortgage Loans then held in the Trust may vary
from those of the Initial Mortgage Loans. See 'Description of the Mortgage
Loans--Conveyance of Subsequent Mortgage Loans' herein.
In the event that at the end of the Funding Period there is an Excess
Funding Amount, the Holders of the Class A-1F Certificates in the case of
Certificate Group F and the Holders of the Class A-2A Certificates in the case
of Certificate Group A will receive an additional distribution allocable to
principal in an amount equal to the applicable Excess Funding Amount.
The ability of the Trust to invest in Subsequent Mortgage Loans is largely
dependent upon the ability of the Seller to originate and/or purchase additional
loans. The ability of the Seller to originate and/or purchase additional loans
may be affected as a result of a variety of social and economic factors.
Economic factors include interest rates, unemployment levels, the rate of
inflation and consumer perception of economic conditions generally.
S-14
<PAGE>
RECENT DEVELOPMENTS. Several class-action lawsuits against a number of
consumer finance companies have been filed recently alleging that the
compensation of mortgage brokers through the payment of a yield spread premium
violates various federal and state consumer protection laws. On March 18, 1997,
the Seller received notice that it had been named in a lawsuit in Federal
District Court, E.D.N.Y., alleging that the Seller's compensation of mortgage
brokers by means of a yield spread premium violates, among other things, the
Real Estate Settlement Procedures Act ('RESPA'). The complaint seeks (i)
certification of a class of plaintiffs, (ii) an injunction against payment of
yield spread premiums by the Seller and (iii) unspecified compensatory and
punitive damages (including attorney's fees). The Seller believes it has
meritorious defenses and intends to defend this suit, but the Seller cannot
estimate with any certainty its ultimate legal or financial liability, if any,
with respect to the alleged claims. On July 7, 1997, the Seller filed an answer
to the plaintiff's amended complaint.
On or about February 10, 1998, the Company received notice that it had been
named in a lawsuit filed in the United States District Court for the Northern
District of Mississippi--Greenville Division, alleging that the Company's
compensation of mortgage brokers by means of yield spread premiums violates
RESPA. The complaint seeks (i) certification of a class of plaintiffs and (ii)
unspecified compensatory damages. Management believes the Company has
meritorious defenses and intends to defend this suit, but the Company has not
yet answered the complaint and cannot estimate with any certainty its ultimate
legal or financial liability, if any, with respect to the alleged claims.
BOOK-ENTRY REGISTRATION MAY AFFECT LIQUIDITY. Issuance of the Offered
Certificates in book-entry form may reduce the liquidity of such Certificates in
the secondary trading market since investors may be unwilling to purchase
Offered Certificates for which they cannot obtain physical certificates.
Since transactions in the Offered Certificates can be effected only through
DTC, Cedel, Euroclear, participating organizations, indirect participants and
certain banks, the ability of a Certificate Owner to pledge an Offered
Certificate to persons or entities that do not participate in the DTC, Cedel or
Euroclear system or otherwise to take actions in respect of such Certificates,
may be limited due to lack of a physical certificate representing the Offered
Certificates.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Offered Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Certificate Owners either directly or
indirectly through indirect participants. See 'Description of the
Certificates--Book-Entry Certificates' herein.
S-15
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The Mortgage Loans will include (i) the mortgage loans identified as of
, 199 , and described herein (the 'Statistic Calculation Mortgage
Loans'), (ii) additional closed-end fixed and adjustable rate home equity loans
to be delivered on the Closing Date (together with the Statistic Calculation
Mortgage Loans, the 'Initial Mortgage Loans') and (iii) additional mortgage
loans to be purchased by the Trust from the Seller from time to time on or prior
to , 199 (the 'Subsequent Mortgage Loans, 'and together with the
Initial Mortgage Loans, the 'Mortgage Loans').
The Mortgage Loans will be divided into two groups (each, a 'Loan Group',
and each constituting a separate sub-trust): 'Loan Group F' and 'Loan Group A'.
Each Mortgage Loan in Loan Group F will bear interest at a fixed rate that is
calculated on the 'simple interest' method. Certain of the Mortgage Loans in
Loan Group F will have original terms to stated maturity of up to 15 years and
amortization schedules of up to 30 years ('Balloon Loans'), leaving a
substantial payment due at the stated maturity (each, a 'Balloon Payment'). The
Mortgage Loans in Loan Group F are secured by first or second liens on the
related Mortgaged Properties.
Each Mortgage Loan in Loan Group A will bear interest at an adjustable rate
(each an 'ARM') that is calculated on the 'simple interest' method. The Loan
Rate borne by each ARM is subject to adjustment on the date set forth in the
related Mortgage Note and at regular intervals thereafter (each, a 'Change
Date') to equal the sum of (i) the applicable index (the 'Loan Index') and (ii)
the number of basis points set forth in such Mortgage Note (the 'Gross Margin'),
subject to rounding and to the effects of the applicable Periodic Cap, the
applicable Lifetime Cap and the applicable Lifetime Floor. The 'Periodic Cap'
limits changes in the Loan Rate for each ARM on each Change Date. The 'Lifetime
Cap' is the maximum Loan Rate that may be borne by an ARM at any point. The
'Lifetime Floor' is the minimum Loan Rate that may be borne by an ARM at any
point. The ARMs do not provide for negative amortization. The Mortgage Loans in
Loan Group A are secured by first liens on the related Mortgaged Properties.
For all of the Statistic Calculation Mortgage Loans in Loan Group A the
Loan Index is the London interbank offered rate for six-month United States
dollar deposits ('Six-month LIBOR'); and the Change Dates occur every six months
after the initial Change Date. The reference for each applicable Loan Index and
the date prior to a Change Date as of which such Loan Index is determined as set
forth in the related Mortgage Note. Approximately % and % (by Principal
Balance) of the Statistic Calculation Mortgage Loans in Loan Group A have
initial Change Dates that are 24 months after origination ('2/28 Loans') and 36
months after origination ('3/27 Loans'), respectively. The Periodic Cap for all
of the ARMs is 1.00%. However, the Periodic Cap for the initial Change Date for
the 2/28 Loans and the 3/27 Loans generally is 3.00%.
As of the Cut-off Date, substantially all of the Statistic Calculation
Mortgage Loans in Loan Group A were accruing interest at Loan Rates that are
below the sum of the related Gross Margin and the Loan Index that would
otherwise have been applicable. On the first Change Date for each such Mortgage
Loan, the related Loan Rate will adjust to the sum of the applicable Loan Index
and the related Gross Margin subject to the application of the related Periodic
Cap, Lifetime Cap and Lifetime Floor.
STATISTICAL INFORMATION
Set forth below is certain approximate statistical information as of the
Cut-off Date regarding the Statistic Calculation Mortgage Loans in each Loan
Group. On the Closing Date additional closed-end, fixed and adjustable rate home
equity loans will be delivered to the Trust for inclusion in Loan Group F and
Loan Group A, respectively. In addition, prior to the Closing Date, Statistic
Calculation Mortgage Loans may be removed from either Loan Group and other
Mortgage Loans may be substituted therefor. The Seller believes that the
information set forth herein with respect to each Loan Group as presently
constituted is representative of the characteristics of the Initial Mortgage
Loans in each Loan Group as it will be constituted at the Closing Date, although
certain characteristics of the Initial Mortgage Loans in either Loan Group may
vary. The sum of the percentage columns in the following tables may not equal
100% due to rounding.
S-16
<PAGE>
LOAN GROUP F. As of the Cut-off Date: the Principal Balances ranged from
$ to $ ; the average Principal Balance was $ ; the Loan Rates
ranged from % to % per annum; the weighted average Loan Rate was
% per annum; the original Combined Loan-to-Value Ratios ranged from %
to %; the weighted average original Combined Loan-to-Value Ratio was
%; the original terms to stated maturity ranged from months to 360
months; the weighted average original term to stated maturity was months; the
remaining terms to stated maturity ranged from months to 360 months; the
weighted average remaining term to stated maturity was 308 months; the loan ages
ranged from 0 months to months; and the weighted average loan age was 1 month;
% (by Principal Balance) are Balloon Loans.
CUT-OFF DATE PRINCIPAL BALANCES
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
RANGE OF CUT-OFF DATE CALCULATION CALCULATION CALCULATION
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
$ 1.00-$ 25,000.00............ $ %
$ 25,000.01-$ 50,000.00............
$ 50,000.01-$ 75,000.00............
$ 75,000.01-$100,000.00............
$100,000.01-$125,000.00............
$125,000.01-$150,000.00............
$150,000.01-$175,000.00............
$175,000.01-$200,000.00............
$200,000.01-$225,000.00............
$225,000.01-$250,000.00............
$250,000.01-$275,000.00............
$275,000.01-$300,000.00............
$300,000.01-$325,000.00............
$325,000.01-$350,000.00............
$350,000.01-$375,000.00............
$375,000.01-$400,000.00............
$425,001.01-$450,000.00............
$675,001.01-$700,000.00............
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
S-17
<PAGE>
GEOGRAPHIC DISTRIBUTION BY STATE(1)
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
CALCULATION CALCULATION CALCULATION
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
Arizona............................ $ %
Arkansas...........................
Colorado...........................
Connecticut........................
Delaware...........................
District of Columbia...............
Florida............................
Georgia............................
Illinois...........................
Indiana............................
Kentucky...........................
Maine..............................
Maryland...........................
Massachusetts......................
Michigan...........................
Minnesota..........................
Mississippi........................
Missouri...........................
Nebraska...........................
Nevada.............................
New Hampshire......................
New Jersey.........................
New Mexico.........................
New York...........................
North Carolina.....................
Ohio...............................
Oklahoma...........................
Oregon.............................
Pennsylvania.......................
Rhode Island.......................
South Carolina.....................
Tennessee..........................
Utah...............................
Vermont............................
Virginia...........................
Washington.........................
West Virginia......................
Wisconsin..........................
------ ------------------ -------
Total......................... 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
- ------------------
(1) Determined by property address designated as such in the related Mortgage.
S-18
<PAGE>
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS(1)
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
RANGE OF ORIGINAL COMBINED CALCULATION CALCULATION CALCULATION
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
5.01%-10.00%...................... $ %
10.01%-15.00%......................
15.01%-20.00%......................
20.01%-25.00%......................
25.01%-30.00%......................
30.01%-35.00%......................
35.01%-40.00%......................
40.01%-45.00%......................
45.01%-50.00%......................
50.01%-55.00%......................
55.01%-60.00%......................
60.01%-65.00%......................
65.01%-70.00%......................
70.01%-75.00%......................
75.01%-80.00%......................
80.01%-85.00%......................
85.01%-90.00%......................
90.01%-95.00%......................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
- ------------------
(1) The original Combined Loan-to-Value Ratios ('CLTV') shown above are equal,
with respect to each Statistic Calculation Mortgage Loan, to (i) the sum of
(a) the original principal balance of such Mortgage Loan at the date of
origination plus (b) the remaining balance of the senior lien(s), if any,
at the date of origination of such Mortgage Loan divided by the value of
the related Mortgaged Property, based upon the lesser of the appraisal made
at the time of origination of such Mortgage Loan or the purchase price of
such Mortgaged Property (where the proceeds are used to purchase the
Mortgaged Property). No assurance can be given that the values of such
Mortgaged Properties have remained or will remain at their levels as of the
dates of origination of the related Statistic Calculation Mortgage Loans.
If the residential real estate market should experience an overall decline
in property values such that the outstanding balances of such Mortgage
Loans together with the outstanding balances of the related first liens
become equal to or greater than the value of the related Mortgaged
Properties, actual losses could be higher than those now generally
experienced in the mortgage lending industry.
S-19
<PAGE>
CUT-OFF DATE LOAN RATES
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
RANGE OF CUT-OFF DATE CALCULATION CALCULATION CALCULATION
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
7.001%- 7.500% ................... $ %
7.501%- 8.000% ...................
8.001%- 8.500% ...................
8.501%- 9.000% ...................
9.001%- 9.500% ...................
9.501%-10.000% ...................
10.001%-10.500% ...................
10.501%-11.000% ...................
11.001%-11.500% ...................
11.501%-12.000% ...................
12.001%-12.500% ...................
12.501%-13.000% ...................
13.001%-13.500% ...................
13.501%-14.000% ...................
14.001%-14.500% ...................
14.501%-15.000% ...................
15.001%-15.500% ...................
15.501%-16.000% ...................
16.001%-16.500% ...................
16.501%-17.000% ...................
------ ------------------ -------
Total ........................ $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
S-20
<PAGE>
ORIGINAL TERM TO STATED MATURITY
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
RANGE OF ORIGINAL TERMS CALCULATION CALCULATION CALCULATION
TO STATED MATURITY (IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
0- 60............................ $ %
61-120............................
121-180............................
181-240............................
241-300............................
301-360............................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
REMAINING MONTHS TO STATED MATURITY
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
RANGE OF REMAINING MONTHS CALCULATION CALCULATION CALCULATION
TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
0- 60............................ $ %
61-120............................
121-180............................
181-240............................
241-300............................
301-360............................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
MONTHS SINCE ORIGINATION
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
CALCULATION CALCULATION CALCULATION
MONTHS SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
0................................ $ %
1-6 ...............................
7-12...............................
13-18..............................
19-24..............................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
S-21
<PAGE>
PROPERTY TYPE
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
CALCULATION CALCULATION CALCULATION
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
Single Family...................... $ %
Two-to-Four Family.................
Five-to-Eight Family...............
Mixed Use..........................
Condominium........................
Mobile Home treated as real
property.........................
Coop...............................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
OCCUPANCY TYPE(1)
LOAN GROUP F
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
CALCULATION CALCULATION CALCULATION
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
Owner Occupied..................... $ %
Non Owner Occupied.................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
- ------------------
(1) Based upon representations made by the borrowers at the time of origination
of such Mortgage Loans.
S-22
<PAGE>
LOAN GROUP A. As of the Cut-off Date: the Principal Balances ranged from
$ to $ ; the average Principal Balance was $ ; the current Loan
Rates ranged from % to % per annum; the weighted average current Loan
Rate was % per annum; the original Loan-to-Value Ratios ranged from %
to %; the weighted average original Loan-to-Value Ratio was %; the
original terms to stated maturity ranged from months to 360 months; the
weighted average original term to stated maturity was 360 months; the remaining
terms to stated maturity ranged from months to 360 months; the weighted
average remaining term to stated maturity was months; the loan ages ranged
from 0 months to months; the weighted average loan age was 1 month; the Gross
Margins ranged from % to %; the weighted average Gross Margin was
%; the Lifetime Floors ranged from % to %; the weighted average
Lifetime Floor was %; the Lifetime Caps ranged from % to %; the
weighted average Lifetime Cap was %; the weighted average current Loan Rate
of the 2/28 Loans and 3/27 Loans was % per annum; the weighted average
number of months to the next Change Date for the 2/28 Loans and 3/27 Loans was
months; and the weighted average number of months to the next Change Date for
the remaining ARMs was months.
CUT-OFF DATE PRINCIPAL BALANCES
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
RANGE OF CUT-OFF DATE CALCULATION CALCULATION CALCULATION
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
$ 1-$ 25,000.................. $ %
$ 25,001-$ 50,000..................
$ 50,001-$ 75,000..................
$ 75,001-$100,000..................
$100,001-$125,000..................
$125,001-$150,000..................
$150,001-$175,000..................
$175,001-$200,000..................
$200,001-$225,000..................
$225,001-$250,000..................
$250,001-$275,000..................
$275,001-$300,000..................
$300,001-$325,000..................
$325,001-$350,000..................
$650,001-$675,000..................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
S-23
<PAGE>
GEOGRAPHIC DISTRIBUTION BY STATE(1)
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
CALCULATION CALCULATION CALCULATION
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
Arizona............................ $ %
Arkansas...........................
Colorado...........................
Connecticut........................
Delaware...........................
District of Columbia...............
Florida............................
Georgia............................
Illinois...........................
Indiana............................
Kentucky...........................
Maine..............................
Maryland...........................
Massachusetts......................
Michigan...........................
Minnesota..........................
Missouri...........................
New Hampshire......................
New Jersey.........................
New York...........................
North Carolina.....................
Ohio...............................
Pennsylvania.......................
Rhode Island.......................
South Carolina.....................
Tennessee..........................
Virginia...........................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
- ------------------
(1) Determined by property address designated as such in the related Mortgage.
S-24
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS(1)
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
RANGE OF ORIGINAL CALCULATION CALCULATION CALCULATION
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
10.01%-20.00%...................... $ %
20.01%-30.00%......................
30.01%-40.00%......................
40.01%-50.00%......................
50.01%-60.00%......................
60.01%-70.00%......................
70.01%-80.00%......................
80.01%-90.00%......................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
- ------------------
(1) The original Loan-to-Value Ratios ('LTV') shown above are equal, with
respect to each Statistic Calculation Mortgage Loan, to the original
principal balance of such Mortgage Loan at the date of origination divided
by the value of the related Mortgaged Property, based upon the lesser of the
appraisal made at the time of origination of such Mortgage Loan or the
purchase price for such Mortgaged Property (where the proceeds are used to
purchase the Mortgaged Property). No assurance can be given that the values
of such Mortgaged Properties have remained or will remain at their levels as
of the dates of origination of the related Statistic Calculation Mortgage
Loans. If the residential real estate market should experience an overall
decline in property values such that the outstanding balances of such
Mortgage Loans become equal to or greater than the value of the related
Mortgaged Properties, the actual losses could be higher than those now
generally experienced in the mortgage lending industry.
S-25
<PAGE>
CUT-OFF DATE LOAN RATES
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
RANGE OF CUT-OFF DATE CALCULATION CALCULATION CALCULATION
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
7.001%- 7.500%.................... $ %
7.501%- 8.000%....................
8.001%- 8.500%....................
8.501%- 9.000%....................
9.001%- 9.500%....................
9.501%-10.000%....................
10.001%-10.500%....................
10.501%-11.000%....................
11.001%-11.500%....................
11.501%-12.000%....................
12.001%-12.500%....................
12.501%-13.000%....................
13.001%-13.500%....................
13.501%-14.000%....................
14.001%-14.500%....................
14.501%-15.000%....................
15.001%-15.500%....................
15.501%-16.000%....................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
ORIGINAL TERM TO STATED MATURITY
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
ORIGINAL TERMS CALCULATION CALCULATION CALCULATION
TO STATED MATURITY (IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
180.............................. $ %
240..............................
360..............................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
S-26
<PAGE>
REMAINING MONTHS TO STATED MATURITY
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
RANGE OF REMAINING CALCULATION CALCULATION CALCULATION
MONTHS TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
121-180............................ $ %
181-240............................
301-360............................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
MONTHS SINCE ORIGINATION
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
CALCULATION CALCULATION CALCULATION
MONTHS SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
0................................ $ %
1-6................................
7-12...............................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
PROPERTY TYPE
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
CALCULATION CALCULATION CALCULATION
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
Single Family...................... $ %
Two-to-Four Family.................
Condominium........................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
OCCUPANCY TYPE
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
CALCULATION CALCULATION CALCULATION
OCCUPANCY STATUS(1) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
Owner Occupied..................... $ %
Non-Owner Occupied.................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
- ------------------------
(1) Based upon representations made by the borrowers at the time of origination
of such Mortgage Loans.
S-27
<PAGE>
GROSS MARGIN
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
CALCULATION CALCULATION CALCULATION
RANGE OF GROSS MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
3.001%- 3.500%.................... $ %
3.501%- 4.000%....................
4.001%- 4.500%....................
4.501%- 5.000%....................
5.001%- 5.500%....................
5.501%- 6.000%....................
6.001%- 6.500%....................
6.501%- 7.000%....................
7.001%- 7.500%....................
7.501%- 8.000%....................
8.001%- 8.500%....................
8.501%- 9.000%....................
9.001%- 9.500%....................
9.501%-10.000%....................
10.001%-10.500%....................
10.501%-11.000%....................
11.501%-12.000%....................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
LIFETIME CAP
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
CALCULATION CALCULATION CALCULATION
RANGE OF LIFETIME CAPS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
13.001%-13.500%.................... $ %
13.501%-14.000%....................
14.001%-14.500%....................
14.501%-15.000%....................
15.001%-15.500%....................
15.501%-16.000%....................
16.001%-16.500%....................
16.501%-17.000%....................
17.001%-17.500%....................
17.501%-18.000%....................
18.001%-18.500%....................
18.501%-19.000%....................
19.001%-19.500%....................
19.501%-20.000%....................
20.001%-20.500%....................
20.501%-21.000%....................
21.001%-21.500%....................
21.501%-22.000%....................
22.001%-22.500%....................
22.501%-23.000%....................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
S-28
<PAGE>
LIFETIME FLOORS
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
CALCULATION CALCULATION CALCULATION
RANGE OF LIFETIME FLOORS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
7.001%- 7.500%.................... $ %
7.501%- 8.000%....................
8.001%- 8.500%....................
8.501%- 9.000%....................
9.001%- 9.500%....................
9.501%-10.000%....................
10.001%-10.500%....................
10.501%-11.000%....................
11.001%-11.500%....................
11.501%-12.000%....................
12.001%-12.500%....................
12.501%-13.000%....................
13.001%-13.500%....................
13.501%-14.000%....................
14.001%-14.500%....................
14.501%-15.000%....................
15.001%-15.500%....................
15.001%-16.000%....................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
MONTH OF NEXT CHANGE DATE
LOAN GROUP A
<TABLE>
<CAPTION>
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
STATISTIC STATISTIC STATISTIC
CALCULATION CALCULATION CALCULATION
MONTH OF NEXT CHANGE DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
May 1998........................... $ %
June 1998..........................
July 1998..........................
August 1998........................
September 1998.....................
October 1998.......................
April 1999.........................
September 1999.....................
October 1999.......................
November 1999......................
December 1999......................
January 2000.......................
February 2000......................
March 2000.........................
April 2000.........................
December 2000......................
January 2001.......................
------ ------------------ -------
Total......................... $ 100.00%
------ ------------------ -------
------ ------------------ -------
</TABLE>
S-29
<PAGE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The Seller expects to sell Subsequent Mortgage Loans to the Trust for Loan
Group F and Loan Group A during the Funding Period. The purchase price for such
Subsequent Mortgage Loans will equal the outstanding principal balances thereof
as of the related Cut-off Dates and will be paid by withdrawal of funds on
deposit in the Pre-Funding Account. The Subsequent Mortgage Loans may have
characteristics which differ from the Mortgage Loans initially included in the
applicable Loan Group. Accordingly, the statistical characteristics of the
Mortgage Loans in the Trust will vary upon the acquisition of Subsequent
Mortgage Loans.
The obligation of the Trust to purchase Subsequent Mortgage Loans on any
date during the Funding Period (each date on which such a purchase occurs is a
'Subsequent Transfer Date') is subject to the following requirements: (i) such
Subsequent Mortgage Loan may not be 30 or more days contractually delinquent as
of the related Cut-off Date; (ii) the remaining term to stated maturity of such
Subsequent Mortgage Loan will not exceed 30 years for fully amortizing loans or
15 years for 'Balloon Loans' in Loan Group F; (iii) such Subsequent Mortgage
Loan will be secured by a Mortgage in a first lien position for Loan Group A or
a first or second lien position for Loan Group F; and (iv) such Subsequent
Mortgage Loan will not have a Loan Rate less than % for Loan Group F and
% for Loan Group A.
Following the addition of the Subsequent Mortgage Loans to each Loan Group,
the Mortgage Loans (including the applicable Subsequent Mortgage Loans, if any)
in each Loan Group will have the following characteristics:
<TABLE>
<S> <C>
LOAN GROUP F
Weighted Average Loan Rate.................................... At least %
Weighted Average Remaining
Term to Stated Maturity..................................... At least months
Weighted Average Original
Combined Loan-to-Value Ratio................................ Not more than %
Balloon Loans................................................. Not more than %
Principal Balance............................................. Not more than $
State concentration........................................... Not more than %
Zip code concentration........................................ Not more than %
Non-owner occupied............................................ Not more than %
Second liens.................................................. Not more than %
LOAN GROUP A
Weighted Average Loan Rate.................................... At least %
Weighted Average Remaining
Term to Stated Maturity..................................... At least months
Weighted Average Original
Loan-to-Value Ratio......................................... Not more than %
Principal Balance............................................. Not more than $
State concentration........................................... Not more than %
Zip code concentration........................................ Not more than %
Non-owner occupied............................................ Not more than %
First liens................................................... 100%
</TABLE>
S-30
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The rate of principal payments on the Offered Certificates, the aggregate
amount of distributions on the Offered Certificates and the yield to maturity of
the Offered Certificates will be related to the rate and timing of payments of
principal, and the rate and timing of defaults and the severity of the resulting
Realized Losses, on the Mortgage Loans in the related Loan Group. The rate of
principal payments on the Mortgage Loans will in turn be affected by their
amortization schedules and by the rate of principal prepayments (including for
this purpose prepayments resulting from refinancing, liquidations of the
Mortgage Loans due to defaults, casualties, condemnations and repurchases by the
Seller or the Servicer). The Mortgage Loans may be prepaid by the Mortgagors at
any time. However, Mortgage Loans secured by first liens on Mortgaged Properties
in New York are subject to a prepayment penalty for the first 12 months
following origination. In addition, Mortgage Loans secured by Mortgaged
Properties in other jurisdictions may be subject to prepayment penalties to the
extent permitted by law.
THE CERTIFICATE RATES
The Certificate Rate for each Class of Offered Certificates, other than the
Notional Amount Certificates, is subject to the applicable Available Funds Cap.
Each Available Funds Cap on any Distribution Date is determined, in part, by
reference to the weighted average Net Loan Rate of the Mortgage Loans in the
related Loan Group in effect at the beginning of the related Due Period. All of
the Loan Rates on the Mortgage Loans in Loan Group F are fixed for the lives of
such Mortgage Loans. If Mortgage Loans bearing higher Loan Rates were to prepay
at rates faster than Mortgage Loans with lower Loan Rates, the Available Funds
Cap for Loan Group F would be lower than otherwise would be the case. There is
no mechanism to compensate the holders of the Fixed Rate Certificates if the
related Certificate Rates are limited by the applicable Available Funds Cap.
The yield to investors in the Adjustable Rate Certificates will be
sensitive to, among other things, the level of 1-Month LIBOR and, in the case of
the Group A Certificates, the levels of the Loan Index. A majority (by Principal
Balance) of the Statistic Calculation Mortgage Loans in Loan Group A are 2/28
Loans and 3/27 Loans which will bear interest at fixed Loan Rates for 24 months
or 36 months after origination of such Mortgage Loans. Although each of the ARMs
bears interest at an adjustable rate, such rate is subject to a Periodic Rate
Cap, a Lifetime Floor and a Lifetime Cap. If the Loan Index increases
substantially between Change Dates, the adjusted Loan Rate on the related
Mortgage Loan may not equal the Loan Index plus the related Gross Margin due to
the constraint of such caps and floors. In such event, the related Loan Rate
will be less than would have been the case in the absence of such caps. In
addition, the Loan Rate applicable to any Change Date will be based on the Loan
Index related to the Change Date. Thus, if the value of the Loan Index with
respect to a Mortgage Loan rises, the lag in time before the corresponding Loan
Rate increases will, all other things being equal, slow the upward adjustment of
the Available Funds Cap for Loan Group A. Furthermore, Mortgage Loans that have
not reached their first Change Date are more likely to be subject to the
applicable Periodic Rate Cap on their first Change Date. See 'DESCRIPTION OF THE
MORTGAGE LOANS' herein. Although the Holders of the Adjustable Rate
Certificates, other than the Class A-1F Certificates, will be entitled to
receive the related LIBOR Carryover to the extent funds are available therefor
as described herein, there is no assurance that sufficient funds will be
available therefor. The ratings on the Adjustable Rate Certificates, other than
the Class A-1F Certificates, do not address the likelihood of the payment of any
LIBOR Carryover.
Although the Loan Rates on the Mortgage Loans in Loan Group A are subject
to adjustment, the Loan Rates adjust less frequently than 1-Month LIBOR and
adjust by reference to the Loan Index. Changes in 1-Month LIBOR may not
correlate with changes in the Loan Index and either may not correlate with
prevailing interest rates. It is possible that an increased level of 1-Month
LIBOR could occur simultaneously with a lower level of prevailing interest
rates, which would be expected to result in faster prepayments, thereby reducing
the weighted average life of one or more Classes of Group A Certificates.
SUBORDINATE CERTIFICATES
The Subordinate Certificates in a Certificate Group provide credit
enhancement for the Senior Certificates in such Certificate Group and may absorb
losses on the Mortgage Loans in the related Loan Group. The weighted average
lives of, and the yields to maturity on, the Subordinate Certificates, in
increasing order of their numerical Class designations, will be progressively
more sensitive to the rate and timing of mortgagor defaults and the severity of
ensuing losses on the Mortgage Loans in the related Loan Group. If the actual
rate and severity of losses on such Mortgage Loans is higher than those assumed
by a Holder of Subordinate Certificates, the actual
S-31
<PAGE>
yield to maturity on such Holder's Certificate may be lower than the yield
expected by such Holder based on such assumption. The timing of losses on the
Mortgage Loans in the related Loan Group also will affect an investor's actual
yield to maturity, even if the rate of defaults and severity of losses over the
life of the Trust are consistent with an investor's expectations. In general,
the earlier a loss occurs, the greater the effect on an investor's yield to
maturity. Realized Losses on the Mortgage Loans in a Loan Group will reduce the
Class Principal Balance of the Class of Subordinate Certificates then
outstanding in the related Certificate Group with the highest numerical Class
designation if and to the extent that the aggregate of the Class Principal
Balances of all Classes of Certificates in such Certificate Group, following all
distributions on a Distribution Date, exceeds the related Loan Group Balance. As
a result of such reductions, less interest will accrue on such Class of
Subordinate Certificates than otherwise would be the case.
The Basic Principal Amount includes the net proceeds in respect of
principal received upon liquidation of a Liquidated Mortgage Loan. If such net
proceeds are less than the unpaid principal balance, the applicable Loan Group
Balance will decline more than the aggregate Class Principal Balance of the
Offered Certificates in the related Certificate Group, thereby reducing the
Overcollateralization Amount for such Certificate Group. If such difference is
not covered by the applicable Overcollateralization Amount, the application of
Excess Interest, or the cross-collateralization provisions, the Class of
Subordinate Certificates in such Certificate Group then outstanding with the
highest numerical Class designation will bear such loss. In addition, the
Subordinate Certificates in a Certificate Group will not be entitled to any
principal distributions prior to the related Stepdown Date or during the
continuation of a Cumulative Loss Event or Trigger Event for such Certificate
Group (unless all of the Certificates in such Certificate Group with a higher
payment priority have been paid in full). Because of the disproportionate
distribution of principal of the Senior Certificates, depending on the timing of
Realized Losses, the Subordinate Certificates in a Certificate Group may bear a
disproportionate percentage of the Realized Losses on the related Mortgage
Loans.
For all purposes, the Class B Certificates in a Certificate Group will be
deemed to have the highest numerical Class designation and the lowest payment
priority of any Class of Subordinate Certificates in such Certificate Group.
YIELD SENSITIVITY OF THE NOTIONAL AMOUNT CERTIFICATES
As the owner of interest-only strip securities, the Holders of the Notional
Amount Certificates will be entitled to receive monthly distributions only of
interest, as described herein. Because they will not receive any distributions
of principal, the Holders of the Notional Amount Certificates will generally be
affected by prepayments, liquidations and other dispositions (including optional
purchases described herein) of the Mortgage Loans in the related Loan Group to a
greater degree than Holders of the other Classes of Offered Certificates.
However, the Notional Amount of each Class of Notional Amount Certificates will
amortize, if at all, only with certain Classes of Certificates that are not
expected to receive principal distributions during the first 36 months. Thus,
the yield sensitivities of the Notional Amount Certificates is likely to be more
stable than if such Notional Amount were calculated based on the amortization of
the underlying Mortgage Loans directly. However, there can be no assurance that
such will be the case. In addition, a portion of the Notional Amount of the
Class IOF Certificates, and all of the Notional Amount of the Class IOA
Certificates, is calculated by reference to the Class Principal Balance of one
or more Classes of Subordinate Certificates in the related Certificate Group. If
losses on the Mortgage Loans were to be sufficiently high, the Class Principal
Balance(s) of such Class(es) of Subordinate Certificates would be reduced,
thereby reducing the Notional Amount of the applicable Class of Notional Amount
Certificates. HOLDERS OF THE NOTIONAL AMOUNT CERTIFICATES WILL NOT BE ENTITLED
TO ANY DISTRIBUTIONS AFTER THE 36TH DISTRIBUTION DATE.
PREPAYMENT CONSIDERATIONS
Prepayments, liquidations and purchases of the Mortgage Loans (including
any optional purchase by the Servicer of a Delinquent Mortgage Loan and any
optional purchase of the remaining Mortgage Loans in connection with the
termination of the Trust, in each case as described herein) will result in
distributions on the related Class or Classes of Offered Certificates then
entitled to distributions of principal which would otherwise be distributed over
the remaining terms of such Mortgage Loans. Since the rate of payment of
principal of the Mortgage Loans will depend on future events and a variety of
factors, no assurance can be given as to such rate or the rate of principal
prepayments. The extent to which the yield to maturity of a Class of Offered
Certificates in either Certificate Group may vary from the anticipated yield
will depend upon the degree to which a
S-32
<PAGE>
Certificate of such Class is purchased at a discount or premium, and the degree
to which the timing of payments thereon is sensitive to prepayments,
liquidations and purchases of the related Mortgage Loans.
The rate of prepayment on the Mortgage Loans cannot be predicted. Home
equity loans such as the Mortgage Loans have been originated in significant
volume only during the past few years. Generally, home equity loans are not
viewed by borrowers as permanent financing. Accordingly, the Mortgage Loans may
experience a higher rate of prepayment than traditional first mortgage loans.
The prepayment experience of the Trust with respect to the Mortgage Loans may be
affected by a wide variety of factors, including economic conditions, prevailing
interest rate levels, the availability of alternative financing and homeowner
mobility and changes affecting the deductibility for Federal income tax purposes
of interest payments on home equity loans. The increased availability of credit
to borrowers with impaired or limited credit profiles may affect the prepayment
experience on the Mortgage Loans. As borrowers re-establish or establish an
acceptable credit profile, such borrowers may be able to refinance their loans
at lower rates reflecting their improved credit profiles. Substantially all of
the Mortgage Loans contain 'due-on-sale' provisions and the Servicer is required
by the Agreement to enforce such provisions, unless such enforcement is not
permitted by applicable law. The enforcement of a 'due-on-sale' provision will
have the same effect as a prepayment of the related Mortgage Loan. See 'CERTAIN
LEGAL ASPECTS OF LOANS--Due-on-Sale Clauses in Home Equity Loans' in the
Prospectus.
As with fixed rate obligations generally, the rate of prepayment on a pool
of mortgage loans with fixed rates such as the Mortgage Loans in Loan Group F is
affected by prevailing market rates for mortgage loans of a comparable term and
risk level. When the market interest rate is below the mortgage coupon,
mortgagors may have an increased incentive to refinance their mortgage loans.
Depending on prevailing market rates, the future outlook for market rates and
economic conditions generally, some mortgagors may sell or refinance mortgaged
properties in order to realize their equity in the mortgaged properties, to meet
cash flow needs or to make other investments.
All of the Mortgage Loans in Loan Group A are ARMs. As is the case with
conventional fixed-rate mortgage loans, the ARMs may be subject to a greater
rate of principal prepayments in a declining interest rate environment. For
example, if prevailing interest rates fall significantly, ARMs could be subject
to higher prepayment rates than if prevailing interest rates remain constant
because the availability of fixed-rate mortgage loans at competitive interest
rates may encourage mortgagors to refinance their ARMs to 'lock in' a lower
fixed interest rate. The 2/28 Loans and 3/27 Loans may become subject to higher
prepayment rates as such loans near their respective initial Change Dates, even
if prevailing interest rates for mortgage loans of a comparable term and risk
level are at or even slightly above the Loan Rates, as the borrowers attempt to
avoid increases in their monthly payments. However, no assurance can be given as
to the level of prepayments that the Mortgage Loans will experience.
In addition to the foregoing factors affecting the weighted average lives
of the Offered Certificates, the use of Excess Interest to pay principal of the
Offered Certificates to the extent required by the Agreement will result in
acceleration of the Class A-1F and Class A-2A Certificates, as applicable,
relative to the amortization of the related Mortgage Loans in the early months
of the transaction and may accelerate the first date on which each other Class
of Offered Certificates in the applicable Certificate Group will begin to
receive distributions of principal. This acceleration feature creates
overcollateralization which results from the excess of the Loan Group Balance
over the aggregate Class Principal Balance of the Certificates in the applicable
Certificate Group. Once the required level of overcollateralization for a
Certificate Group is reached, the acceleration feature will cease, unless
necessary to maintain the required level of overcollateralization.
FINAL SCHEDULED DISTRIBUTION DATES
The Final Scheduled Distribution Date for each Class of Offered
Certificates is set forth under 'SUMMARY--Final Scheduled Distribution Dates'
herein. The Final Scheduled Distribution Date for each Class of Notional Amount
Certificates is the 36th Distribution Date. The Final Scheduled Distribution
Dates for the Class A-1F, Class A-2F, Class A-3F and Class A-4F Certificates
have been set to equal the Distribution Date on which the applicable Class
Principal Balance would be reduced to zero based on the Structuring Assumptions
and a 0% Prepayment Assumption with no Excess Interest used to make accelerated
payments of principal to the Holders of the Offered Certificates. The Final
Scheduled Distribution Date for the Class A-1A, Class A-2A, Class A-5F and Class
A-6F Certificates and each Class of Subordinate Certificates is the Distribution
Date
S-33
<PAGE>
immediately following the month of the last Due Date of the latest possible
maturing loan in the applicable Loan Group, plus 24 months. It is expected that
the last actual Distribution Date for each Class of Offered Certificates will
occur significantly earlier than such Final Scheduled Distribution Dates but
such final Distribution Date could occur later than the applicable Final
Scheduled Distribution Date.
PAYMENT DELAY FEATURE OF FIXED RATE CERTIFICATES
The effective yield to the Certificateholders of each Class of Fixed Rate
Certificates will be lower than the yield otherwise produced by the Certificate
Rate for each such Class and the purchase price of such Certificates because
distributions will not be payable to the Certificateholders until the 25th day
of the month following the month of accrual (without any additional distribution
of interest or earnings thereon in respect of such delay).
MANDATORY PREPAYMENT
In the event that at the end of the Funding Period there is an Excess
Funding Amount, the Holders of the Class A-1F Certificates in the case of
Certificate Group F and the Holders of the Class A-2A Certificates in the case
of Certificate Group A, will receive an additional distribution allocable to
principal in an amount equal to the applicable Excess Funding Amount. Although
there can be no assurance, the Seller anticipates that there should be no
material principal prepayment to the Certificateholders due to a lack of
Subsequent Mortgage Loans.
INITIAL DISTRIBUTION DATE
With respect to a certain number of the Initial Mortgage Loans, the Class
A-1F and Class A-2A Certificateholders will receive a distribution of principal
reflecting two installments of principal during the first Due Period. As a
result, such Certificateholders will receive a larger payment in respect of
principal on the initial Distribution Date than would have been the case if the
first Due Period were a one-month period.
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will increase
the yield on Offered Certificates purchased at a price less than par and will
decrease the yield on Offered Certificates purchased at a price greater than
par. The effect on an investor's yield due to principal payments on the Mortgage
Loans occurring at a rate that is faster (or slower) than the rate anticipated
by the investor in the period immediately following the issuance of the
Certificates will not be entirely offset by a subsequent like reduction (or
increase) in the rate of principal payments. The weighted average lives of the
Offered Certificates also will be affected by the amount and timing of
delinquencies and defaults on the Mortgage Loans and the recoveries, if any, on
Liquidated Mortgage Loans and foreclosed properties.
The 'weighted average life' of a Certificate refers to the average amount
of time that will elapse from the date of issuance to the date each dollar in
respect of principal of such Certificate is repaid. The weighted average life of
any Class of Offered Certificates will be influenced by, among other factors,
the rate at which principal payments are made on the Mortgage Loans, including
final payments made upon the maturity of the Balloon Loans.
Prepayments on Mortgage Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
'Prepayment Assumption') represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of the pool of mortgage loans
for the life of such mortgage loans. A 100% Prepayment Assumption assumes a
constant prepayment rate ('CPR') of % per annum of the outstanding principal
balance of such mortgage loans in the first month of the life of the mortgage
loans and an additional % (precisely percent per annum) in each
month thereafter until the month; beginning in the month and in
each month thereafter during the life of the mortgage loans, a constant
prepayment rate of % per annum each month is assumed. As used in the table
below, 0% Prepayment Assumption assumes a constant prepayment rate equal to 0%
of the Prepayment Assumption, i.e., no prepayments. Correspondingly, 120%
Prepayment Assumption assumes prepayment rates equal to 120% of the Prepayment
Assumption, and so forth. The Prepayment Assumption does not purport to be an
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans. The Seller believes that no existing statistics of which it is
aware
S-34
<PAGE>
provide a reliable basis for Holders of the Offered Certificates to predict the
amount or the timing of receipt of prepayments on the Mortgage Loans.
STRUCTURING ASSUMPTIONS
For the purposes of the tables below, it is assumed that: (i) the Mortgage
Loans consist of pools of loans with the level-pay characteristics as set forth
below, (ii) the amount of interest accrued on the Mortgage Loans is reduced by
amounts sufficient to pay servicing fees and the trustee fees, (iii) the Closing
Date is , 199 , (iv) distributions on the Offered Certificates are made
on the 25th day of each month regardless of the date on which the Distribution
Date actually occurs, commencing in the month after the Closing Date, and are
made in accordance with the priorities described herein, (v) the scheduled
monthly payments of principal and interest on each Mortgage Loan will be timely
paid on the first day of each Due Period (with no delinquencies or defaults)
commencing in the calendar month following their delivery, (vi) all prepayments
are prepayments in full received on the last day of each Due Period commencing
in the calendar month following their delivery with 30 days of accrued interest,
(vii) the Mortgage Loan prepayment rates are a multiple of the Prepayment
Assumption, (viii) the optional termination is not exercised except in the
calculation of weighted average life to call, (ix) each Class of Offered
Certificates has the respective Certificate Rate and initial Class Principal
Balance or Notional Amount as set forth herein, (x) the overcollateralization
levels for the Initial Mortgage Loans apply to the Subsequent Mortgage Loans,
are set initially as specified herein, and thereafter decrease in accordance
with the provisions specified herein, (xi) the Loan Index is % on each
Change Date, (xii) 1-Month LIBOR for each Interest Period will be %,
(xiii) the Initial Mortgage Loans and the Subsequent Mortgage Loans are included
in the Trust as of the Cut-off Date, (xiv) all Mortgage Loans in Loan Group A
have Change Dates every six months after their initial Change Dates, and (xv) a
servicing fee has been computed in the amount of 0.50% per annum based upon the
aggregate outstanding Principal Balance of the Mortgage Loans in the related
Loan Group, and a trustee fee has been computed in the amount of % per
annum based upon the aggregate Certificate Group Balance of the Certificates in
the related Certificate Group.
S-35
<PAGE>
<TABLE>
<CAPTION>
REMAINING ORIGINAL
TERM TO AMORTIZATION
PRINCIPAL LOAN MATURITY TERM
BALANCE($) RATE(%) (MONTHS) (MONTHS)
--------------- ------- --------- ------------
<S> <C> <C> <C> <C>
Group F
Mortgage Loans
Amortization Type
Level Pay.....................
Level Pay.....................
Level Pay.....................
Level Pay.....................
---------------
FIXED POOL $
</TABLE>
<TABLE>
<CAPTION>
REMAINING ORIGINAL NUMBER OF
TERM TO AMORTIZATION MONTHS TO
PRINCIPAL LOAN MATURITY TERM GROSS NEXT RATE MAXIMUM MINIMUM
BALANCE($) RATE(%) (MONTHS) (MONTHS) MARGIN(%) CHANGE RATE(%) RATE(%)
--------------- ------- --------- ------------ --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Group A
Mortgage Loans
Amortization Type
Level Pay.....................
Level Pay.....................
Level Pay.....................
Level Pay.....................
Level Pay.....................
Level Pay.....................
Level Pay.....................
Level Pay.....................
---------------
ARM POOL...................... $
---------------
TOTAL POOL.................... $
---------------
---------------
<CAPTION>
PERIODIC RATE PERIODIC RATE
CAP (SUBSEQUENT CAP (FIRST
RESET DATES(%)) RESET DATE)(%)
--------------- --------------
<S> <C> <C>
Group A
Mortgage Loans
Amortization Type
Level Pay.....................
Level Pay.....................
Level Pay.....................
Level Pay.....................
Level Pay.....................
Level Pay.....................
Level Pay.....................
Level Pay.....................
ARM POOL......................
TOTAL POOL....................
</TABLE>
S-36
<PAGE>
DECREMENT TABLES
Subject to the foregoing discussion and assumptions, the following tables
set forth the percentages of the initial Class Principal Balance of each Class
of Offered Certificates that would be outstanding after each of the dates shown
at various percentages of the Prepayment Assumption and the corresponding
weighted average lives.
Since the tables were prepared on the basis of the Structuring Assumptions,
there are discrepancies between characteristics of the actual Mortgage Loans and
the characteristics of the Mortgage Loans assumed in preparing the tables. Any
such discrepancy may have an effect upon the percentages of the Class Principal
Balances outstanding and weighted average lives of the Certificates set forth in
the tables. In addition, since the actual Mortgage Loans in the Trust have
characteristics which differ from those assumed in preparing the tables set
forth below, the distributions of principal on the Certificates may be made
earlier or later than as indicated in the tables.
S-37
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-1F CLASS A-2F
----------------------------------------------------- -----------------------------------------------------
DISTRIBUTION DATE 0% 50% 100% 120% 150% 200% 0% 50% 100% 120% 150% 200%
- ----------------- ----- ----- ---- ---- ------ ---- ----- ----- ---- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage....... 100 100 100 100 100 100 100 100 100 100 100 100
25, 1999....
25, 2000....
25, 2001....
25, 2002....
25, 2003....
25, 2004....
25, 2005....
25, 2006....
25, 2007....
25, 2008....
25, 2009....
25, 2010....
25, 2011....
25, 2012....
25, 2013....
25, 2014....
25, 2015....
25, 2016....
25, 2017....
25, 2018....
25, 2019....
25, 2020....
25, 2021....
25, 2022....
25, 2023....
25, 2024....
25, 2025....
25, 2026....
25, 2027....
25, 2028....
Weighted Average
Life (years)(1)
To Maturity....
To Call........
<CAPTION>
CLASS A-3F CLASS A-4F
----------------------------------------------------- -------------------------------------------------------
DISTRIBUTION DATE 0% 50% 100% 120% 150% 200% 0% 50% 100% 120% 150% 200%
- ----------------- ----- ----- ---- ---- ------ ---- ----- ----- ----- ----- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage....... 100 100 100 100 100 100 100 100 100 100 100 100
25, 1999....
25, 2000....
25, 2001....
25, 2002....
25, 2003....
25, 2004....
25, 2005....
25, 2006....
25, 2007....
25, 2008....
25, 2009....
25, 2010....
25, 2011....
25, 2012....
25, 2013....
25, 2014....
25, 2015....
25, 2016....
25, 2017....
25, 2018....
25, 2019....
25, 2020....
25, 2021....
25, 2022....
25, 2023....
25, 2024....
25, 2025....
25, 2026....
25, 2027....
25, 2028....
Weighted Average
Life (years)(1)
To Maturity....
To Call........
</TABLE>
- ------------------
(1) The weighted average life of a Certificate of any Class is determined by
(i) multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding
the results, and (iii) dividing the sum by the highest related Certificate
Principal Balance of the Certificate.
S-38
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION--(CONTINUED)
<TABLE>
<CAPTION>
CLASS A-5F CLASS A-6F
--------------------------------------------------- ---------------------------------------------------
0% 50% 100% 120% 150% 200% 0% 50% 100% 120% 150% 200%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage.......... 100 100 100 100 100 100 100 100 100 100 100 100
25, 1999.......
25, 2000.......
25, 2001.......
25, 2002.......
25, 2003.......
25, 2004.......
25, 2005.......
25, 2006.......
25, 2007.......
25, 2008.......
25, 2009.......
25, 2010.......
25, 2011.......
25, 2012.......
25, 2013.......
25, 2014.......
25, 2015.......
25, 2016.......
25, 2017.......
25, 2018.......
25, 2019.......
25, 2020.......
25, 2021.......
25, 2022.......
25, 2023.......
25, 2024.......
25, 2025.......
25, 2026.......
25, 2027.......
25, 2028.......
Weighted Average
Life (years)(1).....
To Maturity.......
To Call...........
</TABLE>
- ------------------------
(1) The weighted average life of a Certificate of any Class is determined by (i)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding
the results, and (iii) dividing the sum by the highest related Certificate
Principal Balance of the Certificate.
S-39
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION--(CONTINUED)
<TABLE>
<CAPTION>
CLASS M-1F CLASS M-2F
--------------------------------------------------- ---------------------------------------------------
DISTRIBUTION DATE 0% 50% 100% 120% 150% 200% 0% 50% 100% 120% 150% 200%
- ----------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage...... 100 100 100 100 100 100 100 100 100 100 100 100
25, 1999.....
25, 2000.....
25, 2001.....
25, 2002.....
25, 2003.....
25, 2004.....
25, 2005.....
25, 2006.....
25, 2007.....
25, 2008.....
25, 2009.....
25, 2010.....
25, 2011.....
25, 2012.....
25, 2013.....
25, 2014.....
25, 2015.....
25, 2016.....
25, 2017.....
25, 2018.....
25, 2019.....
25, 2020.....
25, 2021.....
25, 2022.....
25, 2023.....
25, 2024.....
25, 2025.....
25, 2026.....
25, 2027.....
25, 2028.....
Average Life
(years)(1)
To Maturity......
To Call..........
<CAPTION>
CLASS B-1F
---------------------------------------------------
DISTRIBUTION DATE 0% 50% 100% 120% 150% 200%
- ----------------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Initial
Percentage...... 100 100 100 100 100 100
25, 1999.....
25, 2000.....
25, 2001.....
25, 2002.....
25, 2003.....
25, 2004.....
25, 2005.....
25, 2006.....
25, 2007.....
25, 2008.....
25, 2009.....
25, 2010.....
25, 2011.....
25, 2012.....
25, 2013.....
25, 2014.....
25, 2015.....
25, 2016.....
25, 2017.....
25, 2018.....
25, 2019.....
25, 2020.....
25, 2021.....
25, 2022.....
25, 2023.....
25, 2024.....
25, 2025.....
25, 2026.....
25, 2027.....
25, 2028.....
Average Life
(years)(1)
To Maturity......
To Call..........
</TABLE>
- ------------------------
(1) The weighted average life of a Certificate of any Class is determined by (i)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding
the results, and (iii) dividing the sum by the highest related Certificate
Principal Balance of the Certificate.
S-40
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION--(CONTINUED)
<TABLE>
<CAPTION>
CLASS A-1A CLASS A-2A
--------------------------------------------------- ---------------------------------------------------
DISTRIBUTION DATE 0% 50% 100% 140% 150% 200% 0% 50% 100% 140% 150% 200%
- -------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage.......... 100 100 100 100 100 100 100 100 100 100 100 100
25, 1999........
25, 2000........
25, 2001........
25, 2002........
25, 2003........
25, 2004........
25, 2005........
25, 2006........
25, 2007........
25, 2008........
25, 2009........
25, 2010........
25, 2011........
25, 2012........
25, 2013........
25, 2014........
25, 2015........
25, 2016........
25, 2017........
25, 2018........
25, 2019........
25, 2020........
25, 2021........
25, 2022........
25, 2023........
25, 2024........
25, 2025........
25, 2026........
25, 2027........
25, 2028........
Weighted Average
Life (years)(1)
To Maturity.........
To Call.............
<CAPTION>
CLASS M-1A CLASS M-2A
--------------------------------------------------- ---------------------------------------------------
DISTRIBUTION DATE 0% 50% 100% 140% 150% 200% 0% 50% 100% 140% 150% 200%
- -------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Initial
Percentage.......... 100 100 100 100 100 100 100 100 100 100 100 100
25, 1999........
25, 2000........
25, 2001........
25, 2002........
25, 2003........
25, 2004........
25, 2005........
25, 2006........
25, 2007........
25, 2008........
25, 2009........
25, 2010........
25, 2011........
25, 2012........
25, 2013........
25, 2014........
25, 2015........
25, 2016........
25, 2017........
25, 2018........
25, 2019........
25, 2020........
25, 2021........
25, 2022........
25, 2023........
25, 2024........
25, 2025........
25, 2026........
25, 2027........
25, 2028........
Weighted Average
Life (years)(1)
To Maturity.........
To Call.............
<CAPTION>
CLASS B-1A
---------------------------------------------------
DISTRIBUTION DATE 0% 50% 100% 140% 150% 200%
- -------------------- ------ ------ ------ ------ ------ ------
Initial
Percentage.......... 100 100 100 100 100 100
25, 1999........
25, 2000........
25, 2001........
25, 2002........
25, 2003........
25, 2004........
25, 2005........
25, 2006........
25, 2007........
25, 2008........
25, 2009........
25, 2010........
25, 2011........
25, 2012........
25, 2013........
25, 2014........
25, 2015........
25, 2016........
25, 2017........
25, 2018........
25, 2019........
25, 2020........
25, 2021........
25, 2022........
25, 2023........
25, 2024........
25, 2025........
25, 2026........
25, 2027........
25, 2028........
Weighted Average
Life (years)(1)
To Maturity.........
To Call.............
</TABLE>
- ------------------
(1) The weighted average life of a Certificate of any Class is determined by (i)
multiplying the amount of each distribution in reduction of the related
Certificate Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding
the results, and (iii) dividing the sum by the highest related Certificate
Principal Balance of the Certificate.
S-41
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Offered Certificates will be issued in denominations of $25,000 and
integral multiples of $1,000 in excess thereof and will evidence specified
undivided interests in the Trust. The property of the Trust will consist of, to
the extent provided in the Agreement: (i) the Mortgage Loans; (ii) payments
received after the Cut-off Date, other than payments of interest on the Initial
Mortgage Loans due before 1, 199 ; (iii) Mortgaged Properties relating
to the Mortgage Loans that are acquired by foreclosure or deed in lieu of
foreclosure together with all collections thereon and proceeds thereof; (iv) the
Collection Account and the Distribution Account and such assets deposited
therein from time to time and any investment proceeds thereof; and (v) the
Initial Interest Coverage Account and the Pre-Funding Account and funds on
deposit therein. Definitive Certificates (as defined under 'DESCRIPTION OF THE
SECURITIES--Book-Entry Securities' in the Prospectus), if issued, will be
transferable and exchangeable at the corporate trust office of the Trustee,
which will initially act as Certificate Registrar. See '--Book-Entry
Certificates' below. No service charge will be made for any registration of
exchange or transfer of Certificates, but the Trustee may require payment of a
sum sufficient to cover any tax or other governmental charge.
The principal balance of a Class of Certificates, other than the Notional
Amount Certificates (each, a 'Class Principal Balance') on any Distribution Date
is equal to the applicable Class Principal Balance on the Closing Date reduced
by (i) the aggregate of amounts actually distributed as principal to the Holders
of such Class of Certificates prior to such date and (ii) in the case of a
Subordinate Certificate, any reductions in the Class Principal Balance thereof
due to Realized Losses as described herein. The Notional Amount Certificates do
not have a Class Principal Balance but will have a Notional Amount. The Notional
Amount of the Class IOF Certificates for any Distribution Date prior to the 37th
Distribution Date will equal the lesser of (i) $ and (ii) the sum of
the Class Principal Balance of the Class A-6F Certificates and the last
$ of the Class M-1F Certificates outstanding. The Notional Amount of
the Class IOA Certificates for any Distribution Date prior to the 37th
Distribution Date will equal the lesser of (i) $ and (ii) the sum of
the Class Principal Balances of the Class M-1A and Class M-2A Certificates and
the last $ of the Class B-1A Certificates outstanding. On and after
the 37th Distribution Date, the Notional Amount of each Class of Notional Amount
Certificates will be zero. On any date, the 'Certificate Group Balance' of a
Certificate Group is the aggregate of the Class Principal Balances of the
Certificates in such Certificate Group on such date. The 'Percentage Interest'
of a Certificate of any Class as of any date of determination will equal the
percentage obtained by dividing the denomination of such Certificate by the
original Class Principal Balance or Notional Amount for the related Class of
Certificates.
SEPARATE REMIC STRUCTURE
For federal income tax purposes, the Trust, other than the Pre-Funding
Account and the Initial Interest Coverage Account, created by the Agreement will
include two segregated asset pools, each of which will be treated as a separate
REMIC ('REMIC I' and 'REMIC II,' respectively). The assets of REMIC I will
generally consist of the Mortgage Loans. The assets of REMIC II will generally
consist of uncertificated regular interests issued by REMIC I, which in the
aggregate will correspond to the Certificates.
BOOK-ENTRY CERTIFICATES
The Book-Entry Certificates will be issued in one or more certificates
which equal the aggregate principal balance of the Offered Certificates and will
initially be registered in the name of Cede & Co., the nominee of the Depository
Trust Company ('DTC'). Persons acquiring beneficial ownership interests in the
Offered Certificates ('Certificate Owners') will hold their Certificates through
DTC in the United States, or Cedel or Euroclear in Europe, if they are
participants of such systems, or indirectly through organizations which are
participants in such systems. Cedel and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in Cedel's
and Euroclear's names on the books of their respective depositaries which in
turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank will act as depositary for
Cedel and Chase will act as depositary for Euroclear (in such capacities,
individually the 'Relevant Depositary' and collectively the 'European
Depositaries').
S-42
<PAGE>
Investors may hold such beneficial interests in the Book-Entry Certificates in
minimum denominations representing Class Principal Balances or Notional Amount
of $25,000 and in integral multiples of $1,000 in excess thereof. 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 Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through Participants and DTC. For a description of the features of
the book-entry registration system, see 'DESCRIPTION OF THE
SECURITIES--Book-Entry Securities' in the Prospectus. For information with
respect to tax documentation procedures relating to the Certificates, see
'FEDERAL INCOME TAX CONSIDERATIONS--Federal Income Tax Consequences to Foreign
Investors' and '--Backup Withholding' herein and 'GLOBAL CLEARANCE, SETTLEMENT
AND TAX DOCUMENTATION PROCEDURES--Certain U.S. Federal Income Tax Documentation
Requirements' in Annex I hereto.
Neither the Seller, the Servicer nor 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.
DISTRIBUTION DATES
Distributions on the 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 (each, a 'Distribution Date'),
to the persons in whose names such Certificates are registered (a
'Certificateholder' or 'Holder') as of the related Record Date. The 'Record
Date' for any Distribution Date and (a) the Fixed Rate Certificates, is the last
business day of the calendar month preceding the month of such Distribution Date
and (b) the Adjustable Rate Certificates, the day immediately preceding such
Distribution Date. Distributions will be made (i) in immediately available funds
to Holders of Certificates the aggregate principal balance or notional amount of
which is at least $1,000,000, by wire transfer or otherwise, to the account of
such Certificateholder at a domestic bank or other entity having appropriate
facilities therefor, if such Certificateholder has so notified the Trustee, or
(ii) by check mailed to the address of the person entitled thereto as it appears
on the register (the 'Certificate Register') maintained by the Trustee as
registrar (the 'Certificate Registrar'). Notwithstanding the foregoing, the
final distribution on any Certificate will be made in like manner but only upon
presentment and surrender of such Certificate at the office or agency appointed
for such purpose.
INTEREST DISTRIBUTIONS
On each Distribution Date, the Trustee will withdraw the Interest
Remittance Amount for each Loan Group from the Distribution Account and apply
such amounts in the following order of priority, in each case, to the extent of
the funds remaining therefor:
A. Loan Group F:
(i) to the Trustee, the Trustee fee for such Loan Group and
Distribution Date;
(ii) concurrently, to the Classes of Senior Certificates in
Certificate Group F, the related Class Interest Distribution for such
Distribution Date;
(iii) sequentially, to the Class M-1F, Class M-2F and Class B-1F
Certificates, in that order, the related Class Monthly Interest Amount;
(iv) an amount up to the amount of the Subordination Increase
Amount for Certificate Group F for such Distribution Date, as part of
the related Principal Distribution Amount; and
(v) the remainder pursuant to clause C. below.
B. Loan Group A:
(i) to the Trustee, the Trustee fee for such Loan Group and
Distribution Date;
S-43
<PAGE>
(ii) concurrently, to the Classes of Senior Certificates in
Certificate Group A, the related Class Interest Distribution for such
Distribution Date;
(iii) sequentially, to the Class M-1A, Class M-2A and Class B-1A
Certificates, in that order, the related Class Monthly Interest Amount;
(iv) an amount up to the amount of the Subordination Increase
Amount for Certificate Group A for such Distribution Date as part of the
related Principal Distribution Amount;
(v) the remainder pursuant to clause D. below.
C. Remaining Interest and Excess Overcollateralization Amount for Loan
Group F:
(i) sequentially, to the Class M-1F, Class M-2F and Class B-1F
Certificates, in that order, an amount equal to the related Class
Interest Carryover Shortfall;
(ii) sequentially to the Class M-1F, Class M-2F and Class B-1F
Certificates, in that order, the related Class Principal Carryover
Shortfall;
(iii) to fund any amounts listed in clauses D.(i) and (ii) below,
in that order, which were not fully funded as provided therein;
(iv) concurrently, to the Class M-1F, Class M-2F and Class B-1F
Certificates, any related LIBOR Carryover allocated pro rata among such
Classes in proportion to their respective amounts of LIBOR Carryover,
such amounts to be treated as paid from and to the extent of amounts on
deposit in the LIBOR Carryover Reserve Fund;
(v) to the LIBOR Carryover Reserve Fund for distribution, if any,
pursuant to clause (iv) above, the Reserve Fund Deposit; and
(vi) to the Residual Certificates, the remainder.
D. Remaining Interest and Excess Overcollateralization Amount for Loan
Group A:
(i) sequentially, to the Class M-1A, Class M-2A and Class B-1A
Certificates, in that order, an amount equal to the related Class
Interest Carryover Shortfall;
(ii) sequentially, to the Class M-1A, Class M-2A and Class B-1A
Certificates, in that order, the related Class Principal Carryover
Shortfall;
(iii) to fund any amounts listed in clauses C.(i) and (ii) above
which were not fully funded as provided therein;
(iv) concurrently, to the Class A-2A, Class M-1A, Class M-2A and
Class B-1A Certificates, any related LIBOR Carryover allocated pro rata
among such Classes in proportion to their respective amounts of LIBOR
Carryover; and
(v) to the Residual Certificates, the remainder.
On each Distribution Date, the Class Interest Distribution for each Class
of Senior Certificates in a Certificate Group will be distributed on an equal
priority and any shortfall in the amount required to be distributed as interest
thereon to each such Class will be allocated between such Classes pro rata based
on the amount that would have been distributed on each such Class in the absence
of such shortfall.
PRINCIPAL DISTRIBUTIONS
On each Distribution Date, the Trustee will withdraw each Basic Principal
Amount from the Distribution Account and, on the Distribution Date at or
immediately following the end of the Funding Period, each Excess Funding Amount
from the Pre-Funding Account, and apply such amount together with the amount, if
any, included in the Principal Distribution Amount from clause A.(iv) or B.(iv)
above under '--Interest Distributions,' in the following order of priority, in
each case, to the extent of the funds remaining therefor:
S-44
<PAGE>
A. Loan Group F:
(i) to the Senior Certificates in Certificate Group F, the related
Senior Principal Distribution Amount plus the related Excess Funding Amount
allocated in the following order of priority:
(a) to the Class A-6F Certificates, the Class A-6F Principal
Distribution, until the Class Principal Balance thereof has been reduced
to zero; and
(b) sequentially, to the Class A-1F, Class A-2F, Class A-3F, Class
A-4F, Class A-5F and Class A-6F Certificates, in that order, until the
respective Class Principal Balances thereof have been reduced to zero;
(ii) on or after the related Stepdown Date and so long as a Trigger
Event for the related Certificate Group is not in effect, sequentially, to
the Class M-1F, Class M-2F and Class B-1F Certificates, in that order, the
related Class Principal Distribution Amount until the respective Class
Principal Balances thereof have been reduced to zero; and
(iii) to the Residual Certificates, any remaining principal.
B. Loan Group A:
(i) to the Senior Certificates in Certificate Group A, the related
Senior Principal Distribution Amount plus the related Excess Funding
Amount, allocated in the following order of priority;
(a) 100% to the Class A-2A Certificates until the earlier to occur
of (i) the 21st Distribution Date and (ii) the Distribution Date on
which the Class Principal Balance thereof is reduced to zero;
(b) if the Class A-2A Certificates are outstanding, concurrently,
90% to the Class A-1A Certificates and 10% to the Class A-2A
Certificates until the Class Principal Balance of the Class A-1A
Certificates is reduced to zero; and
(c) to the Class A-1A or Class A-2A Certificates, whichever is
outstanding, until the Class Principal Balance thereof is reduced to
zero.
(ii) on or after the related Stepdown Date and so long as a Trigger
Event for the related Certificate Group is not in effect, sequentially, to
the Class M-1A, Class M-2A and Class B-1A Certificates, in that order, the
related Class Principal Distribution Amount, until the Class Principal
Balances thereof have been reduced to zero; and
(iii) to the Residual Certificates, any remaining principal.
Notwithstanding the priorities set forth in clauses A. (i) and B (i) above,
if the aggregate Class Principal Balance of the related Subordinate Certificates
is reduced to zero, the applicable Senior Principal Distribution Amount will be
distributed concurrently to each Class of Senior Certificates in the applicable
Certificate Group on a pro rata basis in accordance with their respective Class
Principal Balances.
Notwithstanding the foregoing, in the event that the Aggregate Class
Principal Balance of all of the Senior Certificates relating to a Certificate
Group has been reduced to zero either prior to the Distribution Date in April
2001 or thereafter during the continuation of a Trigger Event for such
Certificate Group, all amounts of principal that would have been distributed to
such Senior Certificates will be distributed to the related Subordinate
Certificates of such Certificate Group sequentially in the following order:
Class M-1, Class M-2 and Class B-1 Certificates. Similarly, if the Class
Principal Balance of the Class M-1 Certificates has been reduced to zero, during
the continuation of a Trigger Event for such Certificate Group all amounts of
principal that would have been distributed to such Class M-1 Certificates will
be distributed to the related Class M-2 and Class B-1 Certificates in that
order. If the Class Principal Balance of the Class M-2 Certificates has been
reduced to zero, during the continuation of a Trigger Event for such Certificate
Group all amounts of principal that would have been distributed on such Class
M-2 Certificates will be distributed to the related Class B-1 Certificates.
S-45
<PAGE>
DEFINITIONS
For purposes of the foregoing, the following terms have the respective
meanings set forth below:
Applicable Multiplier: As to Certificate Group F, and as to Certificate
Group A, .
Available Funds: As to either Loan Group and any Distribution Date, the
sum, without duplication of the following amounts with respect to the Mortgage
Loans in such Loan Group: (i) scheduled and unscheduled payments of principal
and interest on the Mortgage Loans received by the Servicer (net of amounts
representing the Servicing Fee with respect to each Mortgage Loan and
reimbursement for related Monthly Advances and Servicing Advances); (ii) Net
Liquidation Proceeds and Insurance Proceeds with respect to the Mortgage Loans
(net of amounts applied to the restoration or repair of a Mortgaged Property);
(iii) the Purchase Price for repurchased Defective Mortgage Loans with respect
to the Mortgage Loans and any related Substitution Adjustment Amounts; (iv)
payments from the Servicer in connection with (a) Monthly Advances, (b)
Prepayment Interest Shortfalls and (c) the termination of the Trust with respect
to the Mortgage Loans as provided in the Agreement; (v) on the Distribution
Dates during and immediately following the Funding Period, amounts from the
Initial Interest Coverage Account for the payment of interest on the related
Classes of Offered Certificates; and (vi) on the Distribution Date at or
immediately following the end of the Funding Period, any related Excess Funding
Amount.
Available Funds Cap: As to either Loan Group and any Distribution Date,
the lesser of (A) % in the case of Certificate Group F and % in the case of
Certificate Group A and (B) a rate equal to (i) the weighted average Net Loan
Rate of the Mortgage Loans in the applicable Loan Group minus (ii) the product
of (x) the Certificate Rate on the Class of Notional Amount Certificates related
to such Loan Group and (y) a fraction, the numerator of which is the Notional
Amount of such Class of Notional Amount Certificates and the denominator of
which is the Loan Group Balance of the related Loan Group.
Basic Principal Amount: As to either Loan Group and any Distribution Date,
an amount equal to the sum of the following amounts (without duplication) with
respect to the Mortgage Loans in such Loan Group and the immediately preceding
Due Period: (i) each payment of principal on a Mortgage Loan received by the
Servicer during such Due Period, including all full and partial principal
prepayments; (ii) the Net Liquidation Proceeds in respect of principal received
during the immediately preceding Due Period; (iii) the portion of the Purchase
Price allocable to principal of all repurchased Defective Mortgage Loans with
respect to such Due Period; and (iv) any Substitution Adjustment Amounts
received on or prior to the previous Determination Date and not yet distributed.
Class A-6F Percentage: As to any Distribution Date, the applicable
percentage set forth below:
<TABLE>
<CAPTION>
DISTRIBUTION DATES PERCENTAGES
- ------------------------------------------------------------- -----------
<S> <C>
1998- 2001................................ 0%
2001- 2003................................ 45%
2003- 2004................................ 80%
2004- 2005................................ 100%
2005 and thereafter................................ 300%
</TABLE>
Class A-6F Principal Distribution: As to any Distribution Date, the
product of (i) the applicable Class A-6F Percentage and (ii) the product of (x)
the related Senior Principal Distribution Amount and (y) a fraction, the
numerator of which is the Class Principal Balance of the Class A-6F Certificates
immediately prior to such Distribution Date, and the denominator of which is the
aggregate Class Principal Balance of the Senior Certificates in Certificate
Group F immediately prior to such Distribution Date.
Class Interest Carryover Shortfall: As to any Class of Certificates and
any Distribution Date, an amount equal to the sum of (i) the excess of the
related Class Monthly Interest Amount for the preceding Distribution Date and
any outstanding Class Interest Carryover Shortfall with respect to such Class on
such preceding Distribution Date, over the amount in respect of interest that is
actually distributed to the Holders of such Class on such preceding Distribution
Date plus (ii) one month's interest on such excess, to the extent permitted by
law, at the related Certificate Rate.
S-46
<PAGE>
Class Interest Distribution: As to any Class of Certificates and
Distribution Date, an amount equal to the sum of (a) the related Class Monthly
Interest Amount and (b) any Class Interest Carryover Shortfall for such Class of
Certificates for such Distribution Date.
Class Monthly Interest Amount: As to any Distribution Date and Class of
Certificates, interest for the related Interest Period at the related
Certificate Rate on the related Class Principal Balance or Notional Amount.
Class Principal Distribution Amount: As to any Class of Subordinate
Certificates and (a) any Distribution Date prior to the related Stepdown Date,
zero and (b) any Distribution Date on or after the related Stepdown Date and so
long as a Trigger Event for the related Certificate Group is not continuing, the
excess of (i) an amount equal to the sum of (x) the Class Principal Balance
(after giving effect to distributions of the related Principal Distribution
Amount on such Distribution Date) of each Class of Certificates in the related
Certificate Group with a higher payment priority and (y) the Class Principal
Balance of such Class of Certificates immediately prior to such Distribution
Date over (ii) the applicable Pro Rata Principal Distribution Amount for such
Distribution Date.
Class Principal Carryover Shortfall: As to any Class of Subordinate
Certificates and any Distribution Date, the excess, if any, of (i) the sum of
(x) the amount of the reduction in the Class Principal Balance of such Class of
Subordinate Certificates on such Distribution Date as provided under
'--Allocation of Realized Losses' below and (y) the amount of such reductions on
prior Distribution Dates over (ii) the amount distributed in respect thereof on
prior Distribution Dates.
Cumulative Loss Event: As to either Certificate Group, the occurrence of
certain rates of cumulative losses during certain periods of time as specified
in the Agreement.
Delinquency Amount: As to either Certificate Group, the aggregate
Principal Balance of the Mortgage Loans that are 90 or more days delinquent,
including Mortgage Loans in foreclosure and REO Properties.
Distribution Percentage: As to the Senior Certificates (as a whole) in a
Certificate Group, 100% minus the product of (i) the Applicable Multiplier and
(ii) the sum of the applicable Original Credit Support Percentage and the
applicable Required OC Percentage as of the Closing Date. As to any Class of
Subordinate Certificates in a Certificate Group, 100% minus the product of (i)
the Applicable Multiplier and (ii) the sum of the applicable Original Credit
Support Percentage and the applicable Required OC Percentage as of the Closing
Date.
Due Period: With respect to the first Distribution Date for collections of
both interest and principal, the period from and including 1, 199
through and including 1, 199 . With respect to each Distribution Date
thereafter for collections of both interest and principal, the period from and
including the second day of the month preceding the month of such Distribution
Date to and including the first day of the month of such Distribution Date.
Excess Delinquency Event: As to either Certificate Group, the occurrence
of certain rates of delinquencies during certain periods of time as specified in
the Agreement.
Excess Funding Amount: As to either Certificate Group, the portion, if
any, of the Pre-Funded Amount allocated to such Certificate Group and remaining
on deposit in the Pre-Funding Account at the end of the Funding Period.
Excess Overcollateralization Amount: As to either Certificate Group and
any Distribution Date, the lesser of (i) the related Basic Principal Amount for
such Distribution Date and (ii) the excess, if any, of (x) the related
Overcollateralization Amount (assuming 100% of the Basic Principal Amount is
distributed on the related Offered Certificates) over (y) the related Required
Overcollateralization Amount.
Interest Period: For any Distribution Date and (a) the Fixed Rate
Certificates, the calendar month preceding the month of such Distribution Date,
calculated on the basis of a 360-day year comprised of twelve 30-day months and
(b) the Adjustable Rate Certificates, the period from the prior Distribution
Date (or in the case of the first Distribution Date, from the Closing Date)
through the day preceding the current Distribution Date, calculated on the basis
of a 360-day year and the actual number of days elapsed; provided, however, that
interest accrued on any Class of Offered Certificates at the applicable
Available Funds Cap, will be calculated on the basis of a 360-day year comprised
of twelve 30-day months.
Interest Remittance Amount: As to either Loan Group and any Distribution
Date, the portion of the Available Funds for such Loan Group that constitutes
amounts in respect of interest.
S-47
<PAGE>
LIBOR Carryover: As to any Class of Adjustable Rate Certificates, other
than the Class A-1F Certificates, and any Distribution Date, the sum of (i) the
excess, if any, of the related Class Monthly Interest Amount calculated on the
basis of 1-Month LIBOR plus the applicable Certificate Margin over the related
Class Monthly Interest Amount for such Distribution Date, (ii) any LIBOR
Carryover remaining unpaid from prior Distribution Dates and (iii) 30 days
interest on the amount in clause (ii) calculated on the basis of 1-Month LIBOR
plus the applicable Certificate Margin.
Liquidated Mortgage Loan: As to any Distribution Date, a Mortgage Loan
with respect to which the Servicer has determined, in accordance with the
servicing procedures specified in the Agreement, as of the end of the preceding
Due Period, that all Liquidation Proceeds which it expects to recover with
respect to such Mortgage Loan (including the disposition of the related REO)
have been received.
OC Floor: As to either Certificate Group, an amount equal to 0.50% of the
aggregate Initial Class Principal Balances of the Offered Certificates in such
Certificate Group as of the Closing Date.
Original Credit Support Percentage: As to any Class of Senior Certificates
or Subordinate Certificates, the applicable percentage set forth below:
<TABLE>
<S> <C>
Senior Group F Certificates.................. %
Class M-1F................................... %
Class M-2F................................... %
Class B-1F................................... 0%
Senior Group A Certificates.................. %
Class M-1A................................... %
Class M-2A................................... %
Class B-1A................................... 0%
</TABLE>
Overcollateralization Amount: As to either Certificate Group, as to any
Distribution Date, the excess, if any, of (i) the sum of (x) the related Loan
Group Balance as of the end of the related Due Period and (y) the Pre-Funded
Amount in the Funding Account allocable to such Certificate Group over (ii) the
aggregate Class Principal Balance of the Certificates in such Certificate Group
after giving effect to the distribution of principal on such Distribution Date.
Principal Distribution Amount: As to either Certificate Group and any
Distribution Date, the sum of (i) the related Basic Principal Amount minus the
related Excess Overcollateralization Amount and (ii) the related Subordination
Increase Amount.
Pro Rata Principal Distribution Amount: As to any Distribution Date and
the Senior Certificates in a Certificate Group or any Class of Subordinate
Certificates in a Certificate Group, the lesser of (i) the product of (x) the
applicable Distribution Percentage and (y) the related Loan Group Balance as of
the last day of the related Due Period and (ii) the excess, if any, of (x) the
related Loan Group Balance as of the last day of the related Due Period over (y)
the applicable OC Floor.
Required OC Percentage: As to either Certificate Group and any date of
determination, the percentage then applicable in the calculation of the Required
Overcollateralization Amount (other than the percentage used to calculate the OC
Floor).
Required Overcollateralization Amount: As to either Certificate Group and
any Distribution Date (a) prior to the related Stepdown Date, the product of (i)
% for Certificate Group F and % for Certificate Group A and (ii) the
aggregate Initial Class Principal Balances of the Offered Certificates in such
Certificate Group as of the Closing Date; and (b) on and after the related
Stepdown Date, the greater of (i) the product of % (in the case of
Certificate Group F) or % (in the case of Certificate Group A) and the
related Loan Group Balance as of the end of the related Due Period and (ii) the
related OC Floor; provided, however, that on each Distribution Date during the
continuance of (a) a Cumulative Loss Event and an Excess Delinquency Event or
(b) a Trigger Event, the Required Overcollateralization Amount will equal the
Required Overcollateralization Amount in effect as of the Distribution Date
immediately preceding the date on which the (a) Cumulative Loss Event and Excess
Delinquency Event or (b) Trigger Event first occurred.
Senior Principal Distribution Amount: As to either Certificate Group and,
(a) any Distribution Date prior to the related Stepdown Date or during the
continuation of a Trigger Event for such Certificate Group, the lesser of (i)
100% of the related Principal Distribution Amount and (ii) the aggregate Class
Principal Balance of the Senior Certificates, and (b) any other Distribution
Date, an amount equal to the excess, if any, of (i) the aggregate
S-48
<PAGE>
Class Principal Balance of the Senior Certificates immediately prior to such
Distribution Date over (ii) the applicable Pro Rata Principal Distribution
Amount.
Stepdown Date: As to either Certificate Group, the later to occur of (x)
the earlier to occur of (i) the Distribution Date in and (ii) the
Distribution Date on which the aggregate Class Principal Balance of the related
Senior Certificates is reduced to zero, and (y) the first Distribution Date on
which the related Subordinate Percentage (assuming 100% of the related Basic
Principal Amount is distributed on the Offered Certificates) is at least equal
to the product of (i) the Applicable Multiplier and (ii) the sum of the Original
Credit Support Percentage for the related Senior Certificates and the related
Required OC Percentage as of the Closing Date.
Subordinate Percentage: As to either Certificate Group and any
Distribution Date, the percentage equivalent of a fraction, the numerator of
which is the sum of (i) the aggregate Class Principal Balance of the Subordinate
Certificates in such Certificate Group and (ii) the related
Overcollateralization Amount, in each case after giving effect to the
distribution of the related Principal Distribution Amount on such Distribution
Date, and the denominator of which is the related Loan Group Balance as of the
last day of the related Due Period.
Subordination Deficiency: As to either Certificate Group and any
Distribution Date, the excess, if any, of (i) the applicable Required
Overcollateralization Amount for such Distribution Date over (ii) the related
Overcollateralization Amount for such Distribution Date after giving effect to
the distribution of the related Basic Principal Amount on such Distribution
Date.
Subordination Increase Amount: As to either Certificate Group and any
Distribution Date, the lesser of (i) the related Subordination Deficiency and
(ii) the related Excess Interest plus, the portion, if any, of the Excess
Interest from the other Certificate Group applied thereto under clause C.(ii) or
D.(ii) of '--Interest Distributions' above.
Trigger Event: A Trigger Event shall have occurred and be continuing with
respect to a Certificate Group, if at any time, the related Delinquency Amount
equals or exceeds twice the sum of (i) the related Overcollaterization Amount
(prior to giving effect to distributions on such Distribution Date) and (ii) (a)
the Excess Interest for the related Loan Group, assuming the related Required
Overcollateralization Amount equals such amount on the prior Distribution Date,
multiplied by (b) 12.
CERTIFICATE RATE
The Certificate Rate for each Class of Fixed Rate Certificates is set forth
on the cover page or described herein. The Certificate Rate for each Class of
Adjustable Rate Certificates for any Interest Period will equal the lesser of
(i) the sum of 1-month LIBOR and the applicable Certificate Margin and (ii) the
applicable Available Funds Cap. The Certificate Margin for each Class of
Adjustable Rate Certificates will be as follows:
<TABLE>
<CAPTION>
CERTIFICATE MARGIN
-----------------------
CLASS (1) (2)
- ---------------------------------------------------- ------------------ ------------------
<S> <C> <C>
A-1F................................................
M-1F................................................
M-2F................................................
B-1F................................................
A-2A................................................
M-1A................................................
M-2A................................................
B-1A................................................
</TABLE>
- ------------------
(1) Prior to or on the Optional Termination Date.
(2) After the Optional Termination Date.
S-49
<PAGE>
With respect to each Distribution Date, 1-Month LIBOR will equal the
interbank offered rate for one-month United States dollar deposits in the London
market as quoted on Telerate Page 3750 as of 11:00 A.M., London time, on the
second LIBOR Business Day prior to the first day of the related Interest Period.
'Telerate Page 3750' means the display designated as page 3750 on the Telerate
Service (or such other page as may replace page 3750 on that service for the
purpose of displaying London interbank offered rates of major banks). If such
rate does not appear on such page (or such other page as may replace that page
on that service, or if such service is no longer offered, such other service for
displaying LIBOR or comparable rates as may be selected by the Trustee after
consultation with the Servicer), the rate will be the Reference Bank Rate. The
'Reference Bank Rate' will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks (which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by the Trustee after consultation with the Servicer) as of
11:00 A.M., London time, on the day that is two LIBOR Business Days prior to the
immediately preceding Distribution Date to prime banks in the London interbank
market for a period of one month in amounts approximately equal to the aggregate
Class Principal Balance of the Adjustable Rate Certificates. The Trustee will
request the principal London office of each of the reference banks to provide a
quotation of its rate. If at least two such quotations are provided, the rate
will be the arithmetic mean of the quotations. If on such date fewer than two
quotations are provided as requested, the rate will be the arithmetic mean of
the rates quoted by one or more major banks in New York City, selected by the
Trustee after consultation with the Servicer, as of 11:00 A.M., New York City
time, on such date for loans in U.S. Dollars to leading European banks for a
period of one month in amounts approximately equal to the aggregate Class
Principal Balance of the Adjustable Rate Certificates. If no such quotations can
be obtained, the rate will be LIBOR for the prior Distribution Date. 'LIBOR
Business Day' means any day other than (i) a Saturday or a Sunday or (i) a day
on which banking institutions in the State of New York or in the city of London,
England are required or authorized by law to be closed.
ALLOCATION OF REALIZED LOSSES
Each Basic Principal Amount includes the net liquidation proceeds in
respect of principal received upon liquidation of a Liquidated Mortgage Loan. If
such net liquidation proceeds are less than the unpaid principal balance, the
related Loan Group Balance will decline more than the aggregate Class Principal
Balance of the Offered Certificates in the related Certificate Group. If such
difference is not covered by the applicable Overcollateralization Amount or the
application of Excess Interest to pay the Subordination Increase Amount, the
related Class of Subordinate Certificates then outstanding with the highest
numerical Class designation will bear such loss.
If, following the distributions on a Distribution Date, the aggregate Class
Principal Balance of the Offered Certificates in a Certificate Group exceeds the
related Loan Group Balance, i.e., the Certificates are undercollateralized, the
Class Principal Balance of the related Class of Subordinate Certificates then
outstanding with the highest numerical Class designation will be reduced by the
amount of such excess. Any such reduction will constitute a Class Principal
Carryover Amount for the applicable Class. Although a Class Principal Carryover
Amount will not accrue interest, such amount may be paid on a future
Distribution Date to the extent funds are available therefor as provided above
under '--Interest Distributions.'
For all purposes hereof, the Class B Certificates in each Certificate Group
will be deemed to have the highest numerical Class designation and the lowest
payment priority of any Class of Subordinate Certificates in such Certificate
Group.
OVERCOLLATERALIZATION PROVISIONS
The 'Excess Interest' for a Certificate Group and any Distribution Date
will equal the excess of (x) the related Interest Remittance Amount over (y) the
sum of (i) the aggregate of the Class Interest Distributions for the related
Senior Certificates, (ii) the Class Monthly Interest Amounts for the related
Subordinate Certificates and (iii) the Trustee Fee for the related Loan Group.
The Excess Interest will be applied to, among other things, the accelerated
amortization of the Offered Certificates in the related Certificate Group then
entitled to distributions of principal until the related Overcollateralization
Amount equals the related Required Overcollateralization Amount.
S-50
<PAGE>
LIBOR CARRYOVER RESERVE FUND
The Agreement contains an interest rate cap agreement (the 'Interest Rate
Cap Agreement') which establishes an account (the 'LIBOR Carryover Reserve
Fund'), which is held in trust by the Trustee on behalf of the Holders of the
Adjustable Rate Certificates in Certificate Group F, other than the Class A-1F
Certificates. The LIBOR Carryover Reserve Fund will not be an asset of any
REMIC. Holders of such Adjustable Rate Certificates will be entitled to receive
payments from the LIBOR Carryover Reserve Fund pursuant to the Interest Rate Cap
Agreement in an amount equal to any LIBOR Carryover for such Certificates as
described herein. The amount required to be deposited in the LIBOR Carryover
Reserve Fund on any Distribution Date (the 'Reserve Fund Deposit') will equal
any LIBOR Carryover for such Certificates for such Distribution Date, or, if no
LIBOR Carryover is payable to such Certificates on such Distribution Date, an
amount such that when added to other amounts already on deposit in the LIBOR
Carryover Reserve Fund, the aggregate amount on deposit therein is equal to
$10,000. Any investment earnings on amounts on deposit in the LIBOR Carryover
Reserve Fund will be paid to (and for the benefit of) the holders of the
Residual Certificates and will not be available to pay any LIBOR Carryover.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to Certificateholders, the Trustee will
forward to each Certificateholder a statement setting forth, among other items
the following, to the extent applicable to each Class of Certificates:
(i) the aggregate amount of the distribution to each Class of
Certificates on such Distribution Date;
(ii) the amount of the distribution set forth in paragraph (i) above
in respect of interest and the amount thereof in respect of any Class
Interest Carryover Shortfall, and the amount of any Class Interest
Carryover Shortfall remaining;
(iii) the amount of the distribution set forth in paragraph (i) above
in respect of principal and the amount thereof in respect of the Class
Principal Carryover Shortfall, and any remaining Class Principal Carryover
Shortfall;
(iv) the amount of Excess Interest for each Loan Group paid as
principal;
(v) the Servicing Fee;
(vi) the Loan Group Balance of each Loan Group, in each case as of the
close of business on the last day of the preceding Due Period;
(vii) the Class Principal Balance of each Class of Certificates after
giving effect to payments allocated to principal above;
(viii) each Overcollateralization Amount and Required
Overcollateralization Amount as of the close of business on the
Distribution Date, after giving effect to distributions of principal on
such Distribution Date;
(ix) for each Certificate Group, whether a Trigger Event or Cumulative
Loss Event has occurred and is continuing and the calculation thereof;
(x) the number and aggregate Principal Balances of the Mortgage Loans
in each Loan Group as to which the minimum monthly payment is delinquent
for 30-59 days, 60-89 days, 90 or more days, respectively, as of the end of
the preceding month;
(xi) the book value of any real estate which is acquired by the Trust
through foreclosure or grant of deed in lieu of foreclosure;
(xii) the amounts of Realized Losses for each Loan Group for such Due
Period and the cumulative amount of Realized Losses to date;
(xiii) the weighted average Loan Rate on the Mortgage Loans in each
Loan Group and specifying such weighted average Loan Rate for each Loan
Group as of the first day of the month prior to the Distribution Date; and
(xiv) the Certificate Rate on each Class of Adjustable Rate
Certificates for such Distribution Date; and
(xv) the amount of LIBOR Carryover distributed to each Class of
Adjustable Rate Certificates and the amount of LIBOR Carryover remaining
for each such Class.
In the case of information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall be expressed as a dollar amount per Certificate with a
$1,000 denomination.
S-51
<PAGE>
Within 60 days after the end of each calendar year, the Trustee will
forward to each Person, if requested in writing by such Person, who was a
Certificateholder during the prior calendar year a statement containing the
information set forth in clauses (ii) and (iii) above aggregated for such
calendar year.
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Agreement. A form of the
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus Supplement and the Prospectus is a part. The following summaries
together with the information herein under 'DESCRIPTION OF THE CERTIFICATES' and
in the Prospectus under the headings 'DESCRIPTION OF THE SECURITIES' and 'THE
AGREEMENTS' describe the material provisions of the Agreement. The summaries do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Agreement. Wherever
particular sections or defined terms of the Agreement are referred to, such
sections or defined terms are hereby incorporated herein by reference.
ASSIGNMENT OF MORTGAGE LOANS
On the Closing Date with respect to the Initial Mortgage Loans and on each
Subsequent Transfer Date with respect to the Subsequent Mortgage Loans, the
Seller will transfer to the Trust all of its right, title and interest in and to
such Mortgage Loan, the related mortgage note, mortgages and other related
documents (collectively, the 'Related Documents'), including all payments
received after the Cut-off Date other than payments of interest on the Initial
Mortgage Loans due before 1, 199 . The Trustee, concurrently with such
initial transfer, will deliver the Certificates to the Seller. Each Mortgage
Loan transferred to the Trust will be identified on a schedule (the 'Mortgage
Loan Schedule') delivered to the Trustee pursuant to the Agreement. Such
schedule will include information as to the Principal Balance of each Mortgage
Loan as of the related Cut-off Date, as well as information with respect to the
Loan Rate.
The Agreement will require that, within the time period specified therein,
the Seller will deliver to the Trustee (or the Custodian, as the Trustee's agent
for such purpose) the Mortgage Loans endorsed to the Trustee and the Related
Documents. In lieu of delivery of original mortgages, if such original is not
available, the Seller may deliver true and correct copies thereof.
Under the terms of the Agreement, the Seller will promptly and in no event
later than 30 days after the Closing Date with respect to the Initial Mortgage
Loans and promptly but not later than 30 days after each Subsequent Transfer
Date with respect to the Subsequent Mortgage Loans, prepare and record
assignments of the mortgages related to each Mortgage Loan in favor of the
Trustee (unless opinions of counsel satisfactory to the Rating Agencies are
delivered to the Trustee to the effect that recordation of such assignments is
not required in the relevant jurisdictions to protect the interests of the
Trustee in the Mortgage Loans). If the recording information with respect to any
assignment of Mortgage is unavailable within 30 days of the Closing Date or
Subsequent Transfer Date, as the case may be, such assignment will be prepared
and recorded within 30 days after receipt of such information, but in no event
later than one year after the Closing Date or Subsequent Transfer Date, as the
case may be.
Within 30 days of the Closing Date with respect to the Initial Mortgage
Loans and each Subsequent Transfer Date with respect to the Subsequent Mortgage
Loans the Trustee (or the Custodian on behalf of the Trustee) will review the
Mortgage Loans and the Related Documents pursuant to the Agreement and if any
Mortgage Loan or Related Document is found to be defective in any material
respect (a 'Defective Mortgage Loan') and such defect is not cured within 90
days following notification thereof to the Seller by the Trustee, the Seller
will be obligated to either (i) substitute for such Mortgage Loan an Eligible
Substitute Mortgage Loan; however, such substitution is permitted only within
two years of the Closing Date and may not be made unless an opinion of counsel
is provided to the effect that such substitution will not disqualify either
REMIC as a REMIC or result in a prohibited transaction tax under the Code or
(ii) purchase such Mortgage Loan at a price (the 'Purchase Price') equal to the
outstanding Principal Balance of such Mortgage Loan as of the date of purchase,
plus unpaid interest thereon from the date interest was last paid or with
respect to which interest was advanced and not reimbursed through the end of the
calendar month in which the purchase occurred, computed at the Loan Rate, net of
the Servicing Fee if the Seller is the Servicer, plus if the Seller is not the
Servicer the amount of any unreimbursed
S-52
<PAGE>
Servicing Advances made by the Servicer. The Purchase Price will be deposited in
the Collection Account on or prior to the next succeeding Determination Date
after such obligation arises. The obligation of the Seller to repurchase or
substitute for a Defective Mortgage Loan is the sole remedy regarding any
defects in the Mortgage Loans and Related Documents available to the Trustee or
the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the 'Substitution Adjustment') equal to the excess of the Principal
Balance of the related Defective Mortgage Loan over the Principal Balance of
such Eligible Substitute Mortgage Loan.
An 'Eligible Substitute Mortgage Loan' is a mortgage loan to be substituted
by the Seller for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding principal balance after deducting all
scheduled principal payments due in the month of such substitution (or in the
case of a substitution of more than one Mortgage Loan for a Defective Mortgage
Loan, an aggregate Principal Balance), not in excess of, and not less than 95%
of, the Principal Balance of the Defective Mortgage Loan; (ii) have a Loan Rate
not less than the Loan Rate of the Defective Mortgage Loan and not more than 1%
in excess of the Loan Rate of such Defective Mortgage Loan; (iii) have a
mortgage of the same or higher level of priority as the mortgage relating to the
Defective Mortgage Loan; (iv) have a remaining term to maturity not more than
six months earlier and not later than the remaining term to maturity of the
Defective Mortgage Loan; and (v) comply with each representation and warranty as
to the Mortgage Loans set forth in the Agreement (deemed to be made as of the
date of substitution).
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan. In addition, the Seller will
represent and warrant, on the Closing Date, that, among other things: (i) at the
time of transfer to the Trust, the Seller has transferred or assigned all of its
right, title and interest in each Mortgage Loan and the Related Documents, free
of any lien; and (ii) each Mortgage Loan complied, at the time of origination,
in all material respects with applicable state and federal laws. Upon discovery
of a breach of any such representation and warranty which materially and
adversely affects the interests of the Certificateholders in the related
Mortgage Loan and Related Documents, the Seller will have a period of 60 days
after discovery or notice of the breach to effect a cure. If the breach cannot
be cured within the 60-day period, the Seller will be obligated to (i)
substitute for such Mortgage Loan an Eligible Substitute Mortgage Loan or (ii)
purchase such Mortgage Loan from the Trust. The same procedure and limitations
that are set forth above for the substitution or purchase of Defective Mortgage
Loans as a result of deficient documentation relating thereto will apply to the
substitution or purchase of a Mortgage Loan as a result of a breach of a
representation or warranty in the Agreement that materially and adversely
affects the interests of the Certificateholders.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Servicer will establish and maintain in the name of the Trustee a
separate trust account (the 'Collection Account') for the benefit of the holders
of the Certificates. The Collection Account will be an Eligible Account (as
defined herein). Upon receipt by the Servicer of amounts in respect of the
Mortgage Loans (excluding amounts representing the Servicing Fee, reimbursement
for Monthly Advances and Servicer Advances and insurance proceeds to be applied
to the restoration or repair of a Mortgaged Property or similar items and
amounts in respect of interest due before 1, 199 ), the Servicer will
deposit such amounts in the Collection Account. Amounts so deposited may be
invested in Eligible Investments (as described in the Agreement) maturing no
later than one Business Day prior to the date on which the amount on deposit
therein is required to be deposited in the Distribution Account or on such
Distribution Date if approved by the Rating Agencies.
The Trustee will establish an account (the 'Distribution Account'). No
later than 11:00 a.m. (New York time) two Business Days prior to each
Distribution Date, the Available Funds for a Loan Group and the related Due
Period are required to be deposited into the Distribution Account. The
Distribution Account will be an Eligible Account. Amounts on deposit therein may
be invested in Eligible Investments maturing on or before the Business Day prior
to the related Distribution Date.
An 'Eligible Account' is a segregated account that is (i) maintained with a
depository institution whose debt obligations at the time of any deposit therein
have the highest short-term debt rating by the Rating Agencies and whose
accounts are insured to the maximum extent provided by either the Savings
Association Insurance
S-53
<PAGE>
Fund ('SAIF') or the Bank Insurance Fund ('BIF') of the Federal Deposit
Insurance Corporation established by such fund with a minimum long-term
unsecured debt rating of A by S&P and A by Fitch, and which is any of (A) a
federal savings and loan association duly organized, validly existing and in
good standing under the federal banking laws, (B) an institution duly organized,
validly existing and in good standing under the applicable banking laws of any
state, (C) a national banking association duly organized, validly existing and
in good standing under the federal banking laws, (D) a principal subsidiary of a
bank holding company; (ii) a segregated trust account maintained with the
corporate trust department of a federal or state chartered depository
institution or trust company, having capital and surplus of not less than
$50,000,000, acting in its fiduciary capacity; or (iii) otherwise acceptable to
each Rating Agency as evidenced by a letter from each Rating Agency to the
Trustee, without reduction or withdrawal of the then current ratings of the
Certificates.
ADVANCES
Not later than the close of business on the Determination Date for each
Distribution Date, the Servicer will remit to the Trustee for deposit in the
Collection Account an amount equal to the sum of the interest accrued on each
Mortgage Loan through the related Due Date but not received by the Servicer as
of the close of business on the last day of the related Due Period (net of the
Servicing Fee) (the 'Monthly Advance'). Such obligation of the Servicer
continues with respect to each Mortgage Loan until such Mortgage Loan becomes a
Liquidated Mortgage Loan.
In the course of performing its servicing obligations, the Servicer will
pay all reasonable and customary 'out-of-pocket' costs and expenses incurred in
the performance of its servicing obligations, including, but not limited to, the
cost of (i) the preservation, restoration and protection of the Mortgaged
Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related Mortgage. Each such expenditure will
constitute a 'Servicing Advance.'
The Servicer's right to reimbursement for Servicing Advances is limited to
late collections on the related Mortgage Loan, including Liquidation Proceeds,
released mortgaged property proceeds, Insurance Proceeds and such other amounts
as may be collected by the Servicer from the related Mortgagor or otherwise
relating to the Mortgage Loan in respect of which such unreimbursed amounts are
owed. The Servicer's right to reimbursement for Monthly Advances is limited to
late collections of interest on any Mortgage Loan and to Liquidation Proceeds
and Insurance Proceeds on the related Mortgage Loan. The Servicer's right to
such reimbursements is prior to the rights of Certificateholders.
Notwithstanding the foregoing, the Servicer is not required to make any
Monthly Advance or Servicing Advance if in the good faith judgment and sole
discretion of the Servicer, the Servicer determines that such advance will not
be ultimately recoverable from collections received from the Mortgagor in
respect of the related Mortgage Loan or other recoveries in respect of such
Mortgage Loan (a 'Nonrecoverable Advance'). In addition, if any Servicing
Advance or Monthly Advance is determined in good faith by the Servicer to be
non-recoverable from such sources, the amount of such Nonrecoverable Advances
may be reimbursed to the Servicer from other amounts on deposit in the
Collection Account.
INITIAL INTEREST COVERAGE ACCOUNT
On the Closing Date, cash will be deposited in the Initial Interest
Coverage Account, which account will be in the name of and maintained by the
Trustee and will be part of the Trust. The amount on deposit in the Initial
Interest Coverage Account, including reinvestment income thereon, will be used
by the Trustee to fund, on the Distribution Dates during and immediately
following the Funding Period, the amount of interest accruing at the weighted
average Certificate Rate of all Certificates in a Certificate Group on the
related Excess Funding Amount, if any. Any amounts remaining in the Initial
Interest Coverage Account and not needed for such purpose will be paid to the
Seller and will not thereafter be available for distribution to the Holders of
the Offered Certificates.
Amounts on deposit in the Initial Interest Coverage Account will be
invested in Eligible Investments. The Initial Interest Coverage Account will not
be an asset of any REMIC.
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PRE-FUNDING ACCOUNT
On the Closing Date, the Maximum Funding Amount will be deposited into the
Pre-Funding Account for Loan Group F and Loan Group A, respectively. See
'DESCRIPTION OF THE MORTGAGE LOANS-- Conveyance of Subsequent Mortgage Loans.'
Amounts in the Pre-Funding Account may be used only (i) to acquire Subsequent
Mortgage Loans, and (ii) to make accelerated payments of principal on the
Certificates. During the Funding Period amounts will, from time to time, be
withdrawn from the Pre-Funding Account to purchase Subsequent Mortgage Loans in
accordance with the Agreement. Any Pre-Funded Amount remaining at the end of the
Funding Period will be distributed as a principal prepayment to the Certificates
in the applicable Certificate Group then entitled to distributions of principal.
Amounts on deposit in the Pre-Funding Account will be invested in Eligible
Investments. Any investment earnings on funds in the Pre-Funding Account will be
transferred to the Initial Interest Coverage Account. The Pre-Funding Account
will not be an asset of any REMIC.
SERVICING COMPENSATION, PAYMENT OF EXPENSES AND PREPAYMENT INTEREST SHORTFALLS
With respect to each Due Period, the Servicer will receive from interest
payments in respect of the Mortgage Loans a portion of such interest payments as
a monthly Servicing Fee in the amount equal to 0.50% per annum (the 'Servicing
Fee Rate') on the Principal Balance of each Mortgage Loan as of the first day of
each such Due Period. All assumption fees, late payment charges, prepayment
penalties and other fees and charges, to the extent collected from borrowers,
will be retained by the Servicer as additional servicing compensation.
Not later than the Determination Date, the Servicer is required to remit to
the Trustee, without any right of reimbursement, an amount equal to, with
respect to each Mortgage Loan as to which a principal prepayment in full was
received during the related Due Period, the lesser of (a) the excess, if any, of
the sum of 30 days' interest on the Principal Balance of each such Mortgage Loan
at the related Loan Rate (or at such lower rate as may be in effect for such
Mortgage Loan because of application of the Civil Relief Act) minus the
Servicing Fee for such Mortgage Loan, over the amount of interest actually paid
by the related Mortgagor in connection with each such principal prepayment (with
respect to all such Mortgage Loans, the 'Prepayment Interest Shortfall') and (b)
the sum of the Servicing Fee received by the Servicer in the most recently ended
Due Period.
The Servicer is not obligated to offset any of the Servicing Fee against,
or to provide any other funds to cover, any Civil Relief Act Interest
Shortfalls.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before the last business day of
the fifth month following the end of each fiscal year of the Servicer, beginning
in , to the Trustee and the Rating Agencies of an annual statement signed
by an officer of the Servicer to the effect that the Servicer has fulfilled its
material obligations under the Agreement throughout the preceding fiscal year,
except as specified in such statement.
On or before the last business day of the fifth month following the end of
each fiscal year of the Servicer, beginning in , the Servicer will furnish
a report prepared by a firm of nationally recognized independent public
accountants (who may also render other services to the Servicer) to the Trustee
and the Rating Agencies to the effect that such firm has examined certain
documents and the records relating to servicing of the Mortgage Loans under the
Uniform Single Attestation Program for Mortgage Bankers and such firm's
conclusion with respect thereto.
The Servicer's fiscal year is the calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
The Agreement provides that the Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law as evidenced by an opinion of counsel delivered
to the Trustee or (ii) upon the satisfaction of the following conditions: (a)
the Servicer has proposed a successor servicer to the Trustee in writing and
such proposed successor servicer is reasonably acceptable to the Trustee; and
(b) the Rating Agencies have confirmed to the Trustee that the appointment of
such proposed successor servicer as the Servicer will not result in the
reduction or withdrawal of the then current ratings of the Offered Certificates.
No such resignation will become effective until the Trustee or a successor
servicer has assumed the Servicer's obligations and duties under the Agreement.
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The Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be affiliates
of the Servicer. Notwithstanding any such arrangement, the Servicer will remain
liable and obligated to the Trustee and the Certificateholders for the
Servicer's duties and obligations under the Agreement, without any diminution of
such duties and obligations and as if the Servicer itself were performing such
duties and obligations.
Any corporation into which the Servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Servicer shall be a party, or any corporation succeeding to the business of
the Servicer shall be the successor of the Servicer under the Agreement, without
the execution or filing of any paper or any further act on the part of any of
the parties to the Agreement, anything in the Agreement to the contrary
notwithstanding.
EVENTS OF DEFAULT
'Events of Default' will consist of: (i) (A) any failure by the Servicer to
make any required Monthly Advance or (B) any other failure of the Servicer to
deposit in the Collection Account or the Distribution Account any deposit
required to be made under the Agreement, which failure continues unremedied for
three Business Days after payment was required to be made; (ii) any failure by
the Servicer duly to observe or perform in any material respect any other of its
covenants or agreements in the Agreement which, in each case, materially and
adversely affects the interests of the Certificateholders and continues
unremedied for 30 days after knowledge or the giving of written notice of such
failure to the Servicer by the Trustee, or to the Servicer and the Trustee by
Certificateholders evidencing at least 25% of the Voting Rights; (iii) any
failure by the Servicer to make any required Servicing Advance, which failure
continues unremedied for a period of 30 days after knowledge or the giving of
written notice of such failure to the Servicer by the Trustee, or to the
Servicer and the Trustee by Certificateholders evidencing at least 25% of the
Voting Rights; (iv) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings relating to the
Servicer and certain actions by the Servicer indicating insolvency,
reorganization or inability to pay its obligations; and (v) cumulative losses
exceed the level set forth in the Agreement.
If any Monthly Advance is not made by 12:00 noon, New York City time, on
the second Business Day preceding the applicable Distribution Date, the Trustee
or a successor Servicer will immediately assume the duties of the Servicer.
Upon removal or resignation of the Servicer, the Trustee will be the
successor servicer (the 'Successor Servicer'). The Trustee, as Successor
Servicer, will be obligated to make Monthly Advances and Servicing Advances
unless it determines reasonably and in good faith that such advances would not
be recoverable. If, however, the Trustee is unwilling or unable to act as
Successor Servicer, or if the majority of Certificateholders so requests, the
Trustee may appoint, or petition a court of competent jurisdiction to appoint
any established mortgage loan servicing institution having a net worth of not
less than $25,000,000 as the Successor Servicer in the assumption of all or any
part of the responsibilities, duties or liabilities of the Servicer.
RIGHTS UPON AN EVENT OF DEFAULT
So long as an Event of Default remains unremedied, either the Trustee or
Certificateholders holding Certificates evidencing at least 51% of the Voting
Rights in the Trust may terminate all of the rights and obligations of the
Servicer under the Agreement and in and to the Mortgage Loans, whereupon the
Trustee will succeed to all the responsibilities, duties and liabilities of the
Servicer under the Agreement and will be entitled to similar compensation
arrangements. In the event that the Trustee would be obligated to succeed the
Servicer but is unwilling or unable so to act, it may appoint, or petition a
court of competent jurisdiction for the appointment of, a housing and home
finance institution or other mortgage loan or home equity loan servicer with all
licenses and permits required to perform its obligations under the Agreement and
having a net worth of at least $25,000,000 to act as successor to the Servicer
under the Agreement. Pending such appointment, the Trustee will be obligated to
act in such capacity unless prohibited by law. Such successor will be entitled
to receive the same compensation that the Servicer would otherwise have received
(or such lesser compensation as the Trustee and such successor may agree). A
receiver or conservator for the Servicer may be empowered to prevent the
termination and replacement of the Servicer if the only Event of Default that
has occurred is an insolvency event.
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AMENDMENT
The Agreement may be amended from time to time by the Seller, the Servicer
and the Trustee without the consent of the Certificateholders, to cure any
ambiguity, to correct or supplement any provisions therein which may be
defective or inconsistent with any other provisions of the Agreement, to add to
the duties of the Servicer to comply with any requirements imposed by the Code
or any regulation thereunder, or to add or amend any provisions of the Agreement
as required by the Rating Agencies in order to maintain or improve any rating of
the Offered Certificates (it being understood that, after obtaining the ratings
in effect on the Closing Date, none of the Seller, the Trustee or the Servicer
is obligated to obtain, maintain, or improve any such rating) or to add any
other provisions with respect to matters or questions arising under the
Agreement which shall not be inconsistent with the provisions of the Agreement,
provided that such action will not, as evidenced by an opinion of counsel,
materially and adversely affect the interests of any Certificateholder;
provided, that any such amendment will not be deemed to materially and adversely
affect the Certificateholders and no such opinion will be required to be
delivered if the person requesting such amendment obtains a letter from the
Rating Agencies stating that such amendment would not result in a downgrading of
the then current rating of the Offered Certificates. The Agreement also may be
amended from time to time by the Seller, the Servicer and the Trustee, with the
consent of Certificateholders holding Certificates evidencing at least 51% of
the Voting Rights of each Class affected thereby (or 51% of all of the Voting
Rights if all Classes are affected), for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of the Agreement
or of modifying in any manner the rights of the Certificateholders, provided
that no such amendment will (i) reduce in any manner the amount of, or delay the
timing of, collections of payments on the Certificates or distributions or
payments which are required to be made on any Certificate without the consent of
the Certificateholder or (ii) reduce the aforesaid percentage required to
consent to any such amendment, without the consent of the holders of all
Certificates of the affected Class then outstanding.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The Trust will terminate on the Distribution Date following the earliest of
(i) the Distribution Date on which the aggregate Class Principal Balance of all
the Certificates has been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust and (iii) the optional
purchase by the Servicer of the Mortgage Loans, as described below.
Subject to provisions in the Agreement concerning adopting a plan of
complete liquidation, the Servicer may, at its option, terminate the Agreement
on any Distribution Date following the Due Period during which the aggregate
Principal Balance of the Mortgage Loans is less than 10% of the sum of the
Principal Balances of the Initial Mortgage Loans and Subsequent Mortgage Loans
as of the Cut-off Date (the 'Optional Termination Date') by purchasing all of
the outstanding Mortgage Loans and REO Properties at a price equal to the sum of
the outstanding Pool Balance (subject to reduction of the purchase price based
in part on the appraised value of any REO Property included in the Trust if such
appraised value is less than the Principal Balance of the related Mortgage Loan,
as provided in the Agreement) and accrued and unpaid interest thereon at the
weighted average of the Loan Rates through the end of the related Due Period.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
The Servicer has the option to purchase from the Trust any Mortgage Loan 90
days or more delinquent at a purchase price equal to the outstanding principal
balance of such Mortgage Loan as of the date of purchase, plus all accrued and
unpaid interest on such principal balance computed at the Loan Rate.
VOTING RIGHTS
Under the Agreement, the portion of the Voting Rights allocated to the
Offered Certificates will equal 100% minus the portion allocated to the Residual
Certificates, and the portion of the Voting Rights allocated to the Residual
Certificates will equal the percentange equivalent of a fraction, the numerator
of which is the sum of each Required Overcollateralization Amount and the
denominator of which is the Pool Balance. Voting Rights allocated to the Classes
of Offered Certificates will be allocated among such Classes in proportion to
their respective Class Principal Balances. Voting Rights allocated to a Class of
Certificates will be further allocated among the Certificates of such Class on
the basis of their respective Percentage Interests.
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THE TRUSTEE
with its principal place of business
in , will be named Trustee pursuant to the Agreement. The
Trustee may have banking relationships with the Seller and the Servicer.
The Trustee may resign at any time, in which event the Seller will be
obligated to appoint a successor Trustee. The Seller may also remove the Trustee
if the Trustee ceases to be eligible to continue as such under the Agreement or
if the Trustee becomes insolvent. Upon becoming aware of such circumstances, the
Seller will be obligated to appoint a successor Trustee. Any resignation or
removal of the Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor Trustee.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders evidencing at least 51% of the Voting Rights have made
written requests upon the Trustee to institute such proceeding in its own name
as Trustee thereunder and have offered to the Trustee reasonable indemnity and
the Trustee for 60 days has neglected or refused to institute any such
proceeding. The Trustee will be under no obligation to exercise any of the
trusts or powers vested in it by the Agreement or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Certificateholders, unless such Certificateholders have offered to the
Trustee reasonable security or indemnity against the cost, expenses and
liabilities which may be incurred therein or thereby.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Seller for general corporate purposes, including repayment of
financing for the Mortgage Loans. Such financing may have been provided by one
or more of the Underwriters.
FEDERAL INCOME TAX CONSIDERATIONS
Separate elections will be made to treat certain assets of the Trust
(exclusive of the Initial Interest Coverage Account, the Funding Account and the
LIBOR Carryover Reserve Fund) as a 'real estate mortgage investment conduit' (a
'REMIC') for federal income tax purposes under the Internal Revenue Code of
1986, as amended (the 'Code'), creating a two-tier REMIC structure. The Offerred
Certificates will be designated as 'regular interests' in a REMIC. The Offered
Certificates generally will be treated as debt instruments issued by a REMIC for
federal income tax purposes. Income on the Offered Certificates must be reported
under an accrual method of accounting. See 'FEDERAL INCOME TAX
CONSIDERATIONS--Taxation of the REMIC and its Holders' in the Prospectus.
The Notional Amount Certificates will, and the other Classes of Offered
Certificates may, depending on their issue price, be issued with original issue
discount ('OID') for federal income tax purposes. In such event, holders of such
Certificates will be required to include OID in income as it accrues under a
constant yield method, in advance of the receipt of cash attributable to such
income. The OID Regulations do not contain provisions specifically interpreting
Code Section 1272(a)(6). Until the Treasury issues guidance to the contrary, the
Trustee intends to base its computation on Code Section 1272(a)(6) and the OID
Regulations as described in the Prospectus. However, because no regulatory
guidance currently exists under Code Section 1272(a)(6), there can be no
assurance that such methodology represents the correct manner of calculating
OID.
The yield used to calculate accruals of OID with respect to the Offered
Certificates with OID will be the original yield to maturity of such
Certificates, determined by assuming that the Mortgage Loans in Loan
Group F and Loan Group A will prepay in accordance with % and %,
respectively, of the Prepayment Assumption. No representation is made as to the
actual rate at which the Mortgage Loans will prepay.
A reasonable application of the principles of the OID Regulations to the
Adjustable Rate Certificates generally would be to report all income with
respect to such Certificates as original issue discount for each period,
computing such original issue discount (i) by assuming that the value of the
1-Month LIBOR will remain constant for purposes of determining the original
yield to maturity of such Class of Certificates and projecting
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future distributions on such Certificates, thereby treating such Certificates as
fixed rate instruments to which the original issue discount computation rules
described in the Prospectus can be applied, and (ii) by accounting for any
positive or negative variation in the actual value of the applicable index in
any period from its assumed value as a current adjustment to original issue
discount with respect to such period.
The Offered Certificates (other than the portion of the Adjustable Covered
Certificates which represents the right to receive LIBOR Carryover from the
LIBOR Carryover Reserve Fund) will be treated as regular interests in a REMIC
under section 860G of the Code. Accordingly, the Offered Certificates will be
treated as (i) assets described in section 7701(a)(19)(C) of the Code, and (ii)
'real estate assets' within the meaning of section 856(c)(4) of the Code, in
each case to the extent described in the Prospectus. Interest on the Offered
Certificates 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 to the same
extent that the Offered Certificates are treated as real estate assets. See
'FEDERAL INCOME TAX CONSIDERATIONS' in the Prospectus.
THE LIBOR CARRYOVER RESERVE FUND
The Adjustable Rate Certificates in Certificate Group F, other than the
Class A-1F Certificates (the 'Adjustable Covered Certificates') will also
represent beneficial ownership of an interest in a limited recourse interest
rate cap agreement. A holder of an Adjustable Covered Certificate must allocate
its purchase price for the Adjustable Covered Certificate between its two
components--the REMIC regular interest component and the Interest Rate Cap
Agreement component. For information reporting purposes, the Trustee will assume
that, with respect to any Adjustable Covered Certificate, the Interest Rate Cap
Agreement component will have only nominal value relative to the value of the
regular interest component. The IRS could, however, argue that the Interest Rate
Cap Agreement component has significant value, and if that argument were to be
sustained, the regular interest component could be viewed as having been issued
with original issue discount or an additional amount of original issue discount
('OID') (which in either case could cause the total amount of discount to exceed
a statutorily defined de minimis amount). See 'FEDERAL INCOME TAX
CONSIDERATIONS' in the Prospectus.
Upon the sale, exchange, or other disposition of an Adjustable Covered
Certificate, the holder must allocate the amount realized between the two
components of the Adjustable Covered Certificate based on the relative fair
market values of those components at the time of sale. Assuming that an
Adjustable Covered Certificate is held as a 'capital asset' within the meaning
of section 1221 of the Code, gain or loss on the disposition of an interest in
the Interest Rate Cap Agreement component should be capital gain or loss, and
gain or loss on the disposition of the regular interest component should,
subject to the limitation described below, be capital gain or loss. Gain
attributable to the regular interest component of an Adjustable Covered
Certificate will be treated as ordinary income, however, to the extent such gain
does not exceed the excess, if any, of (i) the amount that would have been
includable in the holder's gross income with respect to the regular interest
component had income thereon accrued at a rate equal to 110% of the applicable
federal rate as defined in section 1274(d) of the Code determined as of the date
of purchase of the Offered Certificate over (ii) the amount actually included in
such holder's income.
The portion of the overall purchase price attributable to the Interest Rate
Cap Agreement component must be amortized over the life of the Adjustable
Covered Certificate, taking into account the declining balance of the related
regular interest component. Treasury regulations concerning notional principal
contracts provide alternative methods for amortizing the purchase price of an
interest rate cap contract. Under one method--the level yield constant interest
method--the price paid for an interest rate cap agreement is amortized over the
life of the cap as though it were the principal amount of a loan bearing
interest at a reasonable rate. Holders are urged to consult their tax advisors
concerning the methods than can be employed to amortize the portion of the
purchase price paid for the Interest Rate Cap Agreement component of an
Adjustable Covered Certificate.
Any payments made to a holder from the LIBOR Carryover Reserve Fund will be
treated as periodic payments on an interest rate cap agreement. To the extent
the sum of such periodic payments for any year exceed that year's amortized cost
of the Interest Rate Cap Agreement component, such excess is ordinary income. If
for any year the amount of that year's amortized cost exceeds the sum of the
periodic payments, such excess is allowable as an ordinary deduction.
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BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Offered Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other 'reportable
payments' (as defined in the Code) properly, or, under certain circumstances,
fail to provide the Trustee or their broker with a certified statement, under
penalty of perjury, that they are not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Offered Certificates (and the amount of interest withheld for
federal income taxes, if any) for each calendar year, except as to exempt
holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their status
as nonresidents). As long as the only 'Certificateholder' of record is Cede, as
nominee for DTC, Certificate Owners and the IRS will receive tax and other
information including the amount of interest paid on such Certificates owned
from Participants and Indirect Participants rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to enable
Participants, Indirect Participants and certain other persons to complete their
reports.) Each non-exempt Certificate Owner will be required to provide, under
penalty of perjury, a certificate on IRS Form W-9 containing his or her name,
address, correct Federal taxpayer identification number and a statement that he
or she is not subject to backup withholding. Should a nonexempt Certificate
Owner fail to provide the required certification, the Participants or Indirect
Participants (or the Paying Agent) will be required to withhold 31% of the
interest (and principal) otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
Such amounts will be deemed distributed to the affected Certificate Owner for
all purposes of the Certificates and the Agreement.
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the United States federal income tax
treatment of holders that are not United States persons ('Foreign Investors').
The term 'Foreign Investor' means any person other than (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
organized in or under the laws of the United States or any state or political
subdivision thereof or (iii) an estate the income of which is includible in
gross income for United States federal income tax purposes, regardless of its
source or a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust.
The Code and Treasury regulations generally subject interest paid to a
Foreign Investor to a withholding tax at a rate of 30% (unless such rate were
changed by an applicable treaty). The withholding tax, however, is eliminated
with respect to certain 'portfolio debt investments' issued to Foreign
Investors. Portfolio debt investments include debt instruments issued in
registered form for which the United States payor receives a statement that the
beneficial owner of the instrument is a Foreign Investor. The Offered
Certificates will be issued in registered form, therefore if the information
required by the Code is furnished (as described below) and no other exceptions
to the withholding tax exemption are applicable, no withholding tax will apply
to the Offered Certificates.
For the Offered Certificates to constitute portfolio debt investments
exempt from the United States withholding tax, the withholding agent must
receive from the Certificate Owner an executed IRS Form W-8 signed under penalty
of perjury by the Certificate Owner stating that the Certificate Owner is a
Foreign Investor and providing such Certificate Owner's name and address. The
statement must be received by the withholding agent in the calendar year in
which the interest payment is made, or in either of the two preceding calendar
years.
A Certificate Owner that is a nonresident alien or foreign corporation will
not be subject to United States federal income tax on gain realized on the sale,
exchange, or redemption of such Offered Certificate, provided that (i) such gain
is not effectively connected with a trade or business carried on by the
Certificate Owner in the United States, (ii) in the case of a Certificate Owner
that is an individual, such Certificate Owner is not present in the United
States for 183 days or more during the taxable year in which such sale, exchange
or redemption occurs
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and (iii) in the case of gain representing accrued interest, the conditions
described in the immediately preceding paragraph are satisfied.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Offered Certificates should consult with its counsel with respect to the
potential consequences under the Employee Retirement Income Security Act of
1974, as amended ('ERISA'), and the Code, of the Plans acquisition and ownership
of such Certificates. See 'ERISA CONSIDERATIONS' in the Prospectus.
The U.S. Department of Labor has granted an administrative exemption to
(Prohibited Transaction Exemption ) (the 'Exemption')
which exempts from the application of the prohibited transaction rules
transactions relating to (1) the acquisition, sale and holding by Plans of
certain certificates representing an undivided interest in certain asset-backed
pass-through trusts, with respect to which or any of its
affiliates is the sole underwriter or the manager or co-manager of the
underwriting syndicate; and (2) the servicing, operation and management of such
asset-backed pass-through trusts, provided that the general conditions and
certain other conditions set forth in the Exemption are satisfied. The Exemption
will apply to the acquisition, holding and resale of the Senior Certificates by
a Plan provided that certain conditions (certain of which are described below)
are met.
Among the conditions which must be satisfied for the Exemption to apply are
the following:
(1) The acquisition of the Senior Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as favorable
to the investing Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Senior Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Senior 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 either S&P, Fitch, Moody's Investors
Service, Inc., or Duff & Phelps Credit Rating Co.;
(4) The sum of all payments made to and retained by the Underwriters
in connection with the distribution of the Senior Certificates represents
not more than reasonable compensation for underwriting such Certificates;
the sum of all payments made to and retained by the Seller pursuant to the
sale of the Mortgage Loans to the Trust represents not more than the fair
market value of such Mortgage Loans; the sum of all payments made to and
retained by the Servicer represent not more than reasonable compensation
for the Servicer's services under the Agreement and reimbursement of the
Servicer's reasonable expenses in connection therewith;
(5) The Trustee is not an affiliate of the Underwriters, the Seller,
the Servicer, any borrower whose obligations under one or more Mortgage
Loans constitute more than 5% of the aggregate unamortized principal
balance of the assets in the Trust, or any of their respective affiliates
(the 'Restricted Group'); and
(6) The Plan investing in the Senior 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, as amended.
It is expected that the Exemption will apply to the acquisition and holding
of the Senior Certificates by Plans and that all conditions of the Exemption
other than those within the control of the investors will be met.
The Exemption does not apply to Plans sponsored by the Seller, the
Underwriters, the Trustee, the Servicer, any other servicers or any Mortgagor
with respect to Mortgage Loans included in the Trust constituting more than 5%
of the aggregate unamortized principal balance of the assets in such Trust or
any affiliate of such parties (the 'Restricted Group'). No exemption is provided
from the restrictions of ERISA for the acquisition or holding of Offered
Certificates on behalf of an 'Excluded Plan' by any person who is a fiduciary
with respect to the assets of such Excluded Plan. For purposes of the Offered
Certificates, an Excluded Plan is a Plan sponsored
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by any member of the Restricted Group. In addition, no Plan's investment in any
Class of Offered Certificates may exceed 25% of all of the Certificates of such
Class outstanding at the time of the Plan's acquisition and after the Plan's
acquisition of such Class of Offered Certificates, no more than 25% of the
assets over which the fiduciary has investment authority may be invested in
securities of a trust containing assets which are sold or serviced by the same
entity. Finally, in the case of initial issuance (but not secondary market
transactions), at least 50% of each Class of Offered Certificates, and at least
50% of the aggregate interest in the Trust, must be acquired by persons
independent of the Restricted Group.
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Exemption which extends exemptive relief to certain mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. With respect to the Offered Certificates, the
amendment generally allows a portion of the Mortgage Loans ('Loans') supporting
payments to Certificateholders and having a principal amount equal to no more
than 25% of the total principal amount of the Certificates to be transferred
within a 90-day or three-month period following the Closing Date ('Pre-Funding
Period'), instead of requiring that all such Loans be either identified or
transferred on or before the Closing Date, provided that the following
conditions are met:
(1) The ratio of the amount allocated to the Pre-Funding Account to
the total principal amount of the Certificates being offered ('Pre-Funding
Limit') must not exceed twenty-five percent (25%).
(2) All Loans transferred after the Closing Date ('Additional Loans')
must meet the same terms and conditions for eligibility as the original
Loans used to create the Trust, which terms and conditions have been
approved by the Rating Agency.
(3) The transfer of such Additional Loans to the Trust during the
Pre-Funding Period must not result in the Certificates receiving a lower
credit rating from the Rating Agency upon termination of the Pre-Funding
Period than the rating that was obtained at the time of the initial
issuance of the Certificates by the Trust.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the 'average interest rate') for all of
the Loans in the Trust at the end of the Pre-Funding Period must not be
more than 100 basis points lower than the average interest rate for the
Loans which were transferred to the Trust on the Closing Date.
(5) Either: (i) the characteristics of the Additional Loans must be
monitored by an insurer or other credit support provider which is
independent of the Depositor; or (ii) an independent accountant retained by
the Depositor must provide the Depositor with a letter (with copies
provided to the Rating Agency, the Underwriters and the Trustee) stating
whether or not the characteristics of the Additional Loans conform to the
characteristics described in the Prospectus, Prospectus Supplement, Private
Placement Memorandum ('Offering Documents') and/or Pooling and Servicing
Agreement. In preparing such letter, the independent accountant must use
the same type of procedures as were applicable to the Loans which were
transferred as of the Closing Date.
(6) The Pre-Funding Period must end no later than three months or 90
days after the Closing Date or earlier, in certain circumstances, if the
amount on deposit in the Pre-Funding Account is reduced below the minimum
level specified in the Pooling Agreement or an event of default occurs
under the Pooling Agreement.
(7) Amounts transferred to any Pre-Funding Account and/or Capitalized
Interest Account used in connection with the pre-funding may be invested
only in investments which are permitted by the Rating Agency and (i) are
direct obligations of, or obligations fully guaranteed as to timely payment
of principal and interest by, the United States or any agency or
instrumentality thereof (provided that such obligations are backed by the
full faith and credit of the United States); or (ii) have been rated (or
the obligor has been rated) in one of the three highest generic rating
categories by the Rating Agency ('Permitted Investments').
(8) The Offering Documents must describe: (i) any Pre-Funding Account
and/or Capitalized Interest Account used in connection with a Pre-Funding
Account; (ii) the duration of the Pre-Funding Period; (iii) the percentage
and/or dollar amount of the Pre-Funding Limit for the Trust; and (iv) that
the amounts
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<PAGE>
remaining in the Pre-Funding Account at the end of the Pre-Funding Period
will be remitted to Certificateholders as repayments of principal.
(9) The Pooling and Servicing Agreement must describe the Permitted
Investments for the Pre-Funding Account and Capitalized Interest Account
and, if not disclosed in the Offering Documents, the terms and conditions
for eligibility of the Additional Loans.
BECAUSE THE CHARACTERISTICS OF THE SUBORDINATE CERTIFICATES MAY NOT MEET
THE REQUIREMENTS OF THE EXEMPTION OR ANY OTHER ISSUED EXEMPTION UNDER ERISA, THE
PURCHASE AND HOLDING OF THE SUBORDINATE CERTIFICATES BY A PLAN OR BY INDIVIDUAL
RETIREMENT ACCOUNTS OR OTHER PLANS SUBJECT TO SECTION 4975 OF THE CODE MAY
RESULT IN PROHIBITED TRANSACTIONS OR THE IMPOSITION OF EXCISE TAX OR CIVIL
PENALTIES. CONSEQUENTLY, TRANSFERS OF THE SUBORDINATE CERTIFICATES WILL NOT BE
REGISTERED BY THE TRUSTEE UNLESS THE TRUSTEE RECEIVES: (I) A REPRESENTATION FROM
THE TRANSFEREE OF SUCH CERTIFICATE, ACCEPTABLE TO AND IN FORM AND SUBSTANCE
SATISFACTORY TO THE TRUSTEE, TO THE EFFECT THAT SUCH TRANSFEREE IS NOT AN
EMPLOYEE BENEFIT PLAN SUBJECT TO SECTION 406 OF ERISA OR A PLAN OR ARRANGEMENT
SUBJECT TO SECTION 4975 OF THE CODE, NOR A PERSON ACTING ON BEHALF OF ANY PLAN
OR ARRANGEMENT NOR USING THE ASSETS OF ANY SUCH PLAN OR ARRANGEMENT TO EFFECT
SUCH TRANSFER; (II) IF THE PURCHASER IS AN INSURANCE COMPANY, A REPRESENTATION
THAT THE PURCHASER IS AN INSURANCE COMPANY WHICH IS PURCHASING SUCH CERTIFICATES
WITH FUNDS CONTAINED IN AN 'INSURANCE COMPANY GENERAL ACCOUNT' (AS SUCH TERM IS
DEFINED IN SECTION V(E) OF PROHIBITED TRANSACTION CLASS EXEMPTION 95-60 ('PTCE
95-60')) AND THAT THE PURCHASE AND HOLDING OF SUCH CERTIFICATES ARE COVERED
UNDER PTCE 95-60; OR (III) AN OPINION OF COUNSEL SATISFACTORY TO THE TRUSTEE
THAT THE PURCHASE OR HOLDING OF SUCH CERTIFICATE BY A PLAN, ANY PERSON ACTING ON
BEHALF OF A PLAN OR USING SUCH PLAN'S ASSETS WILL NOT RESULT IN THE ASSETS OF
THE TRUST BEING DEEMED TO BE 'PLAN ASSETS' AND SUBJECT TO THE PROHIBITED
TRANSACTION REQUIREMENTS OF ERISA AND THE CODE AND WILL NOT BE SUBJECT THE
TRUSTEE TO ANY OBLIGATION IN ADDITION TO THOSE UNDERTAKEN IN THE AGREEMENT. SUCH
REPRESENTATION AS DESCRIBED ABOVE SHALL BE DEEMED TO HAVE BEEN MADE TO THE
TRUSTEE BY THE TRANSFEREE'S ACCEPTANCE OF A SUBORDINATE CERTIFICATE IN
BOOK-ENTRY FORM. IN THE EVENT THAT SUCH REPRESENTATION IS VIOLATED, OR ANY
ATTEMPT TO TRANSFER TO A PLAN OR PERSON ACTING ON BEHALF OF A PLAN OR USING SUCH
PLAN'S ASSETS IS ATTEMPTED WITHOUT SUCH OPINION OF COUNSEL, SUCH ATTEMPTED
TRANSFER OR ACQUISITION SHALL BE VOID AND OF NO EFFECT.
Any Plan fiduciary considering whether to purchase any Offered Certificates
on behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to such investment. Among other things, before purchasing any
Offered Certificates, a fiduciary of a Plan subject to the fiduciary
responsibility provisions of ERISA or an employee benefit plan subject to the
prohibited transaction provisions of the Code should make its own determination
as to the availability of the exemptive relief provided in the Exemption or PTCE
95-60, and also consider the availability of any other prohibited transaction
exemptions.
LEGAL INVESTMENT CONSIDERATIONS
Upon termination of the Funding Period, the Class A-1A, Class A-2A and
Class M-1A Certificates will constitute 'mortgage related securities' for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA') so
long as they are rated in one of the two highest rating categories by at least
one nationally recognized statistical rating organization and, as such, are
legal investments for certain entities to the extent provided for in SMMEA. The
remaining Classes of Offered Certificates will NOT constitute 'mortgage related
securities' for purposes of SMMEA. Accordingly, many institutions with legal
authority to invest in comparably rated securities may not be legally authorized
to invest in such Certificates. See 'LEGAL INVESTMENT' in the Prospectus.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated , 199 (the 'Underwriting Agreement'), among the
Seller and the Underwriters named below (the 'Underwriters'), the Seller has
agreed to sell to the Underwriters and each of the Underwriters has severally
agreed to purchase from the Seller the principal amount of Offered Certificates
set forth below under such Underwriter's name.
<TABLE>
<CAPTION>
CLASS
- ------------------------- ------------- ----------------------------- --------------------
<S> <C> <C> <C>
Class A-1F............... $ $ $
Class A-2F...............
Class A-3F...............
Class A-4F...............
Class A-5F...............
Class A-6F...............
Class M-1F...............
Class M-2F...............
Class B-1F...............
Class A-1A...............
Class A-2A...............
Class M-1A...............
Class M-2A...............
Class B-1A...............
------------- ---------------- --------------------
Total............... $ $ $
------------- ---------------- --------------------
------------- ---------------- --------------------
</TABLE>
The Seller has been advised that the Underwriters propose initially to
offer the Offered Certificates to certain dealers at such price less a selling
concession not to exceed the applicable percentage of the Certificate
denomination set forth below, and that the Underwriters may allow and such
dealers may reallow a reallowance discount not to exceed the applicable
percentage of the Certificate denomination set forth below:
<TABLE>
<CAPTION>
SELLING REALLOWANCE
CLASS CONCESSION DISCOUNT
- ----------------------------------- ---------- -----------
<S> <C> <C>
A-1F...............................
A-2F...............................
A-3F...............................
A-4F...............................
A-5F...............................
A-6F...............................
M-1F...............................
M-2F...............................
B-1F...............................
A-1A...............................
A-2A...............................
M-1A...............................
M-2A...............................
B-1A...............................
</TABLE>
After the initial public offering, the public offering prices, such
concessions and such discounts may be changed.
Distribution of the Notional Amount Certificates will be made by
from time to time in negotiated transactions or otherwise
at varying prices to be determined at the time of sale. Proceeds to the Seller
from the Notional Amount Certificates are expected to be approximately
$ before deducting expenses payable by the Seller estimated to be
$ . In connection with the purchase and sale of the Notional Amount
Certificates, may be deemed to have received compensation
from the Seller in the form of underwriting discounts and commissions.
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<PAGE>
The Seller has been advised by the Underwriters that they presently intend
to make a market in the Offered Certificates. However, no Underwriter is
obligated to do so, any market-making may be discontinued at any time, and there
can be no assurance that an active public market for any Class of Offered
Certificates will develop or if one does develop, that it will continue for the
life of the applicable Class or that it will provide Certificateholders with a
sufficient level of liquidity of investment.
Until the distribution of the Offered Certificates is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Offered
Certificates. As an exception to these rules, the Underwriters are permitted to
engage in certain transactions that stabilize the prices of the Offered
Certificates. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Offered Certificates.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Seller nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Offered Certificates. In addition,
neither the Seller nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Immediately prior to the sale of the Mortgage Loans to the Trust, the
Mortgage Loans were subject to financing provided by affiliates of certain of
the Underwriters. The Seller will apply a portion of the proceeds it receives
from the sale of the Offered Certificates to repay such financing.
The Underwriting Agreement provides that the Seller will indemnify the
Underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended.
LEGAL MATTERS
Certain legal matters with respect to the Offered Certificates will be
passed upon for the Seller and Servicer by Stroock & Stroock & Lavan LLP, New
York, New York, and for the Underwriters by Brown & Wood LLP, New York, New
York.
RATINGS
It is a condition to the issuance of the Offered Certificates that they
receive ratings by
(' ') and
(' ') (each a 'Rating Agency') as follows:
<TABLE>
<CAPTION>
CLASS
- -------------------------------------- ------- -----
<S> <C> <C>
Senior Certificates
Class M-1F
Class M-1A
Class M-2F
Class M-2A
Class B-1F and Class B-1A
</TABLE>
The ratings assigned by to mortgage pass-through certificates address
the likelihood of the receipt of all distributions on the mortgage loans by the
related Certificateholders under the agreements pursuant to which such
certificates are issued. 's ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on such mortgage pool is adequate to make the
payments required by such certificates. 's ratings on such certificates do
not, however, constitute a statement regarding frequency of prepayments on the
related mortgage loans.
The ratings assigned by to mortgage pass-through certificates address
the likelihood of the receipt by certificateholders of all distributions to
which they are entitled under the transaction structure. 's ratings reflect
its analysis of the riskiness of the mortgage loans and its analysis of the
structure of the transaction as set forth in the operative documents. 's
ratings do not address the effect on the certificate's yield attributable to
prepayments or recoveries on the underlying mortgage loans.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. The ratings do not address the possibility that
S-65
<PAGE>
Holders of the Notional Amount Certificates may fail to recoup their initial
investments or the likelihood that Holders of the Adjustable Rate Certificates
other than the Class A-1F Certificates, will receive any LIBOR Carryover. Each
securities rating should be evaluated independently of similar ratings on
different securities.
The Depositor has not requested a rating of the Offered Certificates by any
rating agency other than the Rating Agencies. However, there can be no assurance
as to whether any other rating agency will rate the Offered Certificates or, if
it does, what rating would be assigned by such other rating agency. The rating
assigned by such other rating agency to the Offered Certificates of any Class
could be lower than the respective ratings assigned by the Rating Agencies.
S-66
<PAGE>
INDEX OF PRINCIPAL TERMS
Set forth below are the pages on which certain principal terms are first
defined. Additional defined terms can be found in GLOSSARY OF TERMS beginning on
page 76 of the Prospectus.
<TABLE>
<CAPTION>
TERMS PAGE
- ----- ------
<S> <C>
Adjustable Covered Certificates.......................................................................... S-10
Adjustable Rate Certificates............................................................................. S-3
Agreement................................................................................................ S-4
Applicable Multiplier.................................................................................... S-42
Available Funds.......................................................................................... S-42
Available Funds Cap...................................................................................... S-46
Basic Principal Amount................................................................................... S-8
Book-Entry Certificates.................................................................................. S-3
Certificateholder........................................................................................ S-43
Certificate Group........................................................................................ S-4
Certificate Group Balance................................................................................ S-42
Certificate Margin....................................................................................... S-7
Certificate Rate......................................................................................... S-3
Certificates............................................................................................. Cover
Class.................................................................................................... Cover
Class A-1F............................................................................................... Cover
Class A-2F............................................................................................... Cover
Class A-3F............................................................................................... Cover
Class A-4F............................................................................................... Cover
Class A-5F............................................................................................... Cover
Class A-6F............................................................................................... Cover
Class A-6F Percentage.................................................................................... S-46
Class A-6F Principal Distribution........................................................................ S-46
Class IOA................................................................................................ Cover
Class M-1F............................................................................................... Cover
Class M-2F............................................................................................... Cover
Class B-1F............................................................................................... Cover
Class A-1A............................................................................................... Cover
Class A-2A............................................................................................... Cover
Class IOA................................................................................................ Cover
Class M-1A............................................................................................... Cover
Class M-2A............................................................................................... Cover
Class B-1A............................................................................................... Cover
Class Interest Carryover Shortfall....................................................................... S-7
Class Interest Distribution.............................................................................. S-6
Class Monthly Interest Amount............................................................................ S-7
Class Principal Balance.................................................................................. S-40
Class Principal Carryover Shortfall...................................................................... S-47
Class Principal Distribution Amount...................................................................... S-47
Class R-1................................................................................................ S-3
Class R-2................................................................................................ S-3
Closing Date............................................................................................. Cover
CPR...................................................................................................... S-33
Cumulative Loss Event.................................................................................... S-47
Custodian................................................................................................ S-4
Cut-off Date............................................................................................. S-4
Delinquency Amount....................................................................................... S-47
Determination Date....................................................................................... S-11
Distribution Account..................................................................................... S-53
Distribution Date........................................................................................ S-2
Distribution Percentage.................................................................................. S-47
</TABLE>
S-67
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
- ----- ------
<S> <C>
DTC...................................................................................................... S-6
Due Period............................................................................................... S-8
Eligible Substitute Mortgage Loan........................................................................ S-51
ERISA.................................................................................................... S-10
Events of Default........................................................................................ S-55
Excess Delinquency Event................................................................................. S-47
Excess Funding Amount.................................................................................... S-47
Excess Interest.......................................................................................... S-9
Excess Overcollateralization Amount...................................................................... S-8
Final Scheduled Distribution Date........................................................................ S-4
Fixed Rate Certificates.................................................................................. S-3
Group A Certificates..................................................................................... S-3
Group F Certificates..................................................................................... S-3
Initial Interest Coverage Account........................................................................ S-6
Initial Mortgage Loans................................................................................... S-2
Interest Period.......................................................................................... S-7
Interest Remittance Amount............................................................................... S-47
LIBOR Business Day....................................................................................... S-47
LIBOR Carryover.......................................................................................... S-47
Liquidated Mortgage Loan................................................................................. S-47
Loan Group A............................................................................................. S-2
Loan Group Balance....................................................................................... S-5
Loan Group F............................................................................................. S-2
Loan Index............................................................................................... S-5
Loan Rate................................................................................................ S-5
Maximum Funding Amount................................................................................... S-2
Mezzanine Certificates................................................................................... S-4
Monthly Advance.......................................................................................... S-12
Mortgaged Properties..................................................................................... S-4
Mortgage Loans........................................................................................... S-2
Mortgagor................................................................................................ S-19
Net Loan Rate............................................................................................ S-7
Nonrecoverable Advance................................................................................... S-44
Notional Amount.......................................................................................... S-3
Notional Amount Certificates............................................................................. S-4
Offered Certificates..................................................................................... Cover
1-Month LIBOR............................................................................................ Cover
OC Floor................................................................................................. S-48
Original Credit Support Percentage....................................................................... S-46
Overcollateralization Amount............................................................................. S-9
Optional Termination Date................................................................................ S-10
Pool Balance............................................................................................. S-8
Pre-Funding Account...................................................................................... S-6
Prepayment Assumption.................................................................................... S-37
Principal Balance........................................................................................ S-5
Principal Distribution Amount............................................................................ S-8
Pro-Rata Principal Distribution Amount................................................................... S-48
Purchase Price........................................................................................... S-51
Rating Agency............................................................................................ S-11
Record Date.............................................................................................. S-4
REMIC.................................................................................................... S-2
REMIC I.................................................................................................. S-42
REMIC II................................................................................................. S-42
Required Overcollateralization Amount.................................................................... S-9
Required OC Percentage................................................................................... S-48
</TABLE>
S-68
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
- ----- ------
<S> <C>
Residual Certificates.................................................................................... S-3
Seller................................................................................................... S-4
Senior Certificates...................................................................................... S-4
Senior Principal Distribution Amount..................................................................... S-48
Servicer................................................................................................. S-4
Servicing Advance........................................................................................ S-44
Servicing Fee............................................................................................ S-11
Servicing Fee Rate....................................................................................... S-48
Six-Month LIBOR.......................................................................................... S-14
SMMEA.................................................................................................... S-10
Statistic Calculation Mortgage Loans..................................................................... S-2
Stepdown Date............................................................................................ S-49
Subordinate Certificates................................................................................. S-4
Subordinate Percentage................................................................................... S-49
Subordination Deficiency................................................................................. S-49
Subordination Increase Amount............................................................................ S-49
Subsequent Mortgage Loans................................................................................ S-2
Substitution Adjustment.................................................................................. S-51
Target Date.............................................................................................. S-3
Trigger Event............................................................................................ S-49
Trust.................................................................................................... Cover
Trustee.................................................................................................. S-4
Underwriters............................................................................................. S-64
Underwriting Agreement................................................................................... S-64
</TABLE>
S-69
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Home Equity
Loan Asset-Backed Certificates, Series 199 (the 'Global Securities') will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of The Depository Trust Company ('DTC'),
Cedel 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 Cedel 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 Home Equity Loan Asset-Backed
Certificates issues.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel 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, Cedel 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 Home Equity 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 Cedel 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 Home
Equity Loan Asset-Backed Certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. Cedel or Euroclear
will instruct the respective Depositary, as the case
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<PAGE>
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 Cedel 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 Cedel or Euroclear cash debt will be valued instead as of
the actual settlement date.
Cedel 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 Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel 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, Cedel 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 Cedel 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 Cedel 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 Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel 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 Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel 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 Cedel
Participant or Euroclear Participant the following day, and receipt of the cash
proceeds in the Cedel 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 Cedel 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 Cedel Participant's or Euroclear
Participant's account would instead be valued as of the actual settlement date.
S-71
<PAGE>
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel 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 Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel 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 settlement, which would
give the Global Securities sufficient time to be reflected in their
Cedel 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 Cedel Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel 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 (i) 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
(ii) 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). 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). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). 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).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). 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). If 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 Owners
or his agent.
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 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term 'U.S. Person' means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate the income
of which is includible in gross income for United States tax purposes,
regardless of its source or a trust if a court within the United States is able
to exercise primary supervision of the administration of the trust and one or
more United States fiduciaries have the authority to control all substantial
decisions of the trust. 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.
S-72
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH STATE.
Subject to Completion Dated May 1, 1998
PROSPECTUS
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
------------------------
DELTA FUNDING CORPORATION
(SELLER AND SERVICER)
------------------------
The Asset-Backed Certificates (the 'Certificates') and the Asset-Backed
Notes (the 'Notes' and, collectively with the Certificates, the 'Securities')
described herein may be sold from time to time in one or more series (each, a
'Series') in amounts, at prices and on terms to be determined at the time of
sale and to be set forth in a supplement to this Prospectus (a 'Prospectus
Supplement'). Each series (each a 'Series') of Securities will include either
one or more classes of Certificates or, if Notes are issued as part of a Series,
one or more Classes of Notes and one or more Classes of Certificates, as set
forth in the related Prospectus Supplement. Certain capitalized terms used
herein are defined in 'GLOSSARY OF TERMS' beginning on page 76.
The Certificates of a Series will evidence undivided interests in certain
assets deposited into a trust (each, a 'Trust Fund') by Delta Funding
Corporation (the 'Seller') pursuant to a Pooling and Servicing Agreement or a
Trust Agreement, as described herein. The Notes of a Series will be issued and
secured pursuant to an Indenture and will represent indebtedness of the related
Trust Fund. The Trust Fund for a Series of Securities will include (a) Primary
Assets, which may include one or more pools of (i) closed-end home equity loans
(the 'Home Equity Loans'), secured by mortgages on one- to four-family
residential or mixed-use properties, and (ii) securities ('Private Securities')
backed or secured by Home Equity Loans (the 'Underlying Loans'), (b) certain
monies received or due thereunder on or after the date specified in the related
Prospectus Supplement (the 'Cutoff Date') net of certain amounts payable to
Delta Funding Corporation, as servicer (the 'Servicer') of the Home Equity
Loans, (c) if specified in the related Prospectus Supplement, funds on deposit
in one or more pre-funding accounts and/or capitalized interest accounts and (d)
reserve funds, letters of credit, surety bonds, insurance policies or other
forms of credit support as described herein and in the related Prospectus
Supplement. Amounts on deposit in a pre-funding account for any Series will be
used to purchase additional Home Equity Loans during the funding period
specified in the related Prospectus Supplement in the manner specified therein.
The amount initially deposited in a pre-funding account for a Series of
Securities will not exceed fifty percent of the aggregate principal amount of
such Series of Securities.
Each Series of Securities will be issued in one or more classes (each, a
'Class'). Interest on and principal of the Securities of a Series will be
payable on the date or dates specified in the related Prospectus Supplement
(each, a 'Distribution Date'), at the times, at the rates, in the amounts and in
the order of priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with respect to
the amount, percentage (which may be 0%) and timing of distributions of
principal, interest or both and one or more Classes may be subordinated to other
Classes with respect to distributions of principal, interest or both as
described herein and in the related Prospectus Supplement. The Primary Assets
and other assets comprising the Trust Fund may be divided into one or more Asset
Groups and each Class of the related Series will evidence beneficial ownership
of the corresponding Asset Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class of a
Series may depend principally upon the rate of payment (including prepayments)
with respect to the Home Equity Loans or Underlying Loans relating to the
Private Securities, as applicable. A rate of prepayment lower or higher than
anticipated will affect the yield on the Securities of a Series in the manner
described herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Securities may be subject to termination or redemption.
If specified in the related Prospectus Supplement, an election may be made
to treat certain assets comprising the Trust Fund for a Series as a 'real estate
mortgage investment conduit' (a 'REMIC') for federal income tax purposes. See
'FEDERAL INCOME TAX CONSIDERATIONS.'
There currently is no secondary market for the Securities. There can be no
assurance that any such market will develop or, if it does develop, that it will
continue.
------------------------
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A SERIES
EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST FUND ONLY AND ARE NOT
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE SELLER, THE TRUSTEE, THE
SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES OR, UNLESS OTHERWISE
SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY OTHER PERSON OR
ENTITY. THE SELLER'S ONLY OBLIGATIONS WITH RESPECT TO ANY SERIES OF
SECURITIES WILL BE PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES
SET FORTH IN THE RELATED AGREEMENT AS DESCRIBED HEREIN OR IN THE
RELATED PROSPECTUS SUPPLEMENT.
------------------------
SEE 'RISK FACTORS' BEGINNING ON PAGE 13 FOR CERTAIN FACTORS
TO BE CONSIDERED IN PURCHASING THE SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE PROSPECTUS SUPPLEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to such Series of
Securities: (i) the aggregate principal amount, interest rate, and authorized
denominations of each Class of such Securities; (ii) certain information
concerning the Primary Assets; (iii) the terms of any Enhancement (as defined
herein) with respect to such Series; (iv) the terms of any insurance related to
the Primary Assets; (v) information concerning any other assets in the related
Trust Fund, including any Reserve Fund; (vi) the Final Scheduled Distribution
Date (as defined herein) of each Class of such Securities; (vii) the method to
be used to calculate the amount of interest and principal required to be applied
to the Securities of each Class of such Series on each Distribution Date, the
timing of the application of interest and principal and the order of priority of
the application of such interest and principal to the respective Classes and the
allocation of interest and principal to be so applied; (viii) the Distribution
Dates and any Assumed Reinvestment Rate (as defined herein); (ix) the amount, if
any, deposited in the Pre-Funding Account (as defined herein) available to
purchase additional Home Equity Loans, the length of the Pre-Funding Period (as
defined herein) and the criteria for determining which additional Home Equity
Loans may become part of the Trust Fund; (x) additional information with respect
to the plan of distribution of such Securities; and (xi) whether a REMIC
election will be made with respect to some or all of the Trust Fund for such
Series.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities are required under the related Agreements to be forwarded to
Holders. Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public
accountant. If so specified in the Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series will be issued in
book-entry form. In such event, (i) owners of beneficial interests in such
Securities will not be considered 'Holders' under the Agreements and will not
receive such reports directly from the related Trust Fund; rather, such reports
will be furnished to such owners through the participants and indirect
participants of the applicable book-entry system and (ii) references herein to
the rights of 'Holders' shall refer to the rights of such owners as they may be
exercised indirectly through such participants. See 'THE AGREEMENTS-- Reports to
Holders.'
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part of
the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Office located as follows,
Midwest Regional Office, 500 West Madison Street, Chicago, Illinois 60661; and
Northeast Regional Office, Seven World Trade Center, New York, New York 10048.
The Commission maintains an Internet Web site that contains reports, proxy and
information statements and other information regarding the registrants that file
electronically with the Commission, including the Seller. The address of such
Internet Web site is (http://www.sec.gov).
Each Trust Fund will be required to file certain reports with the
Commission pursuant to the requirements of the Securities Exchange Act of 1934,
as amended (the 'Exchange Act'). The Seller intends to cause each Trust Fund to
suspend filing such reports if and when such reports are no longer required
under the Exchange Act.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the
2
<PAGE>
Securities offered hereby and thereby nor an offer of the Securities to any
person in any state or other jurisdiction in which such offer would be unlawful.
The delivery of this Prospectus at any time does not imply that information
herein is correct as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund referred
to in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this
Prospectus and prior to the termination of any offering of the Securities issued
by such Trust Fund shall be deemed to be incorporated by reference in this
Prospectus and to be a part of this Prospectus from the date of the filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for all purposes of this Prospectus to the extent that a statement contained
herein (or 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 such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Seller on behalf of any Trust Fund will provide without charge to each
person to whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the documents referred to above that have
been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to Corporate
Secretary, Delta Funding Corporation, 1000 Woodbury Road, Woodbury, New York
11797 (telephone: 516-364-8500; facsimile: 516-364-9450).
3
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the 'GLOSSARY OF TERMS' beginning on page 76.
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SECURITIES OFFERED....... Asset-Backed Certificates (the 'Certificates') and
Asset-Backed Notes (the 'Notes'). Certificates are
issuable from time to time in Series pursuant to a
Pooling and Servicing Agreement or Trust Agreement.
Each Certificate of a Series will evidence an interest
in the Trust Fund for such Series, or in an Asset
Group specified in the related Prospectus Supplement.
Notes are issuable from time to time in a Series
pursuant to an Indenture. Each Series of Securities
will consist of one or more Classes, one or more of
which may be Classes of Compound Interest Securities,
Planned Amortization Class ('PAC') Securities,
Variable Interest Securities, Zero Coupon Securities,
Principal Only Securities, Interest Only Securities,
Senior Securities or Subordinate Securities (each of
which is generally described in the 'GLOSSARY OF
TERMS'). Each Class may differ in, among other things,
the amounts allocated to and the priority of principal
and interest payments, Final Scheduled Distribution
Dates, Distribution Dates and interest rates. The
Securities of each Class will be issued in fully
registered form in the denominations specified in the
related Prospectus Supplement. If so specified in the
related Prospectus Supplement, the Securities or
certain Classes of such Securities offered thereby may
be available in book-entry form only.
SELLER AND SERVICER...... Delta Funding Corporation, a New York corporation,
with its principal executive offices located at 1000
Woodbury Road, Woodbury, New York 11797, and a
telephone number of (516) 364-8500. See 'THE SELLER
AND THE SERVICER.'
INTEREST PAYMENTS........ Interest payments on the Securities of a Series
entitled by their terms to receive interest will be
made on each Distribution Date, to the extent set
forth in, and at the applicable rate specified in (or
determined in the manner set forth in), the related
Prospectus Supplement. The interest rate on Securities
of a Series may be variable or change with changes in
the rates of interest on the related Home Equity Loans
or Underlying Loans relating to the Private
Securities, as applicable and/or as prepayments occur
with respect to such Home Equity Loans or Underlying
Loans, as applicable. Interest Only Securities may be
assigned a 'Notional Amount' which is used solely for
convenience in expressing the calculation of interest
and for certain other purposes and does not represent
the right to receive any distributions allocable to
principal. Principal Only Securities may not be
entitled to receive any interest payments or may be
entitled to receive only nominal interest payments.
Interest payable on the Securities of a Series on a
Distribution Date will include all interest accrued
during the period specified in the related Prospectus
Supplement. See 'DESCRIPTION OF THE
SECURITIES--Payments of Interest.'
PRINCIPAL PAYMENTS....... All payments of principal of a Series of Securities
will be made in an aggregate amount determined as set
forth in the related Prospectus Supplement and will be
paid at the times and will be allocated among
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<TABLE>
<S> <C>
the Classes of such Series in the order and amounts,
and will be applied either on a pro rata or a random
lot basis among all Securities of any such Class, all
as specified in the related Prospectus Supplement.
FINAL SCHEDULED
DISTRIBUTION DATE
OF THE SECURITIES...... The Final Scheduled Distribution Date with respect to
each Class of Notes is the date no later than the date
on which principal thereof will be fully paid and with
respect to each Class of Certificates is the date
after which no Certificates of such Class are expected
to remain outstanding, in each case calculated on the
basis of the assumptions applicable to such Series
described in the related Prospectus Supplement. The
Final Scheduled Distribution Date of a Class may equal
the maturity date of the Primary Asset in the related
Trust Fund which has the latest stated maturity or
will be determined as described herein and in the
related Prospectus Supplement.
The actual final Distribution Date of the Securities
of a Series will depend primarily upon the rate of
payment (including prepayments, liquidations due to
default, the receipt of proceeds from casualty
insurance policies and repurchases) of the Home Equity
Loans or Underlying Loans relating to the Private
Securities, as applicable, in the related Trust Fund.
In general, the actual final Distribution Date of any
Security is likely to occur earlier and may occur
substantially earlier or, with respect to a Class of
Certificates, may occur later than its Final Scheduled
Distribution Date as a result of the application of
prepayments to the reduction of the principal balances
of the Securities and as a result of defaults on the
Primary Assets. The rate of payments on the Home
Equity Loans or Underlying Loans relating to the
Private Securities, as applicable, in the Trust Fund
for a Series will depend on a variety of factors,
including certain characteristics of such Home Equity
Loans or Underlying Loans, as applicable, and the
prevailing level of interest rates from time to time,
economic, demographic, tax and legal factors and
servicing decisions. No assurance can be given as to
the actual prepayment experience with respect to a
Series. See 'RISK FACTORS--Yield May Vary' and
'DESCRIPTION OF THE SECURITIES--Weighted Average Life
of the Securities.'
OPTIONAL TERMINATION..... The Seller, the Servicer, or such other entity that is
specified in the related Prospectus Supplement, may,
at its option, cause an early termination of one or
more Classes of Securities by purchasing all or part
of the Primary Assets remaining in the Trust Fund on
or after a specified date, or on or after such time as
the aggregate principal balance of the Securities of
the Series or the Primary Assets relating to such
Series, as specified in the related Prospectus
Supplement, is less than the amount or percentage, not
more than 25%, specified in the related Prospectus
Supplement. See 'DESCRIPTION OF THE
SECURITIES--Optional Redemption, Purchase or
Termination.'
SECURITIES INVOLVE
RISKS.................. An investment in the Securities of any Series involves
material risks and should only be considered by
investors which, either alone or together with their
investment advisors, have the ability to understand
such risks. See 'RISK FACTORS' beginning on page 13
herein.
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<S> <C>
THE TRUST FUND........... The Trust Fund for a Series of Securities will consist
of one or more of the assets described below, as
described in the related Prospectus Supplement.
A. PRIMARY ASSETS...... The Primary Assets for a Series may consist of any
combination of the following assets, to the extent and
as specified in the related Prospectus Supplement.
(1) HOME EQUITY
LOANS............. Primary Assets for a Series will consist, in whole or
in part, of 'closed-end' home equity loans (the 'Home
Equity Loans'). The Home Equity Loans may, as
specified in the related Prospectus Supplement, have
various payment characteristics, including balloon or
other irregular payment features, and may accrue
interest at a fixed rate or an adjustable rate. Some
Home Equity Loans may be delinquent or non-performing
as specified in the related Prospectus Supplement. The
Home Equity Loans will be originated or acquired by
the Seller in the ordinary course of its business. The
Home Equity Loans will be nonconventional loans.
Additional Home Equity Loans may be periodically added
to the Trust Fund, or may be removed from time to time
if certain asset tests are met, all as described
herein under 'THE TRUST FUNDS' and in the related
Prospectus Supplement.
The Home Equity Loans will be secured by mortgages or
deeds of trust or other similar security instruments
creating a lien on a Mortgaged Property, which may be
subordinated to one or more senior liens on such
Mortgaged Property, as described herein under 'THE
TRUST FUNDS' and in the related Prospectus Supplement.
The related Prospectus Supplement will describe
certain characteristics of the Home Equity Loans for a
Series, including, without limitation, and to the
extent relevant: (a) the aggregate unpaid principal
balance of the Home Equity Loans; (b) the range and
weighted average Home Equity Loan Rate on the Home
Equity Loans and in the case of adjustable rate Home
Equity Loans, the range and weighted average of the
Current Home Equity Loan Rates and the Lifetime Rate
Caps, if any; (c) the range and the average
outstanding principal balance of the Home Equity
Loans; (d) the weighted average original and remaining
term-to-stated maturity of the Home Equity Loans and
the range of original and remaining terms-to-stated
maturity, if applicable; (e) the range of Combined
Loan-to-Value Ratios or Loan-to-Value Ratios, as
applicable, of the Home Equity Loans, computed in the
manner described in the related Prospectus Supplement;
(f) the percentage (by principal balance as of the
Cut-off Date) of Home Equity Loans that accrue
interest at adjustable or fixed interest rates; (g)
any enhancement relating to the Home Equity Loans; (h)
the geographic distribution of the Mortgaged
Properties securing the Home Equity Loans; (i) the use
and type of each Mortgaged Property securing a Home
Equity Loan; (j) the lien priority of the Home Equity
Loans; and (k) the delinquency status and year of
origination of the Home Equity Loans.
(2) PRIVATE
SECURITIES........ Primary Assets for a Series may consist, in whole or
in part, of Private Securities which include (a)
pass-through certificates representing beneficial
interests in loans of the type that would otherwise be
eligible to be Home Equity Loans (the 'Underlying
Loans') or (b) collateralized obligations secured by
Underlying Loans. Such pass-through certificates or
collateralized obligations: (i) will have been
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<S> <C>
registered for sale under the Securities Act of 1933,
as amended; (ii) will have been acquired in the
secondary market and not in the initial offering
thereof; (iii) will have been issued by an issuer
which is not involved in the issuance of the related
Series and which is not an affiliate of the Seller;
and (iv) will be freely transferable under Rule 144(k)
under the Securities Act of 1933, as amended, to the
extent such rule is applicable to such securities.
Although individual Underlying Loans may be insured or
guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and the
Private Securities themselves will not be so insured
or guaranteed. See 'THE TRUST FUNDS--Private
Securities.' Payments on the Private Securities will
be distributed directly to the Trustee as registered
owner of such Private Securities.
The related Prospectus Supplement for a Series will
specify (such disclosure may be on an approximate
basis, as described above and will be as of the date
specified in the related Prospectus Supplement) to the
extent relevant and to the extent such information is
reasonably available to the Seller and the Seller
reasonably believes such information to be reliable:
(i) the aggregate approximate principal amount and
type of any Private Securities to be included in the
Trust Fund for such Series; (ii) certain
characteristics of the Underlying Loans including (A)
the payment features of such Underlying Loans (i.e.,
whether they are fixed rate or adjustable rate and
whether they provide for fixed level payments,
negative amortization or other payment features), (B)
the approximate aggregate principal amount of such
Underlying Loans which are insured or guaranteed by a
governmental entity, (C) the servicing fee or range of
servicing fees with respect to such Underlying Loans,
(D) the minimum and maximum stated maturities of such
Underlying Loans at origination, (E) the lien priority
of such Underlying Loans, and (F) the delinquency
status and year of origination of such Underlying
Loans; (iii) the maximum original term-to-stated
maturity of the Private Securities; (iv) the weighted
average term-to-stated maturity of the Private
Securities; (v) the pass-through or certificate rate
or ranges thereof for the Private Securities; (vi) the
sponsor or depositor of the Private Securities (the
'PS Sponsor'), the servicer of the Private Securities
(the 'PS Servicer') and the trustee of the Private
Securities (the 'PS Trustee'); (vii) certain
characteristics of Enhancement, if any, such as
reserve funds, insurance policies, letters of credit
or guarantees, relating to the Underlying Loans, or to
such Private Securities themselves; (viii) the terms
on which the Underlying Loans may, or are required to,
be repurchased prior to stated maturity; and (ix) the
terms on which substitute Underlying Loans may be
delivered to replace those initially deposited with
the PS Trustee. See 'THE TRUST FUNDS--Private
Securities--Additional Information.'
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<S> <C>
B. COLLECTION,
CERTIFICATE
AND DISTRIBUTION
ACCOUNTS......... All payments on or with respect to the Primary Assets
for a Series, net of amounts permitted to be retained
by the Servicer pursuant to the Agreement, will be
remitted by the Servicer directly to an account (the
'Collection Account' or the 'Certificate Account') to
be established for such Series. The Trustee will be
required to apply a portion of the amount in the
Collection Account or the Certificate Account, to the
payment of certain amounts payable to the Servicer
under the related Agreement and any other person
specified in the Prospectus Supplement, and to deposit
a portion of the amount in the Collection Account into
one or more separate accounts (each, a 'Distribution
Account') to be established for such Series, each in
the manner and at the times established in the related
Prospectus Supplement. All amounts deposited in such
Distribution Account (or, if there is no Distribution
Account, amounts remaining in the Certificate Account)
will be available for (i) application to the payment
of principal of and interest on such Series of
Securities (or such Class or Classes specified in the
related Prospectus Supplement) on the next
Distribution Date, (ii) the making of adequate
provision for future payments on certain Classes of
Securities and (iii) any other purpose specified in
the related Prospectus Supplement. After applying the
funds in the Collection Account or the Certificate
Account as described above, any funds remaining in
such Accounts may be paid over to the Servicer, the
Seller, any provider of Enhancement with respect to
such Series (an 'Enhancer') or any other person
entitled thereto in the manner and at the times
established in the related Prospectus Supplement.
C. PRE-FUNDING AND
CAPITALIZED
INTEREST
ACCOUNTS......... A Trust Fund may include one or more segregated trust
accounts (each, a 'Pre-Funding Account') for the
related Series. On the closing date for such a Series,
a portion of the proceeds of the sale of the
Securities of such Series (such amount, the
'Pre-Funded Amount') will be deposited in the
Pre-Funding Account and may be used to purchase
additional Primary Assets during the period of time,
not to exceed six months, specified in the related
Prospectus Supplement (the 'Pre-Funding Period'). The
Primary Assets to be so purchased will be required to
have certain characteristics specified in the related
Prospectus Supplement. If any Pre-Funded Amount
remains on deposit in the Pre-Funding Account at the
end of the Pre-Funding Period, such amount will be
applied in the manner specified in the related
Prospectus Supplement to prepay the Classes of Notes
and/or the Certificates of the applicable Series
specified in the related Prospectus Supplement. The
amount initially deposited in a Pre-Funding Account
for a Series of Securities will not exceed fifty
percent of the aggregate principal amount of such
Series of Securities. The Seller will include
information regarding the additional Primary Assets in
a Current Report on Form 8-K to the extent such
information, individually or in the aggregate, is
material.
If a Pre-Funding Account is established, one or more
segregated trust accounts (each, a 'Capitalized
Interest Account') may be established for the related
Series. On the closing date for such Series, a portion
of the proceeds of the sale of the Securities of such
Series may be
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deposited in the Capitalized Interest Account and used
to fund the excess, if any, of (x) the sum of (i) the
amount of interest accrued on the Classes of
Securities of such Series specified in the related
Prospectus Supplement and (ii) if specified in the
related Prospectus Supplement, certain fees or
expenses during the Pre-Funding Period such as Trustee
fees and credit enhancement fees, over (y) the amount
of interest available therefor from the Primary Assets
in the Trust Fund. If so specified in the related
Prospectus Supplement, amounts on deposit in the
Capitalized Interest Account may be released to the
Seller prior to the end of the Pre-Funding Period
subject to the satisfaction of certain tests specified
in the related Prospectus Supplement. Any amounts on
deposit in the Capitalized Interest Account at the end
of the Pre-Funding Period that are not necessary for
such purposes will be distributed to the person
specified in the related Prospectus Supplement.
ENHANCEMENT.............. If and to the extent specified in the related
Prospectus Supplement, enhancement with respect to a
Series or any Class of Securities may include any one
or more of the following: a financial guaranty
insurance policy, overcollateralization, a letter of
credit, a cash reserve fund, insurance policies, one
or more Classes of Subordinate Securities, derivative
products or other forms of credit enhancement, or any
combination thereof (collectively, 'Enhancement'). The
Enhancement with respect to any Series or any Class of
Securities may be structured to provide protection
against delinquencies and/or losses on the Primary
Assets, against changes in interest rates, or other
risks, to the extent and under the conditions
specified in the related Prospectus Supplement. Any
form of Enhancement will have certain limitations and
exclusions from coverage thereunder, which will be
described in the related Prospectus Supplement.
Further information regarding any Enhancer, including
financial information when material, will be included
in the related Prospectus Supplement. See
'ENHANCEMENT.'
With respect to any Series of Securities including one
or more Classes of Notes, distributions in respect of
the Certificates may be subordinated in priority of
payment to payments on the Notes, to the extent
specified in the related Prospectus Supplement.
CREDIT QUALITY OF
HOME EQUITY LOANS...... Throughout its operating history, the Seller has
focused on lending to individuals who generally have
impaired or limited credit profiles or higher debt to
income ratios and who typically have substantial
equity in their homes. See 'RISK FACTORS--Underwriting
Standards May Affect Performance' and 'THE SELLER AND
THE SERVICER-- General' and '--Underwriting' herein.
The Seller has in the past and will in the future
change its underwriting guidelines and procedures
when, in its business judgment, competition or other
conditions in its market so warrant. As a result,
Home Equity Loans originated at different times may
reflect different underwriting guidelines and be of
different credit quality. However, any such
differences will be reflected in the levels of
Enhancement for the related Series of Securities.
SERVICING................ The Servicer will be responsible for servicing,
managing and making collections on the Home Equity
Loans for a Series. In addition, the Servicer, if so
specified in the related Prospectus Supplement, will
act
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as custodian and will be responsible for maintaining
custody of the Home Equity Loans and related
documentation on behalf of the Trustee. Advances with
respect to delinquent payments of principal and/or
interest on a Home Equity Loan ('Delinquency
Advances') will be made by the Servicer if and only to
the extent described in the related Prospectus
Supplement. Such advances will be intended to provide
liquidity only and will be reimbursable to the
Servicer to the extent specified in the related
Prospectus Supplement, from scheduled payments of
principal and/or interest, late collections, or from
the proceeds of liquidation of the related Home Equity
Loans or from other recoveries relating to such Home
Equity Loans (including any insurance proceeds or
payments from other credit support) or, to the extent
specified in the related Prospectus Supplement, from
payments or proceeds from other Home Equity Loans. If
and to the extent specified in the related Prospectus
Supplement, the Servicer will be entitled to advance
its own funds to pay for any related expenses of
foreclosure and disposition of any liquidated Home
Equity Loan or related Mortgaged Property (the
'Servicer Advances'). See 'SERVICING OF
LOANS--Advances and Limitations Thereon.' The Servicer
will be entitled to be reimbursed for any such
Servicer Advances as specified in the related
Prospectus Supplement. In performing these functions,
the Servicer will exercise the same degree of skill
and care that it customarily exercises with respect to
similar Home Equity Loans owned or serviced by it.
Under certain limited circumstances, the Servicer may
resign or be removed, in which event either the
Trustee or a third-party servicer will be appointed as
successor servicer. The Servicer will receive a
periodic fee as servicing compensation (the 'Servicing
Fee') and may, as specified in the related Prospectus
Supplement, receive certain additional compensation.
See 'SERVICING OF LOANS--Servicing Compensation and
Payment of Expenses.'
FEDERAL INCOME TAX
CONSIDERATIONS
A. DEBT SECURITIES AND
REMIC RESIDUAL
SECURITIES........ If (i) an election is made to treat all or a portion
of a Trust Fund for a Series as a 'real estate
mortgage investment conduit' (a 'REMIC') or (ii) so
provided in the related Prospectus Supplement, a
Series of Securities will include one or more Classes
of taxable debt obligations under the Internal Revenue
Code of 1986, as amended (the 'Code'). Stated interest
with respect to such Classes of Securities will be
reported by a Holder in accordance with the Holder's
method of accounting except that, in the case of
Securities constituting 'regular interests' in a REMIC
('Regular Interests'), such interest will be required
to be reported on the accrual method regardless of a
Holder's usual method of accounting. Securities that
are Compound Interest Securities, Zero Coupon
Securities or Interest Only Securities will, and
certain other Classes of Securities may, be issued
with original issue discount that is not de minimis.
In such cases, the Holder will be required to include
original issue discount in gross income as it accrues,
which may be prior to the receipt of cash attributable
to such income. If a Security is issued at a premium,
the Holder may be entitled to make an election to
amortize such premium on a constant yield method.
In the case of a REMIC election, a Class of Securities
may be treated as REMIC 'residual interests'
('Residual Interest'). A Holder of a
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Residual Interest will be required to include in its
income its pro rata share of the taxable income of the
REMIC. In certain circumstances, the Holder of a
Residual Interest may have REMIC taxable income or tax
liability attributable to REMIC taxable income for a
particular period in excess of cash distributions for
such period or have an after-tax return that is less
than the after-tax return on comparable debt
instruments. In addition, a portion (or, in some
cases, all) of the income from a Residual Interest (i)
except in certain circumstances with respect to a
Holder classified as a thrift institution under the
Code, may not be subject to offset by losses from
other activities or investments, (ii) for a Holder
that is subject to tax under the Code on unrelated
business taxable income, may be treated as unrelated
business taxable income and (iii) for a foreign
holder, may not qualify for exemption from or
reduction of withholding. In addition, (i) Residual
Interests are subject to transfer restrictions and
(ii) certain transfers of Residual Interests will not
be recognized for federal income tax purposes.
Further, individual holders are subject to limitations
on the deductibility of expenses of the REMIC. See
'FEDERAL INCOME TAX CONSIDERATIONS.'
B. NON-REMIC
PASS-THROUGH
SECURITIES........ If so specified in the related Prospectus Supplement,
the Trust Fund for a Series will be treated as a
grantor trust and will not be classified as an
association taxable as a corporation for federal
income tax purposes and Holders of Securities of such
Series ('Pass-Through Securities') will be treated as
owning directly rights to receive certain payments of
interest or principal, or both, on the Primary Assets
held in the Trust Fund for such Series. All income
with respect to a Stripped Security (as defined
herein) will be accounted for as original issue
discount and, unless otherwise specified in the
related Prospectus Supplement, will be reported by the
Trustee on an accrual basis, which may be prior to the
receipt of cash associated with such income.
C. OWNER TRUST
SECURITIES........ If so specified in the Prospectus Supplement, the
Trust Fund will be treated as a partnership for
purposes of federal and state income tax. Each
Noteholder, by the acceptance of a Note of a given
Series, will agree to treat such Note as indebtedness,
and each Certificateholder, by the acceptance of a
Certificate of a given Series, will agree to treat the
related Trust Fund as a partnership in which such
Certificateholder is a partner for federal income and
state tax purposes. Alternative characterizations of
such Trust Fund and such Certificates are possible,
but would not result in materially adverse tax
consequences to Certificateholders. See 'FEDERAL
INCOME TAX CONSIDERATIONS.'
ERISA CONSIDERATIONS..... Subject to the considerations discussed under 'ERISA
CONSIDERATIONS' herein and in the related Prospectus
Supplement, the Notes may be eligible for purchase by
employee benefit plans. The related Prospectus
Supplement will provide further information with
respect to the eligibility of a Class of Certificates
for purchase by employee benefit plans.
A fiduciary of any employee benefit plan subject to
the Employee Retirement Income Security Act of 1974,
as amended ('ERISA'), or the Code should carefully
review with its own legal advisors whether the
purchase or holding of Securities could give rise to a
transaction
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prohibited or otherwise impermissible under ERISA or
the Code. See 'ERISA CONSIDERATIONS' herein and in the
related Prospectus Supplement.
LEGAL INVESTMENT......... Unless otherwise specified in the related Prospectus
Supplement, Securities of each Series offered by this
Prospectus and the related Prospectus Supplement will
not constitute 'mortgage related securities' under the
Secondary Mortgage Market Enhancement Act of 1984
('SMMEA'). Investors whose investment authority is
subject to legal restrictions should consult their own
legal advisors to determine whether and to what extent
the Securities constitute legal investments for them.
See 'LEGAL INVESTMENT.'
RATINGS.................. It will be a requirement for issuance of any Series
that each Class of Securities offered by this
Prospectus and the related Prospectus Supplement be
rated by at least one Rating Agency in one of its four
highest applicable rating categories. The rating or
ratings applicable to Securities of each Series
offered hereby and by the related Prospectus
Supplement will be as set forth in the related
Prospectus Supplement.
A securities rating should be evaluated independently
of similar ratings on different types of securities.
In general, a securities rating addresses the
likelihood that Holders will receive the distributions
to which they are entitled. A securities rating is not
a recommendation to buy, hold or sell securities and
does not address the effect that the rate of
prepayments on the Home Equity Loans or Underlying
Loans relating to Private Securities, as applicable,
for a Series may have on the yield to investors in the
Securities of such Series.
There is no assurance that the rating initially
assigned to such Securities will not be subsequently
lowered or withdrawn by the Rating Agency. In the
event the rating initially assigned to any Securities
is subsequently lowered for any reason, no person or
entity will be obligated to provide any credit
enhancement in addition to the Enhancement, if any,
specified in the related Prospectus Supplement. See
'RISK FACTORS--Ratings Are Not Recommendations.'
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RISK FACTORS
Investors should consider, among other things, the following risk factors
in connection with the purchase of the Securities.
Lack of Secondary Market Limits Liquidity. There will be no market for the
Securities of any Series prior to the issuance thereof, and there can be no
assurance that a secondary market will develop or, if it does develop, that it
will provide Holders with liquidity of investment or will continue for the life
of the Securities of such Series. See 'PLAN OF DISTRIBUTION.'
Primary Assets Are Only Source of Repayment. The Securities of a Series
will be payable solely from the assets of the Trust Fund for such Securities and
any related Enhancement. There will be no recourse to the Seller or any other
person for any default on the Notes or any failure to receive distributions on
the Certificates. Further, unless otherwise stated in the related Prospectus
Supplement, at the times set forth in the related Prospectus Supplement, certain
Primary Assets and/or any balance remaining in the Collection Account,
Certificate Account or Distribution Account immediately after making all
payments due on the Securities of such Series and other payments specified in
the related Prospectus Supplement, may be promptly released or remitted to the
Seller, the Servicer, the Enhancer or any other person entitled thereto and will
no longer be available for making payments to Holders. Consequently, Holders of
Securities of each Series must rely solely upon payments with respect to the
Primary Assets and the other assets constituting the Trust Fund for a Series of
Securities, including, if applicable, any amounts available pursuant to any
Enhancement for such Series, for the payment of principal of and interest on the
Securities of such Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Seller. There is no assurance that the market value of the
Primary Assets or any other assets for a Series will at any time be equal to or
greater than the aggregate principal amount of the Securities of such Series
then outstanding, plus accrued interest thereon. Moreover, upon an event of
default under the Indenture for a Series of Notes and a sale of the assets in
the Trust Fund or upon a sale of the assets of a Trust Fund for a Series of
Certificates, the Trustee, the Servicer, if any, the Enhancer and any other
service provider specified in the related Prospectus Supplement generally will
be entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement prior
to distributions to Holders of Securities. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on the
Securities of such Series.
Limited Protection Against Losses. Although any Enhancement is intended to
reduce the risk of delinquent payments or losses to Holders entitled to the
benefit thereof, the amount of such Enhancement will be limited, as set forth in
the related Prospectus Supplement, and will decline and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities. As a result Holders may suffer losses. See 'ENHANCEMENT.'
Yield May Vary. The yield to maturity experienced by a Holder of
Securities may be affected by the rate of payment of principal of the Home
Equity Loans or Underlying Loans relating to the Private Securities, as
applicable. The timing of principal payments of the Securities of a Series will
be affected by a number of factors, including the following: (i) the extent of
prepayments of the Home Equity Loans or Underlying Loans relating to the Private
Securities, as applicable; (ii) the manner of allocating principal payments
among the Classes of Securities of a Series as specified in the related
Prospectus Supplement; and (iii) the exercise by the party entitled thereto of
any right of optional termination. See 'DESCRIPTION OF THE SECURITIES--Weighted
Average Life of the Securities.' The rate of prepayments may be affected by the
characteristics of the Home Equity Loans, such as the loans-to-value ratios,
interest rates and purposes of such loans, the prevailing level of interest
rates, demographic, tax, and legal factors and servicing decisions. Prepayments
may also result from repurchases of Home Equity Loans or Underlying Loans
relating to the Private Securities, as applicable, due to material breaches of
the Seller's representations and warranties.
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that would otherwise be
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obtainable if interest payable on the Security were to accrue through the day
immediately preceding each Distribution Date, and the effective yield (at par)
to Holders will be less than the indicated coupon rate. See 'DESCRIPTION OF THE
SECURITIES--Payments of Interest.'
Underwriting Standards May Affect Performance. As described herein under
'THE SELLER AND THE SERVICER--Underwriting,' the Seller's underwriting standards
generally are less stringent than those of Fannie Mae or Freddie Mac with
respect to a borrower's credit history and in certain other respects. A
borrower's past credit history may not preclude the Seller from making a loan;
however, it generally will reduce the size (and consequently the Combined
Loan-to-Value Ratio) of the loan that the Seller is willing to make. As a result
of this approach to underwriting, the Home Equity Loans may experience higher
rates of delinquencies, defaults and foreclosures than mortgage loans
underwritten in a more traditional manner.
Junior Liens Create Additional Risk of Loss. If the Home Equity Loans in a
Trust Fund are secured primarily by junior liens subordinate to the rights of
the mortgagee under the related senior mortgage(s) or deed(s) of trust, the
proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding balance of such Home Equity Loans only to
the extent that the claims of such senior mortgagees or beneficiaries have been
satisfied in full, including any related foreclosure costs. In addition, a
junior mortgagee may not foreclose on the Mortgaged Property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees at or prior to the foreclosure sale or undertake the obligation to
make payments on the senior mortgages in the event the mortgagor is in default
thereunder. The Trust Fund will not have any source of funds to satisfy the
senior mortgages or deeds of trust or make payments due to the senior mortgagees
or beneficiaries.
Property Values May Be Insufficient. There are several factors that could
adversely affect the value of the Mortgaged Properties such that the outstanding
balance of the related Home Equity Loan, together with any senior financing on
the Mortgaged Properties, would equal or exceed the value of the Mortgaged
Properties. Among the factors that could adversely affect the value of the
Mortgaged Properties are an overall decline in the residential real estate
market in the areas in which the Mortgaged Properties are located or a decline
in the general condition of the Mortgaged Properties as a result of failure of
borrowers to maintain adequately the Mortgaged Properties or of natural
disasters that are not necessarily covered by insurance, such as earthquakes and
floods. Any such decline could extinguish the value of a junior interest in a
Property before having any effect on the related senior interest therein. If
such a decline occurs, the actual rates of delinquencies, foreclosure and losses
on the junior Loans could be higher than those currently experienced in the
mortgage and home improvement lending industry in general.
Insufficient Additional Primary Assets May Adversely Affect Yield. The
ability of a Trust Fund to invest in additional Home Equity Loans during the
related Pre-Funding Period will be dependant on the ability of the Seller to
originate or acquire Home Equity Loans that satisfy the requirements for
transfer to the Trust Fund specified in the related Prospectus Supplement. The
ability of the Seller to originate or acquire such Loans will be affected by a
variety of factors, including the prevailing level of market interest rates,
unemployment levels and consumer perceptions of general economic conditions. If
the principal balance of additional Primary Assets delivered to the Trust Fund
during the Pre-Funding Period is less than the Pre-Funded Amount, the Holders of
the Securities of the related Series will receive a prepayment of principal as
and to the extent described in the related Prospectus Supplement. Any such
principal prepayment may adversely affect the yield to maturity of the
applicable Securities. Since prevailing interest rates are subject to
fluctuation, there can be no assurance that investors will be able to reinvest
such a prepayment at yields equaling or exceeding the yields on the related
Securities. It is possible that the yield on any such reinvestment will be
lower, and may be significantly lower, than the yield on the related Securities.
Potential Liability for Environmental Conditions. Real property pledged as
security to a lender may be subject to certain environmental risks. Under the
laws of certain states, contamination of a property may give rise to a lien on
the property to assure the costs of clean-up. In several states, such a lien has
priority over the lien of an existing mortgage or owner's interest against such
property. In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
('CERCLA'), a lender may be liable, as an 'owner' or 'operator,' for costs of
addressing releases or
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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 risks such liability
on foreclosure of the Mortgaged Property.
Consumer Protection Laws May Affect Loans. Applicable state laws generally
regulate interest rates and other charges and require certain disclosures. In
addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the Loans. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and
principles may limit the ability of the Servicer to collect all or part of the
principal of or interest on the Loans, may entitle the borrower to a refund of
amounts previously paid and, in addition, could subject the owner of the Home
Equity Loan to damages and administrative enforcement.
The Loans are also subject to federal laws, including:
(i) the federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit;
(iii) the Americans with Disabilities Act, which, among other things,
prohibits discrimination on the basis of disability in the full and equal
enjoyment of the goods, services, facilities, privileges, advantages or
accommodations of any place of public accommodation; and
(iv) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Loans and in addition could subject the Trust Fund to damages and
administrative enforcement. The Loans may be subject to the Home Ownership and
Equity Protection Act of 1994 (the 'Act') which amended the Truth in Lending Act
as it applies to mortgages subject to the Act. The Act requires certain
additional disclosures, specifies the timing of such disclosures and limits or
prohibits inclusion of certain provisions in mortgages subject to the Act. The
Act also provides that any purchaser or assignee of a mortgage covered by the
Act is subject to all of the claims and defenses which the borrower could assert
against the original lender. The maximum damages that may be recovered under the
Act from an assignee is the remaining amount of indebtedness plus the total
amount paid by the borrower in connection with the Loan. If the Trust Fund
includes Loans subject to the Act, it will be subject to all of the claims and
defenses which the borrower could assert against the Seller. Any violation of
the Act which would result in such liability would be a breach of the Seller's
representations and warranties, and the Seller would be obligated to cure,
repurchase or, if permitted by the Agreement, substitute for the Home Equity
Loan in question. In addition, numerous other federal and state statutory
provisions, including the federal bankruptcy laws, the Soldiers' and Sailors'
Civil Relief Act of 1940 and state debtor relief laws, may also adversely affect
the Servicer's ability to collect the principal of or interest on the Loans and
also would affect the interests of the Securityholders in such Loans if such
laws result in the Loans being uncollectible. See 'CERTAIN LEGAL ASPECTS OF THE
LOANS.'
Insolvency of Seller May Cause Losses. The Seller intends that its
transfer of the Primary Assets to a Trust Fund will constitute a sale, and the
Seller and the Trust Fund will agree to treat each such transfer as a sale. In
the event of the insolvency of the Seller, the trustee in bankruptcy or the
Seller, as debtor-in-possession, may attempt to recharacterize such a sale as a
loan by the Trust Fund to the Seller secured by the pledge of the related
Primary Assets. If such an attempt were to be successful, Holders of Securities
could receive a prepayment of all or part of their Securities. Any such
prepayment would adversely affect the yield on such Securities and could result
in a loss. Even if such an attempt were to be unsuccessful, Holders of
Securities could experience delays in distributions which would adversely affect
the yield on the related Securities.
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Ratings Are not Recommendations. It will be a condition to the issuance of
a Series of Securities that each Class be rated in one of the four highest
rating categories by the Rating Agency identified in the related Prospectus
Supplement. Any such rating would be based on, among other things, the adequacy
of the value of the Primary Assets and any Enhancement with respect to such
Series. In general, a securities rating addresses the likelihood that Holders
will receive the distributions to which they are entitled. Such rating should
not be deemed a recommendation to purchase, hold or sell Securities, inasmuch as
it does not address market price or suitability for a particular investor and
does not address the likelihood of prepayments or the possibility that investors
may receive a lower than anticipated yield. There is also no assurance that any
such rating will remain in effect for any given period of time or may not be
lowered or withdrawn entirely by the Rating Agency if in its judgment
circumstances in the future so warrant. In addition to being lowered or
withdrawn due to any erosion in the adequacy of the value of the Primary Assets,
such rating might also be lowered or withdrawn, among other reasons, because of
an adverse change in the financial or other condition of an Enhancer or a change
in the rating of such Enhancer's long term debt. Any such reduction or
withdrawal in the rating assigned to the Securities may adversely affect the
liquidity of and yield on such Securities.
THE SELLER AND THE SERVICER
GENERAL
Delta Funding Corporation, a New York corporation ('Delta' or the
'Company') is a specialty consumer finance company that has engaged in
originating, acquiring, selling and servicing home equity loans since 1982.
Throughout its operating history, Delta has focused on lending to individuals
who generally have impaired or limited credit profiles or higher debt to income
ratios and typically have substantial equity in their homes. The Company makes
loans to these borrowers for such purposes as debt consolidation, home
improvement, refinancing or education, and these loans are primarily secured by
first mortgages on one- to four-family residential properties.
Delta originates home equity loans through licensed mortgage brokers and
other real estate professionals ('brokers') who submit loan applications on
behalf of the borrower ('Brokered Loans'). Delta also purchases from approved
mortgage bankers and financial institutions ('correspondents') loans that
conform to Delta's underwriting guidelines ('Correspondent Loans'). During the
12 month period ended December 31, 1997, the Company has originated and
purchased loans through a network of approximately 1,150 brokers and
correspondents. The Company believes that it has a competitive advantage in
serving brokers and correspondents in the nonconforming home equity market that
stems from its substantial experience in this sector and its emphasis on
providing quality service that is prompt, responsive and consistent. The 28
members of the Company's senior management have an average of over 14 years of
nonconforming mortgage loan experience. The Company believes this industry- and
company-specific experience, coupled with the systems and programs it has
developed over the past 16 years, enable the Company to provide quality services
that include preliminary approval of most Brokered Loans and certain
Correspondent Loans within one day, consistent application of its underwriting
guidelines and funding or purchasing of loans within 14 to 21 days of
preliminary approval. In addition, the Company seeks to establish and maintain
productive relationships with its network of brokers and correspondents by
servicing each one with a business development representative, a team of
experienced underwriters and, in the case of Brokered Loans, a team of loan
officers and processors who are assigned to specific brokers to process all
applications submitted by each broker.
In February 1997, in an effort to broaden its origination sources and to
expand its geographic presence, Delta's parent company, Delta Financial
Corporation, acquired two related retail originators of home equity loans,
Fidelity Mortgage Inc., based in Cincinnati, Ohio, and Fidelity Mortgage
(Florida), Inc., based in West Palm Beach, Florida, and subsequently merged the
two companies into Fidelity Mortgage Inc. ('Fidelity Mortgage'). Fidelity
Mortgage develops retail loan leads primarily through its telemarketing system
and its network of 15 retail offices located in Florida (3), Georgia, Illinois,
Indiana, Missouri, North Carolina, Ohio (4), Pennsylvania (2) and Tennessee.
During its first 12 years of operation, Delta concentrated its efforts on
serving brokers and correspondents primarily in New York, New Jersey and
Pennsylvania. Commencing in 1995, the Company began to implement a program to
expand its geographic focus into the New England, Mid-Atlantic, Midwest and
Southeast regions. To
16
<PAGE>
increase the size of its network of brokers and correspondents in these new
markets and to provide better service, the Company operates a full service
office in Atlanta, Georgia, staffed by two members of the Company's senior
management who relocated; full processing offices in Chicago, Illinois and
Warwick, Rhode Island; processing offices in Deerfield Beach, Florida and
Cleveland, Ohio and business development offices in Delaware, Michigan (2),
Missouri, New Jersey, Ohio, Pennsylvania, and Virginia. Total loan originations
and purchases increased from $287.8 million in 1995 to $658.8 million in 1996
and $1.25 billion in 1997. Of the total loan production during 1997, 38% was
originated through the Company's broker network, 51% was purchased from its
correspondent network and 11% was originated from its affiliate's retail
network. The Company is not dependent on any single or affiliated group of
brokers or correspondents.
As of December 31, 1997, Delta had 540 full and part-time employees.
Delta's headquarters are located in approximately 120,000 square feet in a
230,000 square foot building located at 1000 Woodbury Road, Woodbury, New York
11797. Its telephone number is (516) 364-8500.
UNDERWRITING
All of Delta's brokers and correspondents are provided with the Company's
underwriting guidelines. Loan applications received from brokers and
correspondents are classified according to certain characteristics, including
but not limited to: condition and location of the collateral, credit history of
the applicant, ability to pay, loan-to-value ratio and general stability of the
applicant in terms of employment history and time in residence. Delta has
established classifications with respect to the credit profile of the applicant,
and each loan is placed into one of four letter ratings 'A' through 'D', with
subratings within those categories. Terms of loans made by Delta, as well as
maximum loan-to-value ratios and debt-to-income ratios, vary depending on the
classification of the applicant. Loan applicants with less favorable credit
ratings are generally offered loans with higher interest rates and lower
loan-to-value ratios than applicants with more favorable credit ratings. The
general criteria used by Delta's underwriting staff in classifying loan
applicants are set forth below.
UNDERWRITING CRITERIA OF DELTA FUNDING CORPORATION
<TABLE>
<CAPTION>
'A' RISK 'B' RISK 'C' RISK 'D' RISK
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Credit profile....... Excellent credit Good overall credit Good to fair credit Fair to poor credit
history
Existing mortgage
history............ Current at Current at Up to 30 days 90 days delinquent or
application time and application time and delinquent at more
a maximum of two a maximum of four application time and
30-day late payments 30-day late payments a maximum of four
in the last 12 months in the last 12 months 30-day late payments,
two 60-day late
payments and one
90-day late payment
in the last 12 months
Other credit......... Minor 30-day late Some slow pays Slow pays, some open Not a factor.
items allowed with a allowed but majority delinquencies Derogatory credit
letter of of credit and allowed. Isolated must be paid with
explanation; no open installment debt paid charge-offs, proceeds. Must
collection accounts, as agreed. Small collection accounts demonstrate ability
charge-offs, isolated charge-offs, or judgments to pay
judgments collections, or case-by-case
judgments allowed
case-by-case
Bankruptcy filings... Discharged more than Discharged more than Discharged more than May be open at
three years prior to two years prior to one year prior to closing, but must be
closing and excellent closing and excellent closing and good paid off with
reestablished credit reestablished credit reestablished credit proceeds
Debt Service to
Income ratio....... Generally 45% or less Generally 50% or less Generally 55% or less Generally 55% or less
Maximum loan-to-value
ratio:
Owner-occupied..... Generally 80% (up to Generally 80% (up to Generally 75% (up to Generally 65% (up to
90%*) for a one- to 85%*) for a one- to 80%*) for a one- to 70%*) for a one- to
four-family residence four-family residence four-family residence four-family residence
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
'A' RISK 'B' RISK 'C' RISK 'D' RISK
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Non-owner Generally 70% (up to Generally 70% (up to Generally 65% (up to Generally 55% (up to
occupied......... 80%*) for a one- to 80%*) for a one- to 75%*) for a one- to 60%*) for a one- to
four-family residence four-family residence four-family residence four-family residence
Employment........... Minimum 2 years Minimum 2 years No minimum required No minimum required
employment in the employment in the
same field same field
</TABLE>
- ------------------
* On an exception basis
Delta uses the foregoing categories and characteristics as guidelines only.
On a case-by-case basis, the Company may determine that the prospective borrower
warrants an exception, if sufficient compensating factors exist. Examples of
such compensating factors are: low loan-to-value ratio, low debt ratio,
long-term stability of employment and/or residence, excellent payment history on
past mortgages, or a significant reduction in monthly housing expenses.
Except for Balloon Loans, the mortgage loans originated by Delta have
amortization schedules ranging from 5 years to 30 years, generally bear interest
at fixed rates and require equal monthly payments which are due as of a
scheduled day of each month which is fixed at the time of origination.
Substantially all of Delta's mortgage loans are simple interest loans. Delta
primarily purchases fixed rate loans which amortize over a period not to exceed
30 years. Delta also acquires and originates Balloon Loans, which generally
provide for scheduled amortization over 30 years, but in some instances over 20
years, with a due date and a Balloon Payment at the end of the fifteenth year.
The principal amounts of the loans purchased or originated by Delta generally
range from a minimum of $6,000 to a maximum of $350,000. Delta generally does
not acquire or originate any mortgage loans where the Combined Loan-to-Value
Ratio exceeds 95%. The collateral securing loans acquired or originated by Delta
are generally one- to four-family residences, including condominiums and
townhomes, and such properties may or may not be occupied by the owner. It is
Delta's policy not to accept commercial properties or unimproved land as
collateral. However, Delta will accept mixed-use properties such as a property
where more than 50% is used for residential purposes and the balance is used for
commercial purposes. Delta does not purchase loans where any senior mortgage
contains open-end advance, negative amortization or shared appreciation
provisions.
Delta's mortgage loan program includes (i) a full documentation program for
salaried borrowers and (ii) a non-income verification program for self-employed
borrowers. Under the full documentation program, the total monthly debt
obligations (which include principal and interest on the new loan and all other
mortgages, loans, charge accounts and scheduled indebtedness) generally does not
exceed 50% of the borrower's monthly gross income. A higher debt to income ratio
will be considered for a loan with a lower Combined Loan-to-Value Ratio, or with
a combined total gross income greater than $50,000 in conjunction with the loan
applicant's favorable credit history, and each approval for such a loan will be
supported by documentation. Loans to borrowers who are salaried employees must
be supported by current employment information in addition to employment
history. This information for salaried borrowers is verified based on written
confirmation from employers, one or more pay-stubs, recent W-2 tax forms, recent
tax returns or telephone confirmation from the employer. For Delta's non-income
verification program, proof of self-employment in the same business plus proof
of current self-employed status is required. Delta generally requires lower
Combined Loan-to-Value Ratios with respect to loans made to self-employed
borrowers.
Assessment of an applicant's ability and willingness to pay is one of the
principal elements in distinguishing Delta's lending specialty from methods
employed by traditional lenders, such as savings and loans and commercial banks.
All lenders utilize debt ratios and loan-to-value ratios in the approval
process. Many lenders simply use software packages to score an applicant for
loan approval and fund the loan after auditing the data provided by the
borrower. In contrast, Delta employs experienced non-conforming mortgage loan
credit underwriters to scrutinize the applicant's credit profile and to evaluate
whether an impaired credit history is a result of adverse circumstances or a
continuing inability or unwillingness to meet credit obligations in a timely
manner. Personal circumstances including divorce, family illnesses or deaths and
temporary job loss due to layoffs and corporate downsizing will often impair an
applicant's credit record.
Delta has a staff of 70 underwriters. With the exception of the Company's
Atlanta, Georgia office, all underwriting functions are centralized in its
Woodbury, New York office. Delta does not delegate underwriting authority to any
broker or correspondent. Delta's Underwriting Department functions independently
of its
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<PAGE>
Business Development and Mortgage Origination Departments and does not report to
any individual directly involved in the origination process. No underwriter at
Delta is compensated on an incentive or commission basis.
Delta has instituted underwriting checks and balances that are designed to
ensure that every loan is reviewed and approved by a minimum of two
underwriters, with certain higher loan amounts requiring a third approval.
Management believes that by requiring each file be seen by a minimum of two
underwriters, a high degree of accuracy and quality control is ensured
throughout the underwriting process and before funding.
Delta's underwriting of every loan submitted consists not only of a
thorough credit review, but also (i) a separate appraisal review conducted by
Delta's Appraisal Review Department, and, (ii) a full compliance review, to
ensure that all documents have been properly prepared, all applicable
disclosures given in a timely fashion, and proper compliance with all federal
and state regulations. Appraisals are performed by third party, fee-based
appraisers or by the Company's staff appraisers and generally conform to current
FNMA/FHLMC secondary market requirements for residential property appraisals.
Each such appraisal includes, among other things, an inspection of the exterior
of the subject property and, where available, data from sales within the
preceding 12 months of similar properties within the same general location as
the subject property. In addition, in certain situations, the Company also
obtains broker price opinions from independent real estate agents.
Delta performs a thorough appraisal review on each loan prior to closing or
prior to purchasing. While Delta recognizes that the general practice by
conventional mortgage lenders is to perform only drive-by appraisals after
closings, management believes this practice does not provide sufficient
protection. In addition to reviewing each appraisal for accuracy, the Company
accesses other sources to validate sales used in the appraisal to determine
market value. These sources include: interfacing with Multiple Listing Services
and Comps, Inc. to access current sales and listing information; its own
in-house database which contains comparable sales from all appraisals ordered by
Delta during the past eight years; and other sources for verification, including
broker price opinions and market analyses by local real estate agents.
Post closing, in addition to its normal due diligence, the Company randomly
selects one out of every ten appraisals, and performs a drive-by appraisal. This
additional step gives the Company an added degree of comfort with respect to
appraisers with which the Company has had limited experience. Delta actively
tracks all appraisers from which it accepts appraisals for quality control
purposes and does not accept work from appraisers who have not conformed to its
review standards.
Upon completion of a broker loan's underwriting and processing, the closing
of the loan is scheduled with a closing attorney or agent approved by Delta. The
closing attorney or agent is responsible for completing the loan closing
transaction in accordance with applicable law and Delta's operating procedures.
Title insurance that insures Delta's interest as mortgagee and evidence of
adequate homeowner's insurance naming Delta as an additional insured party are
required on all loans.
The Company performs a post-funding quality control review to monitor and
evaluate the Company's loan origination policies and procedures. The Quality
Control Department is separate from the Underwriting Department, and reports
directly to a member of senior management.
At least 10% of all loan originations and purchases are subjected to a full
quality control re-underwriting and review, the results of which are reported to
senior management on a monthly basis. Discrepancies noted by the audit are
analyzed and corrective actions are instituted. A typical quality control review
currently includes: (a) obtaining a new drive-by appraisal for each property;
(b) running a new credit report from a different credit report agency; (c)
reviewing loan applications for completeness, signatures, and for consistency
with other processing documents; (d) obtaining new written verification of
income and employment; (e) obtaining new written verification of mortgage to
re-verify any outstanding mortgages; and (f) analyzing the underwriting and
program selection decisions. The quality control process is updated from time to
time as the Company's policies and procedures change.
SERVICING
Delta has been servicing loans since its inception in 1982, and Delta has
serviced or is servicing substantially all of the loans that it has originated
or purchased. Servicing involves, among other things, collecting payments when
due, remitting payments of principal and interest and furnishing reports to the
current owners of the loans and enforcing such owners' rights with respect to
the loans, including, recovering delinquent
19
<PAGE>
payments, instituting foreclosure and liquidating the underlying collateral. As
of December 31, 1997, Delta had a servicing portfolio of $1.8 billion.
Delta services all loans out of its headquarters in Woodbury, New York,
utilizing a leading 'in-house' loan servicing system ('LSAMS') which it
purchased in 1995. LSAMS replaced Delta's former 'service bureau' loan servicing
system, and has provided Delta with considerably more flexibility to adapt the
system to Delta's specific needs as a nonconforming home equity lender. As such,
Delta has achieved significant cost efficiencies by automating a substantial
number of previously manual servicing procedures and functions since its
conversion to LSAMS on July 1, 1995.
At the same time that it upgraded its primary servicing system, Delta
purchased a default management sub-servicing system ('TPLS')--with separate
'modules' for foreclosure, bankruptcy, and REO--to provide it with the ability
to more efficiently monitor and service loans in default. These sub-servicing
modules provide detailed tracking of all key events in foreclosure and
bankruptcy on a loan-by-loan and portfolio-wide basis; the ability to track and
account for all pre- and post-petition payments received in bankruptcy from the
borrower and/or trustee; and the ability to monitor, market and account for all
aspects necessary to liquidate an REO property after foreclosure. Additionally,
Delta's Management Information Systems Department has created a market value
analysis program to run with LSAMS, and provides Delta with the ability to
monitor its equity position on a loan-by-loan and/or portfolio-wide basis.
Centralized controls and standards have been established by Delta for the
servicing and collection of mortgage loans in its portfolio. Delta revises such
policies and procedures from time to time in connection with changing economic
and market conditions and changing legal and regulatory requirements.
Delta's collections policy is designed to identify payment problems
sufficiently early to permit Delta to quickly address delinquency problems and,
when necessary, to act to preserve equity in a preforeclosure property. Delta
believes that these policies, combined with the experience level of independent
appraisers engaged by Delta, help to reduce the incidence of charge-offs of a
first or second mortgage loan.
Borrowers are billed on a monthly basis in advance of the due date.
Collection procedures commence upon identification of a past due account by
Delta's automated servicing system. If timely payment is not received, LSAMS
automatically places the loan in the assigned collector's 'auto queue' and
collection procedures are generally initiated on the day immediately following
the payment due date for chronic late payers, or the day immediately following
the end of the grace period for those borrowers who usually pay within the grace
period or shortly thereafter. LSAMS automatically queues up each loan in the
assigned collector's 'auto queue' at one of these two dates based upon a
particular borrower's payment history over the prior 12 months. The account
remains in the queue unless and until a payment is received, at which point
LSAMS automatically removes the loan from that collector's auto queue until the
next month's payment is due and/or becomes delinquent.
When a loan appears in a collector's auto queue, a collector will telephone
to remind the borrower that a payment is due. Follow-up telephone contacts are
attempted until the account is current or other payment arrangements have been
made. Standard form letters are utilized when attempts to reach the borrower by
telephone fail and/or, in some circumstances, to supplement the phone contacts.
During the delinquency period, the collector will continue to contact the
borrower. Company collectors have computer access to telephone numbers, payment
histories, loan information and all past collection notes. All collection
activity, including the date collection letters were sent and detailed notes on
the substance of each collection telephone call, is entered into a permanent
collection history for each account on LSAMS. Additional guidance with the
collection process is derived through frequent communication with Delta's senior
management.
For those loans in which collection efforts have been exhausted without
success, the Pre-foreclosure Manager recommends the loans be sent to foreclosure
at one of two Foreclosure Committee Meetings held each month. At each such
committee meeting, the Pre-foreclosure Manager meets with the Foreclosure
Manager and a member of the Executive Department, to determine whether
foreclosure proceedings are appropriate, based upon their analysis of all
relevant factors, including a market value analysis, reason for default and
efforts by the borrower to cure the default.
Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of a borrower in default vary greatly from state to
state. As such, all foreclosures are assigned to outside counsel, located in the
same state as the secured property. Bankruptcies filed by borrowers are
similarly assigned to
20
<PAGE>
appropriate local counsel. All aspects of foreclosures and bankruptcies are
closely monitored by Delta through its TPLS sub-servicing loan system described
above and through monthly status reports from attorneys.
Prior to foreclosure sale, Delta performs an in-depth market value analysis
on all defaulted loans. This analysis includes: (i) a current valuation of the
property obtained through a drive-by appraisal or broker's price opinion
conducted by an independent appraiser and/or a broker from Delta's network of
real estate brokers, complete with a description of the condition of the
property, recent price lists of comparable properties, recent closed
comparables, estimated marketing time and required or suggested repairs, and an
estimate of the sales price; (ii) an evaluation of the amount owed, if any, for
real estate taxes; (iii) an evaluation of the amount owed, if any, to a senior
mortgagee; and (iv) estimated carrying costs, brokers' fee, repair costs and
other related costs associated with real estate owned properties. Delta bases
the amount it will bid at foreclosure sales on this analysis.
If Delta acquires title to a property at a foreclosure sale or otherwise,
the REO Department immediately begins working the file by obtaining an estimate
of the sale price of the property by sending at least two local real estate
brokers to inspect the premises, and then hiring one to begin marketing the
property. If the property is not vacant when acquired, local eviction attorneys
are hired to commence eviction proceedings and/or negotiations are held with
occupants in an attempt to get them to vacate without incurring the additional
time and cost of eviction. Repairs are performed if it is determined that they
will increase the net liquidation proceeds, taking into consideration the cost
of repairs, the carrying costs during the repair period and the marketability of
the property both before and after the repairs.
Delta's loan servicing software also tracks and maintains homeowners'
insurance information and tax and insurance escrow information. Expiration
reports are generated bi-weekly listing all policies scheduled to expire within
the next 15 days. When policies lapse, a letter is issued advising the borrower
of such lapse and notifying the borrower that Delta will obtain force-placed
insurance at the borrower's expense. Delta also has an insurance policy in place
that provides coverage automatically for Delta in the event that Delta fails to
obtain force-placed insurance.
DELINQUENCY AND LOSS EXPERIENCE
The following table sets forth information relating to the delinquency and
loss experience of Delta for its servicing portfolio of mortgage loans
(including mortgage loans serviced for others) for the periods indicated.
The information in the tables below has not been adjusted to eliminate the
effect of the significant growth in the size of Delta's mortgage loan portfolio
during the periods shown. Accordingly, loss and delinquency as percentages of
aggregate principal balance of mortgage loans serviced for each period would be
higher than those shown if a group of mortgage loans were artificially isolated
at a point in time and the information showed the activity only in that isolated
group. However, since most of the mortgage loans in Delta's mortgage loan
portfolio are not fully seasoned, the delinquency and loss information for such
an isolated group would also be distorted to some degree since newly originated
loans have not been in existence long enough to give rise to some or all of the
indicated periods of delinquency in the table.
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<PAGE>
DELTA FUNDING CORPORATION'S
HISTORIC SERVICING PORTFOLIO INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
------------ ------------ --------------
<S> <C> <C> <C>
Total Outstanding Principal Balance (end of period)..... $468,846,079 $932,958,188 $1,840,150,403
Average Outstandings(1)................................. $373,384,417 $686,465,257 $1,376,108,923
DELINQUENCY
30-59 Days:
Principal Balance..................................... $ 35,052,951 $ 54,582,550 $ 90,052,724
Percent of Delinquency by Dollar(2)................... 7.48% 5.85% 4.89%
60-89 Days:
Principal Balance..................................... $ 8,086,230 $ 14,272,587 $ 28,864,099
Percent of Delinquency by Dollar(2)................... 1.72% 1.53% 1.57%
90 Days or More:
Principal Balance..................................... $ 6,748,061 $ 9,224,525 $ 17,695,594
Percent of Delinquency by Dollar(2)................... 1.44% 0.99% 0.96%
Total Delinquencies:
Principal Balance..................................... $ 49,887,242 $ 78,079,663 $ 136,612,417
Percent of Delinquency by Dollar(2)................... 10.64% 8.37% 7.42%
FORECLOSURES
Principal Balance..................................... $ 23,506,751 $ 34,765,638 $ 85,500,439
Percent of Foreclosures by Dollar(2).................... 5.01% 3.73% 4.65%
REO..................................................... $ 4,020,295 $ 5,672,811 $ 10,292,208
0.56%
Gross Losses............................................ $ (2,398,968) $ (3,223,525) $ (5,514,944)
Recoveries.............................................. $ 256,869 $ 357,320 $ 529,406
Net Losses on liquidated loans(3)....................... $ (2,142,099) $ (2,866,204) $ (4,985,538)
Percentage of Net Losses on liquidated loans
(based on Average Outstanding Principal Balance)...... 0.57% 0.42% 0.36%
</TABLE>
- ------------------
(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) Percentages are expressed based upon the total outstanding principal balance
as of the indicated date.
(3) Net Losses equal Gross Losses plus recoveries.
As reflected in the table, the Total Delinquencies (Percent of Delinquency
by Dollar) have decreased from 10.64% for 1995 to 8.37% for 1996 to 7.42% for
1997. At the same time, the Percentage of Net Losses on liquidated loans
decreased from 0.57% for 1995 to 0.42% for 1996 to 0.36% for 1997. The Seller
believes that this decrease may be largely a function of the increase in the
size of the portfolio from December 31, 1996, to December 31, 1997.
While the above delinquency and foreclosure and loss experiences reflect
Delta's experiences for the periods indicated, there can be no assurance that
the delinquency and foreclosure and loss experiences on the Home Equity Loans
will be similar. Accordingly, this information should not be considered to
reflect the credit quality of the Home Equity Loans included in the Trust, or as
a basis of assessing the likelihood, amount or severity of losses on the Home
Equity Loans. The statistical data in the table is based on all of the loans in
Delta's servicing portfolio. The Home Equity Loans may, in general, be more
recently originated than, and are likely to have other characteristics which
distinguish them from, the majority of the loans in Delta's servicing portfolio.
DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (the
'Indenture') between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the 'Trustee') with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a 'Pooling and
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<PAGE>
Servicing Agreement' or a 'Trust Agreement') among the Seller, the Servicer, if
the Series relates to Loans, and the Trustee. A form of Pooling and Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. A Series may consist of both Notes and
Certificates.
The following summaries describe the material provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Compound Interest Securities, Variable
Interest Securities, PAC Securities, Zero Coupon Securities, Principal Only
Securities or Interest Only Securities (each of which is generally described in
the 'GLOSSARY OF TERMS'). A Series may also include one or more Classes of
Subordinate Securities. The Securities of each Series will be issued only in
fully registered form, without coupons, in the authorized denominations for each
Class specified in the related Prospectus Supplement. Upon satisfaction of the
conditions, if any, applicable to a Class of a Series, as described in the
related Prospectus Supplement, the transfer of the Securities may be registered
and the Securities may be exchanged at the office of the Trustee specified in
the Prospectus Supplement without the payment of any service charge other than
any tax or governmental charge payable in connection with such registration of
transfer or exchange. If specified in the related Prospectus Supplement, one or
more Classes of a Series may be available in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the related Prospectus Supplement (which may be
different for each Class or for the payment of principal and interest) by check
mailed to Holders of such Series, registered as such at the close of business on
the record date specified in the related Prospectus Supplement applicable to
such Distribution Dates at their addresses appearing on the security register,
except that (a) payments may be made by wire transfer (which, unless otherwise
specified in the related Prospectus Supplement, shall be at the expense of the
Holder requesting payment by wire transfer) in certain circumstances described
in the related Prospectus Supplement and (b) final payments of principal in
retirement of each Security will be made only upon presentation and surrender of
such Security at the office of the Trustee specified in the Prospectus
Supplement. Notice of the final payment on a Security will be mailed to the
Holder of such Security before the Distribution Date on which the final
principal payment on any Security is expected to be made to the holder of such
Security.
Payments of principal of and interest on the Securities will be made by the
Trustee, or a paying agent on behalf of the Trustee, as specified in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, all payments with respect to the Primary Assets for a Series,
together with reinvestment income thereon, amounts withdrawn from any Reserve
Fund, and amounts available pursuant to any other Enhancement will be deposited
directly into the Collection Account or the Certificate Account. If provided in
the related Prospectus Supplement, such amounts may be net of certain amounts
payable to the Servicer and any other person specified in the Prospectus
Supplement. Such amounts thereafter may be deposited into the Distribution
Account and will be available to make payments on the Securities of such Series
on the next applicable Distribution Date. See 'THE TRUST FUNDS--Collection,
Certificate and Distribution Accounts.'
BOOK-ENTRY SECURITIES
If specified in the related Prospectus Supplement, one or more Classes of
Securities may be issued in book-entry form (the 'Book-Entry Securities').
Persons acquiring beneficial ownership interests in the Book-Entry Securities
('Owners') will hold their Securities through the Depository Trust Company
('DTC') in the United States, or CEDEL Bank societe anonyme ('CEDEL') or the
Euroclear System ('Euroclear') (in Europe) if they are participants of such
systems, or indirectly through organizations which are participants in such
systems. The Book-Entry Secutities will be issued in one or more certificates
which equal the aggregate principal balance of the applicable Class or Classes
of Securities and will initially be registered in the name of Cede & Co., the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books
23
<PAGE>
of DTC. Citibank N.A. ('Citibank') will act as depositary for CEDEL and The
Chase Manhattan Bank ('Chase') 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 Security will be entitled to receive a physical certificate
representing such Security (a 'Definitive Security'). Unless and until
Definitive Securities are issued, it is anticipated that the only
'Certificateholder' or Noteholder, as applicable, will be Cede & Co., as nominee
of DTC. Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The Owner's ownership of a Book-Entry Security 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 Security 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 he recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant and on the records of
CEDEL or Euroclear, as appropriate).
Owners will receive all distributions of principal of, and interest on, the
Book-Entry Securities from the Trustee through DTC and DTC participants. While
the Book-Entry Securities are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the 'Rules'), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect to
the Securities and is required to receive and transmit distributions of
principal of, and interest on, the Securities. Participants and indirect
participants with whom Certificate Owners have accounts with respect to
Securities are similarly required to make book-entry transfers and receive and
transmit such distributions on behalf of their respective Owners. Accordingly,
although Owners will not possess certificates, the Rules provide a mechanism by
which Owners will receive distributions and will be able to transfer their
interest.
Owners will not receive or be entitled to receive certificates representing
their respective interests in the Securities, except under the limited
circumstances described below. Unless and until Definitive Securities are
issued, Owners who are not Participants may transfer ownership of Securities
only through Participants and indirect participants by instructing such
Participants and indirect participants to transfer Securities, by book-entry
transfer, through DTC for the account of the purchasers of such 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 Participants
and indirect participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Owners.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving
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payment in accordance with normal procedures for same day funds settlement
applicable to DTC. CEDEL Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
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 rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ('CEDEL
Participants') and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for 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 32 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 Securities 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 Owners 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 Owners that it
represents.
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Under a book-entry format, Owners may experience some delay in their
receipt of payments, since such payments will be forwarded by the Trustee to
Cede. Distributions with respect to Securities held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by the Relevant Depositary. Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. Because DTC can only act on behalf of Financial Intermediaries, the
ability of an Owner to pledge Book-Entry Securities to persons or entities that
do not participate in the Depository system, or otherwise take actions in
respect of such Book-Entry Securities, may be limited due to the lack of
physical certificates for such Book-Entry Securities. In addition, issuance of
the Book-Entry Securities in book-entry form may reduce the liquidity of such
Securities in the secondary market since certain potential investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the applicable Trust Fund will be provided to
Cede, as nominee of DTC, and may be made available by Cede to 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 Securities of such Owners are credited.
DTC has advised the Trustee that, unless and until Definitive Securities
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Securities under the Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Securities are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Securities. CEDEL or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Holder under the Agreement on behalf of a CEDEL 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 Securities which conflict with actions taken
with respect to other Securities.
Definitive Securities will be issued to Owners, or their nominees, rather
than to DTC, only if (a) DTC or the Seller 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
Securities and the Seller or the Trustee is unable to locate a qualified
successor, (b) the Seller, at its sole option, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Default (as
defined herein), Owners owning a majority in principal amount of the applicable
Securities 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
Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all applicable
Owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Certificateholders or Noteholders, as applicable, under the Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
Neither the Seller, the Servicer nor 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 Securities held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
VALUATION OF THE PRIMARY ASSETS
If specified in the related Prospectus Supplement for a Series of Notes,
each Primary Asset included in the related Trust Fund for a Series will be
assigned an initial 'Asset Value.' Unless otherwise specified in the related
Prospectus Supplement, at any time the Asset Value of the Primary Assets will be
equal to the product of the Asset Value Percentage as set forth in the Indenture
and the lesser of (a) the stream of remaining regularly
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scheduled payments on the Primary Assets, net, unless otherwise provided in the
related Prospectus Supplement, of certain amounts payable as expenses, together
with income earned on each such scheduled payment received through the day
preceding the next Distribution Date at the Assumed Reinvestment Rate, if any,
discounted to present value at the highest interest rate on the Notes of such
Series over periods equal to the interval between payments on the Notes, and (b)
the then principal balance of the Primary Assets. Unless otherwise specified in
the related Prospectus Supplement, the initial Asset Value of the Primary Assets
will be at least equal to the principal amount of the Notes of the related
Series at the date of issuance thereof.
The 'Assumed Reinvestment Rate,' if any, for a Series will be the highest
rate permitted by the Rating Agency or a rate insured by means of a surety bond,
guaranteed investment contract, or other arrangement satisfactory to the Rating
Agency. If the Assumed Reinvestment Rate is so insured, the related Prospectus
Supplement will set forth the terms of such arrangement.
PAYMENTS OF INTEREST
The Securities of each Class by their terms entitled to receive interest
will bear interest (calculated, unless otherwise specified in the related
Prospectus Supplement, on the basis of a 360 day year of twelve 30-day months)
from the date and at the rate per annum specified, or calculated in the method
described, in the related Prospectus Supplement. Interest on such Securities of
a Series will be payable on the Distribution Date specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement, the
Distribution Date for the payment of interest of a Class may be different from,
or occur more or less frequently than, the Distribution Date for the payment of
principal of such Class. The rate of interest on Securities of a Series may be
variable or may change with changes in the annual percentage rates of the Loans
or Underlying Loans relating to the Private Securities, as applicable, included
in the related Trust Fund and/or as prepayments occur with respect to such Loans
or Underlying Loans, as applicable. Principal Only Securities may not be
entitled to receive any interest distributions or may be entitled to receive
only nominal interest distributions. Any interest on Zero Coupon Securities that
is not paid on the related Distribution Date will accrue and be added to the
principal thereof on such Distribution Date.
Interest payable on the Securities on a Distribution Date will include all
interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made to
the Holders of the Securities of such Series on which principal is then payable,
to the extent set forth in the related Prospectus Supplement. Such payments will
be made in an aggregate amount determined as specified in the related Prospectus
Supplement and will be allocated among the respective Classes of a Series in the
manner, at the times and in the priority set forth in the related Prospectus
Supplement. The Holders of one or more Classes of Securities may have the right
to request that principal distributions allocable to such Holder's Class of
Securities be distributed to such Holder. If the requests of Holders exceed the
amount of principal to be distributed, the requests generally will be filled in
the order in which they were received. If the amount of principal to be
distributed exceeds the amount of requests, the Trustee will select random lots
of $1,000 each to receive such principal distribution. Thus, some Holders of the
applicable Class of Securities may receive no principal distributions or a
disproportionate amount of such principal distributions. If so specified in the
related Prospectus Supplement, the Distribution Date for the payment of
principal of a Class may be different from, or occur more or less frequently
than, the Distribution Date for the payment of interest for such Class.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of Notes
is the date no later than the date on which the principal thereof will be fully
paid and with respect to each Class of Certificates will be the date on which
the entire aggregate principal balance of such Class is expected to be reduced
to zero, in each case calculated on the basis of the assumptions applicable to
such Series described in the related Prospectus
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Supplement. The Final Scheduled Distribution Date for each Class of a Series
will be specified in the related Prospectus Supplement. Since payments on the
Primary Assets will be used to make distributions in reduction of the
outstanding principal amount of the Securities, it is likely that the actual
final Distribution Date of any such Class will occur earlier, and may occur
substantially earlier, than its Final Scheduled Distribution Date. Furthermore,
with respect to a Series of Certificates, as a result of delinquencies, defaults
and liquidations of the Primary Assets in the Trust Fund, the actual final
Distribution Date of any Certificate may occur later than its Final Scheduled
Distribution Date. No assurance can be given as to the actual prepayment
experience with respect to a Series. See '--Weighted Average Life of the
Securities' below.
SPECIAL REDEMPTION
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes of
Securities of such Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (a 'Special
Redemption Date') if, as a consequence of prepayments on the Loans or Underlying
Loans, as applicable, relating to such Securities or low yields then available
for reinvestment the entity specified in the related Prospectus Supplement
determines, based on assumptions specified in the applicable Agreement, that the
amount available for the payment of interest that will have accrued on such
Securities (the 'Available Interest Amount') through the designated interest
accrual date specified in the related Prospectus Supplement is less than the
amount of interest that will have accrued on such Securities to such date. In
such event and as further described in the related Prospectus Supplement, the
Trustee will redeem a principal amount of outstanding Securities of such Series
as will cause the Available Interest Amount to equal the amount of interest that
will have accrued through such designated interest accrual date for such Series
of Securities outstanding immediately after such redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The Seller, the Servicer, or another entity designated in the related
Prospectus Supplement may, at its option, cause an early termination of one or
more Classes of Securities by purchasing all or part of the Primary Assets from
such Trust Fund on or after a date specified in the related Prospectus
Supplement, or on or after such time as the aggregate outstanding principal
amount of the Securities or Primary Assets, as specified in the related
Prospectus Supplement is less than the amount or percentage, not more than 25%,
specified in the related Prospectus Supplement. In addition, if so specified in
the related Prospectus Supplement upon certain events of insolvency or
receivership of the Seller or another affiliated entity specified in the related
Prospectus Supplement, the related Primary Assets of the Trust Fund will be
liquidated and the Trust Fund will be terminated, subject to the conditions set
forth in the related Prospectus Supplement. In each such event, the Securities
of the related Series will experience a prepayment. The redemption, purchase or
repurchase price will be set forth in the related Prospectus Supplement. If
specified in the related Prospectus Supplement, in the event that a REMIC
election has been made, the Trustee will receive a satisfactory opinion of
counsel that the optional redemption, purchase or termination will be conducted
so as to constitute a 'qualified liquidation' under Section 860F of the Code.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of a Class of the
Securities will be influenced by the rate at which the amount financed under the
Loans or Underlying Loans relating to the Private Securities, as applicable,
included in the Trust Fund for a Series is paid, which may be in the form of
scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the weighted average life of each Class of
Securities of such Series, and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series, in each case based on the
assumptions stated in such Prospectus Supplement, including assumptions that
prepayments on the Loans or Underlying Loans relating to
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the Private Securities, as applicable, included in the related Trust Fund are
made at rates corresponding to various percentages of the prepayment standard or
model specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Loans or Underlying
Loans relating to the Private Securities, as applicable, included in the related
Trust Fund will conform to any level of any prepayment standard or model
specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest payments, and servicing decisions also
affect the rate of principal prepayments. As a result, there can be no assurance
as to the rate or timing of principal prepayments of the Loans or Underlying
Loans either from time to time or over the lives of such Loans or Underlying
Loans.
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the Loans or
Underlying Loans relating to the Private Securities, as applicable, for a
Series, such loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by such loans. In
this regard, it should be noted that the Loans or Underlying Loans, as
applicable, for a Series may have different interest rates. In addition, the
weighted average life of the Securities may be affected by the varying
maturities of the Loans or Underlying Loans relating to the Private Securities,
as applicable. If any Loans or Underlying Loans relating to the Private
Securities, as applicable, for a Series have actual terms-to-stated maturity of
less than those assumed in calculating the Final Scheduled Distribution Date of
the related Securities, one or more Classes of the Series may be fully paid
prior to their respective Final Scheduled Distribution Date, even in the absence
of prepayments and a reinvestment return higher than the Assumed Reinvestment
Rate.
THE TRUST FUNDS
GENERAL
The Notes of each Series will be secured by the pledge of the assets of the
related Trust Fund, and the Certificates of each Series will represent interests
in the assets of the related Trust Fund. The Trust Fund of each Series will
include (i) the Primary Assets, (ii) amounts available from the reinvestment of
payments on such Primary Assets at the Assumed Reinvestment Rate, if any,
specified in the related Prospectus Supplement, (iii) any Enhancement or the
rights thereto, (iv) any Mortgaged Property that secured a Home Equity Loan but
which is acquired by foreclosure or deed in lieu of foreclosure or repossession
and (v) the amount, if any, initially deposited in the Pre-Funding Account,
Capitalized Interest Account, Collection Account, Certificate Account or
Distribution Account for a Series as specified in the related Prospectus
Supplement.
The Securities will be non-recourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related Prospectus Supplement for
a Series of Securities, unless otherwise specified in the related Prospectus
Supplement, will serve as collateral only for that Series of Securities. Holders
of a Series of Notes may only proceed against such collateral securing such
Series of Notes in the case of a default with respect to such Series of Notes
and may not proceed against any assets of the Seller or the related Trust Fund
not pledged to secure such Notes.
The Primary Assets for a Series will be transferred by the Seller to the
Trust Fund. Loans relating to a Series will be serviced by the Servicer pursuant
to a Pooling and Servicing Agreement, with respect to a Series consisting of
only Certificates or a Sale and Servicing Agreement (each, a 'Sale and Servicing
Agreement') between the Seller, the Trust Fund and the Servicer, with respect to
a Series that includes Notes.
As used herein, 'Agreement' means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series that includes Notes, the Indenture and the Sale and
Servicing Agreement, as the context requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a
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trust agreement (each, a 'Trust Agreement') between the Seller and the Trustee
of such Trust Fund specified in the related Prospectus Supplement.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of any
combination of Loans and Private Securities, to the extent and as specified in
the related Prospectus Supplement.
An Agreement may provide that additional Home Equity Loans may be added to
the Trust Fund if such Home Equity Loans were originated or acquired by the
Seller in the ordinary course of its business, the inclusion of such Home Equity
Loans will maintain or increase the level of overcollateralization and the
inclusion of such Home Equity Loans will not result in the withdrawal or
downgrading of the ratings then assigned to the Securities of the related
Series. In addition, an Agreement may provide that Home Equity Loans may be
removed from a Trust Fund from time to time if the actual level of
overcollateralization exceeds the amount of overcollateralization required to be
maintained and such removal will not result in the withdrawal or downgrading of
the ratings then assigned to the Securities of the related Series.
THE LOANS
The Primary Assets for a Series may consist, in whole or in part, of
closed-end home equity loans (the 'Home Equity Loans') secured by mortgages
primarily on Single Family Mortgaged Properties which may be subordinated to
other mortgages on the same Mortgaged Property. The Home Equity Loans may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below.
The full principal amount of a Home Equity Loan is advanced at origination
of the loan and generally is repayable in equal (or substantially equal)
installments of an amount sufficient to fully amortize such loan at its stated
maturity. As more fully described in the related Prospectus Supplement, interest
on each Home Equity Loan is calculated on the basis of the outstanding principal
balance of such loan multiplied by the Home Equity Loan Rate thereon and, in the
case of simple interest loans, 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 is the number of days in the annual
period for which interest accrues on such loan. Interest on Home Equity Loans
also may be calculated on the actuarial basis, in which case each monthly
payment consists of a decreasing amount of interest and an increasing amount of
principal, and the payment either earlier or later then the due date therefor
will not affect the relative applications of principal and interest. The Loans
for a Series may include Home Equity Loans that do not amortize their entire
principal balance by their stated maturity in accordance with their terms and
require a balloon payment of the remaining principal balance at maturity, as
specified in the related Prospectus Supplement. The original terms to stated
maturity of Home Equity Loans will generally not exceed 360 months.
The Mortgaged Properties will include Single Family Property (i.e., one- to
four-family residential housing, including Condominium Units and Cooperative
Dwellings), five- to eight-family properties and mixed-use property. Mixed-use
properties will consist of structures of no more than three stories, which
include one to four residential dwelling units and space used for retail,
professional or other commercial uses. Such uses, which will not involve more
than 50% of the space in the structure, may include doctor, dentist or law
offices, real estate agencies, boutiques, newsstands, convenience stores or
other similar types of uses intended to cater to individual customers as
specified in the related Prospectus Supplement. The properties may be located in
suburban or metropolitan districts. Any such non-residential use will be in
compliance with local zoning laws and regulations. The Mortgaged Properties may
consist of detached individual dwellings, individual condominiums, townhouses,
duplexes, row houses, individual units in planned unit developments and other
attached dwelling units. The Mortgaged Properties also may include module or
manufactured homes which are treated as real estate under local law. Each Single
Family Property will be located on land owned in fee simple by the borrower or
on land leased by the borrower for a term at least ten years greater than the
term of the related Loan. Attached dwellings may include owner-occupied
structures where each borrower owns the land upon which the unit is built, with
the
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remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building. Mortgages on Cooperative Dwellings consist of a lien on the shares
issued by such Cooperative Dwelling and the proprietary lease or occupancy
agreement relating to such Cooperative Dwelling.
The aggregate principal balance of Loans secured by Mortgaged Properties
that are owner-occupied will be disclosed in the related Prospectus Supplement.
The sole basis for determining that a given percentage of the Loans are secured
by Single Family Property that is owner-occupied will be either (i) the making
of a representation by the Mortgagor at origination of the Home Equity Loan
either that the underlying Mortgaged Property will be used by the Mortgagor for
a period of at least six months every year or that the Mortgagor intends to use
the Mortgaged Property as a primary residence, or (ii) a finding that the
address of the underlying Mortgaged Property is the Mortgagor's mailing address
as reflected in the Servicer's records. The Mortgaged Properties also may
include non-owner occupied investment properties and vacation and second homes.
Additional Information. The related Prospectus Supplement for each Series
will provide information with respect to the Loans that are Primary Assets as of
the Cut-off Date, including, among other things, and to the extent relevant: (a)
the aggregate unpaid principal balance of the Loans (b) the range and weighted
average Home Equity Loan Rate on the Loans, and, in the case of adjustable rate
Loans, the range and weighted average of the current Home Equity Loan Rates and
the Lifetime Rate Caps, if any; (c) the range and average outstanding principal
balance of the Loans; (d) the weighted average original and remaining
term-to-stated maturity of the Loans and the range of original and remaining
terms-to-stated maturity, if applicable; (e) the range and weighted average of
Combined Loan-to-Value Ratios or Loan-to-Value Ratios for the Loans, as
applicable; (f) the percentage (by outstanding principal balance as of the
Cut-off Date) of Loans that accrue interest at adjustable or fixed interest
rates; (g) any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the Loans; (h) the geographic distribution of the
Mortgaged Properties securing the Loans; (i) the percentage of Loans (by
principal balance as of the Cut-off Date) that are secured by Single Family
Mortgaged Properties, shares relating to Cooperative Dwellings, Condominium
Units, investment property and vacation or second homes; (j) the lien priority
of the Home Equity Loans; and (k) the delinquency status and year of origination
of the Loans. The related Prospectus Supplement will also specify any other
limitations on the types or characteristics of Loans for a Series.
If information of the nature described above respecting the Loans is not
known to the Seller at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Securities.
PRIVATE SECURITIES
General. Primary Assets for a Series may consist, in whole or in part, of
Private Securities which include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to be
Loans (the 'Underlying Loans') or (b) collateralized obligations secured by
Underlying Loans. Such pass-through certificates or collateralized obligations:
(i) will have been registered for sale under the Securities Act of 1933, as
amended; (ii) will have been acquired in the secondary market and not in the
initial offering thereof; (iii) will have been issued by an issuer which is not
involved in the issuance of the related Series and which is not an affiliate of
the Seller; and (iv) will be freely transferable under Rule 144(k) under the
Securities Act of 1933, as amended to the extent such rule is applicable to such
securities.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a 'PS Agreement').
The seller/servicer of the Underlying Loans will have entered into the PS
Agreement with the trustee under such PS Agreement (the 'PS Trustee'). The PS
Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be serviced by a servicer (the 'PS Servicer') directly or
by one or more sub-servicers who may be subject to the supervision of the PS
Servicer.
The sponsor of the Private Securities (the 'PS Sponsor') will be a
financial institution or other entity engaged generally in the business of
lending; a public agency or instrumentality of a state, local or federal
government; or a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling loans to such
trusts, and selling beneficial interests in such trusts. The obligations
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of the PS Sponsor will generally be limited to certain representations and
warranties with respect to the assets conveyed by it to the related trust.
Additionally, although the Underlying Loans may be guaranteed by an agency or
instrumentality of the United States, the Private Securities themselves will not
be so guaranteed.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Securities by the PS Trustee or the PS
Servicer. The PS Sponsor or the PS Servicer may have the right to repurchase the
Underlying Loans after a certain date or under other circumstances specified in
the related Prospectus Supplement. The Underlying Loans may be fixed rate, level
payment, fully amortizing loans or adjustable rate loans or loans having balloon
or other irregular payment features.
Credit Support Relating to Private Securities. Credit support in the form
of Reserve Funds, subordination of other private securities issued under the PS
Agreement, guarantees, letters of credit, cash collateral accounts, insurance
policies or other types of credit support may be provided with respect to the
Underlying Loans or with respect to the Private Securities themselves. The type,
characteristics and amount of credit support will be a function of certain
characteristics of the Underlying Loans and other factors, such as the operating
history and degree of securitization experience of the seller/servicer of the
Underlying Loans and the then current market for various types of credit
enhancement, and will have been established for the Private Securities on the
basis of requirements of the nationally recognized statistical rating
organization that rated the Private Securities.
Additional Information. The Prospectus Supplement for a Series for which
the Primary Assets include Private Securities will specify (such disclosure may
be on an approximate basis and will be as of the date specified in the related
Prospectus Supplement), to the extent relevant and to the extent such
information is reasonably available to the Seller and the Seller reasonably
believes such information to be reliable: (i) the aggregate approximate
principal amount and type of the Private Securities to be included in the Trust
Fund for such Series; (ii) certain characteristics of the Underlying Loans
including (A) the payment features of such Underlying Loans (i.e., whether they
are fixed rate or adjustable rate and whether they provide for fixed level
payments or other payment features), (B) the approximate aggregate principal
balance, if known, of such Underlying Loans insured or guaranteed by a
governmental entity, (C) the servicing fee or range of servicing fees with
respect to the Underlying Loans, (D) the minimum and maximum stated maturities
of such Underlying Loans at origination, (E) the lien priority of such
Underlying Loans, and (F) the delinquency status and year of origination of such
Underlying Loans; (iii) the maximum original term-to-stated maturity of the
Private Securities; (iv) the weighted average term-to-stated maturity of the
Private Securities; (v) the pass-through or certificate rate or ranges thereof
for the Private Securities; (vi) the PS Sponsor, the PS Servicer (if other than
the PS Sponsor) and the PS Trustee for such Private Securities; (vii) certain
characteristics of credit support if any, such as Reserve Funds, insurance
policies, letters of credit or guarantees relating to such Loans underlying the
Private Securities or to such Private Securities themselves; (viii) the terms on
which Underlying Loans may, or are required to, be purchased prior to their
stated maturity or the stated maturity of the Private Securities; and (ix) the
terms on which Underlying Loans may be substituted for those originally
underlying the Private Securities.
If information of the nature described above representing the Private
Securities is not known to the Seller at the time the Securities are initially
offered, approximate or more general information of the nature described above
will be provided in the Prospectus Supplement and the additional information, if
available, will be set forth in a Current Report on Form 8-K to be available to
investors on the date of issuance of the related Series and to be filed with the
Commission within 15 days of the initial issuance of such Securities.
COLLECTION, CERTIFICATE AND DISTRIBUTION ACCOUNTS
A separate Collection Account or Certificate Account will be established
for each Series of Securities for receipt of all amounts received on or with
respect to the Primary Assets. Certain amounts on deposit in such Collection
Account and certain amounts available pursuant to any Enhancement, as provided
in the related Prospectus Supplement, may be deposited in one or more
Distribution Accounts. Funds in the Collection, Certificate and Distribution
Accounts generally will be invested in Eligible Investments maturing, with
certain exceptions, not later, in the case of funds in the Collection Account,
than the day preceding the date such funds are due to be deposited in the
Distribution Account or otherwise distributed and, in the case of funds in the
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Distribution Account and the Certificate Account, than the day preceding the
next Distribution Date for the related Series of Securities. See '--Eligible
Investments' below.
PRE-FUNDING AND CAPITALIZED INTEREST ACCOUNTS
If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a 'Pre-Funding Account')
established and maintained with the Trustee for the related Series. If so
specified, on the closing date for such Series, a portion of the proceeds of the
sale of the Securities of such Series not to exceed fifty percent of the
aggregate principal amount of such Series (such amount, the 'Pre-Funded Amount')
may be deposited in the Pre-Funding Account and may be used to purchase
additional Primary Assets during the period of time not to exceed six months
specified in the related Prospectus Supplement (the 'Pre-Funding Period').
Pending the purchase of such additional Primary Assets, funds deposited in the
Pre-Funding Account will be invested in Eligible Investments. If any Pre-Funded
Amount remains on deposit in the Pre-Funding Account at the end of the
Pre-Funding Period, such amount will be applied in the manner specified in the
related Prospectus Supplement to prepay the Notes and/or the Certificates of the
applicable Series.
Each additional Primary Asset must satisfy the eligibility criteria
specified in the related Prospectus Supplement and related Agreements. Such
eligibility criteria will be determined in consultation with each Rating Agency
(and/or any Enhancer) prior to the issuance of the related Series and are
designed to ensure that if such additional Primary Assets were included as part
of the initial Primary Assets, the credit quality of such assets would be
consistent with the initial rating of the Securities of such Series. The
eligibility criteria will apply to the pool of Primary Assets, including the
subsequent Primary Assets, and will include a minimum weighted average interest
rate, a maximum weighted average remaining term to maturity and a maximum
weighted average Combined Loan-to-Value Ratio. Depending on the composition of
the original Primary Assets and the type of Enhancement, additional eligibility
criteria such as a minimum interest rate, a maximum principal balance, a
limitation on geographic concentration and a limit on certain types of Primary
Assets such as Balloon Loans or loans secured by other than primary residences.
The Seller will certify to the Trustee that all conditions precedent to the
transfer of the additional Primary Assets, including the satisfaction of the
eligibility criteria to the Trust Fund, have been satisfied. It is a condition
to the transfer of any additional Primary Assets to the Trust Fund that each
Rating Agency, after receiving prior notice of the proposed transfer of the
additional Primary Assets to the Trust Fund, shall not have advised the Seller
or the Trustee or any Enhancer that the conveyance of such additional Primary
Assets will result in a qualification, modification or withdrawal of its then
current rating of any Class of Notes or Certificates of such Series. Following
the transfer of additional Primary Assets to the Trust Fund, the aggregate
characteristics of the Primary Assets then held in the Trust Fund may vary from
those of the initial Primary Assets of such Trust Fund. As a result, the
additional Primary Assets may adversely affect the performance of the related
Securities.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a 'Capitalized Interest Account') may be established and
maintained with the Trustee for the related Series. On the closing date for such
Series, a portion of the proceeds of the sale of the Securities of such Series
will be deposited in the Capitalized Interest Account and used to fund the
excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period such as
Trustee fees and credit enhancement fees, over the amount of interest available
therefor from the Primary Assets in the Trust Fund. If so specified in the
related Prospectus Supplement, amounts on deposit in the Capitalized Interest
Account may be released to the Seller prior to the end of the Pre-Funding Period
subject to the satisfaction of certain tests specified in the related Prospectus
Supplement. Any amounts on deposit in the Capitalized Interest Account at the
end of the Pre-Funding Period that are not necessary for such purposes will be
distributed to the person specified in the related Prospectus Supplement.
ELIGIBLE INVESTMENTS
Each Agreement generally will define Eligible Investments to include the
following:
(i) direct obligations of, or obligations fully guaranteed as to
timely payment of principal and interest by, the United States or any
agency or instrumentality thereof, provided that such obligations are
backed by the full faith and credit of the United States;
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(ii) repurchase agreements on obligations specified in clause (i)
maturing not more than three months from the date of acquisition thereof,
provided that the short-term unsecured debt obligations of the party
agreeing to repurchase such obligations are at the time rated by each
Rating Agency in its highest short-term rating category;
(iii) certificates of deposit, time deposits and bankers' acceptances
of any U.S. depository institution or trust company incorporated under the
laws of the United States or any state thereof and subject to supervision
and examination by federal and/or state banking authorities, provided that
the unsecured short-term debt obligations of such depository institution or
trust company at the date of acquisition thereof have been rated by each
Rating Agency in its highest unsecured short-term debt rating category;
(iv) commercial paper (having original maturities of not more than 90
days) of any corporation incorporated under the laws of the United States
or any state thereof which on the date of acquisition has been rated by
each Rating Agency in their highest short-term rating categories;
(v) short-term investment funds ('STIFS') sponsored by any trust
company or national banking association incorporated under the laws of the
United States or any state thereof which on the date of acquisition has
been rated by each Rating Agency in their respective highest rating
category of long-term unsecured debt; and
(vi) interests in any money market fund which at the date of
acquisition of the interests in such fund and throughout the time as the
interest is held in such fund has a rating of 'Aaa' by Moody's Investors
Service, Inc., and either 'AAAm' or 'AAAm-G' by Standard & Poor's Rating
Group, a division of the McGraw-Hill Companies, Inc.;
provided that no instrument described above may evidence either the right to
receive (a) only interest with respect to the obligations underlying such
instrument or (b) both principal and interst payments derived from obligations
underlying such instrument and the interest and principal payments with respect
to such instrument provided a yield to maturity at par greater than 120% of the
yield to maturity at par of the underlying obligations; and provided, further,
that no instrument described above may be purchased at a price greater than par
if such instrument may be prepaid or called at a price less than its purchase
price prior to its stated maturity.
To the extent any such investment would require registration of the Trust
Fund as an investment company, such investment will not constitute an Eligible
Investment.
ENHANCEMENT
The amounts and types of credit enhancement ('Enhancement') arrangements
and the provider thereof, if applicable, with respect to a Series or any Class
of Securities will be set forth in the related Prospectus Supplement. If
specified in the applicable Prospectus Supplement, Enhancement for any Series of
Securities may cover one or more Classes of Notes or Certificates, and
accordingly may be exhausted for the benefit of a particular Class of Notes or
Certificates and thereafter be unavailable to such other Classes of Notes or
Certificates. Further information regarding any provider of credit enhancement,
including financial information when material, will be included in the related
Prospectus Supplement.
If and to the extent provided in the related Prospectus Supplement,
Enhancement may include one or more of the following or any combination thereof:
Financial Guaranty Insurance Policy which will be issued by a monoline
insurance company and which, subject to the terms of such policy, will
guarantee timely payment of interest on, and ultimate (as opposed to
timely) payment of principal of, the applicable Class or Classes of
Securities;
Overcollateralization which will equal the excess of the aggregate
principal balance of the Primary Assets over the aggregate principal
balance of the Securities. Overcollateralization may take the form of the
initial or subsequent deposit of Primary Assets to create such excess or
may build over time from the application of certain excess cash amounts
generated by the Primary Assets to accelerate the amortization of the
applicable Class or Classes of Securities;
Letter of Credit which will be issued by a bank or other financial
institution in a maximum amount which may be permanently reduced as draws
are made or may be replenished as previous draws are repaid from certain
excess cash amounts generated by the Primary Assets. Draws may be made to
cover shortfalls
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generally in collections, with respect to particular types of shortfalls
such as those due to particular types of losses or with respect to specific
situations such as shortfalls in amounts necessary to pay current interest;
Cash Reserve Fund which may be partially or fully funded on the date
of issuance or may be funded over time from certain excess cash amounts
generated by the Primary Assets. Withdrawals may be made in circumstances
similar to those for which draws may be made on a letter of credit;
Insurance Policies which may insure a portion of the Home Equity Loans
or Underlying Loans against credit losses, bankruptcy losses, fraud losses
or special hazard losses not covered by typical homeowners insurance
policies;
Subordinate Securities which will be subordinated in the right to
reserve distributions to one or more other Classes of Securities of the
same Series, some or all of which may themselves be subordinated to other
Classes of such Series. Subordination may be with respect to distributions
of interest, principal or both. In addition, all or portions of certain
types of losses on the Primary Assets may be allocated to one or more
Classes of the Subordinate Securities prior to the allocation thereof to
other Classes of Subordinate Certificates and/or the Senior Securities of
the applicable Series; or
Derivative Products which may include a swap to convert floating or
fixed rate payments, as applicable, on the Primary Assets into fixed or
floating rate payments, as applicable, on the Securities or a cap or floor
agreement intended to provide protection against changes in floating rates
of interest payable on the Primary Assets and/or the Securities. Any such
derivative product will constitute or will be structured so as to be an
insurance policy or an exempt security.
The presence of Enhancement is intended to increase the likelihood of
receipt by the Certificateholders and the Noteholders of the full amount of
principal and interest due thereon and to decrease the likelihood that the
Certificateholders and the Noteholders will experience losses, or may be
structured to provide protection against changes in interest rates or against
other risks, to the extent and under the conditions specified in the related
Prospectus Supplement. The Enhancement for a Class of Securities generally will
not provide protection against all risks of loss and may not guarantee repayment
of the entire principal and interest thereon. If losses occur which exceed the
amount covered by any Enhancement or which are not covered by any Enhancement,
Securityholders will bear their allocable share of deficiencies. In addition, if
a form of Enhancement covers more than one Class of Securities of a Series,
Securityholders of any such Class will be subject to the risk that such
Enhancement will be exhausted by the claims of Securityholders of other Classes.
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SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans comprising the Primary
Assets in the Trust Fund will be provided by the Servicer directly pursuant to
the related Sale and Servicing Agreement or Pooling and Servicing Agreement, as
the case may be, with respect to a Series of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments required
to be made under the Loans and will, consistent with the terms of the related
Agreement for a Series and any applicable Enhancement, follow such collection
procedures as it follows with respect to comparable loans held in its own
portfolio. Consistent with the above, the Servicer may, in its discretion, (i)
waive any assumption fee, late payment charge, or other charge in connection
with a Home Equity Loan and (ii) arrange with an obligor a schedule for the
liquidation of delinquencies by extending the Due Dates for Scheduled Payments
on such Loan.
The Servicer, to the extent permitted by law, will establish and maintain
escrow or impound accounts ('Escrow Accounts') with respect to Loans in which
payments by obligors with respect to taxes, assessments, mortgage and hazard
insurance premiums, and other comparable items will be deposited. Loans may not
require such payments under the related loan documents, in which case the
Servicer would not be required to establish any Escrow Account with respect to
such Loans. Withdrawals from the Escrow Accounts are to be made to effect timely
payment of taxes, assessments and mortgage and hazard insurance, to refund to
obligors amounts determined to be overages, to pay interest to obligors on
balances in the Escrow Account to the extent required by law, to repair or
otherwise protect the property securing the related Home Equity Loan and to
clear and terminate such Escrow Account. The Servicer will be responsible for
the administration of the Escrow Accounts and generally will make advances to
such accounts when a deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT OR THE CERTIFICATE
ACCOUNT
The Trustee or the Servicer will establish a separate account (the
'Collection Account' or the 'Certificate Account') in the name or for the
benefit of the Trustee. The Collection Account and/or Certificate Account will
be an account maintained (i) at a depository institution, the long-term
unsecured debt obligations of which at the time of any deposit therein are rated
by each Rating Agency rating the Securities of such Series at levels
satisfactory to each Rating Agency or (ii) in an account or accounts the
deposits in which are insured to the maximum extent available by the Federal
Deposit Insurance Corporation (the 'FDIC') or which are secured in a manner
meeting requirements established by each Rating Agency.
The funds held in the Collection Account or the Certificate Account may be
invested, pending remittance to the Trustee, in Eligible Investments. The
Servicer will be entitled to receive as additional compensation any interest or
other income earned on funds in the Collection Account or Certificate Account.
The Servicer, the Seller or the Trustee will deposit into the Collection
Account for each Series, within the period specified in the related Prospectus
Supplement, the following payments and collections received or made by it (other
than, in respect of principal of and interest on the related Primary Assets due
or, in the case of simple interest Loans, received, on or before such Cut-off
Date):
(i) all payments on account of principal, including prepayments, on
such Primary Assets;
(ii) all payments on account of interest on such Primary Assets after
deducting therefrom, at the discretion of the Servicer but only to the
extent of the amount permitted to be withdrawn or withheld from the
Collection Account in accordance with the related Agreement, the Servicing
Fee in respect of such Primary Assets;
(iii) all amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
payments in connection with such Primary Assets received from the obligor,
other than amounts required to be paid or refunded to the obligor pursuant
to the terms of the applicable loan documents or otherwise pursuant to law
('Liquidation Proceeds'), exclusive of, in the discretion of the Servicer,
but only to the extent of the amount permitted to be withdrawn from the
Collection Account or the Certificate Account in
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accordance with the related Agreement, the Servicing Fee, if any, in
respect of the related Primary Asset and, to the extent specified in the
related Prospectus Supplement, net of reimbursements for related
Delinquency Advances and Servicer Advances;
(iv) all proceeds under any title insurance, hazard insurance or other
insurance policy covering any such Primary Asset, other than proceeds to be
applied to the restoration or repair of the related Property or released to
the obligor in accordance with the related Agreement;
(v) all amounts required to be deposited therein from any applicable
Reserve Fund for such Series pursuant to the related Agreement;
(vi) all Delinquency Advances made by the Servicer required pursuant
to the related Agreement; and
(vii) all repurchase prices of any such Primary Assets repurchased by
the Servicer or the Seller pursuant to the related Agreement.
The Servicer is permitted, from time to time, to make withdrawals from the
Collection Account or the Certificate Account for each Series for the following
purposes:
(i) to reimburse itself for Delinquency Advances and Servicing
Advances for such Series made by it pursuant to the related Agreement; the
Servicer's right to reimburse itself for Delinquency Advances and Servicing
Advances is limited to amounts received on or in respect of particular
Loans (including, for this purpose, Liquidation Proceeds and amounts
representing proceeds of insurance policies covering the related Property)
which represent late recoveries of Scheduled Payments respecting which any
such advance was made;
(ii) to reimburse itself for any Delinquency Advances for such Series
that the Servicer determines in good faith it will be unable to recover
from amounts representing late recoveries of Scheduled Payments respecting
which such Advance was made or from Liquidation Proceeds or the proceeds of
insurance policies;
(iii) in the event it has elected not to pay itself the Servicing Fee
out of the interest component of any Scheduled Payment, late payment or
other recovery with respect to a particular Home Equity Loan prior to the
deposit of such Scheduled Payment, late payment or recovery into the
Collection Account, to pay to itself the Servicing Fee, as adjusted
pursuant to the related Agreement, from any such Scheduled Payment, late
payment or such other recovery, to the extent permitted by the related
Agreement;
(iv) to reimburse itself or the Seller for expenses incurred by and
recoverable by or reimbursable to it pursuant to the related Agreement;
(v) to pay to the applicable person with respect to each Primary Asset
or REO Property acquired in respect thereof that has been repurchased or
removed from the Trust Fund by the Seller or the Servicer pursuant to the
related Agreement, all amounts received thereon and not distributed as of
the date on which the related repurchase price was determined;
(vi) to make payments to the Trustee of such Series for deposit into
the Distribution Account, if any, or for remittance to the Holders of such
Series in the amounts and in the manner provided for in the related
Agreement; and
(vii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
ADVANCES AND LIMITATIONS THEREON
The related Prospectus Supplement will describe the circumstances, if any,
under which the Servicer will make advances with respect to delinquent payments
of principal and/or interest on Loans ('Delinquency Advances'). If specified in
the related Prospectus Supplement, the Servicer will be obligated to make
Delinquency Advances, and such obligation may be limited in amount, or may not
be activated until a certain portion of a specified Reserve Fund is depleted.
Such advances are intended to provide liquidity and, except to the extent
specified in the related Prospectus Supplement, not to guarantee or insure
against losses. Accordingly, to the extent specified in the related Prospectus
Supplement, any funds advanced are recoverable by the Servicer
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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 such Delinquency Advance was made or, to the extent
provided in the Prospectus Supplement, from payments or proceeds from other
Loans. If and to the extent specified in the related Prospectus Supplement, the
Servicer will advance its own funds to pay for any related expenses of
foreclosure and disposition of any liquidated Mortgage Home Equity Loan or
related Property (the 'Servicing Advances'). The Servicer will be entitled to be
reimbursed for any such Servicing Advances to the extent provided in the
Prospectus Supplement. If a Servicer Advance is made and subsequently determined
to be nonrecoverable from late collections, proceeds of insurance policies, or
Liquidation Proceeds from the related Loan, the Servicer may be entitled to
reimbursement from other funds in the Collection Account, Certificate Account or
Distribution Account, as the case may be, or from a specified Reserve Fund as
applicable, to the extent specified in the related Prospectus Supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related Prospectus Supplement, the Servicer will be required to maintain
or to cause the obligor on each Home Equity Loan to maintain a hazard insurance
policy naming the Servicer as loss payee thereunder and providing for extended
coverage of the standard form of fire insurance with extended coverage for
certain other hazards as its customary in the state in which the related
Property is located. The standard hazard insurance policies will provide for
coverage at least equal to the applicable state standard form of fire insurance
policy with extended coverage for property of the type securing the related
Loans.
In general, the standard form of fire and extended coverage insurance
policy covers physical damage to or destruction of the improvements on the
property by fire, lightning, explosion, smoke, windstorm and hail, and riot,
strike and civil commotion, subject to the conditions and exclusions specified
in each policy. Although the policies relating to the Home Equity Loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms and therefore will not contain identical terms
and conditions, the basic terms thereof are dictated by respective state laws,
and most such policies typically do not cover any physical damage resulting from
any of the following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive. When a Mortgaged Property is located in a federally designated
special flood hazard area at the time of origination of the related Home Equity
Loan, the Agreement requires the Servicer to cause to be maintained, for each
such Home Equity Loan serviced, flood insurance (to the extent available) in an
amount equal in general to the lesser of the maximum insurance available under
the federal flood insurance program and the sum of the Home Equity Loan Balance
of the applicable Home Equity Home Equity Loan the principal balance of any
mortgage loan senior to such Home Equity Home Equity Loan from time to time.
The hazard insurance policies covering the Mortgaged Properties typically
contain a co-insurance clause that in effect requires the insured at all times
to carry insurance of a specified percentage (generally 80% to 90% of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause generally provides that the insurer's
liability in the event of partial loss does not exceed the greater of (i) the
replacement cost of the improvements less physical depreciation or (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
Unless otherwise specified in the related Prospectus Supplement, coverage
will be in an amount at least equal to the greater of (i) the amount necessary
to avoid the enforcement of any co-insurance clause contained in the policy or
(ii) the outstanding principal balance of the related loan plus the balance of
any senior mortgage. Unless otherwise specified in the related Prospectus
Supplement, the Servicer will also maintain on REO Property that secured a
defaulted Home Equity Loan and that has been acquired upon foreclosure, deed in
lieu of foreclosure, or repossession, a standard hazard insurance policy in an
amount that is equal to the maximum insurable value of such REO Property. No
earthquake or other additional insurance will be required of any obligor or will
be maintained on REO Property acquired in respect of a default Loan, other than
pursuant to such applicable laws and regulations as shall at any time be in
force and shall require such additional insurance.
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The ability of the Servicer to assure that hazard insurance proceeds are
appropriately applied may depend on its being named as an additional insured
under any hazard insurance policy and under any flood insurance policy, or upon
the extent to which information in this regard is furnished to the Servicer by a
borrower. Except as described below, all amounts collected by the Servicer under
any hazard policy (except for amounts applied or expected to be applied to the
restoration or repair of the Property or released to the borrower in accordance
with the Servicer's normal servicing procedures), will be deposited in the
Collection Account. The Agreement provides that the Servicer may satisfy its
obligation to cause hazard policies to be maintained by maintaining a blanket
policy issued by an insurer acceptable to the Rating Agencies insuring against
hazard losses to the collateral securing the Home Equity Loans. If such blanket
policy contains a deductible clause, the Servicer will deposit into the
Collection Account the amount not otherwise payable under the blanket policy
because of such deductible clause.
REALIZATION UPON DEFAULTED LOANS
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Mortgaged
Properties securing the related Loans as come into and continue in default and
as to which no satisfactory arrangements can be made for collection of
delinquent payments. In connection with such foreclosure or other conversion,
the Servicer will follow such practices and procedures as it deems necessary or
advisable and as are normal and usual in its servicing activities with respect
to comparable loans serviced by it. However, the Servicer will not be required
to expend its own funds in connection with any foreclosure or towards the
restoration of the Property unless it determines that (i) such restoration or
foreclosure will increase the Liquidation Proceeds in respect of the related
Home Equity Loan available to the Holders after reimbursement to itself for such
expenses and (ii) such expenses will be recoverable by it either through
Liquidation Proceeds or the proceeds of insurance. Notwithstanding anything to
the contrary herein, in the case of a Trust Fund for which a REMIC election has
been made, the Servicer will be required to liquidate any Mortgaged Property
acquired through foreclosure within two years after the acquisition of the
beneficial ownership of such Mortgaged Property. While the holder of a Mortgaged
Property acquired through foreclosure can often maximize its recovery by
providing financing to a new purchaser, the Trust Fund, if applicable, will have
no ability to do so and neither the Servicer nor the Seller will be required to
do so.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When any Mortgaged Property is being conveyed by the obligor, the Servicer
will be obligated to exercise its rights to accelerate the maturity of the
related Home Equity Loan under the applicable 'due-on-sale' clause, if any,
unless such exercise is not permitted under applicable law or if the enforcement
of such clause would result in loss of coverage under any primary mortgage
insurance policy. In such event, the Servicer is authorized to accept from or
enter into an assumption agreement with the person to whom such property has
been or is about to be conveyed, pursuant to which such person becomes liable
under the Loan. To the extent permitted by applicable law, such assumption will
not release the original borrower from its obligation under the Loan. Any fee
collected in connection with an assumption will be retained by the Servicer as
additional servicing compensation. The terms of a Home Equity Loan may not be
changed in connection with an assumption except to the extent specified in the
related Prospectus Supplement.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be entitled to a periodic fee as servicing compensation
(the 'Servicing Fee') in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as specified
in the related Prospectus Supplement. In addition, the Servicer will be entitled
to servicing compensation in the form of assumption fees, late payment charges
and similar items, or excess proceeds following disposition of Property in
connection with defaulted Loans.
Except to the extent otherwise specified in the related Prospectus
Supplement, the Servicer will pay certain expenses incurred in connection with
the servicing of the Loans, including, without limitation, the payment of the
fees and expenses of the Trustee and independent accountants, payment of
insurance policy premiums and the cost of credit support, if any, and payment of
expenses incurred in preparation of reports to Holders.
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When an obligor makes a principal prepayment in full between Due Dates on
the related Loan, the obligor will generally be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the related Prospectus Supplement in order that one or more Classes of the
Holders of a Series will not be adversely affected by any resulting shortfall in
interest, the amount of the Servicing Fee may be reduced to the extent necessary
to include in the Servicer's remittance to the Trustee for distribution to
Securityholders an amount equal to one month's interest on the related Home
Equity Loan (less the Servicing Fee). If the aggregate amount of such shortfalls
in a month exceeds the Servicing Fee for such month, a shortfall to Holders may
occur.
The Servicer will be entitled to reimbursement for Servicing Advances. The
related Holders will suffer no loss by reason of such Servicing Advances to the
extent expenses are covered under related insurance policies or from excess
Liquidation Proceeds. If claims are either not made or paid under the applicable
insurance policies or if coverage thereunder has been exhausted, the related
Holders will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the Servicing Advances, are less than the outstanding principal
balance of and unpaid interest on the related Home Equity Loan which would be
distributable to Holders. The Servicer is generally also entitled to
reimbursement from the Collection Account for Servicing Advances. In addition,
the Servicer will be entitled to reimbursement for Delinquency Advances as
described above under '--Advances and Limitations Thereon.'
The rights of the Servicer to receive funds from the Collection Account for
a Series, whether as the Servicing Fee or other compensation, or for the
reimbursement of Delinquency Advances and Servicing Advances, expenses or
otherwise, are not subordinate to the rights of Holders of such Series.
EVIDENCE AS TO COMPLIANCE
The applicable 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 such firm has examined certain documents and records relating
to the servicing of the Loans by the Servicer and that such examination, which
has been conducted substantially in compliance with either (i) the audit guide
for audits of non-supervised mortgagees approved by the Department of Housing
and Urban Development or (ii) the requirements of the Uniform Single Attestation
Program for Mortgage Bankers, has disclosed no items of non-compliance with the
provisions of the applicable Agreement that, in the opinion of the firm, are
material, except for such items of non-compliance as shall be referred in the
report.
The applicable Agreement for each Series will also provide for delivery to
the Trustee for such Series of an annual statement signed by an officer of the
Servicer to the effect that the Servicer has fulfilled its material obligations
under such Agreement throughout the preceding calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
If an Event of Default occurs under either a Sale and Servicing Agreement
or a Pooling and Servicing Agreement, the Servicer may be replaced by the
Trustee or a successor Servicer. Unless otherwise specified in the related
Prospectus Supplement, such Events of Default and the rights of the Trustee upon
such a default under the Agreement for the related Series will be substantially
similar to those described under 'THE AGREEMENTS--Events of Default; Rights Upon
Event of Default--Pooling and Servicing Agreement; Sale and Servicing
Agreement.'
The Servicer may assign its rights and delegate its duties and obligations
under the related Agreement for each Series if the successor Servicer accepting
such assignment or delegation (i) services similar loans in the ordinary course
of its business, (ii) is reasonably satisfactory to the Trustee for the related
Series, (iii) would not cause any Rating Agency's rating of the Securities for
such Series in effect immediately prior to such assignment, sale or transfer to
be qualified, downgraded or withdrawn as a result of such assignment, sale or
transfer and (iv) executes and delivers to the Trustee and the Enhancer, if any,
an agreement, in form and substance reasonably satisfactory to the Trustee, and
the Enhancer, if any, which contains an assumption by such Servicer of the due
and punctual performance and observance of each covenant and condition to be
performed or observed by the Servicer under the related Agreement from and after
the date of such agreement. No such assignment will become effective until the
Trustee or a successor Servicer has assumed the servicer's obligations and
duties under the related Agreement. To the extent that the Servicer transfers
its obligations to a wholly-owned subsidiary or
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affiliate, such subsidiary or affiliate need not satisfy the criteria set forth
above; however, in such instance, the assigning Servicer will remain liable for
the servicing obligations under the related Agreement. Any entity into which the
Servicer is merged or consolidated or any successor corporation resulting from
any merger, conversion or consolidation will succeed to the Servicer's
obligations under the related Agreement provided that such successor or
surviving entity meets the requirements for a successor Servicer set forth
above.
The Servicer will not be under any liability to the Trust Fund or the
Securityholders for taking any action or for refraining from taking any action
in good faith pursuant to the Agreement, or for errors in judgment; provided,
however, that the Servicer will not be protected against any liability that
otherwise would be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of its reckless disregard
of its obligations and duties thereunder. Except to the extent otherwise
provided therein, each Agreement further will provide that the Servicer and any
director, officer, employee or agent of the Servicer will be entitled to
indemnification by the Trust Fund and will be held harmless to the extent
provided in the Agreement against any loss, liability or expense incurred in
connection with any legal action relating to the Agreement or the Securities,
other than any loss, liability or expense related to any specific Home Equity
Loan or Loans (except any such loss, liability or expense otherwise reimbursable
pursuant to the Agreement) and any loss, liability or expense incurred by the
Servicer by reason of its willful misfeasance, bad faith or gross negligence in
the performance of its duties thereunder or by reason of the Servicer's reckless
disregard of its obligations and duties thereunder.
Each 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 Agreement and that in its opinion may involve
it in any expense or liability. The Servicer, however, in its discretion, may
undertake any such action that it may deem necessary or desirable with respect
to the Agreement and the rights and duties of the parties thereto and the
interest of the Securityholders and the Enhancer, if any, thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund and the
Servicer will be entitled to be reimbursed therefor to the extent provided in
the Agreement. The Servicer's right to such indemnity or reimbursement will
survive any resignation or termination of the Servicer with respect to any
losses, expenses, costs or liabilities arising prior to such resignation or
termination (or arising from events that occurred prior to such resignation or
termination). Any claims by or on behalf of the Securityholders or the Trust
Fund will be made only against the Servicer, who will be liable with respect to
its own acts and omissions as well as the acts and omissions of its directors,
officer, employees and agents.
THE AGREEMENTS
The following summaries describe the material provisions of the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and qualified in their entirety by reference to, the
provisions of the Agreements. Where particular provisions or terms used in the
Agreements are referred to, such provisions or terms are as specified in the
related Agreements.
ASSIGNMENT OF PRIMARY ASSETS
General. At the time of issuance of the Securities of a Series, the Seller
will transfer, convey and assign to the Trust Fund all right, title and interest
of the Seller in the Primary Assets and other property to be transferred to the
Trust Fund for a Series. Such assignment will include all principal and interest
due or received on or with respect to the Primary Assets after the Cut-off Date
to the extent specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
Assignment of Loans. The Seller will, as to each Loan, deliver or cause to
be delivered to the Trustee, or, as specified in the related Prospectus
Supplement a custodian on behalf of the Trustee (the 'Custodian'), the Mortgage
Note endorsed without recourse to the order of the Trustee or in blank, the
original Mortgage with evidence of recording indicated thereon (except for any
Mortgage not returned from the public recording office, in which case the Seller
will certify that the original of such Mortgage was delivered to such recording
office) and an assignment of the Mortgage in recordable form. The Trustee, or,
if so specified in the related Prospectus Supplement, the Custodian, will hold
such documents in trust for the benefit of the Holders.
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The Seller will, at the time of issuance of the Securities, cause
assignments to the Trustee of the Mortgages relating to the Loans for a Series
to be recorded in the appropriate public office for real property records,
except in states where, in the opinion of counsel acceptable to the Trustee,
such recording is not required to protect the Trustee's interest in the related
Loans. If specified in the related Prospectus Supplement, the Seller will cause
such assignments to be so recorded within the time after issuance of the
Securities as is specified in the related Prospectus Supplement, in which event,
the Agreement may require the Seller to repurchase from the Trustee any Home
Equity Loan the related Mortgage of which is not recorded within such time, at
the price described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the related Prospectus Supplement,
the enforcement of the repurchase obligation would constitute the sole remedy
available to the Holders or the Trustee for the failure of a Mortgage to be
recorded.
Each Home Equity Loan will be identified in a schedule appearing as an
exhibit to the related Agreement (the 'Home Equity Loan Schedule'). Such Home
Equity Loan Schedule will specify with respect to each Loan: the original
principal amount and unpaid principal balance as of the Cut-off Date; the
current interest rate; the current Scheduled Payment of principal and interest;
the maturity date, if any, of the related Mortgage Note; and if the Home Equity
Loan is an adjustable rate Loan, the Lifetime Rate Cap, if any, and the index.
The Seller does not intend to file the Home Equity Loan Schedules or the related
Agreements.
Assignment of Private Securities. The Seller will cause Private Securities
to be registered in the name of the Trustee (or its nominee or correspondent).
The Trustee (or its nominee or correspondent) will have possession of any
certificated Private Securities. The Trustee generally will not be in possession
of or be assignee of record of any underlying assets for a Private Security. See
'THE TRUST FUNDS--Private Securities.' Each Private Security will be identified
in a schedule appearing as an exhibit to the related Agreement (the 'Certificate
Schedule'), which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date for each Private Security conveyed to the Trust Fund. In
the Agreement, the Seller will represent and warrant to the Trustee regarding
the Private Securities: (i) that the information contained in the Certificate
Schedule is true and correct in all material respects; (ii) that, immediately
prior to the conveyance of the Private Securities, the Seller had good title
thereto, and was the sole owner thereof (subject to any Retained Interest);
(iii) that there has been no other sale by it of such Private Securities; and
(iv) that there is no existing lien, charge, security interest or other
encumbrance (other than any Retained Interest) on such Private Securities.
Repurchase and Substitution of Non-Conforming Primary Assets. If any
document in the file relating to the Primary Assets delivered by the Seller to
the Trustee (or Custodian) is found by the Trustee within 90 days of the
execution of the related Agreement (or promptly after the Trustee's receipt of
any document permitted to be delivered after the Closing Date) to be defective
in any material respect and the Seller does not cure such defect within 90 days,
or within such other period specified in the related Prospectus Supplement, the
Seller will, not later than 90 days or within such other period specified in the
related Prospectus Supplement, after the Trustee's notice to the Seller of the
defect, repurchase the related Primary Asset or any property acquired in respect
thereof from the Trustee at a price equal to, unless otherwise specified in the
related Prospectus Supplement, (a) the outstanding principal balance of such
Primary Asset and (b) accrued and unpaid interest to the date of the
repurchase/substitution of such Primary Asset at the rate set forth in the
related Agreement.
The Seller, may, rather than repurchase the Primary Asset as described
above, remove such Primary Asset from the Trust Fund (the 'Deleted Primary
Asset') and substitute in its place one or more other Primary Assets (each, a
'Qualifying Substitute Primary Asset') provided, however, that (i) with respect
to a Trust Fund for which no REMIC election is made, such substitution must be
effected within 120 days of the date of initial issuance of the Securities and
(ii) with respect to a Trust Fund for which a REMIC election is made, after a
specified time period, the Trustee must have received a satisfactory opinion of
counsel that such substitution will not cause the Trust Fund to lose its status
as a REMIC or otherwise subject the Trust Fund to a prohibited transaction tax.
Any Qualifying Substitute Primary Asset will have, on the date of
substitution, (i) an outstanding principal balance, after deduction of all
Scheduled Payments due in the month of substitution, not in excess of the
outstanding principal balance of the Deleted Primary Asset (the amount of any
shortfall to be deposited to the Collection Account in the month of substitution
for distribution to Holders), (ii) an interest rate not less than (and not more
than 2% greater than) the interest rate or Margin of the Deleted Primary Asset,
(iii) a remaining term-to-
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stated maturity not greater than (and not more than two years less than) that of
the Deleted Primary Asset, and will comply with all of the representations and
warranties set forth in the applicable Agreement as of the date of substitution.
The above-described cure, repurchase or substitution obligations constitute
the sole remedies available to the Holders or the Trustee for a material defect
in a document for a Primary Asset.
The Seller will make representations and warranties with respect to Primary
Assets for a Series. If the Seller cannot cure a breach of any such
representations and warranties in all material respects within the time period
specified in the related Prospectus Supplement after notification by the Trustee
of such breach, and if such breach is of a nature that materially and adversely
affects the value of such Primary Asset, the Seller is obligated to repurchase
the affected Primary Asset or, if provided in the related Prospectus Supplement,
provide a Qualifying Substitute Primary Asset therefor, subject to the same
conditions and limitations on purchases and substitutions as described above.
REPORTS TO HOLDERS
The Trustee or other entity specified in the related Prospectus Supplement
will prepare and forward to each Holder on each Distribution Date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to Holders of the related
Securities and the outstanding principal balance of such Securities
following such distribution;
(ii) the amount of interest distributed to Holders of the related
Securities and the current interest on such Securities;
(iii) the amounts of (a) any overdue accrued interest included in such
distribution, (b) any remaining overdue accrued interest with respect to
such Securities or (c) any current shortfall in amounts to be distributed
as accrued interest to Holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal amounts
with respect to such Securities, (c) any current shortfall in receipt of
scheduled principal payments on the related Primary Assets or (d) any
realized losses or Liquidation Proceeds to be allocated as reductions in
the outstanding principal balances of such Securities;
(v) the amount received under any related Enhancement, the remaining
amount available under such Enhancement and the amount reimbursed to the
Enhancer, if any;
(vi) the number and aggregate principal balance of Loans that were
delinquent (a) one monthly payment, (b) two monthly payments and (c) three
or more monthly payments, as of the end of the prior collection period;
(vii) the number and aggregate principal balance of Loans in
foreclosure, as of the end of the prior collection period;
(viii) the aggregate principal balance of Loans which became REO
during the prior collection period;
(ix) the book value of any REO Property acquired by the related Trust
Fund;
(x) the amount of losses realized during the prior collection period;
(xi) the aggregate principal balance of Loans repurchased during the
prior collection period;
(xii) the amount of the Servicing Fee for the prior collection period;
(xiii) during the Pre-Funding Period, the remaining Pre-Funded Amount
and the portion of the Pre-Funding Amount used to acquire additional
Primary Assets since the preceding Distribution Date;
(xiv) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account; and
(xv) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related Prospectus
Supplement, will furnish to each Holder of record at any time during such
calendar year (a) the aggregate of amounts reported pursuant to (i), (ii), and
(iv)(d) above for such calendar
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year and (b) such information specified in the related Agreement to enable
Holders 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 with respect to the Servicer's servicing of the Loans. See
'SERVICING OF LOANS--Evidence as to Compliance.'
If so specified in the Prospectus Supplement for a Series of Securities,
such Series or one or more Classes of such Series will be issued in book-entry
form. In such event, owners of beneficial interests in such Securities will not
be considered Holders and will not receive such reports directly from the
Trustee. The Trustee will forward such reports only to the entity or its nominee
which is the registered holder of the global certificate which evidences such
book-entry securities. Beneficial owners will receive such reports from the
participants and indirect participants of the applicable book-entry system in
accordance with the practices and procedures of such entities.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Sale and Servicing Agreement. Unless
otherwise specified in the related Prospectus Supplement, Events of Default
under the Pooling and Servicing Agreement or Sale and Servicing Agreement for
each Series of Securities relating to Loans include (i) any failure by the
Servicer to deposit amounts in the Collection Account and/or Certificate Account
and/or Distribution Account required to be made thereunder, which failure
continues unremedied for three business days after the giving of written notice
of such failure to the Servicer by the Trustee for such Series, or to the
Servicer and the Trustee by the Enhancer or by the Holders of such Series
evidencing not less than 51% of the aggregate voting rights of the Securities
for such Series, (ii) any failure by the Servicer duly to observe or perform in
any material respect any other of its covenants or agreements in the applicable
Agreement which continues unremedied for 30 days after the giving of written
notice of such failure to the Servicer by the Trustee, or to the Servicer and
the Trustee by the Enhancer or by the Holders of such Series evidencing not less
than 51% of the aggregate voting rights of the Securities for such Series, and
(iii) certain events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities relating to the servicing of Loans, unless
otherwise specified in the related Prospectus Supplement, the Trustee for such
Series or Holders of Securities of such Series evidencing not less than 51% of
the aggregate voting rights of the Securities for such Series with, if specified
in the related Prospectus Supplement, the consent of the Enhancer, may terminate
all of the rights and obligations of the Servicer as servicer under the
applicable Agreement (other than its right to recovery of other expenses and
amounts advanced pursuant to the terms of such Agreement which rights the
Servicer will retain under all circumstances), whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under such 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 such 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 of at least
$15,000,000 to act as successor Servicer under the provisions of the applicable
Agreement. The successor Servicer would be entitled to reasonable servicing
compensation in an amount not to exceed the Servicing Fee as set forth in the
related Prospectus Supplement, together with the other servicing compensation in
the form of assumption fees, late payment charges or otherwise, as provided in
such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Holders of such Series, and, unless
otherwise specified in the related Prospectus Supplement, Holders of Securities
evidencing not less than 51% of the aggregate voting rights of the Securities
for such Series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon that Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or powers
unless such
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Holders have offered the Trustee reasonable security or indemnity against the
cost, expenses and liabilities which may be incurred by the Trustee therein or
thereby. The Trustee may decline to follow any such direction if the Trustee
determines that the action or proceeding so directed may not lawfully be taken
or would involve it in personal liability or be unjustly prejudicial to the
nonassenting Holders.
Indenture. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for 30 days or more in the payment of any principal of or
interest on any Note of such Series; (ii) failure to perform any other covenant
of the Seller or the Trust Fund in the Indenture which continues for a period of
60 days after notice thereof is given in accordance with the procedures
described in the related Prospectus Supplement; (iii) any representation or
warranty made by the Seller or the Trust Fund in the Indenture or in any
certificate or other writing delivered pursuant thereto or in connection
therewith with respect to or affecting such Series having been incorrect in a
material respect as of the time made, and such breach is not cured within 60
days after notice thereof is given in accordance with the procedures described
in the related Prospectus Supplement; (iv) certain events of bankruptcy,
insolvency, receivership or liquidation of the Seller or the Trust Fund; or (v)
any other Event of Default provided with respect to Notes of that Series.
If an Event of Default with respect to 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 such Series
with, if specified in the related Prospectus Supplement, the consent of the
Enhancer, may declare the principal amount (or, if the Notes of that Series are
Zero Coupon Securities, such portion of the principal amount as may be specified
in the terms of that Series, as provided in the related Prospectus Supplement)
of all the Notes of such Series to be due and payable immediately. Such
declaration may, under certain circumstances, be rescinded and annulled by the
Holders of a majority in aggregate outstanding amount of the Notes of such
Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, unless
otherwise specified in the related Prospectus Supplement, 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 such Series for 30 days or more, unless (a)
the Holders of 100% of the then aggregate outstanding amount of the Notes of
such Series consent to such sale, (b) the proceeds of such sale or liquidation
are sufficient to pay in full the principal of and accrued interest due and
unpaid on the outstanding Notes of such Series at the date of such sale or (c)
the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the Holders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for 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 such liquidation for
unpaid fees and expenses. As a result, upon the occurrence of such an 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 such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the Holders of any such 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 such 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 with respect
to 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 such
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Series, unless such 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 such request or direction. Subject to such
provisions for indemnification and certain limitations contained in the
Indenture, the Holders of a majority of the then aggregate outstanding amount of
the Notes of such 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 with respect to the Notes
of such Series, and the Holders of a majority of the then aggregate outstanding
amount of the Notes of such Series may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or interest or a
default in respect 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 such Series affected thereby.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth in
the related Prospectus Supplement. The entity serving as Trustee may have normal
banking relationships with the Seller. In addition, for the purpose of meeting
the legal requirements of certain local jurisdictions, the Trustee will have the
power to appoint co-trustees or separate trustees of all or any part of the
Trust Fund relating to a Series of Securities. In the event of such appointment,
all rights, powers, duties and obligations conferred or imposed upon the Trustee
by the Agreement relating to such Series will be conferred or imposed upon the
Trustee and each such separate trustee or co-trustee jointly, or, in any
jurisdiction in which the Trustee shall be incompetent or unqualified to perform
certain acts, singly upon such separate trustee or co-trustee who will exercise
and perform such rights, powers, duties and obligations solely at the direction
of the Trustee. The Trustee may also appoint agents to perform any of the
responsibilities of the Trustee, which agents will have any or all of the
rights, powers, duties and obligations of the Trustee conferred on them by such
appointment; provided that the Trustee will continue to be responsible for its
duties and obligations under the Agreement. In the event a Series includes both
Notes and Certificates, a separate Trustee identified in the related Prospectus
Supplement will serve as Trustee for the Certificateholders and for the Notes.
DUTIES OF THE TRUSTEE
The Trustee will not make any representations as to the validity or
sufficiency of the Agreement, the Securities or of any Primary Asset or related
documents. If no Event of Default (as defined in the related Agreement) has
occurred, the Trustee is required to perform only those duties specifically
required of it under the Agreement. Upon receipt of the various certificates,
statements, reports or other instruments required to be furnished to it, the
Trustee is required to examine them to determine whether they are in the form
required by the related Agreement. However, the Trustee will not be responsible
for the accuracy or content of any such documents furnished to it by the Holders
or the Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Seller, and if specified in the
related Prospectus Supplement, the Enhancer, if any, resign at any time, in
which event the Seller will be obligated to use its best efforts to appoint a
successor Trustee. If no successor Trustee has been appointed and has accepted
the appointment within the period specified in the Agreement after the giving of
such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for appointment of a successor Trustee. The Trustee may
also be removed at any time (i) if the Trustee ceases to be eligible to continue
as such under the Agreement, (ii) if the Trustee becomes insolvent or (iii) by
the Holders of Securities evidencing over 50% of the aggregate voting rights of
the Securities in the Trust Fund upon written notice to the Trustee and to the
Seller. Any resignation or
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removal of the Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor Trustee.
AMENDMENT OF AGREEMENT
The Agreement for each Series of Securities may be amended by the Seller,
the Servicer and the Trustee with respect to such Series, without notice to or
consent of the Holders (i) to cure any ambiguity, (ii) to correct any defective
provisions or to correct or supplement any provision therein, (iii) to add to
the duties of the Seller, the Trust Fund or Servicer, (iv) to add any other
provisions with respect to matters or questions arising under such Agreement or
related Enhancement, (v) to add or amend any provisions of such Agreement as
required by a Rating Agency in order to maintain or improve the rating of the
Securities (it being understood that none of the Seller, the Servicer or Trustee
is obligated to maintain or improve such rating), or (vi) to comply with any
requirements imposed by the Code; provided that any such amendment except
pursuant to clause (vi) above will not materially and adversely affect the
interests of any Holders of such Series or, if specified in the related
Prospectus Supplement, the Enhancer, as evidenced by an opinion of counsel. Any
such amendment except pursuant to clause (vi) of the preceding sentence shall be
deemed not to adversely affect in any material respect the interests of any
Holder if the Trustee receives written confirmation from each Rating Agency
rating such Securities that such amendment will not cause such Rating Agency to
withdraw or reduce the then current rating thereof. The Agreement for each
Series may also be amended by the Trustee, the Servicer, if applicable, and the
Seller with respect to such Series with the consent of the Enhancer, if
specified in the related Prospectus Supplement or the Holders possessing not
less than 51% of the aggregate outstanding principal amount of the Securities of
such Series or, if only certain Classes of such Series are affected by such
amendment, 51% of the aggregate outstanding principal amount of the Securities
of each Class of such Series affected thereby, for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such Agreement or modifying in any manner the rights of Holders of such Series;
provided, however, that no such amendment may (a) reduce the amount or delay the
timing of payments on any Security without the consent of the Holder of such
Security; or (b) reduce the aforesaid percentage of the aggregate outstanding
principal amount of Securities of each Class, the Holders of which are required
to consent to any such amendment or (c) if specified in the related Prospectus
Supplement, adversely affect the interests of the Enhancer, without, in the case
of clauses (a) or (b), the consent of the Holders of 100% of the aggregate
outstanding principal amount of each Class of Securities affected thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series. Unless otherwise provided
in the related Prospectus Supplement, no Holder of Securities of a Series,
solely by virtue of such Holder's status as a Holder, will have any right under
the applicable Agreement for such Series to institute any proceeding with
respect to such Agreement, unless such Holder previously has given to the
Trustee for such Series written notice of default and unless the Holders of
Securities evidencing not less than 51% of the aggregate voting rights of the
Securities for such Series have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have offered
to the Trustee reasonable indemnity, and the Trustee for 60 days has neglected
or refused to institute any such proceeding.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other meeting of
Holders.
BOOK-ENTRY SECURITIES
If specified in the Prospectus Supplement for a Series of Securities, such
Series or one or more Classes of such Series may be issued in book-entry form.
In such event, beneficial owners of such Securities will not be considered
'Holders' under the Agreements and may exercise the rights of Holders only
indirectly through the participants in the applicable book-entry system.
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REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be the Seller or
an affiliate of the Seller.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to them
pursuant to such Agreement after the earlier of (i) the later of (a) the final
payment or other liquidation of the last Primary Asset remaining in the Trust
Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset or (ii) the repurchase, as described below, by the Servicer or
other entity specified in the related Prospectus Supplement from the Trustee for
such Series of all Primary Assets and other property at that time subject to
such Agreement. The Agreement for each Series permits, but does not require, the
Servicer or other entity specified in the related Prospectus Supplement to
purchase from the Trust Fund for such Series all remaining Primary Assets at a
price equal to, unless otherwise specified in the related Prospectus Supplement,
100% of the aggregate Principal Balance of such Primary Assets plus, with
respect to any property acquired in respect of a Primary Asset, if any, the
outstanding Principal Balance of the related Primary Asset at the time of
foreclosure, less, in either case, related unreimbursed Advances (in the case of
the Primary Assets, only to the extent not already reflected in the computation
of the aggregate Principal Balance of such Primary Assets) and unreimbursed
expenses (that are reimbursable pursuant to the terms of the Pooling and
Servicing Agreement) plus, in either case, accrued interest thereon at the
weighted average rate on the related Primary Assets through the last day of the
Due Period in which such 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 such
Primary Assets, plus accrued interest thereon at the applicable net rates on the
Primary Assets through the last day of the month of such repurchase and (b) the
aggregate fair market value of such Primary Assets plus the fair market value of
any property acquired in respect of a Primary Asset and remaining in the Trust
Fund. The exercise of such right will effect early retirement of the Securities
of such Series, but such entity's right to so purchase is subject to the
aggregate Principal Balance of the Primary Assets at the time of repurchase
being less than a fixed percentage, not more than 25%, to be set forth in the
related Prospectus Supplement, of the aggregate Principal Balance of the Primary
Assets as of the Cut-off Date. In no event, however, will the trust created by
the Agreement continue beyond the expiration of 21 years from the death of the
last survivor of certain persons identified therein. For each Series, the
Servicer or the Trustee, as applicable, will give written notice of termination
of the Agreement to each Holder, and the final distribution will be made only
upon surrender and cancellation of the Securities at an office or agency
specified in the notice of termination. If so provided in the related Prospectus
Supplement for a Series, the Seller or another entity may effect an optional
termination of the Trust Fund under the circumstances described in such
Prospectus Supplement. See 'DESCRIPTION OF THE SECURITIES--Optional Redemption,
Purchase or Termination.'
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the Final Scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
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CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because certain of such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor reflect the laws
of any particular state (other than the state of New York where it is
anticipated that a material percentage of the Mortgaged Properties will be
located), nor encompass the laws of all states in which the properties securing
the Loans are situated.
MORTGAGES
The Home Equity Loans for a Series will be secured by either mortgages or
deeds of trust or deeds to secure debt (such Home Equity Loans are hereinafter
referred to in this section as 'mortgage loans'), depending upon the prevailing
practice in the state in which the property subject to a mortgage loan is
located. In New York, the prevailing practice is a mortgage. The filing of a
mortgage, deed of trust or deed to secure debt creates a lien or title interest
upon the real property covered by such instrument and represents the security
for the repayment of an obligation that is customarily evidenced by a promissory
note. The priority of the liens is important because, among other things, the
foreclosure of a senior lien will extinguish a junior lien, and because the
holder of a senior lien generally will have a right to receive insurance,
condemnation or other proceeds before the holder of a junior lien.
Priority between mortgages and deeds of trust (or other instruments of
record) generally depends in the first instance on the order of filing with the
appropriate government records office. Priority also may be affected by the
express terms of the mortgage or the deed of trust and any subordination
agreement among the lenders.
Although priority among liens on the same property generally depends in the
first instance on the order of filing, there are a number of ways in which a
lien that is a senior lien when it is filed can become subordinate to a lien
filed at a later date. A deed of trust or mortgage generally is not prior to any
liens for real estate taxes and assessments, certain federal liens (including
certain federal criminal liens, environmental liens and tax liens), certain
mechanics and materialmen's liens, and other liens given priority by applicable
law.
There are two parties to a mortgage, the mortgagor, who is the
borrower/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. Under a deed of trust, the
homeowner or borrower, called the 'grantor,' grants the security property to a
third-party grantee, called the 'trustee,' for the benefit of the lender, called
the 'beneficiary.' The deed of trust, upon the instructions of the beneficiary,
gives the trustee the authority, if the borrower defaults, to sell the security
property in a 'foreclosure' or 'trustee's sale' and to apply the sale proceeds
to the secured debt. The mortgagee's authority under a mortgage and the
trustee's authority under a deed of trust are governed by the law of the state
in which the real property is located, the express provisions of the mortgage or
deed of trust, and, in some cases, in deed of trust transactions, the directions
of the beneficiary.
FORECLOSURE
Foreclosure of a mortgage is generally accomplished by judicial action, and
foreclosure of a deed of trust may be 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 to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. 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 or pursuant to a power of sale provided
in the mortgage. Foreclosure of a mortgage by advertisement is essentially
similar to foreclosure of a deed of trust by nonjudicial power of sale.
If a borrower defaults under a loan secured by a deed of trust, the lender
generally may bring suit against the borrower. The lender generally also may
attempt to collect the loan by causing the deed of trust to be enforced against
the property it encumbers. Enforcement of a deed of trust is accomplished in
most cases by a trustee's sale in which the trustee, upon default of the
grantor, and subject to the expiration of applicable cure periods, sells the
security property at a public sale under the terms of the loan documents and
subject to the applicable procedural provisions of state law. In certain states,
the lender must exhaust the security through foreclosure
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(either judicially or non-judicially) prior to collecting on the loan. Whether a
lender may thereafter collect on the unpaid balance of the loan is governed by
the anti-deficiency statute in the applicable state.
The trustee's sale generally must be conducted by public auction in the
county or city in which all or some part of the security property is located. At
the sale, the trustee generally requires a bidder to deposit with the trustee a
set amount or a percentage of the full amount of the bidder's final bid in cash
(or an equivalent thereto satisfactory to the trustee) prior to and as a
condition to recognizing such bid, and may conditionally accept and hold these
amounts for the duration of the sale. The beneficiary of the deed of trust
generally need not bid cash at the sale, but may instead make a 'credit bid' up
to the extent of the total amount due under the deed of trust, including costs
and expenses actually incurred in enforcing the deed of trust, as well as the
trustee's fees and expenses. The trustee will sell the security property to the
highest proper bidder at the sale.
A sale conducted in accordance with the terms of the power of sale
contained in the deed of trust generally is presumed to be conducted regularly
and fairly, and, on a conveyance of the property by trustee's deed, confers
absolute legal title to the property to the purchaser, free of all junior deeds
of trust and free of all other liens and claims subordinate to the deed of trust
under which the sale is made. The purchaser's title, however, is subject to all
senior liens and other senior claims. Thus, if the deed of trust being enforced
is a junior deed of trust, the trustee will convey title to the property to the
purchaser subject to the first deed of trust and any other prior liens and
claims. A trustee's sale or judicial foreclosure under a junior deed of trust
generally has no effect on the first deed of trust, with the possible exception
of the right of a senior beneficiary to accelerate its indebtedness under a
default clause or a 'due-on-sale' clause contained in the senior deed of trust.
See '--Due-on-Sale Clauses in Home Equity Loans' below.
Because a potential buyer at the sale may find it difficult to determine
the exact status of title and other facts about the security property, and
because the physical condition of the security property may have deteriorated,
it generally is more common for the lender, rather than an unrelated third
party, to purchase the security property at a trustee's sale or judicial
foreclosure sale. The lender (or other purchaser at the trustee's sale) will be
subject to the burdens of ownership, including the obligations to service any
senior deed of trust, to obtain hazard insurance and to make such repairs at its
own expense as are necessary to render the security property suitable for
resale. The lender commonly will attempt to resell the security property and
obtain the services of a real estate broker and agree to pay the broker a
commission in connection with the resale. Depending upon market conditions, the
ultimate proceeds of the resale of the security property may not be high enough
to equal the lender's investment.
The proceeds received by the trustee from the sale generally are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the deed of trust under which the sale was conducted.
Any remaining proceeds generally are payable to the holders of junior deeds of
trust and other liens and claims in order of their priority. Any balance
remaining generally is payable to the grantor. Following the sale, if there are
insufficient proceeds to repay the secured debt, the beneficiary under the
foreclosed lien generally may obtain a deficiency judgment against the grantor.
See '--Deficiency Judgments' below.
Some courts have been faced with the issue of whether federal or state
constitutional due process requires that borrowers under deeds of trust receive
notices in addition to the statutorily prescribed minimum. For the most part,
the courts in these cases have upheld the notice provisions and procedures
described above.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the
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mortgagor was insolvent and within one year (or within the state statute of
limitations if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law) of the filing of bankruptcy. Similarly, a suit
against the debtor on the related mortgage note may take several years and,
generally, is a remedy alternative to foreclosure, the mortgagee being precluded
from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale 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 a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such a judgment is available. 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, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's 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 any mortgage guaranty insurance proceeds.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a non-statutory right that must be exercised prior to the foreclosure sale.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory 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 foreclosure or sale
under a deed of trust. Consequently the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
In New York, the debtor (or anyone on the debtor's behalf) may cure a
default by paying the entire amount of the debt then due, plus costs and
expenses actually incurred in enforcing the obligation and statutorily limited
attorneys' fees. In addition, the borrower (or its successor) or any other
persons having a subordinate lien or encumbrance may discharge the mortgage or
deed of trust on the security property by paying the entire principal due as a
result of the acceleration, together with interest and costs, expenses and fees.
In New York, with few exceptions, the right of redemption is forever barred by a
valid foreclosure.
When the lender under a junior mortgage or deed of trust cures the default
and reinstates or redeems the senior mortgage or deed of trust, the amount paid
by the lender for such cure generally becomes a part of the indebtedness secured
by the junior deed of trust.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The mortgage loans comprising or underlying the Primary Assets included in
the Trust Fund for a Series will be secured by mortgages or deeds of trust which
may be second or more junior mortgages to other mortgages held by other lenders
or institutional investors. The rights of the Trust Fund (and therefore the
Holders), as mortgagee under a junior mortgage, are subordinate to those of the
mortgagee under the senior mortgage, 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,
thereby extinguishing the junior mortgagee's lien unless the junior mortgagee
asserts its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In some states, absent a
provision in the mortgage or
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deed of trust, no notice of default is required to be given to a junior
mortgagee. In addition, as described above, the rights of the Trust Fund may be
or become subject to liens for real estate taxes and other obligations. Although
the Seller generally does not cure defaults under a senior deed of trust or
other lien, it is the Seller's standard practice to protect its interest by
monitoring any such sale of which it is aware and bidding for property if it
determines that it is in the Seller's best interests to do so.
The standard form of the mortgage used by most institutional lenders, like
that used by the Seller, confers on the mortgagee the right both to receive all
proceeds collected under any hazard insurance policy required to be maintained
by the borrower and all awards made in connection with condemnation proceedings.
The lender generally has the right, subject to the specific provisions of the
deed of trust securing its loan, to apply such proceeds and awards to repair of
any damage to the security property or to payment of any indebtedness secured by
the deed of trust, in such order as the beneficiary may determine. 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 underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and 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. If
available, proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, will be applied to the indebtedness of a junior mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor 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 under the mortgage. Upon a
failure of the grantor or mortgagor to perform any of these obligations, the
mortgagee or beneficiary is given the right under certain mortgages to perform
the obligation itself, at its election, with the mortgagor agreeing to reimburse
the mortgagee or beneficiary for any sums expended by the mortgagee or
beneficiary on behalf of the mortgagor or grantor. The mortgage or deed of trust
typically provide that all sums so expended by the mortgagee become part of the
indebtedness secured by the mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee 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 net amount realized
upon the public sale of the real property and the amount due to the lender.
However, some states calculate the deficiency as the difference between the
outstanding indebtedness and the greater of the fair market value of the
property and the sales price of the property. Other statutes require the
beneficiary or mortgagee to exhaust the security afforded under a deed of trust
or mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. In certain other states, the
lender has the option of bringing a personal action against the borrower on the
debt without first exhausting such security; however, in some of these states,
the lender, following judgment on such personal action, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the security. Consequently, the practical effect of the election requirement,
when applicable, is that lenders will usually proceed first against the security
rather than bringing a personal action against the borrower. Finally, other
statutory provisions 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 public sale. The purpose of
these statutes is generally 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 New York there is no statutory
prohibition limiting remedies to the lender, and the liability for deficiency in
a mortgage foreclosure action depends upon the contract. However, by statute,
where no express covenant (or other separate instrument, such as a guarantee)
provides for the liability of a deficiency, the remedies of a lender are
confined to the mortgaged property.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act and state laws affording relief
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to debtors, may interfere with or affect the ability of the secured lender to
realize upon collateral and/or enforce a deficiency judgment. For example, with
respect to federal bankruptcy law, the filing of a petition acts as a stay
against the enforcement of remedies for collection of a debt. Moreover, a court
with federal bankruptcy jurisdiction may permit a debtor through a Chapter 13
Bankruptcy Code rehabilitative plan to cure a monetary default with respect to a
loan on a debtor's residence by paying arrearages within a reasonable time
period and reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's Chapter 13 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 loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted Loan. In addition, substantive requirements are imposed
upon lenders in connection with the origination and the servicing of mortgage
loans by numerous federal and some state consumer protection laws. The laws
include the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act,
Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act
and related statutes and regulations. These federal laws impose specific
statutory liabilities upon lenders who originate loans and who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St Germain Depository Institutions Act
of 1982 (the 'Garn-St Germain Act') preempts state constitutional, statutory and
case law that prohibits the enforcement of due-on-sale clauses and permits
lenders to enforce these clauses in accordance with their terms, subject to
certain exceptions. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the 'window period' under the Garn-St
Germain Act which ended in all cases not later than October 15, 1982, and (ii)
originated by lenders other than national banks, federal savings institutions
and federal credit unions. FHLMC has taken the position in its published
mortgage servicing standards that, out of a total of eleven 'window period
states,' five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St Germain Act does
'encourage' lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
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In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations, upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. A mortgagee to whom a prepayment in full has been tendered
may be compelled to give either a release of the mortgage or an instrument
assigning the existing mortgage. The absence of a restraint on prepayment,
particularly with respect to mortgage loans having higher mortgage rates, may
increase the likelihood of refinancing or other early retirements of such
mortgage loans.
APPLICABILITY OF USURY LAWS
New York has usury laws which limit the interest and other amounts that may
be charged under certain loans. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, enacted in March 1980 ('Title
V'), provides that state usury limitations shall not apply to certain types of
residential first mortgage loans originated by certain lenders after March 31,
1980. Similar federal statutes were in effect with respect to mortgage loans
made during the first three months of 1980. Title V authorizes any state to
reimpose interest rate limits by adopting, before April 1, 1983, a state law, or
by certifying that the voters of such state have voted in favor of any
provision, constitutional or otherwise, which expressly rejects an application
of the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V.
ENVIRONMENTAL LEGISLATION
A federal statute, the Comprehensive Environmental Response, Compensation,
and Liability Act, and a growing number of state laws impose a statutory lien
for associated costs on property that is the subject of a cleanup action on
account of hazardous wastes or hazardous substances released or disposed of on
the property. Such a lien generally will have priority over all subsequent liens
on the property and, in certain of these states,
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will have priority over prior recorded liens, including the lien of a deed of
trust. The priority of the environmental lien under federal law depends on the
time of perfection of the federal lien compared to the time of perfection of any
competing liens under applicable state law. In addition, under federal
environmental legislation and possibly under state law in a number of states, a
secured party that takes a deed in lieu of foreclosure or acquires a property at
a foreclosure sale may be liable for the costs of cleaning up a contaminated
site. Although such costs could be substantial, they would probably not be
imposed on a secured lender (such as the applicable Trust Fund) if it promptly
marketed the foreclosed property for resale. In the event that a Trust Fund
acquired title to a property securing a Mortgage Home Equity Loan and cleanup
costs were incurred in respect of the property, the holders of the Securities
might incur a delay in the payment if such costs were required to be paid by
such Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a Home
Equity Loan included in a Trust Fund for a Series is relieved pursuant to the
Soldiers' and Sailors' Civil Relief Act of 1940, none of the Trust Fund, the
Servicer, the Seller nor the Trustee will be required to advance such amounts,
and any loss in respect thereof may reduce the amounts available to be paid to
the Holders of the Securities of such Series. Unless otherwise specified in the
related Prospectus Supplement, any shortfalls in interest collections on Loans
or Underlying Loans relating to the Private Securities, as applicable, included
in a Trust Fund for a Series resulting from application of the Soldiers' and
Sailors' Civil Relief Act of 1940 will be allocated to each Class of Securities
of such Series that is entitled to receive interest in respect of such Loans or
Underlying Loans in proportion to the interest that each such Class of
Securities would have otherwise been entitled to receive in respect of such
Loans or Underlying Loans had such interest shortfall not occurred.
USE OF PROCEEDS
The Seller will apply all or substantially all of the net proceeds from the
sale of each Series of Securities for one or more of the following purposes: (i)
to establish any Reserve Fund, Pre-Funding Account or Capitalized Interest
Account, (ii) to pay costs of structuring and issuing such Securities, including
the costs of obtaining Enhancement and (iii) for its general corporate purposes.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
This section sets forth (i) certain federal income tax opinions of Stroock
& Stroock & Lavan, special counsel to the Seller ('Federal Tax Counsel'), and
(ii) a summary, based on the advice of Federal Tax Counsel, of the material
federal income tax consequences of the purchase, ownership and disposition of
Securities. The summary does not purport to deal with all aspects of federal
income taxation that may affect particular investors in light of their
individual circumstances, nor with certain types of investors subject to special
treatment under the federal income tax laws. The summary focuses primarily upon
investors who will hold Securities as 'capital assets' (generally, property held
for investment) within the meaning of Section 1221 of the of the Internal
Revenue Code of 1986, as amended (the 'Code'), but much of the discussion is
applicable to other investors as well. Because tax consequences may vary based
on the status or tax attributes of the owner of a Security, prospective
investors are advised to consult their own tax advisers concerning the federal,
state, local and any other tax consequences
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to them of the purchase, ownership and disposition of the Securities. For
purposes of this tax discussion (except with respect to information reporting,
or where the context indicates otherwise), any reference to the 'Holder' means
the beneficial owner of a Security.
The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations, and
the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this interpretation is
based are subject to change, and such a change could apply retroactively.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness for
federal income tax purposes; (ii) an election is made to treat the Trust Fund
(or certain assets of the Trust Fund) relating to a particular Series of
Securities as a real estate mortgage investment conduit ('REMIC') under the
Code; (iii) the Securities represent an ownership interest for federal income
tax purposes in some or all of the assets included in the Trust Fund for a
Series; or (iv) for federal income tax purposes the Trust Fund relating to a
particular Series of Certificates is classified as a partnership. The Prospectus
Supplement for each Series of Securities will specify how the Securities will be
treated for federal income tax purposes and will discuss whether a REMIC
election, if any, will be made with respect to such Series.
OPINIONS
Federal Tax Counsel is of the opinion that:
(i) If a Prospectus Supplement indicates that one or more Classes of
Securities of the related Series are to be treated as indebtedness for
federal income tax purposes, assuming that all of the provisions of the
applicable Agreement are complied with, the Securities so designated will
be considered indebtedness of the Trust Fund for federal income tax
purposes;
(ii) If a Prospectus Supplement indicates that one or more REMIC
elections will be made with respect to the related Trust Fund, assuming
that such elections are timely made and all of the provisions of the
applicable Agreement are complied with (a) each segregated pool of assets
specified in such Agreement will constitute a REMIC for federal income tax
purposes, (b) the Class or Classes of Securities of the related Series
which are designated as 'regular interests' in such Prospectus Supplement
will be considered 'regular interests' in a REMIC for federal income tax
purposes and (c) the Class of Securities of the related Series which is
designated as the 'residual interest' in such Prospectus Supplement will be
considered the sole class of 'residual interests' in the applicable REMIC
for federal income tax purposes;
(iii) If a Prospectus Supplement indicates that a Trust Fund will be
treated as a grantor trust for federal income tax purposes, assuming
compliance with all of the provisions of the applicable Agreement, (a) the
Trust Fund will be considered to be a grantor trust under Subpart E, Part 1
of Subchapter J of the Code and will not be considered to be an association
taxable as a corporation and (b) a Holder of the related Securities will be
treated for federal income tax purposes as the owner of an undivided
interest in the Primary Assets included in the Trust Fund; and
(iv) If a Prospectus Supplement indicates that a Trust Fund is to be
treated as a partnership for federal income tax purposes, assuming that all
of the provisions of the applicable Agreements are complied with, such
Trust Fund will be considered to be a partnership for federal income tax
purposes and will not be considered to be an association or publicly traded
partnership taxable as a corporation.
Each such opinion is an expression of an opinion only, is not a guarantee
of results and is not binding on the Internal Revenue Service or any
third-party.
TAXATION OF DEBT SECURITIES (INCLUDING REGULAR INTEREST SECURITIES)
Interest and Acquisition Discount. Securities representing regular
interest in a REMIC ('Regular Interest Securities') are generally taxable to
Holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Holder's normal accounting method. Interest
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(other than original issue discount) on Securities (other than Regular Interest
Securities) that are characterized as indebtedness for federal income tax
purposes will be includible in income by Holders thereof in accordance with
their usual methods of accounting. Securities characterized as debt for federal
income tax purposes and Regular Interest Securities will be referred to
hereinafter collectively as 'Debt Securities.' For Certificates treated as debt
for federal income tax purposes, see 'Certain Certificates Treated as
Indebtedness.'
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with 'original issue discount' ('OID').
The following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations issued
thereunder on February 2, 1994 (the 'OID Regulations'). A Holder should be
aware, however, that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A Holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a prescribed method which takes into account an
economic accrual of the discount. In general, OID must be included in income in
advance of the receipt of the cash representing that income. The amount of OID
on a Debt Security will be considered to be zero if it is less than a de minimis
amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The stated redemption
price at maturity of a Debt Security includes the original principal amount of
the Debt Security, but generally will not include distributions of interest if
such distributions constitute 'qualified stated interest.'
Under the OID Regulations, interest payments will not be qualified stated
interest unless the interest payments are 'unconditionally payable.' The OID
Regulations state that interest is unconditionally payable if late payment of
interest (other than late payment that occurs within a reasonable grace period)
or nonpayment of interest is expected to be penalized or reasonable remedies
exist to compel payment. The meaning of 'penalized' under the OID regulations is
unclear particularly in the case of obligations based on other debt obligations.
Interest payments on Debt Securities which do not have reasonable remedies to
compel timely payment of interest may not be qualified stated interest, and such
Debt Securities may have original issue discount.
Certain Debt Securities will provide for distributions of interest based on
a period that is the same length as the interval between Distribution Dates but
ends prior to each Distribution Date. Any interest that accrues prior to the
Closing Date may be treated under the OID Regulations either (i) as part of the
issue price and the stated redemption price at maturity of the Debt Securities
or (ii) as not included in the issue price or stated redemption price. The OID
Regulations provide a special application of the de minimis rule for debt
instruments with long first accrual periods where the interest payable for the
first period is at a rate which is effectively less than that which applies in
all other periods. In such cases, for the sole purpose of determining whether
original issue discount is de minimis, the OID Regulations provide that the
stated redemption price is equal to the instrument's issue price plus the
greater of the amount of foregone interest or the excess (if any) of the
instrument's stated principal amount over its issue price.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method Holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
See '--Election to Treat All Interest as Original Issue Discount.'
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The Holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the 'daily portions' of such original issue discount. The amount of OID
includible in income by a Holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt Security that
is not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the Loans, the amount of
OID includible in income of a Holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals of OID,
reduced by the total payments made with respect to such Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a 'Pay-Through Security'), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
'Prepayment Assumption'). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a Holder to
take into account prepayments with respect to the Loans at a rate that exceeds
the Prepayment Assumption, and to decrease (but not below zero for any period)
the portions of OID required to be included in income by a Holder of a
Pay-Through Security to take into account prepayments with respect to the Loans
at a rate that is slower than the Prepayment Assumption. Although OID will be
reported to Holders of Pay-Through Securities based on the Prepayment
Assumption, no representation is made to Holders that Loans will be prepaid at
that rate or at any other rate.
The Seller may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Loans, although the
OID Regulations do not provide for such adjustments. If the Internal Revenue
Service were to require that OID be accrued without such adjustments, the rate
of accrual of OID for a Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable Prospectus Supplement
specifies otherwise, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent Holder of a Debt Security will also be required to include OID
in gross income, but such a Holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial Holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related Securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Loans, except possibly to the extent that it can
be established that such amounts are uncollectible. As a result, the amount of
income (including OID) reported by a Holder of such a Security in any period
could significantly exceed the amount of cash distributed to such Holder in that
period. The Holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is reduced as a result of a Home Equity Loan
default.
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However, the timing and character of such losses or reductions in income are
uncertain and, accordingly, Holders of Securities should consult their own tax
advisors on this point.
Interest-Only Debt Securities. The Trust Fund intends to report income
from interest-only classes of Debt Securities to the Internal Revenue Service
and to Holders of interest-only Debt Securities based on the assumption that the
stated redemption price at maturity is equal to the sum of all payments
determined under the applicable prepayment assumption. As a result, such
interest-only Debt Securities Certificates will be treated as having original
issue discount.
Variable Rate Debt Securities. Under the OID Regulations, Debt Securities
paying interest at a variable rate (a 'Variable Rate Debt Security') are subject
to special rules. A Variable Rate Debt Security will qualify as a 'variable rate
debt instrument' if (i) its issue price does not exceed the total noncontingent
principal payments due under the Variable Rate Debt Security by more than a
specified de minimis amount and (ii) it provides for stated interest, paid or
compounded at least annually, at (a) one or more qualified floating rates, (b) a
single fixed rate and one or more qualified floating rates, (c) a single
objective rate or (d) a single fixed rate and a single objective rate that is a
qualified inverse floating rate.
A 'qualified floating rate' is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Debt Security is denominated. A multiple of a qualified floating
rate will generally not itself constitute a qualified floating rate for purposes
of the OID Regulations. However, a variable rate equal to (i) the product of a
qualified floating rate and a fixed multiple that is greater than zero but not
more than 1.35 or (ii) the product of a qualified floating rate and a fixed
multiple that is greater than zero but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition, under the OID Regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Variable Rate Debt Security will be
treated as a single qualified floating rate (a 'Presumed Single Qualified
Floating Rate'). Two or more qualified floating rates with values within 25
basis points of each other as determined on the Variable Rate Debt Security's
issue date will be conclusively presumed to be a Presumed Single Qualified
Floating Rate. Notwithstanding the foregoing, a variable rate that would
otherwise constitute a qualified floating rate but which is subject to one or
more restrictions such as a cap or floor, will not be a qualified floating rate
for purposes of the OID Regulations unless the restriction is fixed throughout
the term of the Variable Rate Debt Security or the restriction will not
significantly affect the yield of the Variable Rate Debt Security.
An 'objective rate' is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon (i)
one or more qualified floating rates, (ii) one or more rates where each rate
would be a qualified floating rate for a debt instrument denominated in a
currency other than the currency in which the Variable Rate Debt Security is
denominated, (iii) either the yield or changes in the price of one or more items
of actively traded personal property or (iv) a combination of rates described in
(i), (ii) and (iii). The OID Regulations also provide that other variable rates
may be treated as objective rates if so designated by the Internal Revenue
Service in the future. Despite the foregoing, a variable rate of interest on a
Variable Rate Debt Security will not constitute an objective rate if it is
reasonably expected that the average value of such rate during the first half of
the Variable Rate Debt Security's term will be either significantly less than or
significantly greater than the average value of the rate during the final half
of the Variable Rate Debt Security's term. An objective rate will qualify as a
'qualified inverse floating rate' if such rate is equal to a fixed rate minus a
qualified floating rate and variations in the rate can reasonably be expected to
inversely reflect contemporaneous variations in the cost of newly borrowed
funds. The OID Regulations also provide that if a Variable Rate Debt Security
provides for stated interest at a fixed rate for an initial period of less than
one year followed by a variable rate that is either a qualified floating rate or
an objective rate and if the variable rate on the Variable Rate Debt Security's
issue date is intended to approximate the fixed rate, then the fixed rate and
the variable rate together will constitute either a single qualified floating
rate or objective rate, as the case may be (a 'Presumed Single Variable Rate').
If the value of the variable rate and the initial fixed rate are within 25 basis
points of each other as determined on the Variable Rate Debt Security's issue
date, the variable rate will be conclusively presumed to approximate the fixed
rate.
For Variable Rate Debt Securities that qualify as a 'variable rate debt
instrument' under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed
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Single Qualified Floating Rate or a Presumed Single Variable Rate throughout the
term (a 'Single Variable Rate Debt Security'), original issue discount is
computed as described above based on the following: (i) stated interest on the
Single Variable Rate Debt Security which is unconditionally payable in cash or
property (other than debt instruments of the issuer) at least annually will
constitute qualified stated interest and (ii) by assuming that the variable rate
on the Single Variable Debt Security is a fixed rate equal to: (a) in the case
of a Single Variable Rate Debt Security with a qualified floating rate or a
qualified inverse floating rate, the value of, as of the issue date, of the
qualified floating rate or the qualified inverse floating rate or (b) in the
case of a Single Variable Rate Debt Security with an objective rate (other than
a qualified inverse floating rate), a fixed rate which reflects the reasonably
expected yield for such Single Variable Debt Security.
In general, any Variable Rate Debt Security other than a Single Variable
Rate Debt Security (a 'Multiple Variable Rate Debt Security') that qualifies as
a 'variable rate debt instrument' will be converted into an 'equivalent' fixed
rate debt instrument for purposes of determining the amount and accrual of
original issue discount and qualified stated interest on the Multiple Variable
Rate Debt Security. The OID Regulations generally require that such a Multiple
Variable Rate Debt Security be converted into an 'equivalent' fixed rate debt
instrument by substituting any qualified floating rate or qualified inverse
floating rate provided for under the terms of the Multiple Variable Rate Debt
Security with a fixed rate equal to the value of the qualified floating rate or
qualified inverse floating rate, as the case may be, as of the Multiple Variable
Rate Debt Security's issue date. Any objective rate (other than a qualified
inverse floating rate) provided for under the terms of the Multiple Variable
Rate Debt Security is converted into a fixed rate that reflects the yield that
is reasonably expected for the Multiple Variable Rate Debt Security. In the case
of a Multiple Variable Rate Debt Security that qualifies as a 'variable rate
debt instrument' and provides for stated interest at a fixed rate in addition to
either one or more qualified floating rates or a qualified inverse floating
rate, the fixed rate is initially converted into a qualified floating rate (or a
qualified inverse floating rate, if the Multiple Variable Rate Debt Security
provides for a qualified inverse floating rate). Under such circumstances, the
qualified floating rate or qualified inverse floating rate that replaces the
fixed rate must be such that the fair market value of the Multiple Variable Rate
Debt Security as of the Multiple Variable Rate Debt Security's issue date is
approximately the same as the fair market value of an otherwise identical debt
instrument that provides for either the qualified floating rate or qualified
inverse floating rate rather than the fixed rate. Subsequent to converting the
fixed rate into either a qualified floating rate or a qualified inverse floating
rate, the Multiple Variable Rate Debt Security is then converted into an
'equivalent' fixed rate debt instrument in the manner described above.
Once the Multiple Variable Rate Debt Security is converted into an
'equivalent' fixed rate debt instrument pursuant to the foregoing rules, the
amount of original issue discount and qualified stated interest, if any, are
determined for the 'equivalent' fixed rate debt instrument by applying the
original issue discount rules to the 'equivalent' fixed rate debt instrument in
the manner described above. A Holder of the Multiple Variable Rate Debt Security
will account for such original issue discount and qualified stated interest as
if the Holder held the 'equivalent' fixed rate debt instrument. Each accrual
period appropriate adjustments will be made to the amount of qualified stated
interest or original issue discount assumed to have been accrued or paid with
respect to the 'equivalent' fixed rate debt instrument in the event that such
amounts differ from the accrual amount of interest accrued or paid on the
Multiple Variable Rate Debt Security during the accrual period.
The OID Regulations do not clearly address the treatment of a Variable Rate
Debt Security that is based on a weighted average of the interest rates on
underlying Loans. Under the OID Regulations, interest payments on such a
Variable Rate Debt Security may be characterized as qualified stated interest
which is includible in income in a manner similar to that described in the
previous paragraph. However, it is also possible that interest payments on such
a Variable Rate Debt Security would be treated as contingent interest (possibly
includible in income when the payments become fixed) or in some other manner.
If a Variable Rate Debt Security does not qualify as a 'variable rate debt
instrument' under the OID Regulations, then the Variable Rate Debt Security
would be treated as a contingent payment debt obligation. It is not clear under
current law how a Variable Rate Debt Security would be taxed if such Debt
Security were treated as a contingent payment debt obligation.
The Internal Revenue Services (the 'IRS') recently issued final regulations
(the 'Contingent Regulations') governing the calculation of OID on instruments
having contingent interest payments. The Contingent Regulations specifically do
not apply for purposes of calculating OID on debt instruments to Code
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Section 1272(a)(6), such as the Debt Security. Additionally, the OID Regulations
do not contain provisions specifically interpreting Code Section 1272(a)(6).
Until the Treasury issues guidelines to the contrary, the Trustee intends to
base its computation on Code Section 1272(a)(6) and the OID Regulations as
described in this Prospectus. However, because no regulatory guidance exists
under Code Section 1272(a)(6), there can be no assurance that such methodology
represents the correct manner of calculating OID.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of 'market discount'
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security, as set forth below, the
Loans underlying such Security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of Securities (or, in the case of a Pass-Through Security, as described below,
the Loans underlying such Security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Security, as described below, the underlying Loans)
with market discount over interest received on such Security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A Holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such Holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. A Holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, the
legislative history of the 1986 Act indicates that premium is to be accrued in
the same manner as market discount. Accordingly, it appears that the accrual of
premium on a Class of Pay-Through Securities will be calculated using the
prepayment assumption used in pricing such Class. If a Holder makes an election
to amortize premium on a Debt Security, such election will apply to all taxable
debt instruments (including all REMIC regular interests and all pass-through
certificates representing ownership interests in a trust holding debt
obligations) held by the Holder at the beginning of the taxable year in which
the election is made, and to all taxable debt instruments acquired thereafter by
such Holder, and will be irrevocable without the consent of the Internal Revenue
Service. Purchasers who pay a premium for the Securities should consult their
tax advisers regarding the election to amortize premium and the method to be
employed.
On June 27, 1996 the IRS issued proposed regulations (the 'Amortizable Bond
Premium Regulations') dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code Section
1272(a)(6) such as the Securities. Absent further guidance from the IRS, the
Trustee intends to account for amortizable bond premium in the manner described
above. Prospective purchasers of the Securities should consult their tax
advisors regarding the possible application of the Amortizable Bond Premium
Regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a Holder Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4,
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1994. If such an election were to be made with respect to a Debt Security with
market discount, the Holder of the Debt Security would be deemed to have made an
election to include in income currently market discount with respect to all
other debt instruments having market discount that such Holder of the Debt
Security acquires during the year of the election or thereafter. Similarly, a
Holder of a Debt Security that makes this election for a Debt Security that is
acquired at a premium will be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Holder owns or acquires. The election to accrue interest, discount and
premium on a constant yield method with respect to a Debt Security is
irrevocable.
Sale or Exchange. A Holder's tax basis in its Debt Security is the price
such Holder pays for a Debt Security, plus amounts of OID or market discount
included in income and reduced by any payments received (other than qualified
stated interest payments) and any amortized premium. Gain or loss recognized on
a sale, exchange, or redemption of a Debt Security, measured by the difference
between the amount realized and the Debt Security's basis as so adjusted, will
generally be capital gain or loss, assuming that the Debt Security is held as a
capital asset. In the case of a Debt Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Debt Security will be taxable as ordinary income or
loss. In addition, gain from the disposition of a Regular Interest Security that
might otherwise be capital gain will be treated as ordinary income to the extent
of the excess, if any, of (i) the amount that would have been includible in the
Holder's income if the yield on such Regular Interest Security had equaled 110%
of the applicable federal rate as of the beginning of such Holder' s holding
period, over the amount of ordinary income actually recognized by the Holder
with respect to such Regular Interest Security. Currently, the maximum tax rate
on ordinary income for individual taxpayers is 39.6% and the maximum tax rate on
long-term capital gains for such taxpayers is 28%. The maximum tax rate on both
ordinary income and long-term capital gains of corporate taxpayers is 35%.
TAXATION OF THE REMIC AND ITS HOLDERS
Status of Regular Interest Securities as Real Property Loans. Regular
Interest Securities and Securities representing a residual interest in a REMIC
(both types of securities collectively referred to as 'REMIC Securities') will
be 'real estate assets' for purposes of Section 856(c)(4)(A) of the Code and
assets described in Section 7701(a)(19)(C) of the Code (assets qualifying under
one or more of those sections, applying each section separately, 'qualifying
assets') to the extent that the REMIC's assets are qualifying assets. However,
if at least 95 percent of the REMIC's assets are qualifying assets, then 100
percent of the REMIC Securities will be qualifying assets. Similarly, income on
the REMIC 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 limitations of the preceding two sentences. In addition to
Loans, the REMIC's assets will include payments on Loans held pending
distribution to Holders of REMIC Securities, amounts in reserve accounts (if
any), other credit enhancements (if any) and possibly buydown funds ('Buydown
Funds'). The Loans generally will be qualifying assets under all three of the
foregoing sections of the Code. However, Loans that are not secured by
residential real property or real property used primarily for church purposes
may not constitute qualifying assets under Section 7701(a)(19)(C)(v) of the
Code. In addition, to the extent that the principal amount of a Home Equity Loan
exceeds the value of the property securing the Loan, it is unclear and Federal
Tax Counsel is unable to opine whether the Loans will be qualifying assets. The
regulations under Sections 860A through 860G of the Code (the 'REMIC
Regulations') treat credit enhancements as part of the mortgage or pool of
mortgages to which they relate, and therefore credit enhancements generally
should be qualifying assets. Regulations issued in conjunction with the REMIC
Regulations provide that amounts paid on Loans and held pending distribution to
Holders of Regular Interest Securities ('cash flow investments') will be treated
as qualifying assets. It is unclear whether reserve funds or Buydown Funds would
also constitute qualifying assets under any of those provisions.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by Holders of the Residual Interest Securities. In the case of a 'single
class REMIC,' however, the expenses will be allocated, under Treasury
regulations, among the Holders of the Regular Interest Securities and the
Holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each Holder on that day. In the case
of a Holder of a Regular Interest Security who is an individual or a
'pass-through interest
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Holder' (including certain pass-through entities but not including real estate
investment trusts), such expenses will be deductible only to the extern that
such expenses, plus other 'miscellaneous itemized deductions' of the Holder,
exceed 2% of such Holder's adjusted gross income and such Holder may not be able
to deduct such fees and expenses to any extent in computing such Holder's
alternative minimum tax liability. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount will be reduced by the
lesser of (i) 3% of the excess of adjusted gross income over the applicable
amount, or (ii) 80% of the amount of itemized deductions otherwise allowable for
such taxable year. The reduction or disallowance of this deduction may have a
significant impact on the yield of the Regular Interest Security to such a
Holder. In general terms, a single class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it were not
a REMIC (treating all interests as ownership interests, even if they would be
classified as debt for federal income tax purposes) or (ii) is similar to such a
trust and which is structured with the principal purpose of avoiding the single
class REMIC rules. Unless otherwise stated in the applicable Prospectus
Supplement, the expenses of the REMIC will be allocated to Holders of the
related Residual Interest Securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the Holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Tiered REMIC Structures. For certain Series of Securities, two or more
separate elections may be made to treat designated portions of the related Trust
Fund as REMICs ('Tiered REMICs') for federal income tax purposes. Solely for
purposes of determining whether the REMIC Certificates will be 'real estate
assets' within the meaning of Section 856(c)(5)(A) of the Code, and 'loans
secured by an interest in real property' under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on Regular Interest
Securities, amortization of any premium with respect to Loans, and servicing
fees and other expenses of the REMIC. A Holder of a Residual Interest Security
that is an individual or a 'pass-through interest Holder' (including certain
pass-through entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the Loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that such
expenses, when aggregated with such Holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such Holder's adjusted
gross income and such Holder may not be able to deduct such fees and expenses to
any extent in computing such holders alternative minimum tax liability.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). Such aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans.
Subject to possible application of the de minimis rules, the method of accrual
by the REMIC of OID income on such loans will be equivalent to the method under
which Holders of Pay-Through Securities accrue original issue discount (i.e.,
under the constant yield method taking into account the Prepayment Assumption).
The REMIC will deduct OID on the Regular Interest Securities in the same manner
that the Holders of the Regular Interest Securities include such discount in
income, but without regard to the de
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minimis rules. See 'Taxation of Debt Securities (Including Regular Interest
Securities)' above. However, a REMIC that acquires loans at a market discount
must include such market discount in income currently, as it accrues, on a
constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (presumably taking into account the Prepayment Assumption) on a
constant yield method. Although the law is somewhat unclear regarding recovery
of premium attributable to loans originated on or before such date, it is
possible that such premium may be recovered in proportion to payments of loan
principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a 'prohibited transaction.' For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
Startup Day. The Holders of Residual Interest Securities will generally be
responsible for the payment of any such taxes imposed on the REMIC. To the
extent not paid by such Holders or otherwise, however, such taxes will be paid
out of the Trust Fund and will be allocated pro rata to all outstanding Classes
of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The Holder of a Security representing a residual interest (a 'Residual
Interest Security') will take into account the 'daily portion' of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such Holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the Holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such day.
The Holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the Loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount. (If this occurs, it is likely that
cash distributions will exceed taxable income in later years.) Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the Holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a Holder may
take into account currently is limited to the Holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A Holder's basis in a
Residual Interest Security will initially equal such Holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the Holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
Holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC
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generated by the same REMIC. The ability of Holders of Residual Interest
Securities to deduct net losses may be subject to additional limitations under
the Code, as to which such Holders should consult their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a Holder of a Residual Interest
Security. If the amount of such payment exceeds a Holder's adjusted basis in the
Residual Interest Security, however, the Holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of such
excess.
Sale or Exchange. A Holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such Holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling Holder acquires any residual interest in a REMIC or similar mortgage
pool within six months before or after such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a Holder of
a Residual Interest Security consisting of 'excess inclusion' income may not be
offset by other deductions or losses, including net operating losses, on such
Holder's federal income tax return. Further, if the Holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, such Holder's excess inclusion income will
be treated as unrelated business taxable income of such Holder. In addition,
under Treasury regulations yet to be issued, if a real estate investment trust,
a regulated investment company, a common trust fund, or certain cooperatives
were to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person, excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as 'portfolio
interest' and is subject to certain additional limitations. See 'Tax Treatment
of Foreign Investors.'
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ('thrift institutions') to use net
operating losses and other allowable deductions to offset their excess inclusion
income from REMIC residual certificates that have 'significant value' within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates held by thrift
institutions since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum income for a tax year cannot be less than excess
inclusions for the year. Third, the amount of any alternative minimum tax net
operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Date multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest Security at the beginning of each calendar quarter will equal its issue
price (calculated in a manner analogous to the determination of the issue price
of a Regular Interest Security), increased by the aggregate of the daily
accruals for prior calendar quarters, and decreased (but not below zero) by the
amount of loss allocated to a Holder and the amount of distributions made on the
Residual Interest Security before the beginning of the quarter. The long-term
federal rate, which is announced monthly by the Treasury Department, is an
interest rate that is based on the average market yield of outstanding
marketable obligations of the United States government having remaining
maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest Securities may be disregarded. See '--Restrictions on
Ownership and Transfer of Residual Interest Securities' and 'Tax Treatment of
Foreign Investors' below.
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Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any 'Disqualified
Organization.' Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Agreement will prohibit Disqualified Organizations
from owning a Residual Interest Security. In addition, no transfer of a Residual
Interest Security will be permitted unless the proposed transferee shall have
furnished to the Trustee an affidavit representing and warranting that it is
neither a Disqualified Organization nor an agent or nominee acing on behalf of a
Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization (in violation of the restrictions set forth above), a substantial
tax will be imposed on the transferor of such Residual Interest Security at the
time of the transfer. In addition, if a Disqualified Organization holds an
interest in a pass-through entity (including, among others, a partnership,
trust, real estate investment trust, regulated investment company, or any person
holding as nominee an interest in a pass-through entity), that owns a Residual
Interest Security, the pass-through entity will be required to pay an annual tax
on its allocable share of the excess inclusion income of the REMIC.
The REMIC Regulations provide that a transfer of a 'noneconomic residual
interest' will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a 'noneconomic residual
interest' unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate,
currently 35 percent, and (2) the transferor reasonably expects that for each
anticipated excess inclusion, the transferee will receive distributions from the
REMIC, at or after the time at which taxes on such excess inclusion accrue,
sufficient to pay the taxes thereon. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had 'improper knowledge') that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor will be presumed not to have improper
knowledge if (i) the transferor conducts, at the time of the 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 came due and finds no significant evidence
to indicate that the transferee will not continue to pay its debts as they come
due in the future, and (ii) the transferee represents to the transferor that (A)
the transferee understands that it might incur tax liabilities in excess of any
cash received with respect to the residual interest and (B) the transferee
intends to pay the taxes associated with owning the residual interest as they
come due. A different formulation of this rule applies to transfers of Residual
Interest Security by or to foreign transferees. See 'Tax Treatment to Foreign
Investors'.
Mark to Market Rules. On January 3, 1995, the IRS released proposed
regulations under Section 475 (the 'Proposed Mark-to-Market Regulations'). The
Proposed Mark-to-Market Regulations provide that any REMIC Residual Interest
acquired after January 3, 1995 cannot be marked to market, regardless of the
value of such REMIC residual interest.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
General. As further described below, each Holder of a Security issued by a
grantor trust (a 'Pass-Through Security') must report on its federal income tax
return the gross income from the portion of the Mortgages that is allocable to
such Pass-Through Security and may deduct the portion of the expenses incurred
or accrued by the Trust Fund that is allocable to such Pass-Through Security, at
the same time and to the same extent as such items would be reported by such
Holder if it had purchased and held directly such interest in the Mortgages and
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received or accrued directly its share of the payments on the Mortgages and
incurred or accrued directly its share of expenses incurred or accrued by the
Trust Fund when those amounts are received, incurred or accrued by the Trust
Fund.
A Holder of a Pass-Through Security that is an individual, estate, or trust
will be allowed deductions for such expenses only to the extent that the sum of
those expenses and the Holder's other miscellaneous itemized deductions exceeds
two percent of such Holder's adjusted gross income. Moreover, a Holder of a
Pass-Through Security that is not a corporation cannot deduct such expenses for
purposes of the alternative minimum tax (if applicable). Such deductions will
include servicing, guarantee and administrative fees paid to the servicer of the
Mortgage Loans. As a result, the Trust Fund will report additional taxable
income to Holders of Pass-Through Securities in an amount equal to their
allocable share of such deductions, and individuals, estates, or trusts holding
Pass-Through Securities may have taxable income in excess of the cash received.
Status of the Pass-Through Securities as Real Property Loans. The
Pass-Through Securities will be 'real estate assets' for purposes of Section
856(c)(5)(A) of the Code and 'loans....secured by an interest in real property'
within the meaning of Section 7701(a)(19)(C)(v) of the Code (assets qualifying
under one or more of those sections, applying each section separately,
'qualifying assets') to the extent that the Trust Fund's assets are qualifying
assets. The Pass-Through Securities may not be qualifying assets under any of
the foregoing sections of the Code to the extent that the Trust Fund's assets
include Buydown Funds, reserve funds, or payments on mortgages held pending
distribution to CertificateHolders. Further, the Pass- Through Securities may
not be 'qualifying real property loans' to the extent loans held by the Trust
Fund are not secured by improved real property or real property which is to be
improved using the loan proceeds, may not be 'real estate assets' to the extent
loans held by the trust are not secured by real property, and may not be
'loanssecured by an interest in real property' to the extent loans held by the
trust are not secured by residential real property or real property used
primarily for church purposes. In addition, to the extent that the principal
amount of a loan exceeds the value of the property securing the loan, it is
unclear and Federal Tax Counsel is unable to opine whether the loans will be
qualifying assets.
Taxation of Pass-Through Securities Under Stripped Bond Rules. The federal
income tax treatment of the Pass-Through Securities will depend on whether they
are subject to the rules of section 1286 of the Code (the 'stripped bond
rules'). The Pass-Through Securities will be subject to those rules if stripped
interest-only Certificates are issued. In addition, whether or not stripped
interest-only Certificates are issued, the Internal Revenue Service may contend
that the stripped bond rules apply on the ground that the Servicer's servicing
fee, or other amounts, if any, paid to (or retained by) the Servicer or its
affiliates, as specified in the applicable Prospectus Supplement, represent
greater than an arm's length consideration for servicing the Loans and should be
characterized for federal income tax purposes as an ownership interest in the
Loans. The Internal Revenue Service has taken the position in Revenue Ruling
91-46 that a retained interest in excess of reasonable compensation for
servicing is treated as a 'stripped coupon' under the rules of Code Section
1286.
If interest retained for the Servicer's servicing fee or other interest is
treated as a 'stripped coupon,' the Pass-Through Securities will either be
subject to the OID rules or the market discount rules. A Holder of a Pass-
Through Security will account for any discount on the Pass-Through Security as
market discount rather than OID if either (i) the amount of OID with respect to
the Pass-Through Security was treated as zero under the OID de minimis rule when
the Pass-Through Security was stripped or (ii) no more than 100 basis points
(including any amount of servicing in excess of reasonable servicing) is
stripped off from the Loans. If neither of the above exceptions applies, the OID
rules will apply to the Pass-Through Securities.
If the OID rules apply, the Holder of a Pass-Through Security (whether a
cash or accrual method taxpayer) will be required to report interest income from
the Pass-Through Security in each taxable year equal to the income that accrues
on the Pass-Through Security in that year calculated under a constant yield
method based on the yield of the Pass-Through Security (or, possibly, the yield
of each Mortgage underlying such Pass-Through Security) to such Holder. Such
yield would be computed at the rate (assuming monthly compounding) that, if used
in discounting the Holder's share of the payments on the Mortgages, would cause
the present value of those payments to equal the price at which the Holder
purchased the Pass-Through Security. With respect to certain categories of debt
instruments, Section 1272(a)(6) of the Code requires that OID be accrued based
on a prepayment assumption determined in a manner prescribed by forthcoming
regulations. It is unclear whether such
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regulations would apply this rule to the Pass-Through Securities, whether
Section 1272(a)(6) might apply to the Pass-Through Securities in the absence of
such regulations, or whether the Internal Revenue Service could require use of a
reasonable prepayment assumption based on other tax law principles and Federal
Tax Counsel is unable to opine with respect to this issue. If required to report
interest income on the Pass-Through Securities to the Internal Revenue Service
under the stripped bond rules, it is anticipated that the Trustee will calculate
the yield of the Pass-Through Securities based on a representative initial
offering price of the Pass-Through Securities and a reasonable assumed rate of
prepayment of the Mortgages (although such yield may differ from the yield to
any particular Holder that would be used in calculating the interest income of
such Holder). The Prospectus Supplement for each series of Pass-Through
Securities will describe the prepayment assumption that will be used for this
purpose, but no representation is made that the Mortgages will prepay at that
rate or at any other rate.
Assume that Holders are not taxed as directly owning the Loans, in the case
of a Pass-Through Security acquired at a price equal to the principal amount of
the Mortgages allocable to the Pass-Through Security, the use of a reasonable
prepayment assumption would not have any significant effect on the yield used in
calculating accruals of interest income. In the case, however, of a Pass-Through
Security acquired at a discount or premium (that is, at a price less than or
greater than such principal amount, respectively), the use of a reasonable
prepayment assumption would increase or decrease such yield, and thus accelerate
or decelerate the reporting of interest income, respectively.
If a Mortgage Loan is prepaid in full, the Holder of a Pass-Through
Security acquired at a discount or premium generally will recognize ordinary
income or loss equal to the difference between the portion of the prepaid
principal amount of the Home Equity Loan that is allocable to the Pass-Through
Security and the portion of the adjusted basis of the Pass-Through Security (see
'Sales of Pass-Through Securities' below) that is allocable to the Loan. The
method of allocating such basis among the Loans may differ depending on whether
a reasonable prepayment assumption is used in calculating the yield of the
Pass-Through Securities for purposes of accruing OID. It is not clear whether
any other adjustments would be required to reflect differences between the
prepayment rate that was assumed in calculating yield and the actual rate of
prepayments.
Pass-Through Securities of certain series ('Variable Rate Pass-Through
Securities') may provide for a Pass-Through Rate based on the weighted average
of the interest rates of the Mortgages held by the Trust Fund, which interest
rates may be fixed or variable. In the case of a Variable Rate Pass-Through
Security that is subject to the OID rules, the daily portions of OID generally
will be calculated under the principles discussed in '--Taxation of Debt
Securities (Including Regular Interest Securities)-Variable Rate Debt
Securities.'
Taxation of Pass-Through Securities If Stripped Bond Rules Do Not
Apply. If the stripped bond rules do not apply to a Pass-Through Security, then
the Holder will be required to include in income its share of the interest
payments on the Mortgages in accordance with its tax accounting method. In
addition, if the Holder purchased the Pass-Through Security at a discount or
premium, the Holder will be required to account for such discount or premium in
the manner described below. The treatment of any discount will depend on whether
the discount is OID as defined in the Code and, in the case of discount other
than OID, whether such other discount exceeds a de minimis amount. In the case
of OID, the Holder (whether a cash or accrual method taxpayer) will be required
to report as additional interest income in each month the portion of such
discount that accrues in that month, calculated based on a constant yield
method. In general it is not anticipated that the amount of OID to be accrued in
each month, if any, will be significant relative to the interest paid currently
on the Mortgages. However, OID could arise with respect to a Home Equity Loan
('ARM') that provides for interest at a rate equal to the sum of an index of
market interest rates and a fixed number. The OID for ARMs generally will be
determined under the principles discussed in 'Taxation of Debt Securities
(Including Regular Interest Securities)--Variable Rate Debt Securities.'
If discount other than OID exceeds a de minimis amount (described below),
the Holder will also generally be required to include in income in each month
the amount of such discount accrued through such month and not previously
included in income, but limited, with respect to the portion of such discount
allocable to any Mortgage, to the amount of principal on such Mortgage received
by the Trust Fund in that month. Because the Mortgages will provide for monthly
principal payments, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount
accrues (and therefore at a rate not
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significantly slower than the rate at which such discount would be included in
income if it were OID). The Holder may elect to accrue such discount under a
constant yield method based on the yield of the Pass-Through Security to such
Holder (or possibly based on the yields of each Loan). In the absence of such an
election, it may be necessary to accrue such discount under a more rapid
straight-line method. Under the de minimis rule, market discount with respect to
a Pass-Through Security will be considered to be zero if it is less than the
product of (i) 0.25% of the principal amount of the Mortgages allocable to the
Pass-Through Security and (ii) the weighted average life (in complete years) of
the Mortgages remaining at the time of purchase of the Pass-Through Security.
If a Holder purchases a Pass-Through Security at a premium, such Holder may
elect under Section 171 of the Code to amortize the portion of such premium that
is allocable to a Home Equity Loan under a constant yield method based on the
yield of the Mortgage Home Equity Loan to such Holder, provided that such Home
Equity Loan was originated after September 27, 1985. Premium allocable to a Home
Equity Loan originated on or before that date should be allocated among the
principal payments on the Home Equity Loan and allowed as an ordinary deduction
as principal payments are made or, perhaps, upon termination.
It is not clear whether the foregoing adjustments for discount or premium
would be made based on the scheduled payments on the Loans or taking account of
a reasonable prepayment assumption, and Federal Tax Counsel is unable to opine
on this issue.
If a Home Equity Loan is prepaid in full, the Holder of a Pass-Through
Security acquired at a discount or premium will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Home Equity Loan that is allocable to the Pass-Through Security and the
portion of the adjusted basis of the Pass-Through Security (see 'Sales of
Pass-Through Securities' below) that is allocable to the Loan. The method of
allocating such basis among the Mortgage Loans may differ depending on whether a
reasonable prepayment assumption is used in calculating the yield of the
Pass-Through Securities for purposes of accruing OID. Other adjustments might be
required to reflect differences between the prepayment rate that was assumed in
accounting for discount or premium and the actual rate of prepayments.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. A Holder, other than a Holder of a Residual Interest
Security, may, under certain circumstances, be subject to 'backup withholding'
at a rate of 31% with respect to distributions or the proceeds of a sale of
certificates to or through brokers that represent interest or original issue
discount on the Securities. This withholding generally applies if the Holder of
a Security (i) fails to furnish the Trustee with its taxpayer identification
number ('TIN'); (ii) furnishes the Trustee an incorrect TIN; (iii) fails to
report properly interest, dividends or other 'reportable payments' as defined in
the Code; or (iv) under certain circumstances, fails to provide the Trustee or
such Holder's securities broker with a certified statement, signed under penalty
of perjury, that the TIN provided is its correct number and that the Holder is
not subject to backup withholding. Backup withholding will not apply, however,
with respect to certain payments made to Holders, including payments to certain
exempt recipients (such as exempt organizations) and to certain Nonresidents (as
defined below). Holders should consult their tax advisers as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trustee will report to the Holders and to the Servicer for each
calendar year the amount of any 'reportable payments' during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds which are
treated as partnerships for federal income tax purposes and with respect to
Certificates treated as debt for federal income tax purposes, unless interest
(including OID) paid on a Security (other than a Residual Interest Security) is
considered to be 'effectively connected' with a trade or business conducted in
the United States by a nonresident alien individual, foreign partnership or
foreign corporation ('foreign investors'), such interest will normally qualify
as portfolio interest (except where (i) the recipient is a Holder, directly or
by attribution, of 10% or more of the capital or profits interest in the issuer,
or (ii) the recipient is a controlled foreign corporation to which the issuer is
a related person) and will be exempt from federal income tax. See '--Tax
Consequences to Holders of the
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Certificates Issued by a Partnership--Tax Consequences to Foreign
Certificateholders' and '--Certain Certificates Treated as Indebtedness--Foreign
Investors'. Upon receipt of appropriate ownership statements, the issuer
normally will be relieved of obligations to withhold tax from such interest
payments. These provisions supersede the generally applicable provisions of
United States law that would otherwise require the issuer to withhold at a 30%
rate (unless such rate were reduced or eliminated by an applicable tax treaty)
on, among other things, interest and other fixed or determinable, annual or
periodic income paid to Nonresidents. Holders of Pass-Through Securities
however, may be subject to withholding to the extent that the Loans were
originated on or before July 18, 1984.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder and timely provide an IRS Form 4224. They will, however,
generally be subject to the regular United States income tax.
Payments to Holders of Residual Interest Securities who are foreign persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders should assume that such income does
not qualify for exemption from United States withholding tax as 'portfolio
interest.' It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a Holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Nonresident will be disregarded for all federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest Holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Nonresident transfers a Residual
Interest Security to a United States person, and if the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See 'Taxation of Holders of Residual Interest Securities--Excess
Inclusions.'
Subject to the discussion in the previous paragraph, any capital gain
realized on the sale, redemption, retirement or other taxable disposition of a
Security by a foreign person will be exempt from United States federal income
and withholding tax, provided that (i) such gain is not effectively connected
with the conduct of a trade or business in the United States by the foreign
person and (ii) in the case of an individual foreign person, the foreign person
is not present in the United States for 183 days or more in the taxable year.
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
If a Trust Fund is intended to be a partnership for federal income tax
purposes the applicable Agreements will provide that the nature of the income of
the Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates
will be structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
NoteHolders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Except as otherwise provided in the related
Prospectus Supplement, Federal Tax Counsel will advise the Seller that the Notes
will be classified as debt for federal income tax purposes. Consequently,
Holders of Notes will be subject to taxation as described in 'Taxation of Debt
Securities (Including Regular Interest Securities)' above for Debt Securities
which are not Regular Interest Securities.
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Possible Alternative Treatment of the Notes. If, contrary to the opinion
of Federal Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might be
treated as equity interests in the Trust Fund. If so treated, the Trust Fund
would likely be treated as a publicly traded partnership that would not be
taxable as a corporation because it would meet certain qualifying income tests.
Nonetheless, treatment of the Notes as equity interests in such a publicly
traded partnership could have adverse tax consequences to certain Holders. For
example, income to foreign Holders generally would be subject to U.S. federal
income tax and U.S. federal income tax return filing and withholding
requirements, and individual Holders might be subject to certain limitations on
their ability to deduct their share of the Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP
Treatment of the Trust Fund as a Partnership. In the case of a Trust Fund
intended to qualify as a partnership for federal income tax purposes, the Trust
Fund and the Seller will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat the Trust Fund as a partnership for purposes
of federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the assets
held by the Trust Fund, the partners of the partnership being the
Certificateholders, and the Notes, if any, being debt of the partnership.
However, the proper characterization of the arrangement involving the Trust
Fund, the Certificates, the Notes, the Trust Fund and the Servicer is not clear
because there is no authority on transactions closely comparable to that
contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership. The following discussion also assumes that all payments on the
Certificates are denominated in U.S. dollars, none of the Certificates have
interest rates which would qualify as contingent interest under the OID
regulations, and that a Series of Securities includes a single Class of
Certificates. If these conditions are not satisfied with respect to any given
Series of Certificates, additional tax considerations with respect to such
Certificates will be disclosed in the applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each CertificateHolder will be required to
separately take into account such Holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The Trust Fund's deductions will
consist primarily of interest and OID accruing with respect to the Notes,
servicing and other fees, and losses or deductions upon collection or
disposition of Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Loans that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
Fund of premium on Loans that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust Fund will be allocated to the Seller. Based on the economic arrangement of
the parties, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the Trust Fund might not have
sufficient cash to make current cash distributions of such
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amount. Thus, cash basis Holders will in effect be required to report income
from the Certificates on the accrual basis and Certificateholders may become
liable for taxes on Trust Fund income even if they have not received cash from
the Trust Fund to pay such taxes. In addition, because tax allocations and tax
reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust Fund.
If Notes are also issued, all of the taxable income allocated to a
Certificateholder 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 such a
Holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such Holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such Holder over the life of
the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans will not have been
issued with OID and, therefore, the Trust should not have OID income. However,
the purchase price paid by the Trust Fund for the Loans may be greater or less
than the remaining principal balance of the Loans at the time of purchase. If
so, the Home Equity Loan will have been acquired at a premium or discount, as
the case may be. (As indicated above, the Trust Fund will make this calculation
on an aggregate basis, but might be required to recompute it on a Home Equity
Loan by Home Equity Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium, the
Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to CertificateHolders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. If such a termination occurs, the Trust Fund will be
considered to distribute its assets to the partners, who would then be treated
as recontributing those assets to the Trust Fund as a new partnership. The Trust
Fund will not comply with certain technical requirements that might apply when
such a constructive termination occurs. As a result, the Trust Fund may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Trust Fund might
not be able to comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
Holder's cost increased by the Holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the Holder's share of the
Notes and other liabilities of the Trust Fund. A Holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the Holder's share of
unrecognized accrued market discount on the Loans would generally be treated as
ordinary income to the Holder and would give rise to special tax reporting
requirements. The Trust Fund does not expect to have any other assets that would
give rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the Trust Fund will elect to include market discount in
income as it accrues.
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If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Sellers and Transferees. In general, the Trust Fund's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a Holder purchasing Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund' s assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund currently does not
intend to make such election. As a result, Certificateholders might be allocated
a greater or lesser amount of Trust Fund income than would be appropriate based
on their own purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust Fund will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to Holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, Holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the Holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such 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 (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Seller will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. 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 Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed
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adjustment to the items of the Trust Fund. An adjustment could also result in an
audit of a Certificateholder's returns and adjustments of items not related to
the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign Holders that are taxable as corporations
and 39.6% for all other foreign Holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust Fund to change its withholding procedures.
Each foreign Holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign Holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust Fund on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign Holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest probably will not be
considered 'portfolio interest.' As a result, Certificateholders will be subject
to United States federal income tax and withholding tax at a rate of 30%, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
Holder would only be entitled to claim a refund for that portion of the taxes,
if any, in excess of the taxes that should be withheld with respect to the
guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a 'backup' withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the Holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in 'Federal
Income Tax Considerations,' 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 with respect to the various
state and local tax consequences of an investment in the Securities.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ('ERISA'), and Section 4975 of the Code prohibit a pension, profit
sharing or other employee benefit plan (each, a 'Benefit Plan') from engaging in
certain transactions involving 'plan assets' with persons that are 'parties in
interest' under ERISA or 'disqualified persons' under the Code with respect to
the plan. ERISA also imposes certain duties and certain prohibitions on persons
who are fiduciaries of plans subject to ERISA. Under ERISA, generally any person
who exercises any authority or control with respect to the management or
disposition of the assets of a plan is considered to be a fiduciary of such
plan. A violation of these 'prohibited transaction' rules may generate excise
tax and other liabilities under ERISA and the Code for such persons.
Certain transactions involving the related Trust Fund might be deemed to
constitute prohibited transactions under ERISA and the Code with respect to a
Benefit Plan that purchased Securities if assets of the related Trust
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Fund were deemed to be assets of the Benefit Plan. Under a regulation issued by
the United States Department of Labor (the 'Plan Assets Regulation'), the assets
of a Trust Fund would be treated as plan assets of a Benefit Plan for the
purposes of ERISA and the Code only if the Benefit Plan acquired an 'equity
interest' in the Trust Fund and none of the exceptions contained in the Plan
Assets Regulation was applicable. An equity interest is defined under the Plan
Assets Regulation as an interest other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features. The likely treatment of Notes and Certificates will be discussed in
the related Prospectus Supplement.
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements.
A plan fiduciary considering the purchase of Securities should consult its
tax and/or legal advisors regarding whether the assets of the Trust Fund would
be considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other issues and their potential consequences.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute 'mortgage-related securities' within the meaning
of SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and
the extent to which the Securities constitute legal investments for them.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement (the
'Underwriting Agreement') with respect to each Trust Fund, the Seller will agree
to sell to each of the underwriters named therein and in the related Prospectus
Supplement, and each of such underwriters will severally agree to purchase from
the Seller, the principal amount of each Class of Securities of the related
Series set forth therein and in the related Prospectus Supplement.
In each Underwriting Agreement, the several underwriters will agree,
subject to the terms and conditions set forth therein, to purchase all of the
Securities described therein which are offered hereby and by the related
Prospectus Supplement if any of such Securities are purchased. In the event of a
default by any such underwriter, each Underwriting Agreement will provide that,
in certain circumstances, purchase commitments of the nondefaulting underwriters
may be increased, or the Underwriting Agreement may be terminated.
Each Prospectus Supplement will either (i) set forth the price at which
each Class of Securities being offered thereby will be offered to the public and
any concessions that may be offered to certain dealers participating in the
offering of such Securities or (ii) specify that the related Securities are to
be resold by the underwriters in negotiated transactions at varying prices to be
determined at the time of such sale. After the initial public offering of any
Securities, the public offering price and such concessions may be changed.
Each Underwriting Agreement will provide that the Seller will indemnify
underwriters against certain liabilities, including liabilities under the
Securities Act.
Under each Underwriting Agreement, the closing of the sale of any Class of
Securities subject thereto will be conditioned on the closing of the sale of all
other such Classes.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Securities will be passed upon for the
Seller by Stroock & Stroock & Lavan, LLP, New York, New York.
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GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used
in this Prospectus. Unless otherwise provided in a 'Supplemental Glossary' or
'Index of Principal Terms' in the Prospectus Supplement for a Series, such
definitions will apply to capitalized terms used in such Prospectus Supplement.
The definitions may vary from those in the related Agreement for a Series and
the related Agreement for a Series generally provides a more complete definition
of certain of the terms. Reference should be made to the related Agreement for a
Series for a more complete definition of such terms.
'Accrual Termination Date' means, with respect to a Class of Compound
Interest Securities, the Distribution Date on which accrued interest on such
Securities becomes payable currently.
'Agreement' means, with respect to a Series of Certificates, the Pooling
and Servicing Agreement or Trust Agreement, and, with respect to a Series of
Notes, the Indenture and the Sale and Servicing Agreement, as the context
requires.
'Appraised Value' means, with respect to property securing a Loan, the
lesser of the appraised value determined in an appraisal obtained at origination
of the Home Equity Loan or sales price of such property at such time.
'Asset Group' means, with respect to the Primary Assets and other assets
comprising the Trust Fund of a Series, a group of such Primary Assets and other
assets having the characteristics described in the related Prospectus
Supplement.
'Assumed Reinvestment Rate' means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the 'Assumed Reinvestment Rate' for funds held in any fund
or account for the Series.
'Available Distribution Amount' means the amount in the Distribution
Account (including amounts deposited therein from any reserve fund or other fund
or account) eligible for distribution to Holders on a Distribution Date.
'Bankruptcy Code' means the federal bankruptcy code, 11 United States Code
101 et seq., and related rules and regulations promulgated thereunder.
'Business Day' means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
'Certificates' means the Asset-Backed Certificates.
'Certificate Account' or 'Collection Account' means, with respect to a
Series, the account established for the deposit by the Servicer of payments
received from the Primary Assets.
'Class' means a Class of Securities of a Series.
'Closing Date' means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Securities of such Series are
first issued.
'Code' means the Internal Revenue Code of 1986, as amended, and regulations
(including proposed regulations) or other pronouncements of the Internal Revenue
Service promulgated thereunder.
'Combined Loan-to-Value Ratio' means, with respect to a Loan, the
percentage equivalent of a fraction, the numerator of which is the sum of (i)
the original principal amount of such Loan at the date of origination thereof
and (ii) the outstanding principal amount of any senior loan on the Mortgaged
Property at the time of origination of such Loan, and the denominator of which
is the Appraised Value of such Mortgaged Property at such date of origination.
'Commission' means the Securities and Exchange Commission.
'Compound Interest Security' means any Security of a Series on which all or
a portion of the interest accrued thereon is added to the principal balance of
such Security on each Distribution Date, through the Accrual Termination Date,
and with respect to which no interest shall be payable until such Accrual
Termination Date, after which interest payments will be made on the Compound
Value thereof.
'Compound Value' means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance
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thereof and reduced by any payments of principal previously made on such Class
of Compound Interest Securities.
'Condominium' means a form of ownership of real property wherein each owner
is entitled to the exclusive ownership and possession of his or her individual
Condominium Unit and also owns a proportionate undivided interest in all parts
of the Condominium Building (other than the individual Condominium Units) and
all areas or facilities, if any, for the common use of the Condominium Units.
'Condominium Association' means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
'Condominium Building' means a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to Condominium ownership.
'Condominium Loan' means a Home Equity Loan secured by a Mortgage on a
Condominium Unit (together with its appurtenant interest in the common
elements).
'Condominium Unit' means an individual housing unit in a Condominium
Building.
'Cooperative' means a corporation owned by tenant-stockholders who, through
the ownership of stock, shares or membership securities in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific units and which is described in Section 216 of the Code.
'Cooperative Dwelling' means an individual housing unit in a building owned
by a Cooperative.
'Cooperative Loan' means a housing loan made with respect to a Cooperative
Dwelling and secured by an assignment by the borrower (tenant-stockholder) or
security interest in shares issued by the applicable Cooperative.
'Cut-off Date' means the date designated as such in the related Prospectus
Supplement for a Series.
'Debt Securities' means Securities characterized as indebtedness for
federal income tax purposes, and Regular Interest Securities.
'Deferred Interest' means the excess of the interest accrued on the
outstanding principal balance of a Home Equity Loan during a specified period
over the amount of interest required to be paid by an obligor on such Home
Equity Loan on the related Due Date.
'Delinquency Advance' means cash advanced by the Servicer in respect of
delinquent payments of principal of and/or interest on a Home Equity Loan to the
extent specified in the related Prospectus Supplement.
'Disqualified Organization' means the United States, any State or political
subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
'Distribution Account' means, with respect to a Series, the account or
accounts established for the deposit of remittances from the Collection Account
for distribution to Securityholders.
'Distribution Date' means, with respect to a Series or Class of Securities,
each date specified as a distribution date for such Series or Class in the
related Prospectus Supplement.
'Due Date' means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
'Eligible Investments' means any one or more of the obligations or
securities described herein under 'THE TRUST FUNDS--Eligible Investments.'
'Enhancement' means a mechanism or instrument which is intended to provide
limited protection to Holders of the applicable Class or Classes of Securities
against losses on the related Primary Assets or other shortfalls in funds
necessary to make required distributions on such Class or Classes of Securities.
'Enhancer' means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
'ERISA' means the Employee Retirement Income Security Act of 1974, as
amended.
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'Escrow Account' means an account, established and maintained by the
Servicer for a Loan, into which payments by borrowers to pay taxes, assessments,
mortgage and hazard insurance premiums and other comparable items required to be
paid to the mortgagee are deposited.
'FDIC' means the Federal Deposit Insurance Corporation.
'FHLMC' or 'Freddie Mac' means the Federal Home Loan Mortgage Corporation.
'Final Scheduled Distribution Date' means, with respect to a Class of Notes
of a Series, the date no later than which principal thereof will be fully paid
and with respect to a Class of Certificates of a Series, the date after which no
Certificates of such Class will remain outstanding, in each case based on the
assumptions set forth in the related Prospectus Supplement.
'FNMA' or 'Fannie Mae' means the Federal National Mortgage Association.
'Holder' or 'Securityholder' means the person or entity in whose name a
Security is registered.
'Home Equity Loan' means a closed-end home equity loan secured by a
Mortgaged Property.
'Home Equity Loan Rate' means, unless otherwise indicated herein or in the
Prospectus Supplement, the interest rate borne by a Loan.
'HUD' means the United States Department of Housing and Urban Development.
'Indenture' means the indenture relating to a Series of Notes between the
Trust Fund and the Trustee.
'Insurance Policies' means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Loans.
'Insurance Proceeds' means amount paid by the insurer under any of the
Insurance Policies covering any Home Equity Loan or Mortgaged Property.
'Interest Only Securities' means a Class of Securities entitled solely or
primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
'IRS' means the Internal Revenue Service.
'Lifetime Rate Cap' means the lifetime limit if any, on the Home Equity
Loan Rate during the life of each adjustable rate Loan.
'Liquidation Proceeds' means amounts received by the Servicer in connection
with the liquidation of a Loan, net of liquidation expenses.
'Loan-to-Value Ratio' means, with respect to a Loan, the percentage
equivalent of a fraction, the numerator of which is the original principal
amount of such Loan at the time of origination thereof, and the denominator of
which is the Appraised Value of the related Mortgaged Property at such time of
origination.
'Minimum Rate' means the lifetime minimum Home Equity Loan Rate during the
life of each adjustable rate Loan.
'Mixed-Use Properties' means structures of no more than three stories,
which include one to four residential dwelling units and 50% or less of the
space in which is used for retail, professional or other commercial uses
including doctor, dentist or law offices, real estate agencies, boutiques,
newsstands, convenience stores or other uses intended to cater to individual
customers.
'Mortgage' means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
'Mortgaged Property' means the real property and improvements thereon
securing a Home Equity Loan.
'Mortgage Note' means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
'Mortgagor' means the obligor on a Mortgage Note.
'1986 Act' means the Tax Reform Act of 1986.
'Notes' means the Asset-Backed Notes.
'Notional Amount' means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
'OTS' means the Office of Thrift Supervision.
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'PAC' ('Planned Amortization Class Securities') means a Class of Securities
of a Series on which payments of principal are made in accordance with a
schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
'Pay Through Security' means Regular Interest Securities and certain Debt
Securities that are subject to acceleration due to prepayment on the underlying
Primary Assets.
'Person' means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
'Pooling and Servicing Agreement' means the pooling and servicing agreement
relating to a Series of Certificates among the Seller, the Servicer (if such
Series relates to Loans) and the Trustee.
'Primary Assets' means the Private Securities and/or Loans, as the case may
be, which are included in the Trust Fund for such Series. A Primary Asset refers
to a specific Private Security or Loan, as the case may be.
'Principal Balance' means, with respect to a Primary Asset and as of a Due
Date, the original principal amount of the Primary Asset, plus the amount of any
Deferred Interest added to such principal amount, reduced by all payments, both
scheduled or otherwise, received on such Primary Asset prior to such Due Date
and applied to principal in accordance with the terms of the Primary Asset.
'Principal Only Securities' means a Class of Securities entitled solely or
primarily to distributions of principal and identified as such in the Prospectus
Supplement.
'Private Security' means a participation or pass-through certificate
representing a fractional, undivided interest in Underlying Loans or
collateralized obligations secured by Underlying Loans.
'PS Agreement' means the pooling and servicing agreement, indenture, trust
agreement or similar agreement pursuant to which a Private Security is issued.
'PS Servicer' means the servicer of the Underlying Loans.
'PS Sponsor' means, with respect to Private Securities, the sponsor or
depositor under a PS Agreement.
'PS Trustee' means the trustee designated under a PS Agreement.
'Qualified Insurer' means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
'Rating Agency' means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Seller to
rate the Securities upon the original issuance thereof.
'Regular Interest' means a regular interest in a REMIC.
'REMIC' means a real estate mortgage investment conduit.
'REMIC Administrator' means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
'REMIC Provisions' means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
'REO Property' means real property which secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
'Reserve Fund' means, with respect to a Series, a segregated trust account
into which funds may be deposited on the Closing Date and/or over time in order
to provide a source of funds to provide limited protection to the Holders of one
or more Classes of Securities against losses on the related Primary Assets or
other shortfalls in amounts necessary to make required distributions to such
Holders.
'Residual Interest' means a residual interest in a REMIC.
'Retained Interest' means, with respect to a Primary Asset, the amount or
percentage specified in the related Prospectus Supplement which is not included
in the Trust Fund for the related Series.
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'Scheduled Payments' means the scheduled payments of principal and interest
to be made by the borrower on a Primary Asset.
'Securities' means the Notes or the Certificates.
'Seller' means Delta Funding Corporation, or its successors.
'Senior Securityholder' means a holder of a Senior Security.
'Senior Securities' means a Class of Securities as to which the holders'
rights to receive distributions of principal and interest are senior to the
rights of holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
'Series' means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
'Servicer' means Delta Funding Corporation, or its successors or assigns.
'Servicing Fee' means the fee payable to the Servicer on a periodic basis
for servicing and administering the Primary Assets in a Trust Fund and
calculated at the rate and on the basis set forth in the related Prospectus
Supplement.
'Single Family Property' means property securing a Home Equity Loan
consisting of one- to four-family attached or detached residential housing,
including Cooperative Dwellings.
'Stripped Securities' means Pass-Through Securities representing interests
in Primary Assets with respect to which all or a portion of the principal
payments have been separated from all or a portion of the interest payments.
'Subordinated Securities' means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities or other Classes of
securities which are themselves subordinate to other Classes, and may be
allocated losses and shortfalls prior to the allocation thereof to other Classes
of Securities, to the extent and under the circumstances specified in the
related Prospectus Supplement.
'Trustee' means the trustee under the applicable Agreement and its
successors.
'Trust Fund' means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are, with respect to a Series of Certificates, held for
the benefit of the Holders by the Trustee under the Pooling and Servicing
Agreement or Trust Agreement or, with respect to a Series of Notes, pledged to
the Trustee under the Indenture as a security for such Notes, including, without
limitation, the Primary Assets (except any Retained Interests), rights to all
amounts in the Distribution Account Collection Account, Certificate Account,
Pre-Funding Account, Capitalized Interest Account or Reserve Funds, if any,
distributions on the Primary Assets (net of servicing fees), and reinvestment
earnings on such net distributions and rights to any Enhancement and all other
property and interest held by or pledged to the Trustee pursuant to the related
Agreement for such Series.
'UCC' means the Uniform Commercial Code.
'Underlying Loans' means loans of the type eligible to be Loans underlying
or securing Private Securities. 'Variable Interest Security' means a Security on
which interest accrues at a rate that is adjusted, based upon a predetermined
index, at fixed periodic intervals, all as set forth in the related Prospectus
Supplement.
'Variable Interest Securities' means a Class of Securities on which
interest will accrue at a per annum rate that will vary from Distribution Date
to Distribution Date based on changes in the weighted average of the interest
rates borne by the related Primary Assets or changes in the level of an index
used to calculate such per annum rate of interest.
'Zero Coupon Security' means a Security entitled to receive payments of
principal only.
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER
OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH THEY RELATE OR
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR
RESPECTIVE DATES.
------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
------------------
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Summary......................................... S-3
Risk Factors.................................... S-12
Description of the Mortgage Loans............... S-16
Prepayment and Yield Considerations............. S-31
Description of the Certificates................. S-42
The Pooling and Servicing Agreement............. S-52
Use of Proceeds................................. S-58
Federal Income Tax Considerations............... S-58
ERISA Considerations............................ S-61
Legal Investment Considerations................. S-63
Underwriting.................................... S-64
Legal Matters................................... S-65
Ratings......................................... S-65
Index of Principal Terms........................ S-67
PROSPECTUS
Prospectus Supplement........................... 2
Reports to Holders.............................. 2
Available Information........................... 2
Incorporation of Certain Documents by
Reference..................................... 3
Summary of Terms................................ 4
Risk Factors.................................... 13
The Seller and the Servicer..................... 16
Description of the Securities................... 22
The Trust Funds................................. 29
Enhancement..................................... 34
Servicing of Loans.............................. 36
The Agreements.................................. 41
Certain Legal Aspects of the Loans.............. 49
Use of Proceeds................................. 55
Federal Income Tax Considerations............... 55
State Tax Considerations........................ 74
ERISA Considerations............................ 74
Legal Investment................................ 75
Plan of Distribution............................ 75
Legal Matters................................... 75
Glossary of Terms............................... 76
</TABLE>
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- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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$
DELTA FUNDING HOME
EQUITY LOAN TRUST 199
HOME EQUITY LOAN
ASSET-BACKED CERTIFICATES,
SERIES 199
DELTA FUNDING CORPORATION
SELLER AND SERVICER
---------------------------------------------
PROSPECTUS SUPPLEMENT
, 199
---------------------------------------------
[Names of Underwriters]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution*
The following is an itemized list of the estimated expenses to be incurred
in connection with the offering of the securities being offered hereunder other
than underwriting discounts and commissions.
<TABLE>
<S> <C>
SEC Registration Fee............... $ 295.00
Printing and Engraving............. $ **
Trustee's Fees..................... $ **
Legal Fees and Expenses............ $ **
Accountant's Fees and Expenses..... $ **
Rating Agency Fees................. $ **
Miscellaneous Fees and Expenses.... $ **
---------
Total Expenses................ $ **
---------
---------
</TABLE>
- ------------------
* All amounts, other than the SEC Registration Fee, are estimates of expenses
to be incurred in connection with the issuance and distribution of a Series
of Securities in an aggregate principal amount assumed for these purposes to
be $200,000,000 of Securities registered hereby.
** To be completed by amendment.
Item 15. Indemnification of Directors and Officers
The New York Business Corporation Law (the 'NYBCL') authorizes a New York
corporation to indemnify any person who is, or is threatened to be made, a party
in any civil or criminal proceeding (other than an action by or in the right of
the corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another entity, against
judgments, fines, amounts paid in settlement and reasonable expenses (including
attorneys' fees), actually and reasonably incurred by such person as a result of
such action or proceeding or any appeal therein. With respect to actions by or
in the right of the corporation, the NYBCL authorizes indemnification of such
person against reasonable expenses, including attorneys' fees and amounts paid
in settlement. To be entitled to indemnification, a person must have acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Court approval is required as a prerequisite to indemnification of expenses in
respect of any claim as to which a person has been adjudged liable to the
corporation. The NYBCL requires indemnification against expenses actually and
reasonably incurred by any director, officer, employee or agent in connection
with a proceeding against such person for action in such capacity to the extent
that the person has been successful on the merits or otherwise. Advancement of
expenses (i.e., payment prior to a determination on the merits) is permitted,
but not required, by the NYBCL, which further requires that any director or
officer must undertake to repay such expenses if it is ultimately determined
that he is not entitled to indemnification. The disinterested members of the
board of directors (or independent legal counsel or the shareholders) must
determine, in each instance where indemnification is not required by the NYBCL,
that such director, officer, employee or agent is entitled to indemnification.
The NYBCL provides that the indemnification provided by statute is not
exclusive.
The form of the Underwriting Agreement, filed as Exhibit 1.1 to this
Registration Statement, provides that the Seller will indemnify and reimburse
the Underwriter(s) and each controlling person of the Underwriter(s) with
respect to certain expenses and liabilities, including liabilities under the
Securities Act of 1933 or other federal or state regulations or under the common
law, which arise out of or are based on certain material misstatements or
omissions in the Registration Statement. In addition, the Underwriting Agreement
provides that the Underwriter(s) will similarly indemnify and reimburse the
Seller and each director, each officer who signed the Registration Statement and
each controlling person of the Seller with respect to certain material
II-1
<PAGE>
misstatements or omissions in the Registration Statement which are based on
certain written information furnished by the Underwriter(s) for use in
connection with the preparation of the Registration Statement.
Item 16. Exhibits
(a) Financial Statements:
None.
(b) Exhibits:
<TABLE>
<S> <C>
*1.1 -- Form of Underwriting Agreement.
*3.1 -- Certificate of Incorporation of Delta Funding Corporation.
*3.2 -- By-Laws of Delta Funding Corporation.
*4.1 -- Form of Indenture.
*4.2 -- Form of Pooling and Servicing Agreement.
*4.3 -- Form of Trust Agreement.
5.1 -- Opinion of Stroock & Stroock & Lavan with respect to the
securities being registered.
8.1 -- Opinion of Stroock & Stroock & Lavan with respect to tax
matters (included as part of Exhibit 5.1).
*10.1 -- Form of Sale and Servicing Agreement.
23.1 -- Consent of Stroock & Stroock & Lavan (included as part of
Exhibit 5.1).
24.1 -- Powers of Attorney of Directors and Officers of Delta Funding
Corporation (included on signature page).
*25.1 -- Statement of Eligibility and Qualification of Trustee (Form
T-1).
</TABLE>
- ------------------
* Filed as an exhibit to Registration Statement No. 333-3418 and incorporated
herein by reference.
Item 17. Undertakings
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section l0(a)(3) of the
Securities Act of 1933, as amended (the 'Act');
(ii) To reflect in the prospectus any fact or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the 'Calculation of
Registration Fee' table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
provided, however, that paragraphs (a)(l)(i) and (a)(l)(ii) do not
apply if the registration statement is on Form S-3, Form S-8 or Form
F-3, and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
with or furnished to the Commission by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the
II-2
<PAGE>
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant undertakes that, for the purposes of determining
any liability under the Act, each filing of the Registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934 that is incorporated by reference in this Registration Statement shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing of Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Woodbury on the 1st day of May, 1998.
DELTA FUNDING CORPORATION
By: /s/ HUGH MILLER
---------------------
Hugh Miller
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Hugh Miller and Richard Blass, or any of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on May 1, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------------- ------------------------------------------------------
<S> <C>
/s/HUGH MILLER President and Director
- --------------------------------------------------- (principal executive officer)
Hugh Miller
/s/RICHARD BLASS Treasurer and Director
- --------------------------------------------------- (principal financial and accounting officer)
Richard Blass
/s/SIDNEY MILLER Director
- ---------------------------------------------------
Sidney Miller
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
-------- ----
<S> <C> <C>
*1.1 -- Form of Underwriting Agreement.
*3.1 -- Certificate of Incorporation of Delta Funding Corporation.
*3.2 -- By-Laws of Delta Funding Corporation.
*4.1 -- Form of Indenture.
*4.2 -- Form of Pooling and Servicing Agreement.
*4.3 -- Form of Trust Agreement.
5.1 -- Opinion of Stroock & Stroock & Lavan LLP with respect to the
securities being registered.
8.1 -- Opinion of Stroock & Stroock & Lavan LLP with respect to tax
matters (included as part of Exhibit 5.1).
*10.1 -- Form of Sale and Servicing Agreement.
23.1 -- Consent of Stroock & Stroock & Lavan LLP (included as part of
Exhibit 5.1).
24.1 -- Powers of Attorney of Directors and Officers of Delta Funding
Corporation (included on signature page).
*25.1 -- Statement of Eligibility and Qualification of Trustee (Form
T-1).
</TABLE>
- ------------------
* Filed as an exhibit to Registration Statement No. 333-3418 and incorporated
herein by reference.
<PAGE>
STROOCK & STROOCK & LAVAN LLP
180 Maiden Lane
New York, New York 10038
May 1, 1998
Delta Funding Corporation
1000 Woodbury Road
Woodbury, New York 11797
Ladies and Gentlemen:
We have acted as counsel to Delta Funding Corporation, a New York corporation
(the "Company"), in connection with the preparation of the registration
statement on Form S-3 (No. 333-3418) (the "Registration Statement") relating
to the proposed offering from time to time in one or more series (each, a
"Series") by one or more trusts of asset backed notes (the "Notes") and asset
backed certificates (the "Certificates," and, together with the Notes, the
"Securities"). The Registration Statement has been filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933,
as amended (the "Act"). As set forth in the Registration Statement, each
Series of Securities is to be issued under and pursuant to the terms of a
separate pooling and servicing agreement, or sale and servicing agreement,
trust agreement and indenture (each, an "Agreement") among the Company as
seller and as servicer and one or more independent trustees (each, a
"Trustee") to be identified in the prospectus supplement for such Series of
Securities.
As such counsel, we have examined copies of the Articles of Incorporation and
By-Laws of the Company, the Registration Statement, the base Prospectus and
form of Prospectus Supplement included therein, the form of each Agreement,
and originals or copies of such other corporate minutes, records, agreements
and other instruments of the Company, certificates of public officials and
other documents and have made such examinations of law, as we have deemed
necessary to form the basis for the opinions hereinafter expressed. In our
examination of such materials, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity to original documents of all copies submitted to us. As to
various questions of fact material to such opinion, we have relied, to the
extent we deemed appropriate, upon representations, statements and
certificates of officers and representatives of the Company and others.
<PAGE>
Delta Funding Corporation
May 1, 1998
Page 2
Based upon and subject to the foregoing, we are of the opinion that:
1. When the issuance, execution and delivery of each Series of Notes
have been authorized by all necessary corporate action of the Company in
accordance with the provisions of the related Agreement or Agreements, and
when such Notes have been duly executed and delivered, authenticated by the
Trustee and sold as described in the Registration Statement, such Notes will
constitute valid and binding obligations of the issuer thereof in accordance
with their terms and the terms of such Agreement or Agreements. This opinion
is subject to the effect of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws relating to or affecting creditors' rights
generally and court decisions with respect thereto and we express no opinion
with respect to the application of equitable principles or remedies in any
proceeding, whether at law or in equity.
2. When the issuance, execution and delivery of each Series of
Certificates have been authorized by all necessary corporate action of the
Company in accordance with the provisions of the related Agreement or
Agreements, and when such Certificates have been duly executed and delivered,
authenticated by the Trustee and sold as described in the Registration
Statement, such Certificates will be legally issued, fully paid and
non-assessable.
3. We hereby confirm the opinions set forth in the Prospectus under
the heading "Federal Income Tax Considerations," to the extent they constitute
matters of law or legal conclusions with respect thereto.
Attorneys involved in the preparation of this opinion are admitted to practice
law in the State of New York and do not express any opinion herein concerning
any law other than the federal laws of the United States of America and the
laws of the State of New York.
<PAGE>
Delta Funding Corporation
May 1, 1998
Page 3
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this firm in the Prospectus
which forms a part of the Registration Statement. In giving such consent, we
do not admit hereby that we come within the category of persons whose consent
is required under Section 7 of the Act or the Rules and Regulations of the
Commission thereunder.
Very truly yours,
/s/Stroock & Stroock & Lavan LLP
- --------------------------------
Stroock & Stroock & Lavan LLP
